SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
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(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001 Commission File No. 0-16751
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NTELOS Inc.
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 10/31/01 16,914,210
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EXPLANATORY NOTE
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This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2001 is being filed in order to reverse the
$5.6 million asset impairment charge recorded during the third quarter of 2000
associated with certain switching equipment planned for early disposition and to
increase depreciation expense by $2.4 million for the fiscal year ended Decmber
31, 2000 and by $.3 million and $2.0 million for the three and nine months ended
September 30, 2001, respectively, to reflect the shortened useful life.
Additionally, this amendment adjusts the per share value assigned to the common
shares issued in the merger with R&B Communications ("R&B") on February 13, 2001
with a total increase to equity of $48 million and an increase to amortization
expense on the related offsetting assets of $.5 million and $1.2 million for the
three and nine months ended September 30, 2001. See Note 1 for further details
on these restatements and for a summary of the financial statement impact.
2
NTELOS Inc.
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, September 30, 2001 and
December 31, 2000 4-5
Condensed Consolidated Statements of Operations, Three and Nine
Month Periods Ended September 30, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows, Nine Month
Periods Ended September 30, 2001 and 2000 7
Condensed Consolidated Statements of Shareholders' Equity, Three
Quarter Periods Ended September 30, 2001 and 2000 8
Notes to Condensed Consolidated Financial Statements 9-16
Management's Discussion and Analysis of Financial Condition and
Results of Operations 17-29
SIGNATURE 30
3
NTELOS Inc.
Condensed Consolidated Balance Sheets
September 30,
2001
(Unaudited and December 31,
(In thousands) Restated) 2000
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Assets
Current Assets
Cash and cash equivalents $ 8,971 $ 1,637
Restricted cash 4,550 20,121
Accounts receivable, net of allowance of $13,573 and $5,100, respectively 36,305 24,268
Inventories and supplies 7,062 7,896
Other receivables and deposits 10,443 11,500
Prepaid expenses and other 4,600 3,178
Income tax receivable - 2,930
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71,931 71,530
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Investments and Advances
Advances to affiliates - 66,210
Securities and investments 14,440 17,405
Restricted cash 31,317 50,903
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45,757 134,518
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Property and Equipment
Land and building 47,156 26,988
Network plant and equipment 404,564 293,024
Furniture, fixtures, and other equipment 58,025 39,539
Radio spectrum licenses 455,425 428,317
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Total in service 965,170 787,868
Under construction 62,744 47,072
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1,027,914 834,940
Less accumulated depreciation 137,439 86,335
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890,475 748,605
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Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization of $8,672 and $4,253, respectively 127,310 45,861
Other intangibles, less accumulated amortization of $8,363 and $3,554, respectively 35,029 44,043
Deferred charges 21,374 26,586
Deferred tax asset 4,423 -
Radio spectrum licenses not in service 13,828 7,874
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201,964 124,364
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$ 1,210,127 $ 1,079,017
==================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
NTELOS Inc.
Condensed Consolidated Balance Sheets
September 30, 2001
(Unaudited and December 31,
(In thousands) Restated) 2000
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 28,307 $ 33,119
Advance billings and customer deposits 10,216 6,697
Accrued payroll 2,644 2,420
Accrued interest 5,991 20,894
Deferred revenue 6,041 4,843
Other accrued liabilities 7,481 7,362
Income taxes payable 144 -
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60,824 75,335
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Long-Term Debt 638,358 556,287
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Long-Term Liabilities
Deferred income taxes - 37,505
Retirement benefits 17,163 12,017
Long-term deferred liabilities 43,886 13,750
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61,049 63,272
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Minority Interests 278 1,258
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Redeemable, Convertible Preferred Stock 258,632 246,906
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Commitments
Shareholders' Equity
Preferred stock - -
Common stock 177,962 45,272
Stock warrants 22,874 22,874
Retained earnings 350 59,355
Unrealized (loss) gain on securities available for sale and cash flow hedge, (10,200) 8,458
net
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190,986 135,959
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$ 1,210,127 $ 1,079,017
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc.
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
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Sept 30, 2001 Sept 30, 2000
(In thousands except per share amounts) (Restated) Sept 30, 2000 (Restated) Sept 30, 2000
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Operating Revenues
Wireless communications $ 31,996 $ 15,316 $ 87,592 $ 19,431
Wireline communications 21,513 14,886 63,270 42,666
Other communications services 2,552 3,222 7,280 13,455
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56,061 33,424 158,142 75,552
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Operating Expenses
Cost of sales (exclusive of items shown separately below) 11,901 5,830 34,627 10,687
Maintenance and support 16,252 8,801 46,012 20,488
Depreciation and amortization 23,150 13,630 59,390 20,381
Customer operations 16,029 10,978 46,781 18,369
Corporate operations 4,806 3,362 14,548 7,521
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72,138 42,601 201,358 77,446
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Operating Loss (16,077) (9,177) (43,216) (1,894)
Other Income (Expenses)
Equity loss from PCS investees
VA PCS Alliance - (840) - (3,679)
WV PCS Alliance - (1,934) (1,286) (5,750)
Gain on sale of assets 22,261 62,633 22,967 62,633
Other financing costs - (6,276) - (6,276)
Interest expense (19,542) (12,278) (56,989) (13,748)
Other income, principally interest 733 3,051 4,042 3,610
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(12,625) 35,179 (74,482) 34,896
Income Tax (Benefit) Provision (4,075) 14,004 (26,645) 13,917
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(8,550) 21,175 (47,837) 20,979
Minority Interests in Losses (Earnings) of Subsidiaries - - 3,058 (105)
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(Loss) Income from Continuing Operations (8,550) 21,175 (44,779) 20,874
Discontinued operation
Income (loss) from discontinued operation, net of tax - (290) - 396
Gain on sale of discontinued operation, net of tax - 16,497 - 16,497
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Net (Loss) Income (8,550) 37,381 (44,779) 37,767
Dividend requirements on preferred stock 4,849 5,670 14,226 5,670
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(Loss) Income Applicable to Common Shares $ (13,399) $ 31,711 $ (59,005) $ 32,097
====================================================================================================================================
Basic Earnings Per Common Share:
(Loss) income from continuing operations $ (0.79) $ 1.18 $ (3.62) $ 1.16
Income from discontinued operation - 1.23 - 1.29
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Basic (loss) earnings per common share $ (0.79) $ 2.41 $ (3.62) $ 2.45
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Diluted Earnings Per Common Share
(Loss) income from continuing operations $ (0.79) $ 1.15 $ (3.62) $ 1.14
Income from discontinued operation - 1.20 - 1.26
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Diluted (loss) earnings per common share $ (0.79) $ 2.35 $ (3.62) $ 2.40
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Average shares outstanding - basic 16,890 13,128 16,282 13,099
Average shares outstanding - diluted 16,890 13,516 16,282 13,359
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Cash dividends per common share $ - $ - $ - $ 0.11475
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
NTELOS Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
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September 30, 2001
(In thousands) (Restated) September 30, 2000
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Cash flows from operating activities
Net (loss) income $ (44,779) $ 37,767
Deduct income from discontinued operation - (396)
Deduct gain on sale of discontinued operations - (16,497)
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(Loss) income from continuing operations (44,779) 20,874
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on disposition of investment (22,967) (62,633)
Depreciation 50,348 17,826
Amortization 9,042 2,555
Deferred taxes (28,318) 24,490
Retirement benefits and other (897) 2,025
Accrued interest on long-term debt 23,408 -
Accrued interest income on restricted cash (3,164) -
Equity loss from PCS Alliances 1,286 9,428
Accretion of loan discount and origination fees 3,174 -
Changes in assets and liabilities from operations, net of effects of
acquisitions and dispositions:
Increase in accounts receivable (3,032) (7,443)
Decrease in materials and supplies 1,538 180
Increase in other current assets (4,822) (503)
Net changes in income taxes 3,074 (9,495)
Increase (decrease) in accounts payable (15,496) 5,669
Increase (decrease) in other accrued liabilities (442) 6,505
Increase in other current liabilities 1,736 4,081
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Net cash provided by (used in) continuing operations (30,311) 13,559
Net cash used in discontinued operation - (544)
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Net cash provided by (used in) operating activities (30,311) 13,015
Cash flows from investing activities
Purchases of property and equipment (72,680) (34,153)
Cash payment on purchase of PrimeCo VA - (408,644)
Investment in restricted cash, net - (70,259)
Proceeds from sale of discontinued operation 3,500 31,744
Investments in PCS Alliances (687) (15,292)
Cash on hand in merged entity 4,096 -
Advances to PCS Alliances (2,960) (53,805)
Deposit on assets 8,000 -
Proceeds from sale of towers and investments 26,992 3,200
Purchase of minority interest (93) (10,745)
Acquisition of Internet company and subscribers - (1,364)
Purchase of investments and other (895) (4,618)
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Net cash used in investing activities (34,727) (563,936)
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Cash flows from financing activities
Proceeds from issuance of long-term debt 76,000 520,459
Proceeds from issuance of preferred stock and warrants - 242,538
Payoff of VA PCS Alliance long-term debt - (118,570)
Cash dividends - (1,501)
Payments on senior notes - (12,727)
Additional payments under lines of credit (net) and other debt instruments (2,943) (23,530)
Net proceeds from exercise of stock options 533 1,095
Payment of debt financing closing costs (1,218) (17,722)
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Net cash provided by financing activities 72,372 590,042
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Increase in cash and cash equivalents 7,334 39,121
Cash and cash equivalents:
Beginning 1,637 198
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Ending $ 8,971 $ 39,319
================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
7
NTELOS Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited and Restated)
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholders'
(In thousands) Shares Amount Warrants Earnings Income Equity
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Balance, December 31, 1999 13,060 $ 43,943 $ - $ 50,385 $ 21,856 $ 116,184
Comprehensive loss:
Net income 48
Unrealized loss on securities available for sale,
net of $1,533 of deferred tax benefit (2,409)
Comprehensive loss (2,361)
Dividends on common shares (1,501) (1,501)
Stock options exercised, net 34 382 382
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Balance, March 31, 2000 13,094 44,325 - 48,932 19,447 112,704
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Comprehensive income:
Net income 337
Unrealized loss on securities available for sale,
net of $439 of deferred tax benefit 686
Comprehensive income 1,023
Stock options exercised, net 23 422 422
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Balance, June 30, 2000 13,117 44,747 - 49,269 20,133 114,149
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Comprehensive income:
Net income 37,381
Unrealized loss on securities available for sale,
net of $6,148 of deferred tax benefit (9,663)
Comprehensive income 27,718
Dividends on preferred shares (5,670) (5,670)
Issuance of warrants 22,874 22,874
Stock options exercised, net 13 291 291
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Balance, September 30, 2000 13,130 $ 45,038 $ 22,874 $ 80,980 $ 10,470 $ 159,362
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Balance, December 31, 2000 13,132 $ 45,272 $ 22,874 $ 59,355 $ 8,458 $ 135,959
Comprehensive loss:
Net loss (17,254)
Cash flow hedge:
Cumulative effect of the adoption of SFAS No.
