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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549
 FORM 10-K For Annual and Transition Reports Pursuant to
Section 13 or 15(d) of the Securities Act of 1934 (Mark One) x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934For The Fiscal Year Ended September 30, 2004.ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 027455 AirGate PCS, Inc. (Exact name of registrant as specified in its charter)
 Delaware
    
    58-2422929(State other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 Harris Tower, 233Peachtree St. NE, Suite 1700,Atlanta, Georgia
    
    30303(Address of principal executive offices)
    
    (Zip code)
 (404) 525-7272 Registrants telephone number, including area code
 Securities registered pursuant toSection 12(b)of the Act: None. Securities registered pursuant toSection 12(g)of the Act: Common Stock, par value $.01 per share (Title of Class)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o




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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No o The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing sale price on The Nasdaq
National Market on March 31, 2004, the last business day of the registrants
most recently completed second fiscal quarter, was approximately $174,423,405.
(For purposes of determination of the foregoing amount, only our directors and
executive officers have been deemed affiliates). As of November 30, 2004, there were 11,768,258 shares of common stock,
$0.01 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement to be filed within 120 days
after September 30, 2004 for the Registrants Annual Stockholder Meeting are
incorporated by reference into Part III of this Report on Form 10-K.




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AIRGATE PCS, INC. ANNUAL REPORT ON FORM 10-K
 TABLE OF CONTENTS
 ITEM NO.
    
    PAGE NO.PART IITEM 1. Business
    
    
    1ITEM 2. Properties
    
    
    38ITEM 3. Legal Proceedings
    
    
    38ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    39PART IIITEM 5. Market for Registrants Common Equity and Related Stockholder
Matters
    
    
    39ITEM 6. Selected Financial Data
    
    
    40ITEM 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    41ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    58ITEM 8. Financial Statements and Supplementary Data
    
    
    59ITEM 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    59ITEM 9A. Controls and Procedures
    
    
    59PART IIIITEM 10. Directors and Executive Officers of the Registrant
    
    
    60ITEM 11. Executive Compensation
    
    
    60ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    60ITEM 13. Certain Relationship and Related Transactions
    
    
    61ITEM 14. Principal Accounting Fees and Services
    
    
    61PART IVITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    61EX-4.10 FORM OF INTERCREDITOR AGREEMENTEX-10.25 FORM OF OPTION AGREEMENT, 2001 NON-EXECUTIVE STOCK OPTION PLANEX-10.28 FORM OF AWARD AGREEMENT, 2002 LONG-TERM INCENTIVE PLANEX-23.1 CONSENT OF KPMG LLPEX-24.1 POWERS OF ATTORNEYEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART 1 
 ITEM 1. Business Special Caution Regarding Forward-Looking Statements This annual report on Form 10-K and other documents we file with the
Securities and Exchange Commission contain forward looking statements that are
based on current expectations, estimates, forecasts and projections about us,
our future performance, our liquidity, the wireless industry, our beliefs and
managements assumptions. Such forward looking statements include statements
regarding expected financial results and other planned events, including but
not limited to, anticipated liquidity, churn rates, ARPU (as defined herein),
CPGA (as defined herein), roaming rates, EBITDA (as defined herein), and
capital expenditures. Words such as anticipate, assume, believe,
estimate, expect, intend, plan, seek, project, target, goal,
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual future events or results may differ
materially from these statements. Among others, these risks and uncertainties
include:  
    
    our dependence on the success of Sprints wireless business and
continued access to the Sprint spectrum;  
    
    the competitiveness and impact of Sprints pricing plans, network
coverage and PCS products and services and introduction of pricing plans
and programs that may adversely affect our business;  
    
    intense competition and increasing consolidation in the wireless
market and the rapidly changing nature of the wireless market;  
    
    the potential to experience a continued high rate of subscriber
turnover;  
    
    the ability of Sprint (directly or through third parties) to provide
back office billing, subscriber care and other services and the quality
and costs of such services;  
    
    subscriber credit quality;  
    
    the ability to successfully leverage third-generation, or 3G, products and services;  
    
    possible inaccuracies in financial information provided by Sprint;  
    
    material changes in government regulations;  
    
    new charges and fees, or increased charges and fees, imposed by Sprint;  
    
    future disputes with Sprint;  
    
    our ability to predict future subscriber growth, as well as other key operating metrics;  
    
    our ability to manage anticipated growth and expansion;  
    
    the impact of spending cuts on network quality, subscriber retention and subscriber growth;  
    
    rates of penetration in the wireless industry;  
    
    our significant level of indebtedness and debt covenant requirements;  
    
    the impact and outcome of legal proceedings between other Sprint network partners and Sprint; 1




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
    
    the potential need for additional sources of capital and liquidity;  
    
    risks related to our ability to compete with larger, more established
businesses with greater access to capital;  
    
    anticipated future losses;  
    
    adequacy of bad debt and other reserves;  
    
    rapid technological and market change;  
    
    an adequate supply of subscriber equipment;  
    
    declines in growth of wireless subscribers;  
    
    the effect of wireless local number portability (WLNP) and other government mandates;  
    
    the volatility of the market price of our common stock;  
    
    the future obsolescence of our network assets based on technological changes and  
    
    general economic and business conditions. These forward looking statements involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the forward looking statements. Forward looking statements should,
therefore, be considered in light of various factors, including those set forth
in this Item 1 under Risk Factors, in Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations under the caption
Future Trends That May Affect Operating Results, Liquidity and Capital
Resources and elsewhere in this report. Moreover, we caution you not to place
undue reliance on these forward-looking statements, which speak only as of the
date they were made. We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. Certain Definitions In this annual report on Form 10-K, we refer to AirGate PCS, Inc. and its
three wholly-owned, restricted subsidiaries, AGW Leasing Company, Inc., AirGate
Network Services, LLC and AirGate Service Company, Inc. as the Company. Sprint PCS refers to Sprint Communications Company, L.P., Sprint
Spectrum L.P. and WirelessCo, L.P. In this annual report on Form 10-K, we refer
to Sprint Corporation and its affiliates, including Sprint PCS, as Sprint. A
Sprint PCS affiliate is an entity, such as us, whose sole or predominant
business is operating (directly or through one or more subsidiaries) a wireless
communications service business pursuant to affiliation or management
agreements with Sprint. Statements in this report regarding Sprint are derived
from information contained in our agreements with Sprint, periodic reports and
other documents filed by Sprint with the Securities and Exchange Commission or
press releases issued by Sprint. iPCS refers to iPCS, Inc. and its two wholly-owned subsidiaries, iPCS
Wireless, Inc. and iPCS Equipment, Inc. 2




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BUSINESS OVERVIEW Our Company We are a network partner of Sprint PCS, the personal communications
services (commonly known as PCS) division of Sprint Corporation, and have the
exclusive right to provide wireless communications services under the Sprint®
and Sprint PCS® brand names in our licensed territory, which includes most of
the state of South Carolina, parts of North Carolina, and the eastern Georgia
cities of Augusta and Savannah. We launched Sprint PCS products and services in
our first market in January 2000 and currently operate in 21 basic trading
areas (BTAs) assigned to us under our affiliation agreements with Sprint PCS.
We offer national calling plans designed by Sprint PCS, as well as local
calling plans tailored to our markets. We market Sprint PCS products and
services through a number of distribution outlets, including our own retail
stores, major national distributors such as RadioShack and Best Buy and local
third party distributors. As of September 30, 2004, our licensed territory had
a total population, which we refer to as POPs, of 7.4 million residents, of
which our network covered 6.1 million residents, which we refer to as covered
POPs, resulting in approximately 83% covered POPs. As of September 30, 2004,
we had 384,537 subscribers. Sprint PCS, along with its network partners, operates a 100% digital, 100%
PCS, nationwide wireless network in the United States, with licenses to provide
services to an area consisting of approximately 280 million POPs. We own and
are responsible for building, operating and managing the portion of the
nationwide PCS network of Sprint PCS located in our licensed territory. Our PCS
network is designed to offer a seamless connection with the nationwide wireless
network of Sprint PCS. Like Sprint PCS and other Sprint PCS affiliates, we
utilize code division multiple access (CDMA) technology. We have CDMA one
times radio transmission technology (1xRTT) capability on all of the cell
sites within our network. Merger Agreement with Alamosa Holdings, Inc. On December 7, 2004, we entered into an Agreement and Plan of Merger (the
Merger Agreement) with Alamosa Holdings, Inc. (Alamosa) and A-Co. Merger
Sub, Inc., a direct wholly-owned subsidiary of Alamosa (Merger Sub).
Pursuant to the Merger Agreement, we will merge (the Merger) with and into
Merger Sub with Merger Sub surviving. After the Merger, we will be a
subsidiary of Alamosa. Under the terms of the Merger Agreement, our
shareholders will receive 2.87 Alamosa shares for every share of AirGate common
stock they hold. In addition, Company shareholders will have the option to
elect cash consideration in place of Alamosa stock, up to an aggregate amount
of $100 million, with the per share cash consideration (the Per Share Cash
Consideration) based on the average closing price of Alamosa stock in the ten
trading days prior to the completion of the transaction multiplied by 2.87 (the
Per Share Amount). The Per Share Cash Consideration is subject to proration
to ensure that Alamosa exchanges no more than $100 million in aggregate cash
consideration. The completion of the Merger is subject to various customary closing
conditions, including obtaining the approval of our and Alamosas stockholders,
the expiration of the applicable waiting period under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1974 and the consent of Sprint PCS. We expect
to consummate the Merger in the Spring of 2005. See Managements Discussion
and Analysis of Financial Condition and Results of Operations  Recent
Developments  Merger Agreement with Alamosa Holdings, Inc. for more
information. Competitive Strengths Strategic Affiliation with Sprint PCS. We believe that our strategic relationship with Sprint PCS provides us
with significant competitive advantages and with a platform for growth. In
particular we are able to offer high quality, nationally branded wireless
services to our network subscribers. We benefit from our Sprint PCS affiliation
in the following ways: Use of the Sprint PCS brand in our territory.We have the right to use
the Sprint PCS® brand name in our licensed territory to market our products and
services. We benefit from Sprint PCS national advertising campaigns, as well
as Sprints sponsorship of numerous national and regional events that provide
additional exposure to the brand and increase product awareness. 3




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Seamless national network partnership.We are the exclusive provider of
Sprint PCS service within our network coverage area. Our product offering is
centered on Sprint PCS national 100% digital network, which allows us to offer
attractive national services plans to potential subscribers within our region.
We also receive significant roaming traffic from Sprint PCS subscribers when
they travel in our territory. Scale benefits usually associated with a national carrier.Our
partnership with Sprint PCS allows us to offer competitive wireless voice and
data services at a lower cost and with fewer capital requirements than would
otherwise be possible as a regional carrier. Sprint PCS provides billing,
collections, customer care and other back-office support services to over 22
million wireless customers. This scale of service enables Sprint to provide
these services to us at a lower cost per customer than if we were to provide
them ourselves. Sprint PCS purchasing leverage allows us to acquire the newest
handsets and network equipment at a lower cost than we could without our
affiliation with Sprint PCS. We also benefit from Sprints negotiated
interconnection agreements with local exchange carriers, resulting in lower
operating costs. Furthermore, Sprint PCS has roaming agreements with other
wireless operators and wireless resellers, such as Virgin Mobile, Qwest
Communications and AT&T, which enable us to receive additional revenue when
subscribers of those operators, and additional resellers that have agreements
with Sprint PCS, use our network. We also market our products and services
through Sprint PCS existing relationships with major national retailers
including RadioShack and Best Buy. Advanced technology and product development.We believe that the CDMA
technology used across the Sprint PCS nationwide network offers significant
advantages when compared with other wireless technologies. These advantages
include greater volume capacity, higher voice quality and access to advanced
features, such as Sprint PCS suite of PCS Vision wireless data products. We
also have access to a wide array of handsets that feature the latest
technologies, such as embedded cameras, color screens and wireless data
capabilities. Attractive Markets. We operate in attractive markets with high population densities and
favorable roaming characteristics. Our markets are adjacent to major, growing
metropolitan areas such as Atlanta, Charlotte and Raleigh. This concentration
within our markets allows us to advertise and market to existing and potential
subscribers in a cost effective manner. Additionally, the high population
densities of our markets enable a higher return on the investment we make in
our network. Our markets cover several major tourist destinations, including a
number of beach and golf destinations, a number of military bases and over 100
colleges, universities and technical schools. Along with the major highways in
our markets, these factors have resulted in a significant amount of roaming
traffic that we receive from other wireless subscribers using our network. State of the Art 3G Wireless Network. We have invested a substantial amount of capital in our CDMA network and
1xRTT network overlay. Our network allows us to provide exceptional call
quality and wireless data services within our coverage area while retaining
ample network capacity for future growth. Business Strategy We believe that with our strategic relationship with Sprint PCS and our
state of the art third-generation wireless network, we are well positioned for
continued growth within our markets. Key aspects of our growth strategy include
the following: Expand Our Distribution Network. We believe a robust distribution network is important to driving
subscriber growth. Therefore, we plan to replace many of our older
Company-owned stores with larger ones in better locations. In addition, we
anticipate signing agreements with exclusive third-party dealers to open and
operate approximately 50 to 75 Sprint-branded stores within our markets. These
new stores will ensure that we have the retail presence in each of our key
markets to drive subscriber growth. We also intend to improve the customer
experience at our stores through introducing new 4




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technologies and capabilities, such as touch-screen computers that will
help efficiently educate customers on our products and services. Continue to Invest in Our Network. While we already operate a state-of-the-art network, we will continue to
invest strategically in our network in order to expand its breadth and
capabilities in the future. We plan to add 250 to 300 cell sites over the next
four years. This will add capacity to some existing areas, allowing us to
continue to increase penetration and introduce new technologies in select
areas, as well as expand network coverage to new areas, and therefore increase
our marketing area. Leverage Our 3G Network Platform and Introduce New Product Offerings. We seek to capitalize on the investment in our network and the Sprint PCS
nationwide network. Sprint PCS is a leading national wireless carrier offering
third generation, or 3G, technology-based services (which Sprint PCS and Sprint
PCS affiliates brand as PCS Vision) across its nationwide footprint. PCS
Vision allows our subscribers to use their PCS Vision-enabled devices to check
e-mail, take, send and receive pictures, play games with full-color graphics
and polyphonic sounds, and browse the internet. We believe these services are
important to attract and retain subscribers, particularly those with prime
credit ratings, and to maintain higher average revenue per user, or ARPU. Focus on Initiatives to Reduce Churn. We believe that focused efforts on the customer experience and the quality
of the services provided to our customers are critical to retaining
subscribers. We offer incentives to attract new customers and induce existing
customers to renew their contracts, such as offering discounts on the purchase
of new handsets. Using incentives such as this, we seek to maximize the number
of subscribers under two-year contracts. Markets We believe that connecting Sprints existing PCS markets with our PCS
markets is an important part of Sprints on-going strategy to provide seamless,
nationwide PCS service to its subscribers. Our territory has approximately 7.4
million residents and includes vacation destinations, substantial highway
mileage and a large student population, with at least 100 colleges,
universities and technical schools. The following table sets forth the location
and estimated population in our territory: AirGate Basic Trading Areas(1)
    
    Population(2)Greenville-Spartanburg, SC
    
    
    935,800Savannah, GA
    
    
    775,800Charleston, SC
    
    
    690,200Columbia, SC
    
    
    685,100Asheville-Hendersonville, NC
    
    
    625,000Augusta, GA
    
    
    601,900Anderson, SC
    
    
    354,500Hickory-Lenoir-Morganton, NC
    
    
    350,300Wilmington, NC
    
    
    342,800Florence, SC
    
    
    262,800Greenville-Washington, NC
    
    
    252,900Goldsboro-Kinston, NC
    
    
    245,100Rocky Mount-Wilson, NC
    
    
    219,900Myrtle Beach, SC
    
    
    205,500New Bern, NC
    
    
    177,400Sumter, SC
    
    
    158,600Jacksonville, NC
    
    
    150,500Orangeburg, SC
    
    
    124,900The Outer Banks, NC(3)
    
    
    93,400Roanoke Rapids, NC
    
    
    79,900Greenwood, SC
    
    
    77,600Total
    
    
    7,409,900
 5




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(1)
    
    Each of our markets contains 10 MHz of spectrum.(2)
    
    Based on 2002 estimates compiled by Kagans Wireless Telecom Atlas &
Databook, 2002 Edition, as reported per individual basic trading area.(3)
    
    Territory covered by our Sprint PCS management agreement does not
comprise a complete basic trading area. Our Sprint agreements required us to cover a specified percentage of the
population at a range of coverage levels within each of the markets granted to
us by those agreements by specified dates. We are fully compliant with these
build-out requirements. Products and Services We offer Sprint PCS products and services throughout our territory. These
PCS products and services generally mirror the services offered by Sprint. 100% Digital Wireless Network with Service Across the Country.Our
primary service is wireless mobility coverage. As Sprint network partners, our
existing PCS network is part of the largest 100% digital wireless PCS network
in the United States. Subscribers in our territory may use Sprint PCS services
throughout our contiguous markets and seamlessly throughout the Sprint PCS
network. PCS Vision Service.In the third calendar quarter of 2002, Sprint
launched PCS Vision, a third generation technology. PCS Vision-enabled devices
take and receive pictures, check personal and corporate e-mail, play games with
full-color graphics and polyphonic sounds and browse the internet wirelessly
with speeds that equal or exceed a home computers dial-up connection. At the
same time, Sprint began to roll out a broad portfolio of PCS Vision-enabled
devices that incorporate voice and data functionality, expanded memory,
high-resolution and larger color screens that allow greater mobility,
convenience and productivity. We support and offer PCS Vision services and
phones in the majority of our territory. Wireless Internet Access.Wireless internet access is available through
both the new PCS Vision service and PCS Vision-enabled phones as well as the
Sprint Wireless Web and other data capable PCS phones. PCS subscribers with web
browser-enabled phones have the ability to receive information such as stock
prices, airline schedules, sports scores and weather updates directly on their
handsets. Subscribers with PCS Vision phones can browse full color, graphic
versions of popular web sites. Those subscribers with other browser-enabled
phones are able to browse specially designated text based sites. CDMA and Dual Band/Dual Mode Handsets.We offer code division multiple
access, or CDMA, digital technology handsets. These handsets range from
full-featured models with special features such as Palm OS and built-in digital
cameras to models with voice only capability. The phones can weigh as little as
2.65 ounces and can have standby times surpassing 300 hours. We offer dual
band/dual mode handsets that allow subscribers to make and receive calls on
both PCS and cellular frequency bands and both digital and analog technology. Sprint and Non-Sprint Roaming.We provide roaming services to PCS
subscribers of Sprint and its network partners that use a portion of our PCS
network, and to non-Sprint subscribers when they use a portion of our PCS
network pursuant to roaming agreements between Sprint and other wireless
service providers. Sprint and other wireless service providers supply similar
services to our subscribers when our subscribers use a portion of their
networks. Marketing Strategy Our marketing and sales strategy generally leverages the national
advertising and marketing programs that have been developed by Sprint, often
enhanced with strategies and tactics we have tailored to our specific markets. 6




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Use Sprints brand equity and marketing.We feature exclusively and
prominently the nationally recognized Sprint brand in our marketing effort.
From the subscribers point of view, they use our network and the PCS national
network seamlessly as a unified nationwide network. Pricing.Our use of the Sprint national pricing strategy offers
subscribers simple, easy-to-understand service plans. Sprints pricing plans
are typically structured with monthly recurring charges, large local calling
areas, bundles of minutes and service features such as voicemail, caller ID,
call waiting, call forwarding and three-way calling. We also feature Sprint
Free and Clear plans, which offer simple, affordable plans for consumer and
business subscribers, and include long distance calling from anywhere on the
Sprint PCS nationwide network. Advertising and promotions.Sprint uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote
its products. We benefit from this national advertising in our territory at no
additional cost to us. Sprint also runs numerous promotional campaigns that
provide subscribers with benefits such as additional features at the same rate,
free minutes of use for limited time periods or special prices on handsets and
other accessories. Sponsorships.Sprint sponsors numerous national, regional and local
events. These sponsorships provide Sprint with brand name and product
recognition in high profile events, create a forum for sales and promotional
events and enhance our promotional efforts in our territory. Sales and Distribution Our agreements with Sprint require us to use Sprints and our own sales
and distribution channels in our territory. Key elements of our sales and
distribution plan consist of the following: Sprint stores.We currently operate 33 retail Sprint stores within our
territory. These stores are located in metropolitan markets within our
territory, providing us with a local presence and visibility. These stores have
been designed to facilitate retail sales, bill collection and customer service. Sprint store within a RadioShack store.Sprint has an arrangement with
RadioShack to install a store within a store. Currently, RadioShack has 120
stores in our territory that are authorized to offer Sprint PCS products and
services to potential subscribers. Other national third-party retail stores.In addition to RadioShack, we
benefit from the sales and distribution agreements established by Sprint with
other national retailers, which currently include Best Buy, CostCo, Staples,
Office Max, Office Depot and Ritz Camera. These retailers and others have
approximately 116 retail stores in our territory. Local third-party retail stores.We benefit from the sales and
distribution agreements that we enter into with local retailers in our
territory. We have entered into sales and distribution agreements related to
approximately 9 local stores in our territory. National accounts and direct selling.We participate in Sprints national
accounts program. Sprint has a national accounts team which focuses on the
corporate headquarters of large companies. Our direct sales force targets the
employees of these companies in our territories and cultivates other local
business subscribers. In addition, once a Sprint national account manager
reaches an agreement with any company headquartered outside of our territory,
we help service the offices and subscribers of that company located in our
territory. Sprint distribution channels.Sprint directly controls various
distribution channels that sell Sprint PCS products and services in our
markets. These channels with significant activity in our markets include:
Sprint Inbound Telemarketing, Sprint web-based electronic commerce, Sprint
Local Telephone Division Retail, and Sprint Local Telephone Division
Telemarketing. In addition to these channels, Sprints retail and business
sales activities often have some incidental overflow into our markets. For the year ended September 30, 2004, the following table sets forth the
percentage of subscriber gross additions that our distribution channels
generated for us: 7




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Retail Sprint Stores
    
    
    43
    %RadioShack
    
    
    17
    %Other National Third-Party
    
    
    11
    %Local Third-Party
    
    
    6
    %National Accounts
    
    
    7
    %Sprint
    
    
    16
    %100
    %
 Suppliers and Equipment Vendors We do not manufacture any of the handsets or network equipment we use in
our operations. We purchase our network equipment and handsets pursuant to
various Sprint vendor arrangements that provide us with volume discounts. These
discounts have significantly reduced the overall capital required to build our
network. Under such arrangements, we currently purchase our network equipment from
Lucent Technologies, Inc. (Lucent). In addition, we currently purchase our
handsets directly from Sprint and our accessories from Sprint and certain other
third-party vendors. Our agreements with Sprint require us to pay Sprint $4.00
for each 3G handset that we purchase either directly from Sprint or from a
Sprint authorized distributor. We agreed to pay this fee starting with
purchases on July 1, 2002 and ending on the earlier of December 31, 2004 or the
date on which the cumulative 3G handset fees received by Sprint from all Sprint
network partners equal $25.0 million. We further agreed to purchase 3G handsets
only from Sprint or a Sprint authorized distributor during this period. Outsourced Services We outsource a number of services from or through Sprint. These services
include:  
    
    billing and collections;  
    
    customer care, including activations of new subscribers and customer call center activities; and  
    
    national support of the Sprint network, such as its national network operating control center. Sprint also requires us to purchase certain services, such as 3G
research and development. Billing and customer care are important to our ability to maintain and
grow our subscriber base and to collect monies owed to us by subscribers. We
believe actual or perceived poor customer care contributes to higher churn. Sprint Relationship and Agreements The following includes a summary of the material terms and provisions of
our Sprint agreements. These agreements were recently amended in a number of
respects to resolve issues that had arisen between Sprint and us. Overview of Sprint Relationship and Agreements Under our long-term agreements with Sprint, we market PCS products and
services under the Sprint brand names in our territory. The agreements with
Sprint require us to build-out our systems, platforms, products and services to
seamlessly interface with the Sprint PCS wireless network. The Sprint
agreements also provide us with:  
    
    the right to receive Sprints equipment discounts in making purchases from equipment vendors;  
    
    roaming revenue from Sprint PCS and its PCS network partner subscribers traveling into our territory;  
    
    national marketing and advertising;  
    
    access to local and interexchange facilities owned and operated by Sprint; and 8




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
    
    various back office services provided by Sprint. Our relationship and agreements with Sprint are structured to provide us
with certain advantages such as avoiding the up-front costs of acquiring
spectrum in our territory and being able to offer high quality products as part
of a nationwide network. The Sprint agreements have an initial term of 20 years
with three 10-year renewals which can lengthen the contracts to a total term of
50 years. Our Sprint agreements will automatically renew for the first 10-year
renewal period unless we are in material default on our obligations under the
agreements. The Sprint agreements will automatically renew for two additional
10-year terms unless either we or Sprint provide the other party with two years
prior written notice to terminate the agreement. We have four major agreements with Sprint:  
    
    the management agreement;  
    
    the services agreement; and  
    
    two separate trademark and service mark license agreements. The Management Agreement Under our management agreement with Sprint, we have agreed to:  
    
    construct and manage a network in our territory in compliance with
Sprints PCS licenses and the terms of the management agreement;  
    
    distribute during the term of the management agreement Sprint PCS products and services;  
    
    use Sprints and our own distribution channels in our territory;  
    
    conduct advertising and promotion activities in our territory; and  
    
    manage that portion of Sprints subscriber base assigned to our territory. Exclusivity.We are designated as the only person or entity that can
manage or operate a PCS network for Sprint in our territory. Sprint is
prohibited from owning, operating, building or managing another wireless
mobility communications network in our territory while our management agreement
is in place and no event has occurred that would permit the agreement to
terminate. Our agreement does not limit the definition of a wireless mobility
communications network to a specific spectrum. Sprint is permitted under the
agreement to make national sales to companies in the covered territories and,
as required by the Federal Communications Commission (FCC), to permit resale
of the Sprint PCS products and services in the covered territory. Network build-out.The management agreement specifies the terms of the
Sprint affiliation, including the required network build-out plan. We agreed to
cover a specified percentage of the population at coverage levels ranging from
39% to 86% within each of the 21 markets which make up our territory by
specified dates. We have satisfied these network build-out requirements. We
have agreed to operate our PCS network, if technically feasible and
commercially reasonable, to provide for a seamless handoff of a call initiated
in our territory to a neighboring Sprint PCS network. If Sprint decides to
expand coverage within our territory, Sprint must provide us with written
notice of the proposed expansion. We have 90 days to determine whether we will
build out the proposed area. If we do not exercise this right, Sprint can build
out the territory or permit another third-party to do so. Any new area that
Sprint or a third-party builds out is removed from our territory. Products and services.The management agreement identifies the wireless
products and services that we can offer in our territory. We may offer
non-Sprint PCS products and services in our territory under limited
circumstances. We may not offer products and services that are confusingly
similar to current Sprint PCS products and services or to future Sprint
products and services if such products or services are introduced within a
certain 9




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period of time. We may cross-sell services such as internet access,
subscriber premises equipment and prepaid phone cards with Sprint and other
Sprint network partners. If we decide to resell such services of third parties,
we must give Sprint an opportunity to provide the services on the same terms
and conditions. We cannot offer wireless local loop services specifically
designed for the competitive local exchange market in areas where Sprint owns
the local exchange carrier without Sprints consent, unless we name the
Sprint-owned local exchange carrier as the exclusive distributor. We are required to participate in the Sprint sales programs for national
sales to subscribers, and to pay the expenses related to sales from national
accounts located in our territory. Long distance service.We must use Sprints long distance service which
we can buy at the best prices offered to comparably situated Sprint customers,
plus an additional administrative fee. Sprint has a right of last offer to
provide backhaul and transport services. Service pricing, roaming and fees.We must offer Sprint subscriber
pricing plans designated for regional or national offerings. We are permitted
to establish our own local price plans for Sprint PCS products and services
offered only in our markets, subject to Sprints approval. We are entitled to
receive fees weekly from Sprint equal to 92% of net billed revenue related to
customer activity less applicable write-offs, net of deposits applied. Sprint
determines the write-offs for any given time period. Outbound non-Sprint PCS
roaming billed to subscribers based in our markets, proceeds from the sales of
handsets and accessories, amounts collected with respect to taxes and
surcharges for enhanced 911, surcharges relating to WLNP, universal service
fund charges, and customer handset insurance are not considered billed
revenue. Billed revenue generally includes all other customer account activity
for Sprint PCS products and services in our markets, which include such
activities billed to, attributed to or otherwise reflected in customers
accounts. We are generally entitled to 100% of the proceeds from customers for
equipment and accessories sold or leased by us and to our proportional cost to
comply with enhanced 911 and WLNP, attributable to customers based in our
markets less applicable write-offs. We also are entitled to 100% of the
universal service funds from the Universal Service Administrative Company
associated with customers in our markets. Many Sprint PCS subscribers purchase
nationwide pricing plans that allow roaming anywhere on Sprint PCS and its
affiliates networks without incremental Sprint PCS roaming charges. However,
we earn Sprint PCS roaming revenue for every minute that a Sprint PCS
subscriber from outside our markets enters our markets and uses our network. We
earn revenue from Sprint based on a per minute rate when Sprints or other
Sprint affiliates subscribers travel on our portion of the Sprint PCS network.
Similarly, we pay the same rate for every minute our subscribers use the Sprint
PCS network outside our markets. The roaming rate onto a non-Sprint PCS
providers network is set under Sprint PCS third party roaming agreements. Under our agreement with Sprint, the reciprocal roaming rate exchanged for
customers who roam into the other partys or another Sprint affiliates network
was initially established at $0.20 per minute. In April 2001, we, along with
other Sprint affiliates, reached an agreement in principle with Sprint to
reduce this reciprocal roaming rate exchanged between Sprint and its
affiliates. The rate was reduced from the original $0.20 per minute of use to
$0.15 per minute of use beginning June 1, 2001, and to $0.12 per minute of use
beginning October 1, 2001. The rate was reduced to $0.10 per minute for 2002,
reduced to $0.058 per minute for 2003 and reduced to $0.041 from January 1
through July 31, 2004. As of August 1, 2004, the rate was increased to $0.058
per minute, pursuant to the September 2004 amendment to our management
agreement. Beginning on January 1, 2007, the reciprocal roaming rate will
change annually to equal 90% of Sprints retail yield from the prior year
subject to certain limitations. Sprint PCS retail yield is defined as Sprint
PCS average revenue per user for voice services divided by the average minutes
of use per user. In addition to the reciprocal per minute fee for the Sprint PCS roaming
discussed above, we also recognize roaming revenue and expense related to data
usage from PCS Vision services when wireless subscribers are using such
services outside of their home territory. We recognize revenue when a wireless
subscriber based outside of our markets uses PCS Vision data services on our
network and we recognize expense when our subscribers use such services on the
Sprint PCS network or network of another Sprint affiliate outside of our
markets. This roaming activity is settled on a per kilobit (KB) basis at a rate
that was $0.0014 per KB for 2003 and increased to $0.002 per KB from January 1
through July 31, 2004. In the September 2004 amendment to our management
agreement with Sprint, we agreed that the rate will be $0.002 per KB for August
2004 through December 31, 2006. Thereafter, the rate will be 90% of Sprints
retail yield for the previous year, subject to certain limitations. Sprints
retail yield for 10




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data services is defined as Sprints average revenue per user for data
services divided by the KB of use for data usage per subscriber. Advertising and promotions.Sprint is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including a portion
of certain costs of promotions or advertising done by third-party retailers in
our territory pursuant to cooperative advertising agreements with Sprint based
on per unit handset sales. Program requirements.Under our management agreement with Sprint, we must
comply with Sprints program requirements for technical standards, customer
service standards and national and regional distribution and national accounts
programs. Sprint can adjust the program requirements at its discretion, subject
to limitations, including those specified below which were included in the
September 2004 amendment to our management agreement. We can decline to
implement any non-capital program requirement change (as defined below) if
the change will:  
    
    cause our combined peak negative cash flow to be an amount greater
than 3% of our enterprise value (as defined below);  
    
    when combined with all other changes in the program requirements that
we agree to or were required to implement, within the prior 12 months,
cause our combined cumulative peak negative cash flow to be an amount
greater than 5% of our enterprise value;  
    
    cause a decrease in our forecasted five-year discounted cash flow of
more than 3% on a combined net present value basis; or  
    
    when combined with all other changes in the program requirements that
we agree to or were required to implement, within the prior 12 months,
cause a decrease in our forecasted five-year discounted cash flow of
more than 5% on a combined net present value basis. For purposes of determining whether a non-capital program requirement
change will adversely impact our operations, our enterprise value is defined
as the book value of our outstanding debt and preferred stock, in addition to
the fair market value of our publicly-traded equity (excluding preferred
stock), less cash. A non-capital program requirement change means a program requirement
change that does not require us to make any capital expenditures in excess of
5% of our capital budget as approved by our board of directors for the fiscal
year in which the program requirement change is requested. These economic
hurdles do not apply to changes to the trademark usage guidelines, the
marketing communications guidelines and the Sprint national or regional
distribution program requirements. We may also decline to implement any change in any capital program
requirement (as defined below), if the change will:  
    
    have a negative net present value applying a five-year discounted cash flow model;  
    
    cause our combined peak negative cash flow to be an amount greater than 3% of our enterprise value; or  
    
    when combined with all other changes in the program requirements that
we agree to or were required to implement, within the prior 12 months,
cause our combined cumulative peak negative cash flow to be an amount
greater than 5% of our enterprise value. A capital program requirement change means a program requirement change
that requires us to make a capital expenditure that is greater than 5% of our
capital budget as approved by our board of directors for the fiscal year in
which the program requirement change is requested. The economic hurdles do not
apply to changes to the trademark usage guidelines, the marketing
communications guidelines and the Sprint national or regional distribution
program requirements. However, we must implement a capital program
requirement change if it is related to network capacity expansion due to a
change in a service plan (if the cost will not exceed the economic hurdles for
non- 11




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capital program requirement changes) or if the change is necessary to
comply with required network performance standards. Our management agreement sets forth a dispute resolution process if Sprint
believes that we do not have the right to decline to implement a change in the
program requirements. In any event, we must implement a change in the program
requirements if Sprint agrees to compensate us for amounts in excess of the
criteria set forth above, subject to certain limitations. Notwithstanding the above, we have agreed to implement a change in program
requirements if the adjustment relates to a pricing plan or roaming program and
Sprint reasonably determines that the change must be implemented on an
immediate or expedited basis to respond to competitive market forces. If the
change would have exceeded one of the criteria set forth above, our management
agreement provides for appropriate compensation from Sprint to the extent such
criteria is exceeded. Resellers.We are now required, pursuant to the September 2004 amendment
to our management agreement, to participate in all resale arrangements that
were entered into by Sprint prior to April 1, 2004. The roaming and data
services rates for these reseller arrangements are set through December 31,
2006. Thereafter, the rates may vary depending on Sprints retail yield. In addition, we are required to participate in all new third party resale
arrangements entered into by Sprint between April 1, 2004 and December 31,
2006, and all existing resale arrangements that are renewed during this period,
subject to certain minimum pricing requirements. The roaming rate and rate for
data services will be the amount of fees collected by Sprint from the resellers
as payment for the resellers use of the service area network. Non-competition.We may not offer Sprint PCS products and services
outside our territory without the prior written approval of Sprint. Within our
territory, we may offer, market or promote telecommunications products and
services only under the Sprint brands, our own brands, brands of related
parties or other products and services approved under the management agreement,
except that no brand of a significant competitor of Sprint or its related
parties may be used for those products and services. To the extent we have or
obtain licenses to provide PCS services outside our territory, we may not use
the spectrum to offer Sprint PCS products and services without prior written
consent from Sprint. Inability to use non-Sprint brand.We may not market, promote, advertise,
distribute, lease or sell any of the Sprint PCS products and services on a
non-branded, private label basis or under any brand, trademark or trade name
other than the Sprint brand, except for sales to resellers approved by Sprint
or required by law or as otherwise permitted under the trademark and service
mark license agreements. Rights of first refusal.Sprint has certain rights of first refusal to
buy our assets upon a proposed sale of all or substantially all of our assets. Termination of management agreement.The management agreement can be
terminated as a result of:  
    
    termination of Sprints PCS licenses in our territory;  
    
    uncured failure by a party to pay any amount due under the management
agreement or any other agreement between the parties or their respective
related parties;  
    
    any other uncured breach under the management agreement;  
    
    bankruptcy of a party to the management agreement;  
    
    subject to the limitations in the management agreement, such
management agreement not complying with any applicable law in any
material respect; or  
    
    the termination of either of the related trademark and service mark
license agreements. 12




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The termination or non-renewal of the management agreement triggers
certain of our rights and those of Sprint. If we have the right to terminate our management agreement because of an
event of termination caused by Sprint, generally we may:  
    
    require Sprint to purchase all of our operating assets used in
connection with our PCS networks for an amount equal to at least 88% of
our entire business value as described below, unless  
    
