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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 005-58523
ALAMOSA (DELAWARE), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2843707
(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 Securities Exchange Act of 1934.
YES [ ] NO [X]
As of November 14, 2002 approximately 100 shares of common stock, $0.01 par
value per share, were issued and outstanding.
The registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is filing this form with the reduced disclosure
pursuant to General Instructions H(2)(b) and H(2)(c).
ALAMOSA (DELAWARE), INC.
TABLE OF CONTENTS
PAGE
- ---------------------------------------------------------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001...................................3
Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001, (unaudited)....4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001, (unaudited)..............5
Notes to the Consolidated Financial Statements....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................35
Item 4. Controls and Procedures...........................................................................................35
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................35
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...............................................................36
Item 5. Other Information.................................................................................................36
Item 6. Exhibits and Reports on Form 8-K..................................................................................36
SIGNATURES...................................................................................................................37
CERTIFICATIONS...............................................................................................................38
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA (DELAWARE), INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 56,411 $ 104,672
Short term investments -- 1,300
Restricted cash 34,988 51,687
Customer accounts receivable, net 49,994 42,740
Receivable from Sprint 9,080 9,137
Interest receivable 347 2,393
Inventory 5,717 4,802
Prepaid expenses and other assets 4,475 4,749
Deferred customer acquisition costs 6,560 5,181
Deferred tax asset 8,112 8,112
----------- -----------
Total current assets 175,684 234,773
Property and equipment, net 462,142 455,695
Debt issuance costs, net 34,561 36,654
Restricted cash -- 43,006
Goodwill -- 293,353
Intangible assets, net 498,438 528,840
Other noncurrent assets 7,712 6,087
----------- -----------
Total assets $ 1,178,537 $ 1,598,408
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 15,900 $ 44,012
Accrued expenses 30,999 29,291
Payable to Sprint 25,946 16,133
Interest payable 9,304 22,123
Deferred revenue 17,943 15,479
Current installments of capital leases 856 596
----------- -----------
Total current liabilities 100,948 127,634
----------- -----------
Long term liabilities:
Capital lease obligations 1,767 1,983
Other noncurrent liabilities 10,720 7,496
Senior secured debt 200,000 187,162
12 7/8% senior discount notes 260,573 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
Deferred tax liability 44,385 98,940
----------- -----------
Total long term liabilities 917,445 932,788
----------- -----------
Total liabilities 1,018,393 1,060,422
----------- -----------
Commitments and contingencies (see Note 11) -- --
Stockholder's equity:
Preferred stock, $.01 par value; 1,000 shares authorized; no
shares issued -- --
Common stock, $.01 par value; 9,000 shares authorized,
100 and 100 shares issued and outstanding, respectively -- --
Additional paid-in capital 800,871 800,293
Accumulated deficit (639,087) (261,371)
Accumulated other comprehensive loss, net of tax (1,640) (936)
----------- -----------
Total stockholder's equity 160,144 537,986
----------- -----------
Total liabilities and stockholder's equity $ 1,178,537 $ 1,598,408
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ---------- ---------- ----------
Revenues:
Subscriber revenues $ 103,642 $ 67,559 $ 289,720 $ 151,372
Roaming revenues 39,129 31,594 99,154 67,204
---------- ---------- ---------- ----------
Total service revenues 142,771 99,153 388,874 218,576
Product sales 4,657 8,721 17,730 18,668
---------- ---------- ---------- ----------
Total revenue 147,428 107,874 406,604 237,244
---------- ---------- ---------- ----------
Costs and expenses:
Cost of service and operations 92,560 67,698 256,378 154,620
Cost of products sold 12,904 16,591 36,134 35,150
Selling and marketing 32,503 31,367 88,360 73,929
General and administrative expenses (excluding
non-cash compensation of $0 and $0 for the
three months ended September 30, 2002 and 2001,
respectively, and $0 and $183 for the nine
months ended September 30, 2002 and 2001,
respectively) 4,102 3,535 10,890 10,602
Depreciation and amortization 26,897 27,305 78,104 64,476
Impairment of goodwill 291,635 -- 291,635 --
Impairment of property and equipment -- -- 1,332 --
Non-cash compensation -- -- -- 183
---------- ---------- ---------- ----------
Total costs and expenses 460,601 146,496 762,833 338,960
---------- ---------- ---------- ----------
Loss from operations (313,173) (38,622) (356,229) (101,716)
Interest and other income 678 2,531 2,882 10,718
Interest expense (26,158) (23,626) (76,832) (58,289)
---------- ---------- ---------- ----------
Net loss before income tax benefit and
extraordinary item (338,653) (59,717) (430,179) (149,287)
Income tax benefit 17,806 22,005 52,463 53,311
---------- ---------- ---------- ----------
Net loss before extraordinary item (320,847) (37,712) (377,716) (95,976)
Loss on debt extinguishment, (net of tax benefit
of $0 and $0 for the three months ended September
30, 2002 and 2001, respectively, and $0 and $1,969
for the nine months ended September 30, 2002
and 2001, respectively) -- -- -- (3,503)
---------- ---------- ---------- ----------
Net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
2002 2001
---------------- --------------
Cash flows from operating activities:
Net loss $ (377,716) $ (99,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash compensation -- 183
Provision for bad debts 32,765 4,338
Non-cash interest expense on derivative instruments 503 --
Depreciation and amortization of property and equipment 47,702 30,745
Amortization of intangible assets 30,402 33,731
Amortization of financing costs included in
interest expense 3,148 2,231
Amortization of discounted interest 297 --
Loss on debt extinguishment, net of tax -- 3,503
Deferred tax benefit (52,463) (53,311)
Interest accreted on discount notes 23,365 20,679
Impairment of property and equipment 1,332 --
Impairment of goodwill 291,635 --
Loss from asset disposition 30 39
Increase in, net of effects from acquisitions:
Receivables (37,916) (32,416)
Inventory (915) (842)
Prepaid expenses and other assets (2,825) (3,283)
Decrease in, net of effects from acquisitions:
Accounts payable and accrued expenses (897) (4,533)
----------- ----------
Net cash used in operating activities (41,553) (98,415)
----------- ----------
Cash flows from investing activities:
Proceeds from sale of assets 1,673 --
Purchases of property and equipment (80,939) (101,462)
Repayment of notes receivable -- 11,860
Acquisition related costs -- (37,617)
Net change in short term investments 1,300 1,600
Other 58 --
----------- ----------
Net cash used in investing activities (77,908) (125,619)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of senior notes -- 384,046
Borrowings under senior secured debt 12,838 203,000
Repayments of borrowings under senior secured debt -- (289,422)
Debt issuance costs (1,350) (16,315)
Capital contribution from parent 577 577
Payments on capital leases (570) (205)
Change in restricted cash 59,705 (96,336)
----------- ----------
Net cash provided by financing activities 71,200 185,345
----------- ----------
Net decrease in cash and cash equivalents (48,261) (38,689)
Cash and cash equivalents at beginning of period 104,672 141,768
----------- ----------
Cash and cash equivalents at end of period $ 56,411 $ 103,079
=========== ==========
Supplemental disclosure of non-cash financing
and investing activities:
Capitalized lease obligations incurred $ 613 $ 1,188
Change in accounts payable for purchases of
property and equipment (24,368) 981
The accompanying notes are an integral part of the consolidated financial
statements.
5
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of September 30, 2002, the
unaudited consolidated statements of operations for the three and nine
months ended September 30, 2002 and 2001, the unaudited consolidated
statements of cash flows for the nine months ended September 30, 2002
and 2001, 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 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, 2001. 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 and nine
months ended September 30, 2002 are not necessarily indicative of
results that may be expected for the year ending December 31, 2002.
Certain reclassifications have been made to prior period balances to
conform to current period presentation.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa (Delaware), Inc. is a direct wholly owned subsidiary of Alamosa
PCS Holdings, Inc. and an indirect wholly owned subsidiary of Alamosa
Holdings, Inc. ("Alamosa Holdings"). 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)"), 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") membership interests, and Alamosa became
wholly owned by Alamosa (Delaware). These financial statements are
presented as if the reorganization had occurred as of the beginning of
the periods presented. Alamosa (Delaware) and its subsidiaries are
collectively referred to in these financial statements as the
"Company."
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."
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 New York Stock Exchange under the symbol "APS." Alamosa
(Delaware) remains the issuer of the Company's public debt.
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.
As of September 30, 2002, the Company had $56,411 in cash and cash
equivalents plus an additional $34,988 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. Management
believes that this $116,399 in cash and available borrowings is
sufficient to fund working capital, capital expenditure and debt
service requirements through the point where the Company generates free
cash flow.
6
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
On September 26, 2002 the Company entered into the sixth amendment to
the amended and restated credit agreement relative to the Senior
Secured Credit Facility which among other things, extended Stage I
covenants for an additional quarter and modified certain financial and
statistical covenants. Specifically, the new agreement modified the
covenant addressing minimum subscribers such that the minimum
subscriber requirement is now 575,000 at September 30, 2002, 610,000 at
December 31, 2002 and 620,000 at March 31, 2003. As a result of the
amendment, the Company is required to maintain a minimum cash balance
of $10,000. In addition to the covenant modifications, the overall
interest rate was increased by 25 basis points such that the interest
margin as a result of the amendment is 4.25% for LIBOR borrowings and
3.25% for base rate borrowings.