133, net of $2,489 of deferred tax benefit (3,900)
Derivative losses, net of $1,523 of deferred tax
benefit (2,402)
Unrealized loss on securities available for sale,
net of $979 of deferred tax benefit (1,531)
Comprehensive loss (25,087)
Common stock issuance pursuant to R&B Merger 3,716 131,807 131,807
Dividends on preferred shares (4,687) (4,687)
Shares issued through Employee Stock 7 145 145
Purchase Plan
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Balance, March 31, 2001 16,855 177,224 22,874 37,414 625 238,137
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Comprehensive loss:
Net loss (18,975)
Unrealized gain on securities available for sale,
net of $3,626 of deferred tax obligation 5,695
Derivative gains, net of $866 of deferred tax
obligation 1,361
Comprehensive loss (11,919)
Dividends on preferred shares (4,690) (4,690)
Stock options exercised, net 12 106 106
Shares issued through Employee Stock 7 146 146
Purchase Plan
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Balance, June 30, 2001 16,874 177,476 22,874 13,749 7,681 221,780
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Comprehensive loss:
Net loss (8,550)
Realization of gain due to sale of equity
interest in
Illuminet Holdings, Inc., net of
$8,138 of deferred tax obligation (12,805)
Derivative losses, net of $3,231 of
deferred tax
Benefit (5,076)
Comprehensive loss (26,431)
Dividends on preferred shares (4,849) (4,849)
Stock issuance for purchase of minority 20 350 350
interest
Stock options exercised, net 3 - -
Shares issued through Employee Stock 11 136 136
Purchase Plan
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Balance, September 30, 2001 16,908 $ 177,962 $ 22,874 $ 350 $ (10,200) $ 190,986
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
8
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
In the opinion of NTELOS Inc. ("NTELOS" or the "Company"), the
accompanying condensed consolidated financial statements which are
unaudited, except for the condensed consolidated balance sheet dated
December 31, 2000, which is derived from audited financial statements,
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position at September 30, 2001
and December 31, 2000, the results of operations for the three and nine
month periods ended September 30, 2001 and 2000 and cash flows for the
nine month periods ended September 30, 2001 and 2000. The results of
operations for the nine month periods ended September 30, 2001 and 2000
are not necessarily indicative of the results to be expected for the
full year.
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 133, as amended by SFAS No. 138, "Accounting for Derivative
Instruments and Hedging Activities". On January 1, 2001, the Company
reported the cumulative effect of adoption of $3.9 million reduction in
other comprehensive income, net of $2.5 million deferred tax benefit.
For the nine month period ended September 30, 2001, the Company reported
derivative losses of $6.1 million, net of $3.9 million deferred tax
benefit. The related $16.4 million liability is classified in other
long-term liabilities.
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. During
2002, the Company will perform the first of the required impairment
tests of goodwill and intangible assets with indefinite lives as of
January 1, 2002 and has not yet determined what the effect of these
tests will be on the earnings and financial position of the Company.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform with
classifications adopted in 2001.
As noted in the explanatory note which precedes these financial
statements, this Form 10-Q/A is being filed to amend the previously
reported Form 10-Q for the fiscal period ended September 30, 2001. As a
result of the PrimeCo VA acquisition in July 2000 and the planned merger
with R&B Communications, Inc. ("R&B") (announced in May 2000), both of
which utilize Lucent switching equipment, the Company decided to convert
to a uniform Lucent switching platform. Accordingly, the Company
recognized a $5.6 million ($3.4 million after tax) write-down of
existing equipment in the third quarter 2000. This represents a
write-down to its estimated net realizable value with the originally
planned disposition in the middle of 2001. This write-down was
calculated using the held for disposal method under Statement of
Financial Accounting Standards ("SFAS") No. 121. However, the Company
continued to utilize this equipment within its business prior to its
planned disposal date and did not have the ability to replace the assets
at the time of the write-down according to ability as discussed in
"Staff Accounting Bulletin 100: Restructuring and Impairment Charges"
(SAB 100) since the replacement switch was not physically on site and
operational at the time of the original write-down. SAB 100 is an
interpretive guidance issued by the Securities and Exchange Commission
to, among other things, clarify the appropriate timing of this type of
write-down under SFAS No. 121. During the second quarter 2001, certain
events occurred which resulted in the delay of the planned switch
replacement until the middle of 2002. Therefore, this document restates
the original Form 10-Q to reflect the reversal of the $5.6 million asset
impairment charge taken in the quarter ended September 30, 2000 and to
recognize $2.8 million in additional depreciation taken during in the
third and fourth quarters of 2000. Additionally, additional depreciation
of $.3 million and $2.0 million is recorded for the three and nine
months ended September 30, 2001, respectively.
9
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
Relative to the merger with R&B, the Company issued 3.7 million shares
of its common stock in exchange for 100% of R&B's outstanding common
stock. The merger was accounted for using the purchase method of
accounting. The value that the Company assigned to the 3.7 million
shares was $83.9 million, or $22.56 per share, based on an average
trading price of the Company's common stock on the transaction closing
date. However, since the exchange of shares was not subject to change
pursuant to the existing terms of the merger agreement, "Emerging Issue
Task Force Bulletin 99-12" (EITF 99-12) requires the price to be set at
the time the terms were agreed to and announced. Significant terms of
this merger were agreed to and the transaction was announced in May 2000
at which time the value of the 3.7 million shares, using average trading
prices at the time, was $131.8 million, or $35.47 per share. Therefore,
the original Form 10-Q is restated to reflect the value of the common
stock issued in the R&B merger at $131.8 million in the quarter ended
March 31, 2001, and to record additional goodwill and license write-up
of $48.0 million and the related $.5 million and $1.2 million in
amortization associated with this write-up for the three and nine months
ended September 30, 2001, respectively.
