UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2005 |
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 incorporation or organization) | (I.R.S. Employer Identification No.) | |||||
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 NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES NO
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES NO
There is currently no public market for the registrant's common stock.
As of November 7, 2005, 100 shares of common stock, $0.01 par value per share, were issued and outstanding.
The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore 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 September 30, 2005 and December 31, 2004 (unaudited) | 3 | |||||||||
Consolidated Statements of Operations for the three months and nine months ended September 30, 2005 and 2004 (unaudited) | 4 | |||||||||
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (unaudited) | 5 | |||||||||
Notes to the Consolidated Financial Statements | 6 | |||||||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 29 | ||||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 39 | ||||||||
Item 4. | Controls and Procedures | 39 | ||||||||
PART II | OTHER INFORMATION | |||||||||
Item 1. | Legal Proceedings | 40 | ||||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 | ||||||||
Item 3. | Defaults Upon Senior Securities | 40 | ||||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 40 | ||||||||
Item 5. | Other Information | 40 | ||||||||
Item 6. | Exhibits | 40 | ||||||||
SIGNATURES | 41 | |||||||||
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALAMOSA (DELAWARE), INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands, except share information)
September 30, 2005 | December 31, 2004 | |||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 74,263 | $ | 127,132 | ||||||
Short term investments | 51,553 | 50,411 | ||||||||
Customer accounts receivable, net | 50,863 | 44,687 | ||||||||
Receivable from Sprint | 29,711 | 24,809 | ||||||||
Receivable from Parent | 19,521 | — | ||||||||
Interest receivable | 202 | 216 | ||||||||
Inventory | 10,150 | 9,136 | ||||||||
Prepaid expenses and other assets | 10,844 | 11,192 | ||||||||
Deferred customer acquisition costs | 4,865 | 6,337 | ||||||||
Deferred tax asset | 4,230 | 4,230 | ||||||||
Total current assets | 256,202 | 278,150 | ||||||||
Property and equipment, net | 445,127 | 441,808 | ||||||||
Debt issuance costs, net | 8,334 | 9,086 | ||||||||
Intangible assets, net | 397,497 | 416,716 | ||||||||
Other noncurrent assets | 4,040 | 4,188 | ||||||||
Total assets | $ | 1,111,200 | $ | 1,149,948 | ||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 13,604 | $ | 24,581 | ||||||
Accrued expenses | 44,991 | 42,383 | ||||||||
Payable to Sprint | 20,784 | 35,852 | ||||||||
Payable to Parent | — | 1,530 | ||||||||
Interest payable | 13,086 | 21,076 | ||||||||
Deferred revenue | 24,429 | 22,549 | ||||||||
Current installments of capital leases | 106 | 110 | ||||||||
Total current liabilities | 117,000 | 148,081 | ||||||||
Long term liabilities: | ||||||||||
Capital lease obligations | 671 | 749 | ||||||||
Other noncurrent liabilities | 8,519 | 5,835 | ||||||||
Deferred tax liability | 28,877 | 16,604 | ||||||||
Senior notes | 748,123 | 739,141 | ||||||||
Total long term liabilities | 786,190 | 762,329 | ||||||||
Total liabilities | 903,190 | 910,410 | ||||||||
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 | 932,059 | 1,003,707 | ||||||||
Accumulated deficit | (722,593 | ) | (764,104 | ) | ||||||
Unearned compensation | (1,456 | ) | (65 | ) | ||||||
Total stockholder's equity | 208,010 | 239,538 | ||||||||
Total liabilities and stockholder's equity | $ | 1,111,200 | $ | 1,149,948 | ||||||
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 September 30, | For the nine months ended September 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Revenues: | ||||||||||||||||||
Subscriber revenues | $ | 166,850 | $ | 143,623 | $ | 485,752 | $ | 401,938 | ||||||||||
Roaming and wholesale revenues | 71,761 | 59,106 | 198,656 | 153,964 | ||||||||||||||
Service revenues | 238,611 | 202,729 | 684,408 | 555,902 | ||||||||||||||
Product sales | 8,329 | 8,637 | 25,011 | 25,483 | ||||||||||||||
Total revenue | 246,940 | 211,366 | 709,419 | 581,385 | ||||||||||||||
Costs and expenses: | ||||||||||||||||||
Cost of service and operations (excluding depreciation shown separately below of $20,855 and $17,327 for the three months ended September 30, 2005 and 2004, respectively, and $58,381 and $51,263 for the nine months ended September 30, 2005 and 2004, respectively, and excluding non-cash compensation of $114 and $2 for the three months ended September 30, 2005 and 2004, respectively, and $252 and $6 for the nine months ended September 30, 2005 and 2004, respectively) | 116,293 | 99,250 | 328,391 | 276,528 | ||||||||||||||
Cost of products sold | 20,690 | 20,265 | 67,096 | 56,427 | ||||||||||||||
Selling and marketing | 33,245 | 40,090 | 103,383 | 102,922 | ||||||||||||||
General and administrative expenses (excluding non-cash compensation of $808 and $18 for the three months ended September 30, 2005 and 2004, respectively, and $1,776 and $54 for the nine months ended September 30, 2005 and 2004, respectively) | 4,064 | 5,648 | 13,125 | 16,635 | ||||||||||||||
Merger related expenses | — | — | 436 | — | ||||||||||||||
Depreciation and amortization | 29,387 | 25,886 | 83,843 | 78,793 | ||||||||||||||
Loss on disposal of property and equipment | 286 | 172 | 393 | 3,082 | ||||||||||||||
Non-cash compensation | 922 | 20 | 2,028 | 60 | ||||||||||||||
Total costs and expenses | 204,887 | 191,331 | 598,695 | 534,447 | ||||||||||||||
Income from operations | 42,053 | 20,035 | 110,724 | 46,938 | ||||||||||||||
Loss on debt extinguishment | — | — | (482 | ) | (13,101 | ) | ||||||||||||
Interest and other income | 967 | 358 | 2,566 | 744 | ||||||||||||||
Interest expense | (19,813 | ) | (19,206 | ) | (58,965 | ) | (56,393 | ) | ||||||||||
Income (loss) before income taxes | 23,207 | 1,187 | 53,843 | (21,812 | ) | |||||||||||||
Income tax expense | (5,288 | ) | — | (12,332 | ) | (625 | ) | |||||||||||
Net income (loss) | $ | 17,919 | $ | 1,187 | $ | 41,511 | $ | (22,437 | ) | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
4
ALAMOSA (DELAWARE), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
For the nine months ended September 30, | ||||||||||
2005 | 2004 | |||||||||
Cash flows from operating activities: | ||||||||||
Net income (loss) | $ | 41,511 | $ | (22,437 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||
Non-cash compensation | 2,028 | 60 | ||||||||
Non-cash interest expense on derivative instruments | — | 6 | ||||||||
Non-cash accretion of asset retirement obligations | 178 | 139 | ||||||||
Provision for bad debts | 6,804 | 7,603 | ||||||||
Depreciation and amortization of property and equipment | 61,047 | 54,269 | ||||||||
Amortization of intangible assets | 22,797 | 24,524 | ||||||||
Amortization of financing costs included in interest expense | 681 | 718 | ||||||||
Loss on debt extinguishment | 482 | 13,101 | ||||||||
Interest accreted on discount notes | 15,371 | 18,351 | ||||||||
Deferred income taxes | 12,273 | — | ||||||||
Loss on disposal of property and equipment | 393 | 3,082 | ||||||||
Merger related expenses | 436 | — | ||||||||
(Increase) decrease in: | ||||||||||
Receivable from/payable to Parent | (21,889 | ) | 476 | |||||||
Receivables | (17,867 | ) | (20,318 | ) | ||||||
Inventory | (1,014 | ) | 531 | |||||||
Prepaid expenses and other assets | 2,285 | 1,834 | ||||||||
Increase (decrease) in: | ||||||||||
Accounts payable and accrued expenses | (18,814 | ) | 7,069 | |||||||
Net cash provided by operating activities | 106,702 | 89,008 | ||||||||
Cash flows from investing activities: | ||||||||||
Proceeds from sale of assets | 303 | 569 | ||||||||
Purchases of property and equipment | (76,319 | ) | (63,765 | ) | ||||||
Merger related expenses | (436 | ) | — | |||||||
Purchase of intangible asset | — | (453 | ) | |||||||
Net cash paid in acquisition | (865 | ) | — | |||||||
Change in restricted cash | — | 1 | ||||||||
Change in short term investments | (1,142 | ) | (50,342 | ) | ||||||
Net cash used in investing activities | (78,459 | ) | (113,990 | ) | ||||||
Cash flows from financing activities: | ||||||||||
Proceeds from issuance of senior notes | — | 250,000 | ||||||||
Redemption of senior notes | (6,800 | ) | — | |||||||
Repayments of borrowings under senior secured debt | — | (200,000 | ) | |||||||
Debt issuance costs | — | (8,206 | ) | |||||||
Capital distributions | (74,230 | ) | (8,348 | ) | ||||||
Payments on capital leases | (82 | ) | (415 | ) | ||||||
Net cash provided by (used in) financing activities | (81,112 | ) | 33,031 | |||||||
Net increase (decrease) in cash and cash equivalents | (52,869 | ) | 8,049 | |||||||
Cash and cash equivalents at beginning of period | 127,132 | 98,242 | ||||||||
Cash and cash equivalents at end of period | $ | 74,263 | $ | 106,291 | ||||||
Supplemental disclosure of non-cash financing and investing activities: | ||||||||||
Asset retirement obligations capitalized | $ | 376 | $ | 143 | ||||||
Capitalized lease obligations incurred | — | 67 | ||||||||
Change in accounts payable for purchases of property and equipment | (11,636 | ) | (9,532 | ) | ||||||
Non cash fixed asset additions | 1,277 | — | ||||||||
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 PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated balance sheets at September 30, 2005 and December 31, 2004, the unaudited consolidated statements of operations for the three months and nine months ended September 30, 2005 and 2004, the unaudited consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004 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 annually 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, 2004. 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 and nine months ended September 30, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005.
Certain reclassifications have been made to prior period balances to conform to current period presentation.
2. ORGANIZATION AND BUSINESS OPERATIONS
Alamosa (Delaware), Inc. ("Alamosa (Delaware)") 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, Southeastern, Northwestern and Midwestern United States. 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."
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.
On February 15, 2005, Alamosa Holdings completed its acquisition of AirGate PCS, Inc. ("AirGate"). AirGate is a PCS Affiliate of Sprint and has the right to provide wireless communications services under the Sprint brand name in its licensed territory, which includes most of the state of South Carolina, parts of North Carolina and the eastern Georgia cities of Augusta and Savannah. AirGate is a direct wholly-owned subsidiary of Alamosa Holdings and a sister company to
6
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Alamosa (Delaware). The transaction was accounted for as a purchase and the results of operations of AirGate are included in the consolidated financial statements of Alamosa Holdings from the date of acquisition. The consolidated financial statements of Alamosa (Delaware) do not contain results of operations of AirGate.
Alamosa Holdings common stock is quoted on Nasdaq under the symbol "APCS." Alamosa (Delaware) remains an issuer of outstanding public debt.
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.
While the Company has incurred net losses and negative cash flows from operating activities in the past, the Company generated approximately $132 million and $107 million in cash flows from operating activities for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Additionally, the Company reported net income of $42 million for the nine months ended September 30, 2005.
