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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 September 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 November 11, 2004, 100 shares of common stock, $0.01 par value per share,
were issued and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS 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 September 30, 2004 and December 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the three months and nine months ended
September 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended September 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. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits 36
SIGNATURES 37
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA (DELAWARE), INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 106,291 $ 98,242
Restricted cash -- 1
Short term investments 50,342 --
Customer accounts receivable, net 45,164 28,034
Receivable from Sprint 18,531 22,947
Receivable from parent -- 1
Inventory 6,778 7,309
Prepaid expenses and other assets 10,798 9,763
Deferred customer acquisition costs 6,884 8,060
Deferred tax asset 4,572 4,572
-------------------- ---------------------
Total current assets 249,360 178,929
Property and equipment, net 431,363 434,840
Debt issuance costs, net 9,286 14,366
Intangible assets, net 424,283 448,354
Other noncurrent assets 4,700 6,393
-------------------- ---------------------
Total assets $ 1,118,992 $ 1,082,882
==================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 25,880 $ 33,166
Accrued expenses 41,188 37,325
Payable to Sprint 26,729 26,616
Payable to parent 475 --
Interest payable 8,423 5,353
Deferred revenue 23,284 22,742
Current installments of capital leases 168 481
-------------------- ---------------------
Total current liabilities 126,147 125,683
-------------------- ---------------------
Long term liabilities:
Capital lease obligations 777 812
Other noncurrent liabilities 6,225 8,693
Deferred tax liability 15,376 15,379
Senior secured debt -- 200,000
Senior notes 732,722 464,424
-------------------- ---------------------
Total long term liabilities 755,100 689,308
-------------------- ---------------------
Total liabilities 881,247 814,991
-------------------- ---------------------
Commitments and contingencies (see Note 14) -- --
Stockholder's equity:
Preferred stock, $.01 par value; 1,000 shares authorized;
no shares issued -- --
Common stock, $.01 par value; 9,000 shares authorized,
100 and 100 shares issued and outstanding, respectively -- --
Additional paid-in capital 1,007,692 1,015,991
Accumulated deficit (769,862) (747,425)
Unearned compensation (85) (145)
Accumulated other comprehensive loss, net of tax -- (530)
-------------------- ---------------------
Total stockholder's equity 237,745 267,891
-------------------- ---------------------
Total liabilities and stockholder's equity $ 1,118,992 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
Revenues:
Subscriber revenues $ 143,623 $ 116,665 $ 401,938 $ 335,239
Roaming and wholesale revenues 59,106 41,126 153,964 107,956
------------ ------------ ------------- -------------
Service revenues 202,729 157,791 555,902 443,195
Product sales 8,637 8,599 25,483 19,697
------------ ------------ ------------- -------------
Total revenue 211,366 166,390 581,385 462,892
------------ ------------ ------------- -------------
Costs and expenses:
Cost of service and operations (excluding non-cash
compensation of $2 and $4 for the three months
ended September 30, 2004 and 2003, respectively,
and $6 and $12 for the nine months ended September
30, 2004 and 2003, respectively) 99,250 83,313 276,528 242,912
Cost of products sold 20,265 14,913 56,427 40,156
Selling and marketing (excluding non-cash
compensation of $2 and $4 for the three months
ended September 30, 2004 and 2003, respectively
and $6 and $12 for the nine months ended 40,090 29,801 102,922 84,531
September 30, 2004 and 2003, respectively)
General and administrative expenses (excluding non-cash
compensation of $16 and $37 for the three months
ended September 30, 2004 and 2003, respectively,
and $48 and $100 for the nine months ended
September 30, 2004 and 2003, respectively) 5,648 3,980 16,635 12,117
Depreciation and amortization 25,886 28,235 78,793 82,536
Impairment of property and equipment 172 291 3,082 685
Non-cash compensation 20 45 60 124
------------ ------------ ------------- -------------
Total costs and expenses 191,331 160,578 534,447 463,061
------------ ------------ ------------- -------------
Income (loss) from operations 20,035 5,812 46,938 (169)
Loss on debt extinguishment -- -- (13,101) --
Debt exchange expenses -- (2,332) -- (3,528)
Interest and other income 358 186 744 803
Interest expense (19,206) (26,519) (56,393) (79,007)
------------ ------------ ------------- -------------
Income (loss) before income taxes 1,187 (22,853) (21,812) (81,901)
Income tax (expense) benefit -- 5,446 (625) 15,694
------------ ------------ ------------- -------------
Net income (loss) $ 1,187 $ (17,407) $ (22,437) $ (66,207)
============ ============ ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
4
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2004 2003
---------------- ---------------
Cash flows from operating activities:
Net loss $ (22,437) $ (66,207)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Non-cash compensation 60 124
Non-cash interest expense (benefit) on derivative instruments 6 (468)
Non-cash accretion of asset retirement obligations 139 524
Provision for bad debts 7,603 11,100
Depreciation and amortization of property and equipment 54,269 52,486
Amortization of intangible assets 24,524 30,050
Amortization of financing costs included in interest expense 718 3,362
Amortization of discounted interest -- 297
Loss on debt extinguishment 13,101 --
Deferred tax benefit -- (15,694)
Interest accreted on discount notes 18,351 26,483
Impairment of property and equipment 3,082 685
