**UNITED STATESSECURITIES 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 September 30, 2007**                                                                                                                                            |
| ** **                                                                                                                                                                                       | ** ** | ** **                                                                                               |
| **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 itscharter)

 

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

 

**(847)885-2833**

(Registrant’s telephone number, including zipcode)

 

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

 
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

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

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.

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

 

Asof October 31, 2007, there were 17,081,610 shares of common stock, $0.01 parvalue per share, outstanding.

 

 

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**TABLE OF CONTENTS**

 
| PART I    | FINANCIAL INFORMATION                                                                                              | 3      |
|----------------|--------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                               |   |
| ITEM 1.        | FINANCIAL STATEMENTS                                                                                               | 3      |
|           | CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2007 AND DECEMBER 31,  2006 (UNAUDITED)                            | 3      |
|           | CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS  ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED) | 4      |
|           | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED  SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)           | 5      |
|           | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                                               | 6      |
| ITEM 2.        | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 20     |
| ITEM 3.        | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                        | 35     |
| ITEM 4.        | CONTROLS AND PROCEDURES                                                                                            | 35     |
|           |                                                                                                               |   |
| PART II   | OTHER INFORMATION                                                                                                  | 35     |
|           |                                                                                                               |   |
| ITEM 1.        | LEGAL PROCEEDINGS                                                                                                  | 35     |
| ITEM 1A.       | RISK FACTORS                                                                                                       | 35     |
| ITEM 2.        | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                                       | 36     |
| ITEM 3.        | DEFAULTS UPON SENIOR SECURITIES                                                                                    | 36     |
| ITEM 4.        | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               | 36     |
| ITEM 5.        | OTHER INFORMATION                                                                                                  | 36     |
| ITEM 6.        | EXHIBITS                                                                                                           | 36     |
|           |                                                                                                               |   |
| SIGNATURES     |                                                                                                               | 38     |
|           |                                                                                                               |   |
| CERTIFICATIONS |                                                                                                               |   |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**iPCS, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(UNAUDITED)**

(Dollars in thousands, except share and pershare amounts)

 
| ** **                                                                                                                                    | ** ** | **September 30,  2007** | ** ** | **December 31,  2006 (a)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                          |       |                         |       |                                 |       |
| **Assets**                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                           | ** ** |
| Current Assets:                                                                                                                               |       |                         |       |                                 |       |
| Cash and cash equivalents                                                                                                                     |       | $                            | 71,774     |                                 | $          | 120,499 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $10,496 and $6,663, respectively                                              |       | 30,364                       |       | 29,700                               |       |
| Receivable from Sprint (Note 3)                                                                                                               |       | 44,247                       |       | 40,724                               |       |
| Inventories, net (Note 3)                                                                                                                     |       | 4,014                        |       | 4,291                                |       |
| Assets held for sale (Note 4)                                                                                                                 |       | 1,187                        |       | —                               |       |
| Prepaid expenses                                                                                                                              |       | 6,455                        |       | 7,468                                |       |
| Other current assets                                                                                                                          |       | 281                          |       | 272                                  |       |
| Total current assets                                                                                                                          |       | 158,322                      |       | 202,954                              |       |
| Property and equipment, net (Note 4)                                                                                                          |       | 129,856                      |       | 139,641                              |       |
| Financing costs                                                                                                                               |       | 7,982                        |       | 7,724                                |       |
| Customer activation costs                                                                                                                     |       | 4,695                        |       | 3,252                                |       |
| Intangible assets, net of accumulated  amortization of $91,406 and $68,624, respectively (Note 5)                                        |       | 107,371                      |       | 131,353                              |       |
| Goodwill (Note 5)                                                                                                                             |       | 141,783                      |       | 141,783                              |       |
| Other assets                                                                                                                                  |       | 361                          |       | 364                                  |       |
| Total assets                                                                                                                                  |       | $                            | 550,370    |                                 | $          | 627,071 |   |
|                                                                                                                                          |       |                         |       |                                 |       |
| **Liabilities  and Stockholders’ Equity (Deficiency)**                                                                                   | ** ** | ** **                   | ** ** | ** **                           | ** ** |
| Current Liabilities:                                                                                                                          |       |                         |       |                                 |       |
| Accounts payable                                                                                                                              |       | $                            | 5,173      |                                 | $          | 7,387 |   |
| Accrued expenses                                                                                                                              |       | 14,389                       |       | 14,340                               |       |
| Payable to Sprint (Note 3)                                                                                                                    |       | 52,130                       |       | 58,196                               |       |
| Deferred revenue                                                                                                                              |       | 11,088                       |       | 11,065                               |       |
| Accrued interest                                                                                                                              |       | 6,355                        |       | 9,758                                |       |
| Current maturities of long-term debt and  capital lease obligations (Note 6)                                                                  |       | 190                          |       | 24                                   |       |
| Total current liabilities                                                                                                                     |       | 89,325                       |       | 100,770                              |       |
| Customer activation fee revenue                                                                                                               |       | 4,695                        |       | 3,252                                |       |
| Interest rate swap (Note 7)                                                                                                                   |       | 6,062                        |       | —                               |       |
| Other long-term liabilities                                                                                                                   |       | 7,351                        |       | 6,819                                |       |
| Long-term debt and capital lease  obligations, excluding current maturities (Note 6)                                                          |       | 475,445                      |       | 302,045                              |       |
| Total liabilities                                                                                                                             |       | 582,878                      |       | 412,886                              |       |
|                                                                                                                                          |       |                         |       |                                 |       |
| Commitments and contingencies (Note 11)                                                                                                       |       |                         |       |                                 |       |
|                                                                                                                                          |       |                         |       |                                 |       |
| Stockholders’ Equity (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, 17,067,208 and 16,774,060 shares issued and  outstanding, respectively |       | 171                          |       | 168                                  |       |
| Additional paid-in-capital                                                                                                                    |       | 158,713                      |       | 334,156                              |       |
| Accumulated deficiency                                                                                                                        |       | (185,330                     | )          | (120,139                             | )          |
| Accumulated other comprehensive loss                                                                                                          |       | (6,062                       | )          | —                               |       |
| Total stockholders’ equity (deficiency)                                                                                                  |       | (32,508                      | )          | 214,185                              |       |
| Total liabilities and stockholders’ equity  (deficiency)                                                                                 |       | $                            | 550,370    |                                 | $          | 627,071 |   |

 

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(a)             Derived from the Company’s auditedfinancial statements as of December 31, 2006.

 

See Notes to unaudited consolidated financialstatements.

 

3

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**iPCS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                                           | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **September 30,  2007**                       | ** ** | **September 30,  2006**                      | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
| ** **                                                                                           | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                                        | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                                                                      |       | $                                                  | 92,129     |                                              | $          | 79,300 |   | $ | 267,074 |   | $ | 232,021 |   |
| Roaming revenue                                                                                      |       | 46,287                                             |       | 43,728                                            |       | 119,284 |   | 116,888 |   |
| Equipment and other                                                                                  |       | 3,661                                              |       | 3,578                                             |       | 9,805 |   | 10,556 |   |
| Total revenues                                                                                       |       | 142,077                                            |       | 126,606                                           |       | 396,163 |   | 359,465 |   |
| **Operating Expenses:**                                                                              | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of service and roaming (exclusive of  depreciation and amortization, as shown separately below) |       | (79,534                                            | )          | (72,916                                           | )          | (231,688 | ) | (206,567 | ) |
| Cost of equipment                                                                                    |       | (12,880                                            | )          | (10,893                                           | )          | (38,829 | ) | (30,290 | ) |
| Selling and marketing                                                                                |       | (17,785                                            | )          | (17,262                                           | )          | (57,467 | ) | (51,366 | ) |
| General and administrative                                                                           |       | (5,678                                             | )          | (4,352                                            | )          | (21,275 | ) | (17,220 | ) |
| Depreciation (Note 4)                                                                                |       | (10,775                                            | )          | (11,705                                           | )          | (34,644 | ) | (39,032 | ) |
| Amortization of intangible assets (Note 5)                                                           |       | (7,594                                             | )          | (9,490                                            | )          | (22,782 | ) | (28,468 | ) |
| Impairment of intangible asset (Note 5)                                                              |       | (1,200                                             | )          | —                                            |       | (1,200 | ) | — |   |
| Loss on disposal of property and equipment,  net                                                     |       | (65                                                | )          | (97                                               | )          | (130 | ) | (510 | ) |
| Total operating expenses                                                                             |       | (135,511                                           | )          | (126,715                                          | )          | (408,015 | ) | (373,453 | ) |
| **Operating income (loss)**                                                                          |       | 6,566                                              |       | (109                                              | )          | (11,852 | ) | (13,988 | ) |
| Interest income                                                                                      |       | 886                                                |       | 1,415                                             |       | 3,984 |   | 3,883 |   |
| Interest expense                                                                                     |       | (9,853                                             | )          | (8,026                                            | )          | (26,951 | ) | (24,043 | ) |
| Debt extinguishment costs (Note 6)                                                                   |       | —                                             |       | —                                            |       | (30,501 | ) | — |   |
| Other income (loss), net                                                                             |       | (3                                                 | )          | 37                                                |       | 129 |   | 91 |   |
| **Loss before benefit from income taxes**                                                            |       | (2,404                                             | )          | (6,683                                            | )          | (65,191 | ) | (34,057 | ) |
| Benefit from income taxes                                                                            |       | —                                             |       | —                                            |       | — |   | — |   |
| **Net loss**                                                                                         |       | $                                                  | (2,404     | )                                                 | $          | (6,683 | ) | $ | (65,191 | ) | $ | (34,057 | ) |
|                                                                                                 |       |                                               |       |                                              |       |   |   |   |   |
| Basic and diluted loss per share of common  stock                                                    |       | $                                                  | (0.14      | )                                                 | $          | (0.40 | ) | $ | (3.84 | ) | $ | (2.04 | ) |
| Weighted average common shares outstanding                                                           |       | 17,038,040                                         |       | 16,704,673                                        |       | 16,969,488 |   | 16,697,860 |   |

 

See Notes to unaudited consolidated financialstatements.

 

4

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**iPCS, INC.AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)(Dollars in thousands)**

 
| ** **                                                                                                               | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **September 30,  2007**                      | ** ** | **September 30,  2006** | ** ** |
| **Cash Flows from Operating Activities:**                                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                                                                 |       | $                                                 | (65,191    | ) | $ | (34,057 | ) |
| Adjustments to reconcile net loss to net  cash flows from operating activities:                                          |       |                                              |       |   |   |
| Loss on disposal of property and equipment                                                                               |       | 130                                               |       | 510 |   |
| Depreciation and amortization                                                                                            |       | 57,426                                            |       | 67,500 |   |
| Non-cash interest expense, net of  amortization of debt fair value adjustment                                            |       | 362                                               |       | (488 | ) |
| Debt extinguishment costs                                                                                                |       | 30,501                                            |       | — |   |
| Stock-based compensation expense                                                                                         |       | 8,130                                             |       | 1,712 |   |
| Provision for doubtful accounts                                                                                          |       | 14,311                                            |       | 6,522 |   |
| Purchases of investments                                                                                                 |       | —                                            |       | (11,578 | ) |
| Impairment of intangible asset                                                                                           |       | 1,200                                             |       | — |   |
| Changes in assets and liabilities:                                                                                       |       |                                              |       |   |   |
| Accounts receivable                                                                                                      |       | (14,974                                           | )          | (4,810 | ) |
| Receivable from Sprint                                                                                                   |       | (3,522                                            | )          | 5,500 |   |
| Inventories, net                                                                                                         |       | 277                                               |       | (322 | ) |
| Prepaid expenses, other current and long  term assets                                                                    |       | (332                                              | )          | (744 | ) |
| Accounts payable, accrued expenses and  other long term liabilities                                                      |       | (6,785                                            | )          | (643 | ) |
| Payable to Sprint                                                                                                        |       | (6,066                                            | )          | (14,520 | ) |
| Deferred revenue                                                                                                         |       | 1,466                                             |       | 1,416 |   |
| Net cash flows from operating activities                                                                                 |       | 16,933                                            |       | 15,998 |   |
| **Cash Flows from Investing Activities:**                                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                                                      |       | (25,499                                           | )          | (28,723 | ) |
| Proceeds from disposition of property and  equipment                                                                     |       | 552                                               |       | 3,917 |   |
| Net cash flows from investing activities                                                                                 |       | (24,947                                           | )          | (24,806 | ) |
| **Cash Flows from Financing Activities:**                                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Proceeds from senior secured notes offering                                                                              |       | 475,000                                           |       | — |   |
| Proceeds from the exercise of stock options                                                                              |       | 3,445                                             |       | 1,137 |   |
| Repayments of senior notes                                                                                               |       | (290,000                                          | )          | — |   |
| Tender premium on senior notes                                                                                           |       | (34,155                                           | )          | — |   |
| Payments on capital lease obligations                                                                                    |       | (18                                               | )          | (8 | ) |
| Debt financing costs                                                                                                     |       | (8,475                                            | )          | — |   |
| Payment of special cash dividend                                                                                         |       | (186,508                                          | )          | — |   |
| Net cash flows from financing activities                                                                                 |       | (40,711                                           | )          | 1,129 |   |
| Net decrease in cash and cash equivalents                                                                                |       | (48,725                                           | )          | (7,679 | ) |
| **Cash and cash equivalents at beginning of  period**                                                                    |       | 120,499                                           |       | 110,837 |   |
| **Cash and cash equivalents at end of period**                                                                           |       | $                                                 | 71,774     |   | $ | 103,158 |   |
|                                                                                                                     |       |                                              |       |   |   |
| **Supplemental disclosure of cash flow  information- cash paid for interest**                                            |       | $                                                 | 30,462     |   | $ | 23,706 |   |
| **Supplemental disclosure for non-cash  investing activities:**                                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Capitalized interest                                                                                                     |       | $                                                 | 549        |   | $ | 456 |   |
| Accounts payable and accrued expenses  incurred for the acquisition of property, equipment and construction in  progress |       | 3,224                                             |       | 4,674 |   |
| Capital lease obligations incurred for the  acquisition of property and equipment                                        |       | 161                                               |       | — |   |
| **Supplemental disclosure for non-cash  financing activities:**                                                          |       |                                              |       |   |   |
| Dividends declared, but not paid                                                                                         |       | $                                                 | 507        |   | $ | — |   |

 

See Notes to unaudited consolidated financialstatements.

 

5

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**iPCS, INC.AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL 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 a party toa separate affiliation agreement with Sprint PCS, the operator of a 100%digital personal communications service (“PCS”) wireless network with licensesto provide voice and data service to the entire United States population.

 

iPCS, Inc. was formed in March 2000 as a holding company foriPCS Wireless. iPCS Wireless, as the successor to Illinois PCS, LLC, became aPCS affiliate of Sprint in 1999. Through this affiliation agreement, asamended, iPCS has the exclusive right to market and provide Sprint PCS productsand services in 40 markets in Illinois, Michigan, Iowa, and eastern Nebraska.On November 30, 2001, the Company was acquired by AirGate PCS, Inc. (“AirGate”),another PCS Affiliate of Sprint. iPCS was designated as an unrestrictedsubsidiary of AirGate and both companies operated as separate businessentities. On February 23, 2003, the Company and its subsidiaries filed forChapter 11 bankruptcy protection. On October 17, 2003, AirGate irrevocablytransferred its ownership of iPCS to a trust, the beneficial owners of whichtrust were AirGate’s stockholders at the date of transfer. AirGate retained noownership interest in the trust or the Company. Upon the Company’s emergencefrom bankruptcy on July 20, 2004, iPCS’s common stock held by the trustwas cancelled and the trust terminated by its terms.

 

On July 1, 2005, iPCS completed a merger with HorizonPCS, Inc. (“Horizon PCS”), another PCS Affiliate of Sprint, pursuant towhich Horizon PCS merged with and into iPCS, Inc., with iPCS, Inc. asthe surviving corporation. Through its two affiliation agreements with SprintPCS, two wholly owned subsidiaries of Horizon PCS have the exclusive right tomarket and provide Sprint PCS products and services in 40 markets in Ohio,Indiana, Tennessee, Michigan, New York, New Jersey, Maryland, Pennsylvania, andWest Virginia.

 

The unaudited consolidated balance sheets as of September 30, 2007 andDecember 31, 2006, the unaudited consolidated statements of operations for thethree and nine months ended September 30, 2007 and 2006, the unauditedconsolidated statements of cash flows for the nine months ended September 30,2007 and 2006 and related footnotes have been prepared in accordance withaccounting principles generally accepted in the United States of America for interimfinancial information and Rule 10-01 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. The financial information presented herein should be read inconjunction with the Company’s 2006 Annual Report on Form 10-K whichincludes information and disclosures not presented herein. All intercompanyaccounts and transactions have been eliminated in consolidation. In the opinionof management, the unaudited consolidated financial statements contain all ofthe adjustments, consisting only of normal recurring adjustments, necessary topresent fairly, in summarized form, the consolidated financial position,results of operations and cash flows of the Company. The results of operationsfor the three and nine months ended September 30, 2007 are not indicative ofthe results that may be expected for the full year 2007.

