UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-32357
ALAMOSA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2890997
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
5225 SOUTH LOOP 289, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
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 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
As of November 14, 2003, 95,347,753 shares of common stock, $0.01 par value per
share, were issued and outstanding.
ALAMOSA HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 (unaudited)
and December 31, 2002 3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited) 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 35
PART II OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 38
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 98,726 $ 61,737
Restricted cash 1 34,725
Customer accounts receivable, net 28,307 27,926
Receivable from Sprint 26,018 32,576
Interest receivable -- 973
Inventory 6,020 7,410
Prepaid expenses and other assets 8,018 7,239
Deferred customer acquisition costs 8,354 7,312
Deferred tax asset 5,988 5,988
------------------ -----------------
Total current assets 181,432 185,886
Property and equipment, net 429,052 458,946
Debt issuance costs, net 29,692 33,351
Intangible assets, net 458,371 488,421
Other noncurrent assets 7,119 7,802
------------------ -----------------
Total assets $ 1,105,666 $ 1,174,406
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,741 $ 27,203
Accrued expenses 40,943 34,903
Payable to Sprint 27,692 26,903
Interest payable 9,152 22,242
Deferred revenue 22,494 18,901
Current maturities of long term debt 15,000 --
Current installments of capital leases 592 1,064
------------------ -----------------
Total current liabilities 132,614 131,216
------------------ -----------------
Long term liabilities:
Capital lease obligations 894 1,355
Other noncurrent liabilities 10,092 10,641
Deferred tax liability 12,439 27,694
Senior secured debt 185,000 200,000
12 7/8% senior discount notes 295,345 268,862
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
------------------ -----------------
Total long term liabilities 903,770 908,552
------------------ -----------------
Total liabilities 1,036,384 1,039,768
------------------ -----------------
Commitments and contingencies (see Note 12) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no
shares issued -- --
Common stock, $.01 par value; 290,000,000 shares authorized,
95,347,370 and 94,171,938 shares issued and outstanding, respectively 953 942
Additional paid-in capital 800,765 800,260
Accumulated deficit (731,424) (664,720)
Unearned compensation (170) (294)
Accumulated other comprehensive loss, net of tax (842) (1,550)
------------------ -----------------
Total stockholders' equity 69,282 134,638
------------------ -----------------
Total liabilities and stockholders' equity $ 1,105,666 $ 1,174,406
================== =================
The accompanying notes are an integral part of the consolidated
financial statements.
3
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------------------------
2003 2002 2003 2002
----------- ---------- ----------- -------------
Revenues:
Subscriber revenues $ 116,665 $ 103,642 $ 335,239 $ 289,720
Roaming revenues 41,126 39,129 107,956 99,154
----------- ---------- ----------- -------------
Service revenues 157,791 142,771 443,195 388,874
Product sales 8,599 4,657 19,697 17,730
----------- ---------- ----------- -------------
Total revenues 166,390 147,428 462,892 406,604
----------- ---------- ----------- -------------
Costs and expenses:
Cost of service and operations (excluding non-cash
compensation of $4 and $0 for the three months
ended September 30, 2003 and 2002, respectively,
and $12 and $0 for the nine months ended
September 30, 2003 and 2002, respectively) 83,313 92,560 242,912 256,378
Cost of products sold 14,913 12,904 40,156 36,134
Selling and marketing expenses (excluding non-cash
compensation of $4 and $0 for the three months
ended September 30, 2003 and 2002, respectively
and $12 and $0 for the nine months ended
September 30, 2003 and 2002, respectively) 29,801 32,503 84,531 88,360
General and administrative expenses (excluding
non-cash compensation of $37 and $0 for the
three months ended September 30, 2003 and 2002,
respectively, and $261 and $0 for the nine months
ended September 30, 2003 and 2002, respectively) 6,416 4,102 15,999 10,890
Depreciation and amortization 28,235 26,897 82,536 78,104
Impairment of goodwill -- 291,635 -- 291,635
Impairment of property and equipment 291 -- 685 1,332
Non-cash compensation 45 -- 285 --
----------- ---------- ----------- -------------
Total costs and expenses 163,014 460,601 467,104 762,833
----------- ---------- ----------- -------------
Income (loss) from operations 3,376 (313,173) (4,212) (356,229)
Interest and other income 187 678 821 2,882
Interest expense (26,519) (26,158) (79,007) (76,832)
----------- ---------- ----------- -------------
Loss before income tax benefit (22,956) (338,653) (82,398) (430,179)
Income tax benefit 5,446 17,806 15,694 52,463
----------- ---------- ----------- -------------
Net loss $ (17,510) $ (320,847) $ (66,704) $ (377,716)
=========== ========== =========== =============
Net loss per common share, basic and diluted $ (0.19) $ (3.45) $ (0.71) $ (4.06)
=========== ========== =========== =============
Weighted average common shares outstanding,
basic and diluted 94,126,719 93,069,446 93,810,363 92,940,014
=========== ========== =========== =============
The accompanying notes are an integral part of the consolidated
financial statements.
4
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2003 2002
---------------- ---------------
Cash flows from operating activities:
Net loss $ (66,704) $ (377,716)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Non-cash compensation 285 --
Provision for bad debts 11,100 32,765
Non-cash interest expense (benefit) on derivative instruments (468) 503
Accretion of asset retirement obligations 524 --
Depreciation and amortization of property and equipment 52,486 47,702
Amortization of intangible assets 30,050 30,402
Amortization of financing costs included in interest expense 3,362 3,148
Amortization of discounted interest 297 297
Deferred tax benefit (15,694) (52,463)
Interest accreted on discount notes 26,483 23,365
Impairment of property and equipment 685 1,332
Impairment of goodwill -- 291,635
(Increase) decrease in:
Receivables (3,950) (40,170)
Inventory 1,390 (915)
Prepaid expenses and other assets (1,138) (2,825)
Increase (decrease) in:
Accounts payable and accrued expenses (6,765) 1,357
---------------- ---------------
Net cash provided by (used in) operating activities 31,943 (41,583)
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 2,496 409
Purchases of property and equipment (31,645) (79,776)
Net change in short term investments -- 1,300
Change in restricted cash 34,724 59,705
Other -- 189
---------------- ---------------
Net cash provided by (used in) investing activities 5,575 (18,173)
---------------- ---------------
Cash flows from financing activities:
Borrowings under senior secured debt -- 12,838
Debt issuance costs -- (1,350)
Stock options exercised 6 1
Shares issued to employee stock purchase plan 349 576
Payments on capital leases (884) (570)
---------------- ---------------
Net cash provided by (used in) financing activities (529) 11,495
---------------- ---------------
Net increase (decrease) in cash and cash equivalents 36,989 (48,261)
Cash and cash equivalents at beginning of period 61,737 104,672
---------------- ---------------
Cash and cash equivalents at end of period $ 98,726 $ 56,411
================ ===============
Supplemental disclosure of non-cash financing and investing activities:
Capitalized lease obligations incurred $ 73 $ 613
Asset retirement obligations capitalized $ 1,243 $ --
Change in accounts payable for purchases of
property and equipment $ (7,065) $ (24,368)
The accompanying notes are an integral part of the consolidated
financial statements.
5
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet at September 30, 2003, the
unaudited consolidated statements of operations for the three months
and nine months ended September 30, 2003 and 2002, the unaudited
consolidated statements of cash flows for the nine months ended
September 30, 2003 and 2002 and related footnotes have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in
the United States of America. The financial information presented
should be read in conjunction with the audited consolidated financial
statements as of and for the year ended December 31, 2002. In the
opinion of management, the interim data includes all adjustments
(consisting of only normally recurring adjustments) necessary for a
fair statement of the results for the interim periods. Operating
results for the three months and nine months ended September 30, 2003
are not necessarily indicative of results that may be expected for the
year ending December 31, 2003.
Basic and diluted net loss per share of common stock is computed by
dividing net loss for each period by the weighted-average outstanding
number of common shares. No conversion of common stock equivalents has
been assumed in the calculations since the effect would be
antidilutive. As a result, the number of weighted-average outstanding
common shares as well as the amount of net loss per share are the same
for basic and diluted net loss per share calculations for all periods
presented. Common stock equivalents excluded from diluted net loss per
share calculations consisted of options to purchase 8,333,254 and
6,031,830 shares of common stock at September 30, 2003 and 2002,
respectively. In addition, 800,000 shares of restricted stock that were
collectively awarded in October and December of 2002 have been excluded
from the weighted-average outstanding number of common shares for the
three and nine months ended September 30, 2003. These shares will be
included in the weighted-average outstanding number of common shares as
the restrictions lapse.
Certain reclassifications have been made to prior period balances to
conform to current period presentation. Changes in restricted cash have
been reclassified from cash flows from financing activities to cash
flows from investing activities for all periods presented.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa Holdings, Inc. ("Alamosa Holdings") is a PCS Affiliate of
Sprint with the exclusive right to provide wireless personal
communications service under the Sprint brand name in a territory
encompassing approximately 15.8 million residents. Alamosa Holdings was
formed in July 2000. Alamosa Holdings is a holding company and through
its subsidiaries provides wireless personal communications services,
commonly referred to as PCS, in the Southwestern, Northwestern and
Midwestern United States. Alamosa (Delaware), Inc. ("Alamosa
(Delaware)"), a subsidiary of Alamosa Holdings, was formed in October
1999 under the name "Alamosa PCS Holdings, Inc." to operate as a
holding company in anticipation of its initial public offering. On
February 3, 2000, Alamosa (Delaware) completed its initial public
offering. Immediately prior to the initial public offering, shares of
Alamosa (Delaware) were exchanged for Alamosa PCS LLC's ("Alamosa LLC")
membership interests, and Alamosa LLC became wholly owned by Alamosa
(Delaware). Alamosa Holdings and its subsidiaries are collectively
referred to in these financial statements as the "Company," "we," "us"
or "our."
On December 14, 2000, Alamosa (Delaware) formed a new holding company
pursuant to Section 251(g) of the Delaware General Corporation Law. In
that transaction, each share of Alamosa (Delaware) was converted into
one share of the new holding company, and the former public company,
which was renamed "Alamosa (Delaware), Inc." became a wholly owned
subsidiary of the new holding company, which was renamed "Alamosa PCS
Holdings, Inc."
6
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
On February 14, 2001, Alamosa Holdings became the new public holding
company of Alamosa PCS Holdings, Inc. ("Alamosa PCS Holdings") and its
subsidiaries pursuant to a reorganization transaction in which a wholly
owned subsidiary of Alamosa Holdings was merged with and into Alamosa
PCS Holdings. As a result of this reorganization, Alamosa PCS Holdings
became a wholly owned subsidiary of Alamosa Holdings, and each share of
Alamosa PCS Holdings common stock was converted into one share of
Alamosa Holdings common stock. Alamosa Holdings' common stock is quoted
on the Over-the-Counter Bulletin Board under the symbol "ALMO."
3. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
capital contributions from owners, through debt financing and through
proceeds generated from public offerings of common stock. The Company
has incurred substantial net losses and negative cash flow from
operations since inception. Expenses are expected to exceed revenues
until the Company establishes a sufficient subscriber base. Management
expects operating losses to continue for the foreseeable future.
However, management expects operating losses to decrease in the future
as the Company obtains more subscribers.
At September 30, 2003, the Company had $98,726 in cash and cash
equivalents plus an additional $1 in restricted cash held in escrow for
debt service requirements. The Company also had $25,000 remaining on
the revolving portion of the Senior Secured Credit Facility, subject to
the restrictions discussed below.
On September 26, 2002 the Company entered into the sixth amendment to
the amended and restated credit agreement relating to the Senior
Secured Credit Facility, which, among other things, modified certain
financial and statistical covenants, as discussed in Note 8. As a
result of the amendment, the Company is required to maintain a minimum
cash balance of $10,000.
The September 26, 2002 amendment also placed restrictions on the
ability to draw on the $25,000 revolving portion of the Senior Secured
Credit Facility. The first $10,000 can be drawn if cash balances fall
below $15,000 and the Company substantiates through tangible evidence
the need for such advances. The remaining $15,000 is available only at
such time as the Company's leverage ratio is less than or equal to 5.5
to 1. At September 30, 2003, the Company's leverage ratio was 7.21 to
1.
Although management does not currently anticipate the need to raise
additional capital in the upcoming year, the Company's funding status
is dependent on a number of factors influencing projections of earnings
and operating cash flows, including average monthly revenue per user
("ARPU"), cash cost per user ("CCPU"), customer churn and cost per
gross addition ("CPGA"). Should actual results differ significantly
from these assumptions, the Company's liquidity position could be
adversely affected and the Company 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, and could have
a material adverse effect on the Company's ability to achieve its
intended business objectives.
4. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. No
stock-based employee compensation cost is reflected in the consolidated
statements of operations for the three months or nine months ended
September 30, 2003 or 2002, as all options granted by the Company had
an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant. Non-cash compensation
expense reflected in the consolidated statements of operations for the
three and nine month periods ended September 30, 2003 relate to shares
of restricted stock awarded to officers and are not related to the
granting of stock options. The following table illustrates the effect
on net loss and net loss per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
to stock-based employee compensation.
7
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
2003 2002 2003 2002
----------------- ---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss - as reported $ (17,510) $ (320,847) $ (66,704) $ (377,716)
Less stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects 172 (1,305) (3,172) (3,531)
----------------- ---------------- --------------- ----------------
Net loss - pro forma $ (17,338) $ (322,152) $ (69,876) $ (381,247)
================= ================ =============== ================
Net loss per share - as reported
Basic and diluted $ (0.19) $ (3.45) $ (0.71) $ (4.06)
================= ================ =============== ================
Net loss per share - pro forma
Basic and diluted $ (0.18) $ (3.46) $ (0.74) $ (4.10)
================= ================ =============== ================
5. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable represents
amounts owed to the Company by subscribers for PCS service. The amounts
presented in the consolidated balance sheets are net of an allowance
for uncollectible accounts of $7.5 million and $8.5 million at
September 30, 2003 and December 31, 2002, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------ -----------------------
(unaudited)
Net roaming receivable $ 8,172 $ 5,808
Access and interconnect revenue receivable (payable) (25) (188)
Accrued service revenue 2,882 3,345
Customer payments due from Sprint 14,351 21,136
Other amounts due from Sprint 638 2,475
------------------------ -----------------------
$ 26,018 $ 32,576
======================== =======================
Net roaming receivable includes net travel revenue due from Sprint
relative to PCS subscribers based outside of the Company's licensed
territory who utilize the Company's portion of the PCS network of
Sprint. The travel revenue receivable is net of amounts owed to Sprint
relative to the Company's subscribers who utilize the PCS network of
Sprint outside of the Company's licensed territory. In addition, net
roaming receivable also includes amounts due from Sprint which have
been collected from other PCS providers for their customers' usage of
the Company's portion of the PCS network of Sprint.
