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 JUNE 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 [ ]
As of August 14, 2002 approximately 92,915,720 shares of common stock, $0.01 par
value per share, were issued and outstanding.
ALAMOSA HOLDINGS, INC.
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001................................. 3
Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001, (unaudited)... 4
Consolidated Statements of Cash Flows for the six months ended June 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..................................................... 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................................. 27
Item 2. Changes in Securities and Use of Proceeds...................................................................... 27
Item 3. Defaults Upon Senior Securities................................................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders............................................................ 27
Item 5. Other Information.............................................................................................. 28
Item 6. Exhibits and Reports on Form 8-K............................................................................... 28
ALAMOSA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)
JUNE 30, 2002 DECEMBER 31, 2001
--------------- -------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 61,701 $ 104,672
Short term investments 1,300 1,300
Restricted cash 50,491 51,687
Customer accounts receivable, net 50,905 42,740
Receivable from Sprint 7,253 9,137
Interest receivable 1,559 2,393
Inventory 4,860 4,802
Prepaid expenses and other assets 4,784 4,749
Deferred customer acquisition costs 6,292 5,181
Deferred tax asset 8,112 8,112
----------- -----------
Total current assets 197,257 234,773
Property and equipment, net 469,536 455,695
Debt issuance costs, net 34,376 36,654
Restricted cash 8,667 43,006
Goodwill 291,635 293,353
Intangible assets, net 508,706 528,840
Other noncurrent assets 7,280 6,087
----------- -----------
Total assets $ 1,517,457 $ 1,598,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,123 $ 44,012
Accrued expenses 27,672 29,291
Payable to Sprint 19,743 16,133
Interest payable 22,269 22,123
Deferred revenue 18,596 15,479
Current installments of capital leases 749 596
----------- -----------
Total current liabilities 110,152 127,634
----------- -----------
Long term liabilities:
Capital lease obligations 1,859 1,983
Other noncurrent liabilities 9,163 7,496
Senior secured debt 200,000 187,162
12 7/8% senior discount notes 252,539 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
Deferred tax liability 62,472 98,940
----------- -----------
Total long term liabilities 926,033 932,788
----------- -----------
Total liabilities 1,036,185 1,060,422
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; no
shares issued -- --
Common stock, $.01 par value; 290,000,000 shares authorized,
92,915,720 and 92,786,497 shares issued and outstanding, 929 927
respectively
Additional paid-in capital 799,767 799,366
Accumulated deficit (318,240) (261,371)
Accumulated other comprehensive income, net of tax (1,184) (936)
----------- -----------
Total stockholders' equity 481,272 537,986
----------- -----------
Total liabilities and stockholders' equity $ 1,517,457 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Subscriber revenues $ 92,580 $ 53,305 $ 186,078 $ 83,813
Roaming revenues 33,457 24,198 60,025 35,609
---------- ---------- ---------- ----------
Total service revenues 126,037 77,503 246,103 119,422
Product sales 4,752 6,032 13,073 9,947
---------- ---------- ---------- ----------
Total revenue 130,789 83,535 259,176 129,369
---------- ---------- ---------- ----------
Costs and expenses:
Cost of service and operations 85,289 54,446 163,818 86,915
Cost of products sold 9,113 10,526 23,230 18,559
Selling and marketing 26,960 24,281 55,857 42,563
General and administrative expenses (excluding
non-cash compensation of $0 and $0 for the
three months ended June 30, 2002 and 2001,
respectively, and $0 and $183 for the six
months ended June 30, 2002 and 2001,
respectively) 3,053 3,351 6,788 7,074
Depreciation and amortization 26,344 25,235 51,207 37,171
Impairment of property and equipment 1,332 -- 1,332 --
Non-cash compensation -- -- -- 183
---------- ---------- ---------- ----------
Total costs and expenses 152,091 117,839 302,232 192,465