 

The wireless telecom market is characterized by significant risks as aresult of rapid changes in technology and increasing competition. The Company’scontinuing operations are dependent upon Sprint’s ability to perform itsobligations under the affiliation agreements. In addition, the Company must beable to attract and maintain a sufficient customer base and achievesatisfactory growth while successfully managing operations to generate enoughcash from operations to meet future obligations. Changes in technology,increased competition, or the inability to obtain required financing or achieveand maintain positive operating cash flow, among other factors, could have anadverse effect on the Company’s financial position and results of operations.

 

**(2)  Summary of Significant AccountingPolicies**

 

*Loss Per Share*

 

Basic and diluted loss per share for the Company are calculated bydividing the net loss by the weighted average number of shares of common stockof the Company. The calculation was made in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.”  The basic and diluted loss per share are thesame because the inclusion of the incremental potential common shares from anyassumed exercise of stock options is anti-dilutive. Potential common sharesexcluded from the loss per share computations for each of the three and ninemonths ended September 30, 2007 and 

 

6

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2006 were 895,331 and 719,812, respectively.

 

*Derivative Financial Instruments*

 

The Company uses an interest rate swap to manage interest rate risksassociated with a portion of its variable rate debt (see Note 7, DerivativeFinancial Instruments). The interest rate swap agreement qualifies and isdesignated as 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 sheet at fair value. Changes infair value of the effective portion of the swap are recorded in othercomprehensive income (loss), net of income tax, until earnings are affected bythe variability in cash flows of the designated hedged item. Any ineffectivechanges in the value of the swap are recognized currently as interest expensein the consolidated statement of operations.

 

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 would remain in other comprehensive income(loss) and would be reclassified into earnings in the same periods during whichthe hedged debt payments affect earnings. If the cash flow hedge isdiscontinued in the future because it becomes probable that the hedged debtpayments will not occur, the net gain or loss would be reclassified intoearnings in that period.

 

*New Accounting Pronouncements*

 

In February 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS No. 159”), to permit all entities to choose toelect, at specified election dates, to measure eligible financial instrumentsat fair value. An entity shall report unrealized gains and losses on items forwhich the fair value option has been elected in earnings at each subsequent reportingdate, and recognize upfront costs and fees related to those items in earningsas incurred and not deferred. SFAS No. 159 applies to fiscal yearsbeginning after November 15, 2007, with early adoption permitted for anentity that has also elected to apply the provisions of SFAS No. 157, “FairValue Measurements.” An entity is prohibited from retrospectively applying SFASNo. 159, unless it chooses early adoption. SFAS No. 159 also appliesto eligible items existing at November 15, 2007 (or early adoption date). TheCompany does not anticipate that the implementation of Statement 159 will havea material impact on its financial position, results of operations, or cashflows.

 

In September 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”), which defines fair value, provides guidelines formeasuring fair value and expands disclosure requirements. SFAS 157 does notrequire any new fair value measurement but applies to the accountingpronouncements that require or permit fair value measurement. SFAS 157 iseffective for fiscal years beginning after November 15, 2007. The Company doesnot anticipate that the implementation of SFAS 157 will have a material impacton its financial position, results of operations, or cash flows.

 

In July 2006, FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”), which is effective for fiscalyears beginning after December 15, 2006. FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in the financial statements inaccordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48prescribes a comprehensive model for how a company should recognize, measure,present, and disclose in its financial statements uncertain tax positions thatthe company has taken or expects to take on a tax return. The Company adoptedFIN 48 on January 1, 2007 and it did not have a material impact on the Company’sfinancial position, results of operations and cash flows.

 

**(3)  Sprint Agreements**

 

Under the Sprint agreements, Sprint provides the Company significantsupport services such as customer service, billing, long distance transportservices, national network operations support, inventory logistics support, useof the Sprint and Sprint PCS brand name, national advertising, nationaldistribution and product development. Additionally, the Company derivessubstantial roaming revenue when wireless customers of Sprint and other PCSAffiliates of Sprint incur minutes of use in the Company’s territories andincurs expense to Sprint and to other PCS Affiliates of Sprint when the Company’scustomers incur minutes of use in the territories of Sprint and other PCSAffiliates of Sprint. Cost of service and roaming transactions with Sprintinclude the 8% affiliation fee, long distance, roaming expenses, billingsupport and customer care support. Cost of equipment relates to inventory soldby the Company that was purchased from Sprint under the Sprint agreements.Selling and marketing transactions relate to subsidized costs on wirelesshandsets and commissions under Sprint’s national distribution program.

 

The costs incurred by the Company for the support services provided bySprint are determined on a 

 

7

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per-average-monthly-subscriber rate and on a per-customer-additionrate. Pursuant to the Company’s affiliation agreements with Sprint PCS, theper-average-monthly-subscriber rate was set at $7.25 for 2004, $7.00 for 2005and $6.75 for 2006 and the per-customer-addition rate was set at $23.00 in iPCSWireless’s territory and $22.00 in the Horizon/Bright territory. The agreementsalso provide that, for each three-year period after December 31, 2006,these rates will be reset based on Sprint’s reasonable costs. InFebruary 2007, Sprint notified the Company that the per average monthlycash cost per user rate (“CCPU”) would be $7.50 for 2007, $7.09 for 2008, and$6.81 for 2009, and the cost per gross customer addition (“CPGA”) rate would be$20.09 for 2007, $19.41 for 2008 and $18.58 for 2009. The Company stronglydisagrees with Sprint’s new rates and, pursuant to the terms of its affiliationagreements with Sprint, on December 8, 2006, submitted the determinationof the new rates to binding arbitration before the International Institute forConflict Prevention and Resolution. A three-judge panel has been selected andthe parties are engaged in discovery. The Company currently expects that ahearing before the panel will occur next year. In the meantime, the Companycontinues to obtain the support services from Sprint at the rates proposed bySprint in February 2007. If the arbitration panel imposes rates different thanthe ones proposed by Sprint, then the rates imposed by the panel would beretroactively applied to January 1, 2007. However, in the meantime, as requiredby the services agreements, beginning on January 1, 2007, the Companybegan paying the rates proposed by Sprint.

 

As previously mentioned, the Company derives substantial roamingrevenue from Sprint PCS and incurs roaming expense to Sprint PCS. The Company’saffiliation agreements with Sprint PCS set the reciprocal roaming rate withSprint PCS through December 31, 2006 at $0.058 per minute for voice and 2Gdata, and $0.002 per kilobyte for 3G data. Thereafter, the affiliationagreements provide that the reciprocal roaming rates are to be calculated basedupon Sprint’s retail yield for the prior year. With respect to certain of theCompany’s markets in western and eastern Pennsylvania, the Company receives thebenefit of a special reciprocal rate for voice and 2G data of $0.10 perminute. This special rate will terminate, with respect to each of these twosets of markets, on the earlier of December 31, 2011 or the first day ofthe calendar month which follows the first calendar quarter during which theCompany achieves a subscriber penetration rate of at least 7% of the Company’scovered populations in those markets. In February 2007, Sprint notifiedthe Company that effective January 1, 2007, the reciprocal roaming rates are $0.0403per minute for voice and 2G data and $0.001 per kilobyte for 3G data. TheCompany strongly disagrees with Sprint’s reciprocal roaming rates and intendsto vigorously oppose them, including by submitting the matter to arbitration orlitigation, if necessary. If the matter is submitted to an arbitration paneland the arbitration panel imposes rates different than the ones then in effect,the new rates would be retroactively applied to the appropriate period.However, in the meantime, the new rates went into effect on January 1,2007.

 

For the three and nine months ended September 30, 2007, approximately97% and 98%, respectively, of the Company’s revenue was derived from dataprovided by Sprint. This compares to 97% for the comparative periods ended September30, 2006. For the three and nine months ended September 30, 2007, approximately64% and 66%, respectively, of the Company’s cost of service and roaming wasderived from data provided by Sprint. For the comparative periods endedSeptember 30, 2006, approximately 67% and 68%, respectively, of the Company’scost of service and roaming was derived from data provided by Sprint. TheCompany reviews all charges from Sprint and disputes certain of these chargesin cases where the Company does not receive enough supporting detail tovalidate the charges or it does not believe Sprint can charge the Company forcertain expenses under the terms of the Sprint agreements. At September 30,2007, the Company did not have any invoices from Sprint which the Company wasdisputing; however, Sprint notified the Company that it disputes the amounts thatSprint charged the Company for data roaming for April through July 2007 (SeeNote 11, Commitments and Contingencies).

 

Amounts relating to the Sprint agreements for the three and nine months ended September30, 2007 and 2006 are as follows (in thousands):

 

8

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| ** **                                                          | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **September 30,  2007**                       | ** ** | **September 30,  2006**                      | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
| **Amounts included in the Consolidated  Statements of Operations:** | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenue                                                     |       | $                                                  | 92,129     |                                              | $          | 79,300 |   | $ | 267,074 |   | $ | 232,021 |   |
| Roaming revenue                                                     |       | $                                                  | 46,287     |                                              | $          | 43,728 |   | $ | 119,284 |   | $ | 116,888 |   |
| Cost of service and roaming:                                        |       |                                               |       |                                              |       |   |   |   |   |
| Roaming                                                             |       | $                                                  | 24,911     |                                              | $          | 28,177 |   | $ | 74,846 |   | $ | 76,698 |   |
| Customer service                                                    |       | 14,886                                             |       | 11,224                                            |       | 44,047 |   | 32,843 |   |
| Affiliation fees                                                    |       | 7,126                                              |       | 6,054                                             |       | 21,135 |   | 18,183 |   |
| Long distance                                                       |       | 3,465                                              |       | 3,206                                             |       | 9,930 |   | 9,272 |   |
| Other                                                               |       | (276                                               | )          | 408                                               |       | 1,932 |   | 3,373 |   |
| Total cost of service and roaming                                   |       | $                                                  | 50,112     |                                              | $          | 49,069 |   | $ | 151,890 |   | $ | 140,369 |   |
| Cost of equipment                                                   |       | $                                                  | 12,880     |                                              | $          | 10,893 |   | $ | 38,829 |   | $ | 30,290 |   |
| Selling and marketing                                               |       | $                                                  | 3,478      |                                              | $          | 3,646 |   | $ | 13,969 |   | $ | 13,153 |   |

 
| ** **                                                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Amounts included  in the Consolidated Balance Sheets:** | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Receivable from Sprint                                    |       | $                            | 44,247     |                        | $          | 40,724 |   |
| Inventories, net                                          |       | 4,014                        |       | 4,291                       |       |
| Payable to Sprint                                         |       | 52,130                       |       | 58,196                      |       |
|                                                           |            |                              |            |                             |            |  |  |

 

**(4)  Property and Equipment**

 

Property and equipment consists of the following at September 30, 2007and December 31, 2006 (in thousands):

 
| ** **                                      | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Network assets                                  |       | $                            | 235,334    |                        | $          | 214,348 |   |
| Computer equipment                              |       | 4,821                        |       | 4,299                       |       |
| Furniture, fixtures, and office equipment       |       | 7,809                        |       | 7,117                       |       |
| Vehicles                                        |       | 1,974                        |       | 294                         |       |
| Construction in progress                        |       | 12,382                       |       | 16,143                      |       |
| Total property and equipment                    |       | 262,320                      |       | 242,201                     |       |
| Less accumulated depreciation and  amortization |       | (132,464                     | )          | (102,560                    | )          |
| Total property and equipment, net               |       | $                            | 129,856    |                        | $          | 139,641 |   |

 

On March 21, 2006, the Company amended the payment terms of the letterof agreement with Nortel Networks to replace the Motorola equipment deployed inthe Company’s Pennsylvania, New York, New Jersey and Maryland markets withNortel equipment. This amendment accelerated payments for equipment totaling$4.0 million from 2007 to 2006; thereby, reducing the original timeline tocomplete this project. Because of this amendment, the estimated remaininguseful life of the Motorola equipment was shortened by approximately nine months,resulting in additional depreciation expense of approximately $2.4 million forthe nine months ended September 30, 2006.

 

In mid-2006 the Company engaged independent agents to sell theremaining Motorola equipment from the legacy Horizon PCS markets on behalf ofthe Company. Pursuant to SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, during the three months ended March 31, 2007,the Company reclassified $1.8 million from Property and equipment, net, toAssets held for sale for that portion of the Motorola equipment expected to besold within the next twelve months. During the nine months ended September 30,2007, the Company sold approximately $0.6 million of this equipment for animmaterial net loss included in Loss on disposal of property and equipment,net.

 

**(5)  Intangible Assets and Goodwill**

 

As a result of the Company’s reorganization in 2004 and in accordancewith fresh-start accounting under SOP 90-7, “Financial Reporting by Entities inReorganization under the Bankruptcy Code”, the Company revalued its assets totheir estimated fair values and the Company recorded intangible assets of$19.0 million relating to the fair value of the customer base and$59.5 million relating to the fair value of the right to provide serviceunder the Sprint affiliation agreements.

 

9

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In connection with the merger with Horizon PCS in 2005, the Companyallocated portions of the Horizon PCS purchase price to identifiable intangibleassets consisting of the right to provide service under the Sprint affiliationagreements, the acquired customer base, and a Federal Communications Commission(“FCC”) license for a small market in Ohio. The amount allocated to each ofthese items was $67.0 million, $53.0 million, and $1.5 million,respectively. In addition, the excess of the purchase price over the fair valueof the net assets acquired, including these identifiable intangible assets,which totaled $141.8 million, was recorded as goodwill. The goodwill is notdeductible for income taxes.

 

The intangible assets relating to the customer base are being amortizedover the estimated average life of a customer of 30 months. The intangibleassets relating to the right to provide service under the Sprint affiliationagreements are being amortized over the remaining term of the respectiveagreements. The FCC license was determined to have an indefinite life as it isexpected to be renewed with minimal effort and cost.

 

The Company has investigated business opportunities to use its FCClicense in Ohio, but has been unable to build a viable business case for theseopportunities. Therefore, the Company tested the value assigned to this assetfor impairment under SFAS. No 142, “Goodwill and Other Intangible Assets”,using a market analysis approach. As a result of this testing, the Companyrecognized a $1.2 million impairment charge related to this intangible asset inthe three months ended September 30, 2007. The FCC license in Ohio is for sale;however, the Company believes the sale of this asset is unlikely within thenext year.

 

The weighted average amortization period, gross carrying amount,accumulated amortization and net carrying amount of intangible assets atSeptember 30, 2007 and December 31, 2006 are as follows (in thousands):

 
| ** **                                                        | ** ** | **September 30****, 2007**            | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **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 |   | (24,750 | ) | 101,771 |   |
| Customer base                                                     |       | 30 months                                       |       | 71,956 |   | (66,656 | ) | 5,300 |   |
|                                                              |       |                                            |       | $ | 198,777 |   | $ | (91,406 | ) | $ | 107,371 |   |

 
| ** **                                                        | ** ** | **December 31, 2006**                 | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| **Non-amortized intangible asset:**                               | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FCC license                                                       |       |                                            |       | $ | 1,500 |   | $ | — |   | $ | 1,500 |   |
| **Amortized intangible assets:**                                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Right to provide service under the Sprint  affiliation agreements |       | 167 months                                      |       | 126,521 |   | (17,868 | ) | 108,653 |   |
| Customer base                                                     |       | 30 months                                       |       | 71,956 |   | (50,756 | ) | 21,200 |   |
|                                                              |       |                                            |       | $ | 199,977 |   | $ | (68,624 | ) | $ | 131,353 |   |

 

The amortization expense for the three months ended September 30, 2007and 2006 was approximately $7.6 million and $9.5 million, respectively.Amortization expense for the nine months ended September 30, 2007 and 2006 wasapproximately $22.8 million and $28.5 million, respectively. Aggregateamortization expense relative to intangible assets for the periods shown willbe as follows:

 
| **Year Ended December 31** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2007                                      |       | $          | 30,376     |   |
| 2008                                      |       | 9,176      |       |
| 2009                                      |       | 9,176      |       |
| 2010                                      |       | 9,176      |       |
| 2011                                      |       | 9,176      |       |
| Thereafter                                |       | 62,773     |       |
| Total                                     |       | $          | 129,853    |   |

 

10

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**(6) Long-Term Debt**

 

Long-term debt consists of the following at September 30, 2007 andDecember 31, 2006 (in thousands):

 
| ** **                                                                  | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Senior notes 11-1/2%                                                        |       | $                                | —     |                            | $          | 165,000 |   |
| Senior notes 11-3/8%                                                        |       | —                           |       | 125,000                         |       |
| Unamortized fair value adjustment for  11-3/8% senior notes                 |       | —                           |       | 11,577                          |       |
| First lien senior secured floating rate  notes                              |       | 300,000                          |       | —                          |       |
| Second lien senior secured floating rate  notes                             |       | 175,000                          |       | —                          |       |
| Capital lease obligations                                                   |       | 635                              |       | 492                             |       |
| Total long-term debt and capital lease  obligations                         |       | 475,635                          |       | 302,069                         |       |
| Less: current maturities                                                    |       | (190                             | )          | (24                             | )          |
| Long-term debt and capital lease  obligations, excluding current maturities |       | $                                | 475,445    |                            | $          | 302,045 |   |

 

On April 23, 2007, the Company closed itsoffering of $475.0 million in aggregate principal amount of senior secured  notes, consisting of $300.0 million inaggregate principal amount of First Lien Senior Secured Floating Rate Notes due2013 (“First Lien Notes”) and $175.0 million in aggregate principal amount ofSecond Lien Senior Secured Floating Rate Notes due 2014 (“Second Lien Notes”and together with the First Lien Notes, the “Secured Notes”) in a privateplacement transaction.

