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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
----------------------------------------
COMMISSION FILE NUMBER: 0-32357
ALAMOSA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2890997
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
5225 SOUTH LOOP 289, LUBBOCK, TEXAS 79424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 722-1100
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
----------------------------------------
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 [X] NO [ ]
The aggregate market value of the Common Stock as of June 28, 2002 (the last
business day of the registrant's most recently completed second quarter), based
upon the last sale price of the common stock at June 28, 2002 as reported by the
New York Stock Exchange, held by non-affiliates was approximately $81,075,000.
As of March 27, 2003, 94,545,963 shares of Common Stock of the registrant were
issued and outstanding.
The registrant's proxy statement for its 2003 annual meeting is hereby
incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS............................................................................................3
ITEM 2. PROPERTIES.........................................................................................25
ITEM 3. LEGAL PROCEEDINGS..................................................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................................26
ITEM 6. SELECTED FINANCIAL DATA............................................................................27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION...............................................................................28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................................................55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................56
ITEM 11. EXECUTIVE COMPENSATION.............................................................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................................................56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................56
ITEM 14. CONTROLS AND PROCEDURES............................................................................56
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...........................................................................................57
SIGNATURES...........................................................................................................58
CERTIFICATIONS.......................................................................................................59
PART I
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this annual report on Form 10-K, including without limitation, the statements
under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" and located elsewhere herein
regarding our financial position and liquidity are forward-looking statements.
These forward-looking statements also include:
o forecasts of growth in the number of consumers using wireless
personal communications services and in estimated populations;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and operating losses; and
o statements regarding expectations or projections about markets in
our territories.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from our expectations
("Cautionary Statements") are disclosed in this annual report on Form 10-K.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements included herein include, but are not
limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter fees paid or charged to us under
our affiliation agreements;
o our limited operating history and anticipation of future losses;
o our dependence on back office services provided by Sprint;
o potential fluctuations in our operating results;
o changes or advances in technology;
o competition in the industry and markets in which we operate;
o our ability to attract and retain skilled personnel;
o our potential need for additional capital or the need for
refinancing existing indebtedness;
o our potential inability to expand our services and related
products in the event of substantial increases in demand for these
services and related products;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
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o effects of mergers and consolidations within the
telecommunications industry and unexpected announcements or
developments from others in the telecommunications industry.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the Cautionary Statements.
ITEM 1. BUSINESS.
For convenience in this annual report, unless indicated otherwise,
"Company," "we," "us," and "our" refer to Alamosa Holdings, Inc. and its
subsidiaries. "Sprint PCS" refers to Sprint Communications Company, L.P., Sprint
Spectrum L.P. and WirelessCo, L.P. "Sprint" refers to Sprint Corporation and its
affiliates. Statements in this annual report regarding Sprint or Sprint PCS are
derived from information contained in our agreements with Sprint, periodic
reports and other documents filed by Sprint and Sprint Spectrum L.P. with the
Securities and Exchange Commission ("SEC") or press releases issued by Sprint.
References in this annual report on Form 10-K to us as a provider of
wireless personal communications services or similar phrases generally refer to
our building, owning and managing our portion of the PCS network of Sprint
network pursuant to our affiliation agreements with Sprint. Sprint holds the
spectrum licenses and controls the network through its agreements with us.
All references contained in this annual report on Form 10-K to resident
population and residents ("POPs") are based on year-end 2000 population counts
compiled by the U.S. Census Bureau adjusted for published population growth
rates.
OVERVIEW
We are the largest PCS Affiliate of Sprint in terms of subscribers and
revenues. We have the exclusive right to provide wireless mobility
communications network services under the Sprint brand name in a territory
encompassing over 15.8 million residents primarily located in Texas, New Mexico,
Arizona, Colorado, Wisconsin, Illinois, Oklahoma, Kansas, Missouri, Washington
and Oregon. For the year ended December 31, 2002, we generated approximately
$555.7 million in revenue and ended the period with approximately 622,000
subscribers.
We launched Sprint wireless services in Laredo, Texas, in June 1999,
and through December 31, 2002, have commenced service in 87 additional basic
trading areas ("BTAs"), including markets in territories serviced by companies
that we acquired in 2001. At December 31, 2002, our systems covered
approximately 11.8 million residents out of approximately 15.8 million total
residents in those markets. We have substantially completed the network
build-out requirements required by Sprint. The number of residents covered by
our system does not represent the number of wireless subscribers that we expect
to serve in our territories.
During the first quarter of 2001, we completed our acquisitions of
three PCS Affiliates of Sprint. We acquired Roberts Wireless Communications,
L.L.C. ("Roberts") and Washington Oregon Wireless, LLC ("WOW") on February 14,
2001. We acquired Southwest PCS Holdings, Inc. ("Southwest") on March 30, 2001.
The acquisitions added territories with a total of approximately 6.8 million
residents and added approximately 90,000 subscribers. The results of operations
for the acquired companies are reflected in our consolidated results from the
date of acquisition.
OUR BACKGROUND
Alamosa (Delaware), Inc. ("Alamosa Delaware") (formerly known as
Alamosa PCS Holdings, Inc.) was formed in October 1999 to operate as a holding
company and closed its initial public offering in February 2000. Immediately
prior to Alamosa (Delaware)'s initial public offering, the founding members of
Alamosa PCS LLC received shares of Alamosa (Delaware) common stock in the same
proportion to their membership interest in Alamosa PCS LLC.
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.
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We were formed in July 2000 to operate as a holding company. On
February 14, 2001, Alamosa Sub I, Inc., our wholly owned subsidiary, merged with
and into Alamosa PCS Holdings, with Alamosa PCS Holdings surviving the merger
and becoming our wholly owned subsidiary. Each share of Alamosa PCS Holdings
common stock issued and outstanding immediately prior to the merger was
converted into the right to receive one share of our common stock.
On February 14, 2001, we also completed our acquisitions of Roberts and
WOW. Roberts' service area included 2.5 million people, including the market
areas surrounding Kansas City, the world headquarters of Sprint, and St. Louis,
and the Interstate 70 corridor connecting the two cities. At the time of the
acquisition, Roberts' network covered approximately 1.1 million people. WOW's
service area included approximately 1.5 million people, including the market
areas of Ellenburg, Yakima and Kennewick, Washington and key travel corridors
within Washington and Oregon. At the time of the acquisition, WOW's network
covered approximately 800,000 residents.
On March 30, 2001, we completed our acquisition of Southwest.
Southwest's service area, which included approximately 2.8 million people,
includes market areas in Texas, Oklahoma, Kansas and Arkansas, encompassing over
2,100 highway miles. At the time of acquisition, Southwest had launched service
in 18 markets covering approximately 1.5 million residents.
In connection with the Roberts and WOW acquisitions, we entered into a
Senior Secured Credit Facility (the "Senior Secured Credit Facility") for up to
$280.0 million. In connection with the acquisition of Southwest, we increased
the amount of the Senior Secured Credit Facility from $280.0 million to $333.0
million. The Senior Secured Credit Facility was reduced to $225.0 million
concurrently with the issuance of $150.0 million face amount of senior notes
(the "13 5/8 Senior Notes") on August 15, 2001.
OUR RELATIONSHIP WITH SPRINT
Sprint PCS is a wholly owned tracking group of Sprint Corporation and
operates the largest 100% digital, 100% PCS nationwide wireless network in the
United States with licenses to provide services to an area consisting of more
than 280 million residents in the United States, Puerto Rico and the U.S. Virgin
Islands. The PCS network of Sprint uses code division multiple access ("CDMA")
technology nationwide. Sprint directly operates its PCS network in major markets
throughout the United States and has entered into independent agreements with
various PCS Affiliates such as us, under which the PCS Affiliate has agreed to
construct and manage PCS networks in smaller metropolitan areas and along major
highways.
We are the largest PCS Affiliate of Sprint based on subscribers and
revenues, and our territories adjoin several major PCS markets. The build-out of
our territories has significantly extended Sprint wireless coverage in the
Southwestern, Northwestern and Midwestern United States of America. Due to our
relationship with Sprint, we benefit from:
BRAND RECOGNITION - We market products and services directly under the
Sprint brand name. We benefit from the recognizable Sprint brand name and
national advertising as we open markets. We offer PCS pricing plans, promotional
campaigns and handset and accessory promotions of Sprint.
EXISTING DISTRIBUTION CHANNELS - We benefit from relationships with
major national retailers who distribute PCS products and services under existing
Sprint contracts. These national retailers have approximately 735 retail outlets
in our territories. Furthermore, we benefit from sales made by Sprint to
customers in our territories through the Sprint national telemarketing sales
force, national account sales team and Internet sales capability. These existing
distribution channels provide immediate access to customers as our services
become available in their area. For more information on our distribution plan,
see "Sales and Distribution."
THE PCS NATIONWIDE NETWORK OF SPRINT - We offer access to the
nationwide PCS network of Sprint. The PCS network of Sprint offers service in
metropolitan markets across the country representing over 280 million people. We
derive additional revenue from Sprint when its wireless customers based outside
of our territories roam on our portion of the PCS network of Sprint.
HIGH CAPACITY NETWORK - Sprint built its PCS network around CDMA
digital technology, which we believe provides advantages in capacity,
voice-quality, security and handset battery life. For more information on the
benefits of this technology, see "Technology--Code Division Multiple Access."
4
LICENSED SPECTRUM - Sprint has invested in the wireless mobility
communications network service licenses in our territories and shared in costs
with us to remove sources of microwave signals that interfere with the licensed
spectrum, a process generally referred to as microwave clearing.
BETTER EQUIPMENT AVAILABILITY AND PRICING - We are able to acquire
handsets and other equipment more quickly and at a lower cost than we would
without our affiliation with Sprint. For example, Sprint will use commercially
reasonable efforts to obtain for us the same discounted volume-based pricing on
wireless-related products and warranties as Sprint receives from its vendors.
ESTABLISHED BACK OFFICE SUPPORT SERVICES - We have contracted with
Sprint to provide critical back office services, including customer activation,
handset logistics, billing, customer care and network monitoring services.
Because we do not have to establish and operate these systems, we are able to
capitalize upon Sprint's economies of scale.
THIRD GENERATION (3G) TECHNOLOGY - We along with Sprint have made the
next step towards third generation data services in 2002. We benefit from
Sprint's research and development in connection with this nationwide rollout.
For more information, see "Products and Services -- Third Generation Services."
MARKETS
We believe part of our success is attributable to the strategic
attractiveness of our markets. We believe our markets are attractive for several
reasons:
o PROXIMITY TO MAJOR PCS MARKETS OF SPRINT - Our markets are located
near or around several major PCS markets of Sprint, including
Dallas, San Antonio, Kansas City, St. Louis, Phoenix, Seattle,
Portland, Milwaukee, Minneapolis, Tulsa and Wichita.
o FEWER COMPETITORS - We believe that we face a smaller number of
competitors in our markets than the typical PCS market of Sprint
and fewer competitors than is generally the case for service
providers operating in more urban areas.
o MEXICO/U.S. BORDER - Our territories include more than 75% of the
Mexico/U.S. border area.
o HIGH POPULATION GROWTH MARKETS - The overall population growth
rate in our territories has been above the national average for
the past ten years.
The following table lists the location, BTA number, megahertz of
spectrum, estimated total residents and estimated covered residents for each of
the BTAs that comprise our territories under our affiliation agreements with
Sprint as of December 31, 2002. The number of estimated covered residents does
not represent the number of wireless subscribers that we expect to be based in
our territories.
ESTIMATED TOTAL ESTIMATED COVERED
LOCATION BTA NO.(1) MHZ OF SPECTRUM RESIDENTS (2) RESIDENTS (3)
- --------------------------------------------------------------------------------------------------------
ARKANSAS
Fayetteville-Springdale-Rogers .... 140 30 346,200 299,600
Fort Smith ........................ 153 30 331,600 205,700
Little Rock (4) ................... 257 30 15,700 8,800
Russellville ...................... 387 30 100,400 73,200
ARIZONA
Flagstaff ......................... 144 30 119,700 78,500
Las Vegas, NV (Arizona side) (4) .. 245 30 157,100 139,000
Prescott .......................... 362 30 181,800 172,100
Phoenix (4) ....................... 347 30 110,500 13,800
Sierra Vista-Douglas .............. 420 30 121,000 98,400
Tucson (4) ........................ 447 30 2,000 1,900
Yuma .............................. 486 30 169,900 166,100
CALIFORNIA
El Centro-Calexico .............. 124 30 151,500 137,700
San Diego (4) ................... 402 30 1,000 300
5
COLORADO
Colorado Springs (4) ............ 89 30 1,300 100
Farmington, NM-Durango, CO ..... 139 10 217,100 120,600
Grand Junction ................. 168 30 257,500 156,300
Pueblo ......................... 366 30 320,100 185,900
ILLINOIS
Carbondale-Marion ............... 67 30 214,800 142,100
KANSAS
Pittsburgh-Parsons .............. 349 30 92,100 29,000
Emporia ........................ 129 30 47,900 35,200
Hutchinson (4) .................. 200 30 29,600 23,200
Manhattan-Junction City ......... 275 30 117,300 90,100
Salina .......................... 396 30 143,800 64,700
MINNESOTA
La Crosse, WI-Winona, MN ....... 234 30 324,100 208,900
Minneapolis-St. Paul (4) ....... 298 30 85,200 44,000
MISSOURI
Cape Girardeau-Sikeston ......... 66 30 190,200 154,700
Columbia ........................ 90 30 220,200 176,700
Jefferson City .................. 217 30 167,100 138,900
Kirksville ...................... 230 30 57,400 34,100
Poplar Bluff .................... 355 30 154,500 47,200
Quincy, IL-Hannibal ............. 367 30 185,700 119,400
Rolla ........................... 383 30 105,400 69,700
St. Joseph ...................... 393 30 196,900 134,400
Sedalia ......................... 414 30 80,500 48,700
Springfield ..................... 428 30 682,400 481,300
West Plains ..................... 470 30 78,300 --
Kansas City (4).................. 226 30 16,800 12,400
NEW MEXICO
Albuquerque ..................... 8 10 851,500 754,200
Carlsbad ........................ 68 10 51,700 50,700
Clovis .......................... 87 30 76,000 66,000
Gallup .......................... 162 10 146,000 45,400
Hobbs ........................... 191 30 55,500 48,800
Roswell ......................... 386 10 82,300 75,100
Santa Fe ........................ 407 10 225,900 172,800
Las Cruces ...................... 244 10 258,400 191,900
OKLAHOMA
Joplin, MO-Miami ................ 220 30 251,000 214,600
Ada ............................. 4 30 54,300 35,300
Ardmore ......................... 19 30 91,500 58,900
Bartlesville .................... 31 30 49,100 46,100
Enid ............................ 130 30 85,700 53,200
Lawton-Duncan ................... 248 30 181,300 146,900
McAlester ....................... 267 30 55,100 33,500
Muskogee ........................ 311 30 166,500 107,900
Oklahoma City (4) ............... 329 30 418,300 318,600
Ponca City ...................... 354 30 49,800 44,600
Stillwater ...................... 433 30 80,000 62,400
Tulsa (4) ....................... 448 30 192,200 121,900
OREGON
Bend ............................ 38 30 166,400 147,900
Coos Bay-North Bend ............. 97 30 84,700 30,400
Klamath Falls ................... 231 30 81,700 49,200
Medford-Grants Pass ............. 288 30 266,200 228,000
Portland (4) .................... 358 30 82,600 44,300
Roseburg ........................ 385 30 101,200 70,900
Walla Walla, WA-Pendleton, OR.... 460 30 178,600 128,100
TEXAS
Eagle Pass-Del Rio .............. 121 30 121,100 116,600
El Paso ......................... 128 20 766,500 746,000
Laredo .......................... 242 30 232,400 223,100
Wichita Falls ................... 473 30 224,000 144,000
Abilene ......................... 3 30 263,500 203,100
Amarillo ........................ 13 30 416,500 295,300
Big Spring ...................... 40 30 36,100 33,700
Lubbock ......................... 264 30 411,100 376,900
Midland ......................... 296 30 122,000 121,700
Odessa .......................... 327 30 210,000 134,600
San Angelo ...................... 400 30 162,600 100,900
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WASHINGTON
Kennewick-Pasco-Richland......... 228 30 199,800 188,900
Wenatchee ....................... 468 30 222,500 131,500
Yakima .......................... 482 30 263,500 233,600
WISCONSIN
Appleton-Oshkosh ................ 18 30 461,200 367,900
Eau Claire ...................... 123 30 197,400 152,100
Fond du Lac ..................... 148 30 98,100 83,300
Green Bay ....................... 173 30 362,600 296,500
Madison (4) ..................... 272 30 147,100 67,500
Manitowoc ....................... 276 30 83,100 82,600
Milwaukee (4) ................... 297 30 87,300 50,500
Sheboygan ....................... 417 30 113,600 112,900
Stevens Point-Marshfield-Wisconsin
Rapids ........................ 432 30 217,400 126,800
Wausau-Rhinelander .............. 466 30 247,700 130,400
---------- ----------
TOTAL ........................... 15,845,200 11,780,700
========== ==========
(1) BTA No. refers to the basic trading area number assigned to that market
by the Federal Communications Commission (" FCC") for the purposes of
issuing licenses for wireless services.
(2) Estimated total residents is based on estimates of 2000 population
counts compiled by the U.S. Census Bureau adjusted by published
population growth rates.
(3) Estimated covered residents is based on our actual network coverage
using estimates of 2000 population counts compiled by the U.S. Census
Bureau adjusted by published population growth rates.
(4) Total residents and covered residents for these markets reflect only
those residents contained in our licensed territories, not the total
residents or covered residents in the entire BTA.
Pursuant to our affiliation agreements with Sprint, we have agreed to
cover a minimum percentage of the resident population in our territories within
specified time periods. We have substantially complied with these build-out
requirements. As of December 31, 2002, we had approximately 622,000 wireless
subscribers representing approximately 5 percent penetration of our covered
POPs.
NETWORK OPERATIONS
The effective operation of our portion of the PCS network of Sprint
requires:
o public switched and long distance interconnection;
o the implementation of roaming arrangements; and
o the development of network monitoring systems.
Our portion of the PCS network of Sprint connects to the public
switched telephone network to facilitate the origination and termination of
traffic between the wireless network and both local exchange and long distance
carriers. Through our arrangements with Sprint and Sprint's arrangements with
other wireless service providers, our subscribers have roaming capabilities on
other PCS networks. We monitor our portion of the PCS network of Sprint during
normal business hours. For after-hours monitoring, the PCS Network Operating
Centers of Sprint provide 24 hours, seven days a week monitoring of our portion
of the PCS network of Sprint and notification to our designated personnel.
As of December 31, 2002, our portion of the PCS network of Sprint
included 1,509 base stations and nine switching centers.
PRODUCTS AND SERVICES
We offer products and services throughout our territories under the
Sprint brand name. Our services are typically designed to align with the service
offerings of the PCS Division of Sprint and to integrate with the PCS network of
Sprint. The PCS service packages we currently offer include the following:
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100% DIGITAL WIRELESS NETWORK WITH SERVICE ACROSS THE COUNTRY - We are
part of the largest 100% digital wireless personal communications services
network in the country. Our customers may access PCS services from Sprint
throughout the PCS network of Sprint, which includes more than 4,000 cities and
communities across the United States. Dual-band/dual-mode handsets allow roaming
on other wireless networks where Sprint has roaming agreements.
THIRD GENERATION SERVICES - CDMA technology allows existing CDMA
networks to be upgraded to the next generation in a timely and cost efficient
manner. We along with Sprint launched third generation ("3G") capability in our
service area in the third quarter of 2002. This capability allows more efficient
utilization of our network when voice calls are made using 3G-enabled handsets.
It also provides enhanced data services. The service, marketed as "PCS
VisionSM," allows consumer and business customers to use their Vision-enabled
PCS devices to check personal and corporate e-mail, take and receive pictures,
play games with full-color graphics and polyphonic sounds and browse the
Internet wirelessly with speeds of up to 144 kilobits per-second with average
throughput speeds in the range of 50-70 kilobits per second.
CLEAR PAY/ACCOUNT SPENDING LIMIT - Under the PCS service plans of
Sprint, customers who do not meet certain credit criteria can nevertheless
select any plan offered subject to an account spending limit ("ASL") to control
credit exposure. Prior to May 2001, these customers were required to make a
deposit ranging from $125 to $200 that could be credited against future
billings. In May 2001, the deposit requirement was eliminated on certain credit
classes, under the No Deposit ASL ("NDASL") program which was subsequently
renamed Clear PaySM. From May 2001 to February 2002, a majority of our customer
additions were under the Clear Pay/NDASL program. On February 24, 2002, we along
with certain other PCS Affiliates of Sprint, reinstated the deposit requirement
for certain credit classes that was in place prior to May 2001 in an effort to
limit our exposure to bad debt relative to these credit classes. This new
program is referred to as Clear Pay II and was not a national Sprint program.
Since the implementation of Clear Pay II in February 2002 we have experienced a
significant decline in customer additions, but the credit quality of those
additions has improved. Sprint has the right to end or materially change the
terms of the ASL, NDASL/Clear Pay or any other program in its sole discretion.
OTHER SERVICES - In addition to these services, we may also offer
wireless local loop services in our territories, but only where Sprint is not a
local exchange carrier. Wireless local loop is a wireless substitute for the
landline-based telephones in homes and businesses. We also believe that new
features and services will be developed on the PCS network of Sprint to take
advantage of CDMA technology. Sprint conducts ongoing research and development
to produce innovative services that are intended to give Sprint and its PCS
Affiliates a competitive advantage. We may incur additional expenses in
modifying our technology to provide these additional features and services.
ROAMING
SPRINT PCS ROAMING - Sprint PCS roaming includes both inbound Sprint
PCS roaming, when Sprint wireless subscribers based outside of our territories
use our portion of the PCS network of Sprint, and outbound Sprint PCS roaming,
when our subscribers use the PCS network of Sprint outside of our territories.
We have a reciprocal per minute fee with Sprint for inbound and outbound Sprint
PCS roaming. Roaming revenue is not subject to the 8% affiliation fee. The
reciprocal rate was reduced from 20 cents per minute to 15 cents per minute
effective June 1, 2001, and to 12 cents per minute effective October 1, 2001.
The reciprocal rate for the year ended December 31, 2002 was 10 cents per
minute. Sprint has notified us that the reciprocal rate for 2003 will be 5.8
cents per minute which Sprint has indicated represents a fair and reasonable
return on the cost of the underlying network based on an agreement in principle
reached with Sprint in 2001. This rate went into effect on January 1, 2003. We
have not agreed that 5.8 cents per minute represents a fair and reasonable
return on the underlying network and are currently in discussions with Sprint as
to the determination of this rate.
In addition to the reciprocal per minute fee for the Sprint PCS roaming
discussed above, we also recognize roaming revenue and expense relative to data
usage from PCS Vision services when wireless subscribers are using such services
outside of their home territory. We recognize revenue when a wireless subscriber
based outside of our territory uses PCS Vision data services on our portion of
the PCS network of Sprint and we recognize expense when our subscribers use such
services on the PCS network of Sprint outside of our territory. This roaming
activity is settled on a per-kilobit ("Kb") basis at a rate that was initially
set at $0.0055 per Kb through December 31, 2002. The rate for 2003 and beyond
has not been determined and we are in discussions with Sprint as to the
appropriate method for determining this rate.
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NON-SPRINT PCS ROAMING - Non-Sprint PCS roaming includes both inbound
non-Sprint PCS roaming, when non-Sprint PCS subscribers use our portion of the
PCS network of Sprint, and outbound non-Sprint PCS roaming, when our subscribers
use a non-Sprint PCS network. Pursuant to roaming agreements between Sprint and
other wireless service providers, when another wireless service provider's
subscriber uses our portion of the PCS network of Sprint, we earn inbound
non-Sprint PCS roaming revenue. These wireless service providers must pay fees
for their subscribers' use of our network, and as part of our collected
revenues, we are entitled to 92% of these fees. Currently, pursuant to our
services agreements with Sprint, Sprint bills these wireless service providers
for these fees and passes our portion of the fees to us. When another wireless
service provider provides service to one of our subscribers, we pay outbound
non-Sprint PCS roaming fees. Sprint, pursuant to our current services agreements
with Sprint, then bills our subscriber for use of that provider's network at
rates specified in their contract and pays us 100% of this outbound non-Sprint
PCS roaming revenue collected from that subscriber on a monthly basis. We bear
the collection risk for all service.
MARKETING STRATEGY
Our marketing strategy is to complement Sprint's national marketing
strategies with techniques tailored to each of the specific markets in our
territories.
USE SPRINT'S BRAND - We feature exclusively and prominently the
nationally recognized Sprint brand name in our marketing and sales efforts. From
the customers' point of view, they use our portion of the PCS network of Sprint
and the rest of the PCS network of Sprint as a unified national network.
ADVERTISING AND PROMOTIONS - Sprint promotes its products through the
use of national as well as regional television, radio, print, outdoor and other
advertising campaigns. In addition to Sprint's national advertising campaigns,
we advertise and promote PCS products and services from Sprint on a local level
in our markets at our cost. We have the right to use any promotion or
advertising materials developed by Sprint and only have to pay the incremental
cost of using those materials, such as the cost of local radio and television
advertisement placements, and material costs and incremental printing costs. We
also benefit from any advertising or promotion of PCS products and services from
Sprint by third party retailers in our territories, such as RadioShack, Circuit
City and Best Buy. We must pay the cost of specialized Sprint print advertising
by third party retailers. Sprint also runs numerous promotional campaigns which
provide customers with benefits such as additional features at the same rate, or
free minutes or Kb of use for limited time periods. We offer these promotional
campaigns to potential customers in our territories.
SALES FORCE WITH LOCAL PRESENCE - We have established local sales
forces to execute our marketing strategy through our company-owned retail
stores, local distributors, direct business-to-business contacts and other
channels. Our marketing teams also participate in local clubs and civic
organizations such as the Chamber of Commerce, Rotary and Kiwanis.
SALES AND DISTRIBUTION
Our sales and distribution plan is designed to mirror Sprint's multiple
channel sales and distribution plan and to enhance it through the development of
local distribution channels. Key elements of our sales and distribution plan
consist of the following:
SPRINT RETAIL STORES - As of December 31, 2002, we owned and operated
59 Sprint Stores and 2 kiosks at military bases or other locations. These stores
provide us with a local presence and visibility in the markets within our
territories. Following the Sprint model, these stores are designed to facilitate
retail sales, activation, bill collection and customer service.
LOCAL INDIRECT AGENTS - We contract directly with local indirect
retailers in our territory. These retailers are typically local businesses that
have a presence in our markets, which purchase handsets and other equipment from
us and market PCS services from Sprint on our behalf. We are responsible for
managing this distribution channel and as of December 31, 2002 these local
indirect agents had approximately 402 locations within our licensed territory.
SPRINT STORE WITHIN A RADIOSHACK STORE - Sprint has an arrangement with
RadioShack to install a "store within a store." This arrangement benefits us to
the extent that RadioShack has locations within our territories. As of December
31, 2002, RadioShack had approximately 286 locations in our territories.
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OTHER NATIONAL THIRD PARTY RETAIL STORES - In addition to RadioShack,
we benefit from the distribution agreements established by Sprint with other
national and regional retailers such as Best Buy, Circuit City and Target. As of
December 31, 2002, these retailers had approximately 449 locations in our
territories.
ELECTRONIC COMMERCE - The PCS Division of Sprint maintains an Internet
site, www.sprintpcs.com, which contains information on PCS products and services
from Sprint. A visitor to the PCS Internet site can order and pay for a handset
and select a rate plan. Sprint wireless customers visiting the site can review
the status of their account, including the number of minutes used in the current
billing cycle. We recognize the revenues generated by wireless customers in our
territories who purchase products and services over the PCS Internet site.
During 2002, our distribution mix approximated:
Sprint retail stores 36%
Local indirect agents 15
National retailers 30
Other 19
-----------
100%
===========
SEASONALITY
Our business is subject to seasonality because the wireless industry is
heavily dependent on fourth quarter results. Among other things, the industry
relies on significantly higher customer additions and handset sales in the
fourth quarter as compared to the other three fiscal quarters. A number of
factors contribute to this trend, including:
o the heavy reliance on retail distribution, which is dependent upon
the year-end holiday shopping season;
o the timing of new product and service announcements and
introductions;
o competitive pricing pressures; and
o aggressive marketing and promotions.
TECHNOLOGY
GENERAL - In 1993, the FCC allocated the 1900 MHz frequency block of
the radio spectrum for wireless personal communications services. Wireless
personal communications services differ from traditional analog cellular
telephone service principally in that wireless personal communications services
systems operate at a higher frequency and employ advanced digital technology.
Analog-based systems send signals in which the transmitted signal resembles the
input signal, the caller's voice. Digital systems convert voice or data signals
into a stream of digits that permit a single radio channel to carry multiple
simultaneous transmissions. Digital systems also achieve greater frequency reuse
than analog systems resulting in greater capacity than analog systems. This
enhanced capacity, along with enhancements in digital protocols, allows
digital-based wireless technologies, whether using wireless personal
communications services or cellular frequencies, to offer new and enhanced
services, including greater call privacy and more robust data transmission, such
as facsimile, electronic mail and connecting notebook computers with
computer/data networks.
Wireless digital signal transmission is accomplished through the use of
various forms of frequency management technology or "air interface protocols."
The FCC has not mandated a universal air interface protocol for wireless
personal communications services systems. Wireless personal communications
systems operate under one of three principal air interface protocols: CDMA, time
division multiple access ("TDMA"), or global system for mobile communications
("GSM"). TDMA and GSM communications are both time division multiple access
systems but are incompatible with each other. CDMA is incompatible with both GSM
and TDMA systems. Accordingly, a subscriber of a system that utilizes CDMA
technology is unable to use a CDMA handset when traveling in an area not served
by CDMA based wireless personal communications services operators, unless the
customer carries a dual-band/dual-mode handset that permits the customer to use
the analog cellular system in that area. The same issue would apply to users of
TDMA or GSM systems. All of the wireless personal communications services
operators now have dual-mode or tri-mode handsets available to their customers.
Because digital networks do not cover all areas in the country, these
10
handsets will remain necessary for segments of the subscriber base.
CODE DIVISION MULTIPLE ACCESS TECHNOLOGY - The PCS network of Sprint and the
networks of PCS Affiliates of Sprint all use digital CDMA technology. We believe
that CDMA provides important system performance benefits such as:
GREATER CAPACITY - We believe, based on studies by CDMA manufacturers
and our experience since the inception of the Company, that CDMA systems can
provide system capacity that is approximately seven to ten times greater than
that of analog technology and approximately three times greater than TDMA and
GSM digital systems.
PRIVACY AND SECURITY - One of the benefits of CDMA access technology is
that it combines a constantly changing coding scheme with a low power signal to
enhance call security and privacy.
SOFT HAND-OFF - CDMA systems transfer calls throughout the CDMA network
using a technique referred to as a soft hand-off, which connects a mobile
customer's call with a new base station while maintaining a connection with the
base station currently in use. CDMA networks monitor the quality of the
transmission received by multiple base stations simultaneously to select a
better transmission path and to ensure that the network does not disconnect the
call in one cell unless replaced by a stronger signal from another base station.
Analog, TDMA and GSM networks use a "hard hand-off" and disconnect the call from
the current base station as it connects with a new one without any simultaneous
connection to both base stations.
SIMPLIFIED FREQUENCY PLANNING - Frequency planning is the process used
to analyze and test alternative patterns of frequency used within a wireless
network to minimize interference and maximize capacity. Unlike TDMA and GSM
based systems, CDMA based systems can reuse the same subset of allocated
frequencies in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
LONGER BATTERY LIFE - Due to their greater efficiency in power
consumption, CDMA handsets can provide longer standby time and more talk time
availability when used in the digital mode than handsets using alternative
digital or analog technologies.
EFFICIENT MIGRATION PATH - CDMA technology has an efficient and
incremental migration path to 3G voice and data services. The incremental
investment in each step along the migration path is an advantage of this
technology. The first step along this path was our conversion to one times radio
transmission technology ("1XRTT") that occurred in 2002 which was completed for
less than $3 per covered POP. Additional steps, beyond 1XRTT can be taken as
demand for more robust data services or need for additional capacity develops
for similar capital investment levels.
COMPETITION
Competition in the wireless communications services industry is
intense. We compete with a number of wireless service providers in our markets.
We believe that our primary competition is with national and regional wireless
providers such as AT & T Wireless Services, Cingular, T-Mobile (formerly
Voicestream Wireless), Verizon and ALLTEL.
We also face competition from resellers, which provide wireless
services to customers but do not hold FCC licenses or own facilities. Instead,
the resellers buy blocks of wireless telephone numbers and capacity from a
licensed carrier and resell services through their own distribution network to
the public.
In addition, we compete with existing communications technologies such
as paging, enhanced specialized mobile radio service dispatch and conventional
landline telephone companies in our markets. Potential users of wireless
personal communications services systems may find their communications needs
satisfied by other current and developing technologies. One or two-way paging or
beeper services that feature voice messaging and data display as well as
tone-only service may be adequate for potential customers who do not need to
speak to the caller.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Many of our competitors have significantly greater financial and
technical resources and larger subscriber bases than we do. Some of our
competitors also have established infrastructures, marketing programs and brand
names. In
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addition, some of our competitors may be able to offer regional coverage in
areas not served by the PCS network of Sprint, or, because of their calling
volumes or relationships with other wireless providers, may be able to offer
regional roaming rates that are lower than those that we offer. Wireless
personal communications services operators will likely compete with us in
providing some or all of the services available through our network and may
provide services that we do not. Additionally, we expect that existing cellular
providers will continue to upgrade their systems to provide digital wireless
communication services competitive with Sprint. Currently, there are six
national wireless providers who are generally all present in major markets
across the country. In January 2003, the FCC rule imposing limits on the amount
of spectrum that can be held by one provider in a specific market was lifted
which may facilitate the consolidation of some national providers.
Over the past several years, the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS services from Sprint. Based upon increased competition, we anticipate that
market prices for two-way wireless services generally will decline in the
future. We will compete to attract and retain customers principally on the basis
of:
o the strength of the Sprint brand name, services and features;
o nationwide network;
o our network coverage and reliability; and
o CDMA technology.
Our ability to compete successfully will also depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
industry, including:
o new services and technologies that may be introduced;
o changes in consumer preferences;
o demographic trends;
o economic conditions; and
o discount pricing strategies by competitors.
INTELLECTUAL PROPERTY
The Sprint diamond design logo is a service mark registered with the
United States Patent and Trademark Office. The service mark is owned by Sprint.
We use the Sprint brand name, the Sprint diamond design logo and other service
marks of Sprint in connection with marketing and providing wireless services
within our territories. Under the terms of the trademark and service mark
license agreements with Sprint, we do not pay a royalty fee for the use of the
Sprint brand name and Sprint service marks.
Except in certain instances and other than in connection with the
national distribution agreements, Sprint has agreed not to grant to any other
person a right or license to use the licensed marks in our territories. In all
other instances, Sprint reserves the right to use the licensed marks in
providing its services within or without our territories.
The trademark license agreements contain numerous restrictions with
respect to the use and modification of any of the licensed marks. See "Our
Affiliation Agreements with Sprint -- The Trademark and Service Mark License
Agreements" for more information on this topic.
ENVIRONMENTAL COMPLIANCE
Our environmental compliance expenditures primarily result from the
operation of standby power generators for our telecommunications equipment and
compliance with various environmental rules during network build-out and
operations. The expenditures arise in connection with standards compliance or
permits which are usually related to generators, batteries or fuel storage. Our
environmental compliance expenditures have not been material to our financial
statements or to our operations and are not expected to be material in the
future.
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EMPLOYEES
As of December 31, 2002, we employed 804 full-time employees. None of
our employees are represented by a labor union. We believe that our relations
with our employees are good.
OUR AFFILIATION AGREEMENTS WITH SPRINT
We initially entered into four major affiliation agreements with
Sprint:
o a management agreement;
o a services agreement; and
o two trademark and service mark license agreements with different
Sprint entities.