    Sprint becomes the licensee for 20 MHz of spectrum in our
territory and has licensed at least 20 MHz of spectrum to us for use
in our territory, or  
    
    we have acquired or have the right to use any other spectrum, in
which case the purchase price will be an amount equal to 80% of our
entire business value;  
    
    if Sprint is the licensee for 20 MHz or more of the spectrum on the
date we terminate the management agreement, require Sprint to sell to
us, subject to governmental approval, up to 10 MHz of licensed spectrum
for an amount equal to the greater of:  
    
    the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint, or  
    
    9% of our entire business value; or  
    
    sue Sprint for damages or submit the matter to arbitration and not terminate the management agreement. If Sprint has the right to terminate a management agreement because of an
event of termination caused by us, generally Sprint may:  
    
    require us to sell our operating assets to Sprint for an amount equal
to 72% of our entire business value;  
    
    require us to purchase, subject to governmental approval, the
licensed spectrum in our territory for an amount equal to the greater
of:  
    
    the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint, or  
    
    10% of our entire business value;  
    
    take any action as Sprint deems necessary to cure our breach of our
management agreement, including assuming responsibility for, and
operating, the related PCS network; or  
    
    sue us for damages or submit the matter to arbitration and not
terminate the management agreement. Non-renewal.If Sprint gives us timely notice that it does not intend to
renew our management agreement, we may:  
    
    require Sprint to purchase all of our operating assets used in
connection with the PCS network for an amount equal to at least 80% of
our entire business value; or  
    
    if Sprint is the licensee for 20 MHz or more of the spectrum on the
date we terminate the management agreement, require Sprint to assign to
us, subject to governmental approval, up to 10 MHz of licensed spectrum
for an amount equal to the greater of:  
    
    the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint, or  
    
    10% of our entire business value. 13




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If we give Sprint timely notice of non-renewal of the management
agreement, or we and Sprint both give notice of non-renewal, or the management
agreement can be terminated for failure to comply with legal requirements or
regulatory considerations, Sprint may:  
    
    purchase all of our operating assets for an amount equal to 80% of
our entire business value; or  
    
    require us to purchase, subject to governmental approval, the
licensed spectrum for an amount equal to the greater of:  
    
    the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint, or  
    
    10% of our entire business value. Determination of Entire Business Value.If the entire business value is
to be determined, we and Sprint will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the entire business value on a going concern basis using the
following guidelines:  
    
    the entire business value is based on the price a willing buyer would
pay a willing seller for the entire on-going business;  
    
    then-current customary means of valuing a wireless telecommunications business will be used;  
    
    the business is conducted under the Sprint brands and the related Sprint agreements;  
    
    that we own the spectrum and frequencies presently owned by Sprint
and subject to the related Sprint agreements; and  
    
    the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and such businesses
will not be included in the sale. Insurance.We are required to obtain and maintain with financially
reputable insurers, who are licensed to do business in all jurisdictions where
any work is performed under the management agreement and who are reasonably
acceptable to Sprint, workers compensation insurance, commercial general
liability insurance, business automobile insurance, umbrella excess liability
insurance and all risk property insurance. Indemnification.We have agreed to indemnify Sprint and its directors,
employees and agents and related parties of Sprint and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in our management agreement or any other
agreement between us or either of our related parties and Sprint, our ownership
of the operating assets or the actions or the failure to act of anyone employed
or hired by us in the performance of any work under the management agreement,
except we will not indemnify Sprint for any claims arising solely from the
negligence or willful misconduct of Sprint. Sprint has agreed to indemnify us
and our directors, employees and agents against all claims against any of the
foregoing arising from Sprints violation of any law and from Sprints breach
of any representation, warranty or covenant contained in the management
agreement or any other agreement between Sprint and its related parties and us
or our related parties, except Sprint will not indemnify us for any claims
arising solely from our negligence or willful misconduct. Most favored nation clause.We generally have the right to amend our
management agreement or services agreement to obtain the most favorable terms
provided under a management agreement or services agreement between Sprint and
another Sprint PCS affiliate of similar size (defined as covering at least 3.0
million people) if, prior to December 31, 2006, Sprint amends the terms of any
of those agreements of another Sprint PCS affiliate of similar size in a manner
that are more favorable than the terms of our agreements. This right is only
effective, however, if we agree to accept all of the terms and conditions set
forth in the other agreements agreed to after August 1, 2004 and does not apply
to (1) those agreements which are amended with such Sprint PCS affiliate solely
because the affiliate owns the spectrum on which its network operates (unless
such Sprint PCS affiliate acquired the spectrum from Sprint after August 1,
2004), (2) the amendments which are compelled by a law or regulation 14




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inapplicable to us, (3) the amendments are due solely to a change in a
build out plan or (4) the amendments which relate to unique terms or
conditions. The Services Agreement Pursuant to the September 2004 amendment to our services agreement, Sprint
consolidated support services relating to billing, customer care, collections,
network operations control center monitoring, national platform
interconnectivity, voice mail, directory assistance, operator services and
roaming clearinghouse services into one back office service referred to as
Sprint CCPU service, all of which support services we had been purchasing prior
to the consolidation. We have agreed to continue to purchase the Sprint CCPU
service from Sprint for the period August 2004 through December 2006 and pay a
monthly rate of $7.25 per subscriber through December 31, 2004, $7.00 from
January 1, 2005 through December 31, 2005, and $6.75 from January 1, 2006
through December 31, 2006. Beginning in 2007, the monthly rate for the next
three years for Sprint CCPU service will be based on the amount necessary to
recover Sprints reasonable costs for providing the services. If we and Sprint
cannot agree to a new rate for any future three-year period beyond 2006, we
have the option to continue to purchase the Sprint CCPU services and have an
arbitrator determine the new rate, self-provide the services or procure those
services from another vendor, subject to certain rights and procedures relating
to our ability to transition only customer care and collection services
beginning in 2008. Sprint also consolidated services relating to subscriber
activation, credit verification, handset logistics and handset carrying and
obsolescence costs into a category referred to as Sprint CPGA service, all of
which services and/or costs, prior to the consolidation, we had been purchasing
in the case of the services or bearing in the case of the costs. We have agreed
to continue to purchase the Sprint CPGA service from Sprint for the period
August 2004 through December 2006 at $23.00 multiplied by the average number of
newly activated customers in the service area. Beginning in 2007, the rate for
the next three years for Sprint CPGA service will be based on the amount
necessary to recover Sprints reasonable costs for providing the services. If
we and Sprint cannot agree to a new rate for any future three-year period
beyond 2006, we have the option to continue to purchase the Sprint CPGA service
and have an arbitrator determine the new rate, self-provide the services or
procure those services from another vendor. Under the terms of the services agreement, we may elect to outsource all
of our customer care services during the period beginning on January 1, 2006
and ending on June 30, 2006. If we elect to outsource these services, we would
have to pay Sprint a fee and incur other costs, and we would have to outsource
the services to a customer care center whose facility and personnel are managed
by us, but the center would have to use Sprints systems and processes. After
the transition, the fees for Sprint CCPU and Sprint CPGA services will be the
then-current cost to Sprint to provide the services, except that CPGA services
will be $15.00, multiplied by the number of newly activated customers through
December 31, 2006. We on the one hand and Sprint on the other hand have each agreed to
indemnify each other as well as officers, directors, employees and certain
other related parties and their officers, directors and employees for
violations of law or the services agreement except for any liabilities
resulting from the indemnitees negligence or willful misconduct. The services
agreement also provides that no party to the agreement will be liable to the
other party for special, indirect, incidental, exemplary, consequential or
punitive damages, or loss of profits arising from the relationship of the
parties or the conduct of business under, or breach of, the services agreement
except as may otherwise be required by the indemnification provisions. The Trademark and Service Mark License Agreements We have non-transferable, royalty-free licenses to use the following
trademarks and service marks of Sprint: Sprint, together with the related
Diamond logo, Sprint PCS and Sprint Personal Communications Services. In
addition, we have licenses to use the following trademarks and service marks of
Sprint: The Clear Alternative to Cellular, Experience the Clear Alternative
to Cellular Today, and such other marks as may be adopted in the future. We
believe that the Sprint brand names and symbols enjoy a very high degree of
awareness, providing us an immediate benefit in the market place. Our use of
the licensed marks is subject to our adherence to quality standards determined
by Sprint and use of the licensed marks in a manner which would not reflect
adversely on the image of quality symbolized by the licensed marks. We have
agreed to promptly notify Sprint of any infringement of any of the licensed
marks within our territory of which we become aware and to provide assistance
to Sprint in connection with Sprints enforcement of its respective rights. We
have agreed with Sprint to indemnify each other for losses 15




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incurred in connection with a material breach of the trademark license
agreements. In addition, we have agreed to indemnify Sprint from any loss
suffered by reason of our use of the licensed marks or marketing, promotion,
advertisement, distribution, lease or sale of any Sprint PCS products and
services other than losses arising solely out of our use of the licensed marks
in compliance with certain guidelines. Sprint can terminate the trademark and service mark license agreement if
we file for bankruptcy, materially breach the agreements or our management
agreement is terminated. We can terminate our trademark and service mark
license agreements upon Sprints abandonment of the licensed marks or if Sprint
files for bankruptcy, or the management agreement is terminated. Employees and Labor Relations As of September 30, 2004, we employed approximately 396 full-time
employees and 73 part-time employees. None of our employees are represented by
a labor union. We believe that we have good relations with our employees. Competition Competition in the wireless communications industry is intense. We operate
in highly competitive markets in the southeast. We compete with national and
regional cellular, PCS and other wireless providers. We believe that our
primary competition is with Verizon Wireless, Nextel, Cingular Wireless,
T-Mobile, Triton PCS, Alltel and US Cellular. These wireless service providers
offer services that are generally comparable to our PCS service. Most of our
competitors have financial resources and subscriber bases greater than ours. Many of our competitors have access to more licensed spectrum than the 10
MHz licensed to Sprint in our territory. In addition, certain of our
competitors may be able to offer coverage in areas not served by our PCS
network, or, because of their calling volumes or their affiliations with, or
ownership of, wireless providers, may be able to offer roaming rates that are
lower than those we offer. Wireless providers compete with us in providing some
or all of the services available through the Sprint PCS network and may provide
services that we do not. Our ability to compete effectively with these other providers will depend
on a number of factors, including:  
    
    the continued success of CDMA technology in providing competitive call clarity and quality;  
    
    our ability to provide quality network service in a limited capital environment;  
    
    the competitiveness of the Sprint brand;  
    
    the competitiveness of Sprints pricing plans;  
    
    our spending on marketing and promotions compared to our competitors;  
    
    liquidity and capital resources;  
    
    our ability to upgrade our network to accommodate new technologies;  
    
    the continued expansion and improvement of the Sprint PCS nationwide network;  
    
    the quality of our customer care experience; and  
    
    our selection of handset options. Our ability to compete successfully will also depend, in part, on the
ability of Sprint and us to anticipate and respond to various competitive
factors affecting the industry, including:  
    
    new services that may be introduced; 16




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
    
    changes in consumer preferences;  
    
    demographic trends;  
    
    economic conditions; and  
    
    discount pricing strategies by competitors. Network Operations The effective operation of our portions of the Sprint PCS network
requires:  
    
    public switched and long distance interconnection;  
    
    the implementation of roaming arrangements; and  
    
    the development of network monitoring systems. We utilize Sprints Network Operations Control Center for around-the-clock
monitoring of our network base stations and switches. Sprint developed the initial plan for the build-out of our Sprint PCS
network. We have further enhanced this plan to provide enhanced coverage for
our territory. Pursuant to our network operations strategy, we have provided
PCS service to the largest communities in our markets and have covered
interstates and primary roads connecting these communities to each other and to
the adjacent major markets owned and operated by Sprint. As of September 30, 2004, our network consisted of four switches located
at two switch centers and approximately 800 tower sites. A switching center
serves several purposes, including routing calls, managing call handoff,
managing access to the public telephone network and providing access to voice
mail. 99% of our operating cell sites are co-located. Co-location describes the
strategy of leasing available space on a tower or cell site owned by another
company rather than building and owning the tower or cell site directly. Our networks connect to the public telephone network through local
exchange carriers, which facilitate the origination and termination of traffic
between our networks and both local exchange and long distance carriers.
Through our management agreement with Sprint, we have the benefit of
Sprint-negotiated interconnection agreements with local exchange carriers. Under our management agreement with Sprint, we are required to use Sprint
for long distance services and Sprint provides us with preferred rates for
these services. Backhaul services are provided by other third-party vendors.
These services carry traffic from our cell sites and local points of
interconnection to our switching facilities. Technology General.In 1993, the FCC allocated the 1900 MHz frequency block of the
radio spectrum for wireless PCS Systems. PCS networks operate at a higher
frequency and employ more advanced digital technology than traditional analog
cellular telephone service. The enhanced capacity of digital systems, along
with enhancements in digital protocols, allows digital-based wireless
technologies, whether using PCS or cellular frequencies, to offer new and
enhanced services, including greater call privacy and more robust data
transmission, such as facsimile, electronic mail and connecting notebook
computers with computer/data networks. However, because radio signals in the
1900 MHz band do not travel as far or penetrate as much as signals in the 800
MHz cellular band, it generally takes a greater number of PCS transmitting
sites to achieve the same coverage as a cellular system. Presently, wireless PCS systems operate under one of three principal air
interface protocols: CDMA, time division multiple access (TDMA) or global
system for mobile communications (GSM). Wireless PCS operators 17




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in the United States now have dual-mode or tri-mode handsets available so
that their customers can operate on different networks that employ different
protocols. CDMA Technology.Sprints network and Sprints network partners networks
all use CDMA technology. CDMA technology is fundamental to accomplishing our
business objective of providing high volume, high quality airtime at a low
cost. We believe that CDMA provides important system performance benefits. CDMA
systems offer more powerful error correction, less susceptibility to fading and
reduced interference than analog systems. Using enhanced voice coding
techniques, CDMA systems achieve voice quality that is comparable to that of
the typical wireline telephone. This CDMA vocoder technology also employs
adaptive equalization, which filters out background noise more effectively than
existing wireline, analog cellular or other digital PCS phones. CDMA technology
also allows a greater number of calls within one allocated frequency and reuses
the entire frequency spectrum in each cell. In addition, CDMA technology
combines a coding scheme with a low power signal to enhance security and
privacy. As a subscriber travels from one cell site to another cell site, the
call must be handed off to the second cell site. CDMA systems transfer calls
throughout the network using a technique referred to as soft hand-off, which
connects a mobile subscribers call with a new cell site while maintaining a
connection with the cell site currently in use. CDMA offers a cost effective migration to the next generation of wireless
services. CDMA standards and products currently in place will allow existing
CDMA networks to be upgraded in a cost efficient manner to the next generation
of wireless technology. We have 1xRTT capabilities across our entire network.
This technology offers data speeds of up to 144 kilobits per second, voice
capacity improvements of over 50% and improved battery life in the handset.
Further standards are being developed for CDMA that will offer data speeds in
excess of 2,000 kilobits per second and additional improvements in voice
capacity. Competing Digital Technologies.TDMA builds on frequency division
multiple access (FDMA). TDMA divides conversations by timeslots and frequency
channels, fitting three digital conversations into a single FDMA channel. Each
user of a TDMA channel takes turn transmitting and receiving in a round-robin
fashion. A single user uses the channel in short bursts; the user then
momentarily relinquishes the channel to allow other users their turn. GSM uses a modified version of TDMA. Like TDMA, GSM divides conversations
by timeslots and frequency channels. However, calls shift between channels and
timeslots to maximize the GSM cellular systems usage. Integrated Dispatch Enhanced Network (iDEN), also a modified version of
TDMA, is a proprietary Motorola technology. Motorola is the sole manufacturer
of iDEN cellular telephones and iDEN infrastructure equipment, and Nextel is
the only competitor using this technology. The iDEN technology has been
developed in a manner that permits various push-to-talk and group calling
features. Of our competitors, Triton and Cingular use TDMA, adding a GSM overlay. In
our territory, Cingular is primarily using GSM. T-Mobile uses GSM, and Verizon,
Alltel and US Cellular use CDMA technology. Compared to these technologies, CDMA offers the following advantages:  
    
    greater capacity by accommodating more subscribers per MHz of
bandwidth, which allows a greater number of calls within one allocated
frequency;  
    
    enhanced security and privacy; and  
    
    soft hand-off, which greatly reduces dropped calls and interruptions during the hand-off process. However, a disadvantage of CDMA is channel pollution. Channel pollution
occurs when signals from too many cellular sites are present at a subscribers
phone, but none are dominant. This causes audio quality to decline rapidly.
Channel pollution occurs frequently in densely populated urban environments. We did not choose CDMA technology as our primary technology based on these
advantages and disadvantages. Rather, it is the technology used by Sprint. 18




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Research and Development We currently do not conduct our own research and development. Instead we
leverage Sprints and our vendors extensive research and development effort,
which provides us with access to new technological products and enhanced
service features without significant research and development expenditures of
our own. We have been provided access to key developments produced by Sprint for
use in our network. We believe that new features and services will be developed
for the Sprint PCS network to take advantage of CDMA technology. We may be
required to incur additional expenses in modifying our network to provide these
additional features and services. Intellectual Property Other than our corporate names, we do not own any intellectual property
that is material to our business. Sprint, the Sprint diamond design logo,
Sprint PCS, Sprint Personal Communication Services, The Clear Alternative
to Cellular and Experience the Clear Alternative to Cellular Today are
service marks registered with the United States Patent and Trademark Office and
owned by Sprint or its affiliates. Pursuant to our management agreement with
Sprint, we have the right to use, royalty-free, the Sprint and Sprint PCS brand
names and the Sprint diamond design logo and certain other service marks of
Sprint in connection with marketing, offering and providing licensed services
to end-users and resellers, solely within our territory. Except in certain instances, Sprint has agreed not to grant to any other
person a right or license to provide or resell, or act as agent for any person
offering, licensed services under the licensed marks in our territory, except
as to Sprints marketing to national accounts and the limited right of
resellers of Sprint to inform their subscribers of handset operation on the
Sprint PCS network. In all other instances, Sprint has reserved for itself and
its network partners the right to use the licensed marks in providing its
services, subject to its exclusivity obligations described above, whether
within or without our territories. Our agreements with Sprint contain numerous restrictions with respect to
the use and modification of any of the licensed marks. Regulation of the Wireless Telecommunications Industry Federal Communications Commission Regulation.The FCC regulates the
licensing, construction, operation, acquisition and interconnection
arrangements of wireless telecommunications systems in the United States.
Specifically, we are subject to radio license regulation under Title III of the
Communications Act, as amended, as well as common carrier regulation under
Title II of the Communications Act, as amended. In addition, our operations are
subject to regulation as commercial mobile radio services, commonly referred to
as CMRS, and to service-specific personal communications service regulations. The FCC has promulgated, and is in the process of promulgating and
revising, a series of rules, regulations and policies that affect our
operations. Penalties for violating the FCCs rules and policies can range from
monetary forfeitures to license revocation or non-renewal of licenses. The FCC
Title II regulations applicable to our wireless operations include, among other
things:  
    
    requirements and standards, discussed further below, designed to
protect the public health (e.g.,environmental standards), public safety
(e.g., emergency calling) and public welfare (e.g., access to
communications facilities);  
    
    requirements and standards, discussed further below, for the
interconnection of PCS networks with other wireless and wireline
carriers; requirements to provide service upon reasonable request and
prohibitions on unjust or unreasonable discrimination by carriers
between similarly situated subscribers and the charging of unreasonable
or unjust rates; and  
    
    requirements to pay access charges, universal service funding (as
discussed below), and other regulatory and non-regulatory fees and
charges. 19




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We do not hold any radio licenses, but rather operate using spectrum
licensed to Sprint under the Sprint management agreements. Nonetheless, we are
subject to, or impacted by, a number of additional regulations and requirements
under Title III of the Communications Act, as amended. These requirements
include, among other things:  
    
    requirements in most cases to obtain prior consent before the
assignment and/or transfer of control of a PCS license, as discussed
below;  
    
    limitations on the extent of non-U.S. ownership of radio licenses and
the qualifications of holders of radio licenses; and  
    
    requirements for compliance of antenna sites with the National
Environmental Policy Act of 1969, including restrictions on emissions of
radio frequency radiation, as well as requirements on the marking and
lighting of antenna structures, and related notifications to the Federal
Aviation Administration, for certain antenna sites. Furthermore, our operations are also subject to CMRS and service specific
regulation by the FCC. CMRS regulations include, among other things:  
    
    possible limitations on having attributable interests (usually 20% or
greater) in broadband PCS, cellular and specialized mobile radio
service, or SMR, spectrum totaling too great an amount in a given
market. Although a previously established 55 MHz spectrum cap per market
has now expired, the FCC continues to consider competitive factors when
licensees seek to aggregate large amounts of spectrum that exceed these
thresholds in a certain geographical area;  
    
    requirements for carriers to provide access to emergency 911
(E-911) services from mobile handsets, including handsets of users who
are not subscribers of such carrier, and for the network to provide
enhanced location and other mobile identification information to public
safety answering points, as discussed below;  
    
    requirements to comply with CALEA, including the dedication of
capacity and provision of access points for law enforcement agencies to
facilitate wiretaps and intercepts with valid authority; and  
    
    requirements to provide local number portability, as discussed
further below, including the ability to deliver calls from the companys
networks to ported numbers anywhere in the country. The FCC has divided the 120 MHz of spectrum allocated to broadband PCS
into six frequency blocks, A through F. Through Sprint, we operate under blocks
B, D and E. PCS specific regulations that affect our operations include, among
other things:  
    
    presumptions regarding the grant or denial of PCS license renewals, as discussed below;  
    
    rules governing the height, power and physical emissions characteristics of PCS transmitters;  
    
    rules, discussed further below, requiring service providers to meet
specific coverage benchmarks by the end of the fifth year from being
licensed and, in some cases, by the end of the license term;  
    
    rules to allow broadband PCS licensees to partition their market
areas and/or to disaggregate their assigned spectrum and to transfer
partial market areas or spectrum assignments to eligible third parties;
and  
    
    rules requiring PCS providers to relocate, or otherwise compensate,
incumbent microwave users (or share in the relocation costs, if the
microwave user has already relocated) in the band if the deployment of
PCS would interfere with the microwave users system. Interconnection.The FCC has the authority to order interconnection
between CMRS providers (which includes us) and any other common carrier. The
FCC has ordered local exchange carriers to provide reciprocal compensation to
CMRS providers for the termination of traffic. Under these new rules, we
benefit from interconnection 20




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agreements negotiated by Sprint for our network with BellSouth and Verizon
and with several smaller independent local exchange carriers. Interconnection
agreements are negotiated on a statewide basis. If an agreement cannot be
reached, parties to interconnection negotiations can submit outstanding
disputes to state authorities for arbitration. Negotiated interconnection
agreements are subject to state approval. The FCC has underway a rulemaking proceeding in which the agency is
considering making major changes to the interconnection compensation scheme
that governs the telecommunications industry. There are also industry
discussions underway which may result in a proposed interconnection
compensation scheme which is materially different from the current reciprocal
compensation system that is in place. Interconnection costs represent a
significant expense item for the Company and any significant changes in the
inter-carrier compensation scheme may have a material impact on the Company.
The Company is unable to determine at this time whether any such changes would
be beneficial to or detrimental to the Company financially. Universal Service Requirements.The FCC and the states are required to
establish a universal service program to ensure that affordable, quality
telecommunications services are available to all residents of the United States
of America. Sprint PCS is required to contribute to the federal universal
service program as well as existing state programs. The FCC has determined that
the contribution to the federal universal service program is a variable
percentage of interstate end-user telecommunications revenues. Although many
states are likely to adopt a similar assessment methodology for intrastate
revenues, the states are free to calculate telecommunications service provider
contributions in any manner they choose as long as the process is not
inconsistent with the FCCs rules. At the present time it is not possible to
predict the extent of our total federal and state universal service assessments
or our ability to recover costs associated with the universal service fund. Transfers, Assignments and Changes of Control of PCS Licenses.The FCC
must give prior approval to the assignment of, or transfers involving,
substantial changes in ownership or control of a PCS license. Non-controlling
interests in an entity that holds a PCS license or operates PCS networks
generally may be bought or sold without prior FCC approval. In addition, the
FCC requires only post-consummation notification of certain pro forma
assignments or transfers of control. An integral element of these rules is that the FCC also requires licensees
to maintain effective working control over their licenses. The Sprint PCS
agreements reflect an alliance that the parties believe meets the FCC
requirements for licensee control of licensed spectrum. If the FCC were to
determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS under the terms of
our Sprint PCS agreements to use our best efforts to modify the agreements as
necessary to cause the agreements to comply with applicable law and to preserve
to the extent possible the economic arrangements set forth in the agreements.
If the agreements cannot be modified, the agreements may be terminated pursuant
to their terms. The FCC could also impose sanctions on the Company. Enhanced 911.In June 1996, the FCC adopted rules requiring broadband PCS
and other CMRS providers to implement Phase I enhanced E-911 calling
capabilities by October 1, 2001 to requesting public safety answering points.
In addition, the FCC required implementation of Phase II enhanced 911
capabilities by October 1, 2002, including the ability to provide automatic
location identification (or ALI) of subscribers by latitude and longitude
with a specified accuracy. Sprint PCS has obtained waivers of the relevant ALI
enhanced 911 requirements based on a modified deployment plan, which includes a
number of interim benchmarks and other conditions, and would provide for
completing Phase II enhanced 911 deployment by 2005. Communications Assistance for Law Enforcement Act (CALEA).CALEA was
enacted in 1994 to preserve electronic surveillance capabilities by law
enforcement officials in the face of rapidly changing telecommunications
technology. CALEA requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. Following adoption of
interim standards and a lengthy rulemaking proceeding, including an appeal and
remand proceeding, as of June 30, 2002, all carriers were required to be in
compliance with the CALEA requirements. We are currently in compliance with the
CALEA requirements. Wireless Local Number Portability.Since November 24, 2003, all covered
CMRS providers, including us, are required to allow customers in the 100
largest metropolitan areas to retain their existing telephone numbers when 21




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switching from one telecommunications carrier to another. These rules are
generally referred to wireless local number portability (WLNP). As of May 24,
2004, FCC regulations require that such CMRS providers must implement WLNP
outside the 100 largest metropolitan areas in the United States as well. Thus
far, the WLNP mandate has not imposed increased operating costs on CMRS
providers, including us, and has not resulted in higher subscriber churn rates
and subscriber acquisition and retention costs. In November 2003, the FCC issued an Order establishing certain wireline
and wireless number porting obligations. The Order is currently under review by
the US Court of Appeals for the District of Columbia Circuit. In addition, in
September 2004, the FCC issued a second rulemaking proceeding which proposes to
reduce the time interval for number porting. Reply comments for this proceeding
are due in December 2004. These proceedings, the outcomes of which cannot be
determined at this time, may have a material impact on the porting obligations
to which the Company is subject. Number Pooling.The FCC regulates the assignment and use of telephone
numbers by wireless and other telecommunications carriers to preserve numbering
resources. Since November 26, 2000, the FCC has required CMRS providers in the
top 100 markets to be capable of sharing blocks of 10,000 numbers among
themselves in subsets of 1,000 numbers (1000s-block number pooling). In
addition, all CMRS carriers, including those operating outside the top 100
markets, must be able to support roaming calls on their network placed by users
with pooled numbers. Wireless carriers must also maintain detailed records of
the numbers they have used, subject to audit. The pooling requirements may
impose additional costs and increase operating expenses on us and limit our
access to numbering resources. Telecommunications Relay Services (TRS).Federal law requires wireless
service providers to take steps to enable the hearing impaired and other
disabled persons to have reasonable access to wireless services. The FCC has
adopted rules and regulations implementing this requirement to which the
Company is subject, and requires the Company to pay a regulatory assessment to
support TRS for the disabled. The Company is in compliance with these
requirements. Consumer Privacy.The Company is subject to various federal and state
laws that are intended to protect the privacy of end-users who subscribe to the
Companys services. For example, the FCC has regulations that place certain
restrictions on the permissible uses that the Company can make of
customer-specific information (known as Customer Proprietary Network
Information or CPNI) received from subscribers. In addition, the FCC is
considering adopting restrictions on the extent to which wireless data
customers will be subjected to receiving unsolicited junk e-mail or spam. One
such restriction, which became effective October 18, 2004, is the prohibition
of sending commercial messages to any address referencing an internet domain
name associated with wireless subscriber messaging services and the requirement
that all CMRS providers must submit to the FCC a list of their internet domain
names that are associated with wireless subscriber messaging services.
Complying with these requirements may impose costs on the Company or force the
Company to alter the way it provides or promotes its services. Roaming and Resale.The Company must comply with various federal
regulations which govern the provision of roaming services and the resale of
the Companys products and services. These regulations change from time to
time, and the Company may be required to change its policies, practices or
operations to comply with any such modifications. Microwave Cost Sharing.PCS licensees have an obligation to operate on an
interference-free basis with other area licensees, including incumbent
microwave service providers who previously occupied portions of the PCS
spectrum. In some instances, PCS licensees are obligated to share the costs of
relocating microwave users to alternate bands. For the most part, these
microwave relocation costs fall on Sprint as the spectrum licensee. However, as
the operator, the Company can be obligated to implement the microwave
relocation plan. Spectrum Auctions.The Communications Act and the FCC rules generally
require that broadband PCS spectrum be assigned to carriers through an auction
or competitive bidding process. In some instances, bidders which qualify as
small or very small businesses, as rural telephone companies, or as being
controlled by Native Americans (so-called Designated Entities), receive
benefits or preferences in these spectrum auctions for which Sprint and the 22




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Company would not qualify. The use of spectrum auctions to assign
licenses, and the manner in which the auctions are structured to benefit
Designated Entities may deprive Sprint or the Company of needed spectrum. PCS License Renewal.PCS licensees can renew their licenses for
additional 10-year terms. PCS renewal applications are not subject to auctions.
However, under the FCCs rules, third parties may oppose renewal applications
and/or file competing applications. If one or more competing applications are
filed, a renewal application will be subject to a comparative renewal hearing.
The FCCs rules afford PCS renewal applicants involved in comparative renewal
hearings with a renewal expectancy. The renewal expectancy is the most
important comparative factor in a comparative renewal hearing and is applicable
if the PCS renewal applicant has:  
    
    provided substantial service during its license term; and  
    
    substantially complied with all applicable laws and FCC rules and policies. The FCCs rules define substantial service in this context as service
that is sound, favorable and substantially above the level of mediocre service
that might minimally warrant renewal. Build-Out Conditions of PCS Licenses.All PCS licenses are granted for
10-year terms conditioned upon timely compliance with the FCCs build-out
requirements. Pursuant to the FCCs build-out requirements, all 30 MHz
broadband PCS licensees must construct facilities that offer coverage to
one-third of the population within the assigned market area within five years
and to two-thirds of the population within 10 years. All 10 MHz broadband PCS
licensees must construct facilities that offer coverage to at least one-quarter
of the population within five years or make a showing of substantial service
within that five year period. Rule violations could result in license
cancellation or revocation. Other Federal Regulations.Wireless systems, which we use in the
provision of services, must comply with certain FCC and Federal Aviation
Administration regulations regarding the siting, marking, lighting and
construction of transmitter towers and antennas. The FCC also requires that
aggregate radio wave emissions from every site location meet certain standards.
Although we believe that our existing network meets these standards, a site
audit may reveal the need to reduce or modify emissions at one or more sites.
This would increase our costs and could have a material adverse affect on our
operations. In addition, these regulations will also affect site selection for
new network build-outs and may increase the costs of improving our network. The
increased costs and delays from these regulations may have a material adverse
affect on our operations. In addition, the FCCs decision to license a proposed
tower may be subject to environmental review pursuant to the National
Environmental Policy Act of 1969, or NEPA, which requires federal agencies to
evaluate the environmental impacts of their decisions under certain
circumstances. FCC regulations implementing NEPA place responsibility on each
applicant to investigate any potential environmental effects, including health
effects relating to radio frequency emissions, of a proposed operation and to
disclose any significant effects on the environment to the agency prior to
commencing construction. In the event that the FCC determines that a proposed
tower would have a significant environmental impact, the FCC would require
preparation of an environmental impact statement. This process could
significantly delay or prevent the registration or construction of a particular
tower or make tower construction more costly. In certain jurisdictions, local
laws or regulations may impose similar requirements. Wireless Facilities Siting.States and localities are not permitted to
regulate the placement of wireless facilities so as to prohibit the provision
of wireless services or to discriminate among providers of such services. In
addition, as long as a wireless system complies with the FCCs rules, states
and localities are prohibited from using radio frequency health effects as a
basis to regulate the placement, construction or operation of wireless
facilities. State and localities are, however, permitted to engage in other
forms of regulation, including zoning regulation, that impacts the Companys
ability to select and modify sites. The FCC is considering numerous requests
for preemption of local actions affecting wireless facilities siting. State Regulation of Wireless Service.Section 332 of the Communications
Act preempts states from regulating the rates and market entry of CMRS
providers. However, states may petition the FCC to regulate such providers and
the FCC may grant such petition if the state demonstrates that: 23




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
    
    market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or  
    
    CMRS is being used as a replacement for landline telephone service
within the state. To date, the FCC has granted no such petition. To the extent we provide
fixed wireless service in the future, we may be subject to additional state
regulation. 24




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RISK FACTORS We strongly encourage you to read the risk factors described below as well
as Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations under the caption Liquidity and Capital Resources for
a discussion of factors which could cause our results to differ materially from
our expectations. Risks Related to Our Business, Strategy and Operations A number of factors outside our control may adversely affect our operating
results. Our business plan and estimated future operating results are based on
estimates of key operating metrics, including:  
    
    subscriber growth;  
    
    subscriber churn;  
    
    capital expenditures;  
    
    ARPU;  
    
    losses on sales of handsets and other subscriber acquisition costs; and  
    
    other operating costs. The following factors, over which we have no control, have created a level
of uncertainty that may affect these key operating metrics in a manner we
cannot foresee:  
    
    the rapidly changing nature of the wireless market;  
    
    current economic conditions;  
    
    the potential impact of continued marketing of wholesale capacity to
mobile virtual network operators (MVNOs);  
    
    potential problems in our relationship with Sprint that may arise from time to time;  
    
    wireless consolidations that may create competitors with greater market power;  
    
    increased competition in the wireless telecommunications industry;  
    
    new service offerings of increasingly large bundles of minutes of use
at lower prices by wireless carriers; and  
    
    other issues facing the wireless telecommunications industry in
general. If we are unable to accurately estimate our key operating metrics, we may
not utilize our resources appropriately which may result in lower revenues and
increased expenses. For example, if we overestimate subscriber growth, we may
budget our spending levels beyond what our actual results will support. Our revenues may be less than we anticipate which could materially affect our
liquidity, financial condition and results of operations. Revenue growth is primarily dependent on: 25




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
    
    the size of our subscriber base;  
    
    average monthly revenues per user; and  
    
    roaming revenue. In addition, subscriber growth in fiscal 2004 has been slower than in
prior years. We believe slower growth is due in large part to:  
    
    a decrease in distribution points for our products and services, as
well as lower productivity of our existing distribution points;  
    
    increased competition;  
    
    declining rates of wireless subscriber growth in general;  
    
    increased deposit requirements for some segments of sub-prime credit subscribers; and  
    
    current economic conditions. We have seen a continuation of competitive pressures in the wireless
telecommunications market causing carriers to offer plans with increasingly
large bundles of minutes of use at lower prices which may compete with the
calling plans we offer, including the Sprint calling plans we support. It is
possible that subscriber growth will be less than we project and that average
revenue per user will be lower than we project. Increased price competition may
lead to lower average monthly revenues per user than we anticipate. See Risks
Related to Our Relationship with Sprint. In addition, beginning in January
2007, Sprints reciprocal roaming rate may decrease which could reduce our
roaming revenue if not offset by an increase in minutes of use. If our revenues
are less than we anticipate, it could materially adversely affect our
liquidity, financial condition and results of operations. We estimate for
fiscal 2005, that every $1 reduction in monthly ARPU will decrease our annual
operating income by approximately $5 million. Our actual operating costs may be higher than we anticipate. Changes in our operating environment, including changes as a result of
government regulation, may require us to spend more than we anticipate. For
example, increased competition may lead to higher promotional costs, losses on
sales of handset and other costs to acquire subscribers. Further, as described
below under Risks Related to Our Relationship With Sprint, a substantial
portion of costs of service and roaming are attributable to fees and charges we
pay Sprint for billing and collections, customer care and other back-office
support. Our ability to manage costs charged by or through Sprint after
December 31, 2006 is limited. If our costs are more than we anticipate, the
actual amount of funds needed to implement our strategy and business plan may
exceed our estimates, which could have a material adverse affect on our
liquidity, financial condition and results of operations. We estimate for
fiscal year 2005, for every 1% that aggregate Sprint fees exceed our current
expectations, our annual operating income will decrease by approximately
$400,000. We may continue to experience a high rate of churn, which could result in a
reduction in our revenues and an increase in our operating expenses. The wireless personal communications services industry in general, and
Sprint and its network partners in particular, have experienced a higher rate
of subscriber turnover, commonly known as churn, as compared to cellular
industry averages. Furthermore, due to significant competition in our industry
and general economic conditions, among other things, churn may increase and our
future rate of subscriber turnover may be higher than projected or higher than
our historical rate. Factors that may contribute to higher churn include:  
    
    the pricing and attractiveness of our competitors products and services; 26




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
    
    wireless local number portability;  
    
    quality of customer service;  
    
    network performance and coverage relative to our competitors;  
    
    inability or unwillingness of subscribers to pay their bills which results in involuntary deactivations;  
    
    subscriber mix and credit class, particularly sub-prime credit subscribers;  
    
    changes in Sprints billing systems, collections systems and/or customer care; and  
    
    any future changes by us in the products and services we offer. A high rate of subscriber turnover could adversely affect our competitive
position, and result in an increase in our costs of, or losses incurred in,
obtaining new subscribers, especially because we subsidize some of the costs of
initial purchases of handsets by subscribers. We estimate for fiscal year 2005,
that a 0.1% increase in monthly churn will decrease our annual operating income
by approximately $200,000. Wireless local number portability requirements may increase churn, lower
revenues and result in higher subscriber acquisition and retention costs. Since November 24, 2003, all covered commercial mobile radio services
providers (CMRS), including us, are required to allow customers in the 100
largest metropolitan statistical areas to retain their existing telephone
numbers when switching from one telecommunications carrier to another. These
rules are generally referred to as a wireless local number portability
(WLNP). As of May 24, 2004, FCC regulations require that such CMRS providers
must have implemented WLNP outside the 100 largest metropolitan statistical
areas in the United States as well. In the future, WLNP could lead to increased
churn as our customers switch carriers, lower revenues and increased subscriber
acquisition and retention costs. Our allowance for doubtful accounts may not be sufficient to cover
uncollectible accounts. On an ongoing basis, we estimate the amount of subscriber receivables that
we will not collect to reflect the expected loss on such accounts in the
current period. Our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:  
    
    our involuntary churn rate may exceed our estimates;  
    
    bad debt as a percentage of service revenues may be higher than we assume in our business plan;  
    
    adverse changes in the economy;  
    
    changes in Sprints PCS products and services;  
    
    changes in the composition of our subscriber base; or  
    
    changes in our credit policy. If our allowance for doubtful accounts is insufficient to cover losses on
our receivables, it could have an adverse effect on our liquidity, financial
condition and results of operations. Our roaming revenue could be less than we anticipate. Until December 31, 2006, our reciprocal roaming rate is fixed at $0.058
per minute. However, after that date the reciprocal roaming rate may decrease
which would reduce our roaming revenue and may not be offset by a reduction in
our roaming expense or an increase in minutes of use. Based upon the roaming
minutes of use for the 27