The following is a summary of the effects this restatement has on the
September 30, 2001 financial statements (amounts in 000's except
Earnings Per Share):
September 30, 2001
------------------------------------
Excerpt from Condensed Consolidated Originally Increase
Balance Sheet (Restated) Reported (decrease)
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Network plant and equipment $ 404,564 $ 397,028 $ 7,536
Radio Spectrum Licenses 455,425 444,742 10,683
Less accumulated depreciation 137,439 130,556 6,883
Net property and equipment 890,475 879,139 11,336
Costs in excess of net assets of business acquired 127,310 94,835 32,475
Deferred Tax Asset 4,423 4,352 71
Radio Spectrum Licenses in Other Assets 13,828 10,078 3,750
Common Stock 177,962 130,006 47,956
Retained Earnings 350 674 (324)
Three Months Ended
September 30, 2001
------------------------------------
Excerpt from Condensed Consolidated Originally Increase
Statements of Income (Restated) Reported (decrease)
-----------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 23,150 $ 22,373 $ 777
Operating loss (16,077) (15,300) 777
Income taxes (4,075) (3,812) 263
Loss from continuing operations per
common share (8,550) (8,036) 514
Net loss (8,550) (8,036) 514
Loss applicable to common shares (13,399) (12,885) 514
Loss from continuing operations per
common share-basic and diluted $ (0.79) $ (0.76) $ 0.03
Loss per common share-basic and diluted $ (0.79) $ (0.76) $ 0.03
10
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
Nine Months Ended
September 30, 2001
------------------------------------
Excerpt from Condensed Consolidated Originally Increase
Statements of Income (Restated) Reported (decrease)
----------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 59,390 $ 56,182 $ 3,208
Operating loss (43,216) (40,008) (3,208)
Income taxes (26,645) (25,448) (1,197)
Loss from continuing operations (44,779) (42,768) (2,011)
Net loss (44,779) (42,768) (2,011)
Loss applicable to common shares (59,005) (56,994) (2,011)
Loss from continuing operations-diluted (3.62) (3.50) (0.12)
Diluted loss per common share $ (3.62) $ (3.50) $ (0.12)
2. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company manages its six primary business segments with separable
management focus and infrastructures. These segments are described in
more detail in Note 2 of the Company's 2000 Annual Report to
Shareholders. Some changes were made to the reportable segments which
are described in Note 2 of the Company's Form 10-Q for the quarter ended
March 31, 2001. Summarized financial information concerning the
reportable segments is shown in the following table.
Depreciation and amortization of corporate assets is included in the
"other" column in the tables below. This amounted to $.5 million for the
quarters ended September 30, 2000 and 2001 of the total "other"
depreciation and amortization. This amounted to $1.1 million for the
nine month periods ended September 30, 2000 and 2001 of the total
"other" depreciation and amortization.
Analog
(in thousands) Telephone Network CLEC Internet Wireless PCS Cellular Other Total
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For the three month period ended September 30, 2001 (Restated)
- --------------------------------------------------------------
Revenues $ 10,929 $ 2,397 $ 4,022 $ 4,165 $ 31,996 $ - $ 2,552 $ 56,061
EBITDA* 6,873 1,951 (226) 354 (2,968) - 1,089 7,073
Depreciation &
Amortization 2,843 1,069 609 996 17,016 - 617 23,150
For the three month period ended September 30, 2000
- ---------------------------------------------------
Revenues $ 8,058 $ 795 $ 2,578 $ 3,455 $ 15,316 $ 709 $ 2,513 $ 33,424
EBITDA* 5,632 525 91 (145) (2,770) 210 910 4,453
Depreciation &
Amortization 1,075 256 503 1,117 9,593 (18) 1,104 13,630
11
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
Analog
(in thousands) Telephone Network CLEC Internet Wireless PCS Cellular Other Total
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As of and for the nine month period ended September 30, 2001 (Restated)
- -----------------------------------------------------------------------
Revenues $ 31,472 $ 6,312 $ 13,020 $ 12,466 $ 87,592 $ - $ 7,280 $ 158,142
EBITDA* 20,039 5,087 1,261 668 (13,705) - 2,824 16,174
Depreciation &
Amortization 7,616 2,644 1,748 2,905 42,844 - 1,633 59,390
Total Segment Assets 128,768 53,295 30,108 18,220 805,104 - 32,101 1,067,596
Corporate Assets 142,531
---------------
Total Assets $ 1,210,127
===============
As of and for the nine month period ended September 30, 2000
- ------------------------------------------------------------
Revenues $ 24,049 $ 2,667 $ 6,124 $ 9,827 $ 19,430 $ 5,556 $ 7,899 $ 75,552
EBITDA* 16,611 1,760 (452) (724) (4,006) 2,652 2,646 18,487
Depreciation &
Amortization 3,142 605 1,147 2,582 9,593 394 2,918 20,381
Total Segment Assets 50,748 11,580 22,271 19,035 683,616 - 33,649 820,899
Corporate Assets 253,248
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Total Assets $ 1,074,147
===============
* Operating Income (loss) before depreciation and amortization and asset
write-down charge.
3. INVESTMENTS IN WIRELESS AFFILIATES
As of September 30, 2001, the Company had a 93% common ownership
interest in the Virginia PCS Alliance, L.C. ("VA Alliance"), a PCS
provider serving a 1.7 million populated area in central and western
Virginia. On July 25, 2000, the Company converted its preferred interest
to common interest and exercised its right to fund the redemption of the
VA Alliance's Series A preferred membership interest. As a result of
these events, the Company increased its common interest from 21% to 65%
and commenced consolidating the VA Alliance as of July 26, 2000. The
Company's ownership interest increased again on February 13, 2001 from
65% to 91% as a result of the merger with R&B Communications, Inc.
("R&B") (Note 4). Finally, the Company increased its ownership to 93% on
August 16, 2001 by purchasing additional minority interest in exchange
for 20,000 shares of its common stock valued at $.4 million.
As of September 30, 2001, the Company had a 79% common ownership
interest in the West Virginia PCS Alliance, L.C. ("WV Alliance"), a PCS
provider serving a 2.0 million populated area in West Virginia and parts
of eastern Kentucky, southwestern Virginia and eastern Ohio. Prior to
the R&B merger, the Company held a 45% ownership interest and used the
equity method to account for this investment. As a result of the R&B
merger, the Company's ownership interest increased from 45% to 79%.
Based on this change, the Company commenced consolidating the WV
Alliance as of the February 13, 2001 merger date (Note 4).
At December 31, 2000, $66.2 million had been advanced to the WV Alliance
which has been reflected as advances to affiliates in the Company's
consolidated balance sheet. At September 30, 2001, the advance is
reflected as an inter-company obligation which is eliminated from the
Company's balance sheet pursuant to consolidation.
4. MERGER AND ACQUISITIONS
R&B Communications Merger
-------------------------
Effective February 13, 2001, the Company closed on its merger with R&B.
Under the terms of the merger, the Company issued approximately 3.7
million shares of its common stock in exchange for 100% of R&B's
outstanding common stock. The merger is being accounted for using the
purchase method of accounting and was valued at $131.8 million or $35.47
per share based on the average share price for the two days preceding
May 18, 2000, the date the merger terms were agreed to and announced.
The purchase price in excess of the net assets acquired is approximately
$100.5 million and has been classified as goodwill ($86 million),
principally allocated to the Telephone and Network segments and to
active PCS licenses ($10.7 million) located in the Wireless PCS segment
and inactive PCS licenses ($3.8 million) held in corporate assets.
12
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
In connection with the R&B merger, the Company assumed debt of $7.3
million payable in the years 2001 through 2026. The Company's results of
operations include R&B operating results commencing on February 13,
2001.
R&B is an Integrated Communications Provider ("ICP") providing local and
long distance telephone service and dial-up and high-speed Internet
service to business and residential customers in Roanoke, Virginia and
the surrounding area, as well as in the New River Valley of Virginia.
PrimeCo VA Acquisition
----------------------
On July 26, 2000, the Company closed on the acquisition of the PCS
licenses, assets and operations of PrimeCo Personal Communications, L.P.
("PrimeCo VA") located in the Richmond and Hampton Roads areas of
Virginia, which serves an area with a total population of 2.9 million.
The Company acquired the PrimeCo VA licenses, assets and operations for
cash of $408.6 million, the assumption of approximately $20.0 million of
lease obligations and the transfer of a limited partnership interest and
the assets, licenses and operations of our analog wireless operation,
with a combined value of approximately $78.5 million. This acquisition
was accounted for under the purchase method of accounting. The Company's
results of operations include PrimeCo VA operating results commencing on
July 26, 2000.
5. DISPOSITIONS
Effective July 11, 2000, pursuant to a stock purchase agreement dated
May 17, 2000 with telegate AG, a Federal Republic of Germany
corporation, the Company sold the capital stock of CFW Information
Services, Inc., through which directory assistance operations are
conducted. In exchange, the Company received $32.0 million at closing
and $3.5 million in January 2001 and recognized a $26.2 million pre-tax
gain ($16.0 million after tax). As a result, the directory assistance
operation is treated as a discontinued operation in the 2000 financial
statements.
Revenue, operating income and income taxes from the discontinued
operation through the date of disposition were $6.8 million, $.6 million
and $.3 million, respectively. For the period from July 1, 2000 to July
11, 2000 disposition date, revenue, operating loss and income tax
benefit from the discontinued operations were $4,000, $.5 million and
$.2 million, respectively.
6. SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
The Company made its first scheduled semi-annual payment of interest,
including the period from July 26, 2000 to August 15, 2000, for $20.1
million on February 15, 2001 on the $280 million senior notes out of
restricted cash in accordance with the terms and conditions set forth in
the senior note indenture. On August 15, 2001, the second semi-annual
payment of interest on senior notes was due and made for $18.2 million.
In February 2001, the Company closed on the non-cash merger transaction
with R&B (see Note 4).
In April 2001, the Company acquired PCS licenses from AT&T in southern
and central Pennsylvania, an area with a population of more than 2.5
million people which is contiguous to the Company's existing license
holdings. This was a non-cash transaction, accounted for as a like-kind
exchange, in which the Company exchanged certain of its non-operating
WCS licenses, with a book value of $.1 million, for these PCS licenses.
As of September 30, 2001, the Company has sold all its holdings in
Illuminet, Inc. for proceeds of $30.6 million, with $6.6 million
received after September 30, 2001. The Company recognized a $19.3
million pre-tax gain on this transaction.
7. FINANCIAL INSTRUMENTS
As noted in Note 1, the Company has adopted SFAS No. 133 and 138 and has
reported the effect of this
13
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
adoption in other comprehensive income. The underlying derivative
activity, more fully described in Note 9 of the Company's 2000 Annual
Report to Shareholders, related to interest rate swap agreements entered
into in 2000 for a total notional amount of $162.5 million. These
instruments, required by the senior notes indenture, mature in 5 years
and exist for the purpose of managing the Company's exposure to interest
rate movements by effectively converting a portion of its long-term debt
from variable to fixed. Thus, the Company has interest rate risk on its
variable rate senior credit facility in the amount above the $162.5
million swap hedge. At September 30, 2001, the Company's senior credit
facility totaled $251 million, $88.5 million over the swap agreements. A
one percentage point change in the Company's variable rate exposure
would result in $.9 million change in interest expense on an annual
basis.
The Company's senior notes are trading at rates well below their book
values. The Company's management believes that the risk of the fair
value exceeding the carrying value of this debt in the foreseeable
future is remote due to the current trading level, as well as market and
industry conditions.
8. INCOME TAXES
The effective tax rate in the nine month period ended September 30, 2001
was 37.3% as compared to an effective income tax rate at December 31,
2000 of 25.6%. Non deductible amortization totaled $.3 million in 2000
and the Company estimates the non-deductible amortization in 2001 will
be $4.8 million. Additionally, the Company's net operating loss
carryforward was approximately $20 million at December 31, 2000 and, at
September 30, 2001, is estimated to be approximately $47 million for the
2001 year end. The Company has not recognized a valuation allowance
based on available tax planning strategies which would result in the
Company recognizing the tax benefit over the remaining statutory
carryforward period.
9. EARNINGS PER SHARE
The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, was increased by 388,000 and
260,000 shares for the three and nine months ended September 30, 2000 to
reflect the assumed conversion of dilutive stock options and warrants.
For the three and nine months ended September 30, 2001, the Company had
common stock equivalents from options totaling 40,000 and 24,000 shares,
respectively, and 300,000 stock warrants for these three and nine month
periods, which would be dilutive. However, due to the fact that the
Company has a loss from continuing operations and a loss applicable to
common shares, these common stock equivalents are antidilutive, as
additional shares would decrease the computed loss per share
information; therefore, basic and diluted earnings per share are
calculated using the basic average shares outstanding. The Company
currently has a total of 1.2 million options outstanding and 1.3 million
warrants outstanding to acquire shares of common stock. Of these,
386,000 options and all of the warrants are currently exercisable.
10. PRO FORMA RESULTS
The pro forma unaudited results of operations for the nine month periods
ended September 30, 2001 and 2000, assuming consummation of the
transactions more fully described in the Notes above and in the Notes to
the Consolidated Financial Statements in the Company's 2000 Annual
Report as of January 1, 2000, are as follows:
14
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
Nine Months Ended September 30,
-------------------------------
2001
(In thousands, except per share data) (Restated) 2000
-----------------------------------------------------------------------
Operating revenues $ 163,309 $ 133,117
Operating expenses 202,043 183,946
Operating loss (44,920) (52,314)
Net loss from continuing operations (48,073) (66,164)
Dividend requirements on preferred stock (14,226) (13,813)
Loss applicable to common shares (62,299) (79,977)
Net loss per common share:
Basic and diluted $ (3.70) $ (4.75)
11. PENDING TRANSACTIONS AND SUBSEQUENT EVENTS
On July 25, 2001, the Company announced the signing of a definitive
merger agreement to acquire Conestoga Enterprises, Inc. ("CEI"). Under
the terms of this agreement, CEI shareholders will receive approximately
$335 million, or $40 per share, and, additionally, the Company will
assume approximately $73 million of CEI's debt. The merger is subject to
regulatory and shareholder approvals and customary closing conditions.
We anticipate that regulatory approval and shareholder vote will not
occur until first quarter of 2002. The merger agreement permits CEI
shareholders to elect to receive cash, Company common stock or a
combination of cash and stock, provided that not more than an aggregate
of 58% of the merger consideration may be paid in cash. The transaction
will be a tax-free reorganization accounted for as a purchase. The
number of shares of Company common stock a CEI shareholder will receive
will float between a range of 1.3333 and 2.2222, and will be determined
by dividing $40 by the volume weighted average per share sales price of
the Company's common stock during the 20 trading days ending two
business days prior to the effective time of the merger. To the extent
that this average per share sales price is either above $30 or below $18
per share, CEI shareholders will receive 1.3333 or 2.2222 shares of
NTELOS stock, respectively, for each CEI share for the stock component
of the merger consideration.
The Company will finance the cash portion of the merger by issuing up to
$200 million of a new Series E Redeemable, Convertible Preferred Stock
("Series E Preferred Stock") to Welsh, Carson, Anderson & Stowe
("WCAS"), an existing preferred shareholder. The Series E Preferred
Stock will have a $21.25 conversion price, provide an 8.5% annual coupon
rate, compounded semi-annually, and be payable in kind at the Company's
option. In addition, at closing, the Company will exchange WCAS' Series
B and Series C Preferred Stock for a new Series F Redeemable,
Convertible Preferred Stock ("Series F Preferred Stock"). The Series F
Preferred Stock will have a 7% coupon rate, compounded semi-annually and
payable in kind at the Company's option. The Series F Preferred Stock
and the warrants previously issued with the Series B Preferred Stock
will have a conversion price determined in accordance with the
anti-dilution protection provided in the Series B and Series C Preferred
Stock agreements, but not to exceed $34 per share. WCAS will also
receive a 1% cash commitment fee and one million warrants to purchase
the Company's common stock with an exercise price of $21.25 per share.
CEI is an ICP with a service area that covers southern and central
Pennsylvania and is contiguous to the Company's Virginia and West
Virginia operations. CEI provides local and competitive local telephone
services with 85,000 and 17,000 access lines, respectively, throughout
central Pennsylvania. Additionally, CEI has 41,000 long distance
customers, 19,000 wireless PCS subscribers, over 1,000 high-speed
Internet customers and 5,000 paging customers. CEI generated earnings
before income taxes, depreciation and amortization of $19.2 million in
2000 and $21.3 million for the nine months ended September 30, 2001.
On August 28, 2001 the Company and CEI announced the signing of a
definitive purchase agreement with VoiceStream Wireless to sell to
VoiceStream the Conestoga Wireless GSM (Global System of Mobile
15
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
Communications) network in central Pennsylvania for $60 million. This
sale of assets includes the PCS licenses, the wireless network assets
and operations and approximately 19,000 PCS customers of Conestoga
Wireless. The transaction is subject to the closing of the
aforementioned merger, regulatory approvals and other customary
conditions.
On July 20, 2001 the Company entered into a definitive agreement to sell
the PCS license in Kingsport, Tennessee to Lafayette Communications for
$11.6 million. Consummation of the sale is subject to regulatory
approval. Additionally, on July 24, 2001, the Company entered into a
definitive agreement to sell and leaseback up to 82 communications
towers in the Virginia East Market to American Towers, Inc. for up to
$27.9 million. On November 1, 2001, the Company closed on 46 of these
towers for $15.6 million and anticipates a second closing before
year-end for up to 36 additional towers for proceeds of up to
approximately $12 million.
On October 19, 2001, the Company exchanged a Wireless Communications
Services (WCS) license for certain digital PCS licenses from AT&T
Wireless covering an area with 400,000 people in southeastern Ohio,
which is contiguous to the Company's existing PCS license holdings, and
received additional spectrum in one of its existing areas. The
transaction was structured as a like-kind exchange.