Access and interconnect revenue receivable represents net amounts due
from Sprint for calls originated by a local exchange carrier ("LEC") or
an interexchange carrier ("IXC") that terminate on the Company's
network.
8
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Under the Company's affiliation agreements with Sprint, Sprint collects
this revenue from other carriers and remits 92% of those collections to
the Company. The $25 and $188 amounts owed to Sprint at September 30,
2003 and December 31, 2002, respectively, are the result of rate
adjustments on previously collected amounts.
Accrued service revenue receivable represents the Company's estimate of
airtime usage and other charges that have been earned but not billed at
the end of the period.
Customer payments due from Sprint relate to amounts that have been
collected by Sprint at the end of the period which were not remitted to
the Company until the subsequent period. Customer payments are
processed daily by Sprint and the Company receives its share of such
collections on a weekly basis under the terms of the affiliation
agreements.
Included in the December 31, 2002 balance of customer payments due from
Sprint is $12,209 in amounts that were due to the Company related to
payments that Sprint had collected from customers from April 2000 to
December 2002 that had not been passed on to the Company due to the
methodology that had been previously used by Sprint to allocate cash
received from customers. These amounts were collected in January and
February 2003.
Included in the September 30, 2003 balance of customer payments due
from Sprint is $3,601 in amounts that were due to the Company related
to payments that Sprint had collected from customers from April 2000 to
September 2003 that had not been passed on to the Company due to the
methodology that had been used by Sprint to allocate cash received from
customers.
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation of
$173.7 million and $122.9 million at September 30, 2003 and December
31, 2002, respectively.
7. INTANGIBLE ASSETS
In connection with acquisitions completed during 2001, the Company
allocated portions of the respective purchase prices to identifiable
intangible assets consisting of (i) the value of the Sprint agreements
in place at the acquired companies and (ii) the value of the subscriber
base in place at the acquired companies.
The value assigned to the Sprint agreements is being amortized using
the straight-line method over the remaining original terms of the
agreements that were in place at the time of acquisition or
approximately 17.6 years. The value assigned to the subscriber bases
acquired is being amortized using the straight-line method over the
estimated life of the acquired subscribers, or approximately three
years.
Intangible assets consist of:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- -----------------------
(unaudited)
Sprint affiliate and other agreements $ 532,200 $ 532,200
Accumulated amortization (78,133) (55,458)
---------------------- -----------------------
Subtotal 454,067 476,742
---------------------- -----------------------
Subscriber base acquired 29,500 29,500
Accumulated amortization (25,196) (17,821)
---------------------- -----------------------
Subtotal 4,304 11,679
---------------------- -----------------------
Intangible assets, net $ 458,371 $ 488,421
====================== =======================
9
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Amortization expense relative to intangible assets was $10,017 and
$10,267 for the three months ended September 30, 2003 and 2002,
respectively, and was $30,050 and $30,402 for the nine months ended
September 30, 2003 and 2002, respectively. Amortization expense
relative to intangible assets will be $10,017 for the remainder of
2003.
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 $ 40,067
2004 32,079
2005 30,234
2006 30,234
2007 30,234
Thereafter 325,573
---------------
$ 488,421
===============
The current trends in the wireless telecommunications industry that
drove the Company's decision to launch an exchange offer for its
publicly traded debt as discussed in Note 9 were deemed to be a
"triggering event" requiring impairment testing of the Company's
long-lived assets, including intangibles, under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets." In
performing this test, assets are grouped according to identifiable cash
flow streams and the undiscounted cash flow over the life of the asset
group is compared to the carrying value of the asset group. No
impairment was indicated as a result of this test.
8. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
---------------------- -----------------------
(unaudited)
12 7/8% senior discount notes $ 295,345 $ 268,862
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
Senior secured debt 200,000 200,000
---------------------- -----------------------
Total debt 895,345 868,862
Less current maturities (15,000) --
---------------------- -----------------------
Long-term debt, excluding current maturities $ 880,345 $ 868,862
====================== =======================
SENIOR UNSECURED OBLIGATIONS
----------------------------
SENIOR DISCOUNT NOTES - On December 23, 1999, Alamosa (Delaware) filed
a registration statement with the U.S. Securities and Exchange
Commission for the issuance of $350 million face amount of Senior
Discount Notes (the "12 7/8% Notes Offering"). The 12 7/8% Notes
Offering was completed on February 8, 2000 and generated net proceeds
of approximately $181 million after underwriters' commissions and
expenses of approximate $6.1 million. The 12 7/8% senior discount notes
("12 7/8% Senior Discount Notes") mature in ten years (February 15,
2010), carry a coupon rate of 12 7/8%, and provide for interest
deferral for the first five years. The 12 7/8% Senior Discount Notes
will accrete to their $350 million face amount by February 8, 2005,
after which, interest will be paid in cash semiannually. The proceeds
of the 12 7/8% Senior Discount Notes Offering were used to prepay the
existing credit facility, to pay costs to build out additional areas
within the Company's existing territories, to fund operating working
capital needs and for other general corporate purposes.
10
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
12 1/2% SENIOR NOTES - On January 31, 2001, Alamosa (Delaware)
consummated the offering (the "12 1/2% Notes Offering") of $250 million
aggregate principal amount of senior notes (the "12 1/2% Senior
Notes"). The 12 1/2% Senior Notes mature in ten years (February 1,
2011), carry a coupon rate of 12 1/2% and are payable semiannually on
February 1 and August 1, beginning on August 1, 2001. The net proceeds
from the sale of the 12 1/2% Senior Notes were approximately $241
million, after deducting the commissions and estimated offering
expenses.
Approximately $59.0 million of the proceeds of the 12 1/2% Senior Notes
Offering was used by Alamosa (Delaware) to establish a security account
(with cash or U.S. government securities) to secure on a pro rata basis
the payment obligations under the 12 1/2% Senior Notes and the 12 7/8%
Senior Discount Notes, and the balance was used for general corporate
purposes of Alamosa (Delaware), including accelerating coverage within
the existing territories of Alamosa (Delaware); the build-out of
additional areas within its existing territories; expanding its
existing territories; and pursuing additional telecommunications
business opportunities or acquiring other telecommunications businesses
or assets. As of September 30, 2003, the security account balance
related to the 12 1/2% Senior Notes Offering was $1.
13 5/8% SENIOR NOTES - On August 15, 2001, Alamosa (Delaware) issued
$150 million face amount of Senior Notes (the "13 5/8% Senior Notes").
The 13 5/8% Senior Notes mature in ten years (August 15, 2011) and
carry a coupon rate of 13 5/8% payable semiannually on February 15 and
August 15, beginning on February 15, 2002. The net proceeds from the
sale of the 13 5/8% Senior Notes were approximately $141.5 million,
after deducting the commissions and estimated offering expenses.
Approximately $66 million of the proceeds were used to pay down a
portion of the Senior Secured Credit Facility discussed below.
Approximately $39.1 million of the proceeds of the 13 5/8% Senior Notes
issuance was used by Alamosa (Delaware) to establish a security account
to secure on a pro rata basis the payment obligations under all of the
Company's unsecured borrowings. The balance was used for general
corporate purposes. As of September 30, 2003, the security account
balance related to the 13 5/8% Senior Notes was $0.
SENIOR SECURED OBLIGATIONS
--------------------------
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, the Company,
Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower, entered into
a $280 million senior secured credit facility (the "Senior Secured
Credit Facility") with Citicorp USA, as administrative agent and
collateral agent; Toronto Dominion (Texas), Inc., as syndication agent;
Export Development Corporation ("EDC") as co-documentation agent; First
Union National Bank, as documentation agent; and a syndicate of banking
and financial institutions. On March 30, 2001, the Senior Secured
Credit Facility was amended to increase the facility to $333 million.
The Senior Secured Credit Facility was again amended in August 2001
concurrent with the issuance of the 13 5/8% Senior Notes to reduce the
maximum borrowing to $225 million, consisting of a 7-year senior
secured 12-month delayed draw term loan facility of $200 million and a
7-year senior secured revolving credit facility in an aggregate
principal amount of up to $25 million.
On September 26, 2002, the Company further amended the Senior Secured
Credit Facility to, among other things, modify certain financial and
statistical covenants. Under the Senior Secured Credit Facility,
interest will accrue, at Alamosa Holdings, LLC's option: (i) at the
London Interbank Offered Rate adjusted for any statutory reserves
("LIBOR"), or (ii) the base rate which is generally the higher of the
administrative agent's base rate, the federal funds effective rate plus
0.50% or the administrative agent's base CD rate plus 0.50%, in each
case plus an interest margin which was initially 4.00% for LIBOR
borrowings and 3.00% for base rate borrowings. The applicable interest
margins are subject to reductions under a pricing grid based on ratios
of Alamosa Holdings, LLC's total debt to its earnings before interest,
taxes, depreciation and amortization ("EBITDA"). The interest rate
margins will increase by an additional 200 basis points in the event
Alamosa Holdings, LLC fails to pay principal, interest or other amounts
as they become due and payable under the Senior Secured Credit
Facility. At September 30, 2003 the interest margin was 4.00% for LIBOR
borrowings and 3.00% for base rate borrowings.
11
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
The weighted average interest rate on the outstanding borrowings under
this facility at September 30, 2003 is 5.19%. Alamosa Holdings, LLC is
also required to pay quarterly in arrears a commitment fee on the
unfunded portion of the commitment of each lender. The commitment fee
accrues at a rate per annum equal to (i) 1.50% on each day when the
utilization (determined by dividing the total amount of loans plus
outstanding letters of credit under the Senior Secured Credit Facility
by the total commitment amount under the Senior Secured Credit
Facility) of the Senior Secured Credit Facility is less than or equal
to 33.33%, (ii) 1.25% on each day when utilization is greater than
33.33% but less than or equal to 66.66% and (iii) 1.00% on each day
when utilization is greater than 66.66%. The Company has entered into
derivative hedging instruments to hedge a portion of the interest rate
risk associated with borrowings under the Senior Secured Credit
Facility, as discussed in Note 11.
Alamosa Holdings, LLC is also required to pay a separate annual
administration fee and a fee on the aggregate face amount of
outstanding letters of credit, if any, under the revolving credit
facility.
At September 30, 2003, Alamosa Holdings, LLC had drawn $200 million
under the term portion of the Senior Secured Credit Facility. Any
amount outstanding at the end of the 12-month period will amortize
quarterly beginning May 14, 2004. The first such quarterly principal
reduction of $7.5 million will be due in May 2004 and is presented as a
current liability in the accompanying balance sheet. The September 26,
2002 amendment placed restrictions on the ability to draw the $25
million revolving portion. The first $10 million can be drawn if cash
balances fall below $15 million and the Company substantiates through
tangible evidence the need for such advances. The remaining $15 million
is available only at such time as the Company's leverage ratio is less
than or equal to 5.5 to 1. No advances have been drawn on the revolving
portion of the Senior Secured Credit Facility. Any balance outstanding
under the revolving portion of the Senior Secured Credit Facility will
begin reducing quarterly in amounts to be agreed, beginning May 14,
2004.
Pursuant to the Senior Secured Credit Facility, the Company is subject
to financial and statistical covenants, including covenants with
respect to the ratio of EBITDA to total cash interest expense. Stage I
covenants were applicable through March 31, 2003 and provided for:
o minimum numbers of subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures.
As of March 31, 2003, the Company became subject to the following Stage
II covenants:
o ratio of senior debt to EBITDA; and
o ratio of total debt to EBITDA.
Beginning April 1, 2003, the Company became subject to the following
additional Stage II covenants:
o ratio of EBITDA to consolidated cash interest expense;
o ratio of EBITDA to total fixed charges (the sum of debt service,
capital expenditures and taxes); and
o ratio of EBITDA to pro forma debt service.
9. DEBT RESTRUCTURING
In an effort to proactively manage its capital structure and align it
with recent operating trends in the wireless telecommunications
industry, the Company launched an offer to exchange its publicly traded
debt on September 12, 2003. The offer, as amended on October 15, 2003
(as so amended, the "Exchange Offer"), sought to exchange all of the
Company's existing 12 7/8% Senior Discount Notes, 12 1/2% Senior Notes
and 13 5/8%
12
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Senior Notes for a combination of new notes and convertible Alamosa
Holdings preferred stock. The Exchange Offer was successful and
expired on November 10, 2003.
Holders of the 12 7/8% Senior Discount Notes due 2010 (the "Discount
Notes") who tendered their Discount Notes will receive for each $1,000
accreted amount of the Discount Notes tendered, as of the expiration of
the Exchange Offer, (1) $650 in original issue amount of new 12% Senior
Discount Notes due 2009 (the "New Discount Notes") and (2) one share of
Series B Convertible Preferred Stock of Alamosa Holdings with a
liquidation preference of $250 per share (the "Preferred Stock").
Holders of the 12 1/2% Senior Notes due 2011 and the 13 5/8% Senior
Notes due 2011 (collectively, the "Old Cash Pay Notes" and, together
with the Discount Notes, the "Old Notes") who tendered their Old Cash
Pay Notes will receive, for each $1,000 principal amount of the Old
Cash Pay Notes tendered, (1) $650 in principal amount of new 11% Senior
Notes due 2010 (the "New Cash Pay Notes" and, together with the New
Discount Notes, the "New Notes") and (2) one share of Preferred Stock.
Fractional shares of Preferred Stock will not be issued under the
Exchange Offer and New Notes will be issued only in denominations that
are integral multiples of $1,000. With respect to any holder of Old
Notes who would otherwise receive a fractional share of Preferred Stock
or New Notes in an amount that is not an integral multiple of $1,000,
the Company will round down to the nearest whole share of Preferred
Stock or $1,000 of New Notes, as applicable, and substitute a cash
payment equal to the liquidation preference allocable to the fractional
share of Preferred Stock or the amount by which the amount of New Notes
is reduced.
The New Discount Notes will accrete at 12 percent, compounded
semi-annually through July 31, 2005. Cash interest on the accreted
value will then be paid semi-annually at 12 percent beginning on
January 31, 2006 until maturity on July 31, 2009. The New Cash Pay
Notes will require cash payment of interest semi-annually beginning
January 31, 2004 until maturity on July 31, 2010.
