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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to ______
COMMISSION FILE NUMBER: 005--58523
ALAMOSA (DELAWARE), INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2843707
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5225 SOUTH LOOP 289, SUITE 120
LUBBOCK, TEXAS 79424
(Address of principal executive offices, including zip code)
(806) 722-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
There is currently no public market for the registrant's common stock.
As of May 4, 2004, 100 shares of common stock, par value $0.01 per share, of the
registrant were issued and outstanding.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-1 AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
ALAMOSA (DELAWARE), INC.
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited) 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA (DELAWARE), INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
MARCH 31, 2004 DECEMBER 31, 2003
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 133,600 $ 98,242
Restricted cash -- 1
Customer accounts receivable, net 40,136 28,034
Receivable from Sprint 15,290 22,947
Receivable from parent 290 1
Inventory 5,373 7,309
Prepaid expenses and other assets 11,354 9,763
Deferred customer acquisition costs 7,712 8,060
Deferred tax asset 4,572 4,572
-------------------- ---------------------
Total current assets 218,327 178,929
Property and equipment, net 428,348 434,840
Debt issuance costs, net 9,595 14,366
Intangible assets, net 438,950 448,354
Other noncurrent assets 5,636 6,393
-------------------- ---------------------
Total assets $ 1,100,856 $ 1,082,882
==================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 22,718 $ 33,166
Accrued expenses 35,490 37,325
Payable to Sprint 25,477 26,616
Interest payable 9,073 5,353
Deferred revenue 23,274 22,742
Current installments of capital leases 326 481
-------------------- ---------------------
Total current liabilities 116,358 125,683
-------------------- ---------------------
Long term liabilities:
Capital lease obligations 828 812
Other noncurrent liabilities 6,954 8,693
Deferred tax liability 15,376 15,379
Senior secured debt -- 200,000
Senior notes 720,425 464,424
-------------------- ---------------------
Total long term liabilities 743,583 689,308
-------------------- ---------------------
Total liabilities 859,941 814,991
-------------------- ---------------------
Commitments and contingencies (see Note 13) -- --
Stockholder's equity:
Preferred stock, $.01 par value; 1,000 shares authorized; no shares
issued -- --
Common stock, $.01 par value; 9,000 shares authorized,
100 and 100 shares issued and outstanding, respectively -- --
Additional paid-in capital 1,013,125 1,015,991
Accumulated deficit (772,085) (747,425)
Unearned compensation (125) (145)
Accumulated other comprehensive loss, net of tax -- (530)
-------------------- ---------------------
Total stockholder's equity 240,915 267,891
-------------------- ---------------------
Total liabilities and stockholder's equity $ 1,100,856 $ 1,082,882
==================== =====================
The accompanying notes are an integral part of the consolidated financial
statements.
3
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
2004 2003
--------------- ---------------
Revenues:
Subscriber revenues $ 124,746 $ 104,024
Roaming revenues 43,153 31,790
--------------- ---------------
Service revenues 167,899 135,814
Product sales 8,791 5,294
--------------- ---------------
Total revenues 176,690 141,108
--------------- ---------------
Costs and expenses:
Cost of service and operations (excluding non-cash
compensation of $2 and $4 for 2004 and 2003,
respectively) 86,216 79,317
Cost of products sold 19,783 12,844
Selling and marketing expenses (excluding non-cash
compensation of $2 and $4 for 2004 and 2003, respectively) 30,993 28,146
General and administrative expenses (excluding non-cash
compensation of $16 and $33 for 2004 and 2003,
respectively) 5,479 3,525
Depreciation and amortization 27,384 26,882
Impairment of property and equipment 306 360
Non-cash compensation 20 41
--------------- ---------------
Total costs and expenses 170,181 151,115
--------------- ---------------
Income (loss) from operations 6,509 (10,007)
Loss on debt extinguishment (13,101) --
Interest and other income 167 369
Interest expense (18,235) (26,537)
--------------- ---------------
Loss before income taxes (24,660) (36,175)
Income tax benefit -- 5,768
--------------- ---------------
Net loss $ (24,660) $ (30,407)
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2004 2003
---------------- ---------------
Cash flows from operating activities:
Net loss $ (24,660) $ (30,407)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Non-cash compensation 20 41
Non-cash interest expense (benefit) on derivative instruments 6 (114)
Non-cash accretion of asset retirement obligations 45 --
Provision for bad debts 1,935 6,500
Depreciation and amortization of property and equipment 17,980 16,865
Amortization of intangible assets 9,404 10,017
Amortization of financing costs included in interest expense 265 1,116
Amortization of discounted interest -- 99
Loss on debt extinguishment 13,101 --
Deferred tax benefit -- (5,768)
Interest accreted on discount notes 6,001 8,552
Impairment of property and equipment 306 360
(Increase) decrease in:
Receivables (6,669) 9,651
Inventory 1,936 2,275
Prepaid expenses and other assets (486) (1,930)
Increase (decrease) in:
Accounts payable and accrued expenses 1,112 (13,011)
---------------- ---------------
Net cash provided by operating activities 20,296 4,246
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 343 19
Purchases of property and equipment (24,218) (10,377)
Change in restricted cash 1 24,804
---------------- ---------------
Net cash provided by (used in) investing activities (23,874) 14,446
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of senior notes 250,000 --
Repayments of borrowings under senior secured debt (200,000) --
Debt issuance costs (8,059) --
Capital distribution to parent (2,866) (124)
Payments on capital leases (139) (210)
---------------- ---------------
Net cash provided by (used in) financing activities 38,936 (334)
---------------- ---------------
Net increase in cash and cash equivalents 35,358 18,358
Cash and cash equivalents at beginning of period 98,242 60,525
---------------- ---------------
Cash and cash equivalents at end of period $ 133,600 $ 78,883
================ ===============
Supplemental disclosure of non-cash financing and investing activities:
Asset retirement obligations capitalized 29 --
Change in accounts payable for purchases of property and equipment (12,110) (1,240)
The accompanying notes are an integral part of the consolidated financial
statements.
5
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except as noted)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheet at March 31, 2004, the
unaudited consolidated statements of operations for the three months
ended March 31, 2004 and 2003, the unaudited consolidated statements of
cash flows for the three months ended March 31, 2004 and 2003 and
related footnotes have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America. The financial information presented should be read
in conjunction with the audited consolidated financial statements as of
and for the year ended December 31, 2003. In the opinion of management,
the interim data includes all adjustments (consisting of only normally
recurring adjustments) necessary for a fair statement of the results
for the interim periods. Operating results for the three months ended
March 31, 2004 are not necessarily indicative of results that may be
expected for the year ending December 31, 2004.
