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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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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, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- --------------------------------------------------------------- ----------------------------------------
ALAMOSA (DELAWARE), INC. 12 7/8% SENIOR DISCOUNT NOTES DUE 2010 AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
There is currently no public market for the registrant's common stock.
As of March 9, 2004, 100 shares of common stock, par value $.01 per share, 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.........................................................................................24
ITEM 3. LEGAL PROCEEDINGS..................................................................................24
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.........................................50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................................................52
ITEM 9A. CONTROLS AND PROCEDURES............................................................................53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................53
ITEM 11. EXECUTIVE COMPENSATION.............................................................................53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................................................53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................................................53
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.............................................................53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...........................................................................................54
SIGNATURES...........................................................................................................56
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 population growth in our territory;
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,
include, but are not limited to:
o our dependence on our affiliation with Sprint;
o the ability of Sprint to alter the terms of our affiliation
agreements with it, including fees paid or charged to us and other
program requirements;
o our limited operating history and anticipation of future losses;
o our dependence on back office services, such as billing and
customer care, provided by Sprint;
o inaccuracies in financial information provided by Sprint;
o potential fluctuations in our operating results;
o our ability to predict future customer growth, as well as other
key operating metrics;
o changes or advances in technology;
o the ability to leverage 3G products and services;
o competition in the industry and markets in which we operate;
o subscriber credit quality;
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 our inability to predict the outcome of potentially material
litigation;
2
o the potential impact of wireless local number portability
("WLNP");
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
o effects of mergers and consolidations within the wireless
telecommunications industry and unexpected announcements or
developments from others in the wireless 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 set forth above.
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 exclusively 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, including Sprint PCS. Statements in this annual
report regarding Sprint or Sprint PCS are derived from information contained in
our agreements with Sprint, periodic reports and other documents filed by Sprint
and Sprint Spectrum L.P. with the U.S. Securities and Exchange Commission
("SEC") or press releases issued by Sprint. A "PCS Affiliate of Sprint" is an
entity whose sole or predominant business is operating (directly or through one
or more subsidiaries) a personal communications service business pursuant to
affiliation agreements with Sprint Spectrum L.P. and/or its affiliates, or their
successors. "Sprint PCS products and services" refer to digital wireless
personal communications services, including wireless voice and data services,
and related retail products, including handsets, in any case, offered under the
Sprint brand name.
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 ("POPs") are based on year-end 2000 population counts compiled by the
U.S. Census Bureau adjusted for annual population growth rate estimates provided
to us by Sprint.
OVERVIEW
We are the largest PCS Affiliate of Sprint in terms of subscribers. 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 portions of Texas, New Mexico, Arizona,
Colorado, Wisconsin, Arkansas, Illinois, Oklahoma, Kansas, Missouri, Washington
and Oregon. For the year ended December 31, 2003, we generated $631.1 million in
revenue, $55.7 million in cash flows from operating activities and reported a
net loss of $83.3 million. As of December 31, 2003, we had approximately 727,000
subscribers.
We launched Sprint wireless services in our first market in June 1999
and currently operate in the 88 basic trading areas ("BTAs") assigned to us
under our affiliation agreements with Sprint PCS. At December 31, 2003, our
network covered approximately 12.0 million POPs, or approximately 76% of the
total POPs in our markets. The number of residents covered by our network does
not represent the number of wireless subscribers that we serve or expect to
serve in our territory. Sprint PCS, along with its PCS Affiliates, operates a
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
POPs. Like Sprint PCS, we utilize code division multiple access ("CDMA")
technology across our portion of the PCS Network of Sprint. As of December 31,
2003, we have upgraded our network to CDMA 1xRTT in markets representing
approximately 96% of the covered POPs in our markets.
3
During the first quarter of 2001, we completed 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 PCS") 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
respective date of acquisition.
OUR BACKGROUND
We were formed in October 1999 to operate as a holding company and
closed our initial public offering in February 2000. On December 14, 2000, we
formed a new holding company and became a wholly-owned subsidiary of the new
holding company, which was named Alamosa PCS Holdings, Inc. ("Alamosa PCS
Holdings").
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, merged with and into Alamosa PCS Holdings, with Alamosa PCS
Holdings surviving the merger and becoming Alamosa Holdings' 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 common stock. We are a direct wholly owned
subsidiary of Alamosa PCS Holdings and an indirect wholly owned subsidiary of
Alamosa Holdings.
OUR RELATIONSHIP WITH SPRINT
Sprint PCS, along with its PCS Affiliates, operate 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.
The PCS network of Sprint uses CDMA technology nationwide. Sprint directly
operates its PCS network in major markets throughout the United States and has
entered into independent agreements with various companies such as us, under
which each has become a PCS Affiliate of Sprint and has agreed to construct and
manage PCS networks in smaller metropolitan areas and along major highways
designed to operate seamlessly with the nationwide PCS network of Sprint.
Pursuant to our affiliation agreements with Sprint PCS, we agreed to
provide network coverage to a minimum percentage of the POPs in our territory
within specified time periods. We believe we are in compliance with our network
build-out requirements and Sprint PCS' other program requirements. The build-out
of our territory has significantly extended Sprint PCS wireless coverage in the
Southwestern, Northwestern and Midwestern regions of the United States.