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fiscal year ended September 30, 2004, a reduction in the roaming rate of
$0.01 per minute of use would have reduced our roaming revenue by approximately
$11.0 million and reduced our roaming expense by approximately $8.5 million. The amount of roaming revenue we receive also depends on the minutes of
use on our network by PCS subscribers of Sprint and the other Sprint PCS
network partners. If actual usage is less than we anticipate, our roaming
revenue would be lower. Conversely, the amount of our roaming expense depends
on the minutes of use our subscribers use the networks operated by Sprint and
the other Sprint PCS network partners. If our subscribers use the networks
operated by Sprint and the other Sprint PCS network partners more than we
anticipate, then our roaming expense will exceed our estimates. We may incur significantly higher wireless handset subsidy and rebate costs
than we anticipate for existing subscribers who upgrade to a new handset. As our subscriber base matures, and technological innovations occur, more
existing subscribers will upgrade to new wireless handsets, and as a part of
our subscriber retention efforts, we may offer these subscribers incentives on
the purchases of new wireless handsets. We subsidize a portion of the price of
wireless handsets and incur sales commissions, even for handset upgrades.
Excluding sales commissions, we incurred approximately $10.0 million and $2.4
million, respectively, of costs associated with wireless handset upgrades for
existing subscribers for the fiscal year ended September 30, 2004 and 2003. We
have limited historical experience regarding the adoption rate for wireless
handset upgrades. If more subscribers upgrade to new wireless handsets than we
project, our actual costs will be greater than our projected cost. The loss of the officers and skilled employees who we depend upon to operate
our business could have an adverse effect on our results of operations. Our business is managed by a small number of executive officers. We
believe that our future success depends in part on our continued ability to
attract and retain highly qualified technical and management personnel. We may
not be successful in retaining our key personnel or in attracting and retaining
other highly qualified technical and management personnel. Our ability to
attract and retain such persons may be negatively impacted if we do not
maintain our positive liquidity position. The loss of our officers and skilled
employees could materially adversely affect our results of operation. Our territorys limited amount of licensed spectrum may not be sufficient to
accommodate future growth. Sprint has licenses covering 10 MHz of spectrum in our territory. As the
number of subscribers in our territory increases, this limited amount of
licensed spectrum may not be able to accommodate increases in call volume, may
lead to increased dropped and blocked calls and may limit our ability to offer
enhanced services, all of which could result in increased subscriber turnover
and fewer new subscribers and adversely affect our financial condition and
results of operations. If we or Sprint need to acquire additional spectrum to
accommodate increased call volume, it is possible that spectrum will not be
available on favorable terms, if at all. Further, in January 2003, the FCC lifted its rules limiting the amount of
spectrum that can be held by any one provider in a specific market. The FCC now
relies on case-by-case review of transactions involving transfers of control of
CMRS spectrum in connection with its public interest review of all license
transfers. In light of this change in regulatory review, competition may
increase to the extent that licenses are transferred from smaller stand-alone
operators to larger, better capitalized, and more experienced wireless
communications operators. These larger wireless communications operators may be
able to offer subscribers network features not offered by us. The actions of
these larger wireless communications operators could negatively affect our
churn, ability to attract new subscribers, ARPU, cost to acquire subscribers
and operating costs per subscriber. There is a high concentration of ownership of the wireless towers we lease, and
we may lose the right to install our equipment on certain wireless towers and
be unable to renew expiring leases. Most of our cell sites are co-located on leased tower facilities shared
with one or more wireless providers. A few tower companies own a large portion
of these leased tower sites. Approximately 73% of the towers leased by us are 28




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owned by four tower companies (and their affiliates). If a master
co-location agreement with any of these tower companies were to terminate, or
if any of these tower companies were unable to support our use of its tower
sites, we would have to find new sites or possibly be required to rebuild that
portion of our network. In addition, we may be unable to renew expiring leases
with such tower companies on favorable terms, if at all. For example, if our
agreement with our largest tower company were to expire without successful
renegotiation, we would be required to relocate approximately 33% of our cell
site locations which would cause a disruption to our network operations. Certain wireless providers are seeking to change the standards controlling the
types of wireless handsets that operate on their networks which may limit our
ability to provide our subscribers with service in areas not covered by
Sprints PCS network. We rely on Sprints roaming agreements with its competitors to provide
automatic roaming capabilities to our subscribers in many of the areas of the
United States not covered by Sprints PCS network. Competitors may be able to
offer coverage in areas not served by Sprints PCS network or may be able to
offer roaming rates that are lower than those offered by Sprint. Certain
competitors have sought to reduce or eliminate the use of the AMPS air
interface on their networks. AMPS is an important air interface on which
Sprints subscribers roam. Further, on September 24, 2002, the FCC modified its
rules to eliminate, after a five-year transition period, the requirement that
carriers provide analog service compatible with AMPS specifications. If AMPS is
eliminated and our subscribers do not have wireless handsets that are
compatible with our competitors air interface, then these subscribers will not
be able to roam on our competitors networks, which could lead to customer
dissatisfaction and increased churn. Our business is subject to seasonal trends. Historically, the wireless industry has also been heavily dependent on
fourth calendar quarter for the addition of new subscribers and the sales of
handsets. A number of factors have contributed to this trend, including:  
    
    the increasing use of retail distribution, which is heavily dependent
upon the year-end holiday shopping season;  
    
    the timing of new product and service announcements and introductions;  
    
    competitive pricing pressures; and  
    
    aggressive marketing and promotions. The increased level of activity requires a greater use of available
financial resources during this period. Furthermore, this seasonality may make
it more difficult to make quarter-to-quarter comparisons of our results of
operations and may mean that our performance in previous quarters will not be
indicative of our performance in the future. Governmental regulation has a material impact on our business. The wireless business is heavily regulated by the FCC. Governmental
mandates can impose significant unanticipated costs on our business.
Governmental policies also may have a significant impact on the competitive
environment, for example by authorizing the allocation of additional spectrum,
or licensing new competitors, in the markets where the Company provides
service. The Companys ability to affect or control these governmental policies
is limited. Risks Related to Our Relationship with Sprint Our business experiences certain risks related to Sprint. In the past, Sprint has increased fees charged to us and other network
partners and has added fees that were not anticipated when the agreements with
Sprint were entered into. In the past, Sprint also sought to collect money from
us that we believe was not authorized under the agreements. In addition, Sprint
has imposed additional programs, 29




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requirements and conditions that have adversely affected our financial
performance. If these increases, additional charges and changes continue, our
operating results, liquidity and capital resources could be adversely affected. The termination of our affiliation with Sprint would severely restrict our
ability to conduct our business. We do not own the underlying spectrum licenses on which we operate our
wireless network. Our ability to offer Sprint PCS products and services and
operate a PCS network is dependent on our Sprint agreements remaining in effect
and not being terminated. All of our subscribers have purchased Sprint PCS
products and services to date, and we do not anticipate any change in the near
future. The agreements between Sprint and us are not perpetual. Our management
agreement automatically renews at the expiration of the 20-year initial term
(July 22, 2018) for an additional 10-year period unless we are in material
default. Sprint can choose not to renew our management agreement at the
expiration of the ten-year renewal term or any subsequent ten-year renewal
term. In addition, these agreements can be terminated for breach of any material
term, including, among others, failure to pay and marketing, build-out and
network operational requirements. Many of these requirements are extremely
technical and detailed in nature. In addition, many of these requirements can
be changed by Sprint with little notice. As a result, we may not always be in
compliance with all requirements of the Sprint agreements. There may be
substantial costs associated with remedying any non-compliance. We are also dependent on Sprints ability to perform its obligations under
the Sprint agreements. The non-renewal or termination of any of the Sprint
agreements or the failure of Sprint to perform its obligations under the Sprint
agreements would severely restrict our ability to conduct business. Sprint may make business decisions that are not in our best interests, which
may adversely affect our relationships with subscribers in our territory,
increase our expenses and/or decrease our revenues. Sprint, under the Sprint agreements, has a substantial amount of control
over the conduct of our business. Accordingly, Sprint has made and, in the
future may make, decisions that adversely affect our business, such as the
following:  
    
    Sprint, subject to limitations in our agreements with them, could
price its national plans based on its own objectives and could set price
levels or other terms that may not be economically sufficient for our
business;  
    
    Sprint, subject to limitations in our agreements with them, could
develop products and services, such as a one-rate plan where subscribers
are not required to pay roaming charges on its PCS to PCS plan, or
establish credit policies, such as the no-deposit account spending limit
program (the NDASL program), in which the deposit requirement was
waived except in very limited circumstances, which could adversely
affect our results of operations;  
    
    On January 1, 2007 certain provisions of our agreement with Sprint
expire and Sprint, subject to limitations in our agreements with them,
could then raise the costs to perform certain back office services or
not pass on to us any reductions in Sprints costs to provide these
services, reduce levels of services or expenses or otherwise seek to
increase expenses and other amounts charged, as well as reduce the
reciprocal roaming rate charged when Sprints or other Sprint network
partners PCS subscribers roam onto our network;  
    
    Sprint may elect with little or no notification to upgrade or convert
its financial reporting, billing or inventory software systems or change
third party service organizations which may adversely affect our ability
to determine or report our operating results, adversely affect our
ability to obtain handsets or adversely affect our subscriber
relationships;  
    
    Sprint, subject to limitations in our agreements with them, could
limit our ability to develop local and other promotional plans to enable
us to attract sufficient subscribers;  
    
    Sprint, subject to limitations under our agreements with them, could
alter its network and technical requirements; 30




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
    
    Sprints introduction of payment methods that do not have adequate
controls or limitations could result in fraudulent payments to
subscriber accounts. If this type of fraud becomes widespread, it could
have a material adverse impact on our results of operations and
financial condition;  
    
    Sprint could make decisions which could adversely affect the Sprint
brand names, products or services; and  
    
    Sprint could decide not to renew the Sprint agreements or to no
longer perform its obligations, which would severely restrict our
ability to conduct business. Recently, Sprint has changed how it aligns its resources in order to focus
on two market segments: businesses and consumers. This represents a shift away
from the current organizational focus on asset groups and products: local
telecommunications, global wireline voice and data services and wireless. This
initiative is often referred to as One Sprint-Many Solutions. This
realignment was designed to facilitate Sprints cross-selling and bundling of
products across these product lines. This shift could:  
    
    divert marketing, advertising and internal Sprint resources once
dedicated to wireless to bundled or non-PCS Sprint products and
services;  
    
    increase the risk that Sprint will design wireless products and
services in a manner that is not profitable for us; and  
    
    reduce the significance of Sprints wireless network partners,
including us. The occurrence of any of the foregoing could adversely affect our
relationship with subscribers in our territories, increase our expenses and/or
decrease our revenues and have a material adverse effect on our liquidity,
financial condition and results of operations. Furthermore, Sprint has announced that it plans to deploy Evolution  Data
Only technology (EV-DO) in certain of its markets, and they, subject to
limitations in our agreements with them, could require us to implement EV-DO in
our network. It is possible that our existing network will not have sufficient
spectrum to accommodate EV-DO without affecting the quality of our network.
Such disruptions could lead to increased subscriber turnover or could
necessitate our acquisition of additional spectrum, which may not be available
on favorable terms, if at all. Additionally, Sprint has entered into MVNO arrangements with Virgin Mobile
USA, Qwest Communications, AT&T and others. In these arrangements, Sprint is
wholesaling airtime to its MVNO partner, which in turn markets retail service
under its own brand and pricing. Under our agreements with Sprint, we are
required to participate in resale arrangements entered into by Sprint. See
Business  Sprint Relationship and Agreements  Resellers. The Company may
enjoy an increase in traffic as a result of these MVNO relationships, but the
rates paid to the Company, and the margins earned on this traffic, may not be
as favorable to the Company as would be the case if Sprint was selling on a
retail rather than on a wholesale basis. Sprints PCS to PCS program has had, and may continue to have, a negative
impact on our business. In late 2002, Sprint implemented a new PCS to PCS product offering under
which subscribers receive unlimited buckets of minutes for little or no
additional cost, for any calls made from one Sprint PCS subscriber to another.
Pursuant to our Sprint agreements, we are required to support this program in
our territory. The number of minutes-over-plan used and associated revenues of
our subscribers has dropped. This has contributed to our ARPU declining from
approximately $61 for the fiscal year ended September 30, 2002 to approximately
$60 for the fiscal year ended September 30, 2003, and to approximately $57 for
the fiscal year ended September 30, 2004. In addition, the program had the
effect of switching current subscribers to the product offering, rather than
resulting in a meaningful increase in new subscribers. In addition to the lost
revenue the PCS to PCS plan causes, it is also generating a large amount of
incremental traffic on our network, which may increase our capital needs and
our costs beyond what we have planned. Our dependence on Sprint for services may limit our ability to reduce costs,
which could materially adversely affect our financial condition and results of
operation. 31




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For the fiscal year ended September 30, 2004, approximately 68% of cost of
service and roaming in our financial statements relate to charges from or
through Sprint. As a result, a substantial portion of our cost of service and
roaming is outside our control. Pursuant to our settlement with Sprint, Sprint
has agreed to charge us certain specified rates for roaming and service until
December 31, 2006. However, after that time Sprints rates for roaming will be
based on a specified percentage of their average revenue per subscriber, which
could result in a significant increase in our cost for roaming. As provided in
our agreement with Sprint, after December 31, 2006 Sprint may charge us its
reasonable costs to provide this service, and these costs could increase
significantly. Furthermore, our ability to replace Sprint with lower cost
providers may be limited. We estimate that for every 1% of aggregate Sprint
fees that exceed our current expectations, it will decrease our annual
operating income by approximately $400,000. Inaccuracies in data provided by Sprint could understate our expenses or
overstate our revenues and result in out-of-period adjustments that may
materially adversely affect our financial results. Because Sprint provides billing and collection services for us, Sprint
remits approximately 96% of our revenues to us. The data provided by Sprint is
the primary source for our recognition of service revenue and a significant
portion of our selling and marketing and cost of service and operating
expenses. As a result, we rely on Sprint to provide accurate, timely and
sufficient data and information to properly record our revenues, expenses and
accounts receivables, which underlie a substantial portion of our periodic
financial statements and other financial disclosures. In the past, we and Sprint have discovered billing and other errors or
inaccuracies. If we are required in the future to make additional adjustments
or charges as a result of errors or inaccuracies in data provided to us by
Sprint that we do not detect in a timely manner, such adjustments or charges
may affect our revenues and expenses in the period that the adjustments or
charges are made, our ability to report accurate information on a timely basis
and our ability to make fully informed business decisions. The inability of Sprint to provide high quality back office services could lead
to subscriber dissatisfaction, increase churn or otherwise increase our costs. We currently rely on Sprints internal support systems, including customer
care, billing and back office support. Our operations could be disrupted if
Sprint is unable to provide internal support systems in a high quality manner
or to efficiently outsource those services and systems through other
third-party vendors. Cost pressures are expected to continue to pose a
significant challenge to Sprints internal support systems. Additionally,
Sprint has made reductions in its customer service support structure and may
continue to do so in the future, which may have an adverse effect on our churn
rate. Further, Sprint has relied on third-party vendors for a significant
number of important functions and components of its internal support systems
and may continue to rely on these vendors in the future. We currently depend on
Sprints willingness to continue to offer these services and to provide these
services effectively and at competitive costs. These costs were approximately
$22.6 million for the fiscal year ended September 30, 2004. Our Sprint
agreements provide that, upon nine months prior written notice, Sprint may
elect to terminate any of these significant services and may terminate any
other service upon reasonable notice. The inability of Sprint to provide high
quality back office services, or our inability to use Sprint back office
services and third-party vendors back office systems, could lead to subscriber
dissatisfaction, increase churn or otherwise increase our costs. Pursuant to our settlement with Sprint, Sprint has agreed to a specified
rate for these services until December 31, 2006. However, after that time the
rates will change and will be based on the amount necessary to recover Sprints
reasonable costs for providing the services, and as a result, the costs for
back office services could increase significantly. See Business  Recent
Developments  Changes to our management and services agreements with Sprint
PCS. If this occurs, our operating expenses will increase, and our liquidity,
financial condition and results of operations could be adversely affected. If Sprints business plan does not succeed, our business may not succeed. As a network partner of Sprint, we have the right to provide PCS products
and services under the Sprint brand names in our territory in the southeastern
United States. In addition, we feature exclusively and prominently the
nationally recognized Sprint brand in our marketing effort. Consequently, our
business and results of operations 32




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depend on the continued recognition of the Sprint brand name and success
of Sprints business. If Sprints business plan does not succeed, or if Sprint
has a significant disruption to its business plan or network, fails to operate
its business in an efficient manner, or suffers a weakening of its brand name
or erosion of its customer base, our operations and profitability would likely
be negatively impacted. If Sprint were to file for bankruptcy, Sprint may be able to reject its
agreements with us under Section 365 of the Bankruptcy Code. The agreements
provide us remedies, including purchase and put rights, though we cannot
predict if or to what extent our remedies would be enforceable. Sprints roaming arrangements may not be competitive with other wireless
service providers, which may restrict our ability to attract and retain
subscribers and create other risks for us. We rely on Sprints roaming arrangements with other wireless service
providers for coverage in some areas where Sprint service is not yet available.
The risks related to these arrangements include:  
    
    the roaming arrangements are negotiated by Sprint and may not benefit
us in the same manner that they benefit Sprint;  
    
    the quality of the service provided by another provider during a
roaming call may not approximate the quality of the service provided by
the Sprint PCS network;  
    
    the price of a roaming call off our network may not be competitive
with prices of other wireless companies for roaming calls;  
    
    subscribers may have to use a more expensive dual-band/dual mode
handset with diminished standby and talk time capacities;  
    
    subscribers may have to end a call in progress and initiate a new
call when leaving the Sprint PCS network and entering another wireless
network;  
    
    Sprint subscribers may not be able to use Sprints advanced features,
such as voicemail notification, while roaming; and  
    
    Sprint or the carriers providing the service may not be able to
provide us with accurate billing information on a timely basis. If subscribers from our territory are not able to roam instantaneously or
efficiently onto other wireless networks, we may lose current subscribers, and
our Sprint PCS services will be less attractive to new subscribers. Certain provisions of the Sprint agreements may restrict the sale of our
business and diminish the value a buyer would pay for our business. Under limited circumstances and without further stockholder approval,
Sprint may purchase our operating assets at a discount. In addition, Sprint
must approve a change of control of the ownership of us and must consent to any
assignment of our Sprint agreements. Sprint also has a right of first refusal
if we decide to sell our operating assets to a third party. We also are subject
to a number of restrictions on the transfer of our business, including a
prohibition on the sale of our operating assets to competitors of Sprint. These
restrictions and other restrictions contained in the Sprint agreements may
limit our ability to sell our business, may reduce the value a buyer would be
willing to pay for our business, may reduce the entire business value, as
described in our Sprint agreements, and may limit our ability to obtain new
investment or support from any source. We may have difficulty in obtaining an adequate supply of certain handsets from
Sprint, which could adversely affect our results of operations. We depend on our relationship with Sprint to obtain handsets, and we have
agreed to purchase most of our 3G capable handsets from Sprint or a Sprint
authorized distributor through the earlier of December 31, 2004 or the date 33




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on which the cumulative 3G handset fees received by Sprint from all Sprint
network partners equal $25.0 million. Sprint orders handsets from various
manufacturers. We could have difficulty obtaining specific types of handsets in
a timely manner if:  
    
    Sprint does not adequately project the need for handsets for itself,
its network partners and its other third-party distribution channels,
particularly in transition to newer technologies, such as 1xRTT;  
    
    Sprint gives preference to other distribution channels, which it does periodically;  
    
    we do not adequately project our need for handsets;  
    
    Sprint modifies its handset logistics and delivery plan in a manner
that restricts or delays our access to handsets;  
    
    there is an adverse development in the relationship between Sprint
and its suppliers or vendors; or  
    
    if Sprints current suppliers cannot meet their commitments, Sprint
would have to use different vendors and this could result in delays,
interruptions or additional expenses associated with the upgrade and
expansion of Sprints networks and the offering of its products and
services. The occurrence of any of the foregoing could disrupt our subscriber
service and/or result in a decrease in subscribers, which could adversely
affect our results of operations. If Sprint does not complete the construction of its nationwide PCS network, we
may not be able to attract and retain subscribers. Sprint currently intends to cover a significant portion of the population
of the United States, Puerto Rico and the U.S. Virgin Islands by creating a
nationwide PCS network through its own construction efforts and those of its
network partners. Sprint is still constructing its nationwide network and does
not offer PCS services, either on its own network or through its roaming
agreements, in every city in the United States. Sprint has entered into
management agreements similar to ours with companies in other markets under its
nationwide PCS build-out strategy. Our results of operations are dependent on
Sprints national network and, to a lesser extent, on the networks of Sprints
other network partners. Sprints PCS network may not provide nationwide
coverage to the same extent as its competitors, which could adversely affect
our ability to attract and retain subscribers. If other Sprint network partners have financial difficulties, the Sprint PCS
network could be disrupted. Sprints national network is a combination of networks. The large
metropolitan areas are owned and operated by Sprint, and the areas in between
them are owned and operated by Sprint network partners. We believe that most,
if not all, of these companies have incurred substantial debt to pay the large
cost of building out their networks. Two of these companies filed petitions
seeking reorganization under Chapter 11 of the Bankruptcy Code. If other network partners experience financial difficulties, Sprints PCS
network could be disrupted. If Sprints agreements with those network partners
were like ours, Sprint would have the right to step in and operate the network
in the affected territory, subject to the rights of their lenders. In such
event, there can be no assurance that Sprint could transition in a timely and
seamless manner or that lenders would permit Sprint to do so. Non-renewal or revocation by the FCC of Sprints PCS licenses would
significantly harm our business. PCS licenses are subject to renewal and revocation by the FCC. Sprints
licenses in our territories will begin to expire in 2007 but may be renewed for
additional ten-year terms. There may be opposition to renewal of Sprints PCS
licenses upon their expiration, and Sprints PCS licenses may not be renewed.
The FCC has adopted specific standards to apply to PCS license renewals. Any
failure by Sprint or us to comply with these standards could cause revocation
or forfeiture of Sprints PCS licenses for our territories. If Sprint loses any
of its licenses in our territory, we would be severely restricted in our
ability to conduct business. 34




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If Sprint does not maintain control over its licensed spectrum, the Sprint
agreements may be terminated, which would result in our inability to provide
service. The FCC requires that licensees like Sprint maintain effective working
control of their licensed spectrum and not delegate control to third-party
operators or managers. Although the Sprint agreements with us reflect an
arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum, we cannot be sure that the FCC will agree. If the
FCC were to determine that the Sprint agreements need to be modified to
increase the level of licensee control, we have agreed with Sprint to use our
best efforts to modify the Sprint agreements to comply with applicable law. If
we cannot agree with Sprint to modify the Sprint agreements, they may be
terminated. If the Sprint agreements are terminated, we would no longer be a
part of the Sprint PCS network and would be severely restricted in our ability
to conduct business. Any required modifications could also have a material
adverse effect on our business, financial condition and liquidity. If we lose our right to use the Sprint brand and logo under its trademark and
service mark license agreements, we would lose the advantages associated with
marketing efforts conducted by Sprint. The Sprint brand and logo are highly recognizable. If we lose the rights
to use this brand and logo or the value of the brand and logo decreases,
customers may not recognize our brand readily and we may have to spend
significantly more money on advertising to create brand recognition. Risks Particular to Our Industry Significant competition in the wireless communications services industry may
result in our competitors offering new or better products and services or lower
prices, which could prevent us from operating profitably. Competition in the wireless communications industry is intense. According
to information it has filed with the Securities and Exchange Commission, Sprint
believes that the traditional dividing lines between long distance, local,
wireless, and internet services are increasingly becoming blurred. Through
mergers and various service integration strategies, major providers, including
Sprint, are striving to provide integrated solutions both within and across all
geographical markets. We do not currently offer services other than wireless
services and may not be able to effectively compete against competitors with
integrated solutions. Further, the provision of integrated offerings may
increase Sprints control over our business. Competition has caused, and we anticipate that competition will continue
to cause, the market prices for two-way wireless products and services to
decline in the future. Our ability to compete will depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
telecommunications industry. Our dependence on Sprint to develop competitive
products and services and the requirement that we obtain Sprints consent to
sell local pricing plans and non-Sprint approved equipment may limit our
ability to keep pace with competitors on the introduction of new products,
services and equipment. Many of our competitors are larger than us, possess
greater financial and technical resources and may market other services, such
as landline telephone service, cable television and internet access, with their
wireless communications services. Some of our competitors also have
well-established infrastructures, marketing programs and brand names. In
addition, some of our competitors may be able to offer regional coverage in
areas not served by the Sprint PCS network or, because of their calling volumes
or relationships with other wireless providers, may be able to offer regional
roaming rates that are lower than those we offer. Additionally, we expect that
existing cellular providers will continue to upgrade their systems to provide
digital wireless communication services competitive with Sprint. Our success,
therefore, is, to a large extent, dependent on Sprints ability to distinguish
itself from competitors by marketing and anticipating and responding to various
competitive factors affecting the wireless industry, including new services
that may be introduced, changes in consumer preferences, demographic trends,
economic conditions and discount pricing strategies by competitors. The ability
of Sprint to meet these challenges may be affected by competitive pressures
that Sprint is experiencing in its long distance and landline telephone
businesses as well. To the extent that Sprint is not able to keep pace with
technological advances or fails to respond timely to changes in competitive
factors in the wireless industry, it could cause us to lose market share or
experience a decline in revenue. There has been a recent trend in the wireless communications industry
towards consolidation of wireless service providers through joint ventures,
reorganizations and acquisitions. For example, a proposed acquisition of AT&T 35




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Wireless by Cingular Wireless could create the largest wireless carrier in
the U.S. with considerable spectrum resources, extensive network coverage and
vast financial resources. We expect these types of consolidations to lead to
larger competitors over time. We may be unable to compete successfully with
larger companies that have substantially greater resources or that offer more
services than we do. In addition, we may be at a competitive disadvantage since
we may be more highly leveraged than many of our competitors. If the demand for wireless data services does not grow, or if we or Sprint fail
to capitalize on such demand, it could have an adverse effect on our growth
potential. Sprint and its network partners, including us, have committed significant
resources to wireless data services and our business plan assumes increasing
uptake in such services. That demand may not materialize. Even if such demand
does develop, our ability to deploy and deliver wireless data services depends,
in many instances, on new and unproven technology. Existing technology may not
perform as expected. We may not be able to obtain new technology to effectively
and economically deliver these services. The success of wireless data services is substantially dependent on the
ability of Sprint and others to develop applications for wireless data devices
and to develop and manufacture devices that support wireless applications.
These applications or devices may not be developed or developed in sufficient
quantities to support the deployment of wireless data services. These services
may not be widely introduced and fully implemented at all or in a timely
fashion. These services may not be successful when they are in place, and
customers may not purchase the services offered. Consumer needs for wireless data services may be met by technologies such
as 802.11, known as Wi-Fi, which does not rely on FCC regulated spectrum. The
lack of standardization across wireless data handsets may contribute to
customer confusion, which could slow acceptance of wireless data services, or
increase customer care costs. Either could adversely affect our ability to
provide these services profitably. If these services are not successful or
costs associated with implementation and completion of the rollout of these
services materially exceed our current estimates, our financial condition and
prospects could be materially adversely affected. Alternative technologies and current uncertainties in the wireless market may
reduce demand for PCS. The wireless communications industry is experiencing significant
technological change, as evidenced by:  
    
    the increasing pace of digital upgrades in existing analog wireless systems;  
    
    evolving industry standards;  
    
    ongoing improvements in the capacity and quality of digital technology;  
    
    shorter development cycles for new products; and  
    
    enhancements and changes in end-user requirements and preferences. Technological advances and industry changes could cause the technology
used on our network to become obsolete. We rely on Sprint for research and
development efforts with respect to the products and services of Sprint and
with respect to the technology used on our network. Sprint may not be able to
respond to such changes and implement new technology on a timely basis or at an
acceptable cost. If Sprint is unable to keep pace with these technological changes or
changes in the wireless communications market based on the effects of
consolidation from the Telecommunications Act of 1996 or from the uncertainty
of future government regulation, the technology used on our network or our
business strategy may become obsolete. We are a consumer business, and a recession in the United States involving
significantly lowered spending could negatively affect our results of
operations. 36




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Our subscriber base is primarily individual consumers, and our accounts
receivable represent unsecured credit. We believe that the recent economic
downturn had an adverse impact on our operations. Although it appears that the
economy in the United States and our territory has begun to improve, in the
event that there is another downturn in the economy or the economy does not
continue to improve, spending by individual consumers may drop significantly,
and our business may be negatively affected as a result. Regulation by government and taxing agencies may increase our costs of
providing service or require us to change our services, either of which could
impair our financial performance. Our operations and those of Sprint are subject to varying degrees of
regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety
and Health Administration and state and local regulatory agencies and
legislative bodies. Adverse decisions or regulation of these regulatory bodies
could negatively impact our operations and our costs of doing business. For
example, regulatory mandates pertaining to the provision of E-911 services by
wireless carriers, compliance with CALEA, the meeting of telephone number
pooling and porting requirements, satisfying universal service standards, the
protection of subscriber privacy, the provision of services to the hearing
impaired and the satisfaction of environmental and safety standards, have
imposed, and will continue to impose, substantial costs on our industry.
Because the fixed component of costs incurred to meet some of these mandates
can be relatively high, smaller carriers such as the Company can be
competitively disadvantaged by these mandates. Moreover, changes in tax laws or the interpretation of existing tax laws
by state and local authorities could subject us to increased income, sales,
gross receipts or other tax costs or require us to alter the structure of our
current relationship with Sprint. Use of hand-held phones may pose health risks, which could result in the
reduced use of wireless services or liability for personal injury claims. Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation. Any resulting
decrease in demand for wireless services, or costs of litigation and damage
awards, could impair our ability to achieve and sustain profitability. Regulation by government or potential litigation relating to the use of
wireless phones while driving could adversely affect our results of operations. Some studies have indicated that some aspects of using wireless phones
while driving may impair drivers attention in certain circumstances, making
accidents more likely. These concerns could lead to litigation relating to
accidents, deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use, any of which also could have material
adverse effects on our results of operations. A number of U.S. state and local
governments are considering or have recently enacted legislation that would
restrict or prohibit the use of a wireless handset while driving a vehicle or,
alternatively, require the use of a hands-free telephone. Legislation of this
sort, if enacted, would require wireless service providers to provide
hands-free enhanced services, such as voice activated dialing and hands-free
speaker phones and headsets, so that they can keep generating revenue from
their subscribers, who make many of their calls while on the road. If we are
unable to provide hands-free services and products to subscribers in a timely
and adequate fashion, the volume of wireless phone usage would likely decrease,
and our ability to generate revenues would suffer. Unauthorized use of, or interference with, the PCS network of Sprint could
disrupt our service and increase our costs. We may incur costs associated with the unauthorized use of the PCS network
of Sprint, including administrative and capital costs associated with
detecting, monitoring and reducing the incidence of fraud. Fraudulent use of
the PCS network of Sprint may impact interconnection costs, capacity costs,
administrative costs, fraud prevention costs and payments to other carriers for
fraudulent roaming. 37




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Equipment failure and natural disasters or terrorist acts may adversely affect
our operations. A major equipment failure or a natural disaster or terrorist act that
affects our mobile telephone switching offices, microwave links, third-party
owned local and long distance networks on which we rely, our cell sites or
other equipment or the networks of other providers on which subscribers roam,
could have a material adverse effect on our operations. While we have insurance
coverage for some of these events, our inability to operate our wireless system
even for a limited time period may result in a loss of subscribers or impair
our ability to attract new subscribers, which would have a material adverse
effect on our business, results of operations and financial condition. 
 ITEM 2.Properties As of September 30, 2004, our properties were as follows:  Corporate offices. Our principal executive offices consist of leased office space located in
Atlanta, Georgia. We also lease office space in Charleston, Columbia and Greenville, South
Carolina and Asheville, North Carolina.Sprint PCS stores. As of September 30, 2004, we lease space for 33 retail stores in our territory.
Switching Centers. We lease switching centers in Greenville, South Carolina and Columbia, South
Carolina.Cell Sites. We lease space on approximately 800 cell site towers and own one tower. We co-locate
on approximately 99% of our cell sites. We believe our facilities are in good operating condition and are
currently suitable and adequate for our business operations. 
 ITEM 3.Legal Proceedings AirGate Securities Litigation In May 2002, putative class action complaints were filed in the United
States District Court for the Northern District of Georgia against AirGate PCS,
Inc., Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit
Suisse First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company,
Thomas Wiesel Partners LLC and TD Securities. The complaints do not specify an
amount or range of damages that the plaintiffs are seeking. The complaints seek
class certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former stockholders of iPCS, a
former subsidiary of the Company, on December 18, 2001 contained materially
false and misleading statements and omitted material information necessary to
make the statements in the prospectus not false and misleading. The alleged
omissions included (i) failure to disclose that in order to complete an
effective integration of iPCS, drastic changes would have to be made to the
Companys distribution channels, (ii) failure to disclose that the sales force
in the acquired iPCS markets would require extensive restructuring and (iii)
failure to disclose that the churn or turnover rate for subscribers would
increase as a result of an increase in the amount of sub-prime credit quality
subscribers the Company added from its merger with iPCS. On July 15, 2002,
certain plaintiffs and their counsel filed a motion seeking appointment as lead
plaintiffs and lead counsel. Subsequently, the court denied this motion without
prejudice and two of the plaintiffs and their counsel filed a renewed motion
seeking appointment as lead plaintiffs and lead counsel. On September 12, 2003,
the court again denied that motion without prejudice and on December 2, 2003,
certain plaintiffs and their counsel filed a modified renewed motion seeking
appointment as lead plaintiffs and lead counsel. On August 17, 2004 the court
granted the plaintiffs motion. Pursuant to a consent scheduling order agreed to by the parties, lead
plaintiffs filed a consolidated amended class action complaint on October 15,
2004 (the Consolidated Complaint). As did the original complaints filed in
these actions, the Consolidated Complaint alleges that the Companys
registration statement and prospectus relating to the December 2001 offering
misrepresented and/or omitted adverse facts regarding the anticipated effects
of the Companys acquisition of iPCS. The Consolidated Complaint also asserts
that the registration statement/prospectus was false and misleading in certain
other respects not previously alleged. The legal claims asserted in the
Consolidated Complaint remain the same as those in the original
complaints, i.e., the registration statement/prospectus violated Sections 11,
12(a)(2) and 15 of the Securities Act of 1933. In addition, the class that
lead plaintiffs seek to represent remains the same, and the named defendants
remain the same. 38




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Defendants responses to the Consolidated Complaint are due on or before
December 17, 2004. In the event that any defendant moves to dismiss, lead
plaintiffs are to serve their opposition by January 21, 2005, and defendants
reply briefs are due on or before February 22, 2005. No further dates have
been set in the case. iPCS Bankruptcy On February 23, 2003, iPCS and its two subsidiaries, iPCS Wireless, Inc.
and iPCS Equipment, Inc. (the Debtors) filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code. During the bankruptcy cases, iPCS
filed a motion and obtained an order authorizing it to assume a management
agreement between iPCS, AirGate PCS and AirGate Services Co., as amended. The
Company subsequently filed an administrative expense priority claim for amounts
that the Company contends are owed by the Debtors under the assumed management
agreement. The claim is for amounts that the Company is or might be liable to
certain third party vendors for goods and services provided by such vendors to
or for the benefit of the Debtors. In their disclosure statement, the Debtors
indicated that they might seek to defend against the claim by arguing, among
other things, that the Company has failed to disgorge an alleged preferential
transfer in the amount of $3,079,311.41 and that the Company, its affiliates,
officers, and directors may be subject to claims of the Debtors for
mismanagement, breach of fiduciary duties, officer and director liability, and
similar claims. iPCS has not yet named the Company as a defendant in a
preference action. The parties are currently engaged in settlement discussions
in an effort to resolve all of the disputes between them in advance of the
January 2005 hearing on the Companys claim. 
 ITEM 4.Submission Of Matters To A Vote Of Security Holders None. 
 PART II 
 ITEM 5.Market For Registrants Common Equity And Related Stockholder Matters Shares of our common stock began trading on The Nasdaq National Market on
September 28, 1999, under the symbol PCSA. Before that date, there was no
public market for our common stock. Beginning on April 8, 2003, after being
de-listed from The Nasdaq National Market, our common stock began trading on
the OTC Bulletin Board under the symbol PCSA.OB. On February 17, 2004, our
common stock again began trading on The Nasdaq National Market. The stock
traded under the symbol PCSAD for a 20-day period to reflect the 1-for-5
reverse split effected on February 13, 2004, and following the expiration of
that period has traded under the symbol PCSA. On November 30, 2004, the
closing price per share of AirGates common stock on The Nasdaq National Market
was $32.47. On November 30, 2004, there were 144 holders of record of our
common stock. The following table lists the high and low bid prices for our common stock
for the periods indicated, as reported by The Nasdaq National Market and the
OTC Bulletin Board for the periods our stock has traded on each as noted above. Price Range ofCommon StockHigh
    
    LowFiscal Year Ended September 30, 2004:Fourth Quarter
    
    $
    19.60
    
    
    $
    14.24Third Quarter
    
    $
    20.30
    
    
    $
    15.00Second Quarter
    
    $
    22.09
    
    
    $
    12.60First Quarter
    
    $
    12.65
    
    
    $
    6.85Fiscal Year Ended September 30, 2003:Fourth Quarter
    
    $
    17.90
    
    
    $
    5.05Third Quarter
    
    $
    6.70
    
    
    $
    0.55Second Quarter
    
    $
    4.75
    
    
    $
    0.70First Quarter
    
    $
    8.35
    
    
    $
    1.75
 39




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Price Range ofCommon StockHigh
    
