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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________
----------------------------------------
COMMISSION FILE NUMBER: 005-58523
ALAMOSA (DELAWARE), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2843707
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5225 SOUTH LOOP 289, LUBBOCK, TEXAS 79424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 722-1100
Securities registered pursuant to Section 12(b) ofthe Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------------------------
ALAMOSA (DELAWARE), INC. 12 7/8% AMERICAN STOCK EXCHANGE
SENIOR DISCOUNT NOTES DUE 2010
Securities registered pursuant to Section 12(g) of the Act: NONE
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [ ] NO [X]
There is currently no public market for the registrant's common stock.
As of March 27, 2003, 100 shares of Common Stock of the registrant were issued
and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(A)
AND I(1)(B) OF FORM 10-K AND IS FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTIONS I(2)(B) AND I(2)(C).
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS............................................................................................3
ITEM 2. PROPERTIES.........................................................................................25
ITEM 3. LEGAL PROCEEDINGS..................................................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................................26
ITEM 6. SELECTED FINANCIAL DATA............................................................................26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION...............................................................................26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................................................52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................52
ITEM 11. EXECUTIVE COMPENSATION.............................................................................52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................................................52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................52
ITEM 14. CONTROLS AND PROCEDURES............................................................................52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...........................................................................................52
SIGNATURES...........................................................................................................54
CERTIFICATIONS.......................................................................................................55
PART I
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this annual report on Form 10-K, including without limitation, the statements
under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" and located elsewhere herein
regarding our financial position and liquidity are forward-looking statements.
These forward-looking statements also include:
o forecasts of growth in the number of consumers using wireless
personal communications services and in estimated populations;
o statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and operating losses; and
o statements regarding expectations or projections about markets in
our territories.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors with respect to
any such forward-looking statements, including certain risks and uncertainties
that could cause actual results to differ materially from our expectations
("Cautionary Statements") are disclosed in this annual report on Form 10-K.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements included herein include, but are not
limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter fees paid or charged to us under
our affiliation agreements;
o our limited operating history and anticipation of future losses;
o our dependence on back office services provided by Sprint;
o potential fluctuations in our operating results;
o changes or advances in technology;
o competition in the industry and markets in which we operate;
o our ability to attract and retain skilled personnel;
o our potential need for additional capital or the need for
refinancing existing indebtedness;
o our potential inability to expand our services and related
products in the event of substantial increases in demand for these
services and related products;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
o effects of mergers and consolidations within the
telecommunications industry and unexpected
2
announcements or developments from others in the
telecommunications industry.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the Cautionary Statements.
ITEM 1. BUSINESS.
For convenience in this annual report, unless indicated otherwise,
"Company," "we," "us," and "our" refer to Alamosa (Delaware), Inc. and its
subsidiaries. "Alamosa Holdings" refers to our parent Company, Alamosa Holdings,
Inc. "Sprint PCS" refers to Sprint Communications Company, L.P., Sprint Spectrum
L.P. and WirelessCo, L.P. "Sprint" refers to Sprint Corporation and its
affiliates. Statements in this annual report regarding Sprint or Sprint PCS are
derived from information contained in our agreements with Sprint PCS, periodic
reports and other documents filed by Sprint and Sprint Spectrum L.P. with the
Securities and Exchange Commission ("SEC") or press releases issued by Sprint.
References in this annual report on Form 10-K to us as a provider of
wireless personal communications services or similar phrases generally refer to
our building, owning and managing our portion of the PCS network of Sprint
pursuant to our affiliation agreements with Sprint. Sprint holds the spectrum
licenses and controls the network through its agreements with us.
All references contained in this annual report on Form 10-K to resident
population and residents ("POPs") are based on year-end 2000 population counts
compiled by the U.S. Census Bureau adjusted for published population growth
rates.
OVERVIEW
We are the largest PCS Affiliate of Sprint in terms of subscribers and
revenues. We have the exclusive right to provide wireless mobility
communications network services under the Sprint brand name in a territory
encompassing over 15.8 million residents primarily located in Texas, New Mexico,
Arizona, Colorado, Wisconsin, Illinois, Oklahoma, Kansas, Missouri, Washington
and Oregon. For the year ended December 31, 2002, we generated approximately
$555.7 million in revenue and ended the period with approximately 622,000
subscribers.
We launched Sprint wireless services in Laredo, Texas, in June 1999,
and through December 31, 2002, have commenced service in 87 additional basic
trading areas ("BTAs"), including markets in territories serviced by companies
that we acquired in 2001. At December 31, 2002, our systems covered
approximately 11.8 million residents out of approximately 15.8 million total
residents in those markets. We have substantially completed the network
build-out requirements required by Sprint. The number of residents covered by
our system does not represent the number of wireless subscribers that we expect
to serve in our territories.
During the first quarter of 2001, we completed our acquisitions of
three PCS Affiliates of Sprint. We acquired Roberts Wireless Communications,
L.L.C. ("Roberts") and Washington Oregon Wireless, LLC ("WOW") on February 14,
2001. We acquired Southwest PCS Holdings, Inc. ("Southwest") on March 30, 2001.
The acquisitions added territories with a total of approximately 6.8 million
residents and added approximately 90,000 subscribers. The results of operations
for the acquired companies are reflected in our consolidated results from the
date of acquisition.
OUR BACKGROUND
We were formed in October 1999 under the name "Alamosa PCS Holdings,
Inc." to operate as a holding company and closed our initial public offering in
February 2000. Immediately prior to our initial public offering, the founding
members of Alamosa PCS LLC received shares of Alamosa (Delaware) common stock in
the same proportion to their membership interest in Alamosa PCS LLC.
On December 14, 2000, we formed a new holding company pursuant to
Section 251(g) of the Delaware General Corporation Law. In that transaction,
each share of our common stock was converted into one share of the new holding
company, and we became a wholly-owned subsidiary of the new holding company,
which was renamed Alamosa PCS Holdings, Inc.
Alamosa Holdings, Inc. was formed in July 2000 to operate as a holding
company. On February 14, 2001, Alamosa Sub I, Inc., a wholly owned subsidiary of
Alamosa Holdings, Inc., merged with and into Alamosa PCS
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Holdings, with Alamosa PCS Holdings surviving the merger and becoming Alamosa
Holdings, Inc.'s wholly owned subsidiary. Each share of Alamosa PCS Holdings
common stock issued and outstanding immediately prior to the merger was
converted into the right to receive one share of Alamosa Holdings, Inc. common
stock. We are a direct wholly owned subsidiary of Alamosa PCS Holdings, Inc. and
an indirect wholly owned subsidiary of Alamosa Holdings, Inc.
On February 14, 2001, Alamosa Holdings, Inc. completed its acquisitions
of Roberts and WOW. Roberts' service area included 2.5 million people, including
the market areas surrounding Kansas City, the world headquarters of Sprint, and
St. Louis, and the Interstate 70 corridor connecting the two cities. At the time
of the acquisition, Roberts' network covered approximately 1.1 million people.
WOW's service area included approximately 1.5 million people, including the
market areas of Ellenburg, Yakima and Kennewick, Washington and key travel
corridors within Washington and Oregon. At the time of the acquisition, WOW's
network covered approximately 800,000 residents.
On March 30, 2001, we completed our acquisition of Southwest.
Southwest's service area, which included approximately 2.8 million people,
includes market areas in Texas, Oklahoma, Kansas and Arkansas, encompassing over
2,100 highway miles. At the time of acquisition, Southwest had launched service
in 18 markets covering approximately 1.5 million residents.
In connection with the Roberts and WOW acquisitions, we entered into a
Senior Secured Credit Facility (the "Senior Secured Credit Facility") for up to
$280.0 million. In connection with the acquisition of Southwest, we increased
the amount of the Senior Secured Credit Facility from $280.0 million to $333.0
million. The Senior Secured Credit Facility was reduced to $225.0 million
concurrently with the issuance of $150.0 million face amount of senior notes
(the "13 5/8 Senior Notes") on August 15, 2001.
Roberts, WOW and Southwest are indirect wholly owned subsidiaries of
Alamosa (Delaware).
OUR RELATIONSHIP WITH SPRINT
Sprint PCS is a wholly owned tracking group of Sprint Corporation and
operates the largest 100% digital, 100% PCS nationwide wireless network in the
United States with licenses to provide services to an area consisting of more
than 280 million residents in the United States, Puerto Rico and the U.S. Virgin
Islands. The PCS network of Sprint uses code division multiple access ("CDMA")
technology nationwide. Sprint directly operates its PCS network in major markets
throughout the United States and has entered into independent agreements with
various PCS Affiliates such as us, under which the PCS Affiliate has agreed to
construct and manage PCS networks in smaller metropolitan areas and along major
highways.
We are the largest PCS Affiliate of Sprint based on subscribers and
revenues, and our territories adjoin several major PCS markets. The build-out of
our territories has significantly extended Sprint wireless coverage in the
Southwestern, Northwestern and Midwestern United States of America. Due to our
relationship with Sprint, we benefit from:
BRAND RECOGNITION - We market products and services directly under the
Sprint brand name. We benefit from the recognizable Sprint brand name and
national advertising as we open markets. We offer PCS pricing plans, promotional
campaigns and handset and accessory promotions of Sprint.
EXISTING DISTRIBUTION CHANNELS - We benefit from relationships with
major national retailers who distribute PCS products and services under existing
Sprint contracts. These national retailers have approximately 735 retail outlets
in our territories. Furthermore, we benefit from sales made by Sprint to
customers in our territories through the Sprint national telemarketing sales
force, national account sales team and Internet sales capability. These existing
distribution channels provide immediate access to customers as our services
become available in their area. For more information on our distribution plan,
see "--Sales and Distribution."
THE PCS NATIONWIDE NETWORK OF SPRINT - We offer access to the
nationwide PCS network of Sprint. The PCS network of Sprint offers service in
metropolitan markets across the country representing over 280 million people. We
derive additional revenue from Sprint when its wireless customers based outside
of our territories roam on our portion of the PCS network of Sprint.