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 leverage ratio is less than or equal to 5.5 to 1.
Management does not anticipate the need to raise additional capital in
the foreseeable future. The Company's funding status is dependent on a
number of factors influencing projections of operating cash flows
including those related to subscriber growth, average revenue per user
("ARPU"), 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 favorable terms.
4. MERGERS WITH ROBERTS WIRELESS COMMUNICATIONS, L.L.C., WASHINGTON
OREGON WIRELESS, LLC, AND SOUTHWEST PCS HOLDINGS, INC.
Alamosa Holdings completed the acquisitions of three PCS Affiliates of
Sprint during the first quarter of 2001. On February 14, 2001, Alamosa
Holdings completed its acquisitions of Roberts Wireless Communications,
L.L.C. ("Roberts") and Washington Oregon Wireless, LLC ("WOW"). In
connection with the Roberts and WOW acquisitions, the Company entered
into a new senior secured credit facility (the "Senior Secured Credit
Facility") for up to $280 million. On March 30, 2001, Alamosa Holdings
completed its acquisition of Southwest PCS Holdings, Inc.
("Southwest"). In connection with the Southwest acquisition, the
Company increased the Senior Secured Credit Facility from $280 million
to $333 million. Each of these transactions was accounted for under the
purchase method of accounting and the results of the acquired companies
are included in these consolidated financial statements from the date
of acquisition.
The merger consideration in the Roberts acquisition consisted of 13.5
million shares of Alamosa Holdings' common stock and approximately $4.0
million in cash. The Company also assumed the net debt of Roberts in
the transaction, which amounted to approximately $57 million as of
February 14, 2001.
The merger consideration in the WOW acquisition consisted of 6.05
million shares of Alamosa Holdings' common stock and approximately
$12.5 million in cash. The Company also assumed the net debt of WOW in
the transaction, which amounted to approximately $31 million as of
February 14, 2001.
The merger consideration in the Southwest acquisition consisted of 11.1
million shares of Alamosa Holdings' common stock and approximately $5.0
million in cash. The Company also assumed the net debt of Southwest in
the transaction, which amounted to approximately $81 million as of
March 30, 2001.
The Company obtained independent valuations as of the date of
acquisition of Roberts, WOW and Southwest to allocate the purchase
price. The results of the allocations are as follows:
7
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
ROBERTS WOW SOUTHWEST TOTAL
---------- --------- ------------ -----------
Consideration:
Common stock issued $ 291,060 $ 130,438 $ 123,543 $ 545,041
Stock options granted 1,134 -- -- 1,134
Cash (including merger related costs) 8,940 15,962 12,715 37,617
---------- --------- ------------ -----------
Total 301,134 146,400 136,258 583,792
---------- --------- ------------ -----------
Allocated to:
Current assets 4,545 1,969 5,923 12,437
Property, plant and equipment 53,506 35,732 36,722 125,960
Intangible assets (other than goodwill) 258,300 116,400 187,000 561,700
Liabilities acquired (including deferred taxes) (185,452) (85,433) (152,955) (423,840)
---------- --------- ------------- -----------
Goodwill $ 170,235 $ 77,732 $ 59,568 $ 307,535
========== ========= ============ ==========
The unaudited pro forma condensed consolidated statement of operations
for the nine months ended September 30, 2001 set forth below, presents
the results of operations as if the acquisitions had occurred at the
beginning of the period and are not necessarily indicative of future
results or actual results that would have been achieved had these
acquisitions occurred as of the beginning of the period.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
---------------------
(UNAUDITED)
Total revenues $ 256,166
=========
Net loss before income tax benefit
and extraordinary item $(173,023)
Income tax benefit 61,128
---------
Net loss before extraordinary item (111,895)
Loss on debt extinguishment, net of tax
benefit of $1,969 (3,503)
---------
Net loss $(115,398)
=========
5. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable represent
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 $10.1 million and $5.9 million at
September 30, 2002 and December 31, 2001, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets includes net roaming revenue receivable
from Sprint. This receivable also includes amounts billed by Sprint on
the Company's behalf to other communications providers for calls
terminated on the Company's network. In addition, this item includes
accruals for estimated unbilled revenue through the end of the period.
8
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
Receivable from Sprint consists of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Net roaming receivable $ 5,170 $ 1,731
Access and interconnect revenue receivable (130) 3,252
Accrued service revenue 4,040 4,154
-------- -------
$ 9,080 $ 9,137
======== =======
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation of
$106.5 million and $60.9 million at September 30, 2002 and December 31,
2001, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisitions completed during 2001 discussed in
Note 4, 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. In
addition to the identifiable intangibles, goodwill was recorded in the
amount by which the purchase price exceeded the fair value of the net
assets acquired including identified intangibles.
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 3 years.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial recognition.
The provisions of SFAS No. 142 (i) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (ii) require that
goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating
that the carrying value may be impaired), (iii) require that reporting
units be identified for the purpose of assessing potential future
impairments of goodwill and (iv) remove the forty year limitation on
the amortization period of intangible assets that have finite lives. As
of December 31, 2001, the Company had recorded $15.9 million in
accumulated amortization of goodwill. Upon the adoption of SFAS No. 142
the amortization of goodwill was discontinued.
SFAS No. 142 requires that goodwill and indefinite-lived intangible
assets be tested annually for impairment using a two-step process. The
first step is to identify a potential impairment by comparing the fair
value of reporting units to their carrying value and, upon adoption,
must be measured as of the beginning of the fiscal year. As of January
1, 2002, the results of the first step indicated no potential
impairment of the Company's goodwill. The Company will perform this
assessment annually and the first such assessment was done as of July
31, 2002.
The annual assessment as of July 31, 2002 was performed with the
assistance of a nationally recognized appraisal firm. In performing the
evaluation, the appraisal firm used information from various sources
including, but not limited to, current stock price, transactions
involving similar companies, the business plan prepared by management
and current and past operating results of the Company. The appraisal
firm used a combination of the guideline transaction approach, the
discounted cash flow approach and the public price approach to
determine the fair value of Alamosa Holdings which had been determined
to be the single reporting unit. The guideline transaction approach
used a sample of recent wireless service provider transactions to
determine an average price per POP and price per customer. The
discounted cash flow approach used the
9
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
projected discounted future cash flows and residual values of Alamosa
Holdings to determine the indicated value of invested capital. The
public price approach was based on the market price for Alamosa
Holdings' publicly traded equity securities along with an estimated
premium for control. This was combined with the carrying value of the
Company's debt securities to arrive at the indicated value of invested
capital. The results of this valuation indicated that the fair value
of the reporting unit was less than the carrying amount.
Based on the indicated impairment resulting from this valuation, the
Company proceeded to the second step of the annual impairment testing
which involves allocating the fair value of the reporting unit to its
identifiable assets and liabilities as if the reporting unit had been
acquired in a business combination where the purchase price is
considered to be the fair value of the reporting unit. Any unallocated
purchase price is considered to be the implied fair value of goodwill.
The second step of this impairment test has not been completed as of
the filing of the Form 10-Q for the quarter ended September 30, 2002
and will be completed in the fourth quarter of 2002. An impairment
charge of $291,635 was recorded in the third quarter of 2002 to reflect
management's best estimate of the potential goodwill impairment as of
July 31, 2002. After the completion of the second step, any change in
the estimated amount of impairment will be recorded in the fourth
quarter of 2002. This impairment charge is included as a separate line
item in the consolidated statements of operations for the three and
nine months ended September 30, 2002.
The impairment of goodwill was deemed to be a "triggering event"
requiring impairment testing of the Company's other long-lived assets
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 additional impairment was recorded as a result
of this test.
Goodwill and intangible assets consist of:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Goodwill $ -- $ 293,353
========== ==========
Intangible assets:
Sprint affiliation and other agreements $ 532,200 $ 532,200
Accumulated amortization (47,900) (25,768)
---------- ----------
Subtotal 484,300 506,432
---------- ----------
Subscriber base acquired 29,500 29,500
Accumulated amortization (15,362) (7,092)
---------- ----------
Subtotal 14,138 22,408
---------- ----------
Intangible assets, net $ 498,438 $ 528,840
========== ==========
Amortization expense relative to intangible assets was $10,267 and
$30,402 for the three and nine months ended September 30, 2002 and will
be $10,017 for the remainder of 2002.