    LowFiscal Year Ended September 30, 2002:Fourth Quarter
    
    $
    9.40
    
    
    $
    1.95Third Quarter
    
    $
    87.65
    
    
    $
    4.60Second Quarter
    
    $
    239.85
    
    
    $
    42.60First Quarter
    
    $
    302.20
    
    
    $
    211.00
 The Company has never declared or paid any cash dividends on its common
stock or any other of its securities. We intend to retain any future earnings
for use in our business and do not anticipate paying cash dividends in the
foreseeable future. In addition, our credit facility and the indentures
governing our notes severely limit our ability to declare dividends. For
further information regarding restrictions on payments of dividends and
distributions of our common stock, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations under the caption
Contractual Obligations. 
 ITEM 6. Selected Financial Data The selected historical consolidated financial information presented below
is derived from our audited consolidated financial statements as of and for
each of the years ended September 30, 2004, 2003, 2002, 2001, and 2000. For the Years Ended September 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands except share and subscriber data)Statement
of Operations Data:Revenues:Service revenue
    
    $
    254,488
    
    
    $
    251,481
    
    
    $
    226,504
    
    
    $
    105,976
    
    
    $
    9,746Roaming revenue
    
    
    69,708
    
    
    
    68,222
    
    
    
    74,013
    
    
    
    55,329
    
    
    
    12,338Equipment revenue
    
    
    12,912
    
    
    
    11,645
    
    
    
    13,027
    
    
    
    10,782
    
    
    
    2,981Total revenues
    
    
    337,108
    
    
    
    331,348
    
    
    
    313,544
    
    
    
    172,087
    
    
    
    25,065Operating expenses:Cost of services and
roaming (exclusive of
depreciation and
amortization as shown
separately below)(1)
    
    
    161,430
    
    
    
    187,365
    
    
    
    204,153
    
    
    
    116,909
    
    
    
    27,993Cost of equipment
    
    
    29,109
    
    
    
    21,522
    
    
    
    27,778
    
    
    
    20,218
    
    
    
    5,685Selling and marketing
    
    
    50,859
    
    
    
    51,769
    
    
    
    79,099
    
    
    
    71,706
    
    
    
    28,539General and
administrative
    
    
    22,430
    
    
    
    23,347
    
    
    
    18,143
    
    
    
    17,141
    
    
    
    15,338Depreciation and
amortization
    
    
    47,829
    
    
    
    46,494
    
    
    
    40,764
    
    
    
    30,667
    
    
    
    12,034Loss on disposal
of property and
equipment
    
    
    48
    
    
    
    518
    
    
    
    1,074
    
    
    
    
    
    
    
    Total operating
expenses
    
    
    311,705
    
    
    
    331,015
    
    
    
    371,011
    
    
    
    256,641
    
    
    
    89,589Operating income (loss)
    
    
    25,403
    
    
    
    333
    
    
    
    (57,467
    )
    
    
    (84,554
    )
    
    
    (64,524
    )Interest income
    
    
    747
    
    
    
    187
    
    
    
    161
    
    
    
    2,463
    
    
    
    9,321Interest expense
    
    
    (36,285
    )
    
    
    (42,706
    )
    
    
    (35,474
    )
    
    
    (28,899
    )
    
    
    (26,120
    )Loss from continuing
operations before income
tax
    
    
    (10,135
    )
    
    
    (42,186
    )
    
    
    (92,780
    )
    
    
    (110,990
    )
    
    
    (81,323
    )Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from continuing
operations
    
    
    (10,135
    )
    
    
    (42,186
    )
    
    
    (92,780
    )
    
    
    (110,990
    )
    
    
    (81,323
    )Discontinued operations:Loss from discontinued
operations, net of
$28,761 income tax
benefit for 2002(2)
    
    
    
    
    
    
    (42,571
    )
    
    
    (903,837
    )
    
    
    
    
    
    
    Gain on disposal of
discontinued operations,
net of $0 income tax
expense(3)
    
    
    184,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    173,980
    
    
    $
    (84,757
    )
    
    $
    (996,617
    )
    
    $
    (110,990
    )
    
    $
    (81,323
    )
 40




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For the Years Ended September 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands except share and subscriber data)Basic and diluted earnings
(loss) per share:Loss from
continuing operations
    
    $
    (1.10
    )
    
    $
    (8.14
    )
    
    $
    (19.53
    )
    
    $
    (42.40
    )
    
    $
    (33.00
    )Income (loss) from
discontinued
operations
    
    
    19.98
    
    
    
    (8.22
    )
    
    
    (190.27
    )
    
    
    
    
    
    
    Net income
(loss)
    
    $
    18.88
    
    
    $
    (16.36
    )
    
    $
    (209.80
    )
    
    $
    (42.40
    )
    
    $
    (33.00
    )Basic and diluted weighted-
average number of shares
outstanding
    
    
    9,216,778
    
    
    
    5,181,683
    
    
    
    4,750,301
    
    
    
    2,617,857
    
    
    
    2,465,829Other Data:Number of subscribers at
end of period
    
    
    384,537
    
    
    
    359,460
    
    
    
    339,139
    
    
    
    235,025
    
    
    
    56,689Statement of Cash Flow
Data:Cash provided by (used
in) operating activities
    
    $
    (405
    )
    
    $
    50,181
    
    
    $
    (25,534
    )
    
    $
    (40,850
    )
    
    $
    (41,609
    )Cash used in investing
activities
    
    
    (14,083
    )
    
    
    (16,023
    )
    
    
    (46,321
    )
    
    
    (71,772
    )
    
    
    (152,397
    )Cash provided by (used
in) financing activities
    
    
    (26,137
    )
    
    
    15,033
    
    
    
    62,452
    
    
    
    68,528
    
    
    
    (6,510
    )Balance Sheet Data (at
period end):Cash and cash equivalents
    
    $
    13,453
    
    
    $
    54,078
    
    
    $
    4,887
    
    
    $
    14,290
    
    
    $
    58,384Short-term investment
securities
    
    
    55,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    144,324
    
    
    
    178,070
    
    
    
    213,777
    
    
    
    209,326
    
    
    
    183,581Total assets
    
    
    266,647
    
    
    
    290,916
    
    
    
    574,294
    
    
    
    281,010
    
    
    
    268,948Long-term debt
    
    
    248,396
    
    
    
    386,509
    
    
    
    354,264
    
    
    
    266,326
    
    
    
    180,727Stockholders equity
(deficit)
    
    
    (80,292
    )
    
    
    (376,997
    )
    
    
    (292,947
    )
    
    
    (52,724
    )
    
    
    49,873
  (1)
    
    During the year ended September 30, 2004, the Company recorded an
adjustment to reduce cost of service and roaming by approximately $11.7
million related to the settlement of previously disputed charges between
us and Sprint PCS. See note 4 to the consolidated financial statements
for further discussion on this and other settlements with Sprint.  (2)
    
    Loss from discontinued operations represents the net losses incurred
by iPCS from November 30, 2001 through February 23, 2003. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results
of Operations under the caption  iPCS.  (3)
    
    Gain on disposal of discontinued operations represents the gain
recognized upon the disposal of iPCS. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations under the caption  iPCS. 
 ITEM 7.Managements Discussion And Analysis of Financial Condition And
Results of Operations Overview AirGate PCS, Inc. and its subsidiaries and predecessors were formed for
the purpose of becoming a leading regional provider of wireless Personal
Communication Services, or PCS. We are a network partner of Sprint PCS, which
is a group of wholly-owned subsidiaries of Sprint Corporation (a diversified
telecommunications service provider), that operate and manage Sprints PCS
products and services. Sprint operates a 100% digital PCS wireless network in the United States
and holds the licenses to provide PCS nationwide using a single frequency band
and a single technology. Sprint, directly and indirectly through network
partners such as us, provides wireless services in more than 4,000 cities and
communities across the country. Sprint directly operates its PCS network in
major metropolitan markets throughout the United States. Sprint has also
entered into independent agreements with various network partners, such as
us, under which the network partners have agreed to construct and manage PCS
networks in smaller metropolitan areas and along major highways. 41




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During the fiscal year ended September 30, 2004, we continued to stay
focused on our key financial and operating performance metrics, including net
income and earnings before income, taxes, depreciation and amortization
(EBITDA). Important indicators of our overall performance and financial
well-being include:  
    
    Loss from continuing operations for the year ended September
30, 2004 decreased to $10.1 million, or $1.10 per share for both
basic and diluted outstanding common shares, compared to a loss from
continuing operations of $42.2 million or $8.14 per share for 2003;
    
    EBITDA was $73.2 million for the year ended September 30, 2004
compared to $46.8 million for 2003;
    
    Subscriber gross additions were 160,002 for the year ended
September 30, 2004 compared to 172,007 for 2003;
    
    Churn decreased to 2.8% for the year ended September 30, 2004
compared to 3.2% for 2003; and
    
    Cash, cash equivalents and short-term investment securities
increased to $68.5 million at September 30, 2004 from $54.1 million
at September 30, 2003. As of September 10, 2004 (effective August 1, 2004), we entered into
amendments to our management and services agreements that govern our
relationship with Sprint PCS. These amendments provide us with fixed rates for
back office services provided to us by Sprint PCS and a fixed reciprocal
roaming rate through December 31, 2006. In conjunction with the amendments to our management and services
agreement with Sprint PCS, we agreed to resolve all historical disputes,
including previously disputed charges between us and Sprint PCS. In
conjunction with this resolution, we paid Sprint $6.8 million in September 2004
and recorded an adjustment to reduce cost of service and roaming by
approximately $11.7 million in the fourth fiscal quarter of 2004. As of September 30, 2004, the Company had 384,537 subscribers and total
network coverage of approximately 6.1 million residents, representing
approximately 83% of the 7.4 million residents in its territory. iPCS On November 30, 2001, we acquired iPCS, another Sprint network partner, in
a merger. Because iPCS had a small subscriber base and required relatively high
capital expenditures due to its earlier stage of development, the iPCS
operations were affected by problems in the industry to a greater extent than
the Company. On February 23, 2003, iPCS filed a Chapter 11 bankruptcy petition
in the United States Bankruptcy Court for the Northern District of Georgia for
the purpose of effecting a court administered reorganization. In order to avoid
the loss of the use of iPCS net operating losses as a result of the Companys
recapitalization, on October 17, 2003, the Company irrevocably transferred all
of its shares of iPCS common stock to a trust for the benefit of the Companys
stockholders of record as of that date. The Companys financial statements
reflect iPCS as a discontinued operation. Critical Accounting Policies and Estimates The Company relies on the use of estimates and makes assumptions that
impact its financial condition and results. These estimates and assumptions are
based on historical results and trends as well as the Companys forecasts as to
how these might change in the future. While we believe that the estimates we
use are reasonable, actual results could differ from those estimates. The
Companys most critical accounting policies and estimates that may materially
impact the Companys results of operations include: Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. Effective July 1, 2003 the Company adopted FASB Emerging Issues Task
Force (EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple
Element Deliverables. The EITF guidance addresses how to account for
arrangements that may involve multiple revenue-generating activities, i.e., the
delivery or performance of multiple products, services, and/or rights to use
assets. In applying this guidance, separate contracts with the same party,
entered into at or near the same time, are presumed to be a bundled
transaction, and the consideration is measured and allocated to the separate
units based on their relative fair values. The adoption of 42




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EITF No. 00-21 resulted in substantially all of the activation fee revenue generated from
Company-owned retail stores and associated costs being recognized at the time
the related wireless handset is sold. Previously deferred revenues and costs
continue to be amortized over the remaining estimated life of a subscriber, not
to exceed 30 months. Revenue and costs for activations at other retail
locations continue to be deferred and amortized over their estimated lives. The Company recognizes service revenue from its subscribers as they use
the service. The Company provides a reduction of recorded revenue for billing
adjustments and credits, and estimated uncollectible late payment fees and
early cancellation fees. The Company also reduces recorded revenue for rebates
and discounts given to subscribers on wireless handset sales in accordance with
EITF No. 01-9 Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products). For industry competitive
reasons, the Company sells wireless handsets at a loss. The Company
participates in the Sprint national and regional distribution programs in which
national retailers such as RadioShack and Best Buy sell Sprint PCS products and
services. In order to facilitate the sale of Sprint PCS products and services,
national retailers purchase wireless handsets from Sprint for resale and
receive compensation from Sprint for Sprint PCS products and services sold. For
industry competitive reasons, Sprint subsidizes the price of these handsets by
selling the handsets at a price below cost. Under the Companys Sprint
Agreements, when a national retailer sells a handset purchased from Sprint to a
subscriber in the Companys territory, the Company is obligated to reimburse
Sprint for the handset subsidy. The Company does not receive any revenue from
the sale of handsets and accessories by such national retailers. The Company
classifies these handset subsidy charges as a selling and marketing expense for
a new subscriber handset sale and classifies these subsidies as a cost of
service and roaming for a handset upgrade to an existing subscriber. The Company records equipment revenue from the sale of handsets to
subscribers in its retail stores upon delivery in accordance with EITF No.
00-21. The Company does not record equipment revenue on handsets and
accessories purchased from national third-party retailers such as RadioShack
and Best Buy or directly from Sprint by subscribers in its territory. Sprint is entitled to retain 8% of net billed service revenue from
subscribers based in the Companys markets and from non-Sprint subscribers who
roam onto the Companys network. The amount of affiliation fees retained by
Sprint is recorded as cost of service and roaming. Revenue derived from the
sale of handsets and accessories by the Company and from certain roaming
services are not subject to the 8% affiliation fee from Sprint. Revenue and Cost Data Provided by Sprint Although the Company recognizes its responsibility for all of its internal
controls, we place substantial reliance on the timeliness, accuracy and
sufficiency of certain revenue, accounts receivable and cost data provided by
Sprint which we use in the preparation of our financial statements and
financial disclosures. The data provided by Sprint is the primary source for
our recognition of service revenue and a significant portion of our selling and
marketing and cost of service and operations expenses. At times, we have been
invoiced by Sprint for charges that we believed to be incorrect based on our
agreements with Sprint. We review all charges from Sprint and dispute charges
if appropriate based upon our interpretation of our agreements with Sprint PCS.
When Sprint does not notify us in a timely manner of charges that we have
incurred, we record estimates primarily based on our historical trends and our
estimate of the amount due to Sprint. When any amounts are in dispute with
Sprint they are fully reserved or otherwise provided for. Allowance for Doubtful Accounts Estimates are used in determining the allowance for doubtful accounts and
are based on historical collection and write-off experience, current trends,
credit policies, accounts receivable by aging category and current trends in
the credit quality of our subscriber base. In determining these estimates, the
Company compares historical write-offs in relation to the estimated period in
which the subscriber was originally billed. The Company also looks at the
historical and projected average length of time that elapses between the
original billing date and the date of write-off in determining the adequacy of
the allowance for doubtful accounts by aging category. From this information,
the Company provides specific amounts to the aging categories. The Company
provides an allowance for substantially all receivables over 90 days old. 43




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Using historical information, the Company provides a reduction in revenues
for certain billing adjustments and credits, late payment fees and early
cancellation fees that it anticipates will not be collected. The reserves for
billing adjustments and credits, late payment fees and early cancellation fees
are included in the allowance for doubtful accounts balance. If the allowance
for doubtful accounts is not adequate, it could have a material adverse affect
on the Companys liquidity, financial position and results of operations. The Company continually evaluates its credit policy and evaluates the
impact the subscriber base will have on the business and raises or lowers
credit standards periodically, as allowed by Sprint. Valuation and Recoverability of Long-Lived Assets Long-lived assets such as property and equipment represent approximately
54% of the Companys total assets as of September 30, 2004. Property and
equipment are stated at original cost, less accumulated depreciation and
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of 15 years for the one tower which we own, three to
five years for computer equipment, five years for furniture, fixtures and
office equipment and five to seven years for network assets (other than
towers). The Company reviews long-lived assets for impairment in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. We review our long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected undiscounted future cash flows is less than the
carrying amount of the asset, a loss, if any, is recognized for the difference
between the fair value and the carrying value of the asset. The impairment
analysis is based on our current business and technology strategy, our views of
growth rates for the business, anticipated future economic and regulatory
conditions and expected technological availability. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to
sell the asset. Valuation of Income Taxes Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates applied to expected
taxable income for the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred income tax assets and
liabilities for a change in tax rates is recognized as income in the period
that includes the enactment date. A valuation allowance is provided for
deferred income tax assets based upon the Companys assessment of whether it is
more likely than not that the deferred income tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Significant New Accounting Pronouncements See Note 3 to the consolidated financial statements for the years ended
September 30, 2004, 2003 and 2002 for a description of new accounting
pronouncements and their impact on the Company. The year ended September 30, 2004 compared to year ended September 30, 2003: Results of Operations We derive our revenue from the following sources: Service.We sell wireless personal communications services. The various
types of service revenue associated with wireless communications services
include monthly recurring access and feature charges and monthly non-recurring
charges for local, wireless long distance and airtime usage in excess of the
subscribed usage plan. 44




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Roaming.The Company receives roaming revenue at a per-minute rate from
Sprint and other Sprint PCS network partners when Sprints or its network
partners PCS subscribers from outside of the Companys territory use the
Companys network. The Company pays the same reciprocal roaming rate when
subscribers from its territories use the network of Sprint or its other PCS
network partners. The Company also receives non-Sprint roaming revenue when
subscribers of other wireless service providers who have roaming agreements
with Sprint roam on the Companys network. Equipment.We sell wireless personal communications handsets and
accessories that are used by our subscribers in connection with our wireless
services. Equipment revenue is derived from the sale of handsets and
accessories from Company owned stores, net of sales incentives, rebates and an
allowance for returns. The Companys handset return policy allows subscribers
to return their handsets for a full refund generally within 14 days of
activation. When handsets are returned to the Company, the Company may be able
to reissue the handsets to subscribers at little additional cost. When handsets
are returned to Sprint for refurbishing, the Company receives a credit from
Sprint. For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease) $
    
    (Decrease) %(in thousands)Service revenue
    
    $
    254,488
    
    
    $
    251,481
    
    
    $
    3,007
    
    
    
    1.2
    %Roaming revenue
    
    
    69,708
    
    
    
    68,222
    
    
    
    1,486
    
    
    
    2.2
    %Equipment revenue
    
    
    12,912
    
    
    
    11,645
    
    
    
    1,267
    
    
    
    10.9
    %Total
    
    $
    337,108
    
    
    $
    331,348
    
    
    $
    5,760
    
    
    
    1.7
    %
 Service Revenue.The increase in service revenue for the year ended
September 30, 2004 over the same period of the previous year reflects a higher
average number of subscribers using our network, higher monthly recurring
revenue and feature charges and increased data revenue, partially offset by
lower revenue from minutes over plan, or airtime usage in excess of the
subscribed usage plans and higher customer care and promotional credits. Roaming Revenue.The increase in roaming revenue for the year ended
September 30, 2004 over the same period of the previous year is attributable to
higher inbound roaming traffic partially offset by an approximately 30%
decrease in the reciprocal roaming rate from $0.058 to $0.041 for the period
January 1, 2004 through July 31, 2004. In conjunction with the amendment to
our management and services agreement with Sprint PCS, the reciprocal roaming
rate was increased to $0.058 beginning August 1, 2004. For the year ended
September 30, 2004, the Companys roaming revenue from Sprint and its PCS
network partners was $67.0 million, or approximately 96% of roaming revenue,
compared to $63.8 million or approximately 94% of roaming revenue for the year
ended September 30, 2003. Equipment Revenue.Equipment revenue for the year ended September 30,
2004 increased over the same period of the previous year, primarily due to an
increase in handset and accessory sales of $14.1 million or a 74% increase
prior to rebates and promotion costs, offset by a $13.0 million increase in
handset rebates and promotions. The increase in handset sales is comprised of
an $8.9 million increase in sales of handsets to existing subscribers, a $5.0
million increase in sales to new subscribers and a $0.2 million increase in
accessory sales. Cost of Service and Roaming.Cost of service and roaming principally
consists of costs to support the Companys subscriber base including:  
    
    Cost of roaming;
    
    Network operating costs (including salaries, cell site lease
payments, fees related to the connection of the Companys switches to
the cell sites that they support, inter-connect fees and other expenses
related to network operations);
    
    Bad debt expense related to estimated uncollectible accounts receivable;
    
    Other cost of service includes:  
    
    Back office services provided by Sprint such as customer care, billing and activation; 45




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
    
    The 8% of net billed service revenue representing the Sprint affiliation fee;
    
    Long distance expense relating to inbound roaming revenue and the
Companys own subscribers long distance usage and roaming expense
when subscribers from the Companys territory place calls on Sprints
network; and
    
    Wireless handset subsidies on existing subscriber upgrades sold
through national third-party retailers. For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease) $
    
    (Decrease) %(in thousands)Cost of roaming
    
    $
    54,232
    
    
    $
    53,708
    
    
    $
    524
    
    
    
    1.0
    %Network operating costs
    
    
    47,569
    
    
    
    43,750
    
    
    
    3,819
    
    
    
    8.7
    %Bad debt expense
    
    
    181
    
    
    
    5,220
    
    
    
    (5,039
    )
    
    
    (96.5
    )%Other cost of service
    
    
    59,448
    
    
    
    84,687
    
    
    
    (25,239
    )
    
    
    (29.8
    )%Total cost of service and roaming
    
    $
    161,430
    
    
    $
    187,365
    
    
    $
    (25,935
    )
    
    
    (13.8
    )%
 Cost of Roaming.The increase in cost of roaming for the year ended
September 30, 2004 compared to the same period of the previous year is
attributable to higher outbound roaming traffic partially offset by the lower
reciprocal rate for a portion of the fiscal year discussed above. Cost of
roaming of $51.8 million and $50.4 million or 96% and 94% of the total cost of
roaming was attributable to Sprint and its network partners for the year ended
September 30, 2004 and 2003, respectively. Network Operating Costs.Network operating costs increased for the year
ended September 30, 2004 compared to the same period of the previous year
primarily due to higher network related costs resulting from a 30% increase in
our network usage and increased inter-connect fees. Bad Debt Expense.Bad debt expense decreased for the year ended September
30, 2004 compared to the same period of the previous year. During the year
ended September 30, 2004, the Company recorded a $1.2 million special
settlement received from Sprint resulting from a change in the bad debt profile
for certain subscribers and recorded a $0.3 million reduction in bad debt
expense related to significantly past due accounts receivable which were
previously written-off by Sprint. In addition, we believe the improvements in
the credit quality and payment profile of our subscriber base since we
re-imposed deposits for sub-prime credit subscribers in early 2002 and the
subsequent increases in February 2003 resulted in significant improvements in
accounts receivable write-off experience, increased collections, and the
associated decrease in bad debt expense for the year ended September 30, 2004.
Additionally, we have not seen a significant decline in our collections as a
result of the change in credit policy in April 2004. Other Cost of Service.Other cost of service decreased for the year ended
September 30, 2004 compared to the same period of the previous year. The
decrease was attributable to lower service bureau costs and fees paid to
Sprint, lower wireless handset subsidies, a $2.6 million settlement credit from
Sprint for service bureau fees charged for calendar year 2003, a $1.2 million
special settlement credit resulting from Sprints decision to discontinue their
billing system conversion in 2004 and an $11.7 million special settlement
credit resulting from the resolution of previous disputes with Sprint in
connection with the amendment of our management and services agreement with
Sprint PCS. Cost of Equipment, Other Operating Expenses and Interest For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease) $
    
    (Decrease) %(in thousands)Cost of equipment
    
    $
    29,109
    
    
    $
    21,522
    
    
    $
    7,587
    
    
    
    35.3
    %Selling and marketing
    
    
    50,859
    
    
    
    51,769
    
    
    
    (910
    )
    
    
    (1.8
    )%General and administrative
    
    
    22,430
    
    
    
    23,347
    
    
    
    (917
    )
    
    
    (3.9
    )%Depreciation and amortization of property and
equipment
    
    
    47,829
    
    
    
    46,494
    
    
    
    1,335
    
    
    
    2.9
    %
 46




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For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease) $
    
    (Decrease) %(in thousands)Loss on disposal of property and
equipment
    
    
    48
    
    
    
    518
    
    
    
    (470
    )
    
    
    (90.7
    )%Interest income
    
    
    747
    
    
    
    187
    
    
    
    560
    
    
    
    299.5
    %Interest expense
    
    
    36,285
    
    
    
    42,706
    
    
    
    (6,421
    )
    
    
    (15.0
    )%
 Cost of Equipment.Cost of equipment increased for the year ended
September 30, 2004 compared to the same period of the previous year primarily
as a result of increased retail sales of wireless handsets to existing
subscribers, partially offset by decreased subscriber gross additions. Selling and Marketing Expense.Selling and marketing expense decreased
for the year ended September 30, 2004 compared to the same period of the
previous year reflecting the effect of staff reductions and store closings
implemented in fiscal 2003, partially offset by increased rebate and commission
costs for handsets sold through national third parties and higher advertising
costs. General and Administrative Expense.General and administrative expense
decreased for the year ended September 30, 2004 compared to the same period of
the previous year, as a result of a decrease in outside consulting costs
incurred in fiscal year 2004. Depreciation and Amortization of Property and Equipment.Depreciation and
amortization expense increased for the year ended September 30, 2004 compared
to the same period of the previous year primarily as a result of additional
network assets placed in service in the later part of fiscal year 2003 and
during 2004. The Company purchased $14.1 million and $16.0 million of property
and equipment in the years ended September 30, 2004 and 2003, respectively. Interest Expense.Interest expense decreased for the year ended September
30, 2004 compared to the same period of the previous year as a result of lower
outstanding debt balances and a lower interest rate on the Companys notes. As
a result of the debt restructuring in early calendar 2004, our outstanding
notes were reduced from $300.0 million of 13.5% notes to $159.0 million in 9
3/8% notes and $1.8 million in remaining 13.5% notes. Additionally, the
outstanding balance on our credit facility was $131.2 million with a weighted
average rate of 5.69% at September 30, 2004 compared to $151.3 million with a
weighted average rate of 5.05% at September 30, 2003. Income Tax.No income tax benefit on continuing operations was recorded
for the years ended September 30, 2004 and 2003 as it was not more likely than
not that the income tax benefit would be realized. Loss from Continuing Operations.For the year ended September 30, 2004,
loss from continuing operations improved to $10.1 million compared to $42.2
million for the year ended September 30, 2003. The improvement is the result of
higher revenue, reduced cost of service and roaming, lower selling and
marketing expense and lower interest expense. Income (Loss) from Discontinued Operations.Discontinued operations is
comprised of a $184.1 million non-monetary gain from the elimination of the
investment in iPCS for the year ended September 30, 2004 and a loss from the
discontinued operations of iPCS of $42.6 million during the year ended
September 30, 2003. Non-GAAP Financial Measures and Key Operating Metrics We use certain operating and financial measures that are not calculated in
accordance with accounting principles generally accepted in the United States
of America, or GAAP. A non-GAAP financial measure is defined as a numerical
measure of a companys financial performance that (i) excludes amounts, or is
subject to adjustments that have the effect of excluding amounts, that are
included in the comparable measure calculated and presented in accordance with
GAAP in the statement of income or statement of cash flows; or (ii) includes
amounts, or is subject to adjustments that have the effect of including
amounts, that are excluded from the comparable measure so calculated and
presented. Terms such as subscriber net additions, average revenue per user (ARPU),
churn, and cost per gross addition (CPGA) are important operating metrics
used in the wireless telecommunications industry. These metrics are important
to compare us to other wireless service providers. ARPU and CPGA assist
management in budgeting and 47




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CPGA also assists management in quantifying the incremental costs to acquire a new subscriber. Except for churn and net
subscriber additions, we have included a reconciliation of these metrics to the
most directly comparable GAAP financial measure. Churn and subscriber net
additions are operating statistics with no comparable GAAP financial measure.
ARPU and CPGA are supplements to GAAP financial information and should not be
considered an alternative to, or more meaningful than, revenues, expenses,
income (loss) from continuing operations, or net income (loss) as determined in
accordance with GAAP. Earnings from continuing operations before interest, taxes, depreciation
and amortization, or EBITDA, is a performance metric we use and which is used
by other companies. Management believes that EBITDA is a useful adjunct to
income (loss) from continuing operations and other measurements under GAAP
because it is a meaningful measure of a companys performance, as interest,
taxes, depreciation and amortization can vary significantly between companies
due in part to differences in accounting policies, tax strategies, levels of
indebtedness, capital purchasing practices and interest rates. EBITDA also
assists management in evaluating operating performance and is sometimes used to
evaluate performance for executive compensation. We have included below a
presentation of the GAAP financial measure most directly comparable to EBITDA,
which is income (loss) from continuing operations, as well as a reconciliation
of EBITDA to income (loss) from continuing operations. EBITDA is a supplement
to GAAP financial information and should not be considered an alternative to,
or more meaningful than, net income (loss), income (loss) from continuing
operations, or operating income (loss) as determined in accordance with GAAP.
EBITDA has distinct limitations as compared to GAAP information such as net
income (loss), income (loss) from continuing operations, or operating income
(loss). By excluding interest and income taxes for example, it may not be
apparent that both represent a reduction in cash available to the Company.
Likewise, depreciation and amortization, while non-cash items, represent
generally the decreases in the value of assets that produce revenue for the
Company. ARPU, churn, CPGA, and EBITDA as used by the Company may not be comparable
to a similarly titled measure of another company. The following terms used in this report have the following meanings:  
    
    ARPU summarizes the average monthly service revenue per user,
excluding roaming revenue. The Company excludes roaming revenue from its
ARPU calculation because this revenue is generated from subscribers of
Sprint and other carriers that use our network and not directly from our
subscribers. ARPU is computed by dividing average monthly service
revenue for the period by the average number of subscribers for the
period.
    
    Churn is the average monthly rate of subscriber turnover that both
voluntarily and involuntarily discontinued service during the period,
expressed as a percentage of the average number of subscribers for the
period. Churn is computed by dividing the number of subscribers that
discontinued service during the period, net of 30-day returns, by the
average subscribers for the period.
    
    CPGA summarizes the average cost to acquire new subscribers during
the period. CPGA is computed by adding the equipment margin for handsets
sold to new subscribers (equipment revenues less cost of equipment,
which costs have historically exceeded the related revenues) and selling
and marketing expenses related to adding new subscribers. Equipment
margin on handsets sold to existing subscribers, including handset
upgrade transactions, are excluded, as these costs are incurred
specifically for existing subscribers. The net amount is then divided by
the total new subscribers acquired during the period. Prior to June 30,
2004, the Company included upgrade costs for existing subscribers as a
component of CPGA. The Company believes the measure is more meaningful
and comparable if these costs are excluded given they relate to existing
subscribers. For the years ended September 30, 2004 and 2003, the
Company has excluded handset upgrade costs for existing subscribers from
the CPGA calculation.
    
    EBITDA means earnings from continuing operations before interest,
taxes, depreciation and amortization.  The tables which follow present and reconcile non-GAAP financial measures
and key operating metrics for the Company for the years ended September 30,
2004 and 2003. 48




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For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease)%Total subscribers, end of period
    
    
    384,537
    
    
    
    359,460
    
    
    
    25,077
    
    
    
    7.0
    %Subscriber gross additions
    
    
    160,002
    
    
    
    172,007
    
    
    
    (12,005
    )
    
    
    (7.0
    )%Subscriber net additions
    
    
    25,077
    
    
    
    20,321
    
    
    
    4,756
    
    
    
    23.4
    %Churn
    
    
    2.8
    %
    
    
    3.2
    %
    
    
    (0.4
    )%
    
    NMARPU
    
    $
    57
    
    
    $
    60
    
    
    $
    (3
    )
    
    
    (5.0
    )%CPGA
    
    $
    375
    
    
    $
    361
    
    
    $
    14
    
    
    
    3.9
    %EBITDA (in thousands)
    
    $
    73,232
    
    
    $
    46,827
    
    
    $
    26,405
    
    
    
    56.4
    %
 The reconciliation of ARPU to service revenue, as determined in accordance
with GAAP, is as follows: For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease) %Service revenue (in thousands)
    
    $
    254,488
    
    
    $
    251,481
    
    
    $
    3,007
    
    
    
    1.2
    %Average subscribers
    
    
    371,999
    
    
    
    349,300
    
    
    
    22,699
    
    
    
    6.5
    %ARPU
    
    $
    57
    
    
    $
    60
    
    
    $
    (3
    )
    
    
    (5.0
    )%
 The reconciliation of CPGA to selling and marketing expense, as determined
in accordance with GAAP, is calculated as follows: For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease) %(in thousands, except gross addition data)Selling and marketing expense
    
    $
    50,859
    
    
    $
    51,769
    
    
    $
    (910
    )
    
    
    (1.8
    )%Plus: activation costs
    
    
    3,353
    
    
    
    2,917
    
    
    
    436
    
    
    
    14.9
    %Plus: cost of equipment
    
    
    29,109
    
    
    
    21,522
    
    
    
    7,587
    
    
    
    35.3
    %Less: costs for existing subscribers, net
    
    
    10,439
    
    
    
    2,443
    
    
    
    7,996
    
    
    
    327.3
    %Less: equipment revenue
    
    
    12,912
    
    
    
    11,645
    
    
    
    1,267
    
    
    
    10.9
    %Total acquisition costs
    
    $
    59,970
    
    
    $
    62,120
    
    
    $
    (2,150
    )
    
    
    (3.5
    )%Gross additions
    
    
    160,002
    
    
    
    172,007
    
    
    
    (12,005
    )
    
    
    (7.0
    %)CPGA
    
    $
    375
    
    
    $
    361
    
    
    $
    14
    
    
    
    3.9
    %
 The reconciliation of EBITDA to our reported loss from continuing
operations, as determined in accordance with GAAP, is as follows: For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease)
    
    (Decrease) %(in thousands)Loss from continuing operations
    
    $
    (10,135
    )
    
    $
    (42,186
    )
    
    $
    32,051
    
    
    
    76.0
    %Plus: Depreciation and amortization of property and
equipment
    
    
    47,829
    
    
    
    46,494
    
    
    
    1,335
    
    
    
    2.9
    %Less: Interest income
    
    
    747
    
    
    
    187
    
    
    
    560
    
    
    
    299.5
    %Plus: Interest expense
    
    
    36,285
    
    
    
    42,706
    
    
    
    (6,421
    )
    
    
    (15.0
    )%EBITDA
    
    $
    73,232
    
    
    $
    46,827
    
    
    $
    26,405
    
    
    
    56.4
    %
 Subscriber Gross Additions.Subscriber gross additions decreased for the
year ended September 30, 2004 compared to the same period in 2003. This
decrease is primarily due to the loss of distribution from closed retail stores
and Sprints loss of certain national third-party distribution channels. Subscriber Net Additions.Subscriber net additions increased for the year
ended September 30, 2004, compared to the same period in 2003. This increase is
due to the improved subscriber churn rate partially offset by the reduction in
subscriber gross additions. Churn.Churn improved for the year ended September 30, 2004, compared to
the same period for 2003. The Company has focused on improving the credit
quality of the subscriber base. We believe this improvement in credit 49




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##### Table of Contents



quality may have resulted in the reduction in churn for the year ended September 30,
2004 compared to the same period in 2003. Average Revenue Per User.ARPU decreased for the year ended September 30,
2004 compared to the same period for 2003 primarily as a result of a reduction
in revenue from subscribers using minutes in excess of their subscriber usage
plans and higher subscriber credits, partially offset by an increase in
subscriber monthly recurring charges and higher data revenues. Cost per Gross Addition.CPGA increased for the year ended September 30,
2004 compared to the same period in 2003. The increase reflects the fact that
there were a lower number of gross additions in the denominator partially
offset by a decrease in total acquisition costs. EBITDA.EBITDA for the year ended September 30, 2004 increased from the
same period in 2003. This increase is a result of an increase in revenues,
decrease in cost of service and roaming, and decreased selling and marketing
expense. For the year ended September 30, 2004, cost of service and roaming
included special Sprint settlements of $1.2 million recorded for the change in
certain customer bad debt profiles, a $2.6 million settlement from Sprint for
service bureau fees charged for calendar year 2003, a $1.2 million special
settlement resulting from Sprints decision to discontinue their billing system
conversion, and an $11.7 million special settlement credit from resolution of
previous disputes with Sprint. For the year ended September 30, 2003, EBITDA
was positively impacted by $7.3 million of special settlements received from
Sprint and $1.3 million in settlement credits from Sprint for service bureau
fees charged for calendar year 2002. Year ended September 30, 2003 compared to the year ended September 30, 2002: Revenues Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease) $
    
    (Decrease) %(in thousands)Service revenue
    
    $
    251,481
    
    
    $
    226,504
    
    
    $
    24,977
    
    
    
    11.0
    %Roaming revenue
    
    
    68,222
    
    
    
    74,013
    
    
    
    (5,791
    )
    
    
    (7.8
    )%Equipment revenue
    
    
    11,645
    
    
    
    13,027
    
    
    
    (1,382
    )
    
    
    (10.6
    )%Total
    
    $
    331,348
    
    
    $
    313,544
    
    
    $
    17,804
    
    
    
    5.7
    %
 Service Revenue.The increase in service revenue for the year ended
September 30, 2003 compared to the previous year reflects the higher average
number of subscribers using the Companys network and a special settlement
received from Sprint of $3.7 million, partially offset by lower minute over
plan overage charges. Roaming Revenue.The decrease in roaming revenue for the year ended
September 30, 2003 compared to the previous year reflects a lower reciprocal
roaming rate, offset by higher roaming minutes of use. Sprint has unilaterally
decreased this rate over time, from $0.20 per minute of use prior to June 1,
2001, to $0.10 per minute of use through calendar year 2002 to $0.058 per
minute of use in 2003. Equipment Revenue.Equipment revenue for the year ended September 30,
2003 decreased compared to previous year, primarily due to reduced subscriber
gross additions during the year ended September 30, 2003 compared to the year
ended September 30, 2002. Cost of Service and Roaming Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease) $
    
    (Decrease) %(in thousands)Cost of roaming
    
    $
    53,708
    
    
    $
    57,689
    
    
    $
    (3,981
    )
    