Debt exchange expenses -- 3,528
(Increase) decrease in:
Receivables (20,318) (3,950)
Receivable from/payable to parent 476 365
Inventory 531 1,390
Prepaid expenses and other assets 1,834 (1,138)
Increase (decrease) in:
Accounts payable and accrued expenses 7,069 (6,765)
---------------- ---------------
Net cash provided by operating activities 89,008 36,172
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 569 2,496
Purchases of property and equipment (63,765) (31,645)
Purchase of intangible asset (453) --
Change in restricted cash 1 34,724
Change in short term investments (50,342) --
---------------- ---------------
Net cash provided by (used in) investing activities (113,990) 5,575
---------------- ---------------
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 (8,206) --
Debt exchange expenses -- (3,528)
Capital distributions (8,348) (173)
Payments on capital leases (415) (884)
---------------- ---------------
Net cash provided by (used in) financing activities 33,031 (4,585)
---------------- ---------------
Net increase in cash and cash equivalents 8,049 37,162
Cash and cash equivalents at beginning of period 98,242 60,525
---------------- ---------------
Cash and cash equivalents at end of period $ 106,291 $ 97,687
================ ===============
Supplemental disclosure of non-cash financing and investing activities:
Asset retirement obligations capitalized $ 143 $ 1,243
Capitalized lease obligations incurred $ 67 $ 73
Change in accounts payable for purchases of property and equipment $ (9,532) $ (7,065)
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 September 30, 2004, the
unaudited consolidated statements of operations for the three months and
nine months ended September 30, 2004 and 2003, the unaudited consolidated
statements of cash flows for the nine months ended September 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 months and nine months ended September 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
incurred negative cash flows from operating activities through 2002, the
Company generated approximately $56 million and $89 million of cash flows
from operating activities for the year ended December 31, 2003 and the nine
months ended September 30, 2004, respectively. In November 2003, the
Company completed a debt exchange that provided for approximately $238
million of principal debt reduction.
As of September 30, 2004, the Company had $106 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 months
and nine months ended September 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 month and nine month periods ended September 30,
2004 and 2003 relate to the vesting of shares of restricted Alamosa
Holdings stock awarded to officers and directors and unrestricted 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
----------------- ---------------- ---------------- ----------------
Net income (loss) - as reported $ 1,187 $ (17,407) $ (22,437) $ (66,207)
Add: stock-based employee
compensation included in
reported net income (loss),
net of related tax 20 45 60 124
Deduct: stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (3,652) 127 (6,421) (3,296)
----------------- ---------------- ---------------- ----------------
Net loss - pro forma $ (2,445) $ (17,235) $ (28,798) $ (69,379)
================= ================ ================ ================
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 nine 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. The investment
account is managed by a third party in accordance with the board approved
investment policy and consists 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 short term
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 $5.7 million and $6.0 million at September 30,
2004 and December 31, 2003, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
----------------------- -----------------------
Net roaming receivable $ 15,331 $ 13,071
Accrued service revenue 2,982 2,584
Service fee refund -- 6,418
Other amounts due from Sprint 218 874
----------------------- -----------------------
$ 18,531 $ 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 and wholesale customers 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 $230.9 million and $188.1 million at September 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 nine months ended September 30, 2004 of $35
and $143, 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 nine months ended September 30, 2004, the Company recorded $139 in
accretion of asset retirement obligations and $96 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
9
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 during 2004.
In September 2004 the Company purchased the rights to additional territory
from Sprint in connection with an amendment of one of its management
agreements. The purchase price of $467 consisted of $14 allocated to
purchased equipment and $453 allocated to the value of the Sprint agreement
associated with the territory acquired. The intangible asset related to the
Sprint agreement will be amortized over the remaining original term of the
Sprint agreement at the time of purchase or approximately 14 years.
Intangible assets consist of:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------ -----------------------
Sprint affiliate and other agreements $ 532,653 $ 532,200
Accumulated amortization (108,370) (85,692)
------------------------ -----------------------
Subtotal 424,283 446,508
------------------------ -----------------------
Subscriber base acquired 29,500 29,500
Accumulated amortization (29,500) (27,654)
------------------------ -----------------------
Subtotal -- 1,846
------------------------ -----------------------
Intangible assets, net $ 424,283 $ 448,354
======================== =======================
Amortization expense relative to intangible assets was $7,562 and $10,017
for the three months ended September 30, 2004 and 2003, respectively.
