Table ofContents

 

 

 

**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 June 30, 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 zip code)

 

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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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during thepreceding 12 months (or such shorter period that the registrant wasrequired to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting 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 July 27, 2009,there were 16,774,509 shares of common stock, $0.01 par value per share,outstanding.

 

 

 

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Table of Contents

 

**TABLEOF CONTENTS**

 
| PART I    | FINANCIAL  INFORMATION                                                                                             | 3      |
|----------------|--------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                               |   |
| ITEM 1.        | FINANCIAL  STATEMENTS                                                                                              | 3      |
|           | CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2009  AND DECEMBER 31, 2008 (UNAUDITED)                            | 3      |
|           | CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE  AND SIX MONTHS ENDED  JUNE 30, 2009 AND 2008 (UNAUDITED) | 4      |
|           | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX  MONTHS ENDED JUNE 30, 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                        | 23     |
| ITEM 3.        | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        | 41     |
| ITEM 4.        | CONTROLS AND  PROCEDURES                                                                                           | 41     |
|           |                                                                                                               |   |
| PART II   | OTHER INFORMATION                                                                                                  | 41     |
|           |                                                                                                               |   |
| ITEM 1.        | LEGAL PROCEEDINGS                                                                                                  | 41     |
| ITEM 1A.       | RISK FACTORS                                                                                                       | 41     |
| ITEM 2.        | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                       | 42     |
| ITEM 3.        | DEFAULTS  UPON SENIOR SECURITIES                                                                                   | 42     |
| ITEM 4.        | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                               | 42     |
| ITEM 5.        | OTHER INFORMATION                                                                                                  | 43     |
| ITEM 6.        | EXHIBITS                                                                                                           | 44     |
|           |                                                                                                               |   |
| SIGNATURES     | 45                                                                                                                 |
|           |                                                                                                               |   |
| CERTIFICATIONS |                                                                                                               |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

 

**iPCS,INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

(Inthousands, except share and per share amounts)

 
| ** **                                                                                                                   | ** ** | **June 30,  2009** | ** ** | **December 31,  2008 (a)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
|                                                                                                                         |       |                    |       |                                 |       |
| **Assets**                                                                                                                   | ** ** | ** **              | ** ** | ** **                           | ** ** |
| Current Assets:                                                                                                              |       |                    |       |                                 |       |
| Cash and cash equivalents                                                                                                    |       | $                       | 75,639     |                                 | $          | 55,940 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $7,254 and $8,125, respectively                              |       | 42,321                  |       | 37,859                               |       |
| Receivable from Sprint (Note 3)                                                                                              |       | 27,867                  |       | 25,623                               |       |
| Inventories, net                                                                                                             |       | 6,175                   |       | 5,465                                |       |
| Assets held for sale (Note 4)                                                                                                |       | —                  |       | 389                                  |       |
| Prepaid expenses                                                                                                             |       | 7,069                   |       | 7,223                                |       |
| Other current assets                                                                                                         |       | 101                     |       | 63                                   |       |
| Total current assets                                                                                                         |       | 159,172                 |       | 132,562                              |       |
| Property and equipment, net (Note 4)                                                                                         |       | 157,577                 |       | 162,014                              |       |
| Financing costs, net                                                                                                         |       | 5,731                   |       | 6,419                                |       |
| Deferred customer activation costs                                                                                           |       | 3,178                   |       | 3,816                                |       |
| Intangible assets, net (Note 5)                                                                                         |       | 86,014                  |       | 90,602                               |       |
| Goodwill (Note 5)                                                                                                            |       | 141,783                 |       | 141,783                              |       |
| Other assets                                                                                                                 |       | 411                     |       | 416                                  |       |
| Total assets                                                                                                                 |       | $                       | 553,866    |                                 | $          | 537,612 |   |
|                                                                                                                         |       |                    |       |                                 |       |
| **Liabilities and  Stockholders’ Deficiency**                                                                           | ** ** | ** **              | ** ** | ** **                           | ** ** |
| Current Liabilities:                                                                                                         |       |                    |       |                                 |       |
| Accounts payable                                                                                                             |       | $                       | 6,205      |                                 | $          | 5,051 |   |
| Accrued expenses                                                                                                             |       | 17,335                  |       | 18,337                               |       |
| Payable to Sprint (Note 3)                                                                                                   |       | 47,078                  |       | 41,067                               |       |
| Deferred revenue                                                                                                             |       | 14,336                  |       | 13,410                               |       |
| Accrued interest                                                                                                             |       | 5,287                   |       | 5,519                                |       |
| Current maturities of long-term debt and capital  lease obligations (Note 6)                                                 |       | 40                      |       | 37                                   |       |
| Total current liabilities                                                                                                    |       | 90,281                  |       | 83,421                               |       |
| Deferred customer activation fee revenue                                                                                     |       | 3,178                   |       | 3,816                                |       |
| Interest rate swap (Note 7)                                                                                                  |       | 13,596                  |       | 16,621                               |       |
| Other long-term liabilities                                                                                                  |       | 5,872                   |       | 6,551                                |       |
| Long-term debt and capital lease obligations,  excluding current maturities (Note 6)                                         |       | 475,381                 |       | 475,401                              |       |
| Total liabilities                                                                                                            |       | 588,308                 |       | 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, 17,263,483 and 17,163,221 shares issued, respectively |       | 173                     |       | 172                                  |       |
| Additional paid-in-capital                                                                                                   |       | 169,835                 |       | 167,531                              |       |
| Accumulated deficiency                                                                                                       |       | (186,130                | )          | (199,280                             | )          |
| Accumulated other comprehensive loss (Note 7 and  12)                                                                        |       | (13,596                 | )          | (16,621                              | )          |
| Treasury stock, at cost; 400,899 and 0 shares,  respectively (Note 13)                                                       |       | (4,724                  | )          | —                               |       |
| Total stockholders’ deficiency                                                                                          |       | (34,442                 | )          | (48,198                              | )          |
| Total liabilities and stockholders’ deficiency                                                                          |       | $                       | 553,866    |                                 | $          | 537,612 |   |

 

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(a)    Derivedfrom the Company’s audited financial statements as of December 31, 2008.

 

See Notes to unauditedconsolidated financial statements.

 

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**iPCS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

(Dollars in thousands,except share data)

 
| ** **                                                | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                | ** ** | **June 30, 2009**                        | ** ** | **June 30, 2008**                      | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| ** **                                                | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue:**                                              | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                           |       | $                                                  | 107,139    |                                             | $          | 94,174 |   | $ | 211,120 |   | $ | 186,273 |   |
| Roaming revenue                                           |       | 28,153                                             |       | 31,657                                           |       | 55,773 |   | 61,801 |   |
| Equipment and other                                       |       | 4,867                                              |       | 3,540                                            |       | 9,430 |   | 6,955 |   |
| Total revenue                                             |       | 140,159                                            |       | 129,371                                          |       | 276,323 |   | 255,029 |   |
| **Operating Expense:**                                    | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of service and roaming                               |       | 71,650                                             |       | 70,463                                           |       | 143,800 |   | 138,647 |   |
| Cost of equipment                                         |       | 15,320                                             |       | 12,874                                           |       | 31,532 |   | 24,537 |   |
| Selling and marketing                                     |       | 17,336                                             |       | 16,444                                           |       | 33,986 |   | 34,303 |   |
| General and administrative                                |       | 7,736                                              |       | 7,992                                            |       | 16,617 |   | 15,080 |   |
| Gain on Sprint settlement (Note 3)                        |       | —                                             |       | —                                           |       | (4,273 | ) | — |   |
| Depreciation                                              |       | 9,961                                              |       | 11,556                                           |       | 20,247 |   | 23,217 |   |
| Amortization of intangible assets (Note 5)                |       | 2,294                                              |       | 2,293                                            |       | 4,588 |   | 4,587 |   |
| Loss on disposal of property and equipment, net           |       | 417                                                |       | 248                                              |       | 516 |   | 258 |   |
| Total operating expense                                   |       | 124,714                                            |       | 121,870                                          |       | 247,013 |   | 240,629 |   |
| **Operating income**                                      |       | 15,445                                             |       | 7,501                                            |       | 29,310 |   | 14,400 |   |
| Interest income                                           |       | 78                                                 |       | 384                                              |       | 164 |   | 1,104 |   |
| Interest expense                                          |       | (7,997                                             | )          | (8,221                                           | )          | (16,031 | ) | (17,136 | ) |
| Other income, net                                         |       | 22                                                 |       | 15                                               |       | 27 |   | 30 |   |
| **Income (loss) before provision  for income tax**        |       | 7,548                                              |       | (321                                             | )          | 13,470 |   | (1,602 | ) |
| Provision for income tax (Note 9)                         |       | 170                                                |       | 325                                              |       | 320 |   | 650 |   |
| **Net income (loss)**                                     |       | $                                                  | 7,378      |                                             | $          | (646 | ) | $ | 13,150 |   | $ | (2,252 | ) |
|                                                      |       |                                               |       |                                             |       |   |   |   |   |
| **Income (loss) per share of  common stock:**             |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                     |       | $                                                  | 0.44       |                                             | $          | (0.04 | ) | $ | 0.78 |   | $ | (0.13 | ) |
| Diluted                                                   |       | $                                                  | 0.43       |                                             | $          | (0.04 | ) | $ | 0.77 |   | $ | (0.13 | ) |
|                                                      |       |                                               |       |                                             |       |   |   |   |   |
| **Weighted average shares of  common stock outstanding:** |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                     |       | 16,820,907                                         |       | 17,154,237                                       |       | 16,946,548 |   | 17,145,140 |   |
| Diluted                                                   |       | 17,046,214                                         |       | 17,154,237                                       |       | 17,059,469 |   | 17,145,140 |   |

 

See Notes to unaudited consolidated financial statements.

 

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**iPCS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

(In thousands)

 
| ** **                                                                                                              | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **June 30,  2009**                          | ** ** | **June 30,  2008** | ** ** |
| **Cash Flows from Operating  Activities:**                                                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                       |       | $                                                | 13,150     |   | $ | (2,252 | ) |
| Adjustments to reconcile net income (loss) to net  cash flows from operating activities:                                |       |                                             |       |   |   |
| Loss on disposal of property and equipment                                                                              |       | 517                                              |       | 258 |   |
| Depreciation and amortization                                                                                           |       | 24,835                                           |       | 27,804 |   |
| Non-cash interest expense                                                                                               |       | 688                                              |       | 688 |   |
| Payment-in-kind interest                                                                                                |       | 1,491                                            |       | — |   |
| Stock-based compensation expense                                                                                        |       | 2,314                                            |       | 3,660 |   |
| Provision for doubtful accounts                                                                                         |       | 4,864                                            |       | 10,149 |   |
| Changes in assets and liabilities:                                                                                      |       |                                             |       |   |   |
| Accounts receivable                                                                                                     |       | (9,326                                           | )          | (14,945 | ) |
| Receivable from Sprint                                                                                                  |       | (2,245                                           | )          | 2,025 |   |
| Inventories, net                                                                                                        |       | (709                                             | )          | (319 | ) |
| Prepaid expenses, other current and long-term  assets                                                                   |       | 822                                              |       | 1,068 |   |
| Accounts payable, accrued expenses and other  long-term liabilities                                                     |       | (1,606                                           | )          | (1,179 | ) |
| Payable to Sprint                                                                                                       |       | 6,011                                            |       | 810 |   |
| Deferred revenue                                                                                                        |       | 289                                              |       | 717 |   |
| Net cash flows provided by operating activities                                                                         |       | 41,095                                           |       | 28,484 |   |
| **Cash Flows from Investing  Activities:**                                                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                                                     |       | (17,022                                          | )          | (40,990 | ) |
| Proceeds from disposition of property and  equipment                                                                    |       | 185                                              |       | 163 |   |
| Net cash flows used in investing activities                                                                             |       | (16,837                                          | )          | (40,827 | ) |
| **Cash Flows from Financing  Activities:**                                                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Payments on capital lease obligations                                                                                   |       | (17                                              | )          | (15 | ) |
| Proceeds from the exercise of stock options                                                                             |       | —                                           |       | 396 |   |
| Payment of special cash dividend                                                                                        |       | (59                                              | )          | (72 | ) |
| Repurchase of common stock                                                                                              |       | (4,483                                           | )          | (11 | ) |
| Net cash flows (used in) provided by financing  activities                                                              |       | (4,559                                           | )          | 298 |   |
| Net increase (decrease) in cash and cash  equivalents                                                                   |       | 19,699                                           |       | (12,045 | ) |
| **Cash and cash equivalents at  beginning of period**                                                                   |       | 55,940                                           |       | 77,599 |   |
| **Cash and cash equivalents at  end of period**                                                                         |       | $                                                | 75,639     |   | $ | 65,554 |   |
|                                                                                                                    |       |                                             |       |   |   |
| **Supplemental disclosure of cash  flow information - cash paid for interest (net of amount capitalized)**              |       | $                                                | 15,536     |   | $ | 17,004 |   |
| **Supplemental disclosure for  non-cash investing activities:**                                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Accounts payable and accrued expenses incurred for  the acquisition of property, equipment and construction in progress |       | $                                                | 1,202      |   | $ | 5,326 |   |

 

See Notes to unauditedconsolidated financial statements.

 

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**iPCS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

 

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

** **

iPCS, Inc. (the “Company” or “iPCS”) is a holding company thatoperates as a PCS Affiliate of Sprint through three wholly owned subsidiaries:iPCS Wireless, Inc., Horizon Personal Communications, Inc. and BrightPersonal Communications Services, LLC. Each of these subsidiaries is aparty to separate affiliation agreements with Sprint PCS, the operator of a100% digital wireless personal communications services (“PCS”) network withlicenses to provide voice and data service to the entire United Statespopulation. These affiliation agreements grant the iPCS subsidiaries theexclusive right to sell wireless mobility communications network products andservices under the Sprint brand in 81 markets, including markets in Illinois,Indiana, Iowa, Michigan, Pennsylvania, Ohio, Maryland, Nebraska, New York,New Jersey, Tennessee and West Virginia.

 

Theunaudited consolidated balance sheets as of June 30, 2009 and December 31,2008, the unaudited consolidated statements of operations for the three and sixmonths ended June 30, 2009 and 2008, the unaudited consolidated statementsof cash flows for the six months ended June 30, 2009 and 2008 and relatedfootnotes have been prepared in accordance with accounting principles generallyaccepted in the United States of America for interim financial information and Rule 10-01of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. The financial information presentedherein should be read in conjunction with the Company’s 2008 Annual Report on Form 10-Kwhich includes information and disclosures not presented herein. Allintercompany accounts and transactions have been eliminated in consolidation.Subsequent events have been evaluated through July 31, 2009, the datethese financial statements were issued. In the opinion of management, the unaudited consolidated financialstatements contain all of the adjustments, consisting of normal recurringadjustments as well as those related to the Company’s settlement of certaindisputes with Sprint, necessary to present fairly, in summarized form, theconsolidated financial position, results of operations and cash flows of theCompany. The results of operations for the three and six months ended June 30,2009 are not indicative of the results that may be expected for the full year2009.

 

**(2)  Per Share Data**

 

Basicincome (loss) per share for the Company is calculated by dividing net income(loss) by the weighted average number of shares of common stock of the Company,outstanding during the period, net of shares held in treasury.   Diluted income per share for the Company isbased upon the weighted average number of common and common equivalent shares ofcommon stock of the Company, outstanding during the period, net of shares heldin treasury.

 

Netincome and a reconciliation of the weighted average number of sharesoutstanding, net of shares held in treasury, used in calculating diluted income(loss) per share are as follows (in thousands, except share data):

 
| ** **                                                  | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                  | ** ** | **June 30, 2009**                        | ** ** | **June 30, 2008**                 | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Net  income (loss)                                          |       | $                                                  | 7,378      |                                        | $          | (646 | ) | $ | 13,150 |   | $ | (2,252 | ) |
|                                                        |       |                                               |       |                                        |       |   |   |   |   |
| Weighted  average shares outstanding - Basic                |       | 16,820,907                                         |       | 17,154,237                                  |       | 16,946,548 |   | 17,145,140 |   |
| Net  effect of dilutive stock options and restricted shares |       | 225,307                                            |       | —                                      |       | 112,921 |   | — |   |
| Weighted  average shares outstanding - Diluted              |       | 17,046,214                                         |       | 17,154,237                                  |       | 17,059,469 |   | 17,145,140 |   |
|                                                        |       |                                               |       |                                        |       |   |   |   |   |
| Net  income (loss) per share:                               |       |                                               |       |                                        |       |   |   |   |   |
| Basic                                                       |       | $                                                  | 0.44       |                                        | $          | (0.04 | ) | $ | 0.78 |   | $ | (0.13 | ) |
| Diluted                                                     |       | $                                                  | 0.43       |                                        | $          | (0.04 | ) | $ | 0.77 |   | $ | (0.13 | ) |

 

Forthe three and six months ended June 30, 2008, basic and diluted loss pershare are the same because the inclusion of the incremental potential shares ofcommon stock from any assumed exercise of stock options is anti-dilutive.Potential shares of common stock excluded from the income (loss) per sharecomputations because their inclusion would be anti-dilutive were 1,063,353 and1,082,308 for the three and six months ended June 30, 2009, respectively,and were 1,384,377 for both the three and six months ended June 30, 2008.

 

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**(3)  Sprint Agreements**

 

Each of iPCS Wireless, Inc., Horizon Personal Communications, Inc.and Bright Personal Communications Services, LLC has entered intoaffiliation agreements with Sprint PCS. Under these agreements, which have beenamended from time to time, most recently on March 3, 2008, Sprint providesthe Company significant support services such as customer service, billing,long distance transport services, national network operations support, nationalpricing plans, inventory logistics support, use of the Sprint and Sprint PCSbrand names, national advertising, national distribution, product developmentand the supply of financial and operational data.

 

Thecosts incurred by the Company 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. For 2008 and 2009, the CCPU ratewas $6.50 and $5.85, respectively, as adjusted and subject to furtheradjustments as described below.  The CPGArate 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 to be reduced by $0.15 from the then current ratewhen the Company’s EV-DO Rev. A deployment covers at least 6.0 million inpopulation (“POPs”); by another $0.15 from the then current rate when theCompany covers at least 7.0 million POPs; and by another $0.15 from thethen current 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 reduced to$6.20 starting August 1, 2008 for the remainder of 2008 and has beenreduced to $5.85 and $5.55 for 2009 and 2010, respectively, subject to anyfurther adjustments related to incremental EV-DO Rev. A coverage.