Holders of Preferred Stock will be entitled to receive cumulative
dividends at an annual rate of 7.5 percent of the $250 per share
liquidation preference. Dividends will be payable quarterly in arrears
on the last calendar day of each January, April, July and October.
Until July 31, 2008, Alamosa Holdings will have the option to pay
Preferred Stock dividends in (i) cash, (ii) shares of Alamosa Holdings
Series C Convertible Preferred Stock ("Dividend Preferred Stock" and,
together with the Preferred Stock, the "Preferred Shares"), (iii)
shares of Alamosa Holdings common stock or (iv) a combination thereof.
After July 31, 2008, all Preferred Stock dividends will be payable in
cash only. The Dividend Preferred Stock will have essentially the same
terms as the Preferred Stock with the exception of the conversion rate,
as discussed below.
Each share of Preferred Stock and Dividend Preferred Stock will be
convertible at the holder's option and at any time into shares of
Alamosa Holdings common stock. The Preferred Stock will be convertible
at $3.40 per share and the Dividend Preferred Stock will be convertible
at $4.25 per share.
Beginning on the third anniversary of the date of original issuance of
the Preferred Stock, Alamosa Holdings has the option to redeem
outstanding Preferred Shares for cash. The initial redemption price
will be 125 percent of the $250 per share liquidation preference,
reduced by 5 percent annually thereafter until 2011 after which time
the redemption price will remain at 100 percent. All outstanding
Preferred Shares must be redeemed by Alamosa Holdings on July 31, 2013.
Upon the expiration of the Exchange Offer on November 10, 2003, the
Company had received tenders from existing noteholders amounting to
approximately $343.6 million or 98 percent of the Discount Notes,
$238.4 million or 95 percent of the 12 1/2% Senior Notes and $147.5
million or 98 percent of the 13 5/8% Senior Notes. The consummation of
the Exchange Offer will be accounted for under the provisions of SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." In accordance with the provisions of SFAS No. 15, the
New Notes and Preferred Stock will be recorded at fair value. The
excess of the carrying value of the existing debt tendered by
noteholders over the fair value of the New Notes and Preferred Stock
will reduce interest expense over the life of the New Notes due to the
fact that the total cash flows associated with the New Notes exceeds
the carrying value of the Old Notes.
In contemplation of the Exchange Offer, Alamosa (Delaware), on
September 11, 2003, amended the terms of the respective indentures
governing its existing 12 7/8% Senior Discount Notes, 12 1/2% Senior
Notes and 13 5/8% Senior Notes to add Alamosa Holdings as a guarantor
under the indentures. The Company further amended the indentures
governing these notes on October 29, 2003, after receiving the
requisite consents from the holders of the notes, to eliminate
substantially all covenant protection under such indentures.
13
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Concurrently with the closing of the Exchange Offer, the Company
entered into amendments to certain of its agreements with Sprint (the
"Sprint Amendments") and to the credit facility governing the Senior
Secured Credit Facility (the "Bank Amendment"). The Company entered
into the Sprint Amendments to (i) simplify the manner in which
financial settlements are determined and settled between the Company
and Sprint, (ii) settle outstanding disputed charges between the
Company and Sprint and (iii) provide clarity with respect to access to
information between the Company and Sprint. The Company entered into
the Bank Amendment to, among other things, modify the financial
maintenance ratios in the credit agreement and obtain the requisite
consent to the execution of Sprint Amendments, the consummation of
the Exchange Offer, and the issuance of the New Notes and Preferred
Stock.
10. INCOME TAXES
The income tax benefit represents the anticipated recognition of the
Company's deductible net operating loss carry forwards. This benefit is
being recognized based on an assessment of the combined expected future
taxable income of the Company and expected reversals of the temporary
differences from acquisitions closed in 2001. Due to the Company's
limited operating history and lack of positive taxable earnings, a
valuation allowance has been established during 2003 as the deferred
tax asset is expected to exceed the deferred tax liabilities. The
establishment of this valuation allowance in the nine months ended
September 30, 2003 has resulted in an effective tax rate of 19.0
percent. The effective tax rate was 12.2 percent for the nine months
ended September 30, 2002 due to the goodwill impairment charge of
$291,635 which was not deductible for income tax purposes.
11. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" in its accounting for hedging
activities. The statement requires the Company to record all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivatives are either recognized in earnings or
are recognized in other comprehensive income until the hedged item is
recognized in earnings. Approximately $1,961 in cash settlements under
derivative instruments classified as hedges is included in interest
expense for the nine months ended September 30, 2003.
As of September 30, 2003, the Company has recorded $2,003 in "other
noncurrent liabilities" relative to the fair value of derivative
instruments, including $1,359 representing derivative instruments that
qualify for hedge accounting under SFAS No. 133. During the nine month
period ended September 30, 2003, the Company recognized gains of $707
(net of income tax expense of $439) in other comprehensive income.
During the nine month period ended September 30, 2002, the Company
recognized losses of $704 (net of income tax benefit of $431) in other
comprehensive income. Other comprehensive income appears as a separate
component of Stockholders' Equity, as "Accumulated other comprehensive
income," as illustrated below:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2003 2002 2003 2002
---------------- ----------------- ---------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss $ (17,510) $ (320,847) $ (66,704) $ (377,716)
Change in fair values of
derivative instruments,
net of income tax expense
(benefit) of $244, $(279),
$439 and $(431),
respectively 226 (456) 707 (704)
---------------- ----------------- ---------------- -----------------
Comprehensive loss $ (17,284) $ (321,303) $ (65,997) $ (378,420)
================ ================= ================ =================
14
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
12. COMMITMENTS AND CONTINGENCIES
ACCESS REVENUE REFUND - On July 3, 2002, the Federal Communications
Commission issued a ruling on a dispute between AT&T, as an
interexchange carrier ("IXC"), and Sprint Spectrum L.P., a Commercial
Mobile Radio Service ("wireless carrier"). This ruling addressed the
wireless carrier charging terminating access fees to the IXC for calls
terminated on a wireless network, indicating such fees could be
assessed; however, the IXC would only be obligated to pay such fees if
a contract was in place providing for the payment of access charges.
As a result of this ruling, Sprint has requested that the Company
refund approximately $1.4 million of a total $5.6 million in amounts
that had been previously paid to the Company by Sprint relating to
terminating access fees. Although the Company has contested the refund
of these amounts, a liability has been recorded relative to this
contingency in the consolidated financial statements at September 30,
2003.
LITIGATION - The Company has been named as a defendant in a number of
purported securities class actions in the United States District Court
for the Southern District of New York, arising out of its initial
public offering (the "IPO"). Various underwriters of the IPO also are
named as defendants in the actions. The action against the Company is
one of more than 300 related class actions which have been consolidated
and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement
and prospectus filed with the U.S. Securities and Exchange Commission
for purposes of the IPO were false and misleading because they failed
to disclose that the underwriters allegedly (i) solicited and received
commissions from certain investors in exchange for allocating to them
shares of common stock in connection with the IPO, and (ii) entered
into agreements with their customers to allocate such stock to those
customers in exchange for the customers agreeing to purchase additional
Company shares in the aftermarket at pre-determined prices. On February
19, 2003, the Court granted motions by the Company and 115 other
issuers to dismiss the claims under Rule 10b-5 of the Exchange Act
which had been asserted against them. The Court denied the motions by
the Company and virtually all of the other issuers to dismiss the
claims asserted against them under Section 11 of the Securities Act.
The Company maintains insurance coverage which may mitigate its
exposure to loss in the event that this claim is not resolved in the
Company's favor.
The issuers in the IPO cases, including the Company, have reached an
agreement in principle with the plaintiffs to settle the claims
asserted by the plaintiffs against them. Under the terms of the
proposed settlement, the insurance carriers for the issuers will pay
the plaintiffs the difference between $1 billion and all amounts which
the plaintiffs recover from the underwriter defendants by way of
settlement or judgment. Accordingly, no payment on behalf of the
issuers under the proposed settlement will be made by the issuers
themselves. The claims against the issuers will be dismissed, and the
issuers and their officers and directors will receive releases from the
plaintiffs. Under the terms of the proposed settlement, the issuers
will also assign to plaintiffs certain claims which they may have
against the underwriters arising out of the IPOs, and the issuers will
also agree not to assert certain other claims which they may have
against the underwriters, without plaintiffs' consent. The proposed
settlement is subject to the approval of the Court.
On January 23, 2001, the Company's board of directors, in a unanimous
decision, terminated the employment of Jerry Brantley, then President
and COO of the Company. On April 29, 2002, Mr. Brantley initiated
litigation against the Company and the Chairman of the Company, David
E. Sharbutt in the District Court of Lubbock County, Texas, 22nd
Judicial District, alleging wrongful termination, among other things.
On September 27, 2002, the Court entered an Agreed Order Compelling
Arbitration. A panel of three arbitrators has been selected. The
Company believes that there is no basis for Mr. Brantley's claim and
intends to vigorously defend the lawsuit.
On January 8, 2003, a claim was made against the Company by Southwest
Antenna and Tower, Inc. ("SWAT") in the Second Judicial District Court,
County of Bernalillo, State of New Mexico, for monies due on an open
account. SWAT sought to recover approximately $2.0 million from the
Company relating to work performed by SWAT during 2000 for Roberts
Wireless Communications, LLC, which was acquired by the Company in the
first quarter of 2001. This claim was settled for $0.875 million during
the second quarter of 2003.
15
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
In addition to the above, the Company is involved in various claims and
legal actions arising in the ordinary course of business. The ultimate
disposition of these matters is not expected to have a material adverse
impact on the Company's financial position, results of operations or
liquidity.
13. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations."
SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. For the Company's leased
telecommunication facilities, primarily consisting of cell sites and
switch site operating leases and operating leases for retail and office
space, the Company has adopted SFAS No. 143 as of January 1, 2003.
As previously disclosed, upon adoption of SFAS No. 143, the Company had
concluded that, for its leased telecommunication facilities, a
liability could not be reasonably estimated due to (1) the Company's
inability to reasonably assess the probability of the likelihood that a
lessor would enforce the remediation requirements upon expiration of
the lease term and therefore its impact on future cash outflows, (2)
the Company's inability to estimate a potential range of settlement
dates due to its ability to renew site leases after the initial lease
expiration and (3) the Company's limited experience in abandoning cell
site locations and actually incurring remediation costs.
It is the Company's understanding that further clarification has been
provided by the Securities and Exchange Commission ("SEC") regarding
the accounting for asset retirement obligations and specifically
relating to factors to consider in determining the estimated settlement
dates and the probability of enforcement of the remediation obligation.
Based on this information, the Company has revised certain of the
estimates used in its original analysis and calculated an asset
retirement obligation for its leased telecommunication facilities. The
Company determined that the aforementioned asset retirement obligations
did not have a material impact on its consolidated results of
operations, financial position or cash flows for the three and nine
month periods ended September 30, 2003, as well as for each of the
three month periods ended March 31 and June 30, 2003. As such, the
Company has recorded the asset retirement obligations in the three
month period ended September 30, 2003.
As a result, an initial asset retirement obligation of $1,243 has been
recorded and classified in other non-current liabilities as of
September 30, 2003. In addition, the Company also recorded a
corresponding increase in property and equipment of $1,243 as of
September 30, 2003. The effect on the Company's statement of operations
for the three and nine month periods ended September 30, 2003 related
to accretion of the asset retirement obligation and depreciation of the
corresponding asset through September 30, 2003. Included in costs of
services and operations in the consolidated statement of operations for
the three and nine month periods ended September 30, 2003 is a charge
of $524 related to the accretion of the asset retirement obligations.
Included in depreciation and amortization in the consolidated statement
of operations for the three and nine month periods ended September 30,
2003 is a charge of $456 related to the depreciation of the assets
recorded in connection with the asset retirement obligations. For
purposes of determining the aforementioned asset retirement
obligations, the Company has assigned a 100% probability of enforcement
to the remediation obligations and has assumed an average settlement
period of 20 years.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002," which rescinded or amended
various existing standards. One change addressed by this standard
pertains to treatment of extinguishments of debt as an extraordinary
item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt" and states that an extinguishment of debt
cannot be classified as an extraordinary item unless it meets the
unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
16
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Unusual and Infrequently Occurring Events and Transactions." The
provisions of this statement are effective for fiscal years beginning
after May 15, 2002 and extinguishments of debt that were previously
classified as an extraordinary item in prior periods that do not meet
the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The adoption of SFAS No. 145 in the quarter
ending March 31, 2003 has resulted in a reclassification of the loss on
extinguishment of debt that the Company previously reported as an
extraordinary item for the year ended December 31, 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires companies
to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of this statement are effective for exit
or disposal activities initiated after December 31, 2002, and the
adoption of this statement did not have a material impact on the
Company's results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an
amendment of SFAS No. 123, "Accounting for Stock-Based Compensation."
This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of this
statement are effective for fiscal years ending after and interim
periods beginning after December 15, 2002. As the Company continues to
account for stock-based employee compensation using the intrinsic value
method under APB Opinion No. 25, the Company, as required, has only
adopted the revised disclosure requirements of SFAS No. 148 as of
December 31, 2002, as discussed in Note 4.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and did
not have a material impact on the Company's results of operations,
financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) and is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The adoption of this statement did not have a material impact
on the Company's results of operations, financial position or cash
flows.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21, "Revenue Arrangements with Multiple Deliverables,"
in May 2003. This abstract addresses certain aspects of the accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, it addresses how
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in this abstract became
effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, and the Company has adopted the
provisions of this abstract as of July 1, 2003.
The Company has elected to apply the accounting provisions of this
abstract on a prospective basis beginning July 1, 2003. Under the
accounting provisions of this abstract, the Company will allocate
amounts charged to customers between the sale of handsets and other
equipment and the sale of wireless telecommunication services in those
transactions in distribution channels controlled by the Company. In
many cases, this will result in all amounts collected from the customer
upon activation of the handset being allocated to the sale of the
handset. As a result of this treatment, activation fees included in the
consideration at the time of sale will be
17
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
recorded as handset revenue. Prior to the adoption of the provisions of
this abstract the Company had deferred all activation fee revenue as
well as activation costs in a like amount and amortized these revenues
and costs over the average life of the Company's subscribers. The
existing deferred revenue and costs at July 1, 2003 will continue to be
amortized along with that portion of activation fees generated by
customers outside of distribution channels controlled by the Company.