As of September 30, 2005, the Company had $74 million in cash and cash equivalents as well as $52 million in short-term investments, which the Company believes will be sufficient to fund expected capital expenditures and to cover its working capital and debt service requirements (including dividends on Alamosa Holdings preferred stock) 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. MERGERS AND ACQUISITIONS
The Company entered into an asset purchase agreement with NTCH Colorado, Inc. ("NTCH") in February 2005 with respect to the purchase of certain assets in the Grand Junction, Colorado Basic Trading Area ("BTA"). NTCH operated a wireless telecommunication network in the Grand Junction, Colorado BTA under the brand name Cleartalk. In accordance with the purchase agreement, the Company acquired subscribers and entered into operating leases for wireless tower space from NTCH and NTCH eliminated the Cleartalk brand from the Grand Junction BTA. The commencement date of this agreement was September 1, 2005, at which time the purchase price was fixed based on the number of Cleartalk subscribers that had been successfully converted to the Company's network. The agreement also provided for the Company to reimburse NTCH for lost earnings during the transition period, which was the period from the execution of the agreement in February 2005 through the commencement date of September 1, 2005 and amounted to approximately $865.
The consideration to the seller is made up of the $865 for lost earnings discussed above and a monthly cash payment of $143 for five years beginning September 1, 2005. Included in the monthly payment is $91 related to the operating leases entered into and $52 in consideration for the subscribers and elimination of the Cleartalk brand. The purchase price was allocated to the assets received based on relative fair value.
7
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
5. 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 nine months ended September 30, 2005 or 2004, as all options granted by the Company had an exercise price equal to or greater than the market value of the underlying Alamosa Holdings common stock on the date of grant. Non-cash compensation expense reflected in the consolidated statements of operations for the nine month periods ended September 30, 2005 and 2004 is related to the vesting of shares of restricted stock awarded to officers and directors and unrestricted shares of stock awarded to directors and is 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 September 30, | For the nine months ended September 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Net income (loss) – as reported | $ | 17,919 | $ | 1,187 | $ | 41,511 | $ | (22,437 | ) | |||||||||
Add: stock-based employee compensation included in reported net income or loss, net of related tax effects | 572 | 20 | 1,257 | 60 | ||||||||||||||
Deduct: stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | (1,221 | ) | (3,652 | ) | (3,331 | ) | (6,421 | ) | ||||||||||
Net income (loss) – pro forma | $ | 17,270 | $ | (2,445 | ) | $ | 39,437 | $ | (28,798 | ) | ||||||||
6. ACCOUNTS RECEIVABLE
Customer accounts receivable – Customer accounts receivable represent amounts owed to the Company by subscribers for PCS service. Customer accounts receivable do not bear interest.
The amounts presented in the consolidated balance sheets are net of an allowance for uncollectible accounts of $6,494 and $5,728 at September 30, 2005 and December 31, 2004, respectively. Estimates are used in determining the allowance for uncollectible accounts and are based on the Company's historical collection experience, current trends, credit policy, a percentage of accounts receivable by aging category and expectations of future bad debts based on current collection activities. In determining the allowance, the Company considers historical write-offs of its receivables as well as historical changes in its credit policies. The Company also takes into consideration current trends in the credit quality of its customer base.
Receivable from Sprint – Receivable from Sprint in the accompanying consolidated balance sheets consists of the following:
September 30, 2005 | December 31, 2004 | |||||||||
Net roaming receivable | $ | 22,863 | $ | 20,948 | ||||||
Accrued service revenue | 6,003 | 2,910 | ||||||||
Other amounts due from Sprint | 845 | 951 | ||||||||
$ | 29,711 | $ | 24,809 | |||||||
8
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 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. The receivable is recorded net due to a right of offset with respect to the receivable from/payable to Sprint with respect to travel and the fact that the activity has historically been settled on a net basis by Sprint. In addition, net roaming receivable also includes amounts due from Sprint, which have been collected from other PCS providers and wholesale customers for their customers' usage of the Company's portion of the PCS network of Sprint.
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.
Other amounts due from Sprint at September 30, 2005 and December 31, 2004 primarily consist of universal service fund recoveries and interconnect revenue receivable.
7. PROPERTY AND EQUIPMENT
Property and equipment are stated net of accumulated depreciation and amortization of $307.3 million and $246.4 million at September 30, 2005 and December 31, 2004, respectively.
8. ASSET RETIREMENT OBLIGATIONS
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, "Accounting for Asset Retirement Obligations," as of January 1, 2003. The obligations associated with the Company's operating leases primarily relate to the restoration of the leased sites to specified conditions described in the respective lease agreements. For purposes of determining the amounts recorded as asset retirement obligations associated with the respective leases, the Company has estimated the costs by type of lease to be incurred upon the termination of the lease for restoration costs, as adjusted for expected inflation. These costs have been discounted back to the origination of the lease using an appropriate discount rate to determine the amount of obligation to be recorded upon the inception of the lease. The liability is accreted up to the expected settlement amount over the life of the lease using the effective interest rate method. A corresponding asset is recorded at the inception of the lease in the same amount as the asset retirement obligation. This asset is depreciated using the same method and life of similar network assets or leasehold improvements.
The following table illustrates the activity with respect to asset retirement obligations for the three months and nine months ended September 30, 2005 and 2004:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Balance at beginning of period | $ | 2,619 | $ | 1,979 | $ | 2,212 | $ | 1,813 | ||||||||||
Initial obligation recorded during the period | 84 | 68 | 376 | 143 | ||||||||||||||
Obligations settled during the period | — | — | — | — | ||||||||||||||
Accretion of obligation during the period | 63 | 48 | 178 | 139 | ||||||||||||||
Impact of revision in estimates | — | — | — | — | ||||||||||||||
Balance at end of period | $ | 2,766 | $ | 2,095 | $ | 2,766 | $ | 2,095 | ||||||||||
9
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
9. GOODWILL AND INTANGIBLE ASSETS
In connection with the acquisition of other PCS affiliates of Sprint, the Company allocated portions of the respective purchase prices to identifiable intangible assets consisting of (i) the value of the Sprint agreements in place at the acquired companies and (ii) the value of the subscriber base in place at the acquired companies. In addition to the identifiable intangibles, goodwill has been recorded in the amount by which the purchase price exceeded the fair value of the net assets acquired, including identified intangibles.
The value assigned to the Sprint agreements is being amortized using the straight-line method over the remaining original terms of the agreements that were in place at the time of acquisition. The value assigned to the subscriber bases acquired is amortized using the straight-line method over the estimated life of the acquired subscribers.
In September 2004, the Company purchased the rights to additional territory from Sprint in connection with an amendment of one of its management agreements. The purchase price of $467 consisted of $14 allocated to purchased equipment and $453 allocated to the value of the Sprint agreement associated with the territory acquired. The intangible asset related to the Sprint agreement will be amortized over the remaining original term of the Sprint agreement at the time of purchase.
In connection with the purchase of assets from NTCH Colorado, Inc. on September 1, 2005 as discussed in Note 4, the Company allocated the consideration to the assets received based on relative fair values. The subscribers acquired were valued at $3,444 and will be amortized over the estimated life of the subscribers acquired or approximately three years. The non-competition agreement entered into by the seller was valued at $133 and will be amortized over the life of the agreement which is six years.
The Company accounts for goodwill and intangible assets in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 (i) prohibit the amortization of goodwill and indefinite-lived intangible assets, (ii) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value may be impaired) and (iii) require that reporting units be identified for the purpose of assessing potential future impairments of goodwill.
Goodwill and intangible assets consist of:
September 30, 2005 | December 31, 2004 | |||||||||
Goodwill | $ | — | $ | — | ||||||
Intangible assets: | ||||||||||
Sprint affiliate and other agreements | $ | 532,653 | $ | 532,653 | ||||||
Accumulated amortization | (138,636 | ) | (115,937 | ) | ||||||
Subtotal | 394,017 | 416,716 | ||||||||
Subscriber base acquired | 32,944 | 29,500 | ||||||||
Accumulated amortization | (29,595 | ) | (29,500 | ) | ||||||
Subtotal | 3,349 | — | ||||||||
Non-compete agreement | 133 | — | ||||||||
Accumulated amortization | (2 | ) | — | |||||||
Subtotal | 131 | — | ||||||||
Intangible assets, net | $ | 397,497 | $ | 416,716 | ||||||
10
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Amortization expense related to intangible assets was $7,664 and $7,562 for the three months ended September 30, 2005 and 2004, respectively, and $22,797 and $24,524 for the nine months ended September 30, 2005 and 2004, respectively.
Aggregate amortization expense relative to intangible assets for the periods shown is estimated to be as follows:
Year ended December 31, | ||||||
2005 | $ | 30,656 | ||||
2006 | 31,436 | |||||
2007 | 31,436 | |||||
2008 | 31,436 | |||||
2009 | 31,436 | |||||
Thereafter | 263,892 | |||||
$ | 420,292 | |||||
10. LONG-TERM DEBT
Long-term debt consists of the following:
September 30, 2005 | December 31, 2004 | |||||||||
12 7/8% Senior Discount Notes, net of discount | $ | — | $ | 6,293 | ||||||
12% Senior Discount Notes, net of discount | 233,303 | 218,028 | ||||||||
12½% Senior Notes | 11,600 | 11,600 | ||||||||
13 5/8% Senior Notes | 2,325 | 2,325 | ||||||||
11% Senior Notes | 250,895 | 250,895 | ||||||||
8½% Senior Notes | 250,000 | 250,000 | ||||||||
Total Debt | 748,123 | 739,141 | ||||||||
Less current maturities | — | — | ||||||||
Long term debt, excluding current maturities | $ | 748,123 | $ | 739,141 | ||||||
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 accreted to their $6,389 face amount on February 15, 2005. The 12 7/8% Senior Discount Notes were redeemed in April 2005 at a premium of $411. Additionally, $71 in unamortized loan costs was charged to expense when the notes were redeemed.
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 accreted to their $233 million face amount on July 31, 2005. Beginning January 31, 2006, interest is paid in cash semiannually.
12½% Senior Notes – The 12½% Senior Notes were issued in January 2001, mature February 1, 2011 and carry a coupon rate of 12½%, payable semiannually on February 1 and August 1. Approximately $59.0 million of the proceeds of the 12½% 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 12½% Senior Notes and the 12 7/8%
11
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Senior Discount Notes. As of December 31, 2004, 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, 2004, 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.
8½% Senior Notes – The 8½% Senior Notes were issued in January 2004, mature January 31, 2012 and carry a coupon rate of 8½%, 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 and for general corporate purposes.
11. INCOME TAXES
The Company's effective income tax rate is based on annual income (loss), statutory tax rates, tax planning opportunities, expected future taxable income and expected reversals of taxable temporary differences. The forecasted annual rate is then applied to the Company's quarterly operating results. The Company establishes a valuation allowance for deferred tax assets when it is more likely than not that the deferred tax assets will not be realized. Due to the Company's limited operating history and lack of positive taxable earnings, a valuation allowance was established during 2003 as deferred tax assets were expected to exceed deferred tax liabilities. For the nine months ended September 30, 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 negative 2.9 percent. The effective tax rate for the nine months ended September 30, 2005 is 23 percent. The difference between the statutory rate of 35 percent and the projected rate is primarily due to a reduction of the valuation allowance against deferred tax assets.
The Company is included in the consolidated federal income tax return filed by Alamosa Holdings, Inc. As a result, income tax expense and related income tax balances included in the accompanying consolidated financial statements have been calculated as if the Company had operated as a separate entity.
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 and rebates 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 initially 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
12
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 was initially calculated as a percentage of certain of Sprint PCS' selling and marketing expenses and was to be applied to the actual number of gross subscriber activations the Company experiences on a monthly basis through December 31, 2006. The per-activation fee is recorded in selling and marketing expenses in the consolidated statement of operations.
