Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-66358
[ALAMOSA LOGO]
ALAMOSA HOLDINGS, INC
30,649,990 SHARES OF COMMON STOCK
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This prospectus may be used only in connection with the resale of
30,649,990 shares of our common stock by the selling stockholders listed on page
75 of this prospectus. The selling stockholders obtained their shares of our
common stock in connection with our acquisitions of companies owned by them. The
methods of sale of our common stock offered in this prospectus are described
under the heading "Plan of Distribution." We will receive none of the proceeds
from such sales.
Our common stock trades on The Nasdaq National Market under the ticker
symbol "APCS." On September 27, 2001, the closing price of one share of our
common stock was $13.11.
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INVESTING IN THE SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is September 28, 2001.
TABLE OF CONTENTS
PAGE
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Where You May Find More Information..........................................ii
Statements Regarding Forward-Looking Information............................iii
Prospectus Summary............................................................1
Alamosa Holdings, Inc. Selected Historical Financial Information..............7
Risk Factors..................................................................9
Use of Proceeds..............................................................22
Price Range of Common Stock..................................................22
Dividend Policy..............................................................22
Capitalization...............................................................23
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................24
Business.....................................................................34
Management...................................................................45
Certain Relationships and Related Transactions...............................53
Our Affiliation Agreements with Sprint PCS...................................58
Regulatory Environment.......................................................67
Security Ownership of Certain Beneficial Owners and Management...............72
Selling Stockholders.........................................................75
Description of Capital Stock.................................................79
Plan of Distribution.........................................................86
Alamosa Holdings, Inc. Selected Unaudited Pro Forma Financial Data...........88
Legal Matters................................................................95
Experts......................................................................95
Index To Financial Statements...............................................F-1
Alamosa Holdings, Inc. Financial Statements.................................F-2
Roberts Wireless Communications, L.L.C. Financial Statements...............F-39
Washington Oregon Wireless Financial Statements ...........................F-49
SWPCS Holdings, L.L.C. Financial Statements................................F-61
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WHERE YOU MAY FIND MORE INFORMATION
We file reports and other information with the Securities and Exchange
Commission. Copies of those reports and other information may be inspected and
copied at the public reference facilities maintained by the SEC at:
o Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
or
o Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms.
Copies of these materials can also be obtained by mail at prescribed
rates from the Public Reference Room of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding us. The address of the SEC website is http://www.sec.gov.
We have filed a registration statement on Form S-1 under the Securities
Act of 1933 with the SEC with respect to our common stock offered hereby. This
prospectus does not contain all of the information set forth in the registration
statement because certain parts of the registration statement are omitted in
accordance with the rules and regulations of the SEC. The registration statement
and its exhibits are available for inspection and copying as set forth above.
The documents referred to in this prospectus are available from us upon
request. We will provide a copy of any and all of the information that is
referred to in this prospectus to any person, without charge, upon written or
oral request. If exhibits to the documents referred to in this prospectus are
not themselves specifically referred to in this prospectus, then the exhibits
will not be provided.
Requests for documents should be directed to:
Alamosa Holdings, Inc.
5225 S. Loop 289
Lubbock, TX 79424
Attention: Kendall W. Cowan,
Chief Financial Officer and Secretary
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY OUR COMMON STOCK IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
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STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains statements about future events and
expectations, which are "forward-looking statements." Any statement in this
prospectus or the documents that are incorporated herein by reference that is
not a statement of historical fact may be deemed to be a forward-looking
statement. These forward-looking statements include:
o forecasts of growth in the number of consumers using wireless
personal communications services and in estimated populations;
o statements regarding our plans for, schedule for and costs of the
build-out of our portion of the Sprint PCS network;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources, operating losses and projections
of when we will launch commercial wireless personal communications
service in particular markets; and
o statements regarding expectations or projections about markets in
our territories.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements.
Specific factors that might cause such a difference include, but are not limited
to:
o our dependence on our affiliation with Sprint PCS;
o the ability of Sprint PCS to alter fees paid or charged to us in
accordance with our affiliation agreements;
o the need to successfully complete the build-out of our portion of
the Sprint PCS network on our anticipated schedule;
o our limited operating history and anticipation of future losses;
o our dependence on Sprint PCS's back office services;
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; and
o general economic and business conditions.
For a discussion of some of these factors, see "Risk Factors" beginning
on page 9 of this prospectus.
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PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the
information that you should consider before investing in our common stock. You
should read this entire prospectus carefully, including "Risk Factors," and our
financial statements and the accompanying notes.
For convenience in this prospectus, unless indicated otherwise,
"Alamosa" "we," "us" and "our" refer to Alamosa Holdings, Inc. and its
subsidiaries. "Sprint PCS" refers to Sprint Communications Company, L.P., Sprint
Spectrum L.P. and WirelessCo, L.P. "Sprint" refers to Sprint Corporation and its
affiliates other than Sprint PCS. Statements in this prospectus regarding Sprint
or Sprint PCS are derived from information contained in our agreements with
Sprint PCS, periodic reports and other documents filed by Sprint and Sprint
Spectrum L.P. with the SEC or press releases issued by Sprint or Sprint PCS.
ALAMOSA HOLDINGS, INC.
OVERVIEW
We are the largest network partner in terms of subscribers, revenues
and market population of Sprint PCS, the personal communications services group
of Sprint Corporation. We have the exclusive right to provide wireless mobility
communications network services under the Sprint and Sprint PCS brand names in a
territory encompassing over 15.6 million residents primarily located in Texas,
New Mexico, Arizona, Colorado Wisconsin, Illinois, Oklahoma, Kansas, Missouri,
Washington and Oregon. For the six months ended June 30, 2001 we generated
approximately $129.4 million in revenue and ended the period with approximately
316,000 subscribers.
We launched Sprint PCS services in Laredo Texas in June 1999, and
through June 30, 2001, have commenced service in 62 additional markets,
including markets in territories serviced by companies that we acquired in 2001.
At June 30, 2001, our systems covered approximately 10 million residents out of
approximately 15.6 million total residents in those markets. We anticipate that
we will complete the network build-out requirements required by Sprint PCS by
the end of 2001. At such time, our network will cover approximately 11 million
residents in 87 markets. The number of residents covered by our system does not
represent the number of Sprint PCS subscribers that we expect to be based in our
territories.
Over the past year we have grown our business significantly. During the
first quarter of 2001, we completed our acquisitions of three Sprint PCS
affiliates. We acquired Roberts Wireless Communications, L.L.C. ("Roberts") and
Washington Oregon Wireless, LLC ("WOW") on February 14, 2001. We acquired
Southwest PCS Holdings, Inc. ("Southwest") on March 30, 2001. The acquisitions
added territories with a total of approximately 6.8 million residents and added
approximately 90,000 subscribers. Since the second quarter of 2000, we have
increased subscribers and revenues an average of 49% and 49%, respectively, per
quarter.
ATTRACTIVE TERRITORY
We believe part of our success is attributable to the strategic
attractiveness of our markets. We believe our markets are attractive for several
reasons:
o PROXIMITY TO MAJOR SPRINT PCS MARKETS. Our markets are located
near or around several major Sprint PCS markets, including Dallas,
San Antonio, Kansas City, St. Louis, Phoenix, Seattle, Portland,
Milwaukee, Minneapolis, Tulsa and Wichita.
o FEWER COMPETITORS. We believe we face a smaller number of
competitors in our markets than the typical Sprint PCS market and
fewer competitors than is generally the case for service providers
operating in more urban areas.
o MEXICO / U.S. BORDER. Our territories include more than 75% of the
Mexico / U.S. border area.
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o HIGH POPULATION GROWTH MARKETS. The overall population growth rate
in our territories has been approximately 37% above the national
average for the past ten years.
ALAMOSA FOOTPRINT WITH
ROBERTS, WOW AND SOUTHWEST
[GRAPHIC OMITTED]
STRATEGIC RELATIONSHIP WITH SPRINT PCS
We believe that our strategic relationship with Sprint PCS provides
significant competitive advantages. Sprint PCS is a national provider of
wireless services and products. Under our affiliation agreements with Sprint
PCS, we have the exclusive right to provide wireless mobility communications
network services under the Sprint and Sprint PCS brand names in our territories.
Sprint PCS handles our billing and collections and pays us 92% of "collected
revenues" from subscribers based in our territory and retains the remaining 8%.
We also receive other revenues, including Sprint PCS roaming revenues for each
minute that Sprint PCS customers based outside our territory use our portion of
the Sprint PCS network and 100% of revenues from handset sales.
We believe that our affiliation with Sprint PCS allows us to establish
high quality, branded wireless services more quickly, at a lower cost and with
lower initial capital requirements than would otherwise be possible. For
example, we benefit from Sprint PCS's:
o MARKETING. We market products and services through Sprint PCS's
existing relationships with major national retailers under the
highly recognizable Sprint and Sprint PCS brand names.
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o NATIONAL NETWORK. Customers in our territory can immediately
access Sprint PCS's growing network in 300 major metropolitan
areas across the country.
o ADVANCED TECHNOLOGY. We believe that the technology used by Sprint
PCS provides advantages in capacity and voice-quality, as well as
access to advanced features such as wireless Internet access.
o HANDSET AND EQUIPMENT AVAILABILITY AND PRICING. Sprint PCS's
purchasing leverage allows us to acquire handsets and network
equipment more quickly and at a lower cost than we could without
our affiliation with Sprint PCS.
RECENT DEVELOPMENTS
SECOND QUARTER 2001 OPERATING RESULTS. Total revenues for the second
quarter of 2001 were $83.5 million, an increase of $66.0 million over the second
quarter of 2000. Our average monthly revenue per user ("ARPU") was $91 including
roaming and long distance and approximately $62 without roaming for the second
quarter of 2001, compared to approximately $85 including roaming and long
distance and approximately $65 without roaming for the second quarter of 2000.
We added over 54,000 new subscribers in the second quarter of 2001, representing
a 204% increase from 17,995 net subscriber additions in the second quarter of
2000. Our churn rate (excluding 30 day returns) for the second quarter of 2001
was 2.4% compared to 3.0% for the second quarter of 2000. We had approximately
245,000 more subscribers at June 30, 2001 than at June 30, 2000, an increase of
over 354%.
NEW RATE AGREEMENT. On April 27, 2001, we announced that Sprint PCS had
reached an agreement in principle with its network partners, including us and
our subsidiaries, providing for a reduction in the reciprocal rate exchanged
between Sprint PCS and its network partners for customers of either party who
travel into territories covered by the other party's portion of the Sprint PCS
network. The rate was reduced from 20 cents per minute to 15 cents per minute
effective June 1, 2001, and to 12 cents per minute effective October 1, 2001.
Beginning January 1, 2002 and continuing throughout the remaining term of the
affiliate agreements with Sprint PCS, the rate will be adjusted to provide a
fair and reasonable return on the cost of the underlying network, which we
expect to be approximately 10 cents per minute.
DEBT COVENANT WAIVER. In connection with the Roberts and WOW
acquisitions, we entered into a new senior secured credit facility the ("senior
secured credit facility") for up to $280 million, which was later increased to
$333 million, in connection with the Southwest acquisition. As of March 31,
2001, we did not meet the maximum negative EBITDA covenant under the senior
secured credit facility, which had an outstanding balance of $203 million.
During the quarter ended March 31, 2001, we reported an EBITDA loss of $16.7
million, which exceeded the maximum negative EBITDA covenant by $7 million. On
May 8, 2001, we obtained a waiver of any default or event of default arising
from the failure to comply with the covenant for the quarter ended March 31,
2001 from the lenders under the senior secured credit facility. We met the
negative EBITDA covenant in the senior secured credit facility for the quarter
ended June 30, 2001.
NEW NOTES OFFERING. On August 15, 2001 we issued $150.0 million face
amount of 13 5/8% senior notes. The 13 5/8% senior notes mature in ten years
(August 15, 2011), carry a coupon rate of 13 5/8%, payable semiannually on
February 15 and August 15, beginning on February 15, 2002. The net proceeds from
the sale of the 13 5/8% senior notes were approximately $140.5 million, after
deducting the discounts and commissions to the initial purchasers and estimated
offering expenses.
AMENDMENT TO THE SENIOR SECURED CREDIT FACILITY. The senior secured
credit facility was amended simultaneously with the closing of the 13 5/8%
senior notes offering to, among other things, permit the 13 5/8% senior notes
offering, reduce the amount of the senior secured credit facility to
approximately $225.0 million and modify the financial covenants.
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ADDITIONAL INFORMATION
Our principal executive office is located at 5225 S. Loop 289, Lubbock,
Texas 79424. Our telephone number is (806) 722-1100.
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THE OFFERING
Common stock offered by
the selling stockholders..... 30,649,990 shares
Selling Stockholders......... The selling stockholders obtained their shares
of our common stock in connection with our
acquisitions of companies owned by them. The
former members of Roberts Wireless Holdings,
L.L.C. (the former parent company of Roberts)
received 13,500,000 shares of our common stock,
in connection with our acquisition of Roberts.
The former members of WOW Holdings, LLC (the
former parent company of WOW) received 6,049,991
shares of our common stock, in connection with
our acquisition of WOW. The former stockholders
of Southwest received 11,099,999 shares of our
common stock, in connection with our acquisition
of Southwest.
Use of Proceeds.............. We will not receive any proceeds from this
offering. All proceeds will be received by the
selling stockholders.
The Nasdaq National Market
Symbol....................... APCS
Risk Factors................. You should carefully read and consider the
information set forth in "Risk Factors" and all
other information set forth in this prospectus
before investing in our common stock.
"Lock-up" and Other
Restrictions on Transfer..... Each of the former members of Roberts Holdings
and WOW Holdings entered into a "lock-up"
arrangement under which each holder is
prohibited from selling or disposing of any
shares of our common stock received in the
Roberts and WOW mergers until September 30,
2001, without our prior written consent.
Each of the former stockholders of Southwest
entered into a "lock-up" arrangement under which
each holder agreed to limit sales until March
30, 2002 under the registration statement of
which this prospectus forms a part to an amount
that will not exceed 50% of our common stock
that such holder received in the Southwest
merger.
We have agreed to maintain the effectiveness of the registration
statement of which this prospectus forms a part for the shares of common stock
owned by the selling stockholders who were former members of WOW Holdings and
Roberts Holdings for a period of one year after the later of: (i) the first day
the registration statement becomes effective and (ii) October 1, 2001. However,
if the shares of our common stock that the selling stockholders who were former
members of WOW Holdings and Roberts Holdings are selling pursuant to the
registration statement become freely tradeable pursuant to Rule 144(k) of the
Securities Act prior to the termination of the effective period, then we are
under no further obligation to keep the registration statement effective for the
shares of common stock owned by the selling stockholders who were former members
of WOW Holdings and Roberts Holdings. No sales of common stock owned by the
selling stockholders who were former members of WOW Holdings and Roberts
Holdings may be made pursuant to this prospectus after the termination of the
effective period unless we amend or supplement this prospectus to indicate that
we have agreed to extend the period of effectiveness.
We have also agreed to maintain the effectiveness of the registration
statement of which this prospectus forms a part for the shares of common stock
owned by the selling stockholders who were former stockholders of Southwest
until the earlier of: (i) such time as all such selling stockholders sell their
shares registered under the registration statement or (ii) such time as all such
selling stockholders sell all of their shares registered under the
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registration statement without restriction pursuant to Rule 144(k) under the
Securities Act. However, at any time when there is no registration statement
filed by us pursuant to Rule 415 of the Securities Act that is effective with
the SEC other than the registration statement, we are not required to maintain
the effectiveness of the registration statement after March 30, 2003 as to any
shares held by a selling stockholder, who was a former stockholder of Southwest,
that otherwise could then be sold pursuant to Rule 144(k), but may not be sold
pursuant to Rule 144(k) because the holder of such shares is an "affiliate" (as
such term is defined in Rule 144 under the Securities Act) solely because such
holder is the beneficial owner of additional shares of common stock acquired not
in connection with the Southwest merger, which has caused such holder to be
deemed an affiliate for purposes of Rule 144. No sales may be made pursuant to
this prospectus by the selling stockholders who were former stockholders of
Southwest after the termination of the effective period unless we amend or
supplement this prospectus to indicate that we have agreed to extend the period
of effectiveness.
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ALAMOSA HOLDINGS, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected historical financial data presented below under the
captions "Selected Operating Data" and "Selected Balance Sheet Data" as of
December 31, 2000, 1999 and 1998 and for each of the years ended December 31,
2000 and 1999 and for the period ended December 31, 1998 have been derived from
our audited consolidated financial statements.
The selected historical financial data presented under the captions
"Selected Operating Data" and "Selected Balance Sheet Data" as of June 30, 2001
and 2000 and for the six months ended June 30, 2001 and 2000 are derived from
our unaudited consolidated financial statements. Our unaudited financial
statements include all adjustments, consisting only of normal accruals, that
management considers necessary for a fair presentation of financial position and
results of operations for the unaudited interim periods. Operating results for
the six months ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 2001.
It is important that you also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements for the six months ended June 30, 2001 and June 30, 2000, and for the
periods ended December 31, 2000, 1999, and 1998 and the related notes, included
herein.
FOR THE PERIOD
JULY 16, 1998 FOR THE
(INCEPTION) YEAR ENDED FOR THE SIX MONTHS
THROUGH DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, -------------------------- --------------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
SELECTED OPERATING DATA:
Revenues:
Service revenues .......... $ -- $ 6,534 $ 73,500 $ 25,661 $ 119,422
Product sales ............. -- 2,450 9,200 3,772 9,947
---------- ---------- ---------- ---------- ----------
Total revenue ........... -- 8,984 82,700 29,433 129,369
---------- ---------- ---------- ---------- ----------
Costs and expenses .......... 959 39,656 151,597 53,291 192,465
Interest and other income/
(expense) ................. 35 (2,164) (11,291) (4,630) (26,475)
Net loss before
extraordinary item ........ (924) (32,836) (80,188) (28,488) (89,571)
Income tax benefit .......... -- -- -- -- 31,306
Loss on debt extinguishment.. -- -- -- -- (3,503)
---------- ---------- ---------- ---------- ----------
Net income/(loss) ........... $ (924) $ (32,836) $ (80,188) $ (28,488) $ (61,768)
Deficiency of earnings
before fixed
charges (1) ............... (924) (33,493) (80,188) (28,488 (90,552)
Pro forma deficiency of
earnings before fixed
charges (7) ............... (95,357) (98,137)
AS OF
DECEMBER 31, AS OF JUNE 30,
------------------------------------------ --------------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents ..... $ 13,529 $ 5,656 $ 141,768 $ 241,038 $ 122,092
Short-term investments ........ -- -- 1,600 21,841 --
Property and equipment, net ... 2,093 84,714 228,983 142,220 410,432
Restricted cash ............... -- 518 -- -- 70,727
Goodwill and intangible assets,
net ......................... -- -- -- -- 856,141
Total assets .................. $ 15,674 $ 104,492 $ 458,398 $ 428,691 $1,542,688
========== ========== ========== ========== ==========
Accounts payable and accrued
expenses .................. $ 846 $ 16,335 $ 61,386 $ 43,975 $ 93,451
Long-term debt ................ 708(2) 72,703(3) 264,843(4) 201,914(5) 677,313(6)
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---------- ---------- ---------- ---------- ----------
Total liabilities ............. 1,598 93,052 327,000 246,439 927,236
Total stockholders' equity .... 14,076 11,440 131,398 182,252 615,452
---------- ---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity ........ $ 15,674 $ 104,492 $ 458,398 $ 428,691 $1,542,688
========== ========== ========== ========== ==========
-------------------
(1) For purposes of computing the deficiency of earnings before fixed charges,
fixed charges consist of interest expense, capitalized interest, rental
expense and amortization of expense related to indebtedness. The
deficiency of earnings before fixed charges is the amount required for the
ratio of earnings to fixed charges to be one-to-one.
(2) Reflects capital lease obligations of $708.
(3) Reflects indebtedness incurred under the credit facility (the "EDC credit
facility") entered into with Export Development Corporation (which was
refinanced with the senior secured credit facility) of $71,876 and capital
lease obligations of $827.
(4) Reflects indebtedness incurred under the 12 7/8% senior discount notes of
$209,280, EDC credit facility of $54,524, and capital lease obligations of
$1,039.
(5) Reflects indebtedness incurred under the 12 7/8% senior discount notes of
$196,575, EDC credit facility of $4,524 and capital lease obligations of
$815.
(6) Reflects indebtedness incurred under the 12 7/8% senior discount notes of
$222,807, 12 1/2% senior notes of $250,000, senior secured credit facility
of $203,000 and capital lease obligations of $1,506.
(7) For purposes of computing the pro forma deficiency of earnings before
fixed charges, in addition to the items listed in note (1) above, we have
applied the proceeds of the debt and associated interest expense, as if
the offering of the 13 5/8% senior notes had occurred on January 1, 2000.
8
RISK FACTORS
You should carefully consider the following risk factors in addition to
other information contained in this prospectus before purchasing the common
stock we are offering.
RISKS RELATING TO OUR BUSINESS, STRATEGY AND OPERATIONS
WE HAVE A VERY LIMITED OPERATING HISTORY AND WE MAY NOT ACHIEVE OR
SUSTAIN OPERATING PROFITABILITY OR POSITIVE CASH FLOWS, WHICH MAY
LIKELY RESULT IN A DROP IN OUR STOCK PRICE.
We have a limited operating history. We expect to continue to incur
significant operating losses and to generate significant negative cash flow from
operating activities at least through the year ending December 31, 2001. Our
operating profitability will depend upon many factors, including, among others,
our ability to market Sprint PCS services, achieve projected market penetration
and manage customer turnover rates. If we do not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, our stock price could fall and you could lose all or part of your
investment. We will have to dedicate a substantial portion of any cash flow from
operations to make interest and principal payments on our consolidated debt,
which will reduce funds available for other purposes. If we do not achieve and
maintain positive cash flow from operations on a timely basis, we may be unable
to develop our network or conduct our business in an effective or competitive
manner.
IF WE RECEIVE LESS REVENUES OR INCUR MORE FEES THAN WE ANTICIPATE FOR
SPRINT PCS ROAMING, OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY
AFFECTED.
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based outside of our territories uses the
Sprint PCS network in our territories. Similarly, we pay a fee to Sprint PCS for
every minute that a Sprint PCS subscriber based in our territories uses the
Sprint PCS network outside our territories. Sprint PCS customers from our
territories may spend more time in other Sprint PCS coverage areas than we
anticipate, and Sprint PCS customers from outside our territories may spend less
time in our territories or may use our services less than we anticipate. During
the six months ended June 30, 2001, we experienced a significantly higher
increase in usage by our subscribers outside our network compared to the
increase in usage by other Sprint PCS subscribers on our network than we had
previously anticipated. That relative increase in outbound versus inbound usage
contributed to a larger EBITDA loss for the six months ended June 30, 2001 than
we had previously anticipated. If this trend in the ratio of outbound to inbound
usage continues, our results of operations may be negatively affected in the
future. In addition, on April 27, 2001, we reached an agreement with Sprint PCS
providing for a reduction in the reciprocal rate exchanged between Sprint PCS
and us for each other's customers that travel into territories covered by the
other party's portion of the Sprint PCS network. Depending on the pattern of
usage by our subscribers and Sprint PCS subscribers, the rate reductions may
result in lower revenues for us, which may negatively affect our results of
operations. See "Prospectus Summary--Alamosa Holdings, Inc.--Recent
Developments."
OUR ROAMING ARRANGEMENTS MAY NOT BE COMPETITIVE WITH OTHER WIRELESS
SERVICE PROVIDERS, WHICH MAY RESTRICT OUR ABILITY TO ATTRACT AND RETAIN
CUSTOMERS AND THUS MAY ADVERSELY AFFECT OUR OPERATIONS.
We rely on roaming arrangements with other wireless service providers
for coverage in some areas. Some risks related to these arrangements are as
follows:
o the quality of the service provided by another provider during a
roaming call may not approximate the quality of the service
provided by Sprint PCS;
o the price of a roaming call may not be competitive with prices
charged by other wireless companies for roaming calls;
o customers may have to use a more expensive dual-band/dual mode
handset with diminished standby and talk time capacities;
9
o customers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless
network; and
o Sprint PCS customers may not be able to use Sprint PCS advanced
features, such as voicemail notification, while roaming.
If Sprint PCS customers are not able to roam instantaneously or
efficiently onto other wireless networks, we may lose current Sprint PCS
subscribers and Sprint PCS services will be less attractive to potential new
customers.
WE ARE LIKELY TO RECEIVE VERY LITTLE NON-SPRINT PCS ROAMING REVENUE
SINCE THE SPRINT PCS NETWORK IS NOT COMPATIBLE WITH MANY OTHER
NETWORKS.
A portion of our revenue may be derived from payments by other wireless
service providers for use by their subscribers of the Sprint PCS network in our
territories. However, the technology used in the Sprint PCS network is not
compatible with the technology used by many other systems, which diminishes the
ability of other wireless service providers' subscribers to use Sprint PCS
services. Sprint PCS has entered into few agreements that enable customers of
other wireless service providers to roam onto the Sprint PCS network. As a
result, the actual non-Sprint PCS roaming revenue that we receive in the future
is likely to be low relative to that of other wireless service providers.
WE MAY NOT BE ABLE TO MANAGE OUR RAPID GROWTH SUCCESSFULLY.
We expect to experience rapid growth and development in a relatively
short period of time as we complete the build-out of our portion of the Sprint
PCS network. The management of this anticipated growth will require, among other
things:
o continued development of our operational and administrative
systems;
o stringent control of costs and timing of network build-out;
o increased marketing activities;
o the ability to attract and retain qualified management, technical
and sales personnel; and
o the training of new personnel.
Our failure to successfully manage our expected rapid growth and
development could impair our ability to complete the build-out of our portion of
the Sprint PCS network, manage the expanding systems in those territories and
achieve profitability.
Our projected build-out plan does not cover all areas of our
territories, which could make it difficult to maintain a profitable customer
base.
Our projected build-out plan does not cover all areas of our
territories. Upon completion of our current build-out plan, we expect to cover
approximately 72.1% of the resident population in our territories. As a result,
our build-out plan may not adequately serve the needs of the potential customers
in our territories or attract enough subscribers to operate our business
successfully. To correct this potential problem, we may have to cover a greater
percentage of our territories than we currently anticipate, which we may not
have the financial resources to complete or may be unable to do profitably.
10
PARTS OF OUR TERRITORIES HAVE LIMITED LICENSED SPECTRUM, AND THIS MAY
AFFECT THE QUALITY OF OUR SERVICE OR RESTRICT OUR ABILITY TO PURCHASE
SPECTRUM LICENSES FROM SPRINT PCS IN THOSE AREAS.
While Sprint PCS has licenses to use 30 MHZ of spectrum throughout most
of our territories, it has licenses covering only 10 MHZ in New Mexico and
Durango and 20 MHZ in El Paso. In the future, as the number of our subscribers
in those areas increases, this limited licensed spectrum may not be able to
accommodate increases in call volume and may lead to more dropped calls than in
other parts of our territories. In addition, if Sprint PCS were to terminate its
affiliation agreements with us, Sprint PCS would have no obligation to sell
spectrum licenses to us in areas where Sprint PCS owns less than 20 MHZ of
spectrum. Accordingly, if Sprint PCS were to terminate the affiliation
agreements with us, it is likely that we would be unable to operate our business
in New Mexico and Durango.
THE TECHNOLOGY THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY WITHIN THE WIRELESS INDUSTRY.
The wireless telecommunications industry is experiencing significant
technological change. We employ code division multiple access ("CDMA") digital
technology, the digital wireless communications technology selected by Sprint
PCS for its nationwide network. CDMA technology may not ultimately provide all
of the advantages expected by us or Sprint PCS. If another technology becomes
the preferred industry standard, we would be at a competitive disadvantage and
competitive pressures may require Sprint PCS to change its digital technology,
which in turn could require us to make changes to our network at substantial
costs. We may be unable to respond to these pressures and implement new
technology on a timely basis or at an acceptable cost.
UNAUTHORIZED USE OF, OR INTERFERENCE WITH, THE SPRINT PCS NETWORK COULD
DISRUPT OUR SERVICE AND INCREASE OUR COSTS.
We may incur costs associated with the unauthorized use of the Sprint
PCS network, including administrative and capital costs associated with
detecting, monitoring and reducing the incidence of fraud. Fraudulent use of the
Sprint PCS network may impact interconnection costs, capacity costs,
administrative costs, fraud prevention costs and payments to other carriers for
inviolable fraudulent roaming. In addition, some of our border markets are
susceptible to uncertainties related to areas not governed by the Federal
Communications Commission. For example, unauthorized microwave radio signals
near the border in Mexico could disrupt our service in the United States.
POTENTIAL ACQUISITIONS MAY REQUIRE US TO INCUR SUBSTANTIAL ADDITIONAL
DEBT AND INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH MAY
BE COSTLY AND TIME CONSUMING.
We intend to continually evaluate opportunities for the acquisition of
businesses that are intended to complement or extend our existing operations. If
we acquire additional new businesses, we may encounter difficulties that may be
costly and time-consuming, may slow our growth or may affect the market value of
our common stock. Examples of such difficulties are that we may have to:
o assume and/or incur substantial additional debt to finance the
acquisitions and fund the ongoing operations of the acquired
companies;
o integrate new technologies with our existing technology;
o integrate new operations with our existing operations;
o integrate new services with our existing offering of services; or
o divert the attention of our management from other business
concerns.
11
OUR FAILURE TO OBTAIN ADDITIONAL CAPITAL, IF NEEDED TO COMPLETE THE
BUILD-OUT OF OUR PORTION OF THE SPRINT PCS NETWORK, COULD CAUSE DELAY
OR ABANDONMENT OF OUR DEVELOPMENT PLANS.
The build-out of our portions of the Sprint PCS network will require
substantial capital. We estimate that we will have incurred approximately $500.8
million in total capital expenditures from inception through December 31, 2001
for the build-out of our portion of the Sprint PCS network. We plan to fund
these requirements using existing cash and borrowings under the senior secured
credit facility. Additional funds could be required for a variety of reasons,
including unforeseen delays, unanticipated expenses, higher than expected
operating losses, engineering design changes and other technology risks or other
corporate purposes. If we contract to develop additional markets, we will need
to raise additional equity or debt capital. These additional funds may not be
available. Even if these funds are available, we may not be able to obtain them
on a timely basis, on terms acceptable to us or within limitations permitted
under the covenants contained in the documents governing our debt. Failure to
obtain additional funds, should the need for funds develop, could result in the
delay or abandonment of our development and expansion plans.
WE MAY ENCOUNTER DIFFICULTIES IN COMPLETING THE BUILD-OUT OF OUR
PORTION OF THE SPRINT PCS NETWORK, WHICH COULD INCREASE COSTS AND DELAY
COMPLETION OF OUR BUILD-OUT.
As part of our build-out, we must successfully lease or otherwise
retain rights to a sufficient number of radio communications and network control
sites, complete the purchase and installation of equipment, build out the
physical infrastructure and test the network. Some of the radio communications
sites are likely to require us to obtain zoning variances or other local
governmental or third party approvals or permits. Additionally, we must obtain
rights to a sufficient number of tower sites, which will require us to obtain
local regulatory approvals. The local governmental authorities in various
locations in our markets have, at times, placed moratoriums on the construction
of additional towers and radio communications sites. We may also have to make
changes to our radio base station network design as a result of difficulties in
the site acquisition process. Additionally, the FCC requires that our portion of
the PCS network must not interfere with the operations of microwave radio
systems, and Sprint PCS may be required to relocate incumbent microwave
operations to enable us to complete our build-out. Any of the foregoing
developments could increase the costs and delay the completion of our network
build-out. Any failure by us to construct our portion of the Sprint PCS network
on a timely basis may limit our network capacity and may reduce the number of
new Sprint PCS subscribers. Any significant delays could have a material adverse
effect on our business.
BECAUSE WE DEPEND HEAVILY ON OUTSOURCING, THE INABILITY OF THIRD
PARTIES TO FULFILL THEIR CONTRACTUAL OBLIGATIONS TO US MAY DISRUPT OUR
SERVICES OR THE BUILD-OUT OF OUR PORTION OF THE SPRINT PCS NETWORK.
Because we outsource portions of our business, we depend heavily on
third-party vendors, suppliers, consultants, contractors and local exchange
carriers. These parties:
o design and engineer our systems;
o construct base stations, switch facilities and towers;
o install T-1 lines; and
o deploy our wireless personal communications services network
systems.
We are especially dependent on Nortel for network equipment. In
addition, we lease some tower sites for our wireless systems through a master
lease agreement with Omni America Development Corp. and a master design build
agreement with SBA Towers, Inc. Both Omni America and SBA in turn have separate
leasing arrangements with each of the owners of the sites. If Omni America or
SBA were to become insolvent or Omni America or SBA were to breach its leasing
arrangements, we may experience extended service interruption in the areas
serviced by those sites. The failure by any of our vendors, suppliers,
consultants, contractors or local exchange carriers to fulfill their contractual
obligations to us could materially delay build out or adversely affect the
operations of our portion of the Sprint PCS network.
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WE MAY HAVE DIFFICULTY OBTAINING EQUIPMENT THAT IS IN SHORT SUPPLY,
WHICH COULD CAUSE DELAYS IN THE BUILD-OUT OF OUR NETWORK.
We depend on our relationships with manufacturers of equipment used by
us to construct our portion of the Sprint PCS network. The demand for this
equipment is considerable, and some manufacturers could have substantial order
backlogs. If we are unable to rely on these manufacturers, we could have
difficulty obtaining necessary equipment in a timely manner and our costs for
obtaining necessary equipment could increase. As a result, we could suffer
increased costs, delays in the build-out of our portion of the Sprint PCS
network, disruptions in customer service and a reduction in subscribers.
RISKS RELATED TO OUR INDEBTEDNESS
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH.
We are highly leveraged. As of June 30, 2001, after giving effect to
the issuance of the 13 5/8% senior notes and the application of the net proceeds
therefrom, our total outstanding debt, excluding unused commitments made by
lenders, would have been approximately $761.5 million. As of that date, such
total long term indebtedness represents approximately 55% of our total
capitalization.
The senior secured credit facility and the indentures governing the
12 7/8% senior discount note, the 12 1/2% senior notes and the 13 5/8% senior
notes permit us to incur additional indebtedness subject to certain limitations.
Our substantial indebtedness could adversely affect our financial
health by, among other things:
o increasing our vulnerability to adverse economic conditions or
increases in prevailing interest rates, particularly if any of our
borrowings are at variable interest rates;
o limiting our ability to obtain any additional financing we may
need to operate, develop and expand our business;
o requiring us to dedicate a substantial portion of any cash flow
from operations to service our debt, which reduces the funds
available for operations and future business opportunities; and
o potentially making us more highly leveraged than our competitors,
which could potentially decrease our ability to compete in our
industry.
The ability to make payments on our debt will depend upon our future
operating performance which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which we cannot
control. If the cash flow from our operating activities is insufficient, we may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations. Further, we may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. The senior
secured credit facility and the indentures for the 12 7/8% senior discount
notes, for the 12 1/2% senior notes and for the 13 5/8% senior notes may limit
our ability to take several of these actions. Our failure to generate sufficient
funds to pay our debts or to successfully undertake any of these actions could,
among other things, materially adversely affect the market value of our common
stock.
THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US AND OUR SUBSIDIARIES
WHICH MAY LIMIT OUR OPERATING FLEXIBILITY.
The documents governing the terms of our debt, impose material
operating and financial restrictions on us and our subsidiaries. These
restrictions, subject to ordinary course of business exceptions, may limit our
ability and the ability of our subsidiaries to engage in some transactions,
including the following:
o designated types of mergers or consolidations;
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o paying dividends or other distributions to our stockholders;
o making investments;
o selling or encumbering assets;
o repurchasing our common stock;
o changing lines of business;
o borrowing additional money; and
o engaging in transactions with affiliates.
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, complete acquisitions for cash or debt, or react to changes in our
operating environment.
The senior secured credit facility contains numerous affirmative and
negative covenants customary for credit facilities of a similar nature,
including, but not limited to, negative covenants imposing limitations on our
ability to, among other things, (1) declare dividends or repurchase stock; (2)
prepay, redeem or repurchase debt; (3) incur liens and engage in sale-leaseback
transactions; (4) make loans and investments; (5) incur additional debt, hedging
agreements and contingent obligations; (6) issue preferred stock of
subsidiaries; (7) engage in mergers, acquisitions and asset sales; (8) engage in
certain transactions with affiliates; (9) amend, waive or otherwise alter
material agreements or enter into restrictive agreements; and (10) alter the
businesses we conduct.
Pursuant to the senior secured credit facility, we are also subject to
the following financial covenants, which will apply until June 30, 2002:
o minimum numbers of Sprint PCS subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o maximum negative EBITDA or minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures.
After June 30, 2002, the financial covenants will be the following:
o ratio of senior debt to EBITDA;
o ratio of total debt to EBITDA;
o ratio of EBITDA to total fixed charges (the sum of debt service,
capital expenditures and taxes);
o ratio of EBITDA to total cash interest expense; and
o ratio of EBITDA to pro forma debt service.
14
In addition, we may not satisfy the financial ratios and tests under
the senior secured credit facility due to events that are beyond our control. If
we fail to satisfy any of the financial ratios and tests, we could be in a
default under the senior secured credit facility, or we may be limited in our
ability to access additional funds under the senior secured credit facility.
As of March 31, 2001, we did not meet the maximum negative EBITDA
covenant under the senior secured credit facility, which had an outstanding
balance of $203.0 million. During the quarter ended March 31, 2001, we reported
an EBITDA loss of $16.7 million which exceeded the maximum negative EBITDA
covenant by $7.0 million. On May 8, 2001, we obtained a waiver of any default or
event of default arising from the failure to comply with the covenant for the
quarter ended March 31, 2001 from the lenders under the senior secured credit
facility. We met the negative EBITDA covenant for the quarter ended June 30,
2001.
We believe that the EBITDA covenants in the senior secured credit
facility will be met for the next twelve months. However, in connection with
negotiating modified financial covenants to the senior secured credit facility,
we have provided our senior lenders with various models some of which may
include losses larger than the maximum losses contemplated by our public
guidance published on August 8, 2001. Our EBITDA is directly impacted by the
upfront selling and marketing expenses we incur in order to increase our
subscriber base, so in the event we experience greater than expected subscriber
growth there is a material risk that we will not achieve our publicly forecasted
results.
The senior secured credit facility was amended simultaneously with the
closing of the offering of the 13 5/8% senior notes to, among other things,
permit the offering of the 13 5/8% senior notes, reduce the amount of the senior
secured credit facility to approximately $225.0 million and modify the financial
covenants.
IF WE DEFAULT UNDER THE SENIOR SECURED CREDIT FACILITY, THE LENDERS MAY
DECLARE THE DEBT IMMEDIATELY DUE AND SPRINT PCS WILL HAVE THE RIGHT TO
EITHER PURCHASE OUR ASSETS OR PURCHASE THE OUTSTANDING DEBT OBLIGATIONS
UNDER THE SENIOR SECURED CREDIT FACILITY AND FORECLOSE ON OUR ASSETS.
The senior secured credit facility requires us and our subsidiaries to
comply with specified financial ratios and other performance covenants. If we
fail to comply with these covenants or default on our obligations under the
senior secured credit facility, the lenders may accelerate the maturity of the
debt. If the lenders accelerate the debt, Sprint PCS will have the right to
either:
o purchase our operating assets for an amount equal to the greater
of (i) 72% of our "entire business value" and (ii) the aggregate
amount of the outstanding debt under the senior secured credit
facility; or
o purchase the obligations under the senior secured credit facility
by repaying the lenders in full in cash. To the extent Sprint PCS
purchases these obligations from the lenders, Sprint PCS's rights
as a senior lender would enable it to foreclose on the assets
securing the senior secured credit facility in a manner not
otherwise permitted under our affiliation agreements with Sprint
PCS.
If Sprint PCS does not exercise either of these options, the lenders
under the senior secured credit facility may sell the assets securing the
facility to third parties. In addition, if Sprint PCS provides notice to the
lenders under the senior secured credit facility that we are in breach of our
management agreements with Sprint PCS and, as a result, our obligations under
the senior secured credit facility are accelerated and Sprint PCS does not elect
to operate our business, the lenders under the senior secured credit facility
may designate a third party to operate our business.
15
RISKS RELATED TO THE RELATIONSHIPS WITH SPRINT PCS
IF WE FAIL TO COMPLETE THE BUILD-OUT OF OUR PORTION OF THE SPRINT PCS
NETWORK IN ACCORDANCE WITH THE TERMS OF OUR MANAGEMENT AGREEMENTS WITH
SPRINT PCS, AND AN ACCELERATION IS DECLARED UNDER THE SENIOR SECURED
CREDIT FACILITY, SPRINT PCS MAY HAVE THE RIGHT TO PURCHASE OUR
OPERATING ASSETS AT A DISCOUNT TO MARKET VALUE.
Our affiliation agreements with Sprint PCS require that we provide
network coverage to a minimum network coverage area within specified time
frames. We may amend our agreements with Sprint PCS in the future to expand this
network coverage. A failure by us to meet the build-out requirements for any one
of our markets could constitute an event of termination under our management
agreements with Sprint PCS. Our affiliation agreements provide that upon the
occurrence of an event of termination, Sprint PCS has the right to purchase our
operating assets without further stockholder approval and for a price equal to
72% of our "entire business value." The "entire business value" includes our
spectrum licenses, business operations and other assets.
Sprint PCS's right to purchase our assets following an event of
termination under our affiliation agreements is currently subject to the
provisions of a consent and agreement entered into by Sprint PCS for the benefit
of the lenders under the senior secured credit facility. Pursuant to the terms
of this consent and agreement, Sprint may not purchase our operating assets
until all of our obligations under the senior secured credit facility have been
paid in full in cash and all commitments to advance credit under the senior
secured credit facility have been terminated or have expired. However, Sprint
PCS may purchase our assets if it first pays all obligations due under the
senior secured credit facility and the senior secured credit facility is
terminated in connection with such payment. Furthermore, Sprint PCS also has the
right to purchase our assets upon receipt of a notice of acceleration under the
senior secured credit facility following an event of default thereunder. Such
right to purchase is subject to time limitations, and the purchase price must be
the greater of an amount equal to 72% of our "entire business value" or the
amount owed under the senior secured credit facility.
IF SPRINT PCS DOES NOT COMPLETE THE CONSTRUCTION OF ITS NATIONWIDE PCS
NETWORK, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS.
Sprint PCS currently intends to cover a significant portion of the
population of the United States, Puerto Rico and the U.S. Virgin Islands by
creating a nationwide PCS network through its own construction efforts and those
of its network partners. Sprint PCS is still constructing its nationwide network
and does not offer PCS services, either on its own network or through its
roaming agreements, in every city in the United States. Sprint PCS has entered
into, and anticipates entering into, management agreements similar to ours with
companies in other markets under its nationwide PCS build-out strategy. Our
results of operations are dependent on Sprint PCS's national network and, to a
lesser extent, on the networks of Sprint PCS's other network partners. Sprint
PCS's network may not provide nationwide coverage to the same extent as its
competitors, which could adversely affect our ability to attract and retain
customers.
SPRINT PCS'S VENDOR DISCOUNTS MAY BE DISCONTINUED, WHICH COULD INCREASE
OUR EQUIPMENT COSTS AND REQUIRE MORE CAPITAL THAN WE PROJECT TO
BUILD-OUT OUR NETWORK.
We intend to continue to purchase infrastructure equipment under Sprint
PCS's vendor agreements that include significant volume discounts. If Sprint PCS
were unable to continue to obtain vendor discounts for its affiliates, the loss
of vendor discounts could increase our equipment costs for our new markets.
SPRINT PCS MAY MAKE DECISIONS THAT COULD INCREASE OUR EXPENSES, REDUCE
OUR REVENUES OR MAKE OUR AFFILIATE RELATIONSHIPS WITH SPRINT PCS LESS
COMPETITIVE.
Sprint PCS, under our affiliation agreements has a substantial amount
of control over factors which significantly affect the conduct of our business.
Accordingly, Sprint PCS may make decisions that adversely affect our business,
such as the following:
16
o Sprint PCS prices its national plans based on its own objectives
and could set price levels or change other characteristics of
their plans in a way that may not be economically sufficient for
our business. See "Prospectus Summary--Alamosa Holdings,
Inc.--Recent Developments."
o Sprint PCS could further change the per minute rate for Sprint PCS
roaming fees and increase the costs for Sprint PCS to perform back
office services. See "Prospectus Summary--Alamosa Holdings,
Inc.--Recent Developments."
o Sprint PCS may alter its network and technical requirements or
request that we build out additional areas within our territories,
which could result in increased equipment and build-out costs or
in Sprint PCS building out that area itself or assigning it to
another affiliate.
THE TERMINATION OF OUR AFFILIATION AGREEMENTS WITH SPRINT PCS WOULD
SEVERELY RESTRICT OUR ABILITY TO CONDUCT OUR BUSINESS.
Our relationship with Sprint PCS is governed by our affiliation
agreements with Sprint PCS. Since we do not own any licenses to operate a
wireless network, our business depends on the continued effectiveness of these
affiliation agreements. However, Sprint PCS may be able to terminate our
affiliation agreements if we materially breach the agreements. Among other
things, a failure by us to meet the build-out requirements for any one of the
individual markets in our territories or to meet Sprint PCS's technical or
customer service requirements contained in the affiliation agreements would
constitute a material breach of the agreements, which could lead to its
termination. On more than one occasion in the past year, we have failed to meet
the requirements of the Sprint PCS build-out schedule due to force majeure
conditions in particular territories. In the event that we have a similar
failure and Sprint PCS disagrees with us over the presence of a force majeure
condition, Sprint PCS may choose to attempt to terminate one or more of our
affiliation agreements. If Sprint PCS terminates the affiliation agreements, we
may not be a part of the Sprint PCS network and we would have extreme difficulty
conducting our business.
IF SPRINT PCS DOES NOT RENEW OUR AFFILIATION AGREEMENTS, OUR ABILITY TO
CONDUCT OUR BUSINESS WOULD BE SEVERELY RESTRICTED.
Our affiliation agreements with Sprint PCS are not perpetual, and will
eventually expire. Sprint PCS can choose not to renew these agreements at the
expiration of their 20 year initial terms or any ten year renewal term. If
Sprint PCS decides not to renew our affiliation agreements, we may no longer be
a part of the Sprint PCS network and we would have extreme difficulty conducting
our business.
CERTAIN PROVISIONS OF OUR AFFILIATION AGREEMENTS WITH SPRINT PCS MAY
DIMINISH OUR VALUE AND RESTRICT THE SALE OF OUR BUSINESS.
Under specific circumstances and without further stockholder approval,
Sprint PCS may purchase our operating assets or capital stock at a discount. In
addition, Sprint PCS must approve any change of control of our ownership and
must consent to any assignment of our affiliation agreements. Sprint PCS also
has a right of first refusal if we decide to sell our operating assets to a
third party. We are also subject to a number of restrictions on the transfer of
our business, including a prohibition on the sale of us or our operating assets
to competitors of Sprint or Sprint PCS. These restrictions and other
restrictions contained in these affiliation agreements with Sprint PCS could
adversely affect the value of our common stock, may limit our ability to sell
our business, may reduce the value a buyer would be willing to pay for our
business and may reduce our "entire business value."
PROBLEMS EXPERIENCED BY SPRINT PCS WITH ITS INTERNAL SUPPORT SYSTEMS
COULD LEAD TO CUSTOMER DISSATISFACTION OR INCREASE OUR COSTS.
We rely on Sprint PCS's internal support systems, including customer
care, billing and back office support. As Sprint PCS has expanded, its internal
support systems have been subject to increased demand and, in some cases,
suffered a degradation in service. We cannot assure you that Sprint PCS will be
able to successfully add system capacity or that its internal support systems
will be adequate. It is likely that problems with Sprint PCS's internal support
systems could cause:
17
o delays or problems in our operations or services;
o delays or difficulty in gaining access to customer and financial
information;
o a loss of Sprint PCS customers; and
o an increase in the costs of customer care, billing and back office
services.
OUR COSTS FOR INTERNAL SUPPORT SYSTEMS MAY INCREASE IF SPRINT PCS
TERMINATES ALL OR PART OF OUR SERVICES AGREEMENTS.
We currently estimate that the costs for the services provided by
Sprint PCS under our services agreements in the year 2001 will be approximately
$11.0 million. We expect this number to significantly increase as our number of
subscribers increases. Our services agreements with Sprint PCS provide that,
upon nine months' prior written notice, Sprint PCS may terminate any service
provided under such agreements. We do not expect to have a contingency plan if
Sprint PCS terminates any such service. If Sprint PCS terminates a service for
which we have not developed a cost-effective alternative or increases the amount
it charges for these services, our operating costs may increase beyond our
expectations and our operations may be interrupted or restricted.
IF SPRINT PCS DOES NOT MAINTAIN CONTROL OVER ITS LICENSED SPECTRUM, THE
AFFILIATION AGREEMENTS WITH SPRINT PCS MAY BE TERMINATED.
Sprint PCS, not us, owns the licenses necessary to provide wireless
services in our territories. The FCC requires that licensees like Sprint PCS
maintain control of their licensed systems and not delegate control to third
party operators or managers. Our affiliation agreements with Sprint PCS reflect
an arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum. However, if the FCC were to determine that any of
our affiliation agreements with Sprint PCS need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the agreements to comply with applicable law. If we cannot
agree with Sprint PCS to modify the agreements, those agreements may be
terminated. If the agreements are terminated, we would no longer be a part of
the Sprint PCS network and we would not be able to conduct our business.
THE FCC MAY FAIL TO RENEW THE SPRINT PCS LICENSES UNDER CERTAIN
CIRCUMSTANCES, WHICH WOULD PREVENT US FROM PROVIDING WIRELESS SERVICES.
We do not own any licenses to operate a wireless network. We are
dependent on Sprint PCS's licenses, which are subject to renewal and revocation
by the FCC. Sprint PCS's licenses in our territories will expire in 2005 or 2007
but may be renewed for additional ten-year terms. The FCC has adopted specific
standards that apply to wireless personal communications services license
renewals. Any failure by Sprint PCS or us to comply with these standards could
cause the nonrenewability of the Sprint PCS licenses for our territories.
Additionally, if Sprint PCS does not demonstrate to the FCC that Sprint PCS has
met the five-year and ten-year construction requirements for each of its
wireless personal communications services licenses, it can lose those licenses.
If Sprint PCS loses its licenses in our territories for any of these reasons, we
and our subsidiaries would not be able to provide wireless services without
obtaining rights to other licenses.
RISKS RELATED TO OUR COMMON STOCK
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND AMENDED AND
RESTATED BYLAWS INCLUDE PROVISIONS THAT MAY DISCOURAGE A CHANGE OF CONTROL
TRANSACTION OR MAKE REMOVAL OF MEMBERS OF THE BOARD OF DIRECTORS MORE DIFFICULT.
Some provisions of our amended and restated certificate of
incorporation and amended and restated bylaws could have the effect of delaying,
discouraging or preventing a change in control of us or making removal of
members of the Board of Directors more difficult.
18
These provisions include the following:
o a classified board, with each board member serving a three-year
term;
o no authorization for stockholders to call a special meeting;
o no ability of stockholders to remove directors;
o prohibition of action by written consent of stockholders; and
o advance notice for nomination of directors and for stockholder
proposals.
These provisions, among others, may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of us, even though a change in ownership might be economically beneficial to us
and our stockholders.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE, WHICH COULD RESULT IN
WIDE FLUCTUATIONS IN OUR STOCK PRICE.
The market price of growth stage technology stocks have recently
experienced wide fluctuations. Our common stock is likely to be highly volatile
and could be subject to wide fluctuations in response to factors such as the
following, some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
o changes in our relationship with Sprint PCS;
o changes in law and regulation;
o announcements by third parties of significant claims or
proceedings against us;
o changes in market valuations of other PCS companies, including
Sprint PCS and its network partners;
o announcements of technological innovations or new services by us
or our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o announcements by Sprint PCS concerning developments or changes in
its business, financial condition or results of operations, or in
its expectations as to future financial performance;
o additions or departures of key personnel;
o release of "lock-up" or other transfer restrictions on our
outstanding shares of common stock or sales of additional shares
of our common stock; and
o stock market price and volume fluctuations.
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RISKS RELATED TO THE WIRELESS PERSONAL COMMUNICATIONS SERVICES INDUSTRY
WE MAY EXPERIENCE A HIGH RATE OF CUSTOMER TURNOVER WHICH WOULD INCREASE
OUR COSTS OF OPERATIONS AND REDUCE OUR REVENUE.
The wireless personal communications services industry in general and
Sprint PCS in particular have experienced a higher rate of customer turnover as
compared to cellular industry averages. In particular, the customer turnover
experienced by us may be high because:
o Sprint PCS does not require its customers to sign long-term
contracts; and
o Sprint PCS's handset return policy allows customers to return used
handsets within 14 days of purchase and receive a full refund.
A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new subscribers, especially because our subsidiaries subsidize some of
the costs of initial purchases of handsets by customers.
REGULATION BY GOVERNMENT AGENCIES AND TAXING AUTHORITIES MAY INCREASE
OUR COSTS OF PROVIDING SERVICE OR REQUIRE US TO CHANGE OUR SERVICES.
Our operations and those of Sprint PCS may be subject to varying
degrees of regulation by the FCC, the Federal Trade Commission, the Federal
Aviation Administration, the Environmental Protection Agency, the Occupational
Safety and Health Administration and state and local regulatory agencies and
legislative bodies. Adverse decisions or regulations of these regulatory bodies
could negatively impact Sprint PCS's operations and our costs of doing business.
For example, changes in tax laws or the interpretation of existing tax laws by
state and local authorities could subject us to increased income, sales, gross
receipts or other tax costs or require us to alter the structure of our current
relationship with Sprint PCS.
CONCERNS OVER HEALTH RISKS POSED BY THE USE OF WIRELESS HANDSETS MAY
REDUCE THE CONSUMER DEMAND FOR OUR SERVICES.