 

TheCompany receives roaming revenue when subscribers of Sprint and other PCSAffiliates of Sprint incur minutes of use in the Company’s territories, and theCompany incurs expense payable to Sprint and to other PCS Affiliates of Sprintwhen Sprint subscribers based in the Company’s territory incur minutes of usein the territories of Sprint and other PCS Affiliates of Sprint.  Effective January 1, 2008 through December 31,2010, subject to adjustment as described below, 3G data roaming is not settledseparately with Sprint; however, the Company does settle 3G data roamingseparately with the other PCS Affiliates of Sprint. For 2008, reciprocalroaming rates were $0.0400 per minute for voice and 2G data, excluding certainmarkets as described below, and $0.0003 per kilobyte for 3G data. For 2009, reciprocalroaming rates are $0.0400 per minute for voice and 2G data, excluding certainmarkets as described below, and $0.0001 per kilobyte for 3G data.

 

Withrespect 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 $0.1000 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.

 

Commencing on January 1, 2010, and each January 1 thereafter, eitherSprint or the Company may initiate a review to determine whether the 3G dataroaming ratio between the two for the prior calendar year has changed by morethan 20% from the calendar year that is two years prior. If the ratio haschanged by more than 20%, then the parties will commence discussions as towhether an appropriate adjustment in other fees can be made to compensate forsuch changes. If the parties cannot agree, then the parties will revert tosettling 3G data roaming separately and any CCPU reductions related toincremental EV-DO Rev. A coverage, currently totaling $0.30, will be foregoneeffective January 1 of the year in which such review was initiated.

 

TheCompany’s affiliation agreements with Sprint also provide the Company withprotective rights to decline to implement certain future program requirementchanges that Sprint proposes that would adversely affect the Company’sbusiness. The Company also has a right of first refusal to build out newcoverage within the Company’s territory. If the Company does not exercise thisright, then Sprint may build out the new coverage, or may allow another PCSAffiliate of Sprint to do so, in which case Sprint has the right to manage thenew coverage.

 

Roamingexpense is recorded in cost of service and roaming within the statements ofoperations. Cost of service and roaming transactions with Sprint include the 8%affiliation fee, long distance, roaming expense and Sprint’s CCPU charges forsupport services. Cost of equipment relates to inventory sold by the Companythat was purchased from Sprint under the Company’s affiliation agreements withSprint. Selling and marketing transactions relate to subsidized costs onwireless handsets and commissions under Sprint’s national distribution program.

 

Foreach of the three and six months ended June 30, 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 the three and six monthsended June 30, 2009, approximately 60% and 59%, respectively, of theCompany’s cost of service and roaming was derived from 

 

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informationprovided by Sprint on the basis of data within Sprint’s possession andcontrol.  For each of the three and sixmonths ended June 30, 2008, approximately 58% 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 tobe erroneous, it may dispute, and has disputed, such settlements in accordancewith the procedures set forth in the affiliation agreements with Sprint.  The Company has disputed certain items withSprint which remain unresolved as of July 31, 2009. The final outcome ofthese unresolved disputed items is unknown at this time.

 

OnJanuary 22, 2009, the Company reached a settlement with Sprint related topreviously disputed 2008 items, which resulted in a Gain on Sprint settlement of$4.3 million being recorded in the Company’s consolidated statement ofoperations for the six months ended June 30, 2009.

 

Amountsrelating to the Sprint affiliation agreements for the three and sixmonths ended June 30, 2009 and 2008 and as of June 30, 2009 and December 31,2008 are as follows (in thousands):

 
| ** **                                                          | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                          | ** ** | **June 30,  2009**                            | ** ** | **June 30,  2008**                          | ** ** | **June 30,  2009** | ** ** | **June 30,  2008** | ** ** |
| **Amounts included in the Consolidated Statements  of Operations:** | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                                     |       | $                                                  | 107,139    |                                             | $          | 94,174 |   | $ | 211,120 |   | $ | 186,273 |   |
| Roaming revenue                                                     |       | $                                                  | 28,153     |                                             | $          | 31,657 |   | $ | 55,773 |   | $ | 61,801 |   |
| Cost  of service and roaming:                                       |       |                                               |       |                                             |       |   |   |   |   |
| Roaming                                                             |       | $                                                  | 20,409     |                                             | $          | 18,304 |   | $ | 39,670 |   | $ | 34,830 |   |
| Customer  service                                                   |       | 14,070                                             |       | 13,559                                           |       | 27,916 |   | 26,839 |   |
| Affiliation  fees                                                   |       | 8,688                                              |       | 7,516                                            |       | 17,269 |   | 14,366 |   |
| Long  distance and other                                            |       | (138                                               | )          | 1,750                                            |       | 488 |   | 5,059 |   |
| Total  cost of service and roaming                                  |       | $                                                  | 43,029     |                                             | $          | 41,129 |   | $ | 85,343 |   | $ | 81,094 |   |
| Cost  of equipment                                                  |       | $                                                  | 15,320     |                                             | $          | 12,874 |   | $ | 31,532 |   | $ | 24,537 |   |
| Selling  and marketing                                              |       | $                                                  | 3,357      |                                             | $          | 2,521 |   | $ | 5,545 |   | $ | 5,045 |   |

 
| ** **                                                | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Amounts included in the  Consolidated Balance Sheets:** | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Receivable from Sprint                                    |       | $                       | 27,867     |                        | $          | 25,623 |   |
| Payable to Sprint                                         |       | 47,078                  |       | 41,067                      |       |
|                                                           |            |                         |            |                             |            |  |  |

 

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

 

Propertyand equipment consists of the following at June 30, 2009 and December 31,2008 (in thousands):

 
| ** **                                     | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Network assets                                 |       | $                       | 312,538    |                        | $          | 295,550 |   |
| Land                                           |       | 114                     |       | 114                         |       |
| Building                                       |       | 1,566                   |       | 1,566                       |       |
| Computer equipment                             |       | 7,657                   |       | 6,773                       |       |
| Furniture, fixtures, and office equipment      |       | 9,694                   |       | 9,744                       |       |
| Vehicles                                       |       | 2,814                   |       | 2,540                       |       |
| Construction in progress                       |       | 18,862                  |       | 23,980                      |       |
| Total property and equipment                   |       | 353,245                 |       | 340,267                     |       |
| Less accumulated depreciation and amortization |       | (195,668                | )          | (178,253                    | )          |
| Total property and equipment, net              |       | $                       | 157,577    |                        | $          | 162,014 |   |

 

Duringthe three months ended June 30, 2009, the Company sold its remainingMotorola equipment, which was replaced by Nortel equipment and held as Assetsheld for sale.  A loss of approximately$0.3 million was realized upon sale of these assets during the three monthsended June 30, 2009.

 

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**(5)  Goodwill and Intangible Assets**

 

Goodwill,totaling $141.8 million, represents the excess of purchase price over the fairvalue of the net assets acquired, including identifiable intangibleassets.  Goodwill is not deductible forincome tax purposes.

 

Intangibleassets represent the values assigned to the Company’s customer base, the rightto provide service under the Sprint affiliation agreements and an FCC licensefor a small market in Ohio.

 

Theintangible assets relating to the customer base were amortized over theestimated average life of a customer of 30 months.  The intangible assets relating 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.

 

Theweighted average amortization period, gross carrying amount, accumulatedamortization and net carrying amount of intangible assets at June 30, 2009and December 31, 2008 are as follows (in thousands):

 
| ** **                                                        | ** ** | **June 30, 2009**                     | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| **Non-amortized intangible asset:**                               | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FCC license                                                       |       | —                                          |       | $ | 300 |   | $ | — |   | $ | 300 |   |
| **Amortized intangible assets:**                                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Right to provide service under the Sprint  affiliation agreements |       | 167 months                                      |       | 126,521 |   | (40,807 | ) | 85,714 |   |
| Customer base                                                     |       | 30 months                                       |       | 71,956 |   | (71,956 | ) | — |   |
|                                                              |       | 117 months                                      |       | $ | 198,777 |   | $ | (112,763 | ) | $ | 86,014 |   |

 
| ** **                                                        | ** ** | **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 June 30,2009 and 2008 was $2.3 million for each period. Amortization expense for the six months ended June 30, 2009 and2008 was $4.6 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     |   |

 

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**(6)  Long-Term Debt**

 

Long-termdebt consists of the following at June 30, 2009 and December 31, 2008(in thousands):

 
| ** **                                                                  | ** ** | **June 30,  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                                                   |       | 421                     |       | 438                         |       |
| Total long-term debt and capital lease obligations                          |       | 475,421                 |       | 475,438                     |       |
| Less: current maturities                                                    |       | (40                     | )          | (37                         | )          |
| Long-term debt and capital lease obligations,  excluding current maturities |       | $                       | 475,381    |                        | $          | 475,401 |   |

 

***First Lien and Second Lien SeniorSecured Floating Rate Notes***

 

TheCompany has outstanding $475.0 million in aggregate principal amount ofsenior secured notes, consisting of $300.0 million in aggregate principalamount of First Lien Senior Secured Floating Rate Notes due 2013 (“First LienNotes”) and $175.0 million in aggregate principal amount of Second LienSenior Secured Floating Rate Notes due 2014 (“Second Lien Notes” and togetherwith the First Lien Notes, the “Secured Notes”).  The offering of the Secured Notes closed on April 23,2007.

 

TheSecured 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 assets of the Company and its subsidiary guarantors,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 torequire the 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.

 

Theindentures governing the Secured Notes contain covenants which restrict theCompany’s and its restricted subsidiaries’ ability to incur additionalindebtedness, merge, pay dividends, dispose of its assets, and certain othermatters as defined in the indentures.  AtJune 30, 2009, the Company believes it was in compliance with thesecovenants.

 

Intereston the First Lien Notes accrues at an annual rate equal to three-month LIBORplus 2.125% and is payable quarterly in cash on February 1, May 1, August 1and November 1 of each year. Interest on the Second Lien Notes accrues atan annual rate equal to three-month LIBOR plus 3.25% and is payable quarterlyon February 1, May 1, August 1 and November 1 of each year.The Company may elect to pay interest on the Second Lien Notes entirely in cashor entirely by increasing the principal amount of the Second Lien Notes (“Payment-in-kindinterest” or “PIK Interest”).  PIKInterest on the Second Lien Notes accrues at an annual rate equal tothree-month LIBOR plus 4.0%. Since issuance, the Company has paid all of itsinterest relating to the Second Lien Notes in cash. The Company has elected PIKInterest in relation to its August 1, 2009, November 1, 2009 and February 1,2010 interest payments on the Second Lien Notes. Accrued PIK Interest isreflected in Accrued interest until the interest payment date, when it will bereflected as additional principal of the Second Lien Notes.  The Company has made no other decisionsregarding the future election of PIK Interest. Three-month LIBOR for theSecured Notes resets on February 1, May 1, August 1 and November 1of each year and was 1.03% on June 30, 2009.

 

***Capital Lease Obligations***

 

Intereston capital lease obligations is all at fixed rates, which, on a weightedaverage basis, approximated 12.5% per annum at June 30, 2009.

 

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**(7)  Interest Rate Swap**

 

OnJuly 20, 2007, the Company entered into an interest rate swap to manageinterest rate risks associated with a portion of its variable rate debt.  The interest rate swap agreement is for anotional amount of $300.0 million associated with the interest on theCompany’s First Lien Notes effective August 1, 2007 for a period of threeyears. Under this agreement, the Company receives interest at a floating rateof three-month LIBOR and pays interest at a fixed rate of 5.34%, resulting inan effective interest rate for the First Lien Notes of 7.47% throughout theterm of the swap. The interest rate swap agreement qualifies and is designatedas a cash flow hedge under SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.” As such, the swap is accounted for as anasset or liability 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 (“AOCL”), 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 to no longer be effective asa hedge, is sold or terminated, or is de-designated from the hedgerelationship, any net gain or loss remaining in Accumulated other comprehensiveloss would be reclassified into earnings in the same periods during which thehedged debt payments affect earnings. If the cash flow hedge is discontinued inthe future because itbecomes probable that the hedged debt payments will not occur, the net gain orloss would be reclassified into earnings in that period.

 

See Note 8 forinformation regarding fair values of the interest rate swap as of June 30,2009 and December 31, 2008.

 

The followingtable presents the impact of our interest rate swap on our Consolidated Statementsof Operations and Consolidated Balance Sheets for the three and six monthsended June 30, 2009 and 2008 (in thousands):

 
| ** **         | ** ** | **Amount of Loss (Income)  Recognized  in AOCL on the Interest Rate  Swap (Effective Portion)** | ** ** | **Amount of Loss Reclassified  into Interest Expense  (Effective Portion)** | ** ** | **Amount of (Gain) Loss  Recognized in Interest  Expense on the Interest Rate  Swap (Ineffective Portion)** | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three months ended  June 30,**                                                           | ** ** | **Three months ended  June 30,**                                       | ** ** | **Three months ended  June 30,**                                                                       | ** ** |
| **Liabilities**    | ** ** | **2009**                                                                                        | ** ** | **2008**                                                                    | ** ** | **2009**                                                                                                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|               |       |                                                                                            |       |                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
| Interest rate swap |       | $                                                                                               | 1,374      |                                                                        | $          | (6,644                                                                                                      | )          | $ | 3,237 |   | $ | 1,781 |   | $ | — |   | $ | — |   |
|                    |            |                                                                                                 |            |                                                                             |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **         | ** ** | **Amount of Loss Recognized  in AOCL on the Interest Rate  Swap (Effective Portion)** | ** ** | **Amount of Loss Reclassified  into Interest Expense  (Effective Portion)** | ** ** | **Amount of (Gain) Loss  Recognized in Interest  Expense on the Interest Rate  Swap (Ineffective Portion)** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Six months ended  June 30,**                                                   | ** ** | **Six months ended  June 30,**                                         | ** ** | **Six months ended  June 30,**                                                                         | ** ** |
| **Liabilities**    | ** ** | **2009**                                                                              | ** ** | **2008**                                                                    | ** ** | **2009**                                                                                                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|               |       |                                                                                  |       |                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
| Interest rate swap |       | $                                                                                     | 2,802      |                                                                        | $          | 2,438                                                                                                       |       | $ | 5,827 |   | $ | 2,944 |   | $ | — |   | $ | — |   |
|                    |            |                                                                                       |            |                                                                             |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amount of lossrecorded in Accumulated other comprehensive loss at June 30, 2009 that isexpected to be reclassified to interest expense in the next twelve months ifinterest rates underlying the Company’s fair value calculations remainunchanged is approximately $13.4 million.

 

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**(8)  Fair Value Measurements**

 

Fair value estimates and assumptions and methods used to estimate thefair value of the Company’s assets and liabilities are made in accordance withthe requirements of SFAS No. 107, “Disclosure about Fair Value ofFinancial Instruments” and SFAS No. 157, “Fair Value Measurements.”

 

SFAS 157 clarifies that fair value is an exit price, representingthe amount that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants. As such, fairvalue is a market-based measurement that should be determined based onassumptions that market participants would use in pricing an asset orliability. As a basis for considering such assumptions, SFAS 157establishes a three-tier value hierarchy, which prioritizes the inputs used inmeasuring fair value as follows: Level 1 are observable inputs such asquoted prices in active markets; Level 2 are inputs other than the quotedprices in active markets that are observable either directly or indirectly; andLevel 3 are unobservable inputs in which there is little or no marketdata, which require the Company to develop its own assumptions. This hierarchyrequires the Company to use observable market data, when available, and tominimize the use of unobservable inputs when determining fair value. On arecurring basis, the Company measures certain assets and liabilities at fairvalue, including the Company’s money market funds, commercial paper andinterest rate swap.

 

The following table presents the Company’s assets and liabilitiesmeasured at fair value on a recurring basis as of June 30, 2009 and December 31,2008 (in thousands):

 
| ** **                               | ** ** | **June 30, 2009** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | ** **             | ** ** | **Level 1**      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **2008** | ** ** |
| ** **                               | ** ** | **Fair Value**         | ** ** | **Inputs**            | ** ** | **Inputs** | ** ** | **Inputs** | ** ** | **Fair Value** | ** ** |
| Assets:                                  |       |                   |       |                  |       |   |   |   |   |   |   |
| Money market funds(a)                    |       | $                      | 69,458     |                  | $          | — |   | $ | 69,458 |   | $ | — |   | $ | 27,194 |   |
| Commercial paper(a)                      |       | —                 |       | —                |       | — |   | — |   | 14,117 |   |
| Total assets measured at fair value      |       | $                      | 69,458     |                  | $          | — |   | $ | 69,458 |   | $ | — |   | $ | 41,311 |   |
| Liabilities:                             |       |                   |       |                  |       |   |   |   |   |   |   |
| Interest rate swap(b)                    |       | $                      | 13,596     |                  | $          | — |   | $ | 13,596 |   | $ | — |   | $ | 16,621 |   |
| Total liabilities measured at fair value |       | $                      | 13,596     |                  | $          | — |   | $ | 13,596 |   | $ | — |   | $ | 16,621 |   |

 

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(a)                                  The fair valuesof the Company’s money market funds and commercial paper are based on thirdparty estimates using recent trading activity and other relevant marketinformation.

 

(b)                                 The fair valuesof the interest rate swap are derived from a discounted cash flow analysisbased on the terms of the contract and observable market data, includingadjustment for nonperformance risk.

 

Thefollowing table presents carrying value and estimated fair value of theCompany’s financial instruments that are carried at historical cost (inthousands):

 
| ** **                                        | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **Carrying  amount**   | ** ** | **Estimated  fair value**  | ** ** | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
| First lien senior secured floating rate notes(a)  |       | $                      | 300,000    |                       | $          | 234,000 |   | $ | 300,000 |   | $ | 211,500 |   |
| Second lien senior secured floating rate notes(a) |       | 175,000                |       | 119,000                    |       | 175,000 |   | 105,875 |   |
|                                                   |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

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(a)                                  The fair valuesof the Company’s senior secured floating rate notes are based on third partyestimates using recent trading activity and other relevant market information.