The impact of the adoption of these accounting provisions was not
material to the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN 45 also requires additional disclosures by a guarantor
in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45
are effective for guarantees issued after December 31, 2002, while the
disclosure requirements were effective for financial statements for
periods ending after December 15, 2002. At December 31, 2002, the
Company had not entered into any material arrangement that would be
subject to the disclosure requirements of FIN 45. The adoption of FIN
45 did not have a material impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"
or the "Interpretation"), "Consolidation of Variable Interest Entities,
an interpretation of ARB No. 51." The primary objectives of FIN 46 are
to provide guidance on the identification of entities for which control
is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which
business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make
additional disclosures. For public entities with VIEs created before
February 1, 2003, the implementation and disclosure requirements of FIN
46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created
after January 31, 2003, the requirements are effective immediately. The
adoption of FIN 46 did not have a material impact on the Company's
consolidated financial statements.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this quarterly report on Form 10-Q regarding our financial position and
liquidity are forward-looking statements. These forward-looking statements also
include:
o forecasts of growth in the number of consumers using wireless
personal communications services and in estimated populations;
o statements regarding our anticipated revenues, expense levels,
liquidity, capital resources and operating losses; and
o statements regarding expectations or projections about markets in
our territories.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from our expectations
("Cautionary Statements"), are further disclosed in our annual report on Form
10-K for the year ended December 31, 2002 under the sections "Item 1. Business"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." Important factors that could cause actual results to
differ materially from those in the forward-looking statements included herein
include, but are not limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter fees paid or charged to us under our
affiliation agreements;
o our limited operating history and anticipation of future losses;
o our dependence on back office services provided by Sprint;
o potential fluctuations in our operating results;
o changes or advances in technology;
o competition in the industry and markets in which we operate;
o our ability to attract and retain skilled personnel;
o our potential need for additional capital or the need for
refinancing existing indebtedness;
o our potential inability to expand our services and related products
in the event of substantial increases in demand for these services
and related products;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
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o effects of mergers and consolidations within the telecommunications
industry and unexpected announcements or developments from others in
the telecommunications industry.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the Cautionary Statements.
DEFINITIONS OF OPERATING AND NON-GAAP FINANCIAL MEASURES
We provide readers financial measures generated using generally
accepted accounting principles ("GAAP") and using adjustments to GAAP
("Non-GAAP"). These financial measures reflect industry conventions or standard
measures of liquidity, profitability or performance commonly used by the
investment community for comparability purposes. The Non-GAAP financial measures
used in this document include the following:
o Earnings before interest, taxes, depreciation and amortization
("EBITDA") is defined as net income (loss) plus net interest
expense, depreciation expense, amortization expense and other
non-cash expense items. EBITDA is a measure used by the investment
community for comparability as well as in our debt covenants for
compliance purposes and is not intended to represent the results of
our operations in accordance with GAAP.
o Free cash flow is defined as EBITDA less net cash requirements for
capital expenditures and debt service requirements.
The financial measures and other operating metrics used in this document include
the following:
o Average monthly revenue per user ("ARPU") is a measure used to
determine the monthly subscriber revenue earned for subscribers
based in our territory. This measure is determined based on
subscriber revenues in our consolidated statement of operations and
our average subscribers during the period.
o Cash cost per user ("CCPU") is a measure of the costs to operate our
business on a per user basis consisting of costs of service and
operations and general and administrative expenses in our
consolidated statement of operations, plus handset subsidies on
equipment sold to existing subscribers. These costs are allocated
across average subscribers during the period to calculate this
measure.
o Customer churn is used to measure the rate at which subscribers
based in our territory deactivate service on a voluntary or
involuntary basis. We calculate churn based on the number of
subscribers deactivated (net of transfers out of our service area
and those who deactivated within 30 days of activation) as a
percentage of our average subscriber base during the period.
o Cost per gross addition ("CPGA") is used to measure the costs
incurred to add new subscribers in our territory. This measure
includes handset subsidies on new subscriber activations,
commissions, rebates and other selling and marketing costs and is
calculated based on product sales revenue, cost of products sold and
selling and marketing expenses in our consolidated statement of
operations net of handset subsidies on equipment sold to existing
subscribers allocated over the total number of subscribers activated
in our territory during the period.
o Covered POPs represent the number of residents (usually expressed in
millions) covered by our network in our markets. The number of
residents covered by our network does not represent the number of
wireless subscribers that we expect to serve in our territories.
GENERAL
Since our inception in 1998, we have incurred substantial costs in
connection with negotiating our contracts with Sprint, obtaining our debt
financing, completing our public equity offerings, engineering our wireless PCS
network, developing our business infrastructure and building out our portion of
the PCS network of Sprint. Prior to the launch of
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our first market in June 1999, we did not have any markets in operation and we
had no customers. At September 30, 2003, we had approximately 693,000
subscribers. As of September 30, 2003, our accumulated deficit is $731 million,
and we have incurred a significant amount of capital expenditures in connection
with constructing our portion of the PCS network of Sprint and developing our
business infrastructure, including the establishment of our retail distribution
channels. While we anticipate losses to continue, we expect revenue to continue
to increase as our subscriber base increases.
On July 17, 1998, we entered into our original affiliation agreements
with Sprint. We subsequently amended our original agreements in 1999 to add
additional territories to our licensed area. In the first quarter of 2001, we
completed the acquisitions of three additional PCS Affiliates of Sprint,
bringing our total licensed POPs to approximately 15.8 million at September 30,
2003.
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless, mobility communications network services under the Sprint brand name
in our licensed territory. We are responsible for building, owning and managing
the portion of the PCS network of Sprint located in our territory. We offer
national plans designed by Sprint and intend to offer local plans tailored to
our market demographics. Our portion of the PCS network of Sprint is designed to
offer a seamless connection with the 100% digital PCS nationwide wireless
network of Sprint. We market wireless products and services through a number of
distribution outlets located in our territories, including our own retail
stores, major national distributors and local third party distributors.
We recognize revenues from our subscribers, proceeds from the sales of
handsets and accessories through channels controlled by us and fees from Sprint
and other wireless service providers when their customers roam onto our portion
of the PCS network of Sprint. Sprint retains 8% of all collected service revenue
from our subscribers (not including products sales) and fees collected from
other wireless service providers when their customers roam onto our portion of
the PCS network of Sprint. We report the amount retained by Sprint as an
operating expense. In addition, Sprint bills our subscribers for taxes, handset
insurance, equipment and Universal Service Fund charges which we do not record.
Sprint collects these amounts from the subscribers and remits them to the
appropriate entity.
As part of our affiliation agreements with Sprint, we have the option
of contracting with Sprint to provide back office services such as customer
activation, handset logistics, billing, customer care and network monitoring
services. We have elected to delegate the performance of these services to
Sprint to take advantage of their economies of scale, to accelerate our
build-out and market launches and to lower our initial capital requirements. The
cost for these services is primarily on a per subscriber and per transaction
basis and is recorded as an operating expense.
CRITICAL ACCOUNTING POLICIES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of an
entity. To aid in that understanding, we have identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our consolidated financial statements, either because of
the significance of the financial statement item to which they relate or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Estimates are used in determining our
allowance for bad debts and are based on our historical collection experience,
current trends, credit policy, a percentage of our accounts receivable by aging
category and expectations of future bad debts based on current collection
activities. In determining the allowance, we consider historical write-offs of
our receivables and our history is somewhat limited due to the number of changes
that have historically been made to credit policies. We also look at current
trends in the credit quality of our customer base, as well as changes in the
credit policies. Under PCS service plans from Sprint, customers who do not meet
certain credit criteria can nevertheless select any plan offered, subject to an
account spending limit, referred to as "ASL," to control credit exposure.
Account spending limits range from $125 to $200 and generally require deposits
in the amount of the limit that could be credited against future billings. In
May 2001, the deposit requirement was eliminated on certain, but not all, credit
classes ("NDASL"). As a result, a significant amount of our customer additions
during 2001 were under the NDASL program. The NDASL program was replaced by the
"Clear Pay" program in November 2001, which reinstated the deposit requirement
for certain of the lowest credit class customers and features increased back
office controls with respect to collection efforts. We reinstated the deposit
for customers in other credit classes on the Clear
21
Pay program as of February 24, 2002, and we believe that this program, referred
to as Clear Pay II, has reduced our bad debt exposure.
REVENUE RECOGNITION - We record equipment revenue for the sale of
handsets and accessories to customers in our retail stores and to local
resellers in our territories. We do not record equipment revenue on handsets and
accessories purchased by our customers from national resellers or directly from
Sprint. Our customers pay an activation fee when they initiate service. In the
past, we have deferred this activation fee in all cases and recorded the
activation fee revenue over the estimated average life of our customers, which
ranges from 12 to 36 months depending on credit class and based on our past
experience. We recognize revenue from our customers as they use the service.
Additionally, we provide a reduction of recorded revenue for billing adjustments
and billing corrections.
We recognize revenue for product sales in connection with our sales of
handsets and accessories through our retail stores and our local indirect
retailers. The cost of handsets sold generally exceeds the retail sales price as
we subsidize the price of handsets for competitive reasons. For handsets sold
through channels controlled by Sprint that are activated by a subscriber in our
territory, we reimburse Sprint for the amount of subsidy incurred by them in
connection with the sale of these handsets.
Effective July 1, 2003, we have adopted the accounting provisions of
Emerging Issues Task Force ("EITF") Abstract No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Beginning July 1, 2003, we allocate
amounts charged to customers between the sale of handsets and other equipment
and the sale of wireless telecommunication services in those transactions taking
place in distribution channels that we directly control. Activation fees charged
in transactions outside of our directly controlled distribution channels
continue to be deferred and amortized over the life of the subscriber.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, equipment and intangibles, comprise approximately 80 percent of our
total assets at September 30, 2003. Changes in technology or in our intended use
of these assets may cause the estimated period of use or the value of these
assets to change. In addition, changes in general industry conditions, such as
increased competition, lower ARPU, etc., could cause the value of certain of
these assets to change. We monitor the appropriateness of the estimated useful
lives of these assets. Whenever events or changes in circumstances indicate that
the carrying amounts of these assets may not be recoverable, we review the
respective assets for impairment. The current trends in the wireless
telecommunications industry that drove our decision to launch the Exchange Offer
for our publicly traded debt in September 2003 was deemed to be a "triggering
event" requiring impairment testing of our long-lived assets under Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." In performing this test, assets are grouped
according to identifiable cash flow streams, and the undiscounted cash flow over
the life of the asset group is compared to the carrying value of the asset
group. We have determined that we have one asset grouping relatied to cash flows
generated by our subscriber base which includes all assets of the Company. The
life of this asset group for purposes of this impairment test was assumed to be
ten years. No impairment was indicated as a result of this test. Estimates and
assumptions used in both estimating the useful life and evaluating potential
impairment issues require a significant amount of judgment.
INCOME TAXES - We utilize an asset and liability approach to accounting
for income taxes, wherein deferred taxes are provided for book and tax basis
differences for assets and liabilities. In the event differences exist between
book and tax basis of our assets and liabilities that result in deferred assets,
an evaluation of the probability of being able to realize the future benefits
indicated by such assets is made. A valuation allowance is provided for the
portion of deferred tax assets for which there is sufficient uncertainty
regarding our ability to recognize the benefits of those assets in future years.
Deferred taxes are provided for those items reported in different
periods for income tax and financial reporting purposes. The net deferred tax
asset was fully reserved through December 31, 2000 because of uncertainty
regarding our ability to recognize the benefit of the asset in future years. In
connection with the acquisitions completed by the Company in 2001, a significant
deferred tax liability was recorded relative to intangibles. The reversal of the
timing differences which gave rise to the deferred tax liability will allow us
to benefit from the deferred tax asset. As such, the valuation allowance against
the deferred tax asset was reduced in 2001 to account for the expected benefit
to be realized. Prior to February 1, 2000, our predecessor operated as a limited
liability company ("LLC") under which losses for income tax purposes were
utilized by the LLC members on their income tax returns. Subsequent to January
31, 2000,
22
we became a C-corp for federal income tax purposes and, therefore, subsequent
losses became net operating loss carryforwards to us. We continue to evaluate
the likelihood of realizing the benefits of deferred tax items. Should events or
circumstances indicate that it is warranted, a valuation allowance will again be
established. During the first quarter of 2003 we reinstated a valuation
allowance due to the fact that the timing differences that give rise to the
deferred tax asset are expected to exceed the timing differences that give rise
to the deferred tax liabilities and there is uncertainty as to whether we will
recognize the benefit of those deferred taxes in future periods.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -
We place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of cash flow, revenue, cost of service,
selling and marketing costs and the adequacy of our allowance for uncollectible
accounts based on this data we receive from Sprint. We obtain assurance as to
the accuracy of this data through analytic review and reliance on the service
auditor report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint could have a
material adverse effect on our results of operations and cash flow.
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003 COMPARED TO THE
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 693,000 at September 30, 2003 compared to
approximately 591,000 at September 30, 2002. This growth of approximately
102,000 subscribers or 17 percent year over year compares to 46 percent growth
from September 30, 2001 to September 30, 2002. The decline in the rate of growth
from 2002 to 2003 is due to the fact that markets were being launched during
2001 when our coverage area increased from 4.5 million to 11.2 million covered
POPs. During 2002 our coverage area increased from 11.2 million to 11.8 million
covered POPs as we had substantially completed the build-out of our network by
the end of 2001. During the first nine months of 2003 our coverage area
increased to 11.9 million covered POPs.
Monthly churn for the third quarter of 2003 was approximately 2.9
percent compared to approximately 3.8 percent for the third quarter of 2002.
This level of churn in the third quarter of 2003 was higher than that in the
second quarter of 2003 when we experienced monthly churn of 2.5 percent.
Increases in churn negatively impact our operations as we incur significant up
front costs in acquiring customers. Churn increased significantly during 2002 as
the result of a significantly higher level of involuntary deactivations of
subscribers for non-payment. This was driven by the addition of a significant
number of sub-prime credit quality subscribers in 2001 under the Clear Pay/NDASL
program. We reinstated deposit requirements for sub-prime credit quality
subscribers in our markets in February 2002 and began to see the impact of this
change in the form of decreasing churn beginning in the fourth quarter of 2002
when churn declined to 3.4 percent from 3.8 percent in the third quarter of
2002. This trend has continued through the first nine months of 2003.
Our CPGA includes handset subsidies on new subscriber activations and
selling and marketing costs and was approximately $409 per gross addition in the
third quarter of 2003, which was approximately 7 percent less than the $442 per
gross addition in the third quarter of 2002. Our CPGA increased $34 in the third
quarter of 2003 over the $375 per gross addition we experienced in the second
quarter of 2003. As overall subscriber growth on a national basis has declined,
competition among the wireless communications providers has become more intense.
