Filed Pursuant to 424(b)(3)
Registration File No. 333-66358
ALAMOSA HOLDINGS, INC.
30,649,990 SHARES OF COMMON STOCK
----------
SUPPLEMENT NO. 13 TO
PROSPECTUS
----------
This prospectus supplement relates to the resale by selling
stockholders of up to 30,649,990 shares of our common stock that the selling
stockholders acquired from us in connection with our acquisitions of companies
formerly owned by them. We will not receive any of the proceeds from the sale of
any of these shares by the selling stockholders.
You should read this prospectus supplement in conjunction with the
prospectus dated September 28, 2001, filed by us with the Securities and
Exchange Commission, prospectus supplement no. 1, filed by us with the
Securities and Exchange Commission on October 18, 2001, prospectus supplement
no. 2, filed by us with the Securities and Exchange Commission on October 30,
2001, prospectus supplement no. 3, filed by us with the Securities and Exchange
Commission on November 14, 2001, prospectus supplement no. 4, filed by us with
the Securities and Exchange Commission on February 28, 2002, prospectus
supplement no. 5, filed by us with the Securities and Exchange Commission on
March 29, 2002, prospectus supplement no. 6, filed by us with the Securities and
Exchange Commission on May 2, 2002, prospectus supplement no. 7, filed by us
with the Securities and Exchange Commission on May 15, 2002, prospectus
supplement no. 8, filed by us with the Securities and Exchange Commission on
June 13, 2002, prospectus supplement no. 9, filed by us with the Securities and
Exchange Commission on August 8, 2002, prospectus supplement no. 10, filed by us
with the Securities and Exchange Commission on August 15, 2002, prospectus
supplement no. 11, filed by us with the Securities and Exchange Commission on
October 2, 2002 and prospectus supplement no. 12, filed by us with the
Securities and Exchange Commission on November 7, 2002. All terms used in this
prospectus supplement have the meaning assigned to them in the prospectus. Our
common stock is traded on The New York Stock Exchange under the symbol "APS." On
November 14, 2002, the last reported sale price of one share of our common stock
was $0.48.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This supplement is part of the prospectus and must accompany the
prospectus to satisfy prospectus delivery requirements under the Securities Act
of 1933, as amended.
The date of this prospectus supplement is November 15, 2002.
RECENT DEVELOPMENTS
On November 14, 2002 we filed with the Securities and Exchange
Commission the attached Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-32357
ALAMOSA HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2890997
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
5225 SOUTH LOOP 289, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934.
YES [ ] NO [X]
As of November 14, 2002 approximately 94,071,938 shares of common stock, $0.01
par value per share, were issued and outstanding.
ALAMOSA HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 (unaudited)
and December 31, 2001.............................................. 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 2002 and 2001, (unaudited)......... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001, (unaudited)..................... 5
Notes to the Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 27
Item 4. Controls and Procedures............................................ 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 30
Item 2. Changes in Securities and Use of Proceeds.......................... 30
Item 3. Defaults Upon Senior Securities.................................... 30
Item 4. Submission of Matters to a Vote of Security Holders................ 30
Item 5. Other Information.................................................. 30
Item 6. Exhibits and Reports on Form 8-K................................... 30
SIGNATURES................................................................. 32
CERTIFICATIONS............................................................. 33
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 56,411 $ 104,672
Short term investments -- 1,300
Restricted cash 34,988 51,687
Customer accounts receivable, net 49,994 42,740
Receivable from Sprint 9,080 9,137
Interest receivable 347 2,393
Inventory 5,717 4,802
Prepaid expenses and other assets 4,475 4,749
Deferred customer acquisition costs 6,560 5,181
Deferred tax asset 8,112 8,112
----------- -----------
Total current assets 175,684 234,773
Property and equipment, net 462,142 455,695
Debt issuance costs, net 34,561 36,654
Restricted cash -- 43,006
Goodwill -- 293,353
Intangible assets, net 498,438 528,840
Other noncurrent assets 7,712 6,087
----------- -----------
Total assets $ 1,178,537 $ 1,598,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,900 $ 44,012
Accrued expenses 30,999 29,291
Payable to Sprint 25,946 16,133
Interest payable 9,304 22,123
Deferred revenue 17,943 15,479
Current installments of capital leases 856 596
----------- -----------
Total current liabilities 100,948 127,634
----------- -----------
Long term liabilities:
Capital lease obligations 1,767 1,983
Other noncurrent liabilities 10,720 7,496
Senior secured debt 200,000 187,162
12 7/8% senior discount notes 260,573 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
Deferred tax liability 44,385 98,940
----------- -----------
Total long term liabilities 917,445 932,788
----------- -----------
Total liabilities 1,018,393 1,060,422
----------- -----------
Commitments and contingencies (see Note 11) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 290,000,000 shares
authorized, 93,371,938 and 92,786,497 shares issued
and outstanding, respectively 934 927
Additional paid-in capital 799,937 799,366
Accumulated deficit (639,087) (261,371)
Accumulated other comprehensive loss, net of tax (1,640) (936)
----------- -----------
Total stockholders' equity 160,144 537,986
----------- -----------
Total liabilities and stockholders' equity $ 1,178,537 $ 1,598,408
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
3
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Subscriber revenues $ 103,642 $ 67,559 $ 289,720 $ 151,372
Roaming revenues 39,129 31,594 99,154 67,204
------------ ------------ ------------ ------------
Total service revenues 142,771 99,153 388,874 218,576
Product sales 4,657 8,721 17,730 18,668
------------ ------------ ------------ ------------
Total revenue 147,428 107,874 406,604 237,244
------------ ------------ ------------ ------------
Costs and expenses:
Cost of service and operations 92,560 67,698 256,378 154,620
Cost of products sold 12,904 16,591 36,134 35,150
Selling and marketing 32,503 31,367 88,360 73,929
General and administrative expenses (excluding
non-cash compensation of $0 and $0 for the
three months ended September 30, 2002 and
2001, respectively, and $0 and $183 for the
nine months ended September 30, 2002 and 2001,
respectively) 4,102 3,535 10,890 10,602
Depreciation and amortization 26,897 27,305 78,104 64,476
Impairment of goodwill 291,635 -- 291,635 --
Impairment of property and equipment -- -- 1,332 --
Non-cash compensation -- -- -- 183
------------ ------------ ------------ ------------
Total costs and expenses 460,601 146,496 762,833 338,960
------------ ------------ ------------ ------------
Loss from operations (313,173) (38,622) (356,229) (101,716)
Interest and other income 678 2,531 2,882 10,718
Interest expense (26,158) (23,626) (76,832) (58,289)
------------ ------------ ------------ ------------
Net loss before income tax benefit and
extraordinary item (338,653) (59,717) (430,179) (149,287)
Income tax benefit 17,806 22,005 52,463 53,311
------------ ------------ ------------ ------------
Net loss before extraordinary item (320,847) (37,712) (377,716) (95,976)
Loss on debt extinguishment, (net of tax benefit of
$0 and $0 for the three months ended September 30,
2002 and 2001, respectively, and $0 and $1,969
for the nine months ended September 30, 2002 and
2001, respectively) -- -- -- (3,503)
------------ ------------ ------------ ------------
Net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
============ ============ ============ ============
Net loss per common share, basic and diluted:
Net loss before extraordinary item $ (3.45) $ (0.41) $ (4.06) $ (1.13)
Loss on debt extinguishment, net of tax -- -- -- (0.04)
------------ ------------ ------------ ------------
Net loss $ (3.45) $ (0.41) $ (4.06) $ (1.17)
============ ============ ============ ============
Weighted average common shares outstanding,
basic and diluted 93,069,446 92,030,496 92,940,014 85,287,918
============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $(377,716) $ (99,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash compensation -- 183
Provision for bad debts 32,765 4,338
Non-cash interest expense on derivative instruments 503 --
Depreciation and amortization of property and
equipment 47,702 30,745
Amortization of intangible assets 30,402 33,731
Amortization of financing costs included in
interest expense 3,148 2,231
Amortization of discounted interest 297 --
Loss on debt extinguishment, net of tax -- 3,503
Deferred tax benefit (52,463) (53,311)
Interest accreted on discount notes 23,365 20,679
Impairment of property and equipment 1,332 --
Impairment of goodwill 291,635 --
Loss from asset disposition 30 39
Increase in, net of effects from acquisitions:
Receivables (37,916) (32,416)
Inventory (915) (842)
Prepaid expenses and other assets (2,825) (3,283)
Decrease in, net of effects from acquisitions:
Accounts payable and accrued expenses (897) (4,533)
--------- ---------
Net cash used in operating activities (41,553) (98,415)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of assets 1,673 --
Purchases of property and equipment (80,939) (101,462)
Repayment of notes receivable -- 11,860
Acquisition related costs -- (37,617)
Net change in short term investments 1,300 1,600
Other 58 --
--------- ---------
Net cash used in investing activities (77,908) (125,619)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of senior notes -- 384,046
Borrowings under senior secured debt 12,838 203,000
Repayments of borrowings under senior secured debt -- (289,422)
Debt issuance costs (1,350) (16,315)
Stock options exercised 1 211
Shares issued to employee stock purchase plan 576 366
Payments on capital leases (570) (205)
Change in restricted cash 59,705 (96,336)
--------- ---------
Net cash provided by financing activities 71,200 185,345
--------- ---------
Net decrease in cash and cash equivalents (48,261) (38,689)
Cash and cash equivalents at beginning of period 104,672 141,768
--------- ---------
Cash and cash equivalents at end of period $ 56,411 $ 103,079
========= =========
Supplemental disclosure of non-cash financing
and investing activities:
Capitalized lease obligations incurred $ 613 $ 1,188
Change in accounts payable for purchases of
property and equipment (24,368) 981
The accompanying notes are an integral part of the
consolidated financial statements.
5
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of September 30, 2002, the
unaudited consolidated statements of operations for the three and nine
months ended September 30, 2002 and 2001, the unaudited consolidated
statements of cash flows for the nine months ended September 30, 2002 and
2001, and related footnotes, have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required
by accounting principles generally accepted in the United States of
America. The financial information presented should be read in conjunction
with the audited consolidated financial statements as of and for the year
ended December 31, 2001. In the opinion of management, the interim data
includes all adjustments (consisting of only normally recurring
adjustments) necessary for a fair statement of the results for the interim
periods. Operating results for the three and nine months ended September
30, 2002 are not necessarily indicative of results that may be expected for
the year ending December 31, 2002.