Certain reclassifications have been made to prior period balances to
conform to current period presentation. Changes in restricted cash have
been reclassified from cash flows from financing activities to cash
flows from investing activities for all periods presented.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa (Delaware), Inc. is a direct wholly owned subsidiary of Alamosa
PCS Holdings, Inc. and an indirect wholly owned subsidiary of Alamosa
Holdings, Inc. ("Alamosa Holdings"). Alamosa Holdings was formed in
July 2000. Alamosa Holdings is a holding company and through its
subsidiaries provides wireless personal communications services,
commonly referred to as PCS, in the Southwestern, Northwestern and
Midwestern United States. Alamosa (Delaware), Inc. ("Alamosa
(Delaware)"), was formed in October 1999 under the name "Alamosa PCS
Holdings, Inc." to operate as a holding company in anticipation of its
initial public offering. On February 3, 2000, Alamosa (Delaware)
completed its initial public offering. Immediately prior to the initial
public offering, shares of Alamosa (Delaware) were exchanged for
Alamosa PCS, LLC's ("Alamosa LLC") membership interests, and Alamosa
LLC became wholly owned by Alamosa (Delaware). Alamosa (Delaware) and
its subsidiaries are collectively referred to in these consolidated
financial statements as the "Company," "we," "us" or "our."
On December 14, 2000, Alamosa (Delaware) formed a new holding company
pursuant to Section 251(g) of the Delaware General Corporation Law. In
that transaction, each share of Alamosa (Delaware) was converted into
one share of the new holding company, and the former public company,
which was renamed "Alamosa (Delaware), Inc." became a wholly owned
subsidiary of the new holding company, which was renamed "Alamosa PCS
Holdings, Inc."
On February 14, 2001, Alamosa Holdings became the new public holding
company of Alamosa PCS Holdings, Inc. ("Alamosa PCS Holdings") and its
subsidiaries pursuant to a reorganization transaction in which a wholly
owned subsidiary of Alamosa Holdings was merged with and into Alamosa
PCS Holdings. As a result of this reorganization, Alamosa PCS Holdings
became a wholly owned subsidiary of Alamosa Holdings, and each share of
Alamosa PCS Holdings common stock was converted into one share of
Alamosa Holdings common stock. Alamosa Holdings' common stock is quoted
on Nasdaq under the symbol "APCS." Alamosa (Delaware) is the issuer of
the outstanding public debt of Alamosa Holdings and its subsidiaries.
3. LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through
capital contributions from owners, through debt financing and through
proceeds generated from public offerings of common stock. The proceeds
from these transactions have been used to fund the build-out of the
Company's portion of the PCS network of Sprint, subscriber acquisition
costs and working capital.
6
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
While the Company has incurred substantial net losses since inception
and negative cash flows from operating activities through 2002, the
Company generated approximately $56 million and $20 million of cash
flows from operating activities for the year ended December 31, 2003
and the three months ended March 31, 2004, respectively. In November
2003, the Company completed a debt exchange that provided for
approximately $238 million of principal debt reduction.
As of March 31, 2004, the Company had $134 million in cash and cash
equivalents and believes that this cash on hand plus the additional
liquidity that it expects to generate from operations will be
sufficient to fund expected capital expenditures and to cover its
working capital and debt service requirements for at least the next 12
months.
The Company's future liquidity will be dependent on a number of factors
influencing its projections of operating cash flows, including those
related to subscriber growth, average revenue per user, average monthly
churn and cost per gross addition. Should actual results differ
significantly from these assumptions, the Company's liquidity position
could be adversely affected and it could be in a position that would
require it to raise additional capital which may or may not be
available on terms acceptable to the Company, if at all, and could have
a material adverse effect on the Company's ability to achieve its
intended business objectives.
4. STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock options. No
stock-based employee compensation cost related to option grants is
reflected in the consolidated statements of operations for the three
months ended March 31, 2004 or 2003, as all options granted by the
Company had an exercise price equal to or greater than the market value
of the underlying common stock of Alamosa Holdings on the date of
grant. Non-cash compensation expense reflected in the consolidated
statements of operations for the three month periods ended March 31,
2004 and 2003 relate to the vesting of shares of restricted Alamosa
Holdings stock awarded to officers and shares of Alamosa Holdings stock
awarded to directors and are not related to the granting of stock
options. The following table illustrates the effect on net loss if the
Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation.
------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003
---------------- ----------------
Net loss - as reported $ (24,660) $ (30,407)
Add: stock-based employee compensation
included in reported net loss, net of
related tax 20 41
Deduct: stock-based employee
compensation expense determined under
fair value method, net of related tax (1,178) (1,472)
---------------- ----------------
Net loss - pro forma $ (25,818) $ (31,838)
================ ================
5. ACCOUNTS RECEIVABLE
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable represents
amounts owed to the Company by subscribers for PCS service. The amounts
presented in the consolidated balance sheets are net of an allowance
7
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
for uncollectible accounts of $5.3 million and $6.0 million at March
31, 2004 and December 31, 2003, respectively.
RECEIVABLE FROM SPRINT - Receivable from Sprint in the accompanying
consolidated balance sheets consists of the following:
MARCH 31, 2004 DECEMBER 31, 2003
----------------------- -----------------------
Net roaming receivable $ 12,101 $ 13,071
Access and interconnect revenue receivable (payable) 89 (15)
Accrued service revenue 2,920 2,584
Service fee refund -- 6,418
Other amounts due from Sprint 180 889
----------------------- -----------------------
$ 15,290 $ 22,947
======================= =======================
Net roaming receivable includes net travel revenue due from Sprint
relative to PCS subscribers based outside of the Company's licensed
territory who utilize the Company's portion of the PCS network of
Sprint. The net roaming revenue receivable is net of amounts owed to
Sprint relative to the Company's subscribers who utilize the PCS
network of Sprint outside of the Company's licensed territory. In
addition, net roaming receivable also includes amounts due from Sprint,
which have been collected from other PCS providers for their customers'
usage of the Company's portion of the PCS network of Sprint.
Access and interconnect revenue receivable represents net amounts due
from Sprint for calls originated by a local exchange carrier ("LEC") or
an interexchange carrier ("IXC") that terminate on the Company's
network. Under the Company's affiliation agreements with Sprint, Sprint
collects this revenue from other carriers and remits 92% of those
collections to the Company. The $15 amount owed to Sprint at December
31, 2003 is the result of rate adjustments on previously collected
amounts.
Accrued service revenue represents the Company's estimate of airtime
usage and other charges that have been earned but not billed at the end
of the period.
Service fee refund due from Sprint at December 31, 2003 related to a
refund of fees paid to Sprint for services such as billing and customer
care. Under the previous agreements with Sprint, these fees were
determined at the beginning of each year based on estimated costs and
were adjusted based on actual costs incurred by Sprint in providing the
respective services. This process changed effective December 1, 2003
under the new agreements with Sprint as discussed in Note 12.
6. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation and
amortization of $203.9 million and $188.1 million at March 31, 2004 and
December 31, 2003, respectively.