Amortization expense relative to intangible assets was $24,524 and $30,050
for the nine months ended September 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 $ 32,090
2005 30,266
2006 30,266
2007 30,266
2008 30,266
Thereafter 295,653
----------------
$ 448,807
================
10
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
10. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
SENIOR NOTES:
12 7/8% Senior Discount Notes, net of discount $ 6,101 $ 5,556
12% Senior Discount Notes, net of discount 211,801 193,995
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 732,722 464,424
SENIOR SECURED CREDIT FACILITY -- 200,000
--------------------- ---------------------
TOTAL DEBT 732,722 664,424
Less current maturities -- --
--------------------- ---------------------
LONG TERM DEBT, EXCLUDING CURRENT MATURITIES $ 732,722 $ 664,424
===================== =====================
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.
11
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 to hedge a portion of the interest rate risk
associated with borrowings under the Senior Secured Credit Facility, as
discussed in Note 12.
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 was 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 nine
months ended September 30, 2003 resulted in an effective tax rate of 19.2
percent. For the nine months ended September 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 nine
months ended September 30, 2004 is negative 2.9 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
12
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 nine month
period ended September 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
nine months ended September 30, 2004.
During the nine month period ended September 30, 2003, the Company
recognized a gain of $707 (net of income tax expense of $439) in other
comprehensive income related to the change in fair values of derivative
instruments.
Total comprehensive income (loss) for the three months and nine months
ended September 30, 2004 and 2003 is illustrated below:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
Net income (loss) $ 1,187 $ (17,407) $ (22,437) $ (66,207)
Change in fair values of
derivative instruments,
net of income tax expense
(benefit) of $0, $244, $0
and $439, respectively -- 226 -- 707
---------------- ----------------- ---------------- -----------------
Comprehensive income (loss) $ 1,187 $ (17,181) $ (22,437) $ (65,500)
================ ================= ================ =================
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 and rebates 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 initially
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 was
to be 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
13
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 data
services from $0.0014 per Kb to $0.0020 per Kb and extended the fixed
reciprocal rates for voice and 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.
Expenses reflected in the consolidated statements of operations related to
the Sprint affiliation agreements are:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
Cost of service and other
operations $ 72,445 $ 61,229 $ 201,591 $ 169,943
Cost of products sold 20,265 14,913 56,427 40,156
Selling and marketing 16,858 11,199 38,067 36,155
---------------- ----------------- ---------------- -----------------
Total $ 109,568 $ 87,341 $ 296,085 $ 246,254
================ ================= ================ =================
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,
14
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 nine
months ended September 30, 2004, the Company paid $8,348 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 September 30, 2004, Alamosa Holdings has 479,849 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, 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
is currently pending before the Court.
The Company believes that Alamosa Holdings and the other 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
15
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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, the Company's Chairman and Chief Executive
Officer, Kendall W. Cowan, the Company's 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. On August 27, 2004, the lawsuits were
consolidated into one action pending in State District Court in Dallas
County, Texas. 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 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 of the senior notes and Alamosa Delaware Operations
LLC which is the Company's non-guarantor subsidiary (the "Non-Guarantor
Subsidiary") of the senior notes, as of September 30, 2004 and December 31,
2003 and for the three months and nine months ended September 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 September 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 SEPTEMBER 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------- -------------- ------------- ------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,680 $ 99,588 $ 23 $ -- $ 106,291
Short term investments 50,342 -- -- -- 50,342
Customer accounts receivable, net -- 45,164 -- -- 45,164
Receivable from Sprint -- 18,531 -- -- 18,531
Intercompany receivable 21,063 -- 394 (21,457) --
Inventory -- 6,778 -- -- 6,778
Investment in subsidiary 892,228 -- -- (892,228) --