    
    (6.9
    )%Network operating costs
    
    
    43,750
    
    
    
    48,328
    
    
    
    (4,578
    )
    
    
    (9.5
    )%Bad debt expense
    
    
    5,220
    
    
    
    21,343
    
    
    
    (16,123
    )
    
    
    (75.6
    )%Other cost of service
    
    
    84,687
    
    
    
    76,793
    
    
    
    7,894
    
    
    
    10.3
    %
 50




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##### Table of Contents



Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease) $
    
    (Decrease) %(in thousands)Total cost of service and roaming
    
    $
    187,365
    
    
    $
    204,153
    
    
    $
    (16,788
    )
    
    
    (8.2
    )%
 Cost of Roaming.The decrease in the cost of roaming for the year ended
September 30, 2003 compared to the previous year is attributable to the
decrease in the reciprocal roaming rate paid to Sprint and its network
partners, partially offset by increased roaming minutes of use by our
subscribers. The increase in roaming minutes of use is due both to the growth
in the subscriber base as well as the general increase in usage per subscriber
year over year. Cost of roaming of $50.4 million and $52.7 million or 94% and
91% of the total cost of roaming was attributable to Sprint and its network
partners for the years ended September 30, 2003 and 2002, respectively. Network Operating Costs.Network operating costs decreased for the year
ended September 30, 2003 compared to the previous year. The decrease resulted
from more favorable network connectivity-related costs despite the growing
subscriber base and increased subscriber usage. At September 30, 2003, 359,460
subscribers were supported by a network of approximately 800 active cell sites,
four switches and 64 network operations employees, compared to September 30,
2002, when the network consisted of approximately 800 active cell sites, four
switches and 89 network operations employees. Bad Debt Expense.Bad debt expense decreased for the year ended September
30, 2003 compared to the previous year. The decrease in bad debt expense is
attributable to the decrease in payment defaults resulting from the
re-imposition and increase of deposit requirements for sub-prime credit
customers and the improved credit quality of our customer base during the 2003
fiscal year. Sprint has a program in which subscribers with lower quality credit or
limited credit history may nonetheless sign up for services subject to certain
account spending limits, if the subscriber makes a deposit ranging from $125 to
$250. In May 2001, Sprint introduced the No Deposit Account Spending Limit
NDASL Program, in which the deposit requirement was waived except in very
limited circumstances. The NDASL program was replaced in late 2001 with the
Clear Pay program. The Clear Pay program re-instituted the deposit for only the
lowest credit quality subscribers. The NDASL and Clear Pay programs and their
associated lack of general deposit requirements increased the number of
sub-prime credit subscribers. In February 2002, Sprint allowed its network
partners to re-institute deposits in a program called the Clear Pay II program.
In early February 2003, we increased the deposit threshold to $250 for most
sub-prime customers. Other Cost of Service.Other cost of service increased for the year ended
September 30, 2003 compared to the previous year. These other cost of service
expenses, which include long distance expenses, wireless handset upgrades sold
through national third parties to existing subscribers, Sprint affiliation fees
and Sprint service fees to support our customer base, increased primarily
reflecting growth in the subscriber base from 339,139 as of September 30, 2002
to 359,460 as of September 30, 2003 and was partially offset by a $3.6 million
special settlement received from Sprint and a $1.3 million settlement credit
from Sprint for service bureau fees charged for calendar year 2002. Cost of Equipment, Other Operating Expenses and Interest Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease) $
    
    (Decrease) %(in thousands)Cost of equipment
    
    $
    21,522
    
    
    $
    27,778
    
    
    $
    (6,256
    )
    
    
    (22.5
    )%Selling and marketing
    
    
    51,769
    
    
    
    79,099
    
    
    
    (27,330
    )
    
    
    (34.6
    )%General and administrative
    
    
    23,347
    
    
    
    18,143
    
    
    
    5,204
    
    
    
    28.7
    %Depreciation and amortization of property
and equipment
    
    
    46,494
    
    
    
    40,764
    
    
    
    5,730
    
    
    
    14.1
    %Loss on disposal of property and
equipment
    
    
    518
    
    
    
    1,074
    
    
    
    (556
    )
    
    
    (51.8
    )%Interest income
    
    
    187
    
    
    
    161
    
    
    
    26
    
    
    
    16.1
    %Interest expense
    
    
    42,706
    
    
    
    35,474
    
    
    
    7,232
    
    
    
    20.4
    %
 Cost of Equipment.Cost of equipment decreased for the year ended
September 30, 2003 compared to the previous year as a result of the reduction
in the number of subscribers added during the period. 51




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Selling and Marketing.Selling and marketing expense decreased for the
year ended September 30, 2003 compared to the previous year reflecting reduced
gross subscriber additions, a reduction in our staff of 103 employees, nine
store closings, and reduced advertising and promotion expenses, partially
offset by severance and similar costs. At September 30, 2003, there were approximately 343 employees performing
sales and marketing functions, compared to 480 sales and marketing employees as
of September 30, 2002. General and Administrative.General and administrative expense increased
for the year ended September 30, 2003 compared to the previous year as a result
of increased spending for costs associated with the recapitalization plan
effected in February 2004 of $3.0 million, outside consultants providing
services to help us identify cost saving opportunities and costs associated
with migrating the accounting function to Atlanta, Georgia from Geneseo,
Illinois. Depreciation and Amortization of Property and Equipment.Depreciation and
amortization expense increased for the year ended September 30, 2003 compared
to the previous year primarily as a result of capital additions at the end of
fiscal year 2002 that were depreciated for a full year in fiscal year 2003. The Company incurred capital expenditures of $16.0 million for the year
ended September 30, 2003, compared to $40.3 million for the year ended
September 30, 2002. Loss on Disposal of Property and Equipment.Loss on disposal of property
and equipment decreased for the year ended September 30, 2003 compared to the
previous year. The loss for the year ended September 30, 2003 was the result of
store closures. The loss for the year ended September 30, 2002 related to the
abandonment of eleven cell sites. Interest Expense.Interest expense increased for the year ended September
30, 2003 compared to the previous year as a result of increased borrowings
under the credit facility, which was partially offset by lower interest rates,
and an increase in the accreted value of the 131⁄2% notes. The Company had borrowings, including accreted value, of $404.3 million as
of September 30, 2003, compared to $356.3 million at September 30, 2002. Loss from Continuing Operations.For the year ended September 30, 2003,
loss from continuing operations improved to $42.2 million compared to $92.8
million for the previous year. The improvement is the result of higher revenue
and lower operating expenses, offset in part by higher interest expense. Loss from Discontinued Operations.Discontinued operations is comprised
of a loss from discontinued operations of iPCS of $42.6 million and $903.8
million, for the years ended 2003 and 2002 respectively. Non-GAAP Financial Measures and Key Operating Metrics The tables which follow present and reconcile non-GAAP financial measures
and key operating metrics for the Company for the years ended September 30,
2003 and 2002. Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease) %Total subscribers, end of period
    
    
    359,460
    
    
    
    339,139
    
    
    
    20,321
    
    
    
    6.0
    %Subscriber gross additions
    
    
    172,007
    
    
    
    247,221
    
    
    
    (75,214
    )
    
    
    (30.4
    )%Subscriber net additions
    
    
    20,321
    
    
    
    104,116
    
    
    
    (83,795
    )
    
    
    (80.5
    )%Churn
    
    
    3.2
    %
    
    
    3.5
    %
    
    
    (0.3
    )%
    
    NMARPU
    
    $
    60
    
    
    $
    61
    
    
    $
    (1
    )
    
    
    (1.6
    )%CPGA*
    
    $
    375
    
    
    $
    389
    
    
    $
    (14
    )
    
    
    (3.6
    )%EBITDA (in thousands)
    
    $
    46,827
    
    
    $
    (16,703
    )
    
    $
    63,530
    
    
    NM
 52




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*
    
    CPGA has not been adjusted to exclude upgrade costs for existing
subscribers to reflect the change to the calculation effective on June 30,
2004. The Company did not separately identify upgrade costs in fiscal
year 2002. The reconciliation of ARPU to service revenue, as determined in accordance
with GAAP, is as follows: Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease) %Service revenue (in thousands)
    
    $
    251,481
    
    
    $
    226,504
    
    
    $
    24,977
    
    
    
    11.0
    %Average subscribers
    
    
    349,300
    
    
    
    310,013
    
    
    
    39,287
    
    
    
    12.7
    %ARPU
    
    $
    60
    
    
    $
    61
    
    
    $
    (1
    )
    
    
    (1.6
    )%
 The reconciliation of CPGA to selling and marketing expense, as determined
in accordance with GAAP, is calculated as follows: Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease) %(in thousands, except gross additions data)Selling and marketing expense
    
    $
    51,769
    
    
    $
    79,099
    
    
    $
    (27,330
    )
    
    
    (34.6
    )%Plus: activation costs
    
    
    2,917
    
    
    
    2,442
    
    
    
    475
    
    
    
    19.5
    %Plus: cost of equipment
    
    
    21,522
    
    
    
    27,778
    
    
    
    (6,256
    )
    
    
    (22.5
    )%Less: equipment revenue
    
    
    11,645
    
    
    
    13,027
    
    
    
    (1,382
    )
    
    
    (10.6
    )%Total acquisition costs
    
    $
    64,563
    
    
    $
    96,292
    
    
    $
    (31,729
    )
    
    
    (33.0
    )%Gross additions
    
    
    172,007
    
    
    
    247,221
    
    
    
    (75,214
    )
    
    
    (30.4
    )%CPGA
    
    $
    375
    
    
    $
    389
    
    
    $
    (14
    )
    
    
    (3.6
    )%
 The reconciliation of EBITDA to loss from continuing operations, as
determined in accordance with GAAP, is as follows: Years Ended September 30,Increase
    
    Increase2003
    
    2002
    
    (Decrease)
    
    (Decrease) %(in thousands)Loss from continuing operations
    
    $
    (42,186
    )
    
    $
    (92,780
    )
    
    $
    50,594
    
    
    
    NMPlus: Depreciation and amortization of property and
equipment
    
    
    46,494
    
    
    
    40,764
    
    
    
    5,730
    
    
    
    14.1
    %Less: Interest income
    
    
    187
    
    
    
    161
    
    
    
    26
    
    
    
    16.1
    %Plus: Interest expense
    
    
    42,706
    
    
    
    35,474
    
    
    
    7,232
    
    
    
    20.4
    %EBITDA
    
    $
    46,827
    
    
    $
    (16,703
    )
    
    $
    63,530
    
    
    
    NM
 Subscriber Gross Additions.Subscriber gross additions for the year ended
September 30, 2003 decreased compared to the previous year. The decrease is
attributable to an increase in the deposit amounts required for sub-prime
credit customers, the loss of distribution from closing retail stores, Sprints
loss of certain national third-party distribution channels, staff reductions
and sales compensation plan changes. Subscriber Net Additions.Subscriber net additions for the year ended
September 30, 2003 decreased compared to the previous year. The decline is
primarily due to a decrease in gross subscriber additions and an increase in
the total number of subscribers who terminated service during the period. Churn.Churn for the year ended September 30, 2003 improved compared to
the previous year primarily as a result of a decrease in the number of
sub-prime credit quality subscribers whose service was involuntarily
discontinued during the period. Average Revenue Per User.ARPU for the year ended September 30, 2003
decreased compared to the previous year. The decrease in average revenue per
user reflects lower minute over plan overage charges per user and lower
cancellation fees per user, which was partially offset by increased
monthly recurring charges per user, and an increase in E911 and WLNP payments. 53




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Cost Per Gross Addition.CPGA for the year ended September 30, 2003
improved compared to the previous year as a result of reduced customer
acquisition costs, partially offset by fewer subscriber gross additions. EBITDA.EBITDA for the year ended September 30, 2003 improved compared to
the previous year. During the year ended September 30, 2003, EBITDA was
primarily affected by $25.0 million in higher service revenues, a $27.3 million
reduction in sales and marketing expenses, primarily in advertising, a $16.1
million improvement in bad debt expense and $7.3 million in special settlements
received from Sprint and $1.3 million in settlement credits from Sprint for
service bureau fees charged for calendar year 2002. Liquidity and Capital Resources As of September 30, 2004, the Company had $13.5 million in cash and cash
equivalents compared to $54.1 million in cash and cash equivalents at September
30, 2003. The Companys working capital for September 30, 2004 was $24.2
million, compared to working capital of $12.5 million at September 30, 2003.
The decrease in the Companys cash and cash equivalents of $40.6 million is
attributable to the following: For the Years Ended September 30,Increase
    
    Increase2004
    
    2003
    
    (Decrease) $
    
    (Decrease) %(in thousands)Cash (used in)provided by operating activities
    
    $
    (405
    )
    
    $
    50,181
    
    
    $
    (50,586
    )
    
    
    (100.8
    )%Cash used in investing activities
    
    
    (14,083
    )
    
    
    (16,023
    )
    
    
    1,940
    
    
    
    12.1
    %Cash (used in) provided by financing activities
    
    
    (26,137
    )
    
    
    15,033
    
    
    
    (41,170
    )
    
    
    (273.9
    )%Net (decrease) increase
    
    $
    (40,625
    )
    
    $
    49,191
    
    
    $
    (89,816
    )
    
    
    (182.6
    )%
 Cash (Used in) Provided by Operating Activities.The $0.4 million of cash
used in operating activities for the year ended September 30, 2004 was the
result of the Companys $174.0 million net income offset by non-cash items
including gain on discontinued operations, depreciation, amortization of note
discounts, financing costs, provision for doubtful accounts, non-cash stock
compensation and loss on disposal of property and equipment totaling $118.3
million and a decrease in other operating assets and liabilities of $56.1
million. The $50.2 million of cash provided by operating activities for the
year ended September 30, 2003 was the result of the Companys $84.8 million net
loss offset by non-cash items including loss on discontinued operations,
depreciation, amortization of note discounts, financing costs, provision for
doubtful accounts and non-cash stock option compensation, loss on disposal of
property and equipment totaling $129.7 million and an increase in other
operating assets and liabilities of $5.3 million. Cash Used in Investing Activities.The $14.1 million of cash used in
investing activities for the year ended September 30, 2004 represents purchases
of property and equipment related to expansion of switch capacity and
improvements in network coverage. For the year ended September 30, 2003, cash
used in investing activities was $16.0 million for purchases of property and
equipment related to expansion of switch capacity and improvements in network
coverage. Cash (Used In) Provided by Financing Activities.The $26.1 million in
cash used in financing activities during the year ended September 30, 2004,
consisted of $20.3 million for principal payments under the credit facility and
$4.8 million in debt restructuring costs which were capitalized as part of
paid-in-capital, and $1.1 million in fees capitalized related to amendments to
the credit facility. The $15.0 million of cash provided by financing activities
during the year ended September 30, 2003 consisted of $17.0 million borrowed
under the senior credit facility, offset by $2.0 million of principal payments
under the credit facility. Liquidity.We have principally relied on the proceeds from equity and
debt financings and cash provided from operations as our primary sources of
capital. As of September 30, 2004, the Company had cash and cash equivalents of
$13.5 million, short-term investment securities of $55.0 million, working
capital of $24.2 million, and no remaining availability under its credit
facility. As a result, the Company is completely dependent on available cash and
operating cash flow to pay debt service and meet its other capital needs. If
such sources are not sufficient, alternative funding sources may not be
available. 54




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Completion of our PCS network has required substantial capital. Since
inception through fiscal 2004 we incurred over $300 million for capital
expenditures. The Company currently expects capital expenditures for fiscal
2005 to be approximately $25 to $35 million. Although we have essentially
completed our network coverage build-out, our business will likely require
additional capital expenditures primarily for capacity enhancements and
coverage improvements. Additionally, to the extent we decide to expand our
network or deploy next generation technologies, we may also require additional
financing to fund these projects. Capital Resources.As of September 30, 2004, the Company had $13.5
million of cash and cash equivalents and $55.0 million of short-term investment
securities. The Company had no further borrowing available under the credit
facility. While we do not currently anticipate the need to raise additional capital
to meet our operating and capital expenditure requirements in the foreseeable
future, our funding status is dependent on a number of factors influencing
projections of operating cash flows, including those related to gross new
subscriber additions, subscriber turnover, revenues, selling and marketing
cost, bad debt expense, and roaming revenue and cost. Further, we believe that
the cash on hand plus the additional liquidity that we expect to generate from
operations will be sufficient to meet the cash requirements of the business
including capital expenditures, operating losses, cash interest and working
capital needs for at least the next twelve months. Should actual results differ
significantly from our current assumptions, our liquidity position could be
adversely affected and we could be in a position that would require us to raise
additional capital, which may not be available to us or may not be available on
acceptable terms. Further, if we fail to satisfy the covenants and other requirements
contained in our indentures governing our outstanding notes, our debts could
become immediately payable at a time when we are unable to pay them, without
additional capital. Recent Developments. Issuance of $175 Million Notes.On October 25, 2004, the Company issued $175.0 million of first priority
senior secured floating rate notes due 2011 at par value. The notes bear
interest at a rate equal to the three-month London Interbank Borrowed Rate
(LIBOR) plus 3.75%, reset quarterly. Proceeds from the notes were used to
repay and terminate the Companys $131.2 million senior credit facility (also
at LIBOR plus 3.75%), redeem the Companys $1.8 million 13 1/2% senior
subordinated discount notes due 2009, and for general corporate purposes. In
October 2004, the Company incurred and capitalized approximately $4.5 million
of fees and expenses related to the $175 million note offering and expensed
previously paid transaction fees related to the credit facility and the 13.5%
notes totaling approximately $2.8 million. Each of our subsidiaries jointly, severally and unconditionally guarantee
the notes on a senior secured basis. The notes and the guarantees constitute
senior debt. They rank equally in right of payment with all of our and the
guarantors existing and future senior debt and senior in right of payment to
all of our and the guarantors existing and future subordinated debt, including
our 9 3/8% notes and the related guarantees. The notes contain covenants, subject to certain exceptions, that restrict
the Companys ability to, among other things, incur more debt; create liens;
repurchase stock and make certain investments; pay dividends, make loans or
transfer property or assets; enter into sale and leaseback transactions;
transfer or dispose of substantially all of the Companys assets; or engage in
transactions with affiliates. Notwithstanding the covenants restricting the
ability of the Company to incur debt, the Company is permitted to, among other
things, incur up to $50.0 million of additional indebtedness, including
additional notes, and other obligations that may also be secured by liens on
the collateral that are pari passu with the first priority liens securing the
$175 million notes. If the Company undergoes a change of control (as defined
in the indenture that governs the notes), then it must make an offer to
repurchase the notes at 101% of their principal amount, plus accrued and unpaid
interest. Merger Agreement with Alamosa Holdings, Inc.On December 7, 2004, we
entered into an Agreement and Plan of Merger (the Merger Agreement) with
Alamosa Holdings, Inc. (Alamosa) and A-Co. Merger Sub, Inc., a
direct wholly-owned subsidiary of Alamosa (Merger Sub). The description
of the Merger Agreement set forth below is qualified in its entirety by
reference to the actual terms of the Merger Agreement, which we filed with the
Securities and Exchange Commission as Exhibit 2.1 to a current report on Form
8-K filed on December 9, 2004. 55




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##### Table of Contents



Pursuant to the Merger Agreement, the Company will merge (the Merger)
with and into Merger Sub with Merger Sub surviving. After the Merger, the
Company will be a subsidiary of Alamosa. Under the terms of the Merger
Agreement, Company shareholders will receive 2.87 Alamosa shares for every
share of Company common stock they hold. In addition, Company shareholders will
have the option to elect cash consideration in place of Alamosa stock, up to an
aggregate amount of $100 million, with the per share cash consideration (the
Per Share Cash Consideration) based on the average closing price of Alamosa
stock in the ten trading days prior to the completion of the transaction
multiplied by 2.87 (the Per Share Amount). The Per Share Cash Consideration
is subject to proration to ensure that Alamosa exchanges no more than $100
million in aggregate cash consideration. Immediately prior to the effective time of the Merger, all outstanding
options for our common stock will become vested in full and we will pay the
holders an amount in cash equal to the number of shares of our common stock
issuable thereunder times the amount, if any, by which the Per Share Amount
exceeds the exercise price of the options. All outstanding restricted stock
units (RSUs) will be terminated and we will pay the holder an amount in cash
equal to the Per Share Amount for each RSU held. Outstanding warrants for our
common stock will become exercisable for Alamosa common stock and cash in the
same proportion as our shareholders receive in the aggregate in the Merger. The completion of the Merger is subject to various customary closing
conditions, including obtaining the approval of the Companys and Alamosas
stockholders, the expiration of the applicable waiting period under the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1974 and the consent of Sprint
PCS. In the event of a termination of the Merger Agreement under certain
circumstances, the Company or Alamosa may be required to pay the other a
termination fee as set forth in the Merger Agreement. Pursuant to the Merger Agreement, Alamosa has agreed to assume our
obligations with respect to certain currently effective registration statements
covering our outstanding Notes (as defined below) and warrants. In addition,
the Indentures (the Indentures) governing our outstanding 9 3/8% Senior
Subordinated Discount Notes due 2009 and our First Priority Senior Secured
Floating Rate Notes due 2011 (together, the Notes), provide that we may be
required to effect a repurchase offer of such Notes upon a change of control of
the Company. Pursuant to the Merger Agreement, Alamosa has agreed that it
shall, or shall cause Merger Sub, to effect such repurchase offers, if so
required by the Indentures. Equipment Purchase Commitment..In December 2004, the Company entered
into an agreement with an equipment vendor to purchase network products and
services which provides for a minimum purchase commitment of $80 million during
the time period beginning October 1, 2004 and ending on September 30, 2009.
The Company plans to both buy new equipment and replace existing equipment.
The Company will evaluate the remaining economic life of any equipment that it
replaces and accelerate depreciation if necessary. Future Trends That May Affect Operating Results, Liquidity and Capital
Resources During 2003, we experienced overall declining net subscriber growth
compared to previous periods. This decline was attributable to increased
competition and slowing aggregate subscriber growth in the wireless
telecommunications industry. Although we have experienced improvements in
subscriber growth during fiscal 2004, we may continue to experience net losses
as the cost to acquire subscribers is significant. If the trend of slowing net
subscriber growth does not improve, we believe it will lengthen the amount of
time it will take for us to reach a sufficient number of subscribers needed to
offset the costs of acquisition. The FCC implemented WLNP in the 100 largest
metropolitan areas in the United States in November 2003 and required all
remaining markets to be in compliance by May 2004. It is not yet clear what
effect the WLNP mandate will have on subscriber growth, although we believe
that it may lead to some increase in gross subscriber additions as it makes
switching service providers easier for subscribers but may also lead to
increased competition among service providers. Through September 30, 2004, we have not experienced a material impact to
churn related to WLNP with respect to the markets in which we operate. If
average monthly churn increases over the long-term, we would lose the cash
flows attributable to those customers and have greater than projected losses. 56




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We may incur significant handset subsidy costs for existing customers who
upgrade their handsets. As our subscriber base matures and technological
advances in our services take place, we believe more of our existing
subscribers will begin to upgrade to new handsets to take advantage of these
services. We have limited historical experience regarding the rate at which
existing subscribers upgrade their handsets and if more subscribers upgrade
than we are currently anticipating, it could have a material adverse impact on
our results of operations or cash flows. Contractual Obligations As of September 30, 2004, the Company was obligated to make future
payments under various contracts it has entered into, including amounts
pursuant to the credit facility, the 131⁄2% notes, the 9 3/8% notes and
non-cancelable operating lease agreements for office space, cell sites,
vehicles and office equipment. Expected future minimum contractual cash
obligations for the next five years and in the aggregate at September 30, 2004,
are as follows: Payments Due By Period for Years Ending September 30,Total
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter(in thousands)Credit facility, principal(1)(2)
    
    $
    131,200
    
    
    $
    21,200
    
    
    $
    30,107
    
    
    $
    39,893
    
    
    $
    40,000
    
    
    
    
    
    
    
    Credit facility, interest(2)(3)
    
    
    18,016
    
    
    
    7,087
    
    
    
    5,714
    
    
    
    3,778
    
    
    
    1,437
    
    
    
    
    
    
    
    131⁄2% notes, principal(2)
    
    
    1,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,795
    
    
    
    131⁄2% notes, interest(2)
    
    
    1,212
    
    
    
    242
    
    
    
    242
    
    
    
    242
    
    
    
    243
    
    
    
    243
    
    
    
    9 3/8% notes, principal
    
    
    159,035
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,035
    
    
    
    9 3/8% notes, interest
    
    
    77,032
    
    
    
    14,909
    
    
    
    14,909
    
    
    
    14,909
    
    
    
    14,909
    
    
    
    17,396
    
    
    
    Operating leases(4)
    
    
    88,959
    
    
    
    16,895
    
    
    
    12,764
    
    
    
    10,812
    
    
    
    9,770
    
    
    
    8,905
    
    
    
    29,813$
    477,249
    
    
    $
    60,333
    
    
    $
    63,736
    
    
    $
    69,634
    
    
    $
    66,359
    
    
    $
    187,374
    
    
    $
    29,813
   (1)
    
    Total repayments are based upon borrowings outstanding as of September
30, 2004.(2)
    
    Principal and accrued interest under the credit
facility and the 131⁄2%
notes were repaid with the proceeds of the $175 million notes issued in
October 2004. The $175 million notes are due October 2011 and pay
interest quarterly beginning January 2005.(3)
    
    Interest rate is assumed to be 5.75%. As of September 30, 2004, the
weighted-average interest rate on the credit facility was 5.69%.(4)
    
    Operating leases do not include payments due under renewals to the
original lease term. On August 16, 1999, the Company entered into a $153.5 million senior
credit facility. The credit facility was amended on November 30, 2003 and
provided for (i) a $13.5 million senior secured term loan (Tranche I Term
Loan) which was scheduled to mature on June 6, 2007 and (ii) a $140.0 million
senior secured term loan (Tranche II Term Loan) which was scheduled to mature
on September 30, 2008. Under the credit facility, the Company made quarterly
payments that began on December 31, 2002 for the Tranche I Term Loan and March
31, 2004 for the Tranche II Term Loan. The quarterly payments were
predetermined based upon a percentage of the aggregate balance and consisted of
(i) eight payments of 3.75%, (ii) four payments of 5.0%, (iii) six payments of
7.143% and (iv) a final payment of 7.142%. No amounts remain available for
borrowing under the credit facility. All the assets of the Company and its
restricted subsidiaries secured the credit facility. The interest rate for the
credit facility was determined on a margin above either the prime lending rate
in the United States or LIBOR. The credit facility contains ongoing financial covenants, including
reaching covered population targets, maximum annual spending on capital
expenditures, attaining minimum subscriber revenues, and maintaining certain
leverage and other ratios such as debt to total capitalization, debt to EBITDA
(as defined in the credit facility agreement, Bank EBITDA) and Bank EBITDA to
fixed charges. The credit facility restricted the ability of the Company and
its restricted subsidiaries to: create liens; incur indebtedness; make certain
payments, including payments of dividends and distributions in respect of
capital stock; consolidate, merge and sell assets and engage in certain
transactions with affiliates. As of September 30, 2004, the Company was in
compliance in all material respects with covenants contained in the credit
facility. The credit facility was repaid with the proceeds of a note offering
in October 2004. See Recent Developments. On February 20, 2004, the Company issued approximately $159.0 million in
aggregate principal amount of 9 3/8% notes that mature on September 1, 2009 and
shares of common stock representing approximately 56.0% of the shares of our
common stock issued and outstanding immediately after the recapitalization in
exchange for 131⁄2% notes in an aggregate principal amount of $298.2 million.
The 9 3/8% notes began accruing interest on January 1, 57




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##### Table of Contents



2004, and interest is payable each January 1 and July 1. Interest payments began on July 1, 2004.
The Company may redeem some or all of the 9 3/8 % notes at any time on or after
January 1, 2006 at specified redemption prices. The
9 3/8% notes are subordinated to up to $175.0 million of the Companys
senior debt under its senior facility and are fully and unconditionally
guaranteed on a senior subordinated basis by the Companys subsidiaries that
guarantee the Companys obligations under the credit facility. In addition, the
9 3/8% notes are secured by a second-priority lien, subject to certain exceptions
and permitted liens, on all the collateral that secures the Companys and its
guarantor subsidiaries obligations under the Companys credit facility. If the
Company undergoes a change of control (as defined in the indenture that governs
the 9 3/8% notes), then it must make an offer to repurchase the 9 3/8% notes at 101%
of the principal amount of the notes then outstanding. The 9 3/8% notes contain covenants, subject to certain exceptions, that
prohibit the Companys ability to, among other things, incur more debt; create
liens; repurchase stock and make certain investments; pay dividends, make loans
or transfer property or assets; enter into sale and leaseback transactions,
transfer or dispose of substantially all of the Companys assets; or engage in
transactions with affiliates. Some exceptions to the restrictions on the
Companys ability to incur more debt include: up to $175.0 million of
indebtedness under the Companys senior facility or its replacement; up to $5.0
million of capital lease obligations; and up to $50.0 million of additional
general indebtedness. As of September 30, 2004, the Company was in compliance
in all material respects with covenants contained in the note indenture. The Company has no off-balance sheet arrangements and has not entered into
any transactions involving unconsolidated, limited purpose variable interest
entities or commodity contracts. As of September 30, 2004, two major credit rating agencies rate the
Companys unsecured debt. The ratings were as follows: Type of facility
    
    S&P
    
    Moodys9 3/8% notes
    
    CCC
    
    CaalCredit facility.
    
    CCC+
    
    
    B2
 
 ITEM 7A.Quantitative And Qualitative Disclosure About Market Risk In the normal course of business, the Companys operations are exposed to
interest rate risk on its credit facilities and any future financing
requirements. As of September 30, 2004, the Companys fixed rate debt consisted
primarily of 9 3/8% senior subordinated notes ($159.0 million at September 30,
2004) due in 2009 and variable rate debt consisted of borrowings made under the
credit facility ($131.2 million at September 30, 2004). As of September 30,
2004, the weighted average interest rate under the credit facility was 5.69%.
Our primary interest rate risk exposures relate to (i) the interest rate on
long-term borrowings; (ii) our ability to refinance the 9 3/8% notes at
maturity at market rates; and (iii) the impact of interest rate movements on
our ability to meet interest expense requirements and financial covenants under
our debt instruments. The Company manages the interest rate risk on its outstanding long-term
debt through the use of a combination of fixed and variable rate debt. While
the Company cannot predict its ability to refinance existing debt or the impact
interest rate movements will have on existing debt, the Company continues to
evaluate its interest rate risk on an ongoing basis. The following table presents the estimated future balances of outstanding
long-term debt projected at the end of each period and future required annual
principal payments for each period then ended associated with the Companys
notes and credit facility. 58




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##### Table of Contents



Years Ending September 302005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter( in thousands)9 3/8%
notes
    
    $
    159,035
    
    
    $
    159,035
    
    
    $
    159,035
    
    
    $
    159,035
    
    
    
    
    
    
    
    Fixed interest
rate
    
    
    9 3/8
    %
    
    
    9 3/8
    %
    
    
    9 3/8
    %
    
    
    9 3/8
    %
    
    
    9 3/8
    %
    
    
    Principal
payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    159,035
    
    
    
    Credit
facility(1)
    
    $
    110,000
    
    
    $
    79,893
    
    
    $
    40,000
    
    
    
    
    
    
    
    
    
    
    
    Variable interest rate
(2)
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    5.75
    %
    
    
    
    
    
    
    Principal
payments
    
    $
    21,200
    
    
    $
    30,107
    
    
    $
    39,893
    
    
    $
    40,000
    
    
    
    
    
    
    
    13.5%
notes(1)
    
    $
    1,795
    
    
    $
    1,795
    
    
    $
    1,795
    
    
    $
    1,795
    
    
    
    
    
    
    
    Fixed interest
rate
    
    
    13.5
    %
    
    
    13.5
    %
    
    
    13.5
    %
    
    
    13.5
    %
    
    
    13.5
    %
    
    
    Principal
payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,795
    
    
    
    
  (1)
    
    Principal and accrued interest under the credit facility and
the 13 1/2% notes were repaid with
the proceeds of the $175 million notes issued in October 2004. The $175 million notes are due
October 2011 and pay interest quarterly beginning January 2005.(2)
    
    The interest rate on the credit facility equals LIBOR plus 3.75%. LIBOR is assumed to equal 2.0%
for all periods presented. A 1% increase (decrease) in the variable interest rate would result in
a $3.1 million increase (decrease) in the related interest expense over the balance of the credit
facilitys term as of September 30, 2004. 
 ITEM 8.Financial Statements and Supplementary Data Our financial statements are listed under Item 15(a) of this annual report
and are filed as part of this report on the pages indicated. 
 ITEM 9.Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure None. 
 ITEM 9A.Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports pursuant to the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commissions rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. As of the end of the period covered by this report, September 30, 2004
(the Evaluation Date), we carried out an evaluation, under the supervision
and with the participation of the Companys management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of the Evaluation
Date. Under our agreements with Sprint, Sprint provides us with billing,
collections, customer care and other back office services. As a result, Sprint
remits approximately 96% of our revenues to us. In addition, approximately 68%
of cost of service and roaming in our consolidated financial statements relate
to charges from Sprint for its affiliation fee, charges for services provided
under our agreements with Sprint such as billing, collections and customer
care, roaming expense, long-distance, and pass-through and other fees and
expenses. The Company, as a result, necessarily relies on Sprint to provide
accurate, timely and sufficient data and information to properly record our
revenues, expenses and accounts receivable which underlie a substantial portion
of our periodic financial statement and other financial disclosures. The relationship with Sprint is
established by our agreements and our flexibility to use a service provider
other than Sprint is limited. Although the Company acknowledges its responsibility for all of its
internal controls, because of our reliance on Sprint for financial information,
we depend on Sprint to design adequate internal controls with respect to the 59




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##### Table of Contents



processes established to provide this data and information to the Company and
Sprints other network partners. As part of this control process, Sprint
engages its service auditors to perform a periodic evaluation of these controls
and to provide a Report on Controls Placed in Operation and Tests of Operating
Effectiveness for the Reporting and Financial Settlement Process under
guidance provided in Statement of Auditing Standards No. 70 (Type II SAS 70
reports). The Type II SAS 70 report is provided to us semi-annually and
covers our entire fiscal year. There was no change in the Companys internal control over financial
reporting during the fourth quarter of fiscal 2004 identified in connection
with the evaluation described above that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting. 
 PART III 
 ITEM 10.Directors and Executive Officers of the Registrant. The information required by this item is incorporated by reference to the
Companys Proxy Statement to be delivered in connection with its 2005 Annual
Stockholder Meeting (the Proxy Statement). The Company intends to file the
Proxy Statement within 120 days after the end of its fiscal year. 
 ITEM 11.Executive Compensation. The information required by this item is incorporated by reference to the
Companys Proxy Statement. 
 ITEM 12.Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of September 30, 2004 with
respect to shares of our common stock that may be issued under the Companys
existing equity compensation plans, which include:  
    
    the AirGate PCS, Inc. 1999 Stock Option Plan,  
    
    the AirGate PCS, Inc. Amended and Restated 2000 Long-Term Incentive Plan, which the Company assumed when it acquired iPCS in November 2001,  
    
    the AirGate PCS, Inc. 2001 Non-Executive Stock Option Plan,  
    
    the AirGate PCS, Inc. Amended and Restated 2002 Long-Term Incentive Plan, and  
    
    the AirGate PCS, Inc. 2001 Employee Stock Purchase Plan (c) Number of SecuritiesRemaining Available for(a) Number of
    
    
    
    
    
    Future Issuance UnderSecurities to be Issued
    
    (b) Weighted Average
    
    Equity CompensationUpon Exercise of
    
    Exercise Price of
    
    Plans (Excluding
    
    (d) Total of SecuritiesOutstanding Options,
    
    Outstanding Options,
    
    Securities Reflected
    
    Reflected inPlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    in Column (a))
    
    Columns (a) and (c)Equity Compensation Plans Approved by
Stockholders
    
    
    41,273
    (2)
    
    $
    158.61
    
    
    
    
    (1)
    
    
    41,27343,876
    (3)
    
    $
    154.57
    
    
    
    
    (1)
    
    
    43,876567,226
    (4)
    
    $
    14.48
    
    
    
    624,424
    
    
    
    1,191,650
    
    
    
    
    
    
    
    14,655
    (6)
    
    
    14,655Equity Compensation Plans Not Approved by
Stockholders
    
    
    7,507
    (5)
    
    $
    223.86
    
    
    
    
    (1)
    
    
    7,507TOTAL
    
    
    659,882
    
    
    $
    40.00
    
    
    
    639,079
    
    
    
    1,298,961
 60




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##### Table of Contents



(1)
    
    The right to issue options under this plan terminated upon shareholder approval of the Amended and Restated 2002 Long-Term Incentive Plan.  (2)
    
    Issued under the AirGate PCS, Inc. 1999 Stock Option Plan.  (3)
    
    Issued under the AirGate PCS, Inc. Amended and Restated 2000 Long-Term Incentive Plan.  (4)
    
    Issued under the AirGate PCS, Inc. Amended and Restated 2002 Long-Term Incentive Plan.  (5)
    
    Issued under the AirGate PCS, Inc. 2001 Non-Executive Stock Option Plan. Options granted under the plan vest ratably over a four-year period
beginning at the grant date and expire ten years from the date of grant. Initially, 30,000 shares were reserved for issuance. Upon adoption of the
Companys Amended and Restated 2002 Long-Term Incentive Plan, future grants of options under the 2001 Non-Executive Plan were prohibited.  (6)
    