10
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 $ 40,419
2003 40,067
2004 32,079
2005 30,234
2006 30,234
Thereafter 355,807
----------
$ 528,840
==========
The following tables present net loss before extraordinary item and net
loss amounts as if the provisions of SFAS 142 had been adopted January
1, 2001:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
2002 2001 2002 2001
---------- ---------- ------------ ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Reported net loss before
extraordinary item $ (320,847) $ (37,712) $ (377,716) $ (95,976)
Add back: goodwill amortization -- 4,634 -- 10,803
---------- ---------- ---------- ----------
Adjusted net loss before
extraordinary item $ (320,847) $ (33,078) $ (377,716) $ (85,173)
========== ========== ========== ==========
Reported net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
Add back: goodwill amortization -- 4,634 -- 10,803
---------- ---------- ---------- ----------
Adjusted net loss $ (320,847) $ (33,078) $ (377,716) $ (88,676)
========== ========== ========== ==========
8. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Senior secured debt $ 200,000 $ 187,162
12 7/8% senior discount notes 260,573 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
---------- ----------
Total debt 860,573 824,369
Less current maturities -- --
---------- ----------
Long-term debt, excluding current maturities $ 860,573 $ 824,369
========== ==========
SENIOR SECURED CREDIT FACILITY
On February 14, 2001, Alamosa Holdings, 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; EDC as co-documentation agent;
First Union National Bank, as documentation agent; and a syndicate of
banking and financial institutions. On March 30, 2001, this credit
facility was amended to increase the facility to $333 million in
relation to the acquisition of Southwest. This credit facility was
again amended in August 2001 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 February 11, 2002, the Company drew the remaining $12,838
on the term portion of the Senior Secured Credit Facility. No advances
have been taken on the revolving portion of the Senior Secured Credit
Facility.
11
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
Interest on the Senior Secured Credit Facility accrues at the option of
the Company at either (i) the London Interbank Offered Rate ("LIBOR")
adjusted for any statutory reserve, 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. These margins are subject to adjustment under certain
conditions.
Repayment of amounts borrowed under the Senior Secured Credit Facility
will begin on May 14, 2004 and payment will be made quarterly
thereafter in amounts to be agreed upon by the Company and the lenders.
On September 26, 2002 the Company entered into the sixth amendment to
the amended and restated credit agreement which among other things,
extended Stage I covenants for an additional quarter and modified
certain financial and statistical covenants. Specifically, the new
agreement modified the covenant addressing minimum subscribers such
that the minimum subscriber requirement is now 575,000 at September 30,
2002, 610,000 at December 31, 2002 and 620,000 at March 31, 2003. In
addition to the covenant modifications, the overall interest rate was
increased by 25 basis points such that the interest margin as a result
of the amendment is 4.25% for LIBOR borrowings and 3.25% for base rate
borrowings.
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 leverage ratio is less than or equal to 5.5 to 1.
NORTEL/EDC CREDIT FACILITY
On February 14, 2001, the outstanding balance of $54,524 related to the
Nortel/EDC Credit Facility, which was originally entered into in 1999,
was paid in full plus accrued interest in the amount of $884 with
proceeds from the Senior Secured Credit Facility. The Company was
refunded $1,377 of the original issuance cost as a result of the early
extinguishment. The balance of unamortized cost totaling $5,472 was
written off and classified as an extraordinary item (net of an income
tax benefit of $1,969) in the quarter ended March 31, 2001.
12 7/8% SENIOR DISCOUNT NOTES
On December 23, 1999, Alamosa (Delaware) filed a registration statement
with the Securities and Exchange Commission for the issuance of $350
million face amount of senior discount notes (the "12 7/8% Senior
Discount Notes Offering"). The 12 7/8% Senior Discount Notes Offering
was completed on February 8, 2000 and generated net proceeds of
approximately $181 million after underwriters' commissions and expenses
of approximately $6.1 million. The 12 7/8% Senior Discount Notes mature
in ten years (February 15, 2010) and carry a coupon rate of 12 7/8%,
and provides 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 $75 million of the Nortel credit facility
that was in place at the time, to pay costs to build out the system, to
fund operating working capital needs and for other general corporate
purposes.
12 1/2% SENIOR NOTES
On January 31, 2001, Alamosa (Delaware) consummated the offering (the
"12 1/2% Senior 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%, 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 discounts
and commissions to the initial purchasers and offering expenses.
12
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
Approximately $59 million of the proceeds of the 12 1/2% Senior Notes
Offering were 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 the Company; 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.
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 discounts
and commissions to the initial purchasers and offering expenses.
Approximately $39.1 million of the proceeds of the 13 5/8% Notes
Offering were 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 13 5/8% Senior Notes, the
12 1/2% Senior Notes and the 12 7/8% Senior Discount Notes.
Approximately $66 million of the proceeds were used to pay down a
portion of the Senior Secured Credit Facility. The balance was used for
general corporate purposes.
9. 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 the Roberts, WOW and Southwest mergers.
The effective tax rate differs from the statutory rate in 2002
primarily due to the fact that the impairment of goodwill is not
deductible for tax purposes.
10. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company adopted SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" on January 1, 2001. 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 $550 and
$ 1,608 in cash settlements under derivative instruments classified as
hedges is included in interest expense for the three and nine months
ended September 30, 2002.
As of September 30, 2002, the Company has recorded $3,813 in "other
noncurrent liabilities" relative to the fair value of derivative
instruments including $2,650 representing derivative instruments that
qualify for hedge accounting under SFAS No. 133. In addition, the
Company has recorded $12 in "other noncurrent assets" at September 30,
2002 related to the fair value of derivative instruments. 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. During the nine month period ended September 30,
2001, the Company recognized losses of $1,228 (net of income tax
benefit of $680) in other comprehensive income. Other Comprehensive
income appears as a separate component of Stockholder's Equity as
"Accumulated other comprehensive income," as illustrated below:
13
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
Three months ended September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
-------------- ------------ --------------- -------------
Net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
Change in fair values of
derivative instruments, net
of income tax benefit of
$279, $773, $431 and $680,
respectively (456) (1,394) (704) (1,228)
------------ ----------- ----------- -----------
Comprehensive loss $ (321,303) $ (39,106) $ (378,420) $ (100,707)
============ =========== =========== ===========
11. 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 relative to terminating
access fees. Although the Company intends to contest the refund of
these amounts, a liability has been recorded in the consolidated
financial statements as of September 30, 2002.
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 complaints allege, among other
things, that the registration statement and prospectus filed with the
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.
The Court has ordered that these putative class actions against the
Company, along with hundreds of IPO allocation cases against other
issuers, be transferred for coordinated pre-trial proceedings. At a
status conference held on September 7, 2001, the Court adjourned all
defendants' time to respond to the complaints until further order of
the Court. These cases remain at a preliminary stage and no discovery
proceedings have taken place.
On January 23, 2001, Jerry Brantley, President and COO of the Company,
terminated his employment with the Company at the unanimous request of
the board of directors. On April 29, 2002, Mr. Brantley initiated
litigation against the Company and the chairman of the Company, David
E. Sharbutt, alleging wrongful termination among other things. The
Company believes that there is no basis for Mr. Brantley's claim and
intends to vigorously defend the lawsuit.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. The ultimate disposition of these
matters are not expected to have a material adverse impact on the
Company's financial position, results of operations or liquidity.
NYSE LISTING REQUIREMENTS - Alamosa Holdings is listed on the New York
Stock Exchange ("NYSE") and is subject to various listing requirements
set forth by the NYSE. Alamosa Holdings received written notice from
the NYSE on August 29, 2002 indicating that Alamosa Holdings had fallen
below the requirements to (1) maintain an average closing price that is
not less than $1.00 per share over a consecutive 30 trading-day period
14
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
and (2) to maintain an average global market capitalization over a
consecutive 30 trading-day period of not less than $100 million.
Alamosa Holdings submitted a proposed business plan to the NYSE on
October 15, 2002 to address plans to cure the violations of listing
requirements and is awaiting approval of the plan by the NYSE.
12. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("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. The Company is in the process of evaluating the
impact that the adoption of SFAS No. 143 will have on the Company's
results of operations, financial position and cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. The provisions of SFAS No. 144
are effective for financial statements issued for fiscal years
beginning after December 31, 2001. As discussed in Note 7, the
impairment of goodwill recorded as a result of the Company's annual
testing under SFAS 142 triggered an impairment analysis under SFAS 144
relative to the Company's other long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Recission 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 is expected to
result in a reclassification of the extinguishment of debt that the
Company previously reported in the three-month period ended March 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 are not
expected to have a material impact on the Company's results of
operations, financial position or cash flows.