Basic and diluted net loss per share of common stock is computed by
dividing net loss for each period by the weighted-average outstanding
common shares. No conversion of common stock equivalents has been assumed
in the calculations since the effect would be antidilutive. As a result,
the number of weighted-average outstanding common shares as well as the
amount of net loss per share are the same for basic and diluted net loss
per share calculations for all periods presented. Common stock equivalents
excluded from diluted net loss per share calculations consisted of options
to purchase 6,031,830 and 5,512,003 shares of common stock at September 30,
2002 and 2001, respectively.
Certain reclassifications have been made to prior period balances to
conform to current period presentation.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa Holdings, Inc. ("Alamosa Holdings") was formed in July 2000.
Alamosa Holdings is a holding company and through its subsidiaries provides
wireless personal communications services, commonly referred to as PCS, in
the Southwestern, Northwestern and Midwestern United States. Alamosa
(Delaware), Inc. ("Alamosa (Delaware)"), a subsidiary of Alamosa Holdings,
was formed in October 1999 under the name "Alamosa PCS Holdings, Inc." to
operate as a holding company in anticipation of its initial public
offering. On February 3, 2000, Alamosa (Delaware) completed its initial
public offering. Immediately prior to the initial public offering, shares
of Alamosa (Delaware) were exchanged for Alamosa PCS LLC's ("Alamosa")
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 New York
Stock Exchange under the symbol "APS."
6
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
3. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through capital
contributions from owners, through debt financing and through proceeds
generated from public offerings of common stock.
As of September 30, 2002, the Company had $56,411 in cash and cash
equivalents plus an additional $34,988 in restricted cash held in escrow
for debt service requirements. The Company also had $25,000 remaining on
the revolving portion of the Senior Secured Credit Facility subject to the
restrictions discussed below. Management believes that this $116,399 in
cash and available borrowings is sufficient to fund working capital,
capital expenditure and debt service requirements through the point where
the Company generates free cash flow.
On September 26, 2002 the Company entered into the sixth amendment to the
amended and restated credit agreement relative to the Senior Secured Credit
Facility which among other things, extended Stage I covenants for an
additional quarter and modified certain financial and statistical
covenants. Specifically, the new agreement modified the covenant addressing
minimum subscribers such that the minimum subscriber requirement is now
575,000 at September 30, 2002, 610,000 at December 31, 2002 and 620,000 at
March 31, 2003. As a result of the amendment, the Company is required to
maintain a minimum cash balance of $10,000. In addition to the covenant
modifications, the overall interest rate was increased by 25 basis points
such that the interest margin as a result of the amendment is 4.25% for
LIBOR borrowings and 3.25% for base rate borrowings.
The September 26, 2002 amendment also placed restrictions on the ability to
draw on the $25,000 revolving portion of the Senior Secured Credit
Facility. The first $10,000 can be drawn if cash balances fall below
$15,000 and the Company substantiates through tangible evidence the need
for such advances. The remaining $15,000 is available only at such time as
the leverage ratio is less than or equal to 5.5 to 1.
Management does not anticipate the need to raise additional capital in the
foreseeable future. The Company's funding status is dependent on a number
of factors influencing projections of operating cash flows including those
related to subscriber growth, average revenue per user ("ARPU"), churn and
cost per gross addition ("CPGA"). Should actual results differ
significantly from these assumptions, the Company's liquidity position
could be adversely affected and the Company could be in a position that
would require it to raise additional capital which may or may not be
available on favorable terms.
4. MERGERS WITH ROBERTS WIRELESS COMMUNICATIONS, L.L.C., WASHINGTON OREGON
WIRELESS, LLC, AND SOUTHWEST PCS HOLDINGS, INC.
The Company completed the acquisitions of three PCS Affiliates of Sprint
during the first quarter of 2001. On February 14, 2001, the Company
completed its acquisitions of Roberts Wireless Communications, L.L.C.
("Roberts") and Washington Oregon Wireless, LLC ("WOW"). In connection with
the Roberts and WOW acquisitions, the Company entered into a new senior
secured credit facility (the "Senior Secured Credit Facility") for up to
$280 million. On March 30, 2001, the Company completed its acquisition of
Southwest PCS Holdings, Inc. ("Southwest"). In connection with the
Southwest acquisition, the Company 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 and the results of
the acquired companies are included in these consolidated financial
statements from the date of acquisition.
The merger consideration in the Roberts acquisition consisted of 13.5
million shares of the Company's common stock and approximately $4.0 million
in cash. The Company also assumed the net debt of Roberts in the
transaction, which amounted to approximately $57 million as of February 14,
2001.
The merger consideration in the WOW acquisition consisted of 6.05 million
shares of the Company's common stock and approximately $12.5 million in
cash. The Company also assumed the net debt of WOW in the transaction,
which amounted to approximately $31 million as of February 14, 2001.
7
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
The merger consideration in the Southwest acquisition consisted of 11.1
million shares of the Company's common stock and approximately $5.0 million
in cash. The Company also assumed the net debt of Southwest in the
transaction, which amounted to approximately $81 million as of March 30,
2001.
The Company obtained independent valuations as of the date of acquisition
of Roberts, WOW and Southwest to allocate the purchase price. The results
of the allocations are as follows:
ROBERTS WOW SOUTHWEST TOTAL
--------- --------- --------- ---------
Consideration:
Common stock issued $ 291,060 $ 130,438 $ 123,543 $ 545,041
Stock options granted 1,134 -- -- 1,134
Cash (including merger related costs) 8,940 15,962 12,715 37,617
--------- --------- --------- ---------
Total 301,134 146,400 136,258 583,792
--------- --------- --------- ---------
Allocated to:
Current assets 4,545 1,969 5,923 12,437
Property, plant and equipment 53,506 35,732 36,722 125,960
Intangible assets (other than goodwill) 258,300 116,400 187,000 561,700
Liabilities acquired (including deferred taxes) (185,452) (85,433) (152,955) (423,840)
--------- --------- --------- ---------
Goodwill $ 170,235 $ 77,732 $ 59,568 $ 307,535
========= ========= ========= =========
The unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 2001 set forth below, presents the
results of operations as if the acquisitions had occurred at the beginning
of the period and are not necessarily indicative of future results or
actual results that would have been achieved had these acquisitions
occurred as of the beginning of the period.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
-------------------------
(UNAUDITED)
Total revenues $ 256,166
=========
Net loss before income tax benefit
and extraordinary item $(173,023)
Income tax benefit 61,128
---------
Net loss before extraordinary item (111,895)
Loss on debt extinguishment, net of tax
benefit of $1,969 (3,503)
---------
Net loss $(115,398)
=========
Basic and diluted net loss per share
before extraordinary item $ (1.22)
=========
Basic and diluted net loss per share $ (1.25)
=========
5. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE -- Customer accounts receivable represent
amounts owed to the Company by subscribers for PCS service. The amounts
presented in the consolidated balance sheets are net of an allowance for
uncollectible accounts of $10.1 million and $5.9 million at September 30,
2002 and December 31, 2001, respectively.
8
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
RECEIVABLE FROM SPRINT -- Receivable from Sprint in the accompanying
consolidated balance sheets includes net roaming revenue receivable from
Sprint. This receivable also includes amounts billed by Sprint on the
Company's behalf to other communications providers for calls terminated on
the Company's network. In addition, this item includes accruals for
estimated unbilled revenue through the end of the period.
Receivable from Sprint consists of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Net roaming receivable $ 5,170 $1,731
Access and interconnect revenue receivable (130) 3,252
Accrued service revenue 4,040 4,154
------- ------
$ 9,080 $9,137
======= ======
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation of $106.5
million and $60.9 million at September 30, 2002 and December 31, 2001,
respectively.
7. GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisitions completed during 2001 discussed in Note
4, the Company allocated portions of the respective purchase prices to
identifiable intangible assets consisting of (i) the value of the Sprint
agreements in place at the acquired companies and (ii) the value of the
subscriber base in place at the acquired companies. In addition to the
identifiable intangibles, goodwill was recorded in the amount by which the
purchase price exceeded the fair value of the net assets acquired including
identified intangibles.
The value assigned to the Sprint agreements is being amortized using the
straight-line method over the remaining original terms of the agreements
that were in place at the time of acquisition or approximately 17.6 years.
The value assigned to the subscriber bases acquired is being amortized
using the straight-line method over the estimated life of the acquired
subscribers or approximately 3 years.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," on
January 1, 2002. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their initial recognition. The
provisions of SFAS No. 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and
in interim periods if certain events occur indicating that the carrying
value may be impaired), (iii) require that reporting units be identified
for the purpose of assessing potential future impairments of goodwill and
(iv) remove the forty year limitation on the amortization period of
intangible assets that have finite lives. As of December 31, 2001, the
Company had recorded $15.9 million in accumulated amortization of goodwill.
Upon the adoption of SFAS No. 142 the amortization of goodwill was
discontinued.
SFAS No. 142 requires that goodwill and indefinite-lived intangible assets
be tested annually for impairment using a two-step process. The first step
is to identify a potential impairment by comparing the fair value of
reporting units to their carrying value and, upon adoption, must be
measured as of the beginning of the fiscal year. As of January 1, 2002, the
results of the first step indicated no potential impairment of the
Company's goodwill. The Company will perform this assessment annually and
the first such assessment was done as of July 31, 2002.
The annual assessment as of July 31, 2002 was performed with the assistance
of a nationally recognized appraisal firm. In performing the evaluation,
the appraisal firm used information from various sources
9
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
including, but not limited to, current stock price, transactions involving
similar companies, the business plan prepared by management and current and
past operating results of the Company. The appraisal firm used a
combination of the guideline transaction approach, the discounted cash flow
approach and the public price approach to determine the fair value of the
Company which had been determined to be the single reporting unit. The
guideline transaction approach used a sample of recent wireless service
provider transactions to determine an average price per POP and price per
customer. The discounted cash flow approach used the projected discounted
future cash flows and residual values of the Company to determine the
indicated value of invested capital. The public price approach was based on
the market price for the Company's publicly traded equity securities along
with an estimated premium for control. This was combined with the carrying
value of the Company's debt securities to arrive at the indicated value of
invested capital. The results of this valuation indicated that the fair
value of the reporting unit was less than the carrying amount.
Based on the indicated impairment resulting from this valuation, the
Company proceeded to the second step of the annual impairment testing which
involves allocating the fair value of the reporting unit to its
identifiable assets and liabilities as if the reporting unit had been
acquired in a business combination where the purchase price is considered
to be the fair value of the reporting unit. Any unallocated purchase price
is considered to be the implied fair value of goodwill. The second step of
this impairment test has not been completed as of the filing of the Form
10-Q for the quarter ended September 30, 2002 and will be completed in the
fourth quarter of 2002. An impairment charge of $291,635 was recorded in
the third quarter of 2002 to reflect management's best estimate of the
potential goodwill impairment as of July 31, 2002. After the completion of
the second step, any change in the estimated amount of impairment will be
recorded in the fourth quarter of 2002. This impairment charge is included
as a separate line item in the consolidated statements of operations for
the three and nine months ended September 30, 2002.