Media reports have suggested that radio frequency emissions from
wireless handsets may:
o be linked to various health problems resulting from continued or
excessive use, including cancer;
o interfere with various electronic medical devices, including
hearing aids and pacemakers; and
o cause explosions if used while fueling an automobile.
Widespread concerns over radio frequency emissions may expose us to
potential litigation or discourage the use of wireless handsets. Any resulting
decrease in demand for these services could impair our ability to profitably
operate our business.
WORSE THAN EXPECTED FOURTH QUARTER RESULTS MAY SIGNIFICANTLY REDUCE OUR
OVERALL RESULTS OF OPERATIONS AND CAUSE OUR STOCK PRICE TO DROP.
The wireless industry is heavily dependent on fourth quarter results.
Among other things, the industry relies on significantly higher customer
additions and handset sales in the fourth quarter as compared to the other three
fiscal quarters.
Our overall results of operations could be significantly reduced, and
the price of our common stock may drop, if we have a worse than expected fourth
quarter for any reason, including the following:
o our inability to match or beat pricing plans offered by
competitors;
20
o the failure to adequately promote Sprint PCS's products, services
and pricing plans;
o our inability to obtain an adequate supply or selection of
handsets;
o a downturn in the economy of some or all markets in our
territories; or
o a poor holiday shopping season.
SIGNIFICANT COMPETITION IN THE WIRELESS COMMUNICATIONS SERVICES
INDUSTRY MAY RESULT IN OUR COMPETITORS OFFERING NEW SERVICES OR LOWER
PRICES, WHICH COULD PREVENT US FROM OPERATING PROFITABLY.
Competition in the wireless communications services industry is
intense. We anticipate that competition will cause the market prices for two-way
wireless products and services to decline in the future. Our ability to compete
will depend, in part, on our ability to anticipate and respond to various
competitive factors affecting the telecommunications industry.
Our dependence on Sprint PCS to develop competitive products and
services and the requirement that we obtain Sprint PCS's consent for our
subsidiaries to sell non-Sprint PCS approved equipment may limit our ability to
keep pace with our competitors on the introduction of new products, services and
equipment. Some of our competitors are larger than us, possess greater resources
and more extensive coverage areas, and may market other services, such as
landline telephone service, cable television and Internet access, with their
wireless communications services. In addition, we may be at a competitive
disadvantage since we may be more highly leveraged than some of our competitors.
Furthermore, there has been a recent trend in the wireless
communications industry towards consolidation of wireless service providers
through joint ventures, reorganizations and acquisitions. We expect this
consolidation to lead to larger competitors over time. We may be unable to
compete successfully with larger competitors who have substantially greater
resources or who offer more services than we do.
A LACK OF SUITABLE TOWER SITES MAY DELAY THE BUILD-OUT OF OUR PORTION
OF THE SPRINT PCS NETWORK AND RESTRICT OUR OPERATING CAPACITY.
We have in the past experienced difficulty, and may in the future have
difficulty, in obtaining tower sites in some areas of our territories on a
timely basis. For example, the local governmental authorities in various
locations in our territories have at times placed moratoriums on the
construction of additional towers and base stations. These moratoriums may
materially and adversely affect the timing of the planned build-out and quality
of the network operations in those markets. A lack of tower site availability
due to difficulty in obtaining local regulatory approvals, or for any other
reasons, may delay the build-out of our portion of the Sprint PCS network, delay
the opening of markets, limit network capacity or reduce the number of new
Sprint PCS subscribers in our territories.
21
USE OF PROCEEDS
All net proceeds from the sale of the shares of our common stock
covered by this prospectus will go to the selling stockholders. We will not
receive any proceeds from the sale of the shares of our common stock offered by
the selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock has traded on The Nasdaq National Market under the
symbol "APCS" since February 3, 2000. Prior to that date, there was no public
market for our common stock. No quoted market prices for our common stock are
available for the years ended December 31, 1999 and 1998. The following table
set forth, for the periods indicated, the range of high and low sales prices for
our common stock as reported on The Nasdaq National Market.
2000 HIGH LOW
-------------------------------------------- ------ ------
First Quarter (ended March 31, 2000) $43.63 $22.19
Second Quarter (ended June 30, 2000) $41.00 $11.81
Third Quarter (ended September 30, 2000) $27.50 $12.50
Fourth Quarter (ended December 31, 2000) $16.88 $ 6.13
2001
--------------------------------------------
First Quarter (ended March 31, 2001) $17.13 $ 7.25
Second Quarter (ended June 30, 2001) $17.20 $ 9.69
Third Quarter (through September 27, 2001) $20.00 $10.90
On September 27, 2001, the last reported sales price of our common
stock as reported on The Nasdaq National Market was $13.11 per share. On
September 27, 2001, there were approximately 230 holders of record of our common
stock, not including the stockholders for whom shares are held in "nominee" or
"street" name.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
or other securities. We do not expect to pay cash dividends on our capital stock
in the foreseeable future. We currently intend to retain our future earnings, if
any, to fund the development and growth of our business. Future dividends, if
any, will be determined by the Board of Directors and will depend upon our
results of operations, financial condition and capital expenditure plans, as
well as other factors that the Board of Directors considers relevant.
22
CAPITALIZATION
The following table shows our cash and cash equivalents, restricted
cash, short-term debt, long-term debt, stockholders' equity and capitalization:
o On a historical basis as of June 30, 2001; and
o On an adjusted basis reflecting (1) the issuance of the 13 5/8%
senior notes in the amount of $150.0 million less original issue
discount and offering-related expenses of approximately $9.5
million, (2) the pay down of the senior secured credit facility of
approximately $65.8 million, and (3) the use of approximately
$39.2 million of the net proceeds to establish a security account
to secure on a pro rata basis our payment obligations under the
13 5/8% senior notes, the 12 7/8% senior discount notes and the
12 1/2% senior notes.
AS OF JUNE 30, 2001
-----------------------------
ACTUAL AS ADJUSTED
----------- -----------
(dollars in thousands, except
share data, unaudited)
Cash and cash equivalents ........................... $ 122,092 $ 157,560
Short-term investments .............................. -- --
Restricted cash (1) ................................. 70,727 109,967
Short-term debt:
Current portion of capital lease obligations ..... $ 138 $ 138
Long-term debt:
Senior secured credit facility ................... 203,000 137,162
12 7/8% senior discount notes .................... 222,807 222,807
12 1/2% senior notes ............................. 250,000 250,000
13 5/8% senior notes ............................. -- 150,000
Capital lease obligations ........................ 1,506 1,506
----------- -----------
Total long-term debt ............................. 677,313 761,475
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; no shares issued -- --
Common stock, par value $.01 per share;
290,000,000 shares authorized; 92,010,296 issued
and outstanding ..................................... 920 920
Additional paid-in capital .......................... 791,012 791,012
Unearned compensation ............................... (930) (930)
Accumulated other comprehensive income, net of tax .. 166 166
Accumulated deficit ................................. (175,716) (175,716)
----------- -----------
Total stockholders' equity .......................... 615,452 615,452
----------- -----------
Total capitalization ................................ $ 1,292,903 $ 1,377,065
=========== ===========
-------------------
(1) Restricted cash includes (i) $59.0 million and $39.2 million,
respectively, placed in two separate security accounts to secure on a pro
rata basis the payment obligations under the 12 7/8% senior discount
notes, the 12 1/2% senior notes and the 13 5/8% senior notes and (ii)
$11.5 million as interest collateral for the senior secured credit
facility.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934, which can be identified by the use of
forward-looking terminology such as, "may," "might," "could," "would,"
"believe," "expect," "intend," "plan," "seek," "anticipate," "estimate,"
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from those referred to in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to those discussed in "Statements Regarding
Forward-Looking Information."
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. We do not undertake any obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the disclosure under the
section "Risk Factors" in this prospectus and the risk factors described in
other documents we file from time to time with the SEC.
OVERVIEW
Prior to January 1, 2000, we had very limited operations, very limited
revenues, significant losses, substantial future capital requirements and an
expectation of continued losses. As a result of significant operational results
reflected in the December 31, 2000 financial statements presented in this
document, beginning on page F-1, a comparison of these results to the same
period for 1999 may not be meaningful.
Since our inception, we have incurred substantial costs to negotiate
our contracts with Sprint PCS and our debt financing, to raise funds in the
public market, to engineer our wireless system, to develop our business
infrastructure and distribution channels and to build-out our portion of the
Sprint PCS network. As of June 30, 2001, our accumulated deficit was $175.7
million. Through June 30, 2001, we incurred $443.8 million of capital
expenditures and construction in progress including capital expenditures related
to the build-out of our portion of the Sprint PCS network, including costs
connected to the acquisition of Roberts, WOW and Southwest. While we anticipate
operating losses to continue, we expect revenues to continue to increase
substantially as the base of Sprint PCS subscribers located in our territories
increases.
On July 17, 1998, we entered into our affiliation agreements with
Sprint PCS. We subsequently amended our affiliation agreements with Sprint PCS
to expand our territories so that as of June 30, 2001 it included approximately
10 million covered residents, including the acquisitions of Roberts, WOW and
Southwest.
As a Sprint PCS affiliate, we have the exclusive right to provide
wireless mobility communications network services under the Sprint and Sprint
PCS brand names in our territories. We are responsible for building, owning and
managing the portion of the Sprint PCS network located in our territories. We
market wireless products and services in our territories under the Sprint and
Sprint PCS brand names. We offer national plans designed by Sprint PCS and
intend to offer specialized local plans tailored to our market demographics. Our
portion of the Sprint PCS network is designed to offer a seamless connection
with Sprint PCS's 100% digital wireless network. We market wireless products and
services through a number of distribution outlets located in our territories,
including our own Sprint PCS stores, major national distributors and third party
local representatives.
We recognize 100% of revenues from Sprint PCS subscribers based in our
territories, proceeds from the sales of handsets and accessories and fees from
Sprint PCS and other wireless service providers when their customers roam onto
our portion of the Sprint PCS network. Sprint PCS handles our billing and
collections and retains 8% of all collected revenue from Sprint PCS subscribers
based in our territories and fees from wireless service providers other than
Sprint PCS when their subscribers roam onto our portion of the Sprint PCS
network. We report the amount retained by Sprint PCS as an operating expense.
24
As part of our affiliation agreements with Sprint PCS, we have the
option of contracting with Sprint PCS to provide back office services such as
customer activation, handset logistics, billing, customer service and network
monitoring services. We have elected to delegate the performance of these
services to Sprint PCS to take advantage of Sprint PCS's 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 calculated on a per
subscriber and per transaction basis and is recorded as an operating expense.
As of the end of the first quarter of 2001, we completed the
acquisitions of three Sprint PCS network partners. On February 14, 2001, we
completed our acquisition of Roberts and WOW. In connection with the Roberts and
WOW acquisitions, we entered into a new senior secured credit facility for up to
$280.0 million. On March 30, 2001, we completed our acquisition of Southwest. In
connection with the Southwest acquisition we increased the senior secured credit
facility from $280.0 million to $333.0 million. Each of these transactions was
accounted for under the purchase method of accounting.
On February 14, 2001, as part of the reorganization transaction in
which we acquired Roberts and WOW, Alamosa PCS Holdings, Inc. merged with our
wholly owned subsidiary and became our wholly owned subsidiary, with us becoming
the new public holding company. Each share of Alamosa PCS Holdings common stock
issued and outstanding immediately prior to the merger was converted into the
right to receive one share of our common stock.
We launched Sprint PCS service in our first market, Laredo, Texas, in
June 1999, and have since commenced service in 62 additional markets including
acquisitions through June 30, 2001. At June 30, 2001 our systems, including
acquisitions, covered approximately 10 million residents out of approximately
15.6 million total residents in those markets. The number of residents covered
by our systems does not represent the number of Sprint PCS subscribers that we
expect to be based in our territories. As of June 30, 2001, approximately
316,000 Sprint PCS subscribers were based in our territories.
Additionally, pursuant to our services agreements with Roberts and WOW
prior to closing the mergers on February 14, 2001, we launched markets in
Springfield and Joplin, Missouri for Roberts and Kennewick, Yakima and Walla
Walla, Washington and Klamath Falls, Roseburg and Medford-Grants Pass, Oregon on
behalf of WOW. Roberts and WOW systems cover approximately 1.9 million residents
out of approximately 2.4 million total residents in those territories.
Pursuant to our services agreements with Roberts and WOW prior to
closing the mergers, we were responsible for the operation of Jefferson City,
Columbia and St. Joseph, Missouri which were in operation when the services
agreements were signed.
RESULTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE QUARTER AND
SIX MONTHS ENDED JUNE 30, 2000
NET LOSS. Our net loss for the quarter ended June 30, 2001 was $34.3
million as compared to a net loss of $12.9 million for the quarter ended June
30, 2000. Net loss for the six months ended June 30, 2001 was $61.8 million
compared to a net loss of $28.5 million for the six months ended June 30, 2000.
These losses were the result of the continued incurrence of start-up expenses
relative to the preparation of markets for commercial launch and the operation
of markets in service.
SERVICE REVENUES. Service revenues are comprised of subscriber revenue,
Sprint PCS roaming revenue, non-Sprint PCS roaming revenue and long distance
revenue, all of which initially began accruing to us at or near our first
initial commercial launch in June 1999. Subscriber revenue consists of payments
received from Sprint PCS subscribers based in our territories for monthly Sprint
PCS service under a variety of service plans. These plans generally reflect the
terms of national plans offered by Sprint PCS. We receive Sprint PCS roaming
revenue at a per minute rate from Sprint PCS or another Sprint PCS affiliate
when Sprint PCS subscribers based outside of our territories use our portion of
the Sprint PCS network. This reciprocal rate was 20 cents per minute for travel
from inception through May 31, 2001. Pursuant to our affiliation agreements with
Sprint PCS, Sprint PCS can change this
25
per minute rate. Sprint and the Company recently agreed to change the reciprocal
roaming rate to 15 cents effective June 1, 2001, 12 cents effective October 1,
2001, and 10 cents effective January 1, 2002 and thereafter. The long distance
rate of 6 cents per minute remains unchanged. Service revenues were $77.5
million for the quarter ended June 30, 2001 compared to $15.4 million for the
quarter ended June 30, 2000. Service revenues were $119.4 million for the six
months ended June 30, 2001, and $25.7 million for the six months ended June 30,
2000. These increases are due to the growth in our subscribers and the
approximately 90,000 subscribers acquired in the first quarter of 2001,
resulting from the closing of the merger with WOW, Roberts and Southwest.
Non-Sprint PCS roaming revenue primarily consists of fees collected
from Sprint PCS customers based in our territories when they roam on non-Sprint
PCS networks. These fees are based on rates specified in the customers'
contracts. However, it is possible that in some cases these fees may be less
than the amount we must pay to other wireless service providers that provide
service to Sprint PCS customers based in our territories. Non-Sprint PCS roaming
revenue also includes payments from wireless service providers, other than
Sprint PCS, when those providers' customers roam on our portion of the Sprint
PCS network. For the quarter ended June 30, 2001 our average monthly revenue per
user ("ARPU") including roaming and long distance revenue was approximately $91
compared to approximately $85 for the same quarter of 2000. For the six months
ended June 30, 2001, ARPU for Sprint PCS customers in our territories, including
long distance and roaming revenue, was approximately $88 and was approximately
$85 for the six months ended June 30, 2000. For the quarter ended June 30, 2001,
ARPU without roaming was approximately $62 compared to $65 for the quarter ended
June 30, 2000. Without roaming, our ARPU was approximately $61 and $64 for the
six months ended June 30, 2001 and 2000, respectively.
PRODUCT SALES. 100% of the revenue from the sale of handsets and
accessories through our retail stores and to our local indirect distributors are
recorded, net of an allowance for returns, as product sales. Product sales for
the quarter ended June 30, 2001 totaled $6.0 million compared to $2.2 million
for the same quarter of 2000. The amount recorded for the six months ended June
30, 2001 totaled $9.9 million as compared to $3.8 million for the six months
ended June 30, 2000. The increase in product sales, for both the quarter and the
year can be attributed to the opening of retail stores and the addition of local
indirect distributors in markets launched in the last half of 2000 and the
acquisitions of WOW, Roberts and Southwest in the first quarter of 2001. Our
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 PCS for refurbishing, we receive a
credit from Sprint PCS, which is less than the amount we originally paid for the
handset.
COST OF SERVICE AND OPERATIONS. These expenses include the cost of
operations for our network, (such as fees related to data transfer via T-1 and
other transport lines and inter-connection fees), Sprint PCS and, non-Sprint PCS
roaming fees, long distance, the affiliation fee paid to Sprint PCS of 8% of
collected service revenues and customer care, billing and service fees paid to
Sprint PCS. Cost of service and operations totaled $53.9 million and $11.2
million for the quarters ended June 30, 2001 and 2000, respectively. Cost of
service and operations totaled $86.2 million for the six months ended June 30,
2001 and $19.1 million for the six months ended June 30, 2000, related to
providing wireless services to customers and are included in cost of services
and operations. The increase is primarily attributable to the increase in
subscribers in 2001 as compared to 2000. Also included is non-cash compensation
expense related to the Company's stock option plans of $159 for the quarter
ended June 30, 2000. No non-cash compensation expense was recognized in the 2001
for service and operations. We pay Sprint PCS roaming fees when Sprint PCS
subscribers based in our territories use the Sprint PCS network outside of our
territories. Pursuant to our affiliation agreements with Sprint PCS, Sprint PCS
can change this per minute rate. Sprint and the Company recently agreed to
change the reciprocal roaming rate which has been 20 cents to 15 cents effective
June 1, 2001, 12 cents effective October 1, 2001, and 10 cents effective January
1, 2002 and thereafter. We pay non-Sprint PCS roaming fees to other wireless
service providers when Sprint PCS customers based in our territories use their
network.
COST OF PRODUCTS SOLD. The cost of products sold through our retail
stores and to our local indirect retailers totaled $10.5 million for the quarter
ended June 30, 2001 as compared to $3.7 million for the quarter ended June 30,
2000. Cost of products sold was $18.6 million and $7.0 million for the six
months ended June 30, 2001 and 2000, respectively. The increase was due to
growth in our subscribers between June 30, 2000 and June 30, 2001. These amounts
include the cost of accessories and the cost of handsets sold through our retail
stores including sales to local indirects. We expect the cost of handsets to
exceed the retail sales price because we subsidize the price of handsets
26
for competitive reasons. The handset subsidy included in cost of products sold
through our retail stores totaled $4.8 million for the quarter ended June 30,
2001 and $1.6 million for the quarter ended June 30, 2000. For the six months
ended June 30, 2001, handset subsidy through our retail stores was $9.1 million
compared to $3.3 million for the same period of 2000.
SELLING AND MARKETING. Selling and marketing expenses totaled $24.8
million for the quarter ended June 30, 2001 and $8.1 million for the quarter
ended June 30, 2000. Selling and marketing expenses were $43.3 million and $14.7
million for the six months ended June 30, 2001 and 2000, respectively. Selling
and marketing expenses include advertising expenses, promotion costs, sales
commissions and expenses related to our distribution channels and handset
subsidy paid to Sprint PCS for customers based in our territories that purchase
handsets through Sprint PCS or its national retailers. The amount of handset
subsidy from channels other than our retails stores and sales to local indirects
included in selling and marketing totaled $2.7 million and $1.1 million for the
quarters ended June 30, 2001 and 2000, respectively. For the six months ended
June 30, 2001 the amount of handset subsidy from channels other than our retail
stores and sales to local indirects included in selling and marketing totaled
$4.4 million as compared to $2.3 million for the six months ended June 30, 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. For the quarters ended June 30,
2001 and 2000, general and administrative expenses totaled $3.4 million and $2.8
million, respectively. For the six months ended June 30, 2001, these expenses
totaled $7.3 million compared to $7.7 million for the six months ended June 30,
2000. General and administrative expenses include corporate costs and expenses
such as administration, human resources and accounting and finance. Also
included in general and administrative expenses is non-cash compensation expense
related to the Company's stock option plans of $762 for the quarter ended June
30, 2000. No non-cash compensation expense was recorded for the quarter ended
June 30, 2001. For the six months ended June 30, 2001, $183 of non-cash
compensation expense was recorded as compared to $4.3 million for the six months
ended June 30, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
quarter ended June 30, 2001 totaled $25.2 million as compared to $2.5 million
for the quarter ended June 30, 2000. For the six months ended June 30, 2001 and
June 30, 2000, depreciation and amortization totaled $37.2 million and $4.7
million, respectively. Included in depreciation and amortization for the quarter
ended June 30, 2001 and the six months June 30, 2001, was $14.6 million and
$19.2 million, respectively, of amortization of goodwill and identified
intangibles that resulted from the mergers with Roberts, WOW and Southwest.
Depreciation is calculated using the straight-line method over the useful life
of the asset. We begin to depreciate the assets for each market only after we
launch that market. The increase in depreciation expense is due to the
significant increase in network infrastructure we built and launched since June
2000.
INTEREST AND OTHER INCOME. Interest and other income totaled $2.5
million for the quarter ended June 30, 2001 and $4.4 million for the quarter
ended June 30, 2000. Interest and other income totaled $8.2 million and $6.7
million for the six months ended June 30, 2001 and 2000, respectively. This
income generally has been generated from the investment of equity and loan
proceeds held in liquid accounts waiting to be deployed.
INTEREST EXPENSE. Interest expense totaled $19.9 million for the
quarter ended June 30, 2001 and $6.6 million for the quarter ended June 30,
2000. For the six months ended June 30, 2001, interest expense was $34.7 million
compared to $11.4 million for the six months ended June 30, 2000. During the
first quarter of 2001, we issued new Senior Notes and a new credit facility for
a combined total of approximately $453 million. The increase from 2000 to 2001
is due to higher average outstanding debt balances due to business acquisitions
and network construction.
INCOME TAX BENEFIT. For the quarter and six months ended June 30, 2001,
income tax benefit totaled $17.4 million and $31.3 million, respectively. The
income tax benefit represents the anticipated recognition of the Company's
deductible net operating loss carry forward. This benefit is being recognized
based on an assessment of the combined expected future taxable income of the
Company and expected reversals of the temporary differences from the Roberts,
WOW and Southwest mergers
LOSS ON DEBT EXTINGUISHMENT. For the six months ended June 30, 2001, a
loss on extinguishment of debt of $5.4 million, net of tax benefit of $1.9
million was recorded to write off debt issuance costs associated with the
27
Nortel/EDC Credit Facility. This credit facility was replaced with the Senior
Secured Credit Facility, which was entered into on February 14, 2001. No such
loss was incurred for the period ended June 30, 2000.
FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
NET LOSS. Our net loss for the year ended December 31, 2000 was
$80,188,100 as compared to a net loss of $32,835,859 for the year ended December
31, 1999. These losses were comprised of the continued incurrence of start-up
expenses relative to the preparation of markets for commercial launch and the
operation of markets launched during 1999 and 2000. We launched 11 markets
during the year ended December 31, 1999. For the year ended December 31, 2000,
we launched 10 additional markets.
SERVICE REVENUES. Service revenues are comprised of subscriber revenue,
Sprint PCS roaming revenue, non-Sprint PCS roaming revenue and long distance
revenue, all of which initially began accruing to us at or near our first
initial commercial launch in June 1999. Subscriber revenue consists of payments
received from Sprint PCS subscribers based in our territories for monthly Sprint
PCS service under a variety of service plans. These plans generally reflect the
terms of national plans offered by Sprint PCS and are issued on a month-to-month
basis. We receive Sprint PCS roaming revenue at a per minute rate from Sprint
PCS or another Sprint PCS affiliate when Sprint PCS subscribers based outside of
our territories use our portion of the Sprint PCS network. Service revenues were
$73,499,638 for the year ended December 31, 2000, and $6,533,623 for the year
ended December 31, 1999, due to limited operations in 1999 and rapid growth in
the subscriber base of newly launched markets.
Non-Sprint PCS roaming revenue primarily consists of fees collected
from Sprint PCS customers based in our territories when they roam on non-Sprint
PCS networks. These fees are based on rates specified in the customers'
contracts. However, it is possible that in some cases these fees may be less
than the amount we must pay to other wireless service providers that provide
service to Sprint PCS customers based in our territories. Non-Sprint PCS roaming
revenue also includes payments from wireless service providers, other than
Sprint PCS, when those providers' customers roam on our portion of the Sprint
PCS network. Our average monthly revenue per user for Sprint PCS customers in
our territories, including long distance and roaming revenue, was approximately
$96 for the period from June 26, 1999 to December 31, 1999 (the period during
1999 after launch of our first market) and was approximately $84 for the year
ended December 31, 2000.
PRODUCT SALES. 100% of the revenue from the sale of handsets and
accessories is recorded, net of an allowance for returns, as product sales. The
amount recorded for the year ended December 31, 2000 totaled $9,200,669 as
compared to $2,450,090 for the year ended December 31, 1999. The increase was
due to significant growth in our subscribers between December 31, 1999 and
December 31, 2000. Sprint PCS's handset return policy allows customers to return
their handsets for a full refund within 30 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 PCS for
refurbishing, we receive a credit from Sprint PCS, which is less than the amount
we originally paid for the handset.
COST OF SERVICE AND OPERATIONS. Expenses totaling $55,429,985 for the
year ended December 31, 2000 and $8,699,903 for the year ended December 31, 1999
are related to providing wireless services to customers and are included in cost
of services. The increase was due to significant growth in our subscribers
between December 31, 1999 and December 31, 2000. Among these costs are the cost
of operations, fees related to data transfer via T-1 and other transport lines,
inter-connection fees, Sprint PCS roaming fees, non-Sprint PCS roaming fees and
other expenses related to operations. Also included is non-cash compensation
expense related to our stock plans of $836,296 and $1,259,427 for the years
ended December 31, 2000 and 1999, respectively. We pay Sprint PCS roaming fees
when Sprint PCS subscribers based in our territories use the Sprint PCS network
outside of our territories. Pursuant to our affiliation agreements with Sprint
PCS, Sprint PCS can change this per minute rate. We pay non-Sprint PCS roaming
fees to other wireless service providers when Sprint PCS customers based in our
territories use their network.
COST OF PRODUCTS SOLD. The cost of equipment sold totaled $20,524,427
for the year ended December 31, 2000 as compared to $5,938,838 for the year
ended December 31, 1999. These amounts include the cost of accessories and the
cost of handsets sold through our retail stores including sales to local
indirects. We expect the cost of handsets to exceed the retail sales price
because we subsidize the price of handsets for competitive reasons.
28
The handset subsidy included in cost of products sold through our retail stores
totaled $10,961,708 for the year ended December 31, 2000 and $3,535,532 for the
year ended December 31, 1999.
SELLING AND MARKETING. Selling and marketing expenses totaled
$46,513,835 during 2000 and $10,810,946 for 1999. Selling and marketing expenses
include advertising expenses, promotion costs, sales commissions and expenses
related to our distribution channels and handset subsidy paid to Sprint PCS for
customers based in our territories that purchase handsets through Sprint PCS or
its national retailers. We incur handset subsidy expense, in addition to that
incurred through our retail stores, from other sales channels such as
E-commerce, telemarketing and Sprint PCS national retailers. The handset subsidy
incurred from sources other than our retail stores is included in selling and
marketing. The amount of handset subsidy included in selling and marketing
totaled $4,846,009 in 2000 and $1,487,898 in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses include corporate costs and expenses, such as administration, human
resources and accounting and finance. We have incurred significant general and
administrative expenses related to the development of our system. For the year
ended December 31, 2000, general and administrative expenses totaled
$14,351,839. For the year ended December 31, 1999, these expenses totaled
$11,149,059 and are primarily related to the start-up of the business and were
expensed according to American Institute of Certified Public Accountants
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities."
Also included in general and administrative expenses is non-cash compensation
expense related to our stock plans of $4,814,329 and $6,940,084 for the years
ended December 31, 2000 and 1999, respectively.
RELATED PARTY EXPENSES. Related party expenses totaled $1,995,942 for
the year ended December 31, 2000 and $1,726,198 for the year ended December 31,
1999. These amounts were primarily comprised of information technology and other
professional consulting expenses incurred in connection with a contract between
us and a telecommunications engineering and consulting firm. Several key
officers and owners of these companies have an equity ownership interest in us.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
year ended December 31, 2000 totaled $12,530,038 as compared to $3,056,923 for
the year ended December 31, 1999. Depreciation is calculated using the straight
line method over the useful life of the asset. We begin to depreciate the assets
for each market only after we open that market.
INTEREST AND OTHER INCOME. Interest and other income totaling
$14,483,431 for the year ended December 31, 2000 and $477,390 for the year ended
December 31, 1999 generally have been generated from the investment of equity
and loan proceeds held in liquid accounts waiting to be deployed.
INTEREST EXPENSE. Interest expense totaled $25,774,925 for the year
ended December 31, 2000 and $2,641,293 for the year ended December 31, 1999 and
primarily related to interest accretion on the 12 7/8% senior discount notes
during 2000 and financing via our credit facility during 1999.
FOR THE PERIOD JULY 16, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
REVENUES, DIRECT COSTS AND NET LOSS. From inception through December
31, 1998, our operating activities were directed towards the development of our
business. During July 1998, we signed our affiliation agreements with Sprint PCS
to operate as the exclusive affiliate of Sprint PCS in our territories. Our
operating activities were focused on executing our build-out plan and developing
our network infrastructure. As our first market did not launch until June 1999,
the 1998 period reflects no service revenues, product sales or related costs
associated with services or products. Our net loss for the period was $923,822,
which was principally comprised of general and administrative expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the period in the amount of $956,331 were comprised primarily of
legal and other professional services of $704,381 related to the start up of our
business and the development of our systems. In addition, we incurred $166,850
of human resource costs related to preparation for the 1999 launch of our
network. Virtually all general and administrative expenses during this
29
period related to the start-up of the business and were expensed according to
American Institute of Certified Public Accountants Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities."
INCOME TAXES
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes." For the year ended
December 31, 2000, the deferred tax asset generated, primarily from temporary
differences related to the treatment of start-up costs, unearned compensation
and from net operating loss carry forwards, was offset by a full valuation
allowance. For the quarter and six months ended June 30, 2001, the income tax
benefit totaled $17.4 million and $31.3 million, respectively. The income tax
benefit represents the anticipated recognition of the Company's deductible net
operating loss carry forward. This benefit is being recognized based on an
assessment of the combined expected future taxable income of the Company and
expected reversals of the temporary differences from the Roberts, WOW and
Southwest mergers.
Our financial statements for the periods ended December 31, 1999 and
December 31, 1998 did not report any effect for federal and state income taxes
since we had elected to be taxed as a partnership prior to our original Alamosa
reorganization. For the periods presented, the members of the limited liability
company recorded our tax losses on their own income tax returns. Subsequent to
the original Alamosa reorganization, we have accounted for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Had we applied the provisions of SFAS No. 109 for the period
from inception on July 16, 1998 through December 31, 1999, the deferred tax
asset generated, primarily from temporary differences related to the treatment
of start-up costs, unearned compensation and from net operating loss carry
forwards, would have been offset by a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through capital
contributions from our owners, through debt financing and through proceeds
generated from our initial public offering. We entered into a credit agreement
with Nortel effective June 10, 1999, which was amended and restated on February
8, 2000. On June 23, 2000, Nortel assigned the entirety of its loans and
commitments to EDC, and we entered into the credit facility with EDC.
The EDC credit facility was reduced by $75.0 million from the issuance
of the 12 7/8% senior discount notes, such that the EDC credit facility provided
for advancing term loan facilities in the aggregate principal amount of $175.0
million. The terms and conditions of the EDC credit facility were substantially
the same as the terms and conditions of the Nortel credit agreement before the
assignment and the amendments. As of December 31, 2000, approximately $54.5
million of the $175.0 million EDC credit facility had been drawn. On February
14, 2001, we repaid the total amount outstanding on the facility in the amount
of $54.5 million plus accrued interest of $884 with the proceeds from the senior
secured credit facility of $333 million.
Pursuant to the equipment agreement with Nortel, we are required to
purchase a total of $167 million of equipment and services from Nortel. As of
June 30, 2001, this commitment has been fully satisfied. These purchases from
Nortel were financed pursuant to the EDC credit facility prior to the closing of
the senior secured credit facility, and, after the closing of the senior secured
credit facility, have been financed pursuant to such facility.
On February 4, 2000, we issued $350 million face amount of 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 $350.0 million face amount by February 8, 2005, after which
interest will be paid in cash semiannually.
On January 31, 2001, we issued $250 million face amount of 12 1/2%
senior notes. The 12 1/2% senior notes mature in ten years (February 1, 2011),
carry a coupon rate of 12 1/2%, payable semiannually on February 1 and August 1,
beginning on August 1, 2001.
On February 14, 2001, Alamosa Holdings, Alamosa (Delaware) and Alamosa
Holdings, LLC, as borrower; entered into a $280 million senior secured credit
facility with Citicorp USA, as administrative agent and collateral agent Toronto
Dominion (Texas), Inc., as syndication agent; EDC as co-documentation agent;
First Union National
30
Bank, as documentation agent; and a syndicate of banking and financial
institutions. On March 30, 2001, this credit facility was amended to increase
the facility to $333 million in relation to the acquisition of Southwest. At
that time, all covenants were amended to reflect this increase and the inclusion
of Southwest. The senior secured credit facility was amended on July 19, 2001 to
extend the period prior to which Alamosa Holdings, LLC must borrow $50.0 million
of term loans from August 14, 2001 to December 31, 2001.
Net cash used in operating activities was $60.4 million for the six
months ended June 30, 2001. Net cash used in operating activities was $2.8
million for the six months ended June 30, 2000. Cash used in operating
activities was attributable to operating losses and working capital needs.
Net cash used in investing activities was $97.0 million for the six
months ended June 30, 2001, and $65.8 million for the six months ended June 30,
2000. In 2001, we invested $72.9 million in our network infrastructure and $37.6
million in the acquisitions of Roberts, WOW and Southwest. The expenditures in
2000 were related primarily to the purchase of network infrastructure needed to
construct our portion of the Sprint PCS network and investment in short-term
liquid investments of $21.8 million.
Net cash provided by financing activities was $137.7 million for the
six months ended June 30, 2001 and consisted primarily of the net proceeds from
our issuance of the 12 1/2% Senior Notes and borrowings under the Senior Secured
Credit Facility, less repayment of long-term debt of $223.6 million, $169.1
million of which was assumed through acquisitions. We also set aside $70.7
million in restricted cash primarily for escrow of two years of interest on the
12 1/2% Senior Notes. Net cash provided by financing activities was $303.9
million for the six months ended June 30, 2000 consisting primarily of net
proceeds from our initial public offering of approximately $194.3 million and
net proceeds from our issuance of 12 7/8% Senior Discount Notes of approximately
$181 million less repayments of long-term debt of $76.2 million.
As of June 30, 2001, our primary sources of liquidity were
approximately $122 million in cash and cash equivalents and $130 million of
unused capacity under the Senior Secured Credit Facility.
We estimate that we will require approximately $87.0 million to
complete the current build-out plan and fund working capital losses through the
remainder of the year 2001. The actual funds required to build-out our portion
of the Sprint PCS network and to fund operating losses and working capital needs
may vary materially from this estimate and additional funds could be required.
We include capital leases related to network equipment and build-out in
construction in progress until service has commenced in their respective
markets. Once that service has commenced, those capital leases are reclassified
to property and equipment. At June 30, 2001, capital leases totaled $1.6 million
and included long-term capital lease obligations of $1.5 million. At December
31, 2000 the capital leases totaled $1.1 million.
DEBT COVENANT WAIVER
As of March 31, 2001, we did not meet the maximum negative EBITDA
covenant under the senior secured credit facility. During the quarter ended
March 31, 2001, we reported an EBITDA loss of $16.7 million which exceeded the
maximum negative EBITDA covenant by $7.0 million.
On May 8, 2001, we obtained a waiver of any default or event of default
arising from the failure to comply with the maximum negative EBITDA covenant for
the quarter ended March 31, 2001 from the lending institutions under the senior
secured credit facility. See the following comment regarding the changes in the
senior secured credit facility and the resetting of the covenants behind the
credit.
The Company met its negative EBITDA covenant for the quarter ended June
30, 2001 and we believe that the EBITDA covenants will be met for the next
twelve months. Our EBITDA is directly impacted by the up front selling and
marketing expenses we incur in order to grow our subscriber base. As such,
greater than expected subscriber growth may impact our EBITDA negatively.
31
NEW NOTES OFFERING
On August 15, 2001 we issued $150.0 million face amount of 13 5/8%
senior notes. The 13 5/8% senior notes mature in ten years (August 15, 2011),
carry a coupon rate of 13 5/8%, payable semiannually on February 15 and August
15, beginning on February 15, 2002. The net proceeds from the sale of the
13 5/8% senior notes were approximately $140.5 million, after deducting the
discounts and commissions to the initial purchasers and estimated offering
expenses.
Approximately $39.2 million of the net proceeds of the 13 5/8% senior
notes offering were used to establish a security account (with cash or U.S.
government securities) to secure on a pro rata basis the payment obligations
under the 13 5/8% senior notes, the 12 7/8% senior discount notes and the
12 1/2% senior notes. Approximately $65.8 million of the net proceeds of the
13 5/8% senior notes offering were used by to pay down a portion of the senior
secured credit facility. The remaining net proceeds of the 13 5/8% senior notes
offering will be used for general corporate purposes.
AMENDMENT TO THE SENIOR SECURED CREDIT FACILITY
The senior secured credit facility was amended simultaneously with the
closing of the offering of the 13 5/8% senior notes to, among other things,
reduce the amount of the senior secured credit facility from $333.0 million to
$225.0 million and modify the financial covenants.
For a complete description of our indebtedness, please refer to the
consolidated financial statements and the related notes included in this
prospectus.
INFLATION
Management believes that inflation has not had, and is not likely to
have, a material adverse effect on our results of operations.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." The provisions of SFAS No. 141 will apply to all business
combinations initiated after June 30, 2001, and will also apply to all business
combinations accounted for by the purchase method that are completed after June
30, 2001. SFAS No. 142 should be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized. Certain provisions of SFAS No. 142 will be
effective for business combinations completed after June 30, 2001. The Company
is in the process of evaluating the effect of the adoption of these
pronouncements.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
32
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 financing from the
senior secured credit facility and any future floating rate financing.
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 12 7/8% senior discount notes, the
12 1/2% senior notes, the 13 5/8% senior notes, capital leases and the senior
secured credit facility financing based on our projected level of long-term
indebtedness:
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER
--------- -------- -------- -------- ------- ----------
(DOLLARS IN MILLIONS)
Fixed Rate Instruments:
12 7/8 senior discount notes................... $ 237 $ 269 $ 305 $ 345 $ 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 $ 250
Fixed interest rate......................... 12.5% 12.5% 12.5% 12.5% 12.5% 12.5%
Principal payment........................... -- -- -- -- 250
13 5/8% senior notes........................... $ 150 $ 150 $ 150 $ 150 $ 150 $ 150
Fixed interest rate......................... 13.625% 13.625% 13.625% 13.625% 13.625% 13.625%
Principal payment........................... -- -- -- -- -- --
Capital Leases--Annual Minimum:
Lease Payments (1).......................... $0.148 $0.149 $0.150 $0.160 $0.161 $ 1.18
Average Interest Rate ...................... 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Variable Rate Instruments:
senior secured credit facility (2).......... $ 187 225 $ 225 $ 200 $ 149 --
Average Interest Rate (3)................... 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Principal payments........................ -- -- -- $ 25 $ 51 $ 149
---------------
(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 senior
secured 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 under the Nortel financing equals, at our option, either
the London Interbank Offered Rate ("LIBOR") + 3.75%, or the prime or
base rate of Citibank, N.A. plus 2.75%. LIBOR is assumed to equal 6.0%
for all periods presented.
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance the 12 7/8% 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.
The 12 7/8% senior discount notes have a carrying value of $209.0
million and a fair value which approximates $215.0 million.
33
BUSINESS
References in this prospectus to us as a provider of wireless personal
communications services or similar phrases generally refer to our building,
owning and managing our portion of the Sprint PCS network pursuant to our
affiliation agreements with Sprint PCS. Sprint PCS holds the spectrum licenses
and controls the network through its agreements with us.
All references contained in this prospectus to resident population and
residents are based on projections of year-end 2000 population counts calculated
by applying the annual growth rate from 1990 to 1999 to estimates of 1999
population counts compiled by the U.S. Census Bureau.
OVERVIEW
We are the largest network partner in terms of subscribers, revenues
and market population of Sprint PCS, the personal communications services group
of Sprint Corporation. We have the exclusive right to provide wireless mobility
communications network services under the Sprint and Sprint PCS brand names in a
territory encompassing over 15.6 million residents primarily located in Texas,
New Mexico, Arizona, Colorado, Wisconsin, Illinois, Oklahoma, Kansas, Missouri,
Washington and Oregon. For the six months ended June 30, 2001, we generated
approximately $129.4 million in revenue and ended the period with approximately
316,000 subscribers.
We launched Sprint PCS services in Laredo Texas in June 1999, and
through June 30, 2001, have commenced service in 62 additional markets,
including markets in territories serviced by companies that we acquired in 2001.
At June 30, 2001, our systems covered approximately 10 million residents out of
approximately 15.6 million total residents in those markets. We anticipate that
we will complete the network build-out requirements required by Sprint PCS by
the end of 2001. At such time, our network will cover approximately 11 million
residents in 87 markets. The number of residents covered by our system does not
represent the number of Sprint PCS subscribers that we expect to be based in our
territories.
Over the past year we have grown our business significantly. During the
first quarter of 2001, we completed our acquisitions of three Sprint PCS
affiliates. We acquired Roberts and WOW on February 14, 2001. We acquired
Southwest on March 30, 2001. The acquisitions added territories with a total of
approximately 6.8 million residents and added approximately 90,000 subscribers
Since the second quarter of 2000, we have increased subscribers and revenues an
average of 49% and 49%, respectively, per quarter.
OUR BACKGROUND
Prior to the closing of our initial public offering in February 2000,
we were comprised of Alamosa PCS LLC, a Texas limited liability company, Alamosa
Wisconsin Limited Partnership, a Wisconsin limited partnership and a 99.75%
owned subsidiary of Alamosa PCS LLC, and Texas Telecommunications, LP, a Texas
limited partnership and wholly owned subsidiary of Alamosa PCS LLC. Immediately
prior to the closing of our initial public offering, we reorganized the business
into a holding company structure. The members of Alamosa PCS LLC received shares
of our common stock in the same proportion to their membership interests in
Alamosa PCS LLC.
Alamosa (Delaware), Inc. (formerly Alamosa PCS Holdings, Inc.) was
formed in October 1999 to operate as a holding company. Texas
Telecommunications, LP was formed in December 1999. In connection with our
original reorganization, Texas Telecommunications, LP received the assets of
Alamosa PCS LLC related to operations in the Southwest United States and
operated the business of Alamosa PCS LLC. Alamosa PCS, Inc. held a 99% limited
partnership interest in Texas Telecommunications, LP. Alamosa Delaware GP, LLC,
a wholly owned subsidiary of Alamosa PCS, Inc., held a 1% general partnership
interest in Texas Telecommunications, LP. Currently Alamosa Limited, LLC, a
wholly owned subsidiary of Alamosa PCS, Inc., holds the 99% limited partnership
interest in Texas Telecommunications, LP and Alamosa Delaware GP, LLC continues
to hold the 1% general partnership interest in Texas Telecommunications, LP.
Alamosa Wisconsin Limited Partnership was formed in December 1999. In
connection with our original reorganization, Alamosa Wisconsin Limited
Partnership received the assets of Alamosa PCS LLC related to
34
operations in Wisconsin. After our original reorganization, Alamosa Wisconsin
Limited Partnership commenced our business operations in Wisconsin. Alamosa PCS,
Inc. holds the 98.75% Class A limited partnership interests in Alamosa Wisconsin
Limited Partnership and Alamosa PCS Holdings holds the .25% Class B limited
partnership interests in Alamosa Wisconsin Limited Partnership. Alamosa
Wisconsin GP, LLC, a wholly owned subsidiary of Alamosa PCS, Inc., holds a 1%
general partnership interest in Alamosa Wisconsin Limited Partnership.
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."
We were formed in July 2000 to operate as a holding company. On
February 14, 2001, Alamosa Sub I, Inc., our wholly owned subsidiary, merged with
and into Alamosa PCS Holdings, with Alamosa PCS Holdings surviving the merger
and becoming our wholly owned subsidiary. Each share of Alamosa PCS Holdings
common stock issued and outstanding immediately prior to the merger, was
converted into the right to receive one share of our common stock.
On February 14, 2001, we completed our acquisition of Roberts and WOW.
Roberts' service area, which included 2.5 million people, includes the market
areas surrounding Kansas City, the world headquarters of Sprint PCS, and St.
Louis, including the Interstate 70 corridor connecting the two cities. At
December 31, 2000, Roberts' network covered approximately 1.1 million people.
WOW's service area, which included 1.5 million people, includes the market areas
of Ellenburg, Yakima and Kennewick, Washington and key travel corridors within
Washington and Oregon. At December 31, 2000, WOW's network covered approximately
800,000 subscribers.
On March 30, 2001, we completed our acquisition of Southwest.
Southwest's service area, which included 2.8 million people, includes the market
areas in Texas, Oklahoma and Arkansas, encompassing over 2,100 heavily traveled
highway miles. At December 31, 2000, Southwest had launched service in 18
markets covering approximately 1.5 million residents and had approximately
40,000 subscribers.
In connection with the Roberts and WOW acquisitions, we entered into a
new senior secured credit facility for up to $280.0 million. In connection with
the acquisition of Southwest, we increased the amount of the senior secured
credit facility from $280.0 million to $333.0 million. The senior secured credit
facility was reduced to $225.0 million concurrently with the issuance of the
13 5/8% senior notes.
OUR RELATIONSHIP WITH SPRINT PCS
Sprint PCS is a wholly owned tracking group of Sprint Corporation and
operates the largest 100% digital, 100% PCS nationwide network in the United
States with licenses to provide services to an area of more than 280 million
residents in the United States, Puerto Rico and the U.S. Virgin Islands. The
Sprint PCS network uses code division multiple access technology nationwide.
Sprint PCS directly operates its PCS network in major markets throughout the
United States and has entered into independent agreements with various
affiliates such as us, under which the affiliate has agreed to construct and
manage PCS networks in smaller metropolitan areas and along major highways.
We are the largest affiliate of Sprint PCS based on the resident
population in our territories, and our territories adjoin several major Sprint
PCS markets. The build-out of our territories will significantly extend Sprint
PCS's coverage in the Southwestern and Midwestern United States. Due to our
relationship with Sprint PCS, we benefit from:
BRAND RECOGNITION. We market products and services directly under the
Sprint and Sprint PCS brand names. We benefit from the recognizable Sprint and
Sprint PCS brand names and national advertising as we open markets. We offer
pricing plans, promotional campaigns and handset and accessory promotions of
Sprint PCS.
35
EXISTING DISTRIBUTION CHANNELS. We benefit from relationships with
major national retailers who distribute Sprint PCS products and services under
existing Sprint PCS contracts. These national retailers have approximately 470
retail outlets in our territories. Furthermore, we benefit from sales made by
Sprint PCS to customers in our territories through its national telemarketing
sales force, national account sales team and Internet sales capability. These
existing distribution channels provide immediate access to customers as our
services become available in their area. For more information on our
distribution plan, see "--Sales and Distribution."
SPRINT PCS'S NATIONAL NETWORK. We offer access to Sprint PCS's wireless
network. Sprint PCS's network offers service in metropolitan markets across the
country representing 223 million people. We derive additional revenue from
Sprint PCS when its customers based outside of our territories roam on our
portion of the Sprint PCS network.
HIGH CAPACITY NETWORK. Sprint PCS built its network around code
division multiple access digital technology, which we believe provides
advantages in capacity, voice-quality, security and handset battery life. For
more information on the benefits of this technology, see "--Technology--Code
Division Multiple Access."
SPRINT PCS'S LICENSED SPECTRUM. Sprint PCS has invested approximately
$100.0 million to purchase the wireless mobility communications network service
licenses in our territories and to pay costs to remove sources of microwave
signals that interfere with the licensed spectrum, a process generally referred
to as microwave clearing.
BETTER EQUIPMENT AVAILABILITY AND PRICING. We are able to acquire
handsets and network equipment more quickly and at a lower cost than we would
without our affiliation with Sprint PCS. For example, Sprint PCS will use
commercially reasonable efforts to obtain for us the same discounted
volume-based pricing on wireless-related products and warranties as Sprint PCS
receives from its vendors.
ESTABLISHED BACK OFFICE SUPPORT SERVICES. We have contracted with
Sprint PCS to provide critical back office services, including customer
activation, handset logistics, billing, customer care and network monitoring
services. Because we do not have to establish and operate these systems, we are
able to accelerate our market launches and capitalize upon Sprint PCS's
economies of scale.
ACCESS TO THE SPRINT PCS WIRELESS WEB. We support the Sprint PCS
Wireless Web service in our portion of the Sprint PCS network. For more
information on the Sprint PCS Wireless Web, see "--Products and Services--Access
to the Sprint PCS Wireless Web."
Statements in this prospectus regarding Sprint or Sprint PCS are
derived from information contained in our affiliation agreements with Sprint and
Sprint PCS and periodic reports and other documents filed with the SEC by, or
press releases issued by, Sprint and Sprint PCS.
MARKETS
We believe part of our success is attributable to the strategic
attractiveness of our markets. We believe our markets are attractive for several
reasons:
o PROXIMITY TO MAJOR SPRINT PCS MARKETS. Our markets are located
near or around several major Sprint PCS markets, including Dallas,
San Antonio, Kansas City, St. Louis, Phoenix, Seattle, Portland,
Milwaukee, Minneapolis, Tulsa and Wichita.
o FEWER COMPETITORS. We believe we face a smaller number of
competitors in our markets than the typical Sprint PCS market and
fewer competitors than is generally the case for service providers
operating in more urban areas.
o MEXICO / U.S. BORDER. Our territories include more than 75% of the
Mexico / U.S. border area.
o HIGH POPULATION GROWTH MARKETS. The overall population growth rate
in our territories has been approximately 37% above the national
average for the past ten years.
36
The following table lists the location, basic trading area number,
whether the network coverage has been launched, megahertz of spectrum, estimated
total residents and estimated covered residents for each of the markets that
comprise our territories under our affiliation agreements with Sprint PCS as of
June 30, 2001. The number of estimated covered residents does not represent the
number of Sprint PCS subscribers that we expect to be based in our territories.
ESTIMATED ESTIMATED
TOTAL COVERED
LOCATION BTA NO. (1) MHZ OF SPECTRUM RESIDENTS (2) RESIDENTS (3) DATE LAUNCHED
-------- ----------- --------------- ------------- ------------- -------------
ARKANSAS
Fayetteville-Springdale-Rogers.... 140 30 325,400 243,100 3Q99
Fort Smith........................ 153 30 326,900 182,500 4Q98
Little Rock....................... 257 30 19,600 * *
Russellville...................... 387 30 95,400 * *
ARIZONA
Flagstaff......................... 144 30 116,300 76,600 4Q00
Las Vegas, NV (Arizona side)(4)... 245 30 155,000 * *
Prescott.......................... 362 30 167,500 141,200 4Q00
Phoenix (4)....................... 347 30 15,900 * *
Sierra Vista-Douglas.............. 420 30 117,800 * *
Tucson (4)........................ 447 30 17,200 * *
Yuma.............................. 486 30 160,000 142,200 1Q01
CALIFORNIA
El Centro-Calexico................ 124 30 142,400 * *
San Diego (4)..................... 402 30 3,500 * *
COLORADO * *
Colorado Springs (4).............. 89 30 9,000 * *
Farmington, NM-Durango, CO........ 139 30 208,300 * *
Grand Junction.................... 168 30 246,100 135,500 4Q00
Pueblo............................ 366 30 312,800 207,400 3Q00
ILLINOIS
Carbondale-Marion................. 67 30 214,200 114,700 1Q01
KANSAS
Pittsburg-Parsons................. 349 30 92,500 27,900 1Q01
Emporia........................... 129 30 47,800 31,900 1Q99
Hutchinson (4).................... 200 30 30,700 20,700 1Q99
Manhattan-Junction City........... 275 30 117,800 85,400 4Q98
Salina............................ 396 30 144,300 63,400 4Q98
MINNESOTA
La Crosse, WI-Winona, MN.......... 234 30 320,400 * *
Minneapolis-St. Paul (4).......... 298 30 84,800 * *
MISSOURI
Cape Girardeau-Sikeston........... 66 30 189,400 158,600 1Q01
Columbia.......................... 90 30 216,800 154,200 1Q99
Jefferson City.................... 217 30 163,600 131,400 1Q99
Kirksville........................ 230 30 57,400 37,700 4Q00
Poplar Bluff...................... 355 30 154,000 50,900 1Q01
Quincy, IL-Hannibal............... 367 30 184,800 104,500 1Q01
Rolla............................. 383 30 104,800 69,400 4Q00
St. Joseph........................ 393 30 196,600 135,600 2Q00
Sedalia........................... 414 30 92,600 57,700 1Q99
Springfield....................... 428 30 660,200 427,800 4Q99
West Plains....................... 470 30 77,100 * *
NEW MEXICO
Albuquerque....................... 8 10 831,900 684,200 3Q99
Carlsbad.......................... 68 10 51,700 * *
Clovis............................ 87 30 75,300 * *
Gallup............................ 162 10 144,200 * *
37
ESTIMATED ESTIMATED
TOTAL COVERED
LOCATION BTA NO. (1) MHZ OF SPECTRUM RESIDENTS (2) RESIDENTS (3) DATE LAUNCHED
-------- ----------- --------------- ------------- ------------- -------------
Hobbs............................. 191 30 55,500 * *
Roswell........................... 386 10 80,800 * *
Santa Fe.......................... 407 10 218,800 140,100 3Q99
Las Cruces........................ 244 10 249,900 195,200 3Q99
OKLAHOMA
Joplin, MO-Miami.................. 220 30 247,300 214,800 4Q00
Ada............................... 4 30 55,100 29,100 2Q99
Ardmore........................... 19 30 90,800 51,000 3Q99
Bartlesville...................... 31 30 49,000 43,300 3Q99
Enid.............................. 130 30 85,700 50,300 2Q00
Lawton-Duncan..................... 248 30 180,900 103,200 1Q99
McAlester......................... 267 30 54,600 30,100 3Q99
Muskogee.......................... 311 30 164,300 71,800 2Q99
Oklahoma City (4)................. 329 30 577,600 200,000 1Q99
Ponca City........................ 354 30 48,100 42,000 2Q99
Stillwater........................ 433 30 79,600 57,500 4Q98
Tulsa (4)......................... 448 30 278,500 92,800 3Q99
OREGON
Bend.............................. 38 30 153,600 134,200 1Q01
Coos Bay-North Bend............... 97 30 83,900 35,900 3Q00
Klamath Falls..................... 231 30 80,600 59,600 3Q00
Medford-Grants Pass............... 288 30 257,000 199,000 3Q00
Portland (4)...................... 358 30 20,600 20,600 3Q00
Roseburg.......................... 385 30 100,400 80,100 3Q00
Walla Walla, WA-Pendleton, OR..... 460 30 174,500 128,300 3Q00
TEXAS
Eagle Pass-Del Rio................ 121 30 117,400 111,600 1Q00
El Paso........................... 128 20 748,200 702,400 3Q99
Laredo............................ 242 30 216,400 212,400 2Q99
Wichita Falls..................... 473 30 222,500 135,600 4Q98
Abilene........................... 3 30 261,700 155,200 4Q99
Amarillo.......................... 13 30 410,300 240,900 3Q99
Big Spring........................ 40 30 35,800
Lubbock........................... 264 30 409,200 359,600 3Q99
Midland........................... 296 30 120,800 106,300 3Q99
Odessa............................ 327 30 209,100 146,800 3Q99
San Angelo........................ 400 30 161,900 106,100 4Q99
WASHINGTON
Kennewick-Pasco-Richland.......... 228 30 191,800 181,300 3Q00
Wenatchee......................... 468 30 213,500 146,100 4Q00
Yakima............................ 482 30 255,900 246,100 3Q00
WISCONSIN
Appleton-Oshkosh.................. 18 30 452,400 359,000 4Q00
Eau Claire........................ 123 30 195,400 * *
Fond du Lac....................... 148 30 97,300 86,500 4Q00
Green Bay......................... 173 30 355,800 264,500 4Q00
Madison (4)....................... 272 30 149,000 * *
Manitowoc......................... 276 30 82,900 78,500 4Q00
Milwaukee (4)..................... 297 30 84,600 * *
Sheboygan......................... 417 30 112,600 100,000 4Q00
Stevens Point-Marshfield-Wisconsin
Rapids............................ 432 30 214,600 * *
Wausau-Rhinelander................ 466 30 244,000 * *
TOTAL............................. 15,642,200 9,202,300
--------------
* These markets have not yet been launched.