15
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
13. GUARANTOR FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(UNAUDITED)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- ------------- ------------- ------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,883 $ 37,437 $ 15,091 $ -- $ 56,411
Restricted cash 34,988 -- -- -- 34,988
Customer accounts receivable, net -- 49,994 -- -- 49,994
Receivable from Sprint -- 9,080 -- -- 9,080
Interest receivable 347 -- -- -- 347
Intercompany receivable 108,562 -- -- (108,562) --
Inventory -- 5,717 -- -- 5,717
Investment in subsidiary 659,879 -- -- (659,879) --
Prepaid expenses and other assets 12 4,463 -- -- 4,475
Deferred customer acquisition costs -- 6,560 -- -- 6,560
Deferred tax asset -- 8,112 -- -- 8,112
----------- ----------- ------------ ------------ -----------
Total current assets 807,671 121,363 15,091 (768,441) 175,684
Notes receivable -- 35,005 -- (35,005) --
Property and equipment, net -- 462,142 -- -- 462,142
Debt issuance costs, net 21,081 13,480 -- -- 34,561
Intangible assets, net -- 498,438 -- -- 498,438
Other noncurrent assets -- 7,712 -- -- 7,712
----------- ----------- ------------ ------------ -----------
Total assets $ 828,752 $ 1,138,140 $ 15,091 $ (803,446) $ 1,178,537
=========== =========== ============ ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 15,900 $ -- $ -- $ 15,900
Accrued expenses 272 30,727 -- -- 30,999
Payable to Sprint -- 25,946 -- -- 25,946
Interest payable 7,763 1,541 -- -- 9,304
Deferred revenue -- 17,943 -- -- 17,943
Intercompany payable -- 93,873 14,689 (108,562) --
Current installments of capital leases -- 856 -- -- 856
----------- ----------- ------------ ------------ -----------
Total current liabilities 8,035 186,786 14,689 (108,562) 100,948
Capital lease obligations -- 1,767 -- -- 1,767
Other noncurrent liabilities -- 45,725 -- (35,005) 10,720
Senior secured debt -- 200,000 -- -- 200,000
12 7/8% senior discount notes 260,573 -- -- -- 260,573
12 1/2% senior notes 250,000 -- -- -- 250,000
13 5/8% senior notes 150,000 -- -- -- 150,000
Deferred tax liability -- 44,385 -- -- 44,385
----------- ----------- ------------ ------------ -----------
Total liabilities 668,608 478,663 14,689 (143,567) 1,018,393
----------- ----------- ------------ ------------ -----------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- 485 -- (485) --
Additional paid-in capital 800,871 1,162,262 (4,000) (1,158,262) 800,871
Accumulated (deficit) earnings (639,087) (501,630) 4,402 497,228 (639,087)
Accumulated other comprehensive
loss, net of tax (1,640) (1,640) -- 1,640 (1,640)
----------- ----------- ------------ ------------ ------------
Total stockholder's equity 160,144 659,477 402 (659,879) 160,144
----------- ----------- ------------ ------------ -----------
Total liabilities and stockholder's
equity $ 828,752 $ 1,138,140 $ 15,091 $ (803,446) $ 1,178,537
=========== =========== ============ ============ ===========
16
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- -------------- --------------- --------------
Revenues:
Subscriber revenues $ -- $ 103,642 $ -- $ -- $ 103,642
Roaming revenues -- 39,129 -- -- 39,129
------------ ----------- ------------ ---------- ------------
Total service revenues -- 142,771 -- -- 142,771
Product sales -- 4,657 -- -- 4,657
------------ ----------- ------------ ---------- ------------
Total revenue -- 147,428 -- -- 147,428
Costs and expenses:
Cost of service and operations -- 92,560 -- -- 92,560
Cost of products sold -- 12,904 -- -- 12,904
Selling and marketing -- 32,503 -- -- 32,503
General and administrative expenses 42 4,060 -- -- 4,102
Depreciation and amortization -- 26,897 -- -- 26,897
Impairment of goodwill -- 291,635 -- -- 291,635
------------ ----------- ------------ ---------- ------------
Loss from operations (42) (313,131) -- -- (313,173)
Equity in loss of subsidiaries (299,733) -- -- 299,733 --
Interest and other income 476 185 17 -- 678
Interest expense (21,548) (4,610) -- -- (26,158)
------------ ----------- ------------ ---------- ------------
Net income (loss) before income
tax benefit (320,847) (317,556) 17 299,733 (338,653)
Income tax benefit -- 17,806 -- -- 17,806
------------ ----------- ------------ ---------- ------------
Net income (loss) $ (320,847) $ (299,750) $ 17 $ 299,733 $ (320,847)
============ =========== ============ ========== ============
17
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------ -------------- ------------- ------------- --------------
Revenues:
Subscriber revenues $ -- $ 289,720 $ -- $ -- $ 289,720
Roaming revenues -- 99,154 -- -- 99,154
------------ ----------- ------------ ---------- ------------
Total service revenues -- 388,874 -- -- 388,874
Product sales -- 17,730 -- -- 17,730
------------ ----------- ------------ ---------- ------------
Total revenue -- 406,604 -- -- 406,604
Costs and expenses:
Cost of service and operations -- 256,378 -- -- 256,378
Cost of products sold -- 36,134 -- -- 36,134
Selling and marketing -- 88,360 -- -- 88,360
General and administrative expenses 133 10,757 -- -- 10,890
Depreciation and amortization -- 78,104 -- -- 78,104
Impairment of goodwill -- 291,635 -- -- 291,635
Impairment of property and equipment -- 1,332 -- -- 1,332
----------- ----------- ------------ ---------- ------------
Loss from operations (133) (356,096) -- -- (356,229)
Equity in loss of subsidiaries (315,517) -- -- 315,517 --
Interest and other income 1,832 974 76 -- 2,882
Interest expense (63,898) (12,934) -- -- (76,832)
------------ ----------- ------------ ---------- ------------
Net income (loss) before income tax
benefit (377,716) (368,056) 76 315,517 (430,179)
Income tax benefit -- 52,463 -- -- 52,463
----------- ----------- ------------ ---------- ------------
Net income (loss) $ (377,716) $ (315,593) $ 76 $ 315,517 $ (377,716)
=========== =========== ============ ========== ============
18
ALAMOSA (DELAWARE), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands, except as noted)
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- --------------- ------------- ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (377,716) $ (315,593) $ 76 $ 315,517 $(377,716)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Equity in loss of subsidiaries 315,517 -- -- (315,517) --
Provision for bad debt -- 32,765 -- -- 32,765
Non-cash interest expense on hedge -- 503 -- -- 503
arrangements
Depreciation and amortization of property
and equipment -- 47,702 -- -- 47,702
Amortization of intangible assets -- 30,402 -- -- 30,402
Amortization of financing costs included in
interest expense 1,471 1,677 -- -- 3,148
Amortization of discounted interest 297 -- -- -- 297
Deferred tax benefit -- (52,463) -- -- (52,463)
Interest accreted on discount note 23,365 -- -- -- 23,365
Impairment of property and equipment -- 1,332 -- -- 1,332
Impairment of goodwill -- 291,635 -- -- 291,635
Loss from asset disposition -- 30 -- -- 30
(Increase) decrease in:
Receivables 2,046 (39,962) -- -- (37,916)
Inventory -- (915) -- -- (915)
Prepaid expenses and other assets 3 (2,828) -- -- (2,825)
Increase (decrease) in:
Accounts payable and accrued expenses (13,371) 12,474 -- -- (897)
------------ ----------- -------- ----------- ---------
Net cash provided by (used in) operating
activities (48,388) 6,759 76 -- (41,553)
------------ ----------- -------- ----------- ---------
Cash flows from investing activities:
Proceeds from sale of assets -- 1,673 -- -- 1,673
Purchases of property and equipment -- (80,939) -- -- (80,939)
Intercompany receivable 578 (578) -- -- --
Net change in short term investments 1,300 -- -- -- 1,300
Other -- 58 -- -- 58
------------ ----------- -------- ----------- ---------
Net cash provided by (used in)
investing activities 1,878 (79,786) -- -- (77,908)
------------ ----------- -------- ----------- ---------
Cash flows from financing activities:
Capital contributions -- 577 -- -- 577
Borrowings under senior secured debt -- 12,838 -- -- 12,838
Debt issuance costs -- (1,350) -- -- (1,350)
Payments on capital leases -- (570) -- -- (570)
Change in restricted cash 47,852 11,853 -- -- 59,705
------------ ----------- -------- ----------- ---------
Net cash provided by financing activities 47,852 23,348 -- -- 71,200
------------ ----------- -------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents 1,342 (49,679) 76 -- (48,261)
Cash and cash equivalents at beginning of
period 2,541 87,116 15,015 -- 104,672
------------ ----------- -------- ----------- ---------
Cash and cash equivalents at end of period $ 3,883 $ 37,437 $ 15,091 $ -- $ 56,411
============ =========== ======== =========== =========
19
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- -------------- ------------- -------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,541 $ 87,116 $ 15,015 $ -- $ 104,672
Short term investments 1,300 -- -- -- 1,300
Restricted cash 51,687 -- -- -- 51,687
Customer accounts receivable, net -- 42,740 -- -- 42,740
Receivable from Sprint -- 9,137 -- -- 9,137
Interest receivable 2,393 -- -- -- 2,393
Intercompany receivable 109,140 -- -- (109,140) --
Inventory -- 4,802 -- -- 4,802
Investment in subsidiary 975,523 -- -- (975,523) --
Prepaid expenses and other assets 16 4,733 -- -- 4,749
Deferred customer acquisition costs -- 5,181 -- -- 5,181
Deferred tax asset -- 8,112 -- -- 8,112
----------- ------------ ------------ ------------ -----------
Total current assets 1,142,600 161,821 15,015 (1,084,663) 234,773
Notes receivable -- 35,005 -- (35,005) --
Property and equipment, net -- 455,695 -- -- 455,695
Debt issuance costs, net 22,848 13,806 -- -- 36,654