13
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 and decreased the price to the Company on purchases of handsets and accessories. Additionally, the March 2004 amendments increased the reciprocal roaming rate for data services from $0.0014 per Kb to $0.0020 per Kb and extended the fixed reciprocal rates for voice and data roaming through December 31, 2006. In June 2004, the Company further amended its agreements with Sprint to (i) reduce the combined service bureau fee from $7.70 to $7.00 per average subscriber per month and (ii) change the per-activation fee from a percentage of certain of Sprint PCS' selling and marketing expenses to a fixed rate of $23.00 per activation.
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.
Expenses reflected in the consolidated statements of operations related to the Sprint affiliation agreements are:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||||
Cost of service and operations | $ | 87,036 | $ | 72,445 | $ | 246,943 | $ | 201,591 | ||||||||||
Cost of products sold | 20,690 | 20,265 | 67,096 | 56,427 | ||||||||||||||
Selling and marketing | 12,448 | 16,858 | 39,415 | 38,067 | ||||||||||||||
Total | $ | 120,174 | $ | 109,568 | $ | 353,454 | $ | 296,085 | ||||||||||
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.
On December 15, 2004, Sprint Corporation ("Sprint") and Nextel Communications, Inc. ("Nextel") announced a proposed merger of their two companies. Nextel operated a wireless mobility communications network in certain territories in which the Company also provides digital wireless mobility communications network services under the Sprint or affiliated brands. Sprint and Nextel closed the merger on August 12, 2005.
Based upon the terms of the exclusivity covenants contained in the management agreement between Sprint and AirGate PCS, Inc., a wholly-owned subsidiary of Alamosa Holdings and a sister company to Alamosa (Delaware), Alamosa Holdings believes that Nextel's operation of a wireless
14
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
mobility communications network in territories in which AirGate operates from and after the closing of the Sprint-Nextel merger constitutes a breach of the exclusivity covenants in the AirGate management agreement with Sprint. Moreover, based upon public statements and disclosures made by Sprint and Nextel, the Company believes that actions that Sprint and Nextel may take in connection with the integration of their operations following completion of the merger may constitute a breach of the exclusivity and certain other provisions of the management agreements between Sprint and Alamosa (Delaware)'s operating subsidiaries.
As previously disclosed, Alamosa Holdings has been engaged in discussions with Sprint in an attempt to reach a mutually acceptable resolution of the issues related to the Sprint-Nextel merger and its effect on the existing management agreements between Sprint and Alamosa Holdings' subsidiaries. On August 8, 2005, AirGate filed a lawsuit against Sprint, certain of its affiliates and Nextel in the Delaware Court of Chancery alleging, among other things, that following the completion of the merger, Sprint would be in breach of the exclusivity covenants contained in its management agreement with AirGate and that Nextel unlawfully interfered with AirGate's exclusive rights under such agreement. The complaint seeks, among other things, an order directing Sprint and its affiliates to specifically perform their contractual obligations under their agreements with AirGate, an injunction preventing Sprint and Nextel from taking any action or entering into any agreement that would violate the exclusivity covenants contained in the agreements, a declaratory judgment declaring the rights, remedies and obligations of the parties under the agreements, and damages. The Company and its operating subsidiaries also may decide to pursue remedies against Sprint and Nextel, including bringing a lawsuit against Sprint and Nextel.
Under the Company's affiliation agreements with Sprint, an event of termination can be declared by the Company after a material breach by Sprint is not cured within the applicable grace period, which, without extension by the Company, could be as much as 180 days. If the Company has the right to terminate its management agreements because of an event of termination caused by Sprint, generally the Company may (i) require Sprint to purchase all of its operating assets used in connection with its portion of the PCS network of Sprint, (ii) in all areas in the Company's 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 the Company, subject to governmental approval, up to 10 MHz of licensed spectrum or (iii) choose not to terminate its management agreements and sue Sprint for damages or other relief or submit the matter to arbitration.
Should the breach not be cured by Sprint or a modification, waiver or extension not be granted by the Company, the election by the Company to terminate the affiliation agreements would constitute an event of default under each series of the Company's outstanding senior notes. Upon an event of default, the holders of the senior notes would have the right to demand payment and the Company may not have adequate liquidity to satisfy this obligation. At this point in time, management of the Company does not anticipate that an event of termination of the affiliation agreements will occur.
13. COMMITMENTS AND CONTINGENCIES
Alamosa Holdings Preferred Stock Dividends – In November 2003, Alamosa Holdings issued shares of Series B Mandatorily Redeemable Convertible Preferred Stock. Holders of the Series B Mandatorily Redeemable Convertible Preferred Stock are entitled to receive cumulative dividends at an annual rate of 7 ½% of the $250 per share liquidation preference. Dividends are payable quarterly in arrears on the last calendar day of each January, April, July and October. Until July 31, 2008, Alamosa Holdings has the option to pay dividends in (i) cash, (ii) shares of Alamosa Holdings Series C Mandatorily Redeemable Convertible Preferred Stock, (iii) shares of Alamosa Holdings common stock or (iv) a combination thereof. After July 31, 2008, all dividends are payable in cash only.
15
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Alamosa Holdings is a holding company that generates no revenues. Accordingly, the source of any cash dividends paid on the Series B Mandatorily Redeemable Convertible Preferred Stock is related to capital distributions from the Company to Alamosa Holdings. At September 30, 2005, Alamosa Holdings has 220,301 shares of Series B Mandatorily Redeemable Convertible Preferred Stock issued and outstanding. Any future cash dividends paid on the Series B Mandatorily Redeemable Convertible Preferred Stock by Alamosa Holdings may require additional capital distributions from the Company to Alamosa Holdings.
Employment agreements – The Company is a party to employment agreements, effective October 1, 2002, and amended as of January 1, 2005, with its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). The CEO's agreement will expire on December 31, 2007 and entitles the CEO to receive an annual base salary of $425 in 2005, subject to increase from time to time. The agreement also provides that so long as he serves on the Company's board of directors, he will serve as Chairman of the Board. The CFO's agreement will expire on December 31, 2006 and entitles him to receive an annual base salary of $400 in 2005, subject to increase from time to time. The CEO and CFO are eligible to receive an annual performance-based bonus with an initial target of $340 and $280, respectively. The executives are entitled to participate in any long-term incentive plans the Company establishes, including Alamosa Holdings' Amended and Restated 1999 Long Term Incentive Plan ("LTIP").
The agreements provide for annual option grants, contingent upon continued employment. The CEO's agreement provides for the grant of options to purchase 80,000 shares, 64,000 shares and 51,200 shares in 2005, 2006 and 2007, respectively. The CFO's agreement provides for the grant of options to purchase 50,000 shares and 40,000 shares in 2005 and 2006, respectively. Additionally, the agreements provide for grants of restricted stock subject to the terms of the LTIP and that vest upon continued employment and in amounts determined based upon attainment of performance goals as set forth in certain restricted stock agreements. The target shares for restricted stock grants for the CEO are 60,000 in 2005, 48,000 in 2006, and 38,400 in 2007. The target shares for restricted stock grants for the CFO are 50,000 in 2005 and 40,000 in 2006. The actual award shares for restricted stock could range from zero to 200% of the target amount.
The agreements entitle the executives to $5,000 in term life insurance coverage, reimbursement for reasonable business expenses, a car allowance, reimbursement for approved club dues, reimbursement for an annual physical exam up to $5, and financial planning services up to $10 per annum. The executives may participate in any incentive, retirement, life, medical, disability and other benefit plans available to the Company's other executives with comparable responsibilities, subject to the terms of those programs.
Upon termination of employment by the Company without cause or by the executive for good reason, within thirty days after the date of termination, the Company will provide the terminated executive a lump-sum severance payment equal to the sum of: (i) one year's base salary; (ii) the higher of (x) the executive's target bonus or (y) the average annual bonus the executive earned over the two preceding years (the "Bonus"); and (iii) a pro-rated bonus for the year of termination. If such termination occurs within twelve months following a change in control, the terminated executive is instead entitled to three times his base salary and Bonus, plus a pro-rata bonus for the year of termination. In either case, the terminated executive will also receive continuing welfare and fringe benefits for one year following termination of his employment (two years if such termination occurs within twelve months following a change in control) and all restricted stock and options granted to the executive under the agreement will become vested and exercisable.
The Company entered into employment agreements on October 1, 2002, as amended as of January 1, 2005 with its Chief Integration Officer ("CIO"), Chief Technology Officer ("CTO"), and
16
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
Senior Vice President of Corporate Finance ("SVP"). The Company entered into an employment agreement on December 1, 2002, as amended as of January 1, 2005 with its Chief Operating Officer ("COO"). The CIO's agreement will expire on December 31, 2005. The agreements with the CTO, SVP and COO will expire on December 31, 2006.
These agreements provide for annual grants of options to purchase 186,000 shares of Company common stock during 2005 and 2006 and additionally provide for total restricted stock grants among these executives in the target amount of 150,000 shares during 2005 and 2006. The actual award shares for restricted stock could range from zero to 200% of the target amount. Additionally, the agreements entitle the executives to be reimbursed for reasonable business expenses, car allowances, and reimbursement for annual physical exams in amounts as set forth in their agreements as well as other allowed prerequisites. They may participate in any incentive, retirement, life, medical, disability and other benefit plans available to the Company's other executives with comparable responsibilities, subject to the terms of those programs.
Upon termination of employment by the Company without cause or by the executive for good reason, within thirty days after the date of termination, the Company will provide the terminated executive a lump-sum severance payment equal to the sum of: (i) one year's base salary; (ii) the executive's Bonus; and (iii) a pro-rated bonus for the year of termination. If such termination occurs within twelve months following a change in control, the terminated executive is instead entitled to receive two times base salary and Bonus, plus a pro-rata bonus for the year of termination. In either case, the terminated executive will also receive continuing welfare and fringe benefits for one year (two years if such termination occurs within twelve months following a change in control) and all restricted stock and options granted to the executive under the agreement will become vested and exercisable.
The agreements contain non-compete and non-solicitation provisions effective for (i) two years following termination of employment by the Company without cause or by the executive for good reason within one year following a change in control or (ii) one year following termination of employment in any other circumstances.
The restricted stock grants associated with the January 2005 employment agreement amendments are considered variable awards as the number of the shares that will ultimately be earned by the employee is not known until December 31 of each year during the term of the agreement (the measurement dates). In accordance with FAS 123, related compensation expense associated with the annual grants is measured based on the fair market value of the award at the measurement date and is recognized over the vesting period.
The restricted stock granted in January 2005 under the terms of these employment agreement amendments vest 65% on March 1, 2006 and 35% on September 1, 2006. Until the measurement date has been reached, compensation expense is adjusted for changes in the fair market value. The market value of the restricted stock grants was $2,468 on the date of grant and was recorded as unearned compensation, a component of shareholders' equity. At September 30, 2005, the unearned compensation was adjusted to $3,420 based on an increase in the fair market value of the award as of September 30, 2005. The non-cash compensation expense recognized during the nine months ended September 30, 2005 was $1,968 resulting in a balance of $1,452 in unearned compensation related to these awards as of September 30, 2005.