 

The Secured Notes are senior securedobligations of the Company and are unconditionally guaranteed on a seniorsecured basis by all the Company’s existing and future domestic restrictedsubsidiaries. The First Lien Notes are secured by a first priority securityinterest, subject to permitted liens, in substantially all of the Company andits subsidiary guarantor assets, including, but not limitedto:  (1) all the capital stock of eachrestricted subsidiary owned by the Company, or any subsidiary guarantor; (2)all deposit accounts, security accounts, accounts receivable, inventory, investmentproperty, inter-company notes, general intangible assets, equipment,instruments, contract rights, chattel paper, promissory notes and leases; (3)all fixtures; (4) patents, trademarks, copyrights and other 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”). The Second Lien Notes are secured by a secondpriority security interest, subject to permitted liens, in the Collateral.

 

Interest on the First Lien Notes accrues atan annual rate equal to three-month LIBOR plus 2.125% and is payable quarterlyin cash on February 1, May 1, August 1 and November 1 of each year, commencingon August 1, 2007. Interest on the Second Lien Notes accrues at an annual rateequal to three-month LIBOR plus 3.25% and is payable quarterly on February 1,May 1, August 1 and November 1 of each year, commencing on August 1, 2007.Following the first interest payment on August 1, 2007, the Company may electto pay interest on the Second Lien Notes entirely in cash or entirely byincreasing the principal amount of the Second Lien Notes (“PIK Interest”). PIKInterest on the Second Lien Notes accrues at an annual rate equal tothree-month LIBOR plus 4.0%. Three-month LIBOR for the Secured Notes resets onFebruary 1, May 1, August 1 and November 1 of each year, commencing on August1, 2007. Three-month LIBOR for the Secured Notes was 5.36% on August 1, 2007. Subsequentto September 30, 2007, on November 1, 2007, three-month LIBOR for the SecuredNotes was 4.91%.

 

On July 20, 2007, the Company entered into aninterest rate swap agreement for a notional amount of $300.0 million associatedwith the interest on the Company’s First Lien Notes effective August 1, 2007for a period of three years.  Under thisagreement, the Company receives interest at a floating rate of three-monthLIBOR and pays interest at a fixed rate of 5.34%, resulting in an effective ratein relation to the First Lien Notes of 7.47% throughout the term of theswap.  See Note 7, Derivative FinancialInstruments, for a discussion of this interest rate swap.

 

The Company used a portion of the proceeds ofthe Secured Notes offering to repurchase all of its outstanding 11-1/2% notesand 11-3/8% notes, as well as to pay the related fees and expenses of theoffering. The Company also used the remaining net proceeds from the SecuredNotes offering, together with approximately $58.0 million of itsavailable cash, to pay a special cash dividend to common stockholders (see Note9, Stock-Based Compensation). In connection with the Secured Notes offering,for the nine months ended September 30, 2007, the Company recorded debtextinguishment costs as follows (dollars in thousands):

 

| Tender offer premium and consent costs                                                                           |   | $       | 34,155 |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| Write off of remaining deferred financing  costs of 11-1/2% and 11-3/8% senior notes                             |   | 7,284   |   |
| Acceleration of the unamortized balance of  the purchase price fair value adjustment to the 11-3/8% senior notes |   | (10,938 | )      |
| Total debt extinguishment costs                                                                                  |   | $       | 30,501 |   |

 

The indentures governing the Secured Notes contain covenants whichrestrict the Company’s ability to incur additional indebtedness, merge, paydividends, dispose of its assets, and certain other matters as defined in theindentures.

 

11

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Subsequent to September 30, 2007, on October10, 2007, the Company completed an exchange offer pursuant to which theprivately placed Secured Notes were exchanged for notes registered under theSecurities Act of 1933 with substantially identical terms as theprivately placed Secured Notes, except that the capital stock of eachrestricted subsidiary pledged to secure the Secured Notes is automaticallyreleased from the Collateral to the extent that the pledge would require thepreparation and filing of separate audited financial statements of suchsubsidiary under Rule 3-16 of Regulation S-X.

 

In connection with the merger with Horizon PCS in 2005, the allocationof the purchase price resulted in an increase of the value of the 11-3/8%senior notes of approximately $14.7 million, which was recorded aslong-term debt in the Consolidated Balance Sheets. This amount was to beamortized over the remaining life of the 11-3/8% senior notes as a reduction tointerest expense. For the three months ended September 30, 2006, the reductionto interest expense was approximately $0.5 million. For the nine months endedSeptember 30, 2007 and 2006, the reduction to interest expense wasapproximately $0.6 million and $1.6 million, respectively. This unamortizedbalance of the fair value adjustment for the 11-3/8% senior notes was reducedto zero in connection with the Secured Notes offering in April 2007.

 

**(7)  Derivative Financial Instruments**

 

On July 20, 2007, the Company entered into aninterest rate swap agreement for a notional amount of $300.0 million associatedwith the interest on the Company’s First Lien Notes effective August 1, 2007for a period of three years. Under this agreement, the Company receivesinterest at a floating rate of three-month LIBOR and pays interest at a fixedrate of 5.34%, resulting in an effective rate in relation to the First LienNotes of 7.47% throughout the term of the swap. The interest rate swap has beendesignated as a cash flow hedge. The fair value of the interest rate swap isrecorded in Stockholders’ Equity (Deficiency) under Accumulated othercomprehensive income (loss), net of applicable income tax expense or benefit.

 

As of September 30, 2007, the fair value ofthe swap was $6.1 million and is recorded on the balance sheet as a long-termliability and in Accumulated other comprehensive loss. The change in fair valueof the swap for the three months ended September 30, 2007 was $6.1 million. Nocomponent of the interest rate swap is excluded from the assessment ofeffectiveness and no ineffectiveness has been recognized on the swap sinceinception.

 

The amount of loss recorded in Othercomprehensive loss at September 30, 2007 that is expected to be reclassified tointerest expense in the next twelve months if interest rates remain unchangedis approximately $1.9 million.

 

**(8)  Income Taxes**

 

The Company’s effective income tax rate for the interim periodspresented is based on management’s estimate of the Company’s effective tax ratefor the applicable year and differs from the federal statutory income tax rateprimarily due to nondeductible permanent differences, state income taxes andchanges in the valuation allowance for deferred income taxes. In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible. No benefit for federal income taxes has beenrecorded for the three and nine months ended September 30, 2007 and 2006 as thenet deferred tax asset generated, primarily from temporary differences relatedto the net operating loss, was offset by a full valuation allowance because itis not considered more likely than not that these benefits will be realized dueto the Company’s losses since inception.

 

**(9)  Stock-Based Compensation**

 

The Company has two long-term incentive plans currently in place. TheiPCS 2004 long-term incentive plan, as amended (the “iPCS Plan”), was approvedby the Company’s board of directors as provided by the Company’s plan ofreorganization. The Horizon PCS 2004 stock incentive plan, as amended (the “HorizonPlan”), was assumed by the Company in its merger with Horizon PCS in 2005.

 

**iPCS Plan.**Under theiPCS Plan, the Company may grant to employees, directors and consultants of theCompany or its subsidiaries incentive and non-qualified stock options, stockappreciation rights, restricted and unrestricted stock awards and cashincentive awards. All of the stock options and restricted stock awarded to dateunder the iPCS Plan have a ten-year life with vesting on a quarterly basis overfour years for employees, and over one year for directors. The iPCS Plan hasbeen amended twice to increase the number of shares available for issuancethereunder. On May 5, 2005, the iPCS Plan was amended to increase the number ofshares available for issuance by 250,000 shares, and on September 28, 2006, theiPCS Plan was amended to increase the number of shares available for issuanceby 500,000 shares. In connection with the second amendment to the iPCS Plan,the Horizon Plan (discussed below) was amended to decrease the number of sharesavailable for issuance thereunder by 211,227. Each of these amendments wasapproved by the Company’s stockholders. In connection with a special cashdividend paid on May 16, 2007, as discussed below, on May 2, 2007, theCompensation Committee of the Board of Directors of the Company increased thenumber of shares remaining available for award under the 

 

12

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iPCS Plan by 342,630 shares. Giving effect to these amendments andmodifications, the total number of shares remaining available to be awardedunder the iPCS Plan as of September 30, 2007 is 650,647 shares of common stock.

 

**Horizon Plan.**Underthe Horizon Plan, the Company may grant to employees, directors and consultantsof the Company or its subsidiaries incentive or non-qualified stock options orstock appreciation rights. All of the stock options issued to date under theHorizon Plan have a ten-year life and vest equally in six-month increments overthree years from the date of grant. As discussed above, in connection with themost recent amendment to the iPCS Plan, the Horizon Plan was amended todecrease the number of shares available for issuance thereunder by 211,227.This amendment was approved by the Company’s stockholders. On May 2, 2007, asdiscussed below, the Compensation Committee of the Board of Directors of theCompany increased the number of shares remaining available for award under theHorizon Plan by 7,602 shares. Giving effect to this amendment and modification,the total number of shares that may be granted under the Horizon Plan is558,602 shares of common stock, which approximately equals the number of sharesunderlying awards previously made under the Horizon Plan and outstanding on thedate of modification.

 

On April 26, 2007, the Board of Directorsdeclared a special cash dividend of $11.00 per share, approximately $187.0million in the aggregate, payable to all holders of record of the Company’scommon stock on May 8, 2007. Of this amount, approximately $186.5 million was paid on May 16, 2007. The remaining unpaid dividend relatesto restricted stock awards and is being paid out starting in July 2007 as theseawards vest over 15 quarters. On May 2, 2007, in connection with suchdividend, the Compensation Committee of the Board of Directors of the Companyresolved that each stock option that is outstanding under the iPCS Plan and theHorizon Plan, on the trading day immediately preceding the trading daydesignated by the NASDAQ Stock Market as the ex-dividend date (the “AdjustmentDate”) shall be adjusted as follows effective as of the opening of business onthe Adjustment Date:

 

•                  The number ofshares of stock then subject to each option shall be adjusted by dividing thenumber of shares of stock then subject to the option by the Adjustment Factor;and

 

•                  The exerciseprice of each option shall be adjusted by multiplying the exercise price by theAdjustment Factor.

 

The “Adjustment Factor” was 0.78282 and is equal to one minus thepercentage reduction in the closing sale price of a share of stock on theAdjustment Date reported by the NASDAQ Stock Market at the regular hoursclosing price (“Closing Price”) as compared to the Closing Price of a share ofstock on the Adjustment Date minus $11.00. In addition, on the Adjustment Date,the number of shares under the iPCS Plan and the Horizon Plan was adjusted bydividing the number of shares of stock reserved for issuance by the AdjustmentFactor; thereby increasing the number of shares reserved for issuance. Themodification resulted in an additional 184,537 shares to 75 employees anddirectors who had options outstanding on the modification date. All optioninformation has been retroactively restated to reflect this modification. Withthis modification, the Company will record additional stock-based compensationexpense of approximately $6.5 million, of which approximately $3.2 million wasrecorded as of the date of modification and the remainder will be recognizedover the remaining vesting period for the options. An additional $0.9 millionof compensation expense related to the modification was recorded in the ninemonths ended September 30, 2007 with the quarterly vesting of stock options.

 

Effective January 24, 2007, Alan Morse ceased to be the Company’s ChiefOperating Officer. As a result of his separation, Mr. Morse received anaccelerated additional year of vesting of his options. With this agreement, themodification of his option awards resulted in a new measurement date. The fairvalue of the options prior to the modification was zero. The fair value of theoptions subsequent to the modification resulted in an additional $0.6 millionof stock-based compensation expense recorded in the nine months ended September30, 2007.

 

The table below outlines the assumptions used for the optionmodifications:

 
| ** **              | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **September 30, 2007**                  | ** ** |
| ** **              | ** ** | **Range**                                         | ** ** | **Weighted Average** | ** ** |
| Risk free interest rate |       | 4.32%-5.13                                        | %          | 4.47 | % |
| Volatility              |       |                                              |       | 38.00 | % |
| Dividend yield          |       |                                              |       | 0.00 | % |
| Expected life in years  |       |                                              |       | 4.21 |   |
| Fair value price        |       |                                              |       | $ | 10.31 |   |
|                         |            |                                                   |            |  |  |  |

 

During the three and nine months ended September 30, 2007, the Companyawarded 101,500 and 369,485 stock 

 

13

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options, respectively, to employees and the board of directors withexercise prices equal to the fair market value on the date of grants. The fairvalue of each grant is estimated at the grant date using the Black Scholesoption pricing method. There were no grants awarded during the three and ninemonths ended September 30, 2006. The table below outlines the assumptions usedfor the options granted during the three and nine months ended September 30,2007:

 
| ** **                             | ** ** | **For the Three Months Ended  September 30, 2007** | ** ** | **For the Nine Months Ended  September 30, 2007** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Range**                                                                        | ** ** | **Weighted Average**                                                       | ** ** | **Range** | ** ** | **Weighted Average** | ** ** |
| Risk free interest rate |       | 4.63 to 5.06                                                                     | %          | 4.70                                                                            | %          | 4.45% to 5.06 | % | 4.54 | % |
| Volatility                             |       |                                                                             |       | 43.88                                                                           | %          |   |   | 39.62 | % |
| Dividend yield                         |       |                                                                             |       | 0.00                                                                            | %          |   |   | 0.00 | % |
| Expected life in years                 |       |                                                                             |       | 5.96                                                                            |       |   |   | 5.93 |   |
| Fair value price                       |       |                                                                             |       | $                                                                               | 14.94      |   |   |   | $ | 16.78 |   |
|                                        |            |                                                                                  |            |                                                                                 |            |  |  |  |  |  |  |

 

The following table shows stock-based compensation expense by type ofshare-based award for the three and nine months ended September 30, 2007and 2006 included in the consolidated statements of operations (in thousands):

 
| ** **                                                                   | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **Sept. 30, 2007**                       | ** ** | **Sept. 30, 2006**                      | ** ** | **Sept. 30, 2007** | ** ** | **Sept, 30, 2006** | ** ** |
| Restricted stock                                                             |       | $                                                  | 243        |                                              | $          | 25 |   | $ | 645 |   | $ | 75 |   |
| Amortization of unearned compensation of  stock option awards                |       | 28                                                 |       | 89                                                |       | 265 |   | 270 |   |
| Fair value expense of option modifications  related to special cash dividend |       | 374                                                |       | —                                            |       | 4,108 |   | — |   |
| Fair value expense of stock option awards                                    |       | 755                                                |       | 280                                               |       | 3,112 |   | 1,367 |   |
| Total stock-based compensation                                               |       | $                                                  | 1,400      |                                              | $          | 394 |   | $ | 8,130 |   | $ | 1,712 |   |

 

The following table shows the total remaining unrecognized compensationcost related to restricted stock grants and the fair value expense of stockoption awards; as well as the weighted average remaining required serviceperiod over which such costs will be recognized:

 
| ** **                                | ** ** | **Total Remaining  Unrecognized  Compensation Cost** | ** ** | **Weighted Average  Remaining Required  Service Period** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)**                                         | ** ** | **(in years)**                                                     | ** ** |
| Restricted stock                          |       | $                                                              | 3.0        |                                                                    | 3.29       |   |
| Fair value expense of stock option awards |       | 7.9                                                            |       | 2.96                                                                    |       |
|                                           |            |                                                                |            |                                                                         |            |  |

 

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

 
| ** **                     | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **Sept. 30, 2007**                       | ** ** | **Sept. 30, 2006**                      | ** ** | **Sept. 30, 2007** | ** ** | **Sept. 30, 2006** | ** ** |
| Cost of service and roaming    |       | $                                                  | 120        |                                              | $          | 24 |   | $ | 499 |   | $ | 86 |   |
| Sales and marketing            |       | 199                                                |       | 71                                                |       | 996 |   | 339 |   |
| General and administrative     |       | 1,081                                              |       | 299                                               |       | 6,635 |   | 1,287 |   |
| Total stock-based compensation |       | $                                                  | 1,400      |                                              | $          | 394 |   | $ | 8,130 |   | $ | 1,712 |   |

 

A summary of activity related to the Company’s stock option plans is asfollows:

 
| ** **                        | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | ** **                     | ** ** | ** **                                     | ** ** | **(in years)**                                     | ** ** | **(in millions)**              | ** ** |
| Outstanding at December 31, 2006  |       | 831,078                        |       | $                                              | 12.19      |                                                    |       |                                |       |   |
| Granted                           |       | 369,485                        |       | 37.07                                          |       |                                                    |       |                                |       |
| Exercised                         |       | (264,454                       | )          | (13.03                                         | )          |                                                    |       |                                |       |
| Forfeited                         |       | (40,778                        | )          | (27.02                                         | )          |                                                    |       |                                |       |
| Outstanding at September 30, 2007 |       | 895,331                        |       | $                                              | 21.54      |                                                    | 7.97       |                                | $          | 12,843 |   |
| Exercisable at September 30, 2007 |       | 471,663                        |       | $                                              | 16.27      |                                                    | 7.38       |                                | $          | 8,934 |   |

 

14

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A summary of activity related to the Company’s restricted shares is asfollows:

 
| ** **                              | ** ** | **Shares** | ** ** | **Weighted Average  Fair Value Price** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|
| Restricted shares at December 31, 2006  |       | 7,552      |       | $                                                     | 22.67      |   |
| Granted                                 |       | 76,700     |       | 44.93                                                 |       |
| Vested                                  |       | (15,146    | )          | (42.25                                                | )          |
| Forfeited                               |       | (416       | )          | (18.90                                                | )          |
| Restricted shares at September 30, 2007 |       | 68,690     |       | $                                                     | 43.23      |   |

** **

**(10) Comprehensive Loss**

 

Comprehensive loss, which includes all changes in the Company’s equityduring the period except transactions with stockholders, consisted of thefollowing for the three and nine months ended September 30, 2007 and 2006 (inthousands):

 
| ** **                                                             | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                            | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                                                               |       | $                                                   | (2,404     | )                                                   | $          | (6,683 | ) | $ | (65,191 | ) | $ | (34,057 | ) |
| Other comprehensive loss - Unrealized loss  on derivatives, net of tax |       | (6,062                                              | )          | —                                              |       | (6,062 | ) | — |   |
| Comprehensive loss                                                     |       | $                                                   | (8,466     | )                                                   | $          | (6,683 | ) | $ | (71,253 | ) | $ | (34,057 | ) |

** **

**(11)  Commitments and Contingencies**

 

*(a) Commitments*

 

In conjunction with the issuance of the Secured Notes, the Companyentered into registration rights agreements with the initial purchasers of theSecured Notes. Under the agreements, the Company agreed to certain obligationswith respect to registration of the Secured Notes with the SEC. The Companyfiled a registration statement with the SEC on August 21, 2007 and it wasdeclared effective on September 5, 2007. The registered exchange offer commencedon September 5, 2007 and expired on October 5, 2007. Subsequent to September30, 2007, on October 10, 2007, all of the Secured Notes were exchanged forregistered securities.