---------- ---------- ---------- ----------
Loss from operations (21,302) (34,304) (43,056) (63,096)
Interest and other income 871 2,467 2,204 8,188
Interest expense (25,820) (19,947) (50,674) (34,663)
---------- ---------- ---------- ----------
Net loss before income tax benefit and
extraordinary item (46,251) (51,784) (91,526) (89,571)
Income tax benefit 17,515 17,448 34,657 31,306
---------- ---------- ---------- ----------
Net loss before extraordinary item (28,736) (34,336) (56,869) (58,265)
Loss on debt extinguishment, (net of tax benefit
of $0 and $0 for the three months ended June 30,
2002 and 2001, respectively, and $0 and $1,969
for the six months ended June 30, 2002
and 2001, respectively) -- -- -- (3,503)
---------- ---------- ---------- ----------
Net loss $ (28,736) $ (34,336) $ (56,869) $ (61,768)
========== ========== ========== ==========
Net loss per common share, basic and diluted:
Net loss before extraordinary item $ (0.31) $ (0.37) $ (0.61) $ (0.71)
Loss on debt extinguishment, net of tax -- -- -- (0.04)
---------- ---------- ---------- ----------
Net loss $ (0.31) $ (0.37) $ (0.61) $ (0.75)
========== ========== ========== ==========
Weighted average common shares outstanding,
basic and diluted 92,915,638 92,009,977 92,874,226 81,860,743
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
4
ALAMOSA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net loss $ (56,869) $ (61,768)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash compensation -- 183
Provision for bad debts 19,265 713
Non-cash interest expense on derivative instruments 113 --
Depreciation and amortization of property and equipment 31,072 17,971
Amortization of intangible assets 20,135 19,200
Amortization of financing costs included in interest expense 2,081 1,163
Amortization of discounted interest 198 --
Loss on debt extinguishment, net of tax -- 3,503
Deferred tax benefit (34,657) (31,306)
Interest accreted on discount notes 15,332 13,527
Impairment of property and equipment 1,332 --
(Gain) loss from asset disposition (21) 39
(Increase) decrease in, net of effects from acquisitions:
Receivables (24,713) (15,995)
Inventory (58) 1,652
Prepaid expenses and other assets (2,420) (131)
Increase (decrease) in, net of effects from acquisitions:
Accounts payable and accrued expenses 4,361 (9,165)
----------- ----------
Net cash used in operating activities (24,849) (60,414)
----------- ----------
Cash flows from investing activities:
Proceeds from sale of assets 1,673 --
Purchases of property and equipment (68,291) (72,852)
Repayment of notes receivable -- 11,860
Acquisition related costs -- (37,617)
Net change in short term investments -- 1,600
Other 58 --
----------- ----------
Net cash used in investing activities (66,560) (97,009)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of senior notes -- 242,500
Borrowings under senior secured debt 12,838 203,000
Repayments of borrowings under senior secured debt -- (223,584)
Debt issuance costs -- (13,404)
Stock options exercised 1 4
Shares issued to employee stock purchase plan 401 --
Payments on capital leases (337) (42)
Change in restricted cash 35,535 (70,727)
----------- ----------
Net cash provided by financing activities 48,438 137,747
----------- ----------
Net decrease in cash and cash equivalents (42,971) (19,676)
Cash and cash equivalents at beginning of period 104,672 141,768
----------- ----------
Cash and cash equivalents at end of period $ 61,701 $ 122,092
=========== ==========
Supplemental disclosure of non-cash financing and investing activities:
Capitalized lease obligations incurred $ 365 $ --
Change in accounts payable for purchases of
property and equipment (20,759) (2,547)
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 June 30, 2002, the
unaudited consolidated statements of operations for the three and six
months ended June 30, 2002 and 2001, the unaudited consolidated
statements of cash flows for the six months ended June 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 six months
ended June 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 5,834,359 and 5,322,253
shares of common stock at June 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 June 30, 2002, the Company had $63,001 in cash and cash
equivalents plus an additional $59,158 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. Management believes that this $147,159 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.
