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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended June 30, 2004
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: 005--58523
ALAMOSA (DELAWARE), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2843707
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5225 SOUTH LOOP 289, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of August 9, 2004, 100 shares of common stock, $0.01 par value per share, of
the registrant were issued and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
ALAMOSA (DELAWARE), INC.
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION -----
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 34
PART II OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 37
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA (DELAWARE), INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
JUNE 30, 2004 DECEMBER 31, 2003
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 103,286 $ 98,242
Restricted cash -- 1
Short term investments 50,119 --
Customer accounts receivable, net 44,022 28,034
Receivable from Sprint 15,424 22,947
Receivable from parent -- 1
Inventory 7,292 7,309
Prepaid expenses and other assets 10,235 9,763
Deferred customer acquisition costs 7,259 8,060
Deferred tax asset 4,572 4,572
-------------------- ---------------------
Total current assets 242,209 178,929
Property and equipment, net 427,196 434,840
Debt issuance costs, net 9,409 14,366
Intangible assets, net 431,392 448,354
Other noncurrent assets 5,060 6,393
-------------------- ---------------------
Total assets $ 1,115,266 $ 1,082,882
==================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 22,824 $ 33,166
Accrued expenses 37,667 37,325
Payable to Sprint 21,511 26,616
Payable to parent 302 --
Interest payable 21,726 5,353
Deferred revenue 23,107 22,742
Current installments of capital leases 223 481
-------------------- ---------------------
Total current liabilities 127,360 125,683
-------------------- ---------------------
Long term liabilities:
Capital lease obligations 807 812
Other noncurrent liabilities 6,460 8,693
Deferred tax liability 15,376 15,379
Senior secured debt -- 200,000
Senior notes 726,427 464,424
-------------------- ---------------------
Total long term liabilities 749,070 689,308
-------------------- ---------------------
Total liabilities 876,430 814,991
-------------------- ---------------------
Commitments and contingencies (see Note 14) -- --
Stockholder's equity:
Preferred stock, $.01 par value; 1,000 shares authorized; no shares -- --
Common stock, $.01 par value; 9,000 shares authorized, 100 and 100
shares issued and outstanding, respectively
Additional paid-in capital 1,009,990 1,015,991
Accumulated deficit (771,049) (747,425)
Unearned compensation (105) (145)
Accumulated other comprehensive loss, net of tax -- (530)
-------------------- ---------------------
Total stockholder's equity 238,836 267,891
-------------------- ---------------------
Total liabilities and stockholder's equity $ 1,115,266 $ 1,082,882
==================== =====================
The accompanying notes are an integral part of the consolidated
financial statements.
3
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
Revenues:
Subscriber revenues $ 133,569 $ 114,550 $ 258,315 $ 218,574
Roaming and wholesale revenues 51,705 35,040 94,858 66,830
------------ ------------ ------------- -------------
Service revenues 185,274 149,590 353,173 285,404
Product sales 8,055 5,804 16,846 11,098
------------ ------------ ------------- -------------
Total revenue 193,329 155,394 370,019 296,502
------------ ------------ ------------- -------------
Costs and expenses:
Cost of service and operations (excluding non-cash
compensation of $2 and $4 for the three months ended
June 30, 2004 and 2003, respectively, and $4 and $8
for the six months ended June 30, 2004 and 2003,
respectively 91,062 80,282 177,278 159,599
Cost of products sold 16,379 12,399 36,162 25,243
Selling and marketing (excluding non-cash
compensation of $2 and $4 for the three months
ended June 30, 2004 and 2003, respectively and
$4 and $8 for the six months ended June 30, 2004
and 2003, respectively) 31,839 26,584 62,832 54,730
General and administrative expenses (excluding
non-cash compensation of $16 and $30 for the
three months ended June 30, 2004 and 2003,
respectively, and $32 and $63 for the six months
ended June 30, 2004 and 2003, respectively) 5,508 5,808 10,987 9,333
Depreciation and amortization 25,523 27,419 52,907 54,301
Impairment of property and equipment 2,604 34 2,910 394
Non-cash compensation 20 38 40 79
------------ ------------ ------------- -------------
Total costs and expenses 172,395 152,564 343,116 303,679
------------ ------------ ------------- -------------
Income (loss) from operations 20,394 2,830 26,903 (7,177)
Loss on debt extinguishment -- -- (13,101) --
Interest and other income 219 248 386 617
Interest expense (18,952) (25,951) (37,187) (52,488)
------------ ------------ ------------- -------------
Income (loss) before income taxes 1,661 (22,873) (22,999) (59,048)
Income tax (expense) benefit (625) 4,480 (625) 10,248
------------ ------------ ------------- -------------
Net income (loss) $ 1,036 $ (18,393) $ (23,624) $ (48,800)
============ ============ ============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
4
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
2004 2003
---------------- ---------------
Cash flows from operating activities:
Net loss $ (23,624) $ (48,800)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Non-cash compensation 40 79
Non-cash interest expense (benefit) on derivative instruments 6 (261)
Non-cash accretion of asset retirement obligations 91 --
Provision for bad debts 4,114 10,000
Depreciation and amortization of property and equipment 35,945 34,268
Amortization of intangible assets 16,962 20,033
Amortization of financing costs included in interest expense 488 2,237
Amortization of discounted interest -- 198
Loss on debt extinguishment 13,101 --
Deferred tax benefit -- (10,248)
Interest accreted on discount notes 12,056 17,377
Impairment of property and equipment 2,910 394
(Increase) decrease in:
Receivables (12,901) (1,543)
Inventory 17 1,989
Prepaid expenses and other assets 1,663 (1,378)
Increase (decrease) in:
Accounts payable and accrued expenses 11,030 (4,608)
---------------- ---------------
Net cash provided by operating activities 61,898 19,737
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 380 2,454
Purchases of property and equipment (42,636) (19,196)
Change in restricted cash 1 24,977
Change in short term investments (50,119) --
---------------- ---------------
Net cash provided by (used in) investing activities (92,374) 8,235
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of senior notes 250,000 --
Repayments of borrowings under senior secured debt (200,000) --
Debt issuance costs (8,100) --
Capital distribution (6,050) (174)
Payments on capital leases (330) (699)
---------------- ---------------
Net cash provided by (used in) financing activities 35,520 (873)
---------------- ---------------
Net increase in cash and cash equivalents 5,044 27,099
Cash and cash equivalents at beginning of period 98,242 60,525
---------------- ---------------
Cash and cash equivalents at end of period $ 103,286 $ 87,624
================ ===============
Supplemental disclosure of non-cash financing and investing activities:
Asset retirement obligations capitalized $ 75 $ --
Capitalized lease obligations incurred 67 73
Change in accounts payable for purchases of property and equipment (11,186) (6,790)
The accompanying notes are an integral part of the consolidated
financial statements.
5
.
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet at June 30, 2004, the
unaudited consolidated statements of operations for the three months
and six months ended June 30, 2004 and 2003, the unaudited consolidated
statements of cash flows for the six months ended June 30, 2004 and
2003 and related footnotes have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required annually by accounting principles generally accepted
in the United States of America. The financial information presented
should be read in conjunction with the audited consolidated financial
statements as of and for the year ended December 31, 2003. In the
opinion of management, the interim data includes all adjustments
(consisting of only normally recurring adjustments) necessary for a
fair statement of the results for the interim periods. Operating
results for the three and six months ended June 30, 2004 are not
necessarily indicative of results that may be expected for the year
ending December 31, 2004.
Certain reclassifications have been made to prior period balances to
conform to current period presentation. Changes in restricted cash have
been reclassified from cash flows from financing activities to cash
flows from investing activities for all periods presented.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa (Delaware), Inc. ("Alamosa (Delaware)") is a direct wholly
owned subsidiary of Alamosa PCS Holdings, Inc. and an indirect wholly
owned subsidiary of Alamosa Holdings, Inc. ("Alamosa Holdings").
Alamosa Holdings was formed in July 2000. Alamosa Holdings is a holding
company and through its subsidiaries provides wireless personal
communications services, commonly referred to as PCS, in the
Southwestern, Northwestern and Midwestern United States. Alamosa
(Delaware) was formed in October 1999 under the name "Alamosa PCS
Holdings, Inc." to operate as a holding company in anticipation of its
initial public offering. On February 3, 2000, Alamosa (Delaware)
completed its initial public offering. Immediately prior to the initial
public offering, shares of Alamosa (Delaware) were exchanged for
Alamosa PCS, LLC's ("Alamosa LLC") membership interests, and Alamosa
LLC became wholly owned by Alamosa (Delaware). Alamosa (Delaware) and
its subsidiaries are collectively referred to in these consolidated
financial statements as the "Company," "we," "us" or "our."
On December 14, 2000, Alamosa (Delaware) formed a new holding company
pursuant to Section 251(g) of the Delaware General Corporation Law. In
that transaction, each share of Alamosa (Delaware) was converted into
one share of the new holding company, and the former public company,
which was renamed "Alamosa (Delaware), Inc." became a wholly owned
subsidiary of the new holding company, which was renamed "Alamosa PCS
Holdings, Inc."
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 Nasdaq under the symbol "APCS." Alamosa (Delaware) is the issuer of
the outstanding public debt of Alamosa Holdings and its subsidiaries.
3. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
capital contributions from owners, through debt financing and through
proceeds generated from public offerings of common stock. The proceeds
from these transactions have been used to fund the build-out of the
Company's portion of the PCS network of Sprint, subscriber acquisition
costs and working capital.
6
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
While the Company has incurred substantial net losses since inception
and negative cash flows from operating activities through 2002, the
Company generated approximately $56 million and $62 million of cash
flows from operating activities for the year ended December 31, 2003
and the six months ended June 30, 2004, respectively. In November 2003,
the Company completed a debt exchange that provided for approximately
$238 million of principal debt reduction.
As of June 30, 2004, the Company had $103 million in cash and cash
equivalents as well as $50 million in short term investments and
believes that this cash on hand plus the additional liquidity that it
expects to generate from operations will be sufficient to fund expected
capital expenditures and to cover its working capital and debt service
requirements (including dividends on Alamosa Holdings' preferred stock)
for at least the next 12 months.
The Company's future liquidity will be dependent on a number of factors
influencing its projections of operating cash flows, including those
related to subscriber growth, average revenue per user, average monthly
churn and cost per gross addition. Should actual results differ
significantly from these assumptions, the Company's liquidity position
could be adversely affected and it could be in a position that would
require it to raise additional capital which may or may not be
available on terms acceptable to the Company, if at all, and could have
a material adverse effect on the Company's ability to achieve its
intended business objectives.
4. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. No
stock-based employee compensation cost related to option grants is
reflected in the consolidated statements of operations for the three
and six months ended June 30, 2004 or 2003, as all options granted by
the Company had an exercise price equal to or greater than the market
value of the underlying common stock of Alamosa Holdings on the date of
grant. Non-cash compensation expense reflected in the consolidated
statements of operations for the three and six months ended June 30,
2004 and 2003 relate to the vesting of shares of restricted Alamosa
Holdings stock awarded to officers and shares of Alamosa Holdings stock
awarded to directors and are not related to the granting of stock
options. The following table illustrates the effect on net income
(loss) if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
----------------- ---------------- ---------------- ----------------
Net income (loss) - as reported $ 1,036 $ (18,393) $ (23,624) $ (48,800)
Add: stock-based employee
compensation included in
reported net loss, net of
related tax 20 38 40 79
Deduct: stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (1,590) (1,955) (2,769) (3,427)
----------------- ---------------- ---------------- ----------------
Net loss - pro forma $ (534) $ (20,310) $ (26,353) $ (52,148)
================= ================ ================ ================
7
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
5. SHORT TERM INVESTMENTS
During the first six months of 2004, the Board of Directors approved a
change in the Company's investment policy to extend the allowable
weighted average maturity of investments from the 90 days allowed
previously to 270 days. In connection with this amendment, the Company
established a short term investment account in the second quarter of
2004 to invest excess liquidity and improve earnings on this excess
liquidity. All investments are classified as held-to-maturity, mature
in less than one year and consist primarily of short term corporate
debt securities with a Moody's rating of Aa3 or higher or a Standard &
Poor's rating of AA- or higher. The fair value of the Company's
held-to-maturity investments approximates carrying value due to the
short term nature of these investments.
6. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable represents
amounts owed to the Company by subscribers for PCS service. The amounts
presented in the consolidated balance sheets are net of an allowance
for uncollectible accounts of $5.9 million and $6.0 million at June 30,
2004 and December 31, 2003, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
JUNE 30, 2004 DECEMBER 31, 2003
----------------------- -----------------------
Net roaming receivable $ 12,590 $ 13,071
Accrued service revenue 2,686 2,584
Service fee refund -- 6,418
Other amounts due from Sprint 148 874
----------------------- -----------------------
$ 15,424 $ 22,947
======================= =======================
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 net roaming 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.
Accrued service revenue represents the Company's estimate of airtime
usage and other charges that have been earned but not billed at the end
of the period.
Service fee refund due from Sprint at December 31, 2003 related to a
refund of fees paid to Sprint for services such as billing and customer
care. Under the previous agreements with Sprint, these fees were
determined at the beginning of each year based on estimated costs and
were adjusted based on actual costs incurred by Sprint in providing the
respective services. This process changed effective December 1, 2003
under the new agreements with Sprint as discussed in Note 13.
7. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation and
amortization of $212.8 million and $188.1 million at June 30, 2004 and
December 31, 2003, respectively.
8
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
8. ASSET RETIREMENT OBLIGATIONS
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 telecommunications
facilities, primarily consisting of cell sites and switch site
operating leases and operating leases for retail and office space, the
Company has adopted SFAS No. 143 as of January 1, 2003.
As previously disclosed, upon adoption of SFAS No. 143, the Company had
concluded that, for its leased telecommunications facilities, a
liability could not be reasonably estimated due to (1) the Company's
inability to reasonably assess the probability of the likelihood that a
lessor would enforce the remediation requirements upon expiration of
the lease term and therefore its impact on future cash outflows, (2)
the Company's inability to estimate a potential range of settlement
dates due to its ability to renew site leases after the initial lease
expiration and (3) the Company's limited experience in abandoning cell
site locations and actually incurring remediation costs.
It is the Company's understanding that further clarification has been
provided by the Securities and Exchange Commission regarding the
accounting for asset retirement obligations and specifically relating
to factors to consider in determining the estimated settlement dates
and the probability of enforcement of the remediation obligation. Based
on this information, the Company revised certain of the estimates used
in its original analysis and calculated an asset retirement obligation
for its leased telecommunications facilities. The Company determined
that the aforementioned asset retirement obligations did not have a
material impact on its consolidated results of operations, financial
position or cash flows and recorded the asset retirement obligations in
the third quarter of 2003.
An initial asset retirement obligation of $1,213 was recorded and
classified in other non-current liabilities and a corresponding
increase in property and equipment of $1,213 was recorded in the third
quarter of 2003 relating to obligations that existed upon the adoption
of SFAS No. 143. The Company incurred additional asset retirement
obligations during the year ended December 31, 2003 and the six months
ended June 30, 2004 of $35 and $75, respectively, related to new leases
entered into. Included in costs of services and operations in the
Company's statement of operations for the year ended December 31, 2003
is a charge of $402 related to the cumulative accretion of the asset
retirement obligations as of the adoption of SFAS No. 143 as well as an
additional $163 in accretion recorded for the year ended December 31,
2003. Included in depreciation and amortization expenses in the
Company's statement of operations for the year ended December 31, 2003
is a charge of $364 related to the cumulative depreciation of the
related assets recorded at the time of the adoption of SFAS No. 143 as
well as an additional $123 in depreciation recorded for the year ended
December 31, 2003. For the six months ended June 30, 2004, the Company
recorded $91 in accretion of asset retirement obligations and $63 in
depreciation of the related assets. For purposes of determining the
asset retirement obligations, the Company has assigned a 100%
probability of enforcement to the remediation obligations and has
assumed an average settlement period of 20 years.
9. INTANGIBLE ASSETS
In connection with acquisitions completed during 2001, the Company
allocated portions of the respective purchase prices to identifiable
intangible assets consisting of (i) the value of the Sprint agreements
in place at the acquired companies and (ii) the value of the subscriber
base in place at the acquired companies.
The value assigned to the Sprint agreements is being amortized using
the straight-line method over the remaining original terms of the
agreements that were in place at the time of acquisition or
approximately 17.6 years. The value assigned to the subscriber bases
acquired was being amortized using the straight-line method over the
estimated life of the acquired subscribers, or approximately three
years and became fully amortized
9
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
during 2004.
Intangible assets consist of:
JUNE 30, 2004 DECEMBER 31, 2003
------------------------ -----------------------
Sprint affiliate and other agreements $ 532,200 $ 532,200
Accumulated amortization (100,808) (85,692)
------------------------ -----------------------
Subtotal 431,392 446,508
------------------------ -----------------------
Subscriber base acquired 29,500 29,500
Accumulated amortization (29,500) (27,654)
------------------------ -----------------------
Subtotal -- 1,846
------------------------ -----------------------
Intangible assets, net $ 431,392 $ 448,354
======================== =======================
Amortization expense relative to intangible assets was $16,962 and
$20,033 for the six months ended June 30, 2004 and 2003, respectively.
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 $ 32,079
2005 30,234
2006 30,234
2007 30,234
2008 30,234
Thereafter 295,339
----------------
$ 448,354
================
10. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, 2004 DECEMBER 31, 2003
------------------- ---------------------
SENIOR NOTES:
12 7/8% Senior Discount Notes, net of $ 5,915 $ 5,556
12% Senior Discount Notes, net of discount 205,692 193,995
12 1/2% Senior Notes 11,600 11,600
13 5/8% Senior Notes 2,325 2,475
11% Senior Notes 250,895 250,798
8 1/2% Senior Notes 250,000 --
------------------- ---------------------
Total Senior Notes 726,427 464,424
SENIOR SECURED CREDIT FACILITY -- 200,000
------------------- ---------------------
TOTAL DEBT 726,427 664,424
Less current maturities -- --
------------------- ---------------------
LONG TERM DEBT, EXCLUDING CURRENT MATURITIES $ 726,427 $ 664,424
=================== =====================
10
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
SENIOR NOTES
------------
12 7/8% SENIOR DISCOUNT NOTES - The 12 7/8% Senior Discount Notes were
issued in February 2000, mature February 15, 2010, carry a coupon rate
of 12 7/8% and provide for interest deferral through February 15, 2005.
The 12 7/8% Senior Discount Notes will accrete to their $6,389 face
amount by February 8, 2005, after which, interest will be paid in cash
semiannually.
12% SENIOR DISCOUNT NOTES - The 12% Senior Discount Notes were issued
in November 2003, mature July 31, 2009, carry a coupon rate of 12% and
provide for interest deferral through July 31, 2005. The 12% Senior
Discount Notes will accrete to their $233 million face amount by July
31, 2005, after which, interest will be paid in cash semiannually.
12 1/2% SENIOR NOTES - The 12 1/2% Senior Notes were issued in January
2001, mature February 1, 2011 and carry a coupon rate of 12 1/2%,
payable semiannually on February 1 and August 1.
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. As of December 31, 2003, all of the
escrowed proceeds had been used in connection with payment of cash
interest.
13 5/8% SENIOR NOTES -The 13 5/8% Senior Notes were issued in August
2001, mature August 15, 2011 and carry a coupon rate of 13 5/8% payable
semiannually on February 15 and August 15. 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 pro rata
basis the payment obligations under all of the Company's unsecured
borrowings. As of December 31, 2003, all of the escrowed proceeds had
been used in connection with payment of cash interest.
11% SENIOR NOTES - The 11% Senior Notes were issued in November 2003,
mature July 31, 2010 and carry a coupon rate of 11%, payable
semiannually on January 31 and July 31.
8 1/2% SENIOR NOTES - The 8 1/2% Senior Notes were issued in January
2004, mature January 31, 2012 and carry a coupon rate of 8 1/2% payable
semiannually on January 31 and July 31. The proceeds of these notes
were used to permanently repay the Company's senior secured credit
facility in January 2004 as discussed below and for general corporate
purposes.
SENIOR SECURED OBLIGATIONS
--------------------------
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, Alamosa
Holdings, Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower,
entered into a $280 million senior secured credit facility (the "Senior
Secured Credit Facility") with Citicorp USA, as administrative agent
and collateral agent; Toronto Dominion (Texas), Inc., as syndication
agent; Export Development Corporation ("EDC") as co-documentation
agent; First Union National Bank, as documentation agent; and a
syndicate of banking and financial institutions. On March 30, 2001, the
Senior Secured Credit Facility was amended to increase the facility to
$333 million. The Senior Secured Credit Facility was again amended in
August 2001 concurrent with the issuance of the 13 5/8% Senior Notes to
reduce the maximum borrowing to $225 million, consisting of a 7-year
senior secured 12-month delayed draw term loan facility of $200 million
and a 7-year senior secured revolving credit facility in an aggregate
principal amount of up to $25 million.
The weighted average interest rate on the outstanding borrowings under
this facility at December 31, 2003 was 4.69%. Alamosa Holdings, LLC was
also required to pay quarterly in arrears a commitment fee on the
unfunded portion of the commitment of each lender. The Company entered
into derivative hedging instruments
11
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
to hedge a portion of the interest rate risk associated with borrowings
under the Senior Secured Credit Facility, as discussed in Note 13.
At December 31, 2003, Alamosa Holdings, LLC had drawn $200 million
under the term portion of the Senior Secured Credit Facility. In
connection with the issuance of the 8 1/2% Senior Notes discussed
above, a portion of the proceeds from that issuance was used to
permanently repay the advances outstanding under the Senior Secured
Credit Facility and the facility was terminated in January 2004.