Litigation – The Company has been named as a defendant in a number of purported securities class actions in the United States District Court for the Southern District of New York, arising out of its initial public offering (the "IPO"). Various underwriters of the IPO also are named as defendants in the actions. The action against the Company 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
17
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
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 the Company 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 the Company and virtually all of the other issuers to dismiss the claims asserted against them under Section 11 of the Securities Act. The Company maintains insurance coverage which may mitigate its exposure to loss in the event that this claim is not resolved in the Company's favor. On October 13, 2004, the Court granted the plaintiffs' motion for class certification in cases against six of the issuers (not including the Company), and stated that the order of certification gave "strong guidance, if not dispositive effect" in the cases involving all other issuers. The underwriter defendants petitioned the U.S. Court of Appeals for the Second Circuit to hear the appeal of the certification on an interlocutory basis, and on June 30, 2005, the Second Circuit granted their request. The Second Circuit has ordered the appeal to be scheduled and briefed in the normal course.
The issuers in the IPO cases, including the Company, 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 the issuers' IPOs, 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. On August 31, 2005, the court set a date for a final approval hearing of April 24, 2006, and approved providing notice to all class members. The court ordered that notice to the class be mailed beginning on November 15, 2005, and to be completed no later than January 15, 2006. Any class member who wishes to be excluded from the settlement must give notice by March 24, 2006. Objections to the proposed settlement must be filed with the court by March 24, 2006. The court has scheduled a hearing to determine the fairness of the settlement for April 24, 2006.
In November 2003, December 2003 and January 2004, multiple lawsuits were filed against the Company and David E. Sharbutt, its Chairman and Chief Executive Officer as well as Kendall W. Cowan, its 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. 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. On March 4, 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.
On May 18, 2004, the lead plaintiff filed a consolidated complaint. The consolidated complaint named three of the original defendants (the Company, David Sharbutt and Kendall Cowan), dropped
18
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
one of the original defendants (Steven Richardson) and named two new defendants who are outside directors (Michael Roberts and Steven Roberts). The putative class period remained the same. The consolidated complaint alleged violations of Sections 10(b) and 20(a) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Sections 11 and 15 of the Securities Act. The consolidated complaint sought recovery of compensatory damages, fees, costs, recission or rescissory damages in connection with the Sections 11 and 15 claims, and injunctive relief and/or disgorgement in connection with defendants' alleged insider trading proceeds. At the end of the putative class period on June 13, 2002, the Company announced that its projection of net subscriber additions for the third quarter of 2002 would be less than previously projected. The consolidated complaint alleged, among other things, that the Company made false and misleading statements about subscriber additions during the putative class period. The consolidated complaint also alleged that the Company's financial statements were false and misleading because the Company improperly recognized revenue and failed to record adequate allowances for uncollectible receivables.
On March 28, 2005, the Court granted the defendants' motion to dismiss and entered a judgment dismissing this action. On April 22, 2005, the lead plaintiff filed a notice of appeal from the dismissal order and judgment to the Fifth Circuit Court of Appeals. On May 17, 2005, the Fifth Circuit Court of Appeals dismissed the appeal pursuant to the unopposed motion of lead plaintiff/appellant.
On July 8 and 15, 2004, two shareholder derivative suits, each asserting identical allegations, were filed in State District Court in Dallas County, Texas on behalf of the Company against certain of its officers and directors: David E. Sharbutt, the Company's Chairman and Chief Executive Officer, Kendall W. Cowan, the Company's Chief Financial Officer, as well as other current and former members of the Company's board of directors, including Scotty Hart, Michael V. Roberts, Ray M. Clapp, Jr., Schuyler B. Marshall, Thomas F. Riley, Jr., Steven C. Roberts, Jimmy R. White, Thomas B. Hyde and Tom M. Phelps. The suits also name the Company as a nominal defendant. On August 27, 2004, the lawsuits were consolidated into one action pending in State District Court in Dallas County, Texas. On November 24, 2004, the plaintiffs filed a consolidated derivative petition. Based on allegations substantially similar to the federal shareholder action, the suits assert claims for defendants' alleged violations of state law, including breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment that allegedly occurred between January 2001 and June 2002. The suits seek recovery of damages, fees, costs, equitable and/or injunctive remedies, and disgorgement of all profits, benefits and other compensation. The defendants filed a motion to stay this action pending the outcome of the federal shareholder action. In the alternative, the defendants filed special exceptions to the consolidated derivative petition requesting dismissal of the action. The plaintiffs served written discovery requests on defendants and in response, defendants filed a motion for protective order and to stay discovery.
On April 27, 2005, the plaintiffs filed a notice of non-suit without prejudice to dismiss the defendants and all claims asserted in this action without prejudice.
The Company is involved in various claims and legal actions arising in the ordinary course of business. The ultimate disposition of these matters is not expected to have a material adverse impact on the Company's financial position, results of operations or liquidity.
14. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosures of the income statement effects of share-based
19
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
payments is no longer an alternative. SFAS No. 123(R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of July 1, 2005. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. On April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance dates for SFAS No. 123(R). The new rule allows registrants to implement SFAS No. 123(R) at the beginning of their next fiscal year that begins after June 15, 2005. As a result, the Company will be required to adopt the provisions of SFAS No. 123(R) on January 1, 2006. The Company is currently assessing the impact of adopting SFAS No. 123(R) to its consolidated results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to voluntary changes as well as those changes required by an accounting pronouncement if that pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle as opposed to being shown as a cumulative adjustment in the period of change. The Statement is effective for all changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to materially impact the Company.
On March 31, 2005, the FASB issued Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement Obligations" which is an interpretation of SFAS No. 143, "Accounting for Asset Retirement Obligations." FIN 47 clarifies that the recognition and measurement provisions of SFAS No. 143 apply to asset retirement obligations in which the timing and/or method of settlement may be conditional on a future event, including obligations to remediate asbestos at the end of a building's useful life and obligations to dispose of chemically-treated telephone poles at the end of their useful lives. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently assessing the impact of adopting FIN 47 to its consolidated results of operations.
15. 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 September 30, 2005 and December 31, 2004 and for the three months and nine months ended September 30, 2005 and 2004. 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 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 three months ended September 30, 2005.
20
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2005
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
ASSETS | ||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 2,062 | $ | 72,185 | $ | 16 | $ | — | $ | 74,263 | ||||||||||||
Short term investments | 51,553 | — | — | — | 51,553 | |||||||||||||||||
Customer accounts receivable, net | — | 50,863 | — | — | 50,863 | |||||||||||||||||
Receivable from Sprint | — | 29,711 | — | — | 29,711 | |||||||||||||||||
Intercompany receivable | — | 26,302 | 401 | (7,182 | ) | 19,521 | ||||||||||||||||
Interest receivable | 202 | — | — | — | 202 | |||||||||||||||||
Inventory | — | 10,150 | — | — | 10,150 | |||||||||||||||||
Investment in subsidiary | 939,575 | — | — | (939,575 | ) | — | ||||||||||||||||
Prepaid expenses and other assets | 13 | 10,831 | — | — | 10,844 | |||||||||||||||||
Deferred customer acquisition costs | — | 4,865 | — | — | 4,865 | |||||||||||||||||
Deferred tax asset | 4,230 | — | — | — | 4,230 | |||||||||||||||||
Total current assets | 997,635 | 204,907 | 417 | (946,757 | ) | 256,202 | ||||||||||||||||
Property and equipment, net | — | 445,127 | — | — | 445,127 | |||||||||||||||||
Debt issuance costs, net | 8,334 | — | — | — | 8,334 | |||||||||||||||||
Intangible assets, net | — | 397,497 | — | — | 397,497 | |||||||||||||||||
Other noncurrent assets | — | 4,040 | — | — | 4,040 | |||||||||||||||||
Total assets | $ | 1,005,969 | $ | 1,051,571 | $ | 417 | $ | (946,757 | ) | $ | 1,111,200 | |||||||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||
Accounts payable | $ | — | $ | 13,604 | $ | — | $ | — | $ | 13,604 | ||||||||||||
Accrued expenses | 691 | 44,300 | — | — | 44,991 | |||||||||||||||||
Payable to Sprint | — | 20,784 | — | — | 20,784 | |||||||||||||||||
Intercompany Payable | 7,182 | — | — | (7,182 | ) | — | ||||||||||||||||
Interest payable | 13,086 | — | — | — | 13,086 | |||||||||||||||||
Deferred revenue | — | 24,429 | — | — | 24,429 | |||||||||||||||||
Current installments of capital leases | — | 106 | — | — | 106 | |||||||||||||||||
Total current liabilities | 20,959 | 103,223 | — | (7,182 | ) | 117,000 | ||||||||||||||||
Capital lease obligations | — | 671 | — | — | 671 | |||||||||||||||||
Other noncurrent liabilities | — | 8,519 | — | — | 8,519 | |||||||||||||||||
Deferred tax liability | 28,877 | — | — | — | 28,877 | |||||||||||||||||
Senior notes | 748,123 | — | — | — | 748,123 | |||||||||||||||||
Total liabilities | 797,959 | 112,413 | — | (7,182 | ) | 903,190 | ||||||||||||||||
Stockholder's Equity: | ||||||||||||||||||||||
Preferred stock | — | — | — | — | — | |||||||||||||||||
Common stock | — | — | — | — | — | |||||||||||||||||
Additional paid-in capital | 932,059 | — | — | 932,059 | ||||||||||||||||||
LLC member's equity | — | 939,158 | 417 | (939,575 | ) | — | ||||||||||||||||
Accumulated deficit | (722,593 | ) | — | — | — | (722,593 | ) | |||||||||||||||
Unearned compensation | (1,456 | ) | — | — | — | (1,456 | ) | |||||||||||||||
Total stockholder's equity | 208,010 | 939,158 | 417 | (939,575 | ) | 208,010 | ||||||||||||||||
Total liabilities and stockholder's equity | $ | 1,005,969 | $ | 1,051,571 | $ | 417 | $ | (946,757 | ) | $ | 1,111,200 | |||||||||||
21
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
ASSETS | ||||||||||||||||||||||
Current Assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 6,698 | $ | 120,418 | $ | 16 | $ | — | $ | 127,132 | ||||||||||||
Short term investments | 50,411 | — | — | — | 50,411 | |||||||||||||||||
Customer accounts receivable, net | — | 44,687 | — | — | 44,687 | |||||||||||||||||