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 Sprint PCS Network
Partners 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.
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:
7
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
ROBERTS WOW SOUTHWEST T 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 six months ended June 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 SIX MONTHS ENDED
JUNE 30, 2001
------------------
(UNAUDITED)
Total revenues $ 148,292
==========
Net loss before income tax benefit
and extraordinary item $ (113,306)
Income tax benefit 39,123
----------
Net loss before extraordinary item (74,183)
Loss on debt extinguishment, net of tax
benefit of $1,969 (3,503)
----------
Net loss $ (77,686)
==========
Basic and diluted net loss per share
before extraordinary item $ (0.81)
==========
Basic and diluted net loss per share $ (0.84)
==========
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 $6.3 million and $5.9 million at June 30,
2002 and December 31, 2001, respectively.
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.
8
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
Receivable from Sprint consists of the following:
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
Net roaming receivable $ 2,758 $ 1,731
Access and interconnect revenue receivable 486 3,252
Accrued service revenue 4,009 4,154
-------- --------
$ 7,253 $ 9,137
======== ========
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation of
$91.8 million and $60.9 million at June 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 during the third quarter beginning in the third
quarter of 2002. Should the results of the first step of the impairment
testing indicate a potential impairment, the second step would be
completed to measure the amount of any impairment loss.
The annual assessment as of July 31, 2002 will be performed by a
nationally recognized appraisal firm and is expected to be completed by
the time the quarterly report on Form 10-Q for the quarter ended
September 30, 2002 is filed. In performing the evaluation to determine
if an impairment exists, the appraisal firm is expected to use
information from various sources 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 among other information. The estimates used by the
appraisal firm may be different from those used by management in the
preparation of its business plan or from the current operating results
of the Company and those differences may be material. The assessment
could be impacted by future events such as, the stock price of the
Company, being either higher or remaining at current or lower prices
for a significant period of time, transactions announced or completed
prior to the completion of the evaluation, regulatory or other
developments as well as the actual operating results of the Company.
9
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
Goodwill and intangible assets consist of:
JUNE 30, 2002 DECEMBER 31, 2001
----------------- -----------------
(UNAUDITED)
Goodwill * $ 291,635 $ 293,353
========== ==========
Intangible assets:
Sprint affiliation and other agreements $ 532,200 $ 532,200
Accumulated amortization (40,876) (25,768)
---------- ----------
Subtotal 491,324 506,432
---------- ----------
Subscriber base acquired 29,500 29,500
Accumulated amortization (12,118) (7,092)
---------- ----------
Subtotal 17,382 22,408
---------- ----------
Intangible assets, net $ 508,706 $ 528,840
========== ==========
* The change in goodwill from December 31, 2001 to June 30, 2002 relates to a
purchase price adjustment as no amortization has been recorded upon adoption of
SFAS 142.
Amortization expense relative to intangible assets was $10,203 and $20,135 for
the three and six months ended June 30, 2002 and will be $20,284 for the
remainder of 2002.