The impairment of goodwill was deemed to be a "triggering event" requiring
impairment testing of the Company's other long-lived assets under SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In
performing this test, assets are grouped according to identifiable cash
flow streams and the undiscounted cash flow over the life of the asset
group is compared to the carrying value of the asset group. No additional
impairment was recorded as a result of this test.
Goodwill and intangible assets consist of:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Goodwill $ -- $ 293,353
========= =========
Intangible assets:
Sprint affiliation and other agreements $ 532,200 $ 532,200
Accumulated amortization (47,900) (25,768)
--------- ---------
Subtotal 484,300 506,432
--------- ---------
Subscriber base acquired 29,500 29,500
Accumulated amortization (15,362) (7,092)
--------- ---------
Subtotal 14,138 22,408
--------- ---------
Intangible assets, net $ 498,438 $ 528,840
========= =========
Amortization expense relative to intangible assets was $10,267 and $30,402
for the three and nine months ended September 30, 2002 and will be $10,017
for the remainder of 2002.
10
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 $ 40,419
2003 40,067
2004 32,079
2005 30,234
2006 30,234
Thereafter 355,807
---------
$ 528,840
=========
The following tables present net loss before extraordinary item, net loss
and the respective per-share amounts as if the provisions of SFAS 142 had
been adopted January 1, 2001:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
2002 2001 2002 2001
---------- ---------- ------------ ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Reported net loss before extraordinary item $(320,847) $ (37,712) $(377,716) $ (95,976)
Add back: goodwill amortization -- 4,634 -- 10,803
---------- ---------- ---------- ----------
Adjusted net loss before extraordinary item $ (320,847) $ (33,078) $ (377,716) $ (85,173)
========== ========== ========== ==========
Reported net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
Add back: goodwill amortization -- 4,634 -- 10,803
---------- ---------- ---------- ----------
Adjusted net loss $ (320,847) $ (33,078) $ (377,716) $ (88,676)
========== ========== ========== ==========
NET LOSS BEFORE EXTRAORDINARY ITEM PER
COMMON SHARE, BASIC AND DILUTED:
As reported $ (3.45) $ (0.41) $ (4.06) $ (1.13)
Goodwill amortization -- 0.05 -- 0.13
---------- ----------- ----------- -----------
Adjusted $ (3.45) $ (0.36) $ (4.06) $ (1.00)
=========== =========== ========== ===========
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED:
As reported $ (3.45) $ (0.41) $ (4.06) $ (1.17)
Goodwill amortization -- 0.05 -- 0.13
---------- ----------- ----------- -----------
Adjusted $ (3.45) $ (0.36) $ (4.06) $ (1.04)
=========== =========== ========== ===========
8. LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED)
Senior secured debt $ 200,000 $ 187,162
12 7/8% senior discount notes 260,573 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
---------- ----------
Total debt 860,573 824,369
Less current maturities -- --
---------- ----------
Long-term debt, excluding current maturities $ 860,573 $ 824,369
========== ==========
11
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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. This credit facility was again amended in August 2001 to reduce
the maximum borrowing to $225 million consisting of a 7-year senior secured
12-month delayed draw term loan facility of $200 million and a 7-year
senior secured revolving credit facility in an aggregate principal amount
of up to $25 million. On February 11, 2002, the Company drew the remaining
$12,838 on the term portion of the Senior Secured Credit Facility. No
advances have been taken on the revolving portion of the Senior Secured
Credit Facility.
Interest on the Senior Secured Credit Facility accrues at the option of the
Company at either (i) the London Interbank Offered Rate ("LIBOR") adjusted
for any statutory reserve, 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. These margins are subject to
adjustment under certain conditions.
Repayment of amounts borrowed under the Senior Secured Credit Facility will
begin on May 14, 2004 and payment will be made quarterly thereafter in
amounts to be agreed upon by the Company and the lenders.
On September 26, 2002 the Company entered into the sixth amendment to the
amended and restated credit agreement which among other things, extended
Stage I covenants for an additional quarter and modified certain financial
and statistical covenants. Specifically, the new agreement modified the
covenant addressing minimum subscribers such that the minimum subscriber
requirement is now 575,000 at September 30, 2002, 610,000 at December 31,
2002 and 620,000 at March 31, 2003. In addition to the covenant
modifications, the overall interest rate was increased by 25 basis points
such that the interest margin as a result of the amendment is 4.25% for
LIBOR borrowings and 3.25% for base rate borrowings.
The September 26, 2002 amendment also placed restrictions on the ability to
draw on the $25,000 revolving portion of the Senior Secured Credit
Facility. The first $10,000 can be drawn if cash balances fall below
$15,000 and the Company substantiates through tangible evidence the need
for such advances. The remaining $15,000 is available only at such time as
the leverage ratio is less than or equal to 5.5 to 1.
NORTEL/EDC CREDIT FACILITY
On February 14, 2001, the outstanding balance of $54,524 related to the
Nortel/EDC Credit Facility, which was originally entered into in 1999, was
paid in full plus accrued interest in the amount of $884 with proceeds from
the Senior Secured Credit Facility. The Company was refunded $1,377 of the
original issuance cost as a result of the early extinguishment. The balance
of unamortized cost totaling $5,472 was written off and classified as an
extraordinary item (net of an income tax benefit of $1,969) in the quarter
ended March 31, 2001.
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 approximately $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
12
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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 that was in place at the time, 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 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 offering expenses.
Approximately $59 million of the proceeds of the 12 1/2% Senior Notes
Offering were used by Alamosa (Delaware) to establish a security account
(with cash or U.S. government securities) to secure on a pro rata basis the
payment obligations under the 12 1/2% Senior Notes and the 12 7/8% Senior
Discount Notes, and the balance was used for general corporate purposes of
Alamosa (Delaware), including, accelerating coverage within the existing
territories of the Company; the build-out of additional areas within its
existing territories; expanding its existing territories; and pursuing
additional telecommunications business opportunities or acquiring other
telecommunications businesses or assets.
13 5/8% SENIOR NOTES
On August 15, 2001, Alamosa (Delaware) issued $150 million face amount of
Senior Notes (the "13 5/8% Senior Notes"). The 13 5/8% Senior Notes mature
in ten years (August 15, 2011), and carry a coupon rate of 13 5/8% payable
semiannually on February 15 and August 15, beginning on February 15, 2002.
The net proceeds from the sale of the 13 5/8% Senior Notes were
approximately $141.5 million, after deducting the discounts and commissions
to the initial purchasers and offering expenses.
Approximately $39.1 million of the proceeds of the 13 5/8% 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 1/2% Senior Notes and
the 12 7/8% Senior Discount Notes. Approximately $66 million of the
proceeds were used to pay down a portion of the Senior Secured Credit
Facility. The balance was used for general corporate purposes.
9. INCOME TAXES
The income tax benefit represents the anticipated recognition of the
Company's deductible net operating loss carry forwards. This benefit is
being recognized based on an assessment of the combined expected future
taxable income of the Company and expected reversals of the temporary
differences from the Roberts, WOW and Southwest mergers.
The effective tax rate differs from the statutory rate in 2002 primarily
due to the fact that the impairment of goodwill is not deductible for tax
purposes.
10. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company adopted SFAS No. 133, "Accounting for Derivatives and Hedging
Activities" on January 1, 2001. The statement requires the Company to
record all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivatives are either recognized in earnings or are
recognized in other comprehensive income until the hedged item is
recognized in earnings. Approximately $550 and $ 1,608 in cash settlements
under derivative instruments classified as hedges is included in interest
expense for the three and nine months ended September 30, 2002.
13
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
As of September 30, 2002, the Company has recorded $3,813 in "other
noncurrent liabilities" relative to the fair value of derivative
instruments including $2,650 representing derivative instruments that
qualify for hedge accounting under SFAS No. 133. In addition, the Company
has recorded $12 in "other noncurrent assets" at September 30, 2002 related
to the fair value of derivative instruments. During the nine month period
ended September 30, 2002, the Company recognized losses of $704 (net of
income tax benefit of $431) in other comprehensive income. During the nine
month period ended September 30, 2001, the Company recognized losses of
$1,228 (net of income tax benefit of $680) in other comprehensive income.
Other comprehensive income appears as a separate component of Stockholders'
Equity as "Accumulated other comprehensive income," as illustrated below:
Three months ended September 30, Nine months ended September 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Net loss $ (320,847) $ (37,712) $ (377,716) $ (99,479)
Change in fair values of
derivative instruments, net
of income tax benefit of
$279, $773, $431 and $680,
respectively (456) (1,394) (704) (1,228)
-------------- --------------- -------------- --------------
Comprehensive loss $ (321,303) $ (39,106) $ (378,420) $ (100,707)
============== =============== ============== ==============
11. COMMITMENTS AND CONTINGENCIES
ACCESS REVENUE REFUND -- On July 3, 2002, the Federal Communications
Commission issued a ruling on a dispute between AT&T, as an interexchange
carrier ("IXC"), and Sprint Spectrum L.P., a Commercial Mobile Radio
Service ("wireless carrier"). This ruling addressed the wireless carrier
charging terminating access fees to the IXC for calls terminated on a
wireless network indicating such fees could be assessed; however the IXC
would only be obligated to pay such fees if a contract was in place
providing for the payment of access charges. As a result of this ruling,
Sprint has requested that the Company refund approximately $1.4 million of
a total $5.6 million in amounts that had been previously paid to the
Company by Sprint relative to terminating access fees. Although the Company
intends to contest the refund of these amounts, a liability has been
recorded in the consolidated financial statements as of September 30, 2002.
LITIGATION -- The Company has been named as a defendant in a number of
purported securities class actions in the United States District Court for
the Southern District of New York, arising out of its initial public
offering (the "IPO"). Various underwriters of the IPO also are named as
defendants in the actions. The complaints allege, among other things, that
the registration statement and prospectus filed with the Securities and
Exchange Commission for purposes of the IPO were false and misleading
because they failed to disclose that the underwriters allegedly (i)
solicited and received commissions from certain investors in exchange for
allocating to them shares of common stock in connection with the IPO, and
(ii) entered into agreements with their customers to allocate such stock to
those customers in exchange for the customers agreeing to purchase
additional Company shares in the aftermarket at pre-determined prices.
The Court has ordered that these putative class actions against the
Company, along with hundreds of IPO allocation cases against other issuers,
be transferred for coordinated pre-trial proceedings. At a status
conference held on September 7, 2001, the Court adjourned all defendants'
time to respond to the complaints until further order of the Court. These
cases remain at a preliminary stage and no discovery proceedings have taken
place.