As a result of this competition for both new subscribers and existing
subscribers from other carriers, promotional efforts have increased in terms of
handset rebates and other promotional activities, which increases the up front
costs in acquiring customers.
SERVICE REVENUES - Service revenues consist of revenue from subscribers
and roaming revenue earned when customers from other carriers roam onto our
portion of the PCS network of Sprint. Subscriber revenue consists of payments
received from our subscribers for monthly service under their service plans.
Subscriber revenue also includes activation fees and charges for the use of
various features including PCS Vision, the wireless web, voice activated
dialing, etc.
Subscriber revenues were $116,665 for the quarter ended September 30,
2003 compared to $103,642 for the quarter ended September 30, 2002. This
increase of 13 percent was primarily due to the 17 percent increase in our
23
subscriber base discussed above. Subscriber revenues were $335,239 for the nine
months ended September 30, 2003 compared to $289,720 for the nine months ended
September 30, 2002. This increase of 16 percent was also primarily due to the
increase in the subscriber base. ARPU decreased in the third quarter of 2003 to
$57 compared to $60 in the third quarter of 2002. ARPU decreased in the first
nine months of 2003 to $56 compared to $59 in the first nine months of 2002.
This decrease is attributable to lower monthly recurring charges for plans with
larger buckets of minutes being offered as a result of the increased level of
competition in the marketplace. The larger buckets of minutes result in fewer
minutes over plan and less revenue from those overage minutes.
Roaming revenue is comprised of revenue from Sprint and other PCS
subscribers based outside of our territories that roam onto our portion of the
PCS network of Sprint. We have a reciprocal roaming rate arrangement with Sprint
where per minute charges for inbound and outbound roaming relative to Sprint
subscribers are identical. This rate was 10 cents per minute during 2002. During
2003 this reciprocal rate decreased to 5.8 cents per minute. The decline in
rates was offset by increases in roaming minutes due to the fact that we added
additional base stations after the second quarter of 2002, which allowed us to
capture additional roaming traffic as well as the growth in the customer bases
of Sprint and other PCS providers. Sprint has indicated that the reciprocal rate
for 2003 of 5.8 cents per minute represents a fair and reasonable return on the
cost of the underlying network based on an agreement in principle reached with
Sprint in 2001. This rate went into effect on January 1, 2003. The toll rate for
long distance charges associated with Sprint roaming is expected to remain at
approximately 2 cents per minute. We have also experienced a significant
increase in the volume of inbound roaming traffic from PCS providers other than
Sprint, which traffic is settled at rates separately negotiated by Sprint on our
behalf with the other PCS providers. We had approximately 468 million minutes of
inbound roaming traffic in the third quarter of 2003 compared to approximately
307 million minutes of inbound roaming traffic in the third quarter of 2002. The
increase in minutes offset by the decrease in rates accounted for the 5 percent
overall increase in roaming revenue to $41,126 in the third quarter of 2003 from
$39,129 in the third quarter of 2002. We had approximately 1,203 million minutes
of inbound roaming traffic in the first nine months of 2003 compared to
approximately 783 million minutes of inbound roaming traffic in the first nine
months of 2002. The increase in minutes offset by the decrease in rates
accounted for the 9 percent overall increase in roaming revenue to $107,956 in
the first nine months of 2003 from $99,154 in the first nine months of 2002.
PRODUCT SALES AND COST OF PRODUCTS SOLD - We record revenue from the
sale of handsets and accessories, net of an allowance for returns, as product
sales. Product sales revenue and costs of products sold are recorded for all
products that are sold through our retail stores, as well as those sold to our
local indirect agents. The cost of handsets sold generally exceeds the retail
sales price as we subsidize the price of handsets for competitive reasons.
Sprint's handset return policy allows customers to return their handsets for a
full refund within 14 days of purchase. When handsets are returned to us, we may
be able to reissue the handsets to customers at little additional cost to us.
However, when handsets are returned to Sprint for refurbishing, we may receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
Product sales revenue for the third quarter of 2003 was $8,599 compared
to $4,675 for the third quarter of 2002. Cost of products sold for the third
quarter of 2003 was $14,913 compared to $12,904 for the third quarter of 2002.
As such, the subsidy on handsets sold through our retail and local indirect
channels was $6,314 in the third quarter of 2003 and $8,229 in the third quarter
of 2002. On a per activation basis (excluding handsets sold to existing
subscribers), the subsidy was approximately $111 per activation in the third
quarter of 2003 and approximately $134 per activation in the third quarter of
2002. Product sales revenue for the first nine months of 2003 was $19,697
compared to $17,730 for the first nine months of 2002. Cost of products sold for
the first nine months of 2003 was $40,156 compared to $36,134 for the first nine
months of 2002. As such, the subsidy on handsets sold through our retail and
local indirect channels was $20,459 in the first nine months of 2003 and $18,404
in the first nine months of 2002. On a per activation basis (excluding handsets
sold to existing subscribers), the subsidy was approximately $114 per activation
in the first nine months of 2003 and approximately $111 per activation in the
first nine months of 2002. The decrease in subsidy per activation in the third
quarter of 2003 compared to the third quarter of 2002 is primarily due to the
addition of activation fee revenue that was allocated to handset sales in
accordance with the provisions of EITF 00-21, as discussed previously.
COST OF SERVICE AND OPERATIONS (EXCLUDING NON-CASH COMPENSATION) - Cost
of service and operations includes the costs of operating our portion of the PCS
network of Sprint. These costs include items such as outbound roaming fees, long
distance charges, tower leases and maintenance, as well as backhaul costs. In
addition, it includes the fees we pay to Sprint for our 8 percent affiliation
fee, back office services such as billing and customer care, as well as our
provision for estimated uncollectible accounts. Expenses of $83,313 in the third
quarter of 2003 were approximately 10
24
percent less than the $92,560 incurred in the third quarter of 2002. Expenses of
$242,912 in the first nine months of 2003 were approximately 5 percent less than
the $256,378 incurred in the first nine months of 2002. Network operating costs
remained relatively stable as our network build-out is substantially complete
and we are beginning to realize the benefits of our capital investment as we
continue to add subscribers to the network. The improvements noted in overall
cost of service and operations were primarily driven by reduced bad debt expense
in 2003 compared to 2002 as we begin to see the benefit of reinstating deposits
requirements in 2002. Total minutes of use on our network were 1.6 billion
minutes in the third quarter of 2003 compared to 1.1 billion minutes in the
third quarter of 2002 for an increase in traffic of 45 percent. Total minutes of
use on our network were 4.4 billion minutes in the first nine months of 2003
compared to 3.0 billion minutes in the first nine months of 2002, for an
increase in traffic of 47 percent.
SELLING AND MARKETING EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
Selling and marketing expenses include advertising, promotion, sales commissions
and expenses related to our distribution channels including our retail store
expenses. In addition, we reimburse Sprint for the subsidy on handsets sold
through national retail stores due to the fact that these retailers purchase
their handsets from Sprint. This subsidy is recorded as a selling and marketing
expense. The amount of handset subsidy included in selling and marketing
expenses was $3,269 and $4,618 in the third quarter of 2003 and 2002,
respectively. The amount of handset subsidy included in selling and marketing
was $11,441 and $12,483 in the first nine months of 2003 and 2002, respectively.
Total selling and marketing expenses of $29,801 in the third quarter of 2003
were 8 percent less than the $32,503 incurred in the third quarter of 2002.
Total selling and marketing expenses of $84,531 in the first nine months of 2003
were 4 percent less than the $88,360 incurred in the first nine months of 2002.
The decreases experienced during 2003 are attributable to decreases in variable
costs due to the fact that we had less gross activations in 2003 than in 2002 as
subscriber growth is slowing.
GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
General and administrative expenses include corporate costs and expenses such as
administration and finance. General and administrative expenses of $6,416 in the
third quarter of 2003 were 56 percent higher than the $4,102 incurred in the
third quarter of 2002. General and administrative expenses of $15,999 in the
first nine months of 2003 were 47 percent higher than the $10,890 incurred in
the first nine months of 2002. The increase in 2003 has been the result of
approximately $3 million in expenses incurred with respect to the proposed debt
restructuring launched in September 2003 as well as increased professional fees
related to various efforts in preparing for the reporting requirements under the
Sarbanes-Oxley Act of 2002.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization includes
depreciation of our property, plant and equipment as well as amortization of
intangibles. Depreciation is calculated on the straight line method over the
estimated useful lives of the underlying assets and totaled $18,217 in the third
quarter of 2003, which was 10 percent higher than the $16,630 recorded in the
third quarter of 2002. Depreciation totaled $52,486 in the first nine months of
2003, which was 10 percent higher than the $47,702 recorded in the first nine
months of 2002. The increase in 2003 is due to the increase in depreciable costs
as a result of our capital expenditures in the last half of 2002 and the first
half of 2003.
Amortization expense relates to intangible assets recorded in
connection with the acquisitions closed in the first quarter of 2001. We
recorded two identifiable intangibles in connection with each of the
acquisitions, consisting of values assigned to the agreements with Sprint and
the customer base acquired. Amortization expense of $10,017 in the third quarter
of 2003 was consistent with the $10,267 in the third quarter of 2002.
Amortization expense of $30,050 in the first nine months of 2003 was consistent
with the $30,402 in the first nine months of 2002.
IMPAIRMENT OF GOODWILL - In accordance with the provisions of SFAS No.
142 we performed our first annual assessment of goodwill for impairment as of
July 31, 2002. The results of this assessment indicated that goodwill was
impaired and we recorded an impairment charge of $291,635 in the third quarter
of 2002. This impairment charge reduced the carrying value of goodwill to zero
such that no additional impairment testing was necessary in 2003.
IMPAIRMENT OF PROPERTY AND EQUIPMENT - We recorded impairments of
property and equipment in the third quarter and first nine months of 2003 of
$291 and $685, respectively, compared to $0 and $1,332 in the third quarter and
first nine months of 2002. The decrease in 2003 is attributable to a switch site
location that was abandoned in 2002, resulting in a charge of $1,332 in the
second quarter of 2002.
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NON-CASH COMPENSATION - Non-cash compensation expense of $45 in the
third quarter of 2003 related to shares of restricted stock that were awarded to
our officers in October and December of 2002. Certain of our officers received a
total of 800,000 shares of restricted stock at a discount to market price that
will vest over a three-year period. Compensation expense relative to the
difference between the market price of the stock and the price the officers paid
for the stock will be recognized over the vesting period during which the
restrictions lapse. Non-cash compensation expense of $285 in the first nine
months of 2003 includes $161 in compensation to directors in the form of the
issuance of 105,000 shares of our common stock in the second quarter of 2003 in
addition to the vesting of restricted stock. We had no non-cash compensation
expense in the third quarter or first nine months of 2002.
OPERATING INCOME (LOSS) - Our operating income for the third quarter of
2003 was $3,376 compared to a loss of $313,173 for the third quarter of 2002,
representing an improvement of $316,549. Our operating loss for the first nine
months of 2003 was $4,212 compared to $356,229 for the first nine months of
2002, representing an improvement of $352,017. The improvement in operating
income for the third quarter of 2003 of $316,549 and for the first nine months
of 2003 of $352,017 is primarily due to the fact that we recorded a goodwill
impairment charge of $291,635 in the third quarter of 2002. The remaining
improvement is primarily attributable to the leverage we are beginning to
experience in spreading our fixed costs over a larger base of subscribers.
INTEREST AND OTHER INCOME - Interest and other income represents
amounts earned on the investment of excess equity and debt offering proceeds.
Income of $187 in the third quarter of 2003 was 72 percent less than the $678
earned in the third quarter of 2002. Income of $821 in the first nine months of
2003 was 72 percent less than the $2,882 earned in the first nine months of
2002. The decrease in interest earned is due to the fact that excess cash and
investments were liquidated during 2002 in connection with funding our capital
expenditures and operating cash flow losses, as well as making interest payments
from restricted cash.
INTEREST EXPENSE - Interest expense for the third quarter and first
nine months of 2003 includes non-cash interest accreted on our 12 7/8% Senior
Discount Notes of $9,106 and $26,483, respectively, as well as interest accrued
on the two senior notes issued during 2001 and interest on our senior secured
debt. Total interest expense of $26,519 in the third quarter of 2003 is
consistent with the expense of $26,158 in the third quarter of 2002. Total
interest expense of $79,007 in the first nine months of 2003 is 3 percent higher
than total interest expense of $76,832 in the first nine months of 2002,
primarily due to the increased level of advances under senior secured
borrowings.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." As of December 31, 2000, the net deferred tax
asset consisted primarily of temporary differences related to the treatment of
organizational costs, unearned compensation, interest expense and net operating
loss carry forwards. The net deferred tax asset was fully offset by a valuation
allowance as of December 31, 2000 because there was sufficient uncertainty as to
whether we would recognize the benefit of those deferred taxes in future
periods. In connection with the mergers completed in the first quarter of 2001,
we recorded significant deferred tax liabilities due to differences in the book
and tax basis of the net assets acquired, particularly due to the intangible
assets recorded in connection with the acquisitions.
The reversal of the timing differences which gave rise to these
deferred tax liabilities will allow us to realize the benefit of timing
differences which gave rise to the deferred tax asset. As a result, we released
the valuation allowance during the second quarter of 2001. Prior to 2001, all
deferred tax benefit had been fully offset by an increase in the valuation
allowance such that there was no financial statement impact with respect to
income taxes. With the reduction of the valuation allowance in 2001, we began to
reflect a net deferred tax benefit in our consolidated statement of operations.
During the first quarter of 2003 we reinstated a valuation allowance due to the
fact that the timing differences that give rise to the deferred tax asset are
expected to exceed the timing differences that give rise to the deferred tax
liabilities and there is uncertainty as to whether we will recognize the benefit
of those deferred taxes in future periods.
26
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - Operating cash flows were $31,943 in the first
nine months of 2003 and negative $41,583 in the first nine months of 2002. The
increase in operating cash flows of $73,526 is primarily related to a decrease
in net loss before non-cash items of $41,436 coupled with working capital
changes of $32,090 primarily related to receivables.
INVESTING ACTIVITIES - Our investing cash flows were $5,575 in the
first nine months of 2003 compared to negative $18,173 in the first nine months
of 2002. Our cash capital expenditures for the first nine months of 2003 totaled
$31,645 while our cash capital expenditures for the first nine months of 2002
totaled $79,776. Additionally, the decrease in restricted cash was $34,724 in
the first nine months of 2003 compared to $59,705 in the first nine months of
2002.