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
==========
10
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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 JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
---------- ---------- ------------ ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Reported net loss before extraordinary item $ (28,736) $ (34,336) $ (56,869) $ (58,265)
Add back: goodwill amortization -- 4,999 -- 6,169
---------- ---------- ---------- ----------
Adjusted net loss before extraordinary item $ (28,736) $ (29,337) $ (56,869) $ (52,096)
========== ========== ========== ==========
Reported net loss $ (28,736) $ (34,336) $ (56,869) $ (61,768)
Add back: goodwill amortization -- 4,999 -- 6,169
---------- ---------- ---------- ----------
Adjusted net loss $ (28,736) $ (29,337) $ (56,869) $ (55,599)
========== ========== ========== ==========
NET LOSS BEFORE EXTRAORDINARY ITEM PER COMMON
SHARE, BASIC AND DILUTED:
As reported $ (0.31) $ (0.37) $ (0.61) $ (0.71)
Goodwill amortization -- 0.05 -- 0.08
---------- ----------- ----------- -----------
Adjusted $ (0.31) $ (0.32) $ (0.61) $ (0.63)
========== =========== ========== ===========
NET LOSS PER COMMON SHARE, BASIC AND
DILUTED:
As reported $ (0.31) $ (0.37) $ (0.61) $ (0.75)
Goodwill amortization -- 0.05 -- 0.08
---------- ----------- ----------- -----------
Adjusted $ (0.31) $ (0.32) $ (0.61) $ (0.67)
========== =========== ========== ===========
8. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, 2002 DECEMBER 31, 2001
----------------- -----------------
(UNAUDITED)
Senior secured debt $ 200,000 $ 187,162
12 7/8% senior discount notes 252,539 237,207
12 1/2% senior notes 250,000 250,000
13 5/8% senior notes 150,000 150,000
---------- ----------
Total debt 852,539 824,369
Less current maturities -- --
---------- ----------
Long-term debt, excluding current maturities $ 852,539 $ 824,369
========== ==========
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
11
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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.
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 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.
12
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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 will be 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.
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 $532 and
$1,059 in cash settlements under derivative instruments classified as
hedges is included in interest expense for the three and six months
ended June 30, 2002.
As of June 30, 2002, the Company has recorded $2,700 in "other
noncurrent liabilities" relative to the fair value of derivative
instruments including $1,915 representing derivative instruments that
qualify for hedge accounting under SFAS No. 133. In addition, the
Company has recorded $25 in "other noncurrent assets" at June 30, 2002
related to the fair value of derivative instruments. During the six
month period ended June 30, 2002, the Company recognized losses of $248
(net of income taxes of $151) in other comprehensive income. During the
six month period ended June 30, 2001, the Company recognized gains of
$166 (net of income taxes of $93) in other comprehensive income. Other
comprehensive income appears as a separate component of Stockholders'
Equity as "Accumulated other comprehensive income," as illustrated
below:
SIX MONTHS ENDED JUNE 30,
---------------------------
2002 2001
--------- -----------
(unaudited) (unaudited)
Net loss $(56,869) $(61,768)
Change in fair values of derivative instruments,
net of tax effect of $151 and $93, respectively (248) 166
-------- --------
Comprehensive loss $(57,117) $(61,602)
======== ========
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
13
ALAMOSA HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except as noted)
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 $5.4 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, an adjustment was recorded in the second quarter of
2002 to reflect this charge as a reduction of revenue and liability in
the consolidated financial statements as of June 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 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 subject to various listing requirements set forth
by the NYSE. Based on recent market prices of the Company's common
stock, the Company would fall 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 fell below these requirements in
August 2002. Upon receiving notice from the NYSE, and subject to
approval by the NYSE the Company could have 6 months to cure a closing
stock price violation and up to 18 months to cure a global market
capitalization violation. The Company has not received such
notification from 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 adoption of SFAS No. 143 is not expected to
have a material impact on the Company's results of operations,
financial position or 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
14
issued for fiscal years beginning after December 31, 2001. The
adoption of SFAS No. 144 effective January 1, 2002 will not have a
material impact on the Company's 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
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: our dependence on our affiliation with Sprint, shifts in
populations or network focus; changes or advances in technology; changes in
Sprint's national service plans or fee structure with us; change in population;
difficulties in network construction; increased competition in our markets;
failure to consummate anticipated acquisitions or financings; and adverse
changes in financial position, condition or results of operations. 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 June 30, 2002,
we have approximately 571,000 subscribers. As of June 30, 2002, our
accumulated deficit is $318.2 million and we have spent a cumulative total of
approximately $628 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 June 30, 2002.
As a Sprint PCS Network Partner, 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 intend to 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.