On January 23, 2001, Jerry Brantley, President and COO of the Company,
terminated his employment with the Company at the unanimous request of the
board of directors. On April 29, 2002, Mr. Brantley initiated litigation
against the Company and the chairman of the Company, David E. Sharbutt,
alleging wrongful
14
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
termination among other things. The Company believes that there is no basis
for Mr. Brantley's claim and intends to vigorously defend the lawsuit.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The ultimate disposition of these matters are
not expected to have a material adverse impact on the Company's financial
position, results of operations or liquidity.
NYSE LISTING REQUIREMENTS -- The Company is listed on the New York Stock
Exchange ("NYSE") and is subject to various listing requirements set forth
by the NYSE. The Company received written notice from the NYSE on August
29, 2002 indicating that the Company had fallen below the requirements to
(1) maintain an average closing price that is not less than $1.00 per share
over a consecutive 30 trading-day period and (2) to maintain an average
global market capitalization over a consecutive 30 trading-day period of
not less than $100 million. The Company submitted a proposed business plan
to the NYSE on October 15, 2002 to address plans to cure the violations of
listing requirements and is awaiting approval of the plan by the NYSE.
12. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires the fair value of a liability for an asset retirement obligation
to be recognized in the period that it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. The
Company is in the process of evaluating the impact that the adoption of
SFAS No. 143 will have on the Company's results of operations, financial
position and cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 31, 2001. As discussed in Note 7, the impairment of goodwill
recorded as a result of the Company's annual testing under SFAS 142
triggered an impairment analysis under SFAS 144 relative to the Company's
other long-lived assets.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002," which rescinded or amended various existing
standards. One change addressed by this standard pertains to treatment of
extinguishments of debt as an extraordinary item. SFAS No. 145 rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and
states that an extinguishment of debt cannot be classified as an
extraordinary item unless it meets the unusual or infrequent criteria
outlined in Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." The provisions of this statement are effective for
fiscal years beginning after May 15, 2002 and extinguishments of debt that
were previously classified as an extraordinary item in prior periods that
do not meet the criteria in Opinion 30 for classification as an
extraordinary item shall be reclassified. The adoption of SFAS No. 145 is
expected to result in a reclassification of the extinguishment of debt that
the Company previously reported in the three-month period ended March 31,
2001.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize
costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The
provisions of this statement are effective for exit or disposal activities
initiated after December 31, 2002 and are not expected to have a material
impact on the Company's results of operations, financial position or cash
flows.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as, "may," "might," "could," "would,"
"believe," "expect," "intend," "plan," "seek," "anticipate," "estimate,"
"project" or "continue" or the negative thereof or other variations thereon or
comparable terminology. These forward-looking statements are subject to various
risks and uncertainties and are made pursuant to the "safe-harbor" provisions of
the private Securities Litigation Reform Act of 1995. These statements are made
based on management's current expectations or beliefs as well as assumptions
made by, and information currently available to, management.
A variety of factors could cause actual results to differ materially from
those anticipated in our forward-looking statements, including the following
factors:
o our dependence on our affiliation with Sprint;
o shifts in populations or network focus;
o changes or advances in technology;
o changes in Sprint's national service plans or fee structure with us;
o difficulties in network construction;
o increased competition in our markets;
o failure to consummate anticipated acquisitions or financings;
o customer credit quality; and
o the potential to experience a continued high rate of customer
turnover.
For a detailed discussion of these and other cautionary statements and
factors that could cause actual results to differ from our forward-looking
statements, please refer to our filings with the Securities and Exchange
Commission, "Item 1. Business" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation" of our Form 10-K for the year
ended December 31, 2001.
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 risk factors described in other documents we
file from time to time with the Securities and Exchange Commission.
GENERAL
Since our inception in 1998, we have incurred substantial costs in
connection with negotiating our contracts with Sprint, obtaining our debt
financing, completing our public equity offerings, engineering our wireless PCS
network, developing our business infrastructure and building out our portion of
Sprint's PCS network. Prior to the launch of our first market in June 1999, we
did not have any markets in operation and we had no customers. At September 30,
2002, we have approximately 591,000 subscribers. As of September 30, 2002, our
accumulated deficit is $639.1 million and we have spent a cumulative total of
approximately $637 million in capital expenditures (including that spent by
Roberts, WOW and Southwest prior to our acquisition) in connection with
constructing our portion of Sprint's PCS network and developing our business
infrastructure including the establishment of our retail distribution channels.
While we anticipate operating losses to continue, we expect revenue to continue
to increase substantially as our subscriber base increases.
On July 17, 1998, we entered into our original affiliation agreements with
Sprint. We subsequently amended our original agreements in 1999 to add
additional territories to our licensed area. In the first quarter of 2001, we
completed the acquisitions of Roberts, WOW and Southwest bringing our total
licensed POPs to approximately 15.8 million at September 30, 2002.
16
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless, mobility communications network services under the Sprint brand name
in our licensed territory. We are responsible for building, owning and managing
the portion of Sprint's PCS network located in our territory. We offer national
plans designed by Sprint and can offer local plans tailored to our market
demographics. Our portion of Sprint's PCS network is designed to offer a
seamless connection with Sprint's 100% digital PCS nationwide wireless network.
We market wireless products and services through a number of distribution
outlets located in our territories, including our own retail stores, major
national distributors and local third party distributors.
We recognize revenues from Sprint PCS subscribers based in our territories,
proceeds from the sales of handsets and accessories through channels controlled
by us and fees from Sprint and other wireless service providers when their
customers roam onto our portion of Sprint's PCS network. Sprint retains 8% of
all collected service revenue from our subscribers (not including product sales)
and fees collected from other wireless service providers when their customers
roam onto our portion of Sprint's PCS network. We report the amount retained by
Sprint as an operating expense.
As part of our affiliation agreements with Sprint, we have the option of
contracting with Sprint to provide back office services such as customer
activation, handset logistics, billing, customer care and network monitoring
services. We have elected to delegate the performance of these services to
Sprint to take advantage of their economies of scale, to accelerate our
build-out and market launches and to lower our initial capital requirements. The
cost for these services is primarily on a per subscriber and per transaction
basis and is recorded as an operating expense.
CRITICAL ACCOUNTING POLICIES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of an
entity. To aid in that understanding, we have identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our consolidated financial statements, either because of
the significance of the financial statement item to which they relate, or
because they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -- Estimates are used in determining our
allowance for bad debts and are based on our historical collection experience,
current trends, credit policy and expectations of future bad debts based on
current collection activities. In determining the allowance, we consider
historical write-offs of our receivables and our history is limited. We also
look at current trends in the credit quality of our customer base as well as
changes in the credit policies. Under Sprint PCS service plans, customers who do
not meet certain credit criteria can nevertheless select any plan offered,
subject to an account spending limit, referred to as ASL, to control credit
exposure. Account spending limits range from $125 to $200 that could be credited
against future billings. In May 2001, the deposit requirement was eliminated on
certain, but not all, credit classes ("NDASL"). As a result, a significant
amount of our new customer additions have been under the NDASL program. The
NDASL program was replaced by the "Clear Pay" program in November 2001, which
reinstated the deposit requirement for certain of the lowest credit class
customers, and features increased back office controls with respect to
collection efforts. We reinstated the deposit for customers in certain credit
classes on the Clear Pay program as of February 24, 2002 and we have modified
the requirement in certain markets since then.
REVENUE RECOGNITION -- We record equipment revenue for the sale of handsets
and accessories to customers in our retail stores and to local resellers in our
territories. We do not record equipment revenue on handsets and accessories
purchased by our customers from national resellers or directly from Sprint. Our
customers pay an activation fee when they initiate service unless waived. We
defer this activation fee and the related expense and record the activation fee
revenue and expense over the estimated average life of our customers which
ranges from 12 to 36 months depending on credit class and based on our past
experience. We recognize revenue from our customers as they use the service.
Additionally, we provide a reduction of recorded revenue for billing adjustments
and billing corrections.
We record revenue for product sales in connection with our sales of
handsets and accessories through our retail stores and our local indirect
retailers. The cost of handsets sold generally exceeds the retail sales price as
we subsidize the price of handsets for competitive reasons. We reimburse Sprint
for the amount of subsidy incurred by them on handsets sold through channels
controlled by them.
17
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS -- In connection with our
acquisitions of Roberts, WOW and Southwest in the first quarter of 2001, we
recorded certain intangible assets including both identifiable intangibles and
goodwill. Identifiable intangibles consist of the Sprint agreements and the
respective subscriber bases in place at the time of acquisition. The intangible
assets related to the Sprint agreements are being amortized over the remaining
original term of the underlying Sprint agreements or approximately 17.6 years.
The subscriber base intangible asset is being amortized over the estimated life
of the acquired subscribers or approximately 3 years.
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002.
SFAS No. 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. The provisions of SFAS No. 142
(i) prohibit the amortization of goodwill and indefinite-lived intangible
assets, (ii) require that goodwill and indefinite-lived intangible assets be
tested annually for impairment (and in interim periods if certain events occur
indicating that the carrying value of goodwill and indefinite-lived intangible
assets may be impaired), (iii) require that reporting units be identified for
the purpose of assessing potential future impairments of goodwill and (iv)
remove the forty-year limitation on the amortization period of intangible assets
that have finite lives. As of December 31, 2001, we had recorded $15.9 million
in accumulated amortization of goodwill. Upon the adoption of SFAS No. 142 the
amortization of goodwill was discontinued.
SFAS No. 142 requires that goodwill and indefinite-lived intangible assets
be tested annually for impairment using a two-step process. The first step is to
identify a potential impairment by comparing the fair value of reporting units
to their carrying value and, upon adoption, must be measured as of the beginning
of the fiscal year. As of January 1, 2002, the results of the first step
indicated no potential impairment of our goodwill. We will perform this
assessment annually and the first such assessment was done as of July 31, 2002.
The annual assessment as of July 31, 2002 was performed with the assistance
of a nationally recognized appraisal firm. In performing the evaluation, the
appraisal firm used information from various sources including, but not limited
to, current stock price, transactions involving similar companies, the business
plan prepared by management and our current and past operating results. The
appraisal firm used a combination of the guideline transaction approach, the
discounted cash flow approach and the public price approach to determine the
fair value of the Company which had been determined to be the single reporting
unit. The guideline transaction approach used a sample of recent wireless
service provider transactions to determine an average price per POP and price
per customer. The discounted cash flow approach used the projected discounted
future cash flows and residual values of the Company to determine the indicated
value of invested capital. The public price approach was based on the market
price for our publicly traded equity securities along with an estimated premium
for control. This was combined with the carrying value of our debt securities to
arrive at the indicated value of invested capital. The results of this valuation
indicated that the fair value of the reporting unit was less than the carrying
amount.