We entered into one set of these agreements with Sprint for our
territories in the Southwestern part of the United States and another set of
these agreements for our territories in Wisconsin. Roberts entered into a set of
these agreements for its territories in Illinois, Kansas and Missouri, which we
have assumed pursuant to our acquisition of Roberts. WOW entered into a set of
these agreements for its territories in Washington and Oregon, which we have
assumed pursuant to our acquisition of WOW. Southwest entered into a set of
these agreements for its territories in Oklahoma, Kansas, Texas and Arkansas
which we have assumed pursuant to our acquisition of Southwest. Therefore, we
now operate under five sets of affiliation agreements with Sprint. As used
herein, the term "operating subsidiaries" refers to each of our subsidiaries
that have entered into affiliation agreements with Sprint. Unless otherwise
indicated below, the description of our affiliation agreements applies to the
affiliation agreements for all of our territories.
Under our affiliation agreements with Sprint, we have the exclusive
right to provide wireless mobility communications network services using the
1900 MHz frequency block under the Sprint brand name in our territories. Sprint
holds the spectrum licenses. Our affiliation agreements with Sprint require us
to interface with the PCS network of Sprint by building our portion of the PCS
network of Sprint to operate on the 10, 20 or 30 MHz of wireless personal
communications services frequencies licensed to Sprint in the 1900 MHz range.
The following is a description of the material terms and provisions of
our affiliation agreements and the consent and agreement with Sprint and
Citicorp USA ("Citicorp"), that modifies our management agreements for the
benefit of Citicorp, as Administrative Agent, and the holders of the Senior
Secured Credit Facility and any refinancing thereof. See "Consent and Agreement
for the Benefit of the Holders of the Senior Secured Credit Facility."
A breach or event of termination, as the case may be, under any of our
affiliation agreements by one of our operating subsidiaries will also constitute
a breach or event of termination, as the case may be, by all other operating
subsidiaries of the same provision of the applicable affiliation agreement to
which each operating subsidiary is a party. Each operating subsidiary only has
the right to cure its breach and has no right to cure any breach or event of
termination by another operating subsidiary.
THE MANAGEMENT AGREEMENTS - Under our management agreements with Sprint, we have
agreed to:
o own, construct and manage a wireless personal communications
services network in our territories in compliance with FCC license
requirements and other technical requirements contained in our
management agreements;
o distribute PCS products and services from Sprint;
o use Sprint's and our own distribution channels in our territories;
o conduct advertising and promotion activities in our territories;
and
o manage that portion of the wireless customer base assigned to our
territories.
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Sprint will supervise our wireless personal communications services
network operations and has the right to unconditional access to our portion of
the PCS network of Sprint, including the right to test and monitor any of our
facilities and equipment.
EXCLUSIVITY - We are designated as the only person or entity that can
manage or operate a wireless mobility communications network using the 1900 MHz
frequency block for Sprint in our territories. Sprint is prohibited from owning,
operating, building or managing another wireless mobility communications network
in our territories while our management agreements are in place and no event has
occurred that would permit such agreements to terminate. Sprint is permitted to
make national sales to companies in our territories and to permit resale of the
PCS products and services from Sprint in our territories. Our management
agreements prohibit us from interfering with others who resell PCS products and
services from Sprint in our territories.
If Sprint decides to expand the geographic size of the network coverage
within our territories, Sprint must provide us with written notice of the
proposed expansion.
Under our management agreements for our original territories,
Wisconsin, and the territories we assumed pursuant to our acquisitions of
Roberts and Southwest, we have a 90-day right of first refusal to build out the
proposed expansion area. If we choose not to build out the proposed area, then
Sprint may build out the area itself or allow another PCS Affiliate of Sprint to
do so.
Under our management agreement for the territories we assumed pursuant
to our acquisition of WOW, we have agreed to build out any proposed expansion
area. Sprint has agreed not to require any new coverage during the first two
years of such management agreement or to require coverage that exceeds the
capacity and footprint parameters that Sprint has adopted for all its comparable
markets. The management agreement also contains a mechanism for us to appeal to
Sprint if the build-out is not economically advantageous for us. If we fail to
build out the proposed expansion area, Sprint has the termination rights
described below under "Termination of Our Management Agreements."
NETWORK BUILD-OUT - Our management agreements specify the terms of the
Sprint affiliation, including the required network build-out plan. We have
agreed to cover a specified percentage of the population within each of the
markets which make up our territories by specified dates.
If technically feasible and commercially reasonable, we have agreed to
provide for a seamless handoff of a call initiated in our territories to a
neighboring portion of the nationwide PCS network of Sprint. Our management
agreements require us to reimburse Sprint one-half of the microwave clearing
costs for our territories.
PRODUCTS AND SERVICES - Our management agreements identify the products
and services that we can offer in our territories. These services include, but
are not limited to, PCS consumer and business products and services from Sprint
available as of the date of the agreements, or as modified by Sprint. We are
allowed to sell wireless products and services that are not PCS products and
services from Sprint if those additional products and services do not cause
distribution channel conflicts or, in Sprint's sole determination, consumer
confusion with PCS products and services from Sprint. Under our management
agreement for our Wisconsin territories, if Sprint begins to offer nationally a
product or service that we already offer, then that product or service will be
considered to be a PCS product or service from Sprint.
We may also sell services such as specified types of long distance
service, Internet access, handsets, and prepaid phone cards with Sprint and
other PCS Affiliates of Sprint. If we decide to use third parties to provide
these services, we must give Sprint an opportunity to provide the services on
the same terms and conditions. We cannot offer wireless local loop services
specifically designed for the competitive local exchange market in areas where
Sprint owns the local exchange carrier unless we name the Sprint-owned local
exchange carrier as the exclusive distributor or Sprint approves the terms and
conditions. Sprint does not own the local exchange carrier in a majority of the
markets in our territories.
NATIONAL SALES PROGRAMS - We must participate in the Sprint wireless
sales programs for national sales to customers, and will pay the expenses and
receive the compensation from Sprint relative to sales to national accounts
located in our territories. We must use Sprint's long distance service, which we
can buy at the best prices offered to comparably situated Sprint customers.
SERVICE PRICING, ROAMING AND FEES - We must offer PCS subscriber
pricing plans from Sprint designated for regional or national offerings,
including "Free & Clear" plans and "PCS Vision" plans. We are permitted to
establish
14
our own local price plans for PCS products and services offered only in our
territories, subject to Sprint's approval. We are entitled to receive a weekly
fee from Sprint equal to 92% of "collected revenues" for all obligations under
our management agreements, adjusted by the cost of customer services provided to
us by Sprint. "Collected revenues" include revenue from Sprint wireless
subscribers based in our territories and inbound non-Sprint PCS roaming. Sprint
will retain 8% of the collected revenues. Outbound non-Sprint PCS roaming billed
to subscribers based in our territory, inbound and outbound Sprint PCS roaming
fees, proceeds from the sales of handsets and accessories, proceeds from sales
not in the ordinary course of business, amounts collected with respect to taxes
and proceeds from sales of our products and services, are not considered
collected revenues. Except in the case of taxes, since those are collected and
remitted by Sprint, we will retain 100% of these revenues. Many Sprint wireless
subscribers purchase bundled pricing plans that allow roaming anywhere on the
nationwide PCS network of Sprint without incremental roaming charges. However,
we will earn Sprint PCS roaming revenue for every minute that a Sprint wireless
subscriber from outside our territories enters our territories and uses our
services. We will earn revenue from Sprint based on a per minute rate
established by Sprint when Sprint's or its PCS Affiliates' subscribers roam on
our portion of the PCS network of Sprint. Similarly, we will pay the same rate
for every minute our subscribers use the PCS network of Sprint outside our
territories. The analog roaming rate onto a non-Sprint PCS provider's network is
set under Sprint's third party roaming agreements.
VENDOR PURCHASE AGREEMENTS - We may participate in discounted
volume-based pricing on wireless-related products and warranties Sprint receives
from its vendors. Sprint will use commercially reasonable efforts to obtain for
us the same prices as Sprint receives from its vendors.
ADVERTISING AND PROMOTIONS - Sprint uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote its
products. We benefit from the national advertising at no additional cost to us.
In addition to Sprint's national advertising campaigns, we advertise and promote
PCS products and services from Sprint on a local level in our markets at our
cost. We have the right to use any promotion or advertising materials developed
by Sprint and only have to pay the incremental cost of using those materials,
such as the cost of local radio and television advertisement placements and
incremental printing costs. Sprint also runs numerous promotional campaigns
which provide customers with benefits such as additional features at the same
rate or free minutes of use for limited time periods. We offer these promotional
campaigns to potential customers in our territories.
PROGRAM REQUIREMENTS - We must comply with the Sprint program
requirements for technical standards, customer service standards, roaming
coverage and national and regional distribution and national accounts programs.
Sprint can adjust the program requirements at any time. We have the right to
appeal to the management of Sprint if adjustments to program requirements will:
o cause us to incur a cost exceeding 5% of the sum of our
stockholders' equity plus our outstanding long term debt; or
o cause our operating expenses on a per-unit basis using a ten-year
time frame to increase by more than 10% on a net present value
basis.
If Sprint denies our appeal and we fail to comply with the program
adjustment, Sprint has the termination rights described below under "Termination
of Our Management Agreements."
Under our management agreements for our Wisconsin and Southwest
territories, Sprint has agreed that it will use commercial reasonableness to
adjust the Sprint retail store and customer service requirements for cities
located within those territories that have a population of less than 100,000.
NON-COMPETITION - We may not offer PCS products and services from
Sprint outside our territories without the prior written approval of Sprint. We
may offer, market or promote telecommunications products and services within our
territories only under the Sprint brand, our own brand, brands of our related
parties or other products and services approved under our management agreements,
except that no brand of a significant competitor of Sprint or its related
parties may be used for those products and services. To the extent we have or
will obtain licenses to provide wireless personal communications services
outside our territories, we may not use the spectrum to offer PCS products and
services from Sprint without prior written consent from Sprint.
INABILITY TO USE NON-SPRINT BRAND - We may not market, promote,
advertise, distribute, lease or sell any of the PCS products and services from
Sprint on a non-branded, "private label" basis or under any brand, trademark or
trade
15
name other than the Sprint brand, except for sales to resellers or as otherwise
permitted under the Trademark and Service Mark License Agreements.
TRANSFER OF THE PCS NETWORK - Sprint can sell, transfer or assign its
wireless personal communications services network to a third party if the third
party agrees to be bound by the terms of our management agreements and our
services agreements.
CHANGE IN CONTROL - Sprint must approve our change in control, but this
consent cannot be unreasonably withheld.
RIGHTS OF FIRST REFUSAL - Sprint has rights of first refusal, without
further stockholder approval, to buy our assets upon a proposed sale of all or
substantially all of our assets used in the operation of our portion of the PCS
network of Sprint.
TERM - Each of our management agreements has an initial term of 20
years with three 10-year renewal options, which would lengthen each of our
management agreements to a total term of 50 years. The three 10-year renewal
terms automatically occur unless either Sprint or we provide the other with two
years prior written notice to terminate the agreement or unless we are in
material default of our obligations under such agreement.
TERMINATION OF OUR MANAGEMENT AGREEMENTS - Our management agreements
can be terminated as a result of the following events:
o termination of Sprint's spectrum licenses;
o an uncured breach under our management agreements;
o bankruptcy of a party to our management agreements;
o our management agreements not complying with any applicable law in
any material respect; or
o the termination of any of our trademark and service mark license
agreements.
The termination or non-renewal of our management agreements triggers
some of our rights and some rights of Sprint. The right of either party to
require the other party to purchase or sell the operating assets is discussed
below.
If we have the right to terminate our management agreements because of
an event of termination caused by Sprint, generally we may:
o require Sprint to purchase all of our operating assets used in
connection with our portion of the PCS network of Sprint for an
amount equal to at least 80% of our "entire business value" as
defined below;
o in all areas in our territories where Sprint is the licensee for
20 MHZ or more of the spectrum on the date it terminates our
management agreements, require Sprint to assign to us, subject to
governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
of the license plus any microwave clearing costs paid by Sprint or
9% of our "entire business value;" or
o choose not to terminate our management agreements and sue Sprint
for damages or submit the matter to arbitration.
If Sprint has the right to terminate our management agreements because
of an event of termination caused by us, generally Sprint may:
o require us, without further stockholder approval, to sell our
operating assets to Sprint for an amount equal to 72% of our
"entire business value;"
16
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint of the license plus
any microwave relocation costs paid by Sprint or 10% of our
"entire business value;"
o take any action as Sprint deems necessary to cure the breach of
our management agreements, including assuming responsibility for,
and operating, our portion of the PCS network of Sprint; or
o not terminate our management agreements and sue us for damages or
submit the matter to arbitration.
In connection with the Senior Secured Credit Facility, Sprint entered
into a consent and agreement with Citicorp that modifies Sprint's rights and
remedies under our affiliation agreements for the benefit of Citicorp, as
Administrative Agent, and the holders of the Senior Secured Credit Facility and
any refinancing thereof. The consent and agreement with Citicorp provides, among
other things, that our affiliation agreements generally may not be terminated by
Sprint until all our outstanding indebtedness under the Senior Secured Credit
Facility is satisfied in full pursuant to the terms of the consent and
agreement. See "Consent and Agreement for the Benefit of the Holders of the
Senior Secured Credit Facility."
NON-RENEWAL - If Sprint gives us timely notice that it does not intend
to renew our management agreements, we may:
o require Sprint to purchase all of our operating assets used in
connection with our portion of the PCS network of Sprint for an
amount equal to 80% of our "entire business value;" or
o in all areas in our territories where Sprint is the licensee for
20 MHZ or more of the spectrum on the date it terminates such
management agreement, require Sprint to assign to us, subject to
governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
of the license plus any microwave relocation costs paid by Sprint
or 10% of our "entire business value."
If we give Sprint timely notice of non-renewal, or we and Sprint both
give notice of non-renewal, or any of our management agreements expire with
neither party giving a written notice of non-renewal, or if any of our
management agreements can be terminated for failure to comply with legal
requirements or regulatory considerations, Sprint may:
o purchase all of our operating assets, without further stockholder
approval, for an amount equal to 80% of our "entire business
value;" or
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint of the license plus
any microwave clearing costs paid by Sprint or 10% of our "entire
business value."
DETERMINATION OF ENTIRE BUSINESS VALUE - If our "entire business value"
is to be determined, Sprint and we will each select one independent appraiser
and the two appraisers will select a third appraiser. The three appraisers will
determine our "entire business value" on a going concern basis using the
following principles:
o the "entire business value" is based on the price a willing buyer
would pay a willing seller for the entire on-going business;
o the entire business value will not be calculated in a manner that
double counts the operating assets of one or more of our
affiliates;
o then-current customary means of valuing a wireless
telecommunications business will be used;
o the business is conducted under the Sprint brand and our
affiliation agreements with Sprint;
o that we own the spectrum and frequencies presently owned by Sprint
and subject to our affiliation agreements with Sprint; and
17
o the valuation will not include any value for businesses not
directly related to the PCS products and services from Sprint, and
those businesses will not be included in the sale.
INSURANCE - We are required to obtain and maintain with financially
reputable insurers who are licensed to do business in all jurisdictions where
any work is performed under our management agreement and who are reasonably
acceptable to Sprint, workers' compensation insurance, commercial general
liability insurance, business automobile insurance, umbrella excess liability
insurance and "all risk" property insurance.
INDEMNIFICATION - We have agreed to indemnify Sprint and its directors,
employees and agents and related parties of Sprint and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in our management agreements or any other
agreement between us and Sprint, our ownership of the operating assets or the
actions or the failure to act of anyone employed or hired by us in the
performance of any work under such agreement, except that we will not be
obligated to indemnify Sprint for any claims arising solely from the negligence
or willful misconduct of Sprint. Sprint has agreed to indemnify us and our
directors, employees and agents against all claims against any of the foregoing
arising from Sprint's violation of any law and from Sprint's breach of any
representation, warranty or covenant contained in our management agreements or
any other agreement between us and Sprint, except Sprint will not be obligated
to indemnify us for any claims arising solely from our negligence or willful
misconduct.
DISPUTE RESOLUTION - If the parties cannot resolve any dispute between
themselves and our management agreements do not provide a remedy, then either
party may require that any dispute be resolved by a binding arbitration.
THE SERVICES AGREEMENTS
Our services agreements outline various back office services provided
by Sprint and available to us for an additional fee. Sprint can change the
amount of adjustment for any or all of the services one time in any twelve-month
period. We have the option to cancel a service upon notification of a fee
increase, and if we decide to cancel the service, then Sprint, at our option,
must continue to provide that service for nine months at the original price.
Some of the available services include: billing, customer care, activation,
credit checks, handset logistics, home locator record, voice mail, prepaid
services, directory assistance, operator services, roaming fees, roaming
clearinghouse fees, interconnect fees and inter-territory fees. Sprint offers
three packages of available services. Each package identifies which services
must be purchased from Sprint and which may be purchased from a vendor or
provided in-house. Essentially, services such as billing, activation and
customer care must all be purchased from Sprint or none may be purchased from
Sprint. We have chosen to initially delegate the performance of these services
to Sprint, but we may develop an independent capability with respect to these
services over time. Sprint may contract with third parties to provide expertise
and services identical or similar to those to be made available or provided to
us. We have agreed not to use the services performed by Sprint in connection
with any other business or outside our territories. We may discontinue use of
any service upon three months' prior written notice, while Sprint must give nine
months notice if it will no longer offer any service.
We have agreed with Sprint to indemnify each other as well as
affiliates, officers, directors and employees for violations of law or the
services agreements except for any liabilities resulting from the negligence or
willful misconduct of the person seeking to be indemnified or its
representatives. Our services agreements also provide that no party will be
liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, such
services agreement except as may otherwise be required by the indemnification
provisions. Our services agreements automatically terminate upon termination of
our management agreements, and neither party may terminate the services
agreements for any reason other than the termination of the management
agreements.
THE TRADEMARK AND SERVICE MARK LICENSE AGREEMENTS
We have a non-transferable license to use, at no additional cost to us,
the Sprint brand name and "diamond" symbol, and several other U.S. trademarks
and service marks such as "The Clear Alternative to Cellular" and "Clear Across
the Nation" on PCS products and services from Sprint. We believe that the Sprint
brand name and symbols enjoy a high degree of recognition, providing us an
immediate benefit in the market place. Our use of the licensed marks is subject
to our adherence to quality standards determined by Sprint and use of the
licensed marks in a manner, which would not reflect adversely on the image of
quality symbolized, by the licensed marks. We have agreed to promptly notify
Sprint of any infringement of any of the licensed marks within our territories
of which we become aware and to
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provide assistance to Sprint in connection with Sprint's enforcement of their
rights. We have agreed with Sprint that we will indemnify the other for losses
incurred in connection with a material breach of the trademark license
agreements between Sprint and us. In addition, we have agreed to indemnify
Sprint from any loss suffered by reason of our use of the licensed marks or
marketing, promotion, advertisement, distribution, lease or sale of any Sprint
products and services other than losses arising solely out of our use of the
licensed marks in compliance with certain guidelines.
Sprint can terminate our trademark and service mark license agreements
if we file for bankruptcy or materially breach our agreement or if our
management agreements are terminated. We can terminate our trademark and service
mark license agreements upon Sprint's abandonment of the licensed marks or if
Sprint files for bankruptcy or our management agreements are terminated.
However, Sprint can assign their interests in the licensed marks to a third
party if that third party agrees to be bound by the terms of our trademark and
service mark license agreements.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR SECURED
CREDIT FACILITY
Sprint entered into a consent and agreement with Citicorp, as
Administrative Agent, that modifies Sprint's rights and remedies under our
affiliation agreements with Sprint. This consent and agreement was entered into
for the benefit of Citicorp and the holders of the Senior Secured Credit
Facility and any refinancing thereof.
The consent and agreement between Sprint and Citicorp generally
provides, among other things, the following:
o Sprint's consent to the pledge of substantially all of our assets,
including our rights in our affiliation agreements with Sprint;
o that our affiliation agreements with Sprint may not be terminated
by Sprint until all outstanding obligations under the Senior
Secured Credit Facility are satisfied in full pursuant to the
terms of the consent and agreement, unless our operating
subsidiaries or assets are sold to a purchaser who does not
continue to operate the business as a PCS Affiliate of Sprint,
which sale requires the approval of Citicorp;
o Sprint may not exercise its right under our management agreements
to purchase our assets until all obligations pursuant to the
Senior Secured Credit Facility have been paid in full in cash and
all commitments to advance credit under such facility have been
terminated or have expired. However, Sprint retains the option to
purchase our assets if it first pays all obligations under the
Senior Secured Credit Facility and such facility is terminated in
connection with such payment;
o for redirection of payments due to us under our management
agreements from Sprint to Citicorp during the continuation of any
default by us under the Senior Secured Credit Facility;
o for Sprint and Citicorp to provide to each other notices of
default by us under our management agreements and the Senior
Secured Credit Facility, respectively;
o the ability to appoint interim replacements, including Sprint or a
designee of the Administrative Agent under the Senior Secured
Credit Facility, to operate our portion of the PCS network of
Sprint under our affiliation agreements after an event of default
under the Senior Secured Credit Facility or an event of
termination under our affiliation agreements;
o subject to certain requirements and limitations, the ability of
Sprint to assign our affiliation agreements with Sprint and sell
our assets or the partnership interests, membership interests or
other equity interests of our operating subsidiaries to a
qualified purchaser that is not a major competitor of Sprint, free
of the restrictions on assignment and change of control in our
management agreements, if our obligations under the Senior Secured
Credit Facility have been accelerated after a default by us; and
o subject to certain requirements and limitations, that if Sprint
enters into consent and agreement documents with
similarly-situated lenders that have provisions that are more
favorable to the lender, Sprint will give Citicorp written notice
of the amendments and will amend our consent and agreement with
Citicorp in the same manner at Citicorp's request; consequently,
from time to time, Citicorp and Sprint may modify our consent and
agreement so that it will contain terms and conditions more
favorable to Citicorp.
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SPRINT'S RIGHT TO PURCHASE ON ACCELERATION OF AMOUNTS OUTSTANDING UNDER
THE SENIOR SECURED CREDIT FACILITY - Subject to the requirements of applicable
law, so long as the Senior Secured Credit Facility remains outstanding, Sprint
has the right to purchase our operating assets or the partnership interests,
membership interests or other equity interests of our operating subsidiaries,
upon its receipt of notice of an acceleration of the Senior Secured Credit
Facility, under the following terms:
o Sprint elects to make such a purchase within a specified period;
o the purchase price is the greater of an amount equal to 72% of our
"entire business value" or the amount we owe under the Senior
Secured Credit Facility;
o if Sprint has given notice of its intention to exercise the
purchase right, then the Administrative Agent is prohibited for a
specified period after the acceleration, or until Sprint rescinds
its intention to purchase, from enforcing its security interest;
and
o if we receive a written offer that is acceptable to us to purchase
our operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries
after the acceleration, then Sprint has the right to purchase our
operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries,
as the case may be, on terms at least as favorable to us as the
offer we receive. Sprint must agree to purchase the operating
assets or the partnership interests, membership interests or other
equity interests of our operating subsidiaries within 14 business
days of its receipt of the offer, on acceptable conditions, and in
an amount of time acceptable to us and Citicorp.
Upon acceleration of the Senior Secured Credit Facility, Sprint also
has the right to purchase the obligations under the Senior Secured Credit
Facility by repaying such obligations in full in cash.
SALE OF OPERATING ASSETS OR THE PARTNERSHIP INTERESTS, MEMBERSHIP
INTERESTS OR OTHER EQUITY INTERESTS OF OUR OPERATING SUBSIDIARIES TO THIRD
PARTIES - If Sprint does not purchase our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries after an acceleration of the obligations under the Senior Secured
Credit Facility, then Citicorp may sell our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries. Subject to the requirements of applicable law, including the law
relating to foreclosures of security interests, Citicorp has two options:
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to an entity that meets the requirements to be our
successor under our affiliation agreements with Sprint; or
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to any third party, subject to specified conditions.
REGULATORY ENVIRONMENT
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC can have a substantial impact upon entities that manage
wireless personal communications service systems and/or provide wireless
personal communications services because the FCC regulates the licensing,
construction, operation, acquisition and interconnection arrangements of
wireless telecommunications systems in the United States.
The FCC has promulgated, and is in the process of promulgating, a
series of rules, regulations and policies to, among other things:
o grant or deny licenses for wireless personal communications
service frequencies;
o grant or deny wireless personal communications service license
renewals;
o rule on assignments and/or transfers of control of wireless
personal communications service licenses;
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o govern the interconnection of wireless personal communications
service networks with other wireless and wireline service
providers;
o establish access and universal service funding provisions;
o impose fines and forfeitures for violations of any of the FCC's
rules; and
o regulate the technical standards of wireless personal
communications services networks.
Through rules that went into effect on February 13, 2002, the FCC has
eliminated its spectrum cap for Commercial Mobile Radio Services ("CMRS") which
include broadband wireless personal communications services, cellular and
specialized mobile radio ("SMR"). The cap previously had limited CMRS providers
to 55 MHz in any geographic area. This spectrum cap prohibited a single entity
from having an attributable interest (defined as any general partnership
interest of 20% or greater equity or voting interest or certain other business
relationships) totaling more than 55 MHz. The geographic areas at issue were PCS
licensed service areas where there were overlaps involving 10% or more of the
population of such service area. An entity, such as us, that manages the
operations of a broadband PCS, cellular, or SMR licenses pursuant to a
management agreement is also considered to have an attributable interest in the
system it manages. Also effective as of February 13, 2002, the FCC eliminated
its rule which prohibited a party from owning interests in both cellular systems
in the same Metropolitan Statistical Areas ("MSAs") though it retained the
cross-interest prohibition for less populous Rural Service Areas ("RSAs"). The
Commission's new rules blur the "bright line" of these spectrum caps, however,
and require a case-by-case analysis to determine that any proposed CMRS spectrum
combination will not have an anticompetitive effect.
TRANSFERS AND ASSIGNMENTS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a wireless personal
communications service license. This means that we and our stockholders will
receive advance notice of any and all transactions involved in transferring
control of Sprint or the assignment of some or all of the wireless personal
communications service licenses held by Sprint. The FCC proceedings afford us
and our stockholders an opportunity to evaluate proposed transactions well in
advance of closing, and to take actions necessary to protect their interests.
Non-controlling interests in an entity that holds a wireless personal
communications service license or operates wireless personal communications
service networks generally may be bought or sold without prior FCC approval. In
addition, the FCC requires only post-consummation notification of pro forma
assignments or transfers of control of certain commercial mobile radio service
licenses.
CONDITIONS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
All wireless personal communications service licenses are granted for
ten-year terms conditioned upon timely compliance with the FCC's build-out
requirements. Pursuant to the FCC's build-out requirements, all 30 MHZ broadband
wireless personal communications service licensees must construct facilities
that offer coverage to one-third of the population in their licensed areas
within five years and to two-thirds of the population in such areas within ten
years, and all 10 MHZ broadband wireless personal communications services
licensees must construct facilities that offer coverage to at least one-quarter
of the population in their licensed areas within five years or make a showing of
"substantial service" within that five-year period.
If the build-out requirements are not met, wireless personal
communications service licenses could be forfeited. The FCC also requires
licensees to maintain control over their licenses. Our affiliation agreements
with Sprint reflect management agreements that the parties believe meet the FCC
requirements for licensee control of licensed spectrum.
If the FCC were to determine that our affiliation agreements with
Sprint need to be modified to increase the level of licensee control, we have
agreed with Sprint to use our best efforts to modify the agreements to the
extent necessary to cause the agreements to comply with applicable law and to
preserve to the extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be so modified, the agreements may be
terminated pursuant to their terms. The FCC could also impose monetary penalties
on Sprint, and possibly revoke one or more of the Sprint licenses.
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WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSE RENEWAL
Wireless personal communications service licensees can renew their
licenses for additional ten-year terms. Wireless personal communications service
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford wireless personal communications services renewal applicants involved in
comparative renewal hearings with a "renewal expectancy." The renewal expectancy
is the most important comparative factor in a comparative renewal hearing and is
applicable if the wireless personal communications service renewal applicant
has:
o provided "substantial service" during its license term; and
o substantially complied with all applicable laws and Federal
Communications Commission rules and policies.
The FCC's rules define "substantial service" in this context as service
that is sound, favorable and substantially above the level of mediocre service
that might minimally warrant renewal. The FCC's renewal expectancy and
procedures make it very likely that Sprint will retain the wireless personal
communications service licenses that we manage for the foreseeable future.
INTERCONNECTION
The FCC has the authority to order interconnection between commercial
mobile radio services, commonly referred to as CMRS, providers and incumbent
local exchange carriers. The FCC has ordered local exchange carriers to provide
reciprocal compensation to commercial mobile radio service providers for the
termination of traffic. Using these rules, we will assist Sprint in the
negotiation of interconnection agreements for the PCS network of Sprint in their
market area with all of the Bell operating companies, including Verizon and
several smaller independent local exchange carriers. Interconnection agreements
are negotiated on a state-wide basis.
If an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject to state
approval. The FCC rules and rulings, as well as the state arbitration
proceedings, will directly impact the nature and cost of the facilities
necessary for interconnection of the PCS systems of Sprint with local, national
and international telecommunications networks. They will also determine the
nature and amount of revenues that we and Sprint can receive for terminating
calls originating on the networks of local exchange and other telecommunications
carriers.
OTHER FCC REQUIREMENTS
In June 1996, the FCC adopted rules that prohibited broadband wireless
personal communications services providers from unreasonably restricting or
disallowing resale of their services or unreasonably discriminating against
resellers. Resale obligations automatically expired on November 24, 2002. These
existing resale requirements and their expiration may somewhat affect the number
of resellers competing with Sprint and its managers and PCS Affiliates in
various markets. However, to date, wireless resellers have not significantly
impacted wireless service providers. Any losses in retail customers have been
offset, in major part, by increases in wireless customers, traffic and wholesale
revenues.
CMRS providers, including Sprint, are required to permit manual roaming
on their systems. With manual roaming, any user whose mobile phone is
technically capable of connecting with a carrier's system must be able to make a
call by providing a credit card number or making some other arrangement for
payment. The FCC is currently considering changes in its rules that may
terminate the manual roaming requirement and may impose automatic roaming
obligations, under which users with capable equipment would be permitted to
originate or terminate calls without taking action other than turning on the
mobile phone.
FCC rules require local exchange and most commercial mobile radio
services providers to program their networks to allow customers to change
service providers without changing telephone numbers, which is referred to as
service provider number portability ("SPNP"). The FCC requires most commercial
mobile radio service providers to implement wireless service provider number
portability where requested in the 100 largest metropolitan areas in the United
States by November 24, 2003. The FCC currently requires most commercial mobile
radio service providers to be
22
able to deliver calls from their networks to ported numbers anywhere in the
country, and to contribute to the Local Number Portability Fund. Implementation
of wireless service provider number portability will require wireless personal
communications service providers like us and Sprint, to purchase more expensive
switches and switch upgrades. However, it will also enable existing cellular
customers to change to wireless personal communications services without losing
their existing wireless telephone numbers, which should make it easier for
wireless personal communications service providers to market their services to
existing cellular users.
FCC rules permit broadband wireless personal communications service and
other commercial mobile radio service providers to provide wireless local loop
and other fixed services that would directly compete with the wireline services
of local exchange carriers. This may create new markets and revenue
opportunities for Sprint and its managers and PCS Affiliates and other wireless
providers.
FCC rules require broadband personal communications services and other
commercial mobile radio services providers to implement enhanced emergency 911
capabilities. The FCC has approved a plan proposed by Sprint under which it
began selling specially equipped telephone handsets on or before October 1,
2001, with a rollout of such handsets continuing until December 31, 2002, when
all new handsets activated nationwide must be specially equipped. Sprint has
asked the FCC for a six-month extension to enable Sprint to wait until June 30,
2003 before it must specially equip all of its newly-activated handsets. In
addition, Sprint's plan requires that by December 31, 2005, 95% of Sprint
wireless subscriber handsets in service must be equipped for the Sprint wireless
enhanced 911 service. Moreover, Sprint was required to complete its PCS network
upgrade to support enhanced 911 service by December 31, 2002, and to begin
providing a specified level of enhanced 911 service by June 30, 2002. As the
required equipment becomes more functional and less expensive, emergency 911
services may afford wireless carriers substantial and attractive new service and
marketing opportunities.
FCC rules include several measures designed to remove obstacles to
competitive access to customers and facilities in commercial multiple tenant
environments, including the following:
o Telecommunications carriers in commercial settings may not enter
into exclusive contracts with building owners, including contracts
that effectively restrict premises owners or their agents from
permitting access to other telecommunications service providers.
o Utilities, including LECs, must afford telecommunications carriers
and cable service providers reasonable and nondiscriminatory
access to conduits and rights-of-way located in customer buildings
and campuses, to the extent such conduits and rights-of-way are
owned or controlled by the utility.
The FCC has also issued a further notice of proposed rulemaking seeking
comment on whether it should adopt additional rules in this area, including
extending certain regulations to include residential as well as commercial
buildings. The final result of this proceeding could affect the availability and
pricing of sites for our antennae and those of our competitors.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT
The Communications Assistance for Law Enforcement Act ("CALEA") enacted
in 1994, requires wireless personal communications service and other
telecommunications service providers to meet capability and capacity
requirements needed by federal, state and local law enforcement to preserve
their electronic surveillance capabilities. Wireless personal communications
service providers were generally required to comply with the current industry
CALEA capability standard, known as J-STD-025, by June 30, 2000, and with
certain additional standards by September 30, 2001. Wireless personal
communications service providers were also required to implement a "packet-mode"
capability by November 19, 2001. Providers had to meet various other capability
requirements established by the Department of Justice and Federal Bureau of
Investigation as of June 30, 2002. Most wireless personal communications service
providers are ineligible for federal reimbursement for the software and hardware
upgrades necessary to comply with the CALEA capability and capacity
requirements. In addition, the FCC is considering petitions from numerous
parties to establish and implement technical compliance standards pursuant to
CALEA requirements. In sum, CALEA capability and capacity requirements are
likely to impose some additional switching and network costs upon Sprint and its
managers and PCS Affiliates and other wireless entities.
23
The USA Patriot Act of 2001 included certain provisions that enable law
enforcement agencies and other branches of the government to more easily acquire
records and information regarding certain uses of communications facilities from
telecommunications carriers, including PCS carriers.
OTHER FEDERAL REGULATIONS
Sprint and its managers and PCS Affiliates must bear the expense of
compliance with FCC and Federal Aviation Administration regulations regarding
the siting, lighting and construction of transmitter towers and antennas. In
addition, FCC environmental regulations may cause some of the Company's base
station locations to become subject to the additional expense of regulation
under the National Environmental Policy Act. The FCC is required to implement
this Act by requiring service providers to meet land use and radio emissions
standards.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS
The FCC and certain states have established "universal service"
programs to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that Sprint's "contribution" to the federal universal service program
is a variable percentage of "end-user telecommunications revenues." Although
many states are likely to adopt a similar assessment methodology, the states are
free to calculate telecommunications service provider contributions in any
manner they choose as long as the process is not inconsistent with the FCC's
rules. At the present time it is not possible to predict the extent of the
Sprint total federal and state universal service assessments or its ability to
recover from the universal service fund. However, some wireless entities are
seeking state commission designation as "eligible telecommunications carriers,"
enabling them to receive federal and state universal service support, and are
preparing to compete aggressively with wireline telephone companies for
universal service revenue. Because we manage substantial rural areas for the PCS
Division of Sprint, it is possible that we will receive revenues in the future
from federal and state universal service support funds that are much greater
than the reductions in our revenues due to universal service contributions paid
by Sprint.
PARTITIONING; DISAGGREGATION
FCC rules allow broadband wireless personal communications services
licensees to partition their market areas and/or to disaggregate their assigned
spectrum and to transfer partial market areas or spectrum assignments to
eligible third parties. These rules may enable us to purchase wireless personal
communications service spectrum from Sprint and other wireless personal
communications services licensees as a supplement or alternative to the existing
management arrangements.