Prepaid expenses and other assets -- 10,798 -- -- 10,798
Deferred customer acquisition costs -- 6,884 -- -- 6,884
Deferred tax asset -- 4,572 -- -- 4,572
------------- -------------- ------------- ------------- ------------
Total current assets 970,313 192,315 417 (913,685) 249,360
Property and equipment, net -- 431,363 -- -- 431,363
Debt issuance costs, net 9,286 -- -- -- 9,286
Intangible assets, net -- 424,283 -- -- 424,283
Other noncurrent assets -- 4,700 -- -- 4,700
------------- -------------- ------------- ------------- ------------
Total assets $ 979,599 $ 1,052,661 $ 417 $ (913,685) $ 1,118,992
============= ============== ============= ============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 25,880 $ -- $ -- $ 25,880
Accrued expenses 234 40,954 -- -- 41,188
Payable to Sprint -- 26,729 -- -- 26,729
Payable to parent 475 -- -- -- 475
Interest payable 8,423 -- -- -- 8,423
Deferred revenue -- 23,284 -- -- 23,284
Intercompany payable -- 21,457 -- (21,457) --
Current installments of capital leases -- 168 -- -- 168
------------- -------------- ------------- ------------- ------------
Total current liabilities 9,132 138,472 -- (21,457) 126,147
Capital lease obligations -- 777 -- -- 777
Other noncurrent liabilities -- 6,225 -- -- 6,225
Deferred tax liability -- 15,376 -- -- 15,376
Senior notes 732,722 -- -- -- 732,722
------------- -------------- ------------- ------------- ------------
Total liabilities 741,854 160,850 -- (21,457) 881,247
------------- -------------- ------------- ------------- ------------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital 1,007,692 -- -- -- 1,007,692
LLC member's equity -- 891,811 417 (892,228) --
Accumulated deficit (769,862) -- -- -- (769,862)
Unearned compensation (85) -- -- -- (85)
------------
------------- -------------- ------------- -------------
Total stockholder's equity 237,745 891,811 417 (892,228) 237,745
------------- -------------- ------------- ------------- ------------
Total liabilities and
stockholder's equity $ 979,599 $ 1,052,661 $ 417 $ (913,685) $ 1,118,992
============= ============== ============= ============= ============
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
Guarantor Non-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 SEPTEMBER 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------- ------------- ------------ -------------
Revenues:
Subscriber revenues $ -- $ 143,623 $ -- $ -- $ 143,623
Roaming and wholesale revenues -- 59,106 -- -- 59,106
-------------- ------------- ------------- ------------ -------------
Service revenues -- 202,729 -- -- 202,729
Product sales -- 8,637 -- -- 8,637
-------------- ------------- ------------- ------------ -------------
Total revenues -- 211,366 -- -- 211,366
Costs and expenses:
Cost of services and operations -- 99,250 -- -- 99,250
Cost of products sold -- 20,265 -- -- 20,265
Selling and marketing -- 40,090 -- -- 40,090
General and administrative expenses 1 5,647 -- -- 5,648
Depreciation and amortization -- 25,886 -- -- 25,886
Impairment of property and -- 172 -- -- 172
equipment
Non-cash compensation -- 20 -- -- 20
-------------- ------------- ------------- ------------ -------------
Income (loss) from operations (1) 20,036 -- -- 20,035
Equity in earnings of subsidiaries 20,132 -- -- (20,132) --
Interest and other income 234 124 -- -- 358
Interest expense (19,178) (28) -- -- (19,206)
-------------- ------------- ------------- ------------ -------------
Income before income taxes 1,187 20,132 -- (20,132) 1,187
Income taxes -- -- -- -- --
-------------- ------------- ------------- ------------ -------------
Net income $ 1,187 $ 20,132 $ -- $ (20,132) $ 1,187
============== ============= ============= ============ =============
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 SEPTEMBER 30, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Revenues:
Subscriber revenues $ -- $ 116,665 $ -- $ -- $ 116,665
Roaming and wholesale revenues -- 41,126 -- -- 41,126
------------ ------------ ------------ ------------ ------------
Service revenues -- 157,791 -- -- 157,791
Product sales -- 8,599 -- -- 8,599
------------ ------------ ------------ ------------ ------------
Total revenue -- 166,390 -- -- 166,390
Costs and expenses:
Cost of services and operations -- 83,313 -- -- 83,313
Cost of products sold -- 14,913 -- -- 14,913
Selling and marketing -- 29,801 -- -- 29,801
General and administrative expenses 334 3,646 -- -- 3,980
Depreciation and amortization -- 28,235 -- -- 28,235
Impairment of property and equipment -- 291 -- -- 291
Non-cash compensation -- 45 -- -- 45
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (334) 6,146 -- -- 5,812
Equity in earnings of subsidiaries 5,439 -- -- (5,439) --
Debt exchange expenses -- (2,332) -- -- (2,332)
Interest and other income 128 58 -- -- 186
Interest expense (22,640) (3,879) -- -- (26,519)
------------- ------------- ------------ ------------ -------------
Loss before income tax benefit (17,407) (7) -- (5,439) (22,853)
Income tax benefit -- 5,446 -- -- 5,446
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (17,407) $ 5,439 $ -- $ (5,439) $ (17,407)
============ ============ ============ ============= ============
20
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- ------------- ------------- ------------ -------------
Revenues:
Subscriber revenues $ -- $ 401,938 $ -- $ -- $ 401,938
Roaming and wholesale revenues -- 153,964 -- -- 153,964