Based on the indicated impairment resulting from this valuation, we
proceeded to the second step of the annual impairment testing which involves
allocating the fair value of the reporting unit to its identifiable assets and
liabilities as if the reporting unit had been acquired in a business combination
where the purchase price is considered to be the fair value of the reporting
unit. Any unallocated purchase price is considered to be the fair value of
goodwill. The second step of this impairment test has not been completed as of
the filing of the Form 10-Q for the quarter ended September 30, 2002 and will be
completed in the fourth quarter of 2002. An impairment charge of $291,635 was
recorded in the third quarter of 2002 to reflect our best estimate of the
potential goodwill impairment as of July 31, 2002. After the completion of the
second step, any change in the estimated amount of impairment will be recorded
in the fourth quarter of 2002. This impairment charge is included as a separate
line item in the consolidated statements of operations for the three and nine
months ended September 30, 2002.
LONG-LIVED ASSET RECOVERY -- Long-lived assets, consisting primarily of
property, plant and equipment and intangibles, comprise approximately 82 percent
of our total assets. Changes in technology or in our intended use of these
assets may cause the estimated period of use or the value of these assets to
change. In addition, changes in general industry conditions such as increased
competition, lower average revenue per user ("ARPU"), etc., could cause the
value of certain of these assets to change. We monitor the appropriateness of
the estimated useful lives of these assets. Whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
recoverable, we review the respective assets for impairment. The impairment of
goodwill discussed above was deemed to be a "triggering event" requiring
impairment testing of our other long-lived assets under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In performing
this test, assets are grouped according to identifiable cash
18
flow streams and the undiscounted cash flow over the life of the asset group is
compared to the carrying value of the asset group. No additional impairment was
recorded as a result of this test. Estimates and assumptions used in both
estimating the useful life and evaluating potential impairment issues require a
significant amount of judgment.
INCOME TAXES -- We utilize an asset and liability approach to accounting
for income taxes, wherein deferred taxes are provided for book and tax basis
differences for assets and liabilities. In the event differences exist between
book and tax basis of our assets and liabilities that result in deferred assets,
an evaluation of the probability of being able to realize the future benefits
indicated by such assets is made. A valuation allowance is provided for the
portion of deferred tax assets for which there is sufficient uncertainty
regarding our ability to recognize the benefits of those assets in future years.
Deferred taxes are provided for those items reported in different periods
for income tax and financial reporting purposes. The net deferred tax asset was
fully reserved through December 31, 2000 because of uncertainty regarding our
ability to recognize the benefit of the asset in future years. In connection
with the acquisitions in 2001, a significant deferred tax liability was recorded
relative to intangibles. The reversal of the timing differences which gave rise
to the deferred tax liability will allow us to benefit from the deferred tax
asset. As such, the valuation allowance against the deferred tax asset was
reduced in 2001 to account for the expected benefit to be realized. Prior to
February 1, 2000, our predecessor operated as a limited liability company
("LLC") under which losses for income tax purposes were utilized by the LLC
members on their income tax returns. Subsequent to January 31, 2000, we became a
C-corp for federal income tax purposes and therefore subsequent losses became
net operating loss carryforwards to us. We continue to evaluate the likelihood
of realizing the benefits of deferred tax items. Should events or circumstances
indicate that it is warranted, a valuation allowance will again be established.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -- We
place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory that we receive on a periodic basis from Sprint.
We make significant estimates in terms of revenue, cost of service, selling and
marketing costs and the adequacy of our allowance for uncollectible accounts
based on this data we receive from Sprint. We obtain assurance as to the
accuracy of this data through analytic review and reliance on the service
auditor report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint could have a
material adverse effect on our results of operations and cash flow.
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
FOR THE THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO THE
THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
The acquisitions of Roberts, WOW and Southwest took place on February 14,
February 14, and March 30, 2001, respectively. These acquisitions were accounted
for under the purchase method of accounting such that the results of operations
for the acquired entities are included in our consolidated operating results
only from the date of acquisition. This, coupled with our substantial growth
during 2001 in terms of subscribers and network coverage, impacts the comparison
of 2002 operating results to those reported in 2001.
SUBSCRIBER GROWTH AND KEY PERFORMANCE INDICATORS -- We had total
subscribers of approximately 591,000 at September 30, 2002 compared to
approximately 404,000 at September 30, 2001. This growth came as a result of
increasing our network coverage from 10.8 million to 11.5 million covered POPs
providing additional marketing opportunities. Monthly churn (rate of
deactivation of existing subscribers) for the third quarter of 2002 was
approximately 3.8 percent compared to approximately 2.7 percent for the third
quarter of 2001. This increase in churn is a result of higher involuntary
deactivations related to lower credit quality customers obtained during the
second half of 2001 and early 2002 as a result of removing the requirement that
these customers pay a security deposit. This deposit requirement was reinstated
on February 24, 2002 and we have modified the requirement in certain markets
since then. Increases in churn negatively impact our operations as we incur
significant up front costs in acquiring customers. Our cost per gross addition
("CPGA") includes handset subsidies, and selling and marketing costs and was
$442 per activation in the third quarter of 2002 compared to $324 in the third
quarter of 2001. This increase is due to a lower number of activations in the
third quarter of 2002 compared to the third quarter of 2001 due to the
reimplementation of deposit requirements for lower credit quality customers and
increased levels of competition in the marketplace. Due to this lower level of
activations, our fixed marketing dollars were spread over fewer customer
activations.
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SERVICE REVENUE -- Service revenues consist of revenue from subscribers and
roaming revenue earned when customers from other carriers roam onto our portion
of Sprint's PCS network. Subscriber revenue consists of revenue earned from our
subscribers for monthly service under their service plans. Subscriber revenue
also includes activation fees and charges for the use of various features
including the wireless web, voice activated dialing, etc.
Subscriber revenues were $103,642 for the three months ended September 30,
2002 compared to $67,559 for the three months ended September 30, 2001. This
increase of 53 percent was due to the increase in subscribers from approximately
404,000 subscribers at September 30, 2001 to approximately 591,000 subscribers
at September 30, 2002. ARPU before roaming revenue declined in the third quarter
of 2002 to $60 compared to $63 in the third quarter of 2001. Subscriber revenues
were $289,720 for the nine months ended September 30, 2002 compared to $151,372
for the nine months ended September 30, 2001. This increase of 91 percent was
also due to the increase in subscribers discussed above. ARPU before roaming
revenue and a one-time revenue adjustment for terminating access revenue was $59
for the nine months ended September 30, 2002 compared to $62 for the nine months
ended September 30, 2001.
In July 2002, the Federal Communications Commission issued a ruling on a
dispute between AT&T, as an interexchange carrier ("IXC"), and Sprint Spectrum
L.P., a Commercial Mobile Radio Service ("wireless carrier"). This ruling
addressed the wireless carrier charging terminating access fees to the IXC for
calls terminated on a wireless network indicating such fees could be assessed;
however the IXC would only be obligated to pay such fees if a contract was in
place providing for the payment of access charges. As a result of this ruling,
Sprint has requested that we refund amounts that had been previously paid to us
by Sprint relative to terminating access fees. Although we have contested the
refund of these amounts, we recorded an adjustment in 2002 to reflect this
liability of approximately $5.6 million in the consolidated financial
statements.
Roaming revenue is primarily comprised of revenue from Sprint and other PCS
subscribers based outside of our territories that roam onto our portion of
Sprint's PCS network. We have a reciprocal roaming rate arrangement with Sprint
where per minute charges for inbound and outbound roaming are identical. This
rate was 20 cents per minute during the first quarter of 2001, declining to 15
cents on June 1, 2001; 12 cents on October 1, 2001 and declined to 10 cents per
minute as of January 1, 2002. The toll rate for long distance charges associated
with travel minutes was 6 cents per minute for 2001 and was approximately 2
cents per minute in 2002. The decline in rates was offset by significant
increases in roaming minutes due to the fact that we added additional cell sites
which allowed us to capture this additional roaming traffic as well as growth in
the customer bases of Sprint and other PCS providers. The reciprocal rate is
expected to remain at 10 cents through December 31, 2002. We have been notified
by Sprint that the reciprocal rate will be 5.8 cents per minute beginning
January 1, 2003. The toll rate for long distance is expected to remain at
approximately 2 cents per minute. We had approximately 307 million minutes of
inbound roaming traffic in the third quarter of 2002 compared to approximately
153 million minutes in the third quarter of 2001. The increase in minutes offset
by the decrease in rates accounted for the 24 percent overall increase in
roaming revenue to $39,129 in the third quarter of 2002 from $31,594 in the
third quarter of 2001. Roaming revenue for the nine months ended September 30,
2002 was $99,154 compared to $67,204 during the nine months ended September 30,
2001. This increase of 48 percent was driven by the volume of roaming traffic on
our network as the blended rate for the first nine months of 2002 was lower than
that in 2001 due to the rate changes discussed previously. We had approximately
780 million minutes of inbound roaming traffic in the nine months ended
September 30, 2002 compared to approximately 333 million minutes for the nine
months ended September 30, 2001. This was made possible by our placing over 180
new sites on air from September 30, 2001 to September 30, 2002 to capture this
traffic as well as a significant increase in the volume of inbound traffic from
PCS carriers other than Sprint.
PRODUCT SALES AND COST OF PRODUCTS SOLD -- We record revenue from the sale
of handsets and accessories, net of an allowance for returns, as products sales.
Product sales revenue and costs of products sold are recorded for all products
that are sold through our retail stores as well as those sold to our local
indirect agents. The cost of handsets sold generally exceeds the retail sales
price as we subsidize the price of handsets for competitive reasons. Sprint's
handset return policy allows customers to return their handsets for a full
refund within 14 days of purchase. When handsets are returned to us, we may be
able to reissue the handsets to customers at little additional cost to us.
However, when handsets are returned to Sprint for refurbishing, we receive a
credit from Sprint, which is less than the amount we originally paid for the
handset.
20
Products sales revenue for the third quarter of 2002 was $4,657 compared to
$8,721 for the third quarter of 2001. Cost of products sold for the third
quarter of 2002 was $12,904 compared to $16,591 in the third quarter of 2001. As
such, the subsidy on handsets sold through our retail and local indirect
channels was $8,247 in the third quarter of 2002 and $7,870 in the third quarter
of 2001. On a per activation basis, the subsidy was approximately $160 per
activation in the third quarter of 2002 and approximately $121 per activation in
the third quarter of 2001. The increase in subsidy per activation is due to more
aggressive promotional efforts in the third quarter of 2002 which involved a
higher level of instant rebates and other discounts on handset prices.