    Shares of common stock authorized for issuance under the AirGate PCS, Inc. 2001 Employee Stock Purchase Plan. The remaining information called for by this item is incorporated herein
by reference to the Companys Proxy Statement. 
 ITEM 13.Certain Relationships and Related Transactions. The information required by this item is incorporated by reference to the
Companys Proxy Statement. 
 ITEM 14.Principal Accounting Fees and Services. The information required by this item is incorporated by reference to the
Companys Proxy Statement. 
 PART IV 
 ITEM 15.Exhibits, Financial Statement Schedules and Reports On Form 8-K (a) Financial Statements and Schedules See Index to Consolidated Financial Statements at page F-1. (b) Reports on Form 8-K The following Current Reports on 8-K were filed or furnished by the
Company during the quarter ended September 30, 2004: On July 15, 2004, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 5  Other Events announcing that
William J. Loughman has been appointed as Vice President and Chief Financial
Officer. On August 12, 2004, AirGate furnished a Current Report on Form 8-K with
the Securities and Exchange Commission under Item 5  Other Events relating to
issuance of a press release regarding financial and operating results for the
third quarter of fiscal year 2004 On August 19, 2004, AirGate furnished a Current Report on Form 8-K with
the Securities and Exchange Commission under Item 12  Results of Operations
and Financial Condition related to a conference call held to discuss its
financial and operating results for the third quarter and first nine months of
fiscal 2004 ended June 30, 2004. 61




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##### Table of Contents



On September 14, 2004, AirGate filed a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 1.01  Entry into a Material
Definitive Agreement related to an addendum to its Sprint Management and
Services Agreement. On September 30, 2004, AirGate furnished a Current Report on Form 8-K with
the Securities and Exchange Commission under Item 2.02  Results of Operations
and Financial Condition announcing financial and operating guidance for its
fourth quarter ending September 30, 2004. On September 30, 2004, AirGate filed a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 8.01  Other Events announcing a
proposed offering of $175 million aggregate principal amount of its first
priority senior secured floating rate notes. (c) Exhibits ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of December 7, 2004, by and among
Alamosa Holdings, Inc., A-Co. Merger Sub, Inc. and AirGate PCS, Inc.
(incorporated by reference to Exhibit 2.1 to the current report on Form 8-K
filed by AirGate with the Commission on December 9, 2004 (SEC File No.
000-27455))3.1
    
    Corrected Restated Certificate of Incorporation of AirGate PCS, Inc.
(AirGate), dated February 13, 2004 (incorporated by reference to Exhibit
3.(I) to the quarterly report on Form 10-Q filed by AirGate with the
Commission on February 17, 2004 for the quarter ended December, 31 2002 (SEC
File No. 000-27455))3.2
    
    Amended and Restated Bylaws of AirGate, dated December 17, 2002 (incorporated
by reference to Exhibit 3.2 to the annual report on Form 10-K/ A filed by
AirGate with the Commission on January 17, 2003 for the year ended September
30, 2002 (SEC File No. 000-27455))4.1
    
    Specimen of common stock certificate of AirGate (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-1/ A filed by the
registrant with the SEC on June 15, 1999 (File Nos. 333-79189-02 and
333-79189-01))4.2
    
    Form of Warrant Agreement for warrants issued in units offering (incorporated
by reference to Exhibit 10.15 to the Registration Statement on Form S-1/ A
filed by AirGate with the SEC on September 23, 1999 (File Nos. 333-79189-02
and 333-79189-01))4.3
    
    Form of Warrant issued in units offering (included in Exhibit 4.2)4.4
    
    Form of unit (included in Exhibit 4.2)4.5
    
    Form of Lucent Warrants (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-1/ A filed by the registrant with the SEC on
September 17, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))4.6
    
    Indenture, dated as of
February 20, 2004, by and AirGate, its subsidiaries party thereto and the Bank of New York (incorporated by reference to Exhibit
4.2 to the current report on Form 8-K filed by AirGate on February 26, 2004
(SEC File No. 000-27455))4.7
    
    Form of Senior Subordinated Secured Notes due 2009 (included in Exhibit 4.6)4.8
    
    Form of Security Agreement (incorporated by reference to Exhibit 4.11 to the
Registration Statement on Form S-4/A filed by AirGate with the SEC on January
14, 2004 (File No. 333-109165)).4.9
    
    Form of Pledge Agreement (incorporated by reference to Exhibit 4.12 to the
Registration Statement on Form S-4/A filed by AirGate with the SEC on January
14, 2004 (File No. 333-109165).4.10**
    
    Form of Intercreditor Agreement4.11
    
    Indenture, dated as of October 25, 2004, by and among AirGate, its
subsidiaries party thereto and The Bank of New York Trust Company, N.A.
(incorporated by reference to
 62




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##### Table of Contents



ExhibitNumber
    
    DescriptionExhibit 4.1 to the current report on Form 8-K
filed by AirGate on October 29, 2004)4.12
    
    Form of First Priority Senior Secured Floating Rate Notes due 2011 (included
in Exhibit 4.6)4.13
    
    Registration Rights Agreement, dated October 25, 2004, by and among AirGate
PCS, Inc., its subsidiaries party thereto, Banc of America Securities LLC and
Credit Suisse First Boston LLC (incorporated by reference to Exhibit 4.3 to
the current report on Form 8-K filed by AirGate on October 29, 2004)4.14
    
    Form of Pledge Agreement (incorporated by reference to Exhibit 4.4 to the
current report on Form 8-K filed by AirGate on October 29, 2004)4.15
    
    Form of Security Agreement (incorporated by reference to Exhibit 4.5 to the
current report on Form 8-K filed by AirGate on October 29, 2004)10.1
    
    Support Agreement, dated as of September 24, 2003, by and among AirGate and
each of the noteholders signatory thereto (incorporated by reference to
Exhibit 10.1 to the Registration Statement on Form S-4 filed by AirGate with
the SEC on September 26, 2003 (SEC File No. 333-109165))10.2
    
    Sprint PCS Management Agreement and Addenda I-III thereto between SprintCom,
Inc. and AirGate Wireless, L.L.C. (incorporated by reference to Exhibit 10.1
to the Registration Statement on Form S-1/ A filed by AirGate with the
Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))10.3
    
    Assignment of Sprint PCS Management Agreement, Sprint Spectrum Services
Agreement and Trademark and Service Mark Agreement from AirGate Wireless,
L.L.C. to AirGate Wireless, Inc. dated November 20, 1998 (incorporated by
reference to Exhibit 10.14 to the Registration Statement on Form S-1/ A filed
by AirGate with the Commission on August 9, 1999 (SEC File Nos. 333-79189-02
and 333-79189-01))10.4
    
    Addendum IV to Sprint PCS Management Agreement dated August 26, 1999 by and
among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum
L.P. and AirGate (incorporated by reference to Exhibit 10.1.2 to the annual
report on Form 10-K filed by AirGate with the Commission on December 18, 2000
for the year ended September 30, 2000 (SEC File No. 000-27455))10.5
    
    Addendum V to Sprint PCS Management Agreement dated May 12, 2000 by and among
SprintCom, Inc., Sprint Communications Company, L.P. and AirGate (incorporated
by reference to Exhibit 10.1.3 to the annual report on Form 10-K filed by
AirGate with the Commission on December 18, 2000 for the year ended September
30, 2000 (SEC File No. 000-27455))10.6
    
    Addendum VI to Sprint PCS Management Agreement dated December 8, 2000 by and
among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum
L.P. and AirGate (incorporated by reference to Exhibit 10.1.4 to the quarterly
report on Form 10-Q filed by AirGate with the Commission on February 14, 2001
for the quarter ended December 31, 2000 (SEC File No. 000-27455))10.7
    
    Addendum VII to Sprint PCS Management Agreement dated as of September 10, 2004
by and among SprintCom, Inc., Sprint Communications Company, L.P., Sprint
Spectrum L.P. and AirGate (incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K filed by AirGate with the Commission on September
14, 2004 (SEC File No. 000-27455))10.8
    
    Schedule of Definitions to Sprint PCS Management Agreement by and among SprintCom, Inc. and AirGate
Wireless, L.L.C. (incorporated by reference to Exhibit 10.33 to the quarterly report on Form 10-Q filed
by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002 (SEC File No.
000-27455))10.9
    
    Sprint PCS Services Agreement between Sprint Spectrum L.P. and AirGate Wireless, L.L.C. (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-1/ A filed by AirGate with the
Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))10.10
    
    Sprint Spectrum Trademark and Service Mark License Agreement (incorporated by reference to Exhibit 10.3
to the Registration Statement on Form S-1/ A filed by AirGate with the Commission on June 15, 1999 (SEC
File Nos. 333-79189-02 and 333-79189-01))
 63




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##### Table of Contents



ExhibitNumber
    
    Description10.11
    
    Sprint Trademark and Service Mark License Agreement (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1/ A filed by AirGate with the Commission on June 15, 1999 (SEC File
Nos. 333-79189-02 and 333-79189-01))10.12
    
    Sales Agency Agreement made as of May 1, 2001 between Sprint Communications Company L.P. and AirGate
(incorporated by reference to Exhibit 10.10 to the annual report on Form 10-K/ A filed by AirGate with
the Commission on January 17, 2003 for the year ended September 30, 2002 (SEC File No. 000-27455))10.13
    
    Master Site Agreement dated August 6, 1998 between AirGate and BellSouth Carolinas PCS, L.P. and
BellSouth Personal Communications, Inc. (incorporated by reference to Exhibit 10.5 to the Registration
Statement on Form S-1/ A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos.
333-79189-02 and 333-79189-01))10.14
    
    Notice to AirGate of an assignment of sublease dated September 20, 1999 between BellSouth Cellular Corp.
and Crown Castle South Inc., given pursuant to Section 16(b) of the Master Site Agreement (incorporated
by reference to Exhibit 10.5.1 to the annual report on Form 10-K filed by AirGate with the Commission on
December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455))10.15
    
    Master Tower Space Reservation and License Agreement dated February 19, 1999 between AGW Leasing
Company, Inc. and American Tower, L.P. (incorporated by reference to Exhibit 10.5.2 to the annual report
on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30,
2000 (SEC File No. 000-27455))10.16
    
    Master Antenna Site Lease No. J50 dated July 20, 1999 between Pinnacle Towers Inc. and AGW Leasing
Company (incorporated by reference to Exhibit 10.5.3 to the annual report on Form 10-K filed by AirGate
with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455))10.17
    
    Commercial Real Estate Lease dated August 7, 1998 between AirGate and Perry Company of Columbia, Inc. to lease a warehouse facility (incorporated by
reference to Exhibit 10.7 to the Registration Statement on Form S-1/ A filed by AirGate with the Commission on July 12, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))10.18
    
    Lease Agreement dated August 25, 1999 between Robert W. Bruce, Camperdown Company, Inc. and AGW Leasing Company, Inc. to lease office/warehouse space in
Greenville, South Carolina (incorporated by reference to Exhibit 10.7.1 to the annual report on Form 10-K filed by AirGate with the Commission on December
18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455))10.19
    
    Form of Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1/ A filed by AirGate with the
Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))10.20*
    
    Employment Agreement dated April 9, 1999 by and between AirGate and Thomas M. Dougherty (incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form S-1/ A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))10.21*
    
    First Amendment to Employment Agreement dated December 20, 1999 between AirGate and Thomas M. Dougherty (incorporated by reference to Exhibit 10.16 to the
quarterly report on Form 10-Q filed by AirGate with the
Commission on May 15, 2000 for the quarter ended March 31, 2000 (SEC File No. 000-27455))10.22*
    
    AirGate PCS, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by AirGate with the
Commission on April 10, 2000 (SEC File No. 333-34416))10.23*
    
    Form of AirGate PCS, Inc. Option Agreement for AirGate PCS, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 10.25 to the annual report on
Form 10-K filed by AirGate with the Commission on November 30, 2001 for the year ended September 30, 2001 (SEC File No. 000-27455))10.24*
    
    AirGate PCS, Inc. 2001 Non-Executive Stock Option Plan (incorporated by reference to Exhibit 10.11.2 to the quarterly report on Form 10-Q filed by AirGate
with the Commission on February 14, 2001 for the quarter ended December 31, 2000 (SEC File No. 000-27455))
 64




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##### Table of Contents



ExhibitNumber
    
    Description10.25**
    
    Form of AirGate PCS, Inc. Option Agreement for AirGate PCS, Inc. 2001 Non-Executive Stock Option Plan10.26*
    
    AirGate PCS, Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.11.3 to the quarterly report on Form 10-Q filed by AirGate with
the Commission on February 14, 2001 for the quarter ended December 31, 2000 (SEC File No. 000-27455))10.27*
    
    2002 AirGate PCS, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by AirGate with
the Commission on March 29, 2002 (SEC File No. 333-85250)10.28**
    
    Form of Award Agreement for 2002 AirGate PCS, Inc. Long-Term Incentive Plan10.29*
    
    AirGate PCS, Inc. Amended and Restated Non-Employee Director Compensation Plan dated January 22, 2003 (incorporated by reference to Exhibit 10.2 to the
quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2003 for the quarter ended March 31, 2003 (SEC File No. 000-27455))10.31
    
    Agreement and Plan of Merger, dated as of August 28, 2001, by and between AirGate and iPCS, Inc. (incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed by AirGate with the Commission on August 31, 2001 (SEC File No. 000-27455))10.32
    
    Services Agreement dated as of January 1, 2002 by and among AirGate, AirGate Service Company, Inc., iPCS, Inc. and iPCS Wireless, Inc. (incorporated by
reference to Exhibit 10.34 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002
(SEC File No. 000-27455))10.33
    
    First Amendment to Services Agreement dated February 21, 2003 by and among AirGate Service Company, Inc., AirGate, iPCS Wireless, Inc. and iPCS, Inc
(incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2003 for the quarter ended
March 31, 2003 (SEC File No. 000-27455))10.34
    
    Technology License Agreement dated as of January 1, 2002 by and among AirGate, AGW Leasing Company, Inc., AirGate Service Company, Inc., AirGate Network
Services, Inc., iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc. (incorporated by reference to Exhibit 10.35 to the quarterly report on Form 10-Q
filed by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002 (SEC File No. 000-27455))10.35*
    
    Separation Agreement and General Release, dated March 23, 2004, by and between AirGate and William H. Seippel (incorporated by reference to Exhibit 10.1 to
the quarterly report on Form 10-Q filed by AirGate with the Commission on May 17, 2004 for the quarter ended March 31, 2004 (SEC File No. 000-27455))10.36
    
    Settlement Agreement and Mutual Release, dated as of September 10, 2004, by and among Sprint Spectrum L.P., SprintCom, Inc., Sprint Communications Company
L.P., and WirelessCo, L.P., AirGate , AGW Leasing Company, Inc., AirGate Network Services, LLC, and AirGate Service Company, Inc. (incorporated by
reference to Exhibit 10.2 to the current report on Form 8-K filed by AirGate with the Commission on September 14, 2004 (SEC File No. 000-27455))10.37*
    
    Employment Agreement made and entered into December 7, 2004 by and among AirGate PCS, Inc. and Thomas M. Dougherty (incorporated by reference to Exhibit
10.1 to the current report on Form 8-K filed by AirGate with the Commission on December 9, 2004 (SEC File No. 000-27455))10.38*
    
    Employment Agreement made and entered into December 7, 2004 by and among AirGate PCS, Inc. and William J. Loughman (incorporated by reference to Exhibit
10.2 to the current report on Form 8-K filed by AirGate with the Commission on December 9, 2004 (SEC File No. 000-27455))10.39*
    
    Employment Agreement made and entered into December 7, 2004 by and among AirGate PCS, Inc. and Roy E. Hadley (incorporated by reference to Exhibit 10.3 to
the current report on Form 8-K filed by AirGate with the Commission on December 9, 2004 (SEC File No. 000-27455))21.1
    
    Subsidiaries of AirGate PCS, Inc (incorporated by reference to Exhibit 21 to the annual
 65




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##### Table of Contents



ExhibitNumber
    
    Descriptionreport on Form 10-K/ A filed by AirGate with the Commission on
January 17, 2003 for the year ended September 30, 2002 (SEC File No. 000-27455))23.1**
    
    Consent of KPMG LLP24.1**
    
    Powers of Attorney31.1**
    
    Rule 13a-14(a) certification of Chief Executive Officer of AirGate filed in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.31.2**
    
    Rule 13a-14(a) certification of Chief Financial Officer of AirGate filed in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.32.1**
    
    Section 1350 certification of Chief Executive Officer of AirGate furnished in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
    
    Section 1350 certification of Chief Financial Officer of AirGate furnished in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
  *
    
    Denotes a management contract or compensatory plan or arrangement**
    
    Filed herewith 66




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto
duly authorized, on December 14, 2004. AIRGATE PCS, INCBy:
    
    /s/ WILLIAM J. LOUGHMANWilliam J. LoughmanChief Financial Officer(Principal Financial andAccounting Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated. Name
    
    Title
    
    Date/s/ THOMAS M. DOUGHERTYThomas M. Dougherty
    
    President and Chief Executive Officer and
Director (Principal Executive Officer)
    
    December 14,
2004/s/ WILLIAM J. LOUGHMANWilliam J. Loughman
    
    Chief Financial Officer (Principal Financial
and Accounting Officer)
    
    December 14,
2004*Robert A. Ferchat
    
    Chairman of the Board of Directors
    
    December 14,
2004*Max D. Hopper
    
    Member, Board of Directors
    
    December 14,
2004*Timothy M. OBrien
    
    Member, Board of Directors
    
    December 14,
2004*John W. Risner
    
    Member, Board of Directors
    
    December 14,
2004*
    
    Member, Board of Directors
    
    December 14, 2004
 67




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##### Table of Contents



Name
    
    Title
    
    DateStephen R. Stetz*Gail A. Schoettler
    
    Member, Board of Directors
    
    December 14, 2004By: /s/ WILLIAM J. LOUGHMANWilliam J. Loughman
Attorney-in-fact
    
    Chief Financial Officer
    
    December 14, 2004
  *
    
    William J. Loughman, by signing his name hereto, does sign this
document on behalf of the above noted individuals pursuant to powers
of attorney duly executed by such individuals, which have been filed
as an exhibit to this Report. 68




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF AIRGATE PCS, INC. AND SUBSIDIARIES PageAudited Consolidated Financial Statements:Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of September 30, 2004 and September 30, 2003
    
    
    F-3Consolidated Statements of Operations for the Years Ended September 30, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Stockholders Deficit for the Years Ended September 30, 2004,
2003, and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8Financial Statement ScheduleReport of Independent Registered Public Accounting Firm
    
    
    F-31Consolidated Schedule of Valuation and Qualifying Accounts
    
    
    F-32
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors
AirGate PCS, Inc.: We have audited the accompanying consolidated balance sheets of AirGate
PCS, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders deficit, and cash flows
for each of the years in the three-year period ended September 30, 2004. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AirGate
PCS, Inc. and subsidiaries as of September 30, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2004, in conformity with U.S. generally
accepted accounting principles. /s/ KPMG LLPAtlanta, Georgia
December 13, 2004 F-2




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##### Table of Contents



AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts) September 30,2004
    
    2003Assets:Current assets:Cash and cash equivalents
    
    $
    13,453
    
    
    $
    54,078Short-term investment securities
    
    
    55,000
    
    
    
    Accounts receivable, net of allowance for
doubtful accounts of $5,517 and $4,635
    
    
    20,329
    
    
    
    26,994Receivable from Sprint
    
    
    23,601
    
    
    
    15,809Inventories
    
    
    3,052
    
    
    
    2,132Prepaid expenses
    
    
    983
    
    
    
    2,107Other current assets
    
    
    23
    
    
    
    145Total current assets
    
    
    116,441
    
    
    
    101,265Property and equipment, net of accumulated
depreciation and amortization of $177,729 and
$129,986
    
    
    144,324
    
    
    
    178,070Financing costs
    
    
    3,071
    
    
    
    6,682Direct subscriber activation costs
    
    
    1,846
    
    
    
    3,907Other assets
    
    
    965
    
    
    
    992Total assets
    
    $
    266,647
    
    
    $
    290,916Liabilities and Stockholders Deficit:Current liabilities:Accounts payable
    
    $
    2,128
    
    
    $
    5,945Accrued expenses
    
    
    18,967
    
    
    
    12,104Payable to Sprint
    
    
    40,879
    
    
    
    45,069Deferred revenue
    
    
    9,107
    
    
    
    7,854Current maturities of long-term debt
    
    
    21,200
    
    
    
    17,775Total current liabilities
    
    
    92,281
    
    
    
    88,747Deferred subscriber activation fee revenue
    
    
    3,172
    
    
    
    6,701Other long-term liabilities
    
    
    3,090
    
    
    
    1,841Long-term debt, excluding current maturities
    
    
    248,396
    
    
    
    386,509Investment in iPCS
    
    
    
    
    
    
    184,115Total liabilities
    
    
    346,939
    
    
    
    667,913Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Preferred stock, par value, $.01 per share;
1,000,000 shares authorized; no shares issued
and outstanding
    
    
    
    
    
    
    Common stock, par value, $.01 per share;
30,000,000 shares authorized; 11,768,058 and
5,192,238 shares issued and outstanding at
September 30, 2004 and 2003
    
    
    118
    
    
    
    52Additional paid-in-capital
    
    
    1,046,551
    
    
    
    924,095Accumulated deficit
    
    
    (1,126,961
    )
    
    
    (1,300,941
    )Unearned stock compensation
    
    
    
    
    
    
    (203
    )Total stockholders deficit
    
    
    (80,292
    )
    
    
    (376,997
    )Total liabilities and stockholders deficit
    
    $
    266,647
    
    
    $
    290,916
 See accompanying notes to the consolidated financial statements. F-3




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##### Table of Contents



AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts) Years Ended September 30,2004
    
    2003
    
    2002Revenues:Service revenue
    
    $
    254,488
    
    
    $
    251,481
    
    
    $
    226,504Roaming revenue
    
    
    69,708
    
    
    
    68,222
    
    
    
    74,013Equipment revenue
    
    
    12,912
    
    
    
    11,645
    
    
    
    13,027Total revenues
    
    
    337,108
    
    
    
    331,348
    
    
    
    313,544Operating expenses:Cost of service and roaming (exclusive of depreciation
and amortization, as shown separately below)
    
    
    161,430
    
    
    
    187,365
    
    
    
    204,153Cost of equipment
    
    
    29,109
    
    
    
    21,522
    
    
    
    27,778Selling and marketing
    
    
    50,859
    
    
    
    51,769
    
    
    
    79,099General and administrative
    
    
    22,430
    
    
    
    23,347
    
    
    
    18,143Depreciation and amortization of property and equipment
    
    
    47,829
    
    
    
    46,494
    
    
    
    40,764Loss on disposal of property and equipment
    
    
    48
    
    
    
    518
    
    
    
    1,074Total operating expenses
    
    
    311,705
    
    
    
    331,015
    
    
    
    371,011Operating income (loss)
    
    
    25,403
    
    
    
    333
    
    
    
    (57,467
    )Interest income
    
    
    747
    
    
    
    187
    
    
    
    161Interest expense
    
    
    (36,285
    )
    
    
    (42,706
    )
    
    
    (35,474
    )Loss from continuing operations before income tax
    
    
    (10,135
    )
    
    
    (42,186
    )
    
    
    (92,780
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Loss from continuing operations
    
    
    (10,135
    )
    
    
    (42,186
    )
    
    
    (92,780
    )Discontinued operations:Loss from discontinued operations net of $28,761
income tax benefit for 2002
    
    
    
    
    
    
    (42,571
    )
    
    
    (903,837
    )Gain on disposal of discontinued operations net of
$0 income tax
expense
    
    
    184,115
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    173,980
    
    
    $
    (84,757
    )
    
    $
    (996,617
    )Basic and diluted earnings (loss) per share:Loss from continuing operations
    
    $
    (1.10
    )
    
    $
    (8.14
    )
    
    $
    (19.53
    )Income (loss) from discontinued operations
    
    
    19.98
    
    
    
    (8.22
    )
    
    
    (190.27
    )Net income (loss)
    
    $
    18.88
    
    
    $
    (16.36
    )
    
    $
    (209.80
    )Basic and diluted weighted-average number of shares
outstanding
    
    
    9,216,778
    
    
    
    5,181,683
    
    
    
    4,750,301
 See accompanying notes to the consolidated financial statements. F-4




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##### Table of Contents



AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(Dollars in thousands, except share amounts)
Years ended September 30, 2004, 2003, and 2002 Common Stock
    
    Additional
    
    
    
    
    
    Unearned
    
    TotalPaid-in
    
    Accumulated
    
    Stock
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    Compensation
    
    DeficitBalance at September 30, 2001
    
    
    2,672,996
    
    
    $
    27
    
    
    $
    168,362
    
    
    $
    (219,567
    )
    
    $
    (1,546
    )
    
    $
    (52,724
    )Issuance of common stock
in merger with iPCS
    
    
    2,472,514
    
    
    
    25
    
    
    
    706,620
    
    
    
    
    
    
    
    
    
    
    
    706,645Stock options and warrants
assumed in merger with
iPCS
    
    
    
    
    
    
    
    
    
    
    47,727
    
    
    
    
    
    
    
    
    
    
    
    47,727Shares issued under stock
compensation plans, net
    
    
    12,794
    
    
    
    
    
    
    
    1,505
    
    
    
    
    
    
    
    517
    
    
    
    2,022Exercise of common stock
purchase warrants
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (996,617
    )
    
    
    
    
    
    
    (996,617
    )Balance at September 30, 2002
    
    
    5,161,304
    
    
    
    52
    
    
    
    924,214
    
    
    
    (1,216,184
    )
    
    
    (1,029
    )
    
    
    (292,947
    )Exercise of common stock
purchase warrants
    
    
    4,295
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued under stock
compensation plans, net
    
    
    26,639
    
    
    
    
    
    
    
    (119
    )
    
    
    
    
    
    
    826
    
    
    
    707Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84,757
    )
    
    
    
    
    
    
    (84,757
    )Balance at September 30, 2003
    
    
    5,192,238
    
    
    
    52
    
    
    
    924,095
    
    
    
    (1,300,941
    )
    
    
    (203
    )
    
    
    (376,997
    )Issuance of common stock
in connection with
recapitalization
plan
    
    
    6,568,706
    
    
    
    66
    
    
    
    126,710
    
    
    
    
    
    
    
    
    
    
    
    126,776Equity issuance
costs
    
    
    
    
    
    
    
    
    
    
    (4,754
    )
    
    
    
    
    
    
    
    
    
    
    (4,754
    )Shares issued under stock
compensation plans, net
    
    
    7,130
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    203
    
    
    
    703Exercise of common stock
purchase warrants
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of common
shares in connection with
reverse split
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173,980
    
    
    
    
    
    
    
    173,980Balance at September 30, 2004
    
    
    11,768,058
    
    
    $
    118
    
    
    $
    1,046,551
    
    
    $
    (1,126,961
    )
    
    $
    
    
    
    $
    (80,292
    )
 See accompanying notes to the consolidated financial statements. F-5




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##### Table of Contents



AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years Ended September 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    173,980
    
    
    $
    (84,757
    )
    
    $
    (996,617
    )Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Gain on disposal of discontinued
operations
    
    
    (184,115
    )
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    
    
    
    
    42,571
    
    
    
    903,837Depreciation and amortization of property and equipment
    
    
    47,829
    
    
    
    46,494
    
    
    
    40,764Amortization of financing costs into interest expense
    
    
    995
    
    
    
    1,210
    
    
    
    1,210Provision for doubtful accounts
    
    
    181
    
    
    
    5,220
    
    
    
    21,343Interest expense associated with accretion of discounts
    
    
    16,126
    
    
    
    33,020
    
    
    
    28,762Non-cash stock compensation
    
    
    666
    
    
    
    650
    
    
    
    769Loss on disposal of property and equipment
    
    
    48
    
    
    
    518
    
    
    
    1,074Changes in assets and liabilities:Purchases of short-term investment securities,
net
    
    
    (55,000
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    6,484
    
    
    
    (7,969
    )
    
    
    (21,790
    )Receivable from Sprint
    
    
    (7,792
    )
    
    
    13,168
    
    
    
    (18,777
    )Inventories
    
    
    (920
    )
    
    
    2,004
    
    
    
    503Prepaid expenses, other current and non-current assets
    
    
    3,335
    
    
    
    4,150
    
    
    
    (1,745
    )Accounts payable, accrued expenses and other long term
liabilities
    
    
    715
    
    
    
    1,500
    
    
    
    (7,440
    )Payable to Sprint
    
    
    (4,190
    )
    
    
    (8,312
    )
    
    
    20,817Deferred revenue
    
    
    1,253
    
    
    
    714
    
    
    
    1,756Net cash provided by (used in) operating activities
    
    
    (405
    )
    
    
    50,181
    
    
    
    (25,534
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (14,083
    )
    
    
    (16,023
    )
    
    
    (40,263
    )Acquisition of iPCS
    
    
    
    
    
    
    
    
    
    
    (6,058
    )Net cash used in investing activities
    
    
    (14,083
    )
    
    
    (16,023
    )
    
    
    (46,321
    )Cash flows from financing activities:Borrowings under credit facility
    
    
    
    
    
    
    17,000
    
    
    
    61,200Repayments of credit facility
    
    
    (20,275
    )
    
    
    (2,024
    )
    
    
    Financing cost on credit
facility
    
    
    (1,138
    )
    
    
    
    
    
    
    Equity issuance
costs
    
    
    (4,754
    )
    
    
    
    
    
    
    Stock issued to employee stock purchase plan
    
    
    
    
    
    
    57
    
    
    
    567Proceeds from stock option exercises
    
    
    30
    
    
    
    
    
    
    
    685Net cash (used in) provided by financing activities
    
    
    (26,137
    )
    
    
    15,033
    
    
    
    62,452Net increase (decrease) in cash and cash equivalents
    
    
    (40,625
    )
    
    
    49,191
    
    
    
    (9,403
    )Cash and cash equivalents at beginning of period
    
    
    54,078
    
    
    
    4,887
    
    
    
    14,290Cash and cash equivalents at end of period
    
    $
    13,453
    
    
    $
    54,078
    
    
    $
    4,887Supplemental disclosure of cash flow information:Interest paid
    
    $
    14,695
    
    
    $
    7,807
    
    
    $
    6,806Supplemental disclosure of non-cash investing activities:Interest capitalized
    
    $
    75
    
    
    $
    236
    
    
    $
    2,137Supplemental disclosure of non-cash financing activities:Net carrying value of 13.5%
notes
    
    $
    (264,888
    )
    
    $
    
    
    
    $
    Unamortized financing cost of 13.5%
notes
    
    
    3,755
    
    
    
    
    
    
    
    Issuance of 9 3/8%
notes
    
    
    159,035
    
    
    
    
    
    
    
    Carrying value difference on 9 3/8%
notes
    
    
    (24,686
    )
    
    
    
    
    
    
    Common stock issued in exchange for 13.5%
notes
    
    
    126,784
    
    
    
    
    
    
    
    Grant of restricted common stock, restricted stock units and
compensatory stock options
    
    
    463
    
    
    
    21
    
    
    
    252Forfeiture of compensatory stock options
    
    
    
    
    
    
    (195
    )
    
    
    Forfeiture of restricted stock
    
    
    (12
    )
    
    
    (2
    )
    
    
    
 F-6




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See accompanying notes to the consolidated financial statements. F-7




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AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Business, Basis of Presentation and Liquidity (a) Basis of Presentation AirGate PCS, Inc. and its restricted subsidiaries (the Company) were
created for the purpose of providing wireless Personal Communication Services
(PCS). The Company is a network partner of Sprint PCS (Sprint) which is a
group of wholly-owned subsidiaries of Sprint Corporation that operate and
manage Sprints PCS products and services. The Company has the right to market
and provide Sprint PCS products and services using the Sprint brand name in a
defined territory. The accompanying consolidated financial statements include
the accounts of AirGate PCS, Inc. and its wholly-owned restricted subsidiaries,
AGW Leasing Company, Inc., AirGate Service Company, Inc. and AirGate Network
Services, LLC for all periods presented. On October 17, 2003, the Company irrevocably transferred all of its shares
of common stock of iPCS, Inc. and its subsidiaries (iPCS) to a trust for the
benefit of the Companys stockholders of record as of the date of the transfer.
On October 17, 2003, the iPCS investment ($184.1 million credit balance
carrying amount) was eliminated and recorded as a non-monetary gain on disposal
of discontinued operations. The Companys consolidated financial statements
reflect the results of iPCS as discontinued operations (described below in Note
2). On February 13, 2004, the Company effected a 1-for-5 reverse stock split
and stockholders received one share of common stock, and cash resulting from
the elimination of any fractional shares, in exchange for each five shares of
common stock then outstanding. All share and per share amounts have been
restated to give retroactive effect to the reverse stock split. These consolidated financial statements and related footnotes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. All significant intercompany accounts and
transactions have been eliminated in consolidation. (b) Liquidity The PCS market is characterized by significant risks as a result of rapid
changes in technology, intense competition and the costs associated with the
build-out, on-going operation and growth of a PCS network. The Companys
operations are dependent upon Sprints ability to perform its obligations under
the agreements between the Company and Sprint (see Note 4) under which the
Company has agreed to construct and manage its Sprint PCS network (the Sprint
Agreements). Since inception, the Company has financed its operations through debt
financing and proceeds generated from public offerings of its common stock and
cash provided from operations. The proceeds from these transactions and cash
provided from operations have been used to fund the build-out of the Companys
portion of the PCS network of Sprint, subscriber acquisition costs and working
capital. Since inception, the Company has invested over $300 million in
capital expenditures. As of September 30, 2004, the Company had cash and cash equivalents of
$13.5 million, short-term investment securities of $55.0 million, working
capital of $24.2 million, and no remaining availability under its credit
facility. As a result, the Company is completely dependent on available cash
and operating cash flow to pay debt service and meet its other capital needs.
If such sources are not sufficient, alternative funding sources may not be
available. The Company believes that cash on hand and short-term investment
securities plus the additional liquidity that it expects to generate from
operations will be sufficient to fund expected capital expenditures and to
cover its working capital and debt service requirements for at least the next
12 months. The Companys future liquidity will be dependent on a number of factors
influencing its projections of operating cash flow, including those related to
subscriber growth, retention and credit quality, revenue growth and the F-8




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Companys ability to manage operating expenses. Should actual results
differ significantly from these assumptions, the Companys liquidity position
could be adversely affected and it could be in a position that would require it
to raise additional capital which may or may not be available on terms
acceptable to the Company, if at all. The Companys ability to raise capital
when needed could have a material adverse effect on the Companys ability to
achieve its intended business objectives. (2) Discontinued Operations On November 30, 2001, the Company acquired iPCS, another Sprint network
partner, for $1.2 billion. The transaction was accounted for under the
purchase method of accounting. Subsequent to the acquisition of iPCS, the results of operations and
accounts of iPCS were consolidated with the Company in accordance with
generally accepted accounting principles. On February 23, 2003, iPCS filed a
Chapter 11 bankruptcy case in the United States Bankruptcy Court for the
Northern District of Georgia for the purpose of effecting a court administered
reorganization. Subsequent to February 23, 2003, the Company no longer
consolidated the accounts and results of operations of iPCS and the accounts of
iPCS were recorded as an investment using the cost method of accounting. The following reflects the condensed balance sheet information for iPCS,
summarizing the deconsolidation adjustment to record the investment in iPCS on
the cost basis as of February 23, 2003 (dollars in thousands): As of February 23,2003Condensed iPCS Balance Sheet Information:Cash and cash equivalents
    
    $
    10,031Other current assets
    
    
    32,084Total current assets
    
    
    42,115Property and equipment, net
    
    
    174,103Other noncurrent assets
    
    
    24,807Total assets
    
    $
    241,025Current liabilities
    
    $
    416,564Long-term debt
    
    
    409Other long-term liabilities
    
    
    8,167Total liabilities
    
    
    425,140Investment in iPCS
    
    $
    184,115
 On October 17, 2003, the Company irrevocably transferred all of its shares
of iPCS common stock to a trust for the benefit of the Companys stockholders
of record on the date of the transfer. On the date of the transfer, the iPCS
investment ($184.1 million credit balance carrying amount) was eliminated and
recorded as a non-monetary gain on disposal of discontinued operations. The
Companys consolidated financial statements reflect the results of iPCS as
discontinued operations. The year ended September 30, 2004 includes a
non-monetary gain on disposal of discontinued operations of $184.1 million.
The following reflects the loss from discontinued operations for the years
ended September 30, 2003 and 2002 (dollars in thousands): For the Years EndedSeptember 30,2003
    
    2002Revenue
    
    $
    79,364
    
    
    $
    144,080Cost of revenue
    
    
    63,398
    
    
    
    124,031Selling and marketing
    
    
    16,417
    
    
    
    37,511General and administrative
    
    
    6,881
    
    
    
    7,708Depreciation and amortization
    
    
    20,989
    
    
    
    68,765Loss on disposal
    
    
    1,451
    
    
    
    Impairments
    
    
    
    
    
    
    817,413Operating expenses
    
    
    109,136
    
    
    
    1,055,428Operating loss
    
    
    (29,772
    )
    
    
    (911,348
    )Interest expense, net
    
    
    (12,799
    )
    
    
    (21,250
    )Income tax benefit
    
    
    
    
    
    
    28,761Loss from discontinued operations
    
    $
    (42,571
    )
    
    $
    (903,837
    )
 F-9




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Transactions between the Company and iPCS The Company formed AirGate Service Company, Inc. (Service Co) to provide
management services to both the Company and iPCS. For the years ended
September 30, 2003 and 2002, iPCS paid a net total of $2.9 million and $1.7
million, respectively for Service Co expenses, which had the effect of reducing
the Companys expenses by that amount. In the normal course of business under
the Companys and iPCS respective Sprint agreements, the Company subscribers
incur minutes of use in iPCS territory causing the Company to incur roaming
expense to Sprint. In addition, iPCS subscribers incur minutes of use in the
Companys territory for which we receive roaming revenue from Sprint. We
received $0.2 million of roaming revenue with respect to use by iPCS
subscribers of our network and incurred $0.3 million of roaming expense with
respect to use by the Companys subscribers of iPCS network for the year ended
September 30, 2003, compared to $0.4 million of roaming revenue and $0.4
million of roaming expense for the year ended September 30, 2002. The
reciprocal roaming rate charged and other terms are established by Sprint under
the Companys and iPCS respective Sprint agreements. During the year ended September 30, 2003, the Company purchased
approximately $0.3 million of wireless handset inventories from iPCS at cost.
During the year ended September 30, 2002, the Company sold approximately $0.1
million of wireless handset inventories to iPCS. Additionally, the Company
purchased approximately $0.2 million of wireless handset inventory from iPCS. During the year ended September 30, 2002, the Company sold approximately
$0.2 million of network operating equipment to iPCS. Additionally, iPCS sold
the Company approximately $0.7 million of network operating equipment. Transactions Involving Board Members Timothy M. Yager was a member of the Companys Board of Directors until
December 16, 2002. Prior to joining the Board, Mr. Yager was the chief
executive officer of iPCS. Pursuant to his employment agreement with iPCS,
iPCS purchased consulting services from Mr. Yager during the year ended
September 30, 2003. On January 27, 2003, Mr. Yager was appointed chief
restructuring officer to oversee the restructuring of iPCS and his company, YMS
Management, LLC, entered into a management services agreement to manage the
day-to-day operations of iPCS. In connection with his appointment as chief
restructuring officer, Mr. Yager and iPCS agreed to terminate the provisions of
his employment agreement providing for consulting services to iPCS and payment
thereunder to Mr. Yager. (3) Summary of Significant Accounting Policies (a) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. Effective July 1, 2003 the Company adopted Emerging Issues Task Force
(EITF) No. 00-21, Accounting for Revenue Arrangements with Multiple Element
Deliverables. The EITF guidance addresses how to account for arrangements that
may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at
or near the same time, are presumed to be a bundled transaction, and the
consideration is measured and allocated to the separate units based on their
relative fair values. The adoption of EITF No. 00-21 resulted in substantially
all of the activation fee revenue generated from Company-owned retail stores
and associated costs being recognized at the time the related wireless handset
is sold. Previously deferred revenues and costs continue to be amortized over
the remaining estimated life of a subscriber, not to exceed 30 months. Revenue
and costs for activations at other retail locations continue to be deferred and
amortized over their estimated lives. The Company recognizes service revenue from its subscribers as they use
the service. The Company provides a reduction of recorded revenue for billing
adjustments and credits, and estimated uncollectible late payment fees and
early cancellation fees. The Company also reduces recorded revenue for rebates
and discounts given to subscribers on wireless handset sales in accordance with
EITF No. 01-9 Accounting for Consideration Given by a Vendor to a F-10




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Customer (Including a Reseller of the Vendors Products). For industry
competitive reasons, the Company sells wireless handsets at a loss. The Company
participates in the Sprint national and regional distribution programs in which
national retailers such as RadioShack and Best Buy sell Sprint PCS products and
services. In order to facilitate the sale of Sprint PCS products and services,
national retailers purchase wireless handsets from Sprint for resale and
receive compensation from Sprint for Sprint PCS products and services sold. For
industry competitive reasons, Sprint subsidizes the price of these handsets by
selling the handsets at a price below cost. Under the Companys Sprint
Agreements, when a national retailer sells a handset purchased from Sprint to a
subscriber in the Companys territory, the Company is obligated to reimburse
Sprint for the handset subsidy. The Company does not receive any revenue from
the sale of handsets and accessories by such national retailers. The Company
classifies these handset subsidy charges as a selling and marketing expense for
a new subscriber handset sale and classifies these subsidies as a cost of
service and roaming for a handset upgrade to an existing subscriber. The Company records equipment revenue from the sale of handsets to
subscribers in its retail stores upon delivery in accordance with EITF No.
00-21. The Company does not record equipment revenue on handsets and
accessories purchased from national third-party retailers such as RadioShack
and Best Buy, or directly from Sprint by subscribers in its territory. Sprint is entitled to retain 8% of net billed service revenue from
subscribers based in the Companys markets and from non-Sprint subscribers who
roam onto the Companys network. The amount of affiliation fees retained by
Sprint is recorded as cost of service and roaming. Revenue derived from the
sale of handsets and accessories by the Company and from certain roaming
services are not subject to the 8% affiliation fee from Sprint. (b) Allowance for Doubtful Accounts Estimates are used in determining the allowance for doubtful accounts and
are based on historical collection and write-off experience, current trends,
credit policies and accounts receivable by aging category, including current
trends in the credit quality of its subscriber base. In determining these
estimates, the Company compares historical write-offs in relation to the
estimated period in which the subscriber was originally billed. The Company
also looks at the historical and projected average length of time that elapses
between the original billing date and the date of write-off in determining the
adequacy of the allowance for doubtful accounts by aging category. From this
information, the Company provides specific amounts to the aging categories. The
Company provides an allowance for substantially all receivables over 90 days
old. Using historical information the Company provides a reduction in revenues
for certain billing adjustments, late payment fees and early cancellation fees
that it anticipates will not be collected. The reserves for billing adjustments
and credits, late payment fees and early cancellation fees are included in the
allowance for doubtful accounts balance. If the allowance for doubtful accounts
is not adequate, it could have a material adverse affect on the Companys
liquidity, financial position and results of operations. The Company continually evaluates its credit policy and evaluates the
impact the subscriber base will have on the business and raises or lowers
credit standards periodically, as allowed by Sprint. (c) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits, money
market accounts and short-term highly liquid investments with original
maturities of three months or less. (d) Short-term Investment Securities Short-term investment securities primarily consist of investment grade
marketable debt securities acquired with original maturities greater than three
months. Short-term investment securities are bought and held principally for
the purpose of selling them in the near term and are reported at fair market
value. Interest earned on securities is included in interest income. (e) Inventories F-11




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Inventories consist of wireless handsets and related accessories held for
resale. Inventories are carried at the lower of cost or market determined by
using replacement costs. (f) Property and Equipment Property and equipment are stated at original cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are as follows: EstimatedUseful LifeNetwork assets.
    