Receivable from Sprint | — | 24,809 | — | — | 24,809 | |||||||||||||||||
Intercompany receivable | 30,089 | — | 401 | (30,490 | ) | — | ||||||||||||||||
Interest receivable | 216 | — | — | — | 216 | |||||||||||||||||
Inventory | — | 9,136 | — | — | 9,136 | |||||||||||||||||
Investment in subsidiary | 916,199 | — | — | (916,199 | ) | — | ||||||||||||||||
Prepaid expenses and other assets | — | 11,192 | — | — | 11,192 | |||||||||||||||||
Deferred customer acquisition costs | — | 6,337 | — | — | 6,337 | |||||||||||||||||
Deferred tax asset | 4,230 | — | — | — | 4,230 | |||||||||||||||||
Total current assets | 1,007,843 | 216,579 | 417 | (946,689 | ) | 278,150 | ||||||||||||||||
Property and equipment, net | — | 441,808 | — | — | 441,808 | |||||||||||||||||
Debt issuance costs, net | 9,086 | — | — | — | 9,086 | |||||||||||||||||
Intangible assets, net | — | 416,716 | — | — | 416,716 | |||||||||||||||||
Other noncurrent assets | — | 4,188 | — | — | 4,188 | |||||||||||||||||
Total assets | $ | 1,016,929 | $ | 1,079,291 | $ | 417 | $ | (946,689 | ) | $ | 1,149,948 | |||||||||||
LIABILITIES AND STOCKHOLDER'S EQUITY | ||||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||||
Accounts payable | $ | — | $ | 24,581 | $ | — | $ | — | $ | 24,581 | ||||||||||||
Accrued expenses | 570 | 41,813 | — | — | 42,383 | |||||||||||||||||
Payable to Sprint | — | 35,852 | — | — | 35,852 | |||||||||||||||||
Payable to parent | — | 1,530 | — | — | 1,530 | |||||||||||||||||
Interest payable | 21,076 | — | — | — | 21,076 | |||||||||||||||||
Deferred revenue | — | 22,549 | — | — | 22,549 | |||||||||||||||||
Intercompany payable | — | 30,490 | — | (30,490 | ) | — | ||||||||||||||||
Current installments of capital leases | — | 110 | — | — | 110 | |||||||||||||||||
Total current liabilities | 21,646 | 156,925 | — | (30,490 | ) | 148,081 | ||||||||||||||||
Capital lease obligations | — | 749 | — | — | 749 | |||||||||||||||||
Other noncurrent liabilities | — | 5,835 | — | — | 5,835 | |||||||||||||||||
Deferred tax liability | 16,604 | — | — | — | 16,604 | |||||||||||||||||
Senior notes | 739,141 | — | — | — | 739,141 | |||||||||||||||||
Total liabilities | 777,391 | 163,509 | — | (30,490 | ) | 910,410 | ||||||||||||||||
Stockholder's Equity: | ||||||||||||||||||||||
Preferred stock | — | — | — | — | — | |||||||||||||||||
Common stock | — | — | — | — | — | |||||||||||||||||
Additional paid-in capital | 1,003,707 | — | — | — | 1,003,707 | |||||||||||||||||
LLC member's equity | — | 915,782 | 417 | (916,199 | ) | — | ||||||||||||||||
Accumulated deficit | (764,104 | ) | — | — | — | (764,104 | ) | |||||||||||||||
Unearned compensation | (65 | ) | — | — | — | (65 | ) | |||||||||||||||
Total stockholder's equity | 239,538 | 915,782 | 417 | (916,199 | ) | 239,538 | ||||||||||||||||
Total liabilities and stockholder's equity | $ | 1,016,929 | $ | 1,079,291 | $ | 417 | $ | (946,689 | ) | $ | 1,149,948 | |||||||||||
22
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 SEPTEMBER 30, 2005
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Subscriber revenues | $ | — | $ | 166,850 | $ | — | $ | — | $ | 166,850 | ||||||||||||
Roaming and wholesale revenues | — | 71,761 | — | — | 71,761 | |||||||||||||||||
Service revenues | — | 238,611 | — | — | 238,611 | |||||||||||||||||
Product sales | — | 8,329 | — | — | 8,329 | |||||||||||||||||
Total revenues | — | 246,940 | — | — | 246,940 | |||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||
Cost of service and operations | — | 116,293 | — | — | 116,293 | |||||||||||||||||
Cost of products sold | — | 20,690 | — | — | 20,690 | |||||||||||||||||
Selling and marketing | — | 33,245 | — | — | 33,245 | |||||||||||||||||
General and administrative expenses | 996 | 3,068 | — | — | 4,064 | |||||||||||||||||
Depreciation and amortization | — | 29,387 | — | — | 29,387 | |||||||||||||||||
Loss on disposal of property and equipment | — | 286 | — | — | 286 | |||||||||||||||||
Non-cash compensation | — | 922 | — | — | 922 | |||||||||||||||||
Income (loss) from operations | (996 | ) | 43,049 | — | — | 42,053 | ||||||||||||||||
Equity in earnings of subsidiaries | 43,496 | — | — | (43,496 | ) | — | ||||||||||||||||
Loss on debt exchange | — | — | — | — | ||||||||||||||||||
Interest and other income | 451 | 516 | — | — | 967 | |||||||||||||||||
Interest expense | (19,744 | ) | (69 | ) | — | — | (19,813 | ) | ||||||||||||||
Income before income tax expense | 23,207 | 43,496 | — | (43,496 | ) | 23,207 | ||||||||||||||||
Income tax expense | (5,288 | ) | — | — | — | (5,288 | ) | |||||||||||||||
Net income | $ | 17,919 | $ | 43,496 | $ | — | $ | (43,496 | ) | $ | 17,919 | |||||||||||
23
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 SEPTEMBER 30, 2004
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Subscriber revenues | $ | — | $ | 143,623 | $ | — | $ | — | $ | 143,623 | ||||||||||||
Roaming and wholesale revenues | — | 59,106 | — | — | 59,106 | |||||||||||||||||
Service revenues | — | 202,729 | — | — | 202,729 | |||||||||||||||||
Product sales | — | 8,637 | — | — | 8,637 | |||||||||||||||||
Total revenues | — | 211,366 | — | — | 211,366 | |||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||
Cost of service and operations | — | 99,250 | — | — | 99,250 | |||||||||||||||||
Cost of products sold | — | 20,265 | — | — | 20,265 | |||||||||||||||||
Selling and marketing | — | 40,090 | — | — | 40,090 | |||||||||||||||||
General and administrative expenses | 1 | 5,647 | — | — | 5,648 | |||||||||||||||||
Depreciation and amortization | — | 25,886 | — | — | 25,886 | |||||||||||||||||
Loss on disposal of property and equipment | — | 172 | — | — | 172 | |||||||||||||||||
Non-cash compensation | — | 20 | — | — | 20 | |||||||||||||||||
Income (loss) from operations | (1 | ) | 20,036 | — | — | 20,035 | ||||||||||||||||
Equity in earnings of subsidiaries | 20,132 | — | — | (20,132 | ) | — | ||||||||||||||||
Interest and other income | 234 | 124 | — | — | 358 | |||||||||||||||||
Interest expense | (19,178 | ) | (28 | ) | — | — | (19,206 | ) | ||||||||||||||
Income before income tax expense | 1,187 | 20,132 | — | (20,132 | ) | 1,187 | ||||||||||||||||
Income tax expense | — | — | — | — | — | |||||||||||||||||
Net income | $ | 1,187 | $ | 20,132 | $ | — | $ | (20,132 | ) | $ | 1,187 | |||||||||||
24
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Subscriber revenues | $ | — | $ | 485,752 | $ | — | $ | — | $ | 485,752 | ||||||||||||
Roaming and wholesale revenues | — | 198,656 | — | — | 198,656 | |||||||||||||||||
Service revenues | — | 684,408 | — | — | 684,408 | |||||||||||||||||
Product sales | — | 25,011 | — | — | 25,011 | |||||||||||||||||
Total revenues | — | 709,419 | — | — | 709,419 | |||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||
Cost of service and operations | — | 328,391 | — | — | 328,391 | |||||||||||||||||
Cost of products sold | — | 67,096 | — | — | 67,096 | |||||||||||||||||
Selling and marketing | — | 103,383 | — | — | 103,383 | |||||||||||||||||
General and administrative expenses | 1,592 | 11,533 | — | — | 13,125 | |||||||||||||||||
Merger related expenses | — | 436 | — | — | 436 | |||||||||||||||||
Depreciation and amortization | — | 83,843 | — | — | 83,843 | |||||||||||||||||
Loss on disposal of property and equipment | — | 393 | — | — | 393 | |||||||||||||||||
Non-cash compensation | — | 2,028 | — | — | 2,028 | |||||||||||||||||
Income (loss) from operations | (1,592 | ) | 112,316 | — | — | 110,724 | ||||||||||||||||
Equity in earnings of subsidiaries | 113,577 | — | — | (113,577 | ) | — | ||||||||||||||||
Loss on debt exchange | (482 | ) | — | — | — | (482 | ) | |||||||||||||||
Interest and other income | 1,175 | 1,391 | — | — | 2,566 | |||||||||||||||||
Interest expense | (58,835 | ) | (130 | ) | — | — | (58,965 | ) | ||||||||||||||
Income before income tax expense | 53,843 | 113,577 | — | (113,577 | ) | 53,843 | ||||||||||||||||
Income tax expense | (12,332 | ) | — | — | — | (12,332 | ) | |||||||||||||||
Net income | $ | 41,511 | $ | 113,577 | $ | — | $ | (113,577 | ) | $ | 41,511 | |||||||||||
25
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Revenues: | ||||||||||||||||||||||
Subscriber revenues | $ | — | $ | 401,938 | $ | — | $ | — | $ | 401,938 | ||||||||||||
Roaming and wholesale revenues | — | 153,964 | — | — | 153,964 | |||||||||||||||||
Service revenues | — | 555,902 | — | — | 555,902 | |||||||||||||||||
Product sales | — | 25,483 | — | — | 25,483 | |||||||||||||||||
Total revenues | — | 581,385 | — | — | 581,385 | |||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||
Cost of service and operations | — | 276,528 | — | — | 276,528 | |||||||||||||||||
Cost of products sold | — | 56,427 | — | — | 56,427 | |||||||||||||||||
Selling and marketing | — | 102,922 | — | — | 102,922 | |||||||||||||||||
General and administrative expenses | 665 | 15,970 | — | — | 16,635 | |||||||||||||||||
Depreciation and amortization | — | 78,793 | — | — | 78,793 | |||||||||||||||||
Loss on disposal of property and equipment | — | 3,082 | — | — | 3,082 | |||||||||||||||||
Non-cash compensation | — | 60 | — | — | 60 | |||||||||||||||||
Income (loss) from operations | (665 | ) | 47,603 | — | — | 46,938 | ||||||||||||||||
Equity in earnings of subsidiaries | 34,152 | — | — | (34,152 | ) | — | ||||||||||||||||
Loss on debt extinguishment | — | (13,101 | ) | — | — | (13,101 | ) | |||||||||||||||
Interest and other income | 461 | 283 | — | — | 744 | |||||||||||||||||
Interest expense | (55,760 | ) | (633 | ) | — | — | (56,393 | ) | ||||||||||||||
Income (loss) before income tax expense | (21,812 | ) | 34,152 | — | (34,152 | ) | (21,812 | ) | ||||||||||||||
Income tax expense | (625 | ) | — | — | — | (625 | ) | |||||||||||||||
Net income (loss) | $ | (22,437 | ) | $ | 34,152 | $ | — | $ | (34,152 | ) | $ | (22,437 | ) | |||||||||
26
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||
Net income | $ | 41,511 | $ | 113,577 | $ | — | $ | (113,577 | ) | $ | 41,511 | |||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||||||||
Equity in earnings of subsidiaries | (113,577 | ) | — | — | 113,577 | — | ||||||||||||||||
Non-cash compensation | — | 2,028 | — | — | 2,028 | |||||||||||||||||
Non-cash accretion of asset retirement obligation | — | 178 | — | — | 178 | |||||||||||||||||
Provision for bad debts | — | 6,804 | — | — | 6,804 | |||||||||||||||||
Depreciation and amortization of property and equipment | — | 61,047 | — | — | 61,047 | |||||||||||||||||
Amortization of intangible assets | — | 22,797 | — | — | 22,797 | |||||||||||||||||
Amortization of financing costs included in interest expense | 681 | — | — | — | 681 | |||||||||||||||||
Loss on debt extinguishment | 482 | — | — | — | 482 | |||||||||||||||||
Interest accreted on discount notes | 15,371 | — | — | — | 15,371 | |||||||||||||||||
Deferred income taxes | 12,273 | — | — | — | 12,273 | |||||||||||||||||
Loss on disposal of property and equipment | — | 393 | — | — | 393 | |||||||||||||||||
Merger related expenses | — | 436 | — | — | 436 | |||||||||||||||||
(Increase) decrease in: | ||||||||||||||||||||||
Receivable from/payable to parent | 37,271 | (59,160 | ) | — | — | (21,889 | ) | |||||||||||||||
Receivables | 14 | (17,881 | ) | — | — | (17,867 | ) | |||||||||||||||
Inventory | — | (1,014 | ) | — | — | (1,014 | ) | |||||||||||||||
Prepaid expenses and other assets | (13 | ) | 2,298 | — | — | 2,285 | ||||||||||||||||
Decrease in: | ||||||||||||||||||||||
Accounts payable and accrued expenses | (7,869 | ) | (10,945 | ) | — | — | (18,814 | ) | ||||||||||||||
Net cash provided by (used in) operating activities | (13,856 | ) | 120,558 | — | — | 106,702 | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||
Proceeds from sale of assets | — | 303 | — | — | 303 | |||||||||||||||||
Purchases of property and equipment | — | (76,319 | ) | — | — | (76,319 | ) | |||||||||||||||
Net cash paid in acquisition | — | (865 | ) | — | — | (865 | ) | |||||||||||||||
Merger related expenses | — | (436 | ) | — | — | (436 | ) | |||||||||||||||
Change in short term investments | (1,142 | ) | — | — | — | (1,142 | ) | |||||||||||||||
Net cash used in investing activities | (1,142 | ) | (77,317 | ) | — | — | (78,459 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||
Redemption of senior notes | (6,800 | ) | — | — | — | (6,800 | ) | |||||||||||||||
Capital distribution to parent | 17,162 | (91,392 | ) | — | — | (74,230 | ) | |||||||||||||||
