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 QUARTER ENDED JUNE 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-32357
ALAMOSA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2890997
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
5225 SOUTH LOOP 289, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X ] NO [ ]
As of August 14, 2003, 94,650,963 shares of common stock, $0.01 par value per
share, were issued and outstanding.
ALAMOSA HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Operations for the three months and six months ended June 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited) 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 31
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
JUNE 30, 2003 DECEMBER 31, 2002
------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 88,904 $ 61,737
Restricted cash 9,748 34,725
Customer accounts receivable, net 27,656 27,926
Receivable from Sprint 22,704 30,322
Interest receivable 404 973
Inventory 5,421 7,410
Prepaid expenses and other assets 7,618 7,239
Deferred customer acquisition costs 8,414 7,312
Deferred tax asset 5,988 5,988
------------- -------------
Total current assets 176,857 183,632
Property and equipment, net 434,187 458,946
Debt issuance costs, net 30,916 33,351
Intangible assets, net 468,388 488,421
Other noncurrent assets 7,699 7,802
------------- -------------
Total assets $ 1,118,047 $ 1,172,152
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,698 $ 27,203
Accrued expenses 36,777 34,903
Payable to Sprint 25,921 24,649
Interest payable 22,317 22,242
Deferred revenue 21,892 18,901
Current maturities of long term debt 7,500 --
Current installments of capital leases 698 1,064
------------- -------------
Total current liabilities 124,803 128,962
------------- -------------
Long term liabilities:
Capital lease obligations 973 1,355
Other noncurrent liabilities 9,598 10,641
Deferred tax liability 17,642 27,694
Senior secured debt 192,500 200,000
12 7/8% senior discount notes 286,239 268,862
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
------------- -------------
Total long term liabilities 906,952 908,552
------------- -------------
Total liabilities 1,031,755 1,037,514
------------- -------------
Commitments and contingencies (see Note 11) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no
shares issued -- --
Common stock, $.01 par value; 290,000,000 shares authorized,
94,650,963 and 94,171,938 shares issued and outstanding, respectively 947 942
Additional paid-in capital 800,543 800,260
Accumulated deficit (713,914) (664,720)
Unearned compensation (215) (294)
Accumulated other comprehensive loss, net of tax (1,069) (1,550)
------------- -------------
Total stockholders' equity 86,292 134,638
------------- -------------
Total liabilities and stockholders' equity $ 1,118,047 $ 1,172,152
============= =============
The accompanying notes are an integral part of the consolidated financial statements.
3
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------- -------------
Revenues:
Subscriber revenues $ 114,550 $ 92,580 $ 218,574 $ 186,078
Roaming revenues 35,040 33,457 66,830 60,025
------------ ------------ ------------- -------------
Service revenues 149,590 126,037 285,404 246,103
Product sales 5,804 4,752 11,098 13,073
------------ ------------ ------------- -------------
Total revenue 155,394 130,789 296,502 259,176
------------ ------------ ------------- -------------
Costs and expenses:
Cost of service and operations (excluding non-cash
compensation of $4 and $0 for the three months
ended June 30, 2003 and 2002, respectively, and
$8 and $0 for the six months ended June 30, 2003
and 2002, respectively) 80,282 85,289 159,599 163,818
Cost of products sold 12,399 9,113 25,243 23,230
Selling and marketing (excluding non-cash
compensation of $4 and $0 for the three months
ended June 30, 2003 and 2002, respectively and $8
and $0 for the six months ended June 30, 2003 and
2002, respectively) 26,584 26,960 54,730 55,857
General and administrative expenses (excluding non-cash
compensation of $191 and $0 for the three months
ended June 30, 2003 and 2002,
respectively, and $224 and $0 for the six months
ended June 30, 2003 and 2002, respectively) 5,918 3,053 9,583 6,788
Depreciation and amortization 27,419 26,344 54,301 51,207
Impairment of property and equipment 34 1,332 394 1,332
Non-cash compensation 199 -- 240 --
------------ ------------ ------------- -------------
Total costs and expenses 152,835 152,091 304,090 302,232
------------ ------------ ------------- -------------
Income (loss) from operations 2,559 (21,302) (7,588) (43,056)
Interest and other income 249 871 634 2,204
Interest expense (25,951) (25,820) (52,488) (50,674)
------------ ------------ ------------- -------------
Loss before income tax benefit (23,143) (46,251) (59,442) (91,526)
Income tax benefit 4,480 17,515 10,248 34,657
------------ ------------ ------------- -------------
Net loss $ (18,663) $ (28,736) $ (49,194) $ (56,869)
============ ============ ============= =============
Net loss per common share, basic and diluted $ (0.20) $ (0.31) $ (0.53) $ (0.61)
============ ============ ============= =============
Weighted average common shares outstanding,
basic and diluted 93,747,117 92,915,638 93,626,690 92,874,226
============ ============ ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
4
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
-------------- ---------------
Cash flows from operating activities:
Net loss $(49,194) $ (56,869)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Non-cash compensation 240 --
Provision for bad debts 10,000 19,265
Non-cash interest expense (benefit) on derivative instruments (261) 113
Depreciation and amortization of property and equipment 34,268 31,072
Amortization of intangible assets 20,033 20,135
Amortization of financing costs included in interest expense 2,237 2,081
Amortization of discounted interest 198 198
Deferred tax benefit (10,248) (34,657)
Interest accreted on discount notes 17,377 15,332
Impairment of property and equipment 394 1,332
Increase (decrease) in:
Receivables (1,543) (24,713)
Inventory 1,989 (58)
Prepaid expenses and other assets (1,378) (2,420)
Increase (decrease) in:
Accounts payable and accrued expenses (4,608) 4,361
-------- ----------
Net cash provided by (used in) operating activities 19,504 (24,828)
-------- ----------
Cash flows from investing activities:
Proceeds from sale of assets 2,454 379
Purchases of property and equipment (19,196) (67,001)
Other -- 41
-------- ----------
Net cash used in investing activities (16,742) (66,581)
-------- ----------
Cash flows from financing activities:
Borrowings under senior secured debt -- 12,838
Stock options exercised -- 1
Shares issued to employee stock purchase plan 127 401
Payments on capital leases (699) (337)
Change in restricted cash 24,977 35,535
-------- ----------
Net cash provided by financing activities 24,405 48,438
-------- ----------
Net increase (decrease) in cash and cash equivalents 27,167 (42,971)
Cash and cash equivalents at beginning of period 61,737 104,672
-------- ----------
Cash and cash equivalents at end of period $ 88,904 $ 61,701
======== ==========
Supplemental disclosure of non-cash financing and
investing activities:
Capitalized lease obligations incurred $ 73 $ 365
Change in accounts payable for purchases of
property and equipment $ (6,790) $ (20,759)
The accompanying notes are an integral part of the consolidated financial statements.
5
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of June 30, 2003, the
unaudited consolidated statements of operations for the three months
and six months ended June 30, 2003 and 2002, the unaudited consolidated
statements of cash flows for the six months ended June 30, 2003 and
2002, and related footnotes, have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America. The financial information presented should be
read in conjunction with the audited consolidated financial statements
as of and for the year ended December 31, 2002. In the opinion of
management, the interim data includes all adjustments (consisting of
only normally recurring adjustments) necessary for a fair statement of
the results for the interim periods. Operating results for the three
months and six months ended June 30, 2003 are not necessarily
indicative of results that may be expected for the year ending December
31, 2003.
Basic and diluted net loss per share of common stock is computed by
dividing net loss for each period by the weighted-average outstanding
number of common shares. No conversion of common stock equivalents has
been assumed in the calculations since the effect would be
antidilutive. As a result, the number of weighted-average outstanding
common shares as well as the amount of net loss per share are the same
for basic and diluted net loss per share calculations for all periods
presented. Common stock equivalents excluded from diluted net loss per
share calculations consisted of options to purchase 8,440,710 and
5,834,359 shares of common stock at June 30, 2003 and 2002,
respectively. In addition, 800,000 shares of restricted stock that were
awarded in October and December of 2002 have been excluded from the
weighted-average outstanding number of common shares for the three and
six months ended June 30, 2003. These shares will be included in the
weighted-average outstanding number of common shares as the
restrictions lapse.
Certain reclassifications have been made to prior period balances to
conform to current period presentation.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa Holdings, Inc. ("Alamosa Holdings") is a PCS Affiliate of
Sprint with the exclusive right to provide wireless personal
communications service under the Sprint brand name in a territory
encompassing approximately 15.8 million residents. Alamosa Holdings was
formed in July 2000. Alamosa Holdings is a holding company and through
its subsidiaries provides wireless personal communications services,
commonly referred to as PCS, in the Southwestern, Northwestern and
Midwestern United States. Alamosa (Delaware), Inc. ("Alamosa
(Delaware)"), a subsidiary of Alamosa Holdings, was formed in October
1999 under the name "Alamosa PCS Holdings, Inc." to operate as a
holding company in anticipation of its initial public offering. On
February 3, 2000, Alamosa (Delaware) completed its initial public
offering. Immediately prior to the initial public offering, shares of
Alamosa (Delaware) were exchanged for Alamosa PCS LLC's ("Alamosa LLC")
membership interests, and Alamosa LLC became wholly owned by Alamosa
(Delaware). Alamosa Holdings and its subsidiaries are collectively
referred to in these financial statements as the "Company."
On December 14, 2000, Alamosa (Delaware) formed a new holding company
pursuant to Section 251(g) of the Delaware General Corporation Law. In
that transaction, each share of Alamosa (Delaware) was converted into
one share of the new holding company, and the former public company,
which was renamed "Alamosa (Delaware), Inc." became a wholly owned
subsidiary of the new holding company, which was renamed "Alamosa PCS
Holdings, Inc."
6
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
On February 14, 2001, Alamosa Holdings became the new public holding
company of Alamosa PCS Holdings, Inc. ("Alamosa PCS Holdings") and its
subsidiaries pursuant to a reorganization transaction in which a wholly
owned subsidiary of Alamosa Holdings was merged with and into Alamosa
PCS Holdings. As a result of this reorganization, Alamosa PCS Holdings
became a wholly owned subsidiary of Alamosa Holdings, and each share of
Alamosa PCS Holdings common stock was converted into one share of
Alamosa Holdings common stock. Alamosa Holdings' common stock is quoted
on the Over-the-Counter Bulletin Board under the symbol "ALMO."
3. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
capital contributions from owners, through debt financing and through
proceeds generated from public offerings of common stock. The Company
has incurred substantial net losses and negative cash flow from
operations since inception. Expenses are expected to exceed revenues
until the Company establishes a sufficient subscriber base. Management
expects operating losses to continue for the foreseeable future.
However, management expects operating losses to decrease in the future
as the Company obtains more subscribers.
As of June 30, 2003, the Company had $88,904 in cash and cash
equivalents plus an additional $9,748 in restricted cash held in escrow
for debt service requirements. The Company also had $25,000 remaining
on the revolving portion of the Senior Secured Credit Facility subject
to the restrictions discussed below.