(1) BTA No. refers to the basic trading area number assigned to that market
by the FCC for the purposes of issuing licenses for wireless services.
38
(2) Estimated total residents is based on projections of year-end 2000
population counts calculated by applying the annual growth rate from
1990 to 1999 to estimates of 1999 population counts compiled by the
U.S. Census Bureau.
(3) Estimated percent coverage is based on our actual or projected network
coverage in markets at the launch date using current projections of
year-end 2000 population counts calculated by applying the annual
growth rate from 1990 to 1999 to estimates of 1999 population counts
compiled by the U.S. Census Bureau.
(4) Total residents, covered residents and actual customers for these
markets reflect only those residents or customers contained in our
licensed territories, not the total residents, covered residents and
actual customers in the entire basic trading area.
Pursuant to our affiliation agreements with Sprint PCS, we have agreed
to cover a minimum percentage of the resident population in our territories
within specified time periods. We are fully compliant with these build-out
requirements and expect to launch our remaining markets ahead of the schedule
established in our affiliation agreements with Sprint PCS. As of June 30, 2001,
we had 316,000 Sprint PCS subscribers.
NETWORK OPERATIONS
The effective operation of our portion of the Sprint PCS network
requires:
o public switched and long distance interconnection;
o the implementation of roaming arrangements; and
o the development of network monitoring systems.
Our network connects to the public switched telephone network to
facilitate the origination and termination of traffic between our network and
both local exchange and long distance carriers. Sprint provides preferred rates
for long distance services. Through our arrangements with Sprint PCS and Sprint
PCS's arrangements with other wireless service providers, Sprint PCS subscribers
based in our territories have roaming capabilities on other networks. We monitor
our portion of the Sprint PCS network during normal business hours. For after
hours monitoring, Sprint PCS Network Operating Centers provide 24 hours, seven
days a week monitoring of our portion of the Sprint PCS network and notification
to our designated personnel.
As of June 30, 2001, our portion of the Sprint PCS network included
1,283 base stations and 10 switching centers.
PRODUCTS AND SERVICES
We offer products and services throughout our territories under the
Sprint and Sprint PCS brand names. Our services are designed to mirror the
service offerings of Sprint PCS and to integrate with the Sprint PCS network.
The Sprint PCS service packages we currently offer include the following:
100% DIGITAL WIRELESS NETWORK WITH SERVICE ACROSS THE COUNTRY. We are
part of the largest 100% digital wireless personal communications services
network in the country. Sprint PCS customers based in our territories may access
Sprint PCS services throughout the Sprint PCS network, which includes more than
4,000 cities and communities across the United States. Dual-band/dual-mode
handsets allow roaming on wireless networks where Sprint PCS has roaming
agreements.
ACCESS TO THE SPRINT PCS WIRELESS WEB. We support the Sprint PCS
Wireless Web in our portion of the Sprint PCS network. The Sprint PCS Wireless
Web allows customers with data capable handsets to connect their portable
computers or personal digital assistants to the Internet. Sprint PCS customers
with data capable handsets also have the ability to receive periodic information
updates such as stock prices, sports scores and weather reports.
39
Sprint PCS customers with web-browser enabled handsets have the ability to
connect to and browse specially designed text-based Internet sites on an
interactive basis.
OTHER SERVICES. In addition to these services, we may also offer
wireless local loop services in our territories, but only where Sprint is not a
local exchange carrier. Wireless local loop is a wireless substitute for the
landline-based telephones in homes and businesses. We also believe that new
features and services will be developed on the Sprint PCS network to take
advantage of code division multiple access technology. Sprint PCS conducts
ongoing research and development to produce innovative services that are
intended to give Sprint PCS a competitive advantage. We may incur additional
expenses in modifying our technology to provide these additional features and
services.
ROAMING
SPRINT PCS ROAMING. Sprint PCS roaming includes both inbound Sprint PCS
roaming, when a Sprint PCS subscriber based outside of our territories uses our
portion of the Sprint PCS network, and outbound Sprint PCS roaming, when a
Sprint PCS subscriber based in our territories uses the Sprint PCS network
outside of our territories. Sprint PCS pays us a per minute fee for inbound
Sprint PCS roaming. Similarly, we pay a per minute fee to Sprint PCS for
outbound Sprint PCS roaming. Pursuant to our affiliation agreements with Sprint
PCS, Sprint PCS has the discretion to change the per minute rate for Sprint PCS
roaming fees. See "Our Affiliation Agreements with Sprint PCS--Recent
Developments."
NON-SPRINT PCS ROAMING. Non-Sprint PCS roaming includes both inbound
non-Sprint PCS roaming, when a non-Sprint PCS subscriber uses our portion of the
Sprint PCS network, and outbound non-Sprint PCS roaming, when a Sprint PCS
subscriber based in our territories uses a non-Sprint PCS network. Pursuant to
roaming agreements between Sprint PCS and other wireless service providers, when
another wireless service provider's subscriber uses our portion of the Sprint
PCS network, we earn inbound non-Sprint PCS roaming revenue. These wireless
service providers must pay fees for their subscribers' use of our portion of the
Sprint PCS network, and as part of our collected revenues, we are entitled to
92% of these fees. Currently, pursuant to our services agreement with Sprint
PCS, Sprint PCS bills these wireless service providers for these fees. When
another wireless service provider provides service to one of the Sprint PCS
subscribers based in our territories, we pay outbound non-Sprint PCS roaming
fees. Sprint PCS, pursuant to our current services agreement with Sprint PCS,
then bills the Sprint PCS subscriber for use of that provider's network at rates
specified in his or her contract and pays us 100% of this outbound non-Sprint
PCS roaming revenue collected from that subscriber on a monthly basis. We bear
the collection risk for all service.
MARKETING STRATEGY
Our marketing strategy is to complement Sprint PCS's national marketing
strategies with techniques tailored to each of the specific markets in our
territories.
USE SPRINT PCS'S BRAND EQUITY. We feature exclusively and prominently
the nationally recognized Sprint and Sprint PCS brand names in our marketing and
sales effort. From the customers' point of view, they use our portion of the
Sprint PCS network and the rest of the Sprint PCS network as a unified national
network.
ADVERTISING AND PROMOTIONS. Sprint PCS promotes its products through
the use of national as well as regional television, radio, print, outdoor and
other advertising campaigns. In addition to Sprint PCS's national advertising
campaigns, we advertise and promote Sprint PCS products and services on a local
level in our markets at our cost. We have the right to use any promotion or
advertising materials developed by Sprint PCS and only have to pay the
incremental cost of using those materials, such as the cost of local radio and
television advertisement placements, and material costs and incremental printing
costs. We also benefit from any advertising or promotion of Sprint PCS products
and services by third party retailers in our territories, such as RadioShack,
Circuit City and Best Buy. We must pay the cost of specialized Sprint PCS print
advertising by third party retailers. Sprint PCS also runs numerous promotional
campaigns which provide customers with benefits such as additional features at
the same rate or free minutes of use for limited time periods. We offer these
promotional campaigns to potential customers in our territories.
40
SALES FORCE WITH LOCAL PRESENCE. We have established local sales forces
to execute our marketing strategy through direct business-to-business contacts,
our company-owned retail stores, local distributors and other channels. Our
market teams also participate in local clubs and civic organizations such as the
Chamber of Commerce, Rotary and Kiwanis.
SALES AND DISTRIBUTION
Our sales and distribution plan is designed to exploit Sprint PCS's
multiple channel sales and distribution plan and to enhance it through the
development of local distribution channels. Key elements of our sales and
distribution plan consist of the following:
SPRINT PCS RETAIL STORE. As of June 30, 2001, we owned and operated 57
Sprint PCS stores and 7 kiosks at military base locations. These stores provide
us with a local presence and visibility in the markets within our territories.
Following the Sprint PCS model, these stores are designed to facilitate retail
sales, activation, bill collection and customer service.
SPRINT STORE WITHIN A RADIOSHACK STORE. Sprint has an agreement with
RadioShack to build a "store within a store," making Sprint PCS one of two
brands of wireless mobility communications network services using CDMA
technology in the 1900 MHz spectrum and products sold through RadioShack stores.
As of June 30, 2001, RadioShack had approximately 265 stores in our territories.
OTHER NATIONAL THIRD PARTY RETAIL STORES. In addition to RadioShack, we
benefit from the distribution agreements established by Sprint PCS with other
national and regional retailers such as Best Buy, Circuit City and Target. As of
June 30, 2001, these retailers had approximately 368 stores in our territories.
ELECTRONIC COMMERCE. Sprint PCS maintains an Internet site,
www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to Sprint PCS's Internet site can order and pay for a
handset and select a rate plan. Sprint PCS customers visiting the site can
review the status of their account, including the number of minutes used in the
current billing cycle. We recognize the revenues generated by Sprint PCS
customers in our territories who purchase products and services over the Sprint
PCS Internet site.
SEASONALITY
Our business is subject to seasonality because the wireless industry is
heavily dependent on fourth quarter results. Among other things, the industry
relies on significantly higher customer additions and handset sales in the
fourth quarter as compared to the other three fiscal quarters. A number of
factors contribute to this trend, including:
o the increasing use of retail distribution, which is dependent upon
the year-end holiday shopping season;
o the timing of new product and service announcements and
introductions;
o competitive pricing pressures; and
o aggressive marketing and promotions.
TECHNOLOGY
GENERAL. In 1993, the FCC allocated the 1900 MHz frequency block of the
radio spectrum for wireless personal communications services. Wireless personal
communications services differ from traditional analog cellular telephone
service principally in that wireless personal communications services systems
operate at a higher frequency and employ advanced digital technology.
Analog-based systems send signals in which the transmitted signal resembles the
input signal, the caller's voice. Digital systems convert voice or data signals
into a stream of digits that permit a single radio channel to carry multiple
simultaneous transmissions. Digital systems also achieve greater frequency reuse
than analog systems resulting in greater capacity than analog systems. This
enhanced
41
capacity, along with enhancements in digital protocols, allows digital-based
wireless technologies, whether using wireless personal communications services
or cellular frequencies, to offer new and enhanced services, including greater
call privacy and more robust data transmission, such as facsimile, electronic
mail and connecting notebook computers with computer/data networks.
Wireless digital signal transmission is accomplished through the use of
various forms of frequency management technology or "air interface protocols."
The FCC has not mandated a universal air interface protocol for wireless
personal communications services systems. Wireless personal communications
systems operate under one of three principal air interface protocols; code
division multiple access, time division multiple access, commonly referred to as
TDMA, or global system for mobile communications, commonly referred to as GSM.
Time division multiple access and global system for mobile communications are
both time division multiple access systems but are incompatible with each other.
The code division multiple access system is incompatible with both global system
for mobile communications and time division multiple access systems.
Accordingly, a subscriber of a system that utilizes code division multiple
access technology is unable to use a code division multiple access handset when
traveling in an area not served by code division multiple access-based wireless
personal communications services operators, unless the customer carries a
dual-band/dual-mode handset that permits the customer to use the analog cellular
system in that area. The same issue would apply to users of time division
multiple access or global system for mobile communications systems. All of the
wireless personal communications services operators now have dual-mode or
tri-mode handsets available to their customers. Because digital networks do not
cover all areas in the country, these handsets will remain necessary for
segments of the subscriber base.
CODE DIVISION MULTIPLE ACCESS TECHNOLOGY
Sprint PCS's network and its affiliates' networks all use digital code
division multiple access technology. We believe that code division multiple
access provides important system performance benefits such as:
GREATER CAPACITY. We believe, based on studies by code division
multiple access manufacturers, that code division multiple access systems can
provide system capacity that is approximately seven to ten times greater than
that of current analog technology and approximately three times greater than
time division multiple access and global system for mobile communications
systems.
PRIVACY AND SECURITY. One of the benefits of code division multiple
access technology is that it combines a constantly changing coding scheme with a
low power signal to enhance call security and privacy.
SOFT HAND-OFF. Code division multiple access systems transfer calls
throughout the code division multiple access network using a technique referred
to as a soft hand-off, which connects a mobile customer's call with a new base
station while maintaining a connection with the base station currently in use.
Code division multiple access networks monitor the quality of the transmission
received by multiple base stations simultaneously to select a better
transmission path and to ensure that the network does not disconnect the call in
one cell unless replaced by a stronger signal from another base station. Analog,
time division multiple access and global system for mobile communications
networks use a "hard hand-off" and disconnect the call from the current base
station as it connects with a new one without any simultaneous connection to
both base stations.
SIMPLIFIED FREQUENCY PLANNING. Frequency planning is the process used
to analyze and test alternative patterns of frequency used within a wireless
network to minimize interference and maximize capacity. Unlike time division
multiple access and global system for mobile communications based systems, code
division multiple access based systems can reuse the same subset of allocated
frequencies in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
LONGER BATTERY LIFE. Due to their greater efficiency in power
consumption, code division multiple access handsets can provide longer standby
time and more talk time availability when used in the digital mode than handsets
using alternative digital or analog technologies.
42
COMPETITION
Competition in the wireless communications services industry is
intense. We compete with a number of wireless service providers in our markets.
We believe that our primary competition is with national wireless providers such
as AT&T Wireless Services, Cingular, Voicestream Wireless, Verizon Wireless and
Alltel.
We also face competition from resellers, which provide wireless
services to customers but do not hold FCC licenses or own facilities. Instead,
the resellers buy blocks of wireless telephone numbers and capacity from a
licensed carrier and resell services through their own distribution network to
the public. The FCC currently requires all cellular and wireless personal
communications services licensees to permit resale of carrier services to a
reseller.
In addition, we compete with existing communications technologies such
as paging, enhanced specialized mobile radio service dispatch and conventional
landline telephone companies in our markets. Potential users of wireless
personal communications services systems may find their communications needs
satisfied by other current and developing technologies. One or two-way paging or
beeper services that feature voice messaging and data display as well as
tone-only service may be adequate for potential customers who do not need to
speak to the caller.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Many of our competitors have significantly greater financial and
technical resources and subscriber bases than we do. Some of our competitors
also have established infrastructures, marketing programs and brand names. In
addition, some of our competitors may be able to offer regional coverage in
areas not served by the Sprint PCS network, or, because of their calling volumes
or relationships with other wireless providers, may be able to offer regional
roaming rates that are lower than those we offer. Wireless personal
communications services operators will likely compete with us in providing some
or all of the services available through the Sprint PCS network and may provide
services that we do not. Additionally, we expect that existing cellular
providers will continue to upgrade their systems to provide digital wireless
communication services competitive with Sprint PCS. Recently, there has been a
trend in the wireless communications industry towards consolidation of wireless
service providers through joint ventures, mergers and acquisitions. We expect
this consolidation to lead to larger competitors over time. These larger
competitors may have substantial resources or may be able to offer a variety of
services to a large customer base.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
Sprint PCS services. Based upon increased competition, we anticipate that market
prices for two-way wireless services generally will decline in the future. We
will compete to attract and retain customers principally on the basis of:
o the strength of the Sprint and Sprint PCS brand names, services
and features;
o nationwide network;
o our network coverage and reliability; and
o CDMA technology.
Our ability to compete successfully will also depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
industry, including:
o new services and technologies that may be introduced;
o changes in consumer preferences;
43
o demographic trends;
o economic conditions; and
o discount pricing strategies by competitors.
INTELLECTUAL PROPERTY
The Sprint diamond design logo is a service mark registered with the
United States Patent and Trademark Office. The service mark is owned by Sprint.
We use the Sprint and Sprint PCS brand names, the Sprint diamond design logo and
other service marks of Sprint in connection with marketing and providing
wireless services within our territories. Under the terms of the trademark and
service mark license agreements with Sprint and Sprint PCS, we do not pay a
royalty fee for the use of the Sprint and Sprint PCS brand names and Sprint
service marks.
Except in certain instances and other than in connection with the
national distribution agreements, Sprint PCS has agreed not to grant to any
other person a right or license to use the licensed marks in our territories. In
all other instances, Sprint PCS reserves the right to use the licensed marks in
providing its services within or without our territories.
The trademark license agreements contain numerous restrictions with
respect to the use and modification of any of the licensed marks. See "Our
Affiliation Agreements with Sprint PCS--The Trademark and Service Mark License
Agreements" for more information on this topic.
EMPLOYEES
As of June 30, 2001, we employed 846 employees. None of our employees
are represented by a labor union. We believe that our relations with our
employees are good.
PROPERTIES
Our headquarters are located in Lubbock, Texas and we lease space in a
number of locations, primarily for our Sprint PCS stores, base stations, and
switching centers. As of June 30, 2001 we leased 57 retail stores and 10
switching centers. As of June 30, 2001 we leased 1,283 towers and owned 4
towers. We believe that our facilities are adequate for our current operations
and that additional leased space can be obtained if needed on commercially
reasonable terms.
ENVIRONMENTAL COMPLIANCE
Our environmental compliance expenditures primarily result from the
operation of standby power generators for our telecommunications equipment and
compliance with various environmental rules during network build-out and
operations. The expenditures arise in connection with standards compliance or
permits which are usually related to generators, batteries or fuel storage. Our
environmental compliance expenditures have not been material to our financial
statements or to our operations and are not expected to be material in the
future.
LEGAL PROCEEDINGS
We and our subsidiaries are not parties to any pending legal
proceedings that we believe would, if adversely determined, individually or in
the aggregate, have a material adverse effect on our, or our subsidiaries',
financial condition or results of operations.
44
MANAGEMENT
BOARD OF DIRECTORS
The following table presents information with respect to our current
directors:
NAME AGE
---- ---
David E. Sharbutt 51
Michael R. Budagher 43
Ray M. Clapp, Jr. 41
Scotty Hart 51
Thomas Hyde 56
Schuyler B. Marshall 55
Tom M. Phelps 52
Thomas F. Riley, Jr. 55
Steven C. Roberts 49
Michael V. Roberts 52
Jimmy R. White 62
Set forth below is a brief description of the present and past business
experience of each of our directors:
DAVID E. SHARBUTT. Mr. Sharbutt has been Chairman and a director since
we were founded in July 1998 and was named Chief Executive Officer in October
1999. Mr. Sharbutt was formerly the President and Chief Executive Officer of
Hicks & Ragland Engineering Co., an engineering consulting company, now known as
CHR Solutions. Mr. Sharbutt was employed by CHR Solutions as a Senior Consultant
from October 1999 until November 2000. He was employed by CHR Solutions from
1977 through 1999, where he worked with independent telephone companies in
developing strategic, engineering and implementation plans for various types of
telecommunications services. Before he joined CHR Solutions, Mr. Sharbutt was
employed with Southwestern Bell.
MICHAEL R. BUDAGHER. Mr. Budagher has served as a director since
December 1998. Mr. Budagher was the founder of Specialty Constructors, a wholly
owned subsidiary of Specialty Teleconstructors, Inc., a wireless infrastructure
installation company. He served as the President, Chairman of the Board, Chief
Executive Officer and Chief Operating Officer of Specialty from 1990 to 1999.
Mr. Budagher is also a founder, stockholder and the President of Specialty
Antenna Site Resources, Inc. and was a founder and served as the President of
Specialty Constructors Coatings, Inc. until March 1997. He also serves as the
Managing Member and President of the Budagher Family LLC as well as a Manager of
West Texas PCS, LLC, both non-public limited liability companies.
RAY M. CLAPP, JR. Mr. Clapp has served as a director since we were
founded in July 1998. Since 1995, Mr. Clapp has been Managing Director,
Acquisitions and Investments for the Rosewood Corporation, the primary holding
company for the Caroline Hunt Trust Estate. From 1989 to 1995 he has held
various officer level positions with the Rosewood Corporation and its
subsidiaries. Prior to his employment with the Rosewood Corporation, Mr. Clapp
was a consultant with Booz, Allen & Hamilton, a management consulting firm. Mr.
Clapp received his Bachelor of Science and Engineering degree, with honors, from
Princeton University and earned a Master of Business Administration from the
University of Texas at Austin.
SCOTTY HART. Mr. Hart has served as a director since we were founded in
July 1998. He has also served as General Manager of South Plains Telephone
Cooperative, a wireline and wireless telecommunications company, since April
1995, and previously as Assistant Manager of South Plains Telephone Cooperative.
Mr. Hart is currently Vice President of SPPL, Inc., Chairman of the General
Partners Committee for Caprock Cellular Limited Partnership and past Chairman
for Texas RSA3 Limited Partnership, all affiliates of South Plains Telephone
Cooperative. He is also General Manager of South Plains Advanced Communications
& Electronics, Inc., a wholly-owned subsidiary of South Plains Telephone
Cooperative, and Secretary of Alamo Cellular, Inc., a non-public holding company
with interests in a wireless telecommunications service provider and an
affiliate of South Plains Advanced Communications & Electronics, Inc. In
addition, he is the general partner and a limited partner of
45
Lubbock HLH, Ltd. He was President of Alamo IV LLC until its dissolution in
November 1999. Mr. Hart also serves as a director of Texas Statewide Telephone
Cooperative, Inc., a non-public company.
THOMAS HYDE. Mr. Hyde has served as a director since we were founded in
July 1998. Since 1998, Mr. Hyde has served as Manager of Taylor Telephone
Cooperative, Inc., a landline telephone service provider, and from 1996 to 1997
he served as Assistant Manager of that company. He has also served as Manager of
Taylor Telecommunications, Inc., a cellular service provider. Prior to 1996, Mr.
Hyde was self-employed in the farming and ranching business. Mr. Hyde was also
Secretary of Alamo IV LLC until its dissolution in November 1999. Mr. Hyde
currently serves as a director of Alamo Cellular, Inc., and was a director of
Taylor Telephone Cooperative, Inc. and Taylor Telecommunications, Inc. from 1979
to 1996.
SCHUYLER B. MARSHALL. Mr. Marshall has served as a director since
November 1999. He has served as President of the Rosewood Corporation, the
primary holding company for the Caroline Hunt Trust Estate, since January 1999.
From 1996 through 1998, he served as Senior Vice President and General Counsel,
and Executive Director of the Rosewood Corporation, and as director and
president of various of its subsidiaries. He currently serves as a member of the
advisory board of Rosewood Capital IV, L.P., a San Francisco based venture
capital fund that will focus on e-commerce, telecommunications and other
consumer oriented investments. Prior to his employment with the Rosewood
Corporation, Mr. Marshall was a senior shareholder with Thompson & Knight, P.C.,
in Dallas, where he practiced law since 1970.
TOM M. PHELPS. Mr. Phelps has served as a director since December 1998.
Mr. Phelps has served as Chief Executive Officer of Nebraska Wireless since
October 2000. From September 1997 to October 2000 he served as Executive Vice
President and General Manager of ENMR Telephone Cooperative, a
telecommunications services provider, and of Telecommunications Holdings East,
since September 1997. From September 1997 to October 2000 Mr. Phelps was also
Executive Vice President of Plateau Telecommunications, Inc., a wireless and
wireline telecommunications provider and wholly owned subsidiary of
Telecommunications Holdings East. Additionally, Mr. Phelps served as Assistant
Manager of ENMR Telephone Cooperative and its wholly owned subsidiaries from
1995 to 1997, and as Area Manager of GTE Corporation, a telephone service
provider, from 1994 to 1995.
THOMAS F. RILEY, JR. Mr. Riley, a licensed CPA, has served as a
director since his appointment to the Board of Directors on March 30, 2001 in
connection with our completion of our acquisition of Southwest. Mr. Riley has
served as Executive Vice President and Chief Operating Officer of Chickasaw
Holding Co. since January 1997. From July 1999 to March 2001, Mr. Riley served
as President and Chief Executive Officer of Southwest PCS Holdings, Inc. Before
he joined Chickasaw, Mr. Riley was associated with Dobson Communications Corp.
from 1970 through 1996, first as external auditor and consultant, then Chief
Financial Officer from 1986 through 1995 and then as President of Dobson
Telephone Co. in 1996. Pursuant to the agreement providing for the acquisition
of Southwest PCS Holdings, Inc., we agreed to nominate Mr. Riley for re-election
to the Board of Directors and to solicit proxies in favor of his re-election to
the Board of Directors at the Meeting.
MICHAEL V. ROBERTS. Mr. Roberts has served as a director since his
appointment to the Board of Directors on February 14, 2001 in connection with
our completion of our acquisition of Roberts, of which Mr. Roberts formerly was
a 50% owner. Mr. Roberts is co-founder of Roberts Broadcasting Company which
owns several television stations in medium-sized markets in the U.S. and has
served as that company's Chairman and Chief Executive Officer since its founding
in 1989. Mr. Roberts is also the founder of companies involved in commercial
real estate development, construction management, corporate management
consulting and communications towers. He is currently a director of ACME
Communications, Inc., which owns and operates broadcast television stations.
STEVEN C. ROBERTS. Mr. Roberts has served as a director since his
appointment to the Board of Directors on February 14, 2001 in connection with
our completion of our acquisition of Roberts, of which Mr. Roberts formerly was
a 50% owner. Mr. Roberts is co-founder of Roberts Broadcasting Company and has
served as that company's President and Chief Operating Officer since its
founding. Mr. Roberts is the founder of companies involved in commercial real
estate development and communications towers. He is currently a director of
Southside Bancshares Corp. and Falcon Products Inc.
JIMMY R. WHITE. Mr. White has served as a director since we were
founded in July 1998. He has served as the General Manager of XIT Rural
Telephone Cooperative, Inc. and its subsidiaries, XIT Telecommunication &
46
Technology, Inc., XIT Cellular, and XIT Fiber, Inc., all wireline and wireless
telecommunications services providers, since 1975. He was also the Treasurer of
Alamo IV LLC until its dissolution in November 1999. Mr. White currently serves
as the President of Alamo Cellular, Inc., He also currently serves as a director
of Texas Telephone Association, a non-public company, and Forte of Colorado, a
general partnership.
Messrs. Michael V. Roberts and Steven C. Roberts are brothers. There is
no family relationship among any of our other directors or executive officers.
EXECUTIVE OFFICERS
The following table sets forth information concerning the persons who
serve as our executive officers. Our executive officers are elected annually by
the Board of Directors and serve until their successors are duly elected and
qualified.
NAME AGE TITLE
---- --- -----
David E. Sharbutt 51 Chairman of the Board of Directors and Chief
Executive Officer
Kendall W. Cowan 47 Chief Financial Officer and Secretary
Loyd I. Rinehart 46 Senior Vice President of Corporate Finance
Anthony Sabatino 39 Chief Technology Officer and Senior Vice
President of Engineering and Network
Operations
Margaret Z. Couch 49 Chief Marketing Officer
Set forth below is a brief description of the present and past business
experience of each of the persons who serves as an executive officer of Alamosa
who is not also serving as a director.
KENDALL W. COWAN. Mr. Cowan has been Chief Financial Officer since
December 1999. From October 1993 to December 1999, he was a partner in the
public accounting firm of Robinson Burdette Martin & Cowan, L.L.P. and from
January 1986 to September 1993, he was a partner in the Lubbock and Dallas
offices of Coopers & Lybrand. He provided consulting and accounting services to
a wide range of clients at both firms including public companies. He is a
Certified Public Accountant and a member of both the American Institute of
Certified Public Accountants and the Texas Society of Certified Public
Accountants. Mr. Cowan is Chairman of the Board and a stockholder of ShaCo
Xpress, Inc., a director of Robert Heath Trucking, Inc., and a member of C.C. &
Co., L.L.C., all of which are non-public companies.
LOYD I. RINEHART. Mr. Rinehart became the Senior Vice President of
Corporate Finance in June 2000. From June 1998 to June 2000, Mr. Rinehart served
as Chief Financial Officer of Affordable Residential Communities, the fourth
largest owner of manufactured housing land-lease communities and one of the top
three largest independent retailers of manufactured homes. From June 1995 to
June 1998, Mr. Rinehart served as Executive Vice President of Plains Capital
Corporation, a bank holding company based in Lubbock, Texas. He was responsible
for all non-Lubbock banking operations, including due diligence, modeling, the
purchase or the establishment of additional locations and ultimately management.
Prior to his employment with Plains Capital Corporation, Mr. Rinehart served as
Chief Financial Officer of First Nationwide, a $15 billion thrift, and its
predecessor financial institutions. Mr. Rinehart is a Certified Public
Accountant.
ANTHONY SABATINO. Mr. Sabatino became the Chief Technology Officer and
Senior Vice President of Engineering and Network Operations in July 2000. From
1995 to July 2000, he was the National Radio Frequency (RF) Engineering Director
for Sprint PCS and was an initial member of the SPCS corporate launch team. Mr.
Sabatino developed all SPCS National RF Engineering Standards. He also acted as
design lead for a SPCS new RF Interference Analysis Tool. Mr. Sabatino is a
director and President of the PCIA Cost Sharing Clearinghouse and a member of
the University of Kansas Advisory Committee representing electrical engineering.
47
MARGARET Z. COUCH. Mrs. Couch has been Chief Marketing Officer since
May 2001, but she has been with us since 1999 in various capacities. From
February to May 2001 she was Senior Vice President, South Central Region and
from January 2000 to January 2001 she was General Manager and Vice President for
the Great Plains and Northwest Regions. In January 1999 she started as General
Manager for the West Texas Region. In 1987, Mrs. Couch founded Performance
Associates, Inc., a human resources and sales training consulting firm and in
1996 she founded CK BusinesSense, Inc., which expanded the services provided by
Performance Associates, to include management consulting and assisting
organizations in generating greater profitability. Mrs. Couch has more than
twenty years of management and leadership experience as a management consultant
and trainer. She has worked with a vast array of clients, including
communications, manufacturing, health care and financial companies as well as
government, education and non-profit entities.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by our Chief
Executive Officer and our other executive officers who were serving in such
capacities on December 31, 2000 with respect to our 2000 fiscal year. Such
executive officers are referred to herein collectively as the "named executive
officers."
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- --------------------------------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION (1)
-------------------------------- ------- ------------ ------------ -------------- --------------------
David E. Sharbutt 2000 $204,166 $146,024 $20,434
Chief Executive Officer 1999 $43,750 $43,750 1,697,500
Kendall W. Cowan 2000 $162,500 $100,163 $19,889
Chief Financial Officer 1999 $12,500 $12,500 1,455,000
Loyd I. Rinehart 2000 $87,500 $23,908 100,000
Senior Vice President
of Corporate Finance
W. Don Stull 2000 $66,987 $25,663 48,501 $111,462
Former Chief Technology 1999 $90,000 $58,875 145,500
Officer (2) 1998 $16,108 $0 ____
Jerry W. Brantley 2000 $175,000 $75,942 $29,075
Former President and Chief 1999 $175,000 $142,309 1,697,500
Operating Officer (3) 1998 $43,077 $25,823 ____
----------------
(1) The amounts reflected in the "All Other Compensation" column represent the
following payments and benefits: Mr. Sharbutt - $11,223 for life insurance
premiums paid for by us and $9,211 for contributions to our 401(k) plan
made by us; Mr. Cowan - $12,163 life insurance premiums paid for by us and
$7,726 for contributions to our 401(k) plan made by us; Mr. Stull -
$100,000 for severance payments and $11,462 payment in lieu of annual
bonus; Mr. Brantley - $29,075 for life insurance premiums paid for by us.
(2) Mr. Stull served as our Chief Technology Officer from October 1998 to
September 2000.
(3) Mr. Brantley served as our President and Chief Operating Officer from
October 1998 to January 2001.
48
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The table below provides information regarding stock options granted to
the named executive officers in fiscal year 2000 and hypothetical gains for the
options through the end of their respective ten year terms. In accordance with
applicable requirements of the SEC, we have assumed annualized growth rates of
the market price of our common stock over the exercise price of the option of 5%
and 10%, running from the date the option was granted to the end of the option
term. Actual gains, if any, depend on the future performance of our common stock
and overall conditions and the information in this table should not be construed
as an estimate of future stock price growth. We did not grant any stock
appreciation rights in fiscal year 2000.
POTENTIAL
REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATE OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION APPRECIATION
NAME OPTIONS FISCAL YEAR (PER SHARE) DATE FOR OPTION TERM
--------------------- -------------- --------------- -------------- ------------- -----------------------------
5% ($) 10% ($)
------------- --------------
Loyd I. Rinehart 100,000 (1) 4.69% $12.375 6/12/10 $778,257 $1,972,256
----------------
(1) Options become exercisable with respect to one-third of the shares
subject thereto on June 19 of 2001, 2002 and 2003. All options become
fully vested and exercisable upon a change in control of us.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides summary information regarding option
exercises in 2000 by the Named Executive Officers and the value of such
officers' unexercised options at December 31, 2000.
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ON VALUE YEAR-END (#) AT FISCAL YEAR-END
NAME EXERCISE (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)($)(1)
---------------------- ------------- ------------- ---------------------------- ---------------------------------
David E. Sharbutt 242,500 3,843,625 485,000/970,000 0/0
Kendall W. Cowan 0 __ 291,000/1,164,000 0/0
Loyd I. Rinehart 0 __ 0/100,000 0/0
Jerry W. Brantley 242,500 3,843,625 363,750/1,091,250 1,403,469/0
W. Don Stull 0 __ 105,499/0 731,899/0
----------------
(1) The values in this column are based upon the closing price of our
common stock on December 29, 2000 of $6.9375 per share.
EMPLOYMENT AGREEMENTS
DAVID E. SHARBUTT. We are a party to an employment agreement with David
E. Sharbutt, effective October 1, 1999. This employment agreement has a
three-year term and provides that Mr. Sharbutt receive a minimum base salary of
$175,000, payable no less often than semi-monthly, subject to increases at our
discretion. Mr. Sharbutt is entitled to receive a bonus of up to $43,750 for
each calendar quarter in which we meet certain corporate milestones. In
addition, the employment agreement also provides for Mr. Sharbutt to be granted
a total of 1,697,500 stock options, with one-third of the options vesting on
each September 30th during the employment term. Mr. Sharbutt is also entitled to
$5,000,000 in term life insurance coverage, reimbursement for reasonable
business expenses, $1,250 per month as a vehicle and club dues allowance,
reimbursement for vehicle business mileage at the standard rate set
49
by the Internal Revenue Service, and such incentive, retirement, profit-sharing,
life, medical, disability and other benefit plans as may be available to our
other executives with comparable responsibilities, subject to the terms of those
programs.
If we terminate Mr. Sharbutt's employment other than for cause or
non-performance, as defined in the employment agreement, we would be required to
pay him severance pay equal to one year's base salary and all stock options
granted to him under the agreement would become vested and exercisable. If Mr.
Sharbutt should terminate his employment agreement for cause, as defined in the
employment agreement, he will be entitled to severance pay equal to the lesser
of one year's base salary and the unpaid balance of his salary that would have
been payable to him through September 30, 2002 and he will be entitled to a
vesting of the portion of his options that would have become vested on the first
September 30th following the date of his termination. If Mr. Sharbutt is
terminated by us within one year after a change in control (as defined in the
agreement) for any reason other than cause, he will be entitled to severance pay
equal to the unpaid balance of the base salary which would have been payable to
him through September 30, 2002 and all stock options granted to him under the
agreement will become vested and exercisable.
Pursuant to the employment agreement, Mr. Sharbutt has agreed not to
compete with us during his employment and not to compete with us within a
defined area for a period of two years following termination of his employment
(subject to certain exceptions). Further, Mr. Sharbutt has agreed not to
disclose any of our confidential information at any time during or subsequent to
his employment with us without our written consent.
KENDALL W. COWAN. We are a party to an employment agreement with
Kendall W. Cowan, effective December 1, 1999. This employment agreement has a
five-year term and provides that Mr. Cowan receive a minimum base salary of
$150,000, subject to increases at our discretion. In addition, the employment
agreement provides for Mr. Cowan to be granted a total of 1,455,000 stock
options, with one-fifth of the options vesting on each November 30th during the
employment term. Mr. Cowan is entitled to receive a bonus of up to $37,500 for
each calendar quarter in which we meet certain corporate milestones. Mr. Cowan
is also entitled to reimbursement for reasonable business expenses, a $600 per
month vehicle allowance, reimbursement for vehicle business mileage at the
standard mileage rate set by the Internal Revenue Service, and such incentive,
retirement, profit-sharing, life, medical, disability and other benefit plans as
may be available to our other executives with comparable responsibilities,
subject to the terms of those programs. Pursuant to the employment agreement, we
will pay the costs of all continuing professional education courses required for
Mr. Cowan to maintain his certified public accountant license, as well as all
professional dues and licenses attributable to his certified public accountant
license.
If we terminate Mr. Cowan's employment for other than cause or
non-performance, as defined in the employment agreement, we would be required to
pay him severance pay equal to one year's base salary and all stock options
granted to him under the agreement will become vested and exercisable. If Mr.
Cowan should terminate his employment for cause, as defined in the employment
agreement, he will be entitled to severance pay equal to the lesser of one
year's base salary and the unpaid balance of his salary which would be payable
to him through November 30, 2004 and he will be entitled to a pro rata vesting
of the options that would otherwise have become vested on the first November
30th following the date of his termination.
Mr. Cowan has agreed, pursuant to the employment agreement, not to
compete with us during his employment and for a period of two years following
termination of his employment (subject to certain exceptions). Further, Mr.
Cowan has agreed not to disclose any of our confidential information at any time
during or subsequent to his employment with us without our written consent.
LOYD I. RINEHART. We are a party to an employment agreement with Loyd
I. Rinehart effective June 1, 2000. This employment agreement has a five-year
term and provides that Mr. Rinehart receive a minimum base salary of $150,000,
payable no less often than semi-monthly, subject to increases at our discretion.
Mr. Rinehart is entitled to receive bonuses of up to (i) $25,000 for each
calendar quarter in which we meet certain corporate milestones and (ii) $200,000
based on the acquisitions of POPs (not including POPs assigned by Sprint) in any
calendar year, reduced by bonuses paid under (i) above. The maximum bonus Mr.
Rinehart can receive in one calendar year will be the greater of (i) or (ii)
above. Mr. Rinehart is also entitled to reimbursement for reasonable business
expenses, relocation from Denver, Colorado to Lubbock, Texas, a $600 per month
vehicle allowance, reimbursement for vehicle business mileage at the standard
mileage rate set by the Internal Revenue Service, and incentive, retirement,
profit-sharing, life, medical, disability and other benefit plans as may be
available to our other
50
executives with comparable responsibilities, subject to the terms of those
programs. Pursuant to the employment agreement, we will pay the costs of all
continuing professional education courses required for Mr. Rinehart to maintain
his certified public accountant license, as well as all professional dues and
licenses attributable to his certified public accountant license.
If we terminate Mr. Rinehart's employment for other than cause or
non-performance, both as defined in the employment agreement, we would be
required to pay him severance pay equal to one year's base salary. If Mr.
Rinehart should terminate his employment for cause, as defined in the employment
agreement, he will be entitled to severance pay equal to the lesser of one
year's base salary and the unpaid balance of his salary which would be payable
to him through May 31, 2005. Mr. Rinehart has agreed, pursuant to the employment
agreement, not to compete with us during his employment and for a period of two
years following termination of his employment (subject to certain exceptions
detailed in his employment agreement). Further, Mr. Rinehart has agreed not to
disclose any of our confidential information at any time during or subsequent to
his employment with us without our written consent.
JERRY W. BRANTLEY. Prior to Mr. Brantley leaving Alamosa, we were a
party to an amended and restated employment agreement with him, effective
October 1, 1999. On January 23, 2001, we announced that Mr. Brantley left
Alamosa and is pursuing other interests.
W. DON STULL. Before his departure from Alamosa, we were a party to an
amended and restated employment agreement with W. Don Stull, effective October
29, 1999. Mr. Stull left Alamosa on September 20, 2000. In connection with the
termination of his employment, Mr. Stull entered into a separation and release
agreement with us. In addition to the payment described under the "All Other
Compensation" column in the Summary Compensation Table, vesting was accelerated
with respect to an aggregate of 57,001 of Mr. Stull's options pursuant to the
separation agreement.
COMPENSATION OF DIRECTORS
We do not pay any cash fees or other compensation to our non-employee
directors. In fiscal year 2000, pursuant to the our long-term incentive plan,
each of our non-employee directors was granted an initial option to purchase
28,000 shares of our common stock on the date he or she joined the Board of
Directors. Initial options are fully vested on the date of grant and expire on
the tenth anniversary of the date of grant. For fiscal year 2001, the
Compensation Committee will make recommendations to the Board of Directors
regarding initial grants to each non-employee director and each initial grant
will be made on an individual basis. In addition to the initial option, in
fiscal year 2000, each non-employee director received an annual grant pursuant
to the long-term incentive plan of an option to purchase that number of shares
of our common stock equal to $60,000 divided by the fair market value of a share
of our common stock on the date of grant. In respect of service rendered in
fiscal 2001, each non-employee director will receive an annual grant pursuant to
the long-term incentive plan of an option to purchase that number of shares of
our common stock equal to $18,000 divided by the Black-Scholes value of an
option to purchase a share of our common stock. The annual option will be
granted at our first full meeting of the Board of Directors following the end of
the fiscal year. Annual options are fully vested on the date of grant and expire
on the tenth anniversary of the date of grant. The exercise price of each option
granted to a non-employee director is equal to the fair market value of the
common stock subject to such option on the date of grant. All of our
non-employee directors are entitled to reimbursement of their reasonable
out-of-pocket expenses incurred in connection with their travel to, and
attendance at, meetings of the Board of Directors or committees thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2000, the Compensation Committee consisted of
Messrs. Marshall, Hyde and Silber. Mr. Silber resigned from the Board of
Directors effective April 16, 2001. The Compensation Committee is responsible
for reviewing and approving all compensation arrangements for our officers. None
of these committee members are or have been our executive officers or executive
officers of any of our subsidiaries.
In 2000, we entered into various arrangements with Mericom Corporation
and its affiliates for site acquisition, RF engineering and fixed network
design. Mr. Silber holds an indirect minority interest in Mericom
51
Corporation, which is a privately-held provider of planning, design, deployment,
maintenance and operations services for wireless telecommunications networks.
During fiscal year 2000, we paid approximately $1.0 million under these
arrangements. On February 14, 2001, we completed our acquisition of WOW, a
wholly-owned subsidiary of WOW Holdings, LLC through the merger of WOW Holdings
with and into us. Mr. Silber was a member of the board of managers of WOW
Holdings. Mr. Silber is also a principal of Silpearl Associates, LLC, which is
an affiliate of WOW Investment Partners, LP, which owned approximately 44.4% of
the outstanding membership interests of WOW Holdings. WOW Investment Partner,
LLC holds the sole general partner interest of WOW Investment Partners, LP. The
sole membership interest of WOW Investment Partner, LLC is held by Silpearl
Associates, LLC. Mr. Silber indirectly owns 50% of the membership interests, and
is the President, of Silpearl Associates, LLC. Following the closing of the
acquisition of WOW, Mr. Silber received 915,193 shares of our common stock and
approximately $1.5 million in cash as a distribution from WOW Investment
Partners, LP. Mr. Silber did not participate in the Board of Directors vote to
approve the WOW merger.
52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FORMATION OF ALAMOSA PCS, LLC
On July 24, 1998, Alamo IV LLC, Rosewood Telecommunications, L.L.C.,
Tregan International Corp., West Texas PCS, LLC and Longmont PCS, LLC formed
Alamosa PCS, LLC. Those investors received membership interests in exchange for
their capital commitments. The investors amended the formation documents on
December 11, 1998 to allow for a new member, Yellow Rock PCS, L.P., and to
modify their membership interests and capital commitments. Yellow Rock agreed to
contribute a total of $400,000 of capital in exchange for a 0.82% membership
interest in Alamosa PCS, LLC. Pursuant to the agreement, Yellow Rock committed
to a funding schedule beginning with a payment of $123,711 on December 15, 1998
and ending on January 1, 2001. The original investors retained the remaining
99.18% membership interest in Alamosa PCS, LLC in exchange for their capital
commitments of $48,100,000. In November 1999, the members of Alamo IV LLC
dissolved Alamo IV LLC and distributed Alamo IV's membership interest in Alamosa
PCS, LLC to Alamo IV's members.
The obligations to commit capital and the other regulations under the
formation documents were eliminated when we reorganized from a limited liability
company to a holding company structure prior to the closing of our initial
public offering in February 2000.
EDC CREDIT FACILITY GUARANTEES
In connection with the credit agreement entered into between us and
Nortel, which Nortel assigned to EDC and we acknowledged, each of our
stockholders pledged its ownership interest in us to Nortel to guaranty our
obligations under the Nortel credit agreement. The rights and obligations of
Nortel under the credit agreement were assigned to EDC. Our stockholders were
required to secure their unfunded contributions with either a letter of credit
or a marketable securities pledge agreement. Each guaranty, pledge, letter of
credit and marketable securities pledge agreement terminated prior to the
closing of our initial public offering.
AGREEMENTS WITH CHR SOLUTIONS
We have entered into a number of agreements with CHR Solutions as
described in more detail below. During fiscal year 2000, we paid CHR Solutions
approximately $6.3 million under these agreements. David Sharbutt, our Chairman
and Chief Executive Officer, was, at the time the agreements were executed, the
President, Chief Executive Officer, a director and a shareholder of CHR
Solutions. Mr. Sharbutt no longer holds any of these positions at CHR Solutions.
o On July 27, 1998, we entered into an engineering service agreement
with CHR Solutions that is to last through August 2001 for a
maximum fee of approximately $7.0 million, excluding taxes.
o As of April 9, 1999, we entered into a data communications
services agreement with CHR Solutions to perform design and
implementation services in connection with our wide area network
and local area networks for a maximum fee of $262,040, excluding
taxes. The agreement lasts until the project is completed, unless
either party terminates it earlier for cause.
o As of October 8, 1999, we entered into a special service agreement
with CHR Solutions to perform marketing and operations consulting
services in selected areas in Wisconsin for a maximum fee of
$100,000, excluding taxes. This agreement lasts until the project
is completed, unless either party terminates it earlier.
o As of October 8, 1999, we entered into a special service agreement
with CHR Solutions to perform business planning and consulting
services and a feasibility study in selected areas of Wisconsin
for a fixed fee of $81,000. This agreement lasts until the project
is completed, unless either party terminates it earlier.
53
o As of October 8, 1999, we entered into a special service agreement
with CHR Solutions to perform business planning and consulting
services and a feasibility study in selected areas of our
territory for an estimated probable cost of $200,000, excluding
taxes. This agreement lasts until the project is completed, unless
either party terminates it earlier.
o As of October 8, 1999, we entered into a special service agreement
with CHR Solutions to provide Alamosa with radio frequency "drive
testing" to predict the propagation characteristics of given areas
in our territory for an estimated probable cost of $62,085,
excluding taxes. This agreement lasts until the project is
completed, unless either party terminates it earlier.
o As of November 20, 1999, we entered into a special service
agreement with CHR Solutions, who provided Alamosa with marketing
and operations consulting services for a maximum amount of
$100,000, excluding taxes.
o As of January 28, 2000, we entered into a professional services
agreement with CHR Solutions to develop the sub-affiliate program
from the development of a model through the execution of the
sub-affiliate program. The estimated probable costs of the
services are $248,000. Either party may terminate the agreement
without penalty at any time with or without cause upon giving the
other party 30 days prior written notice.
AGREEMENTS WITH TECH TELEPHONE COMPANY LIMITED PARTNERSHIP
As of April 6, 1999, we entered into a telecommunications service
agreement with Tech Telephone Company Limited Partnership, an affiliate of CHR
Solutions, to install and provide DS1 telecommunications lines between Sprint
PCS and our Lubbock operations and between our Lubbock operations and our other
markets. The original term of the agreement is three years, with automatic
renewal for successive 30-day terms until terminated by either party. As of
August 13, 1999, we entered into a distribution agreement with TechTel
Communications Corporation, an affiliate of CHR Solutions, authorizing it to
become a third party distributor of Sprint PCS products and services for us in a
standard agency agreement identical with numerous other agreements between us
and other third party distributors. Pursuant to the distribution agreement,
TechTel Communications Corporation is obligated to purchase ten handsets from us
every quarter for the term of one year. During fiscal year 2000, we paid
approximately $1.7 million under these agreements.
AGREEMENT WITH AMERICAN TOWER CORPORATION
In August 1998, we entered into a nonexclusive master site development
and lease agreement for tower sites with OmniAmerica Development Corp., formerly
known as Specialty Capital Services, Inc., a subsidiary of Specialty
Teleconstructors, Inc. that has since merged with American Tower Corporation.
Pursuant to the agreement, American Tower arranges for collocation of our
equipment, or constructs new facilities, in areas we identify for build-out. The
initial term of the master agreement expires in August 2003, with automatic
renewal for three additional terms of five years each. The agreement provides
for monthly payments aggregating to approximately $5.0 million per year, subject
to an annual adjustment based on the Consumer Price Index. During fiscal year
2000, we paid approximately $2.4 million for these services.
Michael Budagher, who is one of our directors, and a manager of
Budagher Family, LLC, one of our stockholders, was, at the time the agreement
was entered into the Vice Chairman, Chief Operating Officer and a director of
Specialty Teleconstructors, Inc., and the Chief Executive Officer, President and
sole director of Specialty Capital Services, Inc. and Budagher Family, LLC, was,
at the time the agreement was entered into, a stockholder of Specialty
Teleconstructors, Inc. Mr. Budagher no longer holds any of these positions at
Specialty Capital Services, Inc. or Specialty Teleconstructors, Inc. However, he
is a stockholder of American Tower Corporation.
RESERVE OF SHARES BY UNDERWRITERS
As part of our initial public offering, the underwriters reserved a
maximum of 10% of the shares of common stock sold in the offering for sale to
the persons who were our stockholders at the time prior to the offering at a
price per share of $15.8525, the public offering price less the underwriting
discount. The underwriters were not entitled to any discount or commission on
these shares and the proceeds to us were the same as if the shares were
54
sold to the general public. The persons who were our stockholders of at the time
prior to the offering purchased 757,589 shares pursuant to this arrangement.
In connection with our initial public offering, Salomon Smith Barney
Inc. reserved up to approximately five percent of the shares being offered as
directed shares for sale at the initial public offering price to persons who
were our directors, officers or employees, or who were otherwise associated with
us and its affiliates or employees, and who advised us of their desire to
purchase these shares. The number of shares of common stock available for sale
to the general public was reduced to the extent of sales of directed shares to
any of the persons for whom they were reserved. A total of 535,000 shares of
common stock were so purchased by such persons.
AGREEMENTS WITH MESSRS. MICHAEL V. ROBERTS AND STEVEN C. ROBERTS
On February 14, 2001, we completed our acquisition of Roberts. Messrs.
Michael V. Roberts and Steven C. Roberts, who are our directors, were the sole
owners of Roberts. Pursuant to the terms of the merger agreement with Roberts,
upon closing of the transaction, each of Messrs. Michael V. Roberts and Steven
C. Roberts was entitled to receive 6,750,000 shares of common stock and
approximately $2.0 million in cash as consideration in respect of his ownership
interests in Roberts. The terms of the acquisition agreement, including the
consideration payable to Messrs. Michael V. Roberts and Steven C. Roberts, were
determined on the basis of arm's length negotiations between us and Messrs.
Michael V. Roberts and Steven C. Roberts. Messrs. Michael V. Roberts and Steven
C. Roberts were appointed to the Board of Directors upon completion of the
Roberts acquisition.
In connection with the acquisition of Roberts, we entered a number of
arrangements with Messrs. Michael V. Roberts and Steven C. Roberts and certain
companies affiliated with them as described in more detail below.
o LOAN AGREEMENT WITH MESSRS. MICHAEL V. ROBERTS AND STEVEN C.