Restricted cash 31,153 11,853 -- -- 43,006
Goodwill, net -- 293,353 -- -- 293,353
Intangible assets, net -- 528,840 -- -- 528,840
Other noncurrent assets -- 6,087 -- -- 6,087
----------- ------------ ------------ ------------ -----------
Total assets $ 1,196,601 $ 1,506,460 $ 15,015 $ (1,119,668) $ 1,598,408
=========== ============ ============ ============= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 44,012 $ -- $ -- $ 44,012
Accrued expenses 723 28,568 -- -- 29,291
Payable to Sprint -- 16,133 -- -- 16,133
Interest payable 20,685 1,438 -- -- 22,123
Deferred revenue -- 15,479 -- -- 15,479
Intercompany payable -- 94,451 14,689 (109,140) --
Current installments of capital leases -- 596 -- -- 596
----------- ------------ ------------ ------------ -----------
Total current liabilities 21,408 200,677 14,689 (109,140) 127,634
Capital lease obligations -- 1,983 -- -- 1,983
Other noncurrent liabilities -- 42,501 -- (35,005) 7,496
Senior secured debt -- 187,162 -- -- 187,162
12 7/8% senior discount notes 237,207 -- -- -- 237,207
12 1/2% senior notes 250,000 -- -- -- 250,000
13 5/8% senior notes 150,000 -- -- -- 150,000
Deferred tax liability -- 98,940 -- -- 98,940
----------- ------------ ------------ ------------ -----------
Total liabilities 658,615 531,263 14,689 (144,145) 1,060,422
----------- ------------ ------------ ------------ -----------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- 485 -- (485) --
Additional paid-in capital 800,293 1,161,685 (4,000) (1,157,685) 800,293
Accumulated (deficit) earnings (261,371) (186,037) 4,326 181,711 (261,371)
Accumulated other comprehensive loss,
net of tax (936) (936) -- 936 (936)
----------- ------------ ------------ ------------ ------------
Total stockholder's equity 537,986 975,197 326 (975,523) 537,986
----------- ------------ ------------ ------------ -----------
Total liabilities and
stockholder's equity $ 1,196,601 $ 1,506,460 $ 15,015 $ (1,119,668) $ 1,598,408
=========== ============ ============ ============ ===========
20
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- -------------- --------------- --------------
Revenues:
Subscriber revenues $ -- $ 67,559 $ -- $ -- $ 67,559
Roaming revenues -- 31,594 -- -- 31,594
------------ ----------- ------------ ---------- ------------
Total service revenues -- 99,153 -- -- 99,153
Product sales -- 8,721 -- -- 8,721
------------ ----------- ------------ ---------- ------------
Total revenue -- 107,874 -- -- 107,874
Costs and expenses:
Cost of service and operations -- 67,698 -- -- 67,698
Cost of products sold -- 16,591 -- -- 16,591
Selling and marketing -- 31,367 -- -- 31,367
General and administrative
expenses 186 3,349 -- -- 3,535
Depreciation and amortization -- 27,305 -- -- 27,305
----------- ----------- ------------ ---------- ------------
Loss from operations (186) (38,436) -- -- (38,622)
Equity in loss of subsidiaries (20,670) -- -- 20,670 --
Interest and other income 1,386 1,036 109 -- 2,531
Interest expense (18,242) (5,384) -- -- (23,626)
----------- ----------- ------------ ---------- ------------
Net income (loss) before
income tax benefit (37,712) (42,784) 109 20,670 (59,717)
Income tax benefit -- 22,005 -- -- 22,005
----------- ----------- ------------ ---------- ------------
Net income (loss) $ (37,712) $ (20,779) $ 109 $ 20,670 $ (37,712)
===========- ===========- ============ ========== =============
21
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED, IN THOUSANDS)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ----------- ------------- ------------- -----------------
Revenues:
Subscriber revenues $ -- $ 151,372 $ -- $ -- $ 151,372
Roaming and travel revenues -- 67,204 -- -- 67,204
------------ ----------- ------------ ----------- ------------
Total services revenues -- 218,576 -- -- 218,576
Product sales -- 18,668 -- -- 18,668
------------ ----------- ------------ ----------- ------------
Total revenue -- 237,244 -- -- 237,244
Cost of service and operations -- 154,620 -- -- 154,620
Cost of products sold -- 35,150 -- -- 35,150
Selling and marketing -- 73,929 -- -- 73,929
General and administrative 671 9,918 13 -- 10,602
Depreciation and amortization -- 64,476 -- -- 64,476
Non-cash compensation -- 183 -- -- 183
----------- ----------- ------------ ----------- ------------
Loss from operations (671) (101,032) (13) -- (101,716)
Equity in loss of subsidiaries (57,883) -- -- 57,883 --
Interest and other income 3,548 4,830 2,340 -- 10,718
Interest expense (44,473) (13,816) -- -- (58,289)
----------- ----------- ------------ ----------- ------------
Net loss before income tax
benefit and extraordinary item (99,479) (110,018) 2,327 57,883 (149,287)
Income tax benefit -- 53,311 -- -- 53,311
----------- ----------- ------------ ----------- ------------
Net loss before
extraordinary item (99,479) (56,707) 2,327 57,883 (95,976)
Loss on debt extinguishment, net
of tax benefit of $1,969 -- (3,503) -- -- (3,503)
----------- ----------- ------------ ----------- ------------
Net loss $ (99,479) $ (60,210) $ 2,327 $ 57,883 $ (99,479)
=========== =========== ============ =========== ============
22
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED, IN THOUSANDS)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- --------------- ------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ (99,479) $ (60,210) $ 2,327 $ 57,883 $ (99,479)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) in operating
activities:
Equity in loss of subsidiaries 57,883 -- -- (57,883) --
Provision for bad debt -- 4,338 -- -- 4,338
Deferred tax benefit -- (53,311) -- -- (53,311)
Non-cash compensation expense 183 -- -- -- 183
Depreciation and amortization of property
and equipment -- 30,745 -- -- 30,745
Amortization of intangible assets -- 33,731 -- -- 33,731
Amortization of financing costs included
in interest expense 1,039 1,192 -- -- 2,231
Interest accreted on discount note 20,679 -- -- -- 20,679
Loss on debt extinguishment, net -- 3,503 -- -- 3,503
Loss from asset disposition -- 39 -- -- 39
(Increase) decrease in, net of effects
from acquisitions:
Accounts receivable -- (33,316) 900 -- (32,416)
Inventory -- (842) -- -- (842)
Prepaid expense and other assets 2,835 (7,164) 1,046 -- (3,283)
Increase (decrease) in, net of effects
from acquisitions:
Accounts payable and accrued expenses 8,050 (12,544) (39) -- (4,533)
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities (8,810) (93,839) 4,234 -- (98,415)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Intercompany receivable (97,297) 99,180 (1,883) -- --
Equity investment in subsidiary (302,960) -- (4,000) 306,960 --
Equity investment from parent -- 306,960 -- (306,960) --
Additions to property and equipment -- (101,462) -- -- (101,462)
Repayment of notes receivable -- -- 11,860 -- 11,860
Payments for acquisitions, net of cash
acquired -- (37,617) -- -- (37,617)
Sale of short term investments 1,600 -- -- -- 1,600
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities (398,657) 267,061 5,977 -- (125,619)
------------ ----------- ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of senior notes 384,046 -- -- -- 384,046
Borrowings under senior secured debt -- 203,000 -- -- 203,000
Repayment of borrowings under senior
secured debt -- (289,422) -- -- (289,422)
Debt issuance cost (2,192) (14,123) -- -- (16,315)
Capital contribution -- 577 -- -- 577
Change in restricted cash (84,565) (11,771) -- -- (96,336)
Payments on capital leases -- (205) -- -- (205)
----------- ------------ ----------- ----------- ------------
Net cash provided by (used in)
financing activities 297,289 (111,944) -- -- 185,345
----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash
and cash equivalents (110,178) 61,278 10,211 -- (38,689)
Cash and cash equivalents at beginning of
period 114,003 23,054 4,711 -- 141,768
----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at end of period $ 3,825 $ 84,332 $ 14,922 $ -- $ 103,079
=========== ============ =========== =========== ============
23
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. These forward-looking statements are subject to various
risks and uncertainties and are made pursuant to the "safe-harbor" provisions of
the private Securities Litigation Reform Act of 1995. These statements are made
based on management's current expectations or beliefs as well as assumptions
made by, and information currently available to, management.
A variety of factors could cause actual results to differ materially
from those anticipated in our forward-looking statements, including the
following factors:
o our dependence on our affiliation with Sprint;
o shifts in populations or network focus;
o changes or advances in technology;
o changes in Sprint's national service plans
or fee structure with us;
o difficulties in network construction;
o increased competition in our markets;
o failure to consummate anticipated acquisitions or financings;
o customer credit quality; and
o the potential to experience a continued high rate of customer
turnover.
For a detailed discussion of these and other cautionary statements and
factors that could cause actual results to differ from our forward-looking
statements, please refer to our filings with the Securities and Exchange
Commission, "Item 1. Business" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation" of our Form 10-K for the year
ended December 31, 2001.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. We do not undertake any obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents we file from time to time with the Securities and Exchange
Commission.