On September 26, 2002 the Company entered into the sixth amendment to
the amended and restated credit agreement relative to the Senior
Secured Credit Facility, which among other things, modified certain
financial and statistical covenants as discussed in Note 8. As a result
of the amendment, the Company is required to maintain a minimum cash
balance of $10,000.
The September 26, 2002 amendment also placed restrictions on the
ability to draw on the $25,000 revolving portion of the Senior Secured
Credit Facility. The first $10,000 can be drawn if cash balances fall
below $15,000 and the Company substantiates through tangible evidence
the need for such advances. The remaining $15,000 is available only at
such time as the leverage ratio is less than or equal to 5.5 to 1. As
of June 30, 2003, the Company's leverage ratio was 9.35 to 1.
Although management does not currently anticipate the need to raise
additional capital in the upcoming year, the Company's funding status
is dependent on a number of factors influencing projections of earnings
and operating cash flows including average monthly revenue per user
("ARPU"), cash cost per user ("CCPU"), customer churn and cost per
gross addition ("CPGA").
Should actual results differ significantly from these assumptions, the
Company's liquidity position could be adversely affected and the
Company could be in a position that would require it to raise
additional capital which may or may not be available on terms
acceptable to the Company, if at all, and could have a material adverse
effect on the Company's ability to achieve its intended business
objectives.
4. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. No
stock-based employee compensation cost is reflected in the consolidated
statements of operations for the three months or six months ended June
30, 2003 or 2002, as all options granted by the Company had an exercise
price equal to or greater than the market value of the underlying
common stock on the date of grant. Non-cash compensation expense
reflected in the consolidated statements of operations for the three
and six month periods ended June 30, 2003 relate to shares of
restricted stock awarded to officers and are not related to the
granting of stock options. The following table illustrates the effect
on net loss and net loss per share if the Company had
7
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2003 2002 2003 2002
----------- ------------ ----------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss -- as reported $(18,663) $(28,736) $(49,194) $(56,869)
Less stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects (1,917) (1,200) (3,348) (2,225)
-------- -------- -------- --------
Net loss -- pro forma $(20,580) $(29,936) $(52,542) $(59,094)
======== ======== ======== ========
Net loss per share -- as reported
Basic and diluted $ (0.20) $ (0.31) $ (0.53) $ (0.61)
======== ======== ======== ========
Net loss per share -- pro forma
Basic and diluted $ (0.22) $ (0.32) $ (0.56) $ (0.64)
======== ======== ======== ========
5. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable represent
amounts owed to the Company by subscribers for PCS service. The amounts
presented in the consolidated balance sheets are net of an allowance
for uncollectible accounts of $7.8 million and $8.5 million at June 30,
2003 and December 31, 2002, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(unaudited)
Net roaming receivable $ 7,136 $ 3,554
Access and interconnect revenue receivable (payable) (181) (188)
Accrued service revenue 3,203 3,345
Customer payments due from Sprint 11,959 21,136
Other amounts due from Sprint 587 2,475
----------- ---------
$ 22,704 $ 30,322
=========== =========
Net roaming receivable includes net travel revenue due from Sprint
relative to PCS subscribers based outside of the Company's licensed
territory who utilize the Company's portion of the PCS network of
Sprint. The travel revenue receivable is net of amounts owed to Sprint
relative to the Company's subscribers who utilize the PCS network of
Sprint outside of the Company's licensed territory. In addition, net
roaming receivable also includes amounts due from Sprint which have
been collected from other PCS providers for their customers' usage of
the Company's portion of the PCS network of Sprint.
8
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Access and interconnect revenue receivable represents net amounts due
from Sprint for calls originated by a local exchange carrier ("LEC") or
an interexchange carrier ("IXC") that terminate on the Company's
network. Under the Company's affiliation agreements with Sprint, Sprint
collects this revenue from other carriers and remits 92% of those
collections to the Company. The $181 and $188 amounts owed to Sprint at
June 30, 2003 and December 31, 2002, respectively, are the result of
rate adjustments on previously collected amounts.
Accrued service revenue receivable represents the Company's estimate of
airtime usage and other charges that have been earned but not billed at
the end of the period.
Customer payments due from Sprint relate to amounts that have been
collected by Sprint at the end of the period which were not remitted to
the Company until the subsequent period. Customer payments are
processed daily by Sprint and the Company receives its share of such
collections on a weekly basis under the terms of the affiliation
agreements.
Included in the December 31, 2002 balance of customer payments due from
Sprint is $12,209 in amounts that were due to the Company related to
payments that Sprint had collected from customers from April 2000 to
December 2002 that had not been passed on to the Company due to the
methodology that had been previously used by Sprint to allocate cash
received from customers. These amounts were collected in January and
February 2003.
Included in the June 30, 2003 balance of customer payments due from
Sprint is $3,907 in amounts that were due to the Company related to
payments that Sprint had collected from customers from April 2002 to
June 2003 that had not been passed on to the Company due to the
methodology that had been used by Sprint to allocate cash received from
customers.
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation of
$156.5 million and $122.9 million at June 30, 2003 and December 31,
2002, respectively.
7. INTANGIBLE ASSETS
In connection with acquisitions completed during 2001, the Company
allocated portions of the respective purchase prices to identifiable
intangible assets consisting of (i) the value of the Sprint agreements
in place at the acquired companies and (ii) the value of the subscriber
base in place at the acquired companies.
The value assigned to the Sprint agreements is being amortized using
the straight-line method over the remaining original terms of the
agreements that were in place at the time of acquisition or
approximately 17.6 years. The value assigned to the subscriber bases
acquired is being amortized using the straight-line method over the
estimated life of the acquired subscribers or approximately 3 years.
9
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Intangible assets consist of:
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(unaudited)
Sprint affiliate and other agreements $ 532,200 $ 532,200
Accumulated amortization (70,575) (55,458)
----------- ----------
Subtotal 461,625 476,742
----------- ----------
Subscriber base acquired 29,500 29,500
Accumulated amortization (22,737) (17,821)
----------- ----------
Subtotal 6,763 11,679
----------- ----------
Intangible assets, net $ 468,388 $ 488,421
=========== ==========
Amortization expense relative to intangible assets was $20,033 for the
six months ended June 30, 2003 and will be $20,034 for the remainder of
2003.
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 $ 40,067
2004 32,079
2005 30,234
2006 30,234
2007 30,234
Thereafter 325,573
---------
$ 488,421
=========
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
(unaudited)
12 7/8% senior discount notes $ 286,239 $ 268,862
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
Senior secured debt 200,000 200,000
----------- ----------
Total debt 886,239 868,862
Less current maturities (7,500) --
----------- ----------
Long-term debt, excluding current maturities $ 878,739 $ 868,862
=========== ==========
SENIOR UNSECURED OBLIGATIONS
SENIOR DISCOUNT NOTES - On December 23, 1999, Alamosa (Delaware) filed
a registration statement with the Securities and Exchange Commission
for the issuance of $350 million face amount of Senior Discount Notes
(the "12 7/8% Notes Offering"). The 12 7/8% Notes Offering was
completed on February 8, 2000 and generated net proceeds of
approximately $181 million after underwriters' commissions and expenses
of approximate $6.1 million. The 12 7/8% senior discount notes ("12
7/8% Senior Discount Notes") mature in ten years (February 15, 2010)
and carry a coupon rate of 12 7/8% Senior Discount Notes, and provide
for interest deferral for the first five years. The 12 7/8% Senior
Discount Notes will accrete to their $350 million face
10
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
amount by February 8, 2005, after which, interest will be paid in cash
semiannually. The proceeds of the 12 7/8% Senior Discount Notes
Offering were used to prepay the existing credit facility, to pay
costs to build out additional areas within the Company's existing
territories, to fund operating working capital needs and for other
general corporate purposes.
12 1/2% SENIOR NOTES - On January 31, 2001, Alamosa (Delaware)
consummated the offering (the "12 1/2% Notes Offering") of $250 million
aggregate principal amount of senior notes (the "12 1/2% Senior
Notes"). The 12 1/2% Senior Notes mature in ten years (February 1,
2011), carry a coupon rate of 12 1/2%, and are payable semiannually on
February 1 and August 1, beginning on August 1, 2001. The net proceeds
from the sale of the 12 1/2% Senior Notes were approximately $241
million, after deducting the commissions and estimated offering
expenses.
Approximately $59.0 million of the proceeds of the 12 1/2% Senior Notes
Offering were used by Alamosa (Delaware) to establish a security
account (with cash or U.S. government securities) to secure on a pro
rata basis the payment obligations under the 12 1/2% Senior Notes and
the 12 7/8% Senior Discount Notes, and the balance was used for general
corporate purposes of Alamosa (Delaware), including, accelerating
coverage within the existing territories of Alamosa (Delaware); the
build-out of additional areas within its existing territories;
expanding its existing territories; and pursuing additional
telecommunications business opportunities or acquiring other
telecommunications businesses or assets.
13 5/8% SENIOR NOTES - On August 15, 2001, Alamosa (Delaware) issued
$150 million face amount of Senior Notes (the "13 5/8% Senior Notes").
The 13 5/8% Senior Notes mature in ten years (August 15, 2011) and
carry a coupon rate of 13 5/8% payable semiannually on February 15 and
August 15, beginning on February 15, 2002. The net proceeds from the
sale of the 13 5/8% Senior Notes were approximately $141.5 million,
after deducting the commissions and estimated offering expenses.
Approximately $66 million of the proceeds were used to pay down a
portion of the Senior Secured Credit Facility discussed below.
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. The balance was used for general
corporate purposes.
SENIOR SECURED OBLIGATIONS
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, the Company,
Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower, entered into
a $280 million senior secured credit facility (the "Senior Secured
Credit Facility") with Citicorp USA, as administrative agent, and
collateral agent, Toronto Dominion (Texas), Inc., as syndication agent;
Export Development Corporation ("EDC") as co-documentation agent; First
Union National Bank, as documentation agent, and a syndicate of banking
and financial institutions. On March 30, 2001, the Senior Secured
Credit Facility was amended to increase the facility to $333 million.
The Senior Secured Credit Facility was again amended in August 2001
concurrent with the issuance of the 13 5/8% Senior Notes to reduce the
maximum borrowing to $225 million consisting of a 7-year senior secured
12-month delayed draw term loan facility of $200 million and a 7-year
senior secured revolving credit facility in an aggregate principal
amount of up to $25 million.