ROBERTS. On June 30, 2000, Alamosa Operations, Inc., our
subsidiary, (as lender) entered into a loan agreement with Messrs.
Michael V. Roberts and Steven C. Roberts (as borrowers) whereby
Alamosa Operations agreed to lend $10.0 million to Messrs. Michael
V. Roberts and Steven C. Roberts. The proceeds from this loan were
used to fund capital and operation requirements of Roberts and
Roberts Tower Company, a corporation owned and operated by Messrs.
Michael V. Roberts and Steven C. Roberts.
o ROBERTS LOAN AGREEMENT. On July 31, 2000, Alamosa Operations (as
lender) entered into a loan agreement with Roberts (as borrower).
In connection with the loan agreement, Roberts assumed certain
obligations of Messrs. Michael V. Roberts and Steven C. Roberts
under the June 30 loan agreement to the extent the proceeds of
that loan were used to make capital contributions to Roberts. As
of December 31, 2000, approximately $23.8 million had been funded
under the Roberts loan agreement. At the completion of the Roberts
acquisition, the Roberts promissory note was transferred to
Alamosa (Delaware) and contributed as equity to its wholly owned
subsidiary, Alamosa Holdings, LLC.
o ROBERTS TOWER LOAN AGREEMENT. On October 18, 2000, Alamosa
Operations (as lender) and Roberts Tower (as borrower) entered
into a loan agreement whereby Alamosa Operations agreed to lend up
to $15.0 million to Roberts Tower, to be used for the purposes of
repaying all remaining amounts owed by Messrs. Michael V. Roberts
and Steven C. Roberts under the June 30 loan agreement and funding
the construction of wireless telecommunications towers for use by
Roberts through the completion of the merger with Roberts. As of
December 31, 2000, approximately $13.2 million had been funded
under the Roberts Tower loan agreement. In February 2001 the loan
was paid in full.
o JOINT VENTURE DEVELOPMENT AGREEMENT. On October 30, 2000, we
entered into a joint venture development agreement with Messrs.
Michael V. Roberts and Steven C. Roberts. Pursuant to the
agreement, if either Mr. Michael V. Roberts or Mr. Steven C.
Roberts undertakes an international telecommunications business
venture and desires for us to be involved in that project, then
before either Mr. Michael V. Roberts or Mr. Steven C. Roberts
enters into a letter of intent or binding agreement of any nature
with another person regarding the project, they must give us
written notice and we have 60 days to notify them of our desire to
participate in the project. During such 60 day period, we have the
exclusive right with respect to the project. Promptly after we
give a notice of participation, we and either Mr. Michael V.
Roberts or Mr. Steven C. Roberts shall form a project
55
entity and shall execute an agreement setting forth the terms,
covenants, conditions and provisions for the purpose, ownership,
management, financing and operating of the project. Unless we and
either Mr. Michael V. Roberts or Mr. Steven C. Roberts agree to a
different arrangement, we will have a 50% interest in each project
entity and we will have full managerial control of each project
entity. Except as described above, neither us nor Messrs. Michael
V. Roberts and Steven C. Roberts is obligated to bring to the
other any opportunity to participate in a project or any activity,
domestic or international
o CONSULTING AGREEMENTS. On January 29, 2001, we entered into
five-year consulting agreements with each of Messrs. Michael V.
Roberts and Steven C. Roberts. The consulting agreements provide
each of them with an annual compensation of $125,000, which is
paid monthly.
o RIGHT OF FIRST NEGOTIATION AGREEMENT. On February 14, 2001, we
entered into a right of first negotiation agreement with Roberts
Tower which grants Roberts Tower a right to negotiate tower leases
on a "build-to-suit" basis within our present and future
territory. During the term of the agreement, whenever we or one of
our subsidiaries is required to "build to suit" communications
towers within the present or future territories in which we
operate, we must notify Roberts Tower and Roberts Tower will have
the exclusive right for a period of 30 days to negotiate with us
to provide such towers. After such 30 day period, if we have not
reached an agreement with Roberts Tower, we may obtain such tower
sites from other third parties. The term of this agreement is five
years.
o RESALE AGREEMENT. On February 14, 2001, we entered into a resale
agreement with Messrs. Michael V. Roberts and Steven C. Roberts
which permits Messrs. Michael V. Roberts and Steven C. Roberts to
buy air time at a discount for resale on a basis no less favorable
than any other similar agreement to which we may be a party.
Messrs. Michael V. Roberts and Steven C. Roberts may resell such
airtime anywhere where such resales are permitted under applicable
law. Any arrangement between us and Messrs. Michael V. Roberts and
Steven C. Roberts for resales and use of air time will be subject
to all required approvals of Sprint, Sprint Spectrum and Sprint
PCS and/or any other applicable Sprint entities.
o MASTER LEASE AGREEMENT. On February 14, 2001, Roberts and Roberts
Tower entered into a master lease agreement which provides for the
lease from Roberts Tower by Roberts of certain buildings, towers,
tanks and/or improvements thereon for the purpose of installing,
operating and maintaining communications facilities and services
thereon. The initial term of the master lease agreement expires in
February 2006, and Roberts has the right to extend the initial
term of the lease for four additional terms of five years each.
The agreement provides for monthly payments aggregating to
approximately $16,800 per year, subject to an annual adjustment of
4% per annum. Roberts subsequently assigned all of its right,
title and interest in the master lease agreement to its wholly
owned subsidiary, Alamosa Missouri Properties, LLC (formerly
Roberts Wireless Properties, L.L.C.).
OTHER RELATED PARTY TRANSACTIONS
In January 2000, we entered into various arrangements with Mericom
Corporation and its affiliates for site acquisition, RF engineering and fixed
network design. Mr. Reagan Silber, who was one of the our directors, holds an
indirect minority interest in Mericom Corporation. Mr. Silber resigned from the
Board of Directors effective April 16, 2001.
On February 14, 2001, we completed our merger with WOW Holdings. Mr.
Silber was a member of the board of managers of WOW Holdings. Mr. Silber is also
a principal of Silpearl Associates, LLC, an affiliate of WOW Investment
Partners, LP, which owned approximately 44.4% of the outstanding membership
interests of WOW Holdings.
In connection with our distribution and sales of Sprint PCS wireless
communications equipment, on December 28, 1998, we entered into a long-term
agreement to lease space for a retail store in Lubbock, Texas with Lubbock HLH,
Ltd., principally owned by Mr. Hart, who is one of our directors and the general
manager of South Plains Telephone Cooperative, Inc., one of our stockholders.
This lease has a term of 15 years and provides for monthly payments aggregating
to approximately $110,000 a year, subject to adjustment based on the Consumer
56
Price Index on the first day of the sixth lease year and on the first day of the
eleventh lease year. During fiscal year 2000, approximately $100,000 was paid
under this lease.
57
OUR AFFILIATION AGREEMENTS WITH SPRINT PCS
We have entered into five major affiliation agreements with Sprint and
Sprint PCS:
o a management agreement;
o a services agreement; and
o two trademark and service mark license agreements with different
Sprint entities.
We entered into one set of these agreements with Sprint and Sprint PCS
for our territories in the Southwestern part of the United States and another
set of these agreements for our territories in Wisconsin. Roberts entered into a
set of these agreements for its territories in Illinois, Kansas and Missouri,
which we have assumed pursuant to our acquisition of Roberts. WOW entered into a
set of these agreements for its territories in Washington and Oregon, which we
have assumed pursuant to our acquisition of WOW. Southwest entered into a set of
these agreements for its territories in Texas, Oklahoma and Arkansas, which we
have assumed pursuant to our acquisition of Southwest. As used herein, the term
"operating subsidiaries" refers to each of our subsidiaries that have entered
into affiliation agreements with Sprint PCS. Unless otherwise indicated below,
the description of our affiliation agreements applies to the affiliation
agreements for all five of our territories.
Under our affiliation agreements with Sprint PCS, we have the exclusive
right to provide wireless mobility communications network services under the
Sprint and Sprint PCS brand names in our territories. Sprint PCS holds the
spectrum licenses and controls the network through our agreements with Sprint
PCS. Our affiliation agreements with Sprint PCS require us to interface with the
Sprint PCS wireless network by building our portion of the Sprint PCS network to
operate on the 10, 20 or 30 MHZ of wireless personal communications services
frequencies licensed to Sprint PCS in the 1900 MHZ range.
The following is a description of the material terms and provisions of
our affiliation agreements and the consent and agreement with Sprint PCS and
Citicorp, that modifies our management agreements for the benefit of Citicorp,
as administrative agent, and the holders of the senior secured credit facility
and any refinancing thereof. See "--Consent and Agreement for the Benefit of the
Holders of the Senior Secured Credit Facility."
A breach or event of termination, as the case may be, under any of our
affiliation agreements by one of our operating subsidiaries will also constitute
a breach or event of termination, as the case may be, by all other operating
subsidiaries of the same provision of the applicable affiliation agreement to
which each operating subsidiary is a party. Each operating subsidiary only has
the right to cure its breach and has no right to cure any breach or event of
termination by another operating subsidiary.
THE MANAGEMENT AGREEMENTS
We originally entered into one set of management agreements with Sprint
and Sprint PCS for our territories in the Southwestern part of the United States
and another set of these agreements for our territories in Wisconsin. Roberts
entered into a management agreement for its territories in Illinois, Kansas and
Missouri, which we have assumed pursuant to our acquisition of Roberts. WOW
entered into a management agreement for its territories in Washington and
Oregon, which we have assumed pursuant to our acquisition of WOW. Southwest
entered into a management agreement for its territories in Texas, Oklahoma and
Arkansas, which we have assumed pursuant to our acquisition of Southwest. Unless
otherwise indicated below, the description of our management agreements applies
to the management agreements for all five of our territories.
Under our management agreements with Sprint PCS, we have agreed to:
o own, construct and manage a wireless personal communications
services network in our territories in compliance with FCC license
requirements and other technical requirements contained in our
management agreements;
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o distribute Sprint PCS products and services;
o use Sprint PCS's and our own distribution channels in our
territories;
o conduct advertising and promotion activities in our territories;
and
o manage that portion of Sprint PCS's customer base assigned to our
territories.
Sprint PCS will supervise our wireless personal communications services
network operations and has the right to unconditional access to our portion of
the Sprint PCS network, including the right to test and monitor any of our
facilities and equipment.
EXCLUSIVITY. We are designated as the only person or entity that can
manage or operate a wireless mobility communications network for Sprint PCS in
our territories. Sprint PCS is prohibited from owning, operating, building or
managing another wireless mobility communications network in our territories
while our management agreements are in place and no event has occurred that
would permit such agreements to terminate. Sprint PCS is permitted to make
national sales to companies in our territories and, as required by the FCC, to
permit resale of the Sprint PCS products and services in our territories. Our
management agreements prohibit us from interfering with others who resell Sprint
PCS products and services in our territories.
If Sprint PCS decides to expand the geographic size of our build-out
within our territories, Sprint PCS must provide us with written notice of the
proposed expansion. Under our management agreements we have a 90-day right of
first refusal to build out the proposed expansion area. If we choose not to
build out the proposed area, then Sprint PCS may build out the area itself or
allow another Sprint PCS network partner to do so.
NETWORK BUILD-OUT. Our management agreements specify the terms of the
Sprint PCS affiliation, including the required network build-out plan. We have
agreed to cover a specified percentage of the population within each of the
markets, which make up our territories by specified dates. Our current build-out
plans will satisfy the network build-out requirements set forth in our
management agreements.
If technically feasible and commercially reasonable, we have agreed to
provide for a seamless handoff of a call initiated in our territories to a
neighboring Sprint PCS network. Our management agreements require us to
reimburse Sprint PCS one-half of the microwave clearing costs for our
territories.
PRODUCTS AND SERVICES. Our management agreements identify the products
and services that we can offer in our territories. These services include, but
are not limited to, Sprint PCS consumer and business products and services
available as of the date of the agreements, or as modified by Sprint PCS. We are
allowed to sell wireless products and services that are not Sprint PCS products
and services if those additional products and services do not cause distribution
channel conflicts or, in Sprint PCS's sole determination, consumer confusion
with Sprint PCS's products and services. We also cannot sell non-Sprint PCS
products and services if it would hamper our build-out of the network. Under our
management agreement for our Wisconsin territories, if Sprint PCS begins to
offer nationally a product or service that we already offer, then that product
or service will be considered to be a Sprint PCS product or service.
We may also sell services such as specified types of long distance
service, Internet access, handsets, and prepaid phone cards with Sprint, Sprint
PCS and other Sprint network partners. If we decide to use third parties to
provide these services, we must give Sprint PCS an opportunity to provide the
services on the same terms and conditions. We cannot offer wireless local loop
services specifically designed for the competitive local exchange market in
areas where Sprint owns the local exchange carrier unless we name the
Sprint-owned local exchange carrier as the exclusive distributor or Sprint PCS
approves the terms and conditions. Sprint does not own the local exchange
carrier in a majority of the markets in our territories.
NATIONAL SALES PROGRAMS. We must participate in the Sprint PCS sales
programs for national sales to customers, and will pay the expenses and receive
the compensation from Sprint PCS sales to national accounts
59
located in our territories. We must use Sprint's long distance service, which we
can buy at the best prices offered to comparably situated Sprint customers.
SERVICE PRICING, ROAMING AND FEES. We must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings, including Sprint
PCS's "Free & Clear" plans. We are permitted to establish our own local price
plans for Sprint PCS's products and services offered only in our territories,
subject to Sprint PCS's approval. We are entitled to receive a weekly fee from
Sprint PCS equal to 92% of "collected revenues" for all obligations under our
management agreements, adjusted by the cost of customer services provided to us
by Sprint PCS. "Collected revenues" include revenue from Sprint PCS subscribers
based in our territories and inbound non-Sprint PCS roaming. Sprint PCS will
retain 8% of the collected revenues. Outbound non-Sprint PCS roaming revenue,
inbound and outbound Sprint PCS roaming fees, proceeds from the sales of
handsets and accessories, proceeds from sales not in the ordinary course of
business, amounts collected with respect to taxes and proceeds from sales of our
products and services, are not considered collected revenues. Except in the case
of taxes, we will retain 100% of these revenues. Many Sprint PCS subscribers
purchase bundled pricing plans that allow Sprint PCS roaming anywhere on the
Sprint PCS network without incremental Sprint PCS roaming charges. However, we
will earn Sprint PCS roaming revenue for every minute that a Sprint PCS
subscriber from outside our territories enters our territories and uses our
services. We will earn revenue from Sprint PCS based on a per minute rate
established by Sprint PCS when Sprint PCS's or its affiliates' subscribers roam
on our portion of the Sprint PCS network. Similarly, we will pay the same rate
for every minute Sprint PCS subscribers who are based in our territories use the
Sprint PCS network outside our territories. The analog roaming rate onto a
non-Sprint PCS provider's network is set under Sprint PCS's third party roaming
agreements.
VENDOR PURCHASE AGREEMENTS. We may participate in discounted
volume-based pricing on wireless-related products and warranties Sprint PCS
receives from its vendors. Sprint PCS will use commercially reasonable efforts
to obtain for us the same prices as Sprint PCS receives from its vendors.
ADVERTISING AND PROMOTIONS. Sprint PCS uses national as well as
regional television, radio, print, outdoor and other advertising campaigns to
promote its products. We benefit from the national advertising at no additional
cost to us. In addition to Sprint PCS's national advertising campaigns, we
advertise and promote Sprint PCS products and services on a local level in our
markets at our cost. We have the right to use any promotion or advertising
materials developed by Sprint PCS and only have to pay the incremental cost of
using those materials, such as the cost of local radio and television
advertisement placements and incremental printing costs. Sprint PCS also runs
numerous promotional campaigns, which provide customers with benefits such as
additional features at the same rate or free minutes of use for, limited time
periods. We offer these promotional campaigns to potential customers in our
territories.
PROGRAM REQUIREMENTS. We must comply with Sprint PCS's program
requirements for technical standards, customer service standards, roaming
coverage and national and regional distribution and national accounts programs.
Sprint PCS can adjust the program requirements at any time. We have the right to
appeal to the management of Sprint PCS if adjustments to program requirements
will:
o cause us to incur a cost exceeding 5% of the sum of our
stockholders' equity plus our outstanding long term debt; or
o cause our operating expenses on a per-unit basis using a ten year
time frame to increase by more than 10% on a net present value
basis.
If Sprint PCS denies our appeal and we fail to comply with the program
adjustment, Sprint PCS has the termination rights described below under
"--Termination of Management Agreements."
Under our management agreements for our Wisconsin and Southwest
territories, Sprint PCS has agreed that it will use commercial reasonableness to
adjust the Sprint PCS retail store and customer service requirements for cities
located within those territories that have a population of less than 100,000.
NON-COMPETITION. We may not offer Sprint PCS products and services
outside our territories without the prior written approval of Sprint PCS. We may
offer, market or promote telecommunications products and services
60
within our territories only under the Sprint PCS brands, our own brand, brands
of our related parties or other products and services approved under our
management agreements, except that no brand of a significant competitor of
Sprint PCS or its related parties may be used for those products and services.
To the extent we have or will obtain licenses to provide wireless personal
communications services outside our territories, we may not use the spectrum to
offer Sprint PCS products and services without prior written consent from Sprint
PCS.
INABILITY TO USE NON-SPRINT PCS BRAND. We may not market, promote,
advertise, distribute, lease or sell any of the Sprint PCS products and services
on a non-branded, "private label" basis or under any brand, trademark or trade
name other than the Sprint PCS brand, except for sales to resellers or as
otherwise permitted under the Trademark and Service Mark License Agreements.
TRANSFER OF SPRINT PCS NETWORK. Sprint PCS can sell, transfer or assign
its wireless personal communications services network to a third party if the
third party agrees to be bound by the terms of our management agreements and our
services agreements.
CHANGE IN CONTROL. Sprint PCS must approve our change in control, but
this consent cannot be unreasonably withheld.
RIGHTS OF FIRST REFUSAL. Sprint PCS has rights of first refusal,
without further stockholder approval, to buy our assets upon a proposed sale of
all or substantially all of our assets used in the operation of our portion of
the Sprint PCS network.
TERM. Each of our management agreements has an initial term of 20 years
with three 10-year renewal options, which would lengthen each of our management
agreements to a total term of 50 years. The three 10-year renewal terms
automatically occur unless either Sprint PCS or we provide the other with two
years prior written notice to terminate the agreement or unless we are in
material default of its obligations under such agreement.
TERMINATION OF OUR MANAGEMENT AGREEMENTS. Our management agreements can
be terminated as a result of the following events:
o termination of Sprint PCS's spectrum licenses;
o an uncured breach under our management agreements;
o bankruptcy of a party to our management agreements;
o to our management agreements not complying with any applicable law
in any material respect; or
o the termination of any of our trademark and service mark license
agreements.
The termination or non-renewal of our management agreements triggers
some of our rights and some of those of Sprint PCS.
The right of either party to require the other party to purchase or
sell the operating assets is discussed below.
If we have the right to terminate our management agreements because of
an event of termination caused by Sprint PCS, generally we may:
o require Sprint PCS to purchase all of our operating assets used in
connection with our portion of the Sprint PCS network for an
amount equal to at least 80% of our "entire business value" as
defined below;
o in all areas in our territories where Sprint PCS is the licensee
for 20 MHZ or more of the spectrum on the date it terminates our
management agreements, require Sprint PCS to assign to us, subject
to
61
governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
PCS of the license plus any microwave clearing costs paid by
Sprint PCS or 9% of our "entire business value;" or
o choose not to terminate our management agreements and sue Sprint
PCS for damages or submit the matter to arbitration.
If Sprint PCS has the right to terminate our management agreements
because of an event of termination caused by us, generally Sprint PCS may:
o require us, without further stockholder approval, to sell our
operating assets to Sprint PCS for an amount equal to 72% of our
"entire business value;"
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint PCS of the license
plus any microwave relocation costs paid by Sprint PCS or 10% of
our "entire business value;"
o take any action as Sprint PCS deems necessary to cure its breach
of our management agreements, including assuming responsibility
for, and operating, our portion of the Sprint PCS network; or
o not terminate our management agreements and sue us for damages or
submit the matter to arbitration.
In connection with the senior secured credit facility, Sprint PCS
entered into a consent and agreement with Citicorp, that modifies Sprint PCS's
rights and remedies under our affiliation agreements for the benefit of
Citicorp, as administrative agent, and the holders of the senior secured credit
facility and any refinancing thereof. The consent and agreement with Citicorp
provides, among other things, that our affiliation agreements generally may not
be terminated by Sprint PCS until all our outstanding indebtedness under the new
senior secured credit facility is satisfied in full pursuant to the terms of the
consent and agreement. See "--Consent and Agreement for the Benefit of the
Holders of the Senior Secured Credit Facility."
NON-RENEWAL. If Sprint PCS gives us timely notice that it does not
intend to renew our management agreements, we may:
o require Sprint PCS to purchase all of our operating assets used in
connection with our portion of the Sprint PCS network for an
amount equal to 80% of our "entire business value;" or
o in all areas in our territories where Sprint PCS is the licensee
for 20 MHZ or more of the spectrum on the date it terminates such
management agreement, require Sprint PCS to assign to us, subject
to governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
PCS of the license plus any microwave relocation costs paid by
Sprint PCS or 10% of our "entire business value."
If we give Sprint PCS timely notice of non-renewal, or we and Sprint PCS
both give notice of non-renewal, or any of our management agreements expire with
neither party giving a written notice of non-renewal, or if any of our
management agreements can be terminated for failure to comply with legal
requirements or regulatory considerations, Sprint PCS may:
o purchase all of our operating assets, without further stockholder
approval, for an amount equal to 80% of our "entire business
value;" or
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint PCS of the license
plus any microwave clearing costs paid by Sprint PCS or 10% of our
"entire business value."
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DETERMINATION OF ENTIRE BUSINESS VALUE. If our "entire business value"
is to be determined, Sprint PCS and we will each select one independent
appraiser and the two appraisers will select a third appraiser. The three
appraisers will determine our "entire business value" on a going concern basis
using the following principles:
o the "entire business value" is based on the price a willing buyer
would pay a willing seller for the entire on-going business;
o the "entire business value" will not be calculated in a manner
that "double counts" the operating assets of one or more of our
affiliates;
o then-current customary means of valuing a wireless
telecommunications business will be used;
o the business is conducted under the Sprint and Sprint PCS brands
and our affiliation agreements with Sprint PCS;
o that we own the spectrum and frequencies presently owned by Sprint
PCS and subject to our affiliation agreements with Sprint PCS; and
o the valuation will not include any value for businesses not
directly related to the Sprint PCS products and services, and
those businesses will not be included in the sale.
INSURANCE. We are required to obtain and maintain with financially
reputable insurers who are licensed to do business in all jurisdictions where
any work is performed under our management agreement and who are reasonably
acceptable to Sprint PCS, workers' compensation insurance, commercial general
liability insurance, business automobile insurance, umbrella excess liability
insurance and "all risk" property insurance.
INDEMNIFICATION. We have agreed to indemnify Sprint PCS and its
directors, employees and agents and related parties of Sprint PCS and their
directors, employees and agents against any and all claims against any of the
foregoing arising from our violation of any law, a breach by us of any
representation, warranty or covenant contained in our management agreements or
any other agreement between us and Sprint PCS, our ownership of the operating
assets or the actions or the failure to act of anyone employed or hired by us in
the performance of any work under such agreement, except we will not be
obligated to indemnify Sprint PCS for any claims arising solely from the
negligence or willful misconduct of Sprint PCS. Sprint PCS has agreed to
indemnify us and our directors, employees and agents against all claims against
any of the foregoing arising from Sprint PCS's violation of any law and from
Sprint PCS's breach of any representation, warranty or covenant contained in our
management agreements or any other agreement between us and Sprint PCS, except
Sprint PCS will not be obligated to indemnify us for any claims arising solely
from our negligence or willful misconduct.
DISPUTE RESOLUTION. If the parties cannot resolve any dispute between
themselves and our management agreements do not provide a remedy, then either
party may require that any dispute be resolved by a binding arbitration.
THE SERVICES AGREEMENTS
We originally entered into one set of services agreements with Sprint
and Sprint PCS for our territories in the Southwestern part of the United States
and another set of these agreements for our territories in Wisconsin. Roberts
entered into a services agreement for its territories in Illinois, Kansas and
Missouri, which we have assumed pursuant to our acquisition of Roberts. WOW
entered into a services agreement for its territories in Washington and Oregon,
which we have assumed pursuant to our acquisition of WOW. Southwest entered into
a services agreement for its territories in Texas, Oklahoma and Arkansas, which
we have assumed pursuant to our acquisition of Southwest. Unless otherwise
indicated below, the description of our services agreements applies to the
services agreements for all five of our territories.
Our services agreements outline various back office services provided
by Sprint PCS and available to us for an adjustment to our 92% fee. Sprint PCS
can change the amount of adjustment for any or all of the services one
63
time in any twelve month period. We have the option to cancel a service upon
notification of a fee increase, and if we decide to cancel the service, then
Sprint PCS, at our option, must continue to provide that service for nine months
at the original price. Some of the available services include: billing, customer
care, activation, credit checks, handset logistics, home locator record, voice
mail, prepaid services, directory assistance, operator services, roaming fees,
roaming clearinghouse fees, interconnect fees and inter-territory fees. Sprint
PCS offers three packages of available services. Each package identifies which
services must be purchased from Sprint PCS and which may be purchased from a
vendor or provided in-house. Essentially, services such as billing, activation
and customer care must all be purchased from Sprint PCS or none may be purchased
from Sprint PCS. We have chosen to initially delegate the performance of these
services to Sprint PCS, but we may develop an independent capability with
respect to these services over time. Sprint PCS may contract with third parties
to provide expertise and services identical or similar to those to be made
available or provided to us. We have agreed not to use the services performed by
Sprint PCS in connection with any other business or outside our territories. We
may discontinue use of any service upon three months' prior written notice,
while Sprint PCS must give nine months notice if it will no longer offer any
service.
We have agreed with Sprint PCS to indemnify each other as well as
affiliates, officers, directors and employees for violations of law or the
services agreements except for any liabilities resulting from the negligence or
willful misconduct of the person seeking to be indemnified or its
representatives. Our services agreements also provide that no party will be
liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, such
services agreement except as may otherwise be required by the indemnification
provisions. Our services agreements automatically terminate upon termination of
our management agreements, and neither party may terminate the services
agreements for any reason other than the termination of the management
agreements.
THE TRADEMARK AND SERVICE MARK LICENSE AGREEMENTS
We originally entered into one set of trademark and service mark
license agreements with Sprint and Sprint PCS for our territories in the
Southwestern part of the United States and another set of these agreements for
our territories in Wisconsin. Roberts entered into a trademark and service mark
license agreement for its territories in Illinois, Kansas and Missouri, which we
have assumed pursuant to our acquisition of Roberts. WOW entered into a
trademark and service mark license agreement for its territories in Washington
and Oregon, which we have assumed pursuant to our acquisition of WOW. Southwest
entered into a services agreement for its territories in Texas, Oklahoma and
Arkansas, which we have assumed pursuant to our acquisition of Southwest. Unless
otherwise indicated below, the description of the trademark and service mark
license agreements applies to the trademark and service mark license agreements
for all five of our territories.
We have a non-transferable license to use, at no additional cost to us,
the Sprint and Sprint PCS brand names and "diamond" symbol, and several other
U.S. trademarks and service marks such as "The Clear Alternative to Cellular"
and "Clear Across the Nation" on Sprint PCS products and services. We believe
that the Sprint and Sprint PCS brand names and symbols enjoy a high degree of
recognition, providing us an immediate benefit in the market place. Our use of
the licensed marks is subject to our adherence to quality standards determined
by Sprint and Sprint PCS and use of the licensed marks in a manner which would
not reflect adversely on the image of quality symbolized by the licensed marks.
We have agreed to promptly notify Sprint and Sprint PCS of any infringement of
any of the licensed marks within our territories of which we become aware and to
provide assistance to Sprint and Sprint PCS in connection with Sprint's and
Sprint PCS's enforcement of their respective rights. We have agreed with Sprint
and Sprint PCS that we will indemnify the other for losses incurred in
connection with a material breach of the trademark license agreements between
Sprint, Sprint PCS and us. In addition, we have agreed to indemnify Sprint and
Sprint PCS from any loss suffered by reason of our use of the licensed marks or
marketing, promotion, advertisement, distribution, lease or sale of any Sprint
or Sprint PCS products and services other than losses arising solely out of our
use of the licensed marks in compliance with certain guidelines.
Sprint and Sprint PCS can terminate our trademark and service mark
license agreements if we file for bankruptcy or materially breach our agreement
or if our management agreements are terminated. We can terminate our trademark
and service mark license agreements upon Sprint's or Sprint PCS's abandonment of
the licensed marks or if Sprint or Sprint PCS files for bankruptcy or our
management agreements are terminated. However,
64
Sprint and Sprint PCS can assign their interests in the licensed marks to a
third party if that third party agrees to be bound by the terms of our trademark
and service mark license agreements.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR SECURED
CREDIT FACILITY
Sprint PCS entered into a consent and agreement with Citicorp, as
administrative agent, that modifies Sprint PCS's rights and remedies under our
affiliation agreements with Sprint PCS, for the benefit of Citicorp and the
holders of the senior secured credit facility and any refinancing thereof.
The consent and agreement between Sprint PCS and Citicorp generally
provides, among other things, the following:
o Sprint PCS's consent to the pledge of substantially all of our
assets, including our rights in our affiliation agreements with
Sprint PCS;
o that our affiliation agreements with Sprint PCS may not be
terminated by Sprint PCS until all outstanding obligations under
the senior secured credit facility are satisfied in full pursuant
to the terms of the consent and agreement, unless our operating
subsidiaries or assets are sold to a purchaser who does not
continue to operate the business as a Sprint PCS network
affiliate, which sale requires the approval of Citicorp;
o Sprint PCS may not exercise its right under our management
agreements to purchase our assets until all obligations pursuant
to the senior secured credit facility have been paid in full in
cash and all commitments to advance credit under such facility
have been terminated or have expired. However, Sprint PCS retains
the option to purchase our assets if it first pays all obligations
under the senior secured credit facility and such facility is
terminated in connection with such payment;
o for redirection of payments due to us under our management
agreements from Sprint PCS to Citicorp during the continuation of
any default by us under the senior secured credit facility;
o for Sprint PCS and Citicorp to provide to each other notices of
default by us under our management agreements and the senior
secured credit facility, respectively;
o the ability to appoint interim replacements, including Sprint PCS
or a designee of the administrative agent under the senior secured
credit facility, to operate our portion of the Sprint PCS network
under our affiliation agreements after an event of default under
the senior secured credit facility or an event of termination
under our affiliation agreements;
o subject to certain requirements and limitations, the ability of
Sprint PCS to assign our affiliation agreements with Sprint PCS
and sell our assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries
to a qualified purchaser that is not a major competitor of Sprint
PCS or Sprint, free of the restrictions on assignment and change
of control in our management agreements, if our obligations under
the senior secured credit facility have been accelerated after a
default by us; and
o subject to certain requirements and limitations, that if Sprint
PCS enters into consent and agreement documents with
similarly-situated lenders that have provisions that are more
favorable to the lender, Sprint PCS will give Citicorp written
notice of the amendments and will amend our consent and agreement
with Citicorp in the same manner at Citicorp's request;
consequently, from time to time, Citicorp and Sprint PCS may
modify our consent and agreement so that it will contain terms and
conditions more favorable to Citicorp.
SPRINT PCS'S RIGHT TO PURCHASE ON ACCELERATION OF AMOUNTS OUTSTANDING
UNDER THE SENIOR SECURED CREDIT FACILITY. Subject to the requirements of
applicable law, so long as the senior secured credit facility remains
outstanding, Sprint PCS has the right to purchase our operating assets or the
partnership interests, membership
65
interests or other equity interests of our operating subsidiaries, upon its
receipt of notice of an acceleration of the senior secured credit facility,
under the following terms:
o Sprint PCS elects to make such a purchase within a specified
period;
o the purchase price is the greater of an amount equal to 72% of our
"entire business value" or the amount we owe under the senior
secured credit facility;
o if Sprint PCS has given notice of its intention to exercise the
purchase right, then the administrative agent is prohibited for a
specified period after the acceleration, or until Sprint PCS
rescinds its intention to purchase, from enforcing its security
interest; and
o if we receive a written offer that is acceptable to us to purchase
our operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries
after the acceleration, then Sprint PCS has the right to purchase
our operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries,
as the case may be, on terms at least as favorable to us as the
offer we receive. Sprint PCS must agree to purchase the operating
assets or the partnership interests, membership interests or other
equity interests of our operating subsidiaries within 14 business
days of its receipt of the offer, on acceptable conditions, and in
an amount of time acceptable to us and Citicorp.
Upon acceleration of the senior secured credit facility, Sprint also
has the right to purchase the obligations under the senior secured credit
facility by repaying such obligations in full in cash.
SALE OF OPERATING ASSETS OR THE PARTNERSHIP INTERESTS, MEMBERSHIP
INTERESTS OR OTHER EQUITY INTERESTS OF OUR OPERATING SUBSIDIARIES TO THIRD
PARTIES. If Sprint PCS does not purchase our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries after an acceleration of the obligations under the senior secured
credit facility, then Citicorp may sell our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries. Subject to the requirements of applicable law, including the law
relating to foreclosures of security interests, Citicorp has two options:
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to an entity that meets the requirements to be our
successor under our affiliation agreements with Sprint PCS; or
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to any third party, subject to specified conditions.
RECENT DEVELOPMENTS
On April 27, 2001, we announced that Sprint PCS had reached an
agreement in principle with its network partners, including us and our
subsidiaries, providing for a reduction in the reciprocal rate exchanged between
Sprint PCS and its network partners for customers of either party who travel
into territories covered by the other party's portion of the Sprint PCS network.
The rate will be reduced from 20 cents per minute to 15 cents per minute
effective June 1, 2001, and to 12 cents per minute effective October 1, 2001.
Beginning January 1, 2002 and continuing throughout the remaining term of the
affiliate agreements with Sprint PCS, the rate will be adjusted to provide a
fair and reasonable return on the cost of the underlying network, expected to be
approximately 10 cents per minute.
For the year ended December 31, 2000, we reported approximately
$16,244,000 in travel revenue from inbound Sprint PCS customers using the
Alamosa portion of the Sprint PCS network (representing approximately 20% of our
total revenue for the year ended December 31, 2000), and approximately
$14,281,000 of travel expense incurred for our outbound customers using other
portions of the Sprint PCS network (representing approximately 26% of our total
operating expenses) for the year ended December 31, 2000).
66
REGULATORY ENVIRONMENT
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC can have a substantial impact upon entities that manage
wireless personal communications service systems and/or provide wireless
personal communications services because the FCC regulates the licensing,
construction, operation, acquisition and interconnection arrangements of
wireless telecommunications systems in the United States.
The FCC has promulgated, and is in the process of promulgating, a
series of rules, regulations and policies to, among other things:
o grant or deny licenses for wireless personal communications
service frequencies;
o grant or deny wireless personal communications service license
renewals;
o rule on assignments and/or transfers of control of wireless
personal communications service licenses;
o govern the interconnection of wireless personal communications
service networks with other wireless and wireline service
providers;
o establish access and universal service funding provisions;
o impose fines and forfeitures for violations of any of the FCC's
rules; and
o regulate the technical standards of wireless personal
communications services networks.
The FCC currently prohibits a single entity from having an attributable
interest (defined as any general partnership interest or 20% or greater equity
or voting interest or certain other business relationships) in broadband
wireless personal communications service, cellular and specialized mobile radio
("SMR") licenses totaling more than 45 MHZ in any geographic area. The 45 MHZ
cap is raised to 55 MHZ for overlaps involving cellular Rural Service Areas. The
20% threshold is raised to 40% where the owner is an investment company, a small
business or a rural telephone company. The geographic areas at issue are PCS
licensed service areas where there are overlaps involving 10% or more of the
population of such service area. An entity, such as us, that manages the
operations of a broadband PCS, cellular, or SMR licensee pursuant to a
management agreement is also considered to have an attributable interest in the
system it manages. The FCC has opened a proceeding to investigate whether market
conditions warrant eliminating or modifying the spectrum cap.
TRANSFERS AND ASSIGNMENTS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a wireless personal
communications service license. This means that we and our stockholders will
receive advance notice of any and all transactions involved in transferring
control of Sprint PCS or the assignment of some or all of the wireless personal
communications service licenses held by Sprint PCS. The FCC proceedings afford
us and our stockholders an opportunity to evaluate proposed transactions well in
advance of closing, and to take actions necessary to protect their interests.
Non-controlling interests in an entity that holds a wireless personal
communications service license or operates wireless personal communications
service networks generally may be bought or sold without prior FCC approval. In
addition, the FCC requires only post-consummation notification of pro forma
assignments or transfers of control of certain commercial mobile radio service
licenses.
CONDITIONS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
All wireless personal communications service licenses are granted for
ten year terms conditioned upon timely compliance with the FCC's build-out
requirements. Pursuant to the FCC's build-out requirements, all 30 MHZ broadband
wireless personal communications service licensees must construct facilities
that offer coverage to
67
one-third of the population in their licensed areas within five years and to
two-thirds of the population in such areas within ten years, and all 10 MHZ
broadband wireless personal communications services licensees must construct
facilities that offer coverage to at least one-quarter of the population in
their licensed areas within five years or make a showing of "substantial
service" within that five-year period.
If the build-out requirements are not met, wireless personal
communications service licenses could be forfeited. The FCC also requires
licensees to maintain control over their licenses. Our affiliation agreements
with Sprint PCS reflect management agreements that the parties believe meet the
FCC requirements for licensee control of licensed spectrum.
If the FCC were to determine that our affiliation agreements with
Sprint PCS need to be modified to increase the level of licensee control, we
have agreed with Sprint PCS to use our best efforts to modify the agreements to
the extent necessary to cause the agreements to comply with applicable law and
to preserve to the extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be so modified, the agreements may be
terminated pursuant to their terms. The FCC could also impose monetary penalties
on Sprint PCS, and possibly revoke one or more of the Sprint PCS licenses.
WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSE RENEWAL
Wireless personal communications service licensees can renew their
licenses for additional ten year terms. Wireless personal communications service
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford wireless personal communications services renewal applicants involved in
comparative renewal hearings with a "renewal expectancy." The renewal expectancy
is the most important comparative factor in a comparative renewal hearing and is
applicable if the wireless personal communications service renewal applicant
has:
o provided "substantial service" during its license term; and
o substantially complied with all applicable laws and FCC rules and
policies.
The FCC's rules define "substantial service" in this context as service
that is sound, favorable and substantially above the level of mediocre service
that might minimally warrant renewal. The FCC's renewal expectancy and
procedures make it very likely that Sprint PCS will retain the wireless personal
communications service licenses that we manage for the foreseeable future.
INTERCONNECTION
The FCC has the authority to order interconnection between commercial
mobile radio services, commonly referred to as CMRS, providers and incumbent
local exchange carriers. The FCC has ordered local exchange carriers to provide
reciprocal compensation to commercial mobile radio service providers for the
termination of traffic. Using these rules, we will assist Sprint PCS in the
negotiation of interconnection agreements for the Sprint PCS network in their
market area with all of the Bell operating companies, including Verizon Wireless
and several smaller independent local exchange carriers. Interconnection
agreements are negotiated on a state-wide basis.
If an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject to state
approval. The FCC rules and rulings, as well as the state arbitration
proceedings, will directly impact the nature and cost of the facilities
necessary for interconnection of the Sprint PCS systems with local, national and
international telecommunications networks. They will also determine the nature
and amount of revenues that we and Sprint PCS can receive for terminating calls
originating on the networks of local exchange and other telecommunications
carriers.
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OTHER FCC REQUIREMENTS
In June 1996, the FCC adopted rules that prohibit broadband wireless
personal communications services providers from unreasonably restricting or
disallowing resale of their services or unreasonably discriminating against
resellers. Resale obligations will automatically expire on November 24, 2002.
These existing resale requirements and their expiration may somewhat affect the
number of resellers competing with Sprint PCS and its managers and affiliates in
various markets. However, to date, wireless resellers have not significantly
impacted wireless service providers. Any losses in retail customers have been
offset, in major part, by increases in wireless customers, traffic and wholesale
revenues.
CMRS providers, including Sprint PCS, are required to permit manual
"roaming" on their systems. With manual roaming, any user whose mobile phone is
technically capable of connecting with a carrier's system must be able to make a
call by providing a credit card number or making some other arrangement for
payment. The FCC is currently considering changes in its rules that may
terminate the manual roaming requirement and may impose "automatic roaming"
obligations, under which users with capable equipment would be permitted to
originate or terminate calls without taking action other than turning on the
mobile phone.
FCC rules require local exchange and most commercial mobile radio
services providers to program their networks to allow customers to change
service providers without changing telephone numbers, which is referred to as
service provider number portability. The FCC requires most commercial mobile
radio service providers to implement wireless service provider number
portability where requested in the 100 largest metropolitan areas in the United
States by November 24, 2002. The FCC currently requires most commercial mobile
radio service providers to be able to deliver calls from their networks to
ported numbers anywhere in the country, and to contribute to the Local Number
Portability Fund. Implementation of wireless service provider number portability
will require wireless personal communications service providers like us and
Sprint PCS to purchase more expensive switches and switch upgrades. However, it
will also enable existing cellular customers to change to wireless personal
communications services without losing their existing wireless telephone
numbers, which should make it easier for wireless personal communications
service providers to market their services to existing cellular users.
The FCC has adopted rules permitting broadband wireless personal
communications service and other commercial mobile radio service providers to
provide wireless local loop and other fixed services that would directly compete
with the wireline services of local exchange carriers. This creates new markets
and revenue opportunities for Sprint PCS and its managers and affiliates and
other wireless providers, and may do so increasingly in future years. The FCC
has released a series of orders requiring broadband wireless personal
communications services and other commercial mobile radio services providers to
implement enhanced emergency 911 capabilities. The rules require Sprint PCS to
begin selling specially-equipped telephone handsets by October 1, 2001, with a
rollout of such handsets continuing until December 31, 2002, when all new
handsets must be specially-equipped. In addition, Sprint PCS must begin
providing a specified level of enhanced 911 service by October 1, 2001, or
within six months of a request from a designated public safety agency, whichever
is later. Sprint PCS has reported to the FCC that it has a compliance plan in
place to meet the FCC's schedule for enhanced 911 service implementation.
Waivers of the enhanced emergency 911 capability requirements may be obtained by
individual service providers by filing a waiver request. As the required
equipment becomes more functional and less expensive, emergency 911 services may
afford wireless carriers substantial and attractive new service and marketing
opportunities.
On October 12, 2000, the FCC adopted several measures designed to
remove obstacles to competitive access to customers and facilities in commercial
multiple tenant environments, including the following:
o The FCC forbade telecommunications carriers in commercial settings
from entering into exclusive contracts with building owners,
including contracts that effectively restrict premises owners or
their agents from permitting access to other telecommunications
service providers.
o The FCC determined that utilities, including LECs must afford
telecommunications carriers and cable service providers reasonable
and nondiscriminatory access to conduits and rights-of-way located
in customer buildings and campuses, to the extent such conduits
and rights-of-way are owned or controlled by the utility.
69
The FCC also issued a further notice of proposed rulemaking seeking
comment on whether it should adopt additional rules in this area, including
extending certain regulations to include residential as well as commercial
buildings. The final result of this proceeding could affect the availability and
pricing of sites for the our antennae and those of our competitors.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT
The Communications Assistance for Law Enforcement Act, or CALEA,
enacted in 1994 requires wireless personal communications services and other
telecommunications service providers to meet capability and capacity
requirements needed by federal, state and local law enforcement to preserve
their electronic surveillance capabilities. Wireless personal communications
service providers were generally required to comply with the current industry
CALEA capability standard, known as J-STD-025, by June 30, 2000, and with
recently adopted additions by September 30, 2001. Wireless personal
communications services providers must comply with the CALEA capability
requirements by September 30, 2001. In addition, most wireless personal
communications service providers are ineligible for federal reimbursement for
the software and hardware upgrades necessary to comply with the CALEA capability
and capacity requirements, but several bills pending in Congress may expand
reimbursement rights if they are enacted. Finally, the Federal Bureau of
Investigation has been discussing with the industry options for further
deferring CALEA compliance requirements in geographic areas with minimal or
nonexistent electronic surveillance needs.
In addition, the FCC is considering petitions from numerous parties to
establish and implement technical compliance standards pursuant to CALEA
requirements. In sum, CALEA capability and capacity requirements are likely to
impose some additional switching and network costs upon Sprint PCS and its
managers and affiliates and other wireless entities. However, it is possible
that some of these costs will be reduced or delayed if current law enforcement
or legislative initiatives are adopted and implemented.
OTHER FEDERAL REGULATIONS
Sprint PCS and its managers and affiliates must bear the expense of
compliance with FCC and Federal Aviation Administration regulations regarding
the siting, lighting and construction of transmitter towers and antennas. In
addition, FCC environmental regulations may cause some of our base station
locations to become subject to the additional expense of regulation under the
National Environmental Policy Act. The FCC is required to implement this Act by
requiring service providers to meet land use and radio emissions standards.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS
The FCC and certain states have established "universal service"
programs to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint PCS is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that Sprint PCS's "contribution" to the federal universal service
program is a variable percentage of "end-user telecommunications revenues."
Although many states are likely to adopt a similar assessment methodology, the
states are free to calculate telecommunications service provider contributions
in any manner they choose as long as the process is not inconsistent with the
FCC's rules. At the present time it is not possible to predict the extent of the
Sprint PCS total federal and state universal service assessments or its ability
to recover from the universal service fund. However, some wireless entities are
seeking state commission designation as "eligible telecommunications carriers,"
enabling them to receive federal and state universal service support, and are
preparing to compete aggressively with wireline telephone companies for
universal service revenue. Because we manage substantial rural areas for Sprint
PCS, it is likely to receive revenues in the future from federal and state
universal service support funds that are much greater than the reductions in its
revenues due to universal service contributions paid by Sprint PCS.
PARTITIONING; DISAGGREGATION
FCC rules allow broadband wireless personal communications services
licensees to partition their market areas and/or to disaggregate their assigned
spectrum and to transfer partial market areas or spectrum assignments to
eligible third parties. These rules may enable us to purchase wireless personal
communications service spectrum
70
from Sprint PCS and other wireless personal communications services licensees as
a supplement or alternative to the existing management arrangements.
WIRELESS FACILITIES SITING
States and localities are not permitted to regulate the placement of
wireless facilities so as to "prohibit" the provision of wireless services or to
"discriminate" among providers of those services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. These rules are
designed to make it possible for Sprint PCS and its managers and affiliates and
other wireless entities to acquire necessary tower sites in the face of local
zoning opposition and delays. The FCC is considering numerous requests for
preemption of local actions affecting wireless facilities siting.
EQUAL ACCESS
Wireless providers are not required to provide long distance carriers
with equal access to wireless customers for the provision of toll services. This
enables us and Sprint PCS to generate additional revenues by reselling the toll
services of Sprint PCS and other interexchange carriers from whom we can obtain
favorable volume discounts. However, the FCC is authorized to require unblocked
access to toll service providers subject to certain conditions.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating
the rates and entry of commercial mobile radio service providers. Section 332
does not prohibit a state from regulating the other terms and conditions of
commercial mobile services, including consumer billing information and
practices, billing disputes and other consumer protection matters. However,
states may petition the FCC to regulate those providers and the FCC may grant
that petition if the state demonstrates that:
o market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or
o such market conditions exist and commercial mobile radio service
is a replacement for a substantial portion of the landline
telephone service within the state.
To date, the FCC has granted no such petition. To the extent Sprint PCS
and its managers and affiliates provide fixed wireless service, we may be
subject to additional state regulation. These standards and rulings have
prevented states from delaying the entry of wireless personal communications
services and other wireless carriers into their jurisdictions via certification
and similar requirements, and from delaying or inhibiting aggressive or flexible
wireless price competition after entry.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 16, 2001
(except as otherwise indicated) with respect to the number of shares of our
common stock beneficially owned by each person who is known to us to be the
beneficial owner of more than 5% of our common stock, the number of shares of
our common stock beneficially owned by each of our executive officers, directors
and nominees for director, and all of our current executive officers and
directors as a group. Except as otherwise indicated, each such stockholder has
sole voting and investment power with respect to the shares beneficially owned
by such stockholder.
NUMBER
OF SHARES
BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS (1) OWNED (2) OWNERSHIP
--------------------------------------------- --------------- --------------
5% STOCKHOLDERS
Caroline Hunt Trust Estate................... 8,801,866 (3) 9.57%
100 Crescent Court, Suite 1700
Dallas, TX 75201
South Plains Telephone Cooperative, Inc...... 8,769,732 (4) 9.54%
2425 Marshall Street
Lubbock, TX 79415
Budagher Family, LLC......................... 7,312,776 (5) 7.95%
3702 Holland Avenue
Dallas, TX 75219
Taylor Telephone Cooperative, Inc............ 5,175,700 (6) 5.63%
9796 N. Interstate 20
Merkel, TX 79536
DIRECTORS AND EXECUTIVE OFFICERS:
David E. Sharbutt............................ 1,369,724 (7) 1.48%
Michael R. Budagher.......................... 7,312,776 (5) 7.95%
Ray M. Clapp................................. 107,175 (8) *
Kendall W. Cowan............................. 291,000 (9) *
Scotty Hart.................................. 29,300 (10) *
Thomas Hyde.................................. 28,000 (11) *
Schuyler B. Marshall......................... 138,500 (12) *
Tom M. Phelps................................ 31,325 (13) *
Thomas F. Riley, Jr.......................... 166,500 *
Loyd I. Rinehart............................. 33,334 (14) *
Michael V. Roberts........................... 6,753,750 (15) 7.35%
Steven C. Roberts............................ 6,763,650 (16) 7.36%
Anthony Sabatino............................. 30,000 (17) *
Jimmy R. White............................... 29,014 (18) *
All Directors and Executive Officers......... 23,083,798 24.83%
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----------------------------
* Less than one percent.
(1) Except as otherwise indicated in the footnotes below, the address for each
executive officer and director is 5225 S. Loop 289, Lubbock, Texas 79424.
(2) Percentage of ownership is based on 91,946,843 shares of our common stock
outstanding as of April 16, 2001. Beneficial ownership is determined in
accordance with Rule 13d-3 of the Exchange Act. A person is deemed to be
the beneficial owner of any shares of common stock if that person has or
shares voting power or investment power with respect to that common stock,
or has the right to acquire beneficial ownership at any time within 60 days
of the date of the table. As used herein, "voting power" is the power to
vote or direct the voting of shares and "investment power" is the power to
dispose or direct the disposition of shares.
(3) The share information reflected is based upon a statement on Amendment No.
2 to a Schedule 13D filed jointly by Caroline Hunt Trust Estate, The
Rosewood Corporation, Rosewood Financial, Inc. Rosewood Management
Corporation and Fortress Venture Capital II, L.P. on June 18, 2001 with the
SEC. The Rosewood Corporation is a wholly-owned subsidiary of Caroline Hunt
Trust Estate and Rosewood Financial, Inc. is an indirect wholly-owned
subsidiary of Caroline Hunt Trust Estate and The Rosewood Corporation.
Rosewood Management Corporation is a wholly-owned subsidiary of The
Rosewood Corporation and serves as the general partner of Fortress Venture
Capital II, L.P. Caroline Hunt Trust Estate and The Rosewood Corporation
may be deemed to be the beneficial owner of the shares held of record by
Rosewood Financial, Inc., as a result of their parent-subsidiary
relationship. Rosewood Management Corporation may be deemed to be the
beneficial owner of the shares held of record by Fortress Venture Capital
II, L.P., as a result of its general partnership status. Caroline Hunt
Trust Estate, The Rosewood Corporation and Rosewood Financial, Inc. may be
deemed to be the beneficial owner of the shares held of record by Fortress
Venture Capital II, L.P., as a result of their parent-subsidiary
relationship with Rosewood Management Corporation. Caroline Hunt Trust
Estate, The Rosewood Corporation and Rosewood Financial, Inc. disclaim
beneficial ownership of any shares held by Rosewood Management Corporation
or Fortress Venture Capital II, L.P., and Rosewood Management Corporation
and Fortress Venture Capital II, L.P. disclaim beneficial ownership of any
shares held by Caroline Hunt Trust Estate, The Rosewood Corporation and
Rosewood Financial, Inc. The address for The Rosewood Corporation, Rosewood
Financial, Inc., Rosewood Management Corporation and Fortress Venture
Capital II, L.P. is the same address for Caroline Hunt Trust Estate.
(4) The share information reflected is based upon a statement on a Schedule 13D
filed jointly by South Plains Telephone Cooperative, Inc. and South Plains
Advanced Communications & Electronics, Inc. on February 7, 2000 with the
SEC. South Plains Advanced Communications is a wholly-owned subsidiary of
South Plains Telephone Cooperative, which may be deemed to be the
beneficial owner of the shares held of record by South Plains Advanced
Communications. South Plains Telephone Cooperative and South Plains Advance
Communications share voting and investment power for these shares, as a
result of their parent-subsidiary relationship. The address for South
Plains Advanced Communications is the same as the address for South Plains
Telephone Cooperative.
(5) The share information reflected is based upon a statement on a Schedule 13D
filed jointly by Mr. Budagher and the Budagher Family, LLC on February 26,
2001 with the SEC. Mr. Budagher and his spouse and children own 100% of the
membership interests in the Budagher Family, LLC. Includes 28,000 shares
issuable to Mr. Budagher pursuant to options currently exercisable and
7,284,776 shares for which Budagher Family, LLC and Mr. Budagher share
voting and investment power, as a result of their control person
relationship. Mr. Budagher is the sole Manager and President of Budagher
Family, LLC. The address for Mr. Budagher is the same as the address for
the Budagher Family, LLC.