Product sales revenue for the nine months ended September 30, 2002 was
$17,730 compared to $18,668 for the nine months ended September 30, 2001. Cost
of products sold for the nine months ended September 30, 2002 was $36,134
compared to $35,150 for the nine months ended September 30, 2001. As such, the
subsidy on handsets sold through our retail and local indirect channels was
$18,404 for the nine months ended September 20, 2002 and $16,482 for the nine
months ended September 30, 2001. On a per activation basis, the subsidy was
approximately $128 per activation for the nine months ended September 30, 2002
and approximately $107 per activation for the nine months ended September 30,
2001. The increase in subsidy per activation is due to more aggressive
promotional efforts in the first nine months of 2002 which involved a higher
level of instant rebates and other discounts on handset prices.
COST OF SERVICE AND OPERATIONS -- Cost of service and operations includes
the costs of operating our portion of Sprint's PCS network. These costs include
items such as outbound roaming fees, long distance charges, tower leases and
maintenance as well as backhaul costs. In addition, it includes the fees we pay
to Sprint for our 8 percent affiliation fee, back office services such as
billing and customer care as well as our provision for estimated uncollectible
accounts. Expenses of $92,560 in the third quarter of 2002 were 37 percent
higher than the $67,698 incurred in the third quarter of 2001. This increase in
cost is the result of the completion of the build out of our network which drove
an increase in the number of subscribers using our network. In addition, costs
of service and operations are driven by the volume of traffic on our network.
Total minutes of use on our network were 1,074 million minutes in the third
quarter of 2002 compared to 581 million minutes in the third quarter of 2001 for
an increase in traffic of 85 percent. Expenses of $256,378 in the nine months
ended September 30, 2002 were 66 percent higher than the $154,620 incurred in
the nine months ended September 30, 2001. This increase was also due to the
increase in our subscribers and the increased volume of traffic on our network.
Total minutes of use on our network were 2,994 million minutes in the nine
months ended September 30, 2002 compared to 1,338 million minutes in the nine
months ended September 30, 2001.
SELLING AND MARKETING -- Selling and marketing expenses include
advertising, promotion, sales commissions and expenses related to our
distribution channels including our retail store expenses. In addition, we
reimburse Sprint for the subsidy on handsets sold through national retail stores
due to the fact that these retailers purchase their handsets from Sprint. This
subsidy is recorded as a selling and marketing expense. The amount of handset
subsidy included in selling and marketing was $4,618 and $12,483 in the third
quarter and first nine months of 2002, respectively, compared to $5,264 and
$9,697 in the third quarter and first nine months of 2001, respectively. Total
selling and marketing expenses of $32,503 in the third quarter of 2002 were 4
percent higher than the $31,367 incurred in the third quarter of 2001 due to the
expansion of our distribution channels resulting from the additional markets
launched during 2001. Total selling and marketing expenses of $88,360 in the
nine months ended September 30, 2002 were 20 percent higher than the $73,929
incurred in the nine months ended September 30, 2001 due to the same expansion
of our distribution channels through the last three months of 2001 and first
nine months of 2002.
GENERAL AND ADMINISTRATIVE EXPENSES -- General and administrative expenses
include corporate costs and expenses such as our executive, administrative,
human resources and corporate finance areas. General and administrative expenses
of $4,102 in the third quarter of 2002 were 16 percent higher than the $3,535
incurred in the third quarter of 2001. General and administrative expenses of
$10,890 in the nine months ended September 30, 2002 were consistent with the
$10,602 incurred in the nine months ended September 30, 2001.
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization includes
depreciation of our property and equipment as well as amortization of
intangibles. Depreciation is calculated on the straight line method over the
estimated useful lives of the underlying assets and totaled $16,630 in the third
quarter of 2002 as compared to $12,774 in the third quarter of 2001. This
increase of 30 percent is due to the increase in depreciable costs as a result
of our capital expenditures. Depreciation expense of $47,702 in the nine months
ended September 30, 2002 was 55 percent higher than the $30,745 incurred in the
nine months ended September 30, 2001 due to the increase in depreciable costs as
a result of our capital expenditures.
21
Amortization expense of $10,267 and $30,402 in the third quarter and first
nine months of 2002, respectively, relates to intangible assets recorded in
connection with the acquisitions closed in the first quarter of 2001. We
recorded two identifiable intangibles in connection with each of the
acquisitions consisting of values assigned to the agreements with Sprint and the
customer base acquired in connection with each of the three acquisitions.
Amortization expense in the third quarter and first nine months of 2001 was
$14,531 and $33,731 which included $4,634 and $10,803 in amortization of
goodwill recorded in connection with the acquisitions of Roberts, WOW and
Southwest. We adopted the provisions of SFAS No. 142 on January 1, 2002 as
discussed in "Critical Accounting Policies" which resulted in no amortization of
goodwill being recorded in the first nine months of 2002.
IMPAIRMENT OF GOODWILL -- In accordance with the provisions of SFAS No. 142
we performed our first annual assessment of goodwill for impairment as of July
31, 2002. The results of the first step of this assessment indicated that
goodwill was impaired and we recorded an estimated impairment charge of $291,635
in the third quarter of 2002. Upon completion of the second step of the
impairment testing, any change in the estimated amount of impairment will be
recorded in the fourth quarter of 2002.
IMPAIRMENT OF PROPERTY AND EQUIPMENT -- In the nine months ended September
30, 2002 we recorded impairment of property and equipment in the amount of
$1,332 related to a switching facility that was closed.
NON-CASH COMPENSATION -- Non-cash compensation expense related to stock
options that were granted to employees with exercise prices that were below then
current market prices. This expense was being recorded over the vesting period
of the underlying options. Compensation expense relative to these options was
$183 in the first nine months of 2001. No non-cash compensation expense was
recorded in the first nine months of 2002 as all options that had originally
been granted with exercise prices below then current market prices had been
forfeited by the holders prior to January 1, 2002.
OPERATING LOSS -- Our operating loss for the third quarter and first nine
months of 2002 was $313,173 and $356,229, respectively, compared to $38,622 and
$101,716 for the third quarter and first nine months of 2001. This increase is
attributable to the $291,635 impairment of goodwill recorded in the third
quarter of 2002 offset by the leverage we are beginning to experience in
spreading our fixed costs over a larger base of subscribers who generate ARPU
that is relatively stable.
INTEREST AND OTHER INCOME -- Interest and other income represents amounts
earned on the investment of excess equity and debt offering proceeds. Income of
$678 in the third quarter of 2002 was 73 percent less than the $2,531 earned in
the third quarter of 2001 due to declining interest rates and the fact that
excess cash and investments were liquidated during the fourth quarter of 2001 as
well as the first and second quarters of 2002, in connection with funding our
capital expenditures and net operating cash flow outflow. Income of $2,882 in
the nine months ended September 30, 2002 was 73 percent less than the $10,718
earned in the first nine months of 2001 due to declining interest rates and the
fact that excess cash and investments were liquidated during the last three
months of 2001 in connection with funding our capital expenditures and net
operating cash outflow.
INTEREST EXPENSE -- Interest expense for the third quarter of 2002 includes
non-cash interest accreted on our 12 7/8% Senior Discount Notes of $8,034 as
well as interest accrued on the two senior notes issued during 2001 and interest
on our senior secured debt. The increase in total interest expense to $26,158
from $23,626 in the third quarter of 2001 is due to the increased level of debt
after the two issuance of senior notes in 2001 and the increased level of
advances under senior secured borrowings. Interest expense for the nine months
ended September 30, 2002 of $76,832 was 32 percent higher than the $58,289
incurred in the nine months ended September 30, 2001 due to the two additional
senior notes borrowings in 2001 as well as the increased level of advances under
senior secured borrowings.
EXTRAORDINARY ITEM -- In connection with the closing of our Senior Secured
Credit Facility in February 2001, we drew down on that facility and used the
proceeds to repay the Nortel/EDC credit facility which was in place at the time.
We had originally capitalized loan costs in connection with obtaining the
Nortel/EDC credit facility that had a remaining unamortized balance of $5,472.
The extraordinary loss recorded in 2001 represents the $5,472 in unamortized
loan costs written off, net of a tax benefit of $1,969 relative to this loss.
22
INCOME TAXES
We account for income taxes in accordance with SFAS No. 109 "Accounting for
Income Taxes." As of December 31, 2000, the net deferred tax asset consisted
primarily of temporary differences related to the treatment of start-up costs,
unearned compensation, interest expense and net operating loss carry forwards.
The net deferred tax asset was fully offset by a valuation allowance as of
December 31, 2000 because there was sufficient uncertainty as to whether we
would recognize the benefit of those deferred taxes in future periods. In
connection with the mergers completed in the first quarter of 2001, we recorded
significant deferred tax liabilities due to differences in the book and tax
basis of the net assets acquired particularly due to the intangible assets
recorded in connection with the acquisitions.
The reversal of the timing differences which gave rise to these deferred
tax liabilities will allow us to realize the benefit of timing differences which
gave rise to the deferred tax asset. As a result, we released the valuation
allowance with a corresponding reduction to goodwill during the first quarter of
2001. Prior to 2001, all deferred tax benefit had been fully offset by an
increase in the valuation allowance such that there was no financial statement
impact with respect to income taxes. With the reduction of the valuation
allowance in 2001, we began to reflect a net deferred tax benefit in our
consolidated statement of operations.
NYSE LISTING REQUIREMENTS
We are listed on the New York Stock Exchange ("NYSE") and is subject to
various listing requirements set forth by the NYSE. We received written notice
from the NYSE dated August 23, 2002 indicating that we had fallen below the
requirements to (1) maintain an average closing price that is not less than
$1.00 per share over a consecutive 30 trading-day period and (2) to maintain an
average global market capitalization over a consecutive 30 trading-day period of
not less than $100 million. We submitted a proposed business plan to the NYSE on
October 15, 2002 in response to their letter to address our plans to cure the
violations of the listing requirements and we are awaiting approval of the plan
by the NYSE.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES -- Operating cash flows were negative $41,553 in the
first nine months of 2002 and negative $98,415 in the first nine months of 2001.
The increase in operating cash flows of $56,862 is primarily related to a
decrease in net loss before non-cash items of $58,335.
INVESTING ACTIVITIES -- Our investing cash flows were a negative $77,908 in
the first nine months of 2002 compared to a negative $125,619 in the first nine
months of 2001. Our cash capital expenditures for the first nine months of 2002
totaled $80,939 while our cash capital expenditures for the first nine months of
2001 totaled $101,462. In the first nine months of 2001, we also incurred
$37,617 in acquisition related costs relative to the acquisitions of Roberts,
WOW and Southwest.