HIGH CAPACITY NETWORK - Sprint built its PCS network around CDMA
digital technology, which we believe provides advantages in capacity,
voice-quality, security and handset battery life. For more information on the
benefits of
4
this technology, see "Technology--Code Division Multiple Access."
LICENSED SPECTRUM - Sprint has invested in the wireless mobility
communications network service licenses in our territories and shared in costs
with us to remove sources of microwave signals that interfere with the licensed
spectrum, a process generally referred to as microwave clearing.
BETTER EQUIPMENT AVAILABILITY AND PRICING - We are able to acquire
handsets and other equipment more quickly and at a lower cost than we would
without our affiliation with Sprint. For example, Sprint will use commercially
reasonable efforts to obtain for us the same discounted volume-based pricing on
wireless-related products and warranties as Sprint receives from its vendors.
ESTABLISHED BACK OFFICE SUPPORT SERVICES - We have contracted with
Sprint to provide critical back office services, including customer activation,
handset logistics, billing, customer care and network monitoring services.
Because we do not have to establish and operate these systems, we are able to
capitalize upon Sprint's economies of scale.
THIRD GENERATION (3G) TECHNOLOGY - We along with Sprint have made the
next step towards third generation data services in 2002. We benefit from
Sprint's research and development in connection with this nationwide rollout.
For more information, see "Products and Services - Third Generation Services."
MARKETS
We believe part of our success is attributable to the strategic
attractiveness of our markets. We believe our markets are attractive for several
reasons:
o PROXIMITY TO MAJOR PCS MARKETS OF SPRINT - Our markets are located
near or around several major PCS markets of Sprint, including
Dallas, San Antonio, Kansas City, St. Louis, Phoenix, Seattle,
Portland, Milwaukee, Minneapolis, Tulsa and Wichita.
o FEWER COMPETITORS - We believe that we face a smaller number of
competitors in our markets than the typical PCS market of Sprint
and fewer competitors than is generally the case for service
providers operating in more urban areas.
o MEXICO / U.S. BORDER - Our territories include more than 75% of
the Mexico / U.S. border area.
o HIGH POPULATION GROWTH MARKETS - The overall population growth
rate in our territories has been above the national average for
the past ten years.
The following table lists the location, BTA number, megahertz of
spectrum, estimated total residents and estimated covered residents for each of
the BTAs that comprise our territories under our affiliation agreements with
Sprint as of December 31, 2002. The number of estimated covered residents does
not represent the number of wireless subscribers that we expect to be based in
our territories.
ESTIMATED TOTAL ESTIMATED COVERED
LOCATION BTA NO.(1) MHZ OF SPECTRUM RESIDENTS (2) RESIDENTS (3)
- -------------------------------------------------------------------------------------------------------
ARKANSAS
Fayetteville-Springdale-Rogers .... 140 30 346,200 299,600
Fort Smith ........................ 153 30 331,600 205,700
Little Rock (4) ................... 257 30 15,700 8,800
Russellville ...................... 387 30 100,400 73,200
ARIZONA
Flagstaff ......................... 144 30 119,700 78,500
Las Vegas, NV (Arizona side) (4) .. 245 30 157,100 139,000
Prescott .......................... 362 30 181,800 172,100
Phoenix (4) ....................... 347 30 110,500 13,800
Sierra Vista-Douglas .............. 420 30 121,000 98,400
Tucson (4) ........................ 447 30 2,000 1,900
Yuma .............................. 486 30 169,900 166,100
CALIFORNIA
El Centro-Calexico .............. 124 30 151,500 137,700
5
San Diego (4) ................... 402 30 1,000 300
COLORADO
Colorado Springs (4) ............ 89 30 1,300 100
Farmington, NM-Durango, CO ..... 139 10 217,100 120,600
Grand Junction ................. 168 30 257,500 156,300
Pueblo ......................... 366 30 320,100 185,900
ILLINOIS
Carbondale-Marion ............... 67 30 214,800 142,100
KANSAS
Pittsburgh-Parsons .............. 349 30 92,100 29,000
Emporia ........................ 129 30 47,900 35,200
Hutchinson (4) .................. 200 30 29,600 23,200
Manhattan-Junction City ......... 275 30 117,300 90,100
Salina .......................... 396 30 143,800 64,700
MINNESOTA
La Crosse, WI-Winona, MN ....... 234 30 324,100 208,900
Minneapolis-St. Paul (4) ....... 298 30 85,200 44,000
MISSOURI
Cape Girardeau-Sikeston ......... 66 30 190,200 154,700
Columbia ........................ 90 30 220,200 176,700
Jefferson City .................. 217 30 167,100 138,900
Kirksville ...................... 230 30 57,400 34,100
Poplar Bluff .................... 355 30 154,500 47,200
Quincy, IL-Hannibal ............. 367 30 185,700 119,400
Rolla ........................... 383 30 105,400 69,700
St. Joseph ...................... 393 30 196,900 134,400
Sedalia ......................... 414 30 80,500 48,700
Springfield ..................... 428 30 682,400 481,300
West Plains ..................... 470 30 78,300 --
Kansas City (4).................. 226 30 16,800 12,400
NEW MEXICO
Albuquerque ..................... 8 10 851,500 754,200
Carlsbad ........................ 68 10 51,700 50,700
Clovis .......................... 87 30 76,000 66,000
Gallup .......................... 162 10 146,000 45,400
Hobbs ........................... 191 30 55,500 48,800
Roswell ......................... 386 10 82,300 75,100
Santa Fe ........................ 407 10 225,900 172,800
Las Cruces ...................... 244 10 258,400 191,900
OKLAHOMA
Joplin, MO-Miami ................ 220 30 251,000 214,600
Ada ............................. 4 30 54,300 35,300
Ardmore ......................... 19 30 91,500 58,900
Bartlesville .................... 31 30 49,100 46,100
Enid ............................ 130 30 85,700 53,200
Lawton-Duncan ................... 248 30 181,300 146,900
McAlester ....................... 267 30 55,100 33,500
Muskogee ........................ 311 30 166,500 107,900
Oklahoma City (4) ............... 329 30 418,300 318,600
Ponca City ...................... 354 30 49,800 44,600
Stillwater ...................... 433 30 80,000 62,400
Tulsa (4) ....................... 448 30 192,200 121,900
OREGON
Bend ............................ 38 30 166,400 147,900
Coos Bay-North Bend ............. 97 30 84,700 30,400
Klamath Falls ................... 231 30 81,700 49,200
Medford-Grants Pass ............. 288 30 266,200 228,000
Portland (4) .................... 358 30 82,600 44,300
Roseburg ........................ 385 30 101,200 70,900
Walla Walla, WA-Pendleton, OR.... 460 30 178,600 128,100
TEXAS
Eagle Pass-Del Rio .............. 121 30 121,100 116,600
El Paso ......................... 128 20 766,500 746,000
Laredo .......................... 242 30 232,400 223,100
Wichita Falls ................... 473 30 224,000 144,000
Abilene ......................... 3 30 263,500 203,100
Amarillo ........................ 13 30 416,500 295,300
Big Spring ...................... 40 30 36,100 33,700
Lubbock ......................... 264 30 411,100 376,900
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Midland ......................... 296 30 122,000 121,700
Odessa .......................... 327 30 210,000 134,600
San Angelo ...................... 400 30 162,600 100,900
WASHINGTON
Kennewick-Pasco-Richland......... 228 30 199,800 188,900
Wenatchee ....................... 468 30 222,500 131,500
Yakima .......................... 482 30 263,500 233,600
WISCONSIN
Appleton-Oshkosh ................ 18 30 461,200 367,900
Eau Claire ...................... 123 30 197,400 152,100
Fond du Lac ..................... 148 30 98,100 83,300
Green Bay ....................... 173 30 362,600 296,500
Madison (4) ..................... 272 30 147,100 67,500
Manitowoc ....................... 276 30 83,100 82,600
Milwaukee (4) ................... 297 30 87,300 50,500
Sheboygan ....................... 417 30 113,600 112,900
Stevens Point-Marshfield-Wisconsin
Rapids ........................ 432 30 217,400 126,800
Wausau-Rhinelander .............. 466 30 247,700 130,400
---------- ----------
TOTAL ........................... 15,845,200 11,780,700
========== ==========
(1) BTA No. refers to the basic trading area number assigned to that market
by the Federal Communications Commission (" FCC") for the purposes of
issuing licenses for wireless services.
(2) Estimated total residents is based on estimates of 2000 population
counts compiled by the U.S. Census Bureau adjusted by published
population growth rates.
(3) Estimated covered residents is based on our actual network coverage
using estimates of 2000 population counts compiled by the U.S. Census
Bureau adjusted by published population growth rates.
(4) Total residents and covered residents for these markets reflect only
those residents contained in our licensed territories, not the total
residents or covered residents in the entire BTA.
Pursuant to our affiliation agreements with Sprint, we have agreed to
cover a minimum percentage of the resident population in our territories within
specified time periods. We have substantially complied with these build-out
requirements. As of December 31, 2002, we had approximately 622,000 wireless
subscribers representing approximately 5 percent penetration of our covered
POPs.
NETWORK OPERATIONS
The effective operation of our portion of the PCS network of Sprint
requires:
o public switched and long distance interconnection;
o the implementation of roaming arrangements; and
o the development of network monitoring systems.
Our portion of the PCS network of Sprint connects to the public
switched telephone network to facilitate the origination and termination of
traffic between the wireless network and both local exchange and long distance
carriers. Through our arrangements with Sprint and Sprint's arrangements with
other wireless service providers, our subscribers have roaming capabilities on
other PCS networks. We monitor our portion of the PCS network of Sprint during
normal business hours. For after-hours monitoring, the PCS Network Operating
Centers of Sprint provide 24 hours, seven days a week monitoring of our portion
of the PCS network of Sprint and notification to our designated personnel.
As of December 31, 2002, our portion of the PCS network of Sprint
included 1,509 base stations and nine switching centers.