11. INCOME TAXES
The Company's effective income tax rate is based on annual income
(loss), statutory tax rates, tax planning opportunities, expected
future taxable income, and expected reversals of taxable temporary
differences. The annual rate is then applied to the Company's quarterly
operating results. The income tax benefit in 2003 is recognized based
on an assessment of the combined expected future taxable income of the
Company and expected reversals of the temporary differences from
acquisitions completed in 2001. In addition, the Company establishes a
valuation allowance for the deferred tax asset when it is more likely
than not that the deferred tax asset will not be realized. Due to the
Company's limited operating history and lack of positive taxable
earnings, a valuation allowance was established during 2003 as deferred
tax assets were expected to exceed deferred tax liabilities. The
establishment of this valuation allowance in the six months ended June
30, 2003 resulted in an effective tax rate of 17 percent. For the six
months ended June 30, 2004, the expected tax benefit related to net
operating losses generated was fully offset by an increase in the
valuation allowance. The effective tax rate for the six months ended
June 30, 2004 is negative 2.7 percent, due to the fact that the Company
has estimated that it will have a current alternative minimum tax
("AMT") liability for the year ending December 31, 2004.
12. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" in its accounting for derivative
financial instruments and hedging activities. The statement requires
the Company to record all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivatives are either
recognized in earnings or are recognized in other comprehensive income
until the hedged item is recognized in earnings.
As of December 31, 2003, the Company had recorded $1,275 in "other
noncurrent liabilities" related to the fair value of derivative
instruments used for hedging purposes, including $856 representing
derivative instruments that qualified for hedge accounting under SFAS
No. 133. These instruments were settled for cash in January 2004 in
connection with the termination of the Senior Secured Credit Facility.
During the six month period ended June 30, 2004, the Company recognized
losses of $6 (net of income tax benefit of $3) in other comprehensive
income related to the change in fair value of these derivative
instruments from January 1, 2004 through the settlement of the
instruments. The balance of other comprehensive income related to these
derivative instruments was recognized in the first quarter of 2004 when
the derivatives were terminated. The net other comprehensive loss
balance of $536 is included in the loss on debt extinguishment recorded
in the consolidated statement of operations for the six months ended
June 30, 2004.
During the six month period ended June 30, 2003, the Company recognized
a gain of $481 (net of income tax expense of $195) in other
comprehensive income related to the change in fair values of derivative
instruments.
12
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Total comprehensive income (loss) for the three months and six months
ended June 30, 2004 and 2003 is illustrated below:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
Net income (loss) $ 1,036 $ (18,393) $ (23,624) $ (48,800)
Change in fair values of
derivative instruments,
net of income tax expense
(benefit) of $0, $80, $0
and $195, respectively -- 293 -- 481
---------------- ----------------- ---------------- -----------------
Comprehensive income (loss) $ 1,036 $ (18,100) $ (23,624) $ (48,319)
================ ================= ================ =================
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 2003, the Company executed amendments to its affiliation agreements
with Sprint. The amendments, among other things, established fixed per
subscriber costs for services that the Company purchases from Sprint
through December 31, 2006 in the form of two new fees. The amendments
created a new combined service bureau fee, which consolidates numerous
fees that were previously settled separately, for back office services
such as billing and customer care. The combined service bureau fee was
set at $7.70 per average subscriber per month through December 31, 2006
and will be recorded in costs of services and operations in the
consolidated statement of operations. The amendments also created a new
per-activation fee, which consolidates numerous fees that were
previously settled separately, for marketing services, such as
subscriber activation and handset logistics. The per-activation fee was
initially calculated as a percentage of certain of Sprint PCS' selling
and marketing expenses and is applied to the actual number of gross
subscriber activations the Company experiences on a monthly basis
through December 31, 2006. The per-activation fee will be recorded in
selling and marketing expenses in the consolidated statement of
operations. In March 2004, the Company exercised its rights under a
most favored nations clause in the Sprint agreements to implement the
terms of an agreement entered into between Sprint and another PCS
Affiliate of Sprint. As a result, the Company entered into new
amendments that increased the per-activation fee and decreased the
price to the Company on purchases of handsets and accessories.
Additionally, the March 2004 amendments increased the reciprocal
roaming rate for 3G services from $0.0014 per Kb to $0.0020 per Kb and
extended the fixed reciprocal rates for voice and 3G data roaming
through December 31, 2006. In June 2004, the Company further amended
its agreements with Sprint to (1) reduce the combined service bureau
fee from $7.70 to $7.00 per average subscriber per month and (2) change
the per-activation fee from a percentage of certain of Sprint PCS'
selling and marketing expenses to a fixed rate of $23.00 per
activation.
In addition to the new fees, the amendments changed the methodology
used for settling cash received from subscribers. Historically, actual
weekly cash receipts were passed through to the Company by Sprint based
on a calculation of an estimate of the portion of that cash related to
the Company's activity. Under the new methodology, the Company receives
its portion of billed revenue (net of an 8% affiliation fee) less
actual written off accounts in the month subsequent to billing
regardless of when Sprint collects the cash from the subscriber. The
provisions of the amendments became effective on December 1, 2003 and
the Company has the right to evaluate subsequent amendments to the
affiliation agreements of other similarly situated PCS Affiliates of
Sprint and adopt the provisions of those amendments if the Company
elects to do so.
13
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Expenses reflected in the consolidated statements of operations related
to the Sprint affiliation agreements are:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
Cost of service and other
operations $ 66,509 $ 56,146 $ 129,146 $ 108,714
Cost of products sold 16,379 12,399 36,162 25,243
Selling and marketing 10,815 12,047 21,209 24,956
---------------- ----------------- ---------------- -----------------
Total $ 93,703 $ 80,592 $ 186,517 $ 158,913
================ ================= ================ =================
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 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 flows.
14. COMMITMENTS AND CONTINGENCIES
ALAMOSA HOLDINGS PREFERRED STOCK DIVIDENDS - In November 2003, Alamosa
Holdings issued shares of Series B Convertible Preferred Stock. Holders
of the Series B Preferred Stock are entitled to receive cumulative
dividends at an annual rate of 7 1/2% of the $250 per share liquidation
preference. Dividends are payable quarterly in arrears on the last
calendar day of each January, April, July and October. Until July 31,
2008, Alamosa Holdings has the option to pay dividends in (1) cash, (2)
shares of Alamosa Holdings Series C Preferred Stock, (3) shares of
Alamosa Holdings common stock or (4) a combination thereof. After July
31, 2008, all dividends are payable in cash only. Alamosa Holdings is a
holding company that generates no revenues. Accordingly, the source of
any cash dividends paid on the Series B Convertible Preferred Stock is
related to capital distributions from the Company to Alamosa Holdings.
During the six months ended June 30, 2004, the Company paid $6,050 in
capital distributions to Alamosa Holdings for the purpose of funding
Alamosa Holdings' cash dividend payments on its Series B Convertible
Preferred Stock. As of June 30, 2004, Alamosa Holdings has 484,585
shares of Series B Convertible Preferred Stock issued and outstanding.
Any future cash dividends paid on the Series B Convertible Preferred
Stock by Alamosa Holdings will result in additional capital
distributions from the Company to Alamosa Holdings.
LITIGATION - On January 23, 2001, the Company's board of directors, in
a unanimous decision, terminated the employment of Jerry Brantley, then
President and COO of the Company. On April 29, 2002, Mr. Brantley
initiated litigation against the Company and the Chairman of the
Company, David E. Sharbutt, in the District Court of Lubbock County,
Texas, 22nd Judicial District, alleging wrongful termination. In the
litigation, Mr. Brantley claimed, among other things, that the
Company's termination of his employment was without cause under his
employment agreement rather than a termination for non-performance. As
such, Mr. Brantley's claim sought money damages for (i) severance pay
equal to one year's salary at the time of his termination, (ii) the
value of certain unexercised stock options he owned at the time of his
termination, (iii) an allegedly unpaid bonus and (iv) exemplary
damages, as well as recovery of attorneys' fees and costs. On September
27, 2002,
14
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
the Court entered an Agreed Order Compelling Arbitration. A panel of
three arbitrators was selected. Mr. Brantley's claims against the
Company and David Sharbutt, including claims asserted in the Lubbock
County lawsuit and in the arbitration, were resolved pursuant to a
settlement agreement dated February 6, 2004. The settlement does not
materially impact the Company's consolidated financial statements or
our operations.
In November and December 2003 and January 2004, multiple lawsuits were
filed against Alamosa Holdings and David E. Sharbutt, its Chairman and
Chief Executive Officer as well as Kendall W. Cowan, its Chief
Financial officer. Steven Richardson, the Company's Chief Operating
Officer, was also a named defendant in one of the lawsuits. Each claim
is a purported class action filed on behalf of a putative class of
persons who and/or entities that purchased Alamosa Holdings' securities
between January 9, 2001 and June 13, 2002, inclusive, and seeks
recovery of compensatory damages, fees and costs. Each lawsuit was
filed in the United States District Court for the Northern District of
Texas, in either the Lubbock Division or the Dallas Division. On
February 27, 2004, the lawsuits were consolidated into one action
pending in the United States District Court for the Northern District
of Texas, Lubbock Division. On March 4, 2004, the Court appointed the
Massachusetts State Guaranteed Annuity Fund to serve as lead plaintiff
and approved its selection of lead counsel for the consolidated action.
On May 18, 2004, the lead plaintiff filed a consolidated complaint. The
consolidated complaint names three of the original defendants (Alamosa
Holdings, David Sharbutt and Kendall Cowan), drops one of the original
defendants (Steven Richardson) and names two new defendants who are
outside directors (Michael Roberts and Steven Roberts). The putative
class period remains the same. The consolidated complaint alleges
violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5
promulgated thereunder, and Sections 11 and 15 of the Securities Act.
The consolidated complaint seeks recovery of compensatory damages,
fees, costs, recission or rescissory damages in connection with the
Sections 11 and 15 claims, and injunctive relief and/or disgorgement in
connection with defendants' insider trading proceeds. At the end of the
putative class period on June 13, 2002, Alamosa Holdings announced that
its projection of net subscriber additions for the second quarter of
2002 would be less than previously projected. The consolidated
complaint alleges, among other things, that Alamosa Holdings made false
and misleading statements about subscriber additions during the
putative class period. The consolidated complaint also alleges that
Alamosa Holdings' financial statements were false and misleading
because Alamosa Holdings improperly recognized revenue and failed to
record adequate allowances for uncollectible receivables. The
defendants' motion to dismiss the consolidated complaint was filed on
July 26, 2004.
The Company believes that the defendants have meritorious defenses to
these claims and intend to vigorously defend these actions. No
discovery has been taken at this time, and the ultimate outcome is not
currently predictable. There can be no assurance that the litigation
will be resolved in the defendants' favor and an adverse resolution
could adversely affect the Company's financial condition.