16
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 a percentage of our accounts receivable by
aging category. In determining the allowance, we look at 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 record activation fee revenue over the
estimated average life of our customers which ranges from 12 to 36 months
depending on credit class and based on our past experience. 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.
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.
17
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 during the third quarter beginning in the third quarter
of 2002. Should the results of the first step of the impairment testing indicate
a potential impairment, the second step would be completed to measure the amount
of any impairment loss.
The annual assessment as of July 31, 2002 will be performed by a
nationally recognized appraisal firm and is expected to be completed by the time
the quarterly report on Form 10-Q for the quarter ended September 30, 2002 is
filed. In performing the evaluation to determine if an impairment exists, the
appraisal firm is expected to use information from various sources including,
but not limited to, current stock price, transactions involving similar
companies, our business plan prepared by management and current and past
operating results among other information. The estimates used by the appraisal
firm may be different from those used by management in the preparation of our
business plan or from our current operating results and those differences may be
material. The assessment could be impacted by future events such as, our stock
price, being either higher or remaining at current or lower prices for a
significant period of time, transactions announced or completed prior to the
completion of the evaluation, regulatory or other developments as well as our
actual operating results.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, plant and equipment and intangibles, comprise approximately 84 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 ARPU, etc., could cause the value of certain of these assets
to change. We carefully 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. Estimates and assumptions used in both
estimating the useful life and evaluating potential impairment issues require a
significant amount of judgment. See our discussion of recently issued accounting
pronouncements within this document for additional information as to the impact
of such pronouncements as they pertain to long-lived assets.
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.
18
CONSOLIDATED RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT AS NOTED)
FOR THE THREE AND SIX MONTH PERIOD ENDED JUNE 30, 2002 COMPARED TO THE THREE AND
SIX MONTH PERIOD ENDED JUNE 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 571,000 at June 30, 2002 compared to approximately
316,000 at June 30, 2001. This growth came as a result of increasing our network
coverage from 10.0 million to 11.5 million covered POPs providing additional
marketing opportunities. Monthly churn (rate of deactivation of existing
subscribers) for the second quarter of 2002 was approximately 3.2 percent
compared to approximately 2.4 percent for the second 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 as a
result of removing the requirement that these customers pay a deposit ranging
from $125 to $200. 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. Churn is expected to trend higher in the last six months of
2002. Our cost per gross addition ("CPGA") includes handset subsidies, and
selling and marketing costs and was $402 per gross addition in the second
quarter of 2002 compared to $377 in the second quarter of 2001. This increase is
due to a lower number of activations in the second quarter of 2002 compared to
the second 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.
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 payments
received from our subscribers for monthly service under their service plans.
Subscriber revenue also includes activation fees and charges for the use of
various features including the wireless web, voice activated dialing, etc.
Subscriber revenues were $92,580 for the three months ended June 30,
2002 compared to $53,305 for the three months ended June 30, 2001. This increase
of 74 percent was due to the increase in our subscriber base from approximately
316,000 subscribers at June 30, 2001 to approximately 571,000 subscribers at
June 30, 2002. Average revenue per user ("ARPU") before roaming revenue and a
one-time revenue adjustment for terminating access revenue declined in the
second quarter of 2002 to $59 compared to $62 in the second quarter of 2001.
Subscriber revenues were $186,078 for the six months ended June 30, 2002
compared to $83,813 for the six months ended June 30, 2001. This increase of 122
percent was also due to the increase in our subscriber base discussed above.
ARPU before roaming revenue and a one-time revenue adjustment for terminating
access revenue was $59 for the six months ended June 30, 2002 compared to $61
for the six months ended June 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 approximately $5.4 million in amounts that
had been previously paid to us by Sprint relative to terminating access fees.
Although we intend to contest the refund of these amounts, an adjustment was
recorded in the second quarter of 2002 to reflect this liability in the
consolidated financial statements as of June 30, 2002. The impact of this
adjustment was to reduce service revenue for the second quarter of 2002 by $5.4
million.