WIRELESS FACILITIES SITING
States and localities are not permitted to regulate the placement of
wireless facilities so as to "prohibit" the provision of wireless services or to
"discriminate" among providers of those services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. These rules are
designed to make it possible for Sprint and its managers and Network Partners
and other wireless entities to acquire necessary tower sites in the face of
local zoning opposition and delays. The FCC is considering numerous requests for
preemption of local actions affecting wireless facilities siting.
EQUAL ACCESS
Wireless providers are not required to provide long distance carriers
with equal access to wireless customers for the provision of toll services. This
enables us and Sprint to generate additional revenues by reselling the toll
services of Sprint PCS and other interexchange carriers from whom we can obtain
favorable volume discounts. However, the FCC is authorized to require unblocked
access to toll service providers subject to certain conditions.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating
the rates and entry of commercial mobile radio service providers. Section 332
does not prohibit a state from regulating the other terms and conditions of
commercial mobile services, including consumer billing information and
practices, billing disputes and other consumer
24
protection matters. However, states may petition the FCC to regulate those
providers and the FCC may grant that petition if the state demonstrates that:
o market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or
o such market conditions exist and commercial mobile radio service
is a replacement for a substantial portion of the landline
telephone service within the state.
To date, the FCC has granted no such petition. To the extent Sprint and
its managers and PCS Affiliates provide fixed wireless service, we may be
subject to additional state regulation. These standards and rulings have
prevented states from delaying the entry of wireless personal communications
services and other wireless carriers into their jurisdictions via certification
and similar requirements, and from delaying or inhibiting aggressive or flexible
wireless price competition after entry.
AVAILABLE INFORMATION
The Company's Internet address is www.alamosapcs.com. We make available
free of charge through our web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish such material to, the SEC. Information contained on the web
site is not part of this report.
ITEM 2. PROPERTIES.
Our headquarters are located in Lubbock, Texas and we lease space in a
number of locations, primarily for our retail stores, base stations and
switching centers. As of December 31, 2002, we leased 59 retail stores and 9
switching centers. As of December 31, 2002, we leased space on 1,465 towers and
owned 44 towers. We collocate with other wireless service providers on
approximately 42% of our towers. We believe that our facilities are adequate for
our current operations and that additional leased space can be obtained if
needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
We have been named as a defendant in a number of purported securities
class actions in the United States District Court for the Southern District of
New York, arising out of our initial public offering (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The action
against us is one of more than 300 related class actions which have been
consolidated and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for purposes of the
IPO were false and misleading because they failed to disclose that the
underwriters allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of common stock in
connection with the IPO, and (ii) entered into agreements with their customers
to allocate such stock to those customers in exchange for the customers agreeing
to purchase additional Company shares in the aftermarket at pre-determined
prices. On February 19, 2003, the Court granted motions by us and 115 other
issuers to dismiss the claims under Rule 10b-5 of the Exchange Act which had
been asserted against them. The Court denied the motions by us and virtually all
of the other issuers to dismiss the claims asserted against them under Section
11 of the Securities Act. We maintain insurance coverage which may mitigate our
exposure to loss in the event that this claim is not resolved in our favor.
On January 23, 2001, Jerry Brantley, then President and COO of the
Company, 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, in the District Court of Lubbock County,
Texas, 22nd Judicial District alleging wrongful termination among other things.
On September 27, 2002, the Court entered an Agreed Order Compelling Arbitration.
The parties are in the process of selecting a panel of three arbitrators. We
believe that there is no basis for Mr. Brantley's claim and intend to vigorously
defend the lawsuit.
On January 8, 2003 a claim was made against us by Southwest Antenna and
Tower, Inc. ("SWAT") in the Second Judicial District Court, County of
Bernalillo, State of New Mexico, for monies due on an open account. SWAT seeks
to recover approximately $1.6 million from us relative to work performed by SWAT
during 2000 for Roberts Wireless Communications, LLC, which was acquired by us
in the first quarter of 2001. We are in the process of gathering information
relative to this claim and have recorded an estimated liability relative to this
contingency in the consolidated financial statements at December 31, 2002.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock has traded on The New York Stock Exchange ("NYSE")
under the symbol "APS" since December 6, 2001. Prior to that date, our common
stock was traded on The Nasdaq National Market under the symbol "APCS." Prior to
February 3, 2000, there was no public market for our common stock. The following
table sets forth, for the periods indicated, the range of high and low sales
prices for our common stock as reported on The Nasdaq National Market and The
New York Stock Exchange.
PRICE RANGE OF
COMMON STOCK
HIGH LOW
Fiscal year ended December 31, 2002:
Fourth quarter $ 1.11 $ 0.27
Third quarter $ 1.36 $ 0.23
Second quarter $ 6.20 $ 0.75
First quarter $ 11.95 $ 3.00
Fiscal year ended December 31, 2001:
Fourth quarter $ 18.70 $ 10.57
Third quarter $ 20.00 $ 10.90
Second quarter $ 17.20 $ 9.69
First quarter $ 17.13 $ 7.25
On March 27, 2003, the last reported sales price of our common stock as
reported on The New York Stock Exchange was $0.36 per share. On March 27, 2003,
there were 413 holders of record of our common stock.
We are subject to various listing requirements set forth by the NYSE.
We received written notice from the NYSE on August 29, 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) maintain an average global market capitalization over a consecutive 30
trading-day period of not less than $100 million. On October 15, 2002 we
submitted to the NYSE a business plan to cure our non-compliance with the NYSE
listing requirements. The business plan was approved by the NYSE and, as a
result of such approval, we have until February 26, 2004 to re-establish
compliance with the $100 million market capitalization requirement. However,
with respect to the minimum share price requirement, the cure period for
achieving compliance under NYSE listing requirements expired on March 3, 2003.
The trading price and volume of our common stock is under relatively continuous
review by the NYSE, and the NYSE could at any time choose to suspend trading in
our common stock and make an application to the SEC to delist our common stock.
Our Board of Directors has approved taking affirmative actions, if
necessary, to meet the $1.00 minimum share price listing requirement. This
includes affecting a reverse stock split which would be submitted for
shareholder approval at the 2003 annual shareholders meeting. We believe that if
we are still listed in the NYSE at the time a proposed reverse stock split is
approved by shareholders, the NYSE minimum share price listing requirement may
be deemed satisfied if the price of our common stock promptly exceeds $1.00 per
share and remains above the level for at least the following 30 trading days.
Despite the foregoing, the NYSE has broad discretion to suspend trading in our
common stock on the NYSE and make an application to the SEC to delist our common
stock. There is no assurance that the NYSE will continue to allow trading in our
common stock until our annual meeting of stockholders or until such time as we
undertake another action to meet the NYSE minimum share price listing
requirement.
We have never declared or paid any cash dividends on our common stock
or other securities. We do not expect to pay cash dividends on our capital stock
in the foreseeable future. We currently intend to retain our future earnings, if
26
any, to fund the development and growth of our business. Future dividends, if
any, will be determined by our Board of Directors and will depend upon our
results of operations, financial condition and capital expenditure plans, as
well as other factors that our board of directors considers relevant. In
addition, the terms of the indentures governing our Senior Notes may limit our
ability to pay dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below under the captions
"Statement of Operations Data," "Per Share Data," and "Balance Sheet Data" have
been derived from the consolidated balance sheets at December 31, 2002, 2001,
2000, 1999 and 1998, and the related statements of operations for the years
ended December 31, 2002, 2001, 2000 and 1999, and the period from July 16, 1998
(inception) to December 31, 1998, and the notes thereto appearing elsewhere
herein, as applicable. All dollar amounts are in thousands with the exception of
per share amounts.
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 from the date of acquisition.
It is important that you also read "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the financial
statements for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998,
and the related notes.
FOR THE PERIOD
FOR THE YEAR ENDED JULY 16, 1998
--------------------------------------------------------------------------- (INCEPTION THROUGH
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998)
----------------- ------------------ ----------------- ----------------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Service revenues $ 531,770 $ 330,358 $ 73,500 $ 6,534 $ --
Product sales 23,922 26,781 9,201 2,450 --
-------------- --------------- -------------- ----------- -----------
555,692 357,139 82,701 8,984 --
-------------- --------------- -------------- ----------- -----------
Cost and expenses:
Cost of service and operations 343,468 237,843 55,701 7,601 --
Cost of product sales 50,974 53,911 20,524 5,939 --
Selling and marketing 119,059 110,052 45,407 10,650 --
General and administration 15,243 13,853 9,538 4,209 956
Depreciation and amortization 105,121 94,722 12,530 3,057 2
Impairment of goodwill (4) 291,635 -- -- -- --
Impairment of property and
Equipment (5) 1,194 -- -- -- --
Terminated merger and
acquisition
costs -- -- 2,247 -- --
Non-cash compensation 29 (916) 5,651 8,200 --
-------------- --------------- -------------- ----------- -----------
926,723 509,465 151,598 39,656 958
-------------- --------------- -------------- ----------- -----------
Operating loss $ (371,031) $ (152,326) $ (68,897) $ (30,672) $ (958)
============== =============== ============== ============ ===========
Net loss $ (403,349) $ (147,423) $ (80,189) $ (32,836) $ (924)
============== =============== ============== ============ ===========
PER SHARE DATA:
Basic and diluted net loss per
share of common stock (1) $ (4.33) $ (1.69) $ (1.33) N/A N/A
Basic and diluted pro forma net
loss per share of
common stock (1) N/A N/A N/A $ (.68)( 2) $ (.02)(2)
OTHER DATA:
Number of subscribers at end of
period 622,000 503,000 133,000 32,000 --
AS OF DECEMBER 31,
--------------------------------------------------------------------------
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
--------------- ----------- ----------- ---------- -----------
Cash and cash equivalents $ 61,737 $ 104,672 $ 141,768 $ 5,656 $ 13,529
Property and equipment, net 458,946 455,695 228,983 84,714 2,093
Total assets 1,172,152 1,598,408 458,650 104,492 15,674
Short-term debt (3) 1,064 596 36 385 44
Long-term debt 870,217 826,352 264,843 72,753 708
Total liabilities 1,037,514 1,060,422 327,252 93,052 1,598
Equity 134,638 537,986 131,398 11,440 14,076
27
(1) Diluted weighted average shares outstanding exclude the common shares
issuable on the exercise of stock options because inclusion would have
been antidilutive. Basic and diluted weighted average shares
outstanding for the year ended December 31, 2002 excludes 800,000
shares of restricted stock awarded to officers during the year as none
of those shares were vested at December 31, 2002.
(2) The presentation of the pro forma net loss per share of common stock
gives effect to adjustments for federal and state income taxes as if
Alamosa had been taxed as a C Corporation for the year ended December
31, 1999 and for the period from July 16, 1998 (inception) through
December 31, 1998. The presentation of pro forma net loss per share of
common stock also reflects the February 2000 reorganization of Alamosa
PCS, LLC from a limited liability company to a corporation as if it had
occurred upon inception.
(3) Reflects capital lease obligations of $1,064, $596 and $36 as of
December 31, 2002, 2001 and 2000, respectively. Reflects notes payable
of $363 and capital lease obligations of $22 as of December 31, 1999
and notes payable of $24 and capital lease obligations of $20 as of
December 31, 1998.
(4) In the third quarter of 2002 we recorded an impairment charge of
$291,635 as a result of our first annual impairment testing of goodwill
as required by SFAS No. 142. As of December 31, 2002 the carrying value
of goodwill is zero.
(5) Impairment of property and equipment in 2002 relates to our decision to
close a switching center and abandon the site. The net carrying value
of leasehold improvements related to the abandoned site was charged as
an impairment loss.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
FORWARD LOOKING INFORMATION
You should read the following discussion and analysis when you read the
consolidated financial statements and the related notes included in this annual
report on Form 10-K beginning on page F-1. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results anticipated in these
forward-looking statements as a result of factors including, but not limited to,
those under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation - Risk Factors" and "This Annual Report Contains
Forward-Looking Statements."
DEFINITIONS OF OPERATING AND NON-GAAP FINANCIAL MEASURES
We provide readers financial measures generated using generally
accepted accounting principles ("GAAP") and using adjustments to GAAP
("Non-GAAP"). These financial measures reflect industry conventions or standard
measures of liquidity, profitability or performance commonly used by the
investment community for comparability purposes. The Non-GAAP financial measures
and other operating metrics used in this document include the following:
o Free cash flow is defined as cash generated from operations less net
cash requirements for capital expenditures and debt service
requirements.
o Average monthly revenue per user ("ARPU") is a measure used to
determine the monthly subscriber revenue earned for subscribers based
in our territory. This measure is determined based on subscriber
revenues in our consolidated statement of operations and our average
subscribers during the period.
o Cash cost per user ("CCPU") is a measure of the costs to operate our
business on a per user basis consisting of costs of service and
operation and general and administrative expenses in our consolidated
statement of operations. These costs are allocated across average
subscribers during the period to calculate this measure.
o Customer churn is used to measure the rate at which subscribers based
in our territory deactivate service whether such deactivation be on a
voluntary or involuntary basis. We calculate churn based on the number
of subscribers deactivated (net of transfers out of our service area
and those who deactivated within 30 days of activation) as a percentage
of our average subscriber base during the period.
28
o Cost per gross addition ("CPGA") is used to measure the costs incurred
to add new subscribers in our territory. This measure includes handset
subsidies, commissions, rebates and other selling and marketing costs
and is calculated based on product sales revenue, cost of products sold
and selling and marketing expenses in our consolidated statement of
operations allocated over the total number of subscribers activated in
our territory during the period.
GENERAL
Since our inception in 1998, we have incurred substantial costs in
connection with negotiating our contracts with Sprint, obtaining our debt
financing, completing our public equity offerings, engineering our wireless PCS
network, developing our business infrastructure and building out our portion of
the PCS network of Sprint. Prior to the launch of our first market in June 1999,
we did not have any markets in operation and we had no customers. At December
31, 2002, we had approximately 622,000 subscribers. As of December 31, 2002, our
accumulated deficit is $664.7 million and we have spent a cumulative total of
approximately $649 million in capital expenditures (including that spent by
Roberts, WOW and Southwest prior to our acquisition) in connection with
constructing our portion of the PCS network of Sprint and developing our
business infrastructure including the establishment of our retail distribution
channels. While we anticipate operating losses to continue, we expect revenue to
continue to increase as our subscriber base increases.
On July 17, 1998, we entered into our original affiliation agreements
with Sprint. We subsequently amended our original agreements in 1999 to add
additional territories to our licensed area. In the first quarter of 2001, we
completed the acquisitions of Roberts, WOW and Southwest bringing our total
licensed POPs to approximately 15.8 million at December 31, 2002.
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless, mobility communications network services under the Sprint brand name
in our licensed territory. We are responsible for building, owning and managing
the portion of the PCS network of Sprint located in our territory. We offer
national plans designed by Sprint and intend to offer local plans tailored to
our market demographics. Our portion of the PCS network of Sprint is designed to
offer a seamless connection with the 100% digital PCS nationwide wireless
network of Sprint. We market wireless products and services through a number of
distribution outlets located in our territories, including our own retail
stores, major national distributors and local third party distributors.
We recognize revenues from our subscribers, proceeds from the sales of
handsets and accessories through channels controlled by us and fees from Sprint
and other wireless service providers when their customers roam onto our portion
of the PCS network of Sprint. Sprint retains 8% of all collected service revenue
from our subscribers (not including products sales) and fees collected from
other wireless service providers when their customers roam onto our portion of
the PCS network of Sprint. We report the amount retained by Sprint as an
operating expense.
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 a percentage of our accounts receivable by
aging category. In determining the allowance, we also look at historical
write-offs of our receivables and our history is somewhat limited due to the
number of changes that have historically been made to credit policies. We also
look at current trends in the credit quality of our customer base as well as
changes in the credit policies. Under the PCS service
29
plans from Sprint, customers who do not meet certain credit criteria can
nevertheless select any plan offered, subject to an account spending limit,
referred to as ASL, to control credit exposure. Account spending limits range
from $125 to $200 that could be credited against future billings. In May 2001,
the deposit requirement was eliminated on certain, but not all, credit classes.
As a result, a significant amount of our customer additions during 2001 were
under the NDASL program. The NDASL program was replaced by the "Clear Pay"
program in November 2001, which reinstated the deposit requirement for certain
of the lowest credit class customers, and featured 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 believe that this program, referred to as Clear Pay II, will reduce
our future bad debt exposure.
REVENUE RECOGNITION - We record equipment revenue for the sale of
handsets and accessories to customers in our retail stores and to local
resellers in our territories. We do not record equipment revenue on handsets and
accessories purchased by our customers from national resellers or directly from
Sprint. Our customers pay an activation fee when they initiate service. We defer
this activation fee and record activation fee revenue over the estimated average
life of our customers which ranges from 12 to 36 months depending on credit
class and based on our past experience. We recognize revenue from our customers
as they use the service. Additionally, we provide a reduction of recorded
revenue for billing adjustments and billing corrections.
We record revenue for products 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.
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 the Company 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 our 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.
30
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 indicated that goodwill had no
value and an impairment charge of $291,635 was recorded in the third quarter of
2002. This impairment charge is included as a separate line item in the
consolidated statements of operations for the year ended December 31, 2002.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, plant and equipment and intangibles, comprise approximately 81 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 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 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. We anticipate that during 2003 we will reinstate a valuation
allowance when the timing differences that give rise to the deferred tax asset
are expected to exceed the timing differences that give rise to the deferred tax
liabilities due to uncertainty as to whether we will recognize the benefit of
those deferred taxes in future periods.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -
We place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of 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)
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. Accordingly, this impacts the
comparison of our results of operations for the years ended December 31, 2001
and 2000.
31
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 622,000 at December 31, 2002 compared to
approximately 503,000 at December 31, 2001. This growth of approximately 119,000
subscribers or 24 percent compares to 211 percent growth in 2001, excluding
acquired subscribers. The decline in the rate of growth from 2001 to 2002 is due
to the fact that markets were being launched during 2001 where our coverage area
increased from 4.5 million to 11.2 million covered POPs. During 2002 our
coverage area increased from 11.2 million to 11.8 million covered POPs as we had
substantially completed the build-out of our network by the end of 2001.
Monthly churn for 2002 was approximately 3.4 percent compared to
approximately 2.7 percent for 2001. Increases in churn negatively impact our
operations as we incur significant up front costs in acquiring customers. The
increase in churn for 2002 is the result of a significantly higher level of
involuntary deactivations of subscribers for non-payment. This was driven by the
addition of a significant number of sub-prime credit quality subscribers in 2001
under the Clear Pay/NDASL program. We reinstated deposit requirements for
sub-prime credit quality subscribers in our markets in February 2002 and began
to see the impact of this change in the form of decreasing churn in the fourth
quarter of 2002.
Our CPGA includes handset subsidies, and selling and marketing costs
and was approximately $395 per gross addition in 2002 compared to $349 in 2001.
As overall subscriber growth on a national basis declined in 2002, competition
among the wireless communications providers became more intense. As a result of
this competition for both new subscribers and existing subscribers from other
carriers, promotional efforts increased during 2002 in terms of handset rebates
and other promotional activities which increases the up front costs in acquiring
customers. This competition along with having to spread our fixed marketing
expenses over a fewer number of activations in 2002 resulted in the increase in
CPGA of $46 per gross addition.
SERVICE REVENUE - Service revenues consist of revenue from subscribers
and roaming revenue earned when customers from other carriers roam onto our
portion of the PCS network of Sprint. Subscriber revenue consists of payments
received from our subscribers for monthly service under their service plans.
Subscriber revenue also includes activation fees and charges for the use of
various features including the wireless web, voice activated dialing, etc.
Subscriber revenues were $391,927 for the year ended December 31, 2002
compared to $231,145 for the year ended December 31, 2001. This increase of 70
percent was partially due to the 23 percent increase in our subscriber base
discussed above. The increase in revenue exceeded the increases in subscribers
as we had a larger base of subscribers at the beginning of 2002 for which we
earned a full year of revenue in 2002. ARPU decreased in 2002 to $58 compared to
$61 in 2001. This decrease is attributable to lower monthly recurring charges
for plans with larger buckets of minutes being offered in 2002 compared to 2001
as a result of the increased level of competition in the marketplace.
Roaming revenue is comprised of revenue from Sprint and other PCS
subscribers based outside of our territories that roam onto our portion of the
PCS network of Sprint. We have a reciprocal roaming rate arrangement with Sprint
where per minute charges for inbound and outbound roaming relative to Sprint
subscribers are identical. This rate was 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. During 2002
this reciprocal rate remained at 10 cents per minute for the entire year. In
addition, the toll rate for long distance charges associated with Sprint roaming
was approximately 6 cents per minute in 2001 and 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 base stations which
allowed us to capture additional roaming traffic as well as growth in the
customer bases of Sprint and other PCS providers. Sprint has notified us that
the reciprocal rate for 2003 will be 5.8 cents per minute which Sprint has
indicated represents a fair and reasonable return on the cost of the underlying
network based on an agreement in principle reached with Sprint in 2001. This
rate went into effect on January 1, 2003. We have not agreed that 5.8 cents per
minute represents a fair and reasonable return on the underlying network and are
currently in discussions with Sprint as to the determination of this rate. The
toll rate for long distance charges associated with Sprint roaming is expected
to remain at approximately 2 cents per minute. During 2002 we also experienced a
significant increase in the volume of inbound roaming traffic from PCS providers
other than Sprint which traffic is settled at rates separately negotiated by
Sprint on our behalf with the other PCS providers. We had approximately 1.1
billion minutes of inbound roaming traffic in 2002 compared to approximately 515
million minutes of inbound roaming traffic in 2001. The increase in minutes
offset by the decrease in rates accounted for the 41 percent overall increase in
roaming revenue to $139,843 in 2002 from $99,213 in 2001.
32
PRODUCT SALES AND COST OF PRODUCTS SOLD- We record revenue from the
sale of handsets and accessories, net of an allowance for returns, as product
sales. Product sales revenue and costs of products sold are recorded for all
products that are sold through our retail stores as well as those sold to our
local indirect agents. The cost of handsets sold generally exceeds the retail
sales price as we subsidize the price of handsets for competitive reasons.
Sprint's handset return policy allows customers to return their handsets for a
full refund within 14 days of purchase. When handsets are returned to us, we may
be able to reissue the handsets to customers at little additional cost to us.
However, when handsets are returned to Sprint for refurbishing, we receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
Product sales revenue for 2002 was $23,922 compared to $26,781 for
2001. Cost of products sold for 2002 was $50,974 compared to $53,911 for 2001.
As such the subsidy on handsets sold through our retail and local indirect
channels was $27,052 in 2002 and $27,130 in 2001. On a per activation basis, the
subsidy was approximately $137 per activation in 2002 and approximately $121 per
activation in 2001. The increase in subsidy per activation is due to more
aggressive promotional efforts in 2002 which involved a higher level of instant
rebates and other discounts on handset prices for competitive reasons.
COST OF SERVICE AND OPERATIONS (EXCLUDING NON-CASH COMPENSATION) - Cost
of service and operations includes the costs of operating our portion of the PCS
network of Sprint. These costs include items such as outbound roaming fees, long
distance charges, tower leases and maintenance as well as backhaul costs. In
addition, it includes the fees we pay to Sprint for our 8 percent affiliation
fee, back office services such as billing and customer care as well as our
provision for estimated uncollectible accounts. Expenses of $343,468 in 2002
were 44 percent higher than the $237,843 incurred in 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, cost of
service and operations are driven by the volume of traffic on our network. Total
minutes of use on our network were 4.1 billion minutes in 2002 compared to 2.1
billion minutes in 2001 for an increase in traffic of 95 percent.
SELLING AND MARKETING (EXCLUDING NON-CASH COMPENSATION) - Selling and
marketing expenses include advertising, promotion, sales commissions and
expenses related to our distribution channels including our retail store
expenses. In addition, we reimburse Sprint for the subsidy on handsets sold
through national retail stores due to the fact that these retailers purchase
their handsets from Sprint. This subsidy is recorded as a selling and marketing
expense. The amount of handset subsidy included in selling and marketing was
$18,323 and $14,575 in 2002 and 2001, respectively. Total selling and marketing
expenses of $119,059 in 2002 were 8 percent higher than the $110,052 incurred in
2001 due to increased competition in the marketplace.
GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
General and administrative expenses include corporate costs and expenses such as
our corporate finance and sales and marketing organizations. General and
administrative expenses of $15,243 in 2002 were 10 percent higher than the
$13,853 incurred in 2001. The primary causes for this increase were increased
insurance costs and increased professional fees.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization includes
depreciation of our property, plant and equipment as well as amortization of
intangibles. Depreciation is calculated on the straight line method over the
estimated useful lives of the underlying assets and totaled $64,702 in 2002 as
compared to $45,963 in 2001. This increase of 41 percent is due to the increase
in depreciable costs as a result of our capital expenditures in 2002.
Amortization expense relates to intangible assets recorded in
connection with the acquisitions closed in the first quarter of 2001. In
addition to unidentifiable goodwill, 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 acquisitions. Amortization expense of $40,419 in 2002 was 17 percent lower
than the $48,759 in 2001 due to the fact that amortization of goodwill was
discontinued on January 1, 2002 upon the adoption of the provisions of SFAS No.
142 as discussed in "Critical Accounting Policies" which resulted in no
amortization of goodwill being recorded in 2002.
IMPAIRMENT OF GOODWILL - In accordance with the provisions of SFAS No.
142, we performed our first annual assessment of goodwill for impairment as of
July 31, 2002. The results of this assessment indicated that our goodwill had no
value and an impairment charge of $291,635 was recorded in 2002.
33
IMPAIRMENT OF PROPERTY AND EQUIPMENT - In 2002 we recorded impairment
of property and equipment in the amount of $1,194 related to a switching
facility that was closed and abandoned.
NON-CASH COMPENSATION - Non-cash compensation expense in 2001 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 a negative $916 for 2001 due to the forfeiture of remaining options
relative to a terminated employee.
Non-cash compensation expense of $29 in 2002 related to shares of
restricted stock that were awarded to our officers in 2002. Certain of our
officers received a total of 800,000 shares of restricted stock at a discount to
market price that will vest over a three-year period. Compensation expense
relative to the difference between the market price of the stock and the price
the officers paid for the stock will be recognized over the vesting period
during which the restrictions lapse.
OPERATING LOSS - Our operating loss for 2002 was $371,031 compared to
$152,326 for 2001. This increase is primarily attributable to the $291,635
impairment of goodwill recorded in 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 $3,459 in 2002 was 70 percent less than the $11,664 earned in 2001 due
to declining interest rates and the fact that excess cash and investments were
liquidated during 2002 in connection with funding our capital expenditures and
operating cash flow losses.
INTEREST EXPENSE - Interest expense for 2002 includes non-cash interest
accreted on our 12 7/8% Senior Discount Notes of $31,655 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 $102,863 from $81,730 in
2001 is due to the increased level of debt after the two issuances of senior
notes in 2001 and 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. As
discussed in "Recently Issued Accounting Pronouncements," we anticipate that
this loss on debt extinguishment will no longer be classified as an
extraordinary item upon the adoption of SFAS No. 145 in the first quarter of
2003.
FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 503,000 at December 31, 2001 compared to
approximately 133,000 at December 31, 2000. This growth includes approximately
90,000 subscribers acquired in the acquisitions which closed in the first
quarter of 2001. The additional 280,000 subscribers came as a result of
increasing our network coverage from 4.5 million to 11.2 million covered POPs
during 2001 providing additional marketing opportunities. Monthly churn for 2001
was approximately 2.7 percent compared to approximately 2.9 percent for 2000.
This improvement in churn was due to more subscribers signing up under plans
with contracts as well as improved coverage areas as we built out our network.
Our CPGA was approximately $349 per gross addition in 2001 compared to $430 in
2000. This improvement was a result of spreading our fixed marketing costs over
a larger number of gross additions.
SERVICE REVENUE - Subscriber revenues were $231,145 for the year ended
December 31, 2001 compared to $56,154 for the year ended December 31, 2000. This
increase of 312 percent was due to the increase in our subscriber base from
approximately 133,000 subscribers at December 31, 2000 to approximately 503,000
subscribers at December 31, 2001. ARPU decreased in 2001 to $61 compared to $65
in 2000. This decrease was attributable to lower monthly recurring charges for
plans with larger buckets of minutes being offered in 2001 compared to 2000.
The reciprocal roaming rate with Sprint declined during 2001 from 20
cents per minute at January 1, 2001 to 15 cents on June 1, 2001 and to 12 cents
on October 1, 2001 through the end of 2001. The decline in rates was offset by
significant increases in roaming minutes due to the fact that we added
additional base stations during 2001, including
34
531 added through acquisitions, which allowed us to capture additional roaming
traffic as well as growth in the customer bases of Sprint and other PCS
providers. We had approximately 515 million minutes of inbound roaming traffic
in 2001 compared to approximately 69 million minutes of inbound roaming traffic
in 2000. The increase in minutes offset by the decrease in rates accounted for
the 472 percent increase in roaming revenue to $99,213 in 2001 from $17,346 in
2000.
PRODUCT SALES AND COST OF PRODUCTS SOLD - Product sales revenue for
2001 was $26,781 compared to $9,201 for 2000. Cost of products sold was $53,911
for 2001 compared to $20,524 for 2000. As such, the subsidy on handsets sold
through our retail and local indirect channels was $27,130 in 2001 and $11,323
in 2000. On a per activation basis, the subsidy was approximately $121 per
activation in 2001 and approximately $146 per activation in 2000. The decrease
in subsidy per activation is due to less promotional activity in terms of
handset rebates in 2001 than 2000 as we were in the process of launching more
markets in 2000.
COST OF SERVICE AND OPERATIONS (EXCLUDING NON-CASH COMPENSATION) - Cost
of service and operations of $237,843 in 2001 were 327 percent higher than the
$55,701 incurred in 2000. This increase in cost is the result of the completion
of the build out of our network as well as the addition of the networks of the
acquired companies in the first quarter of 2001 which drove an increase in the
number of subscribers using our network. In addition, cost of service and
operations are driven by the volume of traffic on our network. Total minutes of
use on our network were 2.1 billion minutes in 2001 compared to 382 million
minutes in 2000 for an increase in traffic of 450 percent.
SELLING AND MARKETING (EXCLUDING NON-CASH COMPENSATION) - The amount of
handset subsidy included in selling and marketing was $14,575 and $4,846 in 2001
and 2000, respectively. Total selling and marketing expenses of $110,052 in 2001
was 142 percent higher than the $45,407 incurred in 2000 due to the expansion of
our distribution channels resulting from the additional markets launched during
2001 and the markets acquired in connection with the acquisitions in the first
quarter of 2001.
GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
General and administrative expenses of $13,853 in 2001 were 45 percent higher
than the $9,538 incurred in 2000 due to the three acquisitions which were
consummated in the first quarter of 2001. Although the three acquisitions more
than doubled the size of our licensed territory, the corporate costs did not
increase by the same level due to efficiencies gained by leveraging our
corporate costs and eliminating large amounts of corporate costs relative to the
acquired companies.
DEPRECIATION AND AMORTIZATION - Depreciation expense totaled $45,963 in
2001 as compared to $12,530 in 2000. This increase of 267 percent is due to the
increase in depreciable costs as a result of our capital expenditures in 2001 of
$146,817 and the assets acquired in connection with the three acquisitions
closed in the first quarter totaling $125,960.
Amortization expense of $48,759 in 2001 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. We had
no such intangible assets during 2000 such that no amortization was recorded in
2000.
NON-CASH COMPENSATION - Non-cash compensation expense in 2001 and 2000
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 $5,651 in 2000. Compensation expense for 2001 was a negative
$916 due to the forfeiture of remaining options relative to a terminated
employee.
TERMINATED MERGER AND ACQUISITION COSTS - Terminated merger and
acquisition costs recorded in 2000 related to costs incurred in connection with
due diligence performed on potential acquisitions for which agreements were not
reached. No such costs were incurred in 2001.
OPERATING LOSS - Our operating loss for 2001 was $152,326 compared to
$68,897 for 2000. This increase is primarily attributable to the significant
amount of selling and marketing costs incurred in connection with the
acquisition of customers driven by our significant subscriber growth in 2001.
35
INTEREST AND OTHER INCOME - Interest income of $11,664 in 2001 was 19
percent less than the $14,483 earned in 2000 due to declining interest rates and
the fact that excess cash and investments were liquidated during 2001 in
connection with funding our capital expenditures and operating cash flow losses.
INTEREST EXPENSE - Interest expense for 2001 includes non-cash interest
accreted on our 12 7/8% Senior Discount Notes of $27,927 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 $81,730 from $25,775 in
2000 is due to the increased level of debt after the two issuances of senior
notes in 2001 and 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. As
discussed in "Recently Issued Accounting Pronouncements," we anticipate that
this loss on debt extinguishment will no longer be classified as an
extraordinary item upon the adoption of SFAS No. 145 in the first quarter of
2003.
INCOME TAXES
We account for income taxes in accordance with Statement of Financial
Accounting Standards 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 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. We anticipate that during 2003 we will reinstate a valuation
allowance when the timing differences that give rise to the deferred tax asset
are expected to exceed the timing differences that give rise to the deferred tax
liabilities due to uncertainty as to whether we will recognize the benefit of
those deferred taxes in future periods.
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES - Operating cash flows increased $87,117 in 2002
and decreased $84,435 in 2001. The 2002 increase is primarily due to our
decreased net loss before non-cash items in 2002 of $83,615. The 2001 decrease
is primarily due to our increased net loss before non-cash items in 2001 of
$42,868 as well as a significant increase in our customer receivables due to the
growth of our subscriber base
INVESTING ACTIVITIES - Our investing cash flows were a negative $87,667
in 2002 compared to a negative $169,188 in 2001. Our capital expenditures for
2002 totaled $69,639, excluding capital expenditure payments of $20,450 that
related to liabilities that existed at January 1, 2002, but including $613
acquired in connection with capital leases. Our capital expenditures for 2001
totaled $146,817 of which $143,731 were cash expenditures.
FINANCING ACTIVITIES - Our financing cash flows decreased in 2002 to
$71,268 from $245,745 in 2001. Our financing cash flows in 2002 primarily
consisted of $59,968 in restricted cash which was used to meet debt service
requirements and $12,838 in borrowings under our Senior Secured Credit Facility.
In 2001, we received net proceeds from debt offerings of approximately $621,000
and repaid debt of approximately $290,000.
36
CAPITAL REQUIREMENTS
Our 2003 capital expenditure requirements are expected to be
approximately $40 to 50 million. Operating cash flow is expected to continue to
increase in 2003 as we continue to realize the benefits of the subscriber growth
that we have experienced over the past three years. We expect to generate free
cash flow for the first time in 2003 and believe that we are fully funded to
that point as discussed below.
LIQUIDITY
Since inception, we have financed our operations through capital
contributions from our owners, through debt financing and through proceeds
generated from public offerings of our common stock. We have incurred
substantial net losses and negative cash flow from operations since inception.
Expenses are expected to exceed revenues until we establish a sufficient
subscriber base. We expect operating losses to continue for the foreseeable
future. However, we expect operating losses to decrease in the future as we
obtain more subscribers.
EDC CREDIT FACILITY - We entered into a credit agreement with Nortel
effective June 10, 1999, which was amended and restated on February 8, 2000. On
June 23, 2000, Nortel assigned the entirety of its loans and commitments to
Export Development Corporation ("EDC"), and Alamosa and EDC entered into the
credit facility with EDC (the "EDC Credit Facility"). The EDC Credit Facility
was paid in full in the first quarter of 2001 with proceeds from the Senior
Secured Credit Facility described below.
COMMON STOCK - On October 29, 1999, we filed a registration statement
with the Securities and Exchange Commission for the sale of 10,714,000 shares of
our common stock (the "Initial Offering"). The Initial Offering became effective
and the shares were issued on February 3, 2000 at the initial price of $17.00
per share. Subsequently, the underwriters exercised their over-allotment option
for an additional 1,607,100 shares. We received net proceeds of approximately
$193.8 million after commissions of $13.3 million and expenses of approximately
$1.5 million. The proceeds of the Initial Offering were used for the build out
of our portion of the PCS network of Sprint, to fund operating capital needs and
for other corporate purposes.