-------------- ------------- ------------- ------------ -------------
Service revenues -- 555,902 -- -- 555,902
Product sales -- 25,483 -- -- 25,483
-------------- ------------- ------------- ------------ -------------
Total revenues -- 581,385 -- -- 581,385
Costs and expenses:
Cost of services and operations -- 276,528 -- -- 276,528
Cost of products sold -- 56,427 -- -- 56,427
Selling and marketing -- 102,922 -- -- 102,922
General and administrative expenses 665 15,970 -- -- 16,635
Depreciation and amortization -- 78,793 -- -- 78,793
Impairment of property and equipment -- 3,082 -- -- 3,082
Non-cash compensation -- 60 -- -- 60
-------------- ------------- ------------- ------------ -------------
Income (loss) from operations (665) 47,603 -- -- 46,938
Equity in earnings of subsidiaries 34,152 -- -- (34,152) --
Loss on debt extinguishment -- (13,101) -- -- (13,101)
Interest and other income 461 283 -- -- 744
Interest expense (55,760) (633) -- -- (56,393)
-------------- ------------- ------------- ------------ -------------
Income (loss) before income taxes (21,812) 34,152 -- (34,152) (21,812)
Income taxes (625) -- -- -- (625)
-------------- ------------- ------------- ------------ -------------
Net income (loss) $ (22,437) $ 34,152 $ -- $ (34,152) $ (22,437)
============== ============= ============= ============ =============
21
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
--------------- --------------- ------------- -------------- ---------------
Revenues:
Subscriber revenues $ -- $ 335,239 $ -- $ -- $ 335,239
Roaming and wholesale revenues -- 107,956 -- -- 107,956
------------ --------------- ------------ ----------- ------------
Service revenues -- 443,195 -- -- 443,195
Product sales -- 19,697 -- -- 19,697
------------ --------------- ------------ ----------- ------------
Total revenue -- 462,892 -- -- 462,892
Costs and expenses:
Cost of services and operations -- 242,912 -- -- 242,912
Cost of products sold -- 40,156 -- -- 40,156
Selling and marketing -- 84,531 -- -- 84,531
General and administrative expenses 832 11,285 -- -- 12,117
Depreciation and amortization -- 82,536 -- -- 82,536
Impairment of property and equipment -- 685 -- -- 685
Non-cash compensation -- 124 -- -- 124
----------- --------------- ------------ ----------- ------------
Income (loss) from operations (832) 663 -- -- (169)
Equity in earnings of subsidiaries 1,128 -- -- (1,128) --
Debt exchange expenses -- (3,528) -- -- (3,528)
Interest and other income 567 236 -- -- 803
Interest expense (67,070) (11,937) -- -- (79,007)
----------- ---------------- ------------ ----------- ------------
Loss before income tax benefit (66,207) (14,566) -- (1,128) (81,901)
Income tax benefit -- 15,694 -- -- 15,694
----------- --------------- ------------ ----------- ------------
Net income (loss) $ (66,207) $ 1,128 $ -- $ (1,128) $ (66,207)
=========== =============== ============ ============ ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
----------- ----------- ---------- ---------- ------------
Cash flows from operating activities:
Net income (loss) $ (22,437) $ 34,152 $ -- $(34,152) $ (22,437)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Equity in earnings of subsidiaries (34,152) -- -- 34,152 --
Non-cash compensation expense -- 60 -- -- 60
Non-cash interest expense on
derivative instruments -- 6 -- -- 6
Non-cash accretion of asset
retirement obligation -- 139 -- -- 139
Provision for bad debts -- 7,603 -- -- 7,603
Depreciation and amortization of
property and equipment -- 54,269 -- -- 54,269
Amortization of intangible assets -- 24,524 -- -- 24,524
Amortization of financing costs
included in interest expense 634 84 -- -- 718
Loss on debt extinguishment -- 13,101 -- -- 13,101
Interest accreted on discount notes 18,351 -- -- -- 18,351
Impairment of property and equipment -- 3,082 -- -- 3,082
(Increase) decrease in:
Receivables -- (20,318) -- -- (20,318)
Receivable from/payable to parent 476 -- -- -- 476
Inventory -- 531 -- -- 531
Prepaid expenses and other assets 194 1,640 -- -- 1,834
Increase (decrease) in:
Accounts payable and accrued expenses 3,837 3,232 -- -- 7,069
----------- ----------- ---------- ---------- ------------
Net cash provided by (used in)
operating activities (33,097) 122,105 -- -- 89,008
----------- ----------- ---------- ---------- ------------
Cash flows from investing activities:
Proceeds from sale of assets -- 569 -- -- 569
Purchases of property and equipment -- (63,765) -- -- (63,765)
Purchases of intangible assets -- (453) -- -- (453)
Investment in subsidiary (198,612) 198,612 -- -- --
Change in restricted cash 1 -- -- -- 1
Change in short term investments (50,342) -- -- -- (50,342)
Change in intercompany balances 27,742 (27,742) -- -- --
----------- ----------- ---------- ---------- ------------
Net cash provided by (used in)
investing activities (221,211) 107,221 -- -- (113,990)
----------- ----------- ---------- ---------- ------------
Cash flows from financing activities:
Issuance of senior notes 250,000 -- -- -- 250,000
Repayment of secured debt -- (200,000) -- -- (200,000)
Debt issuance costs (8,206) -- -- -- (8,206)
Capital distribution to parent (8,348) -- -- -- (8,348)
Payments on capital leases -- (415) -- -- (415)
----------- ----------- ---------- ---------- ------------
Net cash provided by (used in)
financing activities 233,446 (200,415) -- -- 33,031