7. ASSET RETIREMENT OBLIGATIONS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No.
143 requires the fair value of a liability for an asset retirement
obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. For the Company's leased telecommunications
facilities, primarily consisting of cell sites and switch site
operating leases and operating leases for retail and office space, the
Company has adopted SFAS No. 143 as of January 1, 2003.
8
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
As previously disclosed, upon adoption of SFAS No. 143, the Company had
concluded that, for its leased telecommunications facilities, a
liability could not be reasonably estimated due to (1) the Company's
inability to reasonably assess the probability of the likelihood that a
lessor would enforce the remediation requirements upon expiration of
the lease term and therefore its impact on future cash outflows, (2)
the Company's inability to estimate a potential range of settlement
dates due to its ability to renew site leases after the initial lease
expiration and (3) the Company's limited experience in abandoning cell
site locations and actually incurring remediation costs.
It is the Company's understanding that further clarification has been
provided by the Securities and Exchange Commission regarding the
accounting for asset retirement obligations and specifically relating
to factors to consider in determining the estimated settlement dates
and the probability of enforcement of the remediation obligation. Based
on this information, the Company revised certain of the estimates used
in its original analysis and calculated an asset retirement obligation
for its leased telecommunications facilities. The Company determined
that the aforementioned asset retirement obligations did not have a
material impact on its consolidated results of operations, financial
position or cash flows and recorded the asset retirement obligations in
the third quarter of 2003.
An initial asset retirement obligation of $1,213 was recorded and
classified in other non-current liabilities and a corresponding
increase in property and equipment of $1,213 were recorded in the third
quarter of 2003 relating to obligations that existed upon the adoption
of SFAS No. 143. The Company incurred additional asset retirement
obligations during the year ended December 31, 2003 and the three
months ended March 31, 2004 of $35 and $29, respectively, related to
new leases entered into. Included in costs of services and operations
in the Company's statement of operations for the year ended December
31, 2003 is a charge of $402 related to the cumulative accretion of the
asset retirement obligations as of the adoption of SFAS No. 143 as well
as an additional $163 in accretion recorded for the year ended December
31, 2003. Included in depreciation and amortization expenses in the
Company's statement of operations for the year ended December 31, 2003
is a charge of $364 related to the cumulative depreciation of the
related assets recorded at the time of the adoption of SFAS No. 143 as
well as an additional $123 in depreciation recorded for the year ended
December 31, 2003. For the three months ended March 31, 2004, the
Company recorded $45 in accretion of asset retirement obligations and
$31 in depreciation of the related assets. For purposes of determining
the asset retirement obligations, the Company has assigned a 100%
probability of enforcement to the remediation obligations and has
assumed an average settlement period of 20 years.
8. INTANGIBLE ASSETS
In connection with acquisitions completed during 2001, the Company
allocated portions of the respective purchase prices to identifiable
intangible assets consisting of (i) the value of the Sprint agreements
in place at the acquired companies and (ii) the value of the subscriber
base in place at the acquired companies.
The value assigned to the Sprint agreements is being amortized using
the straight-line method over the remaining original terms of the
agreements that were in place at the time of acquisition or
approximately 17.6 years. The value assigned to the subscriber bases
acquired is being amortized using the straight-line method over the
estimated life of the acquired subscribers, or approximately three
years.
9
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Intangible assets consist of:
MARCH 31, 2004 DECEMBER 31, 2003
------------------------ -----------------------
Sprint affiliate and other agreements $ 532,200 $ 532,200
Accumulated amortization (93,250) (85,692)
------------------------ -----------------------
Subtotal 438,950 446,508
------------------------ -----------------------
Subscriber base acquired 29,500 29,500
Accumulated amortization (29,500) (27,654)
------------------------ -----------------------
Subtotal -- 1,846
------------------------ -----------------------
Intangible assets, net $ 438,950 $ 448,354
======================== =======================
Amortization expense relative to intangible assets was $9,404 and
$10,017 for the three months ended March 31, 2004 and 2003,
respectively.
Aggregate amortization expense relative to intangible assets for the
periods shown will be as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 $ 32,079
2005 30,234
2006 30,234
2007 30,234
2008 30,234
Thereafter 295,339
---------------
$ 448,354
===============
9. LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
SENIOR NOTES:
12 7/8% Senior Discount Notes, net of discount $ 5,734 $ 5,556
12% Senior Discount Notes, net of discount 199,818 193,995
12 1/2% Senior Notes 11,600 11,600
13 5/8% Senior Notes 2,475 2,475
11% Senior Notes 250,798 250,798
8 1/2% Senior Notes 250,000 --
---------------- --------------
Total Senior Notes 720,425 464,424
SENIOR SECURED CREDIT FACILITY -- 200,000
---------------- --------------
TOTAL DEBT 720,425 664,424
Less current maturities -- --
---------------- --------------
LONG TERM DEBT, EXCLUDING CURRENT MATURITIES $ 720,425 $ 664,424
================ ==============
10
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
SENIOR NOTES
12 7/8% SENIOR DISCOUNT NOTES - The 12 7/8% Senior Discount Notes were
issued in February 2000, mature February 15, 2010, carry a coupon rate
of 12 7/8% and provide for interest deferral through February 15, 2005.
The 12 7/8% Senior Discount Notes will accrete to their $6,389 face
amount by February 8, 2005, after which, interest will be paid in cash
semiannually.
12% SENIOR DISCOUNT NOTES - The 12% Senior Discount Notes were issued
in November 2003, mature July 31, 2009, carry a coupon rate of 12% and
provide for interest deferral through July 31, 2005. The 12% Senior
Discount Notes will accrete to their $233 million face amount by July
31, 2005, after which, interest will be paid in cash semiannually.
12 1/2% SENIOR NOTES - The 12 1/2% Senior Notes were issued in January
2001, mature February 1, 2011 and carry a coupon rate of 12 1/2%,
payable semiannually on February 1 and August 1.
Approximately $59.0 million of the proceeds of the 12 1/2% Senior Notes
Offering were used by Alamosa (Delaware) to establish a security
account (with cash or U.S. government securities) to secure on a pro
rata basis the payment obligations under the 12 1/2% Senior Notes and
the 12 7/8% Senior Discount Notes. As of December 31, 2003, all of the
escrowed proceeds had been used in connection with payment of cash
interest.
13 5/8% SENIOR NOTES -The 13 5/8% Senior Notes were issued in August
2001, mature August 15, 2011 and carry a coupon rate of 13 5/8% payable
semiannually on February 15 and August 15. Approximately $39.1 million
of the proceeds of the 13 5/8% Senior Notes were used by Alamosa
(Delaware) to establish a security account to secure on a pro rata
basis the payment obligations under all of the Company's unsecured
borrowings. As of December 31, 2003, all of the escrowed proceeds had
been used in connection with payment of cash interest.