FINANCING ACTIVITIES - Our financing cash flows decreased in the first
nine months of 2003 to a negative $529 from $11,495 in the first nine months of
2002. In 2002 we received $12,838 in proceeds representing the remaining
borrowings under the term portion of our Senior Secured Credit Facility.
CAPITAL REQUIREMENTS
Our capital expenditure requirements for 2003 are expected to be
approximately $40 to $50 million. Operating cash flow is expected to continue to
increase in 2003 as we continue to realize the benefits of the subscriber growth
that we have experienced over the past three years. We expect to generate free
cash flow in 2003 and believe we have sufficient liquidity as discussed below.
LIQUIDITY
Since inception, we have financed our operations through capital
contributions from our owners, through debt financing and through proceeds
generated from public offerings of our common stock. We have incurred
substantial net losses and negative cash flow from operations since inception.
Expenses are expected to exceed revenues until we establish a sufficient
subscriber base. We expect operating losses to continue for the foreseeable
future. However, we expect operating losses to decrease in the future as we
obtain more subscribers.
EDC CREDIT FACILITY - We entered into a credit agreement with Nortel
effective June 10, 1999, which was amended and restated on February 8, 2000. On
June 23, 2000, Nortel assigned the entirety of its loans and commitments to
Export Development Corporation ("EDC"), and Alamosa and EDC entered into the
credit facility with EDC (the "EDC Credit Facility"). The EDC Credit Facility
was paid in full in the first quarter of 2001 with proceeds from the Senior
Secured Credit Facility described below.
COMMON STOCK - On October 29, 1999, we filed a registration statement
with the U.S. Securities and Exchange Commission for the sale of 10,714,000
shares of our common stock (the "Initial Offering"). The Initial Offering became
effective and the shares were issued on February 3, 2000 at the initial price of
$17.00 per share. Subsequently, the underwriters exercised their over-allotment
option for an additional 1,607,100 shares. We received net proceeds of
approximately $193.8 million after commissions of $13.3 million and expenses of
approximately $1.5 million. The proceeds of the Initial Offering were used for
the build out of our portion of the PCS network of Sprint, to fund operating
capital needs and for other corporate purposes.
On November 13, 2001, we completed an underwritten secondary offering
of our common stock pursuant to which certain of our stockholders sold an
aggregate of 4,800,000 shares at a public offering price of $14.75 per share. We
did not receive any proceeds from the sale of these shares, but the underwriters
were granted an option to purchase up to 720,000 additional shares of common
stock to cover over-allotments. This option was exercised on November 16, 2001,
and we received net proceeds from the sale of these shares after offering costs
of approximately $9.1 million, which was used for general corporate purposes.
SENIOR NOTES - On February 8, 2000, Alamosa (Delaware) issued $350.0
million face amount of senior discount notes (the "12 7/8% Senior Discount
Notes"). The 12 7/8% Senior Discount Notes mature in ten years (February 15,
2010), carry a coupon rate of 12 7/8%, and provide for interest deferral for the
first five years. The 12 7/8% Senior Discount Notes will accrete to their $350
million face amount by February 8, 2005, after which interest will be paid in
cash semiannually.
27
On January 31, 2001, Alamosa (Delaware) issued $250.0 million face
amount of senior notes (the "12 1/2% Senior Notes"). The 12 1/2% Senior Notes
mature in ten years (February 1, 2011), carry a coupon rate of 12 1/2% payable
semiannually on February 1 and August 1, beginning on August 1, 2001.
On August 15, 2001, Alamosa (Delaware) issued $150.0 million face
amount of senior notes (the "13 5/8% Senior Notes"). The 13 5/8% Senior Notes
mature in ten years (August 15, 2011), carry a coupon rate of 13 5/8% payable
semiannually on February 15 and August 15, beginning on February 15, 2002.
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, we entered into
a $280.0 million Senior Secured Credit Facility with Citicorp USA, as
administrative agent and collateral agent; Toronto Dominion (Texas), Inc., as
syndication agent; First Union National Bank, as documentation agent; EDC as
co-documentation agent; and a syndicate of banking and financial institutions.
The Senior Secured Credit Facility was closed and initial funding of $150
million was made on February 14, 2001 in connection with the completion of the
acquisitions of two PCS Affiliates of Sprint. A portion of the proceeds of the
Senior Secured Credit Facility were used (i) to pay the cash portion of the
merger consideration for the acquisitions, (ii) to refinance existing
indebtedness under our credit facility with EDC and under the existing credit
facilities of the acquired companies, and (iii) to pay transaction costs. This
facility was amended in March 2001 to increase the maximum borrowings to $333
million as a result of the acquisition of another PCS Affiliate of Sprint. The
facility was again amended in August 2001 to, among other things, modify
financial covenants and reduce the maximum borrowing to $225, million of which
$200 million is outstanding at September 30, 2003. The remaining proceeds were
used for general corporate purposes, including funding capital expenditures,
subscriber acquisition and marketing costs, purchase of spectrum and working
capital needs.
On September 26, 2002 we entered into the sixth amendment to the
amended and restated credit agreement relating to the Senior Secured Credit
Facility which, among other things, modified certain financial and statistical
covenants. As a result of the amendment, we are required to maintain a minimum
cash balance of $10 million.
The September 26, 2002 amendment also placed restrictions on the
ability to draw on the $25 million revolving portion of the Senior Secured
Credit Facility. The first $10 million can be drawn if cash balances fall below
$15 million and we substantiate through tangible evidence the need for such
advances. The remaining $15 million is available only at such time as the
Company's leverage ratio is less than or equal to 5.5 to 1. At September 30,
2003, our leverage ratio was 7.21 to 1.
The terms of this credit facility contain numerous financial and other
covenants, the violation of which could be deemed an event of default by the
lenders. Should we be deemed to be in default, the lenders can declare the
entire outstanding borrowings immediately due and payable or exercise other
rights and remedies. Such an event would likely have a material adverse impact
on us.
DEBT RESTRUCTURING - In an effort to proactively manage its capital
structure and align it with recent operating trends in the wireless
telecommunications industry, the Company launched an offer to exchange its
publicly traded debt on September 12, 2003. The offer, as amended on October 15,
2003 (as so amended, the "Exchange Offer"), sought to exchange all of the
Company's existing 12 7/8% Senior Discount Notes, 12 1/2% Senior Notes and 13
5/8% Senior Notes for a combination of new notes and convertible Alamosa
Holdings preferred stock. The Exchange Offer was successful and expired
on November 10, 2003.
Holders of the 12 7/8% Senior Discount Notes due 2010 (the "Discount
Notes") who tendered their Discount Notes will receive for each $1,000 accreted
amount of the Discount Notes tendered, as of the expiration of the Exchange
Offer, (1) $650 in original issue amount of new 12% Senior Discount Notes due
2009 (the "New Discount Notes") and (2) one share of Series B Convertible
Preferred Stock of Alamosa Holdings with a liquidation preference of $250 per
share (the "Preferred Stock").
Holders of the 12 1/2% Senior Notes due 2011 and the 13 5/8% Senior
Notes due 2011 (collectively, the "Old Cash Pay Notes" and, together with the
Discount Notes, the "Old Notes") who tendered their Old Cash Pay Notes will
receive, for each $1,000 principal amount of the Old Cash Pay Notes tendered,
(1) $650 in principal amount of new 11% Senior Notes due 2010 (the "New Cash Pay
Notes" and, together with the New Discount Notes, the "New Notes") and (2) one
share of Preferred Stock.
Fractional shares of Preferred Stock will not be issued under the
Exchange Offer and New Notes will be issued only in denominations that are
integral multiples of $1,000. With respect to any holder of Old Notes who would
otherwise receive a fractional share of Preferred Stock or New Notes in an
amount that is not an integral multiple of $1,000, the Company will round down
to the nearest whole share of Preferred Stock or $1,000 of New Notes, as
applicable, and substitute a cash payment equal to the liquidation preference
allocable to the fractional share of Preferred Stock or the amount by which the
amount of New Notes is reduced.
The New Discount Notes will accrete at 12 percent, compounded
semi-annually through July 31, 2005. Cash interest on the accreted value will
then be paid semi-annually at 12 percent beginning on January 31, 2006 until
maturity on July 31, 2009. The New Cash Pay Notes will require cash payment of
interest semi-annually beginning January 31, 2004 until maturity on July 31,
2010.
28
Holders of Preferred Stock will be entitled to receive cumulative
dividends at an annual rate of 7.5 percent of the $250 per share liquidation
preference. Dividends will be payable quarterly in arrears on the last calendar
day of each January, April, July and October. Until July 31, 2008, Alamosa
Holdings will have the option to pay Preferred Stock dividends in (i) cash, (ii)
shares of Alamosa Holdings Series C Convertible Preferred Stock ("Dividend
Preferred Stock" and, together with the Preferred Stock, the "Preferred
Shares"), (iii) shares of Alamosa Holdings common stock or (iv) a combination
thereof. After July 31, 2008, all Preferred Stock dividends will be payable in
cash only. The Dividend Preferred Stock will have essentially the same terms as
the Preferred Stock with the exception of the conversion rate, as discussed
below.
Each share of Preferred Stock and Dividend Preferred Stock will be
convertible at the holder's option and at any time into shares of Alamosa
Holdings common stock. The Preferred Stock will be convertible at $3.40 per
share and the Dividend Preferred Stock will be convertible at $4.25 per share.
Beginning on the third anniversary of the date of original issuance of
the Preferred Stock, Alamosa Holdings has the option to redeem outstanding
Preferred Shares for cash. The initial redemption price will be 125 percent of
the $250 per share liquidation preference, reduced by 5 percent annually
thereafter until 2011 after which time the redemption price will remain at 100
percent. All outstanding Preferred Shares must be redeemed by Alamosa Holdings
on July 31, 2013.
Upon the expiration of the Exchange Offer on November 10, 2003, the
Company had received tenders from existing noteholders amounting to
approximately $343.6 million or 98 percent of the Discount Notes, $238.4 million
or 95 percent of the 12 1/2% Senior Notes and $147.5 million or 98 percent of
the 13 5/8% Senior Notes. The consummation of the Exchange Offer will be
accounted for under the provisions of SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." In accordance with the provisions
of SFAS No. 15, the New Notes and Preferred Stock will be recorded at fair
value. The excess of the carrying value of the existing debt tendered by
noteholders over the fair value of the New Notes and Preferred Stock will reduce
interest expense over the life of the New Notes due to the fact that the total
cash flows associated with the New Notes exceeds the carrying value of the Old
Notes.
In contemplation of the Exchange Offer, Alamosa (Delaware), on
September 11, 2003, amended the terms of the respective indentures governing
its existing 12 7/8% Senior Discount Notes, 12 1/2% Senior Notes and 13 5/8%
Senior Notes to add Alamosa Holdings as a guarantor under the indentures. The
Company further amended the indentures governing these notes on October 29,
2003, after receiving the requisite consents from the holders of the notes, to
eliminate substantially all covenant protection under such indentures.
Concurrently with the closing of the Exchange Offer, the Company
entered into amendments to certain of its agreements with Sprint (the "Sprint
Amendments") and to the credit facility governing the Senior Secured Credit
Facility (the "Bank Amendment"). The Company entered into the Sprint Amendments
to (i) simplify the manner in which financial settlements are determined and
settled between the Company and Sprint, (ii) settle outstanding disputed charges
between the Company and Sprint and (iii) provide clarity with respect to access
to information between the Company and Sprint. The Company entered into the Bank
Amendment to, among other things, modify the financial maintenance ratios in the
credit agreement and obtain the requisite consent to the execution of Sprint
Amendments.
The successful restructuring of our debt as described above, coupled
with the economic benefits to us of the Sprint Amendments will provide for over
$240 million of principal debt reduction and over $260 million in cumulative
cash interest expense savings and expected economic benefits resulting from the
modifications to the Sprint agreements. Additionally, the amended covenants
under our Senior Secured Credit Facility will allow us the flexibility to pursue
attractive business opportunities and focus on adding quality customers to our
network.
At September 30, 2003, we had $98,726 in cash and cash equivalents plus
an additional $1 in restricted cash held in escrow for debt service
requirements. We also had $25,000 remaining on the revolving portion of the
Senior Secured Credit Facility, subject to the restrictions discussed
previously. We believe that this $123,727 in cash and available borrowings is
sufficient to fund our working capital, capital expenditure and debt service
requirements through the point where such requirements will be funded through
free cash flow.
Although, we do not anticipate the need to raise additional capital in
the upcoming year, our funding status is dependent on a number of factors
influencing our projections of operating cash flows, including those related to
subscriber growth, ARPU, churn and CPGA. Should actual results differ
significantly from these assumptions, our
29
liquidity position could be adversely affected and we could be in a position
that would require us to raise additional capital, which may or may not be
available on terms acceptable to us, if at all, and could have a material
adverse effect on our ability to achieve our intended business objectives.
In addition, should the recent trends in our metrics which drove our
decision to pursue the exchange offer discussed previously continue to affect
our results, we may be unable to satisfy all of the covenants under the Senior
Secured Credit Facility. In such an event, we may need to obtain further
amendments to the amended and restated credit agreement relative to the Senior
Secured Credit Facility or seek other sources of financing, which may not be
available to us. If we are not able to get the amendment and fail to satisfy one
or more of the financial or other covenants under the Senior Secured Credit
Facility, it could result in an event of default on our debt.
INFLATION - We believe that inflation has not had a significant impact
in the past and is not likely to have a significant impact in the foreseeable
future on our results of operations.
FUTURE TRENDS THAT MAY AFFECT OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
We may not be able to sustain our planned growth or obtain sufficient
revenue to achieve and sustain profitability. Recently, we have experienced
slowing net customer growth. Net customer growth was approximately 48,000 net
subscribers in the first quarter of 2002, 20,000 net subscribers in the second
quarter of 2002, 20,000 net subscribers in the third quarter of 2002 and
improved to 31,000 net subscribers in the fourth quarter of 2002 due to seasonal
activity. We added 16,000 net subscribers in the third quarter of 2003, which
was less than the 24,000 net subscribers added in the second quarter of 2003.
