AirGate cites financial progress, moves toward recap plan

By Paul Deckelman

New York, Dec. 19 - AirGate PCS Inc. said Friday that it was making progress in improving its financial situation and taking steps to implement a previously announced recapitalization plan, which would result in a sharp decrease in the Atlanta-based Sprint PCS affiliate's debt load. At the same time, it remains in negotiations with Sprint on possible changes to the agreement between the two companies, under which AirGate sells Sprint's wireless service in the South and the Midwest.

"This was another successful year and quarter," proclaimed the company's president and chief executive officer, Thomas Dougherty on a conference call with analysts and investors following the release of the company's financial results in the fiscal fourth quarter and fiscal year ended Sept. 30. "We made further strides under Phases One and Two of our four-phase strategy for AirGate."

Earlier this year, AirGate unveiled the four part plan; the first part calls for the company to work on bringing down operational costs that are within its control, such as reducing headcount, more effectively managing relationships with vendors who sell the company goods or services, and trimming capital expenditures, while adding higher-value subscribers likely to bring in more revenue. Phase Two is the capital restructuring, which envisions the company offering new stock and debt for all of its $300 million principal amount of outstanding 13½% senior subordinated discount notes due 2009.

Beyond that lie Phases Three and Four. The third phase involves addressing customer churn, bad debt and key operating issues largely under the control of Sprint, such as customer care; once the first three phases are in place, Dougherty said that AirGate could then move to the accelerated fourth phase of the overall "smart growth" strategy, which focuses on adding more profitable subscribers and expanding its distribution.

Talking about AirGate's first-phase efforts to improve its financial condition, Dougherty said that in the just ended fiscal quarter, AirGate sharply narrowed its net loss from year-ago levels, to $7.8 million (29 cents a share), from $615 million of red ink ($23.83 per share), in the same period of fiscal 2002.

Consolidated EBITDA was $15.3 million, a notable turnaround from it's year-earlier EBITDA loss of $566.4 million. Dougherty noted that EBITDA has held at or above $14 million in each of the last three quarters. Cash increased to $54.1 million by the end of the fourth quarter, from $4.9 million as year earlier.

An important factor in the company's better performance was its ability to attract a better class of customer - more likely to order costly services and less likely to default on payments for them. During the just-ended fiscal year, 69% of AirGate's activations were in the "prime" category and 76% in the last quarter alone. At the end of the quarter, 72% of AirGate's total subscriber base (359,460 subscribers as of Sept. 30, up from 339,139 a year earlier) were considered prime subscribers versus 65% a year earlier.

However, gross subscriber additions for the quarter were just 34,464, down from 48,276 a year ago. The company's vice president and chief financial officer, William Seippel, acknowledged that additions were "lighter than we expected when we did our budgets earlier in the year," due to the loss of distribution channels such as Circuit City and a decline in market share. He said that the company had "made progress" in bolstering its network of distributors, including adding another major local distributor.

AirGate cut costs by reducing its headcount by about 28% to 460 employees, down from 640 a year earlier.

AirGate's performance was also helped by jettisoning its money-losing iPCS subsidiary, which filed for Chapter 11 protection from its creditors in February. AirGate subsequently gave up all of its interest in the company, classifying its investment as a discontinued operation.

Seippel noted that having finished an audit of its results - including what he called the "complex and sometimes confusing" problem of how to account for the discontinued iPCS - and by filing its 10-K annual results report with the Securities and Exchange Commission, AirGate had taken a major step toward satisfying SEC review process requirements that had to be met before it can launch the exchange offer that is at the heart of the recapitalization plan and call a special shareholders' meeting to approve of the proposed transaction, which was first announced in September.

He said that since the end of the fiscal fourth quarter on Sept. 30., AirGate had on Nov. 30 entered into an amendment of its credit facility, changes which he said "clarify ambiguities" and modify definition of EBITDA for the purposes of complying with the facility's financial covenants. "With this amendment, the company believes it will meet its debt covenants in 2004," the executive said.

Under the amendment to the credit facility, AirGate is required to repay $10 million of principal on the date the restructuring is complete, with $7.5 million to be credited against principal payments otherwise due in 2004 and $2.5 million to be credited against principal payments otherwise due in 2005.

The pre-payment was suggested by AirGate, not the lenders, as a means of lowering the company's interest costs. Seippel said that the company's willingness to pre-pay "is an indication of our confidence in our ability to continue to generate cash as we have in the last year."

An analyst commented during the question-answer portion of the conference call that "I'm sure the banks did not protest."

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