PRODUCTS AND SERVICES
We offer products and services throughout our territories under the
Sprint brand name. Our services are
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typically designed to align with the service offerings of the PCS Division of
Sprint and to integrate with the PCS network of Sprint. The PCS service packages
we currently offer include the following:
100% DIGITAL WIRELESS NETWORK WITH SERVICE ACROSS THE COUNTRY - We are
part of the largest 100% digital wireless personal communications services
network in the country. Our customers may access PCS services from Sprint
throughout the PCS network of Sprint, which includes more than 4,000 cities and
communities across the United States. Dual-band/dual-mode handsets allow roaming
on other wireless networks where Sprint has roaming agreements.
THIRD GENERATION SERVICES - CDMA technology allows existing CDMA
networks to be upgraded to the next generation in a timely and cost efficient
manner. We along with Sprint launched third generation ("3G") capability in our
service area in the third quarter of 2002. This capability allows more efficient
utilization of our network when voice calls are made using 3G-enabled handsets.
It also provides enhanced data services. The service, marketed as "PCS
VisionSM," allows consumer and business customers to use their Vision-enabled
PCS devices to check personal and corporate e-mail, take and receive pictures,
play games with full-color graphics and polyphonic sounds and browse the
Internet wirelessly with speeds of up to 144 kilobits per-second with average
throughput speeds in the range of 50-70 kilobits per second.
CLEAR PAY/ACCOUNT SPENDING LIMIT - Under the PCS service plans of
Sprint, customers who do not meet certain credit criteria can nevertheless
select any plan offered subject to an account spending limit ("ASL") to control
credit exposure. Prior to May 2001, these customers were required to make a
deposit ranging from $125 to $200 that could be credited against future
billings. In May 2001, the deposit requirement was eliminated on certain credit
classes, under the No Deposit ASL ("NDASL") program which was subsequently
renamed Clear PaySM. From May 2001 to February 2002 a majority of our customer
additions were under the Clear Pay/NDASL program. On February 24, 2002, we along
with certain other PCS Affiliates of Sprint, reinstated the deposit requirement
for certain credit classes that was in place prior to May 2001 in an effort to
limit our exposure to bad debt relative to these credit classes. This new
program is referred to as Clear Pay II and was not a national Sprint program.
Since the implementation of Clear Pay II in February 2002 we have experienced a
significant decline in customer additions, but the credit quality of those
additions has improved. Sprint has the right to end or materially change the
terms of the ASL, NDASL/Clear Pay or any other program in its sole discretion.
OTHER SERVICES - In addition to these services, we may also offer
wireless local loop services in our territories, but only where Sprint is not a
local exchange carrier. Wireless local loop is a wireless substitute for the
landline-based telephones in homes and businesses. We also believe that new
features and services will be developed on the PCS network of Sprint to take
advantage of CDMA technology. Sprint conducts ongoing research and development
to produce innovative services that are intended to give Sprint and its PCS
Affiliates a competitive advantage. We may incur additional expenses in
modifying our technology to provide these additional features and services.
ROAMING
SPRINT PCS ROAMING - Sprint PCS roaming includes both inbound Sprint
PCS roaming, when Sprint wireless subscribers based outside of our territories
use our portion of the PCS network of Sprint, and outbound Sprint PCS roaming,
when our subscribers use the PCS network of Sprint outside of our territories.
We have a reciprocal per minute fee with Sprint for inbound and outbound Sprint
PCS roaming. Roaming revenue is not subject to the 8% affiliation fee. The
reciprocal rate was reduced from 20 cents per minute to 15 cents per minute
effective June 1, 2001, and to 12 cents per minute effective October 1, 2001.
The reciprocal rate for the year ended December 31, 2002 was 10 cents per
minute. Sprint has notified us that the reciprocal rate for 2003 will be 5.8
cents per minute which Sprint has indicated represents a fair and reasonable
return on the cost of the underlying network based on an agreement in principle
reached with Sprint in 2001. This rate went into effect on January 1, 2003. We
have not agreed that 5.8 cents per minute represents a fair and reasonable
return on the underlying network and are currently in discussions with Sprint as
to the determination of this rate.
In addition to the reciprocal per minute fee for the Sprint PCS roaming
discussed above, we also recognize roaming revenue and expense relative to data
usage from PCS Vision services when wireless subscribers are using such services
outside of their home territory. We recognize revenue when a wireless subscriber
based outside of our territory uses PCS Vision data services on our portion of
the PCS network of Sprint and we recognize expense when our subscribers use such
services on the PCS network of Sprint outside of our territory. This roaming
activity is settled on a per-kilobit ("Kb") basis at a rate that was initially
set at $0.0055 per Kb through December 31, 2002. The rate for 2003 and beyond
has not been determined and we are in discussions with Sprint as to the
appropriate method for determining
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this rate.
NON-SPRINT PCS ROAMING - Non-Sprint PCS roaming includes both inbound
non-Sprint PCS roaming, when non-Sprint PCS subscribers use our portion of the
PCS network of Sprint, and outbound non-Sprint PCS roaming, when our subscribers
use a non-Sprint PCS network. Pursuant to roaming agreements between Sprint and
other wireless service providers, when another wireless service provider's
subscriber uses our portion of the PCS network of Sprint, we earn inbound
non-Sprint PCS roaming revenue. These wireless service providers must pay fees
for their subscribers' use of our network, and as part of our collected
revenues, we are entitled to 92% of these fees. Currently, pursuant to our
services agreements with Sprint, Sprint bills these wireless service providers
for these fees and passes our portion of the fees to us. When another wireless
service provider provides service to one of our subscribers, we pay outbound
non-Sprint PCS roaming fees. Sprint, pursuant to our current services agreements
with Sprint, then bills our subscriber for use of that provider's network at
rates specified in their contract and pays us 100% of this outbound non-Sprint
PCS roaming revenue collected from that subscriber on a monthly basis. We bear
the collection risk for all service.
MARKETING STRATEGY
Our marketing strategy is to complement Sprint's national marketing
strategies with techniques tailored to each of the specific markets in our
territories.
USE SPRINT'S BRAND - We feature exclusively and prominently the
nationally recognized Sprint brand name in our marketing and sales efforts. From
the customers' point of view, they use our portion of the PCS network of Sprint
and the rest of the PCS network of Sprint as a unified national network.
ADVERTISING AND PROMOTIONS - Sprint promotes its products through the
use of national as well as regional television, radio, print, outdoor and other
advertising campaigns. In addition to Sprint's national advertising campaigns,
we advertise and promote PCS products and services from Sprint on a local level
in our markets at our cost. We have the right to use any promotion or
advertising materials developed by Sprint and only have to pay the incremental
cost of using those materials, such as the cost of local radio and television
advertisement placements, and material costs and incremental printing costs. We
also benefit from any advertising or promotion of PCS products and services from
Sprint by third party retailers in our territories, such as RadioShack, Circuit
City and Best Buy. We must pay the cost of specialized Sprint print advertising
by third party retailers. Sprint also runs numerous promotional campaigns which
provide customers with benefits such as additional features at the same rate or
free minutes or Kb of use for limited time periods. We offer these promotional
campaigns to potential customers in our territories.
SALES FORCE WITH LOCAL PRESENCE - We have established local sales
forces to execute our marketing strategy through our company-owned retail
stores, local distributors, direct business-to-business contacts and other
channels. Our marketing teams also participate in local clubs and civic
organizations such as the Chamber of Commerce, Rotary and Kiwanis.
SALES AND DISTRIBUTION
Our sales and distribution plan is designed to mirror Sprint's multiple
channel sales and distribution plan and to enhance it through the development of
local distribution channels. Key elements of our sales and distribution plan
consist of the following:
SPRINT RETAIL STORES - As of December 31, 2002, we owned and operated
59 Sprint Stores and 2 kiosks at military bases or other locations. These stores
provide us with a local presence and visibility in the markets within our
territories. Following the Sprint model, these stores are designed to facilitate
retail sales, activation, bill collection and customer service.
LOCAL INDIRECT AGENTS - We contract directly with local indirect
retailers in our territory. These retailers are typically local businesses that
have a presence in our markets, which purchase handsets and other equipment from
us and market PCS services from Sprint on our behalf. We are responsible for
managing this distribution channel and as of December 31, 2002 these local
indirect agents had approximately 402 locations within our licensed territory.
SPRINT STORE WITHIN A RADIOSHACK STORE - Sprint has an arrangement with
RadioShack to install a "store within a store." This arrangement benefits us to
the extent that RadioShack has locations within our territories. As of December
31, 2002, RadioShack had approximately 286 locations in our territories.
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OTHER NATIONAL THIRD PARTY RETAIL STORES - In addition to RadioShack,
we benefit from the distribution agreements established by Sprint with other
national and regional retailers such as Best Buy, Circuit City and Target. As of
December 31, 2002, these retailers had approximately 449 locations in our
territories.
ELECTRONIC COMMERCE - The PCS Division of Sprint maintains an Internet
site, www.sprintpcs.com, which contains information on PCS products and services
from Sprint. A visitor to the PCS Internet site can order and pay for a handset
and select a rate plan. Sprint wireless customers visiting the site can review
the status of their account, including the number of minutes used in the current
billing cycle. We recognize the revenues generated by wireless customers in our
territories who purchase products and services over the PCS Internet site.
During 2002, our distribution mix approximated:
Sprint retail stores 36%
Local indirect agents 15
National retailers 30
Other 19
-----------
100%
===========
SEASONALITY
Our business is subject to seasonality because the wireless industry is
heavily dependent on fourth quarter results. Among other things, the industry
relies on significantly higher customer additions and handset sales in the
fourth quarter as compared to the other three fiscal quarters. A number of
factors contribute to this trend, including:
o the heavy reliance on retail distribution, which is dependent upon
the year-end holiday shopping season;
o the timing of new product and service announcements and
introductions;
o competitive pricing pressures; and
o aggressive marketing and promotions.
TECHNOLOGY
GENERAL - In 1993, the FCC allocated the 1900 MHz frequency block of
the radio spectrum for wireless personal communications services. Wireless
personal communications services differ from traditional analog cellular
telephone service principally in that wireless personal communications services
systems operate at a higher frequency and employ advanced digital technology.