The trend of slowing subscriber growth experienced during 2002 is attributable
to increased churn and competition, slowing wireless subscriber growth and
weakened consumer confidence. The improvement in the early months of 2003 is
primarily attributable to decreased churn resulting from measures put in place
in 2002 to slow the addition of subscribers with sub-prime credit
characteristics, however the trend is beginning to deteriorate as evidenced by
the decline in net subscriber additions in the third quarter of 2003 compared to
the second quarter of 2003. We are currently experiencing net losses as we
continue to add subscribers, which requires a significant up-front investment in
acquiring those subscribers. If the current trend of slowing net customer growth
does not improve, it will lengthen the amount of time it will take for us to
reach a sufficient number of customers to achieve free cash flow, which in turn
will have a negative impact on liquidity and capital resources. Our business
plan reflects continuing growth in subscribers and free cash flow in 2003 as the
cash flow generated by the growing subscriber base exceeds costs incurred to
acquire new customers.
We may continue to experience higher costs to acquire customers. For
the third quarter of 2003, our CPGA was $409 per activation compared to $375 per
activation in the second quarter of 2003. The fixed costs in our sales and
marketing organization are being allocated among a smaller number of activations
due to the slowdown in subscriber growth. In addition, handset subsidies have
been increasing due to more aggressive promotional efforts. With a higher CPGA,
customers must remain on our network for a longer period of time at a stable
ARPU to recover those acquisitions costs.
We may continue to experience a higher churn rate. Our average customer
monthly churn (net of deactivations that take place within 30 days of the
activation date) for 2002 was 3.4 percent. This rate of churn is the highest
that we have experienced on an annual basis since the inception of the Company
and compares to 2.7 percent in 2001. We expect that in the near term churn will
remain higher than historical levels as a result of a greater percentage of
sub-prime versus prime credit class customers imbedded in the subscriber base in
our territory as a result of various programs that were run during 2001 and the
first two months of 2002 which encouraged sub-prime credit individuals to
subscribe to our service. We have experienced a significantly higher rate of
involuntary deactivations due to non-payment relating to these customers. During
the third quarter of 2003 we experienced an increase in our churn rate to 2.9
percent compared to 2.5 percent in the second quarter of 2003. If churn
increases over the long-term, we would lose the cash flow attributable to these
customers and have greater than projected losses.
We may experience a significantly lower reciprocal roaming rate with
Sprint in 2003 and thereafter. Under our original agreements with Sprint, Sprint
had the right to change the reciprocal roaming rate. On April 27, 2001, we
entered into an agreement with Sprint which reduced the reciprocal roaming rate
from 20 cents per minute to 15 cents per minute beginning June 1, 2001, and to
12 cents per minute on October 1, 2001. For 2002, the rate was 10 cents per
30
minute. On January 1, 2003, the reciprocal rate was reduced to 5.8 cents per
minute, which Sprint has indicated represents a fair and reasonable return on
the cost of the underlying network based on an agreement in principle reached
with Sprint in 2001. The modifications to our affiliation agreements with Sprint
that became effective upon the successful restructuring of our debt fixes this
rate at 5.8 cents per minute until December 31, 2005. We are currently a net
receiver of roaming with Sprint, meaning that other PCS customers roam onto our
network at a higher rate than our customers roam onto other portions of the PCS
network of Sprint. The ratio of inbound to outbound Sprint PCS travel minutes
was 1.1 to 1 for the third quarter of 2003, and we expect this margin to trend
close to 1 to 1 over time.
Our ability to borrow funds under the revolving portion of the Senior
Secured Credit Facility may be limited due to our failure to maintain or comply
with the restrictive financial and operating covenants contained in the
agreements covering our Senior Secured Credit Facility. We amended our credit
agreement on September 26, 2002 and modified certain of the financial and
operating covenants and are in compliance with the lending agreement at
September 30, 2003. We believe we will meet the requirements of these covenants
in future periods; however, if we do not, our ability to access the remaining
$25,000 in the form of the revolving portion of the Senior Secured Credit
Facility could be limited, which could have a material adverse impact on our
liquidity.
We may incur significant handset subsidy costs for existing customers
who upgrade to a new handset. As our customer base matures and technological
advances in our services take place, more existing customers will begin to
upgrade to new handsets to take advantage of these services. We have limited
historical experience regarding the rate at which existing customers upgrade
their handsets and if more customers upgrade than we are currently anticipating,
it could have a material adverse impact on our earnings and cash flows.
We may not be able to access the credit or equity markets for
additional capital if the liquidity discussed above is not sufficient for the
cash needs of our business. We continually evaluate options for additional
sources of capital to supplement our liquidity position and maintain maximum
financial flexibility. If the need for additional capital arises due to our
actual results differing significantly from our business plan or for any other
reason, we may be unable to raise additional capital.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. For our leased telecommunication facilities, primarily consisting
of cell sites and switch site operating leases and operating leases for retail
and office space, we have adopted SFAS No. 143 as of January 1, 2003.
As previously disclosed, upon adoption of SFAS No. 143, we had
concluded that, for our leased telecommunication facilities, a liability could
not be reasonably estimated due to (1) our inability to reasonably assess the
probability of the likelihood that a lessor would enforce the remediation
requirements upon expiration of the lease term and therefore its impact on
future cash outflows, (2) our inability to estimate a potential range of
settlement dates due to our ability to renew site leases after the initial lease
expiration and (3) our limited experience in abandoning cell site locations and
actually incurring remediation costs.
It is our understanding that further clarification has been provided by
the Securities and Exchange Commission ("SEC") regarding the accounting for
asset retirement obligations and specifically relating to factors to consider in
determining the estimated settlement dates and the probability of enforcement of
the remediation obligation. Based on this information, we have revised certain
of the estimates used in our original analysis and calculated an asset
retirement obligation for our leased telecommunication facilities. We determined
that the aforementioned asset retirement obligations did not have a material
impact on our consolidated results of operations, financial position or cash
flows for the three and nine month periods ended September 30, 2003, as well as
for each of the three month periods ended March 31 and June 30, 2003. As such,
we have recorded the asset retirement obligations in the three month period
ended September 30, 2003.
As a result, an initial asset retirement obligation of $1,243 has been
recorded and classified in other non-current liabilities as of September 30,
2003. In addition, we also recorded a corresponding increase in property and
equipment
31
of $1,243 as of September 30, 2003. The effect on our statement of operations
for the three and nine month periods ended September 30, 2003 related to
accretion of the asset retirement obligation and depreciation of the
corresponding asset through September 30, 2003. Included in costs of services
and operations in the consolidated statement of operations for the three and
nine month periods ended September 30, 2003 is a charge of $524 related to the
accretion of the asset retirement obligations. Included in depreciation and
amortization in the consolidated statement of operations for the three and nine
month periods ended September 30, 2003 is a charge of $456 related to the
depreciation of the assets recorded in connection with the asset retirement
obligations. For purposes of determining the aforementioned asset retirement
obligations, we have assigned a 100% probability of enforcement to the
remediation obligations and have assumed an average settlement period of 20
years.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002," which rescinded or amended various existing
standards. One change addressed by this standard pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt" and states that an
extinguishment of debt cannot be classified as an extraordinary item unless it
meets the unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The provisions of this statement are
effective for fiscal years beginning after May 15, 2002 and extinguishments of
debt that were previously classified as an extraordinary item in prior periods
that do not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 in the
quarter ending March 31, 2003 has resulted in a reclassification of the loss on
extinguishment of debt that we previously reported as an extraordinary item for
the year ended December 31, 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of this statement are effective for exit or disposal activities
initiated after December 31, 2002, and the adoption of this statement did not
have a material impact on our results of operations, financial position or cash
flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an amendment of
SFAS No. 123, "Accounting for Stock-Based Compensation." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of this statement are effective
for fiscal years ending after and interim periods beginning after December 15,
2002. As we continue to account for stock-based employee compensation using the
intrinsic value method under APB Opinion No. 25, we, as required, have only
adopted the revised disclosure requirements of SFAS No. 148 as of December 31,
2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003 and did not have a material impact on our results of operations,
financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances) and is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this statement did not have a material
impact on our results of operations, financial position or cash flows.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21, "Revenue Arrangements with Multiple Deliverables," in May
2003. This abstract addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
Specifically, it addresses
32
how consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in this abstract became effective
for revenue arrangements entered into in fiscal periods beginning after June 15,
2003, and we have adopted of the provisions of this abstract as of July 1, 2003.
We have elected to apply the accounting provisions of this abstract on
a prospective basis beginning July 1, 2003. Under the accounting provisions of
this abstract, we will allocate amounts charged to customers between the sale of
handsets and other equipment and the sale of wireless telecommunication services
in those transactions in distribution channels controlled by us. In many cases,
this will result in all amounts collected from the customer upon activation of
the handset being allocated to the sale of the handset. As a result of this
treatment, activation fees included in the consideration at the time of sale
will be recorded as handset revenue. Prior to the adoption of the provisions of
this abstract, we had deferred all activation fee revenue as well as activation
costs in a like amount and amortized these revenues and costs over the average
life of our subscribers. The existing deferred revenue and costs at July 1, 2003
will continue to be amortized along with that portion of activation fees
generated by customers outside of distribution channels controlled by us. The
impact of the adoption of these accounting provisions was not material to us.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued after
December 31, 2002, while the disclosure requirements were effective for
financial statements for periods ending after December 15, 2002. At December 31,
2002, we had not entered into any material arrangement that would be subject to
the disclosure requirements of FIN 45. The adoption of FIN 45 did not have a
material impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"
or the "Interpretation"), "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or "VIEs")
and how to determine when and which business enterprise should consolidate the
VIE (the "primary beneficiary"). This new model for consolidation applies to an
entity which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. For public entities with VIEs
created before February 1, 2003, the implementation and disclosure requirements
of FIN 46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created after
January 31, 2003, the requirements are effective immediately. The adoption of
FIN 46 did not have a material impact on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not
enter into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to some interest rate risk on our senior Secured Credit
Facility and any future floating rate financing.
GENERAL HEDGING POLICIES - We enter into interest rate swap and collar
agreements to manage our exposure to interest rate changes on our variable rate
term portion of our Senior Secured Credit Facility. We seek to minimize
counterparty credit risk through stringent credit approval and review processes,
the selection of only the most creditworthy counterparties, continual review and
monitoring of all counterparties, and through legal review of contracts. We also
control exposure to market risk by regularly monitoring changes in interest rate
positions under normal and stress conditions to ensure that they do not exceed
established limits. Our derivative transactions are used for hedging purposes
only and comply with Board-approved policies. Senior management receives
frequent status updates of all outstanding derivative positions.
33
INTEREST RATE RISK MANAGEMENT - Our interest rate risk management
program focuses on minimizing exposure to interest rate movements by setting an
optimal mixture of floating and fixed-rate debt. We utilize interest rate swaps
and collars to adjust our risk profile relative to our floating rate Senior
Secured Credit Facility. We have hedges in place on approximately 42 percent of
the outstanding advances under our Senior Secured Credit Facility at September
30, 2003.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with the senior discount notes, capital leases
and the credit facility financing based on our projected level of long-term
indebtedness. This table reflects information as of December 31, 2002 and has
not been adjusted to reflect the closing of the Exchange Offer on November 10,
2003:
YEARS ENDING DECEMBER 31,
----------------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER
---------- --------- ---------- ----------- ---------- ----------
(DOLLARS IN MILLIONS)
Fixed Rate Instruments.................
12 7/8% senior discount notes (4). $ 305 $ 345 $ 350 $ 350 $ 350 $ --
Fixed interest rate............. 12.875% 12.875% 12.875% 12.875% 12.875% 12.875%
Principal payments.............. -- -- -- -- -- 350
12 1/2% senior notes.............. 250 250 250 250 250 --
Fixed interest rate............. 12.500% 12.500% 12.500% 12.500% 12.500% 12.500%
Principal payments.............. -- -- -- -- -- 250
13 5/8% senior notes.............. 150 150 150 150 150 --
Fixed interest rate............. 13.625% 13.625% 13.625% 13.625% 13.625% 13.625%
Principal payments.............. -- -- -- -- -- 150
Capital leases.........................
Annual minimum lease payments (1). $ 1.332 $ .596 $ .170 $ .150 $ .144 $ .744
Average Interest Rate............. 12.000% 12.000% 12.000% 12.000% 12.000% 12.000%
Variable Rate Instruments:
Senior Secured Credit Facility (2) $ 200 $ 178 $ 133 $ 83 $ 18 $ --
Average Interest Rate (3)......... 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Principal payments.............. -- 22 45 50 65 18
(1) These amounts represent the estimated minimum annual payments due under
our estimated capital lease obligations for the periods presented.
(2) The amounts represent estimated year-end balances under the credit
facility based on a projection of the funds borrowed under that
facility pursuant to our current plan of network build-out.
(3) Interest rate on the Senior Secured Credit Facility advances equal, at
our option, either (i) the London Interbank Offered Rate adjusted for
any statutory reserves ("LIBOR"), or (ii) the base rate which is
generally the higher of the administrative agent's base rate, the
federal funds effective rate plus 0.50% or the administrative agent's
base CD rate plus 0.50%, in each case plus an interest margin which is
initially 4.00% for LIBOR borrowings and 3.00% for base rate borrowings
as of September 30, 2003. The applicable interest margins are subject
to reductions under a pricing grid based on ratios of our total debt to
our earnings before interest, taxes, depreciation and amortization
("EBITDA"). The interest rate margins will increase by an additional
200 basis points in the event we fail to pay principal, interest or
other amounts as they become due and payable under the Senior Secured
Credit Facility.
(4) Interest will accrete on the senior discount notes through February
2005, at which time the notes will begin to require cash payments of
interest with the first semi-annual cash interest payment due in August
2005.
We are also required to pay quarterly in arrears a commitment fee on
the unfunded portion of the commitment of each lender. The commitment fee
accrues at a rate per annum equal to (i) 1.50% on each day when the utilization
(determined by dividing the total amount of loans plus outstanding letters of
credit under the Senior Secured Credit Facility by the total commitment amount
under the Senior Secured Credit Facility) of the Senior Secured Credit Facility
is less than or equal to 33.33%, (ii) 1.25% on each day when utilization is
greater than 33.33% but less than or equal to 66.66% and (iii) 1.00% on each day
when utilization is greater than 66.66%. We have entered into derivative hedging
instruments to hedge a portion of the interest rate risk associated with
borrowings under the Senior Secured Credit Facility. For purposes of this table,
we have used an assumed average interest rate of 7.25%.
34
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance our senior discount notes at maturity at
market rates; and
o the impact of interest rate movements on our ability to meet
interest expense requirements and meet financial covenants.