 

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**(9)  Income Taxes**

 

TheCompany’s effective income tax rate for the interim periods presented is basedon management’s estimate of the Company’s effective tax rate for the applicableyear and differs from the federal statutory income tax rate primarily due tonondeductible permanent differences, state income taxes and changes in thevaluation allowance for deferred income taxes. In assessing the realizabilityof deferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. There was no federal income tax expense recorded for the three andsix months ended June 30, 2009, as income generated is offset by theutilization of previously recorded net operating loss carryforwards (“NOL’s”)and the reversal of the related valuation allowance.  No federal or state income tax benefit hasbeen recorded for the three and six months ended June 30, 2008, as the netdeferred income tax asset generated, primarily from temporary differencesrelated to the NOL, 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. The income taxprovision for each of the three and six months ended June 30, 2009 and2008 relate to state income taxes which are estimated based upon the taxableincome generated in each state.

 

In July 2009, inrelation to the built-in gain provisions of Internal Revenue Code Section 382,the five-year period subsequent to the ownership change that occurred in July 2004upon the Company’s emergence from bankruptcy lapsed; resulting in the Company’sinability to utilize NOL’s beyond the annual limitation and realized built-ingains.  Consequently, approximately $111 million of NOL’s, from a total ofapproximately $528 million of NOL’s, are no longer available to be realized bythe Company as of July 2009.  This willhave no impact on net income as these NOL’s were fully reserved with avaluation allowance.

 

**(10)  Stock-Based Compensation**

 

The Company has two long-term incentive plans. The Horizon PCS 2004stock incentive plan, as amended (the “Horizon Plan”), was assumed by theCompany in its merger with Horizon PCS, Inc. in 2005. The iPCS 2004long-term incentive plan, as amended (the “iPCS Plan”), was approved by theCompany’s Board of Directors as provided by the Company’s plan ofreorganization. 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 iPCS Plan).Additionally, the iPCS Plan provides that a share of stock issued in connectionwith any full value award during the period starting May 22, 2008 andthrough June 15, 2009 shall reduce the total number of shares that may beawarded by 1.78. On June 16, 2009, the Company’s stockholders approved theThird Amended and Restated iPCS Plan, which included an increase of 1,900,000in the number of shares available for issuance. Giving effect to this amendment, the total number of shares that may beawarded under the iPCS Plan is 4,592,630 shares of common stock, of whichamount, 2,064,606 shares remained available for awards as of June 30,2009.

 

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TheCompany did not award any stock options during the three months ended June 30,2009.  During the six months ended June 30,2009, the Company awarded 332,452 stock options to management and the Board ofDirectors at an exercise price of $8.76, which was the closing price on thedate of grants.  The fair value of eachgrant is estimated at the grant date using the Black-Scholes option pricingmethod.  The table below outlines the assumptionsused for the options granted during the six months ended June 30, 2009:

 
| ** **              | ** ** | **For the Six Months Ended  June 30, 2009** | ** ** |
|-------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Range**                                                                 | ** ** | **Weighted Average** | ** ** |
| Risk-free interest rate |       | 2.50% to 2.66%                                                            |       | 2.63 | % |
| Volatility              |       |                                                                      |       | 70.00 | % |
| Dividend yield          |       |                                                                      |       | 0.00 | % |
| Expected life in years  |       |                                                                      |       | 5.85 |   |
| Fair value price        |       |                                                                      |       | $ | 5.54 |   |
|                         |            |                                                                           |            |  |  |  |

 

The risk-free interest rate was determined using the then implied yieldcurrently available for zero-coupon U.S. government issues with a remainingterm equal to the expected life of the stock options. The expected volatilityassumption used in the Black-Scholes option pricing models was based on thehistorical volatility of peer companies as adjusted for the Company’svolatility since its existence as a publicly traded company in 2004. TheCompany does not currently intend to pay cash dividends and thus has assumed a0% dividend yield. The Company uses the simplified method for calculating theexpected life for stock options in place of using historical exercise data. TheCompany’s stock has been publicly traded since August 2004 and the Companycannot provide a reasonable basis upon which to estimate the expected term ofoptions granted.

 

On May 2, 2007, inconnection with the $11.00 special cash dividend paid in 2007, the CompensationCommittee of the Board of Directors of the Company resolved that each stockoption that was outstanding under the iPCS Plan and the Horizon Plan, on thetrading day immediately preceding the trading day designated by the NASDAQStock Market as the ex-dividend date (the “Adjustment Date”) would be adjustedas follows effective as of the opening of business on the Adjustment Date:

 

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

 

·                  The exercise price of each option would be adjusted bymultiplying the exercise price by the Adjustment Factor.

 

The “Adjustment Factor”was 0.78282 which was equal to one minus the percentage reduction in theclosing sale price of a share of stock on the Adjustment Date reported by theNASDAQ Stock Market at the regular hours closing price (“Closing Price”) ascompared to the Closing Price of a share of stock on the Adjustment Date minus$11.00. In addition, on the Adjustment Date, the number of shares under theiPCS Plan and the Horizon Plan was adjusted by dividing the number of shares ofstock reserved for issuance by the Adjustment Factor; thereby increasing thenumber of shares reserved for issuance. The modification resulted in anadditional 184,537 shares to 72 employees and directors who hadoptions outstanding on the modification date. With this modification, theCompany will record additional stock-based compensation expense ofapproximately $6.5 million, of which approximately $3.2 million wasrecorded as of the date of modification and the remainder is being recognizedover the remaining vesting period for the options, subject to reduction forforfeitures. An additional $0.1 million of compensation expense related tothe modification was recorded in the three and six months ended June 30,2009 and an additional $0.5 million and $0.9 million was recorded in the threeand six months ended June 30, 2008, respectively, with the quarterlyvesting of stock options.  As of June 30,2009, approximately $0.4 million of additional stock-based compensation expenserelated to this modification remains to be recognized over the remainingvesting period of the options.

 

Thefollowing table shows stock-based compensation expense by type of share-basedaward for the three and six months ended June 30, 2009 and 2008 includedin the consolidated statements of operations (in thousands):

 
| ** **                                                                                    | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30, 2009**                             | ** ** | **June 30, 2008**                      | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Restricted  stock                                                                             |       | $                                                  | 329        |                                        | $          | 274 |   | $ | 584 |   | $ | 554 |   |
| Fair  value expense of stock option awards                                                    |       | 800                                                |       | 1,087                                       |       | 1,600 |   | 2,186 |   |
| Fair  value expense of stock option modifications related to special cash dividend  (Note 11) |       | 65                                                 |       | 458                                         |       | 130 |   | 920 |   |
| Total  stock-based compensation                                                               |       | $                                                  | 1,194      |                                        | $          | 1,819 |   | $ | 2,314 |   | $ | 3,660 |   |

 

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Thefollowing table shows the total remaining unrecognized compensation costrelated 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                          |       | $                                                              | 2.2        |                                                                    | 1.84       |   |
| Fair value expense of stock option awards |       | 7.4                                                            |       | 2.50                                                                    |       |
|                                           |            |                                                                |            |                                                                         |            |  |

 

Stock-basedcompensation expense is included in the consolidated statements of operationsas follows (in thousands):

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                      | ** ** | **June 30, 2009**                        | ** ** | **June 30, 2008**                 | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Cost  of service and roaming    |       | $                                                  | 89         |                                        | $          | 163 |   | $ | 169 |   | $ | 326 |   |
| Selling  and marketing          |       | 144                                                |       | 204                                         |       | 280 |   | 417 |   |
| General  and administrative     |       | 961                                                |       | 1,452                                       |       | 1,865 |   | 2,917 |   |
| Total  stock-based compensation |       | $                                                  | 1,194      |                                        | $          | 1,819 |   | $ | 2,314 |   | $ | 3,660 |   |

 

The following is asummary of options outstanding and exercisable at June 30, 2009:

 
| ** **                            | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | ** **                                     | ** ** | **(in years)**                                     | ** ** | **(in thousands)**             | ** ** |
| Outstanding at December 31, 2008 |       | 1,397,947                      |       | $                                              | 22.80      |                                                    |       |                                |       |   |
| Granted                               |       | 332,452                        |       | 8.76                                           |       |                                                    |       |                                |       |
| Exercised                             |       | —                         |       | —                                         |       |                                                    |       |                                |       |
| Forfeited                             |       | (420                           | )          | 39.47                                          |       |                                                    |       |                                |       |
| Expired                               |       | (27,165                        | )          | 20.51                                          |       |                                                    |       |                                |       |
| Outstanding at June 30, 2009     |       | 1,702,814                      |       | $                                              | 20.09      |                                                    | 7.80       |                                | $          | 4,390 |   |
| Exercisable at June 30, 2009     |       | 957,845                        |       | $                                              | 20.00      |                                                    | 6.92       |                                | $          | 2,708 |   |

 

The following is asummary of activity for the three months ended June 30, 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                                      |       | (8,691     | )          | 43.20                                             |       |
| Forfeited                                   |       | (200       | )          | 8.76                                              |       |
| Restricted shares at June 30, 2009     |       | 148,843    |       | $                                                 | 17.22      |   |

 

The iPCS Plan permits, at the employee’s direction, the surrendering ofcommon shares to satisfy certain tax withholding obligations in connection withvesting of restricted stock.

 

**(11)  Special Cash Dividend**

 

On April 26, 2007,the Board of Directors declared a special cash dividend of $11.00 per share,approximately $187.0 million in the aggregate, payable to all holders of recordof the Company’s common stock on May 8, 2007.  Of this amount, approximately $186.5 millionwas paid on May 16, 2007.  The remainingunpaid dividends relate to restricted stock awards and are being paid outstarting in July 2007 as these awards vest.  As of June 30, 2009, approximately $0.2million of this dividend remains to be paid.

 

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

 

Comprehensiveincome (loss), which includes all changes in the Company’s equity during theperiod except transactions with stockholders, consisted of the following forthe three and six months ended June 30, 2009 and 2008 (in thousands):

 
| ** **                                                                             | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                             | ** ** | **June 30, 2009**                             | ** ** | **June 30, 2008**                      | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Net income (loss)                                                                      |       | $                                                  | 7,378      |                                        | $          | (646 | ) | $ | 13,150 |   | $ | (2,252 | ) |
| Other comprehensive income — Unrealized income on  interest rate swap, net of tax |       | 1,863                                              |       | 8,425                                       |       | 3,025 |   | 506 |   |
| Comprehensive income (loss)                                                            |       | $                                                  | 9,241      |                                        | $          | 7,779 |   | $ | 16,175 |   | $ | (1,746 | ) |

 

**(13)  Stock Repurchase Plan**

 

OnJanuary 30, 2009, the Company’s Board of Directors authorized therepurchase of up to $15.0 million of the Company’s common stock in a stockrepurchase 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 repurchase program, during thesix months ended June 30, 2009, the Company purchased 400,899 shares ofits common stock at an average price of $11.78 per share for approximately$4.7 million, of which approximately $4.5 million had been settled in cashas of June 30, 2009.  As of June 30,2009, approximately $10.3 million remained available under the stockrepurchase program.  These repurchasedshares are reflected as Treasury stock, at cost in the Consolidated BalanceSheet as of June 30, 2009.

 

**(14)  New Accounting Pronouncements**

 

In September 2006, the FASB issued Statement No. 157, “FairValue Measurements” (“SFAS 157”). SFAS 157 defines fair value,establishes a framework and gives guidance regarding the methods used formeasuring fair value, and expands disclosures about fair value measurements. InFebruary 2008, the FASB released FASB Staff Position, (FSP)SFAS 157-2—Effective Date of FASB Statement No. 157, which delays theeffective date of SFAS 157 for all non-financial assets and non-financialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually) to fiscal yearsbeginning after November 15, 2008. The Company adopted SFAS 157 as itapplies to financial assets and liabilities as of January 1, 2008. TheCompany adopted SFAS 157, as it relates to non-financial assets andliabilities as of January 1, 2009. See Note 8 for further discussionof fair value measurements of financial instruments.

 

InMarch 2008, the FASB issued Statement No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”(“SFAS 161”). SFAS 161 amends and expands the disclosure requirementsof FASB Statement No. 133, requiring enhanced disclosures about theCompany’s hedging activities. The Company is required to provide enhanceddisclosures about (a) how and why it uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under FASBStatement No. 133 and its related interpretations, and (c) howderivative instruments and related hedged items affect the Company’s financialposition, results of operations, and cash flows. SFAS No. 161 is effectivefor fiscal years and interim periods beginning after December 15, 2008,with comparative disclosures of earlier periods encouraged upon initialadoption. The Companyadopted the provisions of SFAS 161 effective January 1, 2009.  See Note 7 for the Company’s disclosuresabout its derivative instruments and hedging activities.

 

In April 2009, theFASB issued Staff Position SFAS 107-1 and Accounting Principles Board (APB)Opinion No. 28-1, “Interim Disclosures about Fair Value of FinancialInstruments” (SFAS 107-1).  SFAS 107-1 amends FASB Statement No. 107,“Disclosures about Fair Values of Financial Instruments,” and APB Opinion No. 28to require disclosures about fair value of financial instruments in interimfinancial statements as well as in annual financial statements.  SFAS107-1 is effective for interim periods ending after June 15, 2009, butearly adoption is permitted for interim periods ending after March 15,2009.  The Company adopted the provisions of SFAS 107-1 effective forthe interim period ended March 31, 2009. See Note 8 for the Company’s disclosures about its fair values offinancial instruments.

 

In April 2009, theFASB issued Staff Position SFAS 157-4, “Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Indentifying Transactions That Are Not Orderly” (SFAS157-4).  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.

 

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In April 2009, theFASB issued Staff Position SFAS 115-2 and Staff Position SFAS 124-2, “Recognitionand Presentation of Other-Than-Temporary Impairments.”  This StaffPosition provides guidance in determining whether impairments in debtsecurities are other than temporary, and modifies the presentation anddisclosures surrounding such instruments.  This Staff Position iseffective for interim and annual periods ending after June 15, 2009, butearly adoption is 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.

 

In May 2009, theFASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”), whichsets forth general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  SFAS 165is effective for interim periods ending after June 15, 2009.  The Company adopted the provisions of SFAS165 for the interim period ended June 30, 2009.

 

In June 2009, theFASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”(“SFAS 167”), which amends FASB Interpretation No. 46 (revised December 2003)to address the elimination of the concept of a qualifying special purposeentity.  SFAS 167 also replaces thequantitative-based risks and rewards calculation for determining whichenterprise has a controlling financial interest in a variable interest entitywith an approach focused on identifying which enterprise has the power todirect the activities of a variable interest entity and the obligation toabsorb losses of the entity or the right to receive benefits from the entity.Additionally, SFAS 167 provides more timely and useful information about anenterprise’s involvement with a variable interest entity. SFAS 167 is effectivefor fiscal years beginning after November 15, 2009.  The Company does not anticipate that theimplementation of SFAS 167 will have a material impact on its consolidatedfinancial statements.

 

In June 2009, theFASB issued Statement No. 168, “The *FASBAccounting Standards Codification*TM and the Hierarchy of Generally AcceptedAccounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”),which establishes the FASB Accounting Standards Codification as the source ofauthoritative accounting principles recognized by the FASB to be applied in thepreparation of financial statements in conformity with generally acceptedaccounting principles. SFAS 168 explicitly recognizes rules and interpretivereleases of the Securities and Exchange Commission (“SEC”) under federalsecurities laws as authoritative GAAP for SEC registrants. SFAS 168 iseffective for interim and annual periods ending after September 15,2009.  The adoption of SFAS 168 is notexpected to have a material effect on the Company’s consolidated financialstatements.

 

**(15)  Commitments and Contingencies**

 

*(a)  Commitments*

 

OnMarch 13, 2009, the Company signed a letter of agreement with NortelNetworks to purchase EV-DO Rev. A equipment and services totaling approximately$19.7 million in aggregate, consisting of a non-cancelable purchase ofapproximately $14.8 million of equipment and services and an option to purchaseup to an additional approximately $4.9 million of equipment and services.  Under this letter of agreement, the Companyagreed to return to Nortel Networks certain equipment replaced by the purchasedequipment by March 1, 2010.  As of June 30,2009, the Company has submitted non-cancelable purchase orders for approximately$14.8 million of equipment and services and therefore has no remainingcommitment under this letter of agreement to submit additional non-cancelablepurchase orders.  As of June 30,2009, the Company has received and paid for $6.7 million of equipment andservices and has returned approximately half of the replaced equipment toNortel. The remaining replaced equipment is expected to be returned to Nortelby the end of 2009.

 

*(b)  FCC Licenses*

 

SprintPCS holds the licenses necessary to provide wireless services in the Company’sterritory. The FCC requires that licensees like Sprint PCS maintain control oftheir licensed spectrums and not delegate control to third-party operators ormanagers without FCC consent and are subject to renewal and revocation by theFCC.  The FCC has adopted specificstandards that apply to wireless personal communications services licenserenewals. Any failure by Sprint PCS or the Company to comply with thesestandards could result in the non-renewal of the Sprint PCS licenses for theCompany’s territory. Additionally, if Sprint PCS does not demonstrate to theFCC that Sprint PCS has met the construction requirements for each of itswireless personal communications services licenses, it can lose those licenses.If Sprint PCS loses its licenses in the Company’s territory for any of thesereasons, or any other reason, the Company would not be able to provide wirelessservices without obtaining rights to other licenses.

 

IfSprint PCS loses its licenses in another territory, Sprint PCS or theapplicable 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*

 

TheState of Michigan is currently auditing the Company’s sales and use tax returnsfor the years 2003 through 2006.  Theoutcome of this audit cannot be determined at this time.

 

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*(d)  Litigation andArbitration*

 

*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:

 

·                  Within 180 days of thedate of the final order, Sprint and those acting in concert with it must ceaseowning, operating and managing the Nextel wireless network in iPCS Wireless’sterritory.

 

·                  Sprint shall continue tocomply with all terms and conditions of the Forbearance Agreement between iPCSWireless and Sprint setting forth certain limitations on Sprint’s operationspost-merger with Nextel.