11% SENIOR NOTES - The 11% Senior Notes were issued in November 2003,
mature July 31, 2010 and carry a coupon rate of 11%, payable
semiannually on January 31 and July 31.
8 1/2% SENIOR NOTES - The 8 1/2% Senior Notes were issued in January
2004, mature January 31, 2012 and carry a coupon rate of 8 1/2% payable
semiannually on January 31 and July 31. The proceeds of these notes
were used to permanently repay the Company's senior secured credit
facility in January 2004 as discussed below and for general corporate
purposes.
SENIOR SECURED OBLIGATIONS
SENIOR SECURED CREDIT FACILITY - On February 14, 2001, Alamosa
Holdings, Alamosa (Delaware) and Alamosa Holdings, LLC, as borrower,
entered into a $280 million senior secured credit facility (the "Senior
Secured Credit Facility") with Citicorp USA, as administrative agent
and collateral agent; Toronto Dominion (Texas), Inc., as syndication
agent; Export Development Corporation ("EDC") as co-documentation
agent; First Union National Bank, as documentation agent; and a
syndicate of banking and financial institutions. On March 30, 2001, the
Senior Secured Credit Facility was amended to increase the facility to
$333 million. The Senior Secured Credit Facility was again amended in
August 2001 concurrent with the issuance of the 13 5/8% Senior Notes to
reduce the maximum borrowing to $225 million, consisting of a 7-year
senior secured 12-month delayed draw term loan facility of $200 million
and a 7-year senior secured revolving credit facility in an aggregate
principal amount of up to $25 million.
The weighted average interest rate on the outstanding borrowings under
this facility at December 31, 2003 was 4.69%. Alamosa Holdings, LLC was
also required to pay quarterly in arrears a commitment fee on the
unfunded portion of the commitment of each lender. The Company entered
into derivative hedging instruments
11
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
to hedge a portion of the interest rate risk associated with borrowings
under the Senior Secured Credit Facility, as discussed in Note 11.
At December 31, 2003, Alamosa Holdings, LLC had drawn $200 million
under the term portion of the Senior Secured Credit Facility. In
connection with the issuance of the 8 1/2% Senior Notes discussed
above, a portion of the proceeds from that issuance was used to
permanently repay the advances outstanding under the Senior Secured
Credit Facility and the facility was terminated in January 2004.
10. INCOME TAXES
The income tax benefit in 2003 represented the anticipated recognition
of the Company's deductible net operating loss carry forwards. This
benefit was being recognized based on an assessment of the combined
expected future taxable income of the Company and expected reversals of
the temporary differences from acquisitions closed in 2001. Due to the
Company's limited operating history and lack of positive taxable
earnings, a valuation allowance was established during 2003 as the
deferred tax asset was expected to exceed the deferred tax liabilities.
The establishment of this valuation allowance in the three months ended
March 31, 2003 resulted in an effective tax rate of 16 percent. For the
three months ended March 31, 2004, the expected tax benefit related to
net operating losses generated was fully offset by an increase in the
valuation allowance and the effective tax rate was zero.
11. HEDGING ACTIVITIES AND COMPREHENSIVE INCOME
The Company follows the provisions of SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" in its accounting for derivative
financial instruments and hedging activities. The statement requires
the Company to record all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value
through earnings. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivatives are either
recognized in earnings or are recognized in other comprehensive income
until the hedged item is recognized in earnings.
As of December 31, 2003, the Company had recorded $1,275 in "other
noncurrent liabilities" related to the fair value of derivative
instruments used for hedging purposes, including $856 representing
derivative instruments that qualified for hedge accounting under SFAS
No. 133. These instruments were settled for cash in January 2004 in
connection with the termination of the Senior Secured Credit Facility.
During the three month period ended March 31, 2004, the Company
recognized losses of $6 (net of income tax benefit of $3) in other
comprehensive income related to the change in fair value of these
derivative instruments from January 1, 2004 through the settlement of
the instruments. The balance of other comprehensive income related to
these derivative instruments was recognized in the first quarter of
2004 when the derivatives were terminated. The net other comprehensive
loss balance of $536 is included in the loss on debt extinguishment
recorded in the consolidated statement of operations for the three
months ended March 31, 2004.
During the three month period ended March 31, 2003, the Company
recognized a gain of $188 (net of income tax benefit of $115) in other
comprehensive income related to the change in fair values of derivative
instruments.
12
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Total comprehensive loss for the three months ended March 31, 2004 and
2003 is illustrated below:
THREE MONTHS ENDED MARCH 31
-------------------------------------
2004 2003
----------------- ----------------
Net loss $ (24,660) $ (30,407)
Change in fair values of
derivative instruments,
net of income tax expense
of $0 and $115,
respectively -- 188
----------------- ----------------
Comprehensive loss $ (24,660) $ (30,219)
================= ================
12. SPRINT AGREEMENTS
In accordance with the Company's affiliation agreements with Sprint,
Sprint provides the company various services including billing,
customer care, collections and inventory logistics. In addition, Sprint
bills the Company for various pass-through items such as commissions to
national retail merchants, handset subsidies on handsets activated in
the Company's territory but not sold by the Company and long distance
charges.
In 2003, the Company executed amendments to its affiliation agreements
with Sprint. The amendments, among other things, established fixed per
subscriber costs for services that the Company purchases from Sprint
through December 31, 2006 in the form of two new fees. The amendments
created a new combined service bureau fee, which consolidates numerous
fees that were previously settled separately, for back office services
such as billing and customer care. The combined service bureau fee was
set at $7.70 per average subscriber per month through December 31, 2006
and will be recorded in costs of services and operations in the
consolidated statement of operations. The amendments also created a new
per-activation fee, which consolidates numerous fees that were
previously settled separately, for marketing services, such as
subscriber activation and handset logistics. The per-activation fee
will be calculated as 5% of Sprint PCS' most recently reported cost per
gross addition and is applied to the actual number of gross subscriber
activations the Company experiences on a monthly basis through December
31, 2006. The per-activation fee will be recorded in selling and
marketing expenses in the consolidated statement of operations. In
March 2004 the Company exercised its rights under a most favored
nations clause in the Sprint agreements to implement the terms of an
agreement entered into between Sprint and another PCS Affiliate of
Sprint. As a result, the Company entered into new amendments that
increased the per-activation fee to 6.3% of Sprint PCS' most recently
reported cost per gross addition and decreased the price to the Company
on purchases of handsets and accessories. Additionally, the March 2004
amendments increased the reciprocal roaming rate for 3G services from
$0.0014 per Kb to $0.0020 per Kb and extended the fixed reciprocal
rates for voice and 3G data roaming through December 31, 2006.