Payments on capital leases | — | (82 | ) | — | — | (82 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | 10,362 | (91,474 | ) | — | — | (81,112 | ) | |||||||||||||||
Net decrease in cash and cash equivalents | (4,636 | ) | (48,233 | ) | — | — | (52,869 | ) | ||||||||||||||
Cash and cash equivalents at beginning of period | 6,698 | 120,418 | 16 | — | 127,132 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 2,062 | $ | 72,185 | $ | 16 | $ | — | $ | 74,263 | ||||||||||||
27
ALAMOSA (DELAWARE), INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(dollars in thousands, except as noted)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiary | Eliminations | Consolidated | ||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||
Net income (loss) | $ | (22,437 | ) | $ | 34,152 | $ | — | $ | (34,152 | ) | $ | (22,437 | ) | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||||||||
Equity in earnings of subsidiaries | (34,152 | ) | — | — | 34,152 | — | ||||||||||||||||
Non-cash compensation expense | — | 60 | — | — | 60 | |||||||||||||||||
Non-cash interest expense on derivative instruments | — | 6 | — | — | 6 | |||||||||||||||||
Non-cash accretion of asset retirement obligation | — | 139 | — | — | 139 | |||||||||||||||||
Provision for bad debts | — | 7,603 | — | — | 7,603 | |||||||||||||||||
Depreciation and amortization of property and equipment | — | 54,269 | — | — | 54,269 | |||||||||||||||||
Amortization of intangible assets | — | 24,524 | — | — | 24,524 | |||||||||||||||||
Amortization of financing costs included in interest expense | 634 | 84 | — | — | 718 | |||||||||||||||||
Loss on debt extinguishment | — | 13,101 | — | — | 13,101 | |||||||||||||||||
Interest accreted on discount notes | 18,351 | — | — | — | 18,351 | |||||||||||||||||
Loss on disposal of property and equipment | — | 3,082 | — | — | 3,082 | |||||||||||||||||
(Increase) decrease in: | ||||||||||||||||||||||
Receivable from/payable to parent | 476 | — | — | — | 476 | |||||||||||||||||
Receivables | — | (20,318 | ) | — | — | (20,318 | ) | |||||||||||||||
Inventory | — | 531 | — | — | 531 | |||||||||||||||||
Prepaid expenses and other assets | 194 | 1,640 | — | — | 1,834 | |||||||||||||||||
Increase (decrease) in: | ||||||||||||||||||||||
Accounts payable and accrued expenses | 3,837 | 3,232 | — | — | 7,069 | |||||||||||||||||
Net cash provided by (used in) operating activities | (33,097 | ) | 122,105 | — | — | 89,008 | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||
Proceeds from sale of assets | — | 569 | — | — | 569 | |||||||||||||||||
Purchases of property and equipment | — | (63,765 | ) | — | — | (63,765 | ) | |||||||||||||||
Purchases of intangible assets | — | (453 | ) | — | — | (453 | ) | |||||||||||||||
Investment in subsidiary | (198,612 | ) | 198,612 | — | — | — | ||||||||||||||||
Change in restricted cash | 1 | — | — | — | 1 | |||||||||||||||||
Change in short term investments | (50,342 | ) | — | — | — | (50,342 | ) | |||||||||||||||
Change in intercompany balances | 27,742 | (27,742 | ) | — | — | — | ||||||||||||||||
Net cash provided by (used in) investing activities | (221,211 | ) | 107,221 | — | — | (113,990 | ) | |||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||
Proceeds from issuance of senior notes | 250,000 | — | — | — | 250,000 | |||||||||||||||||
Repayments of borrowings under senior secured debt | — | (200,000 | ) | — | — | (200,000 | ) | |||||||||||||||
Debt issuance costs | (8,206 | ) | — | — | — | (8,206 | ) | |||||||||||||||
Capital distribution to parent | (8,348 | ) | — | — | — | (8,348 | ) | |||||||||||||||
Payments on capital leases | — | (415 | ) | — | — | (415 | ) | |||||||||||||||
Net cash provided by (used in) financing activities | 233,446 | (200,415 | ) | — | — | 33,031 | ||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (20,862 | ) | 28,911 | — | — | 8,049 | ||||||||||||||||
Cash and cash equivalents at beginning of period | 27,542 | 70,677 | 23 | — | 98,242 | |||||||||||||||||
Cash and cash equivalents at end of period | $ | 6,680 | $ | 99,588 | $ | 23 | $ | — | $ | 106,291 | ||||||||||||
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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:
• | forecasts of population growth in our territory; |
• | statements regarding our anticipated revenues, expense levels, liquidity, capital resources and operating losses; and |
• | 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, 2004 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:
• | our dependence on our affiliation with Sprint; |
• | 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; |
• | our anticipation of future losses; |
• | our dependence on back office services, such as billing and customer care, provided by Sprint; |
• | inaccuracies in financial information provided by Sprint; |
• | potential fluctuations in our operating results; |
• | our ability to predict future customer growth, as well as other key operating metrics; |
• | changes or advances in technology; |
• | the ability to leverage third generation products and services; |
• | competition in the industry and markets in which we operate; |
• | subscriber credit quality; |
• | our ability to attract and retain skilled personnel; |
• | our potential need for additional capital or the need for refinancing existing indebtedness; |
• | our potential inability to expand our services and related products in the event of substantial increases in demand for these services and related products; |
• | our inability to predict the outcomes of potentially material litigation; |
• | the potential impact of wireless local number portability, or WLNP; |
• | changes in government regulation; |
• | future acquisitions; |
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• | general economic and business conditions; and |
• | 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:
• | 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. |
• | 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. |
• | 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. |
• | 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 September 30, 2005, we had total licensed POPs of over 15.8 million, covered POPs of approximately 13.5 million and total subscribers of approximately 1.0 million.
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 tax authority.
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As part of our affiliation agreements with Sprint, we have contracted with Sprint to provide 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. 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 – We have recorded certain intangible assets in connection with acquisitions, including both identifiable intangibles and goodwill. Identifiable intangibles consist of the Sprint agreements and the respective subscriber bases in place at the acquired companies 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. The subscriber base intangible asset is amortized on a straight line basis over the estimated life of the acquired subscribers.
Long-lived asset recovery – Long-lived assets, consisting primarily of property, equipment and intangibles, comprised approximately 76 percent of our total assets at September 30, 2005. 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
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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. In performing this review, 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 is assumed to be ten years. Estimates and assumptions used in both estimating the useful life and evaluating potential impairment issues require a significant amount of judgment.
Operating leases – Operating leases and related leasehold improvement costs are accounted for based on the provisions of SFAS No. 13, "Accounting for Leases." We have a significant number of leases primarily associated with towers and other locations on which we install our network equipment. These leases are considered operating leases and the monthly rentals are expensed as incurred while any capital expenditures associated with preparing the site for our use are capitalized and depreciated. These capital expenditures are depreciated over the shorter of the lease term or the economic life of the respective assets. Additionally, certain of these operating leases contain rent escalation provisions over the term of the respective leases. For those leases with escalation provisions, the periodic rental expense is recorded on a straight line basis over the lease term.
Income taxes – We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method, 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.
On a quarterly basis, we evaluate the need for and adequacy of the valuation allowance based upon the expected realizability of our deferred tax assets and adjust the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the latest forecast of future taxable income, available tax planning strategies and the future reversal of existing taxable temporary differences.
Reliance on the timeliness and accuracy of data received from Sprint – We place significant reliance on Sprint as a service provider in terms of the timeliness and accuracy of financial and statistical data related to customers based in our service territory that we receive on a periodic basis from Sprint. We make significant estimates in terms of revenue, cost of service, selling and marketing costs and the adequacy of our allowance for uncollectible accounts based on this data we receive from Sprint. We obtain assurance as to the accuracy of this data through analytic review and reliance on the service auditor report on Sprint's internal control processes prepared by Sprint's external service auditor. Inaccurate or incomplete data from Sprint could have a material adverse effect on our results of operations and cash flow.
Consolidated Results of Operations (dollars in thousands)
For the three and nine month periods ended September 30, 2005 compared to the three and nine month periods ended September 30, 2004
Subscriber growth and key performance indicators – We had total subscribers of approximately 1,043,000 at September 30, 2005 compared to approximately 866,000 at September 30, 2004. This growth of approximately 177,000 subscribers represents a 20 percent increase year over year. The increase in subscriber growth is primarily attributable to an increase in our distribution channels, primarily in our own Sprint retail stores and branded dealers in our territory as well as overall growth in the wireless telecommunications industry.
Average monthly churn for the third quarter of 2005 was approximately 2.3 percent compared to approximately 2.4 percent for the third quarter of 2004.
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Service Revenues – Service revenues consist of revenues from our subscribers and roaming and wholesale revenue earned when subscribers from other carriers or resellers of PCS service use our portion of the PCS network of Sprint.
Subscriber revenue consists of payments received from our subscribers for monthly service under their service plans. Subscriber revenue also includes amortization of deferred activation fees and charges for the use of various features including PCS Vision, the wireless web and voice activated dialing. Subscriber revenues were $166,850 for the quarter ended September 30, 2005 compared to $143,623 for the quarter ended September 30, 2004. This increase of 16 percent was primarily due to the increase in our subscriber base discussed above. Subscriber revenues were $485,752 for the nine months ended September 30, 2005 compared to $401,938 for the nine months ended September 30, 2004. This increase of 21 percent was also primarily due to the increase in the subscriber base discussed above. Base ARPU (which does not include roaming revenue) decreased in the third quarter of 2005 to $54 compared to $57 in the third quarter of 2004. Base ARPU in the first nine months of 2005 was relatively consistent at $55 compared to $56 in the first nine months of 2004.
Roaming and wholesale revenue is comprised of revenue from Sprint and other PCS subscribers based outside of our territory who roam onto our portion of the PCS network of Sprint as well as revenue from resellers of PCS service whose subscribers use our portion of the PCS network of Sprint.