As a condition to the Senior Secured Credit Facility, we must maintain
one or more interest rate protection agreements in an amount equal to a portion
of the total debt under the credit facility. We do not hold or issue financial
or derivative financial instruments for trading or speculative purposes. While
we cannot predict our ability to refinance existing debt or the impact that
interest rate movements will have on our existing debt, we continue to evaluate
our financial position on an ongoing basis.
At September 30, 2003, we had entered into the following interest rate
swaps:
INSTRUMENT NOTIONAL TERM FAIR VALUE
--------------- ------------ ----------- -----------------
4.9475% Interest rate swap $ 21,690 3 years $ (633)
4.9350% Interest rate swap $ 28,340 3 years (726)
-----------------
$ (1,359)
=================
These swaps are designated as cash flow hedges such that the fair value
is recorded as a liability in the September 30, 2003 consolidated balance sheet
with changes in fair value (net of tax) shown as a component of other
comprehensive income.
We also entered into an interest rate collar with the following terms:
NOTIONAL MATURITY CAP STRIKE PRICE FLOOR STRIKE PRICE FAIR VALUE
-------- -------- ---------------- ------------------ ----------
$28,340 5/15/04 7.00% 4.12% $ (644)
This collar does not receive hedge accounting treatment such that the
fair value is reflected as a liability in the September 30, 2003 consolidated
balance sheet and the change in fair value has been reflected as an adjustment
to interest expense.
In addition to the swaps and collar discussed above, we purchased an
interest rate cap in February 2002 with a notional amount of $5,000 and a strike
price of 7.00%. This cap does not receive hedge accounting treatment and has no
value at September 30, 2003.
These fair value estimates are subjective in nature and involve
uncertainties and matters of considerable judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the
35
Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been named as a defendant in a number of purported securities
class actions in the United States District Court for the Southern District of
New York, arising out of our initial public offering (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The action
against us is one of more than 300 related class actions which have been
consolidated and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement and
prospectus filed with the U.S. Securities and Exchange Commission for purposes
of the IPO were false and misleading because they failed to disclose that the
underwriters allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of common stock in
connection with the IPO, and (ii) entered into agreements with their customers
to allocate such stock to those customers in exchange for the customers agreeing
to purchase additional Company shares in the aftermarket at pre-determined
prices. On February 19, 2003, the Court granted motions by us and 115 other
issuers to dismiss the claims under Rule 10b-5 of the Exchange Act which had
been asserted against them. The Court denied the motions by us and virtually all
of the other issuers to dismiss the claims asserted against them under Section
11 of the Securities Act. We maintain insurance coverage which may mitigate our
exposure to loss in the event that this claim is not resolved in our favor.
The issuers in the IPO cases, including us, have reached an agreement
in principle with the plaintiffs to settle the claims asserted by the plaintiffs
against them. Under the terms of the proposed settlement, the insurance carriers
for the issuers will pay the plaintiffs the difference between $1 billion and
all amounts which the plaintiffs recover from the underwriter defendants by way
of settlement or judgment. Accordingly, no payment on behalf of the issuers
under the proposed settlement will be made by the issuers themselves. The claims
against the issuers will be dismissed, and the issuers and their officers and
directors will receive releases from the plaintiffs. Under the terms of the
proposed settlement, the issuers will also assign to plaintiffs certain claims
which they may have against the underwriters arising out of the IPOs, and the
issuers will also agree not to assert certain other claims which they may have
against the underwriters, without plaintiffs' consent. The proposed settlement
is subject to the approval of the Court.
On January 23, 2001, the Company's board of directors, in a unanimous
decision, terminated the employment of Jerry Brantley, then President and COO of
the Company. On April 29, 2002, Mr. Brantley initiated litigation against us and
our Chairman, David E. Sharbutt in the District Court of Lubbock County, Texas,
22nd Judicial District, alleging wrongful termination, among other things. On
September 27, 2002, the Court entered an Agreed Order Compelling Arbitration. A
panel of three arbitrators has been selected. We believe that there is no basis
for Mr. Brantley's claim and intend to vigorously defend the lawsuit.
On January 8, 2003, a claim was made against us by Southwest Antenna
and Tower, Inc. ("SWAT") in the Second Judicial District Court, County of
Bernalillo, State of New Mexico, for monies due on an open account. SWAT sought
to recover approximately $2.0 million from the Company relating to work
performed by SWAT during 2000 for Roberts Wireless Communications, LLC, which
was acquired by us in the first quarter of 2001. This claim was settled for
$0.875 million during the second quarter of 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following set forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
3.1 Certificate of the Designations, Powers, Preferences and
Rights of Series B Convertible Preferred Stock of Alamosa
Holdings, Inc.
3.2 Certificate of the Designations, Powers, Preferences and
Rights of Series C Convertible Preferred Stock of Alamosa
Holdings, Inc.
4.1 Indenture for 11% Senior Notes due 2010, dated as of
November 10, 2003, by and among Alamosa (Delaware), Inc.,
the Subsidiary Guarantors party thereto and Wells Fargo Bank
Minnesota, N.A., as trustee.
4.2 Indenture for 12% Senior Discount Notes due 2009, dated as
of November 10, 2003, by and among Alamosa (Delaware), Inc.,
the Subsidiary Guarantors party thereto and Wells Fargo Bank
Minnesota, N.A., as trustee.
4.3 Global Note relating to the 11% Senior Note due 2010.
4.4 Global Note relating to the 12% Senior Discount Note due
2009.
4.5 Fourth Supplemental Indenture for 12 7/8% Senior Discount
Notes due 2010, dated as of September 11, 2003, by and among
Alamosa (Delaware), Inc., Alamosa Holdings, Inc., the
Subsidiary Guarantors party thereto and Wells Fargo Bank
Minnesota, N.A., as trustee.
4.6 Fifth Supplemental Indenture for 12 7/8% Senior Discount
Notes due 2010, dated as of October 29, 2003, by and among
Alamosa (Delaware), Inc., Alamosa Holdings, Inc., the
Subsidiary Guarantors party thereto and Wells Fargo Bank
Minnesota, N.A., as trustee.
4.7 Third Supplemental Indenture for 12 1/2% Senior Notes due
2011, dated as of September 11, 2003, by and among Alamosa
(Delaware), Inc., Alamosa Holdings, Inc., the Subsidiary
Guarantors party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
4.8 Fourth Supplemental Indenture for 12 1/2% Senior Notes due
2011, dated as of October 29, 2003, by and among Alamosa
(Delaware), Inc., Alamosa Holdings, Inc., the Subsidiary
Guarantors party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
4.9 First Supplemental Indenture for 13 5/8% Senior Notes due
2011, dated as of September 11, 2003, by and among Alamosa
(Delaware), Inc., Alamosa Holdings, Inc., the Subsidiary
Guarantors party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
37
4.10 Second Supplemental Indenture for 13 5/8% Senior Notes due
2011, dated as of October 29, 2003, by and among Alamosa
(Delaware), Inc., Alamosa Holdings, Inc., the Subsidiary
Guarantors party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
10.1 Eighth Amendment and Waiver, dated as of October 27, 2003,
to the Amended and Restated Credit Agreement, among Alamosa
Holdings, Inc., Alamosa (Delaware), Inc., Alamosa Holdings,
LLC, the Lenders party thereto and Citicorp USA, Inc., as
Administrative Agent and Collateral Agent.
10.2 Addendum VI to Sprint PCS Management Agreement and Sprint
PCS Services Agreement, dated as of September 12, 2003, by
and among Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company L.P. and Washington Oregon Wireless,
LLC.
10.3 Addendum X to Sprint PCS Management Agreement and Sprint PCS
Services Agreement, dated as of September 12, 2003, by and
among Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company L.P. and Texas Telecommunications LP.
10.4 Addendum V to Sprint PCS Management Agreement and Sprint PCS
Services Agreement, dated as of September 12, 2003, by and
among Sprint Spectrum L.P., SprintCom, Inc., WirelessCo,
L.P., Sprint Communications Company L.P. and Southwest PCS,
L.P.
10.5 Addendum IX to Sprint PCS Management Agreement and Sprint
PCS Services Agreement, dated as of September 12, 2003, by
and among Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company L.P. and Alamosa Wisconsin Limited
Partnership.
10.6 Addendum X to Sprint PCS Management Agreement and Sprint PCS
Services Agreement, dated as of September 12, 2003, by and
among Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company L.P. and Alamosa Missouri, LLC.
10.7 Settlement Agreement and Mutual Release, dated as of
September 12, 2003, by and among Sprint Spectrum L.P.,
SprintCom, Inc., Sprint Communications Company L.P.,
WirelessCo, L.P., Alamosa Holdings, Inc., Alamosa
(Delaware), Inc., Alamosa Missouri, LLC, Southwest PCS,
L.P., Washington Oregon Wireless LLC, Alamosa Wisconsin
Limited Partnership and Texas Telecommunications, LP.
10.8 Amendment to the Amended and Restated Alamosa Holdings, Inc.
Employee Stock Purchase Plan.
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) The following sets forth the current reports on Form 8-K that have been
filed during the quarterly period for which this report is filed:
Current Report on Form 8-K filed on August 8, 2003 (Item 12).
Current Report on Form 8-K filed on September 12, 2003 (Items 5, 7 and
9).
Current Report on Form 8-K filed on September 22, 2003 (Item 9).
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALAMOSA HOLDINGS, INC.
Registrant
/s/ David E. Sharbutt
-----------------------------------
David E. Sharbutt
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Kendall W. Cowan
-----------------------------------
Kendall W. Cowan
Chief Financial Officer
(Principal Financial and Accounting
Officer)
39
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
3.1 Certificate of the Designations, Powers,
Preferences and Rights of Series B Convertible
Preferred Stock of Alamosa Holdings, Inc.
3.2 Certificate of the Designations, Powers,
Preferences and Rights of Series C Convertible
Preferred Stock of Alamosa Holdings, Inc.
4.1 Indenture for 11% Senior Notes due 2010, dated as
of November 10, 2003, by and among Alamosa
(Delaware), Inc., the Subsidiary Guarantors party
thereto and Wells Fargo Bank Minnesota, N.A., as
trustee.
4.2 Indenture for 12% Senior Discount Notes due 2009,
dated as of November 10, 2003, by and among
Alamosa (Delaware), Inc., the Subsidiary
Guarantors party thereto and Wells Fargo Bank
Minnesota, N.A., as trustee.
4.3 Global Note relating to the 11% Senior Note due
2010.
4.4 Global Note relating to the 12% Senior Discount
Note due 2009.
4.5 Fourth Supplemental Indenture for 12 7/8% Senior
Discount Notes due 2010, dated as of September 11,
2003, by and among Alamosa (Delaware), Inc.,
Alamosa Holdings, Inc., the Subsidiary Guarantors
party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
4.6 Fifth Supplemental Indenture for 12 7/8% Senior
Discount Notes due 2010, dated as of October 29,
2003, by and among Alamosa (Delaware), Inc.,
Alamosa Holdings, Inc., the Subsidiary Guarantors
party thereto and Wells Fargo Bank Minnesota,
N.A., as trustee.
4.7 Third Supplemental Indenture for 12 1/2% Senior
Notes due 2011, dated as of September 11, 2003, by
and among Alamosa (Delaware), Inc., Alamosa
Holdings, Inc., the Subsidiary Guarantors party
thereto and Wells Fargo Bank Minnesota, N.A., as
trustee.
4.8 Fourth Supplemental Indenture for 12 1/2% Senior
Notes due 2011, dated as of October 29, 2003, by
and among Alamosa (Delaware), Inc., Alamosa
Holdings, Inc., the Subsidiary Guarantors party
thereto and Wells Fargo Bank Minnesota, N.A., as
trustee.
4.9 First Supplemental Indenture for 13 5/8% Senior
Notes due 2011, dated as of September 11, 2003, by
and among Alamosa (Delaware), Inc., Alamosa
Holdings, Inc., the Subsidiary Guarantors party
thereto and Wells Fargo Bank Minnesota, N.A., as
trustee.
40
4.10 Second Supplemental Indenture for 13 5/8% Senior
Notes due 2011, dated as of October 29, 2003, by
and among Alamosa (Delaware), Inc., Alamosa
Holdings, Inc., the Subsidiary Guarantors party
thereto and Wells Fargo Bank Minnesota, N.A., as
trustee.
10.1 Eighth Amendment and Waiver, dated as of October
27, 2003, to the Amended and Restated Credit
Agreement, among Alamosa Holdings, Inc., Alamosa
(Delaware), Inc., Alamosa Holdings, LLC, the
Lenders party thereto and Citicorp USA, Inc., as
Administrative Agent and Collateral Agent.
10.2 Addendum VI to Sprint PCS Management Agreement and
Sprint PCS Services Agreement, dated as of
September 12, 2003, by and among Sprint Spectrum
L.P., WirelessCo, L.P., Sprint Communications
Company L.P. and Washington Oregon Wireless, LLC.
10.3 Addendum X to Sprint PCS Management Agreement and
Sprint PCS Services Agreement, dated as of
September 12, 2003, by and among Sprint Spectrum
L.P., WirelessCo, L.P., Sprint Communications
Company L.P. and Texas Telecommunications LP.
10.4 Addendum V to Sprint PCS Management Agreement and
Sprint PCS Services Agreement, dated as of
September 12, 2003, by and among Sprint Spectrum
L.P., SprintCom, Inc., WirelessCo, L.P., Sprint
Communications Company L.P. and Southwest PCS,
L.P.
10.5 Addendum IX to Sprint PCS Management Agreement and
Sprint PCS Services Agreement, dated as of
September 12, 2003, by and among Sprint Spectrum
L.P., WirelessCo, L.P., Sprint Communications
Company L.P. and Alamosa Wisconsin Limited
Partnership.
10.6 Addendum X to Sprint PCS Management Agreement and
Sprint PCS Services Agreement, dated as of
September 12, 2003, by and among Sprint Spectrum
L.P., WirelessCo, L.P., Sprint Communications
Company L.P. and Alamosa Missouri, LLC.
10.7 Settlement Agreement and Mutual Release, dated as
of September 12, 2003, by and among Sprint
Spectrum L.P., SprintCom, Inc., Sprint
Communications Company L.P., WirelessCo, L.P.,
Alamosa Holdings, Inc., Alamosa (Delaware), Inc.,
Alamosa Missouri, LLC, Southwest PCS, L.P.,
Washington Oregon Wireless LLC, Alamosa Wisconsin
Limited Partnership and Texas Telecommunications,
LP.
10.8 Amendment to the Amended and Restated Alamosa
Holdings, Inc. Employee Stock Purchase Plan.
31.1 Certification of CEO Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
41
31.2 Certification of CFO Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
42