We believe that our affiliation with Sprint PCS allows us to offer high
quality, branded wireless voice and data services for a lower cost and lower
capital requirements than would otherwise be possible and to also benefit from
Sprint PCS':
o MARKETING - We market Sprint PCS products and services through Sprint
PCS' existing relationships with major national retailers under the
highly recognizable Sprint and Sprint PCS brand names.
o NATIONAL NETWORK - Our subscribers can immediately access Sprint PCS'
national network, which includes over 300 major metropolitan areas.
o ADVANCED TECHNOLOGY - We believe that the CDMA technology used in our
network offers advantages in capacity and voice quality, as well as
access to advanced features such as Sprint PCS' suite of "PCS Vision"
products.
o HANDSET AVAILABILITY AND PRICING - Sprint PCS' purchasing leverage
allows us to acquire handsets more quickly and at a lower cost than we
could without our affiliation with Sprint.
o NATIONAL RESELLER AGREEMENTS - We receive additional revenue as a
result of Sprint PCS' relationships with wireless resellers, including
Virgin Mobile and, beginning in 2004, Qwest Wireless, when customers of
those resellers use our portion of the PCS network of Sprint.
4
MARKETS
We believe we operate in highly attractive markets. We believe our
markets are attractive for a number of reasons:
o FEWER COMPETITORS MARKET-BY-MARKET - Because we operate in less
populated markets, we believe that we face fewer competitors in
most markets in our territory than wireless providers that
operate in more urban areas typically face.
o PROXIMITY TO LARGE U.S. URBAN CENTERS - Our territory is located
near or around several large U.S. urban centers, including
Dallas, Denver, Kansas City, Milwaukee, Minneapolis, Oklahoma
City, Phoenix, Portland, St. Louis, San Antonio, Seattle, Tulsa
and Wichita. This has led to a favorable ratio of wireless
subscribers based outside of our territory using our portion of
the PCS network of Sprint as compared to our subscribers using
wireless communications networks outside our territory.
o ATTRACTIVE ROAMING AND TRAVEL CHARACTERISTICS - Given the rural
nature of many of our markets and our extensive coverage of the
major and secondary highways in our markets, we have
consistently received significant roaming revenue from wireless
subscribers using our portion of the PCS network of Sprint.
o HIGH POPULATION GROWTH MARKETS - The overall population growth in
our territory has been above the national average over the past
five years.
The following table lists the location, BTA number, megahertz ("MHz")
of spectrum and estimated total residents for each of the BTAs that comprise our
territory under our affiliation agreements with Sprint PCS as of December 31,
2003. The number of estimated covered residents does not represent the number of
wireless subscribers that we expect to be based in our territory.
ESTIMATED TOTAL ESTIMATED COVERED
LOCATION BTA NO.(1) MHZ OF SPECTRUM POPs (2) POPs (3)
- ----------------------------------------------------------------------------------------------------------
ARKANSAS
Fayetteville-Springdale-Rogers .... 140 30 346,200
Fort Smith ........................ 153 30 331,600
Little Rock (4) ................... 257 30 15,700
Russellville ...................... 387 30 100,400
-------
793,900 645,000
ARIZONA
Flagstaff ......................... 144 30 119,700
Las Vegas, NV (Arizona side) (4) .. 245 30 157,100
Prescott .......................... 362 30 181,800
Phoenix (4) ....................... 347 30 110,500
Sierra Vista-Douglas .............. 420 30 121,000
Tucson (4) ........................ 447 30 2,000
Yuma .............................. 486 30 169,900
-------
862,000 626,600
CALIFORNIA
El Centro-Calexico .............. 124 30 151,500
San Diego (4) ................... 402 30 1,000
-------
152,500 139,600
COLORADO
Colorado Springs (4) ............ 89 30 1,300
Farmington, NM-Durango, CO ..... 139 20 217,100
Grand Junction ................. 168 30 257,500
Pueblo ......................... 366 30 320,100
-------
796,000 464,100
ILLINOIS
Carbondale-Marion ............... 67 30 214,800 137,000
KANSAS
Pittsburgh-Parsons .............. 349 30 92,100
Emporia ........................ 129 30 47,900
Hutchinson (4) .................. 200 30 29,600
Manhattan-Junction City ......... 275 30 117,300
Salina .......................... 396 30 143,800
-------
430,700 253,300
5
MINNESOTA
La Crosse, WI-Winona, MN ....... 234 30 324,100
Minneapolis-St. Paul (4) ....... 298 30 85,200
-------
409,300 259,000
MISSOURI
Cape Girardeau-Sikeston ......... 66 30 190,200
Columbia ........................ 90 30 220,200
Jefferson City .................. 217 30 167,100
Kirksville ...................... 230 30 57,400
Poplar Bluff .................... 355 30 154,500
Quincy, IL-Hannibal ............. 367 30 185,700
Rolla ........................... 383 30 105,400
St. Joseph ...................... 393 30 196,900
Sedalia ......................... 414 30 80,500
Springfield ..................... 428 30 682,400
West Plains ..................... 470 30 78,300
Kansas City (4).................. 226 30 16,800
---------
2,135,400 1,465,600
NEW MEXICO
Albuquerque ..................... 8 20 851,500
Carlsbad ........................ 68 10 51,700
Clovis .......................... 87 30 76,000
Gallup .......................... 162 10 146,000
Hobbs ........................... 191 30 55,500
Roswell ......................... 386 10 82,300
Santa Fe ........................ 407 20 225,900
Las Cruces ...................... 244 10 258,400
---------
1,747,300 1,407,500
OKLAHOMA
Joplin, MO-Miami ................ 220 30 251,000
Ada ............................. 4 30 54,300
Ardmore ......................... 19 30 91,500
Bartlesville .................... 31 30 49,100
Enid ............................ 130 30 85,700
Lawton-Duncan ................... 248 30 181,300
McAlester ....................... 267 30 55,100
Muskogee ........................ 311 30 166,500
Oklahoma City (4) ............... 329 30 418,300
Ponca City ...................... 354 30 49,800
Stillwater ...................... 433 30 80,000
Tulsa (4) ....................... 448 30 192,200
---------
1,674,800 1,292,100
OREGON
Bend ............................ 38 30 166,400
Coos Bay-North Bend ............. 97 30 84,700
Klamath Falls ................... 231 30 81,700
Medford-Grants Pass ............. 288 30 266,200
Portland (4) .................... 358 30 82,600
Roseburg ........................ 385 30 101,200
Walla Walla, WA-Pendleton, OR.... 460 30 178,600