Roaming revenue is primarily comprised of revenue from other 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
19
to 10 cents per minute as of January 1, 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. We had approximately 265 million minutes of inbound roaming traffic
in the second quarter of 2002 compared to approximately 105 million minutes in
the second quarter of 2001. This accounted for the 38 percent increase in
roaming revenue to $33,457 in the second quarter of 2002 from $24,198 in the
second quarter of 2001. Roaming revenue in the six months ended June 30, 2002
was $60,025 compared to $35,609 during the six months ended June 30, 2001. This
increase of 69 percent was driven by the volume of roaming traffic on our
network as the blended rate for the first six months of 2002 was lower than that
in 2001 due to the rate changes discussed previously. We had approximately 476
million minutes of inbound roaming traffic in the six months ended June 30, 2002
compared to approximately 180 million minutes for the six months ended June 30,
2001. This was made possible by our placing over 300 new sites on air from June
30, 2001 to June 30, 2002 to capture this traffic.
PRODUCT SALES - We record revenue from the sale of handsets and
accessories, net of an allowance for returns, as product sales. Product sales
revenue is recorded for all products sold through our retail stores as well as
those sold to our local indirect agents. Sprint's handset return policy allows
customers to return their handsets for a full refund within 14 days of purchase.
When handsets are returned to us, we may be able to reissue the handsets to
customers at little additional cost to us. However, when handsets are returned
to Sprint for refurbishing, we receive a credit from Sprint, which is less than
the amount we originally paid for the handset. Product sales revenue for the
second quarter of 2002 was $4,752 compared to $6,032 for the second quarter of
2001. This decrease of 21 percent is attributable to the decrease in the number
of activations during the second quarter of 2002, as discussed above. Product
sales revenue for the six months ended June 30, 2002 was $13,073 compared to
$9,947 in the six months ended June 30, 2001. This increase of 31 percent is due
to the increase in sales noted in the first quarter of 2002 over the first
quarter of 2001 which was slightly reduced by the second quarter year over year
decrease in activations discussed previously.
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 $85,289 in the second quarter of 2002 were 57 percent
higher than the $54,446 incurred in the second 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 1,005 million minutes in the second
quarter of 2002 compared to 420 million minutes in the second quarter of 2001
for an increase in traffic of 139 percent. Expenses of $163,818 in the six
months ended June 30, 2002 were 88 percent higher than the $86,915 incurred in
the six months ended June 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 1,921 million minutes in the six months ended
June 30, 2002 compared to 757 million minutes in the six months ended June 30,
2001.
COST OF PRODUCTS SOLD - Cost of products sold includes the cost of
handsets and accessories 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. Expenses of $9,113 for the second quarter of 2002 were 13 percent lower
than the $10,526 incurred in the second quarter of 2001. This decrease is
attributable to the decrease in the number of activations during the second
quarter of 2002 as discussed above. Expenses of $23,230 for the six months ended
June 30, 2002 were 25 percent higher than the $18,559 incurred in the six months
ended June 30, 2001. This increase is due to the increase in products sold
during the first quarter of 2002 over the first quarter of 2001 which was
slightly reduced by the second quarter year over year decrease in products sold
as discussed previously.
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 $4,462 and $7,865 in the second
quarter and first six months of 2002, respectively, compared to $2,742 and
$4,433 in the second quarter and first six months of 2001, respectively. Total
selling and marketing expenses of $26,960 in the second quarter of 2002 were 11
percent higher than the $24,281 incurred in the second 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 $55,857 in the six
months ended June 30, 2002 were 31 percent higher than the
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$42,563 incurred in the six months ended June 30, 2001 due to the same expansion
of our distribution channels through the last six months of 2001 and first six
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 $3,053 in the second quarter of 2002 were consistent
with the $3,351 incurred in the second quarter of 2001. General and
administrative expenses of $6,788 in the six months ended June 30, 2002 were
also consistent with the $7,074 incurred in the six months ended June 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 $16,141 in the
second quarter of 2002 as compared to $10,672 in the second quarter of 2001.