On September 26, 2002, the Company further amended the Senior Secured
Credit Facility, to among other things, modify certain financial and
statistical covenants. Under the Senior Secured Credit Facility,
interest will accrue, at Alamosa Holdings, LLC's option: (i) at the
London Interbank Offered Rate adjusted for any statutory reserves
("LIBOR"), or (ii) the base rate which is generally the higher of the
administrative agent's base rate, the federal funds effective rate plus
0.50% or the administrative agent's base CD rate plus 0.50%, in each
case plus an interest margin which was initially 4.00% for LIBOR
borrowings and 3.00% for base rate borrowings. The applicable interest
margins are subject to reductions under a pricing grid based on ratios
of Alamosa Holdings, LLC's total debt to its earnings before interest,
taxes, depreciation and amortization ("EBITDA"). The interest rate
margins will increase by an additional 200 basis points in the event
Alamosa Holdings, LLC fails to pay principal, interest or other amounts
as they become due and payable under the Senior Secured Credit
11
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Facility. As of June 30, 2003 the interest margin was 4.00% for LIBOR
borrowings and 3.00% for base rate borrowings.
The weighted average interest rate on the outstanding borrowings under
this facility at June 30, 2003 is 5.35%. Alamosa Holdings, LLC is also
required to pay quarterly in arrears a commitment fee on the unfunded
portion of the commitment of each lender. The commitment fee accrues at
a rate per annum equal to (i) 1.50% on each day when the utilization
(determined by dividing the total amount of loans plus outstanding
letters of credit under the Senior Secured Credit Facility by the total
commitment amount under the Senior Secured Credit Facility) of the
Senior Secured Credit Facility is less than or equal to 33.33%, (ii)
1.25% on each day when utilization is greater than 33.33% but less than
or equal to 66.66% and (iii) 1.00% on each day when utilization is
greater than 66.66%. The Company has entered into derivative hedging
instruments to hedge a portion of the interest rate risk associated
with borrowings under the Senior Secured Credit Facility as discussed
in Note 10.
Alamosa Holdings, LLC is also required to pay a separate annual
administration fee and a fee on the aggregate face amount of
outstanding letters of credit, if any, under the revolving credit
facility.
As of June 30, 2003, Alamosa Holdings, LLC had drawn $200 million under
the term portion of the Senior Secured Credit Facility. Any amount
outstanding at the end of the 12-month period will amortize quarterly
beginning May 14, 2004. The first such quarterly principal reduction of
$7,500 will be due in May 2004 and is presented as a current liability
in the accompanying balance sheet. The September 26, 2002 amendment
placed restrictions on the ability to draw the $25 million revolving
portion. The first $10 million can be drawn if cash balances fall below
$15 million and the Company substantiates through tangible evidence the
need for such advances. The remaining $15 million is available only at
such time as the leverage ratio is less than or equal to 5.5 to 1. No
advances have been drawn on the revolving portion of the Senior Secured
Credit Facility. Any balance outstanding under the revolving portion of
the Senior Secured Credit Facility will begin reducing quarterly in
amounts to be agreed beginning May 14, 2004.
Pursuant to the Senior Secured Credit Facility, the Company is subject
to financial and statistical covenants, including covenants with
respect to the ratio of EBITDA to total cash interest expense. Stage I
covenants were applicable through March 31, 2003 and provided for:
o minimum numbers of subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures.
As of March 31, 2003, the Company became subject to the following Stage
II covenants:
o ratio of senior debt to EBITDA; and
o ratio of total debt to EBITDA.
Beginning April 1, 2003, the Company became subject to the following
additional Stage II covenants:
o ratio of EBITDA to consolidated cash interest expense;
o ratio of EBITDA to total fixed charges (the sum of debt service,
capital expenditures and taxes); and
o ratio of EBITDA to pro forma debt service.
9. INCOME TAXES
The income tax benefit represents the anticipated recognition of the
Company's deductible net operating loss carry forwards. This benefit is
being recognized based on an assessment of the combined expected future
taxable income of the Company and expected reversals of the temporary
differences from acquisitions closed in
12
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
2001. Due to the Company's limited operating history and lack of
positive taxable earnings, a valuation allowance has been established
during 2003 as the deferred tax asset is expected to exceed the
deferred tax liabilities. The establishment of this valuation
allowance in the six months ended June 30, 2003 has resulted in an
effective tax rate of 17.24 percent compared to 37.87 percent for the
six months ended June 30, 2002.
10. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" in its accounting for hedging
activities. The statement requires the Company to record all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of the derivatives are either recognized in earnings or
are recognized in other comprehensive income until the hedged item is
recognized in earnings. Approximately $1,289 in cash settlements under
derivative instruments classified as hedges is included in interest
expense for the six months ended June 30, 2003.
As of June 30, 2003, the Company has recorded $2,679 in "other
noncurrent liabilities" relative to the fair value of derivative
instruments including $1,829 representing derivative instruments that
qualify for hedge accounting under SFAS No. 133. During the six month
period ended June 30, 2003, the Company recognized gains of $481 (net
of income tax benefit of $195) in other comprehensive income. During
the six month period ended June 30, 2002, the Company recognized losses
of $248 (net of income tax benefit of $151) in other comprehensive
income. Other comprehensive income appears as a separate component of
Stockholders' Equity as "Accumulated other comprehensive income," as
illustrated below:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ---------- ----------
Net loss $ (18,663) $ (28,736) $ (49,194) $ (56,869)
Change in fair values of
derivative instruments,
net of income tax expense
(benefit) of $80, $(330),
$195 and $(151),
respectively 293 (540) 481 (248)
---------- ----------- ---------- -----------
Comprehensive loss $ (18,370) $ (29,276) $ (48,713) $ (57,117)
========== =========== ========== ===========
11. COMMITMENTS AND CONTINGENCIES
ACCESS REVENUE REFUND - On July 3, 2002, the Federal Communications
Commission issued a ruling on a dispute between AT&T, as an
interexchange carrier ("IXC"), and Sprint Spectrum L.P., a Commercial
Mobile Radio Service ("wireless carrier"). This ruling addressed the
wireless carrier charging terminating access fees to the IXC for calls
terminated on a wireless network indicating such fees could be
assessed; however the IXC would only be obligated to pay such fees if a
contract was in place providing for the payment of access charges.
As a result of this ruling, Sprint has requested that the Company
refund approximately $1.4 million of a total $5.6 million in amounts
that had been previously paid to the Company by Sprint relative to
terminating access fees. Although the Company has contested the refund
of these amounts, a liability has been recorded relative to this
contingency in the consolidated financial statements as of June 30,
2003.
LITIGATION - The Company has been named as a defendant in a number of
purported securities class actions in the United States District Court
for the Southern District of New York, arising out of its initial
public offering (the "IPO"). Various underwriters of the IPO also are
named as defendants in the actions. The action against the Company is
one of more than 300 related class actions which have been consolidated
and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement
and prospectus filed with the Securities and Exchange Commission for
purposes of the IPO were false
13
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
and misleading because they failed to disclose that the underwriters
allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of common stock in
connection with the IPO, and (ii) entered into agreements with their
customers to allocate such stock to those customers in exchange for
the customers agreeing to purchase additional Company shares in the
aftermarket at pre-determined prices. On February 19, 2003, the Court
granted motions by the Company and 115 other issuers to dismiss the
claims under Rule 10b-5 of the Exchange Act which had been asserted
against them. The Court denied the motions by the Company and
virtually all of the other issuers to dismiss the claims asserted
against them under Section 11 of the Securities Act. The Company
maintains insurance coverage which may mitigate its exposure to loss
in the event that this claim is not resolved in the Company's favor.
On January 23, 2001, the board of directors, in a unanimous decision,
terminated the employment of Jerry Brantley, then President and COO of
the Company. On April 29, 2002, Mr. Brantley initiated litigation
against the Company and the Chairman of the Company, David E. Sharbutt
in the District Court of Lubbock County, Texas, 22nd Judicial District,
alleging wrongful termination among other things. On September 27,
2002, the Court entered an Agreed Order Compelling Arbitration. The
parties are in the process of selecting a panel of three arbitrators.
The Company believes that there is no basis for Mr. Brantley's claim
and intends to vigorously defend the lawsuit.
On January 8, 2003, a claim was made against the Company by Southwest
Antenna and Tower, Inc. ("SWAT") in the Second Judicial District Court,
County of Bernalillo, State of New Mexico, for monies due on an open
account. SWAT sought to recover approximately $2.0 million from the
Company relative to work performed by SWAT during 2000 for Roberts
Wireless Communications, LLC which was acquired by the Company in the
first quarter of 2001. This claim was settled for $0.875 million during
the second quarter of 2003.
In addition to the above, the Company is involved in various claims and
legal actions arising in the ordinary course of business. The ultimate
disposition of these matters are not expected to have a material
adverse impact on the Company's financial position, results of
operations or liquidity.
12. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No.
143 requires the fair value of a liability for an asset retirement
obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. For the Company's leased telecommunication
facilities, primarily consisting of cell sites and switch site
operating leases, the Company has evaluated the impact of the adoption
of SFAS No. 143 as of January 1, 2003 and determined that a liability
cannot 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. In addition to cell sites and
switch site operating leases, the Company also has leases for office
and retail locations that are subject to the provisions of SFAS No.
143. The adoption of SFAS No. 143 to leased office and retail locations
did not have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002," which rescinded or amended
various existing standards. One change addressed by this standard
pertains to treatment of extinguishments of debt as an extraordinary
item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt" and states that an extinguishment of debt
cannot be classified as an extraordinary item unless it meets the
unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
14
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Unusual and Infrequently Occurring Events and Transactions." The
provisions of this statement are effective for fiscal years beginning
after May 15, 2002 and extinguishments of debt that were previously
classified as an extraordinary item in prior periods that do not meet
the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The adoption of SFAS No. 145 in the quarter
ending March 31, 2003 has resulted in a reclassification of the loss on
extinguishment of debt that the Company previously reported as an
extraordinary item for the year ended December 31, 2001.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," which requires companies
to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of this statement are effective for exit
or disposal activities initiated after December 31, 2002 and the
adoption of this statement did not have a material impact on the
Company's results of operations, financial position or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an
amendment of SFAS No. 123 "Accounting for Stock-Based Compensation."
This statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of this
statement are effective for fiscal years ending after and interim
periods beginning after December 15, 2002. As the Company continues to
account for stock-based employee compensation using the intrinsic value
method under APB Opinion No. 25, the Company, as required, has only
adopted the revised disclosure requirements of SFAS No. 148 as of
December 31, 2002 as discussed in Note 4.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and is not
expected to have a material impact on the Company's results of
operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) and is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities. The adoption of this statement is not expected to have a
material impact on the Company's results of operations, financial
position or cash flows.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" in January 2003. This abstract addresses certain aspects
of the accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically, it
addresses how consideration should be measured and allocated to the
separate units of accounting in the arrangement. The guidance in this
abstract is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003 and the Company has evaluated the
impact of the adoption of the provisions of this abstract as of July 1,
2003.
The Company has elected to apply the accounting provisions of this
abstract on a prospective basis beginning July 1, 2003. Under the
accounting provisions of this abstract, the Company will allocate
amounts charged to customers between the sale of handsets and other
equipment and the sale of wireless telecommunication services. In many
cases, this will result in all amounts collected from the customer upon
activation of the handset being allocated to the sale of the handset.