-------
961,400 699,000
TEXAS
Eagle Pass-Del Rio .............. 121 30 121,100
El Paso ......................... 128 20 766,500
Laredo .......................... 242 30 232,400
Wichita Falls ................... 473 30 224,000
Abilene ......................... 3 30 263,500
Amarillo ........................ 13 30 416,500
Big Spring ...................... 40 30 36,100
Lubbock ......................... 264 30 411,100
Midland ......................... 296 30 122,000
Odessa .......................... 327 30 210,000
San Angelo ...................... 400 30 162,600
---------
2,965,800 2,546,500
WASHINGTON
Kennewick-Pasco-Richland......... 228 30 199,800
Wenatchee ....................... 468 30 222,500
Yakima .......................... 482 30 263,500
-------
685,800 558,700
WISCONSIN
Appleton-Oshkosh ................ 18 20 461,200
6
Eau Claire ...................... 123 30 197,400
Fond du Lac ..................... 148 20 98,100
Green Bay ....................... 173 20 362,600
Madison (4) ..................... 272 20 147,100
Manitowoc ....................... 276 20 83,100
Milwaukee (4) ................... 297 30 87,300
Sheboygan ....................... 417 20 113,600
Stevens Point-Marshfield-Wisconsin
Rapids ........................ 432 30 217,400
Wausau-Rhinelander .............. 466 30 247,700
----------
2,015,500 1,517,200
---------- ----------
TOTAL ........................... 15,845,200 12,011,200
========== ==========
(1) BTA No. refers to the basic trading area number assigned to that market
by the Federal Communications Commission (in alphabetical order by
name) for the purposes of issuing licenses for wireless services.
(2) Estimated total POPs is based on estimates of 2000 population counts
compiled by the U.S. Census Bureau adjusted by published population
growth rate estimates provided to us by Sprint.
(3) Estimated covered POPs 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 rate estimates provided to us
by Sprint.
(4) Total POPs and covered POPs for these markets reflect only those POPs
contained in our licensed territory within the BTA, not the total POPs
or covered POPs in the entire BTA.
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
certain other PCS networks utilizing similar CDMA technology. 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 real-time notification to our designated personnel.
As of December 31, 2003, our portion of the PCS network of Sprint
included 1,557 base stations and nine switching centers.
PRODUCTS AND SERVICES
We offer wireless voice and data products and services throughout our
territories under the Sprint brand name. Our services are typically designed to
align with the service offerings of Sprint PCS 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 over 300 major metropolitan
areas across the United States. Dual-band/dual-mode or tri-mode handsets allow
roaming on other wireless networks where Sprint has roaming agreements.
7
THIRD GENERATION SERVICES - We believe 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 markets 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. PCS Vision is
Sprint's suite of products designed to utilize 3G services and allows our
subscribers to use their PCS Vision-enabled devices to check 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 Pay. 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 is 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.
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 PCS
Affiliates of Sprint 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 roaming,
when Sprint wireless subscribers based outside of our territory use our portion
of the PCS network of Sprint, and outbound roaming, when our subscribers use the
PCS network of Sprint outside of our territory. We have a reciprocal per minute
fee with Sprint for inbound and outbound Sprint PCS roaming. The reciprocal
rate, which initially was 20 cents per minute, has been periodically reduced by
Sprint and is currently 5.8 cents per minute. We have negotiated an agreement
with Sprint whereby the rate is fixed at the current 5.8 cents per minute rate
through December 31, 2005. Thereafter, the rate will be calculated based upon a
predetermined formula specified in our affiliation agreements with Sprint PCS.
Our ratio of inbound to outbound roaming with Sprint was approximately 1.14 to 1
in 2003 and is expected to decline to approximately 1 to 1 over time. Sprint PCS
roaming revenue is not subject to the 8% affiliation fee that Sprint retains on
revenues billed to subscribers based in our territory.
In addition to the reciprocal per minute fee for the Sprint PCS roaming
discussed above, we also recognize roaming revenue and expense related 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. For 2003, this rate
was $0.0014 per Kb, and we have negotiated an agreement with Sprint PCS whereby
the rate will remain at $0.0014 per Kb through December 31, 2005. Thereafter the
rate will be calculated based upon a predetermined formula specified in our
affiliation agreements with Sprint PCS.
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. Sprint negotiates the roaming agreements with
these other wireless service providers. These wireless service providers must
pay fees for their subscribers' use of our network, and as part of our revenues,
we are entitled to 92% of these fees. Currently, pursuant to our services
agreements with Sprint PCS, Sprint bills these wireless service providers for
these roaming 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 PCS then bills our subscriber for
use of that provider's network at rates specified in their contract and pays
8
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.
RESELLER AGREEMENTS - We also recognize revenue from subscribers of
various wholesale resellers of personal communications service when those
subscribers use our portion of the PCS network of Sprint. These reseller
agreements are negotiated by Sprint, and we receive a per-minute rate for each
minute that the subscribers of these resellers use our portion of the PCS
network of Sprint. These subscribers may be based within or outside our
territory. Currently, we receive wholesale revenue from a reseller agreement
between Sprint and Virgin Mobile. Sprint recently announced an agreement with
Qwest Wireless to transition Qwest's subscribers to Sprint's network on a
wholesale basis. We expect that Qwest subscribers in our territory will be
transitioned during 2004, at which point we will receive per minute wholesale
revenue from Qwest for usage by Qwest subscribers.