On July 8 and 15, 2004, two shareholder derivative suits, each
asserting identical allegations, were filed in State District Court in
Dallas County, Texas on behalf of Alamosa Holdings against certain of
its officers and directors: David E. Sharbutt, its Chairman and Chief
Executive Officer, Kendall W. Cowan, its Chief Financial Officer, as
well as other current and former members of Alamosa Holdings' board of
directors, including Scotty Hart, Michael V. Roberts, Ray M. Clapp,
Jr., Schuyler B. Marshall, Thomas F. Riley, Jr. Steven C. Roberts,
Jimmy R. White, Thomas B. Hyde and Tom M. Phelps. The suits also name
Alamosa Holdings as a nominal defendant. Based on allegations
substantially similar to the federal shareholder action, the suits
assert claims for defendants' alleged violations of state law,
including breaches of fiduciary duty, abuse of control, gross
mismanagement, waste of corporate assets and unjust enrichment that
allegedly occurred between January 2001 and June 2002. The suits seek
recovery of damages, fees, costs, equitable and/or injunctive remedies,
and disgorgement of all profits, benefits and other compensation.
On November 26, 2003, Core Group PC filed a claim against Alamosa PCS
and four other PCS Affiliates of Sprint in the United States District
Court for the District of Kansas alleging copyright infringement
related to the designs used in Sprint retail stores. The complainant
sought money damages and an injunction against
15
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Alamosa PCS' continued use of the alleged copyrighted designs. This
claim was dismissed on June 4, 2004 with no adverse impact to the
Company.
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.
15. GUARANTOR FINANCIAL STATEMENTS
Set forth below are consolidating financial statements of the issuer
and guarantor subsidiaries and Alamosa Delaware Operations LLC which is
the Company's non-guarantor subsidiary (the "Non-Guarantor Subsidiary")
of the senior notes as of June 30, 2004 and December 31, 2003 and for
the three months and six months ended June 30, 2004 and 2003. The
guarantor subsidiaries are all 100% owned by the Company and the
guarantees are full and unconditional. Separate financial statements of
each guarantor subsidiary have not been provided because management has
determined that they are not material to investors.
Alamosa Holdings is an additional guarantor with respect to the 12 7/8%
senior discount notes, the 12 1/2% senior notes and the 13 5/8% senior
notes. Separate financial statements for Alamosa Holdings have not been
provided as Alamosa Holdings is a holding company which does not
independently generate operating revenue. The consolidated financial
statements of Alamosa Holdings are included in its quarterly report on
Form 10-Q for the quarter ended June 30, 2004.
16
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004
Non-
Guarantor Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- -------------- ------------- ------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,829 $ 96,434 $ 23 $ -- $ 103,286
Short term investments 50,119 -- -- -- 50,119
Customer accounts receivable, net -- 44,022 -- -- 44,022
Receivable from Sprint -- 15,424 -- -- 15,424
Intercompany receivable 46,821 -- 394 (47,215) --
Inventory -- 7,292 -- -- 7,292
Investment in subsidiary 874,373 -- -- (874,373) --
Prepaid expenses and other assets -- 10,235 -- -- 10,235
Deferred customer acquisition costs -- 7,259 -- -- 7,259
Deferred tax asset -- 4,572 -- -- 4,572
------------- -------------- ------------- ------------- ------------
Total current assets 978,142 185,238 417 (921,588) 242,209
Property and equipment, net -- 427,196 -- -- 427,196
Debt issuance costs, net 9,409 -- -- -- 9,409
Intangible assets, net -- 431,392 -- -- 431,392
Other noncurrent assets -- 5,060 -- -- 5,060
------------- -------------- ------------- ------------- ------------
Total assets $ 987,551 $ 1,048,886 $ 417 $ (921,588) $ 1,115,266
============= ============== ============= ============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 22,824 $ -- $ -- $ 22,824
Accrued expenses 260 37,407 -- -- 37,667
Payable to Sprint -- 21,511 -- -- 21,511
Payable to parent 302 -- -- -- 302
Interest payable 21,726 -- -- -- 21,726
Deferred revenue -- 23,107 -- -- 23,107
Intercompany payable -- 47,215 -- (47,215) --
Current installments of capital
leases -- 223 -- -- 223
------------- -------------- ------------- ------------- ------------
Total current liabilities 22,288 152,287 -- (47,215) 127,360
Capital lease obligations -- 807 -- -- 807
Other noncurrent liabilities -- 6,460 -- -- 6,460
Deferred tax liability -- 15,376 -- -- 15,376
Senior notes 726,427 -- -- -- 726,427
------------- -------------- ------------- ------------- ------------
Total liabilities 748,715 174,930 -- (47,215) 876,430
------------- -------------- ------------- ------------- ------------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital 1,009,990 -- -- -- 1,009,990
LLC member's equity -- 873,956 417 (874,373) --
Accumulated deficit (771,049) -- -- -- (771,049)
Unearned compensation (105) -- -- -- (105)
------------- -------------- ------------- ------------- ------------
Total stockholder's equity 238,836 873,956 417 (874,373) 238,836
------------- -------------- ------------- ------------- ------------
Total liabilities and
stockholder's equity $ 987,551 $ 1,048,886 $ 417 $ (921,588) $ 1,115,266
============= ============== ============= ============= ============
17
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
Non-
Guarantor Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- -------------- ------------- ------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 27,542 $ 70,677 $ 23 $ -- $ 98,242
Restricted cash 1 -- -- -- 1
Customer accounts receivable, net -- 28,034 -- -- 28,034
Receivable from Sprint -- 22,947 -- -- 22,947
Intercompany receivable 48,805 -- 394 (49,199) --
Receivable from parent 1 -- -- -- 1
Inventory -- 7,309 -- -- 7,309
Investment in subsidiary 658,874 -- -- (658,874) --
Prepaid expenses and other assets 194 9,569 -- -- 9,763
Deferred customer acquisition costs -- 8,060 -- -- 8,060
Deferred tax asset -- 4,572 -- -- 4,572
------------- -------------- ------------- ------------- ------------
Total current assets 735,417 151,168 417 (708,073) 178,929
Property and equipment, net -- 434,840 -- -- 434,840
Debt issuance costs, net 1,718 12,648 -- -- 14,366
Intangible assets, net -- 448,354 -- -- 448,354
Other noncurrent assets -- 6,393 -- -- 6,393
------------- -------------- ------------- ------------- ------------
Total assets $ 737,135 $ 1,053,403 $ 417 $ (708,073) $ 1,082,882
============= ============== ============= ============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 33,166 $ -- $ -- $ 33,166
Accrued expenses 257 37,068 -- -- 37,325
Payable to Sprint -- 26,616 -- -- 26,616
Interest payable 4,563 790 -- -- 5,353
Deferred revenue -- 22,742 -- -- 22,742
Intercompany payable -- 49,199 -- (49,199) --
Current installments of capital
leases -- 481 -- -- 481
------------- -------------- ------------- ------------- ------------
Total current liabilities 4,820 170,062 -- (49,199) 125,683
Capital lease obligations -- 812 -- -- 812
Other noncurrent liabilities -- 8,693 -- -- 8,693
Deferred tax liability -- 15,379 -- -- 15,379
Senior secured debt -- 200,000 -- -- 200,000
Senior notes 464,424 -- -- -- 464,424
------------- -------------- ------------- ------------- ------------
Total liabilities 469,244 394,946 -- (49,199) 814,991
------------- -------------- ------------- ------------- ------------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital 1,015,991 -- -- -- 1,015,991
LLC member's equity -- 658,457 417 (658,874) --
Accumulated deficit (747,425) -- -- -- (747,425)
Unearned compensation (145) -- -- -- (145)
Accumulated other comprehensive loss,
net of tax (530) -- -- -- (530)
------------- -------------- ------------- ------------- ------------
Total stockholder's equity 267,891 658,457 417 (658,874) 267,891
------------- -------------- ------------- ------------- ------------
Total liabilities and
stockholder's equity $ 737,135 $ 1,053,403 $ 417 $ (708,073) $ 1,082,882
============= ============== ============= ============= ============
18
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------- ------------- ------------ -------------
Revenues:
Subscriber revenues $ -- $ 133,569 $ -- $ -- $ 133,569
Roaming and wholesale revenues -- 51,705 -- -- 51,705
-------------- ------------- ------------- ------------ -------------
Service revenues -- 185,274 -- -- 185,274
Product sales -- 8,055 -- -- 8,055
-------------- ------------- ------------- ------------ -------------
Total revenues -- 193,329 -- -- 193,329
Costs and expenses:
Cost of services and operations -- 91,062 -- -- 91,062
Cost of products sold -- 16,379 -- -- 16,379
Selling and marketing -- 31,839 -- -- 31,839
General and administrative
expenses 331 5,177 -- -- 5,508
Depreciation and amortization -- 25,523 -- -- 25,523
Impairment of property and
equipment -- 2,604 -- -- 2,604
Non-cash compensation -- 20 -- -- 20
-------------- ------------- ------------- ------------ -------------
Income (loss) from operations (331) 20,725 -- -- 20,394
Equity in earnings of subsidiaries 20,784 -- -- (20,784) --
Interest and other income 136 83 -- -- 219
Interest expense (18,928) (24) -- -- (18,952)
-------------- ------------- ------------- ------------ -------------
Income before income taxes 1,661 20,784 -- (20,784) 1,661
Income taxes (625) -- -- -- (625)
-------------- ------------- ------------- ------------ -------------
Net income $ 1,036 $ 20,784 $ -- $ (20,784) $ 1,036
============== ============= ============= ============ =============
19
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(DOLLARS IN THOUSANDS)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
--------------- --------------- ------------- -------------- ----------------
Revenues:
Subscriber revenues $ -- $ 114,550 $ -- $ -- $ 114,550
Roaming and wholesale revenues -- 35,040 -- -- 35,040
------------ ----------- ------------ ----------- ------------
Service revenues -- 149,590 -- -- 149,590
Product sales -- 5,804 -- -- 5,804
------------ ----------- ------------ ----------- ------------
Total revenue -- 155,394 -- -- 155,394
Costs and expenses:
Cost of services and operations -- 80,282 -- -- 80,282
Cost of products sold -- 12,399 -- -- 12,399
Selling and marketing -- 26,584 -- -- 26,584
General and administrative
expenses 410 5,398 -- -- 5,808
Depreciation and amortization -- 27,419 -- -- 27,419
Impairment of property and -- 34 -- -- 34
equipment
Non-cash compensation -- 38 -- -- 38
------------ ---------- ------------ ----------- ------------
Income (loss) from operations (410) 3,240 -- -- 2,830
Equity in loss of subsidiaries 4,196 -- -- (4,196) --
Interest and other income 174 74 -- -- 248
Interest expense (22,353) (3,598) -- -- (25,951)
------------ ---------- ------------ ----------- -------------
Loss before income tax benefit (18,393) (284) -- (4,196) (22,873)
Income tax benefit -- 4,480 -- -- 4,480
------------ ---------- ------------ ----------- ------------
Net income (loss) $ (18,393) $ 4,196 $ -- $ (4,196) $ (18,393)
============ ========== ============ ============ ============
20
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------- ------------- ------------ -------------
Revenues:
Subscriber revenues $ -- $ 258,315 $ -- $ -- $ 258,315
Roaming and wholesale revenues -- 94,858 -- -- 94,858
-------------- ------------- ------------- ------------ -------------
Service revenues -- 353,173 -- -- 353,173
Product sales -- 16,846 -- -- 16,846
-------------- ------------- ------------- ------------ -------------
Total revenues -- 370,019 -- -- 370,019
Costs and expenses:
Cost of services and operations -- 177,278 -- -- 177,278
Cost of products sold -- 36,162 -- -- 36,162
Selling and marketing -- 62,832 -- -- 62,832