On November 13, 2001, we completed an underwritten secondary offering
of our common stock pursuant to which certain of our stockholders sold an
aggregate of 4,800,000 shares at a public offering price of $14.75 per share. We
did not receive any proceeds from the sale of these shares, but the underwriters
were granted an option to purchase up to 720,000 additional shares of common
stock to cover over-allotments. This option was exercised on November 16, 2001
and we received net proceeds from the sale of these shares after offering costs
of approximately $9.1 million which will be used for general corporate purposes.
SENIOR NOTES - On February 8, 2000, Alamosa (Delaware) issued $350.0
million face amount of senior discount notes (the "12 7/8% Senior Discount
Notes"). The 12 7/8% Senior Discount Notes mature in ten years (February 15,
2010), carry a coupon rate of 12 7/8%, and provide for interest deferral for the
first five years. The 12 7/8% Senior Discount Notes will accrete to their $350
million face amount by February 8, 2005, after which interest will be paid in
cash semiannually.
On January 31, 2001, Alamosa (Delaware) issued $250.0 million face
amount of senior notes (the "12 1/2% Senior Notes"). The 12 1/2% Senior Notes
mature in ten years (February 1, 2011), carry a coupon rate of 12 1/2%, payable
semiannually on February 1 and August 1, beginning on August 1, 2001.
On August 15, 2001, Alamosa (Delaware) issued $150.0 million face
amount of senior notes (the "13 5/8% Senior Notes"). The 13 5/8% Senior Notes
mature in ten years (August 15, 2011), carry a coupon rate of 13 5/8%, payable
semiannually on February 15 and August 15, beginning on February 15, 2002.
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, we entered into
a $280.0 million Senior Secured Credit Facility with Citicorp USA, as
administrative agent and collateral agent; Toronto Dominion (Texas), Inc., as
syndication agent; First Union National Bank, as documentation agent; EDC as
co-documentation agent; and a syndicate of banking and financial institutions.
The Senior Secured Credit Facility was closed and initial funding of $150
million was made on February 14, 2001 in connection with the completion of the
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
37
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. The facility was again amended in August 2001 to,
among other things, modify financial covenants and reduce the maximum borrowing
to $225 million of which $200 million is outstanding as of December 31, 2002.
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 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 million. 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 increased to 4.25% for
LIBOR borrowings and 3.25% for base rate borrowings. In connection with a
scheduled interest rate reset on September 30, 2002, the interest margin was
reset to 4.00% for LIBOR borrowings and 3.00% for base rate borrowings.
The September 26, 2002 amendment also placed restrictions on the
ability to draw on the $25 million revolving portion of the Senior Secured
Credit Facility. The first $10 million can be drawn if cash balances fall below
$15 million and we substantiate through tangible evidence the need for such
advances. The remaining $15 million is available only at such time as the
leverage ratio is less than or equal to 5.5 to 1. As of December 31, 2002, our
leverage ratio was 24.9 to 1.
The terms of this credit facility contain numerous financial and other
covenants the violation of which could be deemed an event of default by the
lenders. Should we be deemed to be in default, the lenders can declare the
entire outstanding borrowings immediately due and payable or exercise other
rights and remedies. Such an event would likely have a material adverse impact
to us.
Our future contractual obligations related to long-term debt, capital
lease obligations, and non-cancellable operating leases at December 31, 2002
were as follows:
Payments due by period
---------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
One year Years Years Years Total
---------- ------------ ---------- ----------- -----------
Long-term debt $ -- $ 117,500 $ 82,500 $ 750,000 $ 950,000
Capital lease obligations 1,305 908 327 693 3,233
Operating leases 28,973 90,415 62,838 58,834 241,060
----------- ----------- ---------- ----------- -----------
$ 30,278 $ 208,823 $ 145,665 $ 809,527 $1,194,293
=========== ============ ========== =========== ==========
As of December 31, 2002, we had $61,737 in cash and cash equivalents
plus an additional $34,725 in restricted cash held in escrow for debt service
requirements. We also had $25,000 remaining on the revolving portion of the
Senior Secured Credit Facility subject to the restrictions discussed previously.
We believe that this $121,462 in cash and available borrowings is sufficient to
fund our working capital, capital expenditure and debt service requirements
through the point where we generate free cash flow.
Although, we do not anticipate the need to raise additional capital in
the upcoming year, our funding status is dependent on a number of factors
influencing our projections of operating cash flows including those related to
subscriber growth, ARPU, churn and CPGA. Should actual results differ
significantly from these assumptions, our liquidity position could be adversely
affected and we could be in a position that would require us to raise additional
capital which may or may not be available on terms acceptable to us, if at all,
and could have a material adverse effect on our ability to achieve our intended
business objectives.
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.
38
FUTURE TRENDS THAT MAY AFFECT OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
We may not be able to sustain our planned growth or obtain sufficient
revenue to achieve and sustain profitability. Recently, we have experienced
slowing net customer growth. Net customer growth was approximately 48,000 net
subscribers in the first quarter of 2002, 20,000 net subscribers in the second
quarter of 2002, 20,000 net subscribers in the third quarter of 2002 and
improved to 31,000 net subscribers in the fourth quarter of 2002 due to seasonal
activity. 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 improve, it will lengthen the
amount of time it will take for us to reach a sufficient number of customers to
achieve free cash flow, which in turn will have a negative impact on liquidity
and capital resources. Our business plan reflects continuing growth in
subscribers and 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
2002, our CPGA was $395 per activation compared to $349 per activation in 2001.
The fixed costs in our sales and marketing organization are being allocated
among a smaller number of activations due to the slowdown in subscriber growth.
In addition, handset subsidies have been increasing due to more aggressive
promotional efforts. With a higher CPGA, customers must remain on our network
for a longer period of time at a stable ARPU to recover those acquisitions
costs.
We may continue to experience a higher churn rate. Our average customer
monthly churn (net of deactivations that take place within 30 days of the
activation date) for 2002 was 3.4 percent. This rate of churn is the highest
that we have experienced on an annual basis since the inception of the Company
and compares to 2.7 percent in 2001. We expect that in the near term churn will
remain higher than historical levels as a result of a greater percentage of
sub-prime versus prime credit class customers imbedded in the subscriber base in
our territory as a result of various programs that were run during 2001 and the
first two months of 2002 which encouraged sub-prime credit individuals to
subscribe to our service. We have experienced a significantly higher rate of
involuntary deactivations due to non-payment 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 which Sprint has indicated represents a fair and
reasonable return on the cost of the underlying network based on an agreement in
principle reached with Sprint in 2001. We have not agreed that 5.8 cents per
minute represents a fair and reasonable return on the cost of the underlying
network and are currently in discussions with Sprint as to the determination of
this rate. We are currently a net receiver of roaming with Sprint meaning that
other PCS customers roam onto our network at a higher rate than our customers
roam onto other portions of the PCS network of Sprint. The ratio of inbound to
outbound Sprint PCS travel minutes was 1.15 to 1 for 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 December
31, 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.
39
We may not be able to access the credit or equity markets for
additional capital if the liquidity discussed above is not sufficient for the
cash needs of our business. We continually evaluate options for additional
sources of capital to supplement our liquidity position and maintain maximum
financial flexibility. If the need for additional capital arises due to our
actual results differing significantly from our business plan or for any other
reason, we may be unable to raise additional capital.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. For our leased telecommunication and operating facilities,
primarily consisting of cell sites, office and retail locations, we have
evaluated the impact of the adoption of SFAS No. 143 as of January 1, 2003 and
determined that the impact to us will not be material.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002," which rescinded or amended various existing
standards. One change addressed by this standard pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt" and states that an
extinguishment of debt cannot be classified as an extraordinary item unless it
meets the unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The provisions of this statement are
effective for fiscal years beginning after May 15, 2002 and extinguishments of
debt that were previously classified as an extraordinary item in prior periods
that do not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 in the
quarter ending March 31, 2003 is expected to result in a reclassification of the
extinguishment of debt that we 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 our results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an amendment of
SFAS No. 123 "Accounting for Stock-Based Compensation." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of this statement are effective
for fiscal years ending after and interim periods beginning after December 15,
2002. As we continue to account for stock-based employee compensation using the
intrinsic value method under APB Opinion No. 25, we, as required, have only
adopted the revised disclosure requirements of SFAS No. 148 as of December 31,
2002.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" in January, 2003. This Abstract addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, it addresses how consideration
should be measured and allocated to the separate units of accounting in the
arrangement. The guidance in this Abstract is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003 and we are in the
process of evaluating the impact of this Abstract.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued after
December 31, 2002, while the disclosure requirements were effective for
financial statements for periods
40
ending after December 15, 2002. At December 31, 2002, we had not entered into
any material arrangement that would be subject to the disclosure requirements of
FIN 45. We do not believe that the adoption of FIN 45 will have a material
impact on our consolidated financial statements.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46" or the
"Interpretation"), "Consolidation of Variable Interest Entities, an
interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or "VIEs")
and how to determine when and which business enterprise should consolidate the
VIE (the "primary beneficiary"). This new model for consolidation applies to an
entity which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. For public entities with VIEs
created before February 1, 2003, the implementation and disclosure requirements
of FIN 46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created after
January 31, 2003, the requirements are effective immediately. We do not believe
that the adoption of FIN 46 will have a material impact on our consolidated
financial statements.
RISK FACTORS
RISKS RELATING TO OUR BUSINESS, STRATEGY AND OPERATIONS
WE MAY NOT ACHIEVE OR SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH
FLOWS, WHICH MAY ADVERSELY AFFECT OUR STOCK PRICE.
We have a limited operating history. Through the year ended December
31, 2002, we continued to incur significant operating losses. Our operating
profitability and expected cash flow from operating activities will depend upon
many factors, including, among others, our ability to market PCS services from
Sprint, achieve projected market penetration and manage customer turnover rates.
We will have to dedicate a substantial portion of any future cash flow from
operations to make interest and principal payments on our consolidated debt,
which will reduce funds available for other purposes. If we do not achieve and
maintain positive cash flow from operations, or if our operating cash flow is
insufficient to cover our debt obligations in the future, our stock price could
be adversely affected and you could lose all or part of your investment.
IF WE RECEIVE LESS REVENUES OR INCUR MORE FEES THAN WE ANTICIPATE FOR
PCS ROAMING FROM SPRINT, OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED.
We are paid a fee from Sprint or a PCS Affiliate of Sprint for every
minute that Sprint wireless subscribers based outside of our territories use our
portion of the PCS network of Sprint. Similarly, we pay a fee to Sprint for
every minute that our subscribers use the PCS network of Sprint outside our
territories. Customers from our territories may spend more time in other PCS
coverage areas than we anticipate, and wireless customers from outside our
territories may spend less time in our territories or may use our services less
than we anticipate. This rate was 20 cents per minute in 2000. The rate declined
to 15 cents per minute on June 1, 2001 and declined to 12 cents per minute on
October 1, 2001. For the entire year of 2002 the rate was 10 cents per minute.
Sprint has set the rate for 2003 at 5.8 cents per minute as of January 1, 2003,
which Sprint has indicated represents a fair and reasonable return on the cost
of the underlying network based on an agreement in principle reached with Sprint
in 2001. We have not agreed that 5.8 cents per minute represents a fair and
reasonable return on the cost of the underlying network and are currently in
discussions with Sprint as to the determination of this rate. Although the rate
continues to decline, our ratio of inbound to outbound roaming with Sprint was
approximately 1.15 to 1 in 2002 and is expected to decline to approximately 1 to
1 over time, which would mitigate our exposure to future changes in this rate.
WE ARE A CONSUMER BUSINESS AND A RECESSION IN THE UNITED STATES
INVOLVING SIGNIFICANTLY LOWERED CONSUMER SPENDING COULD NEGATIVELY AFFECT OUR
RESULTS OF OPERATIONS.
Our primary customer base is individual consumers, and in the event
that the economic downturn that the United States and other countries have
recently experienced becomes more pronounced or lasts longer than currently
expected and spending by individual consumers drops significantly, our business
may be negatively affected.
41
OUR ROAMING ARRANGEMENTS MAY NOT BE COMPETITIVE WITH OTHER WIRELESS
SERVICE PROVIDERS, WHICH MAY RESTRICT OUR ABILITY TO ATTRACT AND RETAIN
CUSTOMERS AND THUS MAY ADVERSELY AFFECT OUR OPERATIONS.
We rely on roaming arrangements with other wireless service providers
for coverage in some areas. Some risks related to these arrangements are as
follows:
o the roaming arrangements are negotiated by Sprint and may not
benefit us in the same manner that they benefit Sprint;
o the quality of the service provided by another provider during a
roaming call may not approximate the quality of the PCS service
provided by Sprint;
o the price of a roaming call may not be competitive with prices
charged by other wireless companies for roaming calls;
o customers may have to use a more expensive dual-band/dual mode
handset with diminished standby and talk time capacities;
o customers must end a call in progress and initiate a new call when
leaving the PCS network of Sprint and entering another wireless
network;
o Sprint wireless customers may not be able to use advanced PCS
features from Sprint, such as voicemail notification, while
roaming. If Sprint wireless customers are not able to roam
instantaneously or efficiently onto other wireless networks, we
may lose current subscribers and PCS services from Sprint will be
less attractive to potential new customers; and
o Sprint or the carriers providing the service may not be able to
provide us with accurate billing information on a timely basis.
THE TECHNOLOGY THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY WITHIN THE WIRELESS INDUSTRY.
The wireless telecommunications industry is experiencing significant
technological change. We employ CDMA digital technology, the digital wireless
communications technology selected by Sprint for its nationwide network. CDMA
technology may not ultimately provide all of the advantages expected by us or
Sprint. If another technology becomes the preferred industry standard, we would
be at a competitive disadvantage and competitive pressures may require Sprint to
change its digital technology, which in turn could require us to make changes to
our network at substantial costs. We may be unable to respond to these pressures
and implement new technology on a timely basis or at an acceptable cost.
UNAUTHORIZED USE OF, OR INTERFERENCE WITH, THE PCS NETWORK OF SPRINT
COULD DISRUPT OUR SERVICE AND INCREASE OUR COSTS.
We may incur costs associated with the unauthorized use of the PCS
network of Sprint, including administrative and capital costs associated with
detecting, monitoring and reducing the incidence of fraud. Fraudulent use of the
PCS network of Sprint may impact interconnection costs, capacity costs,
administrative costs, fraud prevention costs and payments to other carriers for
fraudulent roaming. In addition, some of our border markets are susceptible to
uncertainties related to areas not governed by the FCC. For example,
unauthorized microwave radio signals near the border in Mexico could disrupt our
service in the United States.
POTENTIAL ACQUISITIONS MAY REQUIRE US TO INCUR SUBSTANTIAL ADDITIONAL
DEBT AND INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH MAY BE
COSTLY AND TIME CONSUMING.
We intend to continually evaluate opportunities for the acquisition of
businesses that are intended to complement or extend our existing operations. If
we acquire additional businesses, we may encounter difficulties that may be
costly and time-consuming, may slow our growth or may affect the market price of
our common stock. Examples of such difficulties are that we may have to:
42
o assume and/or incur substantial additional debt to finance the
acquisitions and fund the ongoing operations of the acquired
companies;
o integrate new operations with our existing operations; or
o divert the attention of our management from other business
concerns.
OUR FAILURE TO OBTAIN ADDITIONAL CAPITAL, IF NEEDED TO EXPAND OUR
PORTION OF SPRINT'S PCS NETWORK, COULD CAUSE DELAY OR ABANDONMENT OF OUR
DEVELOPMENT PLANS.
Our current network does not cover all areas of our territories, which
could make it difficult to maintain a profitable customer base. We currently
cover approximately 74.7% of the resident population in our territories. As a
result, our network may not adequately serve the needs of the potential
customers in our territories or attract enough subscribers to operate our
business successfully. To correct this potential problem, we may have to cover a
greater percentage of our territories than we currently anticipate. Further, we
may contract with Sprint to develop additional markets or meet additional Sprint
technical requirements. Our continued growth could require additional capital
expenditures and increase our capital requirements. Therefore, we may need to
raise additional equity or debt capital. These additional funds may not be
available. Even if these funds are available, we may not be able to obtain them
on a timely basis, on terms acceptable to us or within limitations permitted
under the covenants contained in the documents governing our debt. Failure to
obtain additional funds, should the need for funds develop, could result in the
delay or abandonment of our development and expansion plans.
IF WE LOSE THE RIGHT TO INSTALL OUR EQUIPMENT ON WIRELESS TOWERS OR ARE
UNABLE TO RENEW EXPIRING LEASES FOR WIRELESS TOWERS ON FAVORABLE TERMS OR AT
ALL, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY IMPACTED.
Substantially all of our base stations are installed on leased tower
facilities that are shared with one or more other wireless service providers. In
addition, a large portion of these leased tower sites are owned by a few tower
companies. If a master agreement with one of these tower companies were to
terminate, or if one of these tower companies were unable to support the use of
its tower sites by us, we would have to find new sites or may be required to
rebuild the affected portion of our network. In addition, the concentration of
our tower leases with a limited number of tower companies could adversely affect
our results of operations and financial condition if any of our PCS operating
subsidiaries is unable to renew its expiring leases with these tower companies
on favorable terms or at all. If any of the tower leasing companies that we do
business with should experience severe financial difficulties, or file for
bankruptcy protection, our ability to use our towers could be adversely
affected. That, in turn, would adversely affect our revenues and financial
condition if a material number of towers were involved.
THE LOSS OF THE OFFICERS AND SKILLED EMPLOYEES UPON WHOM WE DEPEND TO
OPERATE OUR BUSINESS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our business is managed by a small number of executive officers. We
believe that our future success will depend in part on our continued ability to
retain these executive officers and to attract and retain highly qualified
technical and management personnel. We may not be successful in retaining key
personnel or in attracting and retaining other highly qualified technical and
management personnel. We maintain policies of life insurance on our key
executives.
RISKS RELATED TO OUR INDEBTEDNESS
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We are highly leveraged. As of December 31, 2002, our total outstanding
debt, including capital lease obligations and excluding unused commitments made
by lenders, was approximately $871.3 million. As of that date, such total
long-term indebtedness represents approximately 87% of our total capitalization.
The Senior Secured Credit Facility and the indentures governing the 12 7/8%
Senior Discount Notes, the 12 1/2% Senior Notes and the 13 5/8% Senior Notes
permit us to incur additional indebtedness subject to certain limitations. Our
substantial indebtedness could adversely affect our financial health by, among
other things:
o increasing our vulnerability to adverse economic conditions or
increases in prevailing interest rates, particularly with respect
to any of our borrowings at variable interest rates;
43
o limiting our ability to obtain any additional financing we may
need to operate, develop and expand our business;
o requiring us to dedicate a substantial portion of any cash flow
from operations to service our debt, which reduces the funds
available for operations and future business opportunities; and
o potentially making us more highly leveraged than our competitors,
which could potentially decrease our ability to compete in our
industry.
The ability to make payments on our debt will depend upon our future
operating performance which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which we cannot
control. If the cash flow from our operating activities is insufficient, we may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations. Further, we may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. The Senior
Secured Credit Facility and the indentures for the 12 7/8% Senior Discount
Notes, for the 12 1/2% Senior Notes and for the 13 5/8% Senior Notes may limit
our ability to take several of these actions. Our failure to generate sufficient
funds to pay our debts or to successfully undertake any of these actions could,
among other things, materially adversely affect the market price of our common
stock.
THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US AND OUR SUBSIDIARIES
WHICH MAY LIMIT OUR OPERATING FLEXIBILITY.
The indentures governing the 12 7/8% Senior Discount Notes, the 12 1/2%
Senior Notes and the 13 5/8% Senior Notes, impose material operating and
financial restrictions on us and our subsidiaries. These restrictions, subject
in certain cases to ordinary course of business exceptions, may limit our
ability and the ability of our subsidiaries to engage in some transactions,
including the following:
o designated types of mergers or consolidations;
o paying dividends or other distributions to our stockholders;
o making investments;
o selling or encumbering assets;
o repurchasing our common stock;
o changing lines of business;
o borrowing additional money; and
o engaging in transactions with affiliates.
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, complete acquisitions for cash or debt, or react to changes in our
operating environment. The Senior Secured Credit Facility contains numerous
affirmative and negative covenants customary for credit facilities of a similar
nature, including, but not limited to, negative covenants imposing limitations
on our ability to, among other things, (1) declare dividends or repurchase
stock; (2) prepay, redeem or repurchase debt; (3) incur liens and engage in
sale-leaseback transactions; (4) make loans and investments; (5) incur
additional debt, hedging agreements and contingent obligations; (6) issue
preferred stock of subsidiaries; (7) engage in mergers, acquisitions and asset
sales; (8) engage in certain transactions with affiliates; (9) amend, waive or
otherwise alter material agreements or enter into restrictive agreements; and
(10) alter the businesses we conduct. Pursuant to the Senior Secured Credit
Facility, we are required to maintain a minimum cash balance of $10 million, and
future draws are conditioned, among other things, on us maintaining a ratio of
senior debt to net property and equipment that does not exceed 1 to 1. We are
also subject to covenants with respect to the ratio of EBITDA to total cash
interest expense. Until March 31, 2003 we are also subject to financial and
statistical covenants with respect to the following:
44
o minimum numbers of subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures.
As of March 31, 2003, we also become subject to financial and
statistical covenants with respect to the following:
o ratio of senior debt to EBITDA;
o ratio of total debt to EBITDA;
o ratio of EBITDA to total fixed charges (the sum of debt service,
capital expenditures and taxes); and
o ratio of EBITDA to pro forma debt service.
We may not satisfy these financial and statistical covenants under the
Senior Secured Credit Facility. If we fail to satisfy any of the financial and
statistical covenants, we could be in default under the Senior Secured Credit
Facility, or we may be limited in our ability to access additional funds under
the Senior Secured Credit Facility.
IF WE DEFAULT UNDER THE SENIOR SECURED CREDIT FACILITY, THE LENDERS MAY
DECLARE THE DEBT IMMEDIATELY DUE AND SPRINT WILL HAVE THE RIGHT TO EITHER
PURCHASE OUR ASSETS OR PURCHASE THE OUTSTANDING DEBT OBLIGATIONS UNDER THE
SENIOR SECURED CREDIT FACILITY AND FORECLOSE ON OUR ASSETS.
The Senior Secured Credit Facility requires us and our subsidiaries to
comply with specified financial ratios and other performance covenants. If we
fail to comply with these covenants or default on our obligations under the
Senior Secured Credit Facility, the lenders may accelerate the maturity of the
debt. If the lenders accelerate the debt, Sprint will have the right to either:
o purchase our operating assets for an amount equal to the greater
of (i) 72% of our "entire business value" and (ii) the aggregate
amount of the outstanding debt under the Senior Secured Credit
Facility; or
o purchase the obligations under the Senior Secured Credit Facility
by repaying the lenders in full in cash.
To the extent Sprint purchases these obligations from the lenders,
Sprint's rights as a senior lender would enable it to foreclose on the assets
securing the Senior Secured Credit Facility in a manner not otherwise permitted
under our affiliation agreements with Sprint. If Sprint does not exercise either
of these options, the lenders under the Senior Secured Credit Facility may
foreclose on and sell the assets securing the facility to third parties. In
addition, if Sprint provides notice to the lenders under the Senior Secured
Credit Facility that we are in breach of our management agreements with Sprint
and, as a result, our obligations under the Senior Secured Credit Facility are
accelerated and Sprint does not elect to operate our business, the lenders under
the Senior Secured Credit Facility may designate a third party to operate our
business. The occurrence of any of these events would be expected to have a
significant negative effect on the value of our stock.
45
RISKS RELATED TO THE RELATIONSHIP WITH SPRINT
IF WE MATERIALLY BREACH OUR MANAGEMENT AGREEMENTS WITH SPRINT, AND AN
ACCELERATION IS DECLARED UNDER THE SENIOR SECURED CREDIT FACILITY, SPRINT MAY
HAVE THE RIGHT TO PURCHASE OUR OPERATING ASSETS AT A DISCOUNT TO MARKET VALUE.
Our affiliation agreements with Sprint require that we provide network
coverage to a minimum network coverage area within specified time frames and
that we meet Sprint's technical and customer service requirements. As of
December 31, 2002, we have substantially completed the network build-out
requirements required by Sprint. We may amend our agreements with Sprint in the
future to expand this network coverage. A failure by us to meet the expanded
build-out requirements for any one of the individual markets in our territories
or to meet Sprint's technical or customer service requirements contained in the
affiliation agreements would constitute a material breach of the agreements,
which could lead to its termination. Our affiliation agreements provide that
upon the occurrence of an event of termination, Sprint has the right to purchase
our operating assets without further stockholder approval and for a price equal
to 72% of our "entire business value." The "entire business value" includes our
spectrum licenses, business operations and other assets. Sprint's right to
purchase our assets following an event of termination under our affiliation
agreements is currently subject to the provisions of a consent and agreement
entered into by Sprint for the benefit of the lenders under the Senior Secured
Credit Facility. Pursuant to the terms of this consent and agreement, Sprint may
not purchase our operating assets until all of our obligations under the Senior
Secured Credit Facility have been paid in full in cash and all commitments to
advance credit under the Senior Secured Credit Facility have been terminated or
have expired. Accordingly, Sprint may foreclose on our assets if it first pays
all obligations due under the Senior Secured Credit Facility and the Senior
Secured Credit Facility is terminated in connection with such payment.
Alternatively, Sprint also has the right to purchase our assets upon receipt of
a notice of acceleration under the Senior Secured Credit Facility following an
event of default thereunder. Such right to purchase is subject to time
limitations, and the purchase price must be the greater of an amount equal to
72% of our "entire business value" or the amount owed under the Senior Secured
Credit Facility.
IF SPRINT DOES NOT COMPLETE THE CONSTRUCTION OF ITS NATIONWIDE PCS
NETWORK, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS.
Sprint currently intends to cover a significant portion of the
population of the United States, Puerto Rico and the U.S. Virgin Islands by
creating a nationwide PCS network through its own construction efforts and those
of its Network Partners. Sprint is still constructing its nationwide network and
does not offer PCS services, either on its own network or through its roaming
agreements, in every city in the United States. Sprint has entered into, and
anticipates entering into, management agreements similar to ours with companies
in other markets under its nationwide PCS build-out strategy. Our results of
operations are dependent on Sprint's national network and, to a lesser extent,
on the networks of Sprint's other PCS Affiliates. The PCS network of Sprint may
not provide nationwide coverage to the same extent as its competitors, which
could adversely affect our ability to attract and retain customers.
SPRINT MAY MAKE DECISIONS THAT COULD INCREASE OUR EXPENSES AND/OR OUR
CAPITAL EXPENDITURE REQUIREMENTS, REDUCE OUR REVENUES OR MAKE OUR AFFILIATE
RELATIONSHIPS WITH SPRINT LESS COMPETITIVE.
Sprint, under our affiliation agreements has a substantial amount of
control over factors which significantly affect the conduct of our business.
Accordingly, Sprint may make decisions that adversely affect our business, such
as the following:
o Sprint prices its national plans based on its own objectives and
could set price levels or change other characteristics of their
plans in a way that may not be economically sufficient for our
business. See "Business - Products and Services - Clear
Pay/Account Spending Limit."
o Sprint could further change the per minute rate for Sprint PCS
roaming fees and increase the costs for Sprint to perform back
office services. See "Business - Roaming - Sprint PCS Roaming."
o Sprint may alter its network and technical requirements or request
that we build out additional areas within our territories, which
could result in increased equipment and build-out costs or in
Sprint building out that area itself or assigning it to another
PCS Affiliate of Sprint.
46
THE TERMINATION OF OUR AFFILIATION AGREEMENTS WITH SPRINT WOULD
SEVERELY RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS.
Our relationship with Sprint is governed by our affiliation agreements
with Sprint. Since we do not own any licenses to operate a wireless network, our
business depends on the continued effectiveness of these affiliation agreements.
However, Sprint may be able to terminate our affiliation agreements if we
materially breach the terms of the agreements. These terms include operational
and network requirements that are extremely technical and detailed and apply to
each retail store, cell site and switch site. Many of these operational and
network requirement can be changed by Sprint with little notice. As a result, we
may not always be in compliance with all requirements of the Sprint agreements.
Sprint conducts periodic audits of compliance with various aspects of its
program guidelines and identifies issues it believes need to be addressed. There
may be substantial costs associated with remedying any non-compliance, and such
costs may adversely affect our operating results and cash flow. If Sprint
terminates the affiliation agreements, we may not continue to be a part of the
PCS network of Sprint and we would have extreme difficulty conducting our
business.
IF SPRINT DOES NOT RENEW OUR AFFILIATION AGREEMENTS, OUR ABILITY TO
CONDUCT OUR BUSINESS WOULD BE SEVERELY RESTRICTED.
Our affiliation agreements with Sprint are not perpetual, and will
eventually expire. Sprint can choose not to renew these agreements at the
expiration of their 20-year initial terms or any ten-year renewal term. If
Sprint decides not to renew our affiliation agreements, we may no longer be a
part of the PCS network of Sprint and we would have extreme difficulty
conducting our business.
CERTAIN PROVISIONS OF OUR AFFILIATION AGREEMENTS WITH SPRINT MAY
DIMINISH OUR VALUE AND RESTRICT THE SALE OF OUR BUSINESS.
Under specific circumstances and without further stockholder approval,
Sprint may purchase our operating assets or capital stock at a discount. In
addition, Sprint must approve any change of control of our ownership and must
consent to any assignment by us of our affiliation agreements. Sprint also has a
right of first refusal if we decide to sell our operating assets to a third
party. We are also subject to a number of restrictions on the transfer of our
business, including a prohibition on the sale of our operating assets to
competitors of Sprint. These restrictions and other restrictions contained in
these affiliation agreements with Sprint, may limit our ability to sell our
business, may reduce the value a buyer would be willing to pay for our business
and may reduce our "entire business value," each of which could adversely affect
the market price of our common stock.
PROBLEMS EXPERIENCED BY SPRINT WITH ITS INTERNAL SUPPORT SYSTEMS COULD
LEAD TO CUSTOMER DISSATISFACTION OR INCREASE OUR COSTS.
We rely on Sprint's internal support systems, including customer care,
billing and back office support. As Sprint has expanded, its internal support
systems have been subject to increased demand and, in some cases, suffered a
degradation in service. We cannot assure you that Sprint will be able to
successfully add system capacity or that its internal support systems will be
adequate. It is likely that problems with Sprint's internal support systems
could cause:
o delays or problems in our operations or services;
o delays or difficulty in gaining access to customer and financial
information;
o a loss of Sprint PCS customers; and
o an increase in the costs of customer care, billing and back office
services.
Should Sprint fail to deliver timely and accurate information, this may
lead to adverse short-term decisions and inaccurate assumptions in our business
plan. It could also adversely affect our cash flow because Sprint collects our
receivables and sends us a net amount that is based on the financial information
it produces for us.
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OUR COSTS FOR INTERNAL SUPPORT SYSTEMS MAY INCREASE IF SPRINT
TERMINATES ALL OR PART OF OUR SERVICES AGREEMENTS.
The costs for the services provided by Sprint under our services
agreements relative to billing, customer care and other back-office functions in
the year 2002 was approximately $57.5 million. We expect this number to
significantly increase as our number of subscribers increases. Our services
agreements with Sprint provide that, upon nine months' prior written notice,
Sprint may terminate any service provided under such agreements. We do not
expect to have a contingency plan if Sprint terminates any such service. If
Sprint terminates a service for which we have not developed a cost-effective
alternative or increases the amount it charges for these services, our operating
costs may increase beyond our expectations and our operations may be interrupted
or restricted.
IF SPRINT DOES NOT MAINTAIN CONTROL OVER ITS LICENSED SPECTRUM, THE
AFFILIATION AGREEMENTS WITH SPRINT MAY BE TERMINATED.
Sprint, not us, owns the licenses necessary to provide wireless
services in our territories. The FCC requires that licensees like Sprint
maintain control of their licensed systems and not delegate control to third
party operators or managers. Our affiliation agreements with Sprint reflect an
arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum. However, if the FCC were to determine that any of
our affiliation agreements with Sprint need to be modified to increase the level
of licensee control, we have agreed with Sprint to use our best efforts to
modify the agreements to comply with applicable law. If we cannot agree with
Sprint to modify the agreements, those agreements may be terminated. If the
agreements are terminated, we would no longer be a part of the PCS network of
Sprint and we would not be able to conduct our business.
THE FCC MAY FAIL TO RENEW THE SPRINT WIRELESS LICENSES UNDER CERTAIN
CIRCUMSTANCES, WHICH WOULD PREVENT US FROM PROVIDING WIRELESS SERVICES.
We do not own any licenses to operate a wireless network. We are
dependent on the Sprint wireless licenses, which are subject to renewal and
revocation by the FCC. The Sprint wireless licenses in our territories will
expire in 2005 or 2007 but may be renewed for additional ten-year terms. The FCC
has adopted specific standards that apply to wireless personal communications
services license renewals. Any failure by Sprint or us to comply with these
standards could result in the nonrenewal of the Sprint licenses for our
territories. Additionally, if Sprint does not demonstrate to the FCC that Sprint
has met the five-year and ten-year construction requirements for each of its
wireless personal communications services licenses, it can lose those licenses.
If Sprint loses its licenses in our territories for any of these reasons, we and
our subsidiaries would not be able to provide wireless services without
obtaining rights to other licenses.
WE RELY ON SPRINT FOR A SUBSTANTIAL AMOUNT OF OUR FINANCIAL
INFORMATION. IF THAT INFORMATION IS NOT ACCURATE, THE INVESTMENT COMMUNITY COULD
LOSE CONFIDENCE IN US.
Under our agreements with Sprint, it performs our billing, manages our
accounts receivable and provides a substantial amount of financial data that
impact our accounts. We use that information to calculate our financial results
and to prepare our financial statements. If we later find errors in that
information, we may be required to restate our financial statements. If that
occurs with respect to us or any other PCS Affiliates of Sprint, investors and
securities analysts may lose confidence in us.
IF SPRINT DOES NOT SUCCEED, OR IF WE DO NOT MAINTAIN A GOOD
RELATIONSHIP WITH SPRINT, OUR BUSINESS MAY NOT SUCCEED.
If Sprint has a significant disruption to its business plan or network,
fails to operate its business in an efficient manner, or suffers a weakening of
its brand name, our operations and profitability would likely be negatively
impacted.
If Sprint should have significant financial problems, including
bankruptcy, our PCS business would suffer material adverse consequences which
could include termination or revision of our Sprint agreements. We currently
have no reason to believe that Sprint will have significant financial problems,
including bankruptcy.
IF OTHER PCS AFFILIATES OF SPRINT HAVE FINANCIAL DIFFICULTIES, THE PCS
NETWORK OF SPRINT COULD BE DISRUPTED.
The national PCS network of Sprint is a combination of networks. The
large metropolitan areas are owned and operated by Sprint, and the areas in
between them are owned and operated by PCS Affiliates of Sprint, all of which
are
48
independent companies like we are. We believe that most, if not all, of these
companies have incurred substantial debt to pay the large cost of building out
their networks.
If other PCS Affiliates of Sprint experience financial difficulties,
the PCS network of Sprint could be disrupted in the territories of those
partners. If the Sprint agreements of those partners are like ours, Sprint would
have the right to step in and operate the affected territory. Of course this
right could be delayed or hindered by legal proceedings, including any
bankruptcy proceeding related to the affected PCS Affiliate. One PCS Affiliate
of Sprint recently declared bankruptcy, alleging that Sprint violated its
agreements with the PCS Affiliate.
Material disruptions in the Sprint PCS network would have a material
adverse effect on our ability to attract and retain subscribers.