As a result of this treatment, activation fees included in the
consideration at the time of sale will be recorded as handset revenue.
Prior to the adoption of the provisions of
15
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
this abstract the Company had deferred activation fee revenue as well
as activation costs in a like amount and amortized these revenues and
costs over the average life of the Company's subscribers. The existing
deferred revenue and costs at July 1, 2003 will continue to be
amortized.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
FIN 45 requires that upon issuance of a guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN 45 also requires additional disclosures by a guarantor
in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45
are effective for guarantees issued after December 31, 2002, while the
disclosure requirements were effective for financial statements for
periods ending after December 15, 2002. At December 31, 2002, the
Company had not entered into any material arrangement that would be
subject to the disclosure requirements of FIN 45. The adoption of FIN
45 did not have a material impact on the Company's consolidated
financial statements.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46" or the "Interpretation"), "Consolidation of Variable Interest
Entities, an interpretation of ARB 51." The primary objectives of FIN
46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights
("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity
which either (1) the equity investors (if any) do not have a
controlling financial interest or (2) the equity investment at risk is
insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a VIE make
additional disclosures. For public entities with VIEs created before
February 1, 2003, the implementation and disclosure requirements of FIN
46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created
after January 31, 2003, the requirements are effective immediately. The
Company does not believe that the adoption of FIN 46 will have a
material impact on its consolidated financial statements.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this quarterly report on Form 10-Q regarding our financial position and
liquidity are forward-looking statements. These forward-looking statements also
include:
o forecasts of growth in the number of consumers using wireless
personal communications services and in estimated populations;
o statements regarding our anticipated revenues, expense levels,
liquidity, capital resources and operating losses; and
o statements regarding expectations or projections about markets in
our territories.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from our expectations
("Cautionary Statements") are further disclosed in our annual report on Form
10-K for the year ended December 31, 2002 under the sections "Item 1. Business"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations." Important factors that could cause actual results to
differ materially from those in the forward-looking statements included herein
include, but are not limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter fees paid or charged to us under our
affiliation agreements;
o our limited operating history and anticipation of future losses;
o our dependence on back office services provided by Sprint;
o potential fluctuations in our operating results;
o changes or advances in technology;
o competition in the industry and markets in which we operate;
o our ability to attract and retain skilled personnel;
o our potential need for additional capital or the need for
refinancing existing indebtedness;
o our potential inability to expand our services and related products
in the event of substantial increases in demand for these services
and related products;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
17
o effects of mergers and consolidations within the telecommunications
industry and unexpected announcements or developments from others in
the telecommunications industry.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the Cautionary Statements.
DEFINITIONS OF OPERATING AND NON-GAAP FINANCIAL MEASURES
We provide reader's financial measures generated using generally
accepted accounting principles ("GAAP") and using adjustments to GAAP
("Non-GAAP"). These financial measures reflect industry conventions or standard
measures of liquidity, profitability or performance commonly used by the
investment community for comparability purposes. The Non-GAAP financial measures
and other operating metrics used in this document include the following:
o Earnings before interest, taxes, depreciation and amortization
("EBITDA") is defined as net income (loss) plus net interest
expense, depreciation expense, amortization expense and other
non-cash expense items. EBITDA is a measure used by the investment
community for comparability as well as in our debt covenants for
compliance purposes and is not intended to represent the results of
our operations in accordance with GAAP.
o Free cash flow is defined as EBITDA less net cash requirements for
capital expenditures and debt service requirements.
o Average monthly revenue per user ("ARPU") is a measure used to
determine the monthly subscriber revenue earned for subscribers
based in our territory. This measure is determined based on
subscriber revenues in our consolidated statement of operations and
our average subscribers during the period.
o Cash cost per user ("CCPU") is a measure of the costs to operate our
business on a per user basis consisting of costs of service and
operations and general and administrative expenses in our
consolidated statement of operations, plus handset subsidies on
equipment sold to existing subscribers. These costs are allocated
across average subscribers during the period to calculate this
measure.
o Customer churn is used to measure the rate at which subscribers
based in our territory deactivate service on a voluntary or
involuntary basis. We calculate churn based on the number of
subscribers deactivated (net of transfers out of our service area
and those who deactivated within 30 days of activation) as a
percentage of our average subscriber base during the period.
o Cost per gross addition ("CPGA") is used to measure the costs
incurred to add new subscribers in our territory. This measure
includes handset subsidies on new subscriber activations,
commissions, rebates and other selling and marketing costs and is
calculated based on product sales revenue, cost of products sold and
selling and marketing expenses in our consolidated statement of
operations net of handset subsidies on equipment sold to existing
subscribers allocated over the total number of subscribers activated
in our territory during the period.
GENERAL
Since our inception in 1998, we have incurred substantial costs in
connection with negotiating our contracts with Sprint, obtaining our debt
financing, completing our public equity offerings, engineering our wireless PCS
network, developing our business infrastructure and building out our portion of
the PCS network of Sprint. Prior to the launch of our first market in June 1999,
we did not have any markets in operation and we had no customers. At June 30,
2003, we had approximately 677,000 subscribers. As of June 30, 2003, our
accumulated deficit is $713.9 million and we have incurred a significant amount
of capital expenditures in connection with constructing our portion of the PCS
network of Sprint and developing our business infrastructure including the
establishment of our retail distribution channels. While we anticipate losses to
continue, we expect revenue to continue to increase as our subscriber base
increases.
18
On July 17, 1998, we entered into our original affiliation agreements
with Sprint. We subsequently amended our original agreements in 1999 to add
additional territories to our licensed area. In the first quarter of 2001, we
completed the acquisitions of three additional PCS Affiliates of Sprint,
bringing our total licensed POPs to approximately 15.8 million at June 30, 2003.
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless, mobility communications network services under the Sprint brand name
in our licensed territory. We are responsible for building, owning and managing
the portion of the PCS network of Sprint located in our territory. We offer
national plans designed by Sprint and intend to offer local plans tailored to
our market demographics. Our portion of the PCS network of Sprint is designed to
offer a seamless connection with the 100% digital PCS nationwide wireless
network of Sprint. We market wireless products and services through a number of
distribution outlets located in our territories, including our own retail
stores, major national distributors and local third party distributors.
We recognize revenues from our subscribers, proceeds from the sales of
handsets and accessories through channels controlled by us and fees from Sprint
and other wireless service providers when their customers roam onto our portion
of the PCS network of Sprint. Sprint retains 8% of all collected service revenue
from our subscribers (not including products sales) and fees collected from
other wireless service providers when their customers roam onto our portion of
the PCS network of Sprint. We report the amount retained by Sprint as an
operating expense. In addition, Sprint bills our subscribers for taxes, handset
insurance, equipment and Universal Service Fund charges which we do not record.
Sprint collects these amounts from the subscribers and remits them to the
appropriate entity.
As part of our affiliation agreements with Sprint, we have the option
of contracting with Sprint to provide back office services such as customer
activation, handset logistics, billing, customer care and network monitoring
services. We have elected to delegate the performance of these services to
Sprint to take advantage of their economies of scale, to accelerate our
build-out and market launches and to lower our initial capital requirements. The
cost for these services is primarily on a per subscriber and per transaction
basis and is recorded as an operating expense.
CRITICAL ACCOUNTING POLICIES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of an
entity. To aid in that understanding, we have identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our consolidated financial statements, either because of
the significance of the financial statement item to which they relate, or
because they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Estimates are used in determining our
allowance for bad debts and are based on our historical collection experience,
current trends, credit policy, a percentage of our accounts receivable by aging
category and expectations of future bad debts based on current collection
activities. In determining the allowance, we consider historical write-offs of
our receivables and our history is somewhat limited due to the number of changes
that have historically been made to credit policies. We also look at current
trends in the credit quality of our customer base as well as changes in the
credit policies. Under PCS service plans from Sprint, customers who do not meet
certain credit criteria can nevertheless select any plan offered, subject to an
account spending limit, referred to as ASL, to control credit exposure. Account
spending limits range from $125 to $200 and generally require deposits in the
amount of the limit that could be credited against future billings. In May 2001,
the deposit requirement was eliminated on certain, but not all, credit classes
("NDASL"). As a result, a significant amount of our customer additions during
2001 were under the NDASL program. The NDASL program was replaced by the "Clear
Pay" program in November 2001, which reinstated the deposit requirement for
certain of the lowest credit class customers, and features increased back office
controls with respect to collection efforts. We reinstated the deposit for
customers in other credit classes on the Clear Pay program as of February 24,
2002 and we believe that this program, referred to as Clear Pay II, has reduced
our bad debt exposure.
REVENUE RECOGNITION - We record equipment revenue for the sale of
handsets and accessories to customers in our retail stores and to local
resellers in our territories. We do not record equipment revenue on handsets and
accessories purchased by our customers from national resellers or directly from
Sprint. Our customers pay an activation fee when they initiate service. In the
past, we have deferred this activation fee and recorded the activation fee
revenue over the
19
estimated average life of our customers which ranges from 12 to 36 months
depending on credit class and based on our past experience. We recognize revenue
from our customers as they use the service. Additionally, we provide a reduction
of recorded revenue for billing adjustments and billing corrections.
We recognize revenue for product sales in connection with our sales of
handsets and accessories through our retail stores and our local indirect
retailers. The cost of handsets sold generally exceeds the retail sales price as
we subsidize the price of handsets for competitive reasons. For handsets sold
through channels controlled by Sprint that are activated by a subscriber in our
territory, we reimburse Sprint for the amount of subsidy incurred by them in
connection with the sale of these handsets.
Effective July 1, 2003, we have adopted the accounting provisions of
Emerging Issues Task Force ("EITF") Abstract No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables." See further discussion under Recently
Issued Accounting Pronouncements in this section.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, equipment and intangibles, comprise approximately 81 percent of our
total assets as of June 30, 2003. Changes in technology or in our intended use
of these assets may cause the estimated period of use or the value of these
assets to change. In addition, changes in general industry conditions such as
increased competition, lower ARPU, etc., could cause the value of certain of
these assets to change. We monitor the appropriateness of the estimated useful
lives of these assets. Whenever events or changes in circumstances indicate that
the carrying amounts of these assets may not be recoverable, we review the
respective assets for impairment. 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. Estimates and assumptions used in both estimating the useful life and
evaluating potential impairment issues require a significant amount of judgment.
INCOME TAXES - We utilize an asset and liability approach to accounting
for income taxes, wherein deferred taxes are provided for book and tax basis
differences for assets and liabilities. In the event differences exist between
book and tax basis of our assets and liabilities that result in deferred assets,
an evaluation of the probability of being able to realize the future benefits
indicated by such assets is made. A valuation allowance is provided for the
portion of deferred tax assets for which there is sufficient uncertainty
regarding our ability to recognize the benefits of those assets in future years.