In addition to the new fees, the amendments changed the methodology
used for settling cash received from subscribers. Historically, actual
weekly cash receipts were passed through to the Company by Sprint based
on a calculation of an estimate of the portion of that cash related to
the Company's activity. Under the new methodology, the Company receives
its portion of billed revenue (net of an 8% affiliation fee) less
actual written off accounts in the month subsequent to billing
regardless of when Sprint collects the cash from the subscriber. The
provisions of the amendments became effective on December 1, 2003 and
the Company has the right to evaluate subsequent amendments to the
affiliation agreements of other similarly situated PCS Affiliates of
Sprint and adopt the provisions of those amendments if the Company
elects to do so.
13
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Expenses reflected in the consolidated statements of
operations related to the Sprint affiliation agreements are:
THREE MONTHS ENDED MARCH 31
-------------------------------------
2004 2003
----------------- ----------------
Cost of service and operations $ 62,638 $ 52,568
Cost of products sold 19,783 12,844
Selling and marketing 10,394 12,909
----------------- ----------------
Total $ 92,815 $ 78,321
================= ================
In connection with the billing services provided to the Company by
Sprint, the Company relies on Sprint to provide information as to
monthly billing activity relative to all subscriber revenues. In
addition, Sprint provides the information utilized for the settlement
of all roaming revenue.
The Company relies upon Sprint as a service provider to provide
accurate information for the settlement of revenue and expense items.
The Company makes estimates used in connection with the preparation of
financial statements based on the financial and statistical information
provided by Sprint. The Company assesses the accuracy of this
information through analytic review and reliance on the service auditor
report on Sprint's internal control processes prepared by Sprint's
external service auditor. Inaccurate or incomplete data from Sprint in
connection with the services provided to the Company by Sprint could
have a material effect on the Company's financial position, results of
operation or cash flow.
13. COMMITMENTS AND CONTINGENCIES
LITIGATION - On January 23, 2001, the Company's board of directors, in
a unanimous decision, terminated the employment of Jerry Brantley, then
President and COO of the Company. On April 29, 2002, Mr. Brantley
initiated litigation against the Company and the Chairman of the
Company, David E. Sharbutt in the District Court of Lubbock County,
Texas, 22nd Judicial District, alleging wrongful termination. In the
litigation, Mr. Brantley claimed, among other things, that the
Company's termination of his employment was without cause under his
employment agreement rather than a termination for non-performance. As
such, Mr. Brantley's claim sought 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 attorneys' 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
the Company 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 the Company's consolidated financial statements
or our operations.
In November and December 2003 and January 2004, multiple lawsuits were
filed against Alamosa Holdings and David E. Sharbutt, the Company's
Chairman and Chief Executive Officer as well as Kendall W. Cowan, the
Company's Chief Financial officer. Steven Richardson, the Company's
Chief Operating Officer, was 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 rescission 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-
14
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
challenged customers to pay deposits upon the initiation of services.
Each lawsuit was filed in the United States 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. In March 2004, the Court
appointed the Massachusetts State Guaranteed Annuity Fund to serve as
lead plaintiff and approved its selection of lead counsel for the
consolidated action. The lead plaintiff has until May 18, 2004 to file
a consolidated complaint. The Company believes 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 the Company's
financial condition.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. The ultimate disposition of these
matters are not expected to have a material adverse impact on the
Company's financial position, results of operations or liquidity.
14. GUARANTOR FINANCIAL STATEMENTS
Set forth below are consolidating financial statements of the issuer
and guarantor subsidiaries and Alamosa Delaware Operations LLC which is
the Company's non-guarantor subsidiary (the "Non-Guarantor Subsidiary")
of the senior notes as of March 31, 2004 and December 31, 2003 and for
the three months ended March 31, 2004 and 2003. The guarantor
subsidiaries are all 100% owned by the Company and the guarantees are
full and unconditional. Separate financial statements of each guarantor
subsidiary have not been provided because management has determined
that they are not material to investors.
Alamosa Holdings is an additional guarantor with respect to the 12 7/8%
senior discount notes, the 12 1/2% senior notes and the 13 5/8% senior
notes. Separate financial statements for Alamosa Holdings have not been
provided as Alamosa Holdings is a holding company which does not
independently generate operating revenue. The consolidated financial
statements of Alamosa Holdings are included in its quarterly report on
Form 10-Q for the quarter ended March 31, 2004.
15
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
--------------- ---------------- ---------------- ---------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 59,953 $ 73,624 $ 23 $ -- $ 133,600
Customer accounts receivable, net -- 40,136 -- -- 40,136
Receivable from Sprint -- 15,290 -- -- 15,290
Intercompany receivable 47,263 -- 394 (47,657) --
Receivable from parent 290 -- -- -- 290
Inventory -- 5,373 -- -- 5,373
Investment in subsidiary 853,568 -- -- (853,568) --
Prepaid expenses and other assets -- 11,354 -- -- 11,354
Deferred customer acquisition costs -- 7,712 -- -- 7,712
Deferred tax asset -- 4,572 -- -- 4,572
--------------- ---------------- ---------------- ---------------- --------------
Total current assets 961,074 158,061 417 (901,225) 218,327
Property and equipment, net -- 428,348 -- -- 428,348
Debt issuance costs, net 9,595 -- -- -- 9,595
Intangible assets, net -- 438,950 -- -- 438,950
Other noncurrent assets -- 5,636 -- -- 5,636
--------------- ---------------- ---------------- ---------------- --------------
Total assets $ 970,669 $ 1,030,995 $ 417 $ (901,225) $ 1,100,856
=============== ================ ================ ================ ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 22,718 $ -- $ -- $ 22,718
Accrued expenses 256 35,234 -- -- 35,490
Payable to Sprint -- 25,477 -- -- 25,477
Interest payable 9,073 -- -- -- 9,073
Deferred revenue -- 23,274 -- -- 23,274
Intercompany payable -- 47,657 -- (47,657) --
Current installments of capital leases -- 326 -- -- 326
--------------- ---------------- ---------------- ---------------- --------------
Total current liabilities 9,329 154,686 -- (47,657) 116,358
Capital lease obligations -- 828 -- -- 828
Other noncurrent liabilities -- 6,954 -- -- 6,954
Deferred tax liability -- 15,376 -- -- 15,376
Senior notes 720,425 -- -- -- 720,425
--------------- ---------------- ---------------- ---------------- --------------
Total liabilities 729,754 177,844 -- (47,657) 859,941
--------------- ---------------- ---------------- ---------------- --------------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital 1,013,125 -- -- -- 1,013,125
LLC member's equity -- 853,151 417 (853,568) --
Accumulated deficit (772,085) -- -- -- (772,085)
Unearned compensation (125) -- -- -- (125)