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
Sprint's PCS network. Prior to the launch of our first market in June 1999, we
did not have any markets in operation and we had no customers. At September 30,
2002, we have approximately 591,000 subscribers. As of September 30, 2002,
our accumulated deficit is $639.1 million and we have spent a cumulative total
of approximately $637 million in capital expenditures (including that spent by
Roberts, WOW and Southwest prior to our acquisition) in connection with
constructing our portion of Sprint's PCS network and developing our business
infrastructure including the establishment of our retail distribution channels.
While we anticipate operating losses to continue, we expect revenue to continue
to increase substantially 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 Roberts, WOW and Southwest bringing our total
licensed POPs to approximately 15.8 million at September 30, 2002.
24
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 Sprint's PCS network located in our territory. We offer national
plans designed by Sprint and can offer local plans tailored to our market
demographics. Our portion of Sprint's PCS network is designed to offer a
seamless connection with Sprint's 100% digital PCS nationwide wireless network.
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 Sprint PCS subscribers based in our
territories, 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 Sprint's PCS network.
Sprint retains 8% of all collected service revenue from our subscribers (not
including product sales) and fees collected from other wireless service
providers when their customers roam onto our portion of Sprint's PCS network. We
report the amount retained by Sprint as an operating expense.
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 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 limited. We also
look at current trends in the credit quality of our customer base as well as
changes in the credit policies. Under Sprint PCS service plans, 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 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 new customer additions have been 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 certain credit
classes on the Clear Pay program as of February 24, 2002 and we have modified
the requirement in certain markets since then.
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 unless
waived. We defer this activation fee and the related expense and record the
activation fee revenue and expense 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 record 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. We reimburse Sprint
for the amount of subsidy incurred by them on handsets sold through channels
controlled by them.
25
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS - In connection with our
acquisitions of Roberts, WOW and Southwest in the first quarter of 2001, we
recorded certain intangible assets including both identifiable intangibles and
goodwill. Identifiable intangibles consist of the Sprint agreements and the
respective subscriber bases in place at the time of acquisition. The intangible
assets related to the Sprint agreements are being amortized over the remaining
original term of the underlying Sprint agreements or approximately 17.6 years.
The subscriber base intangible asset is being amortized over the estimated life
of the acquired subscribers or approximately 3 years.
We adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions of
SFAS No. 142 (i) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (ii) require that goodwill and indefinite-lived intangible
assets be tested annually for impairment (and in interim periods if certain
events occur indicating that the carrying value of goodwill and indefinite-lived
intangible assets may be impaired), (iii) require that reporting units be
identified for the purpose of assessing potential future impairments of goodwill
and (iv) remove the forty-year limitation on the amortization period of
intangible assets that have finite lives. As of December 31, 2001, we had
recorded $15.9 million in accumulated amortization of goodwill. Upon the
adoption of SFAS No. 142 the amortization of goodwill was discontinued.
SFAS No. 142 requires that goodwill and indefinite-lived intangible
assets be tested annually for impairment using a two-step process. The first
step is to identify a potential impairment by comparing the fair value of
reporting units to their carrying value and, upon adoption, must be measured as
of the beginning of the fiscal year. As of January 1, 2002, the results of the
first step indicated no potential impairment of our goodwill. We will perform
this assessment annually and the first such assessment was done as of July 31,
2002.
The annual assessment as of July 31, 2002 was performed with the
assistance of a nationally recognized appraisal firm. In performing the
evaluation, the appraisal firm used information from various sources including,
but not limited to, current stock price, transactions involving similar
companies, the business plan prepared by management and our current and past
operating results. The appraisal firm used a combination of the guideline
transaction approach, the discounted cash flow approach and the public price
approach to determine the fair value of Alamosa Holdings which had been
determined to be the single reporting unit. The guideline transaction approach
used a sample of recent wireless service provider transactions to determine an
average price per POP and price per customer. The discounted cash flow approach
used the projected discounted future cash flows and residual values of the
Company to determine the indicated value of invested capital. The public price
approach was based on the market price for Alamosa Holdings' publicly traded
equity securities along with an estimated premium for control. This was combined
with the carrying value of our debt securities to arrive at the indicated value
of invested capital. The results of this valuation indicated that the fair value
of the reporting unit was less than the carrying amount.
Based on the indicated impairment resulting from this valuation, we
proceeded to the second step of the annual impairment testing which involves
allocating the fair value of the reporting unit to its identifiable assets and
liabilities as if the reporting unit had been acquired in a business combination
where the purchase price is considered to be the fair value of the reporting
unit. Any unallocated purchase price is considered to be the fair value of
goodwill. The second step of this impairment test has not been completed as of
the filing of the Form 10-Q for the quarter ended September 30, 2002 and will be
completed in the fourth quarter of 2002. An impairment charge of $291,635 was
recorded in the third quarter of 2002 to reflect our best estimate of the
potential goodwill impairment as of July 31, 2002. After the completion of the
second step, any change in the estimated amount of impairment will be recorded
in the fourth quarter of 2002. This impairment charge is included as a separate
line item in the consolidated statements of operations for the three and nine
months ended September 30, 2002.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, plant and equipment and intangibles, comprise approximately 82 percent
of our total assets. 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 average revenue per user ("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 impairment of
goodwill discussed above was deemed to be a "triggering event" requiring
impairment testing of our other long-lived assets 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
26
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 additional impairment was
recorded 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 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, 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.
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 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, EXCEPT AS NOTED)
FOR THE THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO THE
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
The acquisitions of Roberts, WOW and Southwest took place on February
14, February 14, and March 30, 2001, respectively. These acquisitions were
accounted for under the purchase method of accounting such that the results of
operations for the acquired entities are included in our consolidated operating
results only from the date of acquisition. This, coupled with our substantial
growth during 2001 in terms of subscribers and network coverage, impacts the
comparison of 2002 operating results to those reported in 2001.
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 591,000 at September 30, 2002 compared to
approximately 404,000 at September 30, 2001. This growth came as a result of
increasing our network coverage from 10.8 million to 11.5 million covered POPs
providing additional marketing opportunities. Monthly churn (rate of
deactivation of existing subscribers) for the third quarter of 2002 was
approximately 3.8 percent compared to approximately 2.7 percent for the third
quarter of 2001. This increase in churn is a result of higher involuntary
deactivations related to lower credit quality customers obtained during the
second half of 2001 and early 2002 as a result of removing the requirement that
these customers pay a security deposit. This deposit requirement was reinstated
on February 24, 2002 and we have modified the requirement in certain markets
since then. Increases in churn negatively impact our operations as we incur
significant up front costs in acquiring customers. Our cost per gross addition
("CPGA") includes handset subsidies, and selling and marketing costs and was
$442 per activation in the third quarter of 2002 compared to $324 in the third
quarter of 2001. This increase is due to a lower number of activations in the
third quarter of 2002 compared to the third quarter of 2001 due to the
reimplementation of deposit requirements for lower credit quality customers and
increased levels of competition in the marketplace. Due to this lower level of
activations, our fixed marketing dollars were spread over fewer customer
activations.
27
SERVICE REVENUE - Service revenues consist of revenue from subscribers
and roaming revenue earned when customers from other carriers roam onto our
portion of Sprint's PCS network. Subscriber revenue consists of revenue earned
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 the wireless web, voice activated dialing, etc.
Subscriber revenues were $103,642 for the three months ended September
30, 2002 compared to $67,559 for the three months ended September 30, 2001. This
increase of 53 percent was due to the increase in subscribers from approximately
404,000 subscribers at September 30, 2001 to approximately 591,000 subscribers
at September 30, 2002. ARPU before roaming revenue declined in the third quarter
of 2002 to $60 compared to $63 in the third quarter of 2001. Subscriber revenues
were $289,720 for the nine months ended September 30, 2002 compared to $151,372
for the nine months ended September 30, 2001. This increase of 91 percent was
also due to the increase in subscribers discussed above. ARPU before roaming
revenue and a one-time revenue adjustment for terminating access revenue was $59
for the nine months ended September 30, 2002 compared to $62 for the nine months
ended September 30, 2001.
In July 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 we refund amounts that had been previously paid to us
by Sprint relative to terminating access fees. Although we have contested the
refund of these amounts, we recorded an adjustment in 2002 to reflect this
liability of approximately $5.6 million in the consolidated financial
statements.