General and administrative
expenses 664 10,323 -- -- 10,987
Depreciation and amortization -- 52,907 -- -- 52,907
Impairment of property and -- 2,910 -- -- 2,910
equipment
Non-cash compensation -- 40 -- -- 40
-------------- ------------- ------------- ------------ -------------
Income (loss) from operations (664) 27,567 -- -- 26,903
Equity in earnings of subsidiaries 14,020 -- -- (14,020) --
Loss on debt extinguishment -- (13,101) -- -- (13,101)
Interest and other income 227 159 -- -- 386
Interest expense (36,582) (605) -- -- (37,187)
-------------- ------------- ------------- ------------ -------------
Income (loss) before income taxes (22,999) 14,020 -- (14,020) (22,999)
Income taxes (625) -- -- -- (625)
-------------- ------------- ------------- ------------ -------------
Net income (loss) $ (23,624) $ 14,020 $ -- $ (14,020) $ (23,624)
============== ============= ============= ============ =============
21
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(DOLLARS IN THOUSANDS)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
--------------- --------------- ------------- -------------- ----------------
Revenues:
Subscriber revenues $ -- $ 218,574 $ -- $ -- $ 218,574
Roaming and wholesale revenues -- 66,830 -- -- 66,830
------------ ----------- ------------ ----------- ------------
Service revenues -- 285,404 -- -- 285,404
Product sales -- 11,098 -- -- 11,098
------------ ----------- ------------ ----------- ------------
Total revenue -- 296,502 -- -- 296,502
Costs and expenses:
Cost of services and operations -- 159,599 -- -- 159,599
Cost of products sold -- 25,243 -- -- 25,243
Selling and marketing -- 54,730 -- -- 54,730
General and administrative
expenses 498 8,835 -- -- 9,333
Depreciation and amortization -- 54,301 -- -- 54,301
Impairment of property and -- 394 -- -- 394
equipment
Non-cash compensation -- 79 -- -- 79
------------ ----------- ------------ ----------- ------------
Loss from operations (498) (6,679) -- -- (7,177)
Equity in loss of subsidiaries (4,311) -- -- 4,311 --
Interest and other income 439 178 -- -- 617
Interest expense (44,430) (8,058) -- -- (52,488)
------------ ------------ ------------ ----------- ------------
Loss before income tax benefit (48,800) (14,559) -- 4,311 (59,048)
Income tax benefit -- 10,248 -- -- 10,248
------------ ----------- ------------ ----------- ------------
Net loss $ (48,800) $ (4,311) $ -- $ 4,311 $ (48,800)
============ ============ ============ =========== ============
22
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------- ------------- ------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (23,624) $ 14,020 $ -- $ (14,020) $ (23,624)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities
Equity in earnings of subsidiaries (14,020) -- -- 14,020 --
Non-cash interest expense on derivative
instruments -- 6 -- -- 6
Non-cash accretion of asset retirement
obligation -- 91 -- -- 91
Non-cash compensation expense -- 40 -- -- 40
Provision for bad debts -- 4,114 -- -- 4,114
Depreciation and amortization of property
and equipment -- 35,945 -- -- 35,945
Amortization of intangible assets -- 16,962 -- -- 16,962
Amortization of financing costs included in
interest expense 405 83 -- -- 488
Loss on debt extinguishment -- 13,101 -- -- 13,101
Interest accreted on discount notes 12,056 -- -- -- 12,056
Impairment of property and equipment -- 2,910 -- -- 2,910
(Increase) decrease in:
Receivables -- (12,901) -- -- (12,901)
Inventory -- 17 -- -- 17
Prepaid expenses and other assets 194 1,469 -- -- 1,663
Increase (decrease) in:
Accounts payable and accrued expenses 17,791 (6,761) -- -- 11,030
-------------- ------------- ------------- ------------- ---------------
Net cash provided by (used in) operating
activities (7,198) 69,096 -- -- 61,898
-------------- ------------- ------------- ------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets -- 380 -- -- 380
Purchases of property and equipment -- (42,636) -- -- (42,636)
Investment in subsidiary (200,909) 200,909 -- -- --
Change in restricted cash 1 -- -- -- 1
Change in short term investments (50,119) -- -- -- (50,119)
Change in intercompany balances 1,662 (1,662) -- -- --
-------------- ------------- ------------- ------------- ---------------
Net cash provided by (used in) investing
activities (249,365) 156,991 -- -- (92,374)
-------------- ------------- ------------- ------------- ---------------
Cash flows from financing activities:
Issuance of senior notes 250,000 -- -- -- 250,000
Repayment of secured debt -- (200,000) -- -- (200,000)
Debt issuance costs (8,100) -- -- -- (8,100)
Capital distribution to parent (6,050) -- -- -- (6,050)
Payments on capital leases -- (330) -- -- (330)
-------------- ------------- ------------- ------------- ---------------
Net cash provided by (used in) financing
activities 235,850 (200,330) -- -- 35,520
-------------- ------------- ------------- ------------- ---------------
Net increase (decrease) in cash and cash
equivalents (20,713) 25,757 -- -- 5,044
Cash and cash equivalents at beginning of
period 27,542 70,677 23 -- 98,242
-------------- ------------- ------------- ------------- ---------------
Cash and cash equivalents at end of period $ 6,829 $ 96,434 $ 23 $ -- $ 103,286
============== ============= ============= ============= ===============
23
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(DOLLARS IN THOUSANDS)
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- --------------- ------------- --------------- ------------
Cash flows from operating activities:
Net loss $ (48,800) $ (4,311) $ -- $ 4,311 $ (48,800)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Equity in loss of subsidiaries 4,311 -- -- (4,311) --
Non-cash compensation expense -- 79 -- -- 79
Provision for bad debts -- 10,000 -- -- 10,000
Non-cash interest benefit on derivative
instruments -- (261) -- -- (261)
Depreciation and amortization of property
and equipment -- 34,268 -- -- 34,268
Amortization of intangibles assets -- 20,033 -- -- 20,033
Amortization of financing costs included in
interest expense 1,011 1,226 -- -- 2,237
Amortization of discounted interest 198 -- -- -- 198
Deferred tax benefit -- (10,248) -- -- (10,248)
Interest accreted on discount notes 17,377 -- -- -- 17,377
Impairment of property and equipment -- 394 -- -- 394
(Increase) decrease in:
Receivables 569 (2,112) -- -- (1,543)
Inventory -- 1,989 -- -- 1,989
Prepaid expenses and other assets (72) (1,306) -- -- (1,378)
Decrease in:
Accounts payable and accrued expenses 113 (4,721) -- -- (4,608)
------------ ----------- ----------- ----------- ------------
Net cash provided by (used in) operating
activities (25,293) 45,030 -- -- 19,737
------------ ----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of assets -- 2,454 -- -- 2,454
Purchases of property and equipment -- (19,196) -- -- (19,196)
Change in restricted cash 24,977 -- -- -- 24,977
Change in intercompany balances 10,089 (10,089) -- -- --
------------ ----------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities 35,066 (26,831) -- -- 8,235
------------ ----------- ----------- ----------- ------------
Cash flows from financing activities:
Capital distribution to parent (174) -- -- -- (174)
Payments on capital leases -- (699) -- -- (699)
------------ ------------ ----------- ----------- -------------
Net cash used in financing activities (174) (699) -- -- (873)
------------- ----------- ----------- ----------- -------------
Net increase in cash and cash equivalents 9,599 17,500 -- -- 27,099
Cash and cash equivalents at beginning of
period 17,821 42,681 23 -- 60,525
------------ ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 27,420 $ 60,181 $ 23 $ -- $ 87,624
============ =========== =========== =========== ============
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this quarterly report on Form 10-Q regarding our financial position and
liquidity may be deemed to be forward-looking statements. These forward-looking
statements include:
o forecasts of population growth in our territory;
o statements regarding our anticipated revenues, expense levels,
liquidity, capital resources and operating losses; and
o statements regarding expectations or projections about markets in
our territories.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from our expectations, are
further disclosed in our annual report on Form 10-K for the year ended December
31, 2003 under the sections "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter the terms of our affiliation
agreements with it, including fees paid or charged to us and other
program requirements;
o our anticipation of future losses;
o our dependence on back office services, such as billing and
customer care, provided by Sprint;
o inaccuracies in financial information provided by Sprint;
o potential fluctuations in our operating results;
o our ability to predict future customer growth, as well as other
key operating metrics;
o changes or advances in technology;
o the ability to leverage third generation products and services;
o competition in the industry and markets in which we operate;
o subscriber credit quality;
o our ability to attract and retain skilled personnel;
o our potential need for additional capital or the need for
refinancing existing indebtedness;
25
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 our inability to predict the outcomes of potentially material
litigation;
o the potential impact of wireless local number portability, or
WLNP;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
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 set forth above.
DEFINITIONS OF OPERATING METRICS
We discuss the following operating metrics relating to our business in
this section:
o ARPU, or average monthly revenue per user, is a measure used to
determine the monthly subscriber revenue earned for subscribers
based in our territory. This measure is calculated by dividing
subscriber revenues in our consolidated statement of operations by
our average daily subscribers during the period divided by the
number of months in the period.
o Average monthly churn is used to measure the rate at which
subscribers based in our territory deactivate service on a
voluntary or involuntary basis. We calculate average monthly churn
based on the number of subscribers deactivated during the period
(net of transfers out of our service area and those who
deactivated within 30 days of activation) as a percentage of our
average daily subscriber base during the period divided by the
number of months during the period.
o Licensed POPs represent the number of residents (usually expressed
in millions) in our territory in which we have an exclusive right
to provide wireless mobility communications services under the
Sprint brand name. The number of residents located in our
territory does not represent the number of wireless subscribers
that we serve or expect to serve in our territory.
o Covered POPs represent the number of residents (usually expressed
in millions) covered by our portion of the PCS network of Sprint
in our territory. The number of residents covered by our network
does not represent the number of wireless subscribers that we
serve or expect to serve in our territory.
GENERAL
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless mobility communications services under the Sprint brand name in our
licensed territory. We own and are responsible for building, operating and
managing the portion of the PCS network of Sprint located in our territory. We
offer national plans designed by Sprint as well as 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 Sprint PCS products and services through a number
of distribution outlets located in our territory, including our own retail
stores, major national distributors and local third party distributors. At June
30, 2004, we had total licensed POPs of over 15.8 million, covered POPs of
approximately 12.1 million and total subscribers of approximately 813,000.