 

*(b) Litigation, Arbitration and OtherDisputes*

 

On July 15, 2005, iPCS Wireless, Inc., a wholly ownedsubsidiary of iPCS, Inc., filed a complaint against Sprint and Sprint PCSin the Circuit Court of Cook County, Illinois. On July 22, 2005, HorizonPersonal Communications, Inc. and Bright Personal Communications Services,LLC, wholly owned subsidiaries of iPCS, Inc., filed a complaint againstSprint and Sprint PCS and Nextel Communications, Inc. in the Court ofChancery of the State of Delaware, New Castle County. The complaints allege,among other things, that Sprint’s conduct following the consummation of themerger between Sprint and Nextel, would breach its exclusivity obligationsunder the Company’s affiliation agreements, as amended. The Company sought,among other things, a temporary restraining order (a TRO), a preliminaryinjunction and a permanent injunction enjoining Sprint and those acting inconcert with it from engaging in conduct that would violate the Company’saffiliation agreements with Sprint PCS.

 

On July 28, 2005, iPCS, Inc. and certain of its wholly ownedsubsidiaries entered into a Forbearance Agreement with Sprint relating to thecomplaints filed against Sprint. The Forbearance Agreement sets forth theCompany’s agreement that it would not seek a TRO or a preliminary injunctionagainst Sprint so long as Sprint operates subject to the limitations set forthin the Forbearance Agreement. Although the Forbearance Agreement expired onJanuary 1, 2006 in the territory managed by iPCS Wireless and onAugust 4, 2006 in the territory managed by Horizon Personal Communicationsand Bright Personal Communications Services, Sprint committed to continue toabide by the terms of the Forbearance Agreement in the territory managed iPCSWireless during the pendency of Sprint’s appeal of the Illinois court finalorder (discussed below).

 

The trial in the Delaware court occurred in January 2006. OnAugust 4, 2006, the Delaware court issued its decision and, onSeptember 7, 2006 issued a final order and judgment effecting itsdecision. The final order and judgment provides that:

 

•         Sprint will violate theimplied duty of good faith and fair dealing if it offers iDEN products andservices using the same Sprint brand and marks that plaintiffs (HorizonPersonal Communications and Bright Personal Communications Services) have usedor are using in connection with their sale of Sprint PCS Products and Services 

 

15

----

 

(the “Sprint pcs brand and/or marks”) or a brand or mark confusinglysimilar to the Sprint pcs brand or marks in plaintiffs’ Service Areas. Sprintmay re-brand the legacy Nextel stores in plaintiffs’ Service Areas, but it mustdo so in a way that does not create a likelihood of confusion in the minds ofconsumers as to the sponsor of the store or which products and services areavailable in it, and it may not use the new Sprint logo.

 

•         Withinplaintiffs’ Service Areas, Sprint and those acting in concert with it areenjoined from:

 

•        offering iDENproducts and services that use the same or confusingly similar brands or marksas the Sprint pcs brand or marks; provided that Sprint is not enjoined orotherwise prohibited from conducting national advertising offering iDENproducts and services that use the same or similar brands and marks as theSprint pcs brands or marks, subject to appropriate disclaimers regardingavailability in certain markets; and

 

•        re-brandingthe legacy Nextel stores with the new Sprint logo or the same or confusinglysimilar brands or marks as the Sprint pcs brand and marks.

 

•        In light ofcertain operational and confidentiality representations made by Sprint,plaintiffs’ claims and requests for relief against such future Sprint behaviorwere deemed not ripe for adjudication and therefore denied. If, however, Sprintin the future breaches these representations, the court will promptly entertaina request for appropriate relief.

 

•        Plaintiffs’claims for tortious interference and civil conspiracy against Nextel weredismissed with prejudice.

 

The trial in the Illinois court was held for 25 days between earlyMarch and early July 2006. On August 14, 2006, the Illinoiscourt issued its decision and on September 20, 2006 issued a final ordereffecting its decision. The final order provides 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 shallcontinue to comply with all terms and conditions of the Forbearance Agreement.

 

On September 28, 2006, Sprint appealed the ruling of the Illinoistrial court to the Appellate Court of Illinois, First Judicial District. Inearly October 2006, Sprint requested a stay of the Illinois trial court’sorder pending appeal and an accelerated appeal. On October 13, 2006, theIllinois appellate court denied Sprint’s request for an accelerated appeal andordered a stay of the Illinois trial court’s order pending appeal on thecondition that (i) Sprint continue to comply with the ForbearanceAgreement and (ii) Sprint comply with the September 7, 2006 order ofthe Delaware court. Accordingly, Sprint must comply with the ForbearanceAgreement, as well as the order of the Delaware court, in iPCS Wireless’sterritory pending a decision from the Illinois appellate court.

 

As of the date hereof, the parties have completed the briefing stage ofthe appeal and are awaiting the scheduling of oral arguments followed by adecision. The Company expects a decision from the appellate court as soon aslater this year or early 2008.

 

On December 8, 2006, the Company initiated arbitration proceedingsagainst Sprint with respect to the Company’s dispute regarding the rates thatSprint charges the Company for providing certain back-office support servicesto the Company. As discussed above in Note 3, the Company strongly disagreeswith the Sprint-proposed rates and, as provided for in the Company’s agreementswith Sprint, the Company elected to submit the determination of the new ratesto binding arbitration before the International Institute for ConflictPrevention and Resolution. A three-judge panel has been selected and theparties are engaged in discovery. The Company currently expects that itshearing before the panel will occur next year.

 

In August 2007, Sprint notified the Companythat it disputes the amounts that Sprint charged the Company for data roamingfor April through July, 2007 because of the Company’s efforts to reduce itsdata roaming expense. Based on Sprint’s calculations, the aggregate amount indispute through September 30, 2007 is $7.6 million (of which amountapproximately $5.0 million relates to the four months that Sprint has formallydisputed). The Company disagrees with Sprint’s position. The amounts disputedby Sprint are not included in cost of service and roaming for the three andnine months ended September 30, 2007.

 

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 

 

16

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outcome of which, individuallyor in the aggregate, is expected to have a material adverse effect on theCompany’s business, financial condition or results of operations.

 

*(c)**                    FCC Licenses*

 

Sprint PCS holds the licenses necessary to provide wireless services inthe Company’s territory. The FCC requires that licensees like Sprint PCSmaintain control of their licensed spectrums and not delegate control tothird-party operators or managers without FCC consent and are subject torenewal and revocation by the FCC. Certain Sprint PCS wireless licenses in theCompany’s territory were scheduled to expire in April and June 2007. Alllicenses that were scheduled to expire in April 2007 and June 2007 were renewedfor additional ten-year terms, except that one such license was renewed for anadditional eight years. The FCC has adopted specific standards that apply towireless personal communications services license renewals. Any failure bySprint PCS or the Company to comply with these standards could result in thenon-renewal of the Sprint PCS licenses for the Company’s territory.Additionally, if Sprint PCS does not demonstrate to the FCC that Sprint PCS hasmet the construction requirements for each of its wireless personalcommunications services licenses, it can lose those licenses. If Sprint PCSloses its licenses in the Company’s territory for any of these reasons, theCompany would not be able to provide wireless services without obtaining rightsto other licenses.

 

If Sprint PCS loses its licenses in another territory, Sprint PCS orthe applicable PCS Affiliate or 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.

 

**(12) Consolidating Financial Information**

 

The Secured Notes are fully, unconditionally and joint and severallyguaranteed by the Company’s domestic restricted subsidiaries, including iPCSWireless, Inc., iPCS Equipment, Inc., Horizon PersonalCommunications, Inc., and Bright Personal CommunicationsServices, LLC, which are 100% owned subsidiaries of iPCS, Inc. (SeeNote 6, Long-Term Debt). The following consolidating financial information asof September 30, 2007 and December 31, 2006 and for the three and nine monthsended September 30, 2007 and 2006 is presented for iPCS, Inc., iPCSWireless, Inc., iPCS Equipment, Inc., Horizon PersonalCommunications, Inc., and Bright Personal Communications Services, LLC(in thousands):

 

**iPCS, Inc. and SubsidiariesCondensed Consolidating Balance Sheetas of September 30, 2007**

 
| ** **                                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Cash and cash equivalents                                          |       | $                  | —     |               | $          | 64,275              |       | $                         | —     |       | $          | 8,046            |       | $                      | (547       | ) | $ | — |   | $ | 71,774 |   |
| Other current assets                                               |       | 425,734            |       | 305,075            |       | 47,382              |       | 178,641                   |       | 103,632    |       | (973,916         | )          | 86,548                 |       |
| Total current assets                                               |       | 425,734            |       | 369,350            |       | 47,382              |       | 186,687                   |       | 103,085    |       | (973,916         | )          | 158,322                |       |
| Property and equipment, net                                        |       | —             |       | 64,988             |       | 2,754               |       | 42,812                    |       | 19,347     |       | (45              | )          | 129,856                |       |
| Intangible assets, net                                             |       | —             |       | 46,180             |       | —              |       | 150,368                   |       | 52,606     |       | —           |       | 249,154                |       |
| Other non-current assets                                           |       | 7,982              |       | 2,303              |       | —              |       | 2,736                     |       | 17         |       | —           |       | 13,038                 |       |
| Investment in subsidiaries                                         |       | 236,378            |       | —             |       | —              |       | —                    |       | —     |       | (236,378         | )          | —                 |       |
| Total assets                                                       |       | $                  | 670,094    |               | $          | 482,821             |       | $                         | 50,136     |       | $          | 382,603          |       | $                      | 175,055    |   | $ | (1,210,339 | ) | $ | 550,370 |   |
| Current liabilities                                                |       | $                  | 221,178    |               | $          | 436,868             |       | $                         | 20         |       | $          | 288,151          |       | $                      | 117,069    |   | $ | (973,961 | ) | $ | 89,325 |   |
| Long-term debt                                                     |       | 475,000            |       | 445                |       | —              |       | —                    |       | —     |       | —           |       | 475,445                |       |
| Other long-term liabilities                                        |       | 6,424              |       | 4,793              |       | —              |       | 6,228                     |       | 663        |       | —           |       | 18,108                 |       |
| Total liabilities                                                  |       | 702,602            |       | 442,106            |       | 20                  |       | 294,379                   |       | 117,732    |       | (973,961         | )          | 582,878                |       |
| Stockholders’ equity (deficiency)                             |       | (32,508            | )          | 40,715             |       | 50,116              |       | 88,224                    |       | 57,323     |       | (236,378         | )          | (32,508                | )          |
| Total liabilities and stockholders’  equity (deficiency) |       | $                  | 670,094    |               | $          | 482,821             |       | $                         | 50,136     |       | $          | 382,603          |       | $                      | 175,055    |   | $ | (1,210,339 | ) | $ | 550,370 |   |
|                                                                    |            |                    |            |                    |            |                     |            |                           |            |            |            |                  |            |                        |            |  |  |  |  |  |  |  |  |

 

17

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**iPCS, Inc. and SubsidiariesCondensed Consolidating Balance Sheetas of December 31, 2006**

 
| ** **                                                   | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Cash and cash equivalents                                    |       | $                  | —     |               | $          | 85,474              |       | $                         | —     |       | $          | 34,823           |       | $                      | 202        |   | $ | — |   | $ | 120,499 |   |
| Other current assets                                         |       | 139,294            |       | 73,621             |       | 38,200              |       | 94,771                    |       | 72,499     |       | (335,930         | )          | 82,455                 |       |
| Total current assets                                         |       | 139,294            |       | 159,095            |       | 38,200              |       | 129,594                   |       | 72,701     |       | (335,930         | )          | 202,954                |       |
| Property and equipment, net                                  |       | —             |       | 64,773             |       | 6,375               |       | 51,960                    |       | 16,597     |       | (64              | )          | 139,641                |       |
| Intangible assets, net                                       |       | —             |       | 49,259             |       | —              |       | 166,609                   |       | 57,268     |       | —           |       | 273,136                |       |
| Other non-current assets                                     |       | 4,790              |       | 1,756              |       | —              |       | 4,079                     |       | 715        |       | —           |       | 11,340                 |       |
| Investment in subsidiaries                                   |       | 253,001            |       | —             |       | —              |       | —                    |       | —     |       | (253,001         | )          | —                 |       |
| Total assets                                                 |       | $                  | 397,085    |               | $          | 274,883             |       | $                         | 44,575     |       | $          | 352,242          |       | $                      | 147,281    |   | $ | (588,995 | ) | $ | 627,071 |   |
| Current liabilities                                          |       | $                  | 17,900     |               | $          | 232,247             |       | $                         | 42         |       | $          | 127,688          |       | $                      | 58,887     |   | $ | (335,994 | ) | $ | 100,770 |   |
| Long-term debt                                               |       | 165,000            |       | 468                |       | —              |       | 104,400                   |       | 32,177     |       | —           |       | 302,045                |       |
| Other long-term liabilities                                  |       | —             |       | 4,088              |       | —              |       | 5,402                     |       | 581        |       | —           |       | 10,071                 |       |
| Total liabilities                                            |       | 182,900            |       | 236,803            |       | 42                  |       | 237,490                   |       | 91,645     |       | (335,994         | )          | 412,886                |       |
| Stockholders’ equity (deficiency)                       |       | 214,185            |       | 38,080             |       | 44,533              |       | 114,752                   |       | 55,636     |       | (253,001         | )          | 214,185                |       |
| Total liabilities and stockholders’ equity (deficiency) |       | $                  | 397,085    |               | $          | 274,883             |       | $                         | 44,575     |       | $          | 352,242          |       | $                      | 147,281    |   | $ | (588,995 | ) | $ | 627,071 |   |

 

**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of OperationsFor the Three Months Ended September 30, 2007**

** **
| ** **                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                     |       | $                  | —     |               | $          | 78,584              |       | $                         | 268        |       | $          | 41,348           |       | $                      | 22,145     |   | $ | (268 | ) | $ | 142,077 |   |
| Cost of revenues                                   |       | —             |       | (51,082            | )          | —              |       | (28,325                   | )          | (13,275    | )          | 268              |       | (92,414                | )          |
| Selling and marketing                              |       | —             |       | (9,664             | )          | —              |       | (5,755                    | )          | (2,366     | )          | —           |       | (17,785                | )          |
| General and administrative                         |       | (683               | )          | (3,073             | )          | —              |       | (1,259                    | )          | (663       | )          | —           |       | (5,678                 | )          |
| Depreciation and amortization                      |       | —             |       | (6,321             | )          | (340                | )          | (8,796                    | )          | (2,912     | )          | —           |       | (18,369                | )          |
| Impairment of intangible asset                     |       |               |       |               |       |                |       | (1,200                    | )          |       |       |             |       | (1,200                 | )          |
| Gain (loss) on disposal of property and  equipment |       | —             |       | (73                | )          | 55                  |       | (17                       | )          | (36        | )          | 6                |       | (65                    | )          |
| Total operating expenses                           |       | (683               | )          | (70,213            | )          | (285                | )          | (45,352                   | )          | (19,252    | )          | 274              |       | (135,511               | )          |
| Other, net                                         |       | (10,008            | )          | (114               | )          | 900                 |       | 226                       |       | 26         |       | —           |       | (8,970                 | )          |
| Income in subsidiaries                             |       | 8,281              |       | —             |       | —              |       | —                    |       | —     |       | (8,281           | )          | —                 |       |
| Net income (loss)                                  |       | $                  | (2,410     | )                  | $          | 8,257               |       | $                         | 883        |       | $          | (3,778           | )          | $                      | 2,919      |   | $ | (8,275 | ) | $ | (2,404 | ) |