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 Sprint PCS products and services on a local level in
our markets at our cost. We have the right to use any promotion or advertising
materials developed by Sprint and only have to pay the incremental cost of using
those materials, such as the cost of local radio and television advertisement
placements, and material costs and incremental printing costs. We also benefit
from any advertising or promotion of Sprint PCS products and services by third
party retailers in our territory, such as RadioShack 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, 2003, we owned and operated
61 Sprint stores at various locations within our markets. These stores provide
us with a local presence and visibility in the markets within our territory.
Following the Sprint model, these stores are designed to facilitate retail
sales, subscriber activation, bill collection and customer service. In addition
to retail stores that we operate, we began to enter into agreements with
exclusive agents in 2003 which operate Sprint stores in our territory to further
expand our distribution channels. These "branded stores" function similarly to
our company-operated stores but are operated by third parties. These third
parties purchase equipment from us and resell it to the consumer, for which the
third party receives compensation in the form of commissions. As of December 31,
2003, we had 36 of these branded stores operating in our territory.
NATIONAL THIRD PARTY RETAIL STORES - Sprint has national distribution
agreements with various national retailers such as RadioShack and Best Buy for
such retailers to sell Sprint PCS products. These national agreements cover
retailers' stores in our territory, and as of December 31, 2003, these retailers
had approximately 580 locations in our territory.
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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. Local indirect agents purchase handsets and
other PCS retail equipment from us and market PCS services from Sprint on our
behalf. These local indirect agents may also market wireless telecommunications
services provided by other carriers as well. We are responsible for managing
this distribution channel and as of December 31, 2003 these local indirect
agents had approximately 209 locations within our licensed territory. We
compensate local indirect agents through commissions for subscriber activations.
ELECTRONIC COMMERCE - Sprint PCS maintains an Internet site,
www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to the Sprint 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 Sprint PCS
Internet site.
DISTRIBUTION MIX - During 2003, our distribution mix approximated:
Sprint retail stores 43%
National retailers 28
Local indirect agents (including branded stores) 12
Other 17
------
100%
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SEASONALITY
Our business is subject to seasonality because the wireless
telecommunications industry is heavily dependent on calendar 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 Federal Communications Commission ("FCC")
allocated the 1900 MHz frequency block of the radio spectrum for wireless
personal communications services. Wireless personal communications services
differ from original analog cellular telephone service principally in that
wireless personal communications services systems operate at a higher frequency
and employ advanced digital technology. Analog-based networks send signals in
which the transmitted signal resembles the input signal, the caller's voice.
Digital networks convert voice or data signals into a stream of digits that
permit a single radio channel to carry multiple simultaneous transmissions.
Digital networks also achieve greater frequency reuse than analog networks
resulting in greater capacity than analog networks. 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 networks. Digital wireless personal
communications networks 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 networks but are incompatible with each other. CDMA is
incompatible with both GSM and TDMA networks. Accordingly, a subscriber of a
network that utilizes CDMA technology is unable to use a CDMA handset when
traveling in an area not served by
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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 network in that area. The same issue would apply to users of
TDMA or GSM networks. All of the wireless personal communications services
operators now have dual-mode or tri-mode handsets available to their customers.
Because digital networks do not cover all areas in the country, these handsets
will remain necessary for segments of the subscriber base.
CDMA 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:
o GREATER CAPACITY - We believe, based on studies by CDMA manufacturers
and our experience since our inception, that CDMA networks can provide
network capacity that is approximately seven to ten times greater than
that of analog technology and approximately three times greater than
TDMA and GSM digital networks.
o PRIVACY AND SECURITY - CDMA technology combines a constantly changing
coding scheme with a low power signal to enhance call security and
privacy.
o SOFT HAND-OFF - CDMA networks 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.
o 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 networks, CDMA-based networks 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.
o 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.
o EFFICIENT MIGRATION PATH - We believe that CDMA technology has an
efficient and incremental migration path to next generation voice and
data services. Unlike technologies that require essentially a
replacement investment to upgrade, CDMA upgrades can be completed
incrementally. The first step - conversion to 1XRTT - was completed in
2002 in approximately 96% of our covered territory 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 telecommunications 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 ALLTEL, AT&T Wireless Services, Cingular Wireless, Nextel
Communications, Nextel Partners, T-Mobile and Verizon Wireless. While we compete
with one or more wireless carriers in each of the markets in our territory, none
of these wireless service providers provide services in all of the markets in
our territory.
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. As described previously in this section, Virgin Wireless and Qwest
Wireless have agreements with Sprint to act as resellers in our territory.
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 networks 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
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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 networks. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Many of our competitors have significantly greater financial and
technical resources and larger subscriber bases than we do. 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 that
are competitive with those offered by 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.
The FCC has mandated that wireless carriers provide for WLNP beginning
on November 24, 2003 in markets within the 100 largest metropolitan statistical
areas ("MSAs"). WLNP allows subscribers to keep their wireless phone number when
switching to a different service provider, which could make it easier for
competing providers to market their services to our existing users. WLNP makes
customer defections more likely, and we may be required to increase subsidies
for product upgrades and/or reduce pricing to match competitors' initiatives in
an effort to retain customers or replace those who switch to other carriers.
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 Sprint's nationwide network;
o our network coverage and reliability; and
o the benefits of 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 territory. Under the terms of our trademark and service mark license
agreements with Sprint PCS, we do not pay a royalty fee for the use of the
Sprint brand name and Sprint service marks.
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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 territory. In all
other instances, Sprint reserves the right to use the licensed marks in
providing its services within or outside our territory.