16
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Overview
We are a leading regional integrated communications provider ("ICP")
offering a broad range of wireless and wireline products and services to
business and residential customers in Virginia, West Virginia, Kentucky,
Tennessee and North Carolina. We own our own digital PCS licenses, fiber optic
network, switches and routers, which enables us to offer our customers
end-to-end connectivity in the regions that we serve. This facilities-based
approach allows us to control product quality and generate operating
efficiencies. As of September 30, 2001, we had approximately 203,800 digital PCS
subscribers and approximately 82,500 combined incumbent local exchange carrier
("ILEC") and competitive local exchange carrier ("CLEC") access lines installed.
Historically, we have derived much of our revenues from our ILEC services. As a
result of our increasing focus on and growth in digital PCS, Internet access and
CLEC services, a significant portion of our operating revenues is generated by
businesses other than our ILEC. These newer businesses have generated lower
operating margins due to start-up costs associated with expansion into new
markets and introduction of new service offerings throughout the regions we
serve. As we continue expansion of these new markets and services, we expect
these lower operating margins to continue.
During the second half of 2000 and into 2001, we have significantly expanded the
scope of the geographic markets that we serve and have focused our growth
efforts on our core communications services, primarily digital PCS services,
local telephone services and Internet access, including dedicated, high-speed
DSL and dial-up services, high-speed data transmission. Over the last eighteen
months, we completed the following:
. closed the merger agreement with R&B, an integrated communications provider in
a geographic market contiguous to ours and commensurate therewith, consolidated
the WV Alliance (final closing in February 2001) (Note 4);
. acquired certain PCS licenses currently owned by AT&T that added a population
of 2.5 million in certain markets in Pennsylvania contiguous to our existing
license holdings in exchange for Wireless Communication Services ("WCS")
licenses that we own but which were not in service (final closing in April
2001);
. acquired additional PCS licenses from AT&T that added an additional population
of .4 million in southeastern Ohio in markets contiguous to our existing license
holdings in exchange for other non-operating WCS licenses (final closing in
October 2001);
. acquired the wireless licenses, assets and operations of PrimeCo Personal
Communications, L.P. ("PrimeCo") in the Richmond and Hampton Roads, Virginia
markets ("PrimeCo VA" and also referred to within our operations as "VA East");
. issued and sold of $375 million of senior and subordinated notes;
. closed on $325 million senior credit facility, with $150 million borrowed on
the date of the PrimeCo VA closing, $175 million outstanding at year-end and
$251 million outstanding at September 30, 2001;
. paid existing senior indebtedness and refinanced VA and WV Alliance debt
obligations;
. issued and sold $250 million of redeemable, convertible preferred stock;
. redeemed the series A preferred membership interest in the VA Alliance and
converted the series B preferred membership interest into common interest;
. disposed of RSA5 and the analog assets and operations of RSA6 in connection
with the PrimeCo VA acquisition; and,
17
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
. disposed of our directory assistance operations.
Collectively these events are referred to as the "Transactions" elsewhere in
this document.
We have accounted for the directory assistance operation disposed of in July
2000 as a discontinued operation. Therefore, the directory assistance operating
results for 2000 are separated in the financial statements from the results of
continuing operations.
As a result of the Transactions, results from the period after July 2000 differ
significantly from those prior to July 2000. Additionally, the first quarter of
2001 differed significantly from any prior quarter due to the inclusion of R&B
and the WV Alliance in the consolidated results from February 14, 2001. We
reported significant losses from operations beginning in the third quarter of
2000 due to the addition of the VA East operations, consolidation of the VA
Alliance results, increase in amortization of goodwill, licenses and other
intangible assets and the increases in interest related costs.
In addition to the Transactions mentioned above, the following events (Note 10)
have occurred during the quarter ended September 30, 2001 which are not yet
completed:
. On July 24, 2001, we signed a definitive merger agreement with Conestoga
Enterprises, Inc. ("CEI"), an ICP with a service area contiguous to our Virginia
and West Virginia operations in southern and central Pennsylvania. The merger is
subject to shareholder and regulatory approval.
. On August 28, 2001, NTLEOS and CEI announced the signing of a definitive
purchase agreement with VoiceStream Wireless to sell to VoiceStream the
Conestoga Wireless GSM ("Global System of Mobile Communications") network in
central Pennsylvania for $60 million. This sale of assets is subject to
consummation of the CEI merger, regulatory approvals and other customary
conditions and includes the PCS licenses, the wireless network assets and
operations and approximately 19,000 PCS customers of Conestoga Wireless.
. On July 20, 2001, we entered into a definitive agreement, which is subject to
FCC approval, to sell the PCS license in Kingsport, Tennessee to Lafayette
Communications for $11.6 million.
. On July 24, 2001, we entered into a definitive agreement to sell and leaseback
up to 82 communications towers in the Virginia East market to American Towers,
Inc. for up to $27.9 million. On November 1, 2001, the Company closed on 46
towers for proceeds of $15.6 million. A subsequent closing of up to 36 towers is
anticipated to occur before year-end.
. On August 24, 2001, we signed an amendment to the existing wholesale network
services agreement between the VA Alliance and WV Alliance and Horizon Personal
Communications, Inc. The amendment stipulated implementation of third generation
digital PCS technology across the alliances' network and modified the standard
wholesale prices for network services over the next 30 month term.
The discussion and analysis herein should be read in conjunction with the
financial statements and the notes thereto included herein. Much of the
discussion in this section involves forward-looking statements. Our actual
results may differ significantly from the results suggested by these
forward-looking statements. We wish to caution readers that these
forward-looking statements and any other forward-looking statements that we make
are based on a number of assumptions, estimates and projections. The risks
related to these assumptions include but are not limited to the following: the
competitive nature of the wireless telephone and other communications services
industries; changes in industry conditions created by federal and state
legislation and regulations; successful integration of acquisitions; the
achievement of build-out, operational, capital, financing and marketing plans
relating to deployment of PCS services; retention of our existing customer base
and service levels and our ability to attract new customers; the ability of the
Company to attract and retain qualified management personnel; continuation of
economic growth and demand for
18
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
wireless and wireline communications services; rapid changes in technology;
adverse changes in the roaming and other access related rates we charge and pay;
the capital intensity of the wireless telephone business and our debt structure;
our substantial debt obligations and our ability to service those obligations;
the cash flow and financial performance of our subsidiaries; restrictive
covenants and consequences of default contained in our financing arrangements;
our opportunities for growth through acquisitions and investments and our
ability to manage this growth and successfully integrate the businesses; the
level of demand for competitive local exchange services in smaller markets; our
ability to manage and monitor billing; and possible health effects of radio
frequency transmission. Our results are also dependent on our ability to
consummate the merger with Conestoga and our ability to successfully integrate
Conestoga's operations with ours. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof and we undertake no obligation to revise or
update such statements to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
Revenues
Our revenues are generated from the following categories:
o wireless communications, consisting of retail, service and wholesale
digital PCS revenues;
o wireline communications, including telephone revenues, fiber optic
network usage (or carrier's carrier services), Internet, CLEC, and
long distance revenues; and,
o other communications services revenues, including revenues from
paging, voicemail, wireless and wireline cable television, our
sale and lease of communications equipment and security alarm
monitoring and rental of property and equipment, primarily to
tenants of certain company owned facilities. Through the
disposition date of July 26, 2000, analog cellular revenues are
included in this category.
Operating Expenses
Our operating expenses are generally incurred from the following
categories:
o cost of sales, including digital PCS handset equipment costs,
usage-based access charges, including long distance, roaming
charges, and other direct costs. We sell handsets to our customers
at a price below our cost. Previously, we have netted these
discounts and costs against our revenues. We have reclassified
prior periods to conform to our new policy of separately reporting
these cost of sales;
o maintenance and support expenses, including costs related to
specific property and equipment, as well as indirect costs such as
engineering and general administration of property and equipment;
o depreciation and amortization, including amortization of goodwill
and other intangibles from acquisitions, merger and capital
outlays to support continued business expansion;
o customer operations expenses, including marketing, product
management, product advertising, sales, publication of a regional
telephone directory, customer services and directory services;
and,
o corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information technology,
human resources and other general and administrative expenses.
19
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest
income and expense, equity income or loss from RSA5 (through July 25,
2000), and equity income or loss from the VA Alliance (through July 25,
2000) and WV Alliance (through February 13, 2001).
Income Taxes
Our income tax liability and effective tax rate increases or decreases
based upon changes in a number of factors, including our pre-tax income
or loss, losses sustained by the Alliances, net operating losses and
related carryforwards, alternative minimum tax credit carryforwards,
state minimum tax assessments, gain or loss on the sale of assets and
investments, write-down of assets and investments, non-deductible
amortization, and other tax deductible amounts.