 

**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of OperationsFor the Three Months Ended September 30, 2006**

** **
| ** **                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                     |       | $                  | —     |               | $          | 70,941              |       | $                         | 1,031      |       | $          | 18,874           |       | $                      | 36,791     |   | $ | (1,031 | ) | $ | 126,606 |   |
| Cost of revenues                                   |       | —             |       | (46,536            | )          | —              |       | (17,855                   | )          | (20,449    | )          | 1,031            |       | (83,809                | )          |
| Selling and marketing                              |       | —             |       | (9,490             | )          | —              |       | (4,605                    | )          | (3,167     | )          | —           |       | (17,262                | )          |
| General and administrative                         |       | (500               | )          | (1,991             | )          | —              |       | (605                      | )          | (1,256     | )          | —           |       | (4,352                 | )          |
| Depreciation and amortization                      |       | —             |       | (8,234             | )          | (1,165              | )          | (9,069                    | )          | (2,727     | )          | —           |       | (21,195                | )          |
| Gain (loss) on disposal of property and  equipment |       | —             |       | (83                | )          | 91                  |       | (111                      | )          | —     |       | 6                |       | (97                    | )          |
| Total operating expenses                           |       | (500               | )          | (66,334            | )          | (1,074              | )          | (32,245                   | )          | (27,599    | )          | 1,037            |       | (126,715               | )          |
| Other, net                                         |       | (4,968             | )          | 157                |       | 930                 |       | (1,964                    | )          | (729       | )          | —           |       | (6,574                 | )          |
| Loss in subsidiaries                               |       | (1,221             | )          | —             |       | —              |       | —                    |       | —     |       | 1,221            |       | —                 |       |
| Net income (loss)                                  |       | $                  | (6,689     | )                  | $          | 4,764               |       | $                         | 887        |       | $          | (15,335          | )          | $                      | 8,463      |   | $ | 1,227 |   | $ | (6,683 | ) |

 

 

18

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**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2007**

** **
| ** **                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                     |       | $                  | —     |               | $          | 217,740             |       | $                         | 1,374      |       | $          | 116,123          |       | $                      | 62,300     |   | $ | (1,374 | ) | $ | 396,163 |   |
| Cost of revenues                                   |       | —             |       | (147,754           | )          | —              |       | (84,438                   | )          | (39,699    | )          | 1,374            |       | (270,517               | )          |
| Selling and marketing                              |       | —             |       | (30,798            | )          | —              |       | (18,789                   | )          | (7,880     | )          | —           |       | (57,467                | )          |
| General and administrative                         |       | (1,830             | )          | (13,088            | )          | (1                  | )          | (4,477                    | )          | (1,879     | )          | —           |       | (21,275                | )          |
| Depreciation and amortization                      |       | —             |       | (20,857            | )          | (1,737              | )          | (26,226                   | )          | (8,606     | )          | —           |       | (57,426                | )          |
| Impairment of intangible asset                     |       |               |       |               |       |                |       | (1,200                    | )          |       |       |             |       | (1,200                 | )          |
| Gain (loss) on disposal of property and  equipment |       | —             |       | (3,251             | )          | 3,179               |       | (39                       | )          | (38        | )          | 19               |       | (130                   | )          |
| Total operating expenses                           |       | (1,830             | )          | (215,748           | )          | 1,441               |       | (135,169                  | )          | (58,102    | )          | 1,393            |       | (408,015               | )          |
| Other, net                                         |       | (46,757            | )          | 643                |       | 2,768               |       | (7,483                    | )          | (2,510     | )          | —           |       | (53,339                | )          |
| Loss in subsidiaries                               |       | (16,623            | )          | —             |       | —              |       | —                    |       | —     |       | 16,623           |       | —                 |       |
| Net income (loss)                                  |       | $                  | (65,210    | )                  | $          | 2,635               |       | $                         | 5,583      |       | $          | (26,529          | )          | $                      | 1,688      |   | $ | 16,642 |   | $ | (65,191 | ) |

 

**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of OperationsFor the Nine Months Ended September 30, 2006**

** **
| ** **                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                     |       | $                  | —     |               | $          | 201,776             |       | $                         | 3,422      |       | $          | 102,739          |       | $                      | 54,950     |   | $ | (3,422 | ) | $ | 359,465 |   |
| Cost of revenues                                   |       | —             |       | (132,889           | )          | —              |       | (73,566                   | )          | (33,824    | )          | 3,422            |       | (236,857               | )          |
| Selling and marketing                              |       | —             |       | (27,947            | )          | —              |       | (16,092                   | )          | (7,327     | )          | —           |       | (51,366                | )          |
| General and administrative                         |       | (1,584             | )          | (8,751             | )          | (1                  | )          | (5,367                    | )          | (1,517     | )          | —           |       | (17,220                | )          |
| Depreciation and amortization                      |       | —             |       | (25,828            | )          | (3,746              | )          | (29,671                   | )          | (8,255     | )          | —           |       | (67,500                | )          |
| Gain (loss) on disposal of property and  equipment |       | —             |       | (440               | )          | 195                 |       | (283                      | )          | —     |       | 18               |       | (510                   | )          |
| Total operating expenses                           |       | (1,584             | )          | (195,855           | )          | (3,552              | )          | (124,979                  | )          | (50,923    | )          | 3,440            |       | (373,453               | )          |
| Other, net                                         |       | (14,905            | )          | 235                |       | 2,594               |       | (5,810                    | )          | (2,183     | )          | —           |       | (20,069                | )          |
| Loss in subsidiaries                               |       | (17,586            | )          | —             |       | —              |       | —                    |       | —     |       | 17,586           |       | —                 |       |
| Net income (loss)                                  |       | $                  | (34,075    | )                  | $          | 6,156               |       | $                         | 2,464      |       | $          | (28,050          | )          | $                      | 1,844      |   | $ | 17,604 |   | $ | (34,057 | ) |

 

**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2007**

 
| ** **                                             | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Operating activities                                   |       | $                  | (99,725    | )                  | $          | 1,104               |       | $                         | (5,042     | )          | $          | 84,582           |       | $                      | 36,014     |   | $ | — |   | $ | 16,933 |   |
| Investing activities                                   |       | —             |       | (22,285            | )          | 5,042               |       | (4,023                    | )          | (3,681     | )          |             |       | (24,947                | )          |
| Financing activities                                   |       | 99,725             |       | (18                | )          | —              |       | (107,336                  | )          | (33,082    | )          | —           |       | (40,711                | )          |
| Decrease in cash and cash equivalents                  |       | —             |       | (21,199            | )          | —              |       | (26,777                   | )          | (749       | )          | —           |       | (48,725                | )          |
| Cash and cash equivalents at  beginning of period |       | —             |       | 85,474             |       | —              |       | 34,823                    |       | 202        |       | —           |       | 120,499                |       |
| Cash and cash equivalents at end of period             |       | $                  | —     |               | $          | 64,275              |       | $                         | —     |       | $          | 8,046            |       | $                      | (547       | ) | $ | — |   | $ | 71,774 |   |

 

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**iPCS, Inc. and SubsidiariesCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2006**

 
| ** **                                             | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Operating activities                                   |       | $                  | —     |               | $          | 8,718               |       | $                         | (2,389     | )          | $          | 8,183            |       | $                      | 1,486      |   | $ | — |   | $ | 15,998 |   |
| Investing activities                                   |       | —             |       | (5,388             | )          | 2,389               |       | (19,784                   | )          | (2,023     | )          | —           |       | (24,806                | )          |
| Financing activities                                   |       | —             |       | 1,129              |       | —              |       | —                    |       | —     |       | —           |       | 1,129                  |       |
| Increase (decrease) in cash and cash  equivalents      |       | —             |       | 4,459              |       | —              |       | (11,601                   | )          | (537       | )          | —           |       | (7,679                 | )          |
| Cash and cash equivalents at beginning of  period |       | —             |       | 68,993             |       | —              |       | 41,099                    |       | 745        |       | —           |       | 110,837                |       |
| Cash and cash equivalents at end of period             |       | $                  | —     |               | $          | 73,452              |       | $                         | —     |       | $          | 29,498           |       | $                      | 208        |   | $ | — |   | $ | 103,158 |   |

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

As used in this Quarterly Report on Form 10-Q, unless the contextotherwise requires: (i) ”Sprint PCS” refers to the affiliated entities ofSprint Nextel Corporation that are party to our affiliation agreements;(ii) ”Sprint” refers to Sprint Nextel Corporation and its affiliates;(iii) a “PCS Affiliate of Sprint” is an entity whose sole or predominantbusiness is operating (directly or through one or more subsidiaries) a personalcommunications service business pursuant to affiliation agreements with SprintSpectrum L.P. and/or its affiliates or their successors; (iv) ”Sprint PCSproducts and services” refers to digital wireless personal communicationsservices, including wireless voice and data services, and related retailproducts, including handsets, in any case, offered under the Sprint brand name;and (v) ”our subscribers” refers to Sprint PCS subscribers who reside inour territory, excluding reseller subscribers. “We”, “us” and “our” refers toiPCS and its direct and indirect wholly owned subsidiaries.

 

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

 

The following is an analysis of our results of operations, liquidityand capital resources and should be read in conjunction with the 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 historicalnature, such statements are forward-looking statements which involve risks anduncertainties. These risks include, but are not limited to the risk 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 subject to the safe harborcreated by the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements include:

 

•                  statementsregarding our anticipated revenues, expense levels, capital expenditures,liquidity and capital resources and operating losses; and

 

•                  statementsregarding expectations or projections about 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

 

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statements, including certain risks and uncertainties that could causeactual results to differ materially from our expectations, include, but are notlimited to:

 

•                  our dependenceon our affiliation with Sprint;

 

•                  the impact andfinal outcome of our litigation and arbitration against Sprint, Nextel andSprint PCS;

 

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

 

•                  the ability ofSprint PCS to alter the terms of our affiliation agreements with it, includingfees paid or charged to us and other program requirements, subject to ourrights to dispute such charges either through arbitration or litigation;

 

•                  our dependenceon back office services, such as billing, collections and customer care,provided by Sprint PCS, and the costs we incur to obtain such services;

 

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

 

•                  competition inthe industry and markets in which we operate;

 

•                  our ability toattract and retain skilled personnel;

 

•                  our potentialneed for additional capital or the need for refinancing any existingindebtedness;

 

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

 

•                  changes ingovernment regulation;

 

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

 

•                  our subscribercredit quality and its ultimate impact on bad debt expense;

 

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

 

•                  inaccuracies inour financial information provided to us by Sprint PCS;

 

•                  our failure tomaintain effective internal controls to satisfy the requirements ofSection 404 of the Sarbanes-Oxley Act, which requires annual managementassessments of the effectiveness of internal control over financial reporting;

 

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

 

•                  our significantlevel of indebtedness;

 

•                  adequacy of baddebt and other reserves;

 

•                  our anticipatedfuture losses;

 

•                  our subscriberpurchasing patterns;

 

•                  subscriber satisfactionwith our network and operations, including with services provided to us bySprint, such as billing and customer care;

 

•                  availability ofan adequate supply of subscriber equipment to Sprint PCS and to usspecifically;

 

•                  risks related tofuture growth and expansion, including subscriber growth;

 

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•                  general economicand business conditions;

 

•                  additionalterrorist attacks; and

 

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

 

**New Accounting Pronouncements**

 

See Note 2, Summary of Significant Accounting Policies, of the “Notesto Unaudited Consolidated Financial Statements” in this Quarterly Report onForm 10-Q for a discussion of new accounting pronouncements.

 

**Definitions of Operating Metrics**

 

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

 

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

 

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

 

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

 

•                  CPGA,or cost per gross addition, is a measure of the average cost we incur to add anew subscriber in our territory. These costs include handset subsidies on newsubscriber activations, commissions, rebates and other selling and marketingcosts. We calculate CPGA by dividing (a) the sum of cost of products soldless product sales revenues associated with transactions with new subscribers,and selling and marketing expenses, net of stock-based compensation expense,during the measurement period, by (b) the total number of 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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In this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” unless the context indicates otherwise, allreferences to “subscribers” or “customers” and other operating metrics meansubscribers or customers excluding subscribers of resellers known as MobileVirtual Network Operators, or MVNOs, that use our network and resell wirelessservice under private brands.

 

**Business Overview**

 

As a PCS Affiliate of Sprint, we have the exclusive right to providedigital wireless personal communications services, or PCS, under the Sprintbrand name in 80 markets including markets in Illinois, Michigan, Pennsylvania,New York, Indiana, Iowa, Ohio and Tennessee. The 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-BayCity (MI), and the Quad Cities region of Illinois and Iowa (Bettendorf andDavenport, IA, and Moline and Rock Island, IL). We own and are responsible forbuilding, operating and managing the portion of the 100% digital, 100% PCSwireless network of Sprint PCS located in our territory. We offer nationalcalling plans designed by Sprint PCS as well as local plans tailored to ourmarkets. Our PCS network is designed to offer a seamless connection with thewireless network of Sprint PCS. We market Sprint PCS products and servicesthrough a number of distribution outlets located in our territory, includingour company-owned retail stores, co-branded dealers, major national retailersand local third party distributors. As of September 30, 2007, our licensedterritory had a total population of approximately 15.0 million residents,of which our wireless network covered approximately 11.9 millionresidents, and we had approximately 622,100 subscribers.

 

We recognize revenues from the provision of wireless telecommunicationsservices to our subscribers, proceeds from the sale of handsets and accessoriesthrough channels controlled by us and roaming fees. Sprint PCS retains 8% ofall service revenue collected from our subscribers (not including product salesor roaming charges billed to our subscribers) and 8% of all fees collected fromother wireless service providers when their subscribers roam onto our network.We report the amount retained by Sprint PCS as an operating expense. Inaddition, Sprint PCS bills our subscribers for taxes, handset insurance andUniversal Service Fund charges which we do not recognize. Sprint PCS collectsthese amounts from the subscribers and remits them to the appropriate entity.

 

***Relationship withSprint***

 

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

 

Sprint’s merger with Nextel, which closed in August 2005, thrust ourrelationship with Sprint into a state of uncertainty, the resolution of whichmay have a material adverse effect on our business. As discussed in Note 11(b),Commitments and Contingencies – Litigation, Arbitration and Other Disputes, ofthe “Notes to Unaudited Consolidated Financial Statements” in this QuarterlyReport on Form 10-Q, Sprint’s merger with Nextel has been the subject of twoseparate lawsuits that we filed against Sprint in July 2005. Although wehave received final orders in both lawsuits, Sprint has appealed the Illinoisorder. Accordingly, the final outcome of the dispute is still unknown pendingappeal. In addition to our complaints, a number of other PCS Affiliates ofSprint also filed complaints against Sprint, Sprint PCS and Nextel, includingAirGate PCS (a wholly owned subsidiary of Alamosa Holdings, Inc.),UbiquiTel, Inc., U.S. Unwired, Inc., Gulf Coast Wireless, Inc.,Enterprise Communications Partnership and Northern PCS Services, LLC. Sprinthas acquired each of these other PCS Affiliates of Sprint and the complaintshave been dismissed.

 

We do not know the final outcome of our litigation against Sprint. Ifwe do not prevail, Sprint may engage in conduct that has a material adverseeffect on our business and operations. We intend to continue to enforce ourrights to the fullest extent, but there is no assurance that we will prevail.

 

Effective January 1, 2007, Sprint increased its rates for certainback-office services Sprint provides to us. We strongly disagree with theserates and have submitted the matter to arbitration. Likewise, Sprint alsodecreased the reciprocal roaming rates we receive for voice and data whensubscribers of Sprint PCS and other PCS Affiliates of Sprint roam onto ournetwork. We strongly disagree with Sprint’s new roaming rates and continue tooppose them. We plan to submit the matter to arbitration or litigation ifnecessary. See discussion below regarding both these rate issues with Sprint in“—Commitments and Contingencies.”

 

In August 2007 Sprint notified us that it disputes the amounts thatSprint charged us for data roaming for April through July, 2007.  The Company disagrees with Sprint’s position.  For additional information regarding thisdispute, see Note 11(b), Commitments and Contingencies – Litigation,Arbitration and Other Disputes, of the “Notes to Unaudited ConsolidatedFinancial Statements” in this Quarterly Report on Form 10-Q and “—Commitmentsand Contingencies” below.