 

On September 28, 2006, Sprint appealed the Circuit Court’s rulingto the Appellate Court of Illinois, First Judicial District (the “AppellateCourt”), and, at Sprint’s request, the Circuit Court’s ruling was stayed by theAppellate Court pending the appeal. On March 31, 2008, the Appellate Courtunanimously affirmed the 2006 Circuit Court decision. On May 5, 2008,Sprint filed a petition for leave to appeal with the Supreme Court of Illinois.On September 24, 2008, the Supreme Court of Illinois (the “Supreme Court”)denied Sprint’s petition for leave to appeal the Appellate Court’s decision.

 

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

 

·                  To grant Sprint360 days (rather than 180 days) to comply with the Circuit Court’s orderto cease owning, operating and managing the Nextel wireless network in iPCSWireless’s territory.

 

·                  To permit Sprint to seek anextension of the 360-day period upon a showing of good cause, with dueconsideration given to the hardship(s) imposed on iPCS Wireless by therequested extension.

 

On January 30, 2009, the Circuit Court entered its final order, asdirected by the Supreme Court, providing that:

 

·                  Sprint, and those acting inconcert with it, must cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s service area.

 

·                  Sprint has until January 25,2010 (360 days from the date of the Circuit Court’s order) to comply withthe order. Sprint may seek an extension of such deadline upon a showing of goodcause, giving due consideration to the hardships that would be imposed on iPCSWireless if such extension were granted.

 

·                  Sprint must continue tocomply with all terms and conditions of the Forbearance Agreement between iPCSWireless and Sprint.

 

On September 22, 2008, Sprint also filed a petition with theCircuit Court seeking to vacate that Court’s original order. On January 20,2009, the Circuit Court denied Sprint’s petition with prejudice. On February 18,2009, Sprint appealed the decision of the Circuit Court denying Sprint’spetition to vacate to the Illinois Appellate Court. The appeal process isongoing.

 

*Sprint/Clearwire Transaction Litigation.*  On May 7, 2008, Sprint announced a proposedtransaction among itself, Clearwire Corporation, and certain other parties (the“Sprint-Clearwire Transaction”) to form a new competing network (“NewClearwire”), pursuant to which transaction Sprint transferred its nextgeneration of wireless technology (“4G”) to the New Clearwire. The same day,Sprint filed a complaint for declaratory judgment against iPCS and certain ofits subsidiaries, iPCS Wireless, Horizon Personal Communications, Inc. andBright 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 Subsidiaries filed a lawsuit againstSprint and certain of its affiliates in the Circuit Court, seeking declaratoryand injunctive relief with respect to the Sprint-Clearwire Transaction. In thatcase, the iPCS Subsidiaries are seeking a declaration that the Sprint-ClearwireTransaction constitutes a breach of Sprint’s affiliation agreements it has withthose subsidiaries, 

 

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andalso sought an injunction barring Sprint from closing the Sprint-ClearwireTransaction until it complied with the affiliation agreements.

 

On July 14, 2008, the Delaware Chancery Court granted the motionto dismiss filed by our Bright and Horizon subsidiaries and dismissed them fromthe Delaware litigation. Pursuant to a motion filed by iPCS and iPCS Wireless,on October 8, 2008, the Delaware Chancery Court stayed all remainingDelaware litigation in favor of the lawsuit brought in Illinois by the iPCSSubsidiaries.

 

On November 3, 2008, the iPCS Subsidiaries filed a motion forpreliminary injunction in the Circuit Court seeking to prevent Sprint fromconsummating the Sprint-Clearwire Transaction until such time that the CircuitCourt could rule on the merits of the underlying litigation brought by theiPCS Subsidiaries against Sprint. On November 17, 2008, the iPCSSubsidiaries, Sprint, and New Clearwire reached a stipulation pursuant to whichthe iPCS Subsidiaries withdrew their motion for preliminary injunction withoutprejudice, 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 Court issued a decision on amotion for partial summary judgment filed by iPCS Wireless based on the 2006decision in the Illinois Sprint/Nextel Merger Litigation. The Circuit Courtspecifically recognized that pursuant to the 2006 decision, Sprint and thoseacting in concert with it cannot compete against iPCS Wireless in its exclusiveservice area, regardless of the radio frequency that they use to compete. TheCircuit Court held that Sprint cannot relitigate the issue of whether Sprintand those acting in concert with it may compete with iPCS Wireless in itsservice area by using a frequency other than 1900 MHz. The Circuit Courtgranted in part iPCS Wireless’s motion for partial summary judgment withrespect to these two issues and entered judgment thereon but stayed enforcementof the judgment pending a ruling on Sprint’s petition to vacate the originaljudgment in the Illinois Sprint/Nextel Merger Litigation, which petition tovacate was then dismissed with prejudice on January 20, 2009. The CircuitCourt also found in its December 30, 2008 ruling that some material issuesof fact remained and would be decided at trial including, but not limited to,whether New Clearwire is a “related party,” whether Sprint controls NewClearwire, whether the protections of exclusivity extend beyond the situationin which Sprint acts through a related party, and the question of whoconstitutes “those acting in concert” with Sprint.

 

On January 9, 2009, the Circuit Court denied Sprint’s motion forpartial summary judgment against Bright and Horizon. In that motion, Sprint hadsought to bar Bright and Horizon from litigating the issue of whether Sprintcould compete with Horizon and Bright outside the 1900 MHz spectrum range, basedon a 2006 decision by the Delaware Chancery Court. The Circuit Court deniedSprint’s motion for partial summary judgment against Bright and Horizon andfound that the Delaware Chancery Court did not actually decide that issue.

 

On January 30, 2009, the iPCS Subsidiaries amended their originalcomplaint against Sprint. Under the amended complaint, the iPCS Subsidiariesincluded, among other things, a claim that Sprint is improperly withholdingadvanced technologies from the iPCS Subsidiaries and diverting thosetechnologies to their competitor in violation of the iPCS Subsidiaries’affiliation agreements with Sprint. The amended complaint also seeks monetaryrelief. On February 27, 2009, Sprint, in its response to the amendedcomplaint, asserted several counterclaims that essentially seek declaratoryrelief that the Clearwire transaction does not violate the affiliationagreements.

 

OnApril 29, 2009, the Circuit Court denied a motion brought by Sprint thatsought to dismiss the iPCS Subsidiaries’ claims as to whether Sprint improperlywithheld advanced 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.

 

The Company presently cannot determine the ultimate resolution of thematters described above. The results of litigation are inherently uncertainand, while the Company believes that it has meritorious claims in the mattersdescribed above, material adverse outcomes are possible.

 

In addition to the foregoing, from time to time, the Company isinvolved in various legal proceedings relating to claims arising in theordinary course of business. The Company is not currently a party to any suchlegal proceedings, the adverse outcome to 

 

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which,individually or in the aggregate, is expected to have a material adverse effecton our business, financial condition or results of operations.

 

**(16)  Consolidating Financial Information**

 

TheSecured Notes are fully, unconditionally and jointly and severally guaranteedby the Company’s domestic restricted subsidiaries, including iPCS Wireless, Inc.,iPCS Equipment, Inc., Horizon Personal Communications, Inc., BrightPCS Holdings, Inc. and Bright Personal Communications Services, LLC,which are 100% owned subsidiaries of iPCS, Inc. (see Note 6). Thefollowing consolidating financial information for iPCS, Inc. as of June 30,2009 and December 31, 2008 and for the three and six months ended June 30,2009 and 2008 is presented for iPCS, Inc. and the Company’s guarantorsubsidiaries (in thousands):

 

**Condensed Consolidating Balance Sheet**

**As of June 30, 2009**

 
| ** **                                                    | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Cash and cash equivalents                                     |       | $                  | —     |                        | $          | 75,639           |       | $                          | —     |   | $ | 75,639 |   |
| Intercompany receivables                                      |       | 545,218            |       | 284,484                     |       | (829,702         | )          | —                     |       |
| Other current assets                                          |       | 369                |       | 83,164                      |       | —           |       | 83,533                     |       |
| Total current assets                                          |       | 545,587            |       | 443,287                     |       | (829,702         | )          | 159,172                    |       |
| Property and equipment, net                                   |       | —             |       | 157,577                     |       | —           |       | 157,577                    |       |
| Intangible assets, net                                        |       | —             |       | 227,797                     |       | —           |       | 227,797                    |       |
| Other noncurrent assets                                       |       | 5,731              |       | 3,589                       |       | —           |       | 9,320                      |       |
| Investment in subsidiaries                                    |       | 193,178            |       | —                      |       | (193,178         | )          | —                     |       |
| Total assets                                                  |       | $                  | 744,496    |                        | $          | 832,250          |       | $                          | (1,022,880 | ) | $ | 553,866 |   |
| Intercompany payable                                          |       | $                  | 284,484    |                        | $          | 545,218          |       | $                          | (829,702   | ) | $ | — |   |
| Other current liabilities                                     |       | 5,770              |       | 84,511                      |       | —           |       | 90,281                     |       |
| Total current liabilities                                     |       | 290,254            |       | 629,729                     |       | (829,702         | )          | 90,281                     |       |
| Long-term debt                                                |       | 475,000            |       | 381                         |       | —           |       | 475,381                    |       |
| Other long-term liabilities                                   |       | 13,684             |       | 8,962                       |       | —           |       | 22,646                     |       |
| Total liabilities                                             |       | 778,938            |       | 639,072                     |       | (829,702         | )          | 588,308                    |       |
| Stockholders’ equity (deficiency)                        |       | (34,442            | )          | 193,178                     |       | (193,178         | )          | (34,442                    | )          |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                  | 744,496    |                        | $          | 832,250          |       | $                          | (1,022,880 | ) | $ | 553,866 |   |

 

**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 of Operations**

**For the Three Months Ended June 30, 2009**

 
| ** **                                      | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Total revenue                                   |       | $                  | —     |                        | $          | 140,159          |       | $                          | —     |   | $ | 140,159 |   |
| Cost of revenue                                 |       | —             |       | 86,970                      |       | —           |       | 86,970                     |       |
| Selling and marketing                           |       | —             |       | 17,336                      |       | —           |       | 17,336                     |       |
| General and administrative                      |       | 605                |       | 7,131                       |       | —           |       | 7,736                      |       |
| Depreciation and amortization                   |       | —             |       | 12,255                      |       | —           |       | 12,255                     |       |
| Loss on disposal of property and equipment, net |       | —             |       | 417                         |       | —           |       | 417                        |       |
| Total operating expense                         |       | 605                |       | 124,109                     |       | —           |       | 124,714                    |       |
| Other, net                                      |       | —             |       | (7,897                      | )          | —           |       | (7,897                     | )          |
| Income in subsidiaries                          |       | 7,983              |       | —                      |       | (7,983           | )          | —                     |       |
| Income before provision for income tax          |       | 7,378              |       | 8,153                       |       | (7,983           | )          | 7,548                      |       |
| Provision for income tax                        |       | —             |       | 170                         |       | —           |       | 170                        |       |
| Net income                                      |       | $                  | 7,378      |                        | $          | 7,983            |       | $                          | (7,983     | ) | $ | 7,378 |   |

 

**Condensed Consolidating Statement of Operations**

**For the Three Months Ended June 30, 2008**

** **
| ** **                                      | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Total revenue                                   |       | $                  | —     |                        | $          | 129,371          |       | $                          | —     |   | $ | 129,371 |   |
| Cost of revenue                                 |       | —             |       | 83,337                      |       | —           |       | 83,337                     |       |
| Selling and marketing                           |       | —             |       | 16,444                      |       | —           |       | 16,444                     |       |
| General and administrative                      |       | 763                |       | 7,229                       |       | —           |       | 7,992                      |       |
| Depreciation and amortization                   |       | —             |       | 13,849                      |       | —           |       | 13,849                     |       |
| Loss on disposal of property and equipment, net |       | —             |       | 248                         |       | —           |       | 248                        |       |
| Total operating expense                         |       | 763                |       | 121,107                     |       | —           |       | 121,870                    |       |
| Other, net                                      |       | 1                  |       | (7,823                      | )          | —           |       | (7,822                     | )          |
| Income in subsidiaries                          |       | 116                |       | —                      |       | (116             | )          | —                     |       |
| Income (loss) before provision for income tax   |       | (646               | )          | 441                         |       | (116             | )          | (321                       | )          |
| Provision for income tax                        |       | —             |       | 325                         |       | —           |       | 325                        |       |
| Net income (loss)                               |       | $                  | (646       | )                           | $          | 116              |       | $                          | (116       | ) | $ | (646 | ) |

 

**Condensed Consolidating Statement of Operations**

**For the Six Months Ended June 30, 2009**

 
| ** **                                      | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Total revenue                                   |       | $                  | —     |                        | $          | 276,323          |       | $                          | —     |   | $ | 276,323 |   |
| Cost of revenue                                 |       | —             |       | 175,332                     |       | —           |       | 175,332                    |       |
| Selling and marketing                           |       | —             |       | 33,986                      |       | —           |       | 33,986                     |       |
| General and administrative                      |       | 1,226              |       | 15,391                      |       | —           |       | 16,617                     |       |
| Gain on Sprint settlement                       |       | —             |       | (4,273                      | )          | —           |       | (4,273                     | )          |
| Depreciation and amortization                   |       | —             |       | 24,835                      |       | —           |       | 24,835                     |       |
| Loss on disposal of property and equipment, net |       | —             |       | 516                         |       | —           |       | 516                        |       |
| Total operating expense                         |       | 1,226              |       | 245,787                     |       | —           |       | 247,013                    |       |
| Other, net                                      |       | —             |       | (15,840                     | )          | —           |       | (15,840                    | )          |
| Income in subsidiaries                          |       | 14,376             |       | —                      |       | (14,376          | )          | —                     |       |
| Income before provision for income tax          |       | 13,150             |       | 14,696                      |       | (14,376          | )          | 13,470                     |       |
| Provision for income tax                        |       | —             |       | 320                         |       | —           |       | 320                        |       |
| Net income                                      |       | $                  | 13,150     |                        | $          | 14,376           |       | $                          | (14,376    | ) | $ | 13,150 |   |

 

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**Condensed Consolidating Statement of Operations**

**For the Six Months Ended June 30, 2008**

 
| ** **                                      | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Total revenue                                   |       | $                  | —     |                        | $          | 255,029          |       | $                          | —     |   | $ | 255,029 |   |
| Cost of revenue                                 |       | —             |       | 163,184                     |       | —           |       | 163,184                    |       |
| Selling and marketing                           |       | —             |       | 34,303                      |       | —           |       | 34,303                     |       |
| General and administrative                      |       | 1,475              |       | 13,605                      |       | —           |       | 15,080                     |       |
| Depreciation and amortization                   |       | —             |       | 27,804                      |       | —           |       | 27,804                     |       |
| Loss on disposal of property and equipment, net |       | —             |       | 258                         |       | —           |       | 258                        |       |
| Total operating expense                         |       | 1,475              |       | 239,154                     |       | —           |       | 240,629                    |       |
| Other, net                                      |       | 2,212              |       | (18,214                     | )          | —           |       | (16,002                    | )          |
| Loss in subsidiaries                            |       | (2,989             | )          | —                      |       | 2,989            |       | —                     |       |
| Loss before provision for income tax            |       | (2,252             | )          | (2,339                      | )          | 2,989            |       | (1,602                     | )          |
| Provision for income tax                        |       | —             |       | 650                         |       | —           |       | 650                        |       |
| Net loss                                        |       | $                  | (2,252     | )                           | $          | (2,989           | )          | $                          | 2,989      |   | $ | (2,252 | ) |

 

**Condensed Consolidating Statement of Cash Flows**

**For the Six Months Ended June 30, 2009**

 
| ** **                                       | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Operating activities                             |       | $                  | 4,542      |                        | $          | 36,553           |       | $                          | —     |   | $ | 41,095 |   |
| Investing activities                             |       | —             |       | (16,837                     | )          | —           |       | (16,837                    | )          |
| Financing activities                             |       | (4,542             | )          | (17                         | )          | —           |       | (4,559                     | )          |
| Net increase in cash and cash equivalents        |       | —             |       | 19,699                      |       | —           |       | 19,699                     |       |
| Cash and cash equivalents at beginning of period |       | —             |       | 55,940                      |       | —           |       | 55,940                     |       |
| Cash and cash equivalents at end of period       |       | $                  | —     |                        | $          | 75,639           |       | $                          | —     |   | $ | 75,639 |   |

 

**Condensed Consolidating Statement of Cash Flows**

**For the Six Months Ended June 30, 2008**

 
| ** **                                       | ** ** | **iPCS Inc.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|------------------|------------|----------------------------|------------|
| Operating activities                             |       | $                  | (312       | )                           | $          | 28,796           |       | $                          | —     |   | $ | 28,484 |   |
| Investing activities                             |       | —             |       | (40,827                     | )          | —           |       | (40,827                    | )          |
| Financing activities                             |       | 312                |       | (14                         | )          | —           |       | 298                        |       |
| Net decrease in cash and cash equivalents        |       | —             |       | (12,045                     | )          | —           |       | (12,045                    | )          |
| Cash and cash equivalents at beginning of period |       | —             |       | 77,599                      |       | —           |       | 77,599                     |       |
| Cash and cash equivalents at end of period       |       | $                  | —     |                        | $          | 65,554           |       | $                          | —     |   | $ | 65,554 |   |

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Asused 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.

 

Statementsin this Quarterly Report on Form 10-Q regarding Sprint or Sprint PCS arederived from information contained in our affiliation agreements with SprintPCS, periodic reports and other documents filed by Sprint with the SEC or pressreleases or other statements issued or made by Sprint or Sprint PCS. ThisQuarterly Report on Form 10-Q contains trademarks, service marks and tradenames of companies and organizations other than us. Other than with respect toSprint PCS, our use or display of other parties’ trade names, trademarks orproducts is not intended to and does not imply a relationship with, orendorsement or sponsorship of us by, the trade name or trademark owners.

 

Thefollowing is an analysis of our results of operations, liquidity and capitalresources and should be read in conjunction with the unaudited ConsolidatedFinancial Statements and notes related thereto included in this QuarterlyReport on Form 10-Q. To the extent that the following Management’sDiscussion and Analysis contains statements which are not of a historical nature,such statements are forward-looking statements which involve risks anduncertainties. These risks include, but are not limited to, the risks anduncertainties listed in the next section entitled “Forward-LookingStatements” and other factors discussed elsewhere herein and in our otherfilings with the SEC.