    5 to 7 yearsComputer equipment.
    
    3 to 5 yearsFurniture, fixtures, and office equipment
    
    5 yearsTowers (included in network assets).
    
    15 years
 Construction in progress includes expenditures for the purchase of network
assets. The Company capitalizes interest on its construction in progress
activities. When network assets are placed in service, the related assets are
transferred from construction in progress to network assets and the Company
depreciates those assets over their estimated useful life. (g) Financing Costs Costs incurred for the credit facility and the 13.5% notes were deferred
and are being amortized as interest expense over the term of the respective
financing arrangements using the straight-line method. (h) Income Taxes Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates applied to expected
taxable income for the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred income tax assets and
liabilities for a change in tax rates is recognized as income in the period
that includes the enactment date. A valuation allowance is provided for
deferred income tax assets based upon the Companys assessment of whether it is
more likely than not that the deferred income tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. (i) Basic and Diluted Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted-average number of common shares outstanding during the period.
For the years ended September 30, 2004, 2003, and 2002, all outstanding stock
options and common stock underlying stock purchase warrants as detailed in Note
8 have been excluded from the computation of dilutive earnings (loss) per share
for all periods presented because their effect would have been antidilutive.
The following table shows those potentially dilutive securities with exercise
prices less than market prices of common stock in the respective periods using
the treasury stock method: Years EndedSeptember 30,2004
    
    2003
    
    2002Common stock options
    
    
    50,589
    
    
    
    4,439
    
    
    
    44,534Common stock underlying stock purchase warrants
    
    
    3,707
    
    
    
    8,087
    
    
    
    8,199Total
    
    
    54,296
    
    
    
    12,526
    
    
    
    52,733
 (j) Impairment of Long-Lived Assets F-12




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The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell the asset. (k) New Accounting Pronouncements In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin (ARB) No. 51.(FIN 46R) This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, which was
issued in January 2003. This Interpretation applies immediately to variable
interest entities created or acquired after January 31, 2003, and to special
purpose entities for the quarter ended after December 15, 2003. The
Interpretation is generally effective for interim periods ending after March
15, 2004 for all variable interest entities created or acquired prior to
January 31, 2003. We do not have any variable interest entity arrangements. (l) Use of Estimates Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities at the dates of the consolidated balance sheets and
revenues and expenses during the reporting periods to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates. (m) Concentration of Risk The Companys cell sites are located on towers which are leased from a
limited number of tower companies, with one company owning approximately 34% of
the Companys leased towers. The Company maintains cash, cash equivalents and short-term investment
securities in accounts with financial institutions in excess of the amount
insured by the Federal Deposit Insurance Corporation. Management does not
believe there is significant credit risk associated with deposits in excess of
federally insured amounts. Further, the Company maintains accounts with
nationally recognized investment managers. Such deposits are not insured by the
Federal Deposit Insurance Corporation. Management does not believe there is
significant credit risk associated with these uninsured deposits. A significant amount of the Companys financial transactions result from
the Companys relationship with Sprint, and the Company derives substantial
revenues and expenses from Sprint and Sprint PCS. Refer to Note 4 for
information on the Companys transactions with Sprint. Concentrations of credit risk with respect to accounts receivables are
limited due to a large subscriber base. Initial credit evaluations of
subscribers financial condition are performed and security deposits are
generally obtained for subscribers with a high credit risk profile. The Company
maintains an allowance for doubtful accounts for potential credit losses. (n) Comprehensive Income (Loss) No statements of comprehensive income (loss) have been included in the
accompanying consolidated financial statements since the Company does not have
any elements of other comprehensive income (loss) to report. (o) Advertising Expenses F-13




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The Company expenses advertising costs when the advertisement occurs.
Total advertising expenses amounted to approximately $7.8 million in 2004, $6.7
million in 2003, and $12.2 million in 2002 and are included in selling and
marketing expenses in the accompanying consolidated statements of operations. (p) Segments The Company and its subsidiaries have been operated and are evaluated by
management as a single operating segment in accordance with the provisions of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. (q) Stock-based Compensation Plans We have elected to continue to account for our stock-based compensation
plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and disclose pro forma effects of the plans on a
net income (loss) and earnings (loss) per share basis as provided by SFAS No.
123, Accounting for Stock-Based Compensation. We did not recognize
compensation expense with respect to options that had an exercise price equal
to the fair market value of the Companys common stock on the date of grant.
Had compensation cost for these options been recognized based on fair value at
the grant dates under the related provisions of SFAS No. 123, the pro forma
loss from continuing operations and net income (loss) and earnings (loss) per
share during the fiscal years ended September 30, 2004, 2003 and 2002 would
have been as follows (in thousands, except per share data): Years Ended September 30,2004
    
    2003
    
    2002Loss from continuing operations, as reported
    
    $
    (10,135
    )
    
    $
    (42,186
    )
    
    $
    (92,780
    )Add: stock based compensation expense included in determination of loss from continuing
operations
    
    
    666
    
    
    
    650
    
    
    
    769Less: stock-based compensation expense determined under the fair value based method
    
    
    (1,830
    )
    
    
    (9,698
    )
    
    
    (9,138
    )Pro forma loss from continuing operations
    
    $
    (11,299
    )
    
    $
    (51,234
    )
    
    $
    (101,149
    )Basic and diluted loss from continuing operations per share:As reported
    
    $
    (1.10
    )
    
    $
    (8.14
    )
    
    $
    (19.53
    )Pro forma
    
    $
    (1.23
    )
    
    $
    (9.89
    )
    
    $
    (21.29
    )Basic and diluted weighted-average outstanding common shares
    
    
    9,216,778
    
    
    
    5,181,683
    
    
    
    4,750,301
 Years Ended September 30,2004
    
    2003
    
    2002Net income (loss), as reported
    
    $
    173,980
    
    
    $
    (84,757
    )
    
    $
    (996,617
    )Add: stock based compensation expense included in
determination of net loss
    
    
    666
    
    
    
    650
    
    
    
    769Less: stock-based compensation expense determined under the
fair value based method
    
    
    (1,830
    )
    
    
    (9,698
    )
    
    
    (9,138
    )Pro forma net income (loss)
    
    $
    172,816
    
    
    $
    (93,805
    )
    
    $
    (1,004,986
    )Basic and diluted earnings (loss) per share:As reported
    
    $
    18.88
    
    
    $
    (16.36
    )
    
    $
    (209.80
    )Pro forma
    
    $
    18.75
    
    
    $
    (18.10
    )
    
    $
    (211.56
    )Basic and diluted weighted-average outstanding common shares
    
    
    9,216,778
    
    
    
    5,181,683
    
    
    
    4,750,301
 (r) Asset Retirement Obligations The Companys network is primarily located on leased property and the
Company has certain legal obligations, principally related to its tower leases,
which fall within the scope of SFAS No. 143, Accounting for Asset Retirement
Obligations. These legal obligations upon lease termination primarily include
certain obligations to remediate leased tower space and land on which the
Companys network equipment is located. In addition, the Company has leases
related to switch site, retail and administrative locations subject to the
provisions of SFAS No. 143. F-14




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(4) Sprint Agreements Under our agreements with Sprint, Sprint is obligated to provide the
Company with significant support services such as billing, collections, long
distance, customer care, network operations support, inventory logistics
support, use of Sprint brand names, national advertising, national distribution
and product development. Additionally, the Company derives substantial roaming
revenue and expense when Sprints and Sprints network partners wireless
subscribers incur minutes of use in the Companys territories and when the
Companys subscribers incur minutes of use in Sprint and other Sprint network
partners PCS territories. These transactions are recorded as roaming revenue,
cost of service and roaming, cost of equipment, and selling and marketing
expense in the accompanying consolidated statements of operations. Cost of
service and roaming transactions include an 8% affiliation fee, long distance
charges, roaming expense and costs of service such as billing, collections,
customer service and pass-through expenses. Cost of equipment transactions
relate to inventory purchased by the Company from Sprint under the Sprint
agreements. Selling and marketing transactions relate to subsidized costs on
handsets and commissions paid by the Company under Sprints national
distribution programs. Although the Company acknowledges its responsibility for all of its
internal controls, the Company relies upon Sprint as a service provider to
provide accurate information for the settlement of revenue and certain expense
items. The Company makes estimates used in connection with the preparation of
financial statements based on the financial and statistical information
provided by Sprint. Inaccurate or incomplete data from Sprint in connection
with the services provided to the Company by Sprint could have a material
adverse effect on the Companys financial position, results of operations or
cash flow. Amounts recorded relating to the Sprint agreements for the years ended
September 30, 2004, 2003 and 2002 are as follows (dollars in thousands): Years Ended September 30,2004
    
    2003
    
    2002Amounts included in the Consolidated Statements of
Operations:Roaming revenue
    
    $
    66,950
    
    
    $
    63,798
    
    
    $
    70,002Cost of service and roaming:Roaming
    
    $
    51,797
    
    
    $
    50,383
    
    
    $
    52,746Customer service
    
    
    22,596
    
    
    
    40,014
    
    
    
    40,454Affiliation fees
    
    
    19,208
    
    
    
    18,358
    
    
    
    15,815Long distance
    
    
    13,061
    
    
    
    12,485
    
    
    
    13,846Other
    
    
    2,523
    
    
    
    1,902
    
    
    
    2,115Total cost of service and roaming
    
    $
    109,185
    
    
    $
    123,142
    
    
    $
    124,976Cost of equipment
    
    $
    31,409
    
    
    $
    18,051
    
    
    $
    23,662Selling and marketing
    
    $
    12,937
    
    
    $
    12,440
    
    
    $
    21,728
 As ofSeptember 30,2004
    
    2003Amounts included in the Consolidated Balance Sheets:Receivable from Sprint
    
    $
    23,601
    
    
    $
    15,809Payable to Sprint
    
    
    40,879
    
    
    
    45,069
 As of September 10, 2004 (effective August 1, 2004), we entered into
amendments to our management and services agreements that govern our
relationship with Sprint PCS. These amendments provide for fixed rates for
back office services provided to us by Sprint PCS and a fixed reciprocal
roaming rate through December 31, 2006. Our amended agreements with Sprint PCS establish fixed per subscriber
costs for services we purchase from Sprint PCS through December 31, 2006. The
amendments create a new CCPU fee, which consolidates numerous fees for back
office services such as billing and customer care that were previously settled
separately. The CCPU fee has been set at $7.25 per subscriber per month
through December 31, 2004, $7.00 per subscriber per month from January 1, 2005
through December 31, 2006; in each case multiplied by the average number of
subscribers in our service area. The amendments also create a new CPGA fee,
which consolidates numerous subscriber activation F-15




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##### Table of Contents



fees that were previously settled separately. The CPGA fee will be $23.00
per activation through December 31, 2006. The amendments also establish a fixed reciprocal roaming rate with Sprint
PCS through December 31, 2006 of $0.058 per minute for voice minutes and
$0.0020 per kilobit for data. After December 31, 2006, the reciprocal voice
and data roaming rates will be based on a predetermined formula. In conjunction with the amendments to our management and services
agreement with Sprint PCS, we agreed to resolve all historical disputes,
including previously disputed charges between us and Sprint PCS. In conjunction
with this resolution, we paid Sprint PCS $6.8 million in September 2004 and
recorded an adjustment to reduce cost of service and roaming by approximately
$11.7 million in the fourth fiscal quarter of 2004. During the year ended September 30, 2004, the Company recorded $2.4
million in special settlement credits from Sprint as a reduction of cost of
service and roaming, consisting of $1.2 million resulting from Sprints
decision to discontinue their billing system conversion and $1.2 million
relating to the settlement of the bad debt profile for certain subscribers. During the year ended September 30, 2003, the Company recorded $3.6
million in special settlement credits from Sprint as a reduction of cost of
service and roaming and $3.7 million as an increase in revenue. Sprint estimates monthly service charges at the beginning of each calendar
year. At the end of each year, Sprint calculates the actual costs to provide
these services for its network partners and requires a final settlement for the
calendar year against the charges actually paid. If the costs to provide these
services are less than the amounts paid by Sprints network partners, Sprint
issues a credit for these amounts. If the costs to provide the services are
more than the amounts paid by Sprints network partners, Sprint charges the
network partners for these amounts. During the fiscal years ended September 30,
2004 and 2003, the Company received credits from Sprint for $2.6 million and
$1.3 million, respectively, which were recorded as a reduction to cost of
service and roaming. The Sprint Agreements require the Company to maintain certain minimum
network performance standards and to meet other performance requirements. The
Company believes it was in compliance in all material respects with these
requirements as of September 30, 2004. (5) Property and Equipment Property and equipment as of September 30, 2004 and 2003 consists of the
following (dollars in thousands): 2004
    
    2003Network assets
    
    $
    301,049
    
    
    $
    288,399Computer equipment
    
    
    7,759
    
    
    
    6,712Furniture, fixtures, and office equipment
    
    
    12,301
    
    
    
    12,069Construction in progress
    
    
    944
    
    
    
    876Total property and equipment
    
    
    322,053
    
    
    
    308,056Less accumulated depreciation and amortization
    
    
    (177,729
    )
    
    
    (129,986
    )Total property and equipment, net
    
    $
    144,324
    
    
    $
    178,070
 Interest capitalized for the years ended September 30, 2004, 2003 and 2002
totaled $0.1 million, $0.2 million, and $2.1 million, respectively. (6) Long-Term Debt Long-term debt consists of the following at September 30, 2004 and 2003
(dollars in thousands): 2004
    
    2003Credit facility, net of unaccreted discount of $0 and $178, respectively
    
    $
    131,200
    
    
    $
    151,2979 3/8% notes, net of unaccreted discount of
$22,378
    
    
    136,657
    
    
    
    13.5% notes, net of unamortized discount and accrued interest of $56
and $47,013, respectively
    
    
    1,739
    
    
    
    252,987
 F-16




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##### Table of Contents



2004
    
    2003Total long-term debt
    
    
    269,596
    
    
    
    404,284Current maturities of long-term debt
    
    
    (21,200
    )
    
    
    (17,775
    )Long-term debt, excluding current maturities
    
    $
    248,396
    
    
    $
    386,509
 As of September 30, 2004, future scheduled principal payments under
indebtedness for the next five years and thereafter are as follows (dollars in
thousands): CreditYears Ending September 30,
    
    Facility
    
    Notes
    
    Total2005
    
    $
    21,200
    
    
    $
    
    
    
    $
    21,2002006
    
    
    30,107
    
    
    
    
    
    
    
    30,1072007
    
    
    39,893
    
    
    
    
    
    
    
    39,8932008
    
    
    40,000
    
    
    
    
    
    
    
    40,0002009
    
    
    
    
    
    
    160,830
    
    
    
    160,830Total future principal payments on long-term debt
    
    
    131,200
    
    
    
    160,830
    
    
    
    292,030Less amount representing unaccreted discounts
    
    
    
    
    
    
    (22,434
    )
    
    
    (22,434
    )Total future principal payments on long-term debt,
net of unaccreted discounts
    
    
    131,200
    
    
    
    138,396
    
    
    
    269,596Less current maturities
    
    
    (21,200
    )
    
    
    
    
    
    
    (21,200
    )Long-term debt, excluding current maturities
    
    $
    110,000
    
    
    $
    138,396
    
    
    $
    248,396
 Credit Facility On August 16, 1999, the Company entered into a $153.5 million senior
credit facility. The credit facility provides for (i) a $13.5 million senior
secured term loan (the Tranche I Term Loan) which matures on June 6, 2007,
and (ii) a $140.0 million senior secured term loan (the Tranche II Term Loan)
which matures on September 30, 2008. Mandatory quarterly payments of principal
are required beginning December 31, 2002 for the Tranche I Term Loan and March
31, 2004 for the Tranche II Term Loan payments initially in the amount of 3.75%
of the loan balance then outstanding and increasing thereafter. A commitment
fee of 1.50% on unused borrowings under the credit facility is payable
quarterly and included in interest expense. No commitment fees were paid for
the year ended September 30, 2004. For the years ended September 30, 2003, and
2002, commitment fees paid totaled $0.1 million, and $0.6 million,
respectively. No amounts remain available for borrowing under the credit
facility as of September 30, 2004. The credit facility is secured by all the
assets of the Company and its restricted subsidiaries. In connection with this
financing, the Company issued Lucent Technologies, in its capacity as
administrative agent and manager, warrants to purchase 27,807 shares of common
stock that were exercisable upon issuance. Additionally, the Company incurred
origination fees and expenses of $5.0 million, which have been recorded as
financing costs and are amortized to interest expense using the straight-line
method over the life of the agreement. The interest rate for the credit
facility is determined on a margin above either the prime lending rate in the
United States or the London Interbank Offer Rate. At September 30, 2004 and
2003, the weighted average interest rate on outstanding borrowings was 5.69%
and 5.05%, respectively. The credit facility contains ongoing financial covenants, including
reaching covered population targets, maximum annual spending on capital
expenditures, attaining minimum subscriber revenues, and maintaining certain
leverage and other ratios such as debt to total capitalization, debt to EBITDA
(as defined in credit facility agreement, Bank EBITDA) and Bank EBITDA to
fixed charges. The credit facility restricts the ability of the Company and its
restricted subsidiaries to: create liens; incur indebtedness; make certain
payments, including payments of dividends and distributions in respect of
capital stock; consolidate, merge and sell assets; engage in certain
transactions with affiliates; and fundamentally change its business. The Company amended the credit facility on November 30, 2003. Certain
changes were effective for periods ended December 31, 2003 and were used in
determining compliance with financial covenants for periods ended December 31,
2003 and thereafter. These changes include (i) changes to the definition of
Bank EBITDA to provide that, among other things, in determining Bank EBITDA,
certain additional items will be added back to our consolidated net income or
loss (to the extent deducted in determining such income or loss), including any
charges incurred in connection with the Restructuring, up to $2.0 million per
year to pursue claims against, or dispute claims by, Sprint; up to $5.0 million
in start-up costs in connection with any outsourcing billing and customer care
services, F-17




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##### Table of Contents



and (ii) calculating the ratio of total debt to Bank EBITDA and senior
secured debt to Bank EBITDA based on the four most recent fiscal quarters,
rather than the last two quarters annualized. Other significant changes made included: (i) deleting the minimum
subscriber covenant, (ii) revising the threshold requirements for minimum
revenues and most of the ratios that we are required to maintain; (iii)
providing the Company the ability to incur certain other limited indebtedness
and related liens; make certain limited investments and form subsidiaries under
limited circumstances that are not subject to certain restrictive covenants
contained in the credit facility or required to guarantee the credit facility
and (iv) permitting the Company to repurchase, at a discount, the 13.5% notes
or the 9 3/8% notes from our cash on hand in an aggregate amount not to exceed
$25 million in value of those notes, provided that we at the same time incur an
equal amount of permitted subordinated indebtedness. The amendment did not affect any of the other provisions of the credit
facility, including those which restrict the Companys ability to merge,
consolidate or sell substantially all of its assets. In connection with the
amendment, the Company agreed to prepay $10.0 million in principal under the
credit facility, which was credited against principal payments otherwise due in
2004 and 2005 in the amount of $7.5 million and $2.5 million, respectively. As of September 30, 2004, the Company was in compliance in all material
respects with covenants contained in the credit facility, as amended. As described in Note 13, the Company repaid and terminated the credit
facility on October 25, 2004. Notes On September 30, 1999, the Company received proceeds of $156.1 million
from the issuance of the 13.5% notes, which consisted of 300,000 units, each
unit consisting of $1,000 principal amount at maturity of 13.5% senior
subordinated discount notes due 2009 and one warrant to purchase 0.43 shares of
common stock at a price of $0.05 per share. The accreted value outstanding as
of September 30, 2004 of the 13.5% notes was $1.7 million. The Company incurred
expenses, underwriting discounts and commissions of $6.6 million related to the
13.5% notes, which were recorded as financing costs and amortized to interest
expense using the straight-line method, over the life of the agreement.
As of September 30, 2004, the Company was in compliance in all material
respects with all remaining covenants governing the 13.5% notes. The Company completed a financial restructuring on February 20, 2004 (the
Recapitalization Plan or Restructuring) consisting of:  
    
    The exchange of $298.2 million of outstanding 13.5% senior
subordinated discount due 2009 for (i) newly issued shares of common
stock representing 56% of the shares of common stock issued and
outstanding immediately after the Recapitalization Plan and (ii) $159.0
million aggregate principal amount of newly issued 9 3/8% senior
subordinated notes due 2009; and  
    
    The removal of substantially all of the restrictive covenants in
the indenture governing the 13.5% notes, release of collateral that
secured the Companys obligations thereunder and waiver of any defaults
that occurred in connection with the Recapitalization. The $298.2 million of 13.5% notes exchanged constituted 99.4% of the 13.5%
notes outstanding. In the Recapitalization, each tendering holder of the
Companys 13.5% notes received, for each $1,000 of aggregate principal amount
due at maturity tender, 22.0277 shares of the Companys common stock, $533.33
in principal amount of the Companys 9 3/8% notes and cash resulting from the
elimination of any fractional shares and fractional notes. The exchange offer comprising the Recapitalization Plan was settled on
February 20, 2004. The following summarizes the accounting related to certain key provisions
of the Recapitalization Plan as it relates to the Companys consolidated
financial statements as of and for the year ended September 30, 2004. The 13.5%
notes with a net carrying value of $264.9 million and related unamortized
financing costs of $3.8 million as of February 13, 2004 were exchanged for 9
3/8% notes with a principal balance of $159.0 million and 6,568,706 shares of
common stock, valued at $126.8 million as of February 13, 2004, based upon a
closing common stock market price of $19.30 on that date. F-18




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The financial restructuring was accounted for as a troubled debt
restructuring in accordance with SFAS No. 15 Accounting by Debtors and
Creditors for Troubled Debt Restructurings and EITF 02-4, Determining Whether
a Debtors Modification or Exchange of Debt is within the scope of FASB
Statement No. 15. Based on the terms of the Recapitalization Plan, no gain on
the transaction was recognized since total future cash payments, including
interest, exceeded the remaining carrying amount of the 13.5% notes after
reducing the 13.5% notes by the fair value of the common stock issued in the
restructuring. The difference of approximately $24.7 million between the
principal value of the 9 3/8% notes and the carrying value of the 13.5% notes
will be amortized as interest expense over the term of the 9 3/8% notes under
the effective interest method. The 9 3/8% notes have a stated rate with
interest due July and January of each year, which began on July 1, 2004. As of
September 30, 2004, the carrying value of the 9 3/8% notes was approximately
$136.7 million, with an effective interest rate of approximately 13.3%. Transaction costs of $3.0 million and $3.3 million incurred during the
years ended September 30, 2003 and September 30, 2004, respectively, were
allocated to the debt and were expensed as incurred. Equity issuance costs of
$4.8 million were recorded to additional paid in capital. The 9 3/8% notes are secured, on a second-priority basis, by liens on
substantially all of the Companys existing and after-acquired assets. The 9
3/8% notes contain covenants, subject to certain exceptions, that prohibit the
Companys ability to, among other things: incur more debt; create liens;
repurchase stock and make certain investments; pay dividends; make loans or
transfer property or assets; enter into sale and leaseback transactions,
transfer or dispose of substantially all of the Companys assets; or engage in
transactions with affiliates. If the Company undergoes a change of control (as
defined in the indenture that governs the 9 3/8% notes), then it must make an
offer to repurchase the 9 3/8% notes at 101% of the principal amount of the
notes then outstanding. As of September 30, 2004, the Company was in
compliance in all material respects with all covenants governing the 9 3/8%
notes. (7) Fair Value of Financial Instruments Fair value estimates and assumptions and methods used to estimate the fair
value of the Companys financial instruments are made in accordance with the
requirements of SFAS No. 107, Disclosure about Fair Value of Financial
Instruments. The Company has used available information to derive its
estimates. However, because these estimates are made as of a specific point in
time, they are not necessarily indicative of amounts the Company could realize
currently. The use of different assumptions or estimating methods may have a
material effect on the estimated fair value amounts (dollars in thousands). September 30, 2004
    
    September 30, 2003Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueCash and cash equivalents
    
    $
    13,453
    
    
    $
    13,453
    
    
    $
    54,078
    
    
    $
    54,078Short-term investment
securities
    
    
    55,000
    
    
    
    55,000
    
    
    
    
    
    
    
    Accounts receivable, net
    
    
    20,329
    
    
    
    20,329
    
    
    
    26,994
    
    
    
    26,994Receivable from Sprint
    
    
    23,601
    
    
    
    23,601
    
    
    
    15,809
    
    
    
    15,809Accounts payable
    
    
    2,128
    
    
    
    2,128
    
    
    
    5,945
    
    
    
    5,945Accrued expenses
    
    
    18,967
    
    
    
    18,967
    
    
    
    12,104
    
    
    
    12,104Payable to Sprint
    
    
    40,879
    
    
    
    40,879
    
    
    
    45,069
    
    
    
    45,069Credit facility
    
    
    131,200
    
    
    
    131,200
    
    
    
    151,297
    
    
    
    147,68813.5% notes
    
    
    1,739
    
    
    
    1,773
    
    
    
    252,987
    
    
    
    227,8139 3/8% notes
    
    
    136,657
    
    
    
    155,854
    
    
    
    
    
    
    
    
 (a) Cash and cash equivalents, short-term investment securities, accounts
receivable net, receivable from Sprint, accounts payable, accrued expenses and
payable to Sprint. Management believes that the carrying amounts of these items are
reasonable estimates of their fair value due to the short-term nature of the
instruments. (b) Credit facility and 13.5% notes. F-19




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At September 30, 2004, management estimated the fair value of the credit
facility based upon the principal amount repaid. As described in Note 13, the
credit facility was repaid on October 25, 2004. At September 30, 2003, as there was no active market for the credit
facility, management estimated the fair value of the credit facility based upon
the Companys analysis and discussions with individuals knowledgeable about
such matters. At September 30, 2003 and 2004, the fair value of the 13.5% notes was
estimated at quoted market price. The balance of the 13.5% notes was redeemed
on December 9, 2004 at a 106.75% premium. (c) 9 3/8% notes. The fair value of the 9 3/8% notes are stated at quoted market price. (8) Stockholders Deficit (a) Common Stock Purchase Warrants In June 2000, the Company issued stock purchase warrants to Lucent
Technologies. The exercise price of the warrants equals 120% of the price of
one share of common stock at the closing of the initial public offering, or
$102.00 per share, and the warrants were exercisable for an aggregate of 2,035
shares of the Companys common stock.
These warrants expired on August 15, 2004. The Company recorded a discount
on the credit facility of $0.3 million, which represented the fair value of the
warrants on the date of grant using a Black-Scholes option pricing model. The
discount was recognized as interest expense over the period from the date of
issuance to maturity using the effective interest method. On September 30, 1999, as part of offering the 13.5% notes, the Company
issued warrants to purchase 0.43 shares of common stock for each unit at a
price of $0.05 per share. In January 2000, the Companys registration statement
on Form S-1 relating to warrants to purchase 128,880 shares of common stock
issued together, as units, with the Companys $300 million of 13.5% senior
subordinated discount notes due 2009, was declared effective by the Securities
and Exchange Commission. The Company allocated $10.9 million of the proceeds
from the units offering to the fair value of the warrants and recorded an
original issue discount on the notes, which is recognized as interest expense
over the period from issuance to the maturity date using the effective interest
method. For the years ended September 30, 2004, 2003, and 2002, accretion of
the discount from the warrants totaling $0.4 million, $1.0 million, and $0.9
million, respectively, was recorded as interest expense. The warrants became
exercisable beginning upon the effective date of the registration statement
registering such warrants, for an aggregate of 128,880 shares of common stock,
and expire October 1, 2009. As of September 30, 2004, warrants representing
3,708 shares of common stock were outstanding. These warrants require liability
classification measured at fair value. The fair value of the warrants at
September 30, 2004 and 2003 was $0.1 million. As part of the acquisition of iPCS, the Company assumed warrants
previously issued by iPCS in connection with the iPCS notes. The warrant
holders may purchase 95,070 shares of the Companys common stock with an
exercise price of $172.55 per share all of which were outstanding as of
September 30, 2004. The warrants related to the iPCS notes became exercisable
on July 15, 2001 for a period of ten years after the date of issuance. These
warrants require liability classification measured at fair value. The fair
value of the warrants at September 30, 2004 was $1.5 million and $0.8 million
at September 30, 2003. The Company assumed warrants on 36,717 shares of the Companys common
stock previously issued by iPCS in connection with iPCS amendment of its
management agreement with Sprint with an exercise price of $155.30 per share
all of which were outstanding as of September 30, 2004. The warrants related
to the Sprint Agreements were issued as a part of an amendment to the
management agreement iPCS had with Sprint in connection with iPCS purchase of
Sprint owned PCS territories in Michigan, Iowa and Nebraska and became
exercisable by Sprint on July 15, 2001 and expire on July 15, 2007. The following is a summary of the aggregate common stock share activity
relating to the Companys warrants for F-20




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##### Table of Contents



the three years ended September 30, 2004: iPCS
    
    iPCSLucent
    
    13.5% Note
    
    Note
    
    SprintWarrants
    
    Warrants
    
    Warrants
    
    WarrantsJune 2000
    
    September 1999
    
    July 2000
    
    July 2000
    
    TotalBalance September 30, 2001
    
    
    2,035
    
    
    
    11,034
    
    
    
    
    
    
    
    
    
    
    
    13,069Warrants assumed upon acquisition of iPCS
    
    
    
    
    
    
    
    
    
    
    95,070
    
    
    
    36,717
    
    
    
    131,787Shares issued upon exercise of warrants
    
    
    
    
    
    
    (3,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Balance September 30, 2002
    
    
    2,035
    
    
    
    8,034
    
    
    
    95,070
    
    
    
    36,717
    
    
    
    141,856Shares issued upon exercise of warrants
    
    
    
    
    
    
    (4,296
    )
    
    
    
    
    
    
    
    
    
    
    (4,296
    )Balance September 30, 2003
    
    
    2,035
    
    
    
    3,738
    
    
    
    95,070
    
    
    
    36,717
    
    
    
    137,560Shares issued upon exercise of warrants
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (30
    )Shares expired
    
    
    (2,035
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,035
    )Balance September 30, 2004
    
    
    
    
    
    
    3,708
    
    
    
    95,070
    
    
    
    36,717
    
    
    
    135,495
 (b) Stock Compensation and Benefit Plans In July 1999, the Board of Directors approved the 1999 Stock Option Plan
(1999 Plan), a stock option plan whereby shares of common stock were reserved
for issuance to employees. Options granted under the plan vest at various
terms up to a five-year period beginning at the grant date and expire ten years
from the date of grant. Initially, 400,000 shares were reserved for issuance
under the 1999 Plan. Upon adoption of the Companys Amended and Restated 2002
Long-Term Incentive Plan, future grants of options under the 1999 Plan were
prohibited. The 1999 Plan will continue to operate with respect to previously
granted options. At September 30, 2004, there were 41,273 shares remaining
reserved under the 1999 Plan to cover exercises of previously granted options. In December 2001, the Board of Directors approved the Amended and Restated
2000 Long-Term Incentive Plan (2000 Plan). Options granted under the plan
vest on such terms as determined by the Companys compensation committee and
expire ten years from the date of grant. Initially 300,000 shares were
reserved for issuance under the 2000 Plan. Upon adoption of the Companys
Amended and Restated 2002 Long-Term Incentive Plan, future awards under the
2000 Plan were prohibited. The 2000 Plan will continue to operate with respect
to previously granted options. At September 30, 2004, there were 43,876 shares
remaining reserved under the 2000 Plan to cover exercises of previously granted
options. In January 2001, the Board of Directors approved the 2001 Non-Executive
Stock Option Plan (2001 Non-Executive Plan). Options granted under the plan
vest ratably over a four-year period beginning at the grant date and expire ten
years from the date of grant. Initially, 30,000 shares were reserved for
issuance under the 2001 Non-Executive Plan. Upon adoption of the Companys
Amended and Restated 2002 Long-Term Incentive Plan, future grants of options
under the 2001 Non-Executive Plan were prohibited. The 2001 Non-Executive Plan
will continue to operate with respect to previously granted options. At
September 30, 2004, there were 7,507 shares remaining reserved under the 2001
Non-Executive Plan to cover exercises of previously granted options. In March 2004, the Board of Directors approved the AirGate PCS, Inc.
Amended and Restated 2002 Long-Term Incentive Plan (the 2002 Plan), under
which 1,205,000 shares of Company common stock were reserved for issuance to
select employees and officers, directors and consultants of the Company.
Options granted under the 2002 Plan vest on such terms as determined by the
Companys compensation committee (generally ratably over four years), and
expire ten years after the date of grant. The right to grant awards under the
1999 Plan, the 2000 Plan, and the 2001 Non-Executive Plan were terminated upon
approval of the 2002 Plan.
Shares reserved under the 2002 Plan for outstanding grants at September 30, 2004 were 567,226, including 441,220
stock options and 126,006 restricted stock units discussed below. The weighted-average grant date fair value of stock option grants for the
years ended September 30, 2004, 2003, and 2002 was $12.98, $2.65, and $131.50,
respectively. The fair value of stock options granted was estimated as of the
date of the grant using the Black-Scholes option pricing model with the
following assumptions: F-21