Our trademark license and service mark agreements with Sprint PCS
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 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, 2003, we employed 817 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
Each PCS Affiliate of Sprint enters into four major affiliation
agreements with Sprint PCS:
o a management agreement;
o a services agreement; and
o two trademark and service mark license agreements with different
Sprint entities.
We entered into one set of these agreements for our markets in the
Southwestern part of the United States and another set of these agreements for
our markets in Wisconsin. Roberts entered into a set of these agreements for its
markets in Illinois, Kansas and Missouri, which we assumed pursuant to our
acquisition of Roberts. WOW entered into a set of these agreements for its
markets in Washington and Oregon, which we assumed pursuant to our acquisition
of WOW. Southwest PCS entered into a set of these agreements for its markets in
Oklahoma, Kansas, Texas and Arkansas, which we assumed pursuant to our
acquisition of Southwest PCS. Therefore, we now operate under five sets of
affiliation agreements with Sprint PCS. As used in this description, the term
"operating subsidiaries" refers to each of our subsidiaries that have entered
into affiliation agreements with Sprint PCS. Except as described herein, the
material terms of the affiliation agreements entered into by our operating
subsidiaries, including the amendments we recently entered into with Sprint PCS,
are substantially identical and apply to all of our territories.
Under our affiliation agreements with Sprint PCS, we have the exclusive
right to provide wireless mobility communications services using the 1900 MHz
frequency block under the Sprint brand name in our territory. Sprint holds the
spectrum licenses. Our affiliation agreements with Sprint PCS 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.
A breach or event of termination, as the case may be, under any of our
affiliation agreements with Sprint PCS 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 following is a description of the material terms and provisions of
our affiliation agreements with Sprint PCS.
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THE MANAGEMENT AGREEMENTS - Under our management agreements with Sprint PCS, we
have agreed to:
o own, construct and manage a wireless personal communications
services network in our territory in compliance with FCC license
requirements and other technical requirements contained in our
management agreements;
o distribute Sprint PCS products and services;
o use Sprint's and our own distribution channels in our territory;
o conduct advertising and promotion activities in our territory; and
o manage that portion of the wireless customer base assigned to our
territory.
Sprint has the right to supervise our wireless personal communications
services network operations and 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 territory. Sprint is prohibited from owning,
operating, building or managing another wireless mobility communications network
in our territory 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 territory and to permit resale of the
Sprint PCS products and services in our territory.
NETWORK BUILD-OUT - Our management agreements specify the terms of the
Sprint affiliation, including the required network build-out plan. We have
agreed by specified dates to cover a specified percentage of the population
within each of the markets that make up our territory. Our management agreements
also require us to reimburse Sprint one-half of the microwave clearing costs for
our territory. We believe we are in compliance with our network build-out
requirements and Sprint PCS' other program requirements.
If Sprint decides to expand the geographic size of the network coverage
within our territory, Sprint must provide us with written notice of the proposed
expansion.
Under our management agreements for our territories, with the exception
of the management agreement we assumed pursuant to our acquisition of WOW, 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 coverage in our markets covered by this
management agreement that exceeds the capacity and footprint parameters that
Sprint has adopted for all its comparable markets. This 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."
PRODUCTS AND SERVICES - Our management agreements identify the products
and services that we can offer in our territory. 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 Sprint PCS products and services. Under our management agreement
for our Wisconsin markets, 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 Sprint PCS product or service.
We may also sell services such as specified types of long distance
service, Internet access, handsets, and prepaid phone cards with Sprint 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 incumbent
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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 incumbent local exchange carrier in a vast majority of the
markets in our territory.
NATIONAL SALES PROGRAMS - We must participate in the Sprint wireless
sales programs for sales to Sprint's corporate accounts and will pay the
expenses and receive the compensation from Sprint relative to sales to customers
of those accounts located in our territory. We must use Sprint's long distance
service, which we can buy at the best prices offered to comparably situated
Sprint wholesale customers of Sprint Corporation, which Sprint PCS acquires on
our behalf from Sprint Corporation. However, we may purchase private line
capacity for call routing directly from Sprint Corporation, if we can obtain
more favorable terms, and Sprint Corporation has agreed to provide us with such
capacity at the best price offered to similarly situated third parties. Under
our management agreements, we are prohibited from reselling long distance
service to other carriers, however we may (i) transport long distance calls for
customers, (ii) transport long distance calls for resellers when such resale is
subject to FCC mandate or when Sprint chooses to make such resale available, or
(iii) transport long distance calls for purposes of roaming.
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 territory, subject to Sprint's approval. We are entitled to receive a
weekly fee from Sprint equal to 92% of net "billed revenues" related to customer
activity less applicable write-offs. Outbound non-Sprint PCS roaming billed to
subscribers based in our territory, proceeds from the sales of handsets and
accessories and amounts collected with respect to taxes and proceeds from sales
of our products and services are not considered "billed revenues." Billed
revenues generally include all other customer account activity for Sprint PCS
products and services in our territory, which includes such activities billed
to, attributed to or otherwise reflected in customers' accounts. We are
generally entitled to 100% of the proceeds from customers for equipment and
accessories sold or leased by us and to 92% of any federal or state subsidies
attributable to our territory or customers. 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 territory enters our territory and uses our services, which is
offset against amounts we owe as expenses for every minute that our subscribers
use services outside our territory. 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 territory.