 

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**Consolidated Results of Operations**

 

***Summary***

 

For the three and nine months ended September 30, 2007 our net loss was$2.4 million and $65.2 million, respectively, compared to a net loss of $6.7million and $34.1 million for the same periods in 2006. The higher net loss forthe nine months ended September 30, 2007 included $30.5 million of costsrelated to the repurchase of our 11-1/2% and 11-3/8% senior notes (seeNote 6, Long-Term Debt, of the “Notes to Unaudited Consolidated FinancialStatements” in this Quarterly Report on Form 10-Q). Additionally,reflected in the three and nine months ended September 2007 was a $1.2 millionintangible asset impairment charge (see Note 5, Intangible Assets and Goodwill,of the “Notes to Unaudited Consolidated Financial Statements” in this QuarterlyReport on Form 10-Q). Excluding these two items, our net loss for the three andnine months ended September 30, 2007 would have been $1.2 million and $33.5million, respectively, or $5.5 million and $0.6 million less than the three andnine months ended September 30, 2006, respectively. The smaller net losses,excluding the debt extinguishment costs and the intangible asset impairmentcharge, for the periods ended September 30, 2007 reflected higher revenues,primarily attributable to our larger subscriber base, lower Sprint litigationexpense and lower depreciation and amortization expenses. Additionallycontributing to our smaller net losses for the 2007 periods, excluding the debtextinguishment costs and the intangible asset impairment charge, was ourimproved reciprocal roaming margins, reflecting improvements in our inbound tooutbound ratio due to substantial increases in data kilobytes usage on ournetwork, offset by the impact of lower reciprocal roaming rates as compared tothe 2006 periods. These increased revenues, decreased expenses and roamingmargin improvements were partially offset by increases in subscriberacquisition costs as a result of our growth in gross additions, and increasesin operating expenses, including higher bad debt expenses, back office servicefees paid to Sprint and stock-based compensation expenses. Increased subscriberacquisition costs were a result of increases in gross additions for the threeand nine month periods, growing from approximately 61,200 and 173,300 for thethree and nine months ended September 30, 2006, respectively, to approximately68,400 and 211,800 for the three and nine months ended September 30, 2007,respectively.

 

Presented below is more detailed comparative data and discussionregarding our consolidated results of operations for the three and nine monthsended September 30, 2007 versus the three and nine months ended September 30,2006.

 

***For the Three andNine Months Ended September 30, 2007 compared to the Three and Nine MonthsEnded September 30, 2006***

 

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

 

***Key PerformanceMetrics.***

 

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

 
| ** **               | ** ** | **As of and for the Three Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------|------------|-------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **               | ** ** | **2007**                                                                                        | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Total Subscribers        |       | 622,100                                                                                         |       | 534,300       |       | 87,800         |       | 16 | % |
| Net Subscriber Additions |       | 10,100                                                                                          |       | 16,800        |       | (6,700         | )          | (40 | ) |
| Churn                    |       | 2.8                                                                                             | %          | 2.5           | %          | 0.3            | %          | 12 |   |
| ARPU                     |       | $                                                                                               | 49.78      |          | $          | 50.26          |       | $ | (0.48 | ) | (1 | ) |
| CPGA                     |       | $                                                                                               | 358        |          | $          | 362            |       | $ | (4 | ) | (1 | ) |

 
| ** **               | ** ** | **As of and for the Nine Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **               | ** ** | **2007**                                                                                       | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Total Subscribers        |       | 622,100                                                                                        |       | 534,300       |       | 87,800         |       | 16 | % |
| Net Subscriber Additions |       | 60,800                                                                                         |       | 40,700        |       | 20,100         |       | 49 |   |
| Churn                    |       | 2.4                                                                                            | %          | 2.5           | %          | (0.1           | )%         | (4 | ) |
| ARPU                     |       | $                                                                                              | 49.64      |          | $          | 50.21          |       | $ | (0.57 | ) | (1 | ) |
| CPGA                     |       | $                                                                                              | 365        |          | $          | 370            |       | $ | (5 | ) | (1 | ) |

 

***Net SubscriberAdditions.***      For theperiods ended September 30, 2007, strong handset promotions, an increasednumber of net ported-in subscribers from other wireless carriers, and anaverage of 13 and 21 more exclusive co-branded dealer locations in the threeand nine months periods of 2007, respectively, than in the comparable periodsof 2006, helped to drive new subscriber growth. For the three months endedSeptember 30, 2007, net subscriber additions were negatively impacted by a sharpincrease in involuntary (credit-related) deactivations. Despite the decrease innet subscriber additions for the

 

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three months ended September 30, 2007, net subscriber additions for thenine months ended September 30, 2007 increased due to higher gross additionsand lower churn compared to the same period in 2006.

 

***Churn.***     Theincrease in churn for the three months ended September 30, 2007 reflects asharp increase in involuntary (credit-related) deactivations during the threemonths ended September 30, 2007 compared to the three months ended September30, 2006. We believe that the increase in involuntary (credit-related)deactivations was a result of a deteriorating economic environment and theintroduction of a few new sub-prime credit classes at the end of 2006. Despitethe increase in churn for the three months ended September 30, 2007, churn forthe nine months ended September 30, 2007 improved slightly as compared to thesame period in 2006 reflecting an improvement in voluntary (non credit-related)deactivations. At September 30, 2007 approximately 89% of our subscribers wereunder contract compared to 90% at September 30, 2006.

 

***Average Revenue PerUser.***      We continue toexperience decreasing voice revenue offset by increasing data revenue ascompared to prior year periods. Average monthly voice revenue per subscriberdecreased 7% for both the three month and nine month comparative periods from$40.12 and $40.80 in the three and nine months ended September 30, 2006compared to $37.38 and $37.83 in the three and nine months ended September 30,2007. These decreases can be largely attributed to the continued growth of thefamily add-a-phone plans. While these customers are not as likely to switch toanother wireless company, or churn, their ARPU is lower due to the lowermonthly recurring charge on add-a-phone rate plans. Average monthly datarevenue increased from $9.79 and $9.15 in the three and nine months endedSeptember 30, 2006, respectively, to $10.28 and $10.71 for the three and ninemonths ended September 30, 2007, respectively. The year over year increases inaverage monthly data revenue reflect increased usage of data cards and theincreased popularity of our data products, including text messaging,downloading ringers, music and games, sending and receiving pictures, playinggames and browsing the Internet.

 

***Cost Per GrossAddition.***     Due toincreases in gross additions of 12% and 22% in the three and nine months endedSeptember 30, 2007, respectively, compared to the same periods in 2006, fixedcosts per gross additions dropped $20 and $31 for the same periods,respectively. Offsetting these decreases in fixed costs per gross addition, thevariable costs of commissions and handset subsidy and rebate costs increased$16 and $26 per gross addition in the three and nine month periods endedSeptember 30, 2007 compared to the same periods in 2006, respectively. AtSeptember 30, 2007, we operated 40 retail stores and managed 87 exclusive co-brandeddealers, compared to 40 retail stores and 78 exclusive co-branded dealers atSeptember 30, 2006.

 

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

 

We utilize certain financial measures that are not calculated inaccordance with GAAP to assess our financial performance. A non-GAAP financialmeasure is defined as a numerical measure of financial performance that(a) excludes amounts, or is subject to adjustments that have the effect ofexcluding amounts, that are included in the comparable measure calculated andpresented in accordance with GAAP in the statement of income or statement ofcash flows; or (b) includes amounts, or is subject to adjustments thathave the effect of including amounts, that are excluded from the comparablemeasure so calculated and presented. The non-GAAP financial measures discussedin “—Results of Operations” are ARPU and CPGA. A description of each of thesenon-GAAP financial measures is provided in “—Definition of Operating Metrics.”

 

The following tables reconcile the non-GAAP financial measures with ourconsolidated financial statements presented in accordance with GAAP, excludingsubscriber data:

 
| ** **                     | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                                                   | ** ** | **2006**                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| ***ARPU***                     |       |                                                                       |       |                                                                      |       |   |   |   |   |
| Service revenue (in thousands) |       | $                                                                          | 92,129     |                                                                      | $          | 79,300 |   | $ | 267,074 |   | $ | 232,021 |   |
| Average subscribers            |       | 616,889                                                                    |       | 525,966                                                                   |       | 597,860 |   | 513,450 |   |
| ARPU                           |       | $                                                                          | 49.78      |                                                                      | $          | 50.26 |   | $ | 49.64 |   | $ | 50.21 |   |

 

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

 

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| ** **                                      | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ***CPGA***                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling and Marketing (in thousands):           |       | $                                                                      | 17,785     |                                                                  | $          | 17,262 |   | $ | 57,467 |   | $ | 51,366 |   |
| plus: Equipment costs, net of cost of  upgrades |       | 10,019                                                                 |       | 7,807                                                                 |       | 29,238 |   | 21,098 |   |
| less: Equipment revenue, net of upgrade revenue |       | (3,124                                                                 | )          | (2,838                                                                | )          | (8,510 | ) | (7,943 | ) |
| less: Stock-based compensation expense          |       | (199                                                                   | )          | (71                                                                   | )          | (996 | ) | (339 | ) |
| CPGA costs                                      |       | $                                                                      | 24,481     |                                                                  | $          | 22,160 |   | 77,199 |   | 64,182 |   |
| Gross additions                                 |       | 68,408                                                                 |       | 61,173                                                                |       | 211,754 |   | 173,338 |   |
| CPGA                                            |       | $                                                                      | 358        |                                                                  | $          | 362 |   | $ | 365 |   | $ | 370 |   |

 

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

 

***Revenues.***

 

The following tables set forth a breakdown of revenues by type (dollarsin thousands):

 
| ** **                                                                         | ** ** | **For the Three Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **2007**                                                               | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Service revenue                                                                    |       | $                                                                      | 92,129     |          | $          | 79,300         |       | $ | 12,829 |   | 16 | % |
| Roaming revenue from subscribers of Sprint  PCS and other PCS affiliates of Sprint |       | 38,431                                                                 |       | 38,984        |       | (553           | )          | (1 | ) |
| Roaming revenue from other wireless  carriers                                      |       | 3,983                                                                  |       | 1,932         |       | 2,051          |       | 106 |   |
| Reseller revenue                                                                   |       | 3,873                                                                  |       | 2,812         |       | 1,061          |       | 38 |   |
| Equipment and other revenue                                                        |       | 3,661                                                                  |       | 3,578         |       | 83             |       | 2 |   |
| Total revenues                                                                     |       | $                                                                      | 142,077    |          | $          | 126,606        |       | $ | 15,471 |   | 12 |   |

 
| ** **                                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **2007**                                                              | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Service revenue                                                                    |       | $                                                                     | 267,074    |          | $          | 232,021        |       | $ | 35,053 |   | 15 | % |
| Roaming revenue from subscribers of Sprint  PCS and other PCS affiliates of Sprint |       | 98,007                                                                |       | 102,143       |       | (4,136         | )          | (4 | ) |
| Roaming revenue from other wireless  carriers                                      |       | 9,324                                                                 |       | 6,312         |       | 3,012          |       | 48 |   |
| Reseller revenue                                                                   |       | 11,953                                                                |       | 8,433         |       | 3,520          |       | 42 |   |
| Equipment and other revenue                                                        |       | 9,805                                                                 |       | 10,556        |       | (751           | )          | (7 | ) |
| Total revenues                                                                     |       | $                                                                     | 396,163    |          | $          | 359,465        |       | $ | 36,698 |   | 10 |   |

 

•                    ***Service revenue.***   Service revenue is comprised of themonthly recurring charges for voice and data usage and the monthlynon-recurring charges for voice and data minutes over plan, long distance,roaming usage charges, other feature revenues and late payment fee and early cancellationfee revenues. Deductions for billing adjustments and promotional credits arerecorded as a reduction to service revenue. Our service revenue growth over thethree and nine month periods consists of $13.7 million and $38.2 million,respectively, from additional subscribers, offset by decreases in ARPU of $0.9million and $3.1 million, respectively.

 

•                    ***Roaming revenue from subscribers ofSprint PCS and other PCS Affiliates of Sprint.***   We receive revenue on a per minutebasis for voice traffic and per kilobyte basis for data traffic whensubscribers of Sprint PCS and other PCS Affiliates of Sprint use ournetwork.  In addition, we receive toll revenue for any long distance callsmade by these subscribers while roaming on our network. For the periods endedSeptember 30, 2006, the reciprocal roaming rate was $0.058 per minute for voicetraffic ($0.10 per minute in certain markets in eastern and westernPennsylvania) and $0.002 per kilobyte for data traffic. For the periods endedSeptember 30, 2007, the reciprocal rate was $0.0403 per minute for voicetraffic ($0.10 per minute in certain markets in eastern and westernPennsylvania) and $0.001 per kilobyte for data traffic. For the three and ninemonths ended September 30, 2007 compared to the three and nine months endedSeptember 30, 2006, voice roaming revenue from subscribers of Sprint PCS andother PCS Affiliates of Sprint, including related toll revenue, decreased by$4.1 million and $12.7

 

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million, respectively, due mainly to the decrease in the rate. Dataroaming revenue increased by $3.6 million and $8.6 million for the three andnine month periods, due mainly to increases in data usage of 299% and 210%,respectively, offset by a decrease in the rate. We continue to experienceincreased growth in kilobyte data usage from subscribers of Sprint PCS andother PCS Affiliates of Sprint as more subscribers utilize data products withtheir handsets and air cards due in part to the incremental deployment of EVDOwhich allows for higher data speeds. Roaming minutes from subscribers ofSprint PCS and other PCS Affiliates of Sprint increased slightly from 0.4billion and 1.2 billion for the three and nine months ended September 30, 2006,respectively to 0.5 billion and 1.3 billion for the three and nine months endedSeptember 30, 2007, respectively. Roaming kilobytes from subscribers ofSprint PCS and other PCS Affiliates of Sprint for the three and ninemonths ended September 30, 2007 were 14.3 billion and 30.0 billion,respectively, compared to 3.6 billion and 9.7 billion for the three and ninemonths ended September 30, 2006, respectively.

 

•                    ***Roaming revenue from other wirelesscarriers.***   We receiveroaming revenue from wireless carriers other than Sprint and other PCSAffiliates of Sprint when subscribers of such other wireless carriers roam inour territory. We do not have agreements with these other wireless carriers.Instead, we rely on roaming arrangements Sprint PCS has negotiated with them.We are paid on a per minute basis for voice traffic pursuant to theseagreements.  For the three and nine months ended September 30, 2007,roaming minutes were 66.7 million and 164.4 million, respectively,compared to 24.1 million and 64.2 million for the same periods in 2006. Theaverage per minute rate decreased from $0.08 and $0.10 per minute for the threeand nine months ended September 30, 2006, respectively, to $0.06 per minute forboth the three and nine months ended September 30, 2007. Roaming minutesincreased while the average per minute rate decreased due mainly to a newroaming agreement Sprint signed with Alltel Corporation in mid-2006. Thisagreement has increased the number of roaming minutes we receive from Alltel,but at a rate significantly lower than what we had received in the first halfof 2006.

 

•                    ***Reseller revenue.***   Through Sprint PCS we allow resellers,known as MVNOs, such as Virgin Mobile, to use our network. Pursuant to thesearrangements, we are paid on a per minute and per kilobyte basis. The three andnine months increases primarily reflect increases in reseller subscribers andincreased ARPU per reseller subscriber. At September 30, 2007, we hadapproximately 249,000 reseller subscribers compared to approximately 191,700 atSeptember 30, 2006. For the three and nine months ended September 30, 2007reseller ARPU was $5.20 and $5.43, respectively, compared to $5.01 and $5.10for the three and nine months ended September 30, 2006, respectively.

 

•                     ***Equipment and other revenue.***   Equipment and other revenue is derivedprimarily from the sale of handsets and accessories to new customers and fromcurrent customers who upgrade their handsets through our retail and localdistribution channels, in each case, net of sales incentives, rebates and anallowance for returns. The three months ended September 30, 2007 reflect highergross additions offset by higher promotional discounts for upgrades and newactivations. The decrease in equipment and other revenue for the nine monthperiod reflects higher promotional discounts for upgrades and new activations,offset by higher gross additions.