Deferred taxes are provided for those items reported in different
periods for income tax and financial reporting purposes. The net deferred tax
asset was fully reserved through December 31, 2000 because of uncertainty
regarding our ability to recognize the benefit of the asset in future years. In
connection with the acquisitions completed by the Company in 2001, a significant
deferred tax liability was recorded relative to intangibles. The reversal of the
timing differences which gave rise to the deferred tax liability will allow us
to benefit from the deferred tax asset. As such, the valuation allowance against
the deferred tax asset was reduced in 2001 to account for the expected benefit
to be realized. Prior to February 1, 2000, our predecessor operated as a limited
liability company ("LLC") under which losses for income tax purposes were
utilized by the LLC members on their income tax returns. Subsequent to January
31, 2000, we became a C-corp for federal income tax purposes and therefore
subsequent losses became net operating loss carryforwards to us. We continue to
evaluate the likelihood of realizing the benefits of deferred tax items. Should
events or circumstances indicate that it is warranted, a valuation allowance
will again be established. During the first quarter of 2003 we reinstated a
valuation allowance due to the fact that the timing differences that give rise
to the deferred tax asset are expected to exceed the timing differences that
give rise to the deferred tax liabilities and there is uncertainty as to whether
we will recognize the benefit of those deferred taxes in future periods.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -
We place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of cash flow, revenue, cost of service,
selling and marketing costs and the adequacy of our allowance for uncollectible
accounts based on this data we receive from Sprint. We obtain assurance as to
the accuracy of this data through analytic review and reliance on the service
auditor report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint could have a
material adverse effect on our results of operations and cash flow.
20
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE THREE AND SIX MONTH PERIOD ENDED JUNE 30, 2003 COMPARED TO THE THREE AND
SIX MONTH PERIOD ENDED JUNE 30, 2002
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS - We had total
subscribers of approximately 677,000 at June 30, 2003 compared to approximately
571,000 at June 30, 2002. This growth of approximately 106,000 subscribers or 19
percent year over year compares to 81 percent growth from June 30, 2001 to June
30, 2002. The decline in the rate of growth from 2002 to 2003 is due to the fact
that markets were being launched during 2001 where our coverage area increased
from 4.5 million to 11.2 million covered POPs. During 2002 our coverage area
increased from 11.2 million to 11.8 million covered POPs as we had substantially
completed the build-out of our network by the end of 2001. During the second
quarter of 2003 our coverage area increased to 11.9 million covered POPs.
Monthly churn for the second quarter of 2003 was approximately 2.5
percent compared to approximately 3.2 percent for the second quarter of 2002.
This level of churn in the second quarter of 2003 also represented an
improvement over the first quarter of 2003 where we experienced monthly churn of
3.0 percent. Increases in churn negatively impact our operations as we incur
significant up front costs in acquiring customers. Churn increased significantly
during 2002 as the result of a significantly higher level of involuntary
deactivations of subscribers for non-payment. This was driven by the addition of
a significant number of sub-prime credit quality subscribers in 2001 under the
Clear Pay/NDASL program. We reinstated deposit requirements for sub-prime credit
quality subscribers in our markets in February 2002 and began to see the impact
of this change in the form of decreasing churn beginning in the fourth quarter
of 2002 where churn declined to 3.4 percent from 3.8 percent in the third
quarter of 2002. This trend has continued through the first six months of 2003.
Our CPGA includes handset subsidies on new subscriber activations, and
selling and marketing costs and was approximately $375 per gross addition in the
second quarter of 2003, which was consistent with the $377 per gross addition in
the second quarter of 2002. Our CPGA increased $33 in the second quarter of 2003
over the $342 per gross addition we experienced in the first quarter of 2003. As
overall subscriber growth on a national basis has declined, competition among
the wireless communications providers has become more intense. As a result of
this competition for both new subscribers and existing subscribers from other
carriers, promotional efforts have increased in terms of handset rebates and
other promotional activities which increases the up front costs in acquiring
customers.
SERVICE REVENUE - Service revenues consist of revenue from subscribers
and roaming revenue earned when customers from other carriers roam onto our
portion of the PCS network of Sprint. Subscriber revenue consists of payments
received from our subscribers for monthly service under their service plans.
Subscriber revenue also includes activation fees and charges for the use of
various features including PCS Vision, the wireless web, voice activated
dialing, etc.
Subscriber revenues were $114,550 for the quarter ended June 30, 2003
compared to $92,580 for the quarter ended June 30, 2002. This increase of 24
percent was primarily due to the 19 percent increase in our subscriber base
discussed above. The percentage increase in revenue was more than the percentage
increase in subscribers due to a one time revenue adjustment of $5.4 million in
the second quarter of 2002 relative to an FCC ruling regarding terminating
access charges. Subscriber revenues were $218,574 for the six months ended June
30, 2003 compared to $186,078 for the six months ended June 30, 2002. This
increase of 17 percent was also primarily due to the increase in the subscriber
base after considering the one time revenue adjustment in the second quarter of
2002. ARPU decreased in the second quarter of 2003 to $57 compared to $59
(before the one time revenue adjustment discussed previously) in the second
quarter of 2002. ARPU decreased in the first six months of 2003 to $56 compared
to $59 (before the one time revenue adjustment discussed previously) in the
first six months of 2002. This decrease is attributable to lower monthly
recurring charges for plans with larger buckets of minutes being offered as a
result of the increased level of competition in the marketplace. The larger
buckets of minutes result in fewer minutes over plan and less revenue from those
overage minutes.
Roaming revenue is comprised of revenue from Sprint and other PCS
subscribers based outside of our territories that roam onto our portion of the
PCS network of Sprint. We have a reciprocal roaming rate arrangement with Sprint
where per minute charges for inbound and outbound roaming relative to Sprint
subscribers are identical. This rate was 10 cents per minute during 2002. During
2003 this reciprocal rate decreased to 5.8 cents per minute. The decline in
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rates was offset by increases in roaming minutes due to the fact that we added
additional base stations after the second quarter of 2002 which allowed us to
capture additional roaming traffic as well as the growth in the customer bases
of Sprint and other PCS providers. Sprint has indicated that the reciprocal rate
for 2003 of 5.8 cents per minute represents a fair and reasonable return on the
cost of the underlying network based on an agreement in principle reached with
Sprint in 2001. This rate went into effect on January 1, 2003. We have not
agreed that 5.8 cents per minute represents a fair and reasonable return on the
underlying network and are currently in discussions with Sprint as to the
determination of this rate. The toll rate for long distance charges associated
with Sprint roaming is expected to remain at approximately 2 cents per minute.
We have also experienced a significant increase in the volume of inbound roaming
traffic from PCS providers other than Sprint which traffic is settled at rates
separately negotiated by Sprint on our behalf with the other PCS providers. We
had approximately 395 million minutes of inbound roaming traffic in the second
quarter of 2003 compared to approximately 265 million minutes of inbound roaming
traffic in the second quarter of 2002. The increase in minutes offset by the
decrease in rates accounted for the 5 percent overall increase in roaming
revenue to $35,040 in the second quarter of 2003 from $33,457 in the second
quarter of 2002. We had approximately 735 million minutes of inbound roaming
traffic in the first six months of 2003 compared to approximately 476 million
minutes of inbound roaming traffic in the first six months of 2002. The increase
in minutes offset by the decrease in rates accounted for the 11 percent overall
increase in roaming revenue to $66,830 in the first six months of 2003 from
$60,025 in the first six months of 2002.
PRODUCT SALES AND COST OF PRODUCTS SOLD - We record revenue from the
sale of handsets and accessories, net of an allowance for returns, as product
sales. Product sales revenue and costs of products sold are recorded for all
products that are sold through our retail stores as well as those sold to our
local indirect agents. The cost of handsets sold generally exceeds the retail
sales price as we subsidize the price of handsets for competitive reasons.
Sprint's handset return policy allows customers to return their handsets for a
full refund within 14 days of purchase. When handsets are returned to us, we may
be able to reissue the handsets to customers at little additional cost to us.
However, when handsets are returned to Sprint for refurbishing, we receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
Product sales revenue for the second quarter of 2003 was $5,804
compared to $4,752 for the second quarter of 2002. Cost of products sold for the
second quarter of 2003 was $12,399 compared to $9,113 for the second quarter of
2002. As such the subsidy on handsets sold through our retail and local indirect
channels was $6,595 in the second quarter of 2003 and $4,361 in the second
quarter of 2002. On a per activation basis (excluding handsets sold to existing
subscribers), the subsidy was approximately $117 per activation in the second
quarter of 2003 and approximately $94 per activation in the second quarter of
2002. Product sales revenue for the first six months of 2003 was $11,098
compared to $13,073 for the first six months of 2002. Cost of products sold for
the first six months of 2003 was $25,243 compared to $23,230 for the first six
months of 2002. As such the subsidy on handsets sold through our retail and
local indirect channels was $14,145 in the first six months of 2003 and $10,157
in the first six months of 2002. On a per activation basis (excluding handsets
sold to existing subscribers), the subsidy was approximately $116 per activation
in the first six months of 2003 and approximately $97 per activation in the
first six months of 2002. The increase in subsidy per activation in 2003
compared to 2002 is due to more aggressive promotional efforts, which involved a
higher level of instant rebates and other discounts on handset prices for
competitive reasons.
COST OF SERVICE AND OPERATIONS (EXCLUDING NON-CASH COMPENSATION) - Cost
of service and operations includes the costs of operating our portion of the PCS
network of Sprint. These costs include items such as outbound roaming fees, long
distance charges, tower leases and maintenance as well as backhaul costs. In
addition, it includes the fees we pay to Sprint for our 8 percent affiliation
fee, back office services such as billing and customer care as well as our
provision for estimated uncollectible accounts. Expenses of $81,454 in the
second quarter of 2003 were approximately 4 percent less than the $85,289
incurred in the second quarter of 2002. Expenses of $160,771 in the first six
months of 2003 were approximately 2 percent less than the $163,818 incurred in
the first six months of 2002. Network operating costs remained relatively stable
as our network build-out is substantially complete and we are beginning to
realize the benefits of our capital investment as we continue to add subscribers
to the network. The improvements noted in overall cost of service and operations
were primarily driven by reduced bad debt expense in 2003 compared to 2002 as we
begin to see the benefit of reinstating deposits requirements in 2002. Total
minutes of use on our network were 1.5 billion minutes in the second quarter of
2003 compared to 1,005 million minutes in the second quarter of 2002 for an
increase in traffic of 49 percent. Total minutes of use on our network were 2.8
billion minutes in the first six months of 2003 compared to 1.9 billion minutes
in the first six months of 2002 for an increase in traffic of 47 percent.