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 can decline to
implement any change in the program requirements if the change will:
o cause the combined peak negative cash flow of the operating
subsidiaries to be an amount greater than 3% of Alamosa Holdings'
enterprise value;
o when combined with all other changes in the program requirements
that we and the operating subsidiaries agree to implement, within
the prior 12 months, cause the combined peak negative cash flow of
the operating subsidiaries to be an amount greater than 5% of
Alamosa Holdings' enterprise value;
o cause a decrease in the forecasted 5-year discounted cash flow of
the operating subsidiaries of more than 3% on a net present value
basis; or
15
o when combined with all other changes in the program requirements
that we and the operating subsidiaries agree to implement, within
the prior 12 months, cause a decrease in the forecasted 5-year
discounted cash flow of the operating subsidiaries of more than 5%
on a net present value basis.
For determining whether a program requirement change will adversely
impact our operations, (i) generally, the negative impact to the operating
subsidiaries' cash flows from capital expenditures required to implement the
program requirement change relative to cash benefits from the change during a
comparable time period is compared to (ii) our "enterprise value," which the
amendments to our affiliation agreements with Sprint PCS define as the book
value of its outstanding debt and preferred stock, in addition to the fair
market value of our publicly traded equity, less cash.
Our management agreements set forth a dispute resolution process if
Sprint believes that we do not have the right to decline to implement a change
in the program requirements. In any event, we must implement a change in the
program requirements if Sprint agrees to compensate us for amounts in excess of
the criteria set forth above.
Notwithstanding the above, we have agreed to implement a change in
program requirements if the adjustment relates to a pricing plan or roaming
program and Sprint reasonably determines that the change must be implemented on
an immediate basis to respond to competitive market forces. If the change would
have exceeded one of the criteria set forth above, our management agreements
provide for appropriate compensation from Sprint to the extent such criteria is
exceeded.
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 Sprint PCS products and services
outside our territory 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 territory, we may not use the spectrum to offer Sprint PCS products
and services without prior written consent from Sprint.
INABILITY TO USE NON-SPRINT BRAND - We may not market, promote,
advertise, distribute, lease or sell any of the Sprint PCS products and services
on a non-branded, "private label" basis or under any brand, trademark or trade
name other than the Sprint brand, except for sales to resellers or as otherwise
permitted under the trademark and service mark license agreements.
TRANSFER OF THE PCS NETWORK - In conjunction with the sale of its
wireless PCS network, Sprint can sell, transfer or assign its wireless PCS
network and any of its FCC licenses to a third party if the third party agrees
to be bound by the terms of our management agreements and our services
agreements.
CHANGE IN CONTROL - Sprint PCS must consent to any transaction pursuant
to which we are no longer the "ultimate parent" of any of the operating
subsidiaries, but this consent cannot be unreasonably withheld.
RIGHTS OF FIRST REFUSAL - Sprint has rights of first refusal, without
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 are automatically effectuated unless either Sprint provides us or we
provide Sprint 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;
16
o an uncured breach under 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 territory 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 stockholder approval, to sell our operating
assets to Sprint for an amount equal to 72% of our "entire
business value;"
o require us to purchase, subject to governmental approval, the
licensed spectrum in our territory 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;"
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.
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 territory 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 clearing 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
17
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 ongoing 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 PCS;
o we own the spectrum and frequencies presently owned by Sprint and
subject to our affiliation agreements with Sprint PCS; and
o the valuation will not include any value for businesses not
directly related to the 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 agreements 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.
MOST FAVORED NATION CLAUSE - We generally have the right to amend our
management agreements or services agreements to obtain the most favorable terms
provided under a management agreement or services agreement between Sprint and a
PCS Affiliate of Sprint similarly situated to us if, prior to December 31, 2006,
Sprint amends the terms of any of those agreements to provide such terms. This
right is only effective, however, if we agree to accept all the terms and
conditions set forth in the other agreements and (i) those agreements were not
amended with a PCS Affiliate of Sprint solely because the affiliate owns the
spectrum on which its network operates (unless such PCS Affiliate of Sprint
acquired the spectrum from Sprint after September 1, 2003), (ii) the amendments
to those agreements were not compelled by a law or regulation inapplicable to
us, or (iii) the amendments to those agreements were not due to a change in a
build-out plan. Our management agreements provide that a PCS Affiliate of Sprint
similarly situated to us is one with three million or more covered POPs.
THE SERVICES AGREEMENTS
Our services agreements outline various back office services provided
by Sprint and available to us for an additional fee. We have agreed to obtain
certain services from Sprint until December 31, 2006. The services agreements
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set forth pricing terms and provide a process by which we and Sprint will
renegotiate the fees paid to Sprint every three years, with the first pricing
period ending on December 31, 2006. The prices currently in effect under our
services agreements are effective until December 31, 2006. If we wish to obtain
from a third party vendor a particular service that we currently obtain from
Sprint under our services agreements, we may do so after December 31, 2006 or at
the end of a subsequent three-year pricing period only if we provide Sprint with
notice at least 120 days before the end of such pricing period, and, in any
event, Sprint has a right of first refusal to provide the service on the same
terms and conditions as the third party vendor.
Some of the services available under our services agreements include:
billing, customer care, activation, credit card processing, handset logistics,
voicemail, directory assistance, roaming, interconnection, pricing, long
distance, handsets and clearinghouse for specified fees. We may develop an
independent capability with respect to certain of the services we obtain from
Sprint over time. Under our services agreements, 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
territory. Sprint must give us nine months notice if it will no longer offer any
service, and Sprint has agreed, in the event Sprint will discontinue a service
that we wish to continue to receive, to use commercially reasonable efforts to
help us provide the service ourself or find another vendor to provide the
service and to facilitate any transition.
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 Sprint PCS products and services. 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 provide assistance to Sprint in connection with
Sprint's enforcement of its 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 its 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.
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.