----------- ----------- ---------- ---------- ------------
Net increase (decrease) in cash
and cash equivalents (20,862) 28,911 -- -- 8,049
Cash and cash equivalents at
beginning of period 27,542 70,677 23 -- 98,242
----------- ----------- ---------- ---------- ------------
Cash and cash equivalents at end of
period $ 6,680 $ 99,588 $ 23 $ -- $ 106,291
=========== =========== ========== ========== ============
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 NINE MONTHS ENDED SEPTEMBER 30, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
-------------- --------------- ------------- --------------- -------------
Cash flows from operating activities:
Net income (loss) $ (66,207) $ 1,128 $ -- $ (1,128) $ (66,207)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Equity in earnings of subsidiaries (1,128) -- -- 1,128 --
Non-cash compensation expense -- 124 -- -- 124
Non-cash interest benefit on
derivative instruments -- (468) -- -- (468)
Non-cash accretion of asset
retirement obligation -- 524 -- -- 524
Provision for bad debts -- 11,100 -- -- 11,100
Depreciation and amortization of property
and equipment -- 52,486 -- -- 52,486
Amortization of intangibles assets -- 30,050 -- -- 30,050
Amortization of financing costs included in
interest expense 1,524 1,838 -- -- 3,362
Amortization of discounted interest 297 -- -- -- 297
Deferred tax benefit -- (15,694) -- -- (15,694)
Interest accreted on discount notes 26,483 -- -- -- 26,483
Impairment of property and equipment -- 685 -- -- 685
Debt exchange expenses -- 3,528 -- -- 3,528
(Increase) decrease in:
Receivables 973 (4,923) -- -- (3,950)
Receivable from/payable to parent 365 -- -- -- 365
Inventory -- 1,390 -- -- 1,390
Prepaid expenses and other assets (406) (732) -- -- (1,138)
Increase (decrease) in:
Accounts payable and accrued expenses (12,853) 6,088 -- -- (6,765)
------------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities (50,952) 87,124 -- -- 36,172
------------ ----------- ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of assets -- 2,496 -- -- 2,496
Purchases of property and equipment -- (31,645) -- -- (31,645)
Change in restricted cash 34,724 -- -- -- 34,724
Change in intercompany balances 26,061 (26,061) -- -- --
------------ ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities 60,785 (55,210) -- -- 5,575
------------ ----------- ----------- ----------- ------------
Cash flows from financing activities:
Debt exchange expenses -- (3,528) -- -- (3,528)
Capital distribution to parent (173) -- -- -- (173)
Payments on capital leases -- (884) -- -- (884)
------------ ------------ ----------- ----------- -------------
Net cash used in financing activities (173) (4,412) -- -- (4,585)
------------- ----------- ----------- ----------- -------------
Net increase in cash and cash equivalents 9,660 27,502 -- -- 37,162
Cash and cash equivalents at beginning of period 17,821 42,681 23 -- 60,525
------------ ----------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 27,481 $ 70,183 $ 23 $ -- $ 97,687
============ =========== =========== =========== ============
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
September 30, 2004, we had total licensed POPs of over 15.8 million, covered
POPs of approximately 12.3 million and total subscribers of approximately
866,000.
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 tax authority.
As part of our affiliation agreements with Sprint, we have contracted with
Sprint to provide 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 purchased the rights to
additional territory from Sprint in September 2004 which resulted in the
recognition of an intangible asset related to the rights under the Sprint
agreement. This intangible asset is being amortized over the remaining original
term of the related Sprint agreement or approximately 14 years.
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 75
percent of our total assets at September 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.
28
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT - We
place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of revenue, cost of service, selling and
marketing costs and the adequacy of our allowance for uncollectible accounts
based on this data we receive from Sprint. We obtain assurance as to the
accuracy of this data through analytic review and reliance on the service
auditor report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint could have a
material adverse effect on our results of operations and cash flow.
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 COMPARED TO THE
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total subscribers
of approximately 866,000 at September 30, 2004 compared to approximately 693,000
at September 30, 2003. This growth of approximately 173,000 subscribers or 25
percent year over year compares to 17 percent growth from September 30, 2002 to
September 30, 2003.
Average monthly churn for the third quarter of 2004 was approximately 2.4
percent compared to approximately 2.9 percent for the third quarter of 2003.
This level of churn in the third quarter of 2004 was slightly higher than that
in the second quarter of 2004 when we experienced average monthly churn of 2.1
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
amortization of deferred activation fees and charges for the use of various
features including PCS Vision, the wireless web and voice activated dialing.