22
SELLING AND MARKETING (EXCLUDING NON-CASH COMPENSATION) - Selling and
marketing expenses include advertising, promotion, sales commissions and
expenses related to our distribution channels including our retail store
expenses. In addition, we reimburse Sprint for the subsidy on handsets sold
through national retail stores due to the fact that these retailers purchase
their handsets from Sprint. This subsidy is recorded as a selling and marketing
expense. The amount of handset subsidy included in selling and marketing was
$3,826 and $4,462 in the second quarter of 2003 and 2002, respectively. The
amount of handset subsidy included in selling and marketing was $8,172 and
$7,865 in the first six months of 2003 and 2002, respectively. Total selling and
marketing expenses of $26,584 in the second quarter of 2003 were consistent with
the $26,960 incurred in the second quarter of 2002. Total selling and marketing
expenses of $54,730 in the first six months of 2003 were consistent with the
$55,857 incurred in the first six months of 2002.
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 $5,918 in the
second quarter of 2003 were 94 percent higher than the $3,053 incurred in the
second quarter of 2002. General and administrative expenses of $9,583 in the
first six months of 2003 were 41 percent higher than the $6,788 incurred in the
first six months of 2002. The increase in 2003 has been the result of increased
professional fees related to various efforts in preparing for the reporting
requirements under the Sarbanes-Oxley Act of 2002 and professional fees and
other expenses associated with advisory services in the evaluation of strategic
business opportunities and long-term business planning.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization includes
depreciation of our property, plant and equipment as well as amortization of
intangibles. Depreciation is calculated on the straight line method over the
estimated useful lives of the underlying assets and totaled $17,403 in the
second quarter of 2003 which was 8 percent higher than the $16,141 recorded in
the second quarter of 2002. Depreciation totaled $34,268 in the first six months
of 2003 which was 10 percent higher than the $31,072 recorded in the first six
months of 2002. The increase in 2003 is due to the increase in depreciable costs
as a result of our capital expenditures in the last half of 2002 and the first
half of 2003.
Amortization expense relates to intangible assets recorded in
connection with the acquisitions closed in the first quarter of 2001. We
recorded two identifiable intangibles in connection with each of the
acquisitions consisting of values assigned to the agreements with Sprint and the
customer base acquired. Amortization expense of $10,016 in the second quarter of
2003 was consistent with the $10,203 in the second quarter of 2002. Amortization
expense of $20,033 in the first six months of 2003 was consistent with the
$20,135 in the first six months of 2002.
IMPAIRMENT OF PROPERTY AND EQUIPMENT - We recorded impairments of
property and equipment in the second quarter and first six months of 2003 of $34
and $394, respectively, compared to $1,332 in the second quarter and first six
months of 2002. The decrease in 2003 is attributable to a switch site location
that was abandoned in 2002 resulting in a charge of $1,332 in the second quarter
of 2002.
NON-CASH COMPENSATION - Non-cash compensation expense of $199 in the
second quarter of 2003 included $161 in compensation to directors in the form of
the issuance of 105,000 shares of our common stock. The remaining $38 in
non-cash compensation for the quarter related to shares of restricted stock that
were awarded to our officers in October and December of 2002. Certain of our
officers received a total of 800,000 shares of restricted stock at a discount to
market price that will vest over a three-year period. Compensation expense
relative to the difference between the market price of the stock and the price
the officers paid for the stock will be recognized over the vesting period
during which the restrictions lapse. Non-cash compensation expense of $240 in
the first six months of 2003 includes the $161 related to director compensation
discussed above as well as $79 relative to the vesting of restricted stock. We
had no non-cash compensation expense in the second quarter or first six months
of 2002.
OPERATING INCOME (LOSS) - Our operating income for the second quarter
of 2003 was $2,559 compared to a loss of $21,302 for the second quarter of 2002
representing an improvement of $23,861. Our operating loss for the first six
months of 2003 was $7,588 compared to $43,056 for the first six months of 2002
representing an improvement of $35,468. This improvement is primarily
attributable to the leverage we are beginning to experience in spreading our
fixed costs over a larger base of subscribers.
INTEREST AND OTHER INCOME - Interest and other income represents
amounts earned on the investment of excess equity and debt offering proceeds.
Income of $249 in the second quarter of 2003 was 71 percent less than the $871
23
earned in the second quarter of 2002. Income of $634 in the first six months of
2003 was 71 percent less than the $2,204 earned in the first six months of 2002.
The decrease in interest earned is due to the fact that excess cash and
investments were liquidated during 2002 in connection with funding our capital
expenditures and operating cash flow losses as well as making interest payments
from restricted cash.
INTEREST EXPENSE - Interest expense for the second quarter and first
six months of 2003 includes non-cash interest accreted on our 12 7/8% Senior
Discount Notes of $8,825 and $17,377, respectively, as well as interest accrued
on the two senior notes issued during 2001 and interest on our senior secured
debt. Total interest expense of $25,951 in the second quarter of 2003 is
consistent with the expense of $25,820 in the second quarter of 2002. Total
interest expense of $52,488 in the first six months of 2003 is 4 percent higher
than expense of $50,674 in the first six months of 2002 primarily due to the
increased level of advances under senior secured borrowings.
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109 "Accounting
for Income Taxes." As of December 31, 2000, the net deferred tax asset consisted
primarily of temporary differences related to the treatment of organizational
costs, unearned compensation, interest expense and net operating loss carry
forwards. The net deferred tax asset was fully offset by a valuation allowance
as of December 31, 2000 because there was sufficient uncertainty as to whether
we would recognize the benefit of those deferred taxes in future periods. In
connection with the mergers completed in the first quarter of 2001, we recorded
significant deferred tax liabilities due to differences in the book and tax
basis of the net assets acquired particularly due to the intangible assets
recorded in connection with the acquisitions.
The reversal of the timing differences which gave rise to these
deferred tax liabilities will allow us to realize the benefit of timing
differences which gave rise to the deferred tax asset. As a result, we released
the valuation allowance during the second quarter of 2001. Prior to 2001, all
deferred tax benefit had been fully offset by an increase in the valuation
allowance such that there was no financial statement impact with respect to
income taxes. With the reduction of the valuation allowance in 2001, we began to
reflect a net deferred tax benefit in our consolidated statement of operations.
During the first quarter of 2003 we reinstated a valuation allowance due to the
fact that the timing differences that give rise to the deferred tax asset are
expected to exceed the timing differences that give rise to the deferred tax
liabilities and there is uncertainty as to whether we will recognize the benefit
of those deferred taxes in future periods.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - Operating cash flows were $19,504 in the first
six months of 2003 and negative $24,828 in the first six months of 2002. The
increase in operating cash flows of $44,332 is primarily related to a decrease
in net loss before non-cash items of $27,042 coupled with working capital
changes of $17,290.
INVESTING ACTIVITIES - Our investing cash flows were a negative $16,742
in the first six months of 2003 compared to a negative $66,581 in the first six
months of 2002. Our cash capital expenditures for the first six months of 2003
totaled $19,196 while our cash capital expenditures for the first six months of
2002 totaled $67,001.
FINANCING ACTIVITIES - Our financing cash flows decreased in the first
six months of 2003 to $24,405 from $48,438 in the first six months of 2002. In
2003, we received $24,977 in restricted cash which was released from escrow to
make interest payments on the 12 1/2% Senior Notes and the 13 5/8% Senior Notes.
In 2002 we received $12,838 in proceeds representing the remaining borrowings
under the term portion of our Senior Secured Credit Facility as well as $35,535
in restricted cash which was released from escrow to make interest payments on
the 12 1/2% Senior Notes and the 13 5/8% Senior Notes.
CAPITAL REQUIREMENTS
Our capital expenditure requirements for 2003 are expected to be
approximately $40 to $50 million. Operating cash flow is expected to continue to
increase in 2003 as we continue to realize the benefits of the subscriber growth
that we have experienced over the past three years. We expect to generate free
cash flow in 2003 and believe we have sufficient liquidity as discussed below.
24
LIQUIDITY
Since inception, we have financed our operations through capital
contributions from our owners, through debt financing and through proceeds
generated from public offerings of our common stock. We have incurred
substantial net losses and negative cash flow from operations since inception.
Expenses are expected to exceed revenues until we establish a sufficient
subscriber base. We expect operating losses to continue for the foreseeable
future. However, we expect operating losses to decrease in the future as we
obtain more subscribers.
EDC CREDIT FACILITY - We entered into a credit agreement with Nortel
effective June 10, 1999, which was amended and restated on February 8, 2000. On
June 23, 2000, Nortel assigned the entirety of its loans and commitments to
Export Development Corporation ("EDC"), and Alamosa and EDC entered into the
credit facility with EDC (the "EDC Credit Facility"). The EDC Credit Facility
was paid in full in the first quarter of 2001 with proceeds from the Senior
Secured Credit Facility described below.
COMMON STOCK - On October 29, 1999, we filed a registration statement
with the Securities and Exchange Commission for the sale of 10,714,000 shares of
our common stock (the "Initial Offering"). The Initial Offering became effective
and the shares were issued on February 3, 2000 at the initial price of $17.00
per share. Subsequently, the underwriters exercised their over-allotment option
for an additional 1,607,100 shares. We received net proceeds of approximately
$193.8 million after commissions of $13.3 million and expenses of approximately
$1.5 million. The proceeds of the Initial Offering were used for the build out
of our portion of the PCS network of Sprint, to fund operating capital needs and
for other corporate purposes.
On November 13, 2001, we completed an underwritten secondary offering
of our common stock pursuant to which certain of our stockholders sold an
aggregate of 4,800,000 shares at a public offering price of $14.75 per share. We
did not receive any proceeds from the sale of these shares, but the underwriters
were granted an option to purchase up to 720,000 additional shares of common
stock to cover over-allotments. This option was exercised on November 16, 2001
and we received net proceeds from the sale of these shares after offering costs
of approximately $9.1 million which will be used for general corporate purposes.
SENIOR NOTES - On February 8, 2000, Alamosa (Delaware) issued $350.0
million face amount of senior discount notes (the "12 7/8% Senior Discount
Notes"). The 12 7/8% Senior Discount Notes mature in ten years (February 15,
2010), carry a coupon rate of 12 7/8%, and provide for interest deferral for the
first five years. The 12 7/8% Senior Discount Notes will accrete to their $350
million face amount by February 8, 2005, after which interest will be paid in
cash semiannually.
On January 31, 2001, Alamosa (Delaware) issued $250.0 million face
amount of senior notes (the "12 1/2% Senior Notes"). The 12 1/2% Senior Notes
mature in ten years (February 1, 2011), carry a coupon rate of 12 1/2%, payable
semiannually on February 1 and August 1, beginning on August 1, 2001.
On August 15, 2001, Alamosa (Delaware) issued $150.0 million face
amount of senior notes (the "13 5/8% Senior Notes"). The 13 5/8% Senior Notes
mature in ten years (August 15, 2011), carry a coupon rate of 13 5/8%, payable
semiannually on February 15 and August 15, beginning on February 15, 2002.