20
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Results of Operations
Three and Nine Month Periods Ended September 30, 2001
Compared to Three and Nine Month Periods Ended September 30, 2000
OVERVIEW
Operating income before depreciation and amortization and asset write-down and
impairment charges ("EBITDA") increased $2.6 million, or 59%, from $4.5 million
to $7.1 million for the three months ended September 30, 2001 as compared to
2000. Operating loss increased by $6.9 million, or 75%, from $9.2 million to
$16.1 million for the three months ended September 30, 2000 and 2001,
respectively. Pro forma EBITDA improved $4.1 million from $3.0 million to $7.1
million for the three months ended September 2000 and 2001, respectively. EBITDA
improvements reflect relatively steady pro forma year over year improvements in
the wireless and wireline revenue and operating performance. PCS pro forma
operating cash flows before costs of acquisition ("COA") continued improvement
trends at $9.0 million for the third quarter 2001 compared to $8.0 million and
$6.0 million in the second and first quarters 2001, respectively. Operating
losses increased $1.9 million, or 14%, from $13.4 million to $15.3 million for
the three months ended September 30 2000 and 2001, respectively, with $2.6
million of depreciation acceleration recognized in the third quarter of 2001
with respect to certain wireless network and equipment scheduled to be replaced
in 2002 and 2003 due to recently announced plans to upgrade to 3G-1XRTT
technology (see "Depreciation and Amortization Expenses" below).
EBITDA decreased $2.3 million, or 13%, from $18.5 million to $16.2 million for
the nine months ended September 30, 2000 and 2001, respectively. Operating loss
increased $41.3 million, from $1.9 million to $43.2 million for the nine months
ended September 30, 2000 and 2001, respectively. Pro forma EBITDA improved $10.4
million from $5.6 million to $16.0 million for the nine months ended September
30, 2000 and 2001, respectively. For the nine months ended September 30, 2001,
PCS pro forma operating cash flows before COA totaled $23.1 million, an increase
of 85% over the $12.5 million from the same nine months in 2000. Nine month
actual result comparisons do not reflect the effects of the significant
transactions we have executed just prior to or during this period which are
discussed above and are defined as the "Transactions". Pro forma results
demonstrate operating result growth in the wireless and wireline businesses. Pro
forma operating loss decreased $1.9 million, or 4%, from a loss of $46.6 million
for the nine months ended September 30, 2000 to a loss of $44.7 million for the
nine months ended September 30, 2001.
The combination of digital PCS customers from acquisitions and internal growth
as well as growth in ILEC, CLEC and Internet customers contributed to a year
over year increase in revenue of $82.6 million ($30.1 million on a pro forma
basis). Negative operating margins from mid-stage PCS operations and the
associated costs of adding new PCS customers (referred to as subscriber
acquisition costs), primarily handset subsidies and commissions, drove the
decline in overall operating margins. In addition, costs relating to internal
growth and increased depreciation and amortization from acquisition and merger
activity and the consolidation of the VA Alliance and the WV Alliance reduced
income from operations to a greater loss in 2001 than the operating loss
recognized in the prior year comparable period. For the nine months ended
September 30, 2000, the Company reported its equity share of the VA Alliance and
the WV Alliance on separate lines at its ownership percentage during this period
(21% for VA Alliance until July 26, 2000 and 65% thereafter; 45% for WV
Alliance). However, the Company reported 100% of the VA Alliance operating
results for the nine month period ended September 30, 2001 and 100% of the WV
Alliance operating results for the period from February 14, 2001 to September
30, 2001 (period after consolidation) in the details of the statement of
operations.
Net loss applicable to common shares for the three months ended September 30,
2001 was $13.4 million as compared to net income applicable to common shares of
$31.7 million for the 2000 comparable period. Net loss applicable to common
shares for the nine months ended September 30, 2001 was $59.0 million as
compared to net income applicable to common shares for the nine months ended
September 30, 2000 of $32.1 million. The current year to date results as
compared to the prior year include a $22.3 gain for sale of investments in 2001
versus a $62.6 million gain on sale of assets in 2000, a $43.2 million increase
in interest expense associated with the increased average debt outstanding,
significant increases in intangible amortization associated with the
Transactions, and a $8.6 million increase in preferred stock dividends in 2001
over 2000 due primarily to a full versus partial period.
21
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
OPERATING REVENUES
Operating revenues increased $22.6 million, or 68%, from $33.4 million for the
three months ended September 30, 2000 to $56.0 million for the three months
ended September 30, 2001. Operating revenues increased $82.6 million, or 109%,
from $75.5 million to $158.1 million for the nine months ended September 30,
2000 and 2001, respectively.
WIRELESS COMMUNICATIONS REVENUES--Wireless communications revenues increased
$16.7 million, or 109%, from $15.3 million to $32.0 million for the three months
ended September 30, 2000 and 2001, respectively, and increased $68.2 million
from $19.4 million to $87.6 million for the nine months ended September 30, 2000
and 2001, respectively. This increase is primarily due to the acquisition of
PrimeCo VA, the consolidation of the VA Alliance on July 26, 2000 (Note 4), and
the consolidation of the WV Alliance on February 13, 2001 (Note 4). The
acquisition of PrimeCo VA (now referred to as the "VA East" market) and the
consolidation of the VA Alliance accounted for $6.7 million, or 40%, of the
total three month increase and $51.0 million, or 75%, of the total nine month
increase. The consolidation of the WV Alliance in February 2001 also added $6.4
million and $14.8 million to the year over year revenues for the three and nine
month periods ended September 30, 2001 as compared to 2000, respectively. Pro
forma revenues increased $8.0 million from $24.0 million to $32.0 million for
the three months ended September 30, 2000 and 2001, respectively, and $21.1
million from $69.0 million to $90.1 million for the nine months ended September
30, 2000 and 2001, respectively.
On a pro forma basis, we increased PCS subscribers by 46,100 from 157,700 as of
September 30, 2000 to 203,800 as of September 30, 2001. Gross PCS subscriber
additions for the third quarter of 2001 were 32,140 of which 80% were high-value
post-pay additions. This increase in subscribers, combined with product mix and
average revenue per subscriber ("ARPU") increases, translated to a $15.2 million
year over year increase in pro forma subscriber revenue (actual subscriber
revenue increased $51.0 million). ARPU decreased $1.21, or 2.7%, from $44.57 for
the nine months ended September 30, 2000 to $43.36 for the nine months ended
September 30, 2001 due to competition and promotional introductory rates offered
in the initial months of certain post-pay rate plans. ARPU for the third quarter
of 2001 increased to $45.99, primarily due to growth initiatives and service
offerings targeted at higher-end rate plans. Since the end of the first quarter
of 2001, post pay rate plans of $50 per month or greater have increased by 48%
and now represent 34% of post pay customers. We have successfully shifted the
post-pay/pre-pay customer mix from 61% post-pay at September 30, 2000 to 77%
post-pay at September 30, 2001. This is a leading factor in our ability to
sustain ARPU levels despite the competitive factors described above.
Wholesale and roaming revenue increased $3.4 million and $12.8 million for the
three and nine months ended September 30, 2001 as compared to 2000. Our
wholesale and roaming agreement with Sprint/Horizon, which accounted for $13.7
million, or 95%, of our wholesale revenues for the nine months ended September
30, 2001, was amended during the third quarter of 2001. This amendment covers
the next 30 months of our 10 year existing agreement and will result in lower
average unit rates but predictable and increased monthly revenues. Pursuant to
this agreement, minimum wholesale revenues will be $5.1 million for the fourth
quarter 2001, and $27.4 million and $38.6 million for the years 2002 and 2003,
respectively.
WIRELINE COMMUNICATIONS REVENUES--Wireline communications revenues increased
$6.6 million, or 45%, from $14.9 million to $21.5 million for the three months
ended September 30, 2000 and 2001, respectively. Wireline revenues increased
$2.5 million, or 13%, from $19.0 million to $21.5 million on a pro forma basis
for the three months ended September 30, 2000 and 2001, respectively.
Wireline revenues increased $20.6 million, or 48%, from $42.7 million for the
nine months ended September 30, 2000 to $63.3 million for the nine months ended
September 30, 2001. On a pro forma basis, these revenues increased $10.8
million, or 20%, from $55.0 million to $65.8 million for the nine months ended
September 30, 2000 and 2001, respectively.
22
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
. Telephone Revenues. Telephone revenues, which include local service, access
and toll service, directory advertising and calling feature revenues from our
ILEC business increased $2.9 million, or 36%, from $8.0 million for the three
months ended September 30, 2000 to $10.9 million for the three months ended
September 30, 2001. Telephone revenues increased $7.4 million, or 31%, from
$24.0 million for the nine months ended September 30, 2000 to $31.4 million for
the nine months ended September 30, 2001. The consolidation of R&B Telephone in
the first quarter of 2001 accounted for $2.5 million (87%) and $6.4 million
(86%) of the three and nine month increases, respectively, over the period ended
September 30, 2000. On a pro forma basis for the comparable nine month periods,
ILEC revenues were up 7% due to a .5% increase in access lines and an 8.8%
increase in carrier access minutes.