(6) The share information reflected is based upon a statement on a Schedule 13D
filed jointly by Taylor Telephone Cooperative, Inc. and Taylor
Telecommunications, Inc. on February 7, 2000 with the SEC. Taylor
Telecommunications is a wholly-owned subsidiary of Taylor Telephone
Cooperative, which may be deemed to be the beneficial owner of the shares
held of record by Taylor Telecommunications. Taylor Telephone Cooperative
and Taylor Telecommunications share voting and investment power for these
shares, as a result of their parent-subsidiary relationship. The address
for Taylor Telecommunications is the same as the address for Taylor
Telephone Cooperative.
(7) Includes 242,500 shares held individually by Mr. Sharbutt, 48,824 shares
held in Mr. Sharbutt's 401(k) plan, 593,200 shares beneficially owned by
Five S, Ltd., 200 shares beneficially owned by Mr. Sharbutt's children and
485,000 shares issuable pursuant to options currently exercisable. Mr.
Sharbutt is a limited partner of Five S, Ltd. and President of Sharbutt
Inc., the general partner of Five S Ltd., and may be
73
considered a beneficial owner of the shares owned by Five S, Ltd. Mr.
Sharbutt disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest therein. Additionally, Mr. Sharbutt is a
director, shareholder and the President of US Consultants, Inc., the
general partner of Harness, Ltd., which holds 292,938 shares of common
stock. Mr. Sharbutt disclaims beneficial ownership of the shares owned by
Harness, Ltd. The address for Five S Ltd. is 4606 91st Street, Lubbock,
Texas 79424 and the address for Harness, Ltd. is P.O. Box 65700, 4747 S.
Loop 289, Lubbock, Texas 79464.
(8) Includes 64,175 shares held individually by Mr. Clapp and 43,000 shares
issuable pursuant to options currently exercisable. Includes 64,175 shares
held individually by Mr. Clapp and 43,000 shares issuable pursuant to
options currently exercisable. Excludes 8,801,866 shares held by Caroline
Hunt Trust Estate and its subsidiaries, as to which Mr. Clapp disclaims
beneficial ownership. Mr. Clapp is the Managing Director, Acquisitions and
Investments for the Rosewood Corporation, which is a wholly-owned
subsidiary of the Caroline Hunt Trust Estate. The address for Mr. Clapp is
the same as the address for Caroline Hunt Trust Estate.
(9) These shares are issuable pursuant to options currently exercisable.
(10) Includes 1,000 shares held individually by Mr. Hart, 28,000 shares issuable
pursuant to options currently exercisable and 300 shares held by Lubbock
HLH, Ltd. Mr. Hart controls Lubbock HLH, Ltd. and is a beneficial owner of
the shares held by Lubbock HLH, Ltd. Excludes 8,769,732 shares held by
South Plains Advanced Communications & Electronics, Inc., as to which Mr.
Hart disclaims beneficial ownership. Mr. Hart is the General Manager of
South Plains Telephone Cooperative and South Plains Advanced Communications
& Electronics, a wholly-owned subsidiary of South Plains Telephone
Cooperative. Mr. Hart's address is the same as the address for South Plains
Telephone Cooperative.
(11) Includes 28,000 shares issuable pursuant to options currently exercisable.
Excludes 5,175,700 shares held by Taylor Telecommunications, Inc., as to
which Mr. Hyde disclaims beneficial ownership. Mr. Hyde is the Manager of
Taylor Telephone Cooperative, Inc. and Taylor Telecommunications, a
wholly-owned subsidiary of Taylor Telephone Cooperative. Mr. Hyde's address
is the same as the address for Taylor Telephone Cooperative.
(12) Includes 110,000 shares held individually by Mr. Marshall, 500 shares held
indirectly in an IRA account for Mr. Marshall and 28,000 shares issuable
pursuant to options currently exercisable. Excludes 8,801,866 shares held
by Caroline Hunt Trust Estate, as to which Mr. Marshall disclaims
beneficial ownership. Mr. Marshall is the President of Rosewood Financial,
Inc. and the Rosewood Corporation, both of which are wholly-owned
subsidiaries of the Caroline Hunt Trust Estate. Additionally, Mr. Marshall
is a Director of various Caroline Hunt Trust Estate subsidiaries. The
address for Mr. Marshall is the same as the address for Caroline Hunt Trust
Estate.
(13) Includes 3,325 shares held individually by Mr. Phelps and 28,000 shares
issuable pursuant to options currently exercisable.
(14) These shares are issuable pursuant to options exercisable within 60 days.
(15) Includes 6,752,500 shares held individually by Mr. Roberts, 1,000 shares
held by Mr. Roberts and his wife together and 250 shares owned by Roberts
Broadcasting Company. Mr. Roberts is the Chairman, Chief Executive Officer
and principal stockholder of Roberts Broadcasting Company and may be
considered a beneficial owner of the shares owned by Roberts Broadcasting
Company.
(16) Includes 6,754,500 shares held individually by Mr. Roberts, 2,500 shares
held by Mr. Roberts and his wife together, 1,000 shares held by Mr.
Roberts' wife, 5,400 shares Mr. Roberts' wife holds in custodial accounts
for their minor children and 250 shares owned by Roberts Broadcasting
Company. Mr. Roberts is the President and Chief Operating Officer and
principal stockholder of Roberts Broadcasting Company and may be considered
a beneficial owner of the shares owned by Roberts Broadcasting Company. Mr.
Roberts disclaims beneficial ownership of the shares of common stock held
in custodial accounts for his minor children.
(17) These shares are issuable pursuant to options currently exercisable.
(18) Includes 1,014 shares held individually by Mr. White and 28,000 shares
issuable pursuant to options currently exercisable. Mr. White's address is
Highway 87 North, Dalhart, TX 79022.
74
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders
and the number of shares being registered for sale as of the date of this
prospectus and sets forth the number of shares of common stock known by us to be
beneficially owned by each of the selling stockholders. The shares offered
hereby were acquired by the selling stockholders from us pursuant to our
acquisitions of Roberts, WOW and Southwest. Except as indicated, the following
table assumes that the selling stockholders will sell all of the shares being
offered for their account by this prospectus. However, we are unable to
determine the exact number of shares that actually will be sold. Except as
indicated, none of the selling stockholders has had a material relationship with
us within the past three years other than as a result of the ownership of our
shares of our common stock. The shares offered by this prospectus may be offered
from time to time by the selling stockholders.
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK
OWNED PRIOR TO OF COMMON STOCK OWNED AFTER
NAME OFFERING REGISTERED OFFERING
----------------------------------------------- ------------------ -------------------- -------------------
FORMER MEMBERS OF ROBERTS HOLDINGS
Michael V. Roberts (1)..................... 6,753,750 6,750,000 3,750
Steven C. Roberts (2)...................... 6,763,650 6,750,000 13,650
FORMER MEMBERS OF WOW HOLDINGS (3)
Todd S. Aaron.............................. 3,332 3,332 0
Steven T. Baron............................ 3,332 3,332 0
Frank W. Bender............................ 1,545 1,545 0
Gil J. Besing.............................. 8,330 8,330 0
Mark K. Buechley........................... 108,113 108,113 0
Seth A. Buechley........................... 37,172 37,172 0
Cal-Ore Wireless, Inc...................... 258,884 258,884 0
Casco Communications, Inc.................. 212,836 212,836 0
CBT Wireless Investments, LLC.............. 90,076 90,076 0
Arnold S. Chaplik.......................... 3,332 3,332 0
Clear Creek Mutual Telephone Company....... 212,836 212,836 0
Chad E. Coben.............................. 3,332 3,332 0
Colton Telephone Company................... 28,756 28,756 0
Seth Davidow............................... 3,332 3,332 0
Day Management Corp........................ 359,036 359,036 0
Dayna Decker............................... 3,332 3,332 0
David M. Diwik............................. 8,330 8,330 0
Duncan, Tiger & Tabor...................... 35,990 35,990 0
Philip Erdoes.............................. 4,999 4,999 0
Carlos A. Fierro........................... 3,332 3,332 0
Freedom Wireless, Inc...................... 17,636 17,636 0
75
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK
OWNED PRIOR TO OF COMMON STOCK OWNED AFTER
NAME OFFERING REGISTERED OFFERING
----------------------------------------------- ------------------ -------------------- -------------------
Gervais Telephone Company.................. 27,037 27,037 0
Gordany Superannuation Nominees Pty Ltd.... 3,332 3,332 0
Dean. E. Graffam........................... 1,726 1,726 0
John L. Graham............................. 6,664 6,664 0
Mark Grimes................................ 1,545 1,545 0
Joseph L. Harberg.......................... 3,332 3,332 0
Michael R. Held............................ 3,332 3,332 0
Helix Telephone Co. ....................... 18,013 18,013 0
Henderson Bay, LLC......................... 742,989 742,989 0
William H. Hess............................ 6,664 6,664 0
High Desert Investment Group, LLC.......... 300,000 300,000 0
Mike Horowitz.............................. 3,332 3,332 0
JM Wireless Acquisition Company, LLC....... 63,003 63,003 0
Michael L. Kaeske.......................... 3,332 3,332 0
J. Todd Kale............................... 3,332 3,332 0
Samanth Jo Kirshon Trust................... 3,332 3,332 0
Terry A. Klein............................. 1,726 1,726 0
Steven A. Lieberman........................ 16,661 16,661 0
Randall S. Lieberman....................... 3,332 3,332 0
Robert Lopez............................... 1,726 1,726 0
James Heath Malone......................... 95,540 95,540 0
F. Howard Mandel........................... 76,083 76,083 0
Jeffrey A. Marcus.......................... 3,332 3,332 0
Mark L. Masinter........................... 3,332 3,332 0
Thomas P. McMillin......................... 3,332 3,332 0
Michael McWhirter.......................... 1,726 1,726 0
Molalla Wireless, Inc...................... 191,710 191,710 0
Mt. Angel Telecommunications, Inc.......... 44,558 44,558 0
Nehalem Telephone & Telegraph Co........... 28,756 28,756 0
Nextband Investment Partners, LLC.......... 85,000 85,000 0
Michael J. Ochstien........................ 3,332 3,332 0
Paradigm Partners, LP...................... 6,664 6,664 0
Theodore Pearlman.......................... 3,332 3,332 0
Pioneer Consolidated, Inc.................. 48,646 48,646 0
Gregory P. Pipkin.......................... 3,332 3,332 0
76
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK
OWNED PRIOR TO OF COMMON STOCK OWNED AFTER
NAME OFFERING REGISTERED OFFERING
----------------------------------------------- ------------------ -------------------- -------------------
Jeffrey Rasansky........................... 3,332 3,332 0
Jerald Rasansky............................ 3,332 3,332 0
Kay Gunderson Reeves....................... 3,332 3,332 0
Andrew Reifsnyder.......................... 3,332 3,332 0
James L. Robb.............................. 1,726 1,726 0
Suellen Rosmarin........................... 3,332 3,332 0
Michael K. Rozen........................... 3,332 3,332 0
S. Ann Saucer.............................. 3,332 3,332 0
Mark G. Schlachter......................... 3,332 3,332 0
Scio Mutual Telephone Association.......... 108,867 108,867 0
Ezra Shashoua.............................. 3,332 3,332 0
Heidi Silber............................... 3,332 3,332 0
Brent Silber............................... 3,332 3,332 0
Bob R. Simpson............................. 3,332 3,332 0
A. Gerald Spalding......................... 3,332 3,332 0
Richard Statler............................ 1,726 1,726 0
Stayton Cooperative Telephone Co........... 191,259 191,259 0
Sheldon Stein.............................. 8,330 8,330 0
St. Paul Cooperative Telephone Association. 26,377 26,377 0
Telsystems West, Inc. ..................... 86,633 86,633 0
Trelain Investment Partnership Ltd......... 872,692 872,692 0
Trap King, LLLP............................ 19,171 19,171 0
Carl Tucker................................ 3,332 3,332 0
Umatilla-Monitor Utility Group............. 19,171 19,171 0
Kris Von Hoetzendorff...................... 1,726 1,726 0
Wahkiakum West, Inc........................ 48,646 48,646 0
Kenneth S. Wall............................ 3,332 3,332 0
Wayne Investments, Ltd. (4)................ 837,693 837,693 0
Kevin Wendle............................... 35,000 35,000 0
Western Independent Networks, Inc.......... 57,513 57,513 0
Thomas D. Williams......................... 3,332 3,332 0
Daniel J. Wilson........................... 3,332 3,332 0
WOW Greenbrier Partners, LP................ 452,537 452,537 0
Mark S. Zale............................... 3,332 3,332 0
77
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK NUMBER OF SHARES OF COMMON STOCK
OWNED PRIOR TO OF COMMON STOCK OWNED AFTER
NAME OFFERING REGISTERED OFFERING
----------------------------------------------- ------------------ -------------------- -------------------
FORMER STOCKHOLDERS OF SOUTHWEST
Central Cellular, Inc...................... 814,185 814,185 0
Chickasaw Holding Company.................. 666,000 666,000 0
Massachusetts Mutual Life Insurance Company 2,782,434 2,782,434 0
MassMutual High Yield Partners II, LLC..... 1,391,165 1,391,165 0
Paribas Capital Funding LLC................ 832,500 832,500 0
Pioneer Telecommunications, Inc............ 814,185 814,185 0
Thomas F. Riley, Jr. (5) .................. 166,500 166,500 0
Southwest PCS, L.L.C....................... 3,633,030 3,633,030 0
----------------------------
(1) Mr. Michael V. Roberts has served as our director since February 14,
2001.
(2) Mr. Steven C. Roberts has served as our director since February 14,
2001.
(3) Some of the selling stockholders are selling shares of our common stock
that they received from a former member of WOW Holdings as a
distribution or other transfer and are not former members of WOW
Holdings.
(4) Mr. Reagan Silber is a limited partner in Wayne Investments, Ltd. and
he is president of the general partner. Mr. Silber resigned from the
Board of Directors effective April 16, 2001.
(5) Mr. Thomas F. Riley, Jr. has served as our director since March 30,
2001.
The former members of Roberts Holdings and WOW Holdings are
collectively registering 19,549,991 shares of our common stock pursuant to the
registration statement of which this prospectus forms a part. Each of the former
members of Roberts Holdings and WOW Holdings entered into a "lock-up"
arrangement under which each holder is prohibited from selling or disposing of
any shares of our common stock received in the Roberts and WOW mergers until
September 30, 2001, without our prior written consent.
The former stockholders of Southwest are registering 11,099,999 shares
of our common stock pursuant to the registration statement of which this
prospectus forms a part. Each of the former stockholders of Southwest entered
into a "lock-up" arrangement under which each holder agreed to limit sales until
March 30, 2002 under the registration statement of which this prospectus forms a
part to an amount that will not exceed 50% of our common stock that such holder
received in the Southwest merger.
78
DESCRIPTION OF CAPITAL STOCK
Our amended and restated certificate of incorporation authorizes us to
issue up to 290,000,000 shares of common stock, par value $0.01 per share and
10,000,000 shares of preferred stock, par value $0.01 per share. As of September
27, 2001, there were 92,001,749 shares of common stock issued and outstanding
held by approximately 230 stockholders of record, not including the stockholders
for whom shares are held in "nominee" or "street" name. No shares of preferred
stock are outstanding. The following summaries of certain provisions of the
capital stock do not purport to be complete and are subject to, and qualified in
their entirety by, the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws and by applicable law.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders, including the election of
directors. The holders of our common stock do not have any cumulative voting
rights.
We do not expect to pay cash dividends in the foreseeable future. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business. Any future determination to pay dividends will be at the
discretion of the Board of Directors and will be dependent upon then existing
conditions, including restrictions contained in the indebtedness of our
subsidiaries and our results of operations, financial condition, capital
expenditure plans, contractual restrictions, business prospects and our
subsidiaries and other relevant factors. See "Dividend Policy." However, if we
do pay cash dividends, the holders of our common stock are entitled, subject to
the prior rights of any preferred stock, to share equally, on a share-for-share
basis, in all such dividends.
If we liquidate, dissolve or wind up, the holders of shares of our
common stock will be entitled to share equally, on a share-for-share basis, in
the assets which are legally available for distribution, if any, remaining after
the payment or provision for the payment of all debts and other liabilities and
the payment and setting aside for payment of any preferential amount due to the
holders of shares of any series of preferred stock. Neither a merger or
consolidation of us with or into another corporation, nor the sale or transfer
by us of all or part of our assets, nor the reduction of our capital stock, is
deemed to be a liquidation, dissolution or winding up of us.
Holders of shares of our common stock have no preemptive, conversion,
redemption, subscription or similar rights. All outstanding shares of our common
stock are, and the shares of common stock offered hereby will be, fully paid and
non-assessable.
TRANSFER AGENT
The transfer agent for our common stock is Mellon Investor Services
LLC.
PREFERRED STOCK
Our preferred stock may be issued in one or more series by the Board of
Directors, subject to limitations prescribed by Delaware law, without further
stockholder approval. Each series may have different rights, preferences,
designations, qualifications, limitations and restrictions that may be
established by the Board of Directors without approval from the stockholders.
These rights, designations and preferences include dividend rights, dividend
rates, conversion rights, voting rights, liquidation preferences, terms of
redemption, the number of shares constituting any series and the designation of
such series.
The issuance of preferred stock may discourage or make more difficult a
merger, tender offer, business combination or proxy contest, assumption of
control by a holder of a large block of our securities or the removal of
incumbent management, even if these events were favorable to the interests of
stockholders. The Board of Directors, without stockholder approval, may issue
preferred stock with voting and conversion rights and dividend and liquidation
preferences which may adversely affect the holders of our common stock.
79
The Board of Directors has authorized and designated the Series A
preferred stock described under "--Stockholder Rights Plan" below.
DELAWARE LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. This statute is intended to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with the Board of
Directors. In general, the statute prohibits us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date that the person became an interested stockholder, unless:
o prior to the date that the person became an interested
stockholder, the business combination or the transaction that
resulted in the person becoming an interested stockholder is
approved by the Board of Directors;
o upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of our outstanding voting stock; or
o on or after that date, the business combination is approved by the
Board of Directors and by the affirmative vote of at least 66 2/3%
of our outstanding voting stock that is not owned by the
interested stockholder.
Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with that person's affiliates and associates, owns 15% or
more of our voting stock.
PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS
The following is a summary of certain provisions of our amended and
restated certificate of incorporation and our amended and restated bylaws which
could have the effect of delaying, deferring or preventing a change in control
of us and which would make removal of the Board of Directors more difficult.
BOARD CLASSIFICATION. Our amended and restated certificate of
incorporation provides for the division of the Board of Directors into three
classes, as nearly equal in number as possible, with each class beginning its
three year term in a different year. Our amended and restated certificate of
incorporation also provides that only the Board of Directors may fix the number
of directors.
STOCKHOLDER NOMINATIONS. Our amended and restated bylaws provides that
a stockholder may nominate directors only if the stockholder delivers written
notice to us not less than 45 days or more than 75 days before the first
anniversary of the date on which we first mailed our proxy materials for the
preceding year's annual meeting. If the date of the annual meeting is advanced
more than 30 days before or delayed more than 30 days after the anniversary of
the preceding year's annual meeting, then we must receive the stockholder's
notice not after the later of the ninetieth day before the annual meeting or the
tenth day after the day of public announcement of the date of the annual meeting
is made.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Our amended and restated
certificate of incorporation provides that any newly created directorship
resulting from an increase in the number of directors or a vacancy on the Board
of Directors may be filled only by vote of a majority of the remaining directors
then in office, even if less than a quorum. Under no circumstances may our
stockholders fill any newly created directorships. Directors elected to fill a
vacancy or by reason of an increase in the number of directors will hold office
until the annual meeting of stockholders at which the term of office of the
class to which they have been elected expires.
REMOVAL OF DIRECTORS. Our amended and restated certificate of
incorporation provides that our directors may be removed from office only for
cause and only by the affirmative vote of 80% of the then outstanding shares of
stock entitled to vote on the matter.
80
ACTION BY WRITTEN CONSENT. Our amended and restated certificate of
incorporation provides that any action required or permitted to be taken by our
stockholders may be taken only at a duly called annual or special meeting of our
stockholders, and may not be taken by written consent of our stockholders.
SPECIAL MEETING OF STOCKHOLDERS. Our amended and restated certificate
of incorporation and our amended and restated bylaws provide that special
meetings of stockholders may be called only by the Chairman of the Board of
Directors, if there is one, by our President or by the Board of Directors
pursuant to a resolution adopted by a majority of authorized directors.
The foregoing provisions could have the effect of delaying until the next
annual stockholders meeting stockholder actions that are favored by the holders
of a majority of the outstanding voting securities. These provisions may also
discourage another person or entity from making an offer to stockholders to
acquire all or a majority of our common stock. This is because the person or
entity making the offer, even if it acquired a majority of our outstanding
voting securities, would be unable to increase the size of the board, appoint or
remove directors, call a special meeting of the stockholders or take action
without a stockholder meeting. As a result, any matters which such persons or
entities endorse, including the election of new directors or the approval of a
merger, would have to wait for the next duly called stockholders meeting.
VOTING REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS. Our amended and
restated certificate of incorporation also contains fair price provisions
designed to provide safeguards for stockholders when a stockholder owning 20% or
more of its voting stock, referred to as an "interested stockholder," or that
interested stockholder's affiliates or associates, attempts to effect a business
combination with us.
In general, in addition to any affirmative vote required by law, a
"business combination" (as defined below) between us and an interested
stockholder must be approved by the affirmative vote of the holders of 80% of
our outstanding voting stock. The additional voting requirements will not apply,
however, if:
o the business combination was approved by not less than a majority
of the disinterested directors; or
o a series of conditions are satisfied requiring (in summary):
o that the consideration to be paid to our stockholders in the
business combination must be at least equal to the higher of
(1) the highest per-share price paid by the interested
stockholder in acquiring any shares of our common stock
during the two years prior to the announcement date of the
business combination or in the transaction in which it became
an interested stockholder (the "determination date"),
whichever is higher or (2) the fair market value per share of
our common stock on the announcement date or determination
date, whichever is higher, in either case appropriately
adjusted for any subsequent stock dividend, stock split,
combination of shares or similar event (any non-cash
consideration is treated similarly); and
o certain "procedural" requirements are complied with, such as
the solicitation of proxies pursuant to the rules of the SEC
and no decrease in regular dividends (if any) after the
interested stockholder became an interested stockholder
(except as approved by a majority of the disinterested
directors).
Pursuant to our amended and restated certificate of incorporation, the
following events will be deemed to be "business combinations":
o any merger or consolidation of us involving an (1) interested
stockholder or (2) any other company that is, or after the merger
or consolidation will be, an affiliate or associate of an
interested stockholder;
81
o specified dispositions of assets, cash flow or earning power of us
to an interested stockholder, any issuance of our securities to an
interested stockholder or us entering into loans or other
arrangements involving an interested stockholder, in each case,
meeting specified threshold amounts;
o the adoption of any plan of liquidation or dissolution of us; and
o any issuance or reclassification of our securities having the
effect of increasing the proportionate share of ownership of an
interested stockholder.
Regarding the 20% threshold for the definition of interested
stockholder, certain persons who were our stockholders before the date of our
initial public offering are permitted under our amended and restated certificate
of incorporation to enter into voting agreements with each other without being
deemed the beneficial owner of the securities owned by the other parties to the
voting agreements, but only if the voting agreements:
o were approved by the Board of Directors prior to the time they
were entered into;
o do not govern the voting of our common stock in matters other than
the election of members of the Board of Directors; and
o do not govern the voting of our common stock held by persons other
than persons who were our stockholders before the date of our
initial public offering.
CHARTER AND BY-LAW AMENDMENTS. Delaware Law provides that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation requires the affirmative vote of the holders of at least 80% of
the outstanding voting stock to amend or repeal certain provisions of the
certificate of incorporation or bylaws described above. Except as otherwise
provided by law, holders of our common stock are not entitled to vote on any
amendment to our certificate of incorporation that alters or changes the powers,
preferences, rights or other terms of an outstanding series of our preferred
stock, if the holders of the affected series of preferred stock are entitled to
vote on the proposed amendment. Our bylaws may be amended or repealed by the
vote of two-thirds of the Board of Directors, except if the bylaw provisions
affect provisions of the certificate of incorporation or bylaws described above,
then the affirmative vote of the holders of at least 80% of the outstanding
voting stock is required. The 80% stockholder vote would be in addition to any
separate vote that each class of preferred stock is entitled to that might in
the future be required in accordance with the terms of any preferred stock that
might be outstanding at the time any amendments are submitted to stockholders.
The foregoing provisions, together with the ability of the Board of
Directors to issue preferred stock without further stockholder action, may delay
or frustrate the removal of incumbent directors or the completion of
transactions that would be beneficial, in the short term, to our stockholders.
The provisions may also discourage or make more difficult a merger, tender
offer, other business combination or proxy contest, the assumption of control by
a holder of a large block of securities or the removal of incumbent management,
even if these events would be perceived as favorable to the interests of our
stockholders.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. Our amended and restated
certificate of incorporation requires us to indemnify our directors and officers
to the fullest extent permitted by law. In addition, as permitted by Delaware
law, our amended and restated certificate of incorporation provides that no
director will be liable to us or our stockholders for monetary damages for
breach of certain fiduciary duties as a director. The effect of this provision
is to restrict our rights and the rights of our stockholders in derivative suits
to recover monetary damages against a director for breach of certain fiduciary
duties as a director, except that a director will be personally liable for:
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
82
o the payment of dividends or the redemption or purchase of stock in
violation of Delaware law;
o any breach of the duty of loyalty to us or our stockholders; or
o any transaction from which the director derived an improper
personal benefit.
CERTAIN PROVISIONS OF THE SPRINT PCS AGREEMENTS
Our affiliation agreements Sprint contain restrictions which may limit
our ability to sell its business and may have a substantial anti-takeover
effect.
Pursuant to our affiliation agreements with Sprint PCS, under specific
circumstances and without further stockholder approval, Sprint PCS may purchase
our operating assets or capital stock for 72% or 80% of the "entire business
value" of us, which includes the value of the spectrum licenses, business
operations and other assets more fully described in "Affiliation Agreements with
Sprint PCS--The Management Agreement--Determination of Entire Business Value."
In addition, Sprint PCS must approve any change of control of our ownership and
must consent to any assignment of our affiliation agreements with Sprint PCS.
Sprint PCS has a right of first refusal if we decides to sell its operating
assets to a third party. We are also subject to a number of restrictions on the
transfer of its business including a prohibition on the sale of us or our
operating assets to competitors of Sprint or Sprint PCS.
STOCKHOLDER RIGHTS PLAN
RIGHTS AND RIGHTS CERTIFICATES. On February 14, 2001, the Board of
Directors adopted a stockholder rights plan. The rights plan provides that one
right will be issued with each share of common stock issued. Each right, when
exercisable, will entitle the holder to purchase from us one one-thousandth of a
share of Series A preferred stock at a purchase price of $84 per one
one-thousandth of a share, subject to adjustment. Each such fractional share of
the Series A preferred stock will essentially be the economic equivalent of one
share of common stock.
A stockholder rights plan is designed to deter coercive takeover
tactics and to encourage third parties interested in acquiring us to negotiate
with the Board of Directors. The stockholder rights plan achieves these goals by
significantly diluting the ownership interest of a person who acquires a
specified percentage of our common stock without first obtaining approval of the
Board of Directors.
Initially, the rights will be attached to all certificates representing
outstanding shares of our common stock and will be transferred with and only
with such certificates. The rights will separate from the our common stock and
become exercisable upon the earlier to occur of:
o the close of business on the tenth business day after the public
announcement that a person or group of persons has acquired 20% or
more of our outstanding common stock, except in connection with an
offer approved by the Board of Directors; or
o the close of business on the tenth business day after the
commencement of, or announcement of an intention to commence, a
tender offer or exchange offer that would result in a person or
group of persons acquiring 20% or more of our outstanding common
stock.
A person or group of persons will be considered to have acquired
beneficial ownership of our common stock if they have the power to vote or
direct the voting of our common stock. Certain stockholders named in our amended
and restated certificate of incorporation may enter into voting agreements with
each other only, at any time, without being deemed the beneficial owner of
securities owned by the other parties to the voting agreements, if the voting
agreements:
o were approved by the Board of Directors prior to the time they
were entered into;
83
o do not govern the voting of our common stock regarding matters
other than the election of members of the our board of directors;
and
o do not govern the voting of our common stock held by persons other
than persons who were stockholders in us before the date of our
initial public offering.
EXPIRATION OF RIGHTS. The rights will expire at the close of business
on the tenth anniversary of the date of issuance, unless we redeem or exchange
the rights before that date or amends the stockholder rights plan to extend the
term of the rights.
FLIP-IN RIGHT. If any person or group of persons acquires 20% or more
of our outstanding common stock, each holder of a right, other than the
acquiring person, will have the right to receive, upon exercise thereof, the
number of shares of common stock, or in certain circumstances, cash, property or
other securities of us, having a value equal to two times the purchase price of
the right. The acquiring person's rights will automatically become null and void
in that event. In other words, the stockholders other than the acquiring person
will be able to buy common stock at half price.
FLIP-OVER RIGHT. If at any time after a person or group of persons
acquires 20% or more of our outstanding common stock and the following occurs:
o we effect a merger or other business combination in which we are
not the surviving corporation;
o we are the surviving corporation in a consolidation, merger or
similar transaction in which our shares of common stock are
changed into or exchanged for other securities; or
o we sell or otherwise transfer more than 50% of our assets, cash
flow or earning power;
then each holder of a right, except a person who has acquired beneficial
ownership of 20% or more of the outstanding common stock, may purchase, upon the
exercise of each right at the then-current purchase price, that number of shares
of common stock of the acquiring company with a market value equal to two times
the purchase price of the right. In other words, the stockholders other than the
acquiring person will be able to buy common stock of the acquiring company at
half price.
ADJUSTMENTS. The purchase price and the number of shares of Series A
preferred stock or other securities issuable upon exercise of the rights may be
adjusted to prevent dilution upon:
o stock dividends, subdivisions, combinations or reclassifications
of our common stock or the Series A preferred stock;
o below market issuances of rights or warrants to subscribe for or
convert into Series A preferred stock; or
o distributions to holders of the Series A preferred stock of
evidence of indebtedness, cash, excluding regular quarterly cash
dividends, assets, excluding dividends payable in Series A
preferred stock, or subscription rights or warrants.
EXCHANGE OF RIGHTS. After a person or group of persons acquires 20% of
our outstanding common stock but before that person or group beneficially owns
50% or more of our common stock, we may, at our option, exchange the rights at
an exchange ratio of one-half the number of shares of common stock, Series A
preferred stock, or other property for which a right is exercisable immediately
prior to our decision to exchange the rights, subject to adjustment. Rights held
by an acquiring person are not entitled to these exchange rights. In that event,
the stockholders other than the acquiring person would receive common stock in
exchange for their rights.
REDEMPTION OF RIGHTS. At any time before a person or group of persons
acquires 20% or more of our outstanding common stock, we may redeem the rights
at a price of $0.001 per right. Upon the effective date of the
84
redemption of the rights, the rights will terminate and the rights holders will
only be entitled to receive the $0.001 redemption price.
RIGHTS AS A STOCKHOLDER. Until a right is exercised, the rights will
not entitle the holder to the rights as our stockholder, including, without
limitation, the right to vote or to receive dividends.
SERIES A PREFERRED STOCK. The terms of the Series A preferred stock are
contained in a Certificate of Designations, Rights and Preferences filed with
the Delaware Secretary of State on February 14, 2001.
ANTI-TAKEOVER EFFECTS. The rights may have certain anti-takeover
effects. The rights may cause substantial dilution to any person or group that
attempts to acquire us without the approval of the Board of Directors. As a
result, the overall effect of the rights may be to make more difficult a merger,
tender offer, other business combination or proxy contest involving us, even if
such event would be favorable to the interest of our stockholders.
85
PLAN OF DISTRIBUTION
The selling stockholders may offer our common stock from time to time:
o in one or more types of transactions (which may include block
transactions) on The Nasdaq National Market;
o in the over-the counter market;
o in negotiated transactions;
o through put or call options transactions relating to the shares of
our common stock;
o through short sales of shares of our common stock; or
o a combination of such methods of sale.
Sales may be made at market prices, prevailing at the time of sale, or
at negotiated prices. The selling stockholders may sell shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. The shares may also be sold by pledgees, donees, transferees or
other successors in interest of a selling stockholder.
Broker-dealers may receive compensation in the form of discounts,
concessions, or commissions from the selling stockholders and/or the purchasers
of shares of our common stock for whom such broker-dealers may act as agents or
to whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling stockholders and any broker-dealers that act in connection
with the sale of shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the shares sold by them while
acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act.
The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares of
our common stock against certain liabilities, including liabilities arising
under the Securities Act of 1933.
Because selling stockholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act of 1933, the selling
stockholders will be subject to the prospectus delivery requirements of the
Securities Act of 1933. Selling stockholders also may resell all or a portion of
the shares of common stock in open market transactions in reliance upon Rule 144
under the Securities Act of 1933, provided they meet the criteria and conform to
the requirements of such rule.
We have agreed to maintain the effectiveness of the registration
statement of which this prospectus forms a part for the shares of common stock
owned by the selling stockholders who were former members of WOW Holdings and
Roberts Holdings for a period of one year after the later of: (i) the first day
the registration statement becomes effective and (ii) October 1, 2001. However,
if the shares of our common stock that the selling stockholders who were former
members of WOW Holdings and Roberts Holdings are selling pursuant to the
registration statement become freely tradeable pursuant to Rule 144(k) of the
Securities Act prior to the termination of the effective period, then we are
under no further obligation to keep the registration statement effective for the
shares of common stock owned by the selling stockholders who were former members
of WOW Holdings and Roberts Holdings. No sales of common stock owned by the
selling stockholders who were former members of WOW Holdings and Roberts
Holdings may be made pursuant to this prospectus after the termination of the
effective period unless we amend or supplement this prospectus to indicate that
we have agreed to extend the period of effectiveness.
86
We have also agreed to maintain the effectiveness of the registration
statement of which this prospectus forms a part for the shares of common stock
owned by the selling stockholders who were former stockholders of Southwest
until the earlier of: (i) such time as all such selling stockholders sell their
shares registered under the registration statement or (ii) such time as all such
selling stockholders sell all of their shares registered under the registration
statement without restriction pursuant to Rule 144(k) under the Securities Act.
However, at any time when there is no registration statement filed by us
pursuant to Rule 415 of the Securities Act that is effective with the SEC other
than the registration statement, we are not required to maintain the
effectiveness of the registration statement after March 30, 2003 as to any
shares held by a selling stockholder, who was a former stockholder of Southwest,
that otherwise could then be sold pursuant to Rule 144(k), but may not be sold
pursuant to Rule 144(k) because the holder of such shares is an "affiliate" (as
such term is defined in Rule 144 under the Securities Act) solely because such
holder is the beneficial owner of additional shares of common stock acquired not
in connection with the Southwest merger, which has caused such holder to be
deemed an affiliate for purposes of Rule 144. No sales may be made pursuant to
this prospectus by the selling stockholders who were former stockholders of
Southwest after the termination of the effective period unless we amend or
supplement this prospectus to indicate that we have agreed to extend the period
of effectiveness.
87
ALAMOSA HOLDINGS, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma condensed combined financial statements
combine the historical statements (consolidated, where applicable) of Alamosa
Holdings, Roberts, WOW and Southwest. The unaudited pro forma condensed
combined balance sheet gives effect to the issuance of the 13 5/8% senior notes.
The unaudited pro forma statements of operations give effect to the August 15,
2001 issuance of the 13 5/8% senior notes, the January 31, 2001 issuance of the
12 1/2% senior notes and the acquisitions of Roberts, WOW and Southwest using
the purchase method of accounting. To aid you in your analysis of the financial
aspects of each of these transactions, both individually and combined, we have
presented these unaudited pro forma condensed combined financial statements to
demonstrate the financial aspects of the combined transaction.
We derived this information from the unaudited financial statements
(consolidated, where applicable) of Alamosa Holdings as of and for the six
months ended June 30, 2001, Roberts and WOW for the period January 1, 2001 to
February 14, 2001, Southwest for the period January 1, 2001 to March 30, 2001,
and from the audited consolidated statements of operations of Alamosa Holdings,
Roberts, WOW and Southwest for the year ended December 31, 2000. This
information is only a summary and should be read in conjunction with the
historical financial statements and related notes contained elsewhere herein
for the period presented.
The unaudited pro forma condensed combined statement of operations for the
six months ended June 30, 2001 and the year ended December 31, 2000, assumes
the issuance of the 13 5/8% senior notes, the issuance of the 12 1/2% senior
notes and the acquisitions of Roberts, WOW and Southwest were effected on
January 1, 2000. The unaudited pro forma condensed combined balance sheet as of
June 30, 2001 gives effect to the issuance of the 13 5/8% senior notes as if the
transaction had occurred on June 30, 2001. The accounting policies of Alamosa
Holdings, Roberts, WOW and Southwest are comparable. Certain reclassifications
have been made to Roberts', WOW's and Southwest's historical presentation to
conform to Alamosa Holdings' presentation. These reclassifications do not
materially impact Alamosa Holdings', Roberts', WOW's or Southwest's operations
or financial position for the periods presented.
The pro forma adjustments, which are based upon available information and
upon certain assumptions that we believe are reasonable, are described in the
accompanying notes. The actual allocation of these adjustments will be
different and the difference may be material.
We are providing the unaudited pro forma condensed combined financial
information for illustrative purposes only. The companies may have performed
differently had they always been combined. You should not rely on the unaudited
pro forma condensed combined financial information as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that the combined company will experience.
88
ALAMOSA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2001
(IN THOUSANDS)
ISSUANCE OF
HISTORICAL 13 5/8%
ALAMOSA SENIOR NOTES TOTAL
-------------- -------------------- -------------
ASSETS (NOTE 1)
Current assets:
Cash and cash equivalents ............................ $ 122,092 $ 35,468 $ 157,560
Accounts receivable, net ............................. 39,906 -- 39,906
Inventory ............................................ 4,425 -- 4,425
Prepaid expenses and other assets .................... 4,539 -- 4,539
Deferred tax asset ................................... 1,762 -- 1,762
Interest receivable .................................. 1,169 -- 1,169
---------- ----------- ----------
Total current assets ............................... 173,893 35,468 209,361
Property and equipment, net ........................... 410,432 -- 410,432
Debt issuance costs, net .............................. 27,378 9,454(1b) 36,832
Restricted cash ....................................... 70,727 39,240 109,967
Goodwill and intangible assets, net ................... 856,141 -- 856,141
Other noncurrent assets ............................... 4,117 -- 4,117
---------- ----------- ----------
Total assets ....................................... $1,542,688 $ 84,162 $1,626,850
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................ $ 78,450 $ -- $ 78,450
Accrued interest payable ............................. 15,001 -- 15,001
Current installments of capital leases ............... 138 -- 138
---------- ----------- ----------
Total current liabilities .......................... 93,589 -- 93,589
12 7/8% senior discount notes ........................ 222,807 -- 222,807
12 1/2% senior notes ................................. 250,000 -- 250,000
13 5/8% senior notes ................................. -- 150,000 150,000
Senior secured credit facility ....................... 203,000 (65,838)(1a) 137,162
Deferred tax liability, net .......................... 153,294 -- 153,294
Capital lease obligations, noncurrent ................ 1,506 -- 1,506
Other noncurrent liabilities ......................... 3,040 -- 3,040
---------- ----------- ----------
Total liabilities .................................. 927,236 84,162 1,011,398
---------- ----------- ----------
Commitments and contingencies ......................... -- -- --
Stockholders' equity:
Preferred stock ...................................... -- -- --
Common stock ......................................... 920 -- 920
Additional paid-in capital ........................... 791,012 -- 791,012
Accumulated deficit .................................. (175,716) -- (175,716)
Accumulated other comprehensive income, net of
tax ................................................ 166 -- 166
Unearned compensation ................................ (930) -- (930)
---------- ----------- ----------
Total stockholders' equity ......................... 615,452 -- 615,452
---------- ----------- ----------
Total liabilities and stockholders' equity ......... $1,542,688 $ 84,162 $1,626,850
========== =========== ==========
89
ALAMOSA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
ROBERTS MERGER
------------------------------
ISSUANCE OF ALAMOSA HISTORICAL
HISTORICAL 13 5/8% PRO FORMA ROBERTS PRO FORMA
ALAMOSA SENIOR NOTES SUBTOTAL ADJUSTMENTS WIRELESS ADJUSTMENTS
------------ ------------------- ------------ ------------- ----------- ------------------
Revenues: (NOTE 1) (NOTE 2) (NOTE 3)
Service revenues ....... $ 119,422 $ -- $ 119,422 $ -- $ 3,251 $ --
Product sales .......... 9,947 -- 9,947 -- 291 --
--------- ----------- --------- -------- -------- ----------
Total revenue ......... 129,369 -- 129,369 -- 3,542 --
--------- ----------- --------- -------- -------- ----------
Costs and expenses:
Cost of service and
operations ............ 86,202 -- 86,202 -- 3,133 --
Cost of products
sold .................. 18,559 -- 18,559 -- 608 --
Selling and
marketing ............. 43,276 -- 43,276 -- 2,229 --
General and
administrative
expenses .............. 7,257 -- 7,257 -- 376 44 (3a)
Depreciation and
amortization .......... 37,171 -- 37,171 -- 749 3,559 (3b)
--------- ----------- --------- -------- -------- -----------
Total costs and
expenses .............. 192,465 -- 192,465 -- 7,095 3,603
--------- ----------- --------- -------- -------- -----------
Loss from
operations ............ (63,096) -- (63,096) -- (3,553) (3,603)
Interest and other
income ................. 8,188 -- 8,188 -- 1 --
Interest expense ........ (34,663) (7,585)(1c) (42,248) (2,642) (755) (45)(3c)
--------- ----------- --------- -------- -------- -----------
Loss before income
tax benefit and
extraordinary item (89,571) (7,585) (97,156) (2,642) (4,307) (3,648)
Income tax benefit ...... 31,306 2,882 (1d) 34,188 1,004 -- 2,433 (3b)
--------- ----------- --------- -------- -------- -----------
Loss before
extraordinary item $ (58,265) $ (4,703) $ (62,968) $ (1,638) $ (4,307) $ (1,215)
========= =========== ========= ======== ======== ===========
WOW MERGER SOUTHWEST MERGER
------------------------------- -------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
WOW ADJUSTMENTS SOUTHWEST ADJUSTMENTS TOTAL
------------ ------------------ ------------ ------------------ -------------
Revenues: (NOTE 4) (NOTE 5)
Service revenues ....... $ 1,193 $ -- $ 12,955 $ -- $ 136,821
Product sales .......... 180 -- 1,053 -- 11,471
-------- ---------- -------- ---------- ----------
Total revenue ......... 1,373 -- 14,008 -- 148,292
-------- ---------- -------- ---------- ----------
Costs and expenses:
Cost of service and
operations ............ 1,139 -- 8,950 -- 99,424
Cost of products
sold .................. 398 -- 3,274 -- 22,839
Selling and
marketing ............. 1,308 -- 2,753 -- 49,566
General and
administrative
expenses .............. 525 -- 804 -- 9,006
Depreciation and
amortization .......... 490 1,599 (4a) 2,169 4,980 (5a) 50,717
-------- ----------- -------- ----------- ----------
Total costs and
expenses .............. 3,860 1,599 17,950 4,980 231,552
-------- ----------- -------- ----------- ----------
Loss from
operations ............ (2,487) (1,599) (3,942) (4,980) (83,260)
Interest and other
income ................. 12 -- 4 -- 8,205
Interest expense ........ (325) (24)(4b) (2,302) (137)(5b) (48,478)
-------- ----------- -------- ----------- ----------
Loss before income
tax benefit and
extraordinary item (2,800) (1,623) (6,240) (5,117) (123,533)
Income tax benefit ...... -- 1,411 (4a) -- 3,972 (5a) 43,008
-------- ----------- -------- ----------- ----------
Loss before
extraordinary item $ (2,800) $ (212) $ (6,240) $ (1,145) $ (80,525)
======== =========== ======== =========== ==========
90
ALAMOSA HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
ROBERTS MERGER
---------------------------------
ISSUANCE OF ALAMOSA HISTORICAL
HISTORICAL 13 5/8% PRO FORMA ROBERTS PRO FORMA
ALAMOSA SENIOR NOTES SUBTOTAL ADJUSTMENTS WIRELESS ADJUSTMENTS
------------ -------------------- ------------ ------------- ------------- -------------------
Revenues: (NOTE 1) (NOTE 2) (NOTE 3)
Service revenues ........ $ 73,500 $ -- $ 73,500 $ -- $ 13,413 $ --
Product sales ........... 9,200 -- 9,200 -- 1,316 --
--------- ------------ --------- --------- --------- -----------
Total revenue ......... 82,700 -- 82,700 -- 14,729 --
--------- ------------ --------- --------- --------- -----------
Costs and expenses:
Cost of service and
operations ............ 55,430 -- 55,430 -- 10,005 --
Cost of products
sold .................. 20,524 -- 20,524 -- 2,494 --
Selling and
marketing ............. 46,513 -- 46,513 -- 6,976 --
General and
administrative
expenses .............. 14,352 -- 14,352 -- 2,507 350 (3a)
Terminated merger
and acquisition
costs ................. 2,247 -- 2,247 -- -- --
Depreciation and
amortization .......... 12,530 -- 12,530 -- 5,672 27,047 (3b)
--------- ------------ --------- --------- --------- -----------
Total costs and
expenses .............. 151,596 -- 151,596 -- 27,654 27,397
--------- ------------ --------- --------- --------- -----------
Loss from
operations ............ (68,896) -- (68,896) -- (12,925) (27,397)
Interest and other
income ................. 14,483 -- 14,483 -- 98 --
Interest expense ........ (25,775) (15,169)(1c) (40,944) (32,150) (3,279) (2,942)(3c)
--------- ------------ --------- --------- --------- -----------
Loss before income
tax benefit and
extraordinary item..... (80,188) (15,169) (95,357) (32,150) (16,106) (30,339)
Income tax benefit ...... -- 36,236 (1d) 36,236 12,217 -- 14,061 (3b)
--------- ------------ --------- --------- --------- -----------
Loss before
extraordinary item..... $ (80,188) $ 21,067 $ (59,121) $ (19,933) $ (16,106) $ (16,278)
========= ============ ========= ========= ========= ===========
WOW MERGER SOUTHWEST MERGER
-------------------------------- --------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
WOW ADJUSTMENTS SOUTHWEST ADJUSTMENTS TOTAL
------------ ------------------- ------------ ------------------- -------------
Revenues: (NOTE 4) (NOTE 5)
Service revenues ........ $ 1,823 $ -- $ 27,129 $ -- $ 115,865
Product sales ........... 683 -- 2,732 -- 13,931
--------- ----------- --------- ----------- ----------
Total revenue ......... 2,506 -- 29,861 -- 129,796
--------- ----------- --------- ----------- ----------
Costs and expenses:
Cost of service and
operations ............ 4,374 -- 10,297 -- 80,106
Cost of products
sold .................. 1,750 -- 8,819 -- 33,587
Selling and
marketing ............. 4,106 -- 17,085 -- 74,680
General and
administrative
expenses .............. 4,377 -- 6,507 -- 28,093
Terminated merger
and acquisition
costs ................. -- -- -- -- 2,247
Depreciation and
amortization .......... 1,433 12,133 (4a) 7,501 19,922 (5a) 86,238
--------- ----------- --------- ----------- ----------
Total costs and
expenses .............. 16,040 12,133 50,209 19,922 304,951
--------- ----------- --------- ----------- ----------
Loss from
operations ............ (13,534) (12,133) (20,348) (19,922) (175,155)
Interest and other
income ................. 156 -- 98 -- 14,835
Interest expense ........ (978) (878)(4b) (7,060) (4,948)(5b) (93,179)
--------- ----------- --------- ----------- ----------
Loss before income
tax benefit and
extraordinary item..... (14,356) (13,011) (27,310) (24,870) (253,499)
Income tax benefit ...... -- 8,772 (4a) -- 18,454 (5a) 89,740
--------- ----------- --------- ----------- ----------
Loss before
extraordinary item..... $ (14,356) $ (4,239) $ (27,310) $ (6,416) $ (163,759)
========= =========== ========= =========== ==========
91
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- ADJUSTMENTS FOR ISSUANCE OF 13 5/8% SENIOR NOTES
Our historical financial statements have been adjusted to illustrate the
effects of the August 15, 2001 issuance of the 13 5/8% senior notes in the
amount of $150.0 million.
(1a) Approximately $65.8 million of the net proceeds were used to pay down
the senior secured credit facility borrowings outstanding as of June
30, 2001.
(1b) Debt issuance costs, comprised of a 3% commitment fee and
approximately $4.95 million of other expenses, will be amortized on a
straight-line basis over the ten-year life of the 13 5/8% senior
notes.
(1c) The pro forma adjustment reflects an increase in our interest expense
of $10,692 for the six months ended June 30, 2001 and $21,383 for the
year ended December 31, 2001 offset by interest savings related to the
pay down on the senior secured credit facility of $3,107 for the six
months ended June 30, 2001 and $6,214 for the year ended December 31,
2000.
(1d) The pro forma tax expense adjustment to our historical statement of
operations for the six months ended June 30, 2001 and for the year
ended December 31, 2000, represents the expected income tax benefit
which will be generated based on the issuance of the 13 5/8% senior
notes.
NOTE 2 -- ALAMOSA PRO FORMA ADJUSTMENTS
Our historical statement of operations has been adjusted to illustrate the
effect of the interest expense related to the January 31, 2001 issuance of the
12 1/2% senior notes in the amount of $250.0 million. Additionally, the pro
forma tax expense adjustment to our historical statement of operations for the
six months ended June 30, 2001 and for the year ended December 31, 2000,
represents the expected income tax benefit which will be generated based on the
issuance of the 12 1/2% senior notes.
NOTE 3 -- THE ROBERTS MERGER
Pursuant to the Roberts reorganization agreement, the members of Roberts
formed Roberts Wireless Holdings, L.L.C., which held all of the outstanding
membership interest of Roberts. On February 14, 2001, Roberts Holdings merged
with and into us. Each unit of membership interest of Roberts Holdings was
converted into the right to receive (i) 675 shares of our common stock, and
(ii) up to $200.00 in cash, without any interest thereon. The aggregate
consideration paid in the Roberts merger was 13.5 million shares of our common
stock and $4.0 million in cash. We also assumed the net debt of Roberts, which
amounted to approximately $57.0 million.
The unaudited pro forma condensed combined statements of operations has
been adjusted for the Roberts merger, which was accounted for using the
purchase method of accounting effective February 14, 2001.
The following pro forma adjustments represent the adjustments necessary to
reflect the Roberts merger in the unaudited pro forma condensed combined
statement of operations for the six months ended June 30, 2001 and the year
ended December 31, 2000:
(3a) Represents the estimated cost associated with Michael Roberts', Steven
Roberts' and Kay Gabbert's five-year consulting agreements. The
aggregate annual cost of these consulting agreements totals $350 and
has been recorded as compensation expense.
92
(3b) The pro forma adjustment to depreciation and amortization expense
reflects the incremental amortization expense related to the
intangible assets as if the Roberts merger occurred on January 1,
2000. The intangible assets related to the Sprint PCS affiliation and
operating agreements and goodwill are being amortized over 18 years
and the intangible asset related to the subscribers is being amortized
over 3 years. These amounts total $3,559 for the six months ended June
30, 2001 and $27,047 for the year ended December 31, 2000. These
amounts are exclusive of similar amortization expense already recorded
by Roberts. A deferred tax benefit has been recorded for the Roberts
net operating loss ("NOL") based on the expectation of its
realizability.
(3c) The pro forma adjustment reflects an increase in interest expense
related to the incremental debt to fund the cash consideration of the
Roberts merger, the merger related costs and the debt assumed and paid
off by us at the time of close under the terms of the senior secured
credit facility. This amount totals $45 for the six months ended June
30, 2001 and $2,942 for the year ended December 31, 2000. A 1/8%
variance in interest rates would increase or decrease interest expense
by $14 for the six months ended June 30, 2001 and $87 for the year
ended December 31, 2000.
NOTE 4 -- THE WOW MERGER
Pursuant to the WOW reorganization agreement, the members of WOW formed
WOW Holdings, LLC, which held all of the outstanding membership interest of
WOW. On February 14, 2001, WOW Holdings merged with and into us. Each unit of
membership interest of WOW Holdings was converted into the right to receive (i)
0.19171 shares of our common stock, and (ii) $0.396 in cash, without any
interest thereon. The aggregate consideration paid in the WOW merger was
approximately 6.05 million shares of our common stock and $12.5 million in
cash. We also assumed the net debt of WOW which amounted to approximately $31.0
million.
The unaudited pro forma condensed statement of operations has been
adjusted for the WOW merger, which was accounted for using the purchase method
of accounting effective February 14, 2001.
The pro forma adjustments represent the purchase accounting adjustments
necessary to reflect the WOW merger in the unaudited pro forma condensed
combined statement of operations for the six months ended June 30, 2001 and the
year ended December 31, 2000:
(4a) The pro forma adjustment to depreciation and amortization expense
reflects the incremental amortization expense related to the
intangible assets as if the WOW merger occurred on January 1, 2000.
The intangible assets related to the Sprint PCS affiliation and
operating agreements and goodwill are being amortized over 18 years
and the intangible asset related to the subscribers is being amortized
over 3 years. This amount totals $1,599 for the six months ended June
30, 2001 and $12,133 for the year ended December 31, 2000. A deferred
tax benefit has been recorded for the WOW NOL based on the expectation
of its realizability.
(4b) The pro forma adjustment reflects an increase in interest expense
related to the incremental debt to fund the cash consideration of the
WOW merger, the merger related costs and the debt assumed and paid off
by us at the time of close under the terms of the senior secured
credit facility. This amount totals $24 for the six months ended June
30, 2001 and $878 for the year ended December 31, 2000. A 1/8%
variance in interest rates would increase or decrease interest expense
by $7 for the six months ended June 30, 2001 and $25 for the year
ended December 31, 2000.
NOTE 5 -- THE SOUTHWEST MERGER
On March 30, 2001 Southwest merged with and into Forty Acquisition, Inc.,
our wholly-owned subsidiary. The aggregate consideration paid in the Southwest
merger was approximately 11.1 million shares of our common stock and $5.0
million in cash. We also assumed the net debt of Southwest which amounted to
approximately $81.0 million as of March 30, 2001.