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, we entered into
a $280.0 million Senior Secured Credit Facility with Citicorp USA, as
administrative agent and collateral agent; Toronto Dominion (Texas), Inc., as
syndication agent; First Union National Bank, as documentation agent; EDC as
co-documentation agent; and a syndicate of banking and financial institutions.
The Senior Secured Credit Facility was closed and initial funding of $150
million was made on February 14, 2001 in connection with the completion of the
acquisitions of two PCS Affiliates of Sprint. A portion of the proceeds of the
Senior Secured Credit Facility were used (i) to pay the cash portion of the
merger consideration for the acquisitions, (ii) to refinance existing
indebtedness under our credit facility with EDC and under the existing credit
facilities of the acquired companies, and (iii) to pay transaction costs This
facility was amended in March 2001 to increase the maximum borrowings to $333
million as a result of the acquisition of another PCS Affiliate of Sprint. The
facility was again amended in August 2001 to, among other things, modify
financial covenants and reduce the maximum borrowing to $225 million of which
$200 million is outstanding as of June 30, 2003. The remaining proceeds will be
used for general corporate purposes, including funding capital expenditures,
subscriber acquisition and marketing costs, purchase of spectrum and working
capital needs.
25
On September 26, 2002 we entered into the sixth amendment to the
amended and restated credit agreement relative to the Senior Secured Credit
Facility which among other things, modified certain financial and statistical
covenants. As a result of the amendment, we are required to maintain a minimum
cash balance of $10 million.
The September 26, 2002 amendment also placed restrictions on the
ability to draw on the $25 million revolving portion of the Senior Secured
Credit Facility. The first $10 million can be drawn if cash balances fall below
$15 million and we substantiate through tangible evidence the need for such
advances. The remaining $15 million is available only at such time as the
leverage ratio is less than or equal to 5.5 to 1. As of June 30, 2003, our
leverage ratio was 9.35 to 1.
The terms of this credit facility contain numerous financial and other
covenants the violation of which could be deemed an event of default by the
lenders. Should we be deemed to be in default, the lenders can declare the
entire outstanding borrowings immediately due and payable or exercise other
rights and remedies. Such an event would likely have a material adverse impact
to us.
As of June 30, 2003, we had $88,904 in cash and cash equivalents plus
an additional $9,748 in restricted cash held in escrow for debt service
requirements. We also had $25,000 remaining on the revolving portion of the
Senior Secured Credit Facility subject to the restrictions discussed previously.
We believe that this $123,652 in cash and available borrowings is sufficient to
fund our working capital, capital expenditure and debt service requirements
through the point where such requirements will be funded through free cash flow.
Although, we do not anticipate the need to raise additional capital in
the upcoming year, our funding status is dependent on a number of factors
influencing our projections of operating cash flows including those related to
subscriber growth, ARPU, churn and CPGA. Should actual results differ
significantly from these assumptions, our liquidity position could be adversely
affected and we could be in a position that would require us to raise additional
capital which may or may not be available on terms acceptable to us, if at all,
and could have a material adverse effect on our ability to achieve our intended
business objectives.
INFLATION - We believe that inflation has not had a significant impact
in the past and is not likely to have a significant impact in the foreseeable
future on our results of operations.
FUTURE TRENDS THAT MAY AFFECT OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
We may not be able to sustain our planned growth or obtain sufficient
revenue to achieve and sustain profitability. Recently, we have experienced
slowing net customer growth. Net customer growth was approximately 48,000 net
subscribers in the first quarter of 2002, 20,000 net subscribers in the second
quarter of 2002, 20,000 net subscribers in the third quarter of 2002 and
improved to 31,000 net subscribers in the fourth quarter of 2002 due to seasonal
activity. We added 24,000 net subscribers in the second quarter of 2003, which
was less than the 31,000 net subscribers added in the first quarter of 2003. The
trend of slowing subscriber growth experienced during 2002 is attributable to
increased churn and competition, slowing wireless subscriber growth and weakened
consumer confidence. The improvement in the first half of 2003 is primarily
attributable to decreased churn resulting from measures put in place in 2002 to
slow the addition of subscribers with sub-prime credit characteristics. We are
currently experiencing net losses as we continue to add subscribers, which
requires a significant up-front investment in acquiring those subscribers. If
the current trend of slowing net customer growth does not improve, it will
lengthen the amount of time it will take for us to reach a sufficient number of
customers to achieve free cash flow, which in turn will have a negative impact
on liquidity and capital resources. Our business plan reflects continuing growth
in subscribers and eventual free cash flow in 2003 as the cash flow generated by
the growing subscriber base exceeds costs incurred to acquire new customers.
We may continue to experience higher costs to acquire customers. For
the second quarter of 2003, our CPGA was $375 per activation compared to $342
per activation in the first quarter of 2003. The fixed costs in our sales and
marketing organization are being allocated among a smaller number of activations
due to the slowdown in subscriber growth. In addition, handset subsidies have
been increasing due to more aggressive promotional efforts. With a higher CPGA,
customers must remain on our network for a longer period of time at a stable
ARPU to recover those acquisitions costs.
26
We may continue to experience a higher churn rate. Our average customer
monthly churn (net of deactivations that take place within 30 days of the
activation date) for 2002 was 3.4 percent. This rate of churn is the highest
that we have experienced on an annual basis since the inception of the Company
and compares to 2.7 percent in 2001. We expect that in the near term churn will
remain higher than historical levels as a result of a greater percentage of
sub-prime versus prime credit class customers imbedded in the subscriber base in
our territory as a result of various programs that were run during 2001 and the
first two months of 2002 which encouraged sub-prime credit individuals to
subscribe to our service. We have experienced a significantly higher rate of
involuntary deactivations due to non-payment relative to these customers. During
the second quarter of 2003 we experienced an improvement in our churn rate to
2.5 percent compared to 3.0 percent in the first quarter of 2003. If the
improvement in churn we experienced in the first six months of 2003 does not
continue or if churn increases over the long-term, we would lose the cash flow
attributable to these customers and have greater than projected losses.
We may experience a significantly lower reciprocal roaming rate with
Sprint in 2003 and thereafter. Under our original agreements with Sprint, Sprint
had the right to change the reciprocal roaming rate. On April 27, 2001, we
entered into an agreement with Sprint which reduced the reciprocal roaming rate
from 20 cents per minute to 15 cents per minute beginning June 1, 2001, and to
12 cents per minute on October 1, 2001. For 2002, the rate was 10 cents per
minute. On January 1, 2003, the reciprocal rate was reduced to 5.8 cents per
minute which Sprint has indicated represents a fair and reasonable return on the
cost of the underlying network based on an agreement in principle reached with
Sprint in 2001. We have not agreed that 5.8 cents per minute represents a fair
and reasonable return on the cost of the underlying network and are currently in
discussions with Sprint as to the determination of this rate. We are currently a
net receiver of roaming with Sprint meaning that other PCS customers roam onto
our network at a higher rate than our customers roam onto other portions of the
PCS network of Sprint. The ratio of inbound to outbound Sprint PCS travel
minutes was 1.1 to 1 for the second quarter of 2003 and we expect this margin to
trend close to 1 to 1 over time.
Our ability to borrow funds under the revolving portion of the Senior
Secured Credit Facility may be limited due to our failure to maintain or comply
with the restrictive financial and operating covenants contained in the
agreements covering our Senior Secured Credit Facility. We amended our credit
agreement on September 26, 2002 and modified certain of the financial and
operating covenants and are in compliance with the lending agreement at June 30,
2003. We believe we will meet the requirements of these covenants in future
periods, however, if we do not, our ability to access the remaining $25,000 in
the form of the revolving portion of the Senior Secured Credit Facility could be
limited which could have a material adverse impact on our liquidity.
We may incur significant handset subsidy costs for existing customers
who upgrade to a new handset. As our customer base matures and technological
advances in our services take place, more existing customers will begin to
upgrade to new handsets to take advantage of these services. We have limited
historical experience regarding the rate at which existing customers upgrade
their handsets and if more customers upgrade than we are currently anticipating,
it could have a material adverse impact on our earnings and cash flows.
We may not be able to access the credit or equity markets for
additional capital if the liquidity discussed above is not sufficient for the
cash needs of our business. We continually evaluate options for additional
sources of capital to supplement our liquidity position and maintain maximum
financial flexibility. If the need for additional capital arises due to our
actual results differing significantly from our business plan or for any other
reason, we may be unable to raise additional capital.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. For our leased telecommunication facilities, primarily consisting
of cell sites and switch site operating leases, we have evaluated the impact of
the adoption of SFAS No. 143 as of January 1, 2003 and determined that a
liability cannot be reasonably estimated due to (1) our inability to reasonably
assess the probability of the likelihood that a lessor would enforce the
remediation requirements upon expiration of the lease term and therefore its
impact on future cash outflows, (2) our inability to estimate a potential range
of settlement dates due to our ability to renew site leases after the initial
lease expiration and (3) our limited experience in abandoning cell site
locations and actually incurring remediation costs.
27
In addition to cell sites and switch site operating leases, we also have leases
for office and retail locations that are subject to the provisions of SFAS No.
143. The adoption of SFAS No. 143 to leased office and retail locations did not
have a material impact on our consolidated results of operations, financial
position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002," which rescinded or amended various existing
standards. One change addressed by this standard pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt" and states that an
extinguishment of debt cannot be classified as an extraordinary item unless it
meets the unusual or infrequent criteria outlined in Accounting Principles Board
Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." The provisions of this statement are
effective for fiscal years beginning after May 15, 2002 and extinguishments of
debt that were previously classified as an extraordinary item in prior periods
that do not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 in the
quarter ending March 31, 2003 has resulted in a reclassification of the loss on
extinguishment of debt that we previously reported as an extraordinary item for
the year ended December 31, 2001.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," which requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of this statement are effective for exit or disposal activities
initiated after December 31, 2002 and the adoption of this statement did not
have a material impact on our results of operations, financial position or cash
flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure," which is an amendment of
SFAS No. 123 "Accounting for Stock-Based Compensation." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of this statement are effective
for fiscal years ending after and interim periods beginning after December 15,
2002. As we continue to account for stock-based employee compensation using the
intrinsic value method under APB Opinion No. 25, we, as required, have only
adopted the revised disclosure requirements of SFAS No. 148 as of December 31,
2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003 and is not expected to have a material impact on our results of
operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances) and is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. The adoption of this statement is not expected to have a
material impact on our results of operations, financial position or cash flows.
The Emerging Issues Task Force ("EITF") of the FASB issued EITF
Abstract No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" in January 2003. This abstract addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, it addresses how consideration
should be measured and allocated to the separate units of accounting in the
arrangement. The guidance in this abstract is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003 and we have
evaluated the impact of the adoption of the provisions of this abstract as of
July 1, 2003.