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##### Table of Contents



Years EndedSeptember 30,2004
    
    2003
    
    2002Risk-free interest return
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    2.3
    %Volatility
    
    
    132.0
    %
    
    
    112.0
    %
    
    
    180.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life in years
    
    
    4
    
    
    
    4
    
    
    
    4
 The following table summarizes activity under the Companys stock option
plans: Number of
    
    Weighted-averageOptions
    
    Exercise PriceOptions outstanding as of September 30, 2001
    
    
    291,387
    
    
    $
    186.15Options assumed in acquisition of iPCS
    
    
    95,613
    
    
    
    159.95Granted
    
    
    127,537
    
    
    
    137.25Exercised
    
    
    (6,711
    )
    
    
    134.30Forfeited
    
    
    (55,874
    )
    
    
    176.50Options outstanding as of September 30, 2002
    
    
    451,952
    
    
    
    169.75Granted
    
    
    94,300
    
    
    
    3.60Forfeited
    
    
    (290,838
    )
    
    
    182.35Options outstanding as of September 30, 2003
    
    
    255,414
    
    
    
    91.59Granted
    
    
    379,850
    
    
    
    15.51Exercised
    
    
    (10,350
    )
    
    
    3.58Forfeited
    
    
    (91,038
    )
    
    
    86.25Options outstanding as of September 30, 2004
    
    
    533,876
    
    
    $
    40.08
 The Companys stock option plans have total authorized shares of
approximately 1,297,656. The number of shares of the Companys common stock
available for future grant under the Companys stock option plans was 624,424
as of September 30, 2004. The following table summarizes information for stock options outstanding
and exercisable at September 30, 2004: Options Outstanding
    
    Options ExercisableWeighted Average
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number
    
    Contractual Life
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    (in Years)
    
    Price
    
    Exercisable
    
    Price$1.30-$4.10
    
    
    55,225
    
    
    
    8.24
    
    
    $
    3.72
    
    
    
    14,817
    
    
    $
    3.44$4.35-$13.75
    
    
    13,868
    
    
    
    8.09
    
    
    $
    6.19
    
    
    
    5,368
    
    
    $
    5.50$14.24-$14.24
    
    
    75,000
    
    
    
    9.86
    
    
    $
    14.24
    
    
    
    
    
    
    
    $15.93-$15.93
    
    
    288,050
    
    
    
    9.52
    
    
    $
    15.93
    
    
    
    
    
    
    
    $44.65-$172.60
    
    
    70,098
    
    
    
    5.16
    
    
    $
    114.56
    
    
    
    64,224
    
    
    $
    118.35$178.15-$260.00
    
    
    28,653
    
    
    
    6.00
    
    
    $
    222.19
    
    
    
    24,245
    
    
    $
    221.17$270.00-$270.00
    
    
    342
    
    
    
    7.19
    
    
    $
    270.00
    
    
    
    272
    
    
    $
    270.00279.50-279.50
    
    
    310
    
    
    
    7.07
    
    
    $
    279.50
    
    
    
    195
    
    
    $
    279.50$286.05-$286.05
    
    
    1,330
    
    
    
    6.83
    
    
    $
    286.05
    
    
    
    1,000
    
    
    $
    286.05$492.50-$492.50
    
    
    1,000
    
    
    
    5.44
    
    
    $
    492.50
    
    
    
    1,000
    
    
    $
    492.50$1.30-$492.70
    
    
    533,876
    
    
    
    8.62
    
    
    $
    40.08
    
    
    
    111,121
    
    
    $
    125.54
 As of September 30, 2003, 112,291 options were exercisable with a weighted
average exercise price of $146.90. As of September 30, 2002, 170,969 options
were exercisable with a weighted average exercise price of $172.95. In January 2001, the Board of Directors approved the 2001 Employee Stock
Purchase Plan (the ESPP), under which 40,000 shares of common stock were
reserved for purchase. The ESPP was approved by stockholders and became
effective January 31, 2001.The ESPP allows employees to make voluntary
payroll contributions towards the purchase of Company common stock. At the end
of each offering period, participating employees are able to purchase company
common stock at a 15% discount to the market price of the Companys common
stock at the beginning or end of the offering period, whichever is lower. As of
December 31, 2002, the end of the most recent offering period, 25,345 shares of
common stock had been issued under the ESPP, and 14,655 shares remain reserved
for future issuance. During the fiscal year ended September 30, 2004, the Company issued
130,006 restricted stock units to select F-22




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##### Table of Contents



employees and directors of the Company. The restrictions on the stock
units lapse one to three years from the date of issuance if certain criteria
are met. When the restrictions on the stock units lapse, shares of common
stock will be issued. The restricted stock units qualify for variable
accounting under APB Opinion No. 25 and FASB Interpretation 28. The Company
recorded compensation expense of $0.3 million related to these restricted stock
units during the year ended September 30, 2004. As of September 30, 2004,
126,006 restricted stock units were outstanding. (c) Preferred Stock The Companys articles of incorporation authorize the Companys Board of
Directors to issue up to one million shares of preferred stock without
stockholder approval. The Company has not issued any preferred stock as of
September 30, 2004. (d) Non-Cash Stock Compensation The Companys non-cash stock compensation expense has been recorded to
reflect the difference between the exercise price and the fair market value of
the Companys common stock and restricted stock at the date of grant. The
expense is recognized over the period in which the related services are
rendered. The amounts below have been reflected in the respective categories
shown below in the Consolidated Statements of Operations for the years ending
September 30, 2004, 2003, and 2002 (dollars in thousands): 2004
    
    2003
    
    2002Cost of service and roaming
    
    $
    153
    
    
    $
    154
    
    
    $
    168Selling and marketing
    
    
    130
    
    
    
    89
    
    
    
    89General and administrative
    
    
    383
    
    
    
    407
    
    
    
    512Total
    
    $
    666
    
    
    $
    650
    
    
    $
    769
 (e) 401(k) Plan The Company sponsors a 401(k) defined contribution plan that is available
to substantially all employees. Employer contributions to the plan for the
years ended September 30, 2004, 2003, and 2002 were $0.6 million, $0.6 million,
and $0.5 million, respectively. (9) Income Taxes The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future and any increase or decrease in the valuation
allowance for deferred income tax assets. Income tax benefit from continuing operations for the years ended
September 30, 2004, 2003, and 2002 differed from the amounts computed by
applying the statutory U.S. Federal income tax rate of 34% to loss before
income tax benefit as a result of the following (dollars in thousands): Years Ended September 30,2004
    
    2003
    
    2002Computed expected income tax benefit from continuing operations
    
    $
    (3,446
    )
    
    $
    (14,343
    )
    
    $
    (31,545
    )(Increase) decrease in income tax benefit resulting from:Impact of debt
restructuring
    
    
    39,858
    
    
    
    
    
    
    
    State income tax benefits, net of Federal effect
    
    
    (405
    )
    
    
    (1,687
    )
    
    
    (3,711
    )Increase (decrease) in the valuation allowance for deferred
income tax assets
    
    
    (37,054
    )
    
    
    13,467
    
    
    
    32,609Nondeductible interest expense
    
    
    777
    
    
    
    1,929
    
    
    
    1,502Other, net
    
    
    270
    
    
    
    634
    
    
    
    1,145Total income tax benefit
    
    $
    
    
    
    $
    
    
    
    $
    
 F-23




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Differences between financial accounting and tax bases of assets and
liabilities giving rise to deferred income tax assets and liabilities are as
follows at September 30, 2004 and 2003 (dollars in thousands): 2004
    
    2003Deferred income tax assets:Net operating loss carryforwards
    
    $
    109,621
    
    
    $
    109,379Capitalized start-up costs
    
    
    192
    
    
    
    1,341Accrued expenses
    
    
    275
    
    
    
    2,580Deferred interest expense
    
    
    
    
    
    
    34,107Gross deferred income tax assets
    
    
    110,088
    
    
    
    147,407Less valuation allowance for deferred income tax assets
    
    
    (90,481
    )
    
    
    (127,535
    )Net deferred income tax assets
    
    
    19,607
    
    
    
    19,872Deferred income tax liabilities, principally due to
differences in depreciation and amortization
    
    
    (13,184
    )
    
    
    (19,872
    )Deferred loss on
restructuring
    
    
    (6,423
    )
    
    
    Net deferred income tax assets
    
    $
    
    
    
    $
    
 Deferred income tax assets and liabilities are recognized for differences
between the financial statement carrying amounts and the tax basis of assets
and liabilities that result in future deductible or taxable amounts and for net
operating loss and tax credit carryforwards. In assessing the realizability of
deferred income tax assets, management considers whether it is more likely than
not that some portion of the deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management has provided a valuation allowance
against all of its deferred income tax assets because the realization of those
deferred tax assets is not more likely than not. The valuation allowance for deferred income tax assets as of September 30,
2004 and 2003 was $90.4 million and $127.5 million, respectively. The net
change in the total valuation allowance for the years ended September 30, 2004,
2003, and 2002 was a decrease of $37.1 million and increases of $13.5 million,
and $32.6 million, respectively. At September 30, 2004 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $288 million. The net operating
loss will expire in various amounts beginning in the year 2019. The non-monetary gain on the disposal of discontinued operations recorded
during the quarter ended December 31, 2003 did not impact the Companys net
operating loss carryforwards as the disposition resulted in a non-deductible
loss for tax purposes. As a result of the Companys Recapitalization, the
Companys existing net operating losses (NOLs) will be subject to annual
limitations as required by Section 382 of the Internal Revenue Code of 1986, as
amended. The Company estimates that it had NOLs of approximately $288 million
through the date of restructuring. The Company estimates that the annual
limitation associated with these NOLs (as imposed by Internal Revenue Code
Section 382) is approximately $4.5 million. The limitation imposed by Section
382 may serve to render a portion of the Companys NOLs useless. The net operating loss carryforwards include deductions of approximately
$11.4 million related to the exercise of stock options, which will be credited
to additional paid in capital if recognized. (10) Commitments and Contingencies (a) Operating Leases The Company is obligated under non-cancelable operating lease agreements
for office space, cell sites, vehicles and office equipment. Future minimum
annual lease payments under non-cancelable operating lease agreements with
remaining terms greater than one year for the next five years and in the
aggregate as of September 30, 2004, are as follows (dollars in thousands): F-24




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##### Table of Contents



Years EndingSeptember 30,2005
    
    $
    16,8952006
    
    
    12,7642007
    
    
    10,8122008
    
    
    9,7702009
    
    
    8,905Thereafter
    
    
    29,813Total future minimum annual lease payments
    
    $
    88,959
 Rent expense for operating leases was $20.5 million, $19.4 million, and
$19.1 million for the years ended September 30, 2004, 2003, and 2002,
respectively. (b) Legal Matters AirGate Securities Litigation In May 2002, putative class action complaints were filed in the United
States District Court for the Northern District of Georgia against AirGate PCS,
Inc., Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit
Suisse First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company,
Thomas Wiesel Partners LLC and TD Securities. The complaints do not specify an
amount or range of damages that the plaintiffs are seeking. The complaints seek
class certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS stockholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to
disclose that in order to complete an effective integration of iPCS, drastic
changes would have to be made to the Companys distribution channels, (ii)
failure to disclose that the sales force in the acquired iPCS markets would
require extensive restructuring and (iii) failure to disclose that the churn
or turnover rate for subscribers would increase as a result of an increase in
the amount of sub-prime credit quality subscribers the Company added from its
merger with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed
a motion seeking appointment as lead plaintiffs and lead counsel. Subsequently,
the court denied this motion without prejudice and two of the plaintiffs and
their counsel filed a renewed motion seeking appointment as lead plaintiffs and
lead counsel. On September 12, 2003, the court again denied the motion without
prejudice and on December 2, 2003, certain plaintiffs and their counsel filed a
modified renewed motion seeking appointment as lead plantiffs and lead counsel.
On August 17, 2004 the court granted the plaintiffs motion. Pursuant to a consent scheduling order agreed to by the parties, lead
plaintiffs filed a consolidated amended class action complaint on October 15,
2004 (the Consolidated Complaint). As did the original complaints filed in
these actions, the Consolidated Complaint alleges that the Companys
registration statement and prospectus relating to the December 2001 offering
misrepresented and/or omitted adverse facts regarding the anticipated effects
of the Companys acquisition of iPCS. The Consolidated Complaint also asserts
that the registration statement/prospectus was false and misleading in certain
other respects not previously alleged. The legal claims asserted in the
Consolidated Complaint remain the same as those in the original complaints,
i.e., the registration statement/prospectus violated Sections 11, 12(a)(2) and
15 of the Securities Act of 1933. In addition, the class that lead plaintiffs
seek to represent remains the same, and the named defendants remain the same. Defendants responses to the Consolidated Complaint are due on or before
December 17, 2004. In the event that any defendant moves to dismiss, lead
plaintiffs are to serve their opposition by January 21, 2005, and defendants
reply briefs are due on or before February 22, 2005. No further dates have
been set in the case. iPCS Bankruptcy On February 23, 2003, iPCS and its two subsidiaries, iPCS Wireless, Inc.
and iPCS Equipment, Inc. (the Debtors) filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code. During the bankruptcy cases, iPCS
filed a motion and obtained an order authorizing it to assume a management
agreement between iPCS, AirGate PCS and AirGate Services Co., as amended. The
Company subsequently filed an administrative expense priority claim for amounts
that the Company contends are owed by the Debtors under the assumed management F-25




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##### Table of Contents



agreement. The claim is for amounts that the Company is or might be
liable to certain third party vendors for goods and services provided by such
vendors to or for the benefit of the Debtors. In their disclosure statement,
the Debtors indicated that they might seek to defend against the claim by
arguing, among other things, that the Company has failed to disgorge an alleged
preferential transfer in the amount of $3,079,311.41 and that the Company, its
affiliates, officers, and directors may be subject to claims of the Debtors for
mismanagement, breach of fiduciary duties, officer and director liability, and
similar claims. iPCS has not yet named the Company as a defendant in a
preference action. The parties are currently engaged in settlement discussions
in an effort to resolve all of the disputes between them in advance of the
January 2005 hearing on the Companys claim. Indemnity under Sprint Management Agreement As part of our management agreement with Sprint, we have agreed to
indemnify Sprint and related parties of Sprint against any and all claims
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in our management agreement or any other
agreement between us and Sprint, the actions or the failure to act of anyone
employed or hired by us in the performance of any work under the management
agreement, except we will not indemnify Sprint for any claims arising solely
from the negligence or willful misconduct of Sprint. We are also subject to a variety of other claims and suits that arise from
time to time in the ordinary course of business.
While management currently believes that resolving all of these matters
(including all matters discussed above), individually or in the aggregate, will
not have a material adverse impact on our liquidity, financial condition or
results of operations, the litigation and other claims noted above are subject
to inherent uncertainties and managements view may change in the future. If an
unfavorable outcome were to occur, there exists the possibility of a material
adverse impact on our liquidity, financial condition and results of operation. (11) Selected Quarterly Financial Data (Unaudited) (dollars in thousands, except per share amounts): First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(1)
    
    TotalYear ended September 30, 2004:Total revenue
    
    $
    81,503
    
    
    $
    78,036
    
    
    $
    86,038
    
    
    $
    91,531
    
    
    $
    337,108Operating income
    
    
    49
    
    
    
    1,270
    
    
    
    8,217
    
    
    
    15,867
    
    
    
    25,403Income (loss) from continuing operations
    
    
    (11,110
    )
    
    
    (9,876
    )
    
    
    2,175
    
    
    
    8,676
    
    
    
    (10,135
    )Income from discontinued operations
    
    
    184,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,115Net income (loss)
    
    
    173,005
    
    
    
    (9,876
    )
    
    
    2,175
    
    
    
    8,676
    
    
    
    173,980Earnings (loss) per share  basic and dilutedIncome (loss) from continuing operations
    
    
    (2.14
    )
    
    
    (1.21
    )
    
    
    0.18
    
    
    
    0.74
    
    
    
    (1.10
    )Income from discontinued operations
    
    
    35.46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19.98Net income (loss)
    
    
    33.32
    
    
    
    (1.21
    )
    
    
    0.18
    
    
    
    0.74
    
    
    
    18.88Year ended September 30, 2003:Total revenue
    
    $
    81,865
    
    
    $
    76,980
    
    
    $
    83,186
    
    
    $
    89,317
    
    
    $
    331,348Operating income (loss)
    
    
    (9,233
    )
    
    
    3,474
    
    
    
    2,485
    
    
    
    3,607
    
    
    
    333Loss from continuing operations
    
    
    (19,427
    )
    
    
    (6,698
    )
    
    
    (8,247
    )
    
    
    (7,814
    )
    
    
    (42,186
    )Loss from discontinued operations
    
    
    (28,247
    )
    
    
    (14,324
    )
    
    
    
    
    
    
    
    
    
    
    (42,571
    )Net loss
    
    
    (47,674
    )
    
    
    (21,022
    )
    
    
    (8,247
    )
    
    
    (7,814
    )
    
    
    (84,757
    )Loss per share  basic and dilutedLoss from continuing operations
    
    
    (3.77
    )
    
    
    (1.29
    )
    
    
    (1.60
    )
    
    
    (1.51
    )
    
    
    (8.14
    )Loss from discontinued operations
    
    
    (5.48
    )
    
    
    (2.76
    )
    
    
    
    
    
    
    
    
    
    
    (8.22
    )Net loss
    
    
    (9.25
    )
    
    
    (4.05
    )
    
    
    (1.60
    )
    
    
    (1.51
    )
    
    
    (16.36
    )
 (1) During the fourth quarter of the year ended September 30, 2004, the
Company recorded an adjustment to reduce cost of service and roaming by
approximately $11.7 million related to the settlement of previously disputed
charges between us and Sprint PCS. See note 4 to the consolidated financial
statements for further discussion on this and other settlements with Sprint F-26




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##### Table of Contents



(12)
    
    Condensed Consolidating Financial Information AGW Leasing Company, Inc. (AGW) is a wholly-owned restricted subsidiary of the Company. AGW has fully and unconditionally guaranteed the notes and the credit facility. AGW was formed to hold the real estate interests for the Companys PCS network and retail operations. AGW also was a registrant under the Companys registration statement declared effective by the Securities and Exchange Commission on September 27, 1999. AirGate Network Services LLC (ANS) is a wholly-owned restricted subsidiary of the Company. ANS has fully and unconditionally guaranteed the notes and the credit facility. ANS was formed to provide construction management services for the Companys PCS network. AirGate Service Company, Inc. (Service Co) is a wholly-owned restricted subsidiary of the Company. Service Co has fully and unconditionally guaranteed the notes and the credit facility. Service Co was formed to provide management services to the Company and iPCS. The condensed consolidating financial information for the Company as of September 30, 2004 and for the year ended September 30, 2004 is as follows (dollars in thousands): AGW
    
    AirGate
    
    AirGateLeasing
    
    Network
    
    ServiceAirGate
    
    Company,
    
    Services,
    
    Company,PCS, Inc.
    
    Inc.
    
    LLC
    
    Inc.
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    13,456
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    
    
    
    $
    13,453Short-term investment
securities
    
    
    55,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,000Other current assets
    
    
    109,154
    
    
    
    
    
    
    
    529
    
    
    
    
    
    
    
    (61,695
    )
    
    
    47,988Total current assets
    
    
    177,610
    
    
    
    
    
    
    
    526
    
    
    
    
    
    
    
    (61,695
    )
    
    
    116,441Property and equipment, net
    
    
    116,678
    
    
    
    
    
    
    
    27,646
    
    
    
    
    
    
    
    
    
    
    
    144,324Other noncurrent assets
    
    
    5,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,882Total assets
    
    $
    300,170
    
    
    $
    
    
    
    $
    28,172
    
    
    $
    
    
    
    $
    (61,695
    )
    
    $
    266,647Current liabilities
    
    $
    92,592
    
    
    $
    
    
    
    $
    61,384
    
    
    $
    
    
    
    $
    (61,695
    )
    
    $
    92,281Intercompany
    
    
    (129,365
    )
    
    
    85,114
    
    
    
    
    
    
    
    44,251
    
    
    
    
    
    
    
    Long-term debt
    
    
    248,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,396Other long-term liabilities
    
    
    6,262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,262Investment in subsidiaries
    
    
    162,577
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162,577
    )
    
    
    Total liabilities
    
    
    380,462
    
    
    
    85,114
    
    
    
    61,384
    
    
    
    44,251
    
    
    
    (224,272
    )
    
    
    346,939Stockholders equity (deficit)
    
    
    (80,292
    )
    
    
    (85,114
    )
    
    
    (33,212
    )
    
    
    (44,251
    )
    
    
    162,577
    
    
    
    (80,292
    )Total liabilities and
stockholders equity
(deficit)
    
    $
    300,170
    
    
    $
    
    
    
    $
    28,172
    
    
    $
    
    
    
    $
    (61,695
    )
    
    $
    266,647Revenue
    
    $
    337,108
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    337,108Cost of revenue
    
    
    172,822
    
    
    
    17,711
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    190,539Selling and marketing
    
    
    48,617
    
    
    
    2,242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,859General and administrative
    
    
    21,905
    
    
    
    522
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    22,430Depreciation and amortization
    
    
    38,270
    
    
    
    
    
    
    
    9,559
    
    
    
    
    
    
    
    
    
    
    
    47,829Loss on disposal of property
and equipment
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Total operating expenses
    
    
    281,662
    
    
    
    20,475
    
    
    
    9,568
    
    
    
    
    
    
    
    
    
    
    
    311,705Operating income (loss)
    
    
    55,446
    
    
    
    (20,475
    )
    
    
    (9,568
    )
    
    
    
    
    
    
    
    
    
    
    25,403Loss in subsidiaries
    
    
    (29,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,968
    
    
    
    Interest expense, net
    
    
    (35,613
    )
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    (35,538
    )Income (loss) from continuing
operations before income tax
    
    
    (10,135
    )
    
    
    (20,475
    )
    
    
    (9,493
    )
    
    
    
    
    
    
    29,968
    
    
    
    (10,135
    )Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from
continuing operations
    
    
    (10,135
    )
    
    
    (20,475
    )
    
    
    (9,493
    )
    
    
    
    
    
    
    29,968
    
    
    
    (10,135
    )Income from discontinued
operations
    
    
    184,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,115Net income (loss)
    
    $
    173,980
    
    
    $
    (20,475
    )
    
    $
    (9,493
    )
    
    $
    
    
    
    $
    29,968
    
    
    $
    173,980
 F-27




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##### Table of Contents



AGW
    
    AirGate
    
    AirGateLeasing
    
    Network
    
    ServiceAirGate
    
    Company,
    
    Services,
    
    Company,PCS, Inc.
    
    Inc.
    
    LLC
    
    Inc.
    
    Eliminations
    
    ConsolidatedOperating activities
    
    $
    (666
    )
    
    $
    
    
    
    $
    261
    
    
    $
    
    
    
    $
    
    
    
    $
    (405
    )Investing activities
    
    
    (13,819
    )
    
    
    
    
    
    
    (264
    )
    
    
    
    
    
    
    
    
    
    
    (14,083
    )Financing activities
    
    
    (26,137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,137
    )Increase (decrease) in cash
and cash equivalents
    
    
    (40,622
    )
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (40,625
    )Cash and cash equivalents at
beginning of year
    
    
    54,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,078Cash and cash equivalents at
end of year
    
    $
    13,456
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    
    
    
    $
    13,453
 The condensed consolidating financial information for the Company as of
September 30, 2003 and for the year ended September 30, 2003 is as follows
(dollars in thousands): AGW
    
    AirGate
    
    AirGateLeasing
    
    Network
    
    ServiceAirGate
    
    Company,
    
    Services,
    
    Company,PCS, Inc.
    
    Inc.
    
    LLC
    
    Inc.
    
    Eliminations
    
    ConsolidatedCash and cash equivalents
    
    $
    54,078
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    54,078Other current assets
    
    
    108,136
    
    
    
    
    
    
    
    529
    
    
    
    
    
    
    
    (61,478
    )
    
    
    47,187Total current assets
    
    
    162,214
    
    
    
    
    
    
    
    529
    
    
    
    
    
    
    
    (61,478
    )
    
    
    101,265Property and equipment, net
    
    
    141,129
    
    
    
    
    
    
    
    36,941
    
    
    
    
    
    
    
    
    
    
    
    178,070Other noncurrent assets
    
    
    11,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,581Total assets
    
    $
    314,924
    
    
    $
    
    
    
    $
    37,470
    
    
    $
    
    
    
    $
    (61,478
    )
    
    $
    290,916Current liabilities
    
    $
    89,036
    
    
    $
    
    
    
    $
    61,189
    
    
    $
    
    
    
    $
    (61,478
    )
    
    $
    88,747Intercompany
    
    
    (108,890
    )
    
    
    64,639
    
    
    
    
    
    
    
    44,251
    
    
    
    
    
    
    
    Long-term debt
    
    
    386,509
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,509Other long-term liabilities
    
    
    8,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,542Investment in subsidiaries
    
    
    316,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132,609
    )
    
    
    184,115Total liabilities
    
    
    691,921
    
    
    
    64,639
    
    
    
    61,189
    
    
    
    44,251
    
    
    
    (194,087
    )
    
    
    667,913Stockholders equity (deficit)
    
    
    (376,997
    )
    
    
    (64,639
    )
    
    
    (23,719
    )
    
    
    (44,251
    )
    
    
    132,609
    
    
    
    (376,997
    )Total liabilities and
stockholders equity
(deficit)
    
    $
    314,924
    
    
    $
    
    
    
    $
    37,470
    
    
    $
    
    
    
    $
    (61,478
    )
    
    $
    290,916Revenue
    
    $
    331,348
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    331,348Cost of revenue
    
    
    189,819
    
    
    
    16,640
    
    
    
    24
    
    
    
    3,428
    
    
    
    (1,024
    )
    
    
    208,887Selling and marketing
    
    
    44,446
    
    
    
    2,591
    
    
    
    1
    
    
    
    5,539
    
    
    
    (808
    )
    
    
    51,769General and administrative
    
    
    13,955
    
    
    
    549
    
    
    
    1
    
    
    
    9,955
    
    
    
    (1,113
    )
    
    
    23,347Depreciation and amortization
    
    
    36,940
    
    
    
    
    
    
    
    9,554
    
    
    
    
    
    
    
    
    
    
    
    46,494Loss on disposal of property
and equipment
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Total operating expenses
    
    
    285,678
    
    
    
    19,780
    
    
    
    9,580
    
    
    
    18,922
    
    
    
    (2,945
    )
    
    
    331,015Operating income (loss)
    
    
    45,670
    
    
    
    (19,780
    )
    
    
    (9,580
    )
    
    
    (18,922
    )
    
    
    2,945
    
    
    
    333Loss in subsidiaries
    
    
    (45,158
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,158
    
    
    
    Interest expense, net
    
    
    (42,698
    )
    
    
    
    
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    (42,519
    )Income (loss) from continuing
operations before income tax
    
    
    (42,186
    )
    
    
    (19,780
    )
    
    
    (9,401
    )
    
    
    (18,922
    )
    
    
    48,103
    
    
    
    (42,186
    )Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from
continuing operations
    
    
    (42,186
    )
    
    
    (19,780
    )
    
    
    (9,401
    )
    
    
    (18,922
    )
    
    
    48,103
    
    
    
    (42,186
    )Loss from discontinued
operations
    
    
    (42,571
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,571
    )Net income (loss)
    
    $
    (84,757
    )
    
    $
    (19,780
    )
    
    $
    (9,401
    )
    
    $
    (18,922
    )
    
    $
    48,103
    
    
    $
    (84,757
    )Operating activities
    
    $
    50,299
    
    
    $
    
    
    
    $
    (118
    )
    
    $
    
    
    
    $
    
    
    
    $
    50,181Investing activities
    
    
    (16,023
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,023
    )Financing activities
    
    
    15,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,033Increase (decrease) in cash
and cash equivalents
    
    
    49,309
    
    
    
    
    
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    49,191Cash and cash equivalents at
beginning of year
    
    
    4,769
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    4,887
 F-28




---



##### Table of Contents



AGW
    
    AirGate
    
    AirGateLeasing
    
    Network
    
    ServiceAirGate
    
    Company,
    
    Services,
    
    Company,PCS, Inc.
    
    Inc.
    
    LLC
    
    Inc.
    
    Eliminations
    
    ConsolidatedCash and cash equivalents at
end of year
    
    $
    54,078
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    54,078
 The condensed consolidating financial information for the Company for the
year ended September 30, 2002 is as follows (dollars in thousands): AGW
    
    AirGate
    
    AirGateLeasing
    
    Network
    
    ServiceAirGate
    
    Company,
    
    Services,
    
    Company,PCS, Inc.
    
    Inc.
    
    LLC
    
    Inc.
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    313,544
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    313,544Cost of revenue
    
    
    214,714
    
    
    
    15,219
    
    
    
    
    
    
    
    3,140
    
    
    
    (1,142
    )
    
    
    231,931Selling and marketing
    
    
    73,692
    
    
    
    2,754
    
    
    
    
    
    
    
    4,169
    
    
    
    (1,516
    )
    
    
    79,099General and administrative
    
    
    6,092
    
    
    
    585
    
    
    
    
    
    
    
    18,020
    
    
    
    (6,554
    )
    
    
    18,143Depreciation and
amortization
    
    
    32,407
    
    
    
    
    
    
    
    8,357
    
    
    
    
    
    
    
    
    
    
    
    40,764Loss on disposal of
property and equipment
    
    
    717
    
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    
    
    
    
    1,074Total operating expenses
    
    
    327,622
    
    
    
    18,558
    
    
    
    8,714
    
    
    
    25,329
    
    
    
    (9,212
    )
    
    
    371,011Operating loss
    
    
    (14,078
    )
    
    
    (18,558
    )
    
    
    (8,714
    )
    
    
    (25,329
    )
    
    
    9,212
    
    
    
    (57,467
    )Loss in subsidiaries
    
    
    (41,498
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,498
    
    
    
    Interest expense, net
    
    
    (37,204
    )
    
    
    
    
    
    
    1,891
    
    
    
    
    
    
    
    
    
    
    
    (35,313
    )Loss from continuing
operations before income
tax
    
    
    (92,780
    )
    
    
    (18,558
    )
    
    
    (6,823
    )
    
    
    (25,329
    )
    
    
    50,710
    
    
    
    (92,780
    )Income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from continuing
operations
    
    
    (92,780
    )
    
    
    (18,558
    )
    
    
    (6,823
    )
    
    
    (25,329
    )
    
    
    50,710
    
    
    
    (92,780
    )Discontinued operations
    
    
    (903,837
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (903,837
    )Net loss
    
    $
    (996,617
    )
    
    $
    (18,558
    )
    
    $
    (6,823
    )
    
    $
    (25,329
    )
    
    $
    50,710
    
    
    $
    (996,617
    )Operating activities
    
    $
    (25,809
    )
    
    $
    
    
    
    $
    275
    
    
    $
    
    
    
    $
    
    
    
    $
    (25,534
    )Investing activities
    
    
    (46,321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,321
    )Financing activities
    
    
    62,452
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,452(Decrease) Increase in cash
and cash equivalents
    
    
    (9,678
    )
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    (9,403
    )Cash and cash equivalents
at beginning of year
    
    
    14,447
    
    
    
    
    
    
    
    (157
    )
    
    
    
    
    
    
    
    
    
    
    14,290Cash and cash equivalents
at end of year
    
    $
    4,769
    
    
    $
    
    
    
    $
    118
    
    
    $
    
    
    
    $
    
    
    
    $
    4,887
  (13)
    
    Subsequent Events(a)
    
    Issuance of $175 million notes On October 25, 2004, the Company issued $175.0 million of first priority
senior secured floating rate notes due 2011 at par value. The notes bear
interest at a rate equal to the three-month LIBOR plus 3.75%, reset quarterly.
Proceeds from the notes were used to repay and terminate the Companys $131.2
million senior credit facility, redeem the Companys $1.8 million 13.5% senior
subordinated discount notes due 2009, and for general corporate purposes. If
the Company undergoes a change of control (as defined in the indenture that
governs the $175.0 million notes), then it must make an offer to repurchase the
notes at 101% of their principal amount, plus accrued and unpaid interest. In October 2004, the Company incurred and capitalized approximately $4.5
million of fees and expenses related to the $175.0 million note offering and
expensed previously paid transaction fees related to the credit facility and
the 13.5% notes totaling approximately $2.8 million.  (b)
    
    Merger Agreement with Alamosa Holdings, Inc. F-29




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##### Table of Contents



On December 7, 2004, we entered into an Agreement and Plan of Merger (the
Merger Agreement) with Alamosa Holdings, Inc. (Alamosa) and A-Co. Merger
Sub, Inc., a direct wholly-owned subsidiary of Alamosa (Merger Sub). The
description of the Merger Agreement set forth below is qualified in its
entirety by reference to the actual terms of the Merger Agreement. Pursuant to the Merger Agreement, the Company will merge (the Merger)
with and into Merger Sub with Merger Sub surviving. After the Merger, the
Company will be a subsidiary of Alamosa. Under the terms of the Merger
Agreement, Company shareholders will receive 2.87 Alamosa shares for every
share of Company common stock they hold. In addition, Company shareholders will
have the option to elect cash consideration in place of Alamosa stock, up to an
aggregate amount of $100 million, with the per share cash consideration (the
Per Share Cash Consideration) based on the average closing price of Alamosa
stock in the ten trading days prior to the completion of the transaction
multiplied by 2.87 (the Per Share Amount). The Per Share Cash Consideration
is subject to proration to ensure that Alamosa exchanges no more than $100
million in aggregate cash consideration. Immediately prior to the effective time of the Merger, all outstanding
options for our common stock will become vested in full and we will pay the
holders an amount in cash equal to the number of shares of our common stock
issuable thereunder times the amount, if any, by which the Per Share Amount
exceeds the exercise price of the options. All outstanding restricted stock
units (RSUs) will be terminated and we will pay the holder an amount in cash
equal to the Per Share Amount for each RSU held. Outstanding warrants for our
common stock will become exercisable for Alamosa common stock and cash in the
same proportion as our shareholders receive in the aggregate in the Merger. The completion of the Merger is subject to various customary closing
conditions, including obtaining the approval of the Companys and Alamosas
stockholders, the expiration of the applicable waiting period under the
Hart-Scott-Rodino Anti-Trust Improvements Act of 1974 and the consent of Sprint
PCS. In the event of a termination of the Merger Agreement under certain
circumstances, the Company or Alamosa may be required to pay the other a
termination fee as set forth in the Merger Agreement. Pursuant to the Merger Agreement, Alamosa has agreed to assume our
obligations with respect to certain currently effective registration statements
covering our outstanding Notes (as defined below) and warrants. In addition,
the Indentures (the Indentures) governing our outstanding 9 3/8% Senior
Subordinated Discount Notes due 2009 and our First Priority Senior Secured
Floating Rate Notes due 2011 (together, the Notes), provide that we may be
required to effect a repurchase offer of such Notes upon a change of control of
the Company. Pursuant to the Merger Agreement, Alamosa has agreed that it
shall, or shall cause Merger Sub, to effect such repurchase offers, if so
required by the Indentures.  (c)
    
    Equipment Purchase Commitment In December 2004, the Company entered into an agreement with an equipment
vendor to purchase network products and services which provides for a minimum
purchase commitment of $80 million during the time period beginning October 1,
2004 and ending on September 30, 2009. The Company plans to both buy new
equipment and replace existing equipment. The Company will evaluate the
remaining economic life of any equipment that it replaces and accelerate
depreciation if necessary. F-30




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors
AirGate PCS, Inc.: Under date of December 13, 2004, we reported on the consolidated balance
sheets of AirGate PCS, Inc. and subsidiaries as of September 30, 2004 and 2003,
and the related consolidated statements of operations, stockholders deficit,
and cash flows for each of the years in the three-year period ended September
30, 2004. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule
as listed in the accompanying index. This financial statement schedule is the
responsibility of the Companys management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLPAtlanta, GeorgiaDecember 13, 2004
 F-31




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##### Table of Contents



AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30, 2004. 2003 and 2002
(Dollars in thousands) AdditionsBalance at
    
    Charges to
    
    
    
    
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    
    
    
    
    
    
    
    
    End ofClassification
    
    Period
    
    Expenses
    
    Other
    
    Deductions
    
    PeriodSeptember 30, 2004Allowance for Doubtful Accounts
    
    $
    4,635
    
    
    
    181
    (1)
    
    
    9,379
    (2)
    
    
    (8,678
    )(3)
    
    $
    5,517Income Tax Valuation Allowance
    
    $
    127,535
    
    
    
    (37,054
    )(4)
    
    
    
    
    
    
    
    
    
    $
    90,481September 30, 2003Allowance for Doubtful Accounts
    
    $
    6,759
    
    
    
    5,220
    (1)
    
    
    13,511
    (2)
    
    
    (20,855
    )(3)
    
    $
    4,635Income Tax Valuation Allowance
    
    $
    114,068
    
    
    
    13,467
    (4)
    
    
    
    
    
    
    
    
    
    $
    127,535September 30, 2002Allowance for Doubtful Accounts
    
    $
    2,759
    
    
    
    21,343
    (1)
    
    
    14,053
    (2)
    
    
    (31,396
    )(3)
    
    $
    6,759Income Tax Valuation Allowance
    
    $
    81,459
    
    
    
    32,609
    (4)
    
    
    
    
    
    
    
    
    
    $
    114,068
  (1)
    
    Amounts represent provisions for doubtful accounts charged to cost of
service and roaming. During the year ended September 30, 2004, the
Company received a $1.5 million credit from Sprint related to bad debt
write-offs.(2)
    
    Amounts represent provisions for late payment fees, early cancellation
fees, first payment default customers, and other billing adjustments
charged to subscriber revenues.(3)
    
    Amounts represent write-offs of uncollectible customer accounts.(4)
    
    Amounts represent adjustments to the valuation allowance for deferred
income tax assets to reduce them to the amount believed to be realizable. F-32