Roaming revenue is primarily comprised of revenue from Sprint and other
PCS subscribers based outside of our territories that roam onto our portion of
Sprint's PCS network. We have a reciprocal roaming rate arrangement with Sprint
where per minute charges for inbound and outbound roaming are identical. This
rate was 20 cents per minute during the first quarter of 2001, declining to 15
cents on June 1, 2001; 12 cents on October 1, 2001 and declined to 10 cents per
minute as of January 1, 2002. The toll rate for long distance charges associated
with travel minutes was 6 cents per minute for 2001 and was approximately 2
cents per minute in 2002. The decline in rates was offset by significant
increases in roaming minutes due to the fact that we added additional cell sites
which allowed us to capture this additional roaming traffic as well as growth in
the customer bases of Sprint and other PCS providers. The reciprocal rate is
expected to remain at 10 cents through December 31, 2002. We have been notified
by Sprint that the reciprocal rate will be 5.8 cents per minute beginning
January 1, 2003. The toll rate for long distance is expected to remain at
approximately 2 cents per minute. We had approximately 307 million minutes of
inbound roaming traffic in the third quarter of 2002 compared to approximately
153 million minutes in the third quarter of 2001. The increase in minutes offset
by the decrease in rates accounted for the 24 percent overall increase in
roaming revenue to $39,129 in the third quarter of 2002 from $31,594 in the
third quarter of 2001. Roaming revenue for the nine months ended September 30,
2002 was $99,154 compared to $67,204 during the nine months ended September 30,
2001. This increase of 48 percent was driven by the volume of roaming traffic on
our network as the blended rate for the first nine months of 2002 was lower than
that in 2001 due to the rate changes discussed previously. We had approximately
780 million minutes of inbound roaming traffic in the nine months ended
September 30, 2002 compared to approximately 333 million minutes for the nine
months ended September 30, 2001. This was made possible by our placing over 180
new sites on air from September 30, 2001 to September 30, 2002 to capture this
traffic as well as a significant increase in the volume of inbound traffic from
PCS carriers other than Sprint.
PRODUCT SALES AND COST OF PRODUCTS SOLD- We record revenue from the
sale of handsets and accessories, net of an allowance for returns, as products
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 receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
28
Products sales revenue for the third quarter of 2002 was $4,657
compared to $8,721 for the third quarter of 2001. Cost of products sold for the
third quarter of 2002 was $12,904 compared to $16,591 in the third quarter of
2001. As such, the subsidy on handsets sold through our retail and local
indirect channels was $8,247 in the third quarter of 2002 and $7,870 in the
third quarter of 2001. On a per activation basis, the subsidy was approximately
$160 per activation in the third quarter of 2002 and approximately $121 per
activation in the third quarter of 2001. The increase in subsidy per activation
is due to more aggressive promotional efforts in the third quarter of 2002 which
involved a higher level of instant rebates and other discounts on handset
prices.
Product sales revenue for the nine months ended September 30, 2002 was
$17,730 compared to $18,668 for the nine months ended September 30, 2001. Cost
of products sold for the nine months ended September 30, 2002 was $36,134
compared to $35,150 for the nine months ended September 30, 2001. As such, the
subsidy on handsets sold through our retail and local indirect channels was
$18,404 for the nine months ended September 20, 2002 and $16,482 for the nine
months ended September 30, 2001. On a per activation basis, the subsidy was
approximately $128 per activation for the nine months ended September 30, 2002
and approximately $107 per activation for the nine months ended September 30,
2001. The increase in subsidy per activation is due to more aggressive
promotional efforts in the first nine months of 2002 which involved a higher
level of instant rebates and other discounts on handset prices.
COST OF SERVICE AND OPERATIONS - Cost of service and operations
includes the costs of operating our portion of Sprint's PCS network. 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 $92,560 in the third quarter of 2002 were 37 percent
higher than the $67,698 incurred in the third quarter of 2001. This increase in
cost is the result of the completion of the build out of our network which drove
an increase in the number of subscribers using our network. In addition, costs
of service and operations are driven by the volume of traffic on our network.
Total minutes of use on our network were 1,074 million minutes in the third
quarter of 2002 compared to 581 million minutes in the third quarter of 2001 for
an increase in traffic of 85 percent. Expenses of $256,378 in the nine months
ended September 30, 2002 were 66 percent higher than the $154,620 incurred in
the nine months ended September 30, 2001. This increase was also due to the
increase in our subscribers and the increased volume of traffic on our network.
Total minutes of use on our network were 2,994 million minutes in the nine
months ended September 30, 2002 compared to 1,338 million minutes in the nine
months ended September 30, 2001.
SELLING AND MARKETING - 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 was $4,618 and $12,483 in the third
quarter and first nine months of 2002, respectively, compared to $5,264 and
$9,697 in the third quarter and first nine months of 2001, respectively. Total
selling and marketing expenses of $32,503 in the third quarter of 2002 were 4
percent higher than the $31,367 incurred in the third quarter of 2001 due to the
expansion of our distribution channels resulting from the additional markets
launched during 2001. Total selling and marketing expenses of $88,360 in the
nine months ended September 30, 2002 were 20 percent higher than the $73,929
incurred in the nine months ended September 30, 2001 due to the same expansion
of our distribution channels through the last three months of 2001 and first
nine months of 2002.
GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative
expenses include corporate costs and expenses such as our executive,
administrative, human resources and corporate finance areas. General and
administrative expenses of $4,102 in the third quarter of 2002 were 16 percent
higher than the $3,535 incurred in the third quarter of 2001. General and
administrative expenses of $10,890 in the nine months ended September 30, 2002
were consistent with the $10,602 incurred in the nine months ended September 30,
2001.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization includes
depreciation of our property 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 $16,630 in the third
quarter of 2002 as compared to $12,774 in the third quarter of 2001. This
increase of 30 percent is due to the increase in depreciable costs as a result
of our capital expenditures. Depreciation expense of $47,702 in the nine months
ended September 30, 2002 was 55 percent higher than the $30,745 incurred in the
nine months ended September 30, 2001 due to the increase in depreciable costs as
a result of our capital expenditures.
29
Amortization expense of $10,267 and $30,402 in the third quarter and
first nine months of 2002, respectively, 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 in connection with each of the three acquisitions.
Amortization expense in the third quarter and first nine months of 2001 was
$14,531 and $33,731 which included $4,634 and $10,803 in amortization of
goodwill recorded in connection with the acquisitions of Roberts, WOW and
Southwest. We adopted the provisions of SFAS No. 142 on January 1, 2002 as
discussed in "Critical Accounting Policies" which resulted in no amortization of
goodwill being recorded 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 the first step of this assessment indicated that
goodwill was impaired and we recorded an estimated impairment charge of $291,635
in the third quarter of 2002. Upon completion of the second step of the
impairment testing, any change in the estimated amount of impairment will be
recorded in the fourth quarter of 2002.
IMPAIRMENT OF PROPERTY AND EQUIPMENT - In the nine months ended
September 30, 2002 we recorded impairment of property and equipment in the
amount of $1,332 related to a switching facility that was closed.
NON-CASH COMPENSATION - Non-cash compensation expense related to stock
options that were granted to employees with exercise prices that were below then
current market prices. This expense was being recorded over the vesting period
of the underlying options. Compensation expense relative to these options was
$183 in the first nine months of 2001. No non-cash compensation expense was
recorded in the first nine months of 2002 as all options that had originally
been granted with exercise prices below then current market prices had been
forfeited by the holders prior to January 1, 2002.
OPERATING LOSS - Our operating loss for the third quarter and first
nine months of 2002 was $313,173 and $356,229, respectively, compared to $38,622
and $101,716 for the third quarter and first nine months of 2001. This increase
is attributable to the $291,635 impairment of goodwill recorded in the third
quarter of 2002 offset by the leverage we are beginning to experience in
spreading our fixed costs over a larger base of subscribers who generate ARPU
that is relatively stable.
INTEREST AND OTHER INCOME - Interest and other income represents
amounts earned on the investment of excess equity and debt offering proceeds.
Income of $678 in the third quarter of 2002 was 73 percent less than the $2,531
earned in the third quarter of 2001 due to declining interest rates and the fact
that excess cash and investments were liquidated during the fourth quarter of
2001 as well as the first and second quarters of 2002, in connection with
funding our capital expenditures and net operating cash flow outflow. Income of
$2,882 in the nine months ended September 30, 2002 was 73 percent less than the
$10,718 earned in the first nine months of 2001 due to declining interest rates
and the fact that excess cash and investments were liquidated during the last
three months of 2001 in connection with funding our capital expenditures and net
operating cash outflow.
INTEREST EXPENSE - Interest expense for the third quarter of 2002
includes non-cash interest accreted on our 12 7/8% Senior Discount Notes of
$8,034 as well as interest accrued on the two senior notes issued during 2001
and interest on our senior secured debt. The increase in total interest expense
to $26,158 from $23,626 in the third quarter of 2001 is due to the increased
level of debt after the two issuance of senior notes in 2001 and the increased
level of advances under senior secured borrowings. Interest expense for the nine
months ended September 30, 2002 of $76,832 was 32 percent higher than the
$58,289 incurred in the nine months ended September 30, 2001 due to the two
additional senior notes borrowings in 2001 as well as the increased level of
advances under senior secured borrowings.
EXTRAORDINARY ITEM - In connection with the closing of our Senior
Secured Credit Facility in February 2001, we drew down on that facility and used
the proceeds to repay the Nortel/EDC credit facility which was in place at the
time. We had originally capitalized loan costs in connection with obtaining the
Nortel/EDC credit facility that had a remaining unamortized balance of $5,472.
The extraordinary loss recorded in 2001 represents the $5,472 in unamortized
loan costs written off, net of a tax benefit of $1,969 relative to this loss.
30
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 start-up 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 with a corresponding reduction to goodwill during the
first 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.