26
We recognize revenues from our subscribers for the provision of
wireless telecommunications services, proceeds from the sales of handsets and
accessories through channels controlled by us and fees from Sprint and other
wireless service providers and resellers when their customers roam onto our
portion of the PCS network of Sprint. Sprint retains 8% of all service revenue
collected from our subscribers (not including products sales and roaming charges
billed to our subscribers) and all fees collected from other wireless service
providers and resellers when their customers use our portion of the PCS network
of Sprint. We report the amount retained by Sprint as an operating expense. In
addition, Sprint bills our subscribers for taxes, handset insurance, equipment
and Universal Service Fund charges and other surcharges which we do not record.
Sprint collects these amounts from the subscribers and remits them to the
appropriate entity.
As part of our affiliation agreements with Sprint, we have contracted
with Sprint to receive back office services such as customer activation, handset
logistics, billing, customer care and network monitoring services. We initially
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. We continue to contract
with Sprint for these services today and are obligated to continue using Sprint
to provide these services through December 31, 2006. The cost for these services
is primarily on a per-subscriber or 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 doubtful accounts and are based on our historical collection
experience, current trends, credit policy, a percentage of our accounts
receivable by aging category and expectations of future bad debts based on
current collection activities. In determining the allowance, we consider
historical write-offs of our receivables as well as historical changes in our
credit policies. We also look at current trends in the credit quality of our
customer base.
REVENUE RECOGNITION - We record equipment revenue for the sale of
handsets and accessories to customers in our retail stores and to local
resellers in our territories. We do not record equipment revenue on handsets and
accessories purchased by our customers from national resellers or directly from
Sprint. Our customers pay an activation fee when they initiate service. In the
past, we deferred this activation fee in all cases and recorded the activation
fee revenue over the estimated average life of our customers which ranges from
12 to 36 months depending on credit class and based on our past experience.
Effective July 1, 2003, we adopted the accounting provisions of Emerging Issues
Task Force ("EITF") Abstract No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." Accordingly, beginning July 1, 2003, we allocate
amounts charged to customers at the point of sale between the sale of handsets
and other equipment and the sale of wireless telecommunications services in
those transactions taking place in distribution channels that we directly
control. Activation fees charged in transactions outside of our directly
controlled distribution channels continue to be deferred and amortized over the
average life of the subscriber base.
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.
The cost of handsets sold generally exceeds the retail sales price, as
it is common in our industry to subsidize the price of handsets for competitive
reasons. For handsets sold through channels controlled by Sprint that are
activated by a subscriber in our territory, we reimburse Sprint for the amount
of subsidy incurred by them in connection with the sale of these handsets. This
reimbursement paid to Sprint is reflected in our selling and marketing expenses
in the consolidated statements of operations.
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS - In connection with our
acquisitions of Roberts, WOW and Southwest PCS in the first quarter of 2001, we
recorded certain intangible assets including both identifiable intangibles
27
and goodwill. Identifiable intangibles consisted 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 on a
straight line basis over the remaining original term of the underlying Sprint
agreements or approximately 17.6 years. The subscriber base intangible asset was
amortized on a straight line basis over the estimated life of the acquired
subscribers or approximately 3 years. The subscriber base intangible asset
became fully amortized in the first quarter of 2004.
We 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, we had recorded $15.9 million in accumulated amortization of goodwill.
Upon the adoption of SFAS No. 142, the amortization of goodwill was
discontinued. In connection with our annual impairment testing related to
goodwill as of July 31, 2002, we determined that goodwill was impaired and
recorded an impairment charge in the third quarter of 2002 to reduce the
carrying value of goodwill to zero.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, equipment and finite-lived intangibles, comprised approximately 76
percent of our total assets at June 30, 2004. 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
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 recorded in 2002 and the trends in the wireless
telecommunications industry that drove our decision to launch a debt exchange
offer in September 2003 were deemed to be "triggering events" 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. We have determined that we have one asset
grouping related to cash flows generated by our subscriber base, which includes
all of our assets. The life of this asset group for purposes of these impairment
tests was assumed to be ten years. No impairment was indicated as a result of
these tests. 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
the 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.
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 related 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. During 2003, we reinstated a valuation allowance to reflect
the deferred tax assets at the amounts expected to be realized.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -
We place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of cash flows, revenue, cost of service,
selling and marketing costs and the adequacy of our allowance for uncollectible
accounts
28
based on this data we receive from Sprint. We obtain assurance as to the
accuracy of this data through analytic review and reliance on the service
auditor report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint could have a
material adverse effect on our results of operations and cash flow.
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2004 COMPARED TO THE THREE
AND SIX MONTH PERIODS ENDED JUNE 30, 2003
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 813,000 at June 30, 2004 compared to approximately
677,000 at June 30, 2003. This growth of approximately 136,000 subscribers or 20
percent year over year compares to 19 percent growth from June 30, 2002 to June
30, 2003.
Average monthly churn for the second quarter of 2004 was approximately
2.1 percent compared to approximately 2.5 percent for the second quarter of
2003. This level of churn in the second quarter of 2004 was slightly less than
that in the first quarter of 2004 when we experienced average monthly churn of
2.4 percent. Increases in churn negatively impact our operations as we incur
significant up front costs in acquiring customers.
SERVICE REVENUES - Service revenues consist of revenues from our
subscribers and roaming and wholesale revenue earned when subscribers from other
carriers or resellers of PCS service use our portion of the PCS network of
Sprint.
Subscriber revenue consists of payments received from our subscribers
for monthly service under their service plans. Subscriber revenue also includes
activation fees and charges for the use of various features including PCS
Vision, the wireless web and voice activated dialing. Subscriber revenues were
$133,569 for the quarter ended June 30, 2004 compared to $114,550 for the
quarter ended June 30, 2003. This increase of 17 percent was primarily due to
the 20 percent increase in our subscriber base discussed above. Subscriber
revenues were $258,315 for the six months ended June 30, 2004 compared to
$218,574 for the six months ended June 20, 2003. This increase of 18 percent was
also primarily due to the increase in the subscriber base discussed above. Base
ARPU (which does not include roaming revenue) decreased slightly in the second
quarter of 2004 to $56 compared to $57 in the second quarter of 2003. Base ARPU
in the first six months of 2004 was $56 which was consistent with base ARPU of
$56 in the first six months of 2003.
Roaming and wholesale revenue is comprised of revenue from Sprint and
other PCS subscribers based outside of our territory that roam onto our portion
of the PCS network of Sprint as well as revenue from resellers of PCS service
whose subscribers use our portion of the PCS network of Sprint.
Roaming revenue was $45,774 for the quarter ended June 30, 2004
compared to $34,259 for the quarter ended June 30, 2003. This increase of 34
percent was primarily due to a 40 percent increase in inbound roaming minutes to
553 million for the quarter ended June 30, 2004 compared to 395 million for the
quarter ended June 30, 2003. Roaming revenue was $86,412 for the six months
ended June 30, 2004 compared to $65,396 for the six months ended June 30, 2003.
This increase of 32 percent was primarily due to a 43 percent increase in
inbound roaming minutes to 1,050 million for the six months ended June 30, 2004
compared to 735 million for the six months ended June 30, 2003. The percentage
increase in revenue in both the three and six month periods ended June 30, 2004
was less than the respective percentage increases in minutes due to declining
rates from carriers other than Sprint. We have a reciprocal roaming rate
arrangement with Sprint where per-minute charges for inbound and outbound
roaming related to Sprint subscribers are identical. This rate has been 5.8
cents per minute since January 1, 2003. The November 2003 amendments to our
affiliation agreements with Sprint (as amended in March 2004) that became
effective on December 1, 2003 after the completion of our debt exchange, fixed
our reciprocal roaming rate with Sprint at 5.8 cents per minute until December
31, 2006. We are currently a net receiver of roaming with Sprint, meaning that
other Sprint subscribers roam onto our network at a higher rate than our
subscribers roam onto other portions of the PCS network of Sprint. The ratio of
inbound to outbound Sprint roaming minutes was 1.13 to 1 for the six months
ended June 30, 2004 and we expect this margin to trend close to 1 to 1 over
time. The toll rate for long distance charges associated with Sprint roaming is
expected to decline gradually from its current rate of between approximately 1.5
and 2 cents per minute. We have experienced a significant increase in the volume
of inbound roaming traffic from PCS providers other than Sprint. This
29
traffic is settled at rates separately negotiated by Sprint on our behalf with
the other PCS providers and has declined in some cases during 2004 compared to
2003.
Wholesale revenue was $5,931 for the quarter ended June 30, 2004
compared to $781 for the quarter ended June 30, 2003. This increase of 659
percent was due to the addition of revenue related to subscribers of another PCS
carrier with whom Sprint entered into an agreement to allow those subscribers to
use the PCS network of Sprint on a wholesale basis meaning all minutes of use
for those subscribers in their home areas are on the PCS network of Sprint.
Wholesale revenue was $8,446 for the six months ended June 30, 2004 compared to
$1,434 for the six months ended June 30, 2003. This increase of 489 percent was
also due to the addition of wholesale subscribers discussed above.
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 cost of products sold are recorded for all
products that are sold through our retail stores as well as those sold to our
local indirect agents. The cost of handsets sold generally exceeds the retail
sales price as we subsidize the price of handsets for competitive reasons.
Sprint's handset return policy allows customers to return their handsets for a
full refund within 14 days of purchase. When handsets are returned to us, we may
be able to reissue the handsets to customers at little additional cost to us.
However, when handsets are returned to Sprint for refurbishing, we may receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
Product sales revenue for the second quarter of 2004 was $8,055
compared to $5,804 for the second quarter of 2003. Cost of products sold for the
second quarter of 2004 was $16,379 compared to $12,399 for the second quarter of
2003. As such, the subsidy on handsets sold through our retail and local
indirect channels was $8,324 in the second quarter of 2004 and $6,595 in the
second quarter of 2003. Product sales revenue for the first six months of 2004
was $16,846 compared to $11,098 for the first six months of 2003. Cost of
products sold for the first six months of 2004 was $36,162 compared to $25,243
for the first six months of 2003. As such, the subsidy on handsets sold through
our retail and local indirect channels was $19,316 in the first six months of
2004 and $14,145 in the first six months of 2003. The increase in subsidies of
$1,729 and $5,171 in the three and six months ended June 30, 2004, respectively,
is primarily due to an increase in the number of activations through our retail
and local indirect channels of approximately 14,000 and 27,000, respectively. In
addition to the increase in the number of activations, we also experienced an
increase in subsidies through the retail and indirect channels relating to
existing subscribers upgrading their handsets in 2004.