Analog-based systems send signals in which the transmitted signal resembles the
input signal, the caller's voice. Digital systems convert voice or data signals
into a stream of digits that permit a single radio channel to carry multiple
simultaneous transmissions. Digital systems also achieve greater frequency reuse
than analog systems resulting in greater capacity than analog systems. This
enhanced capacity, along with enhancements in digital protocols, allows
digital-based wireless technologies, whether using wireless personal
communications services or cellular frequencies, to offer new and enhanced
services, including greater call privacy and more robust data transmission, such
as facsimile, electronic mail and connecting notebook computers with
computer/data networks.
Wireless digital signal transmission is accomplished through the use of
various forms of frequency management technology or "air interface protocols."
The FCC has not mandated a universal air interface protocol for wireless
personal communications services systems. Wireless personal communications
systems operate under one of three principal air interface protocols: CDMA, time
division multiple access ("TDMA"), or global system for mobile communications
("GSM"). TDMA and GSM communications are both time division multiple access
systems but are incompatible with each other. CDMA is incompatible with both GSM
and TDMA systems. Accordingly, a subscriber of a system that utilizes CDMA
technology is unable to use a CDMA handset when traveling in an area not served
by CDMA based wireless personal communications services operators, unless the
customer carries a dual-band/dual-mode handset that permits the customer to use
the analog cellular system in that area. The same issue would apply to users of
TDMA or GSM systems. All of the wireless personal communications services
operators now have dual-mode or tri-
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mode handsets available to their customers. Because digital networks do not
cover all areas in the country, these handsets will remain necessary for
segments of the subscriber base.
CODE DIVISION MULTIPLE ACCESS TECHNOLOGY - The PCS network of Sprint and the
networks of PCS Affiliates of Sprint all use digital CDMA technology. We believe
that CDMA provides important system performance benefits such as:
GREATER CAPACITY - We believe, based on studies by CDMA manufacturers
and our experience since the inception of the Company, that CDMA systems can
provide system capacity that is approximately seven to ten times greater than
that of analog technology and approximately three times greater than TDMA and
GSM digital systems.
PRIVACY AND SECURITY - One of the benefits of CDMA access technology is
that it combines a constantly changing coding scheme with a low power signal to
enhance call security and privacy.
SOFT HAND-OFF - CDMA systems transfer calls throughout the CDMA network
using a technique referred to as a soft hand-off, which connects a mobile
customer's call with a new base station while maintaining a connection with the
base station currently in use. CDMA networks monitor the quality of the
transmission received by multiple base stations simultaneously to select a
better transmission path and to ensure that the network does not disconnect the
call in one cell unless replaced by a stronger signal from another base station.
Analog, TDMA and GSM networks use a "hard hand-off" and disconnect the call from
the current base station as it connects with a new one without any simultaneous
connection to both base stations.
SIMPLIFIED FREQUENCY PLANNING - Frequency planning is the process used
to analyze and test alternative patterns of frequency used within a wireless
network to minimize interference and maximize capacity. Unlike TDMA and GSM
based systems, CDMA based systems can reuse the same subset of allocated
frequencies in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
LONGER BATTERY LIFE - Due to their greater efficiency in power
consumption, CDMA handsets can provide longer standby time and more talk time
availability when used in the digital mode than handsets using alternative
digital or analog technologies.
EFFICIENT MIGRATION PATH - CDMA technology has an efficient and
incremental migration path to 3G voice and data services. The incremental
investment in each step along the migration path is an advantage of this
technology. The first step along this path was our conversion to one times radio
transmission technology ("1XRTT") that occurred in 2002 which was completed for
less than $3 per covered POP. Additional steps, beyond 1XRTT can be taken as
demand for more robust data services or need for additional capacity develops
for similar capital investment levels.
COMPETITION
Competition in the wireless communications services industry is
intense. We compete with a number of wireless service providers in our markets.
We believe that our primary competition is with national and regional wireless
providers such as AT & T Wireless Services, Cingular, T-Mobile (formerly
Voicestream Wireless), Verizon and ALLTEL.
We also face competition from resellers, which provide wireless
services to customers but do not hold FCC licenses or own facilities. Instead,
the resellers buy blocks of wireless telephone numbers and capacity from a
licensed carrier and resell services through their own distribution network to
the public.
In addition, we compete with existing communications technologies such
as paging, enhanced specialized mobile radio service dispatch and conventional
landline telephone companies in our markets. Potential users of wireless
personal communications services systems may find their communications needs
satisfied by other current and developing technologies. One or two-way paging or
beeper services that feature voice messaging and data display as well as
tone-only service may be adequate for potential customers who do not need to
speak to the caller.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
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Many of our competitors have significantly greater financial and
technical resources and larger subscriber bases than we do. Some of our
competitors also have established infrastructures, marketing programs and brand
names. In addition, some of our competitors may be able to offer regional
coverage in areas not served by the PCS network of Sprint, or, because of their
calling volumes or relationships with other wireless providers, may be able to
offer regional roaming rates that are lower than those that we offer. Wireless
personal communications services operators will likely compete with us in
providing some or all of the services available through our network and may
provide services that we do not. Additionally, we expect that existing cellular
providers will continue to upgrade their systems to provide digital wireless
communication services competitive with Sprint. Currently, there are six
national wireless providers who are generally all present in major markets
across the country. In January 2003, the FCC rule imposing limits on the amount
of spectrum that can be held by one provider in a specific market was lifted
which may facilitate the consolidation of some national providers.
Over the past several years, the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS services from Sprint. Based upon increased competition, we anticipate that
market prices for two-way wireless services generally will decline in the
future. We will compete to attract and retain customers principally on the basis
of:
o the strength of the Sprint brand name, services and features;
o nationwide network;
o our network coverage and reliability; and
o CDMA technology.
Our ability to compete successfully will also depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
industry, including:
o new services and technologies that may be introduced;
o changes in consumer preferences;
o demographic trends;
o economic conditions; and
o discount pricing strategies by competitors.
INTELLECTUAL PROPERTY
The Sprint diamond design logo is a service mark registered with the
United States Patent and Trademark Office. The service mark is owned by Sprint.
We use the Sprint brand name, the Sprint diamond design logo and other service
marks of Sprint in connection with marketing and providing wireless services
within our territories. Under the terms of the trademark and service mark
license agreements with Sprint, we do not pay a royalty fee for the use of the
Sprint brand name and Sprint service marks.
Except in certain instances and other than in connection with the
national distribution agreements, Sprint has agreed not to grant to any other
person a right or license to use the licensed marks in our territories. In all
other instances, Sprint reserves the right to use the licensed marks in
providing its services within or without our territories.
The trademark license agreements contain numerous restrictions with
respect to the use and modification of any of the licensed marks. See "Our
Affiliation Agreements with Sprint -- The Trademark and Service Mark License
Agreements" for more information on this topic.
ENVIRONMENTAL COMPLIANCE
Our environmental compliance expenditures primarily result from the
operation of standby power generators for our telecommunications equipment and
compliance with various environmental rules during network build-out and
operations. The expenditures arise in connection with standards compliance or
permits which are usually related to
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generators, batteries or fuel storage. Our environmental compliance expenditures
have not been material to our financial statements or to our operations and are
not expected to be material in the future.
EMPLOYEES
As of December 31, 2002, we employed 804 full-time employees. None of
our employees are represented by a labor union. We believe that our relations
with our employees are good.
OUR AFFILIATION AGREEMENTS WITH SPRINT
We initially entered into four major affiliation agreements with
Sprint:
o a management agreement;
o a services agreement; and
o two trademark and service mark license agreements with different
Sprint entities.
We entered into one set of these agreements with Sprint for our
territories in the Southwestern part of the United States and another set of
these agreements for our territories in Wisconsin. Roberts entered into a set of
these agreements for its territories in Illinois, Kansas and Missouri, which we
have assumed pursuant to our acquisition of Roberts. WOW entered into a set of
these agreements for its territories in Washington and Oregon, which we have
assumed pursuant to our acquisition of WOW. Southwest entered into a set of
these agreements for its territories in Oklahoma, Kansas, Texas and Arkansas
which we have assumed pursuant to our acquisition of Southwest. Therefore, we
now operate under five sets of affiliation agreements with Sprint. As used
herein, the term "operating subsidiaries" refers to each of our subsidiaries
that have entered into affiliation agreements with Sprint. Unless otherwise
indicated below, the description of our affiliation agreements applies to the
affiliation agreements for all of our territories.
Under our affiliation agreements with Sprint, we have the exclusive
right to provide wireless mobility communications network services using the
1900 MHz frequency block under the Sprint brand name in our territories. Sprint
holds the spectrum licenses. Our affiliation agreements with Sprint require us
to interface with the PCS network of Sprint by building our portion of the PCS
network of Sprint to operate on the 10, 20 or 30 MHz of wireless personal
communications services frequencies licensed to Sprint in the 1900 MHz range.
The following is a description of the material terms and provisions of
our affiliation agreements and the consent and agreement with Sprint and
Citicorp USA ("Citicorp"), that modifies our management agreements for the
benefit of Citicorp, as Administrative Agent, and the holders of the Senior
Secured Credit Facility and any refinancing thereof. See "Consent and Agreement
for the Benefit of the Holders of the Senior Secured Credit Facility."
A breach or event of termination, as the case may be, under any of our
affiliation agreements by one of our operating subsidiaries will also constitute
a breach or event of termination, as the case may be, by all other operating
subsidiaries of the same provision of the applicable affiliation agreement to
which each operating subsidiary is a party. Each operating subsidiary only has
the right to cure its breach and has no right to cure any breach or event of
termination by another operating subsidiary.
THE MANAGEMENT AGREEMENTS - Under our management agreements with Sprint, we have
agreed to:
o own, construct and manage a wireless personal communications
services network in our territories in compliance with FCC license
requirements and other technical requirements contained in our
management agreements;
o distribute PCS products and services from Sprint;
o use Sprint's and our own distribution channels in our territories;
o conduct advertising and promotion activities in our territories;
and
13
o manage that portion of the wireless customer base assigned to our
territories.