FINANCING ACTIVITIES -- Our financing cash flows decreased in the first
nine months of 2002 to $71,200 from $185,345 in the first nine months of 2001.
In the first nine months of 2002 we received $12,838 in proceeds representing
the remaining borrowings under the term portion of our Senior Secured Credit
Facility as well as $59,705 in restricted cash which was released from escrow to
make interest payments on the 12 1/2% Senior Notes and the 13 5/8% Senior Notes.
In the first nine months of 2001, we received $384,046 in net proceeds from the
offering of our 12 1/2% and 13 5/8% Senior Notes offset by net repayment of
secured debt of $86,422, debt issuance costs of $16,315 and $96,336 in funds
placed into escrow to secure debt service requirements.
CAPITAL REQUIREMENTS
Our capital expenditure requirements for 2002 are expected to be less than
$75 million which includes upgrading our portion of Sprint's PCS network to
1XRTT. Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is expected to continue to be positive for the remainder of 2002 as we continue
to realize the benefits of the subscriber growth that we have experienced over
the past two years. We expect to be free cash flow positive (EBITDA less capital
expenditures and cash interest expense) for the first time in 2003 and believe
we are fully funded to that point as discussed below.
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LIQUIDITY
Since inception, we have financed our operations through capital
contributions from our owners, through debt financing and through proceeds
generated from public offerings of our common stock.
We 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 Alamosa and EDC
entered into the credit facility with EDC (the "EDC Credit Facility"). The EDC
Credit Facility was paid in full in the first quarter of 2001 with proceeds from
the Senior Secured Credit Facility.
On October 29, 1999, we filed a registration statement with the Securities
and Exchange Commission for the sale of 10,714,000 shares of our common stock
(the "Initial Offering"). The Initial Offering became effective and the shares
were issued on February 3, 2000 at the initial price of $17.00 per share.
Subsequently, the underwriters exercised their over-allotment option for an
additional 1,607,100 shares. We received net proceeds of approximately $193.8
million after commissions of $13.3 million and expenses of approximately $1.5
million. The proceeds of the Initial Offering were used for the build-out of our
portion of Sprint's PCS network, to fund operating capital needs and for other
corporate purposes.
On February 8, 2000, we issued $350 million face amount of senior discount
notes (the "12 7/8% Senior Discount Notes"). The 12 7/8% Senior Discount Notes
mature in ten years (February 15, 2010), carry a coupon rate of 12 7/8%, and
provide for interest deferral for the first five years. The 12 7/8% Senior
Discount Notes will accrete to their $350 million face amount by February 8,
2005, after which interest will be paid in cash semiannually.
On January 31, 2001, we issued $250 million face amount of senior notes
(the "12 1/2% Senior Notes"). The 12 1/2% Senior Notes mature in ten years
(February 1, 2011), carry a coupon rate of 12 1/2%, payable semiannually on
February 1 and August 1, beginning on August 1, 2001.
On February 14, 2001, we 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; First Union National Bank,
as documentation agent; Export Development Corporation ("EDC") as
co-documentation agent; and a syndicate of banking and financial institutions.
The Senior Secured Credit Facility was closed and initial funding of $150
million was made on February 14, 2001 in connection with the completion of the
Roberts and WOW mergers. A portion of the proceeds of the Senior Secured Credit
Facility were used (i) to pay the cash portion of the merger consideration for
the Roberts and WOW mergers, (ii) to refinance existing indebtedness under our
credit facility with EDC and under Roberts' and WOW's existing credit
facilities, and (iii) to pay transaction costs. The remaining proceeds will be
used for general corporate purposes, including funding capital expenditures,
subscriber acquisition and marketing costs, purchase of spectrum and working
capital needs. This facility was amended in March 2001 to increase the maximum
borrowings to $333 million as a result of the acquisition of Southwest and was
again amended in August 2001 to reduce the maximum borrowings to $225 million of
which $200 million is outstanding as of June 30, 2002. The terms of this credit
facility contain numerous financial and other covenants the violation of which
could be deemed an event of default by the lenders. Should we be deemed to be in
default, the lenders can declare the entire outstanding borrowings immediately
due and payable or exercise other rights and remedies. Such an event would
likely have a material adverse impact to us.
On August 15, 2001, we issued $150 million face amount of senior notes (the
"13 5/8% Senior Notes"). The 13 5/8% Senior Notes mature in ten years (August
15, 2011), carry a coupon rate of 13 5/8%, payable semiannually on February 15
and August 15, beginning on February 15, 2002. 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 $225 million and
modify the financial covenants.
On November 13, 2001, we completed an underwritten secondary offering of
our common stock pursuant to which certain of our stockholders sold an aggregate
of 4,800,000 shares at a public offering price of $14.75 per share. We did not
receive any proceeds from the sale of these shares, however the underwriters
were granted an option to purchase up to 720,000 additional shares of common
stock to cover over-allotments. This option was exercised on
24
November 16, 2001 and we received net proceeds from the sale of these shares
after offering costs of approximately $9.1 million which were used for general
corporate purposes.
As of September 30, 2002, we had $56,411 in cash and cash equivalents plus
an additional $34,988 in restricted cash held in escrow for debt service
requirements. We also had $25,000 remaining on the revolving portion of the
Senior Secured Credit Facility subject to the restrictions discussed below. We
believe that this $116,399 in cash and available borrowings is sufficient to
fund working capital, capital expenditure and debt service requirements through
the point where we generate free cash flow.
On September 26, 2002 we entered into the sixth amendment to the amended
and restated credit agreement relative to the Senior Secured Credit Facility
which among other things, extended Stage I covenants for an additional quarter
and modified certain financial and statistical covenants. Specifically, the new
agreement modified the covenant addressing minimum subscribers such that the
minimum subscriber requirement is now 575,000 at September 30, 2002, 610,000 at
December 31, 2002 and 620,000 at March 31, 2003. As a result of the amendment,
we are required to maintain a minimum cash balance of $10,000. In addition to
the covenant modifications, the overall interest rate was increased by 25 basis
points such that the interest margin as a result of the amendment is 4.25% for
LIBOR borrowings and 3.25% for base rate borrowings.
The September 26, 2002 amendment also placed restrictions on the ability to
draw on the $25,000 revolving portion of the Senior Secured Credit Facility. The
first $10,000 can be drawn if cash balances fall below $15,000 and we
substantiate through tangible evidence the need for such advances. The remaining
$15,000 is available only at such time as the leverage ratio is less than or
equal to 5.5 to 1.
We do not anticipate the need to raise additional capital in the
foreseeable future. We believe our operations can be funded through operating
cash flow. Our funding status is dependent on a number of factors influencing
our projections of operating cash flows including those related to subscriber
growth, ARPU, churn and CPGA. Should actual results differ significantly from
these assumptions, our liquidity position could be adversely affected and we
could be in a position that would require us to raise additional capital which
may not be available or may not be available on favorable terms.
INFLATION -- We believe that inflation has not had a significant impact in
the past and is not likely to have a significant impact in the foreseeable
future on our results of operations.
FUTURE TRENDS THAT MAY AFFECT OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
We may not be able to sustain our planned growth or obtain sufficient
revenue to achieve and sustain profitability. Recently, we have experienced
slowing net customer growth. Net customer growth was approximately 48,000 net
subscribers in the first quarter of 2002, 20,000 net subscribers in the second
quarter of 2002 and recently 20,000 net subscribers in the third quarter of
2002. This trend is attributable to increased churn and competition, slowing
wireless subscriber growth and weakened consumer confidence. We are currently
experiencing operating losses as we continue to add subscribers which requires a
significant up-front investment in acquiring those subscribers. If the current
trend of slowing net customer growth does not increase, it will lengthen the
amount of time it will take for us to reach a sufficient number of customers to
achieve free cash flow, which in turn will have a negative impact on liquidity
and capital resources. Our business plan reflects continuing growth in
subscribers and eventual free cash flow in 2003 as the cash flow generated by
the growing subscriber base exceeds costs incurred to acquire new customers.
We may continue to experience higher costs to acquire customers. For the
third quarter of 2002, our CPGA was $442 per activation compared to $402 per
activation in the second quarter of 2002 and $340 per activation in the first
quarter of 2002. The fixed costs in our sales and marketing organization are
being allocated among a smaller number of activations due to the slowdown in
subscriber growth. In addition, handset subsidies have been increasing due to
more aggressive promotional efforts. With a higher CPGA, customers must remain
on our network for a longer period of time at a stable ARPU to recover those
acquisitions costs.
We may continue to experience a higher churn rate. Our average customer
monthly churn (net of deactivations that take place within 30 days of the
activation date) for the quarter ended September 30, 2002 was 3.8 percent. This
rate of churn is the highest that we have experienced since inception of the
Company and compares to 2.7 percent in the
25
quarter ended September 30, 2001. We expect that in the near term churn will
remain higher than historical levels as a result of a greater percentage of
sub-prime versus prime credit class customers imbedded in the subscriber base in
our territory as a result of various programs that were run during 2001 and the
first two months of 2002 which encouraged sub-prime credit individuals to
subscribe to our service. We have experienced a significantly higher rate of
involuntary deactivations due to non-payment relative to these customers. If the
rate of churn continues at current rates or increases over the long-term, we
would lose the cash flow attributable to these customers and have greater than
projected losses.
We may experience a significantly lower reciprocal roaming rate with Sprint
in 2003 and thereafter. Under our original agreements with Sprint, Sprint had
the right to change the reciprocal roaming rate. On April 27, 2001, we entered
into an agreement with Sprint which reduced the reciprocal roaming rate from 20
cents per minute to 15 cents per minute beginning June 1, 2001, and to 12 cents
per minute on October 1, 2001. Beginning January 1, 2002 and throughout the year
ending December 31, 2002, the rate will be 10 cents per minute. We have been
notified by Sprint that beginning January 1, 2003, the reciprocal rate will be
5.8 cents per minute. We are currently a net receiver of roaming with Sprint
meaning that other PCS customers roam onto our portion of Sprint's PCS network
at a higher rate than our customers roam onto other portions of Sprint's PCS
network. The ratio of inbound to outbound Sprint PCS travel minutes was 1.14 to
1 for the third quarter of 2002 and we expect this margin to trend to 1 to 1
over time.
Our ability to borrow funds under the revolving portion of the Senior
Secured Credit Facility may be limited due to our failure to maintain or comply
with the restrictive financial and operating covenants contained in the
agreements covering our Senior Secured Credit Facility. We amended our credit
agreement on September 26, 2002 and modified certain of the financial and
operating covenants and are in compliance with the lending agreement at
September 30, 2002. We believe we will meet the requirements of these covenants
in future periods, however, if we do not, our ability to access the remaining
$25,000 in the form of the revolving portion of the Senior Secured Credit
Facility could be limited which could have a material adverse impact on our
liquidity.