WE MAY HAVE DIFFICULTY IN OBTAINING AN ADEQUATE SUPPLY OF CERTAIN
HANDSETS FROM SPRINT, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We depend on our relationship with Sprint to obtain handsets and other
wireless devices. Sprint orders handsets and other wireless devices from various
manufacturers. We could have difficulty obtaining specific types of handsets in
a timely manner if:
o Sprint does not adequately project the need for handsets for
itself, its PCS Affiliates and its other third party distribution
channels, particularly in transition to new technologies such as
3G;
o Sprint gives preference to other distribution channels;
o We do not adequately project our need for handsets or other
wireless devices;
o Sprint modifies its handset logistics and delivery plan in a
manner that restricts or delays our access to handsets; or
o There is an adverse development in the relationship between Sprint
and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt our customer
service and/or result in a decrease in our subscribers, which could adversely
affect our results of operations.
RISKS RELATED TO OUR COMMON STOCK
OUR BUSINESS AND THE VALUE OF YOUR SECURITIES MAY BE ADVERSELY AFFECTED
IF WE FAIL TO MAINTAIN OUR LISTING ON THE NYSE.
We are listed on the New York Stock Exchange ("NYSE") and are subject
to various listing requirements set forth by the NYSE. We received written
notice from the NYSE on August 29, 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) maintain an
average global market capitalization over a consecutive 30 trading-day period of
not less than $100 million. On October 15, 2002 we submitted to the NYSE a
business plan to cure our non-compliance with the NYSE listing requirements. The
business plan was approved by the NYSE and, as a result of such approval, we
have until February 26, 2004 to re-establish compliance with the $100 million
market capitalization requirement. However, with respect to the minimum share
price requirement, the cure period for achieving compliance under NYSE listing
requirements expired on March 3, 2003. The trading price and volume of our
common stock is under relatively continuous review by the NYSE, and the NYSE
could at any time choose to suspend trading in our common stock and make an
application to the SEC to delist our common stock.
Although as of the date of this document, our stock has consistently
traded at prices below the $1.00 minimum, our Board of Directors has approved
taking affirmative actions, if necessary, to meet the $1.00 minimum share price
listing requirement. This includes affecting a reverse stock split which would
be submitted for shareholder approval at the 2003 annual shareholders meeting.
We believe that if we are still listed in the NYSE at the time a proposed
reverse stock split is approved by shareholders, the NYSE minimum share price
listing requirement may be deemed satisfied if the price of our common stock
promptly exceeds $1.00 per share and remains above the level for at least the
following 30 trading days. Despite the foregoing, the NYSE has broad discretion
to suspend trading in our common stock on the
49
NYSE and make an application to the SEC to delist our common stock. There is no
assurance that the NYSE will continue to allow trading in our common stock until
our annual meeting of stockholders or until such time as we undertake another
action to meet the NYSE minimum share price listing requirement.
If our common stock gets delisted from the NYSE and we fail to qualify
for trading in a comparable trading venue, shares of our common stock would
likely trade in the over-the-counter market in the so-called "pink sheets" or
the OTC Bulletin Board. If that happened, selling our common stock would be more
difficult because our trading volume likely would decrease and transactions
could be delayed. In addition, security analysts' and news media coverage of our
stock may be further reduced. These factors could result in lower prices and
larger spreads in the bid and ask prices for shares of our common stock. Such
delisting from the NYSE or further declines in our stock price could also
greatly impair our ability to raise additional necessary capital through equity
or debt financing and may significantly increase the dilution to stockholders
caused by issuing equity in the future. In addition, if our common stock is not
listed on the NYSE, we may become subject to SEC rules that affect "penny
stocks," which are stocks priced below $5.00 per share (subject to certain
exceptions, including listing on the NYSE). These rules would make it more
difficult for brokers to find buyers for our shares and could lower the net
sales prices that our shareholders are able to obtain.
FUTURE SALES OR THE POSSIBILITY OF FUTURE SALES OF A SUBSTANTIAL AMOUNT
OF OUR COMMON STOCK MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of shares of our common stock in
the public market could adversely affect prevailing market prices and the market
price of our common stock and could impair our ability to raise capital through
future sales of our equity securities. Currently we have approximately 94.5
million shares issued and outstanding. We have in the past issued shares of our
common stock in connection with acquisitions and may issue shares of our common
stock from time to time as consideration for future acquisitions and
investments. In the event any such acquisition or investment is significant, the
number of shares that we may issue may in turn be significant. In addition, we
may also grant registration rights covering those shares in connection with any
such acquisitions and investments.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE PROVISIONS THAT MAY
DISCOURAGE A CHANGE OF CONTROL TRANSACTION OR MAKE REMOVAL OF MEMBERS OF THE
BOARD OF DIRECTORS MORE DIFFICULT.
Some provisions of our certificate of incorporation and bylaws could
have the effect of delaying, discouraging or preventing a change in control of
us or making removal of members of the Board of Directors more difficult. These
provisions include the following:
o a classified board, with each board member serving a three-year
term;
o no authorization for stockholders to call a special meeting;
o no ability of stockholders to remove directors without cause;
o prohibition of action by written consent of stockholders; and
o advance notice for nomination of directors and for stockholder
proposals.
These provisions, among others, may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of us, even though a change in ownership might be economically beneficial to us
and our stockholders.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE, AND THIS MAY ADVERSELY
AFFECT OUR STOCKHOLDERS.
The market price of telecommunications and technology stocks recently
have experienced volatility. The market price of our common stock is likely to
be highly volatile and could be subject to wide fluctuations in response to
factors such as the following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
50
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
o changes in our relationship with Sprint;
o changes in laws and regulations;
o announcements by third parties of significant claims or
proceedings against us;
o changes in market valuations of telecommunications and other PCS
companies, including Sprint and PCS Affiliates of Sprint;
o announcements of technological innovations or new services by us
or our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o announcements by Sprint concerning developments or changes in its
business, financial condition or results of operations, or in its
expectations as to future financial performance;
o actual or potential defaults by us under any of our agreements;
o actual or potential defaults in bank covenants by Sprint or PCS
Affiliates of Sprint, which may result in a perception that we are
unable to comply with our bank covenants;
o changes in results of operations, market valuations and investor
perceptions of Sprint, PCS Affiliates of Sprint or of other
companies in the telecommunications industry in general and the
wireless industry in particular, including our competitors;
o additions or departures of key personnel;
o release of transfer restrictions on our outstanding shares of
common stock or sales of additional shares of our common stock;
and
o general stock market price and volume fluctuations.
RISKS RELATED TO THE WIRELESS PERSONAL COMMUNICATIONS SERVICES INDUSTRY
WE MAY CONTINUE TO EXPERIENCE A HIGH RATE OF SUBSCRIBER TURNOVER, WHICH
WOULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
The wireless personal communications services industry in general, and
Sprint and its PCS Affiliates in particular, have experienced a higher rate of
subscriber turnover, commonly known as churn, as compared to cellular industry
averages. This churn rate has been driven higher over the past year due to the
NDASL and Clear Pay programs and the removal of deposit requirements as
described elsewhere in this report. Our business plan assumes that churn will
decline over the course of fiscal 2003. Due to significant competition in our
industry and general economic conditions, among other things, this decline may
not occur and our future rate of subscriber turnover may be higher than our
historical rate. Factors that may contribute to higher churn include:
o inability or unwillingness of subscribers to pay, which results in
involuntary deactivations, which accounted for over 50% of our
deactivations in the year ended December 31, 2002;
o subscriber mix and credit class, particularly sub-prime credit
subscribers which accounted for over 40% of our gross subscriber
additions for the year ended December 31, 2002 and account for
approximately 28% of our subscriber base as of December 31, 2002;
51
o the attractiveness of our competitors' products, services and
pricing;
o network performance and coverage relative to our competitors;
o customer service;
o any increased prices for services in the future; and
o any future changes by us in the products and services we offer,
especially to the Clear Pay program.
A high rate of subscriber turnover could adversely affect our
competitive position, liquidity, financial position, results of operations and
our costs of, or losses incurred in, obtaining new subscribers, especially
because we subsidize some of the costs of initial purchases of handsets by
subscribers.
REGULATION BY GOVERNMENT AGENCIES AND TAXING AUTHORITIES MAY INCREASE
OUR COSTS OF PROVIDING SERVICE OR REQUIRE US TO CHANGE OUR SERVICES.
Our operations and those of Sprint may be subject to varying degrees of
regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state and local regulatory agencies and legislative
bodies. Adverse decisions or regulations of these regulatory bodies could
negatively impact Sprint's operations and our costs of doing business. For
example, changes in tax laws or the interpretation of existing tax laws by state
and local authorities could subject us to increased income, sales, gross
receipts or other tax costs or require us to alter the structure of our current
relationship with Sprint.
CONCERNS OVER HEALTH RISKS POSED BY THE USE OF WIRELESS HANDSETS MAY
REDUCE THE CONSUMER DEMAND FOR OUR SERVICES.
Media reports have suggested that radio frequency emissions from
wireless handsets may:
o be linked to various health problems resulting from continued or
excessive use, including cancer;
o interfere with various electronic medical devices, including
hearing aids and pacemakers; and
o cause explosions if used while fueling an automobile.
Widespread concerns over radio frequency emissions may expose us to
potential litigation or discourage the use of wireless handsets. Any resulting
decrease in demand for these services could impair our ability to profitably
operate our business.
SIGNIFICANT COMPETITION IN THE WIRELESS COMMUNICATIONS SERVICES
INDUSTRY MAY RESULT IN OUR COMPETITORS OFFERING NEW SERVICES OR LOWER PRICES,
WHICH COULD PREVENT US FROM OPERATING PROFITABLY.
Competition in the wireless communications services industry is
intense. Competition has caused, and we anticipate that competition will
continue to cause the market prices for two-way wireless products and services
to decline in the future. Our ability to compete will depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
telecommunications industry. Our dependence on Sprint to develop competitive
products and services and the requirement that we obtain Sprint's consent for
our subsidiaries to sell non-Sprint approved equipment may limit our ability to
keep pace with our competitors on the introduction of new products, services and
equipment. Some of our competitors are larger than us, possess greater resources
and more extensive coverage areas, and may market other services, such as
landline telephone service, cable television and Internet access, with their
wireless communications services. In addition, we may be at a competitive
disadvantage since we may be more highly leveraged than some of our competitors.
Furthermore, there has been a recent trend in the wireless communications
industry towards consolidation of wireless service providers through joint
ventures, reorganizations and acquisitions. We expect this consolidation to lead
to larger competitors over time. We may be unable to compete successfully with
larger competitors who have substantially greater resources or who offer more
services than we do.
52
MARKET SATURATION COULD LIMIT OR DECREASE OUR RATE OF NEW SUBSCRIBER
ADDITIONS.
Intense competition in the wireless communications industry could cause
prices for wireless products and services to continue to decline. If prices
drop, then our rate of net subscriber additions will take on greater
significance in improving our financial condition and results of operations.
However, as our and our competitors' penetration rates in our markets increase
over time, our rate of adding net subscribers could decrease. If this decrease
were to happen, it could materially adversely affect our liquidity, financial
condition and results of operations.
ALTERNATIVE TECHNOLOGIES AND CURRENT UNCERTAINTIES IN THE WIRELESS
MARKET MAY REDUCE DEMAND FOR PCS.
The wireless communications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades in
existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. Technological advances and industry changes could
cause the technology used on our network to become obsolete. We rely on Sprint
for research and development efforts with respect to the products and services
of Sprint and with respect to the technology used on our network. Sprint may not
be able to respond to such changes and implement new technology on a timely
basis, or at an acceptable cost.
If Sprint is unable to keep pace with these technological changes or
changes in the wireless communications market based on the effects of
consolidation from the Telecommunications Act of 1996 or from the uncertainty of
future government regulation, the technology used on our network or our business
strategy may become obsolete.
REGULATION BY GOVERNMENT OR POTENTIAL LITIGATION RELATING TO THE USE OF
WIRELESS PHONES WHILE DRIVING COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Some studies have indicated that some aspects of using wireless phones
while driving may impair drivers' attention in certain circumstances, making
accidents more likely. These concerns could lead to litigation relating to
accidents, deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use, any of which also could have material adverse
effects on our results of operations. A number of U.S. states and local
governments are considering or have recently enacted legislation that would
restrict or prohibit the use of a wireless handset while driving a vehicle or,
alternatively, require the use of a hands-free telephone. Legislation of this
sort, if enacted, would require wireless service providers to provide hands-free
enhanced services, such as voice activated dialing and hands-free speaker phones
and headsets, so that they can keep generating revenue from their subscribers,
who make many of their calls while on the road. If we are unable to provide
hands-free services and products to our subscribers in a timely and adequate
fashion, the volume of wireless phone usage would likely decrease, and our
ability to generate revenues would suffer.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in commodity futures trading activities and do not
enter into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to some interest rate risk on our senior Secured Credit
Facility and any future floating rate financing.
GENERAL HEDGING POLICIES - We enter into interest rate swap and collar
agreements to manage our exposure to interest rate changes on our variable rate
Senior Secured Credit Facility. We seek to minimize counterparty credit risk
through stringent credit approval and review processes, the selection of only
the most creditworthy counterparties, continual review and monitoring of all
counterparties, and through legal review of contracts. We also control exposure
to market risk by regularly monitoring changes in interest rate positions under
normal and stress conditions to ensure that they do not exceed established
limits. Our derivative transactions are used for hedging purposes only and
comply with Board-approved policies. Senior management receives frequent status
updates of all outstanding derivative positions.
INTEREST RATE RISK MANAGEMENT - Our interest rate risk management
program focuses on minimizing exposure to interest rate movements, setting an
optimal mixture of floating- and fixed-rate debt. We utilize interest rate swaps
and collars to adjust our risk profile relative to our floating rate Senior
Secured Credit Facility. We have hedges in place on approximately 42 percent of
the outstanding advances under our Senior Secured Credit Facility at December
31, 2002.
53
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with the senior discount notes, capital leases
and the credit facility financing based on our projected level of long-term
indebtedness:
YEARS ENDING DECEMBER 31,
2003 2004 2005 2006 2007 THEREAFTER
------------ ------------ ------------- ------------- ------------- ------------
(DOLLARS IN MILLIONS)
Fixed Rate Instruments............
12 7/8% senior discount notes (4) $ 305 $ 345 $ 350 $ 350 $ 350 $ --
Fixed interest rate........... 12.875% 12.875% 12.875% 12.875% 12.875% 12.875%
Principal payments............ -- -- -- -- -- 350
12 1/2% senior notes............ 250 250 250 250 250 --
Fixed interest rate........... 12.500% 12.500% 12.500% 12.500% 12.500% 12.500%
Principal payments............ -- -- -- -- -- 250
13 5/8% senior notes............ 150 150 150 150 150 --
Fixed interest rate........... 13.625% 13.625% 13.625% 13.625% 13.625% 13.625%
Principal payments............ -- -- -- -- -- 150
Capital leases....................
Annual minimum lease payments (1) $ 1.305 $ 0.586 $ 0.160 $ 0.162 $ 0.163 $ 0.857
Average Interest Rate........... 12.000% 12.000% 12.000% 12.000% 12.000% 12.000%
Variable Rate Instruments:
Senior Secured Credit Facility (2) $ 200 $ 178 $ 133 $ 83 $ 18 $ --
Average Interest Rate (3)......... 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Principal payments............ -- 22 45 50 65 18
(1) These amounts represent the estimated minimum annual payments due under
our estimated capital lease obligations for the periods presented.
(2) The amounts represent estimated year-end balances under the credit
facility based on a projection of the funds borrowed under that
facility pursuant to our current plan of network build-out.
(3) Interest rate on the Senior Secured Credit Facility advances equal, at
our option, either (i) the London Interbank Offered Rate adjusted for
any statutory reserves ("LIBOR"), or (ii) the base rate which is
generally the higher of the administrative agent's base rate, the
federal funds effective rate plus 0.50% or the administrative agent's
base CD rate plus 0.50%, in each case plus an interest margin which is
initially 4.00% for LIBOR borrowings and 3.00% for base rate borrowings
as of December 31, 2002. The applicable interest margins are subject to
reductions under a pricing grid based on ratios of our total debt to
our earnings before interest, taxes, depreciation and amortization
("EBITDA"). The interest rate margins will increase by an additional
200 basis points in the event we fail to pay principal, interest or
other amounts as they become due and payable under the Senior Secured
Credit Facility.
(4) Interest will accrete on the senior discount notes through February
2005 at which time the notes will begin to require cash payments of
interest with the first semi-annual cash interest payment due in August
2005.
We are also required to pay quarterly in arrears a commitment fee on
the unfunded portion of the commitment of each lender. The commitment fee
accrues at a rate per annum equal to (i) 1.50% on each day when the utilization
(determined by dividing the total amount of loans plus outstanding letters of
credit under the Senior Secured Credit Facility by the total commitment amount
under the Senior Secured Credit Facility) of the Senior Secured Credit Facility
is less than or equal to 33.33%, (ii) 1.25% on each day when utilization is
greater than 33.33% but less than or equal to 66.66% and (iii) 1.00% on each day
when utilization is greater than 66.66%. We have entered into derivative hedging
instruments to hedge a portion of the interest rate risk associated with
borrowings under the Senior Secured Credit Facility. For purposes of this table,
we have used an assumed average interest rate of 7.25%.
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance our senior discount notes at maturity at
market rates;
o the impact of interest rate movements on our ability to meet
interest expense requirements and meet financial covenants; and
54
The 12 7/8% Senior Discount Notes have a carrying value of $268.9
million and a fair value which approximates $63.0 million. The 12 1/2% Senior
Notes have a carrying value of $250.0 million and a fair value which
approximates $75.0 million. The 13 5/8% Senior Notes have a carrying value of
$150.0 million and a fair value which approximates $49.5 million.
As a condition to the Senior Secured Credit Facility, we must maintain
one or more interest rate protection agreements in an amount equal to a portion
of the total debt under the credit facility. We do not hold or issue financial
or derivative financial instruments for trading or speculative purposes. While
we cannot predict our ability to refinance existing debt or the impact that
interest rate movements will have on our existing debt, we continue to evaluate
our financial position on an ongoing basis.
At December 31, 2002, we had entered into the following interest rate
swaps.
INSTRUMENT NOTIONAL TERM FAIR VALUE
---------- -------- ---- ----------
4.9475% Interest rate swap $21,690 3 years $ (1,121)
4.9350% Interest rate swap $28,340 3 years (1,385)
------------
$ (2,506)
============
These swaps are designated as cash flow hedges such that the fair value
is recorded as a liability in the December 31, 2002 consolidated balance sheet
with changes in fair value (net of tax) shown as a component of other
comprehensive income.
We also entered into an interest rate collar with the following terms:
NOTIONAL MATURITY CAP STRIKE PRICE FLOOR STRIKE PRICE FAIR VALUE
-------- -------- ---------------- ------------------ ----------
$28,340 5/15/04 7.00% 4.12% $ (1,112)
This collar does not receive hedge accounting treatment such that the
fair value is reflected as a liability in the December 31, 2002 consolidated
balance sheet and the change in fair value has been reflected as an adjustment
to interest expense.
In addition to the swaps and collar discussed above, we purchased an
interest rate cap in February 2002 with a notional amount of $5,000 and a strike
price of 7.00%. This cap does not receive hedge accounting treatment and the
fair value reflected in the consolidated balance sheet at December 31, 2002 is
less than $1.
These fair value estimates are subjective in nature and involve
uncertainties and matters of considerable judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements required by this item are submitted as a
separate section of this annual report on Form 10-K. See "Financial Statements"
commencing on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by Item 10 of Form 10-K is set forth under the
headings "Election of Directors of Alamosa" and "Executive Officers" in our
proxy statement for our 2003 annual meeting of shareholders (the "Proxy
Statement"), which is incorporated herein by reference. Information relating to
disclosure of delinquent Form 3, 4 and 5 filers is incorporated by reference to
the information appearing under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 of Form 10-K is set forth under the
heading "Executive Officers and Executive Compensation" in the Proxy Statement,
which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 of Form 10-K is set forth under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement, which is incorporated herein by reference. Information set
forth under the caption "Securities Authorized for Issuance Under Equity
Compensation Plans" in the Proxy Statement is also incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 of Form 10-K is set forth under the
heading "Certain Relationships and Related Transactions" in the Proxy Statement,
which is incorporated herein by reference.
ITEM 14. 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
annual 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 consolidate 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.
56
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this annual report on
Form 10-K:
1. Financial Statements
Report of Independent Accountants, Consolidated Balance Sheets as
of December 31, 2002 and 2001, Consolidated Statements of
Operations for the years ended December 31, 2002, 2001 and 2000,
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000, Consolidated Statements of
Cash Flows for the years ended December 31, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule
Consolidated Valuation and Qualifying Accounts
3. Exhibits
(a) See the Exhibit Index immediately proceeding the signature
pages hereto.
(b) During the fourth quarter of 2002, Alamosa Holdings, Inc.
filed the following Current Report on Form 8-K:
On October 1, 2002, Alamosa Holdings, Inc. filed a Current
Report on Form 8-K with the Securities and Exchange
Commission relating to the Sixth Amendment to the Amended and
Restated Credit Agreement dated as of February 14, 2001, as
amended and restated as of March 30, 2001, among Alamosa
Holdings, Inc., Alamosa (Delaware), Inc., Alamosa Holdings,
LLC, the Lenders party thereto, Export Development
Corporation, as Co-Documentation Agent, First Union National
Bank, as Documentation Agent, Toronto Dominion (Texas), Inc.,
as Syndication Agent, and Citicorp USA, Inc., as
Administrative Agent and Collateral Agent.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 2003 ALAMOSA HOLDINGS, INC.
By: /s/ David E. Sharbutt
---------------------------------------
David E. Sharbutt
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934
thereunto, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------------------------ --------------------------------------------------- ---------------
/s/ David E. Sharbutt Chairman of the Board of Directors and March 28, 2003
- ------------------------------------------------ Chief Executive Officer
David E. Sharbutt (Principal Executive Officer)
/s/ Kendall W. Cowan Chief Financial Officer March 28, 2003
- ------------------------------------------------ (Principal Financial and Accounting Officer)
Kendall W. Cowan
/s/ Ray M. Clapp, Jr. Director March 28, 2003
- ------------------------------------------------
Ray M. Clapp, Jr.
/s/ Scotty Hart Director March 28, 2003
- ------------------------------------------------
Scotty Hart
/s/ Allen T. McInnes Director March 28, 2003
- ------------------------------------------------
Allen T. McInnes
/s/ Schuyler B. Marshall Director March 28, 2003
- ------------------------------------------------
Schuyler B. Marshall
Director March 28, 2003
- ------------------------------------------------
John F. Otto
/s/ Thomas F. Riley, Jr. Director March 28, 2003
- ------------------------------------------------
Thomas F. Riley, Jr.
/s/ Jimmy R. White Director March 28, 2003
- ------------------------------------------------
Jimmy R. White
Director March 28, 2003
- ------------------------------------------------
Michael V. Roberts
/s/ Steven C. Roberts Director March 28, 2003
- ------------------------------------------------
Steven C. Roberts
58
CERTIFICATIONS
I, David E. Sharbutt, certify that:
1. I have reviewed this annual report on Form 10-K of Alamosa Holdings,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers 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 (or persons
performing the equivalent functions):
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 officers and I have indicated in
this annual report, whether 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: March 28, 2003
/s/ David E. Sharbutt
------------------------------------
David E. Sharbutt
Chairman and Chief Executive Officer
59
I, Kendall W. Cowan, certify that:
1. I have reviewed this annual report on Form 10-K of Alamosa Holdings,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers 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 (or persons
performing the equivalent functions):
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 officers and I have indicated in
this annual report, whether 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: March 28, 2003
/s/ Kendall W. Cowan
-----------------------
Kendall W. Cowan
Chief Financial Officer
60
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
2.1 Amended and Restated Agreement and Plan of
Reorganization, dated as of December 14, 2000, by and
among Alamosa PCS Holdings, Inc., Alamosa Holdings, Inc.,
Alamosa (Delaware), Inc. and Alamosa Sub I, Inc., filed
as Exhibit 2.1 to Amendment No. 1 to the Registration
Statement on Form S-4, dated January 12, 2001
(Registration No. 333-47916) of Alamosa Holdings, Inc.,
which exhibit is incorporated herein by reference.
2.2 Amended and Restated Agreement and Plan of
Reorganization, dated as of July 31, 2000, by and among
Alamosa PCS Holdings, Inc., Alamosa Holdings, Inc.,
Alamosa Sub I, Inc., Roberts Wireless Communications,
L.L.C., and Members of Roberts Wireless Communications,
L.L.C., filed as Exhibit 2.2 to Amendment No. 1 to the
Registration Statement on Form S-4, dated January 12,
2001 (Registration No. 333-47916) of Alamosa Holdings,
Inc., which exhibit is incorporated herein by reference.
2.3 Amended and Restated Agreement and Plan of
Reorganization, dated as of July 31, 2000, by and among
Alamosa PCS Holdings, Inc., Alamosa Holdings, Inc.,
Alamosa Sub I, Inc., Washington Oregon Wireless, LLC,
Members of Washington Oregon Wireless, LLC and WOW
Holdings, LLC, filed as Exhibit 2.3 to Amendment No. 1 to
the Registration Statement on Form S-4, dated January 12,
2001 (Registration No. 333-47916) of Alamosa Holdings,
Inc., which exhibit is incorporated herein by reference.
2.4 Agreement and Plan of Merger, dated as of December 13,
2000, by and among Alamosa PCS Holdings, Inc., Twenty
Holdings, Inc. and Ten Acquisition, Inc., filed as
Exhibit 2.4 to Form 10-K of Alamosa Holdings, Inc. for
the year ended December 31, 2000, dated March 27, 2001,
which exhibit is incorporated herein by reference.
2.5 Agreement and Plan of Merger, dated as of March 9, 2001,
by and among Alamosa PCS Holdings, Inc., Forty
Acquisition, Inc., Southwest PCS Holdings, Inc.
("Southwest") and the stockholders of Southwest, filed as
Exhibit 2.1 to the Current Report on Form 8-K, dated
April 5, 2001, of Alamosa Holdings, Inc., which exhibit
is incorporated herein by reference.
3.1 Amended and Restated Certificate of Incorporation of
Alamosa Holdings, Inc., filed as Exhibit 1.1 to the
Registration Statement on Form 8-A, dated February 14,
2001 (SEC File No. 000-32357) of Alamosa Holdings, Inc.,
which exhibit is incorporated herein by reference.
3.2 Amended and Restated Bylaws of Alamosa Holdings, Inc.,
filed as Exhibit 1.2 to the Registration Statement on
Form 8-A, dated February 14, 2001 (SEC File No.
000-32357) of Alamosa Holdings, Inc., which exhibit is
incorporated herein by reference.
4.1 Specimen Common Stock Certificate, filed as Exhibit 1.3
to the Registration Statement on Form 8-A, dated February
14, 2001 (SEC File No. 000-32357) of Alamosa Holdings,
Inc., which exhibit is incorporated herein by reference.
61
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
4.2 Form of Indenture for 12 7/8% Senior Discount Notes due
2010, by and among Alamosa PCS Holdings, Inc., the
Subsidiary Guarantors party thereto and Norwest Bank
Minnesota, N.A., as trustee, filed as Exhibit 4.1 to
Amendment No. 2 to the Registration Statement on Form
S-1, dated February 1, 2000 (Registration No. 333-93499)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
4.3 Form of Global Note relating to the Senior Discount Notes
due 2010, filed as Exhibit 4.2 to Amendment No. 2 to the
Registration Statement on Form S-1, dated February 1,
2000 (Registration No. 333-93499) of Alamosa (Delaware),
Inc. (formerly Alamosa PCS Holdings, Inc.), which exhibit
is incorporated herein by reference.
4.4 Indenture for 12 1/2% Senior Notes due 2011, dated as of
January 31, 2001, by and among Alamosa (Delaware), Inc.,
the Subsidiary Guarantors party thereto and Wells Fargo
Bank Minnesota, N.A., as trustee, filed as Exhibit 4.4 to
Form 10-K of Alamosa Holdings, Inc. for the year ended
December 31, 2000, which exhibit is incorporated herein
by reference.
4.5 Form of Global Note relating to the Senior Notes due
2011, filed as Exhibit 4.5 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
4.6 First Supplemental Indenture for 12 7/8% Senior Discount
Notes due 2010, dated as of January 31, 2001, among
Alamosa Finance, LLC, LLC, Alamosa Limited, LLC and Wells
Fargo Bank Minnesota, N.A., (formerly known as Norwest
Bank Minnesota, N.A.), as trustee, filed as Exhibit 4.6
to Form 10-K of Alamosa Holdings, Inc. for the year ended
December 31, 2000, which exhibit is incorporated herein
by reference.
4.7 First Supplemental Indenture for 12 1/2% Senior Notes due
2011, dated as of February 14, 2001, among Roberts
Wireless Communications, L.L.C., Roberts Wireless
Properties, LLC, Washington Oregon Wireless, LLC, Alamosa
Holdings, LLC, Alamosa Properties, L.P., Alamosa
(Wisconsin) Properties, LLC, Washington Oregon Wireless
Properties, LLC, Washington Oregon Wireless Licenses, LLC
and Wells Fargo Bank Minnesota, N.A., (formerly known as
Norwest Bank Minnesota, N.A.), as trustee, filed as
Exhibit 4.7 to Form 10-K of Alamosa Holdings, Inc. for
the year ended December 31, 2000, which exhibit is
incorporated herein by reference.
4.8 Second Supplemental Indenture for 12 7/8% Senior Discount
Notes due 2010, dated as of February 14, 2001, among
Roberts Wireless Communications, L.L.C., Roberts Wireless
Properties, LLC, Washington Oregon Wireless, LLC, Alamosa
Holdings, LLC, Alamosa Properties, L.P., Alamosa
(Wisconsin) Properties, LLC, Washington Oregon Wireless
Properties, LLC, Washington Oregon Wireless Licenses, LLC
and Wells Fargo Bank Minnesota, N.A., (formerly known as
Norwest Bank Minnesota, N.A.), as trustee, filed as
Exhibit 4.8 to Form 10-K of Alamosa Holdings, Inc. for
the year ended December 31, 2000, which exhibit is
incorporated herein by reference.
62
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
4.9 Registration Rights Agreement, dated as of January 24,
2001, by and among Alamosa (Delaware), Inc. and Salomon
Smith Barney Inc., TD Securities (USA) Inc., Credit
Suisse First Boston Corporation, First Union Securities,
Inc., Lehman Brothers Inc., Scotia Capital (USA) Inc.,
filed as Exhibit 4.9 to Form 10-K of Alamosa Holdings,
Inc. for the year ended December 31, 2000, which exhibit
is incorporated herein by reference.
4.10 Rights Agreement, dated as of February 14, 2001, by and
between Alamosa Holdings, Inc. and Mellon Investors
Services LLC, as Rights Agent, including the form of
Certificate of Designation, Preferences and Rights of
Series A Preferred Stock attached as Exhibit A thereto
and the form of Rights Certificate attached as Exhibit B
thereto, filed as Exhibit 1.4 to the Registration
Statement on Form 8-A, dated February 14, 2001
(Registration No. 000-32357) of Alamosa Holdings, Inc.,
which exhibit is incorporated herein by reference.
4.11 Third Supplemental Indenture for 12 7/8% Senior Discount
Notes due 2010, dated as of March 30, 2001, among SWLP,
L.L.C., SWGP, L.L.C., Southwest PCS, L.P., Southwest PCS
Properties, LLC, Southwest PCS Licenses, LLC and Wells
Fargo Bank Minnesota, N.A., as trustee, filed as Exhibit
4.10 to the Registration Statement on Form S-4, dated May
9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
4.12 Second Supplemental Indenture for 12 1/2% Senior Notes
due 2011, dated as of March 30, 2001, among SWLP, L.L.C.,
SWGP, L.L.C., Southwest PCS, L.P., Southwest PCS
Properties, LLC, Southwest PCS Licenses, LLC and Wells
Fargo Bank Minnesota, N.A., as trustee, filed as Exhibit
4.11 to the Registration Statement on Form S-4, dated May
9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
4.13 Indenture for 13 5/8% Senior Notes due 2011, dated August
15, 2001, among Alamosa (Delaware), the Subsidiary
Guarantors party thereto, and Wells Fargo Bank Minnesota,
N.A., as trustee, filed as Exhibit 4.12 to the
Registration Statement on Form S-4, dated August 28, 2001
(Registration No. 333-68538) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
4.14 Form of Global Note relating to the 13 5/8% Senior Notes
due 2011, filed as Exhibit 4.13 to the Registration
Statement on Form S-4, dated August 28, 2001
(Registration No. 333-68538) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
4.15 Registration Rights Agreement, dated August 7, 2001, by
and among Alamosa (Delaware), Salomon Smith Barney Inc.,
TD Securities (USA) Inc., First Union Securities, Inc.,
and Scotia Capital (USA) Inc., relating to the 13 5/8%
Senior Notes due 2011, filed as Exhibit 4.14 to the
Registration Statement on Form S-4, dated August 28, 2001
(Registration No. 333-68538) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
63
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.1 CDMA 1900 SprintCom Additional Affiliate Agreement dated
as of December 21, 1998 by and between Alamosa PCS, LLC
and Northern Telecom, Inc., filed as Exhibit 10.1 to
Amendment No. 3 to the Registration Statement on Form
S-1, dated February 1, 2000 (Registration No. 333-89995)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
10.2 Amendment No. 1 to DMS-MTX Cellular Supply Agreement
dated as of January 12, 1999 by and between Alamosa PCS,
LLC and Nortel Networks Inc. as an amendment to Exhibit
10.1 described above, filed as Exhibit 10.2 to Amendment
No. 3 to the Registration Statement on Form S-1, dated
February 1, 2000 (Registration No. 333-89995) of Alamosa
(Delaware), Inc. (formerly Alamosa PCS Holdings, Inc.),
which exhibit is incorporated herein by reference.
10.3 Amendment No. 2 to DMS-MTX Cellular Supply Agreement,
dated as of March 1, 1999 by and between Alamosa PCS, LLC
and Nortel Networks Inc. as an amendment to Exhibits 10.1
and 10.2 described above, filed as Exhibit 10.3 to
Amendment No. 3 to the Registration Statement on Form
S-1, dated February 1, 2000 (Registration No. 333-89995)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
10.4 Amendment No. 3 to DMS-MTX Cellular Supply Agreement,
dated as of August 11, 1999 by and between Alamosa PCS,
LLC and Nortel Networks Inc. as an amendment to Exhibits
10.1, 10.2 and 10.3 described above, filed as Exhibit
10.4 to Amendment No. 1 to the Registration Statement on
Form S-1, dated December 22, 1999 (Registration No.
333-89995) of Alamosa (Delaware), Inc. (formerly Alamosa
PCS Holdings, Inc.), which exhibit is incorporated herein
by reference.
10.5 Sprint PCS Management Agreement (Wisconsin), as amended
by Addendum I, dated as of December 6, 1999 by and
between Sprint Spectrum, LP, WirelessCo, LP and Alamosa
Wisconsin Limited Partnership, filed as Exhibit 10.10 to
Amendment No. 3 to the Registration Statement on Form
S-1, dated February 1, 2000 (Registration No. 333-89995)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
10.6 Sprint PCS Services Agreement (Wisconsin,) dated as of
December 6, 1999, by and between Sprint Spectrum, LP and
Alamosa Wisconsin Limited Partnership, filed as Exhibit
10.11 to Amendment No. 3 to the Registration Statement on
Form S-1, dated February 1, 2000 (Registration No.
333-89995) of Alamosa (Delaware), Inc. (formerly Alamosa
PCS Holdings, Inc.), which exhibit is incorporated herein
by reference.
64
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.7 Sprint Trademark and Service Mark License Agreement
(Wisconsin), dated as of December 6, 1999, by and between
Sprint Communications Company, LP and Alamosa Wisconsin
Limited Partnership, filed as Exhibit 10.12 to Amendment
No. 3 to the Registration Statement on Form S-1, dated
February 1, 2000 (Registration No. 333-89995) of Alamosa
(Delaware), Inc. (formerly Alamosa PCS Holdings, Inc.),
which exhibit is incorporated herein by reference.