93
The unaudited pro forma condensed combined statement of operations has
been adjusted for the Southwest merger, which was accounted for using the
purchase method of accounting effective March 30, 2001.
The pro forma adjustments represent the purchase accounting adjustments
necessary to reflect the Southwest merger in the unaudited pro forma condensed
combined statement of operations for the six months ended June 30, 2001 and the
year ended December 31, 2000:
(5a) The pro forma adjustment to depreciation and amortization expense
reflects the incremental amortization expense related to the
intangible assets as if the Southwest merger occurred on January 1,
2000. The intangible assets related to the Sprint PCS affiliation and
operating agreements and goodwill are being amortized over 18 years
and the intangible asset related to the subscribers is being amortized
over 3 years. This amount totals $4,980 for the six months ended June
30, 2001 and $19,922 for the year ended December 31, 2000. A deferred
tax benefit has been recorded for the Southwest NOL based on the
expectation of its realizability.
(5b) The pro forma adjustment reflects an increase in interest expense
related to the incremental debt to fund the cash consideration of the
Southwest merger, the merger related costs and the debt assumed and
paid off by us at the time of close under the terms of the senior
secured credit facility. This amount totals $137 for the six months
ended June 30, 2001 and $4,948 for the year ended December 31, 2000. A
1/8% variance in interest rates would increase or decrease interest
expense by $42 for the six months ended June 30, 2001 and $146 for the
year ended December 31, 2000.
94
LEGAL MATTERS
Certain legal matters in connection with the sale of the securities
offered hereby will be passed upon for Alamosa Holdings, Inc. by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements of Alamosa as of December 31,
2000 and 1999 and for each of the two years in the period ended December 31,
2000 and for the period from July 16, 1998 to December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Roberts as of December 31,
1999 and 2000 and for each of the two years in the period ended December 31,
2000 included in this prospectus have been so included in reliance on the report
of Melman, Alton & Co., independent accountants, given on the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of WOW as of December 31, 1999
and 2000 and for each of the two years in the period ended December 31, 2000
included in this prospectus have been so included in reliance on the report of
Aldrich, Kilbride & Tatone, LLP, independent accountants, given on the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of SWPCS Holdings, L.L.C. as of
December 31, 2000 and for the year then ended included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
95
INDEX TO FINANCIAL STATEMENTS
ALAMOSA HOLDINGS, INC.
Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2001 (unaudited) and
December 31, 2000 ..................................................................... F-2
Consolidated Statement of Operations for the three months and six months ended
June 30, 2001 and 2000 (unaudited) .................................................... F-3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000 (unaudited) .................................................... F-4
Notes to the Consolidated Financial Statements .......................................... F-5
Consolidated Financial Statements
Report of Independent Accountants ....................................................... F-11
Consolidated Balance Sheets ............................................................. F-12
Consolidated Statements of Operations for the years ended December 31, 2000 and
December 31, 1999 and for the period July 16, 1998 (inception) through
December 31, 1998 ..................................................................... F-13
Consolidated Statements of Stockholders' Equity for the period July 16, 1998 (inception)
through the year ended December 31, 2000 .............................................. F-14
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and
December 31, 1999 and for the period July 16, 1998 (inception) through
December 31, 1998 ..................................................................... F-15
Notes to Consolidated Financial Statements .............................................. F-16
Report of Independent Accountants on Financial Statement Schedule ........................ F-37
Schedule II .............................................................................. F-38
ROBERTS WIRELESS COMMUNICATIONS, L.L.C.
Independent Auditor's Report ............................................................. F-39
Consolidated Balance Sheets .............................................................. F-40
Consolidated Statements of Operations for the years ended December 31, 2000 and
December 31, 1999 ....................................................................... F-41
Consolidated Statements of Members' Equity (Deficit) for the years ended December 31,
2000 and December 31, 1999 .............................................................. F-42
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and
December 31, 1999 ....................................................................... F-43
Consolidated Notes to Financial Statements ............................................... F-44
WASHINGTON OREGON WIRELESS, LLC
Independent Auditor's Report ............................................................. F-49
Balance Sheets ........................................................................... F-50
Statements of Income for the years ended December 31, 2000 and December 31, 1999 ......... F-51
Statements of Members' Equity (Deficit) for the years ended December 31, 2000 and
December 31, 1999 ....................................................................... F-52
Statements of Cash Flows for the years ended December 31, 2000 and December 31, 1999 ..... F-53
Notes to Financial Statements ............................................................ F-55
SWPCS HOLDINGS, L.L.C.
Report of Independent Accountants ........................................................ F-61
Consolidated Balance Sheet ............................................................... F-62
Consolidated Statement of Operations for the year ended December 31, 2000 ................ F-63
Consolidated Statement of Mandatorily Redeemable Member's Deficit and Members' Deficit
for the year ended December 31, 2000 .................................................... F-64
Consolidated Statement of Cash Flows for the year ended December 31, 2000 ................ F-65
Consolidated Notes to Financial Statement ................................................ F-66
F-1
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
JUNE 30, 2001 DECEMBER 31, 2000
--------------- ------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 122,092 $ 141,768
Short-term investments .................................................. -- 1,600
Accounts receivable, net of allowance for doubtful accounts of
$3,801 and $1,503, respectively........................................ 39,906 14,747
Inventory ............................................................... 4,425 2,753
Prepaid expenses and other assets ....................................... 4,539 3,027
Deferred tax asset ...................................................... 1,762 --
Interest receivable ..................................................... 1,169 1,046
---------- ----------
Total current assets .................................................. 173,893 164,941
Property and equipment, net .............................................. 410,432 228,983
Notes receivable ......................................................... -- 46,865
Debt issuance costs, net ................................................. 27,378 13,108
Restricted cash .......................................................... 70,727 --
Goodwill and intangible assets, net ...................................... 856,141 --
Other noncurrent assets .................................................. 4,117 4,501
---------- ----------
Total assets .......................................................... $1,542,688 $ 458,398
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................... $ 78,450 $ 61,167
Accrued interest payable ................................................ 15,001 219
Current installments of capital leases .................................. 138 36
---------- ----------
Total current liabilities ............................................. 93,589 61,422
12 7/8% senior discount notes ............................................ 222,807 209,280
12 1/2% senior notes ..................................................... 250,000 --
Senior secured credit facility ........................................... 203,000 --
EDC credit facility ...................................................... -- 54,524
Deferred tax liability ................................................... 153,294 --
Capital lease obligations, noncurrent .................................... 1,506 1,039
Other noncurrent liabilities ............................................. 3,040 735
---------- ----------
Total liabilities ..................................................... 927,236 327,000
========== ==========
Commitments and contingencies ............................................ -- --
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,
92,010,296 and 61,359,856 issued and outstanding, respectively ........ 920 614
Additional paid-in capital .............................................. 791,012 245,845
Accumulated deficit ..................................................... (175,716) (113,948)
Accumulated other comprehensive income, net of tax ...................... 166 --
Unearned compensation ................................................... (930) (1,113)
---------- ----------
Total stockholders' equity .............................................. 615,452 131,398
---------- ----------
Total liabilities and stockholders' equity .............................. $1,542,688 $ 458,398
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
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,
----------------------------- -----------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenues:
Subscriber revenues ..................................... $ 53,305 $ 11,734 $ 83,813 $ 19,514
Roaming and travel revenues ............................. 24,198 3,630 35,609 6,147
----------- ----------- ----------- -----------
Total service revenues ................................ 77,503 15,364 119,422 25,661
Product sales ........................................... 6,032 2,189 9,947 3,772
----------- ----------- ----------- -----------
Total revenue ......................................... 83,535 17,553 129,369 29,433
----------- ----------- ----------- -----------
Costs and expenses:
Cost of service and operations ..........................
(including non-cash compensation of $0 and $159
for the three months ended June 30, 2001 and
2000, respectively, and $0 and $615 for the six
months ended June 30, 2001 and 2000,
respectively) ......................................... 53,933 11,208 86,202 19,066
Cost of product sold ..................................... 10,526 3,705 18,559 7,032
Selling and marketing .................................... 24,794 8,058 43,276 14,709
General and administrative expenses (including
non-cash compensation of $0 and $762 for the
three months ended June 30, 2001 and 2000,
respectively, and $183 and $4,279 for the six
months ended June 30, 2001 and 2000,
respectively) ........................................... 3,351 2,835 7,257 7,736
Depreciation and amortization ............................ 25,235 2,491 37,171 4,748
----------- ----------- ----------- -----------
Total costs and expenses .............................. 117,839 28,297 192,465 53,291
----------- ----------- ----------- -----------
Loss from operations .................................. (34,304) (10,744) (63,096) (23,858)
Interest and other income ................................ 2,467 4,408 8,188 6,722
Interest expense ......................................... (19,947) (6,572) (34,663) (11,352)
----------- ----------- ----------- -----------
Net loss before income tax benefit and
extraordinary item .................................... (51,784) (12,908) (89,571) (28,488)
Income tax benefit ...................................... 17,448 -- 31,306 --
----------- ----------- ----------- -----------
Net loss before extraordinary item ...................... (34,336) (12,908) (58,265) (28,488)
Loss on debt extinguishment, net of tax benefit
of $1,969.............................................. -- -- (3,503) --
----------- ----------- ----------- -----------
Net loss .............................................. $ (34,336) $ (12,908) $ (61,768) $ (28,488)
----------- ----------- ----------- -----------
Basic and diluted net loss per common share before
extraordinary item ...................................... $ (0.37) $ (0.21) $ (0.71) $ (0.48)
----------- ----------- ----------- -----------
Basic and diluted net loss per common share on debt
extinguishment .......................................... $ -- $ -- $ (0.04) $ --
----------- ----------- ----------- -----------
Basic and diluted net loss per common share .............. $ (0.37) $ (0.21) $ (0.75) $ (0.48)
=========== =========== =========== ===========
Basic and diluted weighted average common shares ......... 92,009,977 61,354,606 81,860,743 59,026,759
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net loss ....................................................... $ (61,768) $ (28,488)
Adjustments to reconcile net loss to net cash used in
operating activities:
Income tax benefit ............................................ (33,275) --
Non-cash compensation expense ................................. 183 4,894
Depreciation and amortization ................................. 17,971 4,748
Amortization of goodwill ...................................... 19,200 --
Bad debt expense .............................................. 713 514
Amortization of debt issuance costs ........................... 1,163 653
Deferred interest expense ..................................... 13,527 10,346
Loss on debt extinguishment ................................... 5,472 --
Loss from disposition of interest rate cap agreements ......... -- 266
Loss from disposition of assets ............................... 39 54
(Increase) decrease in asset accounts, net of effects from
acquisitions:
Accounts receivable ......................................... (15,995) (158)
Inventory ................................................... 1,652 3,626
Prepaid expenses and other assets ........................... (131) (116)
Increase (decrease) in liability accounts, net of effects from
acquisitions:
Accounts payable and accrued expenses ....................... (9,165) 891
---------- ---------
Net cash used in operating activities ....................... (60,414) (2,770)
---------- ---------
Cash flows from investing activities:
Additions to property and equipment ........................... (72,852) (44,049)
Repayment of notes receivable ................................. 11,860 100
Cash paid for business acquisitions ........................... (37,617) --
Sale (purchase) of short term investments ..................... 1,600 (21,841)
---------- ---------
Net cash used in investing activities ....................... (97,009) (65,790)
---------- ---------
Cash flows from financing activities:
Equity offering proceeds ...................................... -- 208,589
Equity offering costs ......................................... -- (13,599)
Issuance of 12 7/8% senior discount notes ..................... -- 187,096
Issuance of 12 1/2% senior notes .............................. 242,500 --
Issuance of senior secured credit facility .................... 203,000 --
Repayment of debt assumed through acquisitions ................ (169,060) --
Debt issuance costs ........................................... (13,404) (10,763)
Stock options exercised ....................................... 4 619
Proceeds from issuance of long-term debt ...................... -- 7,758
Repayments of long-term debt .................................. (54,524) (76,239)
Change in restricted cash ..................................... (70,727) 518
Payments on capital leases .................................... (42) (10)
Interest rate cap premiums .................................... -- (27)
---------- ---------
Net cash provided by financing activities ................... 137,747 303,942
---------- ---------
Net increase (decrease) in cash and cash equivalents ........... (19,676) 235,382
Cash and cash equivalents at beginning of period ............... 141,768 5,656
---------- ---------
Cash and cash equivalents at end of period ..................... $ 122,092 $ 241,038
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of June 30, 2001, the
unaudited consolidated statements of operations for the three and six months
ended June 30, 2001 and 2000, the unaudited consolidated statements of cash
flows for the six months ended June 30, 2001 and 2000, and related footnotes,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles. The financial information presented
should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2000. 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 six months ended June 30, 2001 are
not necessarily indicative of results that may be expected for the year ending
December 31, 2001.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa Holdings, Inc. ("Alamosa Holdings") was formed in July 2000.
Alamosa Holdings is a holding company and through its subsidiaries provides
wireless personal communications services, commonly referred to as PCS, in the
Southwestern, Northwestern and Midwestern United States. Alamosa (Delaware),
Inc., 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), Inc. ("Alamosa (Delaware)") completed its initial public offering.
Immediately prior to the initial public offering, shares of Alamosa (Delaware)
were exchanged for Alamosa PCS LLC's ("Alamosa") membership interests, and
Alamosa became wholly owned by Alamosa (Delaware). These financial statements
are presented as if the reorganization had occurred as of the beginning of the
periods presented. Alamosa Holdings and its subsidiaries are collectively
referred to in these financial statements as the "Company".
On December 14, 2000, Alamosa (Delaware) formed a new holding company
pursuant to Section 251(g) of the Delaware General Corporation Law. In that
transaction, each share of Alamosa (Delaware) was converted into one share of
the new holding company, and the former public company, which was renamed
"Alamosa (Delaware), Inc." became a wholly owned subsidiary of the new holding
company, which was renamed "Alamosa PCS Holdings, Inc."
On February 14, 2001, Alamosa Holdings became the new public holding
company of Alamosa PCS Holdings, Inc. ("Alamosa PCS Holdings") and its
subsidiaries pursuant to a reorganization transaction in which a wholly owned
subsidiary of Alamosa Holdings was merged with and into Alamosa PCS Holdings.
As a result of this reorganization, Alamosa PCS Holdings became a wholly owned
subsidiary of Alamosa Holdings, and each share of Alamosa PCS Holdings common
stock was converted into one share of Alamosa Holdings common stock. Alamosa
Holdings' common stock is quoted on The Nasdaq National Market under the same
symbol previously used by Alamosa PCS Holdings, "APCS." On that day the Company
also completed its acquisitions of two Sprint PCS affiliates. The Company
acquired Roberts Wireless Communications, L.L.C. ("Roberts") and Washington
Oregon Wireless, LLC ("WOW"). On March 30, 2001, the Company acquired Southwest
PCS Holdings, Inc. ("Southwest").
3. NOTES RECEIVABLE
ROBERTS --On July 31, 2000, Alamosa Holdings' subsidiary, Alamosa
Operations, Inc. ("Operations") entered into a loan agreement with Roberts
whereby Operations agreed to lend up to $26.6 million to be used only for the
purpose of funding Roberts' working capital needs from July 31, 2000 through
the completion of the Roberts merger, as described in Note 4. Also on July 31,
2000, Operations entered into a loan agreement with the owners of Roberts for
$15 million, which was fully repaid at February 14, 2001, when the merger
closed.
F-5
ALAMOSA HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
WOW--Also, on July 31, 2000, WOW and Operations entered into a loan
agreement whereby Operations agreed to lend up to $11 million to WOW to be used
only for the purposes of (a) satisfying certain capital contribution
requirements under WOW's operating agreement, and (b) funding WOW's working
capital needs from July 31, 2000 through the completion of the WOW merger.
4. MERGERS WITH ROBERTS WIRELESS COMMUNICATIONS, L.L.C., WASHINGTON
OREGON WIRELESS, LLC, AND SOUTHWEST PCS HOLDINGS, INC.
As of the end of the first quarter of 2001, Alamosa Holdings completed the
acquisitions of three Sprint PCS network partners. On February 14, 2001,
Alamosa Holdings completed its acquisition of Roberts and WOW. In connection
with the Roberts and WOW acquisitions, Alamosa Holdings entered into a new
senior secured credit facility for up to $280 million. On March 30, 2001,
Alamosa Holdings completed its acquisition of Southwest. In connection with the
Southwest acquisition, Alamosa Holdings increased the senior secured credit
facility from $280 million to $333 million. Each of these transactions was
accounted for under the purchase method of accounting.
The merger consideration in the Roberts acquisition consisted of 13.5
million common shares of Alamosa Holdings and approximately $4.0 million in
cash. Alamosa Holdings also assumed the net debt of Roberts in the transaction,
which amounted to approximately $57 million as of February 14, 2001.
The merger consideration in the WOW acquisition consisted of 6.05 million
common shares of Alamosa Holdings and approximately $12.5 million in cash.
Alamosa Holdings also assumed the net debt of WOW in the transaction, which
amounted to approximately $31 million as of February 14, 2001.
The merger consideration in the Southwest acquisition consisted of 11.1
million common shares of Alamosa Holdings and approximately $5.0 million in
cash. Alamosa Holdings also assumed the net debt of Southwest in the
transaction, which amounted to approximately $81 million as of March 30, 2001.
The Company has obtained preliminary independent valuations of Roberts and
WOW to allocate the purchase price and is in the process of obtaining an
independent valuation of Southwest. The results of the preliminary valuations
are as follows (in thousands):
Current assets ................................................... $ 15,357
Property, plant and equipment .................................... 129,154
Goodwill ......................................................... 127,440
Sprint affiliation and other agreements .......................... 525,488
Subscriber base acquired ......................................... 37,700
--------
Net book value of assets acquired, including intangibles ......... $835,139
========
As a result of the acquisitions, the Company recorded goodwill and
intangibles of $875.3 million. This amount includes a deferred tax liability of
$184.7 million which was recorded for the differences between the estimated
fair value and tax bases of the assets acquired and liabilities assumed.
Additionally, this amount includes $37.7 million which is attributable to the
subscribers acquired with the mergers. The subscriber base will be amortized
over 3 years, which approximates the average life of the Company's customer and
the remaining goodwill and other intangibles will be amortized over 18 years,
which approximates the remaining life of the initial term of the assumed Sprint
PCS contracts.
The unaudited pro forma condensed consolidated statements of income for
the three and six months ended June 30, 2001 and 2000 set forth below, present
the results of operations as if the acquisitions had occurred at the beginning
of each period and are not necessarily indicative of future results or actual
results that would have been achieved had these acquisitions occurred as of the
beginning of the period.
F-6
ALAMOSA HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------
2001 2000
-------------- -------------
(IN THOUSANDS)
Total revenues ............................................... $ 148,292 $ 43,767
---------- ---------
Net loss before income tax benefit and extraordinary item..... $ (113,306) $ (80,830)
Income tax benefit ........................................... 39,123 20,643
---------- ---------
Net loss before extraordinary item ........................... (74,183) (60,187)
Loss on debt extinguishment, net of tax benefit of $1,969..... (3,503) --
---------- ---------
Net loss ..................................................... $ (77,686) $ (60,187)
========== =========
Basic and diluted net loss per share before extraordinary
item ....................................................... $ (0.81) $ (0.67)
---------- ---------
Basic and diluted net loss per share ......................... $ (0.84) $ (0.67)
---------- ---------
5. ACCUMULATED DEPRECIATION AND AMORTIZATION
Property and equipment are stated net of accumulated depreciation of $33.4
million and $15.6 million at June 30, 2001 and December 31, 2000, respectively.
Additionally, goodwill and other intangibles are stated net of accumulated
amortization of $19.2 million and $0 at June 30, 2001 and December 31, 2000,
respectively
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, 2001 DECEMBER 31, 2000
--------------- ------------------
12 7/8% senior discount notes ......................... $222,807 $209,280
12 1/2% senior notes .................................. 250,000 --
Senior secured credit facility ........................ 203,000 --
EDC credit facility ................................... -- 54,524
-------- --------
Total debt .......................................... 675,807 263,804
Less current maturities ............................... -- --
-------- --------
Long-term debt, excluding current maturities .......... $675,807 $263,804
======== ========
12 7/8% SENIOR DISCOUNT NOTES--On December 23, 1999, Alamosa (Delaware)
filed a registration statement with the Securities and Exchange Commission for
the issuance of $350 million face amount of senior discount notes (the "12 7/8%
Senior Discount Notes Offering"). The 12 7/8% Senior Discount Notes Offering was
completed on February 8, 2000 and generated net proceeds of approximately $181
million after underwriters' commissions and expenses of approximate $6.1
million. The 12 7/8% Senior Discount Notes mature in ten years (February 15,
2010) and carry a coupon rate of 12 7/8%, and provides for interest deferral for
the first five years. The 12 7/8% Senior Discount Notes will accrete to their
$350 million face amount by February 8, 2005, after which, interest will be
paid in cash semiannually. The proceeds of the 12 7/8% Senior Discount Notes
Offering were used to prepay $75 million of the Nortel credit facility, to pay
costs to build out the system, to fund operating working capital needs and for
other general corporate purposes
12 1/2% SENIOR NOTES--On January 31, 2001, Alamosa (Delaware) consummated
the offering (the "12 1/2% Senior Notes Offering") of $250 million aggregate
principal amount of senior notes (the "12 1/2% Senior Notes"). The 12 1/2%
Senior Notes mature in ten years (February 1, 2011), carry a coupon rate of
F-7
ALAMOSA HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12 1/2%, payable semiannually on February 1 and August 1, beginning on August 1,
2001. The net proceeds from the sale of the 12 1/2% Senior Notes were
approximately $241 million, after deducting the discounts and commissions to
the initial purchasers and estimated offering expenses.
Approximately $59 million of the proceeds of the 12 1/2% 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 will be 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.
SENIOR SECURED CREDIT FACILITY--On February 14, 2001, Alamosa Holdings,
Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower; entered into a $280
million senior secured credit facility (the "Senior Secured Credit Facility")
with Citicorp USA, as administrative agent and collateral agent; Toronto
Dominion (Texas), Inc., as syndication agent; EDC as co-documentation agent;
First Union National Bank, as documentation agent; and a syndicate of banking
and financial institutions. On March 30, 2001, this credit facility was amended
to increase the facility to $333 million in relation to the acquisition of
Southwest. At that time, all covenants were amended to reflect this increase
and the inclusion of Southwest.
As of June 30, 2001, Alamosa Holdings, LLC borrowed $203 million under the
new term loan facility while an additional $130 million in term debt will be
available for multiple drawings in amounts to be agreed for a period of 12
months thereafter.
DEBT COVENANT WAIVER--As of March 31, 2001, we did not meet the maximum
negative EBITDA covenant under the Senior Secured Credit Facility. During the
quarter ended March 31, 2001, we reported an EBITDA loss of $16.7 million which
exceeded the maximum negative EBITDA covenant by $7.0 million.
On May 8, 2001, we obtained a waiver of any default or event of default
arising from the failure to comply with the maximum negative EBITDA covenant
for the quarter ended March 31, 2001 from the lending institutions under the
Senior Secured Credit Facility.
The Company met its negative EBITDA covenant for the quarter ended June
30, 2001 and we believe that the EBITDA covenants will be met for the next
twelve months. Our EBITDA is directly impacted by the up front selling and
marketing expenses we incur in order to grow our subscriber base. As such,
greater than expected subscriber growth may impact our EBITDA negatively.
See Note 12, Subsequent Events, for additional information on the
restructuring of the Senior Secured Credit Facility and the resetting of the
related financial covenants.
NORTEL/EDC CREDIT FACILITY--On February 14, 2001, the outstanding balance
of $54,524 was paid in full plus accrued interest in the amount of $884 with
proceeds from the Senior Secured Credit Facility. As a result, $5,472 of
unamortized issuance costs were written off and classified as an extraordinary
item. The Company was refunded $1,377 of these costs as a result of the early
extinguishment.
7. INCOME TAXES
The income tax benefit represents the anticipated recognition of the
Company's deductible net operating loss carry forwards. This benefit is being
recognized based on an assessment of the combined expected future taxable
income of the Company and expected reversals of the temporary differences from
the Roberts, WOW and Southwest mergers.
8. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivatives and Hedging Activities" on January 1,
2001. The statement requires the Company to
F-8
ALAMOSA HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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. During
the quarter ended June 30, 2001, the Company recorded approximately $388 in
"other noncurrent assets" and $128 in "other noncurrent liabilities"
representing the change in the fair market value of the interest rate hedge
instruments that expire in 2004. In addition, the Company recognized $166 net
of tax effect, in other comprehensive income, which appears as a separate
component of Stockholder's Equity as "Accumulated other comprehensive income",
as illustrated below:
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
------------- -------------
Net loss ............................ $ (61,768) $ (28,488)
Change in fair value of derivatives
(net of tax effect of $93)......... 166 --
--------- ---------
Comprehensive loss .................. $ (61,602) $ (28,488)
========= =========
9. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOW
Accounts payable at June 30, 2001 and 2000 include $26,269 and $27,356,
respectively, of property and equipment additions. Additions to property and
equipment of $72,852 in the consolidated statements of cash flows for the six
months ended June 30, 2001 include payments of accounts payable outstanding at
December 31, 2000.
10. LONG-TERM INCENTIVE PLAN
A vote of shareholders on February 14, 2001 increased the number of shares
of the Company's common stock reserved for issuance under the long-term
incentive plan by 6,000,000 shares, from 7,000,000 shares to 13,000,000 shares.
11. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS
No. 141 will apply to all business combinations initiated after June 30, 2001,
and will also apply to all business combinations accounted for by the purchase
method that are completed after June 30, 2001. SFAS No. 142 should be applied
in fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. Certain
provisions of SFAS No. 142 will be effective for business combinations
completed after June 30, 2001. The Company is in the process of evaluating the
effect of the adoption of these pronouncements.
12. SUBSEQUENT EVENTS
The Senior Secured Credit Facility was amended on July 19, 2001 to extend
the period prior to which Alamosa Holdings, LLC can borrow $50.0 million of
term loans from August 14, 2001 to December 31, 2001.
On August 15, 2001, Alamosa (Delaware) consummated the offering (the
"13 5/8% Senior Notes Offering") of $150 million aggregate principal amount of
senior notes (the "13 5/8% Senior Notes"). The 13 5/8% Senior Notes mature in
ten years (August 15, 2011), carry a coupon rate of 13 5/8%, payable
semiannually on February 15 and August 15, beginning on February 15, 2002. The
net proceeds from the sale of the 13 5/8% Senior Notes were approximately $140.5
million, after deducting the discounts and commissions to the initial purchasers
and estimated offering expenses.
F-9
ALAMOSA HOLDINGS, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Approximately $39.2 million of the net proceeds of the 13 5/8% 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 13 5/8% Senior Notes, the 12 7/8% Senior Discount Notes
and the 12 1/2% Senior Notes. Approximately $65.8 million of the net proceeds of
the 13 5/8% Senior Notes Offering were used by Alamosa (Delaware) to pay down a
portion of the Senior Secured Credit Facility. The remaining net proceeds of the
13 5/8% Senior Notes Offering will be used for general corporate purposes of
Alamosa (Delaware).
The Senior Secured Credit Facility was amended simultaneously with the
closing of the 13 5/8% Senior Notes Offering to, among other things, permit the
13 5/8% Senior Notes Offering, reduce the amount of the Senior Secured Credit
Facility to approximately $225.0 million and modify the financial covenants.
F-10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Almosa Holdings, Inc. (successor
to Alamosa PCS Holdings, Inc.)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Alamosa
Holdings, Inc. (successor to Alamosa PCS Holdings, Inc.) and its subsidiaries
at December 31, 2000 and December 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2000, and the period from July 16, 1998 (inception) through December 31, 1998,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 2001, except for Note 17 as to which the date is March 9, 2001.
F-11
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 141,768,167 $ 5,655,711
Short term investments ........................................... 1,600,000 --
Accounts receivable, net of allowance for doubtful accounts of
$1,503,049 and $161,704, respectively........................... 14,746,930 1,675,636
Inventory ........................................................ 2,752,788 5,777,375
Prepaid expenses and other assets ................................ 3,026,860 882,516
Interest receivable .............................................. 1,045,785 --
-------------- -------------
Total current assets ........................................... 164,940,530 13,991,238
Property and equipment, net ...................................... 228,982,869 84,713,724
Note receivable .................................................. 46,865,233 100,000
Debt issuance costs, net ......................................... 13,108,376 3,743,308
Restricted cash .................................................. -- 518,017
Other noncurrent assets .......................................... 4,501,005 1,425,912
-------------- -------------
Total assets ................................................... $ 458,398,013 $ 104,492,199
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................ $ 59,749,061 $ 15,153,068
Accounts payable to related parties .............................. 1,636,745 1,182,225
Current installments of capital leases ........................... 35,778 21,818
Bank line of credit .............................................. -- 363,665
Microwave relocation obligation .................................. -- 3,578,155
-------------- -------------
Total current liabilities ...................................... 61,421,584 20,298,931
Capital lease obligations, noncurrent ............................. 1,038,614 827,024
Other noncurrent liabilities ...................................... 735,593 50,035
Long-term debt .................................................... 54,524,224 71,876,379
Senior notes ...................................................... 209,279,908 --
-------------- -------------
Total liabilities .............................................. 326,999,923 93,052,369
-- --
Commitments and contingencies
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,
61,359,856 and 48,500,008 issued and outstanding,
respectively ................................................... 613,598 485,000
Additional paid-in capital ....................................... 245,845,086 50,824,876
Accumulated deficit .............................................. (113,947,781) (33,759,681)
Unearned compensation ............................................ (1,112,813) (6,110,365)
-------------- -------------
Total stockholders' equity ..................................... 131,398,090 11,439,830
-------------- -------------
Total liabilities and stockholders' equity ..................... $ 458,398,013 $ 104,492,199
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
JULY 16, 1998
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------- ------------------
Revenues:
Subscriber revenues ............................. $ 56,154,178 $ 4,398,947 $ --
Roaming and travel revenues ..................... 17,345,460 2,134,676 --
------------- ------------- -----------
Service revenues ................................ 73,499,638 6,533,623 --
Product sales ................................... 9,200,669 2,450,090 --
------------- ------------- -----------
Total revenue ................................. 82,700,307 8,983,713 --
------------- ------------- -----------
Costs and expenses:
Cost of service and operations (including
$836,296 and $1,259,427 of non-cash
compensation for 2000 and 1999,
respectively) ................................. 55,429,985 8,699,903 --
Cost of product sold ............................ 20,524,427 5,938,838 --
Selling and marketing ........................... 46,513,835 10,810,946 --
General and administrative expenses
(including $4,814,329 and $6,940,084 of
non-cash compensation for 2000 and
1999, respectively) ........................... 14,351,839 11,149,059 956,331
Depreciation and amortization ................... 12,530,038 3,056,923 2,063
Terminated merger and acquisition costs ......... 2,246,789 -- --
------------- ------------- -----------
Total costs and expenses ...................... 151,596,913 39,655,669 958,394
------------- ------------- -----------
Loss from operations .......................... (68,896,606) (30,671,956) (958,394)
Interest and other income ........................ 14,483,431 477,390 34,589
Interest expense ................................. (25,774,925) (2,641,293) (17)
------------- ------------- -----------
Net loss ...................................... $ (80,188,100) $ (32,835,859) $ (923,822)
============= ============= ===========
Basic and diluted net loss per common share $ (1.33) $ -- $ --
============= ============= ===========
Basic and diluted weighted average common
shares .......................................... 60,198,390 -- --
============= ============= ===========
Pro forma information:
Net loss ........................................ $ -- $ (32,835,859) $ (923,822)
Pro forma income tax adjustment:
Income tax benefit .............................. -- 10,854,083 317,592
Deferred tax valuation allowance ................ -- (10,854,083) (317,592)
------------- ------------- -----------
Pro forma net loss ............................ $ -- $ (32,835,859) $ (923,822)
============= ============= ===========
Pro forma basic and diluted weighted average
common shares outstanding ....................... -- 48,500,008 48,500,008
============= ============= ===========
Basic and diluted pro forma net loss per
common share .................................... $ -- $ (0.68) $ (0.02)
============= ============= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 16, 1998 (INCEPTION) TO DECEMBER 31, 2000
COMMON STOCK ADDITIONAL
------------------------ PAID-IN
SHARES AMOUNT CAPITAL
------------- ---------- ---------------
Balance, July 16, 1998 (inception) ..... $ -- $ -- $ --
Member's contribution .................. 48,500,008 485,000 14,515,000
Net loss ............................... -- -- --
----------- -------- ------------
Balance, December 31, 1998 . ........... 48,500,008 485,000 14,515,000
Members' contributions ................. -- -- 22,000,000
Stock options .......................... -- -- 14,309,876
Amortization of unearned
compensation .......................... -- -- --
Net loss ............................... -- -- --
----------- -------- ------------
Balance, December 31, 1999 . ........... 48,500,008 485,000 50,824,876
Initial public offering ................ 12,321,100 123,211 193,664,076
Exercise of stock options .............. 538,748 5,387 703,061
Amortization of unearned
compensation .......................... -- -- --
Unearned compensation .................. -- -- 653,073
Net loss ............................... -- -- --
----------- -------- ------------
Balance, December 31, 2000 ............. $61,359,856 $613,598 $245,845,086
=========== ======== ============
ACCUMULATED UNEARNED
DEFICIT COMPENSATION TOTAL
------------------ ---------------- ----------------
Balance, July 16, 1998 (inception) ..... $ -- $ -- $ --
Member's contribution .................. -- -- 15,000,000
Net loss ............................... (923,822) -- (923,822)
-------------- ------------- -------------
Balance, December 31, 1998 . ........... (923,822) -- 14,076,178
Members' contributions ................. -- -- 22,000,000
Stock options .......................... -- (14,309,876) --
Amortization of unearned
compensation .......................... -- 8,199,511 8,199,511
Net loss ............................... (32,835,859) -- (32,835,859)
-------------- ------------- -------------
Balance, December 31, 1999 . ........... (33,759,681) (6,110,365) 11,439,830
Initial public offering ................ -- -- 193,787,287
Exercise of stock options .............. -- -- 708,448
Amortization of unearned
compensation .......................... -- 5,650,625 5,650,625
Unearned compensation .................. -- (653,073) --
Net loss ............................... (80,188,100) -- (80,188,100)
-------------- ------------- -------------
Balance, December 31, 2000 ............. $ (113,947,781) $ (1,112,813) $ 131,398,090
============== ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
JULY 16, 1998
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------- ------------------
Cash flows from operating activities:
Net loss ........................................................ $ (80,188,100) $ (32,835,859) $ (923,822)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash compensation expense ................................. 5,650,625 8,199,511 --
Depreciation and amortization ................................. 12,530,038 3,056,923 2,063
Bad debt expense .............................................. 1,107,339 160,498 --
Amortization of debt issuance costs ........................... 1,397,546 331,063 --
Interest expense on discount notes ............................ 23,051,533 2,068,601 --
Loss from disposition of interest rate cap agreements ......... 266,178 -- --
Loss from asset disposition ................................... 81,347 -- --
(Increase) decrease in:
Accounts receivable ........................................... (14,178,633) (1,836,134) --
Inventory ..................................................... 3,024,587 (5,777,375) --
Prepaid expenses and other assets ............................. (4,296,355) (594,027) (52,046)
Increase (decrease) in:
Accounts payable and accrued expenses ......................... 22,335,731 10,137,095 845,851
-------------- ------------- ------------
Net cash used in operating activities ......................... (29,218,164) (17,089,704) (127,954)
-------------- ------------- ------------
Cash flows from investing activities
Additions to property and equipment ............................. (136,904,260) (76,601,004) (1,366,606)
Issuance of notes receivable .................................... (46,865,233) -- --
Acquisition related costs ....................................... (3,155,782) -- --
Purchase of short term investments .............................. (1,600,000) -- --
Repayment (Issuance) of note receivable from officer ............ 100,000 (100,000) --
Purchase of minority interest in subsidiary ..................... (255,000) -- --
Change in restricted cash ....................................... 518,017 (518,017) --
-------------- ------------- ------------
Net cash used in investing activities ......................... (188,162,258) (77,219,021) (1,366,606)
-------------- ------------- ------------
Cash flows from financing activities:
Equity offering proceeds ........................................ 208,589,367 -- --
Equity offering costs ........................................... (13,598,942) (1,360,405) --
Issuance of Senior Discount Notes ............................... 187,096,000 -- --
Capital contributions ........................................... -- 22,000,000 15,000,000
Proceeds from issuance of long-term debt ........................ 57,758,559 66,357,841 23,637
Debt issuance costs ............................................. (10,762,613) (234,371) --
Stock options exercised ......................................... 708,449 -- --
Repayments of long-term debt .................................... (76,239,373) -- --
Payments on capital leases ...................................... (31,169) (25,756) --
Interest rate cap premiums ...................................... (27,400) (301,950) --
-------------- ------------- ------------
Net cash provided by financing activities ..................... 353,492,878 86,435,359 15,023,637
-------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents ............. 136,112,456 (7,873,366) 13,529,077
Cash and cash equivalents at beginning of period ................. 5,655,711 13,529,077 --
-------------- ------------- ------------
Cash and cash equivalents at end of period ....................... $ 141,768,167 $ 5,655,711 $ 13,529,077
============== ============= ============
Supplemental disclosure -- cash paid for interest ................ $ 1,730,980 $ 218,142 $ --
============== ============= ============
Supplemental disclosure of non-cash activities
Capitalized lease obligations incurred .......................... $ 256,719 $ 146,379 $ 728,219
Liabilities assumed in connection with purchase of
property and equipment ........................................ 28,816,329 5,352,347 --
Liabilities assumed in connection with debt issuance
costs ......................................................... -- 3,840,000 --
Liabilities assumed in connection with microwave
relocation .................................................... -- 3,578,155 --
-------------- ------------- ------------
$ 29,073,048 $ 12,916,881 $ 728,219
============== ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-15
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa PCS Holdings, Inc. ("Holdings") through its subsidiaries provides
wireless personal communications services, commonly referred to as PCS, in the
Southwestern and Midwestern United States. Holdings, a Delaware corporation,
was formed in October 1999 to operate as a holding company in anticipation of
an initial public offering as described in Note 2. Immediately prior to the
offering in February 2000, shares of Holdings were exchanged for Alamosa PCS
LLC's ("Alamosa") membership interests, and Alamosa became wholly owned by
Holdings. These financial statements are presented as if the reorganization had
occurred as of the beginning of the periods presented. Holdings and its
subsidiaries are collectively referred to in these financial statements as the
"Company." As further described below, in 2001, through a series of
transactions, Holdings' name was changed to Alamosa (Delaware), Inc.
In 1998, Alamosa was formed and subsequently entered into affiliation
agreements with Sprint PCS, the PCS Group of Sprint Corporation. These
affiliation agreements provided the Company with the exclusive right to build,
own and manage a wireless voice and data services network in markets with over
5.2 million residents located in Texas, New Mexico, Arizona and Colorado under
the Sprint PCS brand. The Company amended its affiliation agreements with
Sprint PCS in December 1999 to expand its services network so that it includes
8.4 million residents. The Company is required to build out the wireless
network according to Sprint PCS specifications. If the Company does not meet
the build-out schedule as specified in the Sprint management agreement, the
Company could be in breach of its agreement with Sprint and subject to
penalties. The affiliation agreements are in effect for a term of 20 years with
three 10-year renewal options unless terminated by either party under
provisions outlined in the affiliation agreements. The affiliation agreements
include indemnification clauses between the Company and Sprint PCS to indemnify
each other against claims arising from violations of laws or the affiliation
agreements, other than liabilities resulting from negligence or willful
misconduct of the party seeking to be indemnified.
On July 31, 2000, the Company signed definitive agreements to merge two
Sprint PCS affiliates, Roberts Wireless Communications, L.L.C ("Roberts") and
Washington Oregon Wireless, LLC ("WOW") into its operations. On December 14,
2000, Holdings formed a new holding company pursuant to a merger under Section
251(g) of the Delaware General Corporation Law whereby Holdings was merged with
a direct wholly owned subsidiary of a new holding company, which was a direct
wholly owned subsidiary of Holdings. Each share of the former Alamosa PCS
Holdings was converted into one share of the new holding company and the former
public company became a wholly owned subsidiary of the new holding company. The
Section 251(g) transaction did not require any vote of the Alamosa PCS Holdings
stockholders. Upon effectiveness of the Section 251(g) transaction, Holdings'
name was changed to Alamosa (Delaware), Inc. and the new holding company's name
was changed to Alamosa PCS Holdings, Inc. On February 14, 2001, the new Alamosa
PCS Holding became a wholly owned subsidiary of a new holding company, Alamosa
Holdings, Inc. ("Superholdings"). Each share of the new Alamosa PCS Holdings'
common stock issued and outstanding immediately prior to the merger was
converted into the right to receive one share of Superholdings' common stock.
Superholdings' common stock is quoted on The Nasdaq National Market under the
same symbol previously used by Alamosa PCS Holdings, "APCS."
2. INITIAL PUBLIC OFFERING
On October 29, 1999, Holdings filed a registration statement with the
Securities and Exchange Commission for the sale of 10,714,000 shares of its
common stock (the "Stock Offering"). The Stock Offering became effective and
the shares were issued on February 3, 2000 at the initial price of $17.00 per
share. Subsequently, the underwriters exercised their over-allotment option of
1,607,100 shares. Holdings received net proceeds of $194.3 million after
commissions of $13.3 million and expenses of approximately
F-16
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.0 million. The proceeds of the Stock Offering are to be used for the build
out of the system, to fund operating capital needs and for other corporate
purposes.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions are eliminated.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash, money
market funds, and commercial paper with minimal interest rate risk and original
maturities of three months or less at the date of acquisition. The carrying
amount approximates fair value.
SHORT-TERM INVESTMENTS -- The Company invests in highly liquid debt
instruments with strong credit ratings. Commercial paper investments with a
maturity greater than three months, but less than one year, at the time of
purchase are considered to be short-term investments The carrying amount of the
investments approximates fair value due to their short maturity. The Company
maintains cash and cash equivalents and short-term investments with certain
financial institutions. The Company performs periodic evaluations of the
relative credit standing of those financial institutions that are considered in
the Company's investment strategy.
INVENTORY -- Inventory consists of handsets and related accessories.
Inventories purchased for resale are carried at the lower of cost or market
using the first-in first-out method. Market is determined using replacement
cost.
PROPERTY AND EQUIPMENT -- Property and equipment are reported at cost less
accumulated depreciation. Cost incurred to design and construct the wireless
network in a market are classified as construction in progress. When the
wireless network for a particular market is completed and placed into service,
the related costs are transferred from construction in progress to property and
equipment. Repair and maintenance costs are charged to expense as incurred;
significant renewals and betterments are capitalized. When depreciable assets
are retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the respective accounts, and any gains or losses
on disposition are recognized in income. If facts or circumstances support the
possibility of impairment, the Company will prepare a projection of future
operating cash flows, undiscounted and without interest. If based on this
projection, the Company does not expect to recover its carrying cost, an
impairment loss equal to the difference between the fair value of the asset and
its carrying value will be recognized in operating income. Property and
equipment are depreciated using the straight-line method based on estimated
useful lives of the assets.
Asset lives are as follows:
Buildings .............................. 20 years
Network equipment ...................... 5-10 years
Vehicles ............................... 5 years
Furniture and office equipment ......... 5-7 years
Leasehold improvements are depreciated over the shorter of the remaining
term of the lease or the estimated useful life of the improvement.
Interest will be capitalized in connection with the construction of the
wireless network. The capitalized interest will be recorded as part of the
asset to which it relates and will be amortized over the asset's estimated
useful life. No interest was capitalized in 2000. Total interest capitalized
was $656,985 as of December 31, 1999.
Microwave relocation includes costs and the related obligation incurred to
relocate incumbent microwave frequencies in the Company's service area.
Microwave relocation costs are amortized on a
F-17
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
straight-line basis over 20 years beginning upon commencement of services in
respective markets. The amortization of microwave relocation costs was $273,453
and $84,312 for the years ended December 31, 2000 and 1999, respectively.
SOFTWARE COSTS -- In accordance with Statement of Position ("SOP") 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use," certain costs related to the development or purchase of internal-use
software are capitalized and amortized over the estimated useful life of the
software. During fiscal 2000 and 1999, the Company capitalized approximately
$2,037,000 and $411,000, respectively, in software costs under SOP 98-1, which
are being amortized over a five-year life. The Company amortized computer
software costs of approximately $265,000 and $40,000 during 2000 and 1999,
respectively.
START-UP COSTS -- In April 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." This statement became
effective January 1, 1999 and required that costs of start up activities and
organization costs be expensed as incurred.
ADVERTISING COSTS -- Advertising costs are expensed as incurred.
Advertising expenses totaled $18,964,068 and $3,663,893 during 2000 and 1999,
respectively.
INCOME TAXES. -- The Company presents income taxes pursuant to Statement
of Financial Accounting Standards No. 109. "Accounting for Income Taxes" ("FAS
109"). FAS 109 uses an asset and liability approach to account for income
taxes, wherein, deferred taxes are provided for book and tax basis differences
for assets and liabilities In the event differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
result in deferred tax assets, an evaluation of the probability of being able
to realize the future benefits indicated by such assets is required. A
valuation allowance is provided for a portion or all of the deferred tax assets
when there is sufficient uncertainty regarding the Company's ability to
recognize the benefits of the assets in future years.
REVENUE RECOGNITION -- In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 summarizes certain of the staff's
interpretations in applying generally accepted accounting principles to revenue
recognition. The provisions of SAB 101 were required to be adopted during the
quarter ending December 31, 2000 effective as of January 1, 2000. Pursuant to
SAB 101, the company began deferring customer activation fee revenue and an
equal amount of customer acquisition related expenses in October 2000 when the
Company began charging these fees. These deferred amounts are amortized over a
three-year period, which approximates the average life of a customer. For the
year ended December 31, 2000, the Company had deferred $1,180,413 of activation
fee revenue and acquisition related expenses and had amortized $77,012. At
December 31, 2000, $735,593 of the remaining deferral was classified as
long-term.
The Company recognizes revenue as services are performed. Sprint PCS
handles the Company's billings and collections and retains 8% of collected
service revenues from Sprint PCS subscribers based in the Company's territories
and from non-Sprint PCS subscribers who roam onto the Company's network. The
amount retained by Sprint PCS is recorded in Cost of Service and Operations.
Revenues generated from the sale of handsets and accessories and from roaming
services provided to Sprint PCS customers who are not based in the Company's
territories are not subject to the 8% retainage.
Sprint PCS pays the Company a Sprint PCS roaming fee for each minute that
a Sprint PCS subscriber based outside of the Company's territories roams on the
Company's portion of the Sprint PCS network. Revenue from these services will
be recognized as the services are performed. Similarly, the Company will pay
Sprint PCS roaming fees to Sprint PCS, when a Sprint PCS subscriber based in
the Company's territories roams on the Sprint PCS network outside of the
Company's territories. These costs will be included as cost of service when
incurred.
F-18
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Product revenues consisting of proceeds from sales of handsets and
accessories are recorded net of an allowance for sales returns. The allowance
is estimated based on Sprint PCS' handset return policy that allows customers
to return handsets for a full refund within 14 days of purchase. When handsets
are returned to the Company, the Company may be able to reissue the handsets to
customers at little additional cost. However, when handsets are returned to
Sprint PCS for refurbishing, the Company will receive a credit from Sprint PCS,
which will be less than the amount the Company originally paid for the handset.
For the years ended December 31, 2000 and 1999, respectively, product revenue
was $9,200,669 and $2,450,090. The cost of products sold includes the total
cost of accessories and handsets sold through our retail stores (including
sales to local indirects) and totaled $20,524,427 and $5,938,838 for the years
ending December 31, 2000 and 1999, respectively. There were no product revenues
or related costs for the period from inception to December 31, 1998. The costs
of handsets exceeds the retail sales price because we subsidize the price of
handsets for competitive reasons.
STOCK BASED COMPENSATION -- The Company has elected to follow Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. The non-cash compensation expense relates to three employees whose
cash compensation is recorded in cost of service and operations and general and
administrative expenses. The Company has implemented the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation." See Note 13.
EARNINGS (LOSS) PER SHARE -- Basic earnings (loss) per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is computed using the weighted
average number of common and potential dilutive common shares during the
period, except those that are antidilutive. During the fiscal year ended
December 31, 2000, options to purchase approximately 6,788,752 shares were
outstanding but are not included in the computation because they are
antidilutive.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities on the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES -- We estimate that we will require approximately
$223 million to complete the current build-out plan and fund working capital
losses through March 2002. This includes our acquisitions of Roberts and WOW,
as described in Note 17. The actual funds required to build-out our portion of
the Sprint PCS network and to fund operating losses and working capital needs
may vary materially from this estimate, and additional funds could be required.
Failure to obtain additional capital, if needed to complete the build-out of
our portion of the Sprint PCS network, could cause delay or abandonment of our
development plans.
CONCENTRATION OF RISK -- The Company maintains cash and cash equivalents
in accounts with financial institutions in excess of the amount insured by the
Federal Deposit Insurance Corporation. The Company monitors the financial
stability of this institution regularly and management does not believe there
is significant credit risk associated with deposits in excess of federally
insured amounts.
RECLASSIFICATION -- Certain reclassifications have been made to prior year
balances to conform to current year presentations.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998 and June 1999,
the Financial Accounting Standards Board ("FASB"), issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities --
F-19
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferral of the Effective Date of FASB Statement No. 133." These statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedging accounting. SFAS No. 133
will be effective for the Company's fiscal year ending December 31, 2001.
Management believes that the adoption of these statements will not have a
significant impact on the Company's financial results.
4. NOTES RECEIVABLE
ROBERTS -- On July 31, 2000, Alamosa Operations, Inc. ("Operations")
entered into a loan agreement with Roberts Wireless Communications, L.L.C.
("Roberts") whereby Operations agreed to lend up to $26.6 million to be used
only for the purpose of funding Roberts' working capital needs from July 31,
2000 through the completion of the Roberts merger, as described Note 1. Also on
July 31, 2000, Operations entered into a loan agreement with the owners of
Roberts for $15 million. As of December 31, 2000, approximately $37 million had
been funded under the loan agreements. The loans bear interest at the prime
rate and are due 6 months after the termination of the Roberts reorganization
agreement, upon acceleration or upon demand.
WOW -- Also, on July 31, 2000, WOW and Operations entered into a loan
agreement whereby Operations agreed to lend up to $11 million to WOW to be used
only for the purposes of (a) satisfying certain capital contribution
requirements under WOW's operating agreement, and (b) funding WOW's working
capital needs from July 31, 2000 through the completion of the WOW merger. As
of December 31, 2000, approximately $10 million had been funded under the loan
agreement. The loan bears interest at the prime rate and is due 30 days after
the termination of the WOW reorganization agreement or upon demand. The loan is
guaranteed by certain members of WOW Holdings.
The mergers of Roberts and WOW into the Company were completed in
February, 2001.
5. UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma information reflects certain assumptions regarding
transactions and their effects that occurred as a result of the reorganization
described in Note 1.
UNAUDITED PRO FORMA INCOME INFORMATION -- The unaudited pro forma
information as shown on the statements of operations is presented to show the
effects of income taxes related to the Company's subsequent termination of its
limited liability company status. The unaudited pro forma income tax adjustment
is presented as if the Company had been a C Corporation subject to federal and
state income taxes at an effective tax rate of 34% for the period from
inception through December 31, 1998 and the year ended December 31, 1999.
Application of the provisions of SFAS No. 109, "Accounting for Income Taxes"
would have resulted in a deferred tax asset primarily from temporary
differences related to the treatment of start-up costs and from net operating
loss carryforwards. The deferred tax asset would have been offset by a full
valuation allowance, as there is not currently sufficient positive evidence as
required by SFAS No. 109 to substantiate recognition of the asset.
The pro forma information is presented for informational purposes only and
is not necessarily indicative of operating results that would have occurred had
the Company elected to terminate its limited liability company status as of the
beginning of 1999, nor are they necessarily indicative of future operating
results.
UNAUDITED PRO FORMA NET LOSS PER SHARE -- Pro forma net loss per share is
calculated by dividing pro forma net loss by the weighted average number of
shares of common stock which would have been outstanding before the initial
public offering after giving effect to the reorganization of the Company
described in Note 1.
F-20
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING -- Unaudited pro
forma weighted average shares outstanding is computed after giving effect to
the reorganization of the Company described in Note 1. The calculation was made
in accordance with SFAS No. 128, "Earnings Per Share." Diluted weighted average
shares outstanding at December 31, 1999 exclude 141,042 incremental potential
common shares from stock options because inclusion would have been
antidilutive.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- ------------------
Land and building ....................... $ 5,668,180 $ 2,762,357
Network equipment ....................... 159,982,079 72,518,897
Vehicles ................................ 1,584,286 430,753
Furniture and office equipment .......... 10,129,708 2,266,966
------------- ------------
177,364,253 77,978,973
Accumulated depreciation ................ (15,290,044) (2,974,674)
------------- ------------
Subtotal ............................. 162,074,209 75,004,299
Microwave relocation costs .............. 4,103,214 3,578,155
Accumulated amortization ................ (273,453) (84,312)
------------- ------------
Subtotal ............................. 3,829,761 3,493,843
Construction in progress:
Network equipment ...................... 60,596,869 4,825,288
Leasehold improvements ................. 2,482,030 1,390,294
------------- ------------
Subtotal ............................. 63,078,899 6,215,582
------------- ------------
Total ................................ $ 228,982,869 $ 84,713,724
============= ============
7. LEASES
OPERATING LEASES -- The Company has various operating leases, primarily
related to rentals of tower sites and offices. Rental expense was $6,177,267
and $1,924,848 for 2000 and 1999, respectively. At December 31, 2000, the
aggregate minimum rental commitments under noncancelable operating leases for
the periods shown are as follows:
YEARS
--------------------------
2001 ................... $ 8,700,345
2002 ................... 8,684,484
2003 ................... 8,682,799
2004 ................... 8,661,004
2005 ................... 8,535,777
Thereafter ............. 35,025,779
-----------
Total .................. $78,290,188
===========
CAPITAL LEASES -- Capital leases consist of leases for rental of retail
space and switch usage. The net present value of the leases was $1,074,392 and
$848,842 at December 31, 2000 and 1999, respectively, and was included in
property and equipment. Amortization recorded under these leases was $133,724
for the year ended December 31, 2000 and was $30,894 during 1999. At December
31, 2000, the future payments under capital lease obligations, less imputed
interest, are as follows:
F-21
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS
-----
2001 ............................................................. $ 148,280
2002 ............................................................. 149,131
2003 ............................................................. 149,999
2004 ............................................................. 159,135
2005 ............................................................. 160,788
Thereafter ....................................................... 1,181,166
----------
Total minimum lease payments ..................................... 1,948,499
Less: imputed interest ........................................... 874,107
----------
Present value of minimum lease payments .......................... 1,074,392
Less: current installments ....................................... 35,778
----------
Long-term capital lease obligations at December 31, 2000 ......... $1,038,614
==========
8. BANK LINE OF CREDIT
The Company had a $500,000 revolving line of credit with a bank that
expired June 9, 2000. The line of credit had a variable interest rate of 9.25%
at December 31, 1999. Proceeds from this line of credit were used to purchase
vehicles for service representatives. This loan has not renewed and there is no
amount outstanding at December 31, 2000 As of December 31, 1999, $363,665 was
outstanding on the line of credit.
9. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- ------------------
Debt outstanding under credit facilities:
Senior Discount Notes ............................. $209,279,908 $ --
EDC Credit Facility ............................... 54,524,224 71,876,379
Bank line of credit ............................... -- 363,665
------------ -----------
Total debt ........................................... 263,804,132 72,240,044
Less current maturities .............................. -- 363,665
------------ -----------
Long-term debt, excluding current maturities ......... $263,804,132 $71,876,379
============ ===========
SENIOR DISCOUNT NOTES -- On December 23, 1999, Alamosa (Delaware), Inc. filed a
registration statement with the Securities and Exchange Commission for the
issuance of $350 million face amount of Senior Discount Notes (the "Notes
Offering"). The 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 Senior Discount Notes ("Notes ")
mature in ten years (February 15, 2010) and carry a coupon rate of 12 7/8%, and
provides for interest deferral for the first five years. The Notes will accrete
to their $350 million face amount by February 8, 2005, after which, interest
will be paid in cash semiannually. The proceeds of the Notes Offering are to be
used to prepay $75 million of the Nortel credit facility, to pay costs to build
out the system, to fund operating working capital needs and for other general
corporate purposes. Significant terms of the Notes include:
o RANKING -- The 2000 Senior Discount Notes are senior unsecured
obligations of Alamosa (Delaware), Inc., equal in right of payment to all
future senior debt of Alamosa (Delaware), Inc. and senior in right of
payment to all future subordinated debt of Alamosa (Delaware), Inc.;
F-22
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
o GUARANTEES -- The 2000 Senior Discount Notes are unsecured obligations
and will rank equally with all existing and future senior debt and senior
to all existing and future subordinate debt. The Notes are fully and
unconditionally, jointly and severally guaranteed on a senior
subordinated, unsecured basis, by all the existing and any future
restricted subsidiaries of Alamosa (Delaware), Inc. with the exception of
Alamosa Operations, Inc., a wholly owned subsidiary of Alamosa
(Delaware), Inc. The financial statements of Alamosa (Delaware), Inc. and
financial information related to its guarantor subsidiaries are included
in Alamosa (Delaware), Inc.'s Form 10-K.
o OPTIONAL REDEMPTION -- During the first thirty six (36) months after the
2000 Senior Discount Notes offering, we may use net proceeds of an equity
offering to redeem up to 35% of the accreted value of the notes at a
redemption price of 112 7/8%;
o CHANGE OF CONTROL -- Upon a change of control as defined by the 2000
Senior Discount Notes offering, we will be required to make an offer to
purchase the notes at a price equal to 101% of the accreted value
(original principal amount plus accrued interest) before February 15,
2005, or 101% of the principal amount at maturity thereafter; and
o RESTRICTIVE COVENANTS -- The indenture governing the 2000 Senior
Discount Notes contains covenants that, among other things and subject to
important exceptions, limit our ability and the ability of our
subsidiaries to incur additional debt, issue preferred stock, pay
dividends, redeem capital stock or make other restricted payments or
investments as defined by the Notes Offering, create liens on assets,
merge, consolidate or dispose of assets, or enter into transactions with
affiliates and change lines of business.
NORTEL/EDC CREDIT FACILITY -- The Company entered into a credit facility
effective June 10, 1999 with Nortel for $123.0 million. On February 8, 2000 the
Company entered into an Amended and Restated Credit Agreement with Nortel
Networks Inc., and on June 23, 2000, Nortel assigned the entirety of its loans
and commitments under the Amended and Restated Credit Agreement to Export
Development Corporation (the "Nortel/EDC Credit Facility"). The proceeds of the
Nortel/EDC Credit Facility are used to purchase equipment, to fund the
construction of the Company's portion of the Sprint PCS network, and to pay
associated financing costs. The financing terms permitted the Company to borrow
$250 million (which was subsequently reduced to $175 million as a result of the
prepayment of $75 million outstanding) under three commitment tranches through
February 18, 2002, and requires minimum equipment purchases.
The Nortel/EDC Credit Facility is collateralized by all of the Company's
current and future assets and capital stock. The Company is required to
maintain certain financial ratios and other financial conditions including
minimum levels of revenue and wireless subscribers. In addition, the Company is
required to maintain a $1.0 million cash balance as collateral against the
facility. At December 31, 1999, the Company was not in compliance with this
agreement; however, a waiver of this requirement was obtained from Nortel.
Alamosa may borrow money under the Nortel/EDC Credit Facility as either a
base rate loan with an interest rate of prime plus 2.75%, or a Eurodollar loan
with an interest rate of the London interbank offered rate, commonly referred
to as LIBOR, plus 3.75%. The LIBOR interest rate was 6.199% at December 31,
2000. In addition, an annual unused facility fee of 0.75% will be charged
beginning August 8, 2000 on the portion of the available credit that has not
been borrowed. Interest accrued through the two-year anniversary from the
closing date can be added to the principal amount of the loan. Thereafter,
interest is payable monthly in the case of base rate loans and at the end of
the applicable interest period, not to exceed three months, in the case of
Eurodollar loans. Interest expense for the period ended December 31, 2000
totaled $1,332,392. Principal is payable in 20 quarterly installments beginning
September 30, 2002. Alamosa may voluntarily prepay any of the loans at any
time, but any amount repaid may not be reborrowed since there are no revolving
credit features. Alamosa must make
F-23
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mandatory prepayments under certain circumstances, including 50% of the excess
cash flow, as computed under the Nortel/EDC Credit Facility, after March 31,
2002 and any amount in excess of $250,000 received for asset sales outside the
ordinary course of business or insurance proceeds, to the extent not reinvested
in property or assets within a stated period of time. All prepayments are
applied to the outstanding loan balances pro rata in the inverse order of
maturity, except where there is a borrowing base shortage, in which case
prepayments are first applied there, and then pro rata among all three
commitment tranches.
The original commitment terms provided for warrants representing 2% of the
outstanding common stock of Holdings. These warrants were eliminated, by prior
agreement, when the Company used $75 million of the equity contribution from
Holdings to prepay, in February 2000, amounts previously borrowed under the
Nortel/EDC Credit Facility. In addition to the $75 million prepayment, in
conjunction with the closing of the new facility, the Company also paid accrued
interest of approximately $852,500 and origination fees and expenses of
$3,995,000.
As a condition of the financing, Sprint PCS has entered into a consent and
agreement with Nortel that modifies Sprint PCS' rights and remedies under its
affiliation agreements with the Company. Among other things, Sprint PCS
consented to the pledge of substantially all of the Company's assets to Nortel,
including the affiliation agreements. In addition, Sprint PCS may not terminate
the affiliation agreements with the Company and must maintain 10 MHz of PCS
spectrum in the Company's markets until the Nortel/EDC Credit Facility is
satisfied or the Company's assets are sold pursuant to the terms of the consent
and agreement with Nortel.
Alamosa incurred approximately $8,256,000 of costs associated with
obtaining the Nortel/EDC Credit Facility. Those costs consisted of loan
origination fees, legal fees and other debt issuance costs that have been
capitalized and are being amortized to interest expense using the straight-line
method over the term of the Nortel/EDC Credit Facility.
Terms and conditions of the Nortel/EDC Credit Facility after the
assignment on June 23, 2000 are essentially the same as before the assignment.
However, the Company is no longer required to maintain a $1 million cash
balance as collateral against the Nortel/EDC Credit Facility
10. INCOME TAXES
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes.The net deferred tax asset has
been fully reserved because of uncertainty regarding the Company's ability to
recognize the benefit of the asset in future years. Prior to February 1, 2000,
the Company's predecessor operated as a Limited Liability Company ("LLC") under
which losses for income tax purposes were utilized by the LLC members on their
income tax returns. Subsequent to January 31, 2000, the Company became a C-Corp
for federal income tax purposes and therefore subsequent losses became net
operating loss carryforwards of the Company. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities are presented below:
F-24
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
2000
----------------
Deferred tax assets:
Net operating loss carryforwards ......... $ 25,625,914
Original issue discount .................. 7,690,882
Non-cash compensation .................... 2,067,209
Start-up expenses ........................ 1,006,690
Deferred rent ............................ 588,000
Bad debt allowance ....................... 442,577
Other .................................... 600,517
-------------
Gross deferred tax assets .................. 38,021,789
Deferred tax liabilities:
Depreciation ............................. 10,995,932
Other .................................... 40,532
-------------
Net deferred tax assets .................... 26,985,325
Valuation allowance ........................ (26,985,325)
-------------
Deferred tax balance ....................... $ --
=============
The provision for income taxes is different than the amount computed using
the applicable statutory federal income tax rate with the differences
summarized below:
DECEMBER 31,
2000
-------------
Federal tax benefit at statutory rate ..................... (35%)
---
Predecessor Limited Liability Company ..................... 1.45%
Adjustment due to increase in valuation allowance ......... 33.40%
Other ..................................................... .15%
-----
Provision for income taxes ................................ 0.00%
=====
As of December 31, 2000, the Company has available net operating loss
carryforwards totaling approximately $73,217,000 which expire beginning in
2020. Utilization of net operating loss carryforwards may be limited by
ownership changes which may have occurred or could occur in the future.
11. RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE -- On April 23, 1999, the Company entered into a $100,000
loan agreement with an officer of the Company. The loan was fully repaid on
April 10, 2000.
AGREEMENTS WITH CHR SOLUTIONS, INC. -- Alamosa has entered into a number
of agreements with CHR Solutions, Inc. ("CHR") to perform various consulting
and engineering services. CHR resulted from a merger between Hicks & Ragland
Engineering Co., Inc., and Cathey, Hutton & Associates, Inc. effective as of
November 1, 1999. David Sharbutt, the Company's Chairman and Chief Executive
Officer, was at the time the agreements were executed, the President and Chief
Executive Officer of Hicks & Ragland. As of December 2000, Mr. Sharbutt
resigned his position on the Board of CHR, and is no longer an employee of CHR.
Total amounts paid under the above agreements totaled $6,334,259 and
$3,841,793 for the years ended December 31, 2000 and 1999, respectively.
Amounts included in accounts payable for the above agreement totaled $1,489,358
and $893,764 for the years ended December 31, 2000 and 1999, respectively.
F-25
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGREEMENT WITH AMERICAN TOWER CORPORATION -- In August 1998, the Company
entered into a master site development and lease agreement with Specialty
Capital Services, Inc. ("Specialty"), a subsidiary of Specialty
Teleconstructors, Inc. ("Teleconstructors"), that has since merged with
American Tower Corporation ("American"). Pursuant to the agreement, Specialty
arranges for collocation of equipment or constructs new facilities in area
identified for build-out. Specialty provides site acquisitions, leasing and
construction services, and secures zoning, permitting and surveying approvals
and licenses for each base station. This initial term master agreement expires
in August 2003, with automatic renewal for three additional terms of five years
each.
The agreement provides for monthly payments subject to an annual
adjustment based on the Consumer Price Index. Prior to October 1, 1999,
Specialty was related to the Company through one of the Company's directors who
owned interests in both the Company and Teleconstructors and was an employee
and officer of Specialty and Teleconstructors. In addition, another individual
who was one of the Company's directors at the time the agreement was entered
into is a manager of Longmont PCS, LLC, one of the Company's former members.
This individual was also a stockholder of Teleconstructors and acted as a vice
president of American, which acquired Teleconstructors. The two individuals
completed the disposition of their ownership interests in American by September
30, 1999 and are no longer associated with American. No amounts were paid or
outstanding under this agreement during 1998. Through September 30, 1999,
$165,300 was paid under this agreement.
AGREEMENTS WITH TECH TELEPHONE COMPANY -- Alamosa entered into a
telecommunications service agreement with Tech Telephone Company Limited
Partnership, an affiliate of CHR, to install and provide DSI telecommunications
lines between sprint PCS and the Company's Lubbock-based operations and between
the Company's Lubbock-based operations and other markets The original term of
the agreement is three years, but the agreement automatically renews upon
expiration for additional successive 30-day terms by either party.
The Company has also entered into a distribution agreement with Tech
Telephone, authorizing it to become a third party distributor of Sprint PCS
products and services for the Company in Lubbock.
Total amount paid for these contracts was $1,707,074 and $212,687 during
the years ended December 31, 2000 and 1999 respectively. The amounts included
in accounts payable for the same periods were $147,387 and $288,461,
respectively
OTHER RELATED PARTY TRANSACTIONS -- In November 1998, the Company entered into
an agreement to lease space for telephone switching equipment in Albuquerque
with SASR Limited Partnership, 50% owned by one of the Company's directors and
a manager of West Texas PCS, LLC, and Budagher Family LLC, two of the Company's
interest holders. The lease has a term of five years with two optional
five-year terms. The lease provides for monthly payments aggregating to $18,720
a year with 10% increase at the beginning of the two option periods, as well as
a pro rata portion of real estate taxes on the property.
In connection with the Company's distribution and sales of Sprint PCS
wireless communications equipment, on December 28, 1998, the Company entered
into a long-term agreement to lease space for a retail store in Lubbock, Texas
with Lubbock HLH, Ltd., principally owned by one of Holding's directors and the
general manager of South Plains Advance Communications & Electronics, Inc.
("SPACE"). SPACE is a stockholder of the Company. This lease has a term of 15
years and provides for monthly payments aggregating to approximately $110,000 a
year, subject to adjustment based on the Consumer Price Index on the first day
of the sixth lease year and on the first day of the eleventh lease year. No
amounts were paid or outstanding under this lease at December 31, 1998. During
1999, $73,233 was paid under this lease. No amount was payable at December 31,
1999. During 2000, $100,833 was paid under this lease. No amount was payable at
December 31, 2000.
12. EMPLOYEE BENEFITS
Effective November 13, 1998, the Company elected to participate in the
NTCA Savings Plan, a defined contribution employee savings plan sponsored by
the National Telephone Cooperative Associa-
F-26
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion under Section 401(k) of the Internal Revenue Code. No employer
contributions were made to this plan for the period ended December 31, 1999 and
1998. During 2000, the Company made employer contributions of $187,555.
Effective October 1, 1999, the Company entered into a three-year
employment agreement with its Chief Executive Officer ("CEO"), the Company's
chairman. In addition, in December 1999, the Company granted options to the CEO
to acquire 242,500 common shares at an exercise price of $1.15 per share which
vested immediately prior to the completion of the initial public offering and
1,455,000 shares at an exercise price equal to the initial public offering
price which vest 33% per year beginning September 30, 2000. The options expire
January 5, 2009. The Company will recognize compensation expense of $3,116,125
related to the 242,500 options issued with an exercise price below the initial
public offering price over the options vesting period. Compensation expense
recorded for the year ended December 31, 2000 and 1999 was $2,764,797 and
$351,328, respectively.
On October 2, 1998, the Company entered into an employee agreement with
its Chief Operating Officer ("COO"). The agreement provides for the granting of
stock options in three series. The initial exercise price was determined based
on the following formula: $48,500,000, committed capital at September 30, 1998,
multiplied by the percentage interest represented by the option exercised. The
exercise price for each series increased by an annual rate of 8%, 15% or 25%
compounded monthly beginning at the date of grant as specified by the
agreement. Options may be exercised any time from January 1, 2004 to January 5,
2008. The options vest over a three-year period. During 1998, one option from
each series was granted under this agreement. The options to acquire membership
interests described above were to be exchanged for options in Holdings to
acquire an equivalent number of common shares: 242,500 at $1.08 per share,
242,500 at $1.15 per share and 242,500 at $1.25 per share. Effective December
1999, the Company amended his options such that each of his three series of
original options were exchanged for two options to acquire a total of 1,697,500
shares of common stock. The first option to acquire 242,500 shares of common
stock has a fixed exercise price of $1.15 per share and vested immediately
prior to completion of the initial public offering. The second option to
acquire 1,455,000 shares of common stock has an exercise price equal to the
initial public offering price and vests 25% per year beginning September 30,
2000. The expiration date of all of the COO's options was extended from January
5, 2008 to January 5, 2009. These amendments resulted in a new measurement
date. The Company will record compensation expense totaling $9,341,100 in
connection with these options. Compensation expense recorded for the years
ended December 31, 2000 and 1999 was $1,639,532 and $6,588,755, respectively.
Effective December 1, 1999, the Company entered into a five-year
employment agreement with its Chief Financial Officer ("CFO"). In addition, the
Company granted the CFO options to purchase 1,455,000 shares at the initial
public offering price and that will expire January 5, 2009. There is no
compensation cost related to these options.
On October 14, 1998, the Board of Members of the Company approved an
Incentive Ownership Plan. The plan consisted of 3,500 units comprised of 1,200
Series 8, 1,150 Series 15 and 1,150 Series 25 units. The exercise price for
each series was based on a pre-defined strike price which increased by an
annual rate of 8%, 15% or 25% compounded monthly beginning July 1, 2000. The
initial exercise prices were $564.79, $623.84 and $711.88 for Series 8, Series
15 and Series 25 options, respectively. Each unit provided the holder an option
to purchase an interest in the Company. Vested units could have been exercised
any time from July 1, 2000 to December 31, 2006. On October 29, 1998, under an
employment agreement with the Company's Chief Technology Officer, 300 units
were granted under this plan. The options to acquire membership interests
described above were to be exchanged for options to acquire an equivalent
number of common shares: 48,500 at $1.13 per share, 48,500 at $1.25 per share
and 48,500 at $1.42 per share. Effective as of the IPO, these options were
converted into options of Holdings and were amended such that his original
options with exercise prices that increased by an annual rate of 8%, 15%, or
25%
F-27
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(compounded monthly beginning July 1, 2000) were exchanged for options to
purchase an equivalent number of common shares at fixed exercise prices equal
to $1.13, $1.25 and $1.42 per share, which will not increase over the term of
the options. These amendments resulted in a new measurement date. The Company
recorded compensation expense totaling $2,095,723 in connection with these
options. Compensation expense recorded for the year ended December 31, 2000 and
1999 was $836,296 and $1,259,427, respectively.
13. STOCK-BASED COMPENSATION
Holdings adopted an Incentive Stock Option Plan (the "Plan") effective
November 12, 1999, which provides for the granting of either incentive stock
options or nonqualified stock options to purchase shares of Holdings' common
stock and for other stock-based awards to officers, directors and key employees
for the direction and management of the Company and to non-employee consultants
and independent contractors. At December 31, 2000, 7,000,000 shares of common
stock were reserved for issuance under the Plan. The compensation committee of
the board of directors administers the Plan and determines grant prices and
vesting periods. Generally, the options under each plan vest in varying
increments over a three to five-year period, expire ten years from the date of
grant and are issued at exercise prices no less than 100% of the fair market
value of common stock at the time of the grant.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees"
and related interpretation, in accounting for its employee stock options. In
accordance with APB No. 25, no compensation expense or unearned compensation
was recorded as of December 31, 1998. The Company has recorded unearned
compensation of $14,962,949. This amount is being recognized over the vesting
period in accordance with FASB Interpretation No. 28 when applicable. For the
year ended December 31, 2000 and 1999, non-cash compensation of $5,650,625 and
$8,199,511 has been recognized, respectively.
As discussed in Note 3, the Company has adopted the disclosure-only
provisions of SFAS No. 123. Had compensation cost for the Company's stock
option plans been determined based on the fair value provisions of SFAS No.
123, the Company's net loss and net loss per share would have been decreased to
the pro forma amounts indicated below:
FOR THE PERIOD
FROM JULY 16, 1998
YEAR ENDED YEAR ENDED (INCEPTION)
DECEMBER 31, DECEMBER 31, THROUGH
2000 1999 DECEMBER 31, 1998
----------------- ----------------- -------------------
Net loss - as reported ................... $ (80,188,100) $ (32,835,859) $ (923,822)
Net loss - pro forma ..................... $ (80,188,100) $ (32,835,859) $ (997,531)
Net loss per share - as reported .........
Basic and Diluted ....................... $ (1.33) $ (.68) $ (.02)
Net loss per share - pro forma ...........
Basic and Diluted ....................... $ (1.33) $ (.68) $ (.02)
The pro forma disclosures provided are not likely to be representative of
the effects on reported net income or loss for future years due to future
grants and the vesting requirements of the Company's stock option plans.
The weighted-average fair value for all stock options granted in 1998,
1999 and 2000 was $0.46, $13.04, and $12.18, respectively. The fair value of
each stock option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
F-28
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE PERIOD
FROM JULY 16, 1998
YEAR ENDED YEAR ENDED (INCEPTION)
DECEMBER 31, DECEMBER 31, THROUGH
2000 1999 DECEMBER 31, 1998
-------------- -------------- -------------------
Dividend yield ................... 0% 0% 0%
Expected volatility .............. 72% 70% 70%
Risk-free rate of return ......... 6.3% 5.5% 5.5%
Expected life .................... 4.07 years 5.53 years 0.3 years
The following summarizes activity under the Company's stock option plans:
WEIGHTED-AVERAGE EXERCISE
NUMBER OF OPTIONS PRICE PER SHARE
----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
-------------- -------------- -------------- -------------
Options outstanding at beginning of the period 5,282,000 873,000 $ 12.47 $ 1.18
Granted ....................................... 2,131,750 5,282,000 17.17 12.47
Exercised ..................................... (538,750) -- ( 1.48) --
Canceled/forfeited ............................ (86,248) (873,000) (12.35) ( 1.18)
--------- --------- -------- -------
Options outstanding at the end of the period .. 6,788,752 5,282,000 $ 16.87 $ 12.47
========= ========= ======== =======
Options exercisable at end of the period ...... 1,615,502 48,498 $ 16.75 $ 1.27
The following table summarizes information for stock options at December
31, 2000:
OUTSTANDING EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED
REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTURAL NUMBER OF EXERCISE
RANGE OF EXERCISE PRICE OPTIONS PRICE LIFE OPTIONS PRICE
------------------------- ----------- ---------- -------------- ----------- -----------
$1.13 - $10.74.......... 57,002 $ 10.21 8.8 57,002 $ 10.21
$10.75 - $15.67.......... 620,100 $ 13.82 9.7 9,000 $ 15.67
$16.81 - $24.56.......... 6,029,650 $ 17.11 8.3 1,549,500 $ 17.00
$26.25 - $35.63.......... 82,000 $ 27.11 9.6 -- N/A
--------- ------- --- --------- ---------
$1.13 - $35.63.......... 6,788,752 $ 16.87 8.5 1,615,502 $ 16.75
========= =========
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts payable, and accrued expenses
approximate fair value because of the short maturity of these items.
The carrying amount of the debt issued pursuant to the Company's credit
agreement with EDC is expected to approximate fair value because the interest
rate changes with market interest rates.
The Company utilizes interest rate cap agreements to limit the impact of
increases in interest rates on its floating rate debt. The interest rate cap
agreements require premium payments to counterparties based upon a notional
principal amount. Interest rate cap agreements entitle the Company to receive
from the counterparties the amounts, if any, by which the selected market
interest rates exceed the strike rates stated in the agreements. The fair value
of the interest rate cap agreements is estimated by obtaining quotes from
brokers and represents the cash requirement if the existing contracts had been
settled at the balance sheet dates.
F-29
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected information related to the Company's senior discount notes is a
follows:
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- -------------
Book value .................... $209,279,908 $ --
Fair value .................... 215,558,305 --
------------ ----------
Net unrecognized gain ......... $ 6,278,397 $ --
============ ==========
Selected information related to the Company's interest rate cap agreements
is as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- ---------------
Notional amount ...................... $2,300,000 $35,607,000
---------- -----------
Fair value ........................... 439 125,815
Carrying amount ...................... 20,550 282,958
---------- -----------
Net unrecognized gain (loss) ......... $ (20,111) $ (157,143)
========== ===========
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.
15. COMMITMENTS AND CONTINGENCIES
On December 21, 1998, the Company entered into a three-year agreement with
Nortel to purchase network equipment and infrastructure. Pursuant to that
agreement, Nortel also agreed to provide installation and optimization
services, such as network engineering and radio frequency engineering, for the
equipment and to grant the Company a nonexclusive license to use the software
associated with the Nortel equipment. The Company has committed to purchase
$82.0 million worth of equipment and services from Nortel. Under the agreement,
the Company will receive a discount on the network equipment and services
because of the Company's affiliation with Sprint PCS, but must pay a premium on
any equipment and services financed by Nortel. If the Company's affiliation
with Sprint PCS ends, Nortel has the right to either terminate the agreement
or, with the Company's consent, modify the agreement to establish new prices,
terms and conditions. the Company entered into a modification of the agreement
with Nortel after December 31, 1999 as described in Note 9.
F-30
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations (unaudited) for 1998, 1999, and 2000
per quarter are as follows:
QUARTER ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ----------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
1998:
Net sales .................... $ -- $ -- $ -- $ --
Operating loss ............... -- -- (401) (558)
Net loss ..................... -- -- (400) (523)
Basic and diluted pro forma
net loss per share ......... $ -- $ -- $ (.01) $ (.01)
1999:
Net sales .................... $ -- $ 35 $ 1,965 $ 6,984
Operating loss ............... (1,963) (4,005) (11,279) (13,425)
Net loss ..................... (1,745) (4,018) (11,926) (15,147)
Basic and diluted proforma
net loss per share ......... $ (.02) $ (.08) $ (.25) $ (.31)
2000:
Net sales .................... $ 11,880 $ 17,553 $ 23,203 $ 30,064
Operating loss ............... (13,114) (10,744) (14,621) (30,418)
Net loss ..................... (15,580) (12,908) (17,470) (34,230)
Basic and diluted net lossper
share ...................... $ (0.27) $ (0.21) $ (0.28) $ (0.57)
Beginning the fourth quarter of 2000, the Company began recording bad debt
expense as a component of selling and marketing. Quarterly net sales have been
adjusted to reflect the reclassification of bad debt expense to selling and
marketing expense. The effect amounted to $194,722, $319,590 and $219,871 for
each of the first three quarters in the year ended December 31, 2000.
17. SUBSEQUENT EVENTS
2001 SENIOR NOTES
On January 31, 2001, Alamosa (Delaware) consummated the offering (the
"2001 Notes Offering") of $250 million aggregate principal amount of senior
notes (the "2001 Senior Notes"). The 2001 Senior Notes mature in ten years
(February 1, 2011), carry a coupon rate of 12 1/2%, payable semiannually on
February 1 and August 1, beginning on August 1, 2001. The net proceeds from the
sale of the 2001 Senior Notes were approximately $241 million, after deducting
the discounts and commission to the initial purchasers and estimated offering
expenses.
Approximately $59.0 million of the proceeds of the 2001 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 2001 Senior Notes and the 2000 Senior Discount Notes, and
the balance will be 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.
F-31
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant terms of the 2001 Senior Notes include:
RANKING -- The 2001 Senior Notes are senior unsecured obligations of
Alamosa (Delaware), rank equally with all its existing and future senior debt
and rank senior to all its existing and future subordinated debt.
GUARANTEES -- The 2001 Senior Notes are fully and unconditionally, jointly
and severally guaranteed on a senior subordinated basis by the current
subsidiaries and future restricted subsidiaries of Alamosa (Delaware).
SECURITY AGREEMENT -- Concurrently with the closing of the 2001 Senior
Notes, Alamosa (Delaware) deposited $59.0 million with the collateral agent, to
secure on a pro rata basis the payment obligations of Alamosa (Delaware) under
the 2001 Senior Notes and the 2000 Senior Discount Notes. The amount deposited
in the security account, together with the proceeds from the investment
thereof, will be sufficient to pay when due the first four interest payments on
the 2001 Senior Notes. Funds will be released from the security account to make
interest payments on the 2001 Senior Notes or the 2000 Senior Discount Notes as
they become due, so long as there does not exist an event of default with
respect to the 2001 Senior Notes or the 2000 Senior Discount Notes.
OPTIONAL REDEMPTION -- During the first thirty six (36) months after the
2001 Notes Offering, Alamosa (Delaware) may use net proceeds of an equity
offering to redeem up to 35% of the accreted value of the notes at a redemption
price of 112.5%.
CHANGE OF CONTROL -- Upon a change of control as defined by the 2001 Notes
Offering, Alamosa (Delaware) will be required to make an offer to purchase the
2001 Senior Notes at a price equal to 101% of the principal amount together
with accrued and unpaid interest.
RESTRICTIVE COVENANTS -- The indenture governing the 2001 Senior Notes
contains covenants that, among other things and subject to important
exceptions, limit the ability of Alamosa (Delaware) and the ability of the
subsidiaries of Alamosa (Delaware) to incur additional debt, issue preferred
stock, pay dividends, redeem capital stock or make other restricted payments or
investments as defined by the 2001 Notes Offering, create liens on assets,
merge, consolidate or dispose of assets, or enter into transactions with
affiliates and change lines of business.
REGISTRATION RIGHTS -- In connection with the 2001 Senior Notes Offering,
Alamosa (Delaware) entered into a registration rights agreement, where Alamosa
(Delaware) and the guarantors of the 2001 Senior Notes agreed, (i) to file a
registration statement within 90 days of the closing of the 2001 Senior Notes
Offering which, when effective, will enable holders of the 2001 Senior Notes to
exchange the privately placed 2001 Senior Notes for publicly registered notes.
The publicly registered notes will have terms substantially identical to those
of the privately placed notes, except that the new notes will be freely
transferable; and (ii) to use reasonable best efforts to cause the registration
statement to become effective under the Securities Act within 180 days after
the closing of the 2001 Senior Notes Offering.
SENIOR SECURED CREDIT FACILITY
On February 14, 2001, Superholdings, Alamosa (Delaware) and Alamosa
Holdings, LLC, as borrower; entered into the $280.0 million Senior Secured
Credit Facility with Citicorp USA, as administrative agent and collateral agent
Toronto Dominion (Texas), Inc., as syndication agent; EDC as co-documentation
agent; First Union National Bank, as documentation agent; and a syndicate of
banking and financial institutions.
F-32
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the principal terms of the Senior Secured
Credit Facility.
The Senior Secured Credit Facility consists of:
o a 7-year senior secured 12-month delayed draw term loan facility in an
aggregate principal amount of up to $293.0 million; and
o 7-year senior secured revolving credit facility (the "Revolving Credit
Facility") in an aggregate principal amount of up to $40.0 million, part
of which will be available in the form of letters of credit.
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 is 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 Facility.
The interest rate on the outstanding loans is 9.4375% 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%.
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 new revolving credit facility.
On February 14, 2001, Alamosa Holdings, LLC borrowed $150.0 million under
the Senior Secured Credit Facility while an additional $90.0 million in term
debt will be available for multiple drawings in amounts to be agreed for a
period of 12 months thereafter. Any amount outstanding at the end of the
12-month period will amortize quarterly in amounts to be agreed beginning May
14, 2004. The Revolving Credit Facility of $40.0 million will be available for
multiple drawings prior to its final maturity, provided that no amounts under
the new revolving credit facility will be available until all amounts under the
new term facility have been fully drawn. The Revolving Credit Facility will
begin reducing quarterly in amounts to be agreed beginning May 14, 2004. All
advances under the Senior Secured Credit Facility are subject to usual and
customary conditions, including actual and pro forma covenant compliance and
the requirement that the ratio of senior debt to net property, plant and
equipment for the most recent fiscal quarter will not exceed 1:1.
Loans under the new term loan portion of the Senior Secured Credit
Facility will be subject to mandatory prepayments from 50% of excess cash flow
for each fiscal year commencing with the fiscal year ending December 31, 2003,
100% of the net cash proceeds (subject to exceptions and reinvestment rights of
asset sales or other dispositions, including insurance and condemnation
proceeds) of property by Alamosa (Delaware) and its subsidiaries, and 100% of
the net proceeds of issuances of debt obligations of Alamosa (Delaware) and its
subsidiaries (subject to exceptions). After the term loans are repaid in full,
mandatory prepayments will be applied to permanently reduce commitments under
the revolving credit portion of the Senior Secured Credit Facility.
F-33
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All obligations of Alamosa Holdings, LLC under the Senior Secured Credit
Facility are unconditionally guaranteed on a senior basis by Superholdings, the
Company, Alamosa (Delaware) and, subject to certain exceptions, by each current
and future direct and indirect subsidiary of Alamosa (Delaware), including
Alamosa PCS, Inc., Roberts and WOW.
The Senior Secured Credit Facility is secured by a first priority pledge
of all of the capital stock of Alamosa Holdings, LLC and subject to certain
exceptions, each current and future direct and indirect subsidiary of Alamosa
(Delaware), as well as a first priority security interest in substantially all
of the assets (including all of the Sprint affiliation agreements with the
Company, Roberts and WOW) of Alamosa (Delaware) and, subject to certain
exceptions, each current and future direct and indirect subsidiary of Alamosa
(Delaware).
The Senior Secured Credit Facility contains customary events of default,
including, but not limited to:
o the non-payment of the principal, interest and other obligations under
the new Senior Secured Credit Facility;
o the inaccuracy of representations and warranties contained in the credit
agreement or the violation of covenants contained in the credit
agreement;
o cross default and cross acceleration to other material indebtedness;
o bankruptcy;
o material judgments and certain events relating to compliance with the
Employee Retirement Income Security Act of 1974 and related regulations;
o actual or asserted invalidity of the security documents or guaranties of
the Senior Secured Credit Facility;
o the occurrence of a termination event under the management, licenses and
other agreements between any of the Company, WOW, Roberts and their
subsidiaries and Sprint PCS or a breach or default under the consent and
agreement entered into between Citicorp USA, Inc., as administrative
agent for the lenders, and Sprint PCS;
o loss of rights to benefit of or the occurrence of any default under
other material agreements that could reasonably be expected to result in
a material adverse effect on Alamosa Holdings, LLC;
o the occurrence of a change of control;
o any termination, revocation or non-renewal by the FCC of one or more
material licenses; and
o the failure by Alamosa (Delaware) to make a payment, if that could
reasonably be expected to result in the loss, termination, revocation,
non-renewal or material impairment of any material licenses or otherwise
result in a material adverse affect on Alamosa Holdings, LLC.
The Senior Secured Credit Facility contains numerous affirmative and
negative covenants customary for credit facilities of a similar nature,
including, but not limited to, negative covenants imposing limitations on the
ability of Alamosa (Delaware), Alamosa Holdings, LLC and their subsidiaries,
and as appropriate, Superholdings, to, among other things, (i) declare
dividends or repurchase stock; (ii) prepay, redeem or repurchase debt; (iii)
incur liens and engage in sale-leaseback transactions; (iv) make loans and
investments; (v) incur additional debt, hedging agreements and contingent
obligations; (vi) issue preferred stock of subsidiaries; (vii) engage in
mergers, acquisitions and asset sales; (viii) engage in certain transactions
with affiliates; (ix) amend, waive or otherwise alter material agreements or
enter into restrictive agreements; and (x) alter the businesses they conduct.
F-34
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Alamosa (Delaware) is also subject to the following financial covenants,
which will apply until June 30, 2002:
o minimum numbers of Sprint PCS subscribers;
o providing coverage to a minimum number of residents;
o minimum service revenue;
o maximum negative EBITDA or minimum EBITDA;
o ratio of senior debt to total capital;
o ratio of total debt to total capital; and
o maximum capital expenditures.
After June 30, 2002, the financial covenants will be the following:
o ratio of senior debt to EBITDA;
o ratio of total debt to EBITDA;
o ratio of EBITDA to total fixed charges (the sum of debt service, capital
expenditures and taxes);
o ratio of EBITDA to total cash interest expense; and
o ratio of EBITDA to pro forma debt service.
Unless waived by the Senior Secured Credit Facility lenders, the failure
of Superholdings, Alamosa Holdings, LLC and their subsidiaries to satisfy or
comply with any of the financial or other covenants, or the occurrence of an
event of default under the Senior Secured Credit Facility, will entitle the
lenders to declare the outstanding borrowings under the Senior Secured Credit
Facility immediately due and payable and exercise all or any of their other
rights and remedies. Any such acceleration or other exercise of rights and
remedies would likely have a material adverse effect on Superholdings, the
Company, Alamosa (Delaware), Alamosa Holdings, LLC and their subsidiaries.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR SECURED
CREDIT FACILITY
Sprint PCS entered into a consent and agreement with Citicorp, that
modifies Sprint PCS' rights and remedies under our affiliation agreements with
Sprint PCS, for the benefit of Citicorp and the holders of the Senior Secured
Credit Facility and any refinancing thereof.The consent and agreement with
Citicorp generally provide, among other things, Sprint PCS' consent to the
pledge of substantially all of our assets, including our rights in our
affiliation agreements with Sprint PCS, and that our affiliation agreements
with Sprint PCS generally may not be terminated by Sprint PCS until the Senior
Secured Credit Facility is satisfied in full pursuant to the terms of the
consents and agreement.
Subject to the requirements of applicable law, so long as the Senior
Secured Credit Facility remains outstanding, Sprint PCS has the right to
purchase our operating assets or the or the partnership interests, membership
interests or other equity interests of our operating subsidiaries, upon its
receipt of notice of an acceleration of the Senior Secured Credit Facility,
under certain terms.
If Sprint PCS does not purchase our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries after an acceleration of the obligations under the Senior Secured
Credit Facility, then the administrative agent may sell the operating assets or
the partnership interests, membership interests or other equity interests of
our operating subsidiaries.
MERGERS WITH ROBERTS WIRELESS COMMUNICATIONS, L.L.C. AND WASHINGTON OREGON
WIRELESS, LLC
On July 31, 2000, Holdings signed definitive agreements to merge two
Sprint PCS affiliates, Roberts Wireless Communications, L.L.C. ("Roberts") and
Washington Oregon Wireless, LLC ("WOW") into its
F-35
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations. Roberts has a management agreement with Sprint PCS to provide
personal communications services to approximately 2.5 million residents
primarily in the states of Missouri, Kansas and Illinois. WOW has a similar
management agreement with Sprint PCS to provide services to approximately 1.5
million people primarily in Washington and Oregon.
These mergers occurred on February 14, 2001. It is anticipated that both
of these transactions will be accounted for under the purchase accounting
method.
The consummation of these transactions contemplates a merger of the
Company, pursuant to which the Company, Roberts and WOW became subsidiaries of
a new holding company, Superholdings, and the Company's stockholders became
stockholders of Superholdings.
Roberts is a wholly owned subsidiary of Roberts Wireless Holdings, L.L.C.
("Roberts Holdings"). Pursuant to the Roberts merger agreement, the members of
Roberts Holdings received 13.5 million shares of Superholdings and
approximately $4.0 million in cash. Superholdings will assume the net debt of
Roberts in the transaction, which amounted to approximately $56.0 million as of
December 31, 2000.
WOW is a wholly owned subsidiary of WOW Holdings, LLC ("WOW Holdings").
Pursuant to the WOW merger agreement, the members of WOW Holdings received 6.05
million shares of Superholdings and $12.5 million in cash. Superholdings will
assume the net debt of WOW in the transaction, which amounted to approximately
$31 million as of December 31, 2000.
Prior to consummating the mergers, on July 31, 2000, Operations entered
into services agreements with Roberts and WOW, effective July 31, 2000 and
September 1, 2000, respectively, whereby Operations began to manage the
operations of Roberts and WOW, pending completion of the mergers. Operations
provides various services in connection with the operation of Robert's and
WOW's businesses, including (a) all network management services, (b) management
of all sales and marketing services, (c) through the management agreements with
Sprint PCS, customer card, billing, and other services, and (d) certain general
and administrative, executive, financial and accounting, human resources, legal
and other professional and forecasting services. Under the terms of the
agreement, Roberts and WOW each paid Operations a management fee of $100,000
per month for the services provided by Operations and each reimbursed
Operations for certain costs and expenses incurred or paid by Operations in
providing these services.
The terms of the Roberts and WOW services agreements began on July 31,
2000 and September 1, 2000, respectively, and ended upon the completion of the
respective mergers.
MERGER WITH SOUTHWEST PCS
On March 9, 2001, Superholdings announced the signing of a definitive
agreement to merge Sprint PCS network partner, Southwest PCS Holdings, Inc.
("Southwest") into our operations. Southwest shareholders will exchange 100
percent of their common shares of Southwest for 11.1 million shares of our
common stock and $5 million in cash. The transaction will be structured as a
merger. The acquisition is subject to certain conditions including expiration
of the statutory waiting period under federal anti-trust laws. We expect to
complete the acquisition at the end of the first quarter of 2001.
Southwest has a management agreement with Sprint PCS to service more than
2.8 million residents with the exclusive right to market 100 percent digital
and wireless products and services under the Sprint and Sprint PCS brand names.
The Southwest territories covers markets in Texas, Oklahoma and Arkansas,
encompassing over 2,100 heavily traveled highway miles. As of December 31,
2000, Southwest had launched service in 18 markets covering approximately 1.5
million residents and had approximately 40,000 customers.
F-36
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Alamosa Holdings, Inc. (successor to Alamosa PCS
Holdings, Inc.)
Our audits of consolidated financial statements referred to in our report dated
February 19, 2001, except for Note 17 as to which the date is March 9, 2001,
appearing in the 2000 annual report on Form 10-K of Almosa Holdings, Inc. also
included an audit of the financial statement schedule listed in item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 2001
F-37
SCHEDULE II
ALAMOSA HOLDINGS, INC.
(SUCCESSOR TO ALAMOSA PCS HOLDINGS, INC.)
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD JULY 16, 1998 (INCEPTION) THROUGH
DECEMBER 31, 2000 (IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
CLASSIFICATION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
-------------------------------------------- -------------- ----------- ------------ --------------
December 31, 1998
Allowance for doubtful accounts ........... $ -- $ -- $-- $ --
December 31, 1999
Allowance for doubtful accounts ......... $ -- $ 162 $-- $ 162
December 31, 2000
Allowance for doubtful accounts ......... $162 $1,341 $-- $1,503
This schedule should be read in conjunction with the Company's audited
consolidated financial statements and related notes thereto that appear in this
prospectus.
F-38
INDEPENDENT AUDITOR'S REPORT
Members
Roberts Wireless Communications, LLC
We have audited the accompanying consolidated balance sheets of Roberts
Wireless Communications, LLC (the Company) as of December 31, 2000 and 1999,
and the related consolidated statement of income, members' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Roberts Wireless
Communications, LLC as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the year then ended, in accordance with
generally accepted accounting principles.
MELMAN, ALTON & CO., L.L.C.
March 24, 2001
F-39
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
ASSETS
Current Assets
Cash .............................................. $ -- $ 3,144,756
Accounts Receivable ............................... 3,704,786 389,951
Inventory ......................................... 1,156,207 226,968
Prepaid Rent ...................................... 364,296 120,000
Note Receivable ................................... 16,375,106 --
------------- ------------
Total Current Assets ............................ 21,600,395 3,881,675
------------- ------------
Fixed Assets
Land and Buildings ................................ 1,329,270 216,335
Communication Equipment ........................... 71,429,741 14,208,718
Furniture & Fixtures .............................. 996,812 191,207
Vehicles .......................................... 113,553 170,000
------------- ------------
Total Cost ...................................... 73,869,376 14,786,260
Less: Accumulated depreciation .................... (6,732,648) (1,454,939)
Total Fixed Assets .............................. 67,136,728 13,331,321
------------- ------------
Intangible Assets (net of amortization) ........... 6,378,893 10,129,487
Debt Issuance Costs (net of amortization) ......... 1,849,450 --
Other Noncurrent Assets ........................... 24,879 --
------------- ------------
Total Assets .................................... $ 96,990,345 $ 27,342,483
============= ============
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses ............. $ 18,616,283 $ 2,371,177
Note Payable and Other Current Liability .......... 37,320,272 --
Total Current Liabilities ....................... 55,936,555 2,371,177
------------- ------------
Long Term Liabilities
Notes Payable ..................................... 56,000,000 25,011,439
------------- ------------
Total Liabilities .................................. 111,936,555 27,382,616
------------- ------------
Commitments and Contingencies ......................
Members Equity ..................................... (14,946,210) (40,133)
------------- ------------
Total Liabilities and Equity ....................... $ 96,990,345 $ 27,342,483
============= ============
See accompanying notes and accountant's report.
F-40
ROBERTS WIRELESS COMMUNICATIONS, L.L.C.
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------- ------------------
Revenues:
Subscriber revenues ......................... $ 8,492,521 $ 2,025,110
Roaming and travel revenues ................. 4,920,614 469,328
------------- ------------
Service revenues ............................ 13,413,135 2,494,438
Product sales ............................... 1,315,616 379,259
------------- ------------
Total Revenue ............................. 14,728,751 2,873,697
------------- ------------
Cost and expenses:
Cost of services and operations ............. 10,004,526 1,748,565
Cost of products sold ....................... 2,493,853 834,236
Selling and marketing ....................... 6,975,964 2,025,429
General and administrative expenses ......... 2,507,262 702,829
Depreciation and amortization ............... 5,671,944 1,799,281
------------- ------------
Total costs and expenses .................. 27,653,549 7,110,340
------------- ------------
Loss from operations ...................... (12,924,798) (4,236,643)
Interest and other income ................... 98,085 65,739
Interest expense ............................ (3,279,364) (417,337)
------------- ------------
Net Loss .................................. $ (16,106,077) $ (4,588,241)
============= ============
See accompanying notes and accountant's report.
F-41
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2000 AND 1999
CONTRIBUTED
CONTRIBUTED CAPITAL ACCUMULATED
CAPITAL MEMBERS RELATED ENTITIES DEFICIT MEMBERS' EQUITY
----------------- ------------------ ---------------- ----------------
Members' Equity (Deficit) - December 31,
1998 .......................................... $1,176,200 $3,709,129 $ (3,632,381) $ 1,252,948
Contributed Capital - Members .................. 2,903,000 2,903,000
Contributed Capital - Related Entities ......... 392,160 392,160
Net Loss ....................................... (4,588,241) (4,588,241)
------------- -------------
Members Equity (Deficit) - December 31,
1999 .......................................... $4,079,200 $4,101,289 $ (8,220,622) $ (40,133)
Contributed Capital - Members .................. 1,200,000 1,200,000
Net Loss ....................................... (16,106,077) (16,106,077)
------------- -------------
Members Equity (Deficit) - December 31,
2000 .......................................... $5,279,200 $4,101,289 $ (24,326,699) $ (14,946,210)
========== ========== ============= =============
See accompanying notes and accountant's report.
F-42
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------------- ----------------
Cash Flows From Operating Activities:
Net Loss .................................................... $ (16,106,077) $ (4,588,241)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 5,671,944 1,799,281
Change in assets and liabilities:
Increase in accounts receivable ........................... (3,314,835) (1,073,722)
Increase in inventory ..................................... (929,239) (226,968)
Increase in accounts payable and accrued expenses ......... 14,995,688 2,371,177
(Increase) decrease in deposits ........................... (24,879) 1,000,000
Increase in prepaid expenses .............................. (244,296) (120,000)
------------- -------------
Net Cash Provided by (Used in) Operating Activities .......... 48,306 (838,473)
------------- -------------
Cash Flows From Investing Activities
Additions to fixed assets and operating rights .............. (55,612,297) (22,489,025)
------------- -------------
Net Cash Used in Investing Activities ........................ (55,612,297) (22,489,025)
------------- -------------
Cash Flows From Financing Activities:
Increase in loan costs ...................................... (714,492) (1,521,841)
Proceeds from contributed capital ........................... 1,200,000 2,903,000
Proceeds from debt .......................................... 51,613,455 25,011,439
------------- -------------
Net Cash Provided by Financing Activities .................... 52,098,963 26,392,598
------------- -------------
Net Increase (Decrease) in Cash .............................. (3,465,028) 3,065,100
Cash and cash equivalents at Beginning of Year ............... 3,144,756 79,656
------------- -------------
Cash (Bank Overdraft) at End of Year ......................... $ (320,272) $ 3,144,756
============= =============
Supplemental Disclosure ......................................
Cash Paid for Interest ...................................... $ 1,697,952 $ --
============= =============
See accompanying notes and accountant's report.
F-43
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. ORGANIZATION AND BUSINESS POLICIES
NATURE OF OPERATIONS -- Roberts Wireless Communications, LLC (The Company)
was formed May, 1998 as a limited liability company, to engage in the business
of wireless communications and is currently operating as a Sprint PCS
affiliate.
INTERIM NETWORK OPERATING AGREEMENT/ASSET PURCHASE -- On January 21, 1999,
Sprint PCS assigned the Columbia, MO Basic Trading Area ("BTA") and the
Jefferson City, MO BTA service areas to the Company through a purchase
agreement. This assignment included an agreement whereby the Company receives
92% of billed revenue generated by subscribers in these markets. At the time of
this assignment, the Company was in the process of building its master
switching center, thus not capable of operating the network. The Company and
Sprint entered into an Interim Network Operating Agreement whereby the
twenty-three cell sites located in the Columbia and Jefferson City, MO service
areas would remain on the Sprint PCS St. Louis switch, and, Sprint PCS would
continue to maintain such properties until: a) all leases for cell sites in
both service areas had been transferred from Sprint PCS to the Company and b)
The Company paid Sprint PCS in full for the "Asset Purchase". On September 8,
1999, the Asset Purchase was consummated although three of the total
twenty-three leases had not been transferred. From January 21, 1999 through
April 4, 2000, the Company incurred Interim Network Operating fees of varying
amounts based upon the number of cell site leases not transferred. On May 19,
2000, all cell sites in the Columbia and Jefferson City service areas were
transferred off the Sprint PCS switch and connected to the Company's switch.
The purchase price for the operating rights and related equipment totaled
$12.9 million. The fair value of the equipment was $4 million. The remaining
$8.9 million was recorded as an intangible asset and is being amortized over
the remaining life of the Sprint Agreement of 18 years.
WHOLLY-OWNED SUBSIDIARY -- The Company owns 100% of Roberts Wireless
Properties, LLC. This subsidiary is inactive.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of any contingent assets and
liabilities, and the reported revenues and expenses.
INVENTORY -- Inventory consists of handsets and related accessories.
Inventories purchased for resale will be carried at the lower of cost
(first-in, first-out), or market. Market will be determined using replacement
cost.
PROPERTY AND EQUIPMENT -- Property and equipment are reported at cost less
accumulated depreciation. Repair and maintenance costs are charged to expense
as incurred; significant renewals and betterments are capitalized.
When depreciable assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the respective accounts,
and any gains or losses on disposition are recognized in income.
Property and equipment are depreciated using the straight-line method
based on estimated useful lives of the assets. Asset lives are as follows:
Buildings ....................... 39 years
Furniture and Fixtures .......... 5-7 years
Communication Equipment ......... 5-15 years
Vehicles ........................ 5 years
F-44
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- The Company does not believe
that any recently issued accounting pronouncements will have a material impact
on its financial position, results of operations or cash flows.
REVENUE RECOGNITION -- The Company recognizes revenue as services are
performed. Sprint PCS handles the Company's billings and collections and
retains 8% of collected service revenues from Sprint PCS subscribers based in
the Company's territory and from non-Sprint PCS subscribers who roam onto the
Company's network. The amount retained by Sprint PCS is recorded as an
operating expense. Revenues generated from the sale of handsets and accessories
and from roaming services provided to Sprint PCS customers who are not based in
the Company's territory are not subject to the 8% retainage.
ADVERTISING COSTS -- Advertising costs are expensed as incurred.
Advertising expenses totaled approximately $3,143,566 during 2000 and $565,751
during 1999.
ACCRUAL BASIS OF ACCOUNTING -- Assets and liabilities and income and
expenses are recognized on the accrual basis of accounting.
CONCENTRATION OF CREDIT RISK -- The Company maintains deposits in excess
of federally insured limits. Statement of Financial Accounting Standards No.
105 identifies these items as a concentration of credit risk requiring
disclosure, regardless of the degree of risk. The risk is managed by
maintaining all deposits in high quality financial institutions.
ACCOUNTS RECEIVABLE -- The Company uses the allowance method for
recognizing bad debts.
AMORTIZATION -- Loan costs are capitalized and amortized over the term of
the loan on a straight-line basis over eight years.
INCOME TAXES -- No income tax provision has been included in the financial
statements, since income or loss of the limited liability company is reported
by the members on their individual tax returns.
3. NOTE PAYABLE AND OTHER CURRENT LIABILITY
Note Payable -- Alamosa $ 37,000,000
Origination Date: July 31, 2000
Collateral: Membership Interest
Maturity Date: At merger closing
Interest Rate: 9.5%
Balance December 31, 2000 $ 37,000,000
Bank Overdraft 320,272
------------
$ 37,320,272
============
The note payable was paid off February 14, 2001, when the merger with
Alamosa was completed.
4. LONG TERM DEBT
Note payable -- DLJ Origination date: September 8, 1999
Collateral: All assets owned by the company.
Maturity Date: September 8, 2007 $56,000,000
===========
The Company entered into a credit agreement with Lucent. The financing
terms permit the Company to borrow $56 million through three commitment
tranches to finance the costs of equipment and services purchased from Lucent.