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-Q contains statements aboutfuture events and expectations that are “forward-looking statements.” Thesestatements relate to future events or our future financial performance, andinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, levels of activity, performance or achievements to bematerially different from any future results, levels of activity, performanceor achievements expressed or implied by these forward-looking statements. Insome cases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”“predicts,” “potential,” or the negative use of these terms or other comparableterminology. Any statement in this report that is not a statement of historicalfact may be deemed to be a forward-looking statement and subject to the safe harborcreated by the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements include:

 

·                  statements regarding ouranticipated revenue, expense levels, capital expenditures, securityrepurchases, liquidity and capital resources, operating losses and operatingcash flows and litigation results and prospects; and

 

·                  statements regarding expectationsor projections about developments in our industry and markets in our territory.

 

Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. Important factors with respect to anysuch forward-looking statements, including certain risks and uncertainties thatcould cause actual results to differ materially from our expectations, include,but are not limited to:

 

·                  our dependence on ouraffiliation with Sprint, as well as its reputation and performance in themarketplace;

 

·                  the compliance by Sprintwith the judgment and orders of the Circuit Court of Cook County, Illinoisrequiring Sprint to cease owning and operating the Nextel network in iPCSWireless, Inc.’s territory, including Sprint’s plans for the Nextelbusiness going forward and its announcement of its intention to sell certain ofits Nextel assets in our territory in light of that judgment (and whether any suchsale would be in compliance with the Circuit Court’s rulings);

 

·                  the impact and final outcomeof our litigation with Sprint regarding Sprint’s WiMax transaction withClearwire, including Sprint’s plans for the Sprint-Clearwire transaction goingforward in light of any future outcome;

 

·                  the impact and final outcomeof our current and future disputes with Sprint under the affiliationagreements;

 

·                  changes in Sprint’saffiliation strategy;

 

·                  the ability of Sprint PCS toalter the terms of our affiliation agreements with it, including programrequirements;

 

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·                  the ongoing effectiveness ofSprint’s network as a result of Sprint’s outsourcing of its network maintenanceand the effect of any network deterioration on our results of operations;

 

·                  our dependence on backoffice services, such as billing and customer care, as well as certainmarketing and operational services provided by Sprint PCS, and the costs weincur to obtain such services, and the effect on us of Sprint PCS notperforming these services adequately or of Sprint PCS devoting fewerresources to the provisioning of these services;

 

·                  changes or advances intechnology in general, or specifically related to Sprint and its affiliates,that may render our technology less desirable to our customers, or any failureby Sprint to share with us the benefits of any improved technologies;

 

·                  competition in the industryand markets in which we operate;

 

·                  our ability to attract andretain skilled personnel;

 

·                  our potential need foradditional capital or the need for refinancing any of our existingindebtedness;

 

·                  our potential inability to profitablyexpand existing products and services or launch new products and services,including a prepaid offering;

 

·                  changes in governmentregulation;

 

·                  changes in the relativeattractiveness of Sprint PCS’s phones, pricing plans, customer service andcoverage as well as the market’s overall perception of the Sprint PCS brand;

 

·                  our subscriber creditquality;

 

·                  the potential for us toexperience a continued high rate of subscriber turnover as compared to theindustry;

 

·                  changes in the amounts of,and the relationship between, roaming revenue we receive and roaming expenseswe pay;

 

·                  inaccuracies or delays inour financial and other information provided to us by Sprint, particularly inlight of our 2008 migration to Sprint’s “Ensemble” billing and customer careplatform;

 

·                  any failure to maintaineffective internal controls to satisfy the requirements of Section 404 ofthe Sarbanes-Oxley Act, which requires annual management assessments of theeffectiveness of internal control over financial reporting;

 

·                  our rates of penetration inthe wireless industry and in our territories;

 

·                  our significant level ofindebtedness;

 

·                  the adequacy of ourallowance for bad debt and other reserves;

 

·                  our subscriber purchasingpatterns;

 

·                  subscriber satisfaction withour network and operations, including with services provided to us by Sprint,such as billing and customer care;

 

·                  availability of an adequatesupply of subscriber equipment to Sprint PCS and to us and our distributorsspecifically;

 

·                  our dependence onindependent third parties for a sizable percentage of our distribution;

 

·                  risks related to futuregrowth and expansion, including subscriber growth;

 

·                  the risk of our workforcebecoming unionized, particularly in light of the potential adoption of theEmployee Free Choice Act;

 

·                  depth and duration of theeconomic downturn in the United States and its effect on our vendors,distribution partners and existing and potential subscribers;

 

·                  risk of terrorist attack orother macro economic and political events and their impact on our current andpotential subscribers;

 

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·                  effects of mergers,consolidations and joint ventures within the wireless telecommunicationsindustry, including business combinations involving Sprint or affiliates ofSprint, and unexpected announcements or developments from others in thewireless telecommunications industry;

 

·                  our dependency on keyvendors such as Nortel for expansion or maintenance of our network, includingthe continued viability of these vendors; and

 

·                  other factors discussedunder “Recent Trends, Risks and Uncertainties That May Affect Operating Results,Liquidity and Capital Resources” below, elsewhere herein, and Item1A, “Risk Factors,” in our 2008 Annual Report on Form 10-K.

 

**New Accounting Pronouncements**

 

SeeNote 14, New Accounting Pronouncements, of the “Notes to Unaudited ConsolidatedFinancial Statements” in this Quarterly Report on Form 10-Q for adiscussion of new accounting pronouncements.

 

**Definitions of Operating Metrics**

 

Inthis “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” section, we provide certain financial measures that arecalculated in accordance with accounting principles generally accepted in theUnited States (“GAAP”) and as adjusted to GAAP (“non-GAAP”) to assess ourfinancial performance. In addition, we use certain non-financial terms that arenot measures of financial performance under GAAP. Terms such as “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).

 

·                  Net subscriberadditions for the period represented is calculated as the gross subscriberadditions in the period less the number of subscribers deactivated plus the netsubscribers transferred in or out of our markets during the period.

 

·                  Churn is ameasure of the average monthly rate at which subscribers based in our territorydeactivate service on a voluntary or involuntary (credit-related) basis. Wecalculate average monthly churn based on the number of subscribers deactivatedduring the period (net of those who deactivated within 30 days ofactivation and excluding transfers out of our territory) as a percentage of ouraverage monthly subscriber base during the period divided by the number ofmonths during the period.

 

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

 

·                  CPGA, or costper gross addition, is a measure of the average cost we incur to add a newsubscriber in our territory. These costs include handset subsidies on newsubscriber activations, commissions, rebates and other selling and marketingcosts. We calculate CPGA by dividing (a) the sum of cost of products 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.

 

·                  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 thewireless network of Sprint. The number of residents covered by our network doesnot represent the number of wireless subscribers that we serve or expect toserve in our territory.

 

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

 

**Business Overview**

 

As a PCS Affiliate of Sprint, we have the exclusive right to providedigital wireless personal communications services, or PCS, under the Sprintbrand name in 81 markets including markets in Illinois, Michigan, Pennsylvania,New York, Indiana, Iowa, Ohio and Tennessee. Our territory includes key marketssuch as Grand Rapids (MI), Fort Wayne (IN), the Tri-Cities region of Tennessee(Johnson City, Kingsport and Bristol), Scranton (PA), Saginaw-Bay City (MI),Central Illinois (Peoria, IL, Springfield, IL, Decatur, IL and Champaign,IL), and the Quad Cities region of Illinois and Iowa (Bettendorf and Davenport,IA, and Moline and Rock Island, IL). We own and are responsible for building,operating and managing the portion of the 100% digital, 100% PCS wirelessnetwork of Sprint PCS located in our territory. We offer national calling plansdesigned by Sprint PCS as well as local plans tailored to our markets. Our PCSnetwork is designed to offer a seamless connection with the wireless network ofSprint PCS. We market Sprint PCS products and services through a number ofdistribution outlets located in our territory, including our company-ownedretail stores, co-branded dealers, major national retailers and local thirdparty distributors. As of June 30, 2009, our licensed territory had atotal population of approximately 15.1 million residents, of which ourwireless network covered approximately 12.6 million residents, and we hadapproximately 710,200 subscribers.

 

***Relationship with Sprint***

 

Our relationship with Sprint is the most significant relationship wehave and is essential to the current operation of our business. The terms ofour relationship are set forth in the affiliation agreements between certain ofour subsidiaries and Sprint PCS. Pursuant to these affiliation agreements, weagreed to offer CDMA services using Sprint’s spectrum under the Sprint brandname on a wireless network built and operated at our own expense. We believethat our strategic relationship with Sprint provides significant competitiveadvantages. In particular, we believe that our affiliation agreements withSprint allow us to offer high quality, nationally branded wireless voice anddata services for lower cost and lower capital requirements than wouldotherwise be possible.

 

Wehave been, and continue to be, engaged in litigation with Sprint regarding its2005 merger with Nextel and, more recently, its Sprint-Clearwire transactionthrough which Sprint and Clearwire are developing a nationwide mobile 4G WiMaxnetwork. Sprint’s operation of the legacy Nextel business in our Horizon andBright territories must comply with the August 2006 ruling of the DelawareCourt of Chancery. The Circuit Court of Cook County, Illinois has requiredSprint to cease owning, operating and managing the Nextel wireless network iniPCS Wireless’s territory on or before January 25, 2010, subject to Sprintbeing able to request an extension under certain circumstances. While Sprinthas recently announced that it intends to sell certain of its Nextel assetslocated in iPCS Wireless’s territory, such actions may or may not comply withthe Circuit Court’s order.  We intend todiligently monitor Sprint’s actions and take such steps as may be appropriateto ensure full compliance by Sprint with the Circuit Court’s order.  Similarly, we do not know Sprint’s intentionsfor complying with any future court rulings related to the Sprint-Clearwiretransaction, or the impact on our business of Sprint’s actions or inactions inthat case. We intend to continue to vigorously protect and enforce our rights,but there is no assurance that we will prevail. For a detailed discussion ofour litigation with Sprint, see “—Commitments and Contingencies” below.

 

Under our affiliation agreements with Sprint PCS, the costs we incurfor the support services provided by Sprint are determined on a per averagemonthly cash cost per user (“CCPU”) rate and on a monthly cost per grossaddition (“CPGA”) rate. Pursuant to our affiliation agreements with Sprint PCS,the currently applicable CCPU and CPGA rates through 2010, adjusted forachieved milestone reductions as described below, are as follows:

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

 

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*                                         Subject to furtheradjustments as described below.

 

Beginningon January 1, 2011, the rates will be reset each year based on the amountnecessary to recover Sprint PCS’s reasonable costs for providing these servicesto us and the other PCS Affiliates of Sprint.

 

The CCPU rate in effect from 2008 through 2010 is to be reduced fromthe then current rate by $0.15 if we hit certain milestones with respect to ourvoluntary deployment of EV-DO Rev. A, a version of the further evolution ofcode division multiple 

 

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access(“CDMA”) high-speed data technology called Evolution Data Optimized (“EV-DO”).Specifically, the CCPU rates set forth above are to be reduced by $0.15 fromthe then-current rate when our EV-DO Rev. A deployment covers at least6.0 million in population (“POPs”), by another $0.15 from the then-currentrate when we cover at least 7.0 million POPs; and by another $0.15 fromthe then-current rate when we cover at least 9.0 million POPs. Our EV-DORev. A deployment coverage exceeded 6.0 million POPs during June 2008and exceeded 7.0 million POPs during July 2008. As a result, our CCPUrate was reduced to $6.35 starting July 1, 2008, was further reduced to$6.20 starting August 1, 2008 for the remainder of 2008 and has beenreduced to $5.85 and $5.55 in 2009 and 2010, respectively, subject to anyfurther adjustments related to incremental EV-DO Rev. A coverage. As of June 30,2009, our EV-DO Rev. A deployment covered approximately 7.4 million POPs.

 

We receive roaming revenue when subscribers of Sprint and other PCSAffiliates of Sprint incur minutes of use in our territories, and we incurexpense to Sprint and to other PCS Affiliates of Sprint when our subscribersincur minutes of use in the territories of Sprint and other PCS Affiliates ofSprint. Effective January 1, 2008 through December 31, 2010, subjectto adjustment as described below, 3G data roaming is not settled separatelywith Sprint; however, we do settle 3G data roaming separately with the otherPCS Affiliates of Sprint. Pursuant to our affiliation agreements with SprintPCS, 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 certain markets asdescribed below.

 

Beginningon January 1, 2011, the rates will be reset each year to an amount equalto 90% of Sprint’s average monthly retail yield for the first nine months ofthe immediately preceding calendar year; provided, however, that such amountfor any period will not be less than our network costs.

 

With respect to certain of our markets in western and easternPennsylvania, we receive the benefit of a special reciprocal rate for voice and2G data of $0.10 per minute. This special rate will terminate, with respect toeach of these two sets of markets, on the earlier of December 31, 2011 orthe first day of the calendar month which follows the first calendar quarterduring which we achieve a subscriber penetration rate of at least 7% of ourcovered POPs in those markets. We do not anticipate reaching a 7% subscriberpenetration rate in these markets in the foreseeable future.

 

Commencing on January 1, 2010, and each January 1 thereafter, eitherSprint or we may initiate a review to determine whether the 3G data roamingratio between us for the prior calendar year has changed by more than 20% fromthe calendar year that is two years prior. If the ratio has changed by morethan 20%, then the parties will commence discussions as to whether anappropriate adjustment in other fees can be made to compensate for such change.If the parties cannot agree, then the parties will revert to settling 3G dataroaming separately and any CCPU reductions related to incremental EV-DO Rev. Acoverage, currently totaling $0.30, will be foregone effective January 1of the year in which such review was initiated.

 

Themajority of our revenues and cost of service and roaming is derived frominformation provided by Sprint on the basis of data within Sprint’s possessionand control.  We review all such amountssettled to and from Sprint and, in the event we believe any such amounts to beerroneous, we may dispute, and have disputed, such settlements in accordancewith the procedures set forth in the affiliation agreements with Sprint.  We have disputed certain items with Sprintwhich remain unresolved as of July 31, 2009. The final outcome of theseunresolved disputed items is unknown at this time.

 

OnJanuary 22, 2009, we reached a settlement with Sprint related topreviously disputed 2008 items, which resulted in a Gain on Sprint settlementof $4.3 million being recorded in our consolidated statement of operations forthe six months ended June 30, 2009.

 

**Consolidated Results of Operations**

 

***Summary***

 

Forthe three and six months ended June 30, 2009 our net income was $7.4million and $13.2 million, respectively, compared to net losses of $0.6 millionand $2.3 million for the three and six months ended June 30, 2008.  Net income for the six months ended June 30,2009 includes a $4.3 million gain related to a Sprint settlement. The three andsix months ended June 30, 2009 reflected higher subscriber revenue,attributable to our larger subscriber base and higher ARPU, as compared to thesame periods in 2008. Bad debt 

 

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expensedecreased in the three and six months ended June 30, 2009, reflecting adecrease in uncollectable accounts compared to the 2008 periods. Offsetting theincreased subscriber revenue and reduced bad debt expense for the three and sixmonths ended June 30, 2009 were higher costs related to servicing a largernetwork and larger subscriber base, higher Sprint litigation related expensesand a decrease in our roaming margin as compared to the 2008 periods.  Despite lower gross subscriber additions,acquisition costs for new activations increased in the three and six monthsended June 30, 2009 reflecting higher commissions, related to the sale ofmore expensive rate plans and an increase in the percentage of gross additionscoming from distribution channels with higher commission structures, as well ashigher handset subsidy costs as compared to the 2008 periods, offset by lowerfixed costs related to company-owned retail stores.

 

Presentedbelow is a more detailed comparative data and discussion regarding ourconsolidated results of operations for the three and six months ended June 30,2009 compared to the three and six months ended June 30, 2008.

 

***For the Three and Six Months Ended June 30,2009 compared to the Three and Six Months Ended June 30, 2008***

 

Resultsof operations for any period less than one year are not necessarily indicativeof results of operations for a full year.

 

***Key Performance Metrics.***

 

Managementuses several key performance metrics to analyze the operations of our business.Below is a table setting forth the metrics that we use for the relevant timeperiods:

 
| ** **                 | ** ** | **As of and for the Three Months   Ended June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **2009**                                                                                         | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Total Subscribers          |       | 710,200                                                                                          |       | 654,000       |       | 56,200         |       | 8.6 | % |
| Gross Subscriber Additions |       | 55,300                                                                                           |       | 61,800        |       | (6,500         | )          | (10.5 | ) |
| Net Subscriber Additions   |       | 10,100                                                                                           |       | 13,400        |       | (3,300         | )          | (24.6 | ) |
| Churn                      |       | 2.0                                                                                              | %          | 2.3           | %          | (0.3           | )pts       | n/a |   |
| ARPU                       |       | $                                                                                                | 50.70      |          | $          | 48.44          |       | $ | 2.26 |   | 4.7 |   |
| CPGA                       |       | $                                                                                                | 429        |          | $          | 358            |       | $ | 71 |   | 19.8 |   |

 
| ** **                 | ** ** | **As of and for the Six Months   Ended June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|----------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **2009**                                                                                       | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Total Subscribers          |       | 710,200                                                                                        |       | 654,000       |       | 56,200         |       | 8.6 | % |
| Gross Subscriber Additions |       | 115,900                                                                                        |       | 121,000       |       | (5,100         | )          | (4.2 | ) |
| Net Subscriber Additions   |       | 19,100                                                                                         |       | 24,100        |       | (5,000         | )          | (20.7 | ) |
| Churn                      |       | 2.1                                                                                            | %          | 2.3           | %          | (0.2           | )pts       | n/a |   |
| ARPU                       |       | $                                                                                              | 50.28      |          | $          | 48.44          |       | $ | 1.84 |   | 3.8 |   |
| CPGA                       |       | $                                                                                              | 415        |          | $          | 378            |       | $ | 37 |   | 9.8 |   |

 

***Subscriber Additions.***     Grosssubscriber additions decreased in the three and six months ended June 30,2009 as compared to the three and six months ended June 30, 2008,reflecting tightened credit standards and increased overall wirelesspenetration in our markets.  Netsubscriber additions were positively impacted by lower overall churnpercentages, offset by the effect of churn on our larger average subscriberbase in the three and six months ended June 30, 2009 as compared to thethree and six months ended June 30, 2008.