This increase of 51 percent is due to the increase in depreciable costs as a
result of our capital expenditures. Depreciation expense of $31,072 in the six
months ended June 30, 2002 was 73 percent higher than the $17,971 incurred in
the six months ended June 30, 2001 due to the increase in depreciable costs as a
result of our capital expenditures.
Amortization expense of $10,203 and $20,135 in the second quarter and
first six 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 second quarter and first six months of 2001 was
$14,563 and $17,971 which included $4,999 and $6,169 in amortization of goodwill
recorded in connection with the acquisitions of Roberts, WOW and Southwest. We
adopted the provisions of statement 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 six months of 2002.
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 six months of 2001. No non-cash compensation expense was
recorded in the first six 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 second quarter and first
six months of 2002 was $21,302 and $43,056, respectively, compared to $34,304
and $63,096 for the second quarter and first six months of 2001. This decrease
is attributable to 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 $871 in the second quarter of 2002 was 65 percent less than the $2,467
earned in the second quarter of 2001 due to declining interest rates and the
fact that excess cash and investments were liquidated during the third and
fourth quarters of 2001 as well as the first quarter of 2002, in connection with
funding our capital expenditures and net operating cash flow outflow. Income of
$2,204 in the six months ended June 30, 2002 was 73 percent less than the $8,188
earned in the first six months of 2001 due to declining interest rates and the
fact that excess cash and investments were liquidated during the last six months
of 2001 in connection with funding our capital expenditures and net operating
cash outflow.
INTEREST EXPENSE - Interest expense for the second quarter of 2002
includes non-cash interest accreted on our 12 7/8% Senior Discount Notes of
$7,786 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 $25,820 from $19,947 in the second quarter of 2001 is due to the increased
level of debt after the two issuances of senior notes in 2001 and the increased
level of advances under senior secured borrowings. Interest expense for the six
months ended June 30, 2002 of $50,674 was 46 percent higher than the $34,663
incurred in the six months ended June 30, 2001 due to the same additional
borrowings in 2001.
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
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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.
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 subject to
various listing requirements set forth by the NYSE. Based on recent activity
with respect to the market price of our common stock, we could potentially fall
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 fell below these
requirements in August 2002. Upon receiving notice from the NYSE and subject to
approval by the NYSE we could have 6 months to cure a closing stock price
violation and up to 18 months to cure a global market capitalization violation.
We have not received such notification from the NYSE.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES - Operating cash flows were negative $24,849 in
the first six months of 2002 and negative $60,414 in the first six months of
2001. The increase in operating cash flows of $35,565 is primarily related to a
decrease in net loss before non-cash items of $34,756.
INVESTING ACTIVITIES - Our investing cash flows were a negative $66,560
in the first six months of 2002 compared to a negative $97,009 in the first six
months of 2001. Our cash capital expenditures for the first six months of 2002
totaled $68,291 while our cash capital expenditures for the first six months of
2001 totaled $72,852. In the first six 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
six months of 2002 to $48,438 from $137,747 in the first six months of 2001. In
the first six 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 $35,535 in restricted cash which was released from escrow to
make interest payments on the 12 1/2% Senior Notes and the 13 5/8% Senior Notes.
In the first six months of 2001, we received $242,500 in net proceeds from the
offering of our 12 1/2% Senior Notes offset by repayment of secured debt net of
borrowings of $20,584, debt issuance costs of $13,404 and $70,727 in funds
placed into escrow to secure debt service requirements.
CAPITAL REQUIREMENTS
Our capital expenditure requirements for 2002 are expected to be
approximately $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
22
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.
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
23
purchase up to 720,000 additional shares of common stock to cover
over-allotments. This option was exercised on November 16, 2001 and we received
net proceeds from the sale of these shares after offering costs of approximately
$9.1 million which will be used for general corporate purposes.