Roaming revenue was $56,923 for the quarter ended September 30, 2005 compared to $49,475 for the quarter ended September 30, 2004. This increase of 15 percent was due to a 19 percent increase in inbound roaming minutes to 719 million for the quarter ended September 30, 2005 compared to 604 million for the quarter ended September 30, 2004. Roaming revenue was $159,284 for the nine months ended September 30, 2005 compared to $135,887 for the nine months ended September 30, 2004. This increase of 17 percent was primarily due to a 18 percent increase in inbound roaming minutes to 2.0 billion for the nine months ended September 30, 2005 compared to 1.7 billion for the nine months ended September 30, 2004. The percentage increase in revenue in both the three and nine month periods ended September 30, 2005 was less than the percentage increase in minutes due to declining rates from carriers other than Sprint. We have a reciprocal roaming rate arrangement with Sprint pursuant to which per-minute charges for inbound and outbound roaming related to Sprint subscribers are identical. This rate is fixed at 5.8 cents per minute until December 31, 2006. We are currently a net receiver of roaming with Sprint, meaning that the minute volume from other Sprint subscribers roaming onto our network is greater than the minute volume from our subscribers roaming onto other portions of the PCS network of Sprint. The ratio of inbound to outbound Sprint roaming minutes was 1.17 to 1 for the nine months ended September 30, 2005. We have experienced an increase in the volume of inbound roaming traffic from PCS providers other than Sprint. This traffic is settled at rates separately negotiated by Sprint on our behalf with the other PCS providers and these rates have declined in some cases during 2005 compared to 2004.
Wholesale revenue was $14,838 for the quarter ended September 30, 2005 compared to $9,631 for the quarter ended September 30, 2004. This increase of 54 percent was due to the addition of revenue related to subscribers of another PCS carrier with whom Sprint entered into an agreement to allow those subscribers to use the PCS network of Sprint on a wholesale basis subsequent to September 30, 2004. As a result, all minutes of use for those subscribers in their home areas as well as when roaming are on the PCS network of Sprint. Wholesale revenue was $39,372 for the nine months ended September 30, 2005 compared to $18,077 for the nine months ended September 30, 2004. This increase of 118 percent was also due to the addition of wholesale subscribers as discussed above.
Product sales and cost of products sold – We record revenue from the sale of handsets and accessories, net of an allowance for returns, as product sales. Product sales revenue and cost of products sold are recorded for all products that are sold through our retail stores as well as those sold to our local indirect agents. The cost of handsets sold generally exceeds the retail sales price as we subsidize the price of handsets for competitive reasons. Sprint's handset return policy allows customers to return their handsets for a full refund within 14 days of purchase. When handsets are returned to us, we may be able to reissue the handsets to customers at little additional cost to us. However, when
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handsets are returned to Sprint for refurbishing, we may receive a credit from Sprint, which is less than the amount we originally paid for the handset.
Product sales revenue for the quarter ended September 30, 2005 was $8,329 compared to $8,637 for the quarter ended September 30, 2004. Cost of products sold for the quarter ended September 30, 2005 was $20,690 compared to $20,265 for the quarter ended September 30, 2004. As such, the subsidy on handsets sold through our retail and local indirect channels was $12,361 in the quarter ended September 30, 2005 and $11,628 in the quarter ended September 30, 2004. Product sales revenue for the nine months ended September 30, 2005 was $25,011 compared to $25,483 for the nine months ended September 30, 2004. Cost of products sold for the nine months ended September 30, 2005 was $67,096 compared to $56,427 for the nine months ended September 30, 2004. As such, the subsidy on handsets sold through our retail and local indirect channels was $42,085 in the nine months ended September 30, 2005 and $30,944 in the nine months ended September 30, 2004. The increase in subsidies of $11,141 in the nine months ended September 30, 2005 is primarily due to an increase in the number of activations through our retail and local indirect channels of approximately 17,000 subscribers and an increase in subsidies associated with handset upgrades of approximately $1,758.
Cost of service and operations – Cost of service and operations includes the costs of operating our portion of the PCS network of Sprint. These costs include items such as tower operating leases and maintenance as well as backhaul costs, which are costs associated with transporting wireless calls across our portion of the PCS network of Sprint to another carrier's network. In addition, cost of service and operations includes outbound roaming costs, long distance charges, the fees we pay to Sprint for our 8 percent affiliation fee, back office services such as billing and customer care, as well as our provision for estimated uncollectible accounts. Expenses of $116,293 in the quarter ended September 30, 2005 were approximately 17 percent higher than the $99,250 incurred in the quarter ended September 30, 2004. Expenses of $328,391 in the nine months ended September 30, 2005 were approximately 19 percent higher than the $276,528 incurred in the nine months ended September 30, 2004. The increase in expenses in the three and nine months ended September 30, 2005 was due to the increased volume of traffic carried on our network due to the increase in our subscribers, as well as wholesale and resale customers. Total minutes of use on our network were 3.2 billion minutes in the quarter ended September 30, 2005 compared to 2.5 billion minutes in the quarter ended September 30, 2004 for an increase in traffic of 28 percent. Total minutes of use on our network were 9.1 billion minutes in the nine months ended September 30, 2005 compared to 6.6 billion minutes in the nine months ended September 30, 2004 for an increase in traffic of 38 percent. The increase in costs was lower relative to the increase in traffic due to the leverage we experience in spreading our fixed network operating costs over a larger volume of activity.
Selling and marketing expenses – Selling and marketing expenses include advertising, promotion, sales commissions and expenses related to our distribution channels, including our retail store expenses. In addition, we reimburse Sprint for the subsidy on handsets sold through national retail stores due to the fact that these retailers purchase their handsets from Sprint. This subsidy is recorded as a selling and marketing expense. Total selling and marketing expenses of $33,245 in the quarter ended September 30, 2005 were 17 percent lower than the $40,090 incurred in the quarter ended September 30, 2004. Total selling and marketing expenses of $103,383 in the nine months ended September 30, 2005 were comparable to the $102,922 incurred in the nine months ended September 30, 2004. The fluctuations experienced during the three months and nine months ended September 30, 2005, respectively, are attributable to fluctuations in variable costs resulting from fluctuations in gross activations of approximately (15,000) and 19,000 in the three months and nine months ended September 30, 2005, respectively, as compared to the three months and nine months ended September 30, 2004, as well as fluctuations in subsidies on handsets sold through national retail stores to existing subscribers of approximately $(2,197) and $230 in the three months and nine months ended September 30, 2005, respectively.
General and administrative expenses – General and administrative expenses include corporate costs and expenses such as administration and finance. General and administrative expenses of $4,064 in the quarter ended September 30, 2005 were 28 percent lower than the $5,648 incurred in the quarter ended September 30, 2004. General and administrative expenses of $13,125 in the nine months ended
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September 30, 2005 were 21 percent lower than the $16,635 incurred in the nine months ended September 30, 2004. The decrease in the three months and nine months ended September 30, 2005 has been the result of a reduced allocation of general and administrative expenses incurred at the consolidated Alamosa Holdings level due to the allocation of costs to AirGate.
Merger related expenses – Merger related expenses in the nine months ended September 30, 2005 of $436 relates to incremental travel costs associated with our employees in connection with the acquisition of AirGate PCS, Inc. ("AirGate") by Alamosa Holdings that are not considered part of the cost of the transaction in the purchase price allocation. These costs were incurred by us due to the fact that Alamosa Holdings has no employees.
Depreciation and amortization – Depreciation and amortization includes depreciation of our property and equipment as well as amortization of intangibles. Depreciation is calculated on the straight-line method over the estimated useful lives of the underlying assets and totaled $21,723 in the quarter ended September 30, 2005, which was 19 percent higher than the $18,324 recorded in the quarter ended September 30, 2004. Depreciation totaled $61,047 in the nine months ended September 30, 2005, which was 12 percent higher than the $54,269 recorded in the nine months ended September 30, 2004. The increase in the three months and nine months ended September 30, 2005 is due to the increase in depreciable costs as a result of our capital expenditures in the last six months of 2004 and the first nine months of 2005.
Amortization expense relates to identifiable intangible assets we have recorded related to the agreements with Sprint and the customer base acquired in connection with purchase transactions. Amortization expense of $7,664 in the quarter ended September 30, 2005 was comparable to the $7,562 in the quarter ended September 30, 2004. Amortization expense of $22,797 in the nine months ended September 30, 2005 was 7 percent less than the $24,524 in the nine months ended September 30, 2004. The decrease in the nine months ended September 30, 2005 is due to the subscriber bases acquired in the quarter ended March 31, 2001, which became fully amortized during the quarter ended March 31, 2004.
Loss on disposal of property and equipment – We recorded a loss on disposal of property and equipment in the three months and nine months ended September 30, 2005 of $286 and $393, respectively, compared to a loss of $172 and $3,082 in the three months and nine months ended September 30, 2004, respectively. Losses recorded in 2004 primarily relate to the abandonment of certain network equipment with a carrying value of approximately $2.1 million that had become technologically obsolete.
Non-cash compensation – Non-cash compensation expense of $922 in the quarter ended September 30, 2005 was significantly higher than the $20 in the quarter ended September 30, 2004. Non-cash compensation expense of $2,028 in the nine months ended September 30, 2005 was significantly higher than the $60 in the nine months ended September 30, 2004. The expense relates to vesting of restricted stock that had been awarded to certain of our officers. The increase in 2005 is due to the issuance of an additional 200,000 shares of restricted stock to our officers.
Income from operations – Our operating income for the quarter ended September 30, 2005 was $42,053 compared to $20,035 for the quarter ended September 30, 2004, representing an improvement of $22,018. Our operating income for the nine months ended September 30, 2005 was $110,724 compared to $46,938 for the nine months ended September 30, 2004, representing an improvement of $63,786. The improvement in operating income is primarily attributable to the leverage we have achieved in spreading our fixed costs over a larger base of subscribers.
Loss on debt extinguishment – The loss on debt extinguishment of $482 recorded in the nine months ended September 30, 2005 includes a premium paid on early redemption of our 12 7/8% Senior Discount Notes in April 2005 of $411 and $71 in unamortized loan costs written off upon the redemption of these notes. The loss on debt extinguishment of $13,101 recorded in the nine months ended September 30, 2004 relates to the repayment and termination of our senior secured credit facility in January 2004. The loss is comprised of $12,565 in net deferred loan fees related to the terminated credit facility plus the recognition of $536 in other comprehensive loss related to derivative instruments used for hedging interest rate risk on outstanding borrowings under the credit facility.
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Interest and other income – Interest and other income represents amounts earned on the investment of excess cash. Income of $967 in the quarter ended September 30, 2005 was significantly higher than the $358 earned in the quarter ended September 30, 2004. Income of $2,566 in the nine months ended September 30, 2005 was significantly higher than the $744 earned in the nine months ended September 30, 2004. The increase in interest and other income earned in the three months and nine months ended September 30, 2005 is primarily due to the fact that during 2004, the Board of Directors approved a change in the Company's investment policy to extend the allowable weighted average maturity of investments from the 90 days allowed previously to 270 days. As a result, excess cash has been invested in higher yielding instruments. Additionally, the yields on all of our investments have increased during 2005 due to increases in market interest rates.
Interest expense – Interest expense for the quarters ended September 30, 2005 and 2004 included non-cash interest of $2,427 and $6,525, respectively, related to the accretion of senior discount notes, the amortization of debt issuance costs and changes in the fair value of hedge instruments that do not qualify for hedge accounting treatment. The increase in total interest expense to $19,813 in the quarter ended September 30, 2005 from $19,206 in the quarter ended September 30, 2004 is due primarily to the issuance of the 8 1/2% Senior Notes in the first quarter of 2004 which were at a slightly higher interest rate than the secured credit facility that was terminated with the proceeds from the 8 1/2% Senior Notes. Interest expense for the nine months ended September 30, 2005 and 2004 included non-cash interest of $16,052 and $19,075, respectively. The increase in total interest expense to $58,965 in the nine months ended September 30, 2005 from $56,393 in the nine months ended September 30, 2004 is also due to the increased level of debt after the debt exchange completed in November 2004 coupled with a lower interest rate on senior notes issued in January 2004.