Subscriber revenues were $143,623 for the quarter ended September 30, 2004
compared to $116,665 for the quarter ended September 30, 2003. This increase of
23 percent was primarily due to the 25 percent increase in our subscriber base
discussed above. Subscriber revenues were $401,938 for the nine months ended
September 30, 2004 compared to $335,239 for the nine months ended September 30,
2003. This increase of 20 percent was also primarily due to the increase in the
subscriber base discussed above. Base ARPU (which does not include roaming
revenue) remained consistent in the third quarter of 2004 at $57 compared to $57
in the third quarter of 2003. Base ARPU in the first nine months of 2004 was $56
which was consistent with base ARPU of $56 in the first nine 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 $49,475 for the quarter ended September 30, 2004
compared to $40,128 for the quarter ended September 30, 2003. This increase of
23 percent was primarily due to a 29 percent increase in inbound roaming minutes
to 604 million for the quarter ended September 30, 2004 compared to 468 million
for the quarter ended September 30, 2003. Roaming revenue was $135,887 for the
nine months ended September 30, 2004 compared to $105,523 for the nine months
ended September 30, 2003. This increase of 29 percent was primarily due to a 37
percent increase in inbound roaming minutes to 1,654 million for the nine months
ended September 30, 2004 compared to 1,203 million for the nine months ended
September 30, 2003. The percentage increase in revenue in both the three and
nine month periods ended September 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 pursuant to
which 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 the minute volume from other Sprint
subscribers roaming onto our network is
29
greater than the minute volume from our subscribers roaming onto other portions
of the PCS network of Sprint. The ratio of inbound to outbound Sprint roaming
minutes was 1.1 to 1 for the nine months ended September 30, 2004. We have
experienced a significant increase in the volume of inbound roaming traffic from
PCS providers other than Sprint. This 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 $9,631 for the quarter ended September 30, 2004
compared to $998 for the quarter ended September 30, 2003. This increase of 865
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. As a result, all minutes of
use for those subscribers in their home areas as well as when roaming are on the
PCS network of Sprint. Wholesale revenue was $18,077 for the nine months ended
September 30, 2004 compared to $2,433 for the nine months ended September 30,
2003. This increase of 643 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 third quarter of 2004 was $8,637 compared to
$8,599 for the third quarter of 2003. Cost of products sold for the third
quarter of 2004 was $20,265 compared to $14,913 for the third quarter of 2003.
As such, the subsidy on handsets sold through our retail and local indirect
channels was $11,628 in the third quarter of 2004 and $6,314 in the third
quarter of 2003. Product sales revenue for the first nine months of 2004 was
$25,483 compared to $19,697 for the first nine months of 2003. Cost of products
sold for the first nine months of 2004 was $56,427 compared to $40,156 for the
first nine months of 2003. The subsidy on handsets sold through our retail and
local indirect channels was $30,944 in the first nine months of 2004 and $20,459
in the first nine months of 2003. The increase in subsidies of $4,793 and $9,964
in the three and nine months ended September 30, 2004, respectively is primarily
due to an increase in the number of activations through our retail and local
indirect channels of approximately 29,000 and 55,700, 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 operating 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
$99,250 in the third quarter of 2004 were approximately 19 percent higher than
the $83,313 incurred in the third quarter of 2003. Expenses of $276,528 in the
first nine months of 2004 were approximately 14 percent higher than the $242,912
incurred in the first nine months of 2003. The increase in expenses in the third
quarter and first nine months of 2004 was due to the increased volume of traffic
carried on our network. Total minutes of use on our network were 2.5 billion
minutes in the third quarter of 2004 compared to 1.6 billion minutes in the
third quarter of 2003 for an increase in traffic of 56 percent. Total minutes of
use on our network were 6.6 billion minutes in the first nine months of 2004
compared to 4.4 billion minutes in the first nine months of 2003 for an increase
in traffic of 50 percent. The increase in costs was lower relative to 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.
30
Total selling and marketing expenses of $40,090 in the third quarter of 2004
were 35 percent higher than the $29,801 incurred in the third quarter of 2003.
Total selling and marketing expenses of $102,922 in the first nine months of
2004 were 22 percent higher than the $84,531 incurred in the first nine months
of 2003. The increase experienced during the three months and nine months ended
September 30, 2004 is attributable to an increase in variable costs resulting
from increases in gross activations in the third quarter and first nine months
of 2004 as compared to the third quarter and first nine 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 $5,648 in the
third quarter of 2004 were 42 percent higher than the $3,980 incurred in the
third quarter of 2003. General and administrative expenses of $16,635 in the
first nine months of 2004 were 37 percent higher than the $12,117 incurred in
the first nine months of 2003. General and administrative expenses include
corporate costs and expenses such as administration and finance. The increase in
the first nine 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 $18,324 in the third
quarter of 2004, which was consistent with the $18,217 recorded in the third
quarter of 2003. Depreciation totaled $54,269 in the first nine months of 2004
which was 3 percent higher than the $52,486 recorded in the first nine months of
2003. The increase in the first nine months of 2004 is due to the increase in
depreciable costs as a result of our capital expenditures in the last three
months of 2003 and the first nine months of 2004.
Amortization expense relates to identifiable intangible assets we have
recorded related to the agreements with Sprint and the customer base acquired in
connection with purchase transactions. Amortization expense of $7,562 in the
third quarter of 2004 was 25 percent less than the $10,017 in the third quarter
of 2003. Amortization expense of $24,524 in the first nine months of 2004 was 18
percent less than the $30,050 in the first nine months of 2003. The decrease in
both the third quarter and first nine 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 third quarter and first nine months of 2004 of $172 and
$3,082, respectively, compared to $291 and $685, in the third quarter and first
nine 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 third
quarter of 2004 was 56 percent less than the $45 in the third quarter of 2003.
The expense relates to vesting of restricted stock that had been awarded to
certain of our officers.
Non-cash compensation expense of $60 in the first nine months of 2004 was
52 percent less than the $124 in the first nine months of 2003. The expense for
the first nine months of 2004 and 2003 relates to vesting of restricted stock
that had been awarded to certain of our officers.