--------------- ---------------- ---------------- ---------------- --------------
Total stockholder's equity 240,915 853,151 417 (853,568) 240,915
--------------- ---------------- ---------------- ---------------- --------------
Total liabilities and stockholder's
equity $ 970,669 $ 1,030,995 $ 417 $ (901,225) $ 1,100,856
=============== ================ ================ ================ ==============
16
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
--------------- ---------------- ---------------- ---------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 27,542 $ 70,677 $ 23 $ -- $ 98,242
Restricted cash 1 -- -- -- 1
Customer accounts receivable, net -- 28,034 -- -- 28,034
Receivable from Sprint -- 22,947 -- -- 22,947
Intercompany receivable 48,805 -- 394 (49,199) --
Receivable from parent 1 -- -- -- 1
Inventory -- 7,309 -- -- 7,309
Investment in subsidiary 658,874 -- -- (658,874) --
Prepaid expenses and other assets 194 9,569 -- -- 9,763
Deferred customer acquisition costs -- 8,060 -- -- 8,060
Deferred tax asset -- 4,572 -- -- 4,572
--------------- ---------------- ---------------- ---------------- --------------
Total current assets 735,417 151,168 417 (708,073) 178,929
Property and equipment, net -- 434,840 -- -- 434,840
Debt issuance costs, net 1,718 12,648 -- -- 14,366
Intangible assets, net -- 448,354 -- -- 448,354
Other noncurrent assets -- 6,393 -- -- 6,393
--------------- ---------------- ---------------- ---------------- --------------
Total assets $ 737,135 $ 1,053,403 $ 417 $ (708,073) $ 1,082,882
=============== ================ ================ ================ ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ -- $ 33,166 $ -- $ -- $ 33,166
Accrued expenses 257 37,068 -- -- 37,325
Payable to Sprint -- 26,616 -- -- 26,616
Interest payable 4,563 790 -- -- 5,353
Deferred revenue -- 22,742 -- -- 22,742
Intercompany payable -- 49,199 -- (49,199) --
Current installments of capital leases -- 481 -- -- 481
--------------- ---------------- ---------------- ---------------- --------------
Total current liabilities 4,820 170,062 -- (49,199) 125,683
Capital lease obligations -- 812 -- -- 812
Other noncurrent liabilities -- 8,693 -- -- 8,693
Deferred tax liability -- 15,379 -- -- 15,379
Senior secured debt -- 200,000 -- -- 200,000
Senior notes 464,424 -- -- -- 464,424
--------------- ---------------- ---------------- ---------------- --------------
Total liabilities 469,244 394,946 -- (49,199) 814,991
--------------- ---------------- ---------------- ---------------- --------------
Stockholder's Equity:
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital 1,015,991 -- -- -- 1,015,991
LLC member's equity -- 658,457 417 (658,874) --
Accumulated deficit (747,425) -- -- -- (747,425)
Unearned compensation (145) -- -- -- (145)
Accumulated other comprehensive
loss, net of tax (530) -- -- -- (530)
--------------- ---------------- ---------------- ---------------- --------------
Total stockholder's equity 267,891 658,457 417 (658,874) 267,891
--------------- ---------------- ---------------- ---------------- --------------
Total liabilities and stockholder's
equity $ 737,135 $ 1,053,403 $ 417 $ (708,073) $ 1,082,882
=============== ================ ================ ================ ==============
17
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
---------------- ---------------- ---------------- -------------- ----------------
Revenues:
Subscriber revenues $ -- $ 124,746 $ -- $ -- $ 124,746
Roaming revenues -- 43,153 -- -- 43,153
---------------- ---------------- ---------------- -------------- ----------------
Service revenues -- 167,899 -- -- 167,899
Product sales -- 8,791 -- -- 8,791
---------------- ---------------- ---------------- -------------- ----------------
Total revenues -- 176,690 -- -- 176,690
Costs and expenses:
Cost of services and operations -- 86,216 -- -- 86,216
Cost of products sold -- 19,783 -- -- 19,783
Selling and marketing -- 30,993 -- -- 30,993
General and administrative expenses 333 5,146 -- -- 5,479
Depreciation and amortization -- 27,384 -- -- 27,384
Impairment of property and equipment -- 306 -- -- 306
Non-cash compensation -- 20 -- -- 20
---------------- ---------------- ---------------- -------------- ----------------
Income (loss) from operations (333) 6,842 -- -- 6,509
Equity in loss of subsidiaries (6,764) -- -- 6,764 --
Loss on debt extinguishment -- (13,101) -- -- (13,101)
Interest and other income 91 76 -- -- 167
Interest expense (17,654) (581) -- -- (18,235)
---------------- ---------------- ---------------- -------------- ----------------
Loss before income tax benefit (24,660) (6,764) -- 6,764 (24,660)
Income tax benefit -- -- -- -- --
---------------- ---------------- ---------------- -------------- ----------------
Net loss $ (24,660) $ (6,764) $ -- $ 6,764 $ (24,660)
================ ================ ================ ============== ================
18
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
---------------- ------------ -------------- ------------ ------------
Revenues:
Subscriber revenues $ -- $104,024 $ -- $ -- $104,024
Roaming revenues -- 31,790 -- -- 31,790
--------- --------- -------------- --------- ---------
Service revenues -- 135,814 -- -- 135,814
Product sales -- 5,294 -- -- 5,294
--------- --------- -------------- --------- ---------
Total revenues -- 141,108 -- -- 141,108
Costs and expenses:
Cost of services and operations -- 79,317 -- -- 79,317
Cost of products sold -- 12,844 -- -- 12,844
Selling and marketing -- 28,146 -- -- 28,146
General and administrative expenses 88 3,437 -- -- 3,525
Depreciation and amortization -- 26,882 -- -- 26,882
Impairment of property and equipment -- 360 -- -- 360
Non-cash compensation -- 41 -- -- 41
--------- --------- -------------- --------- ---------
Loss from operations (88) (9,919) -- -- (10,007)
Equity in loss of subsidiaries (8,507) -- -- 8,507 --
Interest and other income 265 104 -- -- 369
Interest expense (22,077) (4,460) -- -- (26,537)
--------- --------- -------------- --------- ---------
Loss before income tax benefit (30,407) (14,275) -- 8,507 (36,175)
Income tax benefit -- 5,768 -- -- 5,768
--------- --------- -------------- --------- ---------
Net loss $(30,407) $(8,507) $ -- $8,507 $(30,407)
========= ========= ============== ========= =========
19
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------ ------------ ---------- ------------ ------------
Cash flows from operating activities:
Net loss $(24,660) $(6,764) $ -- $6,764 $(24,660)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Equity in loss of subsidiaries 6,764 -- -- (6,764) --
Non-cash interest expense on derivative instruments -- 6 -- -- 6
Non-cash accretion of asset retirement obligation -- 45 -- -- 45
Non-cash compensation expense -- 20 -- -- 20
Provision for bad debts -- 1,935 -- -- 1,935
Depreciation and amortization of property and
equipment -- 17,980 -- -- 17,980
Amortization of intangible assets -- 9,404 -- -- 9,404
Amortization of financing costs included in
interest expense 182 83 -- -- 265
Loss on debt extinguishment -- 13,101 -- -- 13,101
Interest accreted on discount notes 6,001 -- -- -- 6,001
Impairment of property and equipment -- 306 -- -- 306
(Increase) decrease in:
Receivables -- (6,669) -- -- (6,669)
Inventory -- 1,936 -- -- 1,936
Prepaid expenses and other assets 194 (680) -- -- (486)
Increase in:
Accounts payable and accrued expenses 4,509 (3,397) -- -- 1,112
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities (7,010) 27,306 -- -- 20,296
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of assets -- 343 -- -- 343
Purchases of property and equipment -- (24,218) -- -- (24,218)
Investment in subsidiary (200,908) 200,908 -- -- --
Change in restricted cash 1 -- -- -- 1
Change in intercompany balances 1,253 (1,253) -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities (199,654) 175,780 -- -- (23,874)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Issuance of senior notes 250,000 -- -- -- 250,000