 

***Operating andNon-Operating Expenses.***

 

The following tables set forth a breakdown of our operating andnon-operating expenses by type (dollars in thousands):

 
| ** **                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------------|------------|------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2007**                                                               | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cost of service and roaming    |       | $                                                                      | 79,534     |          | $          | 72,916         |       | $ | 6,618 |   | 9 | % |
| Cost of equipment              |       | 12,880                                                                 |       | 10,893        |       | 1,987          |       | 18 |   |
| Selling and marketing          |       | 17,785                                                                 |       | 17,262        |       | 523            |       | 3 |   |
| General and administrative     |       | 5,678                                                                  |       | 4,352         |       | 1,326          |       | 30 |   |
| Impairment of intangible asset |       | 1,200                                                                  |       | —        |       | 1,200          |       | — |   |
| Depreciation and amortization  |       | 18,369                                                                 |       | 21,195        |       | (2,826         | )          | (13 | ) |
| Interest expense               |       | 9,853                                                                  |       | 8,026         |       | 1,827          |       | 23 |   |
|                                |            |                                                                        |            |               |            |                |            |  |  |  |  |  |

 

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| ** **                     | ** ** | **For the Nine Months Ended  September 30,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2007**                                                              | ** ** | **2006**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cost of service and roaming    |       | $                                                                     | 231,688    |          | $          | 206,567        |       | $ | 25,121 |   | 12 | % |
| Cost of equipment              |       | 38,829                                                                |       | 30,290        |       | 8,539          |       | 28 |   |
| Selling and marketing          |       | 57,467                                                                |       | 51,366        |       | 6,101          |       | 12 |   |
| General and administrative     |       | 21,275                                                                |       | 17,220        |       | 4,055          |       | 24 |   |
| Impairment of intangible asset |       | 1,200                                                                 |       | —        |       | 1,200          |       | — |   |
| Depreciation and amortization  |       | 57,426                                                                |       | 67,500        |       | (10,074        | )          | (15 | ) |
| Interest expense               |       | 26,951                                                                |       | 24,043        |       | 2,908          |       | 12 |   |
| Debt extinguishment costs      |       | 30,501                                                                |       | —        |       | 30,501         |       | — |   |
|                                |            |                                                                       |            |               |            |                |            |  |  |  |  |  |

 

***Cost of Service andRoaming.***   Costof service and roaming includes network operations expense, roaming expenserelating to when our subscribers roam either on other Sprint PCS networks orother wireless carriers’ networks, expense for back-office customer servicesprovided by Sprint PCS, bad debt expense, long distance expense, the 8% affiliationfee due to Sprint PCS for collected revenues and stock-based compensation expense.Network operations expenses include salaries and benefits for networkpersonnel, cell site rent, utilities and maintenance expenses, fees relating tothe connection of our cell sites to our switches and other transport andfacility expenses. Roaming expense is our cost for our subscribers usingSprint PCS and other wireless carriers’ networks. Roaming expense on theSprint PCS network is at the reciprocal rates as described above under “—Roamingrevenue from subscribers of Sprint PCS and other PCS Affiliates of Sprint.”Roaming expense when our subscribers use other wireless carriers networks is atrates as determined by the roaming agreements signed by Sprint PCS withthese other wireless carriers. Of the increases for the two periods, $3.2million and $9.3 million, or 63% and 39%, of the total increase, respectively,was due to higher per user fees charged by Sprint for back-office customerservice coupled with higher average subscribers. Effective January 1, 2007,this rate increased from $6.75 per subscriber per month to $7.50 per subscriberper month. In the three and nine months ended September 30, 2007 compared tothe same 2006 periods, bad debt expense increased $4.6 million and $7.8million, respectively, from $2.7 million and $6.5 million in the three and ninemonth ended September 30, 2006, respectively, to $7.3 million and $14.3 millionin the three and nine months periods of 2007, respectively. These increases aredue to higher average write-offs per subscriber, lower recoveries as apercentage of write-offs and an overall deterioration of our customer accountsreceivable aging, reflecting a higher number of sub-prime credit subscribers in2007 compared to 2006. Roaming expense decreased $3.3 million and $1.9 millionfor the three and nine months ended September 30, 2007, respectively. Voiceroaming expense with Sprint decreased $4.3 million and $11.4 million,respectively, due principally to the decrease in the reciprocal rate withSprint, while data roaming expense paid to Sprint increased $0.9 million and$9.0 million, respectively, reflecting increased kilobyte usage in the threeand nine months ended September 30, 2007 compared to this same period in 2006. Theremaining increase in cost of service and roaming was due to the related costsof servicing a larger network and larger subscriber base.

 

At September 30, 2007, our network consisted of 1,674 leased cell sitesand five switches. At September 30, 2006, our network consisted of 1,558 leasedcell 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 for new activations increased $2.2million and $8.1 million, or 28% and 39%, respectively, in the three and ninemonths ended September 30, 2007 compared to the same periods in 2006,  primarily reflecting increases of 31% and38%, respectively, in new activations from our retail and local distributionchannels. The remaining differences were due to fluctuations in equipment costsrelated to upgrades.

 

***Selling andmarketing.******  ***Selling andmarketing expense includes the costs to operate our retail stores, advertisingand promotional expenses, commissions, equipment subsidies and rebate expensesrelating to new subscriber additions from national third parties and otherSprint-controlled channels and stock-based compensation expense. The increasesfor the three and nine month periods were primarily due to higher commissionsof $0.9 million and $7.2 million, respectively. These increases were the resultof increases in gross subscriber additions in the three and nine months endedSeptember 30, 2007 compared to the same periods of 2006. For the three and ninemonths ended September 30, 2007 compared to the three and nine months endedSeptember 30, 2006, salaries and benefits increased $0.2 million and $1.0million, respectively, due to additional employees hired to support the growthin our retail, commercial and exclusive branded dealer channels. Theseincreases were offset by decreases in costs related to handset subsidies andrebates from our national third parties and other Sprint-controlled channelsand lower promotional expenses for the three and nine month periods in 2007 ascompared to the same periods in 2006. Stock-based compensation expense includedin selling and marketing totaled approximately $0.2 million and$1.0 million for the three and nine months ended September 30, 2007compared to $0.1 million and $0.3 million for the three and nine months endedSeptember 30, 2006. Included in the stock-based compensation expense for the2007 periods was $0.4 million relating to stock option modifications inconnection with the special cash dividend paid in May

 

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2007 (see Note 9, Stock-Based Compensation, of the “Notes toUnaudited Consolidated Financial Statements” in this Quarterly Report onForm 10-Q).

 

***General andadministrative.******  ***Generaland administrative expenses include administrative salaries and benefits, legalfees, insurance expense, other professional expenses and stock-basedcompensation expenses.  For the three and nine months ended September 30,2007, general and administrative expenses included approximately $0.4 millionand $1.5 million, respectively, in Sprint litigation expenses. This compares to$0.7 million and $5.8 million for the three and nine months ended September 30,2006, respectively. Stock-based compensation expense included in general andadministrative expense totaled approximately $1.0 million and $6.6 millionfor the three and nine months ended September 30, 2007, compared to $0.3million and $1.3 million for the three and nine months ended September 30, 2006.Included in the stock-based compensation expense for the three and nine monthperiods in 2007 was $0.3 million and $3.4 million, respectively, relating tostock option modifications in connection with the special cash dividend paid inMay 2007. Additionally, the nine months ended September 30, 2007 included $0.6million related to a modification to option award agreements held by our formerchief operating officer in connection with his separation in January 2007 (seeNote 9, Stock-Based Compensation, of the “Notes to Unaudited ConsolidatedFinancial Statements” in this Quarterly Report on Form 10-Q). In the ninemonths ended September 30, 2007, we also incurred $0.5 million of severanceexpense related to this separation.

 

***Impairment of intangible asset.    ***We haveinvestigated business opportunities to use our FCC license in Ohio, but havebeen unable to build a viable business case for these opportunities. Because ofthis, the license is for sale. Therefore, we tested the value assigned to thisasset for impairment under SFAS. No 142, “Goodwill and Other Intangible Assets”,using a market analysis approach. As a result of this testing, we recognized a $1.2million impairment charge related to this intangible asset in the three monthsended September 30, 2007. The FCC license in Ohio is for sale; however, webelieve the sale of this asset is unlikely within the next year.

 

***Depreciation andamortization.******  ***Amortizationof intangible assets totaled $7.6 million and $22.8 million for thethree and nine months ended September 30, 2007, respectively, compared to $9.5million and $28.5 million for the three and nine months ended September 30,2006, decreases of $1.9 million and $5.7 million for the two respective periods.At December 31, 2006, the intangible asset related to the iPCS Wirelesssubscriber base was fully amortized which decreased the amortization in 2007.Depreciation expense totaled $10.8 million and $34.6 million for the three andnine months ended September 30, 2007 compared to $11.7 million and $39.0million for the three and nine months ended September 30, 2006, decreases of$0.9 million and $4.4 million for the respective periods. During the ninemonths ended September 30, 2006, we recorded accelerated depreciation expenseof $2.4 million due to a reduction in the remaining useful lives of Motorolaequipment replaced in the Pennsylvania, Maryland, New York and New Jerseymarkets.

 

***Interest expense.***   Interest expenseconsists of interest on our outstanding long-term debt (see Note 6, Long-TermDebt, of the “Notes to Unaudited Consolidated Financial Statements” in thisQuarterly Report on Form 10-Q), including amortization of financing costs andnet of capitalized interest. Prior to April 23, 2007, interest expense alsoincluded amortization of the fair value adjustment for the 11-3/8% senior notes.Since August 1, 2007, interest expense also includes the effect of our interestrate swap (see Note 7, Derivative Financial Instruments, of the “Notes toUnaudited Consolidated Financial Statements” in this Quarterly Report on Form10-Q). The increase in interest expense in the three and nine month periodsended September 30, 2007 primarily reflects higher borrowings as compared tothe respective 2006 periods. These higher borrowings were partially offset by alower average interest rate of 7.89% on our outstanding long-term debt duringthe 2007 periods as compared to the average interest rate of 11.45% on ouroutstanding long-term debt during the 2006 periods.

 

***Debt extinguishmentcosts.******  ***Debtextinguishment costs represent expenses recognized during the nine months endedSeptember 30, 2007 in connection with the repurchase of our outstanding11-1/2% and 11-3/8% notes (see Note 6, Long-Term Debt, of the “Notes to theUnaudited Consolidated Financial Statement” in this Quarterly Report on Form10-Q). In the nine months ended September 30, 2007, we recorded approximately$34.2 million of expense related to the tender offer premium and consentpayments on the tender offering, approximately $7.3 million of expense relatedto the write off of the remaining deferred financing fees for the repurchasednotes and approximately $10.9 million as a reduction to interest expense toreflect the accelerated amortization of the remaining unamortized balance ofthe purchase price fair value allocation to the 11-3/8% notes recorded in July2005 related to the Horizon PCS merger.

 

**Liquidity and Capital Resources**

 

On April 23, 2007, we closed our offering of$475.0 million in aggregate principal amount of senior secured notes,consisting of $300.0 million in aggregate principal amount of First Lien SeniorSecured Floating Rate Notes due 2013 (“First Lien Notes”) and $175.0 million inaggregate principal amount of Second Lien Senior Secured Floating Rate Notesdue 2014

 

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(“Second Lien Notes” and together with theFirst Lien Notes, the “Secured Notes”) in a private placement transaction. SeeNote 6, Long-Term Debt, of the “Notes to Unaudited Consolidated Financial Statements”in this Quarterly Report on Form 10-Q for a discussion of our Secured Notesoffering.

 

Principal payments on the Secured Notes are not due until 2013 and2014.  However, our annual cash interest payments will increase incomparison to 2006 as a result of the larger principal amount of the SecuredNotes. In addition, the interest rates on our new notes are variable, and theamount of our interest payments will be impacted by a change in interest rates.In July 2007, we entered into an interest rate swap agreement that effectivelyfixes the interest rate related to the $300.0 million First Lien of the SecuredNotes at 7.47% for three years starting August 1, 2007 (see Note 7,Derivative Financial Instruments, of the “Notes to Unaudited Consolidated FinancialStatements” in this Quarterly Report on Form 10-Q).

 

We used a portion of the proceeds of theSecured Notes offering to repurchase all of our outstanding 11-1/2% notes and11-3/8% notes, as well as to pay the related fees and expenses of the offering.We also used the remaining net proceeds from the Secured Notes offering,together with approximately $58.0 million of our available cash, topay a special cash dividend to common stockholders. On April 26, 2007, ourBoard 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 our common stock on May 8, 2007. Of this, approximately $186.5 million was paid on May 16, 2007. The remaining unpaid dividend relatesto restricted stock awards and is being paid out starting in July 2007 as theseawards vest over 15 quarters.

 

We are completely dependent on available cashon hand and operating cash flow to operate our business and fund our capitalneeds. We believe our available cash and operating cash flow will be sufficientto operate our business and fund our capital needs for the foreseeable future. However,our liquidity is dependent on a number of factors influencing our forecast ofearnings and operating cash flows, including those discussed below in -”RecentTrends, Risks and Uncertainties That May Affect Operating Results, Liquidityand Capital Resources”.

 

***Significant Sourcesof Cash***

 

We generated $16.9 million in net cash flows from operatingactivities for the nine months ended September 30, 2007, compared to$16.0 million for the nine months ended September 30, 2006, an increase of$0.9 million. Our purchases of $11.6 million of short-term investments reduced netcash flows from operating activities in 2006. Excluding these purchases, netcash flows from operating activities decreased $10.7 million for the ninemonths ended September 30, 2007 compared to the nine months ended September 30,2006. For the nine months ended September 30, 2007, operating results provided$46.9 million of cash, compared to $41.7 million for the nine months endedSeptember 30, 2006, generally reflecting increased earnings from our largersubscriber base, offset by increased subscriber acquisition costs in 2007 ascompared to 2006. For the nine months ended September 30, 2007 and 2006, Sprintrelated working capital used cash of $9.6 million and $9.0 million,respectively. For the nine months ended September 30, 2007, non-Sprint relatedworking capital used cash of $20.4 million, reflecting increasing sales and anoverall deterioration in our customer accounts receivable aging includingwritten-off accounts, as well as timing of interest payments in connection withour Secured Notes outstanding at September 30, 2007 as compared with our11-1/2% notes and 11-3/8% notes outstanding at December 31, 2006. For this sameperiod in 2006, non-Sprint related working capital used $5.1 million, primarilyreflecting our increasing sales.

 

We received $475.0 million in proceeds from the Secured Notes offeringduring the nine months ended September 30, 2007.

 

For the nine months ended September 30, 2007 we received $3.4 millionin proceeds from the exercise of options representing approximately 216,900shares. This compares to $1.1 million in proceeds from the exercise of optionsrepresenting approximately 49,500 shares in the nine months ended September 30,2006.

 

In addition, we received approximately $0.5 million from the sale ofused equipment during the nine months ended September 30, 2007. For the ninemonths ended September 30, 2006, we received approximately $0.5 million fromthe sale of land and other equipment no longer needed for operations andapproximately $3.0 million from the sale of used equipment which wasreplaced with equipment we purchased from Nortel Networks. In addition, for thenine months ended September 30, 2006, we received approximately $0.4 millionfrom the sale of the remaining four Horizon PCS owned towers.

 

***Significant Uses ofCash***

 

Cash flows used for investing activities for the nine months endedSeptember 30, 2007 included $25.5 million for capital expenditures. Included in this total was $22.3 million for new cell site constructionand other network-related capital

 

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expenditures of which $9.5 million was for EV-DO Rev. A equipment, and$3.2 million for new stores, store improvements, information technologyand other corporate-related capital expenditures.

 

Cash flows used for investing activities for the nine months endedSeptember 30, 2006 included $28.7 million for capital expenditures. Includedin this total was $20.8 million for the Nortel swap in our Horizon PCS markets,$5.3 million for new cell site construction and other related network capitalexpenditures, and $2.6 million for new stores, store improvements, informationtechnology and other corporate-related capital expenditures.

 

As discussed above, we used $290.0 million to repurchase all of ouroutstanding 11-1/2% notes and 11-3/8% notes during the nine months endedSeptember 30, 2007. In connection with the repurchase, we paid $34.2 million intender premium payments during the nine months ended September 30, 2007. Similarly,we used $8.5 million to pay the related fees and expenses of the Secured Notesoffering during the nine months ended September 30, 2007.

 

During the nine months ended September 30, 2007, we used $186.5 millionfor our special cash dividend to common stockholders as discussed above.

 

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

 

We have identified the following important trends and factors (as wellas risks and uncertainties associated with such items) that could impact ourfuture financial performance.  This section should be read inconjunction with the “Risks Related to Our Business, Strategy and Operations”section found in Item 1A of Part I of our annual report onForm 10-K, filed with the SEC on March 16, 2007, as updated by our riskfactors included in Item 1A of Part II of our Quarterly Report on Form 10-Qfiled with the SEC on May 10, 2007.

 

•        As we have continued toadd subscribers in 2007, we have incurred significant upfront subscriberacquisition expenses, including customer handset subsidies and rebates,commissions and promotional expenses. In the three and nine months endedSeptember 30, 2007, we incurred $2.3 million and $13.0 million, respectively,in additional subscriber acquisition costs compared to the same periods in 2006attributable to 12% and 22% more gross additions, respectively. To the extentwe continue to add subscribers, we will continue to incur increased acquisitionexpenses, which may have a negative effect on our cash flow. Alternatively, wemay choose to slow, or be unable to maintain, our subscriber growth, which maymake it more difficult for us to obtain sufficient revenue to achieve andsustain profitability.

 

•        While our churn decreasedslightly in the nine months ended September 30, 2007 compared to the sameperiod in 2006, it increased in the three months ended September 30, 2007compared to the same period in 2006 and the prior three month periods of 2007. Additionally,our churn remains higher than our competition. Our churn may increase in thefuture due to involuntary (credit-related) deactivations, increased competitiveadvertising, the relative attractiveness of competitors’ phones, pricing plansand customer service, as well as continuing brand confusion related to theSprint Nextel merger.  If churn continues to remain high or increases overthe long-term, we would lose the cash flows attributable to these subscribersand may incur higher net losses.

 

•         Competition in thewireless industry remains intense as more competitors enter the market via MVNOor other relationships with existing carriers, or through the acquisition ofnew wireless spectrum. Unlimited minute and pre-paid plans, neither of which wecurrently offer, also continue to increase in popularity, offering consumersmore alternatives. Accordingly, incumbent carriers, including us, may incurhigher per subscriber acquisition expenses and/or offer more aggressive rateplans in order to maintain or achieve subscriber growth. We expect to seecontinued pressure in pricing in the future as a result of this increasedcompetition and, among other things, an increased focus on family plans.Although we believe that family plans improve churn, these plans tend to lowervoice revenue on a per subscriber basis. Declining voice ARPU resulting inlower overall ARPU will have a negative effect on our cash flow.