10.8 Sprint Spectrum Trademark and Service Mark License
Agreement (Wisconsin), dated as of December 6, 1999, by
and between Sprint Spectrum, LP and Alamosa Wisconsin
Limited Partnership, filed as Exhibit 10.13 to Amendment
No. 3 to the Registration Statement on Form S-1, dated
February 1, 2000 (Registration No. 333-89995) of Alamosa
(Delaware), Inc. (formerly Alamosa PCS Holdings, Inc.),
which exhibit is incorporated herein by reference.
10.9 Engineering Service Contract, System Design and
Construction Inspection, dated as of July 27, 1998, as
amended, by and between Alamosa PCS, LLC and Hicks &
Ragland Engineering Co., Inc., filed as Exhibit 10.14 to
Amendment No. 1 to the Registration Statement on Form
S-1, dated December 22, 1999 (Registration No. 333-89995)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
10.10 Master Site Development and Lease Agreement, as amended,
dated as of August 1998, by and between Alamosa PCS, LLC
and Specialty Capital Services, Inc., filed as Exhibit
10.15 to Amendment No. 3 to the Registration Statement on
Form S-1, dated December 22, 1999 (Registration No.
333-89995) of Alamosa (Delaware), Inc. (formerly Alamosa
PCS Holdings, Inc.), which exhibit is incorporated herein
by reference.
10.11+ * Amended and Restated Employment Agreement, dated as of
October 1, 2002, by and between Alamosa Holdings, Inc.
and David E. Sharbutt
10.12+ * Amended and Restated Employment Agreement, dated as of
October 1, 2002, by and between Alamosa Holdings, Inc.
and Kendall W. Cowan
10.13 Sprint PCS Management Agreement, as amended by Addendum
I, dated as of December 23, 1999, by and between Sprint
Spectrum, LP, WirelessCo, LP, Cox Communications PCS,
L.P., Cox CPS License, LLC, SprintCom, Inc. and Alamosa
PCS, LLC, filed as Exhibit 10.22 to Amendment No. 3 to
the Registration Statement on Form S-1, dated January 19,
2000 (Registration No. 333-89995) of Alamosa (Delaware),
Inc. (formerly Alamosa PCS Holdings, Inc.), which exhibit
is incorporated herein by reference.
10.14 Sprint PCS Services Agreement, dated as of December 23,
1999, by and between Sprint Spectrum, LP and Alamosa PCS,
LLC, filed as Exhibit 10.23 to Amendment No. 2 to the
Registration Statement on Form S-1, dated January 19,
2000 (Registration No. 333-89995) of Alamosa (Delaware),
Inc. (formerly Alamosa PCS Holdings, Inc.), which exhibit
is incorporated herein by reference.
65
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.15 Sprint Trademark and Service Mark License Agreement,
dated as of December 23, 1999 by and between Sprint
Communications Company, LP and Alamosa PCS, LLC, filed as
Exhibit 10.24 to Amendment No. 2 to the Registration
Statement on Form S-1, dated January 19, 2000
(Registration No. 333-89995) of Alamosa (Delaware), Inc.
(formerly Alamosa PCS Holdings, Inc.), which exhibit is
incorporated herein by reference.
10.16 Sprint Spectrum Trademark and Service Mark Agreement,
dated as of December 23, 1999, by and between Sprint
Spectrum, LP and Alamosa PCS, LLC, filed as Exhibit 10.25
to Amendment No. 2 to the Registration Statement on Form
S-1, dated January 19, 2000 (Registration No. 333-89995)
of Alamosa (Delaware), Inc. (formerly Alamosa PCS
Holdings, Inc.), which exhibit is incorporated herein by
reference.
10.17 Amendment No. 4 to DMS-MTX Cellular Supply Agreement by
and between Alamosa PCS, LLC and Nortel Networks Inc. as
an amendment to Exhibits 10.1, 10.2, 10.3 and 10.4
described above, effective as of February 8, 2000, filed
as Exhibit 10.20 to Form 10-K of Alamosa (Delaware), Inc.
(formerly Alamosa PCS Holdings, Inc.), for the year ended
December 31, 1999, which exhibit is incorporated herein
by reference.
10.18 Amended and Restated Master Design Build Agreement, dated
as of March 21, 2000, by and between Texas
Telecommunications, L.P. and Alamosa Wisconsin Limited
Partnership and SBA Towers, Inc., filed as Exhibit 10.23
to Form 10-K of Alamosa (Delaware), Inc. (formerly
Alamosa PCS Holdings, Inc.), for the year ended December
31, 1999, which exhibit is incorporated herein by
reference.
10.19+ * Amended and Restated Employment Agreement dated as of
October 1, 2002, by and between Alamosa Holdings, Inc.
and Loyd Rinehart
10.20 Security Agreement, dated as of January 31, 2001, by and
among Alamosa (Delaware), Inc., Wells Fargo Bank
Minnesota, N.A., as security agent, Wells Fargo Bank
Minnesota, N.A., as collateral agent, Wells Fargo Bank
Minnesota, N.A., as trustee under the 2001 Indenture (as
to paragraph 6(b) and Wells Fargo Bank Minnesota, N.A.,
as trustee under the 2000 Indenture (as to paragraph
6(b)), filed as Exhibit 10.22 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
66
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.21 Amended and Restated Credit Agreement, dated as of March
30, 2001, by and among Alamosa Holdings, LLC, Alamosa
Holdings, Inc., Alamosa (Delaware), Inc., the lenders
party thereto, Citicorp USA, Inc., as administrative and
collateral agent, Export Development Corporation, as
co-documentation agent, First Union National Bank, as
documentation agent, Toronto Dominion (Texas), Inc. as
syndication agent, Export Development Corporation and
First Union Securities, Inc., as lead arrangers and
Salomon Smith Barney Inc. and TD Securities (USA) Inc. as
joint lead arrangers and joint book managers, for a
$333,000,000 credit facility, as amended by the First
Amendment and Waiver dated May 8, 2001 (attached
thereto), filed as Exhibit 10.23 to the Amendment No. 1
to the Registration Statement on Form S-4, dated June 8,
2001 (Registration No. 333-60572) of Alamosa (Delaware),
Inc., which exhibit is incorporated herein by reference.
10.22 Amended and Restated Security Agreement, dated as of
March 30, 2001, by and among Alamosa (Delaware), Inc.,
Alamosa Holdings, LLC, each subsidiary of Alamosa
(Delaware), Inc. listed on Schedule I thereto, and
Citicorp USA, Inc., as collateral agent, filed as Exhibit
10.24 to the Registration Statement on Form S-4, dated
May 9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
10.23 Amended and Restated Pledge Agreement, dated as of March
30, 2001, among Alamosa (Delaware), Inc., Alamosa
Holdings, LLC, each Subsidiary of Alamosa (Delaware),
Inc. listed on Schedule I thereto and Citicorp USA, Inc.,
as collateral agent, filed as Exhibit 10.25 to the
Registration Statement on Form S-4, dated May 9, 2001
(Registration No. 333-60572) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.24 Amended and Restated Consent and Agreement, dated as of
March 30, 2001, by and among Sprint Spectrum L.P.,
SprintCom, Inc., Sprint Communications Company, L.P., Cox
Communications PCS, L.P., Cox PCS License, LLC,
WirelessCo, L.P., and Citicorp USA, Inc., as
administrative agent, filed as Exhibit 10.26 to the
Registration Statement on Form S-4, dated May 9, 2001
(Registration No. 333-60572) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.25 Addendum II to Sprint PCS Management Agreement
(Wisconsin), dated as of February 8, 2000, by and between
Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company, L.P., and Alamosa Wisconsin
Limited Partnership as an amendment to Exhibit 10.5
above, filed as Exhibit 10.27 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
10.26 Addendum III to Sprint PCS Management Agreement
(Wisconsin), dated as of April 25, 2000, by and between
Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company, L.P., and Alamosa Wisconsin
Limited Partnership as an amendment to Exhibit 10.5
above, filed as Exhibit 10.28 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
67
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.27 Addendum IV to Sprint PCS Management Agreement
(Wisconsin), dated as of June 23, 2000, by and between
Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company, L.P., and Alamosa Wisconsin
Limited Partnership as an amendment to Exhibit 10.5
above, filed as Exhibit 10.29 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
10.28 Addendum V to Sprint PCS Management Agreement
(Wisconsin), dated as of February 14, 2001, by and
between Sprint Spectrum L.P., WirelessCo, L.P., Sprint
Communications Company, L.P., and Alamosa Wisconsin
Limited Partnership as an amendment to Exhibit 10.5
above, filed as Exhibit 10.30 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
10.29 Addendum II to Sprint PCS Management Agreement, dated as
of February 8, 2000, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P.,
and Texas Telecommunications, LP as an amendment to
Exhibit 10.13 above, filed as Exhibit 10.31 to Form 10-K
of Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.30 Addendum III to Sprint PCS Management Agreement, dated as
of April 25, 2000, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P.,
and Texas Telecommunications, LP as an amendment to
Exhibit 10.13 above, filed as Exhibit 10.32 to Form 10-K
of Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.31 Addendum IV to Sprint PCS Management Agreement, dated as
of June 23, 2001, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P.,
and Texas Telecommunications, LP as an amendment to
Exhibit 10.13 above, filed as Exhibit 10.33 to Form 10-K
of Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.32 Addendum V to Sprint PCS Management Agreement, dated as
of January 8, 2001, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P.,
and Texas Telecommunications, LP as an amendment to
Exhibit 10.13 above, filed as Exhibit 10.34 to Form 10-K
of Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.33 Addendum VI to Sprint PCS Management Agreement, dated as
of February 14, 2001, by and between Sprint Spectrum
L.P., WirelessCo, L.P., Sprint Communications Company,
L.P., and Texas Telecommunications, LP as an amendment to
Exhibit 10.13 above, filed as Exhibit 10.35 to Form 10-K
of Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
68
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.34 Sprint PCS Management Agreement, dated as of June 8,
1998, as amended by Addendum I - VIII, between Sprint
Spectrum L.P., SprintCom, Inc. and Roberts Wireless
Communications, L.L.C., filed as Exhibit 10.36 to Form
10-K of Alamosa Holdings, Inc. for the year ended
December 31, 2000, which exhibit is incorporated herein
by reference.
10.35 Sprint PCS Services Agreement, dated as of June 8, 1998,
between Sprint Spectrum L.P. and Roberts Wireless
Communications, L.L.C., filed as Exhibit 10.37 to Form
10-K of Alamosa Holdings, Inc. for the year ended
December 31, 2000, which exhibit is incorporated herein
by reference.
10.36 Sprint Trademark and Service Mark License Agreement,
dated as of June 8, 1998, between Sprint Communications
Company, L.P. and Roberts Wireless Communications,
L.L.C., filed as Exhibit 10.38 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
10.37 Sprint Spectrum Trademark and Service Mark License
Agreement, dated as of June 8, 1998, between Sprint
Spectrum L.P. and Roberts Wireless Communications,
L.L.C., filed as Exhibit 10.39 to Form 10-K of Alamosa
Holdings, Inc. for the year ended December 31, 2000,
which exhibit is incorporated herein by reference.
10.38 Sprint PCS Management Agreement, dated as of January 25,
1999, as amended by Addendum I - III, between Sprint
Spectrum L.P., WirelessCo, L.P. and Washington Oregon
Wireless, LLC, filed as Exhibit 10.40 to Form 10-K of
Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.39 Sprint PCS Services Agreement, dated as of January 25,
1999, between Sprint Spectrum L.P. and Washington Oregon
Wireless, LLC, filed as Exhibit 10.41 to Form 10-K of
Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.40 Sprint Trademark and Service Mark License Agreement,
dated as of January 25, 1999, between Sprint
Communications Company, L.P. and Washington Oregon
Wireless, LLC, filed as Exhibit 10.42 to Form 10-K of
Alamosa Holdings, Inc. for the year ended December 31,
2000, which exhibit is incorporated herein by reference.
10.41 Sprint Spectrum Trademark and Service Mark License
Agreement, dated as of January 25, 1999, between Sprint
Spectrum L.P. and Washington Oregon Wireless, LLC, filed
as Exhibit 10.42 to Form 10-K of Alamosa Holdings, Inc.
for the year ended December 31, 2000, which exhibit is
incorporated herein by reference.
10.42+ * Amended and Restated Employment Agreement, dated as of
October 1, 2002, by and between Alamosa Holdings, Inc.
and Anthony Sabatino
69
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.43+ Alamosa Holdings, Inc. Amended and Restated 1999 Long
Term Incentive Plan, filed as Exhibit 4.2 to the
Registration Statement on Form S-8, dated January 10,
2003 (Registration No. 333- 102460) of Alamosa Holdings,
Inc., which exhibit is incorporated herein by reference.
10.44+ Amended and Restated Alamosa Holdings, Inc. Employee
Stock Purchase Plan, filed as Exhibit Exhibit 10.61 to
the Quarterly Report on Form 10-Q for the period ended
June 30, 2002, which exhibit is incorporated herein by
reference.
10.45 Addendum VI to Sprint PCS Management Agreement
(Wisconsin), dated March 30, 2001, by and between Sprint
Spectrum L.P., WirelessCo, L.P., Sprint Communications
Company, L.P. and Alamosa Wisconsin Limited Partnership,
as an amendment to Exhibit 10.5 above, filed as Exhibit
10.45 to the Registration Statement on Form S-4, dated
May 9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
10.46 Addendum VII to Sprint PCS Management Agreement, dated as
of March 30, 2001, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P. and
Texas Telecommunications, LP, as an amendment to Exhibit
10.13 above, filed as Exhibit 10.46 to the Registration
Statement on Form S-4, dated May 9, 2001 (Registration
No. 333-60572) of Alamosa (Delaware), Inc., which exhibit
is incorporated herein by reference.
10.47 Addendum IX to Sprint PCS Management Agreement, dated as
of March 30, 2001, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P. and
Roberts Wireless Communications, as an amendment to
Exhibit 10.36 above, filed as Exhibit 10.47 to the
Registration Statement on Form S-4, dated May 9, 2001
(Registration No. 333-60572) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.48 Addendum IV to Sprint PCS Management Agreement, dated as
of March 30, 2001, by and between Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company, L.P. and
Washington Oregon Wireless, LLC, as an amendment to
Exhibit 10.38 above, filed as Exhibit 10.48 to the
Registration Statement on Form S-4, dated May 9, 2001
(Registration No. 333-60572) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.49 Sprint PCS Management Agreement, dated March 30, 2001, as
amended by Addendum IV, by and between Sprint Spectrum,
L.P., SprintCom, Inc. and Southwest PCS, L.P., filed as
Exhibit 10.49 to the Registration Statement on Form S-4,
dated May 9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
10.50 Sprint PCS Services Agreement, dated July 10, 1998,
between Sprint Spectrum L.P. and Southwest PCS, L.P.,
filed as Exhibit 10.50 to the Registration Statement on
Form S-4, dated May 9, 2001 (Registration No. 333-60572)
of Alamosa (Delaware), Inc., which exhibit is
incorporated herein by reference.
70
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.51 Sprint Trademark and Service Mark License Agreement,
dated July 10, 1998, between Sprint Communications
Company, L.P. and Southwest PCS, L.P., filed as Exhibit
10.51 to the Registration Statement on Form S-4, dated
May 9, 2001 (Registration No. 333-60572) of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by
reference.
10.52 Sprint Spectrum Trademark and Service Mark License
Agreement, dated July 10, 1998, between Sprint Spectrum
L.P. and Southwest PCS, L.P., filed as Exhibit 10.52 to
the Registration Statement on Form S-4, dated May 9, 2001
(Registration No. 333-60572) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.53 Second Amendment, dated as of June 7, 2001, to the
Amended and Restated Credit Agreement, among Alamosa
Holdings, Inc., Alamosa (Delaware), Inc., Alamosa
Holdings, LLC, the Lenders party thereto, Export
Development Corporation, as co-documentation agent, First
Union National Bank, as documentation agent, Toronto
Dominion (Texas), Inc. as syndication agent and Citicorp
USA, Inc., as administrative and collateral agent, as an
amendment to Exhibit 10.21 above, filed as Exhibit 10.55
to the Registration Statement on Form S-1, dated July 31,
2001 (Registration No. 333-66358) of Alamosa Holdings,
Inc. and incorporated herein by reference.
10.54 Third Amendment and Waiver, dated as of July 19, 2001, to
the Amended and Restated Credit Agreement, among Alamosa
Holdings, Inc., Alamosa (Delaware), Inc., Alamosa
Holdings, LLC, Export Development Corporation, as
co-documentation agent, First Union National Bank, as
documentation agent, Toronto Dominion (Texas), Inc. as
syndication agent and Citicorp USA, Inc., as
administrative and collateral agent as an amendment to
Exhibit 10.21 above, filed as Exhibit 10.56 to the
Registration Statement on Form S-1, dated July 31, 2001
(Registration No. 333-66358) of Alamosa Holdings, Inc.
and incorporated herein by reference.
10.55 Fourth Amendment and Waiver, dated as of August 6, 2001,
to the Amended and Restated Credit Agreement, among
Alamosa Holdings, Inc., Alamosa (Delaware), Inc., Alamosa
Holdings, LLC, the Lenders party thereto, Export
Development Corporation as co-documentation agent, First
Union National Bank, as documentation agent, Toronto
Dominion (Texas), Inc., as syndication agent, and
Citicorp USA, Inc., as administrative Agent and
collateral Agent, as an amendment to Exhibit 10.21 above,
filed as Exhibit 10.55 to the Registration Statement on
Form S-4, dated August 28, 2001 (Registration No.
333-68538) of Alamosa (Delaware), Inc., which exhibit is
incorporated herein by reference.
71
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
10.56 Fifth Amendment and Consent, dated as of August 7, 2001,
to the Amended and Restated Credit Agreement, among
Alamosa Holdings, Inc., Alamosa (Delaware), Inc., Alamosa
Holdings, LLC, the Lenders party thereto (the "Lenders"),
Export Development Corporation, as co-documentation
agent, First Union National Bank, as documentation agent,
Toronto Dominion (Texas), Inc., as syndication agent, and
Citicorp USA, Inc., as administrative Agent and
collateral Agent, as an amendment to Exhibit 10.21 above,
filed as Exhibit 10.56 to the Registration Statement on
Form S-4, dated August 28, 2001 (Registration No.
333-68538) of Alamosa (Delaware), Inc., which exhibit is
incorporated herein by reference.
10.57 Security agreement, dated as of August 15, 2001, among
Alamosa (Delaware), Inc., a Delaware corporation, Wells
Fargo Bank Minnesota, N.A., as security agent, Wells
Fargo Bank Minnesota, N.A., as collateral agent for Wells
Fargo Bank Minnesota, N.A., as trustee under the August
2001 Indenture (as to paragraph 6(b)), for Wells Fargo
Bank Minnesota, N.A., as trustee under the January 2001
Indenture (as to paragraph 6(b)), and for Wells Fargo
Bank Minnesota, N.A., as trustee under the 2000 Indenture
(as to paragraph 6(b)), filed as Exhibit 10.57 to the
Registration Statement on Form S-4, dated August 28, 2001
(Registration No. 333-68538) of Alamosa (Delaware), Inc.,
which exhibit is incorporated herein by reference.
10.60+ * Amended and Restated Employment Agreement dated as of
October 1, 2002 by and between Alamosa Holdings, Inc. and
Margaret Z. Couch.
10.61 Sixth Amendment, dated as of September 26, 2002, to the
Amended and Restated Credit Agreement, dates as of
February 14, 2001, as amended and restated as of March
30, 2001, among Alamosa Holdings, Inc., Alamosa
(Delaware), Inc., Alamosa Holdings, LLC, the Lenders
party thereto, Export Development Corporation, as
Co-Documentation Agent, First Union National Bank, as
Documentation Agent, Toronto Dominion (Texas), Inc., as
Syndication Agent, and Citicorp USA, Inc., as
Administrative Agent and Collateral Agent, as amendment
to Exhibit 10.21 above, filed as Exhibit 10.62 to the
Current Report on Form 8-K filed by Alamosa Holdings,
Inc. on October 1, 2002.
10.62+ * Employment Agreement dated as of December 1, 2002 by and
between Alamosa Holdings, Inc. and Steven Richardson.
21.1 Subsidiaries of the Registrant, filed as Exhibit 21.1 to
the Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, which exhibit is incorporated herein
by reference.
23.1 * Consent of PricewaterhouseCoopers LLP.
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.
+ Exhibit is a management contract or compensatory plan.
* Filed herewith
72
ALAMOSA HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.................................................................. F-2
Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000......... F-4
Consolidated Statements of Stockholders' Equity for the period from December 31, 1999 to December
31, 2002........................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000......... F-6
Notes to Consolidated Financial Statements......................................................... F-7
Report of Independent Accountants on Financial Statement Schedule.................................. F-37
Consolidated Valuation and Qualifying Accounts..................................................... F-38
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Alamosa Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Alamosa
Holdings, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the Company has
changed its method of accounting for goodwill and other intangible assets as a
result of adopting SFAS No. 142 as of January 1, 2002.
PricewaterhouseCoopers LLP
Dallas, Texas
February 21, 2003
F-2
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
DECEMBER 31,
----------------------------------
2002 2001
------------------ ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 61,737 $ 104,672
Short term investments -- 1,300
Restricted cash 34,725 51,687
Customer accounts receivable, net 27,926 38,717
Receivable from Sprint 30,322 13,160
Interest receivable 973 2,393
Inventory 7,410 4,802
Prepaid expenses and other assets 7,239 4,749
Deferred customer acquisition costs 7,312 5,181
Deferred tax asset 5,988 8,112
-------------- --------------
Total current assets 183,632 234,773
Property and equipment, net 458,946 455,695
Debt issuance costs, net 33,351 36,654
Restricted cash -- 43,006
Goodwill -- 293,353
Intangible assets, net 488,421 528,840
Other noncurrent assets 7,802 6,087
-------------- --------------
Total assets $ 1,172,152 $ 1,598,408
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,203 $ 44,012
Accrued expenses 34,903 29,291
Payable to Sprint 24,649 16,133
Interest payable 22,242 22,123
Deferred revenue 18,901 15,479
Current installments of capital leases 1,064 596
-------------- --------------
Total current liabilities 128,962 127,634
-------------- --------------
Long term liabilities
Capital lease obligations 1,355 1,983
Other noncurrent liabilities 10,641 7,496
Deferred tax liability 27,694 98,940
Senior secured debt 200,000 187,162
12 7/8% senior discount notes 268,862 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
-------------- --------------
Total long term liabilities 908,552 932,788
-------------- --------------
Total liabilities 1,037,514 1,060,422
-------------- --------------
Commitments and contingencies (see Note 18) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 290,000,000 shares authorized,
94,171,938 and 92,786,497 shares issued and
outstanding, respectively 942 927
Additional paid-in capital 800,260 799,366
Accumulated deficit (664,720) (261,371)
Unearned compensation (294) --
Accumulated other comprehensive income, net of tax (1,550) (936)
-------------- --------------
Total stockholders' equity 134,638 537,986
-------------- --------------
Total liabilities and stockholders' equity $ 1,172,152 $ 1,598,408
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Revenues:
Subscriber revenues $ 391,927 $ 231,145 $ 56,154
Roaming revenues 139,843 99,213 17,346
-------------- -------------- --------------
Service revenues 531,770 330,358 73,500
Product sales 23,922 26,781 9,201
-------------- -------------- --------------
Total revenue 555,692 357,139 82,701
-------------- -------------- --------------
Costs and expenses:
Cost of service and operation
(excluding non-cash compensation of
$4, $0 and $836 for 2002, 2001 and
2000, respectively) 343,468 237,843 55,701
Cost of products sold 50,974 53,911 20,524
Selling and marketing (excluding non-cash
compensation of $4, $0 and $0 for 2002, 2001
and 2000, respectively) 119,059 110,052 45,407
General and administrative expenses
(excluding non-cash compensation of
$21, ($916), and $4,815 for 2002, 2001 and
2000, respectively) 15,243 13,853 9,538
Depreciation and amortization 105,121 94,722 12,530
Terminated merger and acquisition costs -- -- 2,247
Impairment of goodwill 291,635 -- --
Impairment of property and equipment 1,194 -- --
Non-cash compensation 29 (916) 5,651
-------------- --------------- --------------
Total costs and expenses 926,723 509,465 151,598
-------------- -------------- --------------
Loss from operations (371,031) (152,326) (68,897)
Interest and other income 3,459 11,664 14,483
Interest expense (102,863) (81,730) (25,775)
-------------- -------------- --------------
Loss before income tax benefit and
extraordinary item (470,435) (222,392) (80,189)
Income tax benefit 67,086 78,472 --
-------------- -------------- --------------
Loss before extraordinary item (403,349) (143,920) (80,189)
Loss on debt extinguishment, net of tax
benefit of $0, $1,969 and $0 for 2002, 2001
and 2000, respectively -- (3,503) --
-------------- -------------- --------------
Net loss $ (403,349) $ (147,423) $ (80,189)
============== ============== ==============
Net loss per common share, basic and diluted:
Loss before extraordinary item $ (4.33) $ (1.65) $ (1.33)
Loss on debt extinguishment, net of tax -- (0.04) --
-------------- --------------- --------------
Net loss $ (4.33) $ (1.69) $ (1.33)
=============== =============== ===============
Weighted average common shares outstanding, basic
and diluted 93,048,883 87,077,350 60,198,390
=============== ============== ===============
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except share amounts )
FOR THE PERIOD FROM DECEMBER 31, 1999 TO DECEMBER 31, 2002
PREFERRED STOCK COMMON STOCK
COMPREHENSIVE ------------------------- ------------------------
INCOME (LOSS) SHARES AMOUNT SHARES AMOUNT
------------ ------------------------------------- -----------
Balance December 31, 1999 -- $ -- 48,500,008 $ 485
Net loss $ (80,189)
----------
Total comprehensive loss $ (80,189)
==========
Initial public offering 12,321,100 123
Exercise of stock options 538,748 5
Amortization of
unearned compensation
Unearned compensation
---------- ---------- ----------- ---------
Balance December 31, 2000 -- -- 61,359,856 613
Net loss $ (147,423)
Net change in fair value of
derivative instruments
qualifying as cash flow
hedges, net of tax
benefit of $540 (936)
----------
Total comprehensive loss $ (148,359)
==========
Stock issued and options
granted in connection with
acquisitions 30,649,990 307
Shares issued to employee
stock purchase plan 40,706 --
Issuance of shares in
secondary offering 720,000 7
Exercise of stock options 15,945 --
Amortization of unearned
compensation
Unearned compensation
---------- ---------- ----------- ---------
Balance December 31, 2001 -- -- 92,786,497 927
Net loss $ (403,349)
Net change in fair value of
Derivative instruments
qualifying as cash flow
hedges, net of tax
benefit of $376 (614)
----------
Total comprehensive loss $ (403,963)
==========
Shares issued to employee
stock purchase plan 585,191 6
Exercise of stock options 250 1
Restricted shares awarded to
officers 800,000 8
Amortization of unearned
compensation
---------- ---------- ----------- --------
Balance December 31, 2002 -- $ -- 94,171,938 $ 942
========== ========== =========== =========
ADDITIONAL ACCUMULATED OTHER
PAID-IN ACCUMULATED UNEARNED COMPREHENSIVE
CAPITAL DEFICIT COMPENSATION INCOME TOTAL
------------- ------------ ------------ --------------- --------
Balance December 31, 1999 $ 50,825 $ (33,759) $ (6,110) $ -- $ 11,441
Net loss (80,189) (80,189)
Total comprehensive loss
Initial public offering 193,664 193,787
Exercise of stock options 703 708
Amortization of
unearned compensation 5,651 5,651
Unearned compensation 653 (653) --
------------ ----------- ----------- -------------- -----------
Balance December 31, 2000 245,845 (113,948) (1,112) -- 131,398
Net loss (147,423) (147,423)
Net change in fair value of
derivative instruments
qualifying as cash flow
hedges, net of tax
benefit of $540 (936) (936)
Total comprehensive loss
Stock issued and options
granted in connection with
acquisitions 545,868 546,175
Shares issued to employee
stock purchase plan 365 365
Issuance of shares in
secondary offering 9,055 9,062
Exercise of stock options 261 261
Amortization of unearned
compensation (916) (916)
Unearned compensation (2,028) 2,028 --
------------ ----------- ----------- -------------- -----------
Balance December 31, 2001 799,366 (261,371) -- (936) 537,986
Net loss (403,349) (403,349)
Net change in fair value of
Derivative instruments
qualifying as cash flow
hedges, net of tax
benefit of $376 (614) (614)
Total comprehensive loss
Shares issued to employee
stock purchase plan 570 576
Exercise of stock options 1 2
Restricted shares awarded to
officers 323 (323) 8
Amortization of unearned
compensation 29 29
----------- ---------- ----------- -------------- -----------
Balance December 31, 2002 $ 800,260 $ (664,720) $ (294) $ (1,550) $ 134,638
============ ========== ========= ============ ===========
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000
---------------- --------------- -------------
Cash flows from operating activities:
Net loss $ (403,349) $ (147,423) $ (80,189)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation 29 (916) 5,651
Non-cash interest expense on derivative
instruments 464 656 --
Provision for bad debts 40,285 17,490 1,107
Depreciation and amortization of property and
equipment 64,702 45,963 12,530
Amortization of goodwill and intangibles 40,419 48,759 --
Amortization of financing costs included in
interest expense 4,259 3,274 1,664
Amortization of discounted interest 395 165 --
Loss on debt extinguishment, net of tax -- 3,503 --
Deferred tax benefit (67,086) (78,472) --
Interest accreted on discount notes 31,655 27,927 23,052
Impairment of property and equipment 1,194 -- --
Impairment of goodwill 291,635 -- --
Loss from asset disposition 41 102 81
(Increase) decrease in, net of effects from
acquisitions:
Receivables (45,236) (47,895) (14,178)
Inventory (2,608) 1,275 3,024
Prepaid expenses and other assets (6,440) (6,655) (4,296)
Increase in, net of effects from acquisitions:
Accounts payable and accrued expenses 23,105 18,594 22,336
-------------- -------------- -------------
Net cash used in operating activities (26,536) (113,653) (29,218)
-------------- -------------- -------------
Cash flows from investing activities:
Proceeds from sale of assets 451 -- --
Purchases of property and equipment (89,476) (143,731) (136,904)
Repayment (issuance) of notes receivable -- 11,860 (46,865)
Acquisition related costs 58 (37,617) (3,156)
Net change in short term investments 1,300 300 (1,600)
Repayment (issuance) of note receivable from
officer -- -- 100
Purchase of minority interest in subsidiary -- -- (255)
-------------- -------------- -------------
Net cash used in investing activities (87,667) (169,188) (188,680)
-------------- -------------- -------------
Cash flows from financing activities:
Equity offering proceeds -- 10,034 208,589
Equity offering costs -- (972) (13,599)
Proceeds from issuance of senior discount notes -- -- 187,096
Proceeds from issuance of senior notes -- 384,046 --
Proceeds from restricted stock 8 -- --
Borrowings under senior secured debt 12,838 253,000 57,758
Repayments of borrowings under senior secured
debt -- (289,421) (76,239)
Debt issuance costs (1,351) (16,503) (10,763)
Stock options exercised 2 238 708
Shares issued to employee stock purchase plan 576 365 --
Payments on capital leases (773) (349) (31)
Change in restricted cash 59,968 (94,693) 518
Interest rate cap premiums -- -- (27)
-------------- -------------- -------------
Net cash provided by financing activities 71,268 245,745 354,010
-------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents (42,935) (37,096) 136,112
Cash and cash equivalents at beginning of period 104,672 141,768 5,656
-------------- -------------- -------------
Cash and cash equivalents at end of period $ 61,737 $ 104,672 $ 141,768
============== ============== =============
Supplemental disclosure - cash paid for interest $ 70,890 $ 27,804 $ 1,731
============== ============== =============
Supplemental disclosure of non-cash investing and
financing activities:
Capitalized lease obligations incurred $ 613 $ 1,242 $ 257
Change in accounts payable for purchase of
property and equipment (20,450) 1,844 23,464
Liabilities assumed in connection with debt
issuance costs -- 15,954 --
Stock issued in connection with acquisitions -- 545,041 --
Stock options issued in connection with
acquisitions -- 1,134 --
Obligations assumed in connection with
acquisitions -- 253,686 --
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as noted)
1. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa Holdings, Inc. ("Alamosa Holdings") was formed in July 2000.
Alamosa Holdings is a holding company and through its subsidiaries
provides wireless personal communications services, commonly referred
to as PCS, in the Southwestern, Northwestern and Midwestern United
States. Alamosa (Delaware), Inc. ("Alamosa (Delaware)"), a subsidiary
of Alamosa Holdings, was formed in October 1999 under the name "Alamosa
PCS Holdings, Inc." to operate as a holding company in anticipation of
its initial public offering. On February 3, 2000, Alamosa (Delaware)
completed its initial public offering. Immediately prior to the initial
public offering, shares of Alamosa (Delaware) were exchanged for
Alamosa PCS LLC's ("Alamosa LLC") membership interests, and Alamosa LLC
became wholly owned by Alamosa (Delaware). These financial statements
are presented as if the reorganization had occurred as of the beginning
of the periods presented. Alamosa Holdings 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."
2. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
capital contributions from owners, through debt financing and through
proceeds generated from public offerings of common stock. The Company
has incurred substantial net losses and negative cash flow from
operations since inception. Expenses are expected to exceed revenues
until the Company establishes a sufficient subscriber base. Management
expects operating losses to continue for the foreseeable future.
However, management expects operating losses to decrease in the future
as the Company obtains more subscribers.
As of December 31, 2002, the Company had $61,737 in cash and cash
equivalents plus an additional $34,725 in restricted cash held in
escrow for debt service requirements. The Company also had $25,000
remaining on the revolving portion of the Senior Secured Credit
Facility subject to the restrictions discussed below.
On September 26, 2002 the Company entered into the sixth amendment to
the amended and restated credit agreement 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 as discussed in Note 9. 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. In connection with a scheduled interest
rate reset on September 30, 2002, the interest margin was reset to
4.00% for LIBOR borrowings and 3.00% for base rate borrowings.
F-7
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
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. As
of December 31, 2002, the Company's leverage ratio was 24.9 to 1.
Although management does not currently anticipate the need to raise
additional capital in the upcoming year, the Company's funding status
is dependent on a number of factors influencing projections of
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 terms
acceptable to the Company, if at all, and could have a material adverse
effect on the Company's ability to achieve its intended business
objectives.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
intercompany accounts and transactions are eliminated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash,
money market funds, and commercial paper with minimal interest rate
risk and original maturities of three months or less at the date of
acquisition.
The carrying amount approximates fair value.
SHORT-TERM INVESTMENTS - The Company invests in highly liquid debt
instruments with strong credit ratings. Commercial paper investments
with a maturity greater than three months, but less than one year, at
the time of purchase are considered to be short-term investments. The
carrying amount of the investments approximates fair value due to their
short maturity. The Company maintains cash and cash equivalents and
short-term investments with certain financial institutions. The Company
performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment
strategy.
INVENTORY - Inventory consists of handsets and related accessories.
Inventories purchased for resale are carried at the lower of cost or
market using the first-in first-out method. Market is determined using
replacement cost which is consistent with industry practices. The
Company also performs an analysis to identify obsolete or excess
handset inventory for models that are no longer manufactured or are
technologically obsolete and records a reserve, as appropriate.
RESTRICTED CASH - Restricted cash of $34,725 at December 31, 2002 is
held in escrow to secure payment on certain of the Company's debt
obligations. The entire amount is expected to be liquidated during 2003
and is classified as a current asset in the accompanying consolidated
balance sheets.
PROPERTY AND EQUIPMENT - Property and equipment are reported at cost
less accumulated depreciation. Costs incurred to design and construct
the wireless network in a market are classified as construction in
progress. When the wireless network for a particular market is
completed and placed into service, the related costs begin to be
depreciated. Repair and maintenance costs are charged to expense as
incurred; significant renewals and betterments are capitalized. When
depreciable assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the respective
accounts, and any gains or losses on disposition are recognized in
income. Property and equipment are depreciated using the straight-line
method based on estimated useful lives of the assets.