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The FCC has promulgated a series of rules, regulations and policies to,
among other things:
o grant or deny licenses for wireless personal communications
service frequencies;
o grant or deny wireless personal communications service license
renewals;
o rule on assignments and/or transfers of control of wireless
personal communications service licenses;
o govern the interconnection of wireless personal communications
service networks with other wireless and wireline service
providers;
o establish access and universal service funding provisions;
o establish service requirements such as enhanced 911 service;
o impose fines and forfeitures for violations of any of the FCC's
rules;
o regulate the technical standards of wireless personal
communications services networks; and
o govern certain aspects of the relationships between carriers and
customers, such as the use of personal information and number
portability.
Through rules that went into effect on January 1, 2003, 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. The FCC also eliminated its rule which
prohibited a party from owning interests in both cellular networks in the same
MSAs, though it retained the cross-interest prohibition for less populous Rural
Service Areas ("RSAs"). The FCC's new rules blur the "bright line" of 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 our stockholder's
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 PCS reflect management agreements that the parties believe meet the
FCC requirements for licensee control of licensed spectrum.
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If the FCC were to determine that our affiliation agreements with
Sprint PCS need to be modified to increase the level of licensee control, we
have agreed with Sprint 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.
WIRELESS PERSONAL COMMUNICATIONS SERVICES LICENSE RENEWAL
Wireless personal communications service licensees can renew their
licenses for additional ten-year terms. Wireless personal communications service
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford wireless personal communications services renewal applicants involved in
comparative renewal hearings with a "renewal expectancy." The renewal expectancy
is the most important comparative factor in a comparative renewal hearing and is
applicable if the wireless personal communications service renewal applicant
has:
o provided "substantial service" during its license term; and
o substantially complied with all applicable laws and FCC rules and
policies.
The FCC's rules define "substantial service" in this context as service
that is sound, favorable and substantially above the level of mediocre service
that might minimally warrant renewal. The FCC's renewal expectancy and
procedures make it very likely that Sprint 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. Interconnection agreements are negotiated on a
state-wide basis and are subject to state approval.
The FCC rules and rulings, as well as state proceedings, and a review
by courts of such rules and rulings directly impact the nature and cost of the
facilities necessary for interconnection of the PCS networks of Sprint with
local, national and international telecommunications networks. They 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
CMRS providers, including Sprint, are required to permit manual roaming
on their networks. 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. Since October 2000, the FCC has been 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 CMRS providers allow
customers to change service providers without changing telephone numbers, which,
for wireless service providers, is referred to as wireless local number
portability or WLNP. FCC regulations that require most CMRS providers implement
WLNP in the 100 largest metropolitan areas in the United States went into effect
on November 24, 2003. FCC regulations require most CMRS providers to be able to
deliver calls from their networks to ported numbers anywhere in the country and
contribute to the Local Number Portability Fund. We may be liable to Sprint for
any penalties that Sprint may be subject to if we are unable to comply with the
FCC's WLNP regulations within a reasonable period of time. Implementation of
WLNP has required wireless personal communications service providers like us and
Sprint to purchase more expensive switches and switch upgrades. However, it has
also enabled existing cellular customers to change to wireless personal
communications services without losing their existing wireless telephone
numbers, which has made it easier for wireless
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personal communications service providers to market their services to existing
cellular users. The existence of WLNP could adversely impact our business since
it makes customer defections more likely and we may not be able to replace
customers who have switched to other carriers.
FCC rules permit broadband wireless personal communications service and
other CMRS 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 PCS Affiliates and other wireless providers.
FCC rules require broadband personal communications services and other
CMRS providers to implement enhanced emergency 911 capabilities that provide the
location of wireless 911 callers to "Public Safety Answering Points." The FCC
has approved a plan proposed by Sprint under which Sprint began selling
specially equipped telephone handsets in 2001, with a rollout of such handsets
that continued until June 30, 2003, when all new handsets activated nationwide
must be specially equipped. 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 completed its PCS network
upgrade to support enhanced 911 service by December 31, 2002 and began 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;
and
o Utilities, including LECs, must afford telecommunications carriers
and cable service providers reasonable and nondiscriminatory
access to poles, conduits and rights-of-way 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 ensure that their facilities, equipment
and services are able to comply with authorized electronic surveillance by
federal, state and local law enforcement personnel. 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 who sought extensions of compliance
deadlines, including Sprint, are also required to implement a "packet-mode"
capability by January 30, 2004 unless the FCC acts on petitions seeking changes
in its rules. 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.
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.
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OTHER FEDERAL REGULATIONS
Sprint and its 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 PCS affiliates and
other wireless entities to acquire necessary tower sites in the face of local
zoning opposition and delays.
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 of 1934, as amended, preempts
states from regulating the rates and entry of commercial mobile radio service
providers. Section 332 does not prohibit a state from regulating the other terms
and conditions of commercial mobile services, including consumer billing
information and practices, billing disputes and other consumer protection
matters. However, states may petition the FCC to regulate those providers and
the FCC may grant that petition if the state demonstrates that:
o market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or
23
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 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.
INTERFERENCE TEMPERATURE
In November 2003, the FCC launched an inquiry aimed at establishing a
new paradigm for the determination of interference to wireless services.
Currently, interference measurements are based on transmitter operations. The
proposed "interference temperature" would take into account interactions between
transmitters and receivers, as well as all other elements of the radio frequency
environment. One goal of this proceeding is to create opportunities for other
transmitters, whether licensed or unlicensed, to operate in bands that are now
exclusively reserved for licensees, such as the personal communications service
frequencies used by Sprint. It is too early in this proceeding to determine what
effect, if any, this inquiry by the FCC will have on our business.
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.
The public may read and copy any materials the Company files with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of that site is www.sec.gov.
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, 2003, we leased 61 retail stores and nine
switching centers. As of December 31, 2003, we leased space on 1,506 towers and
owned 51 towers. We co-locate with other wireless service providers on
approximately 87% 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.