Repayment of secured debt -- (200,000) -- -- (200,000)
Debt issuance costs (8,059) -- -- -- (8,059)
Capital distribution to parent (2,866) -- -- -- (2,866)
Payments on capital leases -- (139) -- -- (139)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 239,075 (200,139) -- -- 38,936
--------- --------- --------- --------- ---------
Net increase in cash and cash equivalents 32,411 2,947 -- -- 35,358
Cash and cash equivalents at beginning of period 27,542 70,677 23 -- 98,242
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $59,953 $73,624 $23 $ -- $133,600
========= ========= ========= ========= =========
20
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiary Eliminations Consolidated
------ ------------ ---------- ------------ ------------
Cash flows from operating activities:
Net loss $(30,407) $(8,507) $ -- $8,507 $(30,407)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Equity in loss of subsidiaries 8,507 -- -- (8,507) --
Non-cash compensation expense -- 41 -- -- 41
Provision for bad debts -- 6,500 -- -- 6,500
Non-cash interest benefit on derivative instruments -- (114) -- -- (114)
Depreciation and amortization of property and
equipment -- 16,865 -- -- 16,865
Amortization of intangible assets -- 10,017 -- -- 10,017
Amortization of financing costs included in
interest expense 504 612 -- -- 1,116
Amortization of discounted interest 99 -- -- -- 99
Deferred tax benefit -- (5,768) -- -- (5,768)
Interest accreted on discount notes 8,552 -- -- -- 8,552
Impairment of property and equipment -- 360 -- -- 360
(Increase) decrease in:
Receivables 838 8,813 -- -- 9,651
Inventory -- 2,275 -- -- 2,275
Prepaid expenses and other assets (18) (1,912) -- -- (1,930)
Decrease in:
Accounts payable and accrued expenses (12,872) (139) -- -- (13,011)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities (24,797) 29,043 -- -- 4,246
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sale of assets -- 19 -- -- 19
Purchases of property and equipment -- (10,377) -- -- (10,377)
Change in restricted cash 24,804 -- -- -- 24,804
Change in intercompany balances 8,569 (8,569) -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities 33,373 (18,927) -- -- 14,446
-------- -------- -------- -------- --------
Cash flows from financing activities:
Capital distribution to parent (124) -- -- -- (124)
Payments on capital leases -- (210) -- -- (210)
-------- -------- -------- -------- --------
Net cash used in financing activities (124) (210) -- -- (334)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents 8,452 9,906 -- -- 18,358
Cash and cash equivalents at beginning of period 17,821 42,681 23 -- 60,525
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $26,273 $52,587 $23 $ -- $78,883
======== ======== ======== ======== ========
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which can be identified by the use of
forward-looking terminology such as "may," "might," "could," "would," "believe,"
"expect," "intend," "plan," "seek," "anticipate," "estimate," "project" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. All statements other than statements of historical fact included in
this quarterly report on Form 10-Q regarding our financial position and
liquidity may be deemed to be forward-looking statements. These forward-looking
statements include:
o forecasts of population growth in our territory;
o statements regarding our anticipated revenues, expense levels,
liquidity, 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, are
further disclosed in our annual report on Form 10-K for the year ended December
31, 2003 under the sections "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Important factors that could cause actual results to differ materially from
those in the forward-looking statements 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 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 third generation 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;
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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 outcomes of potentially material
litigation;
o the potential impact of wireless local number portability, or
WLNP;
o changes in government regulation;
o future acquisitions;
o general economic and business conditions; and
o effects of mergers and consolidations within the
telecommunications industry and unexpected announcements or
developments from others in the telecommunications industry.
All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth above.
DEFINITIONS OF OPERATING METRICS
We discuss the following operating metrics relating to our business in
this section:
o ARPU, or average monthly revenue per user, is a measure used to
determine the monthly subscriber revenue earned for subscribers
based in our territory. This measure is calculated by dividing
subscriber revenues in our consolidated statement of operations by
our average daily subscribers during the period divided by the
number of months in the period.
o Average monthly churn is used to measure the rate at which
subscribers based in our territory deactivate service on a
voluntary or involuntary basis. We calculate average monthly churn
based on the number of subscribers deactivated during the period
(net of transfers out of our service area and those who
deactivated within 30 days of activation) as a percentage of our
average daily subscriber base during the period divided by the
number of months during the period.
o Licensed POPs represent the number of residents (usually expressed
in millions) in our territory in which we have an exclusive right
to provide wireless mobility communications services under the
Sprint brand name. The number of residents located in our
territory does not represent the number of wireless subscribers
that we serve or expect to serve in our territory.
o Covered POPs represent the number of residents (usually expressed
in millions) covered by our portion of the PCS network of Sprint
in our territory. 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.
GENERAL
As a PCS Affiliate of Sprint, we have the exclusive right to provide
wireless mobility communications services under the Sprint brand name in our
licensed territory. We own and are responsible for building, operating and
managing the portion of the PCS network of Sprint located in our territory. We
offer national plans designed by Sprint as well as local plans tailored to our
market demographics. Our portion of the PCS network of Sprint is designed to
offer a seamless connection with the 100% digital PCS nationwide wireless
network of Sprint. We market Sprint PCS products and services through a number
of distribution outlets located in our territory, including our own retail
stores, major national distributors and local third party distributors. At March
31, 2004, we had total licensed POPs of over 15.8 million, covered POPs of
approximately 12.1 million and total subscribers of approximately 773,000.
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We recognize revenues from our subscribers for the provision of
wireless telecommunications services, proceeds from the sales of handsets and
accessories through channels controlled by us and fees from Sprint and other
wireless service providers and resellers when their customers roam onto our
portion of the PCS network of Sprint. Sprint retains 8% of all service revenue
collected from our subscribers (not including products sales and roaming charges
billed to our subscribers) and all fees collected from other wireless service
providers and resellers when their customers use our portion of the PCS network
of Sprint. We report the amount retained by Sprint as an operating expense. In
addition, Sprint bills our subscribers for taxes, handset insurance, equipment
and Universal Service Fund charges and other surcharges which we do not record.