 

***Churn.***     Churnfor the three and six months ended June 30, 2009 was lower than for the comparable2008 periods reflecting improvements in churn from credit-relateddeactivations.  The decrease ininvoluntary churn for the six months ended June 30, 2009 was partiallyoffset by increased voluntary churn.  At June 30,2009, approximately 81% of our subscribers were under contract compared to 87%at June 30, 2008.

 

***Average Revenue Per User.***  ARPU was positively affected by an increasein monthly recurring revenue per subscriber for the three and six months ended June 30,2009 as compared to the three and six months ended June 30, 2008. Theseincreases reflect the growing popularity of Sprint’s “Simply Everything,” “Everything”and “Talk/Message” plans.  Additionally,ARPU was positively impacted in the 2009 periods by moderating customer carerelated credits provided by Sprint to customers in our territory. Averagemonthly credits per subscriber, including promotional credits, were $5.67 and$5.80 for the three and six months ended June 30, 2009, respectively, ascompared to $6.65 and $6.54 for the three and six months ended June 30,2008, respectively.  Partially offsettingthese positive trends, ARPU was negatively affected by decreases in customerplan overage charges and roaming charges for the three and six months ended June 30,2009 as compared to the three and six months ended June 30, 2008. Thesedecreases also reflect the growing popularity of Sprint’s all inclusive plans.

 

***Cost Per Gross Addition.***  Variable costs per gross addition increasedby $59 and $39 in the three and six months ended June 30, 2009, respectively,as compared to the same periods in 2008, reflecting higher commission costs,related to the sale of more expensive rate plans and an increase in thepercentage of gross additions coming from distribution channels with highercommission 

 

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structures,as well as higher handset subsidy costs. Fixed costs per gross additionincreased $12 in the three months ended June 30, 2009 as compared to thesame period in 2008, reflecting a decrease in gross subscriber additions of 11%,offset by a reduction in company-owned retail presence in favor of moreexclusive Sprint co-branded dealers. Fixed costs per gross addition decreased $2 in the six months ended June 30,2009 compared to the six months ended June 30, 2008, reflecting thereduction in our company-owned retail presence, offset by a decrease in grosssubscriber additions of 4%.  At June 30,2009, we owned and operated 37 retail stores and contracted with 127 exclusiveSprint co-branded dealers compared to 43 retail stores and 104 exclusive Sprintco-branded dealers at June 30, 2008.

 

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**Revenue.**

 

Thefollowing tables set forth a breakdown of revenue by type (dollars inthousands):

 
| ** **                                                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **2009**                                                          | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Service  revenue                                                                   |       | $                                                                 | 107,139    |          | $          | 94,174         |       | $ | 12,965 |   | 13.8 | % |
| Roaming revenue from subscribers of Sprint PCS and  other PCS Affiliates of Sprint |       | 21,265                                                            |       | 23,530        |       | (2,265         | )          | (9.6 | ) |
| Roaming revenue from other wireless carriers                                       |       | 3,990                                                             |       | 4,216         |       | (226           | )          | (5.4 | ) |
| Reseller revenue                                                                   |       | 2,898                                                             |       | 3,911         |       | (1,013         | )          | (25.9 | ) |
| Equipment and other revenue                                                        |       | 4,867                                                             |       | 3,540         |       | 1,327          |       | 37.5 |   |
| Total revenue                                                                      |       | $                                                                 | 140,159    |          | $          | 129,371        |       | $ | 10,788 |   | 8.3 |   |

 
| ** **                                                                         | ** ** | **For the Six Months Ended  June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **2009**                                                        | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Service revenue                                                                    |       | $                                                               | 211,120    |          | $          | 186,273        |       | $ | 24,847 |   | 13.3 | % |
| Roaming revenue from subscribers of Sprint PCS and  other PCS Affiliates of Sprint |       | 40,876                                                          |       | 46,152        |       | (5,276         | )          | (11.4 | ) |
| Roaming revenue from other wireless carriers                                       |       | 8,760                                                           |       | 7,756         |       | 1,004          |       | 12.9 |   |
| Reseller revenue                                                                   |       | 6,137                                                           |       | 7,893         |       | (1,756         | )          | (22.2 | ) |
| Equipment and other revenue                                                        |       | 9,430                                                           |       | 6,955         |       | 2,475          |       | 35.6 |   |
| Total revenue                                                                      |       | $                                                               | 276,323    |          | $          | 255,029        |       | $ | 21,294 |   | 8.3 |   |

 

·                     ***Service revenue.*** Service revenue iscomprised of the monthly recurring charges for voice and data usage and themonthly non-recurring charges for voice and data minutes and data kilobytesover plan, long distance, roaming usage charges, other feature revenue and latepayment fee and early cancellation fee revenues. Deductions for billingadjustments, promotional credits and certain customer care credits are recordedas a reduction to service revenue. Our service revenue growth in 2009 over theprior year three and six month periods consists of $8.2 million and $17.1million, respectively, from a higher average subscriber base and $4.8 millionand $7.7 million, respectively, from increases in ARPU.

 

·                     ***Roaming revenue from subscribers of Sprint PCS andother PCS Affiliates of Sprint.*** We receive revenue on a perminute basis for voice traffic when subscribers of Sprint PCS and other PCSAffiliates of Sprint use our network. We similarly receive revenue on a perkilobyte basis for data traffic when subscribers of other PCS Affiliates ofSprint use our network. In addition, we receive toll revenue for any longdistance calls made by these subscribers while roaming on our network.

 

For 2008 and 2009, the reciprocal roaming rate is$0.0400 per minute for voice traffic ($0.10 per minute in certain markets ineastern and western Pennsylvania).  For thethree and six months ended June 30, 2009 compared to the three and sixmonths ended June 30, 2008, voice roaming revenue from subscribers ofSprint and other PCS Affiliates of Sprint, including toll revenue, decreased by$2.3 million and $5.2 million, respectively, reflecting decreases in roamingminutes and roaming toll minutes, as derived from information provided bySprint.

 

For 2009 and 2008, the reciprocal roaming rate fordata traffic was $0.0001 per kilobyte and $0.0003 per kilobyte, respectively.  3G data roaming revenue from other PCSAffiliates of Sprint decreased by $0.1 million for the six months ended June 30,2009 as compared to the six months ended June 30, 2008 reflecting thedecrease in the reciprocal rate, offset by increased kilobyte traffic fromsubscribers of other PCS Affiliates of Sprint on our network.

 

·                     ***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 data traffic pursuant to these agreements.For the three and six months ended June 30, 2009, roaming minutes were47.6 million and 123.2 million, respectively, compared to81.9 million and 152.0 million for the three and six months ended June 30,2008, decreases of 42% and 19%, respectively. The average per minute rate,including toll, decreased from $0.045 per minute and $0.047 per minute for thethree and six months ended June 30, 2008, respectively, to $0.036 per minuteand $0.041 per minute for the three and six months ended June 30, 2009,respectively. Data roaming revenue from other wireless carriers totaled$2.3 million and $3.7 million for the three and six months ended June 30,2009 compared with $0.5 million and $0.6 million for the three and sixmonths ended June 30, 2008, 

 

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reflecting increased proliferation and usage of 3G devices. Themajority of our roaming revenue from other wireless carriers is derived fromcustomers of Alltel, which was acquired by Verizon Wireless in January 2009.As a result, in 2009 we have experienced a decrease and expect to experience afurther decrease in our roaming revenue from Alltel.

 

·                    ***Reseller revenue.*** Through Sprint PCS we allowresellers, known as MVNOs, the largest of which is Virgin Mobile, to use ournetwork. Pursuant to these arrangements, we are paid on a per minute and perkilobyte basis. The decreases in reseller revenue for the three and six monthsended June 30, 2009 compared to the three and six months ended June 30,2008 reflect decreased reseller ARPU, partially offset by an increase in theaverage reseller subscribers between the respective periods. For the three andsix months ended June 30, 2009, reseller ARPU was $3.48 and $3.72,respectively, compared to $5.50 and $5.41 for the three and six months ended June 30,2008, respectively. Average reseller subscribers were approximately 278,000 and275,200 for the three and six months ended June 30, 2009 compared toapproximately 236,800 and 243,200 for the three and six months ended June 30,2008. At June 30, 2009, we had approximately 278,600 reseller subscribersbased in our territory.

 

·                     ***Equipment and other revenue.*** Equipment andother revenue is derived primarily from the sale of handsets and accessories tonew customers and from current customers who upgrade their handsets through ourretail and local distribution channels, in each case, net of sales incentives,rebates and an allowance for returns. The increases in the three and six monthsended June 30, 2009, as compared to the three and six months ended June 30,2008, reflect higher revenue per new and upgraded handset and a larger numberof upgrades. These increasing factors are offset by lower activations from ourretail and local distribution channels.

** **

***Operating Expense.***

 

Thefollowing tables set forth a breakdown of operating expense by type (dollars inthousands):

 
| ** **                                      | ** ** | **For the Three Months  Ended June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                      | ** ** | **2009**                                                          | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cost of service and roaming                     |       | $                                                                 | 71,650     |          | $          | 70,463         |       | $ | 1,187 |   | 1.7 | % |
| Cost of equipment                               |       | 15,320                                                            |       | 12,874        |       | 2,446          |       | 19.0 |   |
| Selling and marketing                           |       | 17,336                                                            |       | 16,444        |       | 892            |       | 5.4 |   |
| General and administrative                      |       | 7,736                                                             |       | 7,992         |       | (256           | )          | (3.2 | ) |
| Depreciation and amortization                   |       | 12,255                                                            |       | 13,849        |       | (1,594         | )          | (11.5 | ) |
| Loss on disposal of property and equipment, net |       | 417                                                               |       | 248           |       | 169            |       | 68.1 |   |
| Total operating expense                         |       | $                                                                 | 124,714    |          | $          | 121,870        |       | $ | 2,844 |   | 2.3 |   |

 
| ** **                                      | ** ** | **For the Six Months  Ended June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                      | ** ** | **2009**                                                        | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cost of service and roaming                     |       | $                                                               | 143,800    |          | $          | 138,647        |       | $ | 5,153 |   | 3.7 | % |
| Cost of equipment                               |       | 31,532                                                          |       | 24,537        |       | 6,995          |       | 28.5 |   |
| Selling and marketing                           |       | 33,986                                                          |       | 34,303        |       | (317           | )          | (0.9 | ) |
| General and administrative                      |       | 16,617                                                          |       | 15,080        |       | 1,537          |       | 10.2 |   |
| Gain on Sprint settlement                       |       | (4,273                                                          | )          | —        |       | (4,273         | )          | — |   |
| Depreciation and amortization                   |       | 24,835                                                          |       | 27,804        |       | (2,969         | )          | (10.7 | ) |
| Loss on disposal of property and equipment, net |       | 516                                                             |       | 258           |       | 258            |       | 100.0 |   |
| Total operating expense                         |       | $                                                               | 247,013    |          | $          | 240,629        |       | $ | 6,384 |   | 2.7 |   |

 

***Cost of service and roaming.***  Cost of service and roaming includes networkoperations expense, roaming expense relating to when our subscribers roameither on other Sprint PCS networks or other wireless carriers’ networks,back-office customer services provided by Sprint PCS, the provision fordoubtful accounts, long distance expense, the 8% affiliation fee due to SprintPCS for collected revenue and stock-based compensation expense. Networkoperations expense includes salaries and benefits for network personnel, cellsite rent, utilities and maintenance expenses, fees relating to the connectionof our cell sites to our switches and other transport and facility expenses.Roaming expense is our cost of our subscribers using Sprint PCS and otherwireless carriers’ networks. Roaming expense on the Sprint PCS network is atthe reciprocal rates as described above under “—Roaming revenue fromsubscribers of Sprint PCS and other PCS Affiliates of Sprint.” Roaming expensewhen our subscribers use other wireless carriers networks is at rates asdetermined by the roaming agreements signed by Sprint PCS with these otherwireless carriers. Effective January 1, 2008, data roaming with Sprint isnot settled separately, however, we continue to settle separately 3G dataroaming with the other PCS Affiliates of Sprint.

 

The increases in cost of service and roaming for the three and sixmonths ended June 30, 2009 reflect the related costs of servicing a largernetwork and larger subscriber base, such as higher cell site rent andinterconnect costs due to more cell sites. Additionally reflected in theseincreases in cost of service and roaming, roaming expense with wirelesscarriers other than Sprint increased $1.7 million and $3.8 million, from$3.0 million and $4.9 million in the three and six months ended June 30,2008 to 

 

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$4.7 millionand $8.7 million in the three and six months ended June 30, 2009,respectively, due to significantly higher minutes and kilobytes of use onSprint’s roaming partners’ networks. Offsetting these increases, bad debt expense decreased $3.1 millionand $5.3 million from $4.8 million and $10.1 million in the three and sixmonths ended June 30, 2008 to $1.6 million and $4.9 million in thethree and six months ended June 30, 2009. These decreases in bad debtexpense reflect tightened credit policies and increases in deposit requirementsin the three and six months ended June 30, 2009 as compared to the 2008periods. Additionally, due to decreases in our monthly cash cost per user feepayable to Sprint, our cost of service and roaming was lower by $1.4 millionand $2.7 million for the three and six months ended June 30, 2009 ascompared to the three and six months ended June 30, 2008, respectively.

 

AtJune 30, 2009, our network consisted of 1,941 leased cell sites and fiveswitches.  At June 30, 2008, ournetwork consisted of 1,763 leased cell sites and five switches.

 

***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 $1.1 millionand $3.4 million, or 24% and 47%, in the three and six months ended June 30,2009 as compared to the three and six months ended June 30, 2008,reflecting increases in the number of subscribers receiving handset upgradesfrom our retail and local distribution channels and increases in the averagehandset cost per upgrade. Cost of equipment for new activations increased$1.4 million and $3.6 million, or 17% and 21%, in the three and six monthsended June 30, 2009 as compared to the three and six months ended June 30,2008, reflecting an increase in the average cost per activated phone.  The increase in average cost per activatedphone for the six month period was partially offset by a decrease in newactivations from our retail and local distribution channels.  Handset costs have been increasing as demandhas shifted toward more expensive smart phones.

 

***Selling and marketing.***  Selling and marketing expense includes thecosts to operate our owned retail stores, advertising and promotional expenses,commissions to our company-owned retail and local third party distributorchannels, subscriber acquisition costs from national third parties and otherSprint-controlled channels and stock-based compensation expense. The increasein the three months ended June 30, 2009 was due to higher commissions andhigher subscriber acquisition costs from our indirect channels, offset by lowercosts associated with a smaller company employed retail work force.  The decrease in the six months ended June 30,2009 was due to a smaller company employed work force, lower costs related topromotional credits and lower advertising costs, offset by higher commissionsand higher subscriber acquisition costs from our indirect 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 three andsix months ended June 30, 2009, general and administrative expenseincluded approximately $2.3 million and $6.0 million, respectively, ofSprint litigation related expenses. This compares to $1.8 million and $2.1million for the three and six months ended June 30, 2008. Stock-basedcompensation expense included in general and administrative expense totaledapproximately $1.0 million and $1.9 million for the three and six monthsended June 30, 2009 compared to $1.5 million and $2.9 million for thethree and six months ended June 30, 2008.

 

***Gain on Sprint settlement.***** 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 six months ended June 30,2009.

 

***Depreciation and amortization.***  Amortization of intangible assets totaled$2.3 million and $4.6 million for both the three and six months ended June 30,2009 and 2008, respectively. Depreciation expense totaled $9.9 million and $20.2 million for thethree and six months ended June 30, 2009 compared to $11.5 millionand $23.2 million for the three and six months ended June 30, 2008,decreases of $1.6 million and $3.0 million for the three and six monthperiods, respectively. These decreases reflect the full depreciation of certainassets during the second half of 2008. During the six months ended June 30,2008, we recognized an impairment charge of $0.3 million included indepreciation, related to our assets held for sale to reduce their carryingvalue in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”

 

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

 

Thefollowing tables set forth a breakdown of non-operating income and expense bytype (dollars in thousands):

 
| ** **        | ** ** | **For the Three Months Ended  June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------|------------|-------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **        | ** ** | **2009**                                                          | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income   |       | $                                                                 | 78         |          | $          | 384            |       | $ | (306 | ) | (79.7 | )% |
| Interest expense  |       | 7,997                                                             |       | 8,221         |       | (224           | )          | (2.7 | ) |
| Other income, net |       | 22                                                                |       | 15            |       | 7              |       | 46.7 |   |
|                   |            |                                                                   |            |               |            |                |            |  |  |  |  |  |

 
| ** **        | ** ** | **For the Six Months Ended  June 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------|------------|-----------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **        | ** ** | **2009**                                                        | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income   |       | $                                                               | 164        |          | $          | 1,104          |       | $ | (940 | ) | (85.1 | )% |
| Interest expense  |       | 16,031                                                          |       | 17,136        |       | (1,105         | )          | (6.4 | ) |
| Other income, net |       | 27                                                              |       | 30            |       | (3             | )          | (10.0 | ) |
|                   |            |                                                                 |            |               |            |                |            |  |  |  |  |  |

 

***Interest Income.*** The decrease in interest income in the threeand six months ended June 30, 2009 as compared to the three and six monthsended June 30, 2008 reflects a lower interest rate environment during thethree and six months ended June 30, 2009 as compared to the three and sixmonths ended June 30, 2008.

 

***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 financing costs and net of capitalized interest andthe effect of our interest rate swap (see Note 7, Interest Rate Swap, of the “Notesto Unaudited Consolidated Financial Statements” in this Quarterly Report on Form 10-Q).  The decrease in interest expense in the threeand six months ended June 30, 2009 reflects a lower weighted averageinterest rate, net of our interest rate swap, of 6.50% and 6.56% on ouroutstanding long-term debt during the three and six months ended June 30,2009, respectively, as compared to the weighted average interest rate of 7.02%and 7.17% on our outstanding long-term debt during the three and six monthsended June 30, 2008, respectively.

 

Inconnection with our capital expenditures, we capitalized interest ofapproximately $0.2 million and $0.3 million in the three and six months ended June 30,2009, respectively.  We capitalizedinterest of approximately $0.6 million and $0.8 million in the three and sixmonths ended June 30, 2008, respectively.