We have been named as a defendant in a number of purported securities
class actions in the United States District Court for the Southern District of
New York, arising out of our initial public offering (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The action
against us is one of more than 300 related class actions which have been
consolidated and are pending in the same court. The complainants seek to recover
damages and allege, among other things, that the registration statement and
prospectus filed with the SEC for purposes of the IPO were false and misleading
because they failed to disclose that the underwriters allegedly (i) solicited
and received commissions from certain investors in exchange for allocating to
them shares of common stock in connection with the IPO, and (ii) entered into
agreements with their customers to allocate such stock to those customers in
exchange for the customers agreeing to purchase additional Company shares in the
aftermarket at pre-determined prices. On February 19, 2003, the Court granted
motions by us and 115 other issuers to dismiss the claims under Rule 10b-5 of
the Exchange Act which had been asserted against them. The Court denied the
motions by us and virtually all of the other issuers to dismiss the claims
asserted against them under Section 11 of the Securities Act. We maintain
insurance coverage which may mitigate our exposure to loss in the event that
this claim is not resolved in our favor.
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The issuers in the IPO cases, including us, have reached an agreement
in principle with the plaintiffs to settle the claims asserted by the plaintiffs
against them. Under the terms of the proposed settlement, the insurance carriers
for the issuers will pay the plaintiffs the difference between $1 billion and
all amounts which the plaintiffs recover from the underwriter defendants by way
of settlement or judgment. Accordingly, no payment on behalf of the issuers
under the proposed settlement will be made by the issuers themselves. The claims
against the issuers will be dismissed, and the issuers and their officers and
directors will receive releases from the plaintiffs. Under the terms of the
proposed settlement, the issuers will also assign to plaintiffs certain claims
which they may have against the underwriters arising out of our IPO, and the
issuers will also agree not to assert certain other claims which they may have
against the underwriters, without plaintiffs' consent. The proposed settlement
is subject to agreement among the parties on final settlement documents and the
approval of the court. Prior to the approval of the court, certain parties have
the right to object to the terms of the settlement.
On January 23, 2001, our board of directors, in a unanimous decision,
terminated the employment of Jerry Brantley, then President and Chief Operating
Officer of the Company. On April 29, 2002, Mr. Brantley initiated litigation
against us and our Chairman, David E. Sharbutt in the District Court of Lubbock
County, Texas, 22nd Judicial District, alleging wrongful termination. In the
litigation, Mr. Brantley claims, among other things, that our termination of his
employment was without cause under his employment agreement rather than a
termination for non-performance. As such, Mr. Brantley's claim seeks money
damages for (i) severance pay equal to one year's salary at the time of his
termination, (ii) the value of certain unexercised stock options he owned at the
time of his termination, (iii) an allegedly unpaid bonus and (iv) exemplary
damages, as well as recovery of attorney's fees and costs. On September 27,
2002, the Court entered an Agreed Order Compelling Arbitration. A panel of three
arbitrators was selected. Mr. Brantley's claims against us and David Sharbutt,
including claims asserted in the Lubbock County lawsuit and in the arbitration,
were resolved pursuant to a settlement agreement dated February 6, 2004. The
settlement does not materially impact our consolidated financial statements or
our operations.
On January 8, 2003, a claim was made against us by Southwest Antenna
and Tower, Inc. ("SWAT") in the Second Judicial District Court, County of
Bernalillo, State of New Mexico, for monies due on an open account. SWAT sought
to recover approximately $2.0 million from us relating to work performed by SWAT
during 2000 for Roberts Wireless Communications, L.L.C., which was acquired by
us in the first quarter of 2001. This claim was settled for $875,000 during the
second quarter of 2003.
In November and December 2003 and January 2004, multiple lawsuits were
filed against Alamosa Holdings and David E. Sharbutt, our Chairman and Chief
Executive Officer and Kendall W. Cowan, our Chief Financial Officer. Steven
Richardson, our Chief Operating Officer, is also a named defendant in one of the
lawsuits. Each claim is a purported class action filed on behalf of a putative
class of persons who and/or entities that purchased Alamosa Holdings' securities
between January 9, 2001 and June 13, 2002, inclusive, and seeks recovery of
compensatory damages, fees and costs. The cases allege violations of Sections
10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder.
Additionally, certain of the suits allege violations of Sections 11, 12(a) and
15 of the Securities Act and seek recission or rescissory damages in connection
with Alamosa Holdings' November 2001 common stock offering. The suits allege,
among other things, that Alamosa Holdings' filings with the SEC and press
releases issued during the relevant period were false and misleading because
they failed to disclose and/or misrepresented that Alamosa Holdings allegedly
(i) was increasing its subscriber base by relaxing credit standards for new
customers, (ii) had been experiencing high involuntary disconnections from high
credit risk customers that allegedly produced tens of millions of dollars of
impaired receivables on its financial statements, and (iii) had experienced
lower subscription growth due to tightened credit standards that required
credit-challenged customers to pay deposits upon the initiation of services.
Each lawsuit was filed in the United Stated District Court for the Northern
District of Texas, in either the Lubbock Division or the Dallas Division. On
February 27, 2004, the lawsuits were consolidated into one action pending in the
United States District Court for the Northern District of Texas, Lubbock
Division. We believe that the defendants have meritorious defenses to these
claims and intend to vigorously defend these actions. No discovery has been
taken at this time, and the ultimate outcome is not currently predictable. There
can be no assurance that the litigation will be resolved in the defendants'
favor and an adverse resolution could adversely affect our financial condition.
On November 26, 2003, Core Group PC filed a claim against Alamosa PCS
and four other PCS