OPERATING INCOME (LOSS) - Our operating income for the third quarter of
2004 was $20,035 compared to $5,812 for the third quarter of 2003, representing
an improvement of $14,223. Our operating income for the first nine months of
2004 was $46,938 compared to a loss of $169 for the first nine months of 2003,
representing an improvement of $47,107. The improvement in operating income is
primarily attributable to the leverage we have achieved 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 nine 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.
31
DEBT EXCHANGE EXPENSES - Debt exchange expenses recorded in the third
quarter and first nine months of 2003 of $2,332 and $3,528, respectively,
consist of professional fees and transaction costs associated with the debt
exchange that was completed in November 2003 that were allocated to the new
notes issued in the exchange and were expensed in accordance with the accounting
provisions of SFAS No. 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructuring." Because the debt exchange was considered a troubled debt
restructuring under the provisions of SFAS No. 15, transaction costs associated
with the granting of an equity interest to the holders of the notes were
recorded as a reduction in the fair value of the Series B Redeemable Convertible
Preferred Stock of Alamosa Holdings issued in the debt exchange. The remaining
transaction costs were expensed. We had no such debt exchange expenses in 2004.
INTEREST AND OTHER INCOME - Interest and other income represents amounts
earned on the investment of excess cash including restricted cash. Income of
$358 in the third quarter of 2004 was 92 percent higher than the $186 earned in
the third quarter of 2003. Income of $744 in the first nine months of 2004 was 7
percent less than the $803 earned in the first nine months of 2003. The increase
in interest and other income earned in the third quarter is primarily due to the
fact that during 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. The decrease in
interest and other income earned in the first nine months is due to a decrease
in restricted cash of approximately $10 million during the first quarter of 2003
offset by the improvement in yield on excess liquidity during the second and
third quarters of 2004 as discussed above.
INTEREST EXPENSE - Interest expense for the third quarter of 2004 and 2003
included non-cash interest of $6,525 and $10,123, 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 $19,206 in the
third quarter of 2004 from $26,519 in the third 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 nine months of 2004 and 2003 included
non-cash interest of $19,075 and $29,674, respectively. The decrease in total
interest expense to $56,393 in the first nine months of 2004 from $79,007 in the
first nine 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 intangible assets.
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 2004, we have recorded a 100 percent
valuation allowance against all current net operating losses generated for tax
purposes. The current income tax expense related to our expected AMT liability
recorded in the first nine months of 2004 was $625.
CASH FLOWS
OPERATING ACTIVITIES - Operating cash flows increased $52,836 in the first
nine months of 2004 compared to the first nine months of 2003. This increase is
primarily due to our increased income before non-cash items of $53,145.
32
INVESTING ACTIVITIES - Our investing cash flows were negative $113,990 in
the first nine months of 2004 compared to positive $5,575 in the first nine
months of 2003. The decrease of $119,565 is due primarily to three items. First,
our cash capital expenditures for the first nine months of 2004 were $32,120
higher than that in the first nine months of 2003 due to the payment of
obligations incurred in the fourth quarter of 2003. Secondly, the first nine
months of 2003 included a decrease in restricted cash of $34,724 which is
reflected as a positive cash flow from investing activities in that quarter.
Restricted cash only decreased by $1 in the first nine months of 2004.
Additionally, in the first nine 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 nine months of 2004 was $50,342.
FINANCING ACTIVITIES - Our financing cash flows increased in the first nine
months of 2004 to a positive $33,031 from a negative $4,585 in the first nine
months of 2003. Our financing cash flows in the first nine months of 2003
primarily consisted of repayments on capital leases reduced by capital
distributions to Alamosa Holdings and debt exchange expenses. In the first
quarter of 2004, we received net proceeds from an offering of senior notes of
approximately $242 million which were used to permanently repay $200 million in
borrowings outstanding under our senior secured credit facility. We paid capital
distributions to Alamosa Holdings in the first nine months of 2004 of $8,348.
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 incurred
negative cash flows from operating activities through 2002, we generated
approximately $56 million and $89 million of cash flows from operating
activities for the year ended December 31, 2003 and the nine months ended
September 30, 2004, respectively. In November 2003, we completed a debt exchange
that provided for approximately $238 million of principal debt reduction.
As of September 30, 2004, we had $106 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 Alamosa Holdings' 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 have experienced improvement in
subscriber growth in the third quarter and first nine months of 2004, we are
continuing to incur 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 than we are currently
anticipating. Our average monthly churn for the third quarter of 2004 was 2.4
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. Although churn has declined over the past two years,
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 third
quarter of 2004. Through the third 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
33
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.
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
34
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.
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 is
currently pending before the Court.
We believe that Alamosa Holdings and the other 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. On August 27, 2004, the lawsuits
were consolidated into one action pending in State District Court in Dallas
County, Texas. 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. UNREGISTERED SALES OF EQUITY 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.
35
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.
See the Exhibit Index following the signature page hereto for a list of the
exhibits filed pursuant to Item 601 of Regulation S-K.
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.
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.
38