 

***Reconciliation of Non-GAAP FinancialMeasures (All Revenues and Expenses in Thousands)***

 

Weutilize certain financial measures that are not calculated in accordance withGAAP to assess our financial performance. A non-GAAP financial measure isdefined as a numerical measure of financial performance that (a) excludesamounts, or is subject to adjustments that have the effect of excludingamounts, that are included in the comparable measure calculated and presentedin accordance with GAAP in the statement of income or statement of cash flows;or (b) includes amounts, or is subject to adjustments that have the effectof including amounts, that are excluded from the comparable measure so calculatedand presented. The non-GAAP financial measures discussed in “—Results ofOperations” 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 June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                                              | ** ** | **2008**                                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***ARPU***                      |       |                                                                  |       |                                                                |       |   |   |   |   |
| Service  revenue (in thousands) |       | $                                                                     | 107,139    |                                                                | $          | 94,174 |   | $ | 211,120 |   | $ | 186,273 |   |
| Average  subscribers            |       | 704,400                                                               |       | 648,000                                                             |       | 699,800 |   | 640,900 |   |
| ARPU                            |       | $                                                                     | 50.70      |                                                                | $          | 48.44 |   | $ | 50.28 |   | $ | 48.44 |   |

 

ARPU,which is utilized by most wireless companies to determine recurring monthly revenueon a per subscriber basis, is used by analysts and investors to comparerelative subscriber revenue across the wireless industry. We use ARPU to assistin evaluating past selling performance and the success of specific rate planpromotions.

 

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| ** **                                       | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                                          | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ***CPGA***                                       |       |                                                              |       |                                                            |       |   |   |   |   |
| Selling  and Marketing (in thousands):           |       | $                                                                 | 17,336     |                                                            | $          | 16,444 |   | $ | 33,986 |   | $ | 34,303 |   |
| plus:  Equipment costs, net of cost of upgrades  |       | 9,838                                                             |       | 8,468                                                           |       | 20,959 |   | 17,361 |   |
| less:  Equipment revenue, net of upgrade revenue |       | (3,293                                                            | )          | (2,608                                                          | )          | (6,568 | ) | (5,508 | ) |
| less:  Stock-based compensation expense          |       | (144                                                              | )          | (204                                                            | )          | (280 | ) | (417 | ) |
| CPGA  costs                                      |       | $                                                                 | 23,737     |                                                            | $          | 22,100 |   | 48,097 |   | 45,739 |   |
| Gross  additions                                 |       | 55,300                                                            |       | 61,800                                                          |       | 115,900 |   | 121,000 |   |
| CPGA                                             |       | $                                                                 | 429        |                                                            | $          | 358 |   | $ | 415 |   | $ | 378 |   |

 

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

 

***Inflation***

 

We believe that inflation has not had a significant impact on ourrevenues or our results of operations in the three or six months ended June 30,2009 and 2008, respectively.

 

**Liquidity and Capital Resources**

 

We believe our cash and cash equivalents and operating cash flow willbe sufficient to operate our business and fund our capital needs for at leastthe next twelve months. Although we have certain limited additional borrowingsallowed under our current debt agreements, including but not limited to PIKInterest (see Note 6, Long-Term Debt, of the “Notes to Unaudited ConsolidatedFinancial Statements” in this Quarterly Report on Form 10-Q), we aredependent on cash and cash equivalents and operating cash flow to operate ourbusiness and fund our capital needs. However, our future liquidity is dependenton a number of factors influencing our expected earnings and operating cashflows, including those discussed below in “—Recent Trends, Risks andUncertainties That May Affect Operating Results, Liquidity and CapitalResources.”

 

***Significant Sources of Cash***

 

Wegenerated $41.1 million in net cash flows from operating activities forthe six months ended June 30, 2009, compared to $28.5 million for thesix months ended June 30, 2008, an increase of $12.6 million. Excludingchanges in working capital, operating activities provided $47.8 million of cashfor the six months ended June 30, 2009, compared to $40.3 million of cashfor the six months ended June 30, 2008, generally reflecting increasedearnings from our larger subscriber base, cash received related to thesettlement of 2008 disputes with Sprint and lower bad debt expense, offset by adecrease in our roaming margin, increased Sprint related litigation expensesand higher customer acquisition costs. Sprint related working capital, which includes fees and charges payableand receivable between us and Sprint, was a source of cash of $3.8 million forthe six months ended June 30, 2009 compared to a source of cash of $2.8million for the six months ended June 30, 2008, primarily due to thetiming of cash payments both to and from Sprint.  For the six months ended June 30, 2009,non-Sprint related working capital used cash of $10.5 million, reflectingincreased accounts receivable related to a higher subscriber base during theperiod.  For the six months ended June 30,2008, non-Sprint related working capital used cash of $14.6 million reflectingcustomer account write-offs and increased accounts receivable during theperiod.

 

We received approximately $0.2 million primarily from the sale ofequipment during each of the six months ended June 30, 2009 and 2008.

 

For the six months ended June 30, 2008, we received $0.4 millionfrom the exercise of options representing approximately 28,200 shares.  As of June 30, 2009, there were 957,845exercisable stock options outstanding with a weighted average exercise price of$20.00.  We cannot predict at what level,if any, cash will be generated from stock option exercises in the future. At June 30,2009, the intrinsic value of all of our outstanding stock options wasapproximately $4.4 million.

 

***Significant Uses of Cash***

 

Cashflows used for investing activities for the six months ended June 30, 2009included $17.0 million for capital expenditures.  Included in thistotal was $15.0 million for new cell site construction and othernetwork-related capital expenditures, of which $7.6 million was for EV-DO Rev.A equipment, and $2.0 million was for store improvements, IT and othercorporate-related capital expenditures.

 

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Cashflows used for investing activities for the six months ended June 30, 2008included $41.0 million for capital expenditures.  Included in thistotal was $39.7 million for new cell site construction and othernetwork-related capital expenditures, of which $16.8 million was for EV-DO Rev.A equipment, and $1.3 million was for new stores, store improvements, ITand other corporate-related capital expenditures.

 

OnJanuary 30, 2009, our Board of Directors authorized the repurchase of upto $15.0 million of our common stock in a stock repurchase program duringthe 12-month period beginning on the date of authorization. We may purchaseshares from time to time in open market or privately negotiated transactions atprices deemed appropriate by management, depending on market conditions,applicable laws and other factors. The stock repurchase program does notrequire us to repurchase any specific number of shares and may be discontinuedat any time.  Pursuant to this stock repurchase program, during thesix months ended June 30, 2009, we purchased 400,899 shares of our commonstock at an average price of $11.78 per share for approximately$4.7 million, of which approximately $4.5 million had been settled in cashas of June 30, 2009.  As of June 30,2009, approximately $10.3 million remained available under the stock repurchaseprogram. These repurchased shares are reflected as Treasury stock, at cost inthe Consolidated Balance Sheet as of June 30, 2009.

 

Our uses of cash typically include providing for operatingexpenditures, debt service requirements and capital expenditures. We anticipatethat total capital expenditures for 2009 will be between $35.0 million and$45.0 million. This includes cash uses for new cell sites, informationtechnology, and other network-related expenditures, including EV-DO Rev. A. Becauseour long-term debt does not begin to mature until 2013, we do not believe the volatilityof the credit markets, unless prolonged, should have a significant impact onour ability to refinance our debt.

 

In addition to building excess cash, we continually evaluate ourcapital and debt capacity and how to prioritize the use of any excess cash,including for any or a combination of the following strategic options: increasecapital expenditures, pursue strategic acquisitions or new businessopportunities, 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, November 1, 2009 andFebruary 1, 2010 interest payments in relation to our Second Lien Notesentirely by increasing the principal amount of the outstanding Second LienNotes (see Note 6, Long-Term Debt, of the “Notes to Unaudited ConsolidatedFinancial Statements” in this Quarterly Report on Form 10-Q). We have madeno other decisions regarding the future election of PIK Interest.

 

***Recent Trends, Risks andUncertainties That May Affect Operating Results, Liquidity and CapitalResources***

 

Wehave identified the following important trends and factors (as well as risksand uncertainties associated with such items) that could impact our futurefinancial performance.  This section should be read in conjunctionwith 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.

 

·                  Gross additions, includingthose coming from Nextel subscribers switching to Sprint in our territory,slowed in the first half of 2009, reflecting tightened credit standards andincreased overall wireless penetration in our markets. Additionally, gross additionswere negatively impacted by the weakening economic environment, increasedcompetitive advertising, increased competition (including the 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 the 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.

 

·                  While our churn in 2009 hasimproved as compared to 2008 levels, it continues to be higher than thenational industry average. Our churn may increase in the future or remain highdue to the weakening economic environment, increased competition or otherfactors. If churn continues to remain high or increases over the long-term, wewould lose the cash flows attributable to these subscribers and may incurhigher net losses or lower net profits.

 

·                  Despite our recent increases in per subscriber revenue, competition inthe wireless industry remains intense and continues to put pressure on our persubscriber revenue.  The introduction ofmore advanced handheld devices and new technologies and delivery channels, suchas the WiMax offerings of Sprint through the Sprint-Clearwire transaction,further complicate the competitive environment. In addition, prepaid plans(such as those offered by new entrants into our markets like MetroPCS andexisting competitors like Nextel through its Boost product), which we do notcurrently offer, and unlimited plans, including those offered by us, alsocontinue to increase in popularity, which may potentially put more downwardpressure on wireless service pricing as well as potentially, in the case ofunlimited plans, increase our cost of providing service. Incumbent carriers,including Sprint, have offered and may continue to offer more aggressive rateplans in order to maintain or achieve subscriber growth.  While customer care credits given tocustomers in our territory by Sprint moderated in the first half of 2009 ascompared to 2008 levels, customer care credits remain high and the future trendof these credits is unknown. In addition, the FCC and several state courts arecurrently reviewing the industry’s practice related to early cancellation fees.Any negative outcome from one or 

 

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more of these reviews, aswell as the effect of Sprint’s change in its business practice related to earlycancellation fees, is expected to negatively impact our future results. As aresult of these and other factors, we expect to see continued pressure onsubscriber revenue which will have a negative effect on our cash flow and ouroperating results.

 

·                  Our cost per gross addition,or CPGA, has increased and continues to remain high as compared to historicallevels. We may continue to experience higher costs to acquire subscribers inthe future. To the extent that we increase our distribution infrastructure, wewill increase the fixed costs in our sales and marketing organization. Also,more aggressive promotional efforts in the future may lead to higher handsetsubsidies and rebates, as would increased sales of more expensive handsets andsmart phones. In addition, we may increase our marketing expenses and payhigher commissions in an effort to attract and acquire new subscribers. With ahigher CPGA, subscribers must remain our subscribers for a longer period oftime at a stable ARPU for us to recover those acquisition costs.

 

·                  Certain portions of ouroperating expense continue to increase or remain high and may increase in thefuture due to, among other reasons:

 

·                  Bad debt expense could potentially increaseagain due to higher write-offs, lower bad debt recoveries as a percentage ofwrite-offs and a deteriorating economic environment;

 

·                  Higher roaming expense ascustomers increasingly choose roam inclusive rate plans and increase their useof their handset and data devices off our network;

 

·                  Higher handset subsidies,rebates, commissions and other retention expenses for existing subscribers whoupgrade to a new handset as part of promotional efforts to reduce churn;

 

·                  Higher back office andadministrative expenses due to the larger number of subscribers served;

 

·                  Higher network costs as weprocess increasing voice and data traffic on our network, including trafficfrom Sprint customers roaming in our territories, and as a result of expandingour network infrastructure and increasing our deployment of EV-DO Rev. A.; and

 

·                  Higher Sprint litigationrelated expenses, as a result of our ongoing defense of our rights under ouraffiliation agreements, in particular relating to the Sprint-Clearwiretransaction announced in May of 2008, and if any actions taken by Sprintrelated to its announced plan to divest of the Nextel wireless network in ourterritory do not comply with the Circuit Court’s order.

 

·                  A substantialportion of our revenue is derived from roaming revenue, the majority of whichcomes when subscribers of Sprint incur minutes of use in our territories. Webelieve our markets have certain characteristics that have historically had afavorable effect on the level of roaming revenue from subscribers of Sprinttraveling in our markets.  Thesecharacteristics include being located near or around several large U.S. urbancenters and having significant distances of major and secondary highways comprisingprincipal travel corridors between these large urban centers.  In the first half of 2009, we have seen adecrease in roaming revenue that Sprint reports to us for their subscribers’activity in our territory which we believe reflects reduced travel into ourmarkets.  A continued downturn ineconomic conditions could result in further decreased travel activity and havea negative impact on our roaming revenue. Similarly, if Sprint were to continue to lose subscribers, particularlyin markets adjacent to our territory, it could have a negative impact on ourroaming revenue.  Additionally, Sprint’sreciprocal roaming agreements with other carriers, such as its roamingagreement with Alltel, and our participation in those agreements, can changeover time, potentially reducing the reciprocal rate or negatively affecting thelevel of roaming activity related to those roaming partners. The ratio betweenour roaming revenue with wireless carriers other than Sprint and our roamingexpense with wireless carriers other than Sprint continued to decline in thefirst half of 2009 and was below one in the second quarter of 2009. For the sixmonths ended June 30, 2009, approximately $6.5 million, or 74%, ofour roaming revenue from wireless carriers other than Sprint was derived fromcustomers of Alltel, which was acquired by Verizon Wireless in January 2009.As a result, in 2009, we have experienced a decrease and expect to continue toexperience a further decrease in our roaming revenue from Alltel. Moreover,since the ratio of inbound to outbound roaming fluctuates from period to periodand year to year, the margin we earn from the difference between roamingrevenue and roaming expense is difficult to predict. If this roaming marginwith Sprint PCS or with other carriers declines due to less roaming revenue,more roaming expense, or both, our results of operations will be negativelyaffected.

 

·                  As we have added to thecapacity, coverage and quality of our PCS network, we have incurred significantcapital expenditures. We incurred approximately $17.0 million in capitalexpenditures in the six months ended June 30, 2009, includingapproximately $7.6 million for EV-DO Rev. A deployment. We anticipate thattotal capital expenditures for 2009 will be between $35.0 million and$45.0 million. These expenditures include continued new cell sites, aswell as continued expansion of our EV-DO Rev. A deployment. In the future wemay decide to further increase our cell site expansion or EV-DO Rev. Acoverage, either or both of which may increase our anticipated capitalexpenditures and operating expense beyond our current plans. Furthermore,unforeseen changes in technology and changes in our plans to upgrade or expandour network may require us to spend more money than we expected and have anegative effect on our cash flow.

 

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·                  We believe thatSprint’s integration of the Sprint and Nextel businesses has had, and willcontinue to have, a negative impact on our business and prospects. With theintegration of the marketing and sales of Sprint products and services withlegacy Nextel products and services, conflicts and disputes continue to arisewith how Sprint and we conduct business in our territory as well as with regardto Sprint’s commitment and level of service provided to the PCS Affiliateprogram and to us specifically, including the timeliness, completeness andlevel of insight into prospective and historical information provided to us torun our business. Additionally, we believe that changes in Sprint’s billingplatform, Ensemble, and related reporting systems during 2008 resulted in anumber of issues which have had an adverse impact on our subscriber activityand financial results, some of which we have formally disputed and continue todispute. As of June 30, 2009, 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 continue to make it more difficult for us toeffectively manage our business. If continuing or future problems with Ensembleare not resolved in a timely manner for any reason, including Sprint’sinability or unwillingness to commit resources to such issues, our businesswould continue to be negatively impacted. There can be no assurances that wewill not have continued disputes with Sprint relating to these or other itemspertaining to Sprint’s performance of its obligations under the affiliationagreements.

 

·                  Our primary subscriber baseis composed of individual consumers. The current overall weakness in the UnitedStates economy, particularly weakness in the credit and housing markets, risingunemployment and volatile energy and commodity costs, have resulted inconsiderable negative pressure on consumer confidence and spending. As aresult, we believe that these events have impacted consumers in our territoriesin ways that have negatively affected our business. In the event the current economicdownturn in the United States continues or worsens, our current and potentialwireless subscribers, especially our sub-prime subscribers, may be unable orunwilling to purchase wireless services or pay their wireless bills, which maycontinue to negatively impact our business, particularly as we do not yet offera wireless prepaid plan.

 

·                  Turmoil in the creditmarkets and the financial services industry may negatively impact Sprint’s orour business, results of operations, financial condition or liquidity. Thecredit markets and the financial services industry have been experiencing aperiod of unprecedented turmoil characterized by the bankruptcy, failure,collapse or sale of various financial institutions and an unprecedented levelof intervention from the United States federal government. While the ultimateoutcome of these events cannot be predicted, such events may have a materialadverse effect on Sprint’s or our liquidity and financial condition.

 

·                  On or before January 25, 2010, pursuantto a final order of the Circuit Court of Cook County, Illinois, Sprint andthose acting in concert with it must cease owning, operating and managing theNextel wireless network in iPCS Wireless’s territory. Sprint has recentlyannounced that it intends to sell certain of its Nextel assets located in iPCSWireless’s territory in an attempt to comply with the Circuit Court’sorder.  Such actions may or may notcomply with the Circuit Court’s order.  Inaddition, we do not know the impact on our business of any such attempts bySprint to comply.  We intend todiligently monitor Sprint’s actions and take such steps as may be appropriateto ensure full compliance by Sprint with the Circuit Court’s order.  In addition, as with any litigation, it ispossible that the parties may settle the dispute. In that event, we cannotspeculate as to the terms and conditions of any such settlement, which couldinclude a material economic change in our relationship with Sprint. See “—Commitmentsand Contingencies — Sprint/Nextel Merger Litigation” below for furtherdiscussion.

 

·                  The final outcome of ourlitigation with Sprint regarding the Sprint-Clearwire WiMax transaction isunknown. As discussed more fully below in “—Commitments and Contingencies —Sprint/Clearwire Transaction Litigation,” on May 7, 2008, Sprint announceda transaction among itself, Clearwire Corporation, and certain other parties(the “Sprint-Clearwire Transaction”) to form a new competing 4G network (“NewClearwire”).

 

On May 12, 2008, the iPCS Subsidiaries filed a lawsuit againstSprint and certain of its affiliates in the Circuit Court of Cook County,Illinois, 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.