In exchange for Lucent base stations purchased by the Company in connection
with the swap-out of 23 Nortel base stations, Lucent agreed to give the Company
credits amounting to
F-45
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
$2,061,428 to be used for future purchases of Lucent products. This loan was
paid off on February 14, 2001, when the merger with Alamosa was completed.
The loan shall bear interest at the alternate base rate (ABR), plus the
applicable margin set forth as follows:
The applicable margin for ABR Borrowings is a percentage per annum based
on the ratio of total debt to annualized earnings before interest, taxes,
depreciation, and amortization ("EBITDA") of the Borrower as of the prior
fiscal quarter (calculated on a rolling 12-month basis) as follows:
APPLICABLE MARGIN FOR
LEVERAGE ABR BORROWINGS
--------------------------------------------------------- ----------------------
(greater than) 10 x 3.50%
= or (less than) 10 x but (greater than) 6 x 3.25%
= or (less than) 6 x but (less than) 4 x 3.00%
= or (less than) 4 x 2.75%
The interest rate at December 31, 2000 approximated 11.5%.
Maturities of long-term debt for the years succeeding December 31, 2000
were scheduled as follows: This note was paid off on February 14, 2001 (Note
7).
Year Amount
----------------------------- -------
2001 ...................... $ 0
2002 ...................... 0
2003 ...................... 5,002,288
2004 ...................... 5,002,288
2005 ...................... 5,002,288
Thereafter ................ 40,993,136
------------
$ 56,000,000
============
5. RELATED PARTY TRANSACTIONS AND LEASE COMMITMENTS
Capital has been contributed by related entities of the Company. Capital
was contributed in the form of expenditures paid by related entities.
During the year 2000, the Company entered into a loan agreement with
Roberts Tower Company. At December 31, 2000, the amount outstanding was
$16,375,106. The loan was fully repaid on February 14, 2001. Roberts Tower
Company is a corporation owned by the members of the Company.
Agreements with Affiliates - The Company has entered into an agreement
with Roberts Tower Company for the rental of broadcasting equipment. Amounts
paid / accrued under the agreement totaled $293,494 and $0 for the years ended
December 31, 2000 and 1999, respectively.
The Company also has entered into an agreement with Roberts Brothers
Properties, LLC for the rental of office facilities. Amount paid / accrued
under the agreement totaled $128,334 and $0 for the years ended December 31,
2000 and 1999, respectively. Roberts Brothers Properties, LLC is a limited
liability company owned by the members of the Company.
The Company has various operating leases, primarily related to rentals of
tower sites and office facilities.
At December 31, 2000, the aggregate minimum rental commitments under
noncancellable operating leases for the periods shown are as follows:
F-46
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
Year Amount
----------------------------- --------
2001 ...................... $ 1,236,000
2002 ...................... 1,273,080
2003 ...................... 1,311,272
2004 ...................... 1,350,611
2005 ...................... 1,391,129
Thereafter ................ 5,994,564
------------
$ 12,556,656
============
6. COMMITMENTS AND CONTINGENCIES
o The Company is a defendant in a lawsuit . The plaintiff is seeking
$300,000. The Company has filed a motion to dismiss the suit on the basis
that it fails to state any legal claim on which relief can be granted by
the court as a matter of loss. If the motion to dismiss is denied, the
Company intends to vigorously defend the suit. The ultimate resolution of
this matter is not ascertainable at this time. No provision has been made
in the financial statements related to this claim.
7. SUBSEQUENT EVENTS
On February 14, 2001, the Company combined its operations with Alamosa PCS
Holdings, Inc. in a reorganization transaction in which the Company and Alamosa
PCS Holdings, Inc. each became a wholly-owned subsidiary of Alamosa Holding,
Inc.
The members' of the Company received 13,500,000 shares of Alamosa PCS
Holdings, Inc. stock and $4,000,000 in cash. As part of the reorganization, the
Company transferred to the members', Roberts Tower Company or other entities
controlled by them, certain assets amounting to $7,095,293 that include real
estate, towers, Nortel base stations and retail store sites that were funded
directly or indirectly with capital contributions to the Company by the
members'.
On February 14, 2001, Alamosa, as borrower; entered into a $280.0 million
secured credit facility with Citicorp USA, as administrative agent and
collateral agent Toronto Dominion (Texas), Inc., as syndication agent; EDC as
co-documentation agent; First National Bank, as documentation agent; and a
syndicate of banking and financial institutions.
The following is a summary of the principal terms of the new credit
facility.
The new credit facility consists of:
o a 7-year senior secured 12-month delayed draw term loan facility in an
aggregate principal amount of up to $255.0 million; and
o 7-year senior secured revolving credit facility in a aggregate principal
amount of up to $40.0 million, part of which will be available in the form
of letters of credit.
Under the new credit facility, interest will accrue, at Alamosa'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 agents'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. The applicable interest margins are subject to reductions
under a pricing grid based on ratios of Alamosa's total debt to its earnings
before interest, taxes, depreciation and amortization ("EBITDA"). The interest
rate margins will increase be any additional 200 basis points in the event
Alamosa fails to pay principal, interest or other amounts as they become due
and payable under the new credit facility. This secured credit facility with
Citicorp USA was used to pay off DLJ (Note 4).
F-47
ROBERTS WIRELESS COMMUNICATIONS, LLC AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
8. RECLASSIFICATIONS
Certain items in the December 31, 1999 report have been reclassified to
conform to current year classifications. Such reclassifications had no effect
on previously reported net income.
F-48
INDEPENDENT AUDITOR'S REPORT
Board of Managers
Washington Oregon Wireless, LLC
Lake Oswego, Oregon
We have audited the accompanying balance sheets of Washington Oregon
Wireless, LLC (a limited liability company) as of December 31, 2000 and 1999,
and the related statements of income, members' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the financial position of Washington Oregon Wireless,
LLC as of December 31, 2000 and 1999, and the results of its operations,
members' equity, and cash flows for years then ended in conformity with
generally accepted accounting principles.
Aldrich, Kilbride & Tatone LLP
February 28, 2001
Salem, Oregon
F-49
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 8,441,896 596,445
Accounts receivable less allowance for doubtful accounts of zero ........ 552,018 --
Inventory ............................................................... 510,089 --
Prepaid expenses and other current assets ............................... 273,632 --
------------- -------
Total current assets .................................................. 9,777,635 596,445
Property, plant, and equipment, net (Note 5) ............................. 36,686,735 10,413,155
Deferred financing costs (Note 10) ....................................... 1,479,324 --
Other assets ............................................................. 149,232 --
------------- ----------
$ 48,092,926 11,009,600
============= ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities -- accounts payable and accrued expenses ............. $ 7,825,710 8,206,097
------------- ----------
Long-term liabilities:
Note payable CoBank (Note 9) ............................................ 30,960,318 --
Note payable Alamosa (Note 2) ........................................... 9,865,233 --
------------- ----------
Total long-term liabilities ........................................... 40,825,551 --
------------- ----------
Members' equity (deficit) (Note 1):
Capital contributed ..................................................... 15,573,311 3,829,120
Accumulated deficit ..................................................... (15,381,646) (1,025,617)
Capital acquisition costs ............................................... (750,000) --
------------- ----------
Total members' equity (deficit) ....................................... (558,335) 2,803,503
------------- ----------
$ 48,092,926 11,009,600
============= ==========
The accompanying notes are an integral part of the financial statements.
F-50
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---------------- -------------
Revenues:
Subscriber revenue .......................... $ 806,850 --
Travel and roaming revenues ................. 1,016,635 --
------------- ---------
Total service revenues .................... 1,823,485 --
Product sales ............................... 682,576 --
------------- ---------
Total revenues ............................ 2,506,061 --
------------- ---------
Costs and expenses:
Cost of services and operations ............. 4,373,599 --
Cost of products sold ....................... 1,750,059 --
Selling and marketing expenses .............. 4,106,230 --
General and administrative expenses ......... 4,377,348 986,210
Depreciation and amortization ............... 1,432,661 923
------------- -------
Total costs and expenses .................. 16,039,897 987,133
------------- -------
Loss from operations ...................... (13,533,836) (987,133)
------------- --------
Other income (expense):
Interest and other income ................... 155,966 6,992
Interest expense ............................ (978,159) --
------------- --------
Total other income (expense) .............. (822,193) 6,992
------------- --------
Net Loss .................................. $ (14,356,029) (980,141)
============= ========
The accompanying notes are an integral part of the financial statements.
F-51
STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
CAPITAL TOTAL
CAPITAL ACCUMULATED ACQUISITION MEMBERS'
CONTRIBUTED DEFICIT COST EQUITY (DEFICIT)
------------- --------------- ------------- -----------------
Members' equity (deficit),
December 31, 1998 ................. $ 33,000 (45,476) -- (12,476)
Capital contributions ............. 3,796,120 -- -- 3,796,120
Net loss .......................... -- (980,141) -- (980,141)
----------- -------- -- ---------
Members' equity (deficit),
December 31, 1999 ................. 3,829,120 (1,025,617) -- 2,803,503
Capital contributions ............. 11,744,191 -- -- 11,744,191
Net loss .......................... -- (14,356,029) -- (14,356,029)
Capital acquisition costs ......... -- -- (750,000) (750,000)
----------- ----------- -------- -----------
Members' equity (deficit),
Decmber 31, 2000 .................. $15,573,311 (15,381,646) (750,000) (558,335)
=========== =========== ======== ===========
The accompanying notes are an integral part of the financial statements.
F-52
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------------- ---------------
Cash flows from operating activities:
Net loss ...................................................... $ (14,356,029) (980,141)
Contributed services .......................................... 200,000 100,000
Depreciation and amortization ................................. 1,432,661 923
Adjustments to reconcile net loss to net cash used by operating
activities:
Changes in assets and liabilities:
Accounts receivable ........................................... (552,018) --
Inventory ..................................................... (510,089) --
Prepaid expenses and other current assets ..................... (273,632) --
Accounts payable and accrued expenses ......................... 5,377,452 25,060
------------- --------
Net cash used by operating activities ....................... (8,681,655) (854,158)
------------- --------
Cash flows from investing activities:
Capital expenditures .......................................... (33,326,508) (2,249,596)
Purchase of other assets ...................................... (149,232) --
------------- ----------
Net cash used by investing activities ....................... (33,475,740) (2,249,596)
------------- ----------
Cash flows from financing activities:
Member capital contributions .................................. 11,544,191 3,696,120
Proceeds from note payable -- Alamosa ......................... 9,865,233 --
Proceeds from note payable -- CoBank .......................... 30,960,318 --
Loan financing costs .......................................... (1,616,896) --
Capital acquisition costs ..................................... (750,000) --
------------- ----------
Net cash provided by financing activities ................... 50,002,846 3,696,120
------------- ----------
Net increase in cash and cash equivalents ................... 7,845,451 592,366
Cash and cash equivalents, beginning ........................... 596,445 4,079
------------- ----------
Cash and cash equivalents, ending .............................. $ 8,441,896 596,445
============= ==========
The accompanying notes are an integral part of the financial statements.
F-53
STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
Cash paid during the year for interest ................... $ 1,011,142 --
============ ==
Non-cash investing activities:
Additions to communications network and construction in
progress ............................................. $ 24,807,257 10,399,330
Equipment additions .................................. 1,172,999 14,748
Leasehold improvements ............................... 1,588,413 --
Equipment purchases included in accounts payable:
Beginning ............................................ 8,164,482 --
Ending ............................................... (2,406,643) (8,164,482)
------------ ----------
Net cash additions to fixed assets ................. $ 33,326,508 2,249,596
The accompanying notes are an integral part of the financial statements.
F-54
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BUSINESS ACTIVITY
Washington Oregon Wireless, LLC (the Company) (WOW) operates as an Oregon
Limited Liability Company comprised of 27 members as of December 31, 2000. As
an LLC, the members of the Company have limited personal liability for the
obligations and debts of the entity. The Company was formed in 1998 for the
purpose of building out and operating personal communications services (PCS)
networks in Washington and Oregon, to provide other wireless telephone
services, and construct other infrastructure, towers, and networks as the
members may approve.
AFFILIATION AGREEMENT
In February 1999, the Company entered into an "Affiliation Agreement" with
Sprint PCS (Sprint). As a Sprint PCS affiliate, WOW has the exclusive right to
provide digital PCS services under the Sprint and Sprint PCS brand name in its
service areas in rural portions of Oregon and Washington for a period of up to
50 years. Under the Agreement, WOW is responsible for designing, building,
owning, and managing a communications network in its service area to the
standards established by Sprint, which will operate as a single-integrated
system with other Sprint PCS service areas. As part of the Sprint PCS
Agreement, WOW has contracted with Sprint PCS to provide back office services
such as customer activation, handset logistics, billing, customer service, and
network monitoring.
MEMBERSHIP
All members are required to own a membership interest in the Company. Each
member of the Company has subscribed to a minimum of $100,000 cash (or
contributed services, see Note 4) to be admitted in the LLC. Only one class of
members exists and the entity's life shall exist indefinitely until dissolved
as provided by the operating agreement. New members may be admitted with the
approval of members comprising 67% of the ownership rights.
Each member of the Company entered into the Amended and Restated Operating
Agreement of Washington Oregon Wireless, LLC that covered the amount and timing
of its contributions to the LLC. Actual capital calls were made at the
discretion of the Board of Managers of the Company. The original subscription
agreements have been superseded by the Amended and Restated Operating
Agreement. Member capital calls were suspended after the first quarter 2000 due
to the proposed merger (see Note 2). As a result of the merger closing in 2001,
there are no capital subscriptions receivable at December 31, 2000.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The Company maintains
its cash in bank deposit accounts that, at times, may exceed federally insured
limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
INVENTORY
Inventory consists of handsets and phone accessories at retail store
locations. Inventory is stated at the lower of cost, determined using the
first-in, first-out method, or market. Market is determined using replacement
cost in accordance with industry standards.
F-55
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (CONTINUED)
FIXED ASSETS
Fixed assets include communication network, office equipment, leasehold
improvements, and construction in progress. Office equipment and leasehold
improvements are recorded at cost and depreciated on a straight-line basis over
the estimated life of the assets (10 years for the communication network and 5
years for other equipment), or the term of the lease as appropriate. The
communication network and construction in progress consists of the costs of
acquiring wireless communication sites for the placement of base stations,
purchases of the related equipment, and construction of a mobile switching
center in Beavercreek, Oregon.
INCOME TAXES
The Company is not a taxpaying entity for federal income tax purposes, and
thus, no income tax expense has been recorded in the statements. Income (loss)
of the Company is included in the members' tax returns.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR START-UP COSTS
The Company accounts for start-up related costs in accordance with AICPA
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. The
Company expensed start-up costs as incurred unless the costs qualify for
capitalization under other generally accepted accounting principles.
ACCOUNTING FOR APPRECIATION RIGHTS
The Company accounts for its Value Appreciation Rights Plan (see Note 7)
in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation. Statement No. 123 established fair
value as the measurement basis for accounting for employee stock option plans
and similar equity instruments.
INTEREST CAPITALIZATION
The Company follows the policy of capitalizing interest as a component of
the cost of property, plant, and equipment constructed for its own use. For the
year ended December 31, 2000, total interest incurred was $1,567,398 (including
$87,044 of amortization of deferred financing costs), of which $589,239 has
been capitalized and $978,159 expensed. The Company incurred no interest for
the year ended December 31, 1999.
ADVERTISING
Advertising costs, which are expensed to operations when incurred,
amounted to $884,428 in 2000 (none in 1999).
F-56
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (CONTINUED)
2. REORGANIZATION
On July 31, 2000, the Company entered into a definitive agreement to merge
with Sprint PCS affiliate Alamosa PCS Holdings, Inc. (Alamosa). Pursuant to the
Reorganization Agreement, the members of the Company will receive 6,050,000
shares of Alamosa stock and $12.5 million in cash in exchange for 100% of the
ownership of the Company. The merger was completed on February 14, 2001.
Upon closing of the merger, all units granted under the VAR Plan (see Note
7) became fully vested, and the units were valued as of such closing. The
valuation is based on the Company's total equity value as reflected in the
merger (including stock and cash received by the members of the Company),
without deduction of the cost of such merger and without reducing the value of
stock the members of the Company receive, by a discount for any "lock-up"
period applicable to such stock. All amounts owed under the plan were either
paid directly by the members out of the proceeds received under the merger or
assumed by Alamosa as described below. The Company incurred no liability
related to the plan.
As described in the Agreement and Plan of Reorganization, on the closing
date Alamosa, or an affiliate of Alamosa, assumed the obligations owed under
the VAR Plan to the Company's employees whom Alamosa or its affiliates elected
to employ and assumed the obligations owed to the CEO of the Company under the
VAR Plan.
In addition, on July 31, 2000, the Company entered into a services
agreement with Alamosa Operations, Inc. (Operations), a subsidiary of Alamosa,
effective September 30, 2000, whereby Operations began to manage the operations
of the Company pending the outcome of the merger. Operations provides various
services in connection with the operation of the Company's business, including:
(a) all network management services, (b) management of all sales and marketing
services, (c) through the management agreements with Sprint PCS, customer care,
billing, and other services, and (d) certain general and administrative,
executive, financial and accounting, human resources, legal, and other
professional, and forecasting services. Under the terms of the agreement, the
Company pays Operations a management fee of $100,000 per month for the services
provided by Operations and reimburses Operations for certain costs and expenses
incurred by or paid by Operations in providing these services.
Also on July 31, 2000, the Company and Operations entered into a loan
agreement whereby Operations will lend up to $11 million to the Company to be
used only for the purposes of: (a) satisfying certain capital contribution
requirements under the Company's operating agreement, and (b) funding the
Company's working capital needs from July 31, 2000 through completion of the
merger. As of December 31, 2000, $9,865,233 has been funded under the loan
agreement.
The loan bears interest at the prime rate and, prior to the merger
closing, was due 30 days after the termination of the Reorganization Agreement
or upon demand. The loan was guaranteed by certain members of the Company.
Upon the merger closing, the amounts due to Operations by the Company
under the Loan Agreement remained a debt obligation of the Company, subject to
a subordination agreement in favor of the senior lender to Alamosa.
In addition, upon the merger closing, Alamosa received funds under a $280
million credit facility from Citibank, a portion of which were used to pay off
any amounts outstanding on the Company's Senior Secured Credit Facility with
CoBank (see Note 9).
F-57
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (CONTINUED)
3. DEVELOPMENT STAGE OPERATIONS
Since its formation in July 1998, the operations of the Company have been
devoted to raising capital, design and development related to construction of
facilities, acquisition of wireless communication sites, construction of base
stations, and administrative functions. Beginning in the second quarter of
2000, certain tower sites became operational, and the Company began earning
revenue on roaming traffic through its network. In September and throughout the
fourth quarter of 2000, additional tower sites became operational, began
operation of six retail stores, and the Company is no longer considered in the
development stage.
4. RELATED PARTY TRANSACTIONS
A member of the Company, Western Independent Network, Inc. (WIN), rents
switching facilities and provides certain management and administrative
services to WOW. Payments to WIN for these services totaled $158,649 and
$205,675 for the years ended December 31, 2000 and 1999, respectively. WIN also
received $200,000 in contributed capital in 2000 ($100,000 in 1999) for
management services for a total membership interest of $300,000.
Another member of the Company, Duncan, Tiger, and Tabor, provided legal
services to the Company. Payments for these services totaled $94,248 and
$80,657 for years ended December 31, 2000 and 1999, respectively.
In addition, organizations affiliated with JMW Wireless Acquisition
Company, LLC, a member of the Company, have provided various professional
services including assistance in obtaining debt and equity financing for the
Company. Payments for these services were approximately $898,268 (including
$750,000 of capital acquisition costs) and $84,624 for the years ended December
31, 2000 and 1999, respectively.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following:
2000 1999
-------------- -------------
Network equipment ................. $32,875,762 --
Office equipment .................. 1,187,747 14,748
Leasehold improvements ............ 1,588,413 --
Construction in progress .......... 2,330,825 10,399,330
----------- ----------
37,982,747 10,414,078
----------- ----------
Accumulated depreciation .......... 1,296,012 923
----------- ----------
$36,686,735 10,413,155
----------- ----------
6. COMMITMENTS
The Company designed and engineered the wireless network it will build and
has developed an estimate of the cost to construct. The Company has entered
into various agreements related to building out the network. These agreements
cover the purchase of switching and other equipment, construction of base
stations, and the construction of a mobile switching center.
Based on the system design, the estimated costs that WOW will incur to
build the network, including the commitments already made, are as follows:
F-58
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (CONTINUED)
2001 ......... $ 8,590,000
2002 ......... 2,110,000
2003 ......... 1,230,000
2004 ......... 1,950,000
2005 ......... 1,230,000
------------
$ 15,110,000
In addition, the Company has entered into lease agreements for the use of
towers. The lease agreements differ in amount based on whether the tower is a
build-to-suit or a co-locate. The leases commence when a tower is ready for use
and began in 2000. The Company currently has signed lease agreements on 114
sites (90 of which had commenced at December 31, 2000) with annual lease
payments totaling $2,790,000. An additional 38 sites are expected to commence
in 2001 for a total of 152 sites.
The minimum lease payments on all sites are estimated to be as follows:
2001 ......... $ 3,015,000
2002 ......... 3,550,000
2003 ......... 3,550,000
2004 ......... 3,600,000
2005 ......... 3,650,000
------------
$ 17,365,000
The Company has leases for building, office and retail space, vehicles,
and office equipment under operating leases expiring through 2005. Future
minimum payments under these leases are:
2001 ......... $ 433,400
2002 ......... 433,400
2003 ......... 317,400
2004 ......... 226,700
2005 ......... 88,000
-----------
$ 1,498,900
The Company has entered into an agreement to sublease office space in
2001. Total future minimum lease payments above have not been reduced by the
$571,839 of sublease rental to be received in the future under the
non-cancellable sublease.
7. VALUE APPRECIATION RIGHTS PLAN
The Company established a "Value Appreciation Rights" plan for the benefit
of selected management executives effective September 1, 1999. The plan shall
remain in effect until it is otherwise terminated by the Board. A "Value
Appreciation Right" (VAR) is the grant by WOW, to an executive, of "Units"
whose value is tied to the value of the Company, together with the right to be
paid an amount at some time in the future equal to the value of the Units plus
or minus the difference between the value of the Units on the Grant Date and
the value on the date the VAR is exercised. VARs are granted to executives at
the discretion of the Board. The actual benefit available at the time benefits
become payable will depend on the future financial performance of the Company.
The Plan requires a third party valuation firm to annually determine the market
value of the Company based on its financial statements.
As of December 31, 2000, the Board has granted 337,012 units in accordance
with this Plan. As discussed in Note 2, the units became fully vested upon the
merger with Alamosa closing on February 14, 2001 and all obligations under the
Plan were paid or assumed outside the Company. As a result, these
F-59
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 (CONTINUED)
financial statements do not include any costs or liability related to the Plan.
The Plan terminated subsequent to December 31, 2000, as part of the merger.
8. RETIREMENT SAVINGS PLAN
Effective May 1, 2000, the Company began sponsoring a defined contribution
employee retirement savings plan. Employees, age 21 and over, who have been
employed at least one month are eligible to participate in the plan on the
first day of the next calendar quarter. Employees may contribute from 1% to 15%
of their eligible compensation on a pre-tax basis up to a maximum of $10,500
per calendar year. Employer contributions are at the discretion of the Company
and are currently 50% of employees' contributions up to the first 6% of an
employee's eligible compensation deferred under the Plan. Employees must
provide 1,000 hours of service in the plan year to be eligible for employer
matching contributions. Contributions to the Plan in 2000 amounted to $26,437.
The Plan also allows for potential profit sharing contributions at the
discretion of the Company.
9. SENIOR SECURED CREDIT FACILITY
In April 2000, the Company obtained long-term financing from CoBank in the
amount of $45,000,000. Interest rates are determined at the time of each
advance based on the Company's election between either a base rate (the higher
of the prime rate or the sum of the Federal Funds Rate plus .50%) or LIBOR,
plus an applicable margin based on the leverage ratio as defined in the
agreement.
As of December 31, 2000, the Company has borrowed $30,960,318 on this
credit facility, with interest rates ranging from 9.14% to 10.05%. The loan is
secured by a first superior continuing security interest in all assets of the
Company.
As discussed in Note 2, the CoBank credit facility was paid in full by
Alamosa upon the merger closing in 2001. The amount included in the financial
statements related to CoBank is classified as a long-term liability as it is
not the intent of Alamosa to require repayment of this obligation during 2001.
10. DEFERRED FINANCING COSTS
Deferred financing costs consist of loan fees paid to CoBank and legal
fees and other expenses incurred to obtain debt financing. The costs are being
amortized over the life of the loan. Amortization for the year ended December
31, 2000 amounted to $137,572 (none in 1999).
F-60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Alamosa Holdings, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, mandatorily redeemable member's deficit
and members' deficit and cash flows present fairly, in all material respects,
the financial position of SWPCS Holdings, L.L.C. (the "Company") at December
31, 2000, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
April 27, 2001
F-61
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2000
---------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 837,285
Accounts receivable, net of allowance for doubtful accounts of $561,046.. 5,357,377
Inventory ............................................................... 703,548
Prepaid expenses ........................................................ 50,518
Other assets ............................................................ 44,474
-------------
Total current assets .................................................. 6,993,202
Property and equipment, net ............................................. 64,773,196
Financing costs, net .................................................... 4,735,649
Other assets ............................................................ 176,335
-------------
Total assets .......................................................... $ 76,678,382
=============
LIABILITIES, MANDATORILY REDEEMABLE MEMBER'S DEFICIT
AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable- trade ................................................. $ 15,261,229
Accrued equipment purchases ............................................. 1,059,577
Accounts payable - related parties ...................................... 769,135
Deferred revenue ........................................................ 884,145
Accrued interest payable ................................................ 1,377,592
Accrued liabilities - other ............................................. 314,281
-------------
Total current liabilities ............................................. 19,665,959
Long-term debt, net of discount ......................................... 71,556,437
Warrant and option liabilities .......................................... 18,025,470
Mandatorily redeemable member's deficit ................................. (9,008,409)
Members' deficit ........................................................ (23,561,075)
-------------
Total liabilities, mandatorily redeemable member's deficit and members'
deficit .............................................................. $ 76,678,382
=============
The accompanying notes are an integral part of these financial statements.
F-62
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 2000
------------------
Revenues:
Subscriber revenue .................... $ 15,476,568
Roaming revenue ....................... 11,652,876
Product sales ......................... 2,731,731
-------------
Total revenues ...................... 29,861,175
Cost and expenses:
Network operations .................... 10,297,643
Cost of product sold .................. 8,819,132
Selling and marketing ................. 17,084,857
General and administrative ............ 4,379,329
Customer service ...................... 2,127,857
Depreciation and amortization ......... 7,500,760
-------------
Total cost and expenses ............. 50,209,578
Loss from operations .................. (20,348,403)
-------------
Operating income (expense):
Interest expense ...................... (7,059,737)
Interest income ....................... 98,339
-------------
Net loss ............................... $ (27,309,801)
=============
The accompanying notes are an integral part of these financial statements.
F-63
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE
MEMBER'S DEFICIT AND MEMBERS' DEFICIT
MANDATORILY
REDEEMABLE
MEMBER'S
EQUITY
(DEFICIT) MEMBERS' DEFICIT
---------------- ------------------------------------------------------------------------
CENTRAL PIONEER TOTAL
MASS SOUTHWEST CELLULAR TELECOMMUNICATIONS, MEMBERS'
MUTUAL PCS, L.L.C. INC. INC. DEFICIT
---------------- ---------------- ---------------- --------------------- ----------------
Balance at December 31, 1999 ..... $ 1,915,511 $ (7,403,279) $ (1,014,988) $ (1,014,988) $ (9,433,255)
Members' contribution ............ 2,258,061 $ 2,258,061
Net loss ......................... (10,923,920) (11,470,117) (2,457,882) (2,457,882) (16,385,881)
------------- ------------- ------------ ------------ -------------
Balance at December 31, 2000 ..... $ (9,008,409) $ (16,615,335) $ (3,472,870) $ (3,472,870) $ (23,561,075)
============= ============= ============ ============ =============
The accompanying notes are an integral part of these financial statements.
F-64
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31, 2000
------------------
Cash flows from operating activities:
Net loss ..................................................................... $ (27,309,801)
Adjustments to reconcile net loss to cash flows used in operations activities:
Depreciation and amortization .............................................. 7,500,760
Change in fair value of warrant and option liabilities ..................... 1,015,470
Amortization of discount on long term debt ................................. 134,399
Changes in operation assets and liabilities:
Accounts receivable - trade ................................................ (4,306,005)
Inventory .................................................................. 682,548
Prepaid expenses ........................................................... 124,091
Other assets ............................................................... (116,912)
Accounts payable - trade ................................................... 12,420,832
Accounts payable - related parties ......................................... 535,472
Deferred revenue ........................................................... 758,040
Accrued interest payable ................................................... 879,200
Accrued liabilities - other ................................................ 123,871
-------------
Net cash used in operating activities ..................................... (7,558,035)
Cash flows from investing activities:
Purchase of property and equipment ........................................... (26,671,888)
-------------
Net cash used in investing activities ..................................... (26,671,888)
-------------
Cash flows from financing activities:
Net proceeds from revolving credit facility .................................. 8,000,000
Proceeds from long-term debt ................................................. 17,000,000
Payments of financing costs .................................................. (1,111,145)
Contributions of members' equity ............................................. 2,258,061
-------------
Net cash provided by financing activities ................................. 26,146,916
-------------
Decrease in cash and cash equivalents ........................................ (8,083,007)
Cash and cash equivalents at beginning of period ............................. 8,920,292
-------------
Cash and cash equivalents at end of period ................................... $ 837,285
=============
Supplemental schedule of noncash investing and financing activities:
Accrued equipment purchases .................................................. $ 1,059,577
=============
Supplemental cash flow information:
Cash paid during the period for interest ..................................... $ 6,186,136
=============
The accompanying notes are an integral part of these financial statements.
F-65
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND BUSINESS OPERATIONS
On June 4, 1998 Southwest PCS, L.L.C., Central Cellular, Inc. ("Central")
and Pioneer Telecommunications, Inc. ("Pioneer") (collectively, the "Initial
Members") formed Southwest PCS, LP, (the "Partnership"). In July 1998, the
Partnership entered into a Management Agreement with Sprint Spectrum, L.P. and
Sprint COM, Inc. (collectively "Sprint") (the "Sprint Agreement"). Under the
Sprint Agreement, the Partnership will design, construct, and manage wireless
personal communication services, commonly referred to as PCS, in parts of
Oklahoma, Kansas, Arkansas and Texas. The Partnership is required to build out
its wireless network according to Sprint specifications. Under the Sprint
Agreement, the Partnership uses Sprint's licensed spectrum, the Sprint PCS
brand name and Sprint's national advertising. In return, the Partnership pays
Sprint 8% of subscriber revenues. In addition, Sprint provides, for a fee, back
office support, billing and collection, customer activation, and customer
service. The Sprint Agreement has an initial 20-year term and has three 10 year
renewal options. Upon termination of the Sprint Agreement, the Partnership will
either sell its operations to Sprint or purchase up to 10 megahertz of spectrum
from Sprint. The Sprint Agreement includes indemnification clauses between the
Partnership and Sprint PCS to indemnify each other against claims arising from
violations of laws or the affiliation agreements, other than liabilities
resulting from negligence or willful negligence or willful misconduct of the
party seeking to be indemnified.
On April 30, 1999 the Initial Members of the Partnership changed the
Partnership structure and formed SWPCS Holdings, L.L.C. (the "Company") an
Oklahoma limited liability company, SWGP, L.L.C. ("SWGP") and SWLP, L.L.C.
("SWLP"). Further on April 30, 1999, Southwest PCS, L.L.C. contributed 100% of
its 70% general partner interest in the Partnership to SWGP in return for a
100% ownership interest in SWGP. Also on April 30, 1999, Central and Pioneer
each contributed 100% of their respective 15% limited partnership interests in
the Partnership to SWLP in exchange for 50% interests in SWLP. Subsequent to
these contribution transactions, SWGP became the general partner of the
Partnership and SWLP became the limited partner of the Partnership owning 70%
and 30% of the Partnership, respectively.
After the contribution of its general partner interest in the Partnership
to SWGP, Southwest PCS, L.L.C. contributed its 100% ownership interest in SWGP
to the Company and Central and Pioneer contributed their respective 50%,
ownership interest in SWLP to the Company.
Simultaneously, Mass Mutual Life Insurance Company and Mass Mutual High
Yield Partners II L.L.C. (collectively "Mass Mutual") contributed $8,000,000
and $4,000,000, respectively to the Company. Based on these contribution
transactions, the ownership interests in the Company at April 30, 1999 and
December 31, 2000 is as follows:
Southwest PCS, L.L.C., managing member interest ......... 42.00%
Mass Mutual Life Insurance Company ...................... 26.67%
Mass Mutual High Yield Partners II L.L.C. ............... 13.33%
Central ................................................. 9.00%
Pioneer ................................................. 9.00%
The Regulations of the Company, as amended, (the "Regulations") provide
for the governance and administration of the Company's business, allocation of
profits and losses, tax allocations, transactions with members, disposition of
ownership interest and other matters. The Regulations establish two classes of
membership interests. The above mentioned members' ownership interests are
evidenced by Class A Shares. Class A shareholders are entitled to vote on all
matters to be voted on by the members. The Company's Regulations also allow for
Class B shareholders. Class B shareholders are allowed limited voting rights,
including the right to vote on amendments to the Regulations which adversely
affect the
F-66
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
rights of the holders of Class B Shares to vote to dissolve the Company, and to
vote on mergers, consolidations and recapitalizations pursuant to which members
holding Class B Shares would get securities different from those being received
by holders of Class A Shares. As of December 31, 2000, there were no Class B
shareholders.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, SWGP, SWLP, and Southwest PCS,
LP. All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The company considers all investments with a maturity of three months or
less when purchased to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and trade accounts receivable. At times, the Company may have cash balances in
financial institutions in excess of federally insured limits. The Company does
not believe the cash balances are exposed to any significant risk. The Company
sells its products and services to businesses and individuals in one
geographical service area. Credit terms are short-term in nature and generally
uncollateralized although the Company may take deposits from some customers.
INVENTORY
Inventory consists of handsets and related accessories. Inventories
purchased for resale are carried at the lower of cost or market using the
first-in first-out method. Market is determined using replacement cost.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Property and equipment are
depreciated over the estimated useful lives of the assets using the
straight-line method. Costs incurred to design and construct the wireless
network in a market, including related interest costs, are classified as
construction in progress until the network for the related market is placed
into service, at which time the amount is transferred to property and
equipment. Repairs and maintenance are expensed as incurred; significant
renewals and betterments are capitalized. The cost and related accumulated
depreciation of assets sold or retired and removed from the accounts and the
resulting gains or losses are recorded in the period incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates its long lived assets for impairment when events or
change in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. The determination of whether an
impairment has occurred is based on management's estimate of undiscounted
future cash flows before interest attributable to the assets as compared to the
net carrying value of the assets. If an impairment has occurred, the amount of
the impairment recognized is determined by estimating the fair value of the
assets based on estimated discounted future cash flows and recording a
provision for loss if the carrying value is greater than fair value. The net
carrying value of assets identified to be disposed of in the future is compared
to the estimated fair value less the cost to sell to determine if an impairment
is required. Until the assets are disposed of, an estimate of the fair value is
redetermined when related events or circumstances change.
F-67
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
FINANCING COSTS
Financing costs are capitalized and amortized using the straight-line
basis over the life of the loan. For the year ended December 31, 2000, the
Company incurred financing costs associated with the senior term loan C of
$1,111,144. As of December 31, 2000, the total amount of capitalized financing
costs was $5,891,349. Cumulative amortization of financing costs was
$1,155,700.
DISCOUNT ON SUBORDINATED DEBT
The Company amortizes the discount on the senior subordinated note and
junior subordinated debentures over the life of the instruments under the
effective interest method. Amortization of the discount on the subordinated
debt is reflected as a component of interest expense. Amortization for the year
ended December 31, 2000 was $134,399.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosure related to revenue recognition policies. In accordance with SAB 101,
the Company defers customer activation fee revenue and an equal amount of
customer acquisition related expenses. These deferred amounts are amortized
over a three-year period, which approximates the average life of a customer.
For the year ended December 31, 2000, the Company had deferred $68,428 of
activation fee revenue and acquisition related expenses and had amortized
$16,128.
The Company recognizes revenue as services are performed. Sprint PCS
handles the Company's billings and collections and retains 8% of collected
service revenues from Sprint PCS subscribers based in the Company's territory
and from non-Sprint PCS subscribers who roam onto the Company's network. The
amount retained by Sprint PCS is recorded as an operating expense in network
operations. Revenues generated from the sale of handsets and accessories and
from roaming services provided to Sprint PCS customers who are not based in the
Company's territory are not subject to the 8% retainage.
Sprint PCS pays the Company a Sprint PCS roaming fee for each minute that
a Sprint PCS subscriber outside of the Company's territory uses the Company's
portion of the Sprint PCS network. Revenue from these services is recognized as
the services are performed. Similarly, the Company pays Sprint PCS roaming
fees, when a Sprint PCS subscriber based in the Company's territory uses the
Sprint PCS network outside of the Company's territory. These costs are included
as marketing and sales when incurred.
Product revenues consisting of proceeds from sales of handsets and
accessories are recorded net of an allowance for sales returns. The allowance
is estimated based on Sprint PCS's handset policy, which allows customers to
return handsets for a full refund within 15 days of purchase. When handsets are
returned to the Company, the Company may reissue the handsets to customers at
little additional cost. However, when handsets are returned to Sprint PCS for
refurbishing, the Company receives a credit from Sprint PCS, which is less than
the amount the Company originally paid for the handset. For the year ended
December 31, 2000, product revenue was $2,731,731. The cost of these products
was $8,819,132 which was classified as cost of products sold. The costs of
handsets exceed the retail sales price because the Company subsidizes the price
of handsets for competitive reasons.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses totaled
$4,011,443 for the year ended December 31, 2000.
F-68
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
INCOME TAXES
The Company does not pay federal or state income taxes. The Company's
taxable income or loss is passed through to the members. Accordingly, no
provision for income taxes is provided for in these financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, the Financial Accounting Standards Board
("FASB"), issued Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133." These statements require
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedging accounting. SFAS No. 133 will be effective
for the Company's fiscal year ending December 31, 2001. Management believes
that the adoption of these statements will not have a significant impact on the
Company's financial results.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2000:
ESTIMATED
USEFUL LIVE 2000
--------------- --------------
Cell site equipment .................... 8 years $ 54,478,185
Switch equipment ....................... 8 years 6,987,518
Leasehold improvements ................. 8 years 1,970,748
Office equipment and furniture ......... 8 and 3 years 1,979,935
Vehicles ............................... 5 years 66,421
Construction in progress ............... 7,958,584
------------
73,441,391
Accumulated depreciation ............... (8,668,195)
------------
$ 64,773,196
============
Depreciation expense was $6,728,812 for the year ended December 31, 2000.
Interest expense capitalized into construction in progress aggregated
approximately $1,155,469 during 2000.
4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2000:
F-69
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
Senior term loan A .................................................. $15,000,000
Senior term loan B .................................................. 15,000,000
Senior term loan C .................................................. 15,000,000
Revolving credit facilities ......................................... 8,000,000
Senior subordinated notes, less unamortized discount of $803,451..... 11,696,549
Junior subordinated debentures, less unamortized discount of
$640,112........................................................... 6,859,888
-----------
$71,556,437
===========
On April 30, 1999, the Partnership entered into a credit agreement with a
syndication of banks and investment companies. On September 22, 2000, the
credit agreement was amended. The amended credit agreement includes; a
$15,000,000 revolving credit facility, senior term loans A, B and C each in the
amount of $15,000,000, $1,000,000 swingline loan commitment, and $1,000,000 in
letter of credit availability. Borrowings under the swingline loan or issued
letters of credit result in a ratable reduction in the availability under the
revolving credit facility. The credit agreement requires that the Partnership
meet certain levels of revenues and subscriber additions, capital expenditures
limitations, limitation on annual expenses from operating lease agreements, and
maintain certain financial ratios. Additionally, the credit agreement restricts
the Partnerships from paying dividends, with the exception of a dividend
payment for up to 40% of the Partnership's taxable income in any year to be
used by the members to pay their federal income tax obligations. The credit
agreement generally restricts the Partnership and the Company from incurring
additional indebtedness, except for indebtedness from capital leases for up to
$1,000,000 in any one-year or $2,000,000 in the aggregate. All borrowings under
this credit agreement are senior to other borrowings and are collateralized by
substantially all the assets of the Partnership. The Company has guaranteed the
borrowings by the Partnership under the credit agreement.
The $15,000,000 revolving credit facility and any borrowings under the
swingline loan commitment bear interest at variable rates based on either the
London interbank Eurodollar rate plus 3.75% or the greater of the prime rate of
J.P. Morgan Chase & Co. or 0.5% above the federal funds rate, plus 2.75%, as
elected periodically by the Partnership. The agreement allows for a reduction
in the spread on the variable interest rates of up to 1.0% based on the
Partnership reaching certain leverage ratios. Interest is payable monthly or
quarterly depending on the Partnership's interest rate election. At December
31, 2000, the variable rate in effect under the revolving credit facility was
10.68%. Quarterly commitment reductions on the revolving credit facility begin
March 31, 2004 and end March 31, 2005 when the facility matures. The commitment
may also be reduced by proceeds from the issuance of additional debt and equity
instruments in excess of the then outstanding borrowings on the revolving
credit facility or swingline loans during the year ended December 31, 2000.
The $15,000,000 senior term loan A bears interest at variable rates based
on either the London interbank Eurodollar rate plus 3.75% or the greater of
prime rate of J.P. Morgan Chase & Co. or 0.5% above the federal funds rate,
plus 2.75%, as elected periodically by the Partnership. The agreement allows
for a reduction in the spread on the variable interest rates of up to 1.0%,
based on the Partnership reaching certain leverage ratios. At December 31,
2000, the variable rate in effect under the senior term loan A was 10.45%.
Interest is payable monthly or quarterly depending on the Partnership's
interest rate election. Principal is payable quarterly beginning June 30, 2003
until March 31, 2005 when the loan matures. The Partnership is required to make
additional mandatory repayments from the proceeds from the issuance of
additional debt and equity instruments on a pro-rata basis with the then
outstanding borrowings under senior term loan B and C, limited to the then
outstanding borrowings under senior term loan A.
The $15,000,000 senior term loan B bears interest at variable rates based
on either the London interbank Eurodollar rate plus 4.00% or the greater of
prime rate of J.P. Morgan Chase & Co. or 0.5% above the federal funds rate,
plus 3.00%, as elected periodically by the Partnership. The agreement allows
F-70
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
for a reduction in the spread on the variable interest rates of up to 1.0%,
based on the Partnership reaching certain leverage ratios. At December 31,
2000, the variable rate in effect under the senior term loan B was 10.66%.
Principal is payable quarterly beginning June 30, 2004 until March 31, 2006
when the loan matures. The Partnership is required to make additional mandatory
repayments from the proceeds from the issuance of additional debt and equity
instruments on a pro-rata basis with the then outstanding borrowings under
senior term loan A and C, limited to the then outstanding borrowings under
senior term loan B.
The $15,000,000 senior term loan C bears interest at variable rates based
on either the London interbank Eurodollar rate plus 4% or the greater of prime
rate of J.P. Morgan Chase & Co. or 0.5% above the federal funds rate, plus
3.00%, as elected periodically by the Partnership. The agreement allows for a
reduction in the spread on the variable interest rates of up to 1.0%, based on
the Partnership reaching certain leverage ratios. At December 31, 2000, the
variable rate in effect under the senior term loan C was 13.5%. Principal is
payable quarterly beginning June 30, 2004 until March 31, 2006 when the loan
matures. The Partnership is required to make additional mandatory repayments
from the proceeds from the issuance of additional debt and equity instruments
on a pro-rata basis with the then outstanding borrowings under senior term loan
A and B, limited to the then outstanding borrowings under senior term loan C.
On April 30, 1999, the Partnership issued $12,500,000 in senior
subordinated notes net of a discount of $923,925 (See Note 6), resulting in
proceeds to the Partnership of $11,576,075. The senior subordinated notes are
guaranteed by the Company, SWGP and SWLP. The senior subordinated notes require
that the Partnership meet certain levels of revenues and subscriber additions,
capital expenditures limitations, limitation on annual expenses from operating
lease agreements and maintain certain financial ratios. The senior subordinated
notes mature March 31, 2007, have a stated interest rate of 12% and an
effective interest rate of 13.517%. Interest on the senior subordinated notes
is payable quarterly and principal is payable at maturity. Prepayment penalties
on the senior subordinated notes range from 7% of the principal amount if
repaid prior to May 4, 2000 to 1% of the principal amount if repaid prior to
May 4, 2004. Subsequent to May 4, 2004 no prepayment penalties exist. The
Partnership is required to make additional mandatory repayments from the
proceeds from the issuance of additional debt and equity instruments to the
extent the proceeds exceed the prepayment requirements under the senior credit
agreement.
On April 30, 1999, the Partnership issued $7,500,000 in junior
subordinated debentures, net of a discount of $739,140 (See Note 6), resulting
in proceeds to the Partnership of $6,760,860. The junior subordinated
debentures are guaranteed by the Company, SWGP, and SWLP. The junior
subordinated debentures require that the Partnership meet certain levels of
revenues and subscriber additions, capital expenditures limitations, limitation
on annual expenses from operating lease agreements, and maintain certain
financial ratios. The junior subordinated debentures mature April 30, 2007,
have a stated interest rate of 12% and an effective interest rate of 14.058%.
Interest on the junior subordinated debentures is payable quarterly and
principal is payable at maturity. Prepayment penalties on the junior
subordinated debentures range from 7% of the principal amount if repaid prior
to May 4, 2000 to 1% of the principal amount if repaid prior to May 4, 2004.
Subsequent to May 4, 2004 no prepayment penalties exist on the debentures.
On July 7, 1999, the Partnership entered into an interest rate cap
agreement effectively capping the London interbank Eurodollar rate on
$15,000,000 of debt at 6.5% until June 30, 2002 when the agreement expires.
Future maturities of long-term debt as of December 31, 2000 are as
follows:
F-71
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
YEARS ENDING 31,
---------------------------
2001 .................... $ --
2002 .................... --
2003 .................... 4,500,000
2004 .................... 18,500,000
2005 .................... 12,000,000
Thereafter .............. 38,000,000
-----------
Total ................... $73,000,000
===========
As a result of the Company's merger with Alamosa Holdings, Inc.
("Alamosa") (See Note 11), the long-term debt of the Company was repaid in its
entirety on March 30, 2001.
5. LEASES
The Company has various operating lease agreements for retail store
locations, site towers, equipment and vehicles. The Company incurred
approximately $3,722,742 in rent expense during the year ended December 31,
2000.
Minimum noncancelable lease payments under operating leases for the
periods shown are as follows:
2001 .................... $ 3,669,327
2002 .................... 3,795,039
2003 .................... 3,585,525
2004 .................... 2,115,973
2005 .................... 382,563
Thereafter .............. 753,866
-----------
$14,302,293
===========
6. WARRANT AND OPTION LIABILITIES
On April 30, 1999, the Company entered into a warrant agreement with the
holder of the senior subordinated debt. Under the agreement, the warrants are
exercisable at any time through April 30, 2009 into 75,000 Class B Shares of
the Company (7.5% ownership interest in the Company on a fully diluted basis)
at an exercise price of $.001 per warrant share. The warrant agreement contains
provisions under which the warrant holder may require the Company to purchase
the warrants upon the earlier of an event allowing Mass Mutual to require the
Company to purchase its ownership interest or the fourth anniversary of the
warrant agreement (April 30, 2003). Under this warrant agreement, if required
by warrant holder, the Company must pay the market price of a warrant share as
of the repurchase date for each share repurchased. This put right expires upon
the earlier of a qualified public offering by the Company and April 30, 2009.
On April 30, 1999, the Company entered into an option agreement with the
holder of the junior subordinated debentures. The option is exercisable on or
after April 30, 2003 into 60,000 Class B Shares of the Company (6.0% ownership
interest in the Company on a fully diluted basis) at an exercise price of $100
and expires April 30, 2009. The option agreement contains provisions under
which the option holder may require the Company to purchase the options on the
earlier of an event allowing Mass Mutual to require the Company to purchase its
ownership interest, or the fourth anniversary of the option agreement (April
30, 2003). Under this option agreement, if required by the option holders the
Company must pay the market price of an option share as of the repurchase date
for each share repurchased. This put right expires upon the earlier of
qualified public offering by the Company and April 30, 2009. On June 29, 2000
the option was sold to Chickasaw Holding Company.
F-72
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
The option also contains call rights, which can be exercised by the
Company to repurchase the option from the option holder. These call rights vest
on April 30, 2005 and expire on the earlier of an initial public offering and
April 30, 2009. To exercise the call rights, the Company must pay the market
price of an option share as of the repurchase date for each share.
The Company initially recorded the warrant and option agreements as a
liability at their fair value with subsequent changes in the estimated fair
value of the agreements recorded in operations. The Company allocated $923,925
of the proceeds from the sale of the senior subordinated notes to the warrants,
which was the estimated fair value at the time the warrants were issued. The
Company allocated $739,140 of the proceeds from the sale of the junior
subordinate debentures to the options, which was the estimated fair value at
the time the options were issued. For the year ended December 31, 2000, the
Company recorded interest expense of approximately $1,015,470 related to the
increased estimated fair value of the warrants and options. The estimated fair
values of the warrants and the options at December 31, 2000, were $10,014,150
and $8,011,320, respectively. Estimated fair value was determined based upon
details of the merger (see Note 11).
Per the Regulations of SWPCS Holdings, LLC Agreement dated April 30, 1999,
in the event that the warrant holders and/or the Option Holders fully exercise
their respective warrants and the option, the initial members' respective
Company shares will be diluted and adjusted as follows:
PERCENTAGE COMPANY
COMPANY INTEREST SHARES
----------------------------------------- ------------ -------------
Southwest PCS, LLC ................. 34.230% 342,300
Central ............................ 7.335% 73,350
Pioneer Telecommunications ......... 7.335% 73,350
Massachusetts Mutual Life
Insurance Company .................. 7.833% 78,330.2
Massachusetts Mutual Life
Insurance Company .................. 17.234% 172,339.6
Mass Mutual High Yield
Partners II, L.L.C. ................ 12.533% 125,330.2
Option holder ...................... 7.500% 75,000
Warrant holder ..................... 6.000% 60,000
------- ---------
Totals ............................. 100.000% 1,000,000
======= ==========
7. MANDATORILY REDEEMABLE MEMBER'S EQUITY
Pursuant to the Regulations, Mass Mutual was given a put right allowing
Mass Mutual to require the Company to purchase its ownership interest within 60
days of the occurrence of an event of change in control, as defined in the
Regulations. The Company would be required to repurchase those shares, if such
notice presented, at the fair value on a fully diluted basis as determined by
agreement of the parties or an independent financial expert.
8. EMPLOYEE BENEFITS
Effective January 1, 1999, the Company adopted the Southwest PCS, LP
401(k) Plan ("the Plan"). All employees are eligible to participate in the Plan
following the attainment of certain minimum eligibility requirements.
Participants may elect to contribute up to 12% of their pre-tax compensation.
The Company will match 100% of the employees' contributions up to 4% of the
employees' pre-tax compensation. Additionally, the Plan allows the Company to
make discretionary matching contributions
F-73
SWPCS HOLDINGS, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENT
which are allocated to participants' accounts based upon the participant's
contributions to total participant contributions. During the year ended
December 31, 2000, the Company made $73,514 in matching contributions to the
Plan.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued interest and other accrued liabilities approximate
fair value because of the short-term nature of these items. The carrying
amounts of the senior secured term loans A, B, and C approximate their fair
value as the interest rates vary with market interest rates. The fair values of
the senior subordinated notes and the junior subordinated debentures at
December 31, 2000 were approximately $8,692,754 and $5,117,110, respectively.
The Company utilizes an interest rate cap agreement to limit the impact of
increases in interest rates on $15 million of its floating rate debt. The
interest rate cap agreement entitles the company to receive from the counter
parties the amounts, if any, by which the selected market interest rate exceeds
the strike rate stated in the agreement. Amounts in excess of the strike rate
are accrued and recognized as an adjustment of interest accrued. The fair value
of the interest rate cap agreement of $17,925 is estimated by obtaining quotes
from brokers and represents the cash requirement if the existing contract had
been settled at the balance sheet date. The Company acquired the interest rate
cap for a payment of $171,852, which is being amortized as interest expensed
ratably over the 36-month term of the agreement. The amortization for the year
ended December 31, 2000 was $57,284.
Estimates of fair value are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Estimates of fair value are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
10. RELATED PARTY TRANSACTION
The Company leases office space, certain equipment, and vehicles from
related parties. Rent paid under these agreements totaled $237,246 for the year
ended December 31, 2000. The future minimum payment requirement under these
related party leases have been included in the amounts stated in Note 5.
A portion of the construction services related to the Company's network
build-out were provided by related parties in the amount of $566,915 for the
year ended December 31, 2000.
The Company was charged for certain general and administrative expenses
from related parties in the amount of $97,871 for the year ended December 31,
2000.
The Company was charged for Health insurance expenses from related parties
in the amount of $345,372 for the year ended December 31, 2000.
Certain leasehold improvements were charged to the Company by related
parties in the amount of $275,216 for the year ended December 31, 2000.
11. SUBSEQUENT EVENT
In January 2001, Southwest PCS, L.L.C., a related party, made its required
capital contributions for 2001 in the amount of $408,606. No additional
contribution is required.
On March 9, 2001, the Company and Alamosa announced a signing of a
definitive agreement to merge. In conjunction with the merger the Company was
incorporated. The transaction was consummated on March 30, 2001. The
Partnership shareholders exchanged 100 percent of their common shares of the
Company for 11.1 million shares Alamosa common stock and $5 million in cash.
F-74
30,649,990 SHARES OF COMMON STOCK
[ALAMOSA LOGO]
PROSPECTUS
September 28, 2001