. Fiber Optic Network Usage Revenues. Revenues from fiber optic network usage
operations increased $1.6 million, from $.8 million to $2.4 million for the
three months ended September 30, 2000 and 2001, respectively. These revenues
increased $3.6 million, or 137%, from $2.7 million to $6.3 million for the three
months ended September 30, 2000 and 2001, respectively. Of these increases, $1.5
million and $3.3 million for the three and nine month periods ended September
30, 2000 and 2001, respectively, are attributable to the consolidation of R&B
Network in February 2001. On a pro forma basis, these revenues were up $.5
million, or 27%, and $1.1 million, or 19%, for the three and nine month
comparable periods.
. CLEC Revenues. CLEC revenues increased $1.4 million, or 56%, from $2.6 million
for the three months ended September 30, 2000 to $4.0 million for the three
months ended September 30, 2001 and increased $6.9 million, or 113%, from $6.1
million for the nine months ended September 30, 2000 to $13.0 million for the
nine months ended September 30, 2001. Of the increases for the three and nine
month periods, $.9 million (61%) and $2.1 million (31%), respectively, is
attributable to the consolidation of R&B's CLEC operation in February 2001 and
$.6 million (43%) and $3.2 million (46%), respectively, is due to increased
revenues in the Virginia CLEC market. Excluding the R&B market, which increased
2,800 lines (57%), CLEC access lines increased 9,700, or 74%. We finished the
third quarter 2001 with 30,700 CLEC access lines, an increase of 15.6% over the
previous quarter. Reciprocal compensation revenues for the comparable nine month
periods increased $.6 million from $2.4 million to $3.0 million but fell sharply
to $.4 million for the third quarter of 2001 compared to $1.2 million in each of
the first two quarters of 2001 due to lower rates that went into effect in June
2001.
. Internet Revenues. Revenues from Internet services increased $.7 million, or
21%, from $3.4 million to $4.1 million for the three months ended September 30,
2000 and 2001, respectively. These revenues increased $2.6 million, or 27%, from
$9.8 million to $12.4 million for the nine months ended September 30, 2000 and
2001, respectively. The consolidation of R&B's Internet operation in February
2001 accounted for $.2 million (29%) and $.5 million (20%) of the total increase
for the three and nine month periods, respectively. Internet subscribers
increased 12,500, or 21%, in third quarter 2001 over third quarter 2000, with
DSL customer additions accounting for 1,800 of this total, as DSL customers
increased from 1,200 customers at September 30, 2000 to 3,000 customers at
September 30, 2001. DSL showed 30.1% customer growth in the third quarter of
2001 over the second quarter of 2001 and the number of dial up customers grew
6.7% during this same period.
OTHER COMMUNICATIONS SERVICES REVENUES--Other communications services revenues,
including other R&B, decreased $.7 million, or 21%, from $3.2 million to $2.5
million for the three month periods ended September 30, 2000 and 2001,
respectively, and decreased $6.2 million, or 46%, from $13.5 million to $7.3
million for the nine month periods ended September 30, 2000 and 2001,
respectively.
. Other Wireless Revenues. Other wireless revenues consist of revenues from
analog cellular, paging and voicemail. These revenues decreased $1.0 million, or
65%, from $1.5 million to $.5 million for the three months ended September 30,
2000 and 2001, respectively. These revenues decreased $6.2 million, or 79%, from
$7.9 million to $1.7 million for the nine months ended September 30, 2000 and
2001, respectively. This decrease reflects the absence of analog cellular
revenue in 2001, as the business was sold in July 2000 in connection with the
acquisition of VA East. Analog cellular revenue was $.7 million for the three
months ended September 30, 2000 and $5.6 million for the nine months ended
September 30, 2000. Voicemail and paging revenue decreased $.3 million, or 36%,
from $.8 million for the three months ended September 30, 2000 to $.5 million
for the three months ended September 30, 2001 and decreased $.7 million, or 28%,
from $2.3 million for the nine months ended September 30, 2000 to $1.6 million
for the nine months ended September 30, 2001 due primarily to the 20% decrease
in paging customers.
23
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
. Cable and other Revenues. Cable revenues, including wireless and wireline
cable, remained flat for the three months ended September 30, 2001 as compared
to 2000, and decreased $.2 million, or 8%, from $3.0 million to $2.8 million for
the nine months ended September 30, 2000 and September 30, 2001, respectively.
Other communications services revenues remained relatively flat for the three
months ended September 30, 2001 as compared to 2000. However, other
communications services revenues decreased $.5 million, or 18%, from $2.5
million for the nine months ended September 30, 2000 to $2.0 million for the
nine months ended September 30, 2001. The decline from the prior year is
attributable primarily to 13% decrease in wireless cable subscribers partial
offset by the consolidation of R&B's cable and paging operations in February
2001 which accounted for $.3 million and $.7 million of the total three and nine
month revenues in 2001.
OPERATING EXPENSES
TOTAL OPERATING EXPENSES--Total operating expenses increased $29.5 million, or
69%, from $42.6 million to $72.1 million for the three months ended September
30, 2000 and 2001, respectively, and increased $124.0 million, from $77.4
million for the nine months ended September 30, 2000 to $201.4 million for the
nine months ended September 30, 2001. Of this increase, $9.5 million and $39.0
million relates to the increase in depreciation and amortization for the three
and nine month respective periods. Of the remaining increase for the comparable
three and nine month periods, $6.1 million and $56.9 million, respectively,
relates to operating expenses other than depreciation and amortization from the
VA Alliance and VA East, which were consolidated into our results beginning in
July 2000, and $10.5 million and $25.7 million, respectively, is from the WV
Alliance and R&B, which were consolidated into our results after February 13,
2001. Additionally, operating expenses increased by a total of $3.6 million and
$5.7 million in our operations that were present in both of the comparable three
and nine month respective periods. These increases were offset by the $.5
million and $2.9 million decreases attributable to the analog cellular
operation, which was disposed of in July 2000, for the three and nine months
ended September 30, 2001 as compared to 2000, respectively.
On a pro forma basis, operating expenses, excluding depreciation and
amortization, increased $6.0 million, or 14%, in the three months ended
September 30, 2001 as compared to the three months ended September 30, 2000 and
increased $19.6 million, or 15%, in the nine months ended September 30, 2001 as
compared to the nine months ended September 30, 2000. During these same
comparative periods, revenues increased by 22% and 23%, respectively. Over the
three quarters of 2001, these expenses have remained essentially flat in total.
COST OF SALES--Cost of sales increased $6.1 million, or 104%, from $5.8 million
for the three months ended September 30, 2000 to $11.9 million for the three
months ended September 30, 2001 and increased $23.9 million from $10.7 million
for the nine months ended September 30, 2000 to $34.6 million for the nine
months ended September 30, 2001. Cost of sales as a percentage of wireless sales
remained flat for the three month comparable periods and decreased from 55% to
40% for the nine month comparable periods. This is due to the change in the
product mix, with a higher percentage of the total being comprised of post pay
as compared to prepay customers, the increase in wholesale revenues and the
leveraging of the recurring revenues from the growing customer base.
MAINTENANCE AND SUPPORT EXPENSES--Maintenance and support expenses increased
$7.5 million, or 85%, from $8.8 million to $16.3 million for the three months
ended September 30, 2000 and 2001, respectively, and increased $25.5 million, or
125%, from $20.5 million to $46.0 million for the nine months ended September
30, 2000 and 2001, respectively. This increase was primarily attributable to the
significant growth by acquisition in the wireless segment, as this accounted for
$3.3 million of the total three month increase and $16.4 million of the total
nine month increase. In addition, CLEC accounted for $1.3 million of the total
three month increase and $5.0 million of the total nine month increase, and ILEC
accounted for $.5 million of the total three month increase and $2.0 million of
24
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
the total nine month increase. The other remaining increase was spread
relatively evenly among the other segments. The largest driver of expense
increase in all cases relates to network access and other plant related expenses
due to geographic expansions and new facilities-related costs from acquisitions.