 

We cannot predict the outcome of these legal proceedings. If we do notprevail, Sprint may be permitted to operate, through its Sprint-Clearwireventure, a mobile WiMax network that could adversely affect our business andoperations by introducing a competitive product that can be expected to reducedemand for our products and services. If we do prevail, we do not know Sprint’sintentions for complying with any ruling and its impact on our business. Inaddition, as with any litigation, it is possible that the parties may settlethe dispute. In that event, we cannot speculate as to the terms and conditionsof any such settlement, which could include a material economic change in ourrelationship with Sprint. See “—Commitments and Contingencies —Sprint/Clearwire Transaction Litigation” below for further discussion.

 

·                  On July 28,2009, Sprint announced it has agreed to acquire Virgin Mobile USA, subject toVirgin Mobile USA stockholders’ and regulatory approvals. The impact of thispending acquisition on our business, financial results and relationship withSprint is unknown at this time.

 

·                  Our PCS network equipment is supplied solelyby Nortel Networks. If additional equipment or support is needed for expansionor repair of our network, it generally must come from Nortel Networks in orderto be compatible with our existing network equipment. Nortel Networks filed forChapter 11 bankruptcy protection in January 2009.  In July 2009, Ericsson won an auction,subject to court approval in Canada and the United States, of Nortel’scarrier-network division and a wireless-research unit.  If Ericsson, or Nortel or another acquirer ifthis sale does not close, were to cease or delay supplying equipment or suspendwarranty coverage, we could be prevented or delayed in expanding, repairing orsupporting our network.  Any inability toexpand or repair our network could have a material effect on us.  In addition, Ericsson, Nortel, or any potentialsuccessor, potentially could exert significant bargaining power over price,quality, warranty claims or other terms relating to its equipment.

 

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·                  As a PCS Affiliate of Sprint, we aredependent upon Sprint for many aspects of our business, including the brandname under which we operate, the spectrum that we use, technological advancesand the nationwide wireless network outside of our territory. From thesubscribers’ point of view, we are “Sprint” in our markets and they use ourwireless network and the rest of the Sprint PCS network as a unified network.Sprint’s performance and brand reputation nationwide—over which we have nocontrol—impacts our performance. We believe many of Sprint’s operating metrics,including net subscriber additions and churn, have underperformed relative toindustry averages over the last few years, reflecting deterioration in the relativestrength of the Sprint brand. If Sprint is unable to improve its operatingmetrics and brand image in the future, particularly in the face of an economicdownturn and an increasingly maturing industry, our business would likelysuffer material adverse consequences.

 

***Commitments and Contingencies***

 

*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:

 

·                  Within 180 days of thedate of the final order, Sprint and those acting in concert with it must ceaseowning, operating and managing the Nextel wireless network in iPCS Wireless’sterritory.

 

·                  Sprint shall continue tocomply with all terms and conditions of the Forbearance Agreement between iPCSWireless and Sprint setting forth certain limitations on Sprint’s operationspost-merger with Nextel.

 

On September 28, 2006, Sprint appealed the Circuit Court’s rulingto the Appellate Court of Illinois, First Judicial District (the “AppellateCourt”), and, at Sprint’s request, the Circuit Court’s ruling was stayed by theAppellate Court pending the appeal. On March 31, 2008, the Appellate Courtunanimously affirmed the 2006 Circuit Court decision. On May 5, 2008,Sprint filed a petition for leave to appeal with the Supreme Court of Illinois.On September 24, 2008, the Supreme Court of Illinois (the “Supreme Court”)denied Sprint’s petition for leave to appeal the Appellate Court’s decision.

 

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

 

·                  To grant Sprint360 days (rather than 180 days) to comply with the Circuit Court’s orderto cease owning, operating and managing the Nextel wireless network in iPCSWireless’s territory.

 

·                  To permit Sprint to seek anextension of the 360-day period upon a showing of good cause, with dueconsideration given to the hardship(s) imposed on iPCS Wireless by therequested extension.

 

On January 30, 2009, the Circuit Court entered its final order, asdirected by the Supreme Court, providing that:

 

·                  Sprint, and those acting inconcert with it, must cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s service area.

 

·                  Sprint has until January 25,2010 (360 days from the date of the Circuit Court’s order) to comply withthe order. Sprint may seek an extension of such deadline upon a showing of goodcause, giving due consideration to the hardships that would be imposed on iPCSWireless if such extension were granted.

 

·                  Sprint must continue tocomply with all terms and conditions of the Forbearance Agreement between iPCSWireless and Sprint.

 

On September 22, 2008, Sprint also filed a petition with theCircuit Court seeking to vacate that Court’s original order. On January 20,2009, the Circuit Court denied Sprint’s petition with prejudice. On February 18,2009, Sprint appealed the decision of the Circuit Court denying Sprint’spetition to vacate to the Illinois Appellate Court. The appeal process isongoing.

 

*Sprint/Clearwire Transaction Litigation.*  On May 7, 2008, Sprint announced a proposedtransaction among itself, Clearwire Corporation, and certain other parties (the“Sprint-Clearwire Transaction”) to form a new competing network (“NewClearwire”), pursuant to which transaction Sprint transferred its 4G technologyto the New Clearwire. The same day, Sprint filed a complaint for 

 

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declaratoryjudgment against iPCS and certain of its subsidiaries, iPCS Wireless, HorizonPersonal Communications, Inc. and Bright Personal CommunicationsServices, LLC (collectively, the “iPCS Subsidiaries”) in the Court ofChancery of the State of Delaware (the “Delaware Chancery Court”). In thatlawsuit, Sprint sought a declaration that the Sprint-Clearwire Transactionwould not constitute a breach of the Sprint affiliation agreements it has withthe iPCS Subsidiaries.

 

On May 12, 2008, the iPCS Subsidiaries filed a lawsuit againstSprint and certain of its affiliates in the Circuit Court, seeking declaratoryand injunctive relief with respect to the Sprint-Clearwire Transaction. In thatcase, the iPCS Subsidiaries sought a declaration that the Sprint-ClearwireTransaction constitutes a breach of Sprint’s affiliation agreements it has withthose subsidiaries, and also sought an injunction barring Sprint from closingthe Sprint-Clearwire Transaction until it complied with the affiliationagreements.

 

On July 14, 2008, the Delaware Chancery Court granted the motionto dismiss filed by our Bright and Horizon subsidiaries and dismissed them fromthe Delaware litigation. Pursuant to a motion filed by iPCS and iPCS Wireless,on October 8, 2008, the Delaware Chancery Court stayed all remainingDelaware litigation in favor of the lawsuit brought in Illinois by the iPCSSubsidiaries.

 

On November 3, 2008, the iPCS Subsidiaries filed a motion forpreliminary injunction in the Circuit Court seeking to prevent Sprint fromconsummating the Sprint-Clearwire Transaction until such time that the CircuitCourt could rule on the merits of the underlying litigation brought by theiPCS Subsidiaries against Sprint. On November 17, 2008, the iPCSSubsidiaries, Sprint, and New Clearwire reached a stipulation pursuant to whichthe iPCS Subsidiaries withdrew their motion for preliminary injunction withoutprejudice, 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 Court issued a decision on amotion for partial summary judgment filed by iPCS Wireless that sought partialsummary judgment based on the 2006 decision in the Illinois Sprint/NextelMerger Litigation. The Circuit Court specifically recognized that pursuant tothe 2006 decision, Sprint and those acting in concert with it cannot competeagainst iPCS Wireless in its exclusive service areas, regardless of the radiofrequency that they use to compete. The Circuit Court held that Sprint cannotrelitigate the issue of whether Sprint and those acting in concert with it maycompete with iPCS Wireless in its service area by using a frequency other than1900 MHz. 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 Sprint controlsNew Clearwire, whether the protections of exclusivity extend beyond thesituation in which Sprint acts through a related party, and the question of whoconstitutes “those acting in concert” with Sprint.

 

On January 9, 2009, the Circuit Court denied Sprint’s motion forpartial summary judgment against Bright and Horizon. In that motion, Sprint hadsought to bar Bright and Horizon from litigating the issue of whether Sprintcould compete with Horizon and Bright outside the 1900 MHz spectrum range, basedon a 2006 decision by the Delaware Chancery Court. The Circuit Court deniedSprint’s motion for partial summary judgment against Bright and Horizon andfound that the Delaware Chancery Court did not actually decide that issue.

 

On January 30, 2009, the iPCS Subsidiaries amended their originalcomplaint against Sprint. Under the amended complaint, the iPCS Subsidiariesincluded, among other things, a claim that Sprint is improperly withholdingadvanced technologies from the iPCS Subsidiaries and diverting thosetechnologies to their competitor in violation of the iPCS Subsidiaries’affiliation agreements with Sprint. The amended complaint also seeks monetaryrelief. On February 27, 2009, Sprint, in its response to the amendedcomplaint, asserted several counterclaims that essentially seek declaratoryrelief that the Clearwire transaction does not violate the affiliationagreements.

 

OnApril 29, 2009, the Circuit Court denied a motion brought by Sprint thatsought to dismiss the iPCS Subsidiaries’ claims as to whether Sprint improperlywithheld advanced 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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We presently cannot determine the ultimate resolution of the mattersdescribed above. The results of litigation are inherently uncertain and, whilewe believe that we have meritorious claims in the matters described above,material adverse outcomes are possible.

 

In addition to the foregoing, from time to time, we are involved invarious legal proceedings relating to claims arising in the ordinary course ofbusiness. We are not currently a party to any such legal proceedings, theadverse outcome to which, individually or in the aggregate, is expected to havea material adverse effect on our business, financial condition or results ofoperations.

 

***Nortel Networks Equipment Agreement***

 

OnMarch 13, 2009, we signed a letter of agreement with Nortel Networks topurchase EV-DO Rev. A equipment and services totaling approximately $19.7million in aggregate, consisting 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.  Under this letter of agreement, we agreed toreturn to Nortel Networks certain equipment replaced by the purchased equipmentby March 1, 2010.  As of June 30,2009, we have submitted non-cancelable purchase orders for approximately $14.8million of equipment and services and therefore have no remaining commitmentunder this letter of agreement to submit additional non-cancelable purchaseorders.  As of June 30, 2009, wehave received and paid for $6.7 million of equipment and services and havereturned approximately half of the replaced equipment to Nortel.  The remaining replaced equipment is expectedto be returned to Nortel by the end of 2009.

 

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

 

TheState of Michigan is currently auditing our sales and use tax returns for theyears 2003 through 2006. The outcome of this audit cannot be determined at thistime.

 

**Contractual Obligations and Off-Balance Sheet Arrangements**

 

Forinformation 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 June 30, 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 that at June 30, 2009, we have an off balance sheetobligation of approximately $8.1 million. See “—Nortel Networks Equipment Agreement” above for further discussionregarding this obligation.

 

**Seasonality**

 

Ourbusiness is subject to seasonality because the wireless telecommunicationsindustry historically has been dependent on fourth calendar quarter results.Among other things, the industry relies on moderately higher subscriberadditions and handset sales in the fourth calendar quarter as compared to theother three calendar quarters. A number of factors contribute to this trend,including: the use of retail distribution, which is heavily dependent upon theyear-end holiday shopping season; the timing of new product and serviceannouncements and introductions; competitive pricing pressures; and aggressivemarketing and promotions. In addition, our roaming revenue and roaming expenseis subject to seasonality because of decreased travel of wireless subscribersinto our territory during the winter months.

 

**Critical Accounting Policies**

 

Ourfinancial statements are prepared in conformity with accounting principlesgenerally accepted in the United States and require us to select appropriateaccounting policies.  The assumptions and judgments we use in applying ouraccounting policies have a significant impact on our reported amounts ofassets, liabilities, revenue and expenses.  While we believe that theassumptions and judgments used in our estimates are reasonable, actual resultsmay differ from these estimates under different assumptions or conditions.

 

Wehave identified the most critical accounting policies upon which our financialstatus depends.  The critical policies were determined by consideringaccounting policies that involve the most complex or subjective decisions orassessments. We also have other policies considered key accounting policies;however, these policies do not meet the definition of critical accountingpolicies because they do not generally require us to make estimates orjudgments that are complex or subjective.  Our critical accountingpolicies include the following:

 

·                    Revenue recognition

 

·                    Allowance for doubtfulaccounts

 

·                    Long-lived asset recovery

 

·                    Intangible assets

 

·                    Interest rate swap

 

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·                    Income taxes

 

·                    Stock-based compensation

 

Additional information regarding these criticalaccounting policies can be found in the “Management’s Discussion and Analysisof Financial Condition and Results of Operations” section of our AnnualReport on Form 10-K for the year ended December 31, 2008, filed withthe SEC on March 3, 2009.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk.**

 

Wedo not engage in commodity futures trading activities. Although we entered intoa derivative financial instrument transaction for hedging purposes as discussedbelow, we do not enter into derivative financial instrument transactions fortrading or other speculative purposes. We also do not engage in transactions inforeign currencies that could expose us to market risk. Our exposure to marketrisk is limited primarily to the fluctuating interest rates associated withvariable rate indebtedness.

 

In July 2007, we entered into an interest rateswap agreement that effectively fixes the interest rate on $300.0 millionof our variable rate indebtedness at 7.47% for three years starting August 1,2007. The fair value of our interest rate swap was a $13.6 million liability atJune 30, 2009. A hypothetical increase of 100 basis points in average marketinterest rates would increase the fair value of our interest rate swap byapproximately $3.7 million. A decrease of 100 basis points in averagemarket interest rates would decrease the fair value of our interest rate swapby approximately $3.7 million. A prospective increase of 100 basis pointsin the interest rate applicable to the remaining $175.0 million ofvariable rate indebtedness would result in an increase of approximately$1.8 million in our annual interest expense. At June 30, 2009, afterconsideration of the interest rate swap described above, approximately 37% ofour debt is subject to variable interest rates.

 

**Item 4. Controls and Procedures.**

 

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 adequately designits internal controls with respect to the processes established to providefinancial information and other information to us and the other PCS Affiliatesof Sprint. To address this issue, Sprint engages an independent registeredpublic accounting firm to perform a periodic evaluation of these controls andto provide a “Report on Controls Placed in Operation and Tests of OperatingEffectiveness for Affiliates” under guidance provided in Statement of AuditingStandards No. 70. This report is provided to us annually.

 

There have been no changes in our internal controlover financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

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

 

Inaddition to the above, from time to time, we are involved in various legal proceedingsrelating to claims arising in the ordinary course of business.  We are not currently a party to any suchlegal proceedings, the outcome of which, individually or in the aggregate, isexpected to have a material adverse effect on our business, financial conditionor results of operations.

 

**Item 1A. Risk Factors.**

 

Youshould 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 risks anduncertainties that are currently unknown to us or that we currently consider tobe immaterial may also impair our business or adversely affect our financialcondition, results of operations and stock price.

 

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**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

Thefollowing table provides information about shares of common stock the Companyacquired during the second quarter of 2009:

 

Issuer Purchases of EquitySecurities

 
| ** **                                   | ** ** | **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)** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1,  2009 to April 30, 2009   |       | 113,420                                                       |       | $                                                | 11.00      |                                                                                                                                          | 113,420    |                                                                                                                                                                                               | $          | 12,129,573 |   |
| May 1,  2009 to May 31, 2009       |       | 24,724                                                        |       | $                                                | 16.45      |                                                                                                                                          | 24,724     |                                                                                                                                                                                               | $          | 11,722,849 |   |
| June 1,  2009 to June 30, 2009 (b) |       | 95,961                                                        |       | $                                                | 15.13      |                                                                                                                                          | 95,592     |                                                                                                                                                                                               | $          | 10,276,467 |   |
| Total                                        |       | 234,105                                                       |       | $                                                | 13.27      |                                                                                                                                          | 233,736    |                                                                                                                                                                                               | $          | 10,276,467 |   |

 

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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)         Includes369 shares withheld to satisfy certain tax withholding obligations inconnection with vesting of restricted stock as permitted by the iPCS ThirdAmended and Restated 2004 Long-Term Incentive Plan.

 

**Item 3. Defaults Upon Senior Securities.**

 

None.

 

**Item 4. Submission of Matters to aVote of Security Holders.**

 

At ourAnnual Meeting of Stockholders held on June 16, 2009, the stockholdersvoted on the following:

 

1.  The election of eight directors to our boardof directors:

 
| ** **             | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------|------------|------------|------------|--------------|------------|
| Timothy M. Yager       |       | 15,034,801 |       | 76,065       |       |
| Timothy G. Biltz       |       | 15,046,363 |       | 76,503       |       |
| Jeffrey W. Jones       |       | 15,032,359 |       | 78,507       |       |
| Ryan L. Langdon        |       | 12,277,720 |       | 2,833,146    |       |
| Kevin M. Roe           |       | 15,034,363 |       | 76,503       |       |
| Mikal J. Thomsen       |       | 12,298,390 |       | 2,821,476    |       |
| Nicholas J. Vantzelfde |       | 15,034,363 |       | 76,503       |       |
| Eric L. Zinterhofer    |       | 12,288,190 |       | 2,822,676    |       |

 

2. The approval of the iPCS Third Amended and Restated 2004 Long-Term IncentivePlan, including the reservation of an additional 1,900,000 shares of commonstock that may be issued as awards under the plan:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 10,144,947 |       | 3,674,642   |       | 100         |       | 1,291,178                 |       |

 

3.  The ratification of the appointment ofDeloitte & Touche LLP as our independent registered public accountingfirm for the year ending December 31, 2009:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** |   | ** ** | ** ** |
|------------|------------|-------------|------------|-------------|--------|------------|------------|
| 15,069,129 |       | 41,738      |       | 0           |   |       |       |

 

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**Item 5. Other Information.**

 

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                |       | iPCS Third Amended and Restated 2004 Long-Term Incentive Plan  (Incorporated by reference to Exhibit 99.1 to the Form 8-K filed by  iPCS, Inc. on June 16, 2009)                                                                                                                                                                                                                                                                    |
| 31.1*               |       | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                |
| 31.2*               |       | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                |
| 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 the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon 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: July 31, 2009 |            |   |
|                     | By:             | /s/ STEBBINS B. CHANDOR, JR. |
|                     |            | Stebbins B. Chandor, Jr. |
|                     |            | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |
|                     |            |   |
| Date: July 31, 2009 |            |   |

 

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