F-8
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Asset lives are as follows:
Buildings 10 years
Network equipment 5-10 years
Vehicles 5 years
Furniture and office equipment 7-10 years
Leasehold improvements are depreciated over the shorter of the
remaining term of the lease or the estimated useful life of the
improvement.
Interest is capitalized in connection with the construction of the
wireless network. The capitalized interest is recorded as part of the
asset to which it relates and will be amortized over the asset's
estimated useful life. During 2002, approximately $265 in interest
costs were capitalized. During 2001, approximately $1,752 in interest
costs were capitalized. No interest costs were capitalized during 2000.
The remaining unamortized balance of capitalized interest was
approximately $2,077 as of December 31, 2002.
Microwave relocation includes costs and the related obligation incurred
to relocate incumbent microwave frequencies in the Company's service
area. Microwave relocation costs are amortized on a straight-line basis
over 20 years beginning upon commencement of services in respective
markets. The amortization of microwave relocation costs was
approximately $287, $231 and $189 for the years ended December 31,
2002, 2001 and 2000, respectively.
SOFTWARE COSTS - In accordance with Statement of Position ("SOP") 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for
Internal Use," certain costs related to the development or purchase of
internal-use software are capitalized and amortized over the estimated
useful life of the software. During fiscal 2002, 2001 and 2000, the
Company capitalized approximately $838, $1,228, and $1,626,
respectively, in software costs under SOP 98-1, which are being
amortized over a five-year life. The Company amortized computer
software costs of approximately $720, $533, and $225 during 2002, 2001
and 2000, respectively.
ADVERTISING COSTS - Advertising costs are expensed as incurred.
Advertising expenses totaled approximately $26,574, $25,857 and $14,118
during 2002, 2001 and 2000, respectively.
INCOME TAXES. - The Company presents income taxes pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." SFAS No. 109 uses an asset and liability approach to
account for income taxes, wherein deferred taxes are provided for book
and tax basis differences for assets and liabilities. In the event
differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities result in deferred tax assets, an
evaluation of the probability of being able to realize the future
benefits indicated by such assets is required. A valuation allowance is
provided for a portion or all of the deferred tax assets when there is
sufficient uncertainty regarding the Company's ability to recognize the
benefits of the assets in future years. See Note 12.
REVENUE RECOGNITION - The Company recognizes revenue as services are
performed. Sprint handles the Company's billings and collections and
retains 8% of collected service revenues from the Company's subscribers
and from non-Sprint wireless subscribers who roam onto the Company's
portion of the PCS network of Sprint. The amount retained by Sprint is
recorded in Cost of Service and Operations. Revenues generated from the
sale of handsets and accessories and from roaming services provided to
Sprint wireless customers who are not based in the Company's
territories are not subject to the 8% charge.
F-9
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
The Company defers customer activation fee revenue and an equal amount
of customer acquisition related expenses. These deferred amounts are
amortized over a three or one-year period depending on the credit class
of the respective customer, which approximates the average life of that
customer. Prior to October 1, 2000, the Company was not charging
activation fees to its customers. For the year ended December 31, 2000,
the Company deferred approximately $1,180 of activation fee revenue and
acquisition related expenses and amortized approximately $77. For the
year ended December 31, 2001, the Company deferred approximately
$11,544 of activation fee revenue and acquisition related expenses and
amortized approximately $2,315. For the year ended December 31, 2002,
the Company deferred approximately $11,846 of activation fee revenue
and acquisition related expenses and amortized approximately $7,920. At
December 31, 2002, approximately $7,023 of the remaining deferral was
classified as long-term.
Sprint and other PCS Affiliates of Sprint, pay the Company a roaming
fee for each minute that a Sprint wireless subscriber based outside of
the Company's territories roams on the Company's portion of the PCS
network of Sprint. Revenue from these services is recognized as the
services are performed. Similarly, the Company pays roaming fees to
Sprint and other PCS Affiliates of Sprint, when the Company's
subscribers roam on the PCS network of Sprint outside of the Company's
territories. These costs are recorded as a cost of service when
incurred.
Product revenues, consisting of proceeds from sales of handsets and
accessories, are recorded net of an allowance for sales returns. The
allowance is estimated based on Sprint's handset return policy that
allows customers to return handsets for a full refund within 14 days of
purchase. When handsets are returned to the Company, the Company may be
able to reissue the handsets to customers at little additional cost.
However, when handsets are returned to Sprint for refurbishing, the
Company will receive a credit from Sprint, which will be less than the
amount the Company originally paid for the handset. The cost of
products sold includes the total cost of accessories and handsets sold
through the Company's retail stores (including sales to local indirect
retailers). The cost of handsets exceeds the retail sales price because
the Company subsidizes the price of handsets for competitive reasons.
For handsets sold through national indirect retailers (such as Radio
Shack, Circuit City, Best Buy, etc.) and other channels controlled by
Sprint, the Company reimburses Sprint for the subsidy incurred on such
handsets activated within the Company's territory and this cost is
reflected in selling and marketing expenses.
GOODWILL AND INTANGIBLE ASSETS - Goodwill and other intangible assets
were recorded in connection with the acquisitions discussed in Note 4.
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.
The Company adopted the provisions of 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, 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. As
discussed in Note 7, in connection with the first annual impairment
testing of goodwill as of July 31, 2002 the Company recorded an
impairment charge of $291,635 and goodwill has no carrying value at
December 31, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS - If facts or circumstances indicate
the possibility of impairment of long-lived assets, including
intangibles, the Company will prepare a projection of future operating
cash flows, undiscounted and without interest. If based on this
projection, the Company does not expect to recover its
F-10
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
carrying cost, an impairment loss equal to the difference between the
fair value of the asset and its carrying value will be recognized in
operating income.
STOCK BASED COMPENSATION - The Company has elected to follow Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its
employee stock options. The Company has implemented the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock Based Compensation."
See Note 16.
For fixed stock options granted under these plans, the exercise price
of the option equals or exceeds the market value of the Company's
common stock on the date of grant. Accordingly, the Company does not
record compensation expense for any of the fixed stock options granted.
For performance-based options, compensation expense was recognized over
the expected vesting period of the options and was adjusted for changes
in the number of options expected to vest and the market value of the
Company's common stock. Compensation expense (credit) for the
performance-based options amounted to $0 in 2002, $(916) in 2001 and
$5,651 in 2000.
The following table illustrates the effects on net loss and net loss
per share had the Company applied the fair value recognition provisions
of SFAS No. 123 to its stock-based employee compensation plans:
Year Ended December 31,
------------------------------------------------
2002 2001 2000
------------------ -----------------------------
Net loss - as reported $ (403,349) $ (147,423) $ (80,189)
Less stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (5,832) (6,555) (6,588)
---------------- ---------------- ----------------
Net loss - pro forma $ (409,181) $ (153,978) $ (86,777)
================ ================ ================
Net loss per share - as reported
Basic and Diluted $ (4.33) $ (1.69) $ (1.33)
================= ==================================
Net loss per share - pro forma
Basic and Diluted $ (4.40) $ (1.77) $ (1.44)
================= ==================================
The pro forma amounts presented above may not be representative of the
future effects on reported net loss and net loss per share, since the
pro forma compensation expense is allocated over the periods in which
options become exercisable, and new option awards may be granted each
year.
EARNINGS (LOSS) PER SHARE - Basic and diluted net loss per share of
common stock is computed by dividing net loss for each period by the
weighted-average outstanding common shares. No conversion of common
stock equivalents has been assumed in the calculations since the effect
would be antidilutive (see Note 11). As a result, the number of
weighted-average outstanding common shares as well as the amount of net
loss per share are the same for basic and diluted net loss per share
calculations for all periods presented.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities on the date of the financial statements and the
reported amounts of expenses during the period. The most significant of
such estimates include:
o Allowance for uncollectible accounts;
o Estimated customer life in terms of amortization of deferred
revenue and direct costs of acquisition;
o Likelihood of realizing benefits associated with temporary
differences giving rise to deferred tax assets; and
o Impairment of long-lived assets.
F-11
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Actual results could differ from those estimates.
CONCENTRATION OF RISK - The Company maintains cash and cash equivalents
in accounts with financial institutions in excess of the amount insured
by the Federal Deposit Insurance Corporation. The Company monitors the
financial stability of these institutions regularly and management does
not believe there is significant credit risk associated with deposits
in excess of federally insured amounts.
The Company relies on Sprint to provide certain back-office functions
such as billing and customer care, activation of new subscribers,
handset logistics and technology development. Should Sprint be unable
to provide these services, the Company could be negatively impacted.
See Note 13.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company enters into derivative
financial instruments for the purpose of hedging specific exposures as
part of its risk management program and holds all derivatives for
purposes other than trading. To date, the Company's use of such
instruments has been limited to interest rate swaps and collars. The
Company currently uses hedge accounting as prescribed in SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" with
respect to its interest rate swaps. As such, the fair values of these
arrangements are recorded in the consolidated balance sheet with
changes in fair value being reported as a component of other
comprehensive income.
The interest rate collar arrangement does not qualify for hedge
accounting under SFAS No. 133 and as such, the fair value of the
respective asset and liability is recorded in the consolidated balance
sheet with any change during the period being reflected in the
consolidated statement of operations.
RECLASSIFICATION - Certain reclassifications have been made to prior
year amounts to conform to the current year presentation. These
reclassifications had no effect on the results of operations or
stockholders' equity as previously reported.
EFFECTS OF RECENT 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. For the Company's leased telecommunication and operating
facilities, primarily consisting of cell sites, office and retail
locations, the Company has evaluated the impact of the adoption of SFAS
No. 143 as of January 1, 2003 and determined that the impact to the
Company will not be material.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002," which rescinded or amended
various existing standards. One change addressed by this standard
pertains to treatment of extinguishments of debt as an extraordinary
item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt" and states that an extinguishment of debt
cannot be classified as an extraordinary item unless it meets the
unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The
provisions of this statement are effective for fiscal years beginning
after May 15, 2002 and extinguishments of debt that were previously
classified as an extraordinary item in prior periods that do not meet
the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The adoption of SFAS No. 145 in the quarter
ending March 31, 2003 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
F-12
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
material impact on the Company's results of operations, financial
position or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an
amendment of SFAS No. 123 "Accounting for Stock-Based Compensation."
This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of this
statement are effective for fiscal years ending after and interim
periods beginning after December 15, 2002. As the Company continues to
account for stock-based employee compensation using the intrinsic value
method under APB Opinion No. 25, the Company, as required, has only
adopted the revised disclosure requirements of SFAS No. 148 as of
December 31, 2002. (See Stock-Based Compensation section of this note.)
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" in January, 2003. This Abstract addresses certain aspects
of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, it
addresses how consideration should be measured and allocated to the
separate units of accounting in the arrangement. The guidance in this
Abstract is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003 and the Company is in the process
of evaluating the impact of this Abstract.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN 45 also requires additional disclosures by a guarantor
in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45
are effective for guarantees issued after December 31, 2002, while the
disclosure requirements were effective for financial statements for
periods ending after December 15, 2002. At December 31, 2002, the
Company had not entered into any material arrangement that would be
subject to the disclosure requirements of FIN 45. The Company does not
believe that the adoption of FIN 45 will have a material impact on its
consolidated financial statements.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46" or the "Interpretation"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51." The primary objectives of FIN
46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights
("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make
additional disclosures. For public entities with VIEs created before
February 1, 2003, the implementation and disclosure requirements of FIN
46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created
after January 31, 2003, the requirements are effective immediately. The
Company does not believe that the adoption of FIN 46 will have a
material impact on its consolidated financial statements.
4. MERGERS AND ACQUISITIONS
The Company completed the acquisitions of three PCS affiliates of
Sprint during the first quarter of 2001. On February 14, 2001, the
Company completed its acquisitions of Roberts Wireless Communications,
L.L.C. ("Roberts") and Washington Oregon Wireless, LLC ("WOW"). On
March 30, 2001, the Company completed its acquisition of Southwest PCS
Holdings, Inc. ("Southwest"). 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.
F-13
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
The merger consideration in the Roberts acquisition consisted of 13.5
million shares of the Company's 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 the Company's 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 the Company's 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 of Roberts, WOW and
Southwest to allocate the purchase price. The results of the
allocations are as follows:
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
========== ========= ============ ==========
F-14
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
The unaudited pro forma condensed consolidated statements of operations
for the years ended December 31, 2001 and 2000 set forth below, present
the results of operations as if the acquisitions had occurred at the
beginning of each 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 YEAR ENDED
DECEMBER 31,
---------------------------
2001 2000
----------- ----------
(unaudited)
Total revenues $ 376,061 $ 131,203
=========== ===========
Loss before income tax benefit
and extraordinary item $ (246,128) $ (204,742)
Income tax benefit 86,289 71,660
----------- -----------
Loss before extraordinary item (159,839) (133,082)
Loss on debt extinguishment, of tax
benefit of $1,969 (3,503) --
----------- -----------
Net loss $ (163,342) $ (133,082)
=========== ===========
Basic and diluted loss per share
before extraordinary item $ (1.74) $ (1.45)
=========== ==========
Basic and diluted net loss per share $ (1.77) $ (1.45)
=========== ==========
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 $8.5 million and $5.9 million at December
31, 2002 and 2001, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
DECEMBER 31,
--------------------------------------
2002 2001
---------------- ---------------
Net roaming receivable $ 3,554 $ 1,731
Access and interconnect revenue receivable (payable) (188) 3,252
Accrued service revenue 3,345 4,154
Customer payments due from Sprint 21,136 4,023
Other amounts due from Sprint 2,475 --
------------- ------------
$ 30,322 $ 13,160
============= ===========
Net roaming receivable includes net travel revenue due from Sprint
relative to PCS subscribers based outside of the Company's licensed
territory who utilize the Company's portion of the PCS network of
Sprint. The travel revenue receivable is net of amounts owed to Sprint
relative to the Company's subscribers who utilize the PCS network of
Sprint outside of the Company's licensed territory. In addition, net
roaming receivable also includes amounts due from Sprint which have
been collected from other PCS providers for their customers' usage of
the Company's portion of the PCS network of Sprint.
Access and interconnect revenue receivable represents net amounts due
from Sprint for calls originated by a local exchange carrier ("LEC") or
an interexchange carrier ("IXC") that terminate on the Company's
network.
F-15
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Under the Company's affiliation agreements with Sprint, Sprint collects
this revenue from other carriers and remits 92% of those collections to
the Company. The $188 amount owed to Sprint at December 31, 2002 is the
result of rate adjustments on previously collected amounts.
On July 3, 2002, the Federal Communications Commission issued a ruling
on a dispute between AT&T, as an IXC, and Sprint. This ruling addressed
wireless carrier's ability to charge terminating access fees to the IXC
for calls terminated on a wireless network indicating that 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 $5.6 million in amounts that had been
previously paid to the Company by Sprint relative to terminating access
fees. Although the Company has contested the refund of these amounts, a
liability has been recorded in the consolidated financial statements as
of December 31, 2002.
Accrued service revenue receivable represents the Company's estimate of
airtime usage charges that have been earned but not billed at the end
of the period.
Customer payments due from Sprint relate to amounts that have been
collected by Sprint at the end of the period which were not remitted to
the Company until the subsequent period. Customer payments are
processed daily by Sprint and the Company receives its share of such
collections on a weekly basis under the terms of the affiliation
agreements.
Included in the December 31, 2002 balance of customer payments due from
Sprint is $12,209 in amounts that were received by the Company
subsequent to year end related to payments that Sprint had collected
from customers from April 2000 to December 2002 that had not been
passed on to the Company due to the methodology that had been
previously used by Sprint to allocate cash received from customers.
Other amounts due from Sprint at December 31, 2002 related to a refund
of fees paid to Sprint during 2002 for services such as billing and
customer care. These fees are determined at the beginning of each year
based on estimated costs and are adjusted based on actual costs
incurred by Sprint in providing the respective services.
F-16
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------------------
2002 2001
--------------- -----------
Land and buildings $ 12,086 $ 11,492
Network equipment 535,672 463,440
Vehicles 1,756 1,787
Furniture and office equipment 18,062 16,826
------------- -----------
567,576 493,545
Accumulated depreciation (122,060) (60,414)
------------- -----------
Subtotal 445,516 433,131
------------- -----------
Microwave relocation costs 5,773 5,639
Accumulated amortization (792) (504)
------------- -----------
Subtotal 4,981 5,135
------------- -----------
Construction in progress:
Network equipment 7,673 16,126
Leasehold improvements 776 1,303
------------- -----------
Subtotal 8,449 17,429
------------- -----------
Total $ 458,946 $ 455,695
============= ===========
During the year ended December 31, 2002 the Company recorded $1,194 in
impairments of property and equipment related to the abandonment of a
switching facility. The impairment charge represents the net book value
of leasehold improvements at the physical location of the leased
facility.
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 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. A purchase price allocation adjustment of
$1,718 was recorded in the first quarter of 2002 which reduced goodwill
by that
F-17
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
amount.
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 the Company 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
the Company's 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 indicated that goodwill had no
value and an impairment charge of $291,635 was recorded in the third
quarter of 2002. This impairment charge is included as a separate line
item in the consolidated statements of operations for the year ended
December 31, 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:
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Goodwill $ -- $ 293,353
========== ==========
Intangible assets:
Sprint affiliation and other agreements $ 532,200 $ 532,200
Accumulated amortization (55,458) (25,768)
---------- ----------
Subtotal 476,742 506,432
---------- ----------
Subscriber base acquired 29,500 29,500
Accumulated amortization (17,821) (7,092)
---------- ----------
Subtotal 11,679 22,408
---------- ----------
Intangible assets, net $ 488,421 $ 528,840
========== ==========
F-18
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Amortization expense relative to intangible assets was $40,419 and
$32,860 for the years ended December 31, 2002 and 2001, respectively.
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 $ 40,067
2004 32,079
2005 30,234
2006 30,234
2007 30,234
Thereafter 325,573
----------
$ 488,421
==========
The following tables present net loss before extraordinary item, net
loss and the respective per-share amounts as if the provisions of SFAS
142 had been adopted January 1, 2000:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
---------- ---------- ----------
Reported loss before extraordinary item $ (403,349) $ (143,920) $ (80,189)
Add back: goodwill amortization -- 15,899 --
---------- ---------- ----------
Adjusted loss before extraordinary item $ (403,349) $ 128,021 $ (80,189)
========== ========== ==========
Reported net loss $ (403,349) $ (147,423) $ (80,189)
Add back: goodwill amortization -- 15,899 --
---------- ---------- ----------
Adjusted net loss $ (403,349) $ (131,524) $ (80,189)
========== ========== ==========
LOSS BEFORE EXTRAORDINARY ITEM
PER COMMON SHARE, BASIC AND DILUTED:
As reported $ (4.33) $ (1.65) $ (1.33)
Goodwill amortization -- 0.18 --
---------- ----------- -----------
Adjusted $ (4.33) $ (1.47) $ (1.33)
=========== =========== ==========
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED:
As reported $ (4.33) $ (1.69) $ (1.33)
Goodwill amortization -- 0.18 --
---------- ----------- -----------
Adjusted $ (4.33) $ (1.51) $ (1.33)
=========== =========== ==========
F-19
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
8. LEASES
OPERATING LEASES - The Company has various operating leases, primarily
related to rentals of tower sites and offices. These leases range from
5 to 10 years in length and generally provide for annual rent
escalation based on pre-determined amounts or percentages. The
estimated increases in rent are being recognized over the term of the
leases using the straight-line method. Rental expense was $33,520,
$26,548 and $6,177 for 2002, 2001 and 2000, respectively. At December
31, 2002, the aggregate minimum rental commitments under noncancelable
operating leases for the periods shown are as follows:
YEARS:
2003 $ 28,973
2004 29,534
2005 30,047
2006 30,834
2007 31,481
Thereafter 90,191
----------
Total $ 241,060
==========
CAPITAL LEASES - Capital leases consist of leases for rental of retail
space and switch usage. The net present value of the leases was $2,419
and $2,579 at December 31, 2002 and 2001, respectively, and was
included in property and equipment. Accumulated amortization recorded
under these leases was $570 and $292 at December 31, 2002 and 2001,
respectively. At December 31, 2002 the future payments under capital
lease obligations, less imputed interest, are as follows:
YEARS:
2003 $ 1,305
2004 586
2005 160
2006 162
2007 163
Thereafter 857
----------
Total minimum lease payments 3,233
Less: imputed interest (814)
----------
Present value of minimum lease payments 2,419
Less: current installments (1,064)
----------
Long-term capital lease obligations at December 31, 2002 $ 1,355
==========
F-20
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
9. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------------
2002 2001
------------- -------------
12 7/8% Senior Discount Notes, net of discount $ 268,862 $ 237,207
12 1/2% Senior Notes 250,000 250,000
13 5/8% Senior Notes 150,000 150,000
Senior Secured Credit Facility 200,000 187,162
--------- ---------
Total debt 868,862 824,369
Less current maturities -- --
--------- ---------
Long term debt, excluding current maturities $ 868,862 $ 824,369
========= =========
SENIOR UNSECURED OBLIGATIONS
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% Notes Offering"). The 12 7/8% Notes Offering was
completed on February 8, 2000 and generated net proceeds of
approximately $181 million after underwriters' commissions and expenses
of approximate $6.1 million. The 12 7/8% senior discount notes ("12
7/8% Senior Discount Notes") mature in ten years (February 15, 2010)
and carry a coupon rate of 12 7/8% Senior Discount Notes, and provide
for interest deferral for the first five years. The 12 7/8% Senior
Discount Notes will accrete to their $350 million face amount by
February 8, 2005, after which, interest will be paid in cash
semiannually. The proceeds of the 12 7/8% Senior Discount Notes
Offering were used to prepay the existing credit facility, to pay costs
to build out additional areas within the Company's existing
territories, to fund operating working capital needs and for other
general corporate purposes.
12 1/2% SENIOR NOTES - On January 31, 2001, Alamosa (Delaware)
consummated the offering (the "12 1/2% Notes Offering") of $250 million
aggregate principal amount of senior notes (the "12 1/2% Senior
Notes"). The 12 1/2% Senior Notes mature in ten years (February 1,
2011), carry a coupon rate of 12 1/2%, payable semiannually on February
1 and August 1, beginning on August 1, 2001. The net proceeds from the
sale of the 12 1/2% Senior Notes were approximately $241 million, after
deducting the commissions and estimated offering expenses.
Approximately $59.0 million of the proceeds of the 12 1/2% Senior Notes
Offering 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 Alamosa (Delaware); the
build-out of additional areas within its existing territories expanding
its existing territories; and pursuing additional telecommunications
business opportunities or acquiring other telecommunications businesses
or assets.
13 5/8% SENIOR NOTES - On August 15, 2001, Alamosa (Delaware) issued
$150 million face amount of Senior Notes (the "13 5/8% Senior Notes").
The 13 5/8% Senior Notes mature in ten years (August 15, 2011) and
carry a coupon rate of 13 5/8% payable semiannually on February 15 and
August 15, beginning on February 15, 2002. The net proceeds from the
sale of the 13 5/8% Senior Notes were approximately $141.5 million,
after deducting the commissions and estimated offering expenses.
Approximately $66 million of the proceeds were used to pay down a
portion of the Senior Secured Credit Facility. Approximately $39.1
million of the proceeds of the 13 5/8% Senior Notes were used by
Alamosa (Delaware) to establish a security account to secure on a
F-21
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
pro rata basis the payment obligations under all of the Company's
unsecured borrowings. The balance was used for general corporate
purposes.
Significant terms of the senior unsecured obligations include:
o RANKING - The senior unsecured obligations of Alamosa (Delaware)
are equal in right of payment to all future senior debt of Alamosa
(Delaware) and senior in right of payment to all future
subordinated debt of Alamosa (Delaware).
o GUARANTEES - The senior unsecured obligations will rank equally
with all existing and future senior debt and senior to all
existing and future subordinated debt. The obligations are fully
and unconditionally, jointly and severally guaranteed on a senior
subordinated, unsecured basis, by all the existing and any future
restricted subsidiaries of Alamosa (Delaware) with the exception
of Alamosa Operations, Inc., a wholly owned subsidiary of Alamosa
(Delaware). The financial statements of Alamosa (Delaware), Inc.
and financial information related to its guarantor subsidiaries
are included in Alamosa (Delaware)'s Form 10-K.
o OPTIONAL REDEMPTION - During the first thirty-six months after the
respective Notes offerings, the Company may use net proceeds of an
equity offering to redeem up to 35% of the accreted value of the
notes at a redemption price of 112.875%, 112.500% and 113.625% for
the 12 7/8% Senior Discount Notes, 12 1/2% Senior Notes and
13 5/8% Senior Notes, respectively.
Additionally, the senior unsecured obligations contain call
options as follows:
REDEMPTION PRICE
-----------------------------------------------------------------------------------------------
SENIOR DISCOUNT NOTES 12 1/2% SENIOR NOTES 13 5/8% SENIOR NOTES
------------------------------ ---------------------------- ----------------------------
YEAR ENDING FEBRUARY 15, YEAR ENDING JANUARY 31, YEAR ENDING AUGUST 15,
------------------------------ ---------------------------- ----------------------------
2006 106.438% N/A N/A
2007 104.292% 106.250% 106.813%
2008 102.146% 104.167% 104.542%
2009 100.000% 102.083% 102.271%
Thereafter 100.000% 100.000% 100.000%
o CHANGE OF CONTROL - Upon a change of control as defined by the
respective offerings, the Company will be required to make an
offer to purchase the notes at a price equal to 101% of the
accreted value for the 12 7/8% Senior Discount Notes and 101% of
the face amount for the 12 1/2% Senior Notes and 13 5/8% Senior
Notes.
o RESTRICTIVE COVENANTS - The indentures governing the senior
unsecured obligations contain covenants that, among other things
and subject to important exceptions, limit our ability and the
ability of our subsidiaries to incur additional debt, issue
preferred stock, pay dividends, redeem capital stock or make other
restricted payments or investments as defined by the indentures,
create liens on assets, merge, consolidate or dispose of assets,
or enter into transactions with affiliates and change lines of
business. The indentures contain cross-default provisions relative
to other material indebtedness.
o SECURITY AGREEMENT - Concurrently with the closing of the 12 1/2%
Senior Notes, Alamosa (Delaware) deposited $59.0 million with the
collateral agent, to secure on a pro rata basis the payment
obligations of Alamosa (Delaware) under the 12 1/2% Senior Notes
and the 12 7/8% Senior Discount Notes. The amount deposited in the
security account, together with the proceeds from the investment
thereof, will be sufficient to pay when due the first four
interest payments on the 12 1/2% Senior Notes. Funds will be
released from the security account to make interest payments on
the 12 1/2% Senior Notes or the 12 7/8% Senior Discount Notes as
they become due, so long as there does not exist an event of
default with respect to the 12 1/2% Senior Notes or the 12 7/8%
Senior Discount Notes. Approximately $39.1 million of the proceeds
of the 13 5/8% Notes Offering were similarly used to establish a
security account to secure on a pro rata
F-22
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
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.
SENIOR SECURED OBLIGATIONS
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, the Company,
Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower, entered into
a $280 million senior secured credit facility (the "Senior Secured
Credit Facility") with Citicorp USA, as administrative agent, and
collateral agent, Toronto Dominion (Texas), Inc., as syndication agent;
EDC as co-documentation agent; First Union National Bank, as
documentation agent, and a syndicate of banking and financial
institutions. On March 30, 2001, the Senior Secured Credit Facility was
amended to increase the facility to $333 million in relation to the
acquisition of Southwest. The Senior Secured 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 September 26, 2002, the Company further amended the Senior Secured
Credit Facility, to among other things, extend Stage I covenants for an
additional quarter and modify certain financial and statistical
covenants. Under the Senior Secured Credit Facility, interest will
accrue, at Alamosa Holdings, LLC's option: (i) at the London Interbank
Offered Rate adjusted for any statutory reserves ("LIBOR"), or (ii) the
base rate which is generally the higher of the administrative agent's
base rate, the federal funds effective rate plus 0.50% or the
administrative agent's base CD rate plus 0.50%, in each case plus an
interest margin which was initially 4.00% for LIBOR borrowings and
3.00% for base rate borrowings. In connection with the September 26,
2002 amendment, the initial margin was increased to 4.25% for LIBOR
borrowings and 3.25% for base rate borrowings. The applicable interest
margins are subject to reductions under a pricing grid based on ratios
of Alamosa Holdings, LLC's total debt to its earnings before interest,
taxes, depreciation and amortization ("EBITDA"). The interest rate
margins will increase by an additional 200 basis points in the event
Alamosa Holdings, LLC fails to pay principal, interest or other amounts
as they become due and payable under the Senior Secured Credit
Facility. In connection with a scheduled interest rate reset on
September 30, 2002, the interest margin was reset to 4.00% for LIBOR
borrowings and 3.00% for base rate borrowings.
The weighted average interest rate on the outstanding borrowings under
this facility at December 31, 2002 is 5.65%. Alamosa Holdings, LLC is
also required to pay quarterly in arrears a commitment fee on the
unfunded portion of the commitment of each lender. The commitment fee
accrues at a rate per annum equal to (i) 1.50% on each day when the
utilization (determined by dividing the total amount of loans plus
outstanding letters of credit under the Senior Secured Credit Facility
by the total commitment amount under the Senior Secured Credit
Facility) of the Senior Secured Credit Facility is less than or equal
to 33.33%, (ii) 1.25% on each day when utilization is greater than
33.33% but less than or equal to 66.66% and (iii) 1.00% on each day
when utilization is greater than 66.66%. The Company has entered into
derivative hedging instruments to hedge a portion of the interest rate
risk associated with borrowings under the Senior Secured Credit
Facility as discussed in Note 17.
Alamosa Holdings, LLC is also required to pay a separate annual
administration fee and a fee on the aggregate face amount of
outstanding letters of credit, if any, under the revolving credit
facility.
As of December 31, 2002, Alamosa Holdings, LLC had drawn $200 million
under the term portion of the Senior Secured Credit Facility. Any
amount outstanding at the end of the 12-month period will amortize
quarterly beginning May 14, 2004. The September 26, 2002 amendment
placed restrictions on the ability to draw the $25 million revolving
portion. The first $10 million can be drawn if cash balances fall below
$15 million and the Company substantiates through tangible evidence the
need for such advances. The remaining $15 million is available only at
such time as the leverage ratio is less than or equal to 5.5 to 1. No
advances have been drawn on the revolving portion of the Senior Secured
Credit Facility. The revolving portion of the Senior Secured Credit
Facility will begin reducing quarterly in amounts to be agreed
beginning May 14, 2004.
F-23
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Loans under the term loan portion of the Senior Secured Credit Facility
will be subject to mandatory prepayments from 50% of excess cash flow
for each fiscal year commencing with the fiscal year ending December
31, 2003, 100% of the net cash proceeds (subject to exceptions and
reinvestment rights of asset sales or other dispositions, including
insurance and condemnation proceeds) of sales of property by Alamosa
(Delaware) and its subsidiaries, and 100% of the net proceeds of
issuances of debt obligations of Alamosa (Delaware) and its
subsidiaries (subject to exceptions). After the term loans are repaid
in full, mandatory prepayments will be applied to permanently reduce
commitments under the revolving portion of the Senior Secured Credit
Facility.
All obligations of Alamosa Holdings, LLC under the Senior Secured
Credit Facility are unconditionally guaranteed on a senior basis by the
Company, Alamosa (Delaware) and, subject to certain exceptions, by each
current and future direct and indirect subsidiary of Alamosa
(Delaware), including Alamosa PCS, Inc., Roberts, WOW and Southwest.
The Senior Secured Credit Facility is secured by a first priority
pledge of all of the capital stock of Alamosa Holdings, LLC and subject
to certain exceptions, each current and future direct and indirect
subsidiary of Alamosa (Delaware), as well as a first priority security
interest in substantially all of the assets (including all five of the
Sprint affiliation agreements with the Company) of Alamosa (Delaware)
and, subject to certain exceptions, each current and future direct and
indirect subsidiary of Alamosa (Delaware).
The Senior Secured Credit Facility contains customary events of
default, including, but not limited to:
o the non-payment of the principal, interest and other obligations
under the new Senior Secured Credit Facility;
o the inaccuracy of representations and warranties contained in the
credit agreement or the violation of covenants contained in the
credit agreement;
o cross default and cross acceleration to other material
indebtedness;
o bankruptcy;
o material judgments and certain events relating to compliance with
the Employee Retirement Income Security Act of 1974 and related
regulations;
o actual or asserted invalidity of the security documents or
guaranties of the Senior Secured Credit Facility;
o the occurrence of a termination event under the management,
licenses and other agreements between any of the Company, WOW,
Roberts, Southwest and their subsidiaries and Sprint or a breach
or default under the consent and agreement entered into between
Citicorp USA, Inc., as administrative agent for the lenders, and
Sprint;
o loss of rights to benefit of or the occurrence of any default
under other material agreements that could reasonably be expected
to result in a material adverse effect on Alamosa Holdings, LLC;
o the occurrence of a change of control;
o any termination, revocation or non-renewal by the FCC of one or
more material licenses; and
o the failure by Alamosa (Delaware) to make a payment, if that could
reasonably be expected to result in the loss, termination,
revocation, non-renewal or material impairment of any material
licenses or otherwise result in a material adverse affect on
Alamosa Holdings, LLC.
F-24
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
The Senior Secured Credit Facility contains numerous affirmative and
negative covenants customary for credit facilities of a similar nature,
including, but not limited to, negative covenants imposing limitations
on the ability of Alamosa (Delaware), Alamosa Holdings, LLC and their
subsidiaries, and as appropriate, Superholdings, to, among other things
(i) declare dividends or repurchase stock; (ii) prepay, redeem or
repurchase debt; (iii) incur liens and engage in sale-leaseback
transactions; (iv) make loans and investments; (v) incur additional
debt, hedging agreements and contingent obligations; (vi) issue
preferred stock of subsidiaries; (vii) engage in mergers, acquisitions
and asset sales; (viii) engage in certain transactions with affiliates;
(ix) amend, waive or otherwise alter material agreements or enter into
restrictive agreements; and (x) alter the businesses they conduct.
Pursuant to the Senior Secured Credit Facility, the Company is required
to maintain a minimum cash balance of $10 million, and future draws are
conditioned, among other things, on the Company maintaining a ratio of
senior debt to net property and equipment that does not exceed 1 to 1.
The Company is also subject to covenants with respect to the ratio of
EBITDA to total cash interest expense. Alamosa (Delaware) is also
subject to the following financial and statistical covenants (Stage I
covenants), which will apply until March 31, 2003:
o minimum numbers of subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures;
After March 31, 2003, the financial and statistical covenants will be
the following (Stage II covenants):
o ratio of senior debt to EBITDA;
o ratio of total debt to EBITDA;
o ratio of EBITDA to total fixed charges (the sum of debt service,
capital expenditures and taxes); and
o ratio of EBITDA to pro forma debt service.
Unless waived by the Senior Secured Credit Facility lenders, the
failure of the Company, Alamosa Holdings, LLC and their subsidiaries to
satisfy or comply with any of the financial or other covenants, or the
occurrence of an event of default under the Senior Secured Credit
Facility, will entitle the lenders to declare the outstanding
borrowings under the Senior Secured Credit Facility immediately due and
payable and exercise all or any of their other rights and remedies. Any
such acceleration or other exercise of rights and remedies would likely
have a material adverse effect on the Company, Alamosa (Delaware),
Alamosa Holdings, LLC and their subsidiaries.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR
SECURED CREDIT FACILITY
Sprint entered into a consent and agreement with Citicorp, that
modifies Sprint's rights and remedies under our affiliation agreements
with Sprint, for the benefit of Citicorp and the holders of the Senior
Secured Credit Facility and any refinancing thereof. The consent and
agreement with Citicorp generally provides, among
F-25
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
other things, Sprint's consent to the pledge of substantially all of
our assets, including our rights in our affiliation agreements with
Sprint, and that our affiliation agreements with Sprint generally may
not be terminated by Sprint until the Senior Secured Credit Facility is
satisfied in full pursuant to the terms of the consents and agreement.