Income Taxes
We account for income taxes in accordance with SFAS No. 109 "Accounting for Income Taxes." As of December 31, 2000, the net deferred tax asset consisted primarily of temporary differences related to the treatment of organizational costs, unearned compensation, interest expense and net operating loss carry forwards. The net deferred tax asset was fully offset by a valuation allowance as of December 31, 2000 because there was sufficient uncertainty as to whether we would recognize the benefit of those deferred taxes in future periods. In connection with the acquisitions completed in the quarter ended March 31, 2001, we recorded significant deferred tax liabilities due to differences in the book and tax basis of the net assets acquired, particularly intangible assets.
The reversal of the timing differences which gave rise to these deferred tax liabilities allowed us to realize the benefit of timing differences which gave rise to the deferred tax asset. As a result, we released the valuation allowance during the third quarter of 2001. Prior to 2001, all deferred tax benefit had been fully offset by an increase in the valuation allowance such that there was no financial statement impact with respect to income taxes. With the reduction of the valuation allowance in 2001, we began to reflect a deferred tax benefit in our consolidated statement of operations. During 2003, we reinstated a valuation allowance to reflect the deferred tax assets at the amounts expected to be realized. The valuation allowance was further increased in 2004 to reflect the deferred tax assets at the amounts expected to be realized. The 2005 forecasted annual effective tax rate reflects a release of a portion of the valuation allowance based upon projected 2005 taxable income. On a quarterly basis, we evaluate the need for and adequacy of the valuation allowance based on the expected realizability of our deferred tax assets and adjust the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the latest forecast of future taxable income, available tax planning strategies and the future reversal of existing taxable temporary differences.
Cash Flows
Operating activities – Operating cash flows increased $17,694 in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. This increase is primarily due to an increase in net income of $63,948 reduced by advances to Alamosa Holdings of approximately $22,000 in connection with Alamosa Holdings' acquisition of AirGate in the first quarter of 2005.
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Investing activities – Our investing cash flows were negative $78,459 in the nine months ended September 30, 2005 compared to negative $113,990 in the nine months ended September 30, 2004. Cash purchases of property and equipment were $76,319 and $63,765 in the nine months ended September 30, 2005 and 2004, respectively. In the nine months ended September 30, 2004, we invested approximately $50 million in short term investments.
Financing activities – Our financing cash flows decreased in the nine months ended September 30, 2005 to negative $81,112 from positive $33,031 in the nine months ended September 30, 2004. In the nine months ended September 30, 2004, we received net proceeds from an offering of senior notes of approximately $242 million, which were used to permanently repay $200 million in borrowings outstanding under our senior secured credit facility. In the nine months ended September 30, 2005, we made capital distributions to Alamosa Holdings in the amount of $74,230 in connection with Alamosa Holdings' acquisition of AirGate.
Liquidity and Capital Resources
Since inception, we have financed our operations through capital contributions from our owners, debt financing and proceeds generated from public offerings of our common stock. The proceeds from these transactions have been used to fund the build-out of our portion of the PCS network of Sprint, subscriber acquisition costs and working capital.
While we have incurred net losses and negative cash flows from operating activities in the past, we generated approximately $132 million and approximately $107 million in cash flows from operating activities for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Additionally, we reported net income of $45 million for the nine months ended September 30, 2005.
As of September 30, 2005, we had $74 million of cash on hand as well as $52 million in short-term investments, which we believe will be sufficient to fund expected capital expenditures and to cover our working capital and debt service requirements (including dividends on Alamosa Holdings preferred stock) for at least the next 12 months.
Our future liquidity will be dependent on a number of factors influencing our projections of operating cash flows, including those related to subscriber growth, ARPU, average monthly churn and cost per gross addition. Should actual results differ significantly from these assumptions, our liquidity position could be adversely affected and we could be in a position that would require us to raise additional capital, which may or may not be available on terms acceptable to us, if at all, and could have a material adverse effect on our ability to achieve our intended business objectives.
Future Trends That May Affect Operating Results, Liquidity and Capital Resources
On December 15, 2004, Sprint Corporation ("Sprint") and Nextel Communications, Inc. ("Nextel") announced a proposed merger of their two companies. Nextel operated a wireless mobility communications network in certain territories in which we also provide digital wireless mobility communications network services under the Sprint or affiliated brands. Sprint and Nextel closed the merger on August 12, 2005.
Based upon the terms of the exclusivity covenants contained in the management agreement between Sprint and AirGate PCS, Inc., a wholly-owned subsidiary of Alamosa Holdings and a sister company to us, Alamosa Holdings believes that Nextel's operation of a wireless mobility communications network in territories in which AirGate operates from and after the closing of the Sprint-Nextel merger constitutes a breach of the exclusivity covenants in the AirGate management agreement with Sprint. Moreover, based upon public statements and disclosures made by Sprint and Nextel, we believe that actions that Sprint and Nextel may take in connection with the integration of their operations following completion of the merger may constitute a breach of the exclusivity and certain other provisions of the management agreements between Sprint and our operating subsidiaries.
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As previously disclosed, Alamosa Holdings had been engaged in discussions with Sprint in an attempt to reach a mutually acceptable resolution of the issues related to the Sprint-Nextel merger and its effect on the existing management agreements between Sprint and Alamosa Holdings' subsidiaries. On August 8, 2005, AirGate filed a lawsuit against Sprint, certain of its affiliates and Nextel in the Delaware Court of Chancery alleging, among other things, that following the completion of the merger, Sprint would be in breach of the exclusivity covenants contained in its management agreement with AirGate and that Nextel unlawfully interfered with AirGate's exclusive rights under such agreement. The complaint seeks, among other things, an order directing Sprint and its affiliates to specifically perform their contractual obligations under their agreements with AirGate, an injunction preventing Sprint and Nextel from taking any action or entering into any agreement that would violate the exclusivity covenants contained in the agreements, a declaratory judgment declaring the rights, remedies and obligations of the parties under the agreements, and damages. We, along with our operating subsidiaries, also may decide to pursue remedies against Sprint and Nextel, including bringing a lawsuit against Sprint and Nextel.
Under our affiliation agreements with Sprint, an event of termination can be declared by us after a material breach by Sprint is not cured within the applicable grace period, which, without extension by us, could be as much as 180 days. If we have the right to terminate our management agreements because of an event of termination caused by Sprint, generally we may (i) require Sprint to purchase all of our operating assets used in connection with our portion of the PCS network of Sprint, (ii) 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 or (iii) choose not to terminate our management agreements and sue Sprint for damages or other relief or submit the matter to arbitration.
Should the breach not be cured by Sprint or a modification, waiver or extension not be granted by us, the election by us to terminate the affiliation agreements would constitute an event of default under each series of our outstanding senior notes. Upon an event of default, the holders of the senior notes would have the right to demand payment and we may not have adequate liquidity to satisfy this obligation. At this point in time, we do not anticipate that an event of termination of the affiliation agreements will occur.
We may experience a higher average monthly churn rate than we are currently anticipating. Our average monthly churn for the third quarter of 2005 was 2.3 percent compared to 2.3 percent for the year ended December 31, 2004 and 2.7 percent for the year ended December 31, 2003. If average monthly churn increases over the long-term, we would lose the cash flows attributable to those customers.
We may incur significant handset subsidy costs for existing customers who upgrade to a new handset. As our customer base matures and technological advances in our services take place, more existing customers will begin to upgrade to new handsets to take advantage of these services. We have limited historical experience regarding the rate at which existing customers upgrade their handsets and if more customers upgrade than we are currently anticipating, it could have a material adverse impact on our earnings and cash flows.
We may not be able to access the credit or equity markets for additional capital if the liquidity discussed above is not sufficient for the cash needs of our business. We continually evaluate options for additional sources of capital to supplement our liquidity position and maintain maximum financial flexibility. If the need for additional capital arises due to our actual results differing significantly from our business plan or for any other reason, we may be unable to raise additional capital.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosures of the income statement effects of share-based
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payments is no longer an alternative. SFAS No. 123(R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of July 1, 2005. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. On April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance dates for SFAS No. 123(R). The new rule allows registrants to implement SFAS No. 123(R) at the beginning of their next fiscal year that begins after June 15, 2005. As a result, the Company will be required to adopt the provisions of SFAS No. 123(R) on January 1, 2006. The Company is currently assessing the impact of adopting SFAS No. 123(R) to its consolidated results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to voluntary changes as well as those changes required by an accounting pronouncement if that pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle as opposed to being shown as a cumulative adjustment in the period of change. The Statement is effective for all changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to materially impact the Company.
On March 31, 2005, the FASB issued Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement Obligations" which is an interpretation of SFAS No. 143, "Accounting for Asset Retirement Obligations." FIN 47 clarifies that the recognition and measurement provisions of SFAS No. 143 apply to asset retirement obligations in which the timing and/or method of settlement may be conditional on a future event, including obligations to remediate asbestos at the end of a building's useful life and obligations to dispose of chemically-treated telephone poles at the end of their useful lives. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently assessing the impact of adopting FIN 47 to its consolidated results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted under the reduced disclosure format pursuant to General Instruction H(2)(c) of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures. The Company's management with the participation of the Company's Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this quarterly report, the Company's disclosure controls and procedures are effective. |
(b) | Changes in Internal Control Over Financial Reporting. There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. |
We place reliance on Sprint to adequately design its internal controls with respect to the processes established to provide financial information and other information to us and the other PCS Affiliates of Sprint. To address this issue, Sprint engages its independent auditors to perform a periodic evaluation of these controls and to provide a "Report on Controls Placed in Operation and Tests of Operating Effectiveness for Affiliates" under guidance provided in Statement of Auditing Standards No. 70. This report is provided to us semi-annually.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Part I, Item 1, Note 13 under the caption "Commitments and Contingencies – Litigation" for a description of legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted under the reduced disclosure format pursuant to General Instruction H(2)(c) of Form 10-Q.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
See the Exhibit Index following the signature page hereto for a list of the exhibits filed pursuant to Item 601 of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALAMOSA (DELAWARE), INC. (Registrant) | ||||||
/s/ David E. Sharbutt | ||||||
David E. Sharbutt Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | ||||||
/s/ Kendall W. Cowan | ||||||
Kendall W. Cowan Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||
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EXHIBIT INDEX
EXHIBIT NUMBER | EXHIBIT TITLE | |||||
3.1 | Amended and Restated Certificate of Incorporation of Alamosa (Delaware), Inc., filed as Exhibit 3.1 to Form 10-Q of Alamosa (Delaware), Inc. for the quarterly period ended June 30, 2001 (SEC File No. 001-15657), which exhibit is incorporated herein by reference. | |||||
3.2 | Amended and Restated Bylaws of Alamosa (Delaware), Inc., filed as Exhibit 3.2 to the Registration Statement on Form S-4, dated May 9, 2001 (SEC File No. 333-60572) of Alamosa (Delaware), Inc., which exhibit is incorporated herein by reference. | |||||
10.1† | 2006 Board and Board Committee Member Compensation Plan, filed as exhibit 10.1 to the current report on Form 8-K of Alamosa Holdings, Inc. (SEC File No. 000-16793), dated October 31, 2005, which exhibit is incorporated herein by reference. | |||||
31.1 * | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
31.2 * | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||||
32.1 * | Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
32.2 * | Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
† Exhibit is management contract or compensatory plan.
* Exhibit is filed herewith.