Sprint will supervise our wireless personal communications services
network operations and has the right to unconditional access to our portion of
the PCS network of Sprint, including the right to test and monitor any of our
facilities and equipment.
EXCLUSIVITY - We are designated as the only person or entity that can
manage or operate a wireless mobility communications network using the 1900 MHz
frequency block for Sprint in our territories. Sprint is prohibited from owning,
operating, building or managing another wireless mobility communications network
in our territories while our management agreements are in place and no event has
occurred that would permit such agreements to terminate. Sprint is permitted to
make national sales to companies in our territories and to permit resale of the
PCS products and services from Sprint in our territories. Our management
agreements prohibit us from interfering with others who resell PCS products and
services from Sprint in our territories.
If Sprint decides to expand the geographic size of the network coverage
within our territories, Sprint must provide us with written notice of the
proposed expansion.
Under our management agreements for our original territories,
Wisconsin, and the territories we assumed pursuant to our acquisitions of
Roberts and Southwest, we have a 90-day right of first refusal to build out the
proposed expansion area. If we choose not to build out the proposed area, then
Sprint may build out the area itself or allow another PCS Affiliate of Sprint to
do so.
Under our management agreement for the territories we assumed pursuant
to our acquisition of WOW, we have agreed to build out any proposed expansion
area. Sprint has agreed not to require any new coverage during the first two
years of such management agreement or to require coverage that exceeds the
capacity and footprint parameters that Sprint has adopted for all its comparable
markets. The management agreement also contains a mechanism for us to appeal to
Sprint if the build-out is not economically advantageous for us. If we fail to
build out the proposed expansion area, Sprint has the termination rights
described below under "Termination of Our Management Agreements."
NETWORK BUILD-OUT - Our management agreements specify the terms of the
Sprint affiliation, including the required network build-out plan. We have
agreed to cover a specified percentage of the population within each of the
markets which make up our territories by specified dates.
If technically feasible and commercially reasonable, we have agreed to
provide for a seamless handoff of a call initiated in our territories to a
neighboring portion of the PCS network of Sprint. Our management agreements
require us to reimburse Sprint one-half of the microwave clearing costs for our
territories.
PRODUCTS AND SERVICES - Our management agreements identify the products
and services that we can offer in our territories. These services include, but
are not limited to, PCS consumer and business products and services from Sprint
available as of the date of the agreements, or as modified by Sprint. We are
allowed to sell wireless products and services that are not PCS products and
services from Sprint if those additional products and services do not cause
distribution channel conflicts or, in Sprint's sole determination, consumer
confusion with PCS products and services from Sprint. Under our management
agreement for our Wisconsin territories, if Sprint begins to offer nationally a
product or service that we already offer, then that product or service will be
considered to be a PCS product or service from Sprint.
We may also sell services such as specified types of long distance
service, Internet access, handsets, and prepaid phone cards with Sprint and
other PCS Affiliates of Sprint. If we decide to use third parties to provide
these services, we must give Sprint an opportunity to provide the services on
the same terms and conditions. We cannot offer wireless local loop services
specifically designed for the competitive local exchange market in areas where
Sprint owns the local exchange carrier unless we name the Sprint-owned local
exchange carrier as the exclusive distributor or Sprint approves the terms and
conditions. Sprint does not own the local exchange carrier in a majority of the
markets in our territories.
NATIONAL SALES PROGRAMS - We must participate in the Sprint wireless
sales programs for national sales to customers, and will pay the expenses and
receive the compensation from Sprint relative to sales to national accounts
located in our territories. We must use Sprint's long distance service, which we
can buy at the best prices offered to comparably situated Sprint customers.
14
SERVICE PRICING, ROAMING AND FEES - We must offer PCS subscriber
pricing plans from Sprint designated for regional or national offerings,
including "Free & Clear" plans and "PCS Vision" plans. We are permitted to
establish our own local price plans for PCS products and services offered only
in our territories, subject to Sprint's approval. We are entitled to receive a
weekly fee from Sprint equal to 92% of "collected revenues" for all obligations
under our management agreements, adjusted by the cost of customer services
provided to us by Sprint. "Collected revenues" include revenue from Sprint
wireless subscribers based in our territories and inbound non-Sprint PCS
roaming. Sprint will retain 8% of the collected revenues. Outbound non-Sprint
PCS roaming billed to subscribers based in our territory, inbound and outbound
Sprint PCS roaming fees, proceeds from the sales of handsets and accessories,
proceeds from sales not in the ordinary course of business, amounts collected
with respect to taxes and proceeds from sales of our products and services, are
not considered collected revenues. Except in the case of taxes, since those are
collected and remitted by Sprint, we will retain 100% of these revenues. Many
Sprint wireless subscribers purchase bundled pricing plans that allow roaming
anywhere on the nationwide PCS network of Sprint without incremental PCS roaming
charges. However, we will earn Sprint PCS roaming revenue for every minute that
a Sprint wireless subscriber from outside our territories enters our territories
and uses our services. We will earn revenue from Sprint based on a per minute
rate established by Sprint when Sprint's or its PCS Affiliates' subscribers roam
on our portion of the PCS network of Sprint. Similarly, we will pay the same
rate for every minute our subscribers use the PCS network of Sprint outside our
territories. The analog roaming rate onto a non-Sprint PCS provider's network is
set under Sprint's third party roaming agreements.
VENDOR PURCHASE AGREEMENTS - We may participate in discounted
volume-based pricing on wireless-related products and warranties Sprint receives
from its vendors. Sprint will use commercially reasonable efforts to obtain for
us the same prices as Sprint receives from its vendors.
ADVERTISING AND PROMOTIONS - Sprint uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote its
products. We benefit from the national advertising at no additional cost to us.
In addition to Sprint's national advertising campaigns, we advertise and promote
PCS products and services from Sprint on a local level in our markets at our
cost. We have the right to use any promotion or advertising materials developed
by Sprint and only have to pay the incremental cost of using those materials,
such as the cost of local radio and television advertisement placements and
incremental printing costs. Sprint also runs numerous promotional campaigns
which provide customers with benefits such as additional features at the same
rate or free minutes of use for limited time periods. We offer these promotional
campaigns to potential customers in our territories.
PROGRAM REQUIREMENTS - We must comply with the Sprint program
requirements for technical standards, customer service standards, roaming
coverage and national and regional distribution and national accounts programs.
Sprint can adjust the program requirements at any time. We have the right to
appeal to the management of Sprint if adjustments to program requirements will:
o cause us to incur a cost exceeding 5% of the sum of our
stockholder's equity plus our outstanding long term debt; or
o cause our operating expenses on a per-unit basis using a ten-year
time frame to increase by more than 10% on a net present value
basis.
If Sprint denies our appeal and we fail to comply with the program
adjustment, Sprint has the termination rights described below under "Termination
of Our Management Agreements."
Under our management agreements for our Wisconsin and Southwest
territories, Sprint has agreed that it will use commercial reasonableness to
adjust the Sprint retail store and customer service requirements for cities
located within those territories that have a population of less than 100,000.
NON-COMPETITION - We may not offer PCS products and services from
Sprint outside our territories without the prior written approval of Sprint. We
may offer, market or promote telecommunications products and services within our
territories only under the Sprint brand, our own brand, brands of our related
parties or other products and services approved under our management agreements,
except that no brand of a significant competitor of Sprint or its related
parties may be used for those products and services. To the extent we have or
will obtain licenses to provide wireless personal communications services
outside our territories, we may not use the spectrum to offer PCS products and
services from Sprint without prior written consent from Sprint.
15
INABILITY TO USE NON-SPRINT BRAND - We may not market, promote,
advertise, distribute, lease or sell any of the PCS products and services from
Sprint on a non-branded, "private label" basis or under any brand, trademark or
trade name other than the Sprint brand, except for sales to resellers or as
otherwise permitted under the Trademark and Service Mark License Agreements.
TRANSFER OF THE PCS NETWORK - Sprint can sell, transfer or assign its
wireless personal communications services network to a third party if the third
party agrees to be bound by the terms of our management agreements and our
services agreements.
CHANGE IN CONTROL - Sprint must approve our change in control, but this
consent cannot be unreasonably withheld.
RIGHTS OF FIRST REFUSAL - Sprint has rights of first refusal, without
further stockholder approval, to buy our assets upon a proposed sale of all or
substantially all of our assets used in the operation of our portion of the PCS
network of Sprint.
TERM - Each of our management agreements has an initial term of 20
years with three 10-year renewal options, which would lengthen each of our
management agreements to a total term of 50 years. The three 10-year renewal
terms automatically occur unless either Sprint or we provide the other with two
years prior written notice to terminate the agreement or unless we are in
material default of our obligations under such agreement.
TERMINATION OF OUR MANAGEMENT AGREEMENTS - Our management agreements
can be terminated as a result of the following events:
o termination of Sprint's spectrum licenses;
o an uncured breach under our management agreements;
o bankruptcy of a party to our management agreements;
o our management agreements not complying with any applicable law in
any material respect; or
o the termination of any of our trademark and service mark license
agreements.
The termination or non-renewal of our management agreements triggers
some of our rights and some rights of Sprint. The right of either party to
require the other party to purchase or sell the operating assets is discussed
below.
If we have the right to terminate our management agreements because of
an event of termination caused by Sprint, generally we may:
o require Sprint to purchase all of our operating assets used in
connection with our portion of the PCS network of Sprint for an
amount equal to at least 80% of our "entire business value" as
defined below;
o in all areas in our territories where Sprint is the licensee for
20 MHZ or more of the spectrum on the date it terminates our
management agreements, require Sprint to assign to us, subject to
governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
of the license plus any microwave clearing costs paid by Sprint or
9% of our "entire business value;" or
o choose not to terminate our management agreements and sue Sprint
for damages or submit the matter to arbitration.