Subject to the requirements of applicable law, so long as the Senior
Secured Credit Facility remains outstanding, Sprint has the right to
purchase our operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries, upon
its receipt of notice of an acceleration of the Senior Secured Credit
Facility, under certain terms.
If Sprint does not purchase our operating assets or the partnership
interests, membership interests or other equity interests of our
operating subsidiaries after an acceleration of the obligations under
the Senior Secured Credit Facility, then the administrative agent may
sell the operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries.
Aggregate minimum annual principal payments due on all issues of
long-term debt for the next five years are as follows:
YEARS ENDING DECEMBER 31,
---------------------------------
2003 $ --
2004 22,500
2005 45,000
2006 50,000
2007 65,000
Thereafter 767,500
------------
$ 950,000
============
10. STOCKHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of preferred
stock, $0.01 par value, of which no shares have been issued since
inception. The Company is authorized to issue 290,000,000 shares of
common stock, $0.01 par value of which 94,171,938 shares are issued and
outstanding at December 31, 2002.
On October 29, 1999, Alamosa (Delaware) filed a registration statement
with the Securities and Exchange Commission for the sale of 10,714,000
shares of its common stock (the "Stock Offering"). The Stock Offering
became effective and the shares were issued on February 2, 2000 at the
initial price of $17.00 per share. Subsequently, the underwriters
exercised their over-allotment option of 1,607,100 shares. The Company
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 Stock Offering were used for the build out of the
system, to fund operating capital needs and for other corporate
purposes.
On November 13, 2001, the Company completed an underwritten secondary
offering of common stock pursuant to which certain of the existing
stockholders sold an aggregate of 4,800,000 shares at a public offering
price of $14.75 per share. The Company 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 share of common stock to
cover over-allotments. This option was exercised on November 16, 2001
and the Company received net proceeds from the sale of these shares
after offering costs of approximately $9.1 million.
11. EARNINGS PER SHARE
Basic and diluted net loss per share of common stock is computed by
dividing net loss for each period by the weighted average outstanding
common shares. No conversion of common stock equivalents has been
assumed in the calculation since the effect would be antidilutive. As a
result, the number of weighted-average
F-26
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
outstanding common shares as well as the amount of net loss per share
are the same for basic and diluted net loss per share calculations for
all periods presented. Common stock equivalents excluded from diluted
net loss per share calculations consisted of options to purchase 7.9
million, 5.5 million and 6.8 million shares of common stock for 2002,
2001 and 2000, respectively.
Unvested restricted stock issued to officers totaling 800,000 shares
during 2002 as discussed in Note 18 have been excluded from the number
of weighted-average outstanding common shares for 2002 as these shares
are contingently returnable to the Company in the event the vesting
requirements are not met. As these shares vest, they will be included
in the number of weighted-average outstanding common shares in future
periods.
12. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
----------- ---------- --------
Current:
U.S. Federal $ -- $ -- $ --
Foreign -- -- --
State -- -- --
--------- --------- ---------
Total current expense -- -- --
--------- --------- ---------
Deferred:
U.S. Federal (58,938) (68,842) --
Foreign -- -- --
State (8,148) (9,630) --
---------- ---------- ---------
Total deferred expense (benefit) (67,086) (78,472) --
---------- ---------- ---------
Total income taxes expense (benefit) $ (67,086) $ (78,472) $ --
========== ========== =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
DECEMBER 31,
------------------------
2002 2001
------------- --------
Deferred tax assets:
Net operating loss carryforwards $ 170,791 $ 101,890
Original issue discount 30,045 18,795
Non-cash compensation 1,728 1,741
Start-up expenses 472 781
Deferred rent 1,898 2,128
Bad debt allowance 3,468 3,622
Capitalized loan costs 2,593 3,227
Deferred revenue -- 1,969
Other comprehensive income 916 580
Other 1,295 828
---------- ----------
Gross deferred tax assets 213,206 135,561
Deferred Tax liabilities:
Intangible assets 185,600 200,959
Depreciation 45,802 25,383
Other 3,510 47
---------- ----------
Net deferred tax assets (liabilities) (21,706) (90,828)
Valuation allowance -- --
---------- ----------
Deferred tax balance $ (21,706) $ (90,828)
========== ==========
The net deferred tax asset was fully reserved as of December 31, 2000
because of uncertainty regarding the Company's ability to recognize the
benefit of the asset in future years. In connection with the
acquisitions in 2001 discussed in Note 4, a significant deferred tax
liability was recorded. The reversal of the timing
F-27
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
differences which gave rise to the deferred tax liability will allow
the Company to benefit from the deferred tax assets. As such, the
valuation allowance was released in 2001 with a corresponding reduction
to goodwill associated with the acquisitions. Due to the Company's
limited operating history and lack of positive taxable earnings it is
likely that a valuation allowance will be established during 2003 when
the deferred tax asset is expected to exceed the deferred tax
liabilities recorded in 2001. Prior to February 1, 2000, the Company's
predecessor operated as a Limited Liability Company ("LLC") under which
losses for income tax purposes were utilized by the LLC members on
their separate income tax returns. Subsequent to January 31, 2000, the
Company became a C-Corp for federal income tax purposes and therefore
subsequent losses from operations became net operating loss
carryforwards of the Company.
The provision for income taxes is different than the amount computed
using the applicable statutory federal income tax rate due to the
differences summarized below:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000
-------------------------------------- ---------------
Federal tax benefit at statutory rate (35.00)% (35.00)% (35.00)%
================== ================== ===============
Goodwill impairment 21.70% --% --%
Other permanent differences 0.11 2.51 --
State taxes (1.13) (2.79) --
Predecessor Limited Liability Company -- -- 1.45%
Adjustment due to increase in valuation allowance -- -- 33.40%
Other 0.06% (0.01)% 0.15%
----------------- ------------------ --------------
Provision (benefit) for income taxes (14.26)% (35.29)% 0.00%
================== ================== ==============
As of December 31, 2002, the Company has available net operating loss
carryforwards totaling approximately $449 million which expire
beginning in 2020. Utilization of net operating loss carryforwards may
be limited by ownership changes which could occur in the future.
13. SPRINT AGREEMENTS
In accordance with the Company's affiliation agreements with Sprint,
Sprint provides the company various services including billing,
customer care, collections and inventory logistics. In addition, Sprint
bills the Company for various pass-through items such as commissions to
national retail merchants, handset subsidies on handsets activated in
the Company's territory but not sold by the Company and long distance
charges.
In addition to the fees discussed above, the Company pays Sprint an
affiliation fee equal to 8% of collected revenue as it is defined in
the affiliate agreements. This fee is withheld from amounts collected
from subscribers when such collections are remitted to the Company.
Expenses reflected in the consolidated statements of operations related
to the Sprint affiliation agreements are:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000
---------------- -------------------- ---------------
Cost of service and operation $ 219,866 $ 152,724 $ 33,005
Cost of products sold 50,974 53,911 20,524
Selling and marketing 46,132 27,421 10,763
------------- ------------- ----------
Total $ 316,972 $ 234,056 $ 64,292
============= ============= ==========
In connection with the billing services provided to the Company by
Sprint, the Company relies on Sprint to provide information as to
monthly billing activity relative to all subscriber revenues. In
addition, Sprint provides the information utilized for the settlement
of all roaming revenue.
The Company relies upon Sprint as a service provider to provide
accurate information for the settlement of revenue and expense items.
The Company makes estimates used in connection with the preparation of
financial statements based on the financial and statistical information
provided by Sprint. The Company assesses the
F-28
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
accuracy of this information 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 in connection with the services provided to the
Company by Sprint could have a material effect on the Company's
financial position, results of operation or cash flow.
14. RELATED PARTY TRANSACTIONS
AGREEMENTS WITH CHR SOLUTIONS, INC. - The Company has entered into a
number of agreements with CHR Solutions, Inc. ("CHR") to perform
various consulting and engineering services. CHR resulted from a merger
between Hicks & Ragland Engineering Co., Inc., and Cathey, Hutton &
Associates, Inc. effective as of November 1, 1999. At the time the
agreements were executed, the Company's CEO was the President and Chief
Executive Officer of Hicks & Ragland. As of December 2000, the
Company's CEO resigned his position on the Board of CHR, and is no
longer an employee of CHR. Total amounts paid under the above
agreements were $1,063, $3,596 and $6,334 for the years ended December
31, 2002, 2001 and 2000, respectively. Amounts included in accounts
payable for the above agreement totaled $0 and $423 at December 31,
2002 and 2001, respectively.
AGREEMENTS WITH TECH TELEPHONE COMPANY - The Company entered into a
telecommunications service agreement with Tech Telephone Company
Limited Partnership ("TechTel") to install and provide
telecommunications lines between Sprint PCS and the Company's
Lubbock-based operations and between the Company's Lubbock-based
operations and other markets. TechTel is a limited partnership whose
general partner is an entity controlled by the CEO of the Company. The
original term of the agreement is three years, but the agreement
automatically renews upon expiration for additional successive 30-day
terms by either party. The Company has also entered into a distribution
agreement with TechTel, authorizing it to become a third party
distributor of Sprint PCS products and services for the Company in
Lubbock, Texas. The total amount paid for these contracts was $1,157,
$1,315 and $1,707 during the years ended December 31, 2002, 2001 and
2000, respectively. The amounts included in accounts payable relative
to these contracts were $89 and $92 at December 31, 2002 and 2001,
respectively. TechTel was sold to an unrelated third party in October
2002.
AGREEMENTS WITH MESSRS. MICHAEL V. ROBERTS AND STEVEN C. ROBERTS
In connection with the acquisition of Roberts, the Company entered into
a number of arrangements with Messrs. Michael V. Roberts and Steven C.
Roberts and certain companies affiliated with them as described in more
detail below. Michael V. Roberts and Steven C. Roberts became directors
of the Company in February 2001.
JOINT VENTURE DEVELOPMENT AGREEMENT - On October 30, 2000, the Company
entered into a joint venture development agreement with Messrs. Michael
V. Roberts and Steven C. Roberts. Pursuant to the agreement, if either
Mr. Michael V. Roberts or Mr. Steven C. Roberts undertakes an
international telecommunications business venture and desires for the
Company to be involved in that project, then before either Mr. Michael
V. Roberts or Mr. Steven C. Roberts enters into a letter of intent or
binding agreement of any nature with another person regarding the
project, they must give the Company written notice. The Company has 60
days to notify them of its desire to participate in the project. During
such 60-day period, the Company has the exclusive right with respect to
the project. Promptly after the Company gives a notice of
participation, the Company and either Mr. Michael V. Roberts or Mr.
Steven C. Roberts must form a project entity and execute an agreement
setting forth the terms, covenants, conditions and provisions for the
purpose, ownership, management, financing and operation of the project.
Unless the Company and either Mr. Michael V. Roberts or Mr. Steven C.
Roberts agree to a different arrangement, the Company will have a 50%
interest in each project entity and will have full managerial control
of each project entity. Except as described above, neither the Company
nor Messrs. Michael V. Roberts and Steven C. Roberts is obligated to
bring to the other any opportunity to participate in a project or any
activity, domestic or international.
CONSULTING AGREEMENTS - On January 29, 2001, the Company entered into
five-year consulting agreements with each of Messrs. Michael V. Roberts
and Steven C. Roberts. The consulting agreements provide each of them
with an annual compensation of $125, which is paid monthly.
F-29
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
RIGHT OF FIRST NEGOTIATION AGREEMENT - On February 14, 2001, the
Company entered into a right of first negotiation agreement with
Roberts Tower which grants Roberts Tower a right to negotiate tower
leases on a "build-to-suit" basis with the Company's present and future
territory. During the term of the agreement, whenever the Company or
one of its subsidiaries is required to "build-to-suit" communications
towers within the present or future territories in which the Company
operates, the Company must notify Roberts Tower and Roberts Tower will
have the exclusive right for a period of 30 days to negotiate with the
company to provide such towers. After such 30-day period, if the
Company has not reached an agreement with Roberts Tower, the Company
may obtain such tower sites from other third parties. The term of this
agreement is five years.
RESALE AGREEMENT - On February 14, 2001, the Company entered into a
resale agreement with Messrs. Michael V. Roberts and Steven C. Roberts
which permits Messrs. Michael V. Roberts and Steven C. Roberts to buy
air time at a discount for resale on a basis no less favorable than any
other similar agreement to which the Company may be a party. Messrs.
Michael V. Roberts and Steven C. Roberts may resell such airtime
anywhere such resales are permitted under applicable law. Any
arrangement between the Company and Messrs. Michael V. Roberts and
Steven C. Roberts for resales and use of air time will be subject to
all required approvals of Sprint, Sprint Spectrum and Sprint PCS and/or
any other applicable Sprint entities.
MASTER LEASE AGREEMENT - On February 14, 2001, Roberts and Roberts
Tower entered into a master lease agreement which provides for the
lease from Roberts Tower by Roberts of certain buildings, towers, tanks
and/or improvements thereon for the purpose of installing, operating
and maintaining communications facilities and services thereon. The
initial term of the master lease agreement expires in February 2006,
and Roberts has the right to extend the initial term of the lease for
four additional terms of five years each. The agreement provides for
monthly payments aggregating to approximately $17 per tower per year at
inception, subject to an annual adjustment of 4% per annum. Roberts
subsequently assigned all of its right, title and interest in the
master lease agreement to its wholly owned subsidiary, Alamosa Missouri
Properties, LLC (formerly Roberts Wireless Properties, L.L.C). During
the years ended December 31, 2002 and 2001, approximately $2,688 and
$2,264, respectively, in rental expense was recorded under this
agreement.
In addition to the specific agreements discussed above, the Company
paid $346 and $361 in 2002 and 2001, respectively, to Roberts Tower for
other items including the lease of retail space and switching facility
space.
OTHER RELATED PARTY TRANSACTIONS - In November 1998, the Company
entered into an agreement to lease space for telephone switching
equipment in Albuquerque with SASR Limited Partnership which was then
50% owned by one of the Company's then directors who was also a manager
of West Texas PCS, LLC and Budagher Family LLC, two of the Company's
stockholders. The lease has a term of five years with two optional
five-year terms. The lease provides for monthly payments aggregating to
$19 per year at inception with a 10% increase at the beginning of the
two option periods, as well as a pro rata portion of real estate taxes
on the property. The lease was transferred to an unrelated entity by
SASR Limited Partnership in July, 2001. This director resigned from the
board in 2002.
On December 28, 1998, the Company entered into a long-term agreement to
lease space for a retail store in Lubbock, Texas with Lubbock HLH,
Ltd., principally owned by one of the Company's directors and the
general manager of South Plains Advance Communications & Electronics,
Inc. ("SPACE"). SPACE is a stockholder of the Company. This lease has a
term of 15 years and provides for monthly payments subject to
adjustment based on the Consumer Price Index on the first day of the
sixth lease year and on the first day of the eleventh lease year.
During the years ended December 31, 2002, 2001 and 2000, $110 per year
in rental expense was recorded in connection with this lease. No amount
was payable at December 31, 2002. In addition to rental, $20, $38 and
$0 was paid to Lubbock HLH, Ltd. In 2002, 2001 and 2000, respectively
for taxes and other expenses related to the leased property.
15. EMPLOYEE BENEFITS
Effective November 13, 1998, the Company elected to participate in the
NTCA Savings Plan, a defined contribution employee savings plan
sponsored by the National Telephone Cooperative Association under
Section 401(k) of the Internal Revenue Code. No employer contributions
were made to this plan for the period
F-30
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
ended December 31, 2000 or 1999.
Effective July 1, 2000, the Company formed the Alamosa PCS
Contributions Savings Plan ("Company Plan"), a defined contribution
employee savings plan sponsored by the Company under Section 401(k) of
the Internal Revenue Code. Existing balances held in the NTCA Savings
Plan were transferred to the Company Plan on July 1, 2000 and all
contributions to the NTCA Savings Plan ceased at that time. During the
years ended December 31, 2002, 2001 and 2000, the Company made
contributions of $1,058, $900 and $188, respectively to the Company
Plan.
In connection with the acquisition of WOW discussed in Note 4,
employees who were formerly employees of WOW continue to participate in
the Washington Oregon Wireless 401(k) Savings & Investment Plan, a
defined contribution employee savings plan sponsored by the Company
under Section 401(k) of the Internal Revenue Code. During the years
ended December 31, 2002 and 2001, the Company made contributions of $36
and $41, respectively, to the WOW plan. Effective January 1, 2003 the
WOW plan was merged into the Company Plan.
Effective March 1, 2001, the Company adopted the Alamosa Holdings, Inc.
Employee Stock Purchase Plan ("ESPP"). The ESPP provides that eligible
employees may contribute up to 10% of their earnings towards the
purchase of Company common stock. The employee per share purchase price
is 85% of the fair market value of Company shares on (i) the offering
date or (ii) the exercise date, whichever is lower. During the years
ended December 31, 2002 and 2001, shares totaling 585,191 and 40,706,
respectively, were issued in connection with purchases by employees
under the ESPP. As of December 31, 2002 and 2001, 174,103 and 559,294
shares were reserved for issuance under the ESPP.
16. STOCK-BASED COMPENSATION
The Company adopted an Incentive Stock Option Plan (the "Plan")
effective November 12, 1999, which provides for the granting of either
incentive stock options or nonqualified stock options to purchase
shares of Alamosa Holdings' common stock and for other stock-based
awards to officers, directors and key employees for the direction and
management of the Company and to non-employee consultants and
independent contractors. At December 31, 2002, 6,176,559 shares of
common stock were reserved for issuance under the Plan. The stock
option committee of the Board of Directors administers the Plan and
determines grant prices and vesting periods. Generally, the options
under the Plan vest in varying increments over a three to five-year
period, expire ten years from the date of grant and are issued at
exercise prices no less than 100% of the fair market value of common
stock at the time of the grant.
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretation, in accounting for its employee
stock options. The Company initially recorded unearned compensation
totaling $14,963 relative to the intrinsic value of options granted.
This amount was being recognized over the vesting period in accordance
with FASB Interpretation No. 28 when applicable. For the year ended
December 31, 2000, non-cash compensation of $5,651 was recognized.
Non-cash compensation for 2001 was a negative $916 due to the
forfeiture of unvested options. No non-cash compensation was recorded
in 2002 relative to options as all unvested options for which unearned
compensation had been recorded were forfeited in 2001.
F-31
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
The weighted-average fair value for all stock options granted in 2000
and 2001 was $12.18 and $9.01 per share, respectively. The weighted-
average fair value for stock options granted during 2002 with an
exercise price equal to the fair market value at the date of grant ("at
the money") was $1.85 per share. The weighted-average fair value for
stock options granted during 2002 with an exercise price greater than
the fair market value at the date of grant ("out of the money") was
$0.23 per share. The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
--------------------- -------------------- ------------------
Dividend yield 0% 0% 0%
Expected volatility 106% 81% 72%
Risk-free rate of return 3.0% 4.6% 6.3%
Expected life 4.00 years 4.00 years 4.07 years
The following summarizes activity under the Company's stock option
plans:
WEIGHTED AVERAGE EXERCISE
---------------------------------
NUMBER OF OPTIONS PRICE PER SHARE
-------------------------------------- ---------------------------------
YEAR END DECEMBER 31, YEAR END DECEMBER 31,
-------------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
---------- --------------- ----------- ---------- ------------ -------
Options outstanding at
beginning of the
period 5,505,878 6,788,752 5,282,000 $ 16.55 $ 16.87 $ 12.47
Granted:
At the money 1,370,195 635,061 2,131,750 2.57 14.87 17.17
Out of the money 1,500,046 -- -- 0.38 -- --
Exercised (250) (15,945) (538,748) 3.90 14.95 1.48
Canceled/forfeited (507,374) (1,901,990) (86,250) 15.20 16.85 12.35
--------- ------------- ------------ --------------------- --------
Options outstanding at the
end of the period 7,868,495 5,505,878 6,788,752 $ 11.12 $ 16.55 $ 16.87
========= ============ ============ ========== ========= =========
Options exercisable at end
of the period 4,216,112 2,602,368 1,615,502 $ 14.66 $ 16.33 $ 16.75
========= ============ ============ =========== ========= =========
The following table summarizes information for stock options at
December 31, 2002:
OUTSTANDING EXERCISABLE
------------------------------------------------ ----------------------------
WEIGHTED WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
PRICES OPTIONS PRICE LIFE OPTIONS PRICE
---------------------- ------------ ------------- -------------- ------------ ------------
$ 0.23 0.33 322,812 $ 0.29 9.8 138,850 $ 0.24
0.38 0.45 1,521,546 0.38 9.8 120,006 0.38
0.84 1.25 391,741 0.91 9.4 64,666 1.19
1.41 1.42 85,833 1.42 8.6 85,833 1.42
3.52 5.04 522,543 4.90 9.3 172,240 4.65
6.46 8.00 29,610 7.68 8.2 17,590 8.00
10.25 15.31 678,078 13.39 7.8 370,189 13.04
15.67 23.25 4,247,332 17.10 6.4 3,219,138 17.09
26.25 28.50 69,000 26.87 7.6 27,600 $ 26.87
----------- ---------- ----------- ------------ -------------
$ 0.23 28.50 7,868,495 $ 11.12 7.7 4,216,112 $ 14.66
============ ========== =========== ============ =============
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts payable, and accrued expenses
approximate fair value because of the short maturity of these items.
The carrying amount of the Senior Secured Credit Facility approximates
fair value at December 31, 2002 because the interest rate changes with
market interest rates.
F-32
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Selected information related to the Company's senior notes is a
follows:
DECEMBER 31,
--------------------------------
2002 2001
-------------- --------------
Book value $ 668,862 $ 637,207
Fair value 187,500 629,500
-------------- --------------
Net unrecognized gain $ 481,362 $ 7,707
============== ==============
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities," effective January 1, 2001. This
statement requires that all derivatives be recorded on the balance
sheet at fair value. 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.
In order to manage interest costs and exposure to changing interest
rates, the Company enters into interest rate hedges to hedge exposure
to variable interest rates on a portion of the Senior Secured Credit
Facility. At December 31, 2002, the Company had entered into the
following interest rate swaps.
FAIR VALUE
INSTRUMENT NOTIONAL TERM AT DECEMBER 31,
---------- -------- ---- ----------------------
2002 2001
----------- --------
4.9475% Interest rate swap $21,690 3 years $ (1,121) $ (650)
4.9350% Interest rate swap $28,340 3 years (1,385) (865)
---------- ---------
$ (2,506) $ (1,515)
========== =========
These swaps are designated as cash flow hedges such that the fair value
is recorded as a liability in the consolidated balance sheets with
changes in fair value (net of tax) shown as a component of other
comprehensive income.
The Company also maintains an interest rate collar with the following
terms:
FAIR VALUE
AT DECEMBER 31,
---------------------
NOTIONAL MATURITY CAP STRIKE PRICE FLOOR STRIKE PRICE 2002 2001
-------- -------- ---------------- ------------------ -------- -------
$28,340 5/15/2004 7.00% 4.12% $ (1,112) $ (656)
This collar does not receive hedge accounting treatment such that the
fair value is reflected as a liability in the consolidated balance
sheets and the decrease in fair value of $456 and $656 has been
reflected as an increase to interest expense for the years ended
December 31, 2002 and 2001, respectively.
Approximately $2,188 and $1,286 in settlements under the above hedging
instruments are included in interest expense for the years ended
December 31, 2002 and 2001, respectively.
In addition to the swaps and collar discussed above, the Company
purchased an interest rate cap in February 2002 with a notional amount
of $5,000 and a strike price of 7.00%. This cap does not receive hedge
accounting treatment and the fair value reflected in the consolidated
balance sheet is less than $1.
These fair value estimates were obtained from the institutions the
Company entered into the agreements with and are subjective in nature
and involve uncertainties and matters of considerable judgment and
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect these estimates.
F-33
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
18. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - On October 14, 1998, the then Board of Members
of the Company approved an Incentive Ownership Plan. The plan consisted
of 3,500 units comprised of 1,200 Series 8, 1,150 Series 15 and 1,150
Series 25 units. The exercise price for each series was based on a
pre-defined strike price which increased by an annual rate of 8%, 15%
or 25% compounded monthly beginning July 1, 2000. The initial exercise
prices were $564.79, $623.84 and $711.88 for Series 8, Series 15 and
Series 25 options, respectively. Each unit provided the holder an
option to purchase an interest in the Company. Vested units could have
been exercised any time from July 1, 2000 to December 31, 2006.
On October 29, 1998, under an employment agreement with the Company's
then Chief Technology Officer, 300 units were granted under this plan.
The options to acquire membership interests described above were to be
exchanged for options to acquire an equivalent number of common shares:
48,500 at $1.13 per share, 48,500 at $1.25 per share and 48,500 at
$1.42 per share. Effective as of the IPO, these options were converted
into options of the Company and were amended such that the original
options with exercise prices that increased by an annual rate of 8%,
15%, or 25% (compounded monthly beginning July 1, 2000) were exchanged
for options to purchase an equivalent number of common shares at fixed
exercise prices equal to $1.13, $1.25 and $1.42 per share, which would
not increase over the term of the options. These amendments resulted in
a new measurement date. The Company recorded compensation expense
totaling $2,096 in connection with these options. Compensation expense
recorded for the year ended December 31, 2000 was $836. No compensation
expense was recorded in 2001 or 2002.
Effective October 1, 1999, the Company entered into a three-year
employment agreement with its Chief Executive Officer ("CEO"), and
Chairman of the Board. In addition, in December 1999, the Company
granted options to the CEO to acquire 242,500 common shares at an
exercise price of $1.15 per share which vested immediately prior to the
completion of the initial public offering and 1,455,000 shares at an
exercise price equal to the initial public offering price which vest
33% per year beginning September 30, 2000. The options expire January
5, 2009. The Company recognized compensation expense of $3,116 related
to the 242,500 options issued with an exercise price below the initial
public offering price over the options vesting period. Compensation
expense recorded for the year ended December 31, 2000 was $2,765. No
compensation expense was recorded in 2001 or 2002. The Company entered
into a new employment agreement with its CEO and Chairman of the Board
on October 1, 2002 as discussed below.
On October 2, 1998, the Company entered into an employment agreement
with its then Chief Operating Officer ("COO"). The agreement provided
for the granting of stock options in three series. The initial exercise
price was determined based on the following formula: $48,500, committed
capital at September 30, 1998, multiplied by the percentage interest
represented by the option exercised. The exercise price for each series
increased by an annual rate of 8%, 15% or 25% compounded monthly
beginning at the date of grant as specified by the agreement. Options
could be exercised any time from January 1, 2004 to January 5, 2008.
The options vested over a three-year period. During 1998, one option
from each series was granted under this agreement. The options to
acquire membership interests described above were to be exchanged for
options in Holdings to acquire an equivalent number of common shares:
242,500 at $1.08 per share, 242,500 at $1.15 per share and 242,500 at
$1.25 per share. Effective December 1999, the Company amended the COO's
options such that each of the COO's three series of original options
were exchanged for two options to acquire a total of 1,697,500 shares
of common stock. The first option to acquire 242,500 shares of common
stock had a fixed exercise price of $1.15 per share and vested
immediately prior to completion of the initial public offering. The
second option to acquire 1,455,000 shares of common stock had an
exercise price equal to the initial public offering price and vested
25% per year beginning September 30, 2000. The expiration date of all
of the COO's options was extended from January 5, 2008 to January 5,
2009. These amendments resulted in a new measurement date. The Company
was to record compensation expense totaling $9,341 in connection with
these options. Compensation expense recorded for the year ended
December 31, 2000 was $1,640. This individual left the Company in
January 2001 and forfeited all unexercised options. As such,
compensation expense in 2001 was negative $916 due to the forfeiture of
these option. The former COO initiated litigation against the Company
in 2002 as discussed under "Litigation" below. No compensation expense
was recorded in 2002.
F-34
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
Effective December 1, 1999, the Company entered into a five-year
employment agreement with its Chief Financial Officer ("CFO"). In
addition, the Company granted the CFO options to purchase 1,455,000
shares at the initial public offering price and that will expire
January 5, 2009. There is no compensation cost related to these
options. The Company entered into a new employment agreement with its
CFO and other executives on October 1, 2002 as discussed below.
Effective October 1, 2002, the Company entered into employment
agreements with its CEO, CFO, Chief Technology Officer ("CTO"), Chief
Marketing Officer ("CMO") and Senior Vice President of Corporate
Finance ("SVP"). The terms of the agreements were five years for the
CEO and three years for the other officers. In connection with these
employment agreements, options were granted to the executives to
acquire a total of 1,700,000 common shares at an exercise price equal
to the fair market value at the date of grant such that no compensation
expense was recognized in connection with these options. These options
vest over the terms of the respective agreements.
In addition to the option grants, the respective executives were also
awarded a total of 700,000 shares of restricted stock for which the
Company received $0.01 per share at the date of grant. These restricted
shares vest over a three year period and compensation expense will be
recorded during the vesting period totaling $224. These shares are
considered issued and outstanding but are excluded from basic and
diluted earnings per share as discussed in Note 11.
Effective December 1, 2002, the Company entered into an employment
agreement with its Chief Operating Officer ("COO"). The terms of this
agreement are similar to the October 1, 2002 agreements entered into
with the other officers of the Company. The length of the agreement is
three years. Options to acquire 300,000 common shares were awarded with
an exercise price equal to the fair market value at the date of grant.
Restricted stock totaling 100,000 shares were awarded that vest over a
three year period for which the Company received $0.01 per share.
Compensation expense of $99 will be recognized over the vesting period.
LITIGATION - The Company has been named as a defendant in a number of
purported securities class actions in the United States District Court
for the Southern District of New York, arising out of its initial
public offering (the "IPO"). Various underwriters of the IPO also are
named as defendants in the actions. The action against the Company is
one of more than 300 related class actions which have been consolidated
and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement
and prospectus filed with the Securities and Exchange Commission for
purposes of the IPO were false and misleading because they failed to
disclose that the underwriters allegedly (i) solicited and received
commissions from certain investors in exchange for allocating to them
shares of common stock in connection with the IPO, and (ii) entered
into agreements with their customers to allocate such stock to those
customers in exchange for the customers agreeing to purchase additional
Company shares in the aftermarket at pre-determined prices.
On February 19, 2003, the Court granted motions by the Company and 115
other issuers to dismiss the claims under Rule 10b-5 of the Exchange
Act which had been asserted against them. The Court denied the motions
by the Company and virtually all of the other issuers to dismiss the
claims asserted against them under Section 11 of the Securities Act.
The Company maintains insurance coverage which may mitigate its
exposure to loss in the event that this claim is not resolved in the
Company's favor.
On January 23, 2001, Jerry Brantley, then 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, in the District Court of Lubbock County,
Texas, 22nd Judicial District, alleging wrongful termination among
other things. On September 27, 2002, the Court entered an Agreed Order
Compelling Arbitration. The parties are in the process of selecting a
panel of three arbitrators. The Company believes that there is no basis
for Mr. Brantley's claim and intends to vigorously defend the lawsuit.
On January 8, 2003 a claim was made against the Company by Southwest
Antenna and Tower, Inc. ("SWAT") in the Second Judicial District Court,
County of Bernalillo, State of New Mexico, for monies due on an open
account. SWAT seeks to recover approximately $1.6 million from the
Company relative to work performed by SWAT during 2000 for Roberts
Wireless Communications, LLC which was acquired by the Company in the
first quarter of 2001. The Company is in the process of gathering
information relative to this claim and has recorded an estimated
liability relative to this contingency in the consolidated
F-35
ALAMOSA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
financial statements at December 31, 2002.
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 - The Company is listed on the New York Stock
Exchange ("NYSE") and is subject to various listing requirements set
forth by the NYSE. The Company received written notice from the NYSE on
August 29, 2002 indicating that it 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) maintain an
average global market capitalization over a consecutive 30 trading-day
period of not less than $100 million. On October 15, 2002 the Company
submitted to the NYSE a business plan to cure its non-compliance with
the NYSE listing requirements. The business plan was approved by the
NYSE and, as a result of such approval, the Company has until February
26, 2004 to re-establish compliance with the $100 million market
capitalization requirement. However, with respect to the minimum share
price requirement, the cure period for achieving compliance under NYSE
listing requirements expired on March 3, 2003. The trading price and
volume of the Company's common stock is under relatively continuous
review by the NYSE, and the NYSE could at any time choose to suspend
trading in the Company's common stock and make an application to the
SEC to delist the Company's common stock.
The Company's Board of Directors has approved taking affirmative
actions, if necessary, to meet the $1.00 minimum share price listing
requirement. This includes effecting a reverse stock split which would
be submitted for shareholder approval at the 2003 annual shareholders
meeting. The Company believes that if it is still listed in the NYSE at
the time a proposed reverse stock split is approved by shareholders,
the NYSE minimum share price listing requirement may be deemed
satisfied if the price of the Company's common stock promptly exceeds
$1.00 per share and remains above that level for at least the following
30 trading days. Despite the foregoing, the NYSE has broad discretion
to suspend trading in the Company's common stock on the NYSE and make
an application to the SEC to delist the Company's common stock. There
is no assurance that the NYSE will continue to allow trading in the
Company's common stock until its annual meeting of stockholders or
until such time as the Company undertakes another action to meet the
NYSE minimum share price listing requirement.
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations (unaudited) for 2001 and 2002 by
quarter are as follows:
QUARTER ENDED
---------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001:
Net sales $ 45,835 $ 83,535 $ 107,874 $ 119,895
Operating loss (28,791) (34,303) (38,622) (50,610)
Loss before extraordinary item (23,928) (34,336) (37,712) (47,944)
Extraordinary loss, net of tax (3,503) -- -- --
Net loss (27,431) (34,336) (37,712) (47,944)
Basic and diluted loss per share before
extraordinary item (0.33) (0.37) (0.41) (0.52)
Basic and diluted net loss
per share (0.38) (0.37) (0.41) (0.52)
2002:
Net sales $ 128,387 $ 130,789 $ 147,428 $ 149,088
Operating loss (21,754) (21,302) (313,173) (14,802)
Net loss (28,133) (28,736) (320,847) (25,633)
Basic and diluted net loss
per share (0.30) (0.31) (3.45) (0.27)
As discussed in Note 7, the Company recorded a charge relative to its
first annual impairment test of goodwill under SFAS 142 in the third
quarter of 2002. The amount of this charge was $291,635 and is
reflected in the operating loss for the third quarter of 2002.
F-36
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Alamosa Holdings, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 21, 2003 appearing in the 2002 Annual Report to Shareholders of
Alamosa Holdings Inc. also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 21, 2003
F-37
SCHEDULE II
- -----------
ALAMOSA HOLDINGS, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD DECEMBER 31, 2000 THROUGH
DECEMBER 31, 2002 (IN THOUSANDS)
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -------------------------------------- ------------ ------------ ---------- ---------- -------------
December 31, 2000
Allowance for doubtful accounts.... $ 162 $ 1,341 $ -- $ -- $ 1,503
Deferred tax valuation allowance -- 26,985 -- -- 26,985
December 31, 2001
Allowance for doubtful accounts.... $ 1,503 $ 17,490 $ 1,213(1) $ (14,314) $ 5,892
Deferred tax valuation allowance 26,985 -- 2,313(2) (29,298)(3) --
December 31, 2002
Allowance for doubtful accounts.... $ 5,892 $ 40,285 $ -- $ (37,726) $ 8,451
Deferred tax valuation allowance -- -- -- -- --
This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto that appear in this
annual report on Form 10-K.
(1) For the year ended December 31, 2001, amount represents allowance for
doubtful accounts recorded in connection with acquisitions accounted for
under the purchase method of accounting.
(2) Addition represents increase in valuation allowance due to the increase in
the effective tax rate applied to deferred tax items.
(3) This amount represents the reversal of the valuation allowance recorded by
the Company against goodwill as a result of the business combinations with
Roberts, WOW and Southwest (see Note 4).
F-38