 

•         While our cost per gross addition, or CPGA, decreased in 2007 ascompared to the prior year periods, we may experience higher costs to acquiresubscribers in the future. To the extent that we increase our distributionoutlets, we will increase the fixed costs in our sales and marketingorganization. Also, more aggressive promotional efforts have led, and maycontinue to lead, to higher handset subsidies and rebates. In addition, we mayincrease our marketing expenses and pay higher commissions in an effort toattract and acquire new subscribers. With a higher CPGA, subscribers mustremain our subscribers for a longer period of time at a stable ARPU for us torecover those acquisition costs.

 

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•          Our operating expenses continue to increase and may continue toincrease in the future due to, among other reasons:

 

•                  Higher bad debt expense due to higheraverage write-offs per subscriber, lower recoveries as a percentage ofwrite-offs and an overall deterioration of our customer accounts receivableaging, reflecting a higher number of sub-prime credit subscribers;

 

•                  Higher handset subsidy and rebates and otherretention expenses for existing subscribers who upgrade to a new handset aspart of our promotional efforts to reduce churn;

 

•                  Higher back office expenses due to thelarger number of subscribers served and an increase in the per subscriber feeswe incur for certain back office services we obtain from Sprint, as discussedbelow in “—Commitments and Contingencies;” and

 

•                  Higher roaming expenses, primarily relatedto the growth in outbound roaming kilobytes reflecting increased usage of dataapplications and expanded coverage of Sprint’s 3G network.

 

At the same time, a portion of our ongoingnetwork and general and administrative expenses is fixed. We believe that weneed to add more subscribers to recognize increased economies of scale in ourbusiness. If we are unable to add more subscribers or continue to improve theefficiencies in our operating costs, results will be negatively affected.

 

•         A substantial portion of our revenue (approximately 27% and 25% for thethree and nine months ended September 30, 2007, respectively) is derived fromroaming revenue from subscribers of Sprint PCS based outside our territory.Despite an increase in roaming data kilobytes of use, our roaming revenue fromSprint PCS for the periods ended September 30, 2007 was negatively impacted bya lower reciprocal roaming rate that went into effect on January 1, 2007. Perthe terms of our Management Agreement, the reciprocal roaming rates are resetannually on January 1 of each year and a decrease in those rates willnegatively impact our roaming revenue. While the ratio of inbound to outboundroaming can fluctuate from period to period due to seasonal trends, we expectit to decline over time. If the roaming ratio with Sprint PCS declines due toless roaming revenue, more roaming expense, or both, our results of operationswill be negatively affected.

 

•        As we continue to add capacity and coverage and to upgrade our PCSnetwork, we incurred approximately $25.5 million in capital expenditures forthe nine months ended September 30, 2007, including approximately $9.5 millionfor EV-DO Rev. A deployment. We anticipate that total capital expenditures forthe full year 2007 will be at or below our previous estimate of between $38.0million and $42.0 million. Prior to 2007, we deployed EV-DO technology in asmall portion of our service area. During the first nine months of 2007 we selectivelydeployed EV-DO Rev. A technology but we may decide to expand or enhance ourdeployment which may significantly increase our anticipated capitalexpenditures and operating expenses beyond our current plans. Unforeseenchanges in technology and changes in our plans to upgrade or expand our networkmay require us to spend more money than we expected and have a negative effecton our cash flow.

 

•        Ourrevenue from customers of resellers, or MVNO’s, continues to increase, growing38% and 42% in the three and nine months ended September 30, 2007 as comparedto the prior year periods, respectively. Resellers, such as Virgin, Qwest andEmbarq, are subject to a number of risks, including high churn, high bad debtexpense, increased competition, dependence on fourth quarter gross additionsand reliance, in many cases, on specific segments of the market, for example,the youth segment. We are not party to the underlying agreements that theresellers have with Sprint Nextel and therefore are unable to set prices orotherwise monitor the performance of the reseller. If any reseller,particularly Virgin, has a disruption in its business plan, experiencesfinancial difficulties or ceases to grow or service its customer base, we maylose the related revenue and it may make it more difficult for us to obtainsufficient revenue to achieve and sustain profitability.

 

•        Continuing efforts bySprint to integrate the Sprint and Nextel businesses have had, and willcontinue to have, a negative impact on our business and prospects. As Sprintcontinues to integrate the marketing and sales of Sprint products and serviceswith legacy Nextel products and services, more conflicts arise with how weconduct business in our territory. Additionally, Sprint is migrating itssubscribers to a new billing platform called Ensemble. Because subscribersbased in our territory have not yet been migrated to Ensemble, we believe thatit is more difficult and time-consuming for third-party national retailers(such as Radio Shack, Wal-Mart and Best

 

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Buy) and Sprint-controlled distribution channels (such as the Sprintwebsite and Sprint customer care) to activate or upgrade subscribers in ourmarket. Additionally, we believe that Sprint PCS subscribers based in ourterritory are not receiving the same level of customer support and care asSprint PCS subscribers who have been migrated to Ensemble. Consequently, webelieve that use of these two platforms has led to a decline in our customeradditions and an increase in our churn. We do not believe that the subscribersin our territory will be migrated to Ensemble until 2008.

 

***Commitmentsand Contingencies***

 

A substantial portion of our revenue is derived from roaming revenuewhen subscribers of Sprint PCS and other PCS Affiliates of Sprint roam onto ournetwork. Effective January 1, 2007, the roaming rate paid to us by Sprint PCSand other PCS Affiliates of Sprint for voice is $0.043 per minute of use forthe majority of our markets, and for data is $0.001 per kilobyte in all of ourmarkets. This compares with roaming rates in 2006 of $0.058 minute for voiceand $0.002 per kilobyte. These rates were fixed through December 31, 2006 and,now will change annually to equal 90% of Sprint PCS’s retail yield for voiceusage and data usage from the prior year. Such a reduction in the reciprocalroaming rates may have a material adverse effect on our business. We stronglydisagree with Sprint’s estimated new roaming rates and, pursuant to the termsof our affiliation agreements, may elect to submit the matter to arbitration orlitigation if necessary. If the matter is submitted to an arbitration panel andthe arbitration panel imposes a rate different than the one then in effect, thenew rate would be retroactively applied to the appropriate period. However, inthe meantime, we began paying the new rates on January 1, 2007 and wecontinue to engage in discussions with Sprint to reach a negotiated settlement.

 

We purchase certain customer-related back-office services, such ascustomer billing and customer care, from Sprint PCS pursuant to our affiliationagreement with Sprint PCS. Depending on the type of service provided, we incurthese costs on either a per user basis (these services are referred to as “CCPUservices”) or on a per gross subscriber addition basis (these services arereferred to as “CPGA services”). The total cost for these services is recordedas an operating expense. For the three and nine months ended September 30,2007, CCPU expenses were approximately $14.0 million and $40.7 million,respectively, and CPGA expenses were approximately $1.4 million and $4.2million, respectively.  Because we incur these costs on a per subscriberbasis, we expect the aggregate cost for such services to increase as the numberof our subscribers increases.  Our affiliation agreements with Sprint PCSset the monthly rate per subscriber charged to us by Sprint for the CCPUservices at $7.25 during 2004, $7.00 for 2005 and $6.75 for 2006, and the pergross addition rate for the CPGA services for 2004 through 2006 at $23.00 foriPCS Wireless and $22.00 for Horizon. Our affiliation agreements with SprintPCS provide that, beginning on January 1, 2007, the monthly rate for theseservices is reset by Sprint PCS to the amount necessary to recover Sprint PCS’sreasonable costs for providing such services. Effective January 1, 2007, thecosts we incur for the CCPU services increased from $6.75 per average monthlysubscriber to $7.50 for 2007, $7.09 for 2008 and $6.81 for 2009, and the costswe incur for the CPGA services decreased to $20.09 for 2007, $19.41 for 2008and $18.58 for 2009. Our affiliation agreements provide that, if we disagreewith Sprint on its proposed new rates, we have the right to obtain theback-office services from a third party, self-provide the services or submitthe determination of the new rates to arbitration. We strongly disagree withSprint’s new rates and, pursuant to the terms of our affiliation agreements, onDecember 8, 2006 we submitted the determination of the new rates tobinding arbitration before the International Institute for Conflict Preventionand Resolution. A three-judge panel has been selected and the parties areengaged in discovery. We currently expect that a hearing before the panel willoccur next year. If the arbitration panel imposes a rate different than the onethen in effect, the new rate would be retroactively applied to the appropriateperiod. However, in the meantime, as of January 1, 2007, we are required to paythe new higher rate and we continue to engage in discussions with Sprint toreach a negotiated settlement.

 

Although Sprint PCS has not done so, it may elect to terminate anyservice provided under our services agreements upon nine months’ prior writtennotice, but if we would like to continue receiving such service, Sprint PCS hasagreed that it will assist us in developing that function internally orlocating a third-party vendor that will provide that service. Although SprintPCS has agreed in such an event to reimburse us for expenses we incur intransitioning to any service internally or to a third-party, if Sprint PCSterminates a service for which we have not developed or are unable to develop acost-effective alternative, our operating costs may increase beyond ourexpectations and our operations may be interrupted or restricted. We do notcurrently have a contingency plan if Sprint PCS terminates a service wecurrently receive from it.

 

SeeNote 11(b), Commitments and Contingencies –Litigation, Arbitration and Other Disputes,of the “Notes to Unaudited Consolidated Financial Statements” in this QuarterlyReport on Form 10-Q for a discussion of our litigation, arbitration anddisputes with Sprint.

 

Asdiscussed in Note 11(b), Commitments and Contingencies – Litigation, Arbitration and Other Disputes,of the “Notes to Unaudited Consolidated Financial Statements” in this QuarterlyReport on Form 10-Q, in August 2007, Sprint notified us that it disputes theamounts that Sprint charged us for data roaming for April through July, 2007because of our efforts to reduce our data roaming expense. Based on Sprint’scalculations, the aggregate amount in dispute through September 30, 2007 is $7.6million (of which amount approximately $5.0 million relates to the four monthsthat Sprint has formally disputed). The Company disagrees with Sprint’sposition. The amounts disputed by Sprint are not included in cost of serviceand roaming for the three and nine months ended September 30, 2007.  Sprint’s position is that our efforts toreduce our data roaming

 

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expenseis not permissible under the terms of our Management Agreements with Sprint. Sprintdemanded that we immediately cease and desist from further such efforts. Althoughwe disagree with Sprint’s position, in August 2007 we suspended our effortswith respect to this issue pending our discussions with Sprint. We are engagedin discussions with Sprint regarding this issue, but we have not yet come to aresolution with respect to our past activities or with respect to a mutuallyagreeable process to address this issue going forward. The outcome of thisdispute could have a material adverse effect on our operating expenses andother components of our financial statements. Although we remain hopeful thatwe can come to a resolution with Sprint, we intend to vigorously defend ourposition.

 

See Note 11(a), Commitments and Contingencies – Commitments, of the “Notesto Unaudited Consolidated Financial Statements” in this Quarterly Report onForm 10-Q for a discussion of our commitment with the initial purchasers of ourSecured Notes to register such notes with the SEC.

 

**Off-Balance Sheet Arrangements**

 

For information regarding off-balance sheet arrangements, see thecaption “Off-Balance Sheet Arrangements” in “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations” in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2006. AtSeptember 30, 2007, there had not been a material change to the off-balancesheet contractual obligations disclosed in the Company’s Annual Report onForm 10-K for the year ended December 31, 2006.

 

**Seasonality**

 

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

 

**Critical Accounting Policies**

 

Our financial statements are prepared in conformity with accountingprinciples generally accepted in the United States and require us to selectappropriate accounting policies.  The assumptions and judgments we use inapplying our accounting policies have a significant impact on our reportedamounts of assets, liabilities, revenue and expenses.  While we believethat the assumptions and judgments used in our estimates are reasonable, actualresults may differ from these estimates under different assumptions or conditions.

 

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

 

•                    Revenuerecognition

 

•                    Allowance fordoubtful accounts

 

•                    Long-livedasset recovery

 

•                    Intangibleassets

 

•                    Income taxes

 

•                    Stock-basedcompensation expense

 

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Additional information regarding these critical accounting policies canbe found in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section of our Annual Report on Form 10-Kfor the year ended December 31, 2006, filed with the SEC on March 16, 2007.

 

**ITEM 3.****   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

In July 2007, we entered into an interest rate swap agreement thateffectively fixes the interest rate on $300.0 million of our variable rateindebtedness at 7.47% for three years starting August 1, 2007. The fair valueof our interest rate swap was a $6.1 million liability at September 30, 2007. Ahypothetical 10% increase or decrease in average market interest rates wouldincrease or decrease the fair value of our interest rate swap by approximately$4.0 million. A prospective increase of 100 basis points in the interest rateapplicable to the remaining $175.0 million of variable rate indebtedness wouldresult in an increase of approximately $1.8 million in our annual interestexpense. At September 30, 2007, after consideration of the interest rate swapdescribed above, approximately 37% of our debt is subject to variable interestrates.

 

**ITEM 4.****   CONTROLS ANDPROCEDURES**

 

Each of our Chief Executive Officer and Chief Financial Officer hasevaluated the effectiveness of our disclosure controls and procedures (as suchterm is defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act) as of the end of the period covered by this Quarterly Report onForm 10-Q. Based on such evaluation, such officers have concluded that, as ofthe end of the period covered by this Quarterly Report on Form 10-Q, ourdisclosure controls and procedures are effective in alerting them on a timelybasis to material information relating to us (including our consolidatedsubsidiaries) required to be included in our reports filed or submitted underthe Exchange Act.

 

We place reliance on Sprint to adequately design its internal controlswith respect to the processes established to provide financial information andother information to us and the other PCS Affiliates of Sprint. To addressthis issue, Sprint engages an independent registered public accounting firm toperform a periodic evaluation of these controls and to provide a “Report on ControlsPlaced in Operation and Tests of Operating Effectiveness for Affiliates” underguidance provided in Statement of Auditing Standards No. 70. This reportis provided bi-annually to us.

 

There have been no changes in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended September 30,2007 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 FinancialCondition and Results of Operations —Commitments and Contingencies” of thisreport.

 

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

 

**ITEM 1A.****   RISK FACTORS**

 

You should carefully consider the risks and uncertainties described inPart I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2006 (as updated in Part II, Item 1A of our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2007) and the otherinformation in our subsequent filings with the SEC, including this QuarterlyReport on Form 10-Q. Our business, financial condition, results ofoperations and stock price could be materially adversely affected by any ofthese risks. The risks described in our Annual Report on Form 10-K (asupdated in Part II, Item 1A of our

 

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Quarterly Report on Form 10-Q for the quarter ended March 31, 2007) arenot the only ones facing us. Additional risks and uncertainties that arecurrently unknown to us or that we currently consider to be immaterial may alsoimpair our business or adversely affect our financial condition, results ofoperations and stock price.

 

**ITEM 2.****   UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.****   DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4.****   SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

None

 

**ITEM 5.****   OTHER INFORMATION**

 

Effective November 2,2007, the Board of Directors of the Company appointed Nicholas J. Vantzelfde tothe Board. The Board has not determined Mr. Vantzelfde’s committeeappointments.

 

Mr. Vantzelfde wasnominated to be appointed to the Board by the Nominating and CorporateGovernance Committee at the recommendation of Silver Point Capital, L.P., thebeneficial owner of approximately 17% of the shares of the Company’s commonstock as reflected in a Schedule 13G filed on July 18, 2007 with respect to itsholdings as of such date. Mr. Vantzelfde will be compensated according to thepreviously disclosed compensation plan of the Company for outside directors.

 

**ITEM 6.   EXHIBITS**

 
| 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-Q filed by iPCS, Inc. on February 14, 2006)                                               |
|   |   |                                                                                                                                                                                                |
| 3.3    |   | 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)                   |
|   |   |                                                                                                                                                                                                |
| 3.4    |   | 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)                                          |
|   |   |                                                                                                                                                                                                |
| 3.5    |   | 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)                  |
|   |   |                                                                                                                                                                                                |
| 3.6    |   | 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)                                         |
|   |   |                                                                                                                                                                                                |
| 3.7    |   | Articles of  Incorporation 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) |
|   |   |                                                                                                                                                                                                |
| 3.8    |   | Bylaws 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)                     |
|   |   |                                                                                                                                                                                                |
| 3.9    |   | 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)   |

 

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| 3.10   |   | Bylaws 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. with the SEC 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)                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1   |   | 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.                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | 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.                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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 of  the Chief Executive Officer and Chief Financial Officer 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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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                                                     |   | iPCS, Inc. |
|-----------------------------------------------------|--------|-----------------|
|                                                |   |            |   |
|                                                |   | By:             | /s/  TIMOTHY M. YAGER |
|                                                |   |            | Timothy M.  Yager |
|                                                |   |            | President and  Chief Executive Officer  (Principal Executive Officer) |
|                                                |   |            |   |
| Date:    November 8, 2007  |   |            |   |
|                                                |   | By:             | /s/ STEBBINS B.  CHANDOR, JR. |
|                                                |   |            | Stebbins B.  Chandor, Jr. |
|                                                |   |            | Executive Vice  President and  Chief Financial Officer  (Principal Financial Officer) |
|                                                |   |            |   |
| Date:    November 8 , 2007 |   |            |   |

 

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