If Sprint has the right to terminate our management agreements because
of an event of termination caused by us, generally Sprint may:
o require us, without further stockholder approval, to sell our
operating assets to Sprint for an amount equal to 72% of our
"entire business value;"
16
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint of the license plus
any microwave relocation costs paid by Sprint or 10% of our
"entire business value;"
o take any action as Sprint deems necessary to cure the breach of
our management agreements, including assuming responsibility for,
and operating, our portion of the PCS network of Sprint; or
o not terminate our management agreements and sue us for damages or
submit the matter to arbitration.
In connection with the Senior Secured Credit Facility, Sprint entered
into a consent and agreement with Citicorp that modifies Sprint's rights and
remedies under our affiliation agreements for the benefit of Citicorp, as
Administrative Agent, and the holders of the Senior Secured Credit Facility and
any refinancing thereof. The consent and agreement with Citicorp provides, among
other things, that our affiliation agreements generally may not be terminated by
Sprint until all our outstanding indebtedness under the Senior Secured Credit
Facility is satisfied in full pursuant to the terms of the consent and
agreement. See "Consent and Agreement for the Benefit of the Holders of the
Senior Secured Credit Facility."
NON-RENEWAL - If Sprint gives us timely notice that it does not intend
to renew our management agreements, we may:
o require Sprint to purchase all of our operating assets used in
connection with our portion of the PCS network of Sprint for an
amount equal to 80% of our "entire business value;" or
o in all areas in our territories where Sprint is the licensee for
20 MHZ or more of the spectrum on the date it terminates such
management agreement, require Sprint to assign to us, subject to
governmental approval, up to 10 MHZ of licensed spectrum for an
amount equal to the greater of either the original cost to Sprint
of the license plus any microwave relocation costs paid by Sprint
or 10% of our "entire business value."
If we give Sprint timely notice of non-renewal, or we and Sprint both
give notice of non-renewal, or any of our management agreements expire with
neither party giving a written notice of non-renewal, or if any of our
management agreements can be terminated for failure to comply with legal
requirements or regulatory considerations, Sprint may:
o purchase all of our operating assets, without further stockholder
approval, for an amount equal to 80% of our "entire business
value;" or
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territories for an amount equal to the
greater of either the original cost to Sprint of the license plus
any microwave clearing costs paid by Sprint or 10% of our "entire
business value."
DETERMINATION OF ENTIRE BUSINESS VALUE - If our "entire business value"
is to be determined, Sprint and we will each select one independent appraiser
and the two appraisers will select a third appraiser. The three appraisers will
determine our "entire business value" on a going concern basis using the
following principles:
o the "entire business value" is based on the price a willing buyer
would pay a willing seller for the entire on-going business;
o the entire business value will not be calculated in a manner that
double counts the operating assets of one or more of our
affiliates;
o then-current customary means of valuing a wireless
telecommunications business will be used;
o the business is conducted under the Sprint brand and our
affiliation agreements with Sprint;
o that we own the spectrum and frequencies presently owned by Sprint
and subject to our affiliation agreements with Sprint; and
17
o the valuation will not include any value for businesses not
directly related to the PCS products and services from Sprint, and
those businesses will not be included in the sale.
INSURANCE - We are required to obtain and maintain with financially
reputable insurers who are licensed to do business in all jurisdictions where
any work is performed under our management agreement and who are reasonably
acceptable to Sprint, workers' compensation insurance, commercial general
liability insurance, business automobile insurance, umbrella excess liability
insurance and "all risk" property insurance.
INDEMNIFICATION - We have agreed to indemnify Sprint and its directors,
employees and agents and related parties of Sprint and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in our management agreements or any other
agreement between us and Sprint, our ownership of the operating assets or the
actions or the failure to act of anyone employed or hired by us in the
performance of any work under such agreement, except that we will not be
obligated to indemnify Sprint for any claims arising solely from the negligence
or willful misconduct of Sprint. Sprint has agreed to indemnify us and our
directors, employees and agents against all claims against any of the foregoing
arising from Sprint's violation of any law and from Sprint's breach of any
representation, warranty or covenant contained in our management agreements or
any other agreement between us and Sprint, except Sprint will not be obligated
to indemnify us for any claims arising solely from our negligence or willful
misconduct.
DISPUTE RESOLUTION - If the parties cannot resolve any dispute between
themselves and our management agreements do not provide a remedy, then either
party may require that any dispute be resolved by a binding arbitration.
THE SERVICES AGREEMENTS
Our services agreements outline various back office services provided
by Sprint and available to us for an additional fee. Sprint can change the
amount of adjustment for any or all of the services one time in any twelve-month
period. We have the option to cancel a service upon notification of a fee
increase, and if we decide to cancel the service, then Sprint, at our option,
must continue to provide that service for nine months at the original price.
Some of the available services include: billing, customer care, activation,
credit checks, handset logistics, home locator record, voice mail, prepaid
services, directory assistance, operator services, roaming fees, roaming
clearinghouse fees, interconnect fees and inter-territory fees. Sprint offers
three packages of available services. Each package identifies which services
must be purchased from Sprint and which may be purchased from a vendor or
provided in-house. Essentially, services such as billing, activation and
customer care must all be purchased from Sprint or none may be purchased from
Sprint. We have chosen to initially delegate the performance of these services
to Sprint, but we may develop an independent capability with respect to these
services over time. Sprint may contract with third parties to provide expertise
and services identical or similar to those to be made available or provided to
us. We have agreed not to use the services performed by Sprint in connection
with any other business or outside our territories. We may discontinue use of
any service upon three months' prior written notice, while Sprint must give nine
months notice if it will no longer offer any service.
We have agreed with Sprint to indemnify each other as well as
affiliates, officers, directors and employees for violations of law or the
services agreements except for any liabilities resulting from the negligence or
willful misconduct of the person seeking to be indemnified or its
representatives. Our services agreements also provide that no party will be
liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, such
services agreement except as may otherwise be required by the indemnification
provisions. Our services agreements automatically terminate upon termination of
our management agreements, and neither party may terminate the services
agreements for any reason other than the termination of the management
agreements.
THE TRADEMARK AND SERVICE MARK LICENSE AGREEMENTS
We have a non-transferable license to use, at no additional cost to us,
the Sprint brand name and "diamond" symbol, and several other U.S. trademarks
and service marks such as "The Clear Alternative to Cellular" and "Clear Across
the Nation" on PCS products and services from Sprint. We believe that the Sprint
brand name and symbols enjoy a high degree of recognition, providing us an
immediate benefit in the market place. Our use of the licensed marks is subject
to our adherence to quality standards determined by Sprint and use of the
licensed marks in a manner, which would not reflect adversely on the image of
quality symbolized, by the licensed marks. We have agreed to promptly notify
Sprint of any infringement of any of the licensed marks within our territories
of which we become aware and to
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provide assistance to Sprint in connection with Sprint's enforcement of their
rights. We have agreed with Sprint that we will indemnify the other for losses
incurred in connection with a material breach of the trademark license
agreements between Sprint and us. In addition, we have agreed to indemnify
Sprint from any loss suffered by reason of our use of the licensed marks or
marketing, promotion, advertisement, distribution, lease or sale of any Sprint
products and services other than losses arising solely out of our use of the
licensed marks in compliance with certain guidelines.
Sprint can terminate our trademark and service mark license agreements
if we file for bankruptcy or materially breach our agreement or if our
management agreements are terminated. We can terminate our trademark and service
mark license agreements upon Sprint's abandonment of the licensed marks or if
Sprint files for bankruptcy or our management agreements are terminated.
However, Sprint can assign their interests in the licensed marks to a third
party if that third party agrees to be bound by the terms of our trademark and
service mark license agreements.
CONSENT AND AGREEMENT FOR THE BENEFIT OF THE HOLDERS OF THE SENIOR SECURED
CREDIT FACILITY
Sprint entered into a consent and agreement with Citicorp, as
Administrative Agent, that modifies Sprint's rights and remedies under our
affiliation agreements with Sprint. This consent and agreement was entered into
for the benefit of Citicorp and the holders of the Senior Secured Credit
Facility and any refinancing thereof.
The consent and agreement between Sprint and Citicorp generally
provides, among other things, the following:
o Sprint's consent to the pledge of substantially all of our assets,
including our rights in our affiliation agreements with Sprint;
o that our affiliation agreements with Sprint may not be terminated
by Sprint until all outstanding obligations under the Senior
Secured Credit Facility are satisfied in full pursuant to the
terms of the consent and agreement, unless our operating
subsidiaries or assets are sold to a purchaser who does not
continue to operate the business as a PCS Affiliate of Sprint,
which sale requires the approval of Citicorp;
o Sprint may not exercise its right under our management agreements
to purchase our assets until all obligations pursuant to the
Senior Secured Credit Facility have been paid in full in cash and
all commitments to advance credit under such facility have been
terminated or have expired. However, Sprint retains the option to
purchase our assets if it first pays all obligations under the
Senior Secured Credit Facility and such facility is terminated in
connection with such payment;
o for redirection of payments due to us under our management
agreements from Sprint to Citicorp during the continuation of any
default by us under the Senior Secured Credit Facility;
o for Sprint and Citicorp to provide to each other notices of
default by us under our management agreements and the Senior
Secured Credit Facility, respectively;
o the ability to appoint interim replacements, including Sprint or a
designee of the Administrative Agent under the Senior Secured
Credit Facility, to operate our portion of the PCS network of
Sprint under our affiliation agreements after an event of default
under the Senior Secured Credit Facility or an event of
termination under our affiliation agreements;
o subject to certain requirements and limitations, the ability of
Sprint to assign our affiliation agreements with Sprint and sell
our assets or the partnership interests, membership interests or
other equity interests of our operating subsidiaries to a
qualified purchaser that is not a major competitor of Sprint, free
of the restrictions on assignment and change of control in our
management agreements, if our obligations under the Senior Secured
Credit Facility have been accelerated after a default by us; and
o subject to certain requirements and limitations, that if Sprint
enters into consent and agreement documents with
similarly-situated lenders that have provisions that are more
favorable to the lender, Sprint will give Citicorp written notice
of the amendments and will amend our consent and agreement with
Citicorp in the same manner at Citicorp's request; consequently,
from time to time, Citicorp and Sprint may modify our consent and
agreement so that it will contain terms and conditions more
favorable to Citicorp.