We may incur significant handset subsidy costs for existing customers who
upgrade to a new handset. As our customer base matures and technological
advances in our services take place, more existing customers will begin to
upgrade to new handsets to take advantage of these services. We do not have any
historical experience regarding the rate at which existing customers upgrade
their handsets and if more customers upgrade than we are currently anticipating,
it could have a material adverse impact on our earnings and cash flows.
We may not be able to access the credit or equity markets for additional
capital if the liquidity discussed above is not sufficient for the cash needs of
our business. We continually evaluate options for additional sources of capital
to supplement our liquidity position and maintain maximum financial flexibility.
If the need for additional capital arises due to our actual results differing
significantly from our business plan or for any other reason, we may be unable
to raise additional capital.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. We are in the process of evaluating the impact that the adoption
of SFAS No. 143 will have on our results of operations, financial position and
cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 31, 2001. The adoption of SFAS No. 144 effective January 1, 2002 did
not have a material impact on our results of operations, financial position or
cash flows.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002," which rescinded or amended various existing standards. One
change addressed by this standard pertains to treatment of extinguishments of
debt as an extraordinary
26
item. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and states that an extinguishment of debt cannot be
classified as an extraordinary item unless it meets the unusual or infrequent
criteria outlined in Accounting Principles Board Opinion No. 30 "Reporting the
Unusual and Infrequently Occurring Events and Transactions." The provisions of
this statement are effective for fiscal years beginning after May 15, 2002 and
extinguishments of debt that were previously classified as an extraordinary item
in prior periods that do not meet the criteria in Opinion 30 for classification
as an extraordinary item shall be reclassified. The adoption of SFAS No. 145 is
expected to result in a reclassification of the extinguishment of debt that we
reported in the first quarter of 2001.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The provisions of this
statement are effective for exit or disposal activities initiated after December
31, 2002 and are not expected to have a material impact on our results of
operations, financial position or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in commodity futures trading activities and do not enter
into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to some interest rate risk on our senior Secured Credit
Facility and any future floating rate financing.
GENERAL HEDGING POLICIES -- We enter into interest rate swap and collar
agreements to manage our exposure to interest rate changes on our variable rate
term portion of our Senior Secured Credit Facility. We seek to minimize
counterparty credit risk through stringent credit approval and review processes,
the selection of only the most creditworthy counterparties, continual review and
monitoring of all counterparties, and through legal review of contracts. We also
control exposure to market risk by regularly monitoring changes in interest rate
positions under normal and stress conditions to ensure that they do not exceed
established limits. Our derivative transactions are used for hedging purposes
only and comply with Board-approved policies. Senior management receives
frequent status updates of all outstanding derivative positions.
INTEREST RATE RISK MANAGEMENT -- Our interest rate risk management program
focuses on minimizing exposure to interest rate movements by setting an optimal
mixture of floating and fixed-rate debt. We utilize interest rate swaps and
collars to adjust our risk profile relative to our floating rate Senior Secured
Credit Facility. We have hedges in place on approximately 42 percent of the
outstanding advances under our Senior Secured Credit Facility at September 30,
2002.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with the senior discount notes, capital leases
and the credit facility financing based on our projected level of long-term
indebtedness:
27
YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER
------ ------ ------ ------ ------ ----------
(DOLLARS IN MILLIONS)
Fixed Rate Instruments
12 7/8% senior discount notes .... $ 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 --
Fixed interest rate ............ 12.500% 12.500% 12.500% 12.500% 12.500% 12.500%
Principal payments ............. -- -- -- -- -- 250
13 5/8% senior notes ............. 150 150 150 150 150 --
Fixed interest rate ............ 13.625% 13.625% 13.625% 13.625% 13.625% 13.625%
Principal payments ............. -- -- -- -- -- 150
Capital leases
Annual minimum lease payments (1) $ 1.126 $ 1.305 $ 0.586 $ 0.161 $ 0.162 $ 1.019
Average interest rate ............ 12.327% 12.327% 12.327% 12.327% 12.327% 12.327%
Variable Rate Instruments:
Senior Secured Credit Facility (2) $ 225 $ 225 $ 200 $ 149 $ 93 $ --
Average interest rate (3) ........ 9.44% 9.44% 9.44% 9.44% 9.44% 9.44%
Principal payments ............. -- -- 25 51 56 93
(1) These amounts represent the estimated minimum annual payments due under our
estimated capital lease obligations for the periods presented.
(2) The amounts represent estimated year-end balances under the credit facility
based on a projection of the funds borrowed under that facility pursuant to
our current plan of network build-out.
(3) Interest rate on the Senior Secured Credit Facility advances equal, at our
option, either (i) the London Interbank Offered Rate adjusted for any
statutory reserves ("LIBOR"), or (ii) the base rate which is generally the
higher of the administrative agent's base rate, the federal funds effective
rate plus 0.50% or the administrative agent's base CD rate plus 0.50%, in
each case plus an interest margin which is initially 4.25% for LIBOR
borrowings and 3.25% for base rate borrowings. The applicable interest
margins are subject to reductions under a pricing grid based on ratios of
our total debt to our earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The interest rate margins will increase by an
additional 200 basis points in the event we fail to pay principal, interest
or other amounts as they become due and payable under the Senior Secured
Credit Facility.
We are also required to pay quarterly in arrears a commitment fee on the
unfunded portion of the commitment of each lender. The commitment fee accrues at
a rate per annum equal to (i) 1.50% on each day when the utilization (determined
by dividing the total amount of loans plus outstanding letters of credit under
the Senior Secured Credit Facility by the total commitment amount under the
Senior Secured Credit Facility) of the Senior Secured Credit Facility is less
than or equal to 33.33%, (ii) 1.25% on each day when utilization is greater than
33.33% but less than or equal to 66.66% and (iii) 1.00% on each day when
utilization is greater than 66.66%. We have entered into derivative hedging
instruments to hedge a portion of the interest rate risk associated with
borrowings under the Senior Secured Credit Facility. For purposes of this table,
we have used an assumed average interest rate of 9.44%.
Our primary market risk exposure relates to:
o the interest rate risk on long-term and short-term borrowings;
o our ability to refinance our senior discount notes at maturity at
market rates; and
o the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
As a condition to the Senior Secured Credit Facility, we must maintain one
or more interest rate protection agreements in an amount equal to a portion of
the total debt under the credit facility. We do not hold or issue financial or
derivative financial instruments for trading or speculative purposes. While we
cannot predict our ability to refinance existing debt or the impact that
interest rate movements will have on our existing debt, we continue to evaluate
our financial position on an ongoing basis.
28
At September 30, 2002, we had entered into the following interest rate
swaps:
INSTRUMENT NOTIONAL TERM FAIR VALUE
---------- -------- ---- ----------
4.9475% Interest rate swap $21,690 3 years $(1,178)
4.9350% Interest rate swap $28,340 3 years (1,472)
-------
$(2,650)
=======
These swaps are designated as cash flow hedges such that the fair value is
recorded as a liability in the September 30, 2002 consolidated balance sheet
with changes in fair value (net of tax) shown as a component of other
comprehensive income.
We also entered into an interest rate collar with the following terms:
NOTIONAL MATURITY CAP STRIKE PRICE FLOOR STRIKE PRICE FAIR VALUE
-------- -------- ---------------- ------------------ ----------
$28,340 5/15/04 7.00% 4.12% $(1,153)
This collar does not receive hedge accounting treatment such that the fair
value is reflected as a liability in the September 30, 2002 consolidated balance
sheet and the change in fair value has been reflected as an adjustment to
interest expense.
We also entered into an interest rate cap agreement during the first
quarter of 2002 with the following terms:
NOTIONAL MATURITY STRIKE PRICE FAIR VALUE
-------- -------- ------------ ----------
$5,000 5/21/04 7.00% $2
This cap does not receive hedge accounting treatment such that the fair
value is reflected as an asset in the September 30, 2002 consolidated balance
sheet and the change in fair value has been reflected as an adjustment to
interest expense.
These fair value estimates are subjective in nature and involve
uncertainties and matters of considerable judgment and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that,
as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to us (including our consolidated subsidiaries) required to
be included in our reports filed or submitted under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in our internal controls or in other
factors that could significantly affect such controls.
29
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 23, 2001, Jerry Brantley, our former President and COO
terminated his employment with us at the unanimous request of the board of
directors. On April 29, 2002, Mr. Brantley initiated litigation against us and
our chairman, David E. Sharbutt, alleging wrongful termination, among other
things. We believe that there is no basis for Mr. Brantley's claim and intend to
vigorously defend the lawsuit.
We have been named as a defendant in a number of purported securities class
actions in the United States District Court for the Southern District of New
York, arising out of our initial public offering (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The
complaints allege, among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for purposes of the
IPO were false and misleading because they failed to disclose that the
underwriters allegedly (i) solicited and received commissions from certain
investors in exchange for allocating to them shares of Alamosa common stock in
connection with the IPO, and (ii) entered into agreements with their customers
to allocate such stock to those customers in exchange for the customers agreeing
to purchase additional Alamosa shares in the aftermarket at pre-determined
prices.
The Court has ordered that these putative class actions against us, along
with hundreds of IPO allocation cases against other issuers, be transferred to
Judge Scheindlin for coordinated pre-trial proceedings. At a status conference
held on September 7, 2001, Judge Scheindlin adjourned all defendants' time to
respond to the complaints until further order of the Court.
These cases remain at a preliminary stage and no discovery proceedings have
taken place. We believe the claims asserted against us in these cases are
without merit and intend to defend vigorously against them.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following set forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
30
(b) The following sets forth the reports on Form 8-K that have been filed
during the quarter for which this report is filed:
None.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALAMOSA HOLDINGS, INC.
Registrant
/s/ David E. Sharbutt
-------------------------------------------
David E. Sharbutt
Chairman of the Board of Directors and
Chief Executive Officer
(Principal Executive Officer)
/s/ Kendall W. Cowan
-------------------------------------------
Kendall W. Cowan
Chief Financial Officer
(Principal Financial and Accounting Officer)
32
CERTIFICATIONS
I, David E. Sharbutt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamosa
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the discloser controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------
/s/ David E. Sharbutt
-------------------------------------------------------
David E. Sharbutt, Chairman and Chief Executive Officer
33
I, Kendall W. Cowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alamosa
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the discloser controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report, whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Kendall W. Cowan
-----------------------------------------
Kendall W. Cowan, Chief Financial Officer
34
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
35