As of June 30, 2002, we had $63,001 in cash and cash equivalents plus
an additional $59,158 in restricted cash held in escrow for debt service
requirements. We also had $25,000 remaining on the revolving portion of our
Senior Secured Credit Facility. We believe that this $147,159 in cash and
available borrowings is sufficient to fund our working capital, capital
expenditure and debt service requirements through 2003, when we expect to
generate positive free cash flow.
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.
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. The adoption of SFAS No. 143 is not expected to have a material
impact on our results of operations, financial position or 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 will
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 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 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.
24
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
Senior Secured Credit Facility. We seek to minimize counterparty credit risk
through stringent credit approval and review processes, the selection of only
the most creditworthy counterparties, continual review and monitoring of all
counterparties, and through legal review of contracts. We also control exposure
to market risk by regularly monitoring changes in interest rate positions under
normal and stress conditions to ensure that they do not exceed established
limits. Our derivative transactions are used for hedging purposes only and
comply with Board-approved policies. Senior management receives frequent status
updates of all outstanding derivative positions.
INTEREST RATE RISK MANAGEMENT - Our interest rate risk management
program focuses on minimizing exposure to interest rate movements by setting an
optimal mixture of floating- and fixed-rate debt. We utilize interest rate swaps
and collars to adjust our risk profile relative to our floating rate Senior
Secured Credit Facility. We have hedges in place on approximately 42 percent of
the outstanding advances under our Senior Secured Credit Facility at June 30,
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:
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) $ 0.773 $ 1.209 $ 0.490 $ 0.161 $ 0.162 $ 1.019
Average interest rate........... 12.408% 12.408% 12.408% 12.408% 12.408% 12.408%
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 4.00% for LIBOR borrowings and 3.00% for base rate
borrowings. The applicable interest margins are subject to reductions
under a pricing grid based on ratios of 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
25
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.
At June 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 $ (836)
4.9350% Interest rate swap $28,340 3 years (1,079)
-------
$(1,915)
=======
These swaps are designated as cash flow hedges such that the fair value
is recorded as a liability in the June 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% $ (764)
This collar does not receive hedge accounting treatment such that the
fair value is reflected as a liability in the June 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% $4
26
This cap does not receive hedge accounting treatment such that the fair
value is reflected as an asset in the June 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.
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.
On May 29, 2002, we held our 2002 Annual Meeting of Stockholders. In
connections with the meeting, we solicited proxies from our stockholders
pursuant to Regulation 14 of the Securities Exchange Act of 1934. At the
meeting, our stockholders (1) elected as directors Schuyler B. Marshall, Thomas
F. Riley and Steven C. Roberts; and (2) ratified the selection by the Board of
Directors of PricewaterhouseCoopers, LLP as our independent certified public
accountants for the year ending December 31, 2002.
The following tables summarize the votes cast at the meeting on the
matters brought before the stockholders:
1. ELECTION OF DIRECTORS
FOR WITHHELD
Schuyler B. Marshall 81,413,118 189,406
27
Thomas F. Riley, Jr. 81,196,996 405,528
Steven C. Roberts 78,470,465 3,132,059
The following directors did not stand for election and continued in
office as directors after the meeting: David E. Sharbutt, Ray M. Clapp, Jr.,
Scotty Hart, Thomas Hyde, Tom M. Phelps, Michael V. Roberts and Jimmy R. White.
2. RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS, LLP AS
INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 2002
FOR AGAINST ABSTAIN
79,988,581 1,584,646 29,297
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 Number Exhibit Title
-------------- -------------
10.61 Alamosa Holdings, Inc. Amended and Restated Employee
Stock Purchase Plan.
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.
(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
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)
28
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
10.61 Alamosa Holdings, Inc. Amended and Restated Employee Stock
Purchase Plan.
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.