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SPRINT'S RIGHT TO PURCHASE ON ACCELERATION OF AMOUNTS OUTSTANDING UNDER
THE SENIOR SECURED CREDIT FACILITY - Subject to the requirements of applicable
law, so long as the Senior Secured Credit Facility remains outstanding, Sprint
has the right to purchase our operating assets or the partnership interests,
membership interests or other equity interests of our operating subsidiaries,
upon its receipt of notice of an acceleration of the Senior Secured Credit
Facility, under the following terms:
o Sprint elects to make such a purchase within a specified period;
o the purchase price is the greater of an amount equal to 72% of our
"entire business value" or the amount we owe under the Senior
Secured Credit Facility;
o if Sprint has given notice of its intention to exercise the
purchase right, then the Administrative Agent is prohibited for a
specified period after the acceleration, or until Sprint rescinds
its intention to purchase, from enforcing its security interest;
and
o if we receive a written offer that is acceptable to us to purchase
our operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries
after the acceleration, then Sprint has the right to purchase our
operating assets or the partnership interests, membership
interests or other equity interests of our operating subsidiaries,
as the case may be, on terms at least as favorable to us as the
offer we receive. Sprint must agree to purchase the operating
assets or the partnership interests, membership interests or other
equity interests of our operating subsidiaries within 14 business
days of its receipt of the offer, on acceptable conditions, and in
an amount of time acceptable to us and Citicorp.
Upon acceleration of the Senior Secured Credit Facility, Sprint also
has the right to purchase the obligations under the Senior Secured Credit
Facility by repaying such obligations in full in cash.
SALE OF OPERATING ASSETS OR THE PARTNERSHIP INTERESTS, MEMBERSHIP
INTERESTS OR OTHER EQUITY INTERESTS OF OUR OPERATING SUBSIDIARIES TO THIRD
PARTIES - If Sprint does not purchase our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries after an acceleration of the obligations under the Senior Secured
Credit Facility, then Citicorp may sell our operating assets or the partnership
interests, membership interests or other equity interests of our operating
subsidiaries. Subject to the requirements of applicable law, including the law
relating to foreclosures of security interests, Citicorp has two options:
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to an entity that meets the requirements to be our
successor under our affiliation agreements with Sprint; or
o to sell our operating assets or the partnership interests,
membership interests or other equity interests of our operating
subsidiaries to any third party, subject to specified conditions.
REGULATORY ENVIRONMENT
REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC can have a substantial impact upon entities that manage
wireless personal communications service systems and/or provide wireless
personal communications services because the FCC regulates the licensing,
construction, operation, acquisition and interconnection arrangements of
wireless telecommunications systems in the United States.
The FCC has promulgated, and is in the process of promulgating, a
series of rules, regulations and policies to, among other things:
o grant or deny licenses for wireless personal communications
service frequencies;
o grant or deny wireless personal communications service license
renewals;
o rule on assignments and/or transfers of control of wireless
personal communications service licenses;
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o govern the interconnection of wireless personal communications
service networks with other wireless and wireline service
providers;
o establish access and universal service funding provisions;
o impose fines and forfeitures for violations of any of the FCC's
rules; and
o regulate the technical standards of wireless personal
communications services networks.
Through rules that went into effect on February 13, 2002, the FCC has
eliminated its spectrum cap for Commercial Mobile Radio Services ("CMRS") which
include broadband wireless personal communications services, cellular and
specialized mobile radio ("SMR"). The cap previously had limited CMRS providers
to 55 MHz in any geographic area. This spectrum cap prohibited a single entity
from having an attributable interest (defined as any general partnership
interest of 20% or greater equity or voting interest or certain other business
relationships) totaling more than 55 MHz. The geographic areas at issue were PCS
licensed service areas where there were overlaps involving 10% or more of the
population of such service area. An entity, such as us, that manages the
operations of a broadband PCS, cellular, or SMR licenses pursuant to a
management agreement is also considered to have an attributable interest in the
system it manages. Also effective as of February 13, 2002, the FCC eliminated
its rule which prohibited a party from owning interests in both cellular systems
in the same Metropolitan Statistical Areas ("MSAs") though it retained the
cross-interest prohibition for less populous Rural Service Areas ("RSAs"). The
Commission's new rules blur the "bright line" of these spectrum caps, however,
and require a case-by-case analysis to determine that any proposed CMRS spectrum
combination will not have an anticompetitive effect.
TRANSFERS AND ASSIGNMENTS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a wireless personal
communications service license. This means that we and our stockholder will
receive advance notice of any and all transactions involved in transferring
control of Sprint or the assignment of some or all of the wireless personal
communications service licenses held by Sprint. The FCC proceedings afford us
and our stockholder an opportunity to evaluate proposed transactions well in
advance of closing, and to take actions necessary to protect their interests.
Non-controlling interests in an entity that holds a wireless personal
communications service license or operates wireless personal communications
service networks generally may be bought or sold without prior FCC approval. In
addition, the FCC requires only post-consummation notification of pro forma
assignments or transfers of control of certain commercial mobile radio service
licenses.
CONDITIONS OF WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSES
All wireless personal communications service licenses are granted for
ten-year terms conditioned upon timely compliance with the FCC's build-out
requirements. Pursuant to the FCC's build-out requirements, all 30 MHZ broadband
wireless personal communications service licensees must construct facilities
that offer coverage to one-third of the population in their licensed areas
within five years and to two-thirds of the population in such areas within ten
years, and all 10 MHZ broadband wireless personal communications services
licensees must construct facilities that offer coverage to at least one-quarter
of the population in their licensed areas within five years or make a showing of
"substantial service" within that five-year period.
If the build-out requirements are not met, wireless personal
communications service licenses could be forfeited. The FCC also requires
licensees to maintain control over their licenses. Our affiliation agreements
with Sprint reflect management agreements that the parties believe meet the FCC
requirements for licensee control of licensed spectrum.
If the FCC were to determine that our affiliation agreements with
Sprint need to be modified to increase the level of licensee control, we have
agreed with Sprint to use our best efforts to modify the agreements to the
extent necessary to cause the agreements to comply with applicable law and to
preserve to the extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be so modified, the agreements may be
terminated pursuant to their terms. The FCC could also impose monetary penalties
on Sprint, and possibly revoke one or more of the Sprint licenses.
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WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSE RENEWAL
Wireless personal communications service licensees can renew their
licenses for additional ten-year terms. Wireless personal communications service
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford wireless personal communications services renewal applicants involved in
comparative renewal hearings with a "renewal expectancy." The renewal expectancy
is the most important comparative factor in a comparative renewal hearing and is
applicable if the wireless personal communications service renewal applicant
has:
o provided "substantial service" during its license term; and
o substantially complied with all applicable laws and Federal
Communications Commission rules and policies.
The FCC's rules define "substantial service" in this context as service
that is sound, favorable and substantially above the level of mediocre service
that might minimally warrant renewal. The FCC's renewal expectancy and
procedures make it very likely that Sprint will retain the wireless personal
communications service licenses that we manage for the foreseeable future.
INTERCONNECTION
The FCC has the authority to order interconnection between commercial
mobile radio services, commonly referred to as CMRS, providers and incumbent
local exchange carriers. The FCC has ordered local exchange carriers to provide
reciprocal compensation to commercial mobile radio service providers for the
termination of traffic. Using these rules, we will assist Sprint in the
negotiation of interconnection agreements for the PCS network of Sprint in their
market area with all of the Bell operating companies, including Verizon and
several smaller independent local exchange carriers. Interconnection agreements
are negotiated on a state-wide basis.
If an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject to state
approval. The FCC rules and rulings, as well as the state arbitration
proceedings, will directly impact the nature and cost of the facilities
necessary for interconnection of the PCS systems of Sprint with local, national
and international telecommunications networks. They will also determine the
nature and amount of revenues that we and Sprint can receive for terminating
calls originating on the networks of local exchange and other telecommunications
carriers.
OTHER FCC REQUIREMENTS
In June 1996, the FCC adopted rules that prohibited broadband wireless
personal communications services providers from unreasonably restricting or
disallowing resale of their services or unreasonably discriminating against
resellers. Resale obligations automatically expired on November 24, 2002. These
existing resale requirements and their expiration may somewhat affect the number
of resellers competing with Sprint and its managers and PCS Affiliates in
various markets. However, to date, wireless resellers have not significantly
impacted wireless service providers. Any losses in retail customers have been
offset, in major part, by increases in wireless customers, traffic and wholesale
revenues.
CMRS providers, including Sprint, are required to permit manual roaming
on their systems. With manual roaming, any user whose mobile phone is
technically capable of connecting with a carrier's system must be able to make a
call by providing a credit card number or making some other arrangement for
payment. The FCC is currently considering changes in its rules that may
terminate the manual roaming requirement and may impose automatic roaming
obligations, under which users with capable equipment would be permitted to
originate or terminate calls without taking action other than turning on the
mobile phone.
FCC rules require local exchange and most commercial mobile radio
services providers to program their networks to allow customers to change
service providers without changing telephone numbers, which is referred to as
service provider number portability ("SPNP"). The FCC requires most commercial
mobile radio service providers to implement wireless service provider number
portability where requested in the 100 largest metropolitan areas in the United
States by November 24, 2003. The FCC currently requires most commercial mobile
radio service providers to be
22
able to deliver calls from their networks to ported numbers anywhere in the
country, and to contribute to the Local Number Portability Fund. Implementation
of wireless service provider number portability will require wireless personal
communications service providers like us and Sprint, to purchase more expensive
switches and switch upgrades. However, it will also enable existing cellular
customers to change to wireless personal communications services without losing
their existing wireless telephone numbers, which should make it easier for
wireless personal communications service providers to market their services to
existing cellular users.