Sprint collects these amounts from the subscribers and remits them to the
appropriate entity.
As part of our affiliation agreements with Sprint, we have contracted
with Sprint to receive back office services such as customer activation, handset
logistics, billing, customer care and network monitoring services. We initially
elected to delegate the performance of these services to Sprint to take
advantage of their economies of scale, to accelerate our build-out and market
launches and to lower our initial capital requirements. We continue to contract
with Sprint for these services today and are obligated to continue using Sprint
to provide these services through December 31, 2006. The cost for these services
is primarily on a per-subscriber or per-transaction basis and is recorded as an
operating expense.
CRITICAL ACCOUNTING POLICIES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of an
entity. To aid in that understanding, we have identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our consolidated financial statements, either because of
the significance of the financial statement item to which they relate or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Estimates are used in determining our
allowance for doubtful accounts and are based on our historical collection
experience, current trends, credit policy, a percentage of our accounts
receivable by aging category and expectations of future bad debts based on
current collection activities. In determining the allowance, we consider
historical write-offs of our receivables as well as historical changes in our
credit policies. We also look at current trends in the credit quality of our
customer base.
REVENUE RECOGNITION - We record equipment revenue for the sale of
handsets and accessories to customers in our retail stores and to local
resellers in our territories. We do not record equipment revenue on handsets and
accessories purchased by our customers from national resellers or directly from
Sprint. Our customers pay an activation fee when they initiate service. In the
past, we deferred this activation fee in all cases and recorded the activation
fee revenue over the estimated average life of our customers which ranges from
12 to 36 months depending on credit class and based on our past experience.
Effective July 1, 2003, we adopted the accounting provisions of Emerging Issues
Task Force ("EITF") Abstract No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." Accordingly, beginning July 1, 2003, we allocate
amounts charged to customers at the point of sale between the sale of handsets
and other equipment and the sale of wireless telecommunications services in
those transactions taking place in distribution channels that we directly
control. Activation fees charged in transactions outside of our directly
controlled distribution channels continue to be deferred and amortized over the
average life of the subscriber base.
We recognize revenue from our customers as they use the service.
Additionally, we provide a reduction of recorded revenue for billing adjustments
and billing corrections.
The cost of handsets sold generally exceeds the retail sales price, as
it is common in our industry to subsidize the price of handsets for competitive
reasons. For handsets sold through channels controlled by Sprint that are
activated by a subscriber in our territory, we reimburse Sprint for the amount
of subsidy incurred by them in connection with the sale of these handsets. This
reimbursement paid to Sprint is reflected in our selling and marketing expenses
in the consolidated statements of operations.
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS - In connection with our
acquisitions of Roberts, WOW and Southwest PCS in the first quarter of 2001, we
recorded certain intangible assets including both identifiable intangibles
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and goodwill. Identifiable intangibles consisted of the Sprint agreements and
the respective subscriber bases in place at the time of acquisition. The
intangible assets related to the Sprint agreements are being amortized on a
straight line basis over the remaining original term of the underlying Sprint
agreements or approximately 17.6 years. The subscriber base intangible asset was
amortized on a straight line basis over the estimated life of the acquired
subscribers or approximately 3 years. The subscriber base intangible asset is
fully amortized as of March 31, 2004.
We adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002. SFAS No. 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. The provisions of SFAS No. 142 (i) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and indefinite-lived intangible assets may be impaired), (iii) require
that reporting units be identified for the purpose of assessing potential future
impairments of goodwill and (iv) remove the forty-year limitation on the
amortization period of intangible assets that have finite lives. As of December
31, 2001, we had recorded $15.9 million in accumulated amortization of goodwill.
Upon the adoption of SFAS No. 142, the amortization of goodwill was
discontinued. In connection with our annual impairment testing related to
goodwill as of July 31, 2002, we determined that goodwill was impaired and
recorded an impairment charge in the third quarter of 2002 to reduce the
carrying value of goodwill to zero.
LONG-LIVED ASSET RECOVERY - Long-lived assets, consisting primarily of
property, equipment and finite-lived intangibles, comprised approximately 79
percent of our total assets at March 31, 2004. Changes in technology or in our
intended use of these assets may cause the estimated period of use or the value
of these assets to change. In addition, changes in general industry conditions
could cause the value of certain of these assets to change. We monitor the
appropriateness of the estimated useful lives of these assets. Whenever events
or changes in circumstances indicate that the carrying amounts of these assets
may not be recoverable, we review the respective assets for impairment. The
impairment of goodwill recorded in 2002 and the trends in the wireless
telecommunications industry that drove our decision to launch a debt exchange
offer in September 2003 were deemed to be "triggering events" requiring
impairment testing of our other long-lived assets under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." In performing
this test, assets are grouped according to identifiable cash flow streams and
the undiscounted cash flow over the life of the asset group is compared to the
carrying value of the asset group. We have determined that we have one asset
grouping related to cash flows generated by our subscriber base, which includes
all of our assets. The life of this asset group for purposes of these impairment
tests was assumed to be ten years. No impairment was indicated as a result of
these tests. Estimates and assumptions used in both estimating the useful life
and evaluating potential impairment issues require a significant amount of
judgment.
INCOME TAXES - We utilize an asset and liability approach to accounting
for income taxes, wherein deferred taxes are provided for book and tax basis
differences for assets and liabilities. In the event differences exist between
the book and tax basis of our assets and liabilities that result in deferred
assets, an evaluation of the probability of being able to realize the future
benefits indicated by such assets is made. A valuation allowance is provided for
the portion of deferred tax assets for which there is sufficient uncertainty
regarding our ability to recognize the benefits of those assets in future years.
The net deferred tax asset was fully reserved through December 31, 2000
because of uncertainty regarding our ability to recognize the benefit of the
asset in future years. In connection with the acquisitions in 2001, a
significant deferred tax liability was recorded related to intangibles. The
reversal of the timing differences which gave rise to the deferred tax liability
will allow us to benefit from the deferred tax asset. As such, the valuation
allowance against the deferred tax asset was reduced in 2001 to account for the
expected benefit to be realized. Prior to February 1, 2000, our predecessor
operated as a limited liability company ("LLC") under which losses for income
tax purposes were utilized by the LLC members on their income tax returns.
Subsequent to January 31, 2000, we became a C-corp for federal income tax
purposes and therefore subsequent losses became net operating loss carryforwards
to us. We continue to evaluate the likelihood of realizing the benefits of
deferred tax items. During 2003, we reinstated a valuation allowance to reflect
the deferred tax assets at the amounts expected to be realized.
RELIANCE ON THE TIMELINESS AND ACCURACY OF DATA RECEIVED FROM SPRINT -
We place significant reliance on Sprint as a service provider in terms of the
timeliness and accuracy of financial and statistical data related to customers
based in our service territory t