We have elected to apply the accounting provisions of this abstract on
a prospective basis beginning July 1, 2003. Under the accounting provisions of
this abstract, we will allocate amounts charged to customers between the sale
28
of handsets and other equipment and the sale of wireless telecommunication
services. In many cases, this will result in all amounts collected from the
customer upon activation of the handset being allocated to the sale of the
handset. As a result of this treatment, activation fees included in the
consideration at the time of sale will be recorded as handset revenue. Prior to
the adoption of the provisions of this abstract, we had deferred activation fee
revenue as well as activation costs in a like amount and amortized these
revenues and costs over the average life of our subscribers. The existing
deferred revenue and costs at July 1, 2003 will continue to be amortized.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued after
December 31, 2002, while the disclosure requirements were effective for
financial statements for periods ending after December 15, 2002. At December 31,
2002, we had not entered into any material arrangement that would be subject to
the disclosure requirements of FIN 45. The adoption of FIN 45 did not have a
material impact on our consolidated financial statements.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46" or the "Interpretation"), "Consolidation of Variable Interest Entities, an
interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification of entities for which control is achieved through
means other than through voting rights ("variable interest entities" or "VIEs")
and how to determine when and which business enterprise should consolidate the
VIE (the "primary beneficiary"). This new model for consolidation applies to an
entity which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both the
primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. For public entities with VIEs
created before February 1, 2003, the implementation and disclosure requirements
of FIN 46 are effective no later than the beginning of the first interim or
annual reporting period beginning after June 15, 2003. For VIEs created after
January 31, 2003, the requirements are effective immediately. We do not believe
that the adoption of FIN 46 will have a material impact on our consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not
enter into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to some interest rate risk on our senior Secured Credit
Facility and any future floating rate financing.
GENERAL HEDGING POLICIES - We enter into interest rate swap and collar
agreements to manage our exposure to interest rate changes on our variable rate
term portion of our Senior Secured Credit Facility. We seek to minimize
counterparty credit risk through stringent credit approval and review processes,
the selection of only the most creditworthy counterparties, continual review and
monitoring of all counterparties, and through legal review of contracts. We also
control exposure to market risk by regularly monitoring changes in interest rate
positions under normal and stress conditions to ensure that they do not exceed
established limits. Our derivative transactions are used for hedging purposes
only and comply with Board-approved policies. Senior management receives
frequent status updates of all outstanding derivative positions.
INTEREST RATE RISK MANAGEMENT - Our interest rate risk management
program focuses on minimizing exposure to interest rate movements by setting an
optimal mixture of floating and fixed-rate debt. We utilize interest rate swaps
and collars to adjust our risk profile relative to our floating rate Senior
Secured Credit Facility. We have hedges in place on approximately 42 percent of
the outstanding advances under our Senior Secured Credit Facility at June 30,
2003.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with the senior discount notes, capital leases
and
29
the credit facility financing based on our projected level of long-term
indebtedness:
YEARS ENDING DECEMBER 31,
------------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER
--------- -------- -------- -------- -------- ------------
(DOLLARS IN MILLIONS)
Fixed Rate Instruments
12 7/8% senior discount notes (4) $ 305 $ 345 $ 350 $ 350 $ 350 $ --
Fixed interest rate 12.875% 12.875% 12.875% 12.875% 12.875% 12.875%
Principal payments -- -- -- -- -- 350
12 1/2% senior notes 250 250 250 250 250 --
Fixed interest rate 12.500% 12.500% 12.500% 12.500% 12.500% 12.500%
Principal payments -- -- -- -- -- 250
13 5/8% senior notes 150 150 150 150 150 --
Fixed interest rate 13.625% 13.625% 13.625% 13.625% 13.625% 13.625%
Principal payments -- -- -- -- -- 150
Capital leases
Annual minimum lease payments (1) $ 1.332 $ .596 $ .170 $ .150 $ .144 $ .744
Average Interest Rate 12.000% 12.000% 12.000% 12.000% 12.000% 12.000%
Variable Rate Instruments:
Senior Secured Credit Facility (2) $ 200 $ 178 $ 133 $ 83 $ 18 --
Average Interest Rate (3) 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Principal payments -- 22 45 50 65 18
(1) These amounts represent the estimated minimum annual payments due under
our estimated capital lease obligations for the periods presented.
(2) The amounts represent estimated year-end balances under the credit
facility based on a projection of the funds borrowed under that
facility pursuant to our current plan of network build-out.
(3) Interest rate on the Senior Secured Credit Facility advances equal, at
our option, either (i) the London Interbank Offered Rate adjusted for
any statutory reserves ("LIBOR"), or (ii) the base rate which is
generally the higher of the administrative agent's base rate, the
federal funds effective rate plus 0.50% or the administrative agent's
base CD rate plus 0.50%, in each case plus an interest margin which is
initially 4.00% for LIBOR borrowings and 3.00% for base rate borrowings
as of June 30, 2003. The applicable interest margins are subject to
reductions under a pricing grid based on ratios of our total debt to
our earnings before interest, taxes, depreciation and amortization
("EBITDA"). The interest rate margins will increase by an additional
200 basis points in the event we fail to pay principal, interest or
other amounts as they become due and payable under the Senior Secured
Credit Facility.
(4) Interest will accrete on the senior discount notes through February
2005 at which time the notes will begin to require cash payments of
interest with the first semi-annual cash interest payment due in August
2005.
We are also required to pay quarterly in arrears a commitment fee on
the unfunded portion of the commitment of each lender. The commitment fee
accrues at a rate per annum equal to (i) 1.50% on each day when the utilization
(determined by dividing the total amount of loans plus outstanding letters of
credit under the Senior Secured Credit Facility by the total commitment amount
under the Senior Secured Credit Facility) of the Senior Secured Credit Facility
is less than or equal to 33.33%, (ii) 1.25% on each day when utilization is
greater than 33.33% but less than or equal to 66.66% and (iii) 1.00% on each day
when utilization is greater than 66.66%. We have entered into derivative hedging
instruments to hedge a portion of the interest rate risk associated with
borrowings under the Senior Secured Credit Facility. For purposes of this table,
we have used an assumed average interest rate of 7.25%.
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance our senior discount notes at maturity at
market rates; and
o the impact of interest rate movements on our ability to meet
interest expense requirements and meet financial covenants.
30
As a condition to the Senior Secured Credit Facility, we must maintain
one or more interest rate protection agreements in an amount equal to a portion
of the total debt under the credit facility. We do not hold or issue financial
or derivative financial instruments for trading or speculative purposes. While
we cannot predict our ability to refinance existing debt or the impact that
interest rate movements will have on our existing debt, we continue to evaluate
our financial position on an ongoing basis.
At June 30, 2003, we had entered into the following interest rate
swaps:
INSTRUMENT NOTIONAL TERM FAIR VALUE
--------------- ------------- ----------- ----------
4.9475% Interest rate swap $ 21,690 3 years $ (836)
4.9350% Interest rate swap $ 28,340 3 years (993)
----------
$ (1,829)
==========
These swaps are designated as cash flow hedges such that the fair value
is recorded as a liability in the June 30, 2003 consolidated balance sheet with
changes in fair value (net of tax) shown as a component of other comprehensive
income.
We also entered into an interest rate collar with the following terms:
NOTIONAL MATURITY CAP STRIKE PRICE FLOOR STRIKE PRICE FAIR VALUE
-------- -------- ---------------- ------------------ ----------
$28,340 5/15/04 7.00% 4.12% $ (850)
This collar does not receive hedge accounting treatment such that the
fair value is reflected as a liability in the June 30, 2003 consolidated balance
sheet and the change in fair value has been reflected as an adjustment to
interest expense.
In addition to the swaps and collar discussed above, we purchased an
interest rate cap in February 2002 with a notional amount of $5,000 and a strike
price of 7.00%. This cap does not receive hedge accounting treatment and the
fair value reflected in the consolidated balance sheet at June 30, 2003 is less
than $1.
These fair value estimates are subjective in nature and involve
uncertainties and matters of considerable judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been named as a defendant in a number of purported securities
class actions in the United States District Court for the Southern District of
New York, arising out of our initial public offering (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The action
against us is one of more than 300 related class actions which have been
consolidated and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for purposes of the
IPO were false and misleading because they failed to disclose that the
underwriters allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of common stock in
connection with the IPO, and (ii) entered into agreements with their customers
to allocate such stock to those customers in exchange for the customers agreeing
to purchase additional Company shares in the aftermarket at pre-determined
prices. On February 19, 2003, the Court granted motions by us and 115 other
issuers to dismiss the claims under Rule 10b-5 of the Exchange Act which had
been asserted against them. The Court denied the motions by us and virtually all
of the other issuers to dismiss the claims asserted against them under Section
11 of the Securities Act. We maintain insurance coverage which may mitigate our
exposure to loss in the event that this claim is not resolved in our favor.
On January 23, 2001, the board of directors, in a unanimous decision,
terminated the employment of Jerry Brantley, then President and COO of the
Company. On April 29, 2002, Mr. Brantley initiated litigation against us and our
Chairman, David E. Sharbutt in the District Court of Lubbock County, Texas, 22nd
Judicial District, alleging wrongful termination among other things. On
September 27, 2002, the Court entered an Agreed Order Compelling Arbitration.
The parties are in the process of selecting a panel of three arbitrators. We
believe that there is no basis for Mr. Brantley's claim and intend to vigorously
defend the lawsuit.
On January 8, 2003, a claim was made against us by Southwest Antenna
and Tower, Inc. ("SWAT") in the Second Judicial District Court, County of
Bernalillo, State of New Mexico, for monies due on an open account. SWAT sought
to recover approximately $2.0 million from the Company relative to work
performed by SWAT during 2000 for Roberts Wireless Communications, LLC which was
acquired by us in the first quarter of 2001. This claim was settled for $0.875
million during the second quarter of 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders held on May 29, 2003, the
stockholders voted on:
1) the election of four directors for a term of three years expiring in 2006:
For Withheld
---------- -----------
Scotty Hart 78,651,847 242,635
Dr. Allen T. McInnes 76,623,328 2,271,154
Michael V. Roberts 77,796,514 1,097,968
David E. Sharbutt 78,620,628 273,854
2) the approval of an amendment to our Amended and Restated Employee Stock
Purchase Plan to authorize for issuance an additional 2,500,000 shares of
common stock
For Against Abstain
-------------- ------------ -----------
76,583,741 2,179,108 131,633
3) ratification of the appointment of PricewaterhouseCoopers LLP as our
independent auditors for the year ending December 31, 2003
For Against Abstain
-------------- ------------ -----------
72,634,675 6,217,837 41,971
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following set forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) The following sets forth the reports on Form 8-K that have been filed
during the quarter for which this report is filed:
Current Report on Form 8-K filed on May 19, 2003 (Items 7 and 12).
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALAMOSA HOLDINGS, INC.
Registrant
/s/ DAVID E. SHARBUTT
-----------------------------------------
David E. Sharbutt
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ KENDALL W. COWAN
-----------------------------------------
Kendall W. Cowan
Chief Financial Officer
(Principal Financial and Accounting
Officer)
34
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
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.