FCC rules permit broadband wireless personal communications service and
other commercial mobile radio service providers to provide wireless local loop
and other fixed services that would directly compete with the wireline services
of local exchange carriers. This may create new markets and revenue
opportunities for Sprint and its managers and PCS Affiliates and other wireless
providers.
FCC rules require broadband personal communications services and other
commercial mobile radio services providers to implement enhanced emergency 911
capabilities. The FCC has approved a plan proposed by Sprint under which it
began selling specially equipped telephone handsets on or before October 1,
2001, with a rollout of such handsets continuing until December 31, 2002, when
all new handsets activated nationwide must be specially equipped. Sprint has
asked the FCC for a six-month extension to enable Sprint to wait until June 30,
2003 before it must specially equip all of its newly-activated handsets. In
addition, Sprint's plan requires that by December 31, 2005, 95% of Sprint
wireless subscriber handsets in service must be equipped for the Sprint wireless
enhanced 911 service. Moreover, Sprint was required to complete its PCS
network upgrade to support enhanced 911 service by December 31, 2002, and to
begin providing a specified level of enhanced 911 service by June 30, 2002. As
the required equipment becomes more functional and less expensive, emergency 911
services may afford wireless carriers substantial and attractive new service and
marketing opportunities.
FCC rules include several measures designed to remove obstacles to
competitive access to customers and facilities in commercial multiple tenant
environments, including the following:
o Telecommunications carriers in commercial settings may not enter
into exclusive contracts with building owners, including contracts
that effectively restrict premises owners or their agents from
permitting access to other telecommunications service providers.
o Utilities, including LECs, must afford telecommunications carriers
and cable service providers reasonable and nondiscriminatory
access to conduits and rights-of-way located in customer buildings
and campuses, to the extent such conduits and rights-of-way are
owned or controlled by the utility.
The FCC has also issued a further notice of proposed rulemaking seeking
comment on whether it should adopt additional rules in this area, including
extending certain regulations to include residential as well as commercial
buildings. The final result of this proceeding could affect the availability and
pricing of sites for our antennae and those of our competitors.
COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT
The Communications Assistance for Law Enforcement Act ("CALEA") enacted
in 1994, requires wireless personal communications service and other
telecommunications service providers to meet capability and capacity
requirements needed by federal, state and local law enforcement to preserve
their electronic surveillance capabilities. Wireless personal communications
service providers were generally required to comply with the current industry
CALEA capability standard, known as J-STD-025, by June 30, 2000, and with
certain additional standards by September 30, 2001. Wireless personal
communications service providers were also required to implement a "packet-mode"
capability by November 19, 2001. Providers had to meet various other capability
requirements established by the Department of Justice and Federal Bureau of
Investigation as of June 30, 2002. Most wireless personal communications service
providers are ineligible for federal reimbursement for the software and hardware
upgrades necessary to comply with the CALEA capability and capacity
requirements. In addition, the FCC is considering petitions from numerous
parties to establish and implement technical compliance standards pursuant to
CALEA requirements. In sum, CALEA capability and capacity requirements are
likely to impose some additional switching and network costs upon Sprint and its
managers and PCS Affiliates and other wireless entities.
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The USA Patriot Act of 2001 included certain provisions that enable law
enforcement agencies and other branches of the government to more easily acquire
records and information regarding certain uses of communications facilities from
telecommunications carriers, including PCS carriers.
OTHER FEDERAL REGULATIONS
Sprint and its managers and PCS Affiliates must bear the expense of
compliance with FCC and Federal Aviation Administration regulations regarding
the siting, lighting and construction of transmitter towers and antennas. In
addition, FCC environmental regulations may cause some of the Company's base
station locations to become subject to the additional expense of regulation
under the National Environmental Policy Act. The FCC is required to implement
this Act by requiring service providers to meet land use and radio emissions
standards.
REVIEW OF UNIVERSAL SERVICE REQUIREMENTS
The FCC and certain states have established "universal service"
programs to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that Sprint's "contribution" to the federal universal service program
is a variable percentage of "end-user telecommunications revenues." Although
many states are likely to adopt a similar assessment methodology, the states are
free to calculate telecommunications service provider contributions in any
manner they choose as long as the process is not inconsistent with the FCC's
rules. At the present time it is not possible to predict the extent of the
Sprint total federal and state universal service assessments or its ability to
recover from the universal service fund. However, some wireless entities are
seeking state commission designation as "eligible telecommunications carriers,"
enabling them to receive federal and state universal service support, and are
preparing to compete aggressively with wireline telephone companies for
universal service revenue. Because we manage substantial rural areas for the PCS
Division of Sprint, it is possible that we will receive revenues in the future
from federal and state universal service support funds that are much greater
than the reductions in our revenues due to universal service contributions paid
by Sprint.
PARTITIONING; DISAGGREGATION
FCC rules allow broadband wireless personal communications services
licensees to partition their market areas and/or to disaggregate their assigned
spectrum and to transfer partial market areas or spectrum assignments to
eligible third parties. These rules may enable us to purchase wireless personal
communications service spectrum from Sprint and other wireless personal
communications services licensees as a supplement or alternative to the existing
management arrangements.
WIRELESS FACILITIES SITING
States and localities are not permitted to regulate the placement of
wireless facilities so as to "prohibit" the provision of wireless services or to
"discriminate" among providers of those services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. These rules are
designed to make it possible for Sprint and its managers and Network Partners
and other wireless entities to acquire necessary tower sites in the face of
local zoning opposition and delays. The FCC is considering numerous requests for
preemption of local actions affecting wireless facilities siting.
EQUAL ACCESS
Wireless providers are not required to provide long distance carriers
with equal access to wireless customers for the provision of toll services. This
enables us and Sprint to generate additional revenues by reselling the toll
services of Sprint PCS and other interexchange carriers from whom we can obtain
favorable volume discounts. However, the FCC is authorized to require unblocked
access to toll service providers subject to certain conditions.
STATE REGULATION OF WIRELESS SERVICE
Section 332 of the Communications Act preempts states from regulating
the rates and entry of commercial mobile radio service providers. Section 332
does not prohibit a state from regulating the other terms and conditions of
commercial mobile services, including consumer billing information and
practices, billing disputes and other consumer
24
protection matters. However, states may petition the FCC to regulate those
providers and the FCC may grant that petition if the state demonstrates that:
o market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or
o such market conditions exist and commercial mobile radio service
is a replacement for a substantial portion of the landline
telephone service within the state.
To date, the FCC has granted no such petition. To the extent Sprint and
its managers and PCS Affiliates provide fixed wireless service, we may be
subject to additional state regulation. These standards and rulings have
prevented states from delaying the entry of wireless personal communications
services and other wireless carriers into their jurisdictions via certification
and similar requirements, and from delaying or inhibiting aggressive or flexible
wireless price competition after entry.
AVAILABLE INFORMATION
The Company's Internet address is www.alamosapcs.com. We make available
free of charge through our web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish such material to, the SEC. Information contained on the web
site is not part of this report.
ITEM 2. PROPERTIES.
Our headquarters are located in Lubbock, Texas and we lease space in a
number of locations, primarily for our retail stores, base stations and
switching centers. As of December 31, 2002, we leased 59 retail stores and 9
switching centers. As of December 31, 2002, we leased space on 1,465 towers and
owned 44 towers. We collocate with other wireless service providers on
approximately 42% of our towers. We believe that our facilities are adequate for
our current operations and that additional leased space can be obtained if
needed on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
Alamosa PCS Holdings, Inc. has been named as a defendant in a number of
purported securities class actions in the United States District Court for the
Southern District of New York, arising out of its initial public offering (the
"IPO"). Various underwriters of the IPO also are named as defendants in the
actions. The action against Alamosa PCS Holdings, Inc. is one of more than 300
related class actions which have been consolidated and are pending in the same
court. The complainants seek to recover damages and allege, among other things,
that the registration statement and prospectus filed with the Securities and
Exchange Commission for purposes of the IPO were false and misleading because
they failed to disclose that the underwriters allegedly (i) solicited and
received commissions from certain investors in exchange for allocating to them
shares of common stock in connection with the IPO, and (ii) entered into
agreements with their customers to allocate such stock to those customers in
exchange for the customers agreeing to purchase additional Alamosa PCS Holdings,
Inc. shares in the aftermarket at pre-determined prices. On February 19, 2003,
the Court granted motions by Alamosa PCS Holdings, Inc. and 115 other issuers to
dismiss the claims under Rule 10b-5 of the Exchange Act which had been asserted
against them. The Court denied the motions by Alamosa PCS Holdings, Inc. and
virtually all of the other issuers to dismiss the claims asserted against them
under Section 11 of the Securities Act. We maintain insurance coverage which may
mitigate our exposure to loss in the event that this claim is not resolved in
our favor.
On January 23, 2001, Jerry Brantley, then President and COO of the
Company, terminated his employment with us at the unanimous request of the board
of directors. On April 29, 2002, Mr. Brantley initiated litigation against
Alamosa PCS Holdings, Inc. and our Chairman, David E. Sharbutt, in the District
Court of Lubbock County, Texas, 22nd Judicial District, alleging wrongful
termination among other things. On September 27, 2002, the Court entered an
Agreed Order Compelling Arbitration. The parties are in the process of selecting
a panel of three arbitrators. We believe that there is no basis for Mr.
Brantley's claim and intend to vigorously defend the lawsuit.
On January 8, 2003 a claim was made against Alamosa Holdings by
Southwest Antenna and Tower, Inc. ("SWAT") in the Second Judicial District
Court, County of Bernalillo, State of New Mexico, for monies due on an open
account. SWAT seeks to recover approximately $1.6 million from us relative to
work performed by SWAT during 2000 for Roberts Wireless Communications, LLC,
which was acquired by us in the first quarter of 2001. We are in the process of
gathering information relative to this claim and have recorded an
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estimated liability relative to this contingency in the consolidated financial
statements at December 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted under the reduced disclosure format pursuant to General
Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
We are a wholly owned subsidiary of Alamosa PCS Holdings, Inc.