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 tower leases and
maintenance as well as backhaul costs, which are costs associated with
transporting wireless calls across our portion of the PCS network of Sprint to
another carrier's network. In addition, cost of service and operations includes
outbound roaming costs, long distance charges, 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
$91,062 in the second quarter of 2004 were approximately 13 percent higher than
the $80,282 incurred in the second quarter of 2003. Expenses of $177,278 in the
first six months of 2004 were approximately 11 percent higher than the $159,599
incurred in the first six months of 2003. The increase in expenses in the second
quarter and first six months of 2004 was due to the increased volume of traffic
carried on our network. Total minutes of use on our network were 2.2 billion
minutes in the second quarter of 2004 compared to 1.5 billion minutes in the
second quarter of 2003 for an increase in traffic of 47 percent. Total minutes
of use on our network were 4.2 billion minutes in the first six months of 2004
compared to 2.8 billion minutes in the first six months of 2003 for an increase
in traffic of 50 percent. The increase in costs was less than the increase in
traffic due to the leverage we experience in spreading our fixed network
operating costs over a larger volume of activity.
SELLING AND MARKETING EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
Selling and marketing expenses include advertising, promotion, sales commissions
and expenses related to our distribution channels including our retail store
expenses. In addition, we reimburse Sprint for the subsidy on handsets sold
through national retail stores due to the fact that these retailers purchase
their handsets from Sprint. This subsidy is recorded as a selling and marketing
expense. Total selling and marketing expenses of $31,839 in the second quarter
of 2004 were 20 percent higher than the $26,584 incurred in the second quarter
of 2003. Total selling and marketing expenses of $62,832 in the first six months
of 2004 were 15 percent higher than the $54,730 incurred in the first six months
of 2003. The increase experienced during the three months and six months ended
June 30, 2004 is attributable to an increase in variable costs due to the fact
that we
30
had more gross activations in the second quarter and first six months of
2004 than in the second quarter and first six months of 2003.
GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUDING NON-CASH COMPENSATION) -
General and administrative expenses include corporate costs and expenses such as
administration and finance. General and administrative expenses of $5,508 in the
second quarter of 2004 were 4 percent less than the $5,808 incurred in the
second quarter of 2003. General and administrative expenses of $10,987 in the
first six months of 2004 were 18 percent higher than the $9,333 incurred in the
first six months of 2003. General and administrative expenses include corporate
costs and expenses such as administration and finance. The increase in the first
six months of 2004 has been the result of increased professional fees being
driven by various efforts undertaken in preparing for the reporting requirements
under the Sarbanes-Oxley Act of 2002, additional legal fees incurred in defense
of class action lawsuits brought late in 2003 and additional personnel costs.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization includes
depreciation of our property and equipment as well as amortization of
intangibles. Depreciation is calculated on the straight line method over the
estimated useful lives of the underlying assets and totaled $17,965 in the
second quarter of 2004, which was 3 percent less than the $17,403 recorded in
the second quarter of 2003. Depreciation totaled $35,945 in the first six months
of 2004 which was 5 percent higher than the $34,268 recorded in the first six
months of 2003. The increase in the first six months of 2004 is due to the
increase in depreciable costs as a result of our capital expenditures in the
last six months of 2003 and the first six months of 2004. The slight decrease in
the second quarter of 2004 compared to the second quarter of 2003 was due to a
significant amount of asset disposals related to the replacement of certain
obsolete equipment as discussed below.
Amortization expense relates to intangible assets recorded in
connection with the acquisitions closed in 2001. We recorded two identifiable
intangibles in connection with each of the acquisitions, consisting of values
assigned to the agreements with Sprint and the customer base acquired.
Amortization expense of $7,558 in the second quarter of 2004 was 25 percent less
than the $10,016 in the second quarter of 2003. Amortization expense of $16,962
in the first six months of 2004 was 15 percent less than the $20,033 in the
first six months of 2003. The decrease in both the second quarter and first six
months of 2004 is due to the fact that the intangible asset related to the
subscriber base acquired became fully amortized in the first quarter of 2004.
IMPAIRMENT OF PROPERTY AND EQUIPMENT - We recorded impairments of
property and equipment in the second quarter and first six months of 2004 of
$2,604 and $2,910, respectively, compared to $34 and $394, in the second quarter
and first six months of 2003. Impairments recorded in both periods primarily
relate to the abandonment of certain network equipment that had become
technologically obsolete.
NON-CASH COMPENSATION -Non-cash compensation expense of $20 in the
second quarter of 2004 was 47 percent less than the $38 in the second quarter of
2003. Non-cash compensation expense of $40 in the first six months of 2004 was
49 percent less than the $79 in the first six months of 2003. The non-cash
compensation expense relates to the vesting of restricted Alamosa Holdings stock
that has been awarded to certain of our officers.
OPERATING INCOME (LOSS) - Our operating income for the second quarter
of 2004 was $20,394 compared to $2,830 for the second quarter of 2003,
representing an improvement of $17,564. Our operating income for the first six
months of 2004 was $26,903 compared to a loss of $7,177 for the first six months
of 2003, representing an improvement of $34,080. The improvement in operating
income is primarily attributable to the leverage we are experiencing in
spreading our fixed costs over a larger base of subscribers.
LOSS ON DEBT EXTINGUISHMENT - The loss on debt extinguishment of
$13,101 recorded in the first six months of 2004 relates to the repayment and
termination of our senior secured credit facility in January 2004. The loss is
comprised of $12,565 in net deferred loan fees related to the terminated credit
facility plus the recognition of $536 in other comprehensive loss related to
derivative instruments used for hedging interest rate risk on outstanding
borrowings under the credit facility.
INTEREST AND OTHER INCOME - Interest and other income represents
amounts earned on the investment of excess cash including restricted cash.
Income of $219 in the second quarter of 2004 was 12 percent less than the $248
earned in the second quarter of 2003. Income of $386 in the first six months of
2004 was 37 percent less than the $617 earned in
31
the first six months of 2003. The decrease in interest earned in the second
quarter is primarily due to declining interest rates in the market. The decrease
in interest earned in the first six months is also due to declining rates in the
market as well as the decrease in restricted cash of approximately $25 million
during the first six months of 2003.
INTEREST EXPENSE - Interest expense for the second quarter of 2004 and
2003 included non-cash interest of $6,278 and $8,825, respectively, related to
the accretion of senior discount notes, the amortization of debt issuance costs
and changes in the fair value of hedge instruments that do not qualify for hedge
accounting treatment. The decrease in total interest expense to $18,952 in the
second quarter of 2004 from $25,951 in the second quarter of 2003 is due to the
decreased level of debt after the debt exchange completed in November 2003
coupled with a lower interest rate on senior notes issued in November 2003 and
January 2004.
Interest expense for the first six months of 2004 and 2003 included
non-cash interest of $12,550 and $19,551, respectively. The decrease in total
interest expense to $37,187 in the first six months of 2004 from $52,488 in the
first six months of 2003 is also due to the decreased level of debt after the
debt exchange completed in November 2003 coupled with a lower interest rate on
senior notes issued in November 2003 and January 2004.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109 "Accounting
for Income Taxes." As of December 31, 2000, the net deferred tax asset consisted
primarily of temporary differences related to the treatment of organizational
costs, unearned compensation, interest expense and net operating loss carry
forwards. The net deferred tax asset was fully offset by a valuation allowance
as of December 31, 2000 because there was sufficient uncertainty as to whether
we would recognize the benefit of those deferred taxes in future periods. In
connection with the acquisitions 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 allowed us to realize the benefit of timing differences
which gave rise to the deferred tax asset. As a result, we released the
valuation allowance during the second quarter of 2001. Prior to 2001, all
deferred tax benefit had been fully offset by an increase in the valuation
allowance such that there was no financial statement impact with respect to
income taxes. With the reduction of the valuation allowance in 2001, we began to
reflect a deferred tax benefit in our consolidated statement of operations.
During 2003, we reinstated a valuation allowance to reflect the deferred tax
assets at the amounts expected to be realized. During the first six months of
2004, we recorded a 100 percent valuation allowance against all current net
operating losses generated for tax purposes and recorded $625 in current income
tax expense related to our expected alternative minimum tax ("AMT") liability
for 2004.
CASH FLOWS
OPERATING ACTIVITIES - Operating cash flows increased $42,161 in the
first six months of 2004 compared to the first six months of 2003. This increase
is primarily due to our increased income before non-cash items of $36,812
coupled with working capital changes of $5,349.
INVESTING ACTIVITIES - Our investing cash flows were negative $92,374
in the first six months of 2004 compared to positive $8,235 in the first six
months of 2003. The decrease of $100,609 is due primarily to three items. First,
our cash capital expenditures for the first six months of 2004 were $23,440
higher than that in the first six months of 2003 due to the payment of
obligations incurred in the fourth quarter of 2003. Secondly, the first six
months of 2004 included a decrease in restricted cash of $24,977 which is
reflected as a positive cash flow from investing activities in that quarter.
Restricted cash only decreased by $1 in the first six months of 2004.
Additionally, in the first six months of 2004, we established a short term
investment account in an effort to improve yields on excess liquidity. The
amount invested in the first six months of 2004 was $50,119.
FINANCING ACTIVITIES - Our financing cash flows increased in the first
six months of 2004 to a positive $35,520 from a negative $873 in the first six
months of 2003. Our financing cash flows in the first six months of 2003
primarily consisted of repayments on capital leases and capital distributions
paid to Alamosa Holdings.. In the first quarter of 2004, we received net
proceeds from an offering of senior notes of approximately $242 million which
were used to
32
permanently repay $200 million in borrowings outstanding under our senior
secured credit facility. We paid capital distributions to Alamosa Holdings of
$6,050 during the first six months of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through capital
contributions from our owners, debt financing and proceeds generated from public
offerings of our common stock. The proceeds from these transactions have been
used to fund the build-out of our portion of the PCS network of Sprint,
subscriber acquisition costs and working capital.
While we have incurred significant net losses since inception and
negative cash flows from operating activities through 2002, we generated
approximately $56 million and $62 million of cash flows from operating
activities for the year ended December 31, 2003 and the six months ended June
30, 2004, respectively. In November 2003, we completed a debt exchange that
provided for approximately $238 million of principal debt reduction.
As of June 30, 2004, we had $103 million of cash on hand as well as $50
million in short term investments which we believe will be sufficient to fund
expected capital expenditures and to cover our working capital and debt service
requirements (including dividends on preferred stock) for at least the next 12
months.
Our future liquidity will be dependent on a number of factors
influencing our projections of operating cash flows, including those related to
subscriber growth, ARPU, average monthly churn and cost per gross addition.
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.
FUTURE TRENDS THAT MAY AFFECT OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
During 2002 and 2003, we experienced overall declining net subscriber
growth compared to previous periods. This trend is attributable to increased
competition and slowing aggregate subscriber growth in the wireless
telecommunications industry. Although we did experience improvement in
subscriber growth in the second quarter and first six months of 2004, we are
currently experiencing net losses as we continue to add subscribers, which
requires a significant up-front investment to acquire those subscribers. If net
subscriber growth does not continue to improve, it will lengthen the amount of
time it will take for us to reach a sufficient number of subscribers to achieve
profitability.