NYSE LISTING REQUIREMENTS
Our parent, Alamosa Holdings, is listed on the New York Stock Exchange
("NYSE") and is subject to various listing requirements set forth by the NYSE.
Alamosa Holdings received written notice from the NYSE dated August 23, 2002
indicating that we had fallen below the requirements to (1) maintain an average
closing price that is not less than $1.00 per share over a consecutive 30
trading-day period and (2) to maintain an average global market capitalization
over a consecutive 30 trading-day period of not less than $100 million. Alamosa
Holdings submitted a proposed business plan to the NYSE on October 15, 2002 in
response to their letter to address our plans to cure the violations of the
listing requirements and we are awaiting approval of the plan by the NYSE.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - Operating cash flows were negative $41,553 in
the first nine months of 2002 and negative $98,415 in the first nine months of
2001. The increase in operating cash flows of $56,862 is primarily related to a
decrease in net loss before non-cash items of $58,335.
INVESTING ACTIVITIES - Our investing cash flows were a negative $77,908
in the first nine months of 2002 compared to a negative $125,619 in the first
nine months of 2001. Our cash capital expenditures for the first nine months of
2002 totaled $80,939 while our cash capital expenditures for the first nine
months of 2001 totaled $101,462. In the first nine months of 2001, we also
incurred $37,617 in acquisition related costs relative to the acquisitions of
Roberts, WOW and Southwest.
FINANCING ACTIVITIES - Our financing cash flows decreased in the first
nine months of 2002 to $71,200 from $185,345 in the first nine months of 2001.
In the first nine months of 2002 we received $12,838 in proceeds representing
the remaining borrowings under the term portion of our Senior Secured Credit
Facility as well as $59,705 in restricted cash which was released from escrow to
make interest payments on the 12 1/2% Senior Notes and the 13 5/8% Senior Notes.
In the first nine months of 2001, we received $384,046 in net proceeds from the
offering of our 12 1/2% and 13 5/8% Senior Notes offset by net repayment of
secured debt of $86,422, debt issuance costs of $16,315 and $96,336 in funds
placed into escrow to secure debt service requirements.
CAPITAL REQUIREMENTS
Our capital expenditure requirements for 2002 are expected to be less
than $75 million which includes upgrading our portion of Sprint's PCS network to
1XRTT. Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is expected to continue to be positive for the remainder of 2002 as we continue
to realize the benefits of the subscriber growth that we have experienced over
the past two years. We expect to be free cash flow positive (EBITDA less capital
expenditures and cash interest expense) for the first time in 2003 and believe
we are fully funded to that point as discussed below.
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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 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 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.
On October 29, 1999, we filed a registration statement with the
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 Sprint's PCS network, to fund operating capital needs and for other
corporate purposes.
On February 8, 2000, we issued $350 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.
On January 31, 2001, we issued $250 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 February 14, 2001, we entered into a $280 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; Export Development Corporation ("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
Roberts and WOW mergers. 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 Roberts and WOW mergers, (ii) to refinance existing indebtedness under our
credit facility with EDC and under Roberts' and WOW's existing credit
facilities, and (iii) to pay transaction costs. The remaining proceeds will be
used for general corporate purposes, including funding capital expenditures,
subscriber acquisition and marketing costs, purchase of spectrum and working
capital needs. This facility was amended in March 2001 to increase the maximum
borrowings to $333 million as a result of the acquisition of Southwest and was
again amended in August 2001 to reduce the maximum borrowings to $225 million of
which $200 million is outstanding as of June 30, 2002. 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 to us.
On August 15, 2001, we 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), carry a coupon rate of 13 5/8%, payable semiannually on
February 15 and August 15, beginning on February 15, 2002. The Senior Secured
Credit Facility was amended simultaneously with the closing of the 13 5/8%
Senior Notes offering to, among other things, permit the 13 5/8% Senior Notes
offering, reduce the amount of the Senior Secured Credit Facility to $225
million and modify the financial covenants.
On November 13, 2001, Alamosa Holdings completed an underwritten
secondary offering of common stock pursuant to which certain of their
stockholders sold an aggregate of 4,800,000 shares at a public offering price of
$14.75 per share. Alamosa Holdings did not receive any proceeds from the sale of
these shares, however 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 were used
for general corporate purposes.
32
As of September 30, 2002, we had $56,411 in cash and cash equivalents
plus an additional $34,988 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 below. We
believe that this $116,399 in cash and available borrowings is sufficient to
fund working capital, capital expenditure and debt service requirements through
the point where we generate free cash flow.
On September 26, 2002 we entered into the sixth amendment to the
amended and restated credit agreement relative to the Senior Secured Credit
Facility which among other things, extended Stage I covenants for an additional
quarter and modified certain financial and statistical covenants. Specifically,
the new agreement modified the covenant addressing minimum subscribers such that
the minimum subscriber requirement is now 575,000 at September 30, 2002, 610,000
at December 31, 2002 and 620,000 at March 31, 2003. As a result of the
amendment, we are required to maintain a minimum cash balance of $10,000. In
addition to the covenant modifications, the overall interest rate was increased
by 25 basis points such that the interest margin as a result of the amendment is
4.25% for LIBOR borrowings and 3.25% for base rate borrowings.
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
we substantiate through tangible evidence the need for such advances. The
remaining $15,000 is available only at such time as the leverage ratio is less
than or equal to 5.5 to 1.
We do not anticipate the need to raise additional capital in the
foreseeable future. We believe our operations can be funded through operating
cash flow. 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 liquidity position could be adversely affected and we
could be in a position that would require us to raise additional capital which
may not be available or may not be available on favorable terms.
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 and recently 20,000 net subscribers in the third quarter of
2002. This trend is attributable to increased churn and competition, slowing
wireless subscriber growth and weakened consumer confidence. We are currently
experiencing operating 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 increase, 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 eventual 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 2002, our CPGA was $442 per activation compared to $402 per
activation in the second quarter of 2002 and $340 per activation in the first
quarter of 2002. 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 the quarter ended September 30, 2002 was 3.8 percent. This
rate of churn is the highest that we have experienced since inception of the
Company and compares to 2.7 percent in the quarter ended September 30, 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
33
service 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 relative to these customers. If the
rate of churn continues at current rates or 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. Beginning January 1, 2002 and throughout
the year ending December 31, 2002, the rate will be 10 cents per minute. We have
been notified by Sprint that beginning January 1, 2003, the reciprocal rate will
be 5.8 cents per minute. We are currently a net receiver of roaming with Sprint
meaning that other PCS customers roam onto our portion of Sprint's PCS network
at a higher rate than our customers roam onto other portions of Sprint's PCS
network. The ratio of inbound to outbound Sprint PCS travel minutes was 1.14 to
1 for the third quarter of 2002 and we expect this margin to trend 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, 2002. 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 do not have any
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. We are in the process of evaluating the impact that the adoption
of SFAS No. 143 will have on our results of operations, financial position and
cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 31, 2001. The adoption of SFAS No. 144 effective January 1, 2002 did
not have a material impact on our results of operations, financial position or
cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission 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
34
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 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 is expected to result in a
reclassification of the extinguishment of debt that we reported in the first
quarter of 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 are not expected to have a material impact
on our results of operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(c) of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to us (including our consolidated
subsidiaries) required to be included in our reports filed or
submitted under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there
have not been any significant changes in our internal controls or
in other factors that could significantly affect such controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 23, 2001, Jerry Brantley, our former President and COO
terminated his employment with us at the unanimous request of the board of
directors. On April 29, 2002, Mr. Brantley initiated litigation against us and
our chairman, David E. Sharbutt, alleging wrongful termination, among other
things. We believe that there is no basis for Mr. Brantley's claim and intend to
vigorously defend the lawsuit.
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
complaints allege, among other things, that the registration statement and
prospectus filed with the 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 Alamosa 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 Alamosa shares in the aftermarket at pre-determined
prices.
35
The Court has ordered that these putative class actions against us,
along with hundreds of IPO allocation cases against other issuers, be
transferred to Judge Scheindlin for coordinated pre-trial proceedings. At a
status conference held on September 7, 2001, Judge Scheindlin adjourned all
defendants' time to respond to the complaints until further order of the Court.
These cases remain at a preliminary stage and no discovery proceedings
have taken place. We believe the claims asserted against us in these cases are
without merit and intend to defend vigorously against them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(c) of Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(c) of Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(c) of Form 10-Q.
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
-------------- -------------
99.1 Certification of CEO Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 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 reports on Form 8-K that have been filed
during the quarter for which this report is filed:
None.
36
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 (DELAWARE), 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)
37
CERTIFICATIONS
I, David E. Sharbutt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamosa
(Delaware), Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about
the effectiveness of the discloser controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David E. Sharbutt
-----------------------------------
David E. Sharbutt, Chairman and
Chief Executive Officer
38
I, Kendall W. Cowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamosa
(Delaware), Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the discloser controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Kendall W. Cowan
------------------------------------
Kendall W. Cowan, Chief Financial
Officer
39
EXHIBIT INDEX
Exhibit Number Exhibit Title
- -------------- -------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
40