We may experience a higher average monthly churn rate. Our average
monthly churn for the second quarter of 2004 was 2.1 percent compared to 2.7
percent for the year ended December 31, 2003 and 3.4 percent for the year ended
December 31, 2002. The rate of churn experienced in 2002 was the highest that we
have experienced on an annual basis since the inception of the Company. We
expect that in the near term churn may increase as a result of the
implementation of the FCC's WLNP mandate in all of our markets during the second
quarter of 2004. Through the second quarter of 2004, we have not experienced a
material impact to churn related to WLNP with respect to the markets in which we
operate. If average monthly churn increases over the long-term, we would lose
the cash flows attributable to those customers and have greater than projected
losses.
We may incur significant handset subsidy costs for existing customers
who upgrade to a new handset. As our customer base matures and technological
advances in our services take place, more existing customers will begin to
upgrade to new handsets to take advantage of these services. We have limited
historical experience regarding the rate at which existing customers upgrade
their handsets and if more customers upgrade than we are currently anticipating,
it could have a material adverse impact on our earnings and cash flows.
We may not be able to access the credit or equity markets for
additional capital if the liquidity discussed above is not sufficient for the
cash needs of our business. We continually evaluate options for additional
sources of capital to supplement our liquidity position and maintain maximum
financial flexibility. If the need for additional capital arises due to our
actual results differing significantly from our business plan or for any other
reason, we may be unable to raise additional capital.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(c) of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Each of our Chief
Executive Officer and Chief Financial Officer has evaluated the
effectiveness of our disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as
of the end of the period covered by this quarterly report, based on the
evaluation of these controls and procedures required by Rules 13a-15(b)
or 15d-15(b) under the Exchange Act. Based on such evaluation, such
officers have concluded that, as of the end of the period covered by
this quarterly report, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to us (including our consolidated subsidiaries) required to be
included in our reports filed or submitted under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in our internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
We place reliance on Sprint to adequately design its internal controls with
respect to the processes established to provide financial information and other
information to us and the other PCS Affiliates of Sprint. To address this issue,
Sprint engages its independent auditors to perform a periodic evaluation of
these controls and to provide a "Report on Controls Placed in Operation and
Tests of Operating Effectiveness for Affiliates" under guidance provided in
Statement of Auditing Standards No. 70. This report is provided semi-annually to
us.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 23, 2001, our board of directors, in a unanimous decision, terminated
the employment of Jerry Brantley, then President and COO of the Company. On
April 29, 2002, Mr. Brantley initiated litigation against us and our Chairman,
David E. Sharbutt in the District Court of Lubbock County, Texas, 22nd Judicial
District, alleging wrongful termination. In the litigation, Mr. Brantley
claimed, among other things, that our termination of his employment was without
cause under his employment agreement rather than a termination for
non-performance. As such, Mr. Brantley's claim sought money damages for (i)
severance pay equal to one year's salary at the time of his termination, (ii)
the value of certain unexercised stock options he owned at the time of his
termination, (iii) an allegedly unpaid bonus and (iv) exemplary damages, as well
as recovery of attorneys' fees and costs. On September 27, 2002, the Court
entered an Agreed Order Compelling Arbitration. A panel of three arbitrators was
selected. Mr. Brantley's claims against us and David Sharbutt, including claims
asserted in the Lubbock County lawsuit and in the arbitration, were resolved
pursuant to a settlement agreement dated February 6, 2004. The settlement does
not materially impact our consolidated financial statements or our operations.
In November and December 2003 and January 2004, multiple lawsuits were filed
against Alamosa Holdings and David E. Sharbutt, its Chairman and Chief Executive
Officer as well as Kendall W. Cowan, its Chief Financial officer. Steven
Richardson, our Chief Operating Officer, was also a named defendant in one of
the lawsuits. Each claim is a purported class action filed on behalf of a
putative class of persons who and/or entities that purchased Alamosa Holdings'
securities between January 9, 2001 and June 13, 2002, inclusive, and seeks
recovery of compensatory damages, fees and costs. Each lawsuit was filed in the
United States District Court for the Northern District of Texas, in either the
Lubbock Division or the Dallas Division. On February 27, 2004, the lawsuits were
consolidated into one action pending in the United States District Court for the
Northern District of Texas, Lubbock Division. On March 4, 2004, the Court
appointed the Massachusetts State Guaranteed Annuity Fund to serve as lead
plaintiff and approved its selection of lead counsel for the consolidated
action.
34
On May 18, 2004, the lead plaintiff filed a consolidated complaint. The
consolidated complaint names three of the original defendants (Alamosa Holdings,
David Sharbutt and Kendall Cowan), drops one of the original defendants (Steven
Richardson) and names two new defendants who are outside directors (Michael
Roberts and Steven Roberts). The putative class period remains the same. The
consolidated complaint alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, Rule 10b-5 promulgated thereunder, and Sections 11 and 15 of the
Securities Act. The consolidated complaint seeks recovery of compensatory
damages, fees, costs, recission or rescissory damages in connection with the
Sections 11 and 15 claims, and injunctive relief and/or disgorgement in
connection with defendants' insider trading proceeds. At the end of the putative
class period on June 13, 2002, Alamosa Holdings announced that its projection of
net subscriber additions for the second quarter of 2002 would be less than
previously projected. The consolidated complaint alleges, among other things,
that Alamosa Holdings made false and misleading statements about subscriber
additions during the putative class period. The consolidated complaint also
alleges that Alamosa Holdings' financial statements were false and misleading
because it improperly recognized revenue and failed to record adequate
allowances for uncollectible receivables. The defendants' motion to dismiss the
consolidated complaint was filed on July 26, 2004.
We believe that the defendants have meritorious defenses to these claims and
intend to vigorously defend these actions. No discovery has been taken at this
time, and the ultimate outcome is not currently predictable. There can be no
assurance that the litigation will be resolved in the defendants' favor and an
adverse resolution could adversely affect our financial condition.
On July 8 and 15, 2004, two shareholder derivative suits, each asserting
identical allegations, were filed in State District Court in Dallas County,
Texas on behalf of Alamosa Holdings against certain of its officers and
directors: David E. Sharbutt, its Chairman and Chief Executive Officer, Kendall
W. Cowan, its Chief Financial Officer, as well as other current and former
members of Alamosa Holdings' board of directors, including Scotty Hart, Michael
V. Roberts, Ray M. Clapp, Jr., Schuyler B. Marshall, Thomas F. Riley, Jr. Steven
C. Roberts, Jimmy R. White, Thomas B. Hyde and Tom M. Phelps. The suits also
name Alamosa Holdings as a nominal defendant. Based on allegations substantially
similar to the federal shareholder action, the suits assert claims for
defendants' alleged violations of state law, including breaches of fiduciary
duty, abuse of control, gross mismanagement, waste of corporate assets and
unjust enrichment that allegedly occurred between January 2001 and June 2002.
The suits seek recovery of damages, fees, costs, equitable and/or injunctive
remedies, and disgorgement of all profits, benefits and other compensation.
On November 26, 2003, Core Group PC filed a claim against Alamosa PCS and four
other PCS Affiliates of Sprint in the United States District Court for the
District of Kansas alleging copyright infringement related to the designs used
in Sprint retail stores. The complainant sought money damages and an injunction
against Alamosa PCS' continued use of the alleged copyrighted designs. This
claim was dismissed on June 4, 2004 with no adverse impact to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b) of Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b) of Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b) of Form 10-Q.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See the Exhibit Index following the signature page hereto for a
list of the exhibits filed pursuant to Item 601 of Regulation S-K:
35
(b) The following sets forth the current reports on Form 8-K that have been
filed during the quarterly period for which this report is filed:
None.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALAMOSA (DELAWARE), INC.
(Registrant)
/s/ David E. Sharbutt
-----------------------
David E. Sharbutt
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Kendall W. Cowan
-----------------------
Kendall W. Cowan
Chief Financial Officer
(Principal Financial and Accounting Officer)
37
EXHIBIT INDEX
Exhibit Number Exhibit Title
- -------------- -------------
3.1 Amended and Restated Certificate of Incorporation of Alamosa (Delaware),
Inc., filed as Exhibit 3.1 to Form 10-Q of Alamosa (Delaware), Inc. for the
quarterly period ended June 30, 2001, which exhibit is incorporated herein
by reference.
3.2 Amended and Restated Bylaws of Alamosa (Delaware), Inc., filed as Exhibit
3.2 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.
10.1+ Second Amended and Restated Alamosa Holdings, Inc. Employee Stock Purchase
Plan filed as Exhibit 10.39 to Amendment No. 1 to the Registration Statement
of Form S-4, dated July 14, 2004 (Registration No. 333-114592), of Alamosa
(Delaware), Inc., which exhibit is incorporated herein by reference.
10.2 Addendum VIII to Sprint PCS Management Agreement and Sprint PCS Services
Agreement, dated June 14, 2004, by and among Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company L.P. and Washington Oregon
Wireless, LLC, filed as Exhibit 10.65 to Amendment No. 1 to the Registration
Statement on Form S-4, dated July 14, 2004 (Registration No. 333-114592), of
Alamosa (Delaware), Inc., which exhibit is incorporated herein by reference.
10.3 Addendum XII to Sprint PCS Management Agreement and Sprint PCS Services
Agreement, dated June 14, 2004, by and among Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company L.P. and Texas
Telecommunications LP, filed as Exhibit 10.66 to Amendment No. 1 to the
Registration Statement on Form S-4, dated July 14, 2004 (Registration No.
333-114592), of Alamosa (Delaware), Inc., which exhibit is incorporated
herein by reference.
10.4 Addendum VII to Sprint PCS Management Agreement and Sprint PCS Services
Agreement, dated June 14, 2004, by and among Sprint Spectrum L.P.,
SprintCom, Inc., WirelessCo, L.P., Sprint Communications Company L.P. and
Southwest PCS, L.P., filed as Exhibit 10.67 to Amendment No. 1 to the
Registration Statement on Form S-4, dated July 14, 2004 (Registration No.
333-114592), of Alamosa (Delaware), Inc., which exhibit is incorporated
herein by reference.
10.5 Addendum XI to Sprint PCS Management Agreement and Sprint PCS Services
Agreement, dated June 14, 2004, by and among Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company L.P. and Alamosa Wisconsin
Limited Partnership, filed as Exhibit 10.68 to Amendment No. 1 to the
Registration Statement on Form S-4, dated July 14, 2004 (Registration No.
333-114592), of Alamosa (Delaware), Inc., which exhibit is incorporated
herein by reference.
10.6 Addendum XII to Sprint PCS Management Agreement and Sprint PCS Services
Agreement, dated June 14, 2004 by and among Sprint Spectrum L.P.,
WirelessCo, L.P., Sprint Communications Company L.P. and Alamosa
38
Missouri, LLC, filed as Exhibit 10.69 to Amendment No. 1 to the Registration
Statement on Form S-4, dated July 14, 2004 (Registration No. 333-114592), of
Alamosa (Delaware), Inc., which exhibit is incorporated herein by reference.
31.1* Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2* Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1* Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Exhibit is a management contract.
* Exhibit is filed herewith.
39