These types of expenses represent the largest start-up expense from geographic
expansion. Maintenance and support expenses as a percent of total revenues
increased from 26% and 27% for the three and nine months ended September 30,
2000, respectively, to 29% for the three and nine months ended September 30,
2001 due to higher composition of wireless business to the total company, which
carries slightly higher maintenance and support costs.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
increased $9.6 million, or 70%, from $13.6 million to $23.2 million for the
three months ended September 30, 2000 and 2001, respectively, and increased
$39.0 million, from $20.4 million to $59.4 million for the nine months ended
September 30, 2000 and 2001, respectively. Of the total nine month increase,
$8.3 million is from amortization of goodwill, other intangible assets and
licenses, primarily from the acquisition activity. The WV Alliance consolidation
and the R&B merger, none of which were included in the results for the period
ended September 30, 2000, accounted for $2.9 million and $6.0 million,
respectively, of depreciation for the nine month period ending September 30,
2001. The inclusion of VA East and VA Alliance depreciation for the full versus
the prior year partial period, together with the significant increase in the
related property and equipment, accounted for $18.1 million of the increase.
Also within the VA Alliance and WV Alliance third quarter 2001 depreciation, we
recognized an additional $2.6 million depreciation charge related to certain
wireless network equipment scheduled to be replaced due to our planned upgrade
to the third generation (3G-1XRTT) technology to be implemented in the VA
Alliance and WV Alliance markets over the period from October 2001 to June 2003.
This is in connection with a recent amendment to our Sprint/Horizon network
services agreement which, as noted above, provides for scheduled wholesale
revenue minimums over the 30 months commencing July 1, 2001 in return for the
Company's commitment to upgrade the Alliances' network to 3G-1XRTT technology
for an estimated capital outlay of $40-$45 million which will enable offerings
of high-speed data applications. The remaining increase related to the higher
property and equipment asset base.
CUSTOMER OPERATIONS EXPENSES--Customer operations expenses increased $5.0
million, or 46%, from $11.0 million to $16.0 million for the three months ended
September 30, 2000 and 2001, respectively. Customer operations expenses
increased $28.4 million, or 155%, from $18.4 million to $46.8 million for the
nine months ended September 30, 2000 and 2001, respectively. Of this total
increase, $3.1 million and $25.7 million occurred in the wireless segment for
the three and nine month periods, respectively. The total customer operations
increase relates primarily to marketing and sales activities, such as the
increases to operating expenses associated with adding new retail locations (24
added since September 2000) and other resources to the sales function, as well
as the direct commissions associated with customer additions. Additionally,
customer care costs increased significantly, primarily resulting from the
significant PCS customer additions. Despite this overall increase, PCS customer
care costs per subscriber per month fell from an average of $4.84 for the nine
month period ended September 30, 2000 to $2.89 for the same period in 2001. As a
percentage of total revenue, customer operations expenses increased from 24% to
30% over the related nine month periods ended September 30, 2000 and 2001,
respectively. However, customer operations as a percentage of total revenues
decreased from 33% in the third quarter of 2000 to 29% in the third quarter of
2001. The nine month comparative increase is due to the partial period inclusion
of the acquired PCS businesses which contain a higher ratio of customer
operations costs to revenues due to the transaction volume and the increased
retail sales channel activity as compared to the overall wireline businesses.
CORPORATE OPERATIONS EXPENSES--Corporate operations expenses increased $1.4
million, or 43%, from $3.4 million to $4.8 million for the three months ended
September 30, 2000 and 2001, respectively, and increased $7.0 million, or 93%,
from $7.5 million to $14.5 million for the nine months ended September 30, 2000
and 2001, respectively. This was due to the growth in the infrastructure needed
to support the acquired PCS businesses ($1.5 million for the three month
increase and $6.8 million for the nine month increase). Additionally, R&B
accounted for $.2 million of the total corporate operations expense increase for
the comparable nine month periods. A portion of the increase in the wireless PCS
corporate operations expenses resulted from the reallocation of existing
overhead due to the shift in focus to our core strategic segments. Despite the
overall increase, PCS general and administrative expenses have fallen on a per
subscriber per month basis from an average of $9.98 in the third quarter of 2000
to $6.38 in the third quarter of 2001. As a percentage of total revenue,
corporate operations expenses decreased from 10% to 9% for the comparable
periods due to our focus on cost containment.
25
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
OTHER INCOME (EXPENSES)
Total other income (expenses) decreased $40.9 million, or 92%, from a net other
income of $44.4 million for the three months ended September 30, 2000 to a net
other income of $3.5 million for the three months ended September 30, 2001
and decreased $68.1 million, or 185%, from a net other income of $36.8 million
for the nine months ended September 30, 2000 to a net other expense of $31.3
million for the nine months ended September 30, 2001.
Interest expense increased $7.3 million, or 59%, from $12.2 million to $19.5
million for the three months ended September 30, 2000 and 2001, respectively.
Interest expense increased $43.2 million, from $13.7 million to $56.9 million
for the nine months ended September 30, 2000 and 2001, respectively. This
increase is due to additional financing to fund acquisitions and other third
quarter 2000 transactions, and to fund future growth activity in an expanded
market (see Note 4 and overview above). Gain on sale of assets for the nine
months ended September 30, 2000 was $62.6 million. This relates to the
disposition of the RSA6 analog assets and operations and the sale of the 22%
limited partnership interest in RSA5. The 2001 gain of $22.9 million relates to
the sale of Illuminet Holding, Inc. ("Illuminet") stock, $22.3 million of which
occurred during the third quarter of 2001. Additionally, in 2000, we incurred
$6.3 million in financing costs which were expensed in the third quarter related
to the Transactions. Other income, principally interest decreased $2.3 million
and increased $.4 million for the three and nine month comparative periods. This
income related primarily to interest from loans to affiliates (prior to
consolidation) and from restricted cash (for the period from the July 26
transaction date to the end of the quarter). The interest from loans to
affiliates is now eliminated in consolidation and the restricted cash balance
generated income for the full nine months in 2001. However, the average
restricted cash balance decreased significantly during 2001 due to the February
2001 and August 2001 interest payments made on the senior notes from restricted
cash which totaled $38.3 million.
Our share of losses from the VA Alliance was $.8 million for the three months
ended September 30, 2000 and $3.7 million for the nine months ended September
30, 2000. Because the VA Alliance was consolidated in July 2000, no such line
item exists in our 2001 income statement. Our share of losses from the WV
Alliance declined due to WV Alliance being consolidated on February 13, 2001
concurrent with our merger with R&B. Our ownership interests in the VA Alliance
and the WV Alliance increased to 91% and 79%, respectively, upon completion of
the R&B merger (Notes 3 and 4) on February 13, 2001.
INCOME TAXES
Income tax benefits increased $18.1 million, from a tax expense of $14.0 million
for the three months ended September 30, 2000 to a tax benefit of $4.1 million
for the three months ended September 30, 2001. Income tax benefits increased
$40.5 million, from a tax expense of $13.9 million for the nine months ended
September 30, 2000 to a tax benefit of $26.6 million for the nine months ended
September 30, 2001. This increase was primarily due to the change in the pre-tax
income for the comparable periods. The effective tax rate for nine months ended
September 30, 2001 was a 37.3% benefit, as compared to the expense rate for the
nine months ended September 30, 2000 of 40%. The 2000 rate was significantly
above statutory rates due to the impact of nondeductible goodwill from the Net
Access Internet acquisition and state minimum taxes on a near breakeven profit
before income tax. The 2001 benefit rate is below the statutory income tax rates
due to the same factors that were present in 2000 and, additionally,
nondeductible goodwill from the R&B merger (Notes 4 and 7).
LIQUIDITY AND CAPITAL RESOURCES
We have funded our working capital requirements and capital expenditures from
net cash provided from operating activities and borrowings under credit
facilities. We anticipate proceeds in the second half of 2001 of approximately
$20 million from the sale of certain towers and PCS licenses (Note 11). At
September 30, 2001, we had $74 million in unused borrowings available under our
senior credit facility. We borrowed an additional $21 million against our senior
credit facility in the third quarter of 2001. Subsequent to September 30,2001,
the Company received $6.4 million from the late September sale of its remaining
holdings of Illuminet stock and on November 1 received $15.6 million from the
26
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
sale of 46 towers. On November 6, 2001, the Company used these proceeds to
reduce its borrowing under its credit facility by $23 million, resulting in $97
million of available funds for future drawdown under its senior credit facility.
OPERATING CASH FLOWS
During the nine month period ended September 30, 2001, net cash used in
operating activities was $30.3 million, with $12.9 million used in operations
and net negative changes in operating assets and liabilities totaling $17.4
million. Principle changes in operating assets and liabilities were as follows:
accounts receivable was up $3.0 million; inventories and supplies decreased $1.5
million due to the reduction in inventory levels from the quantities on hand at
year-end, which were higher to support the seasonal sales activity through
February; other current assets were up $4.8 million, primarily related to
increases in other receivables related to various non-trade programs; income
taxes went from a receivable at the 2000 year end of $2.9 million to a $.1
million payable position at September 30, 2001 due to the receipt of the year
end receivable and the state minimum tax payable at September 30, 2001; and,
accounts payable and other liabilities decreased by $14.2 million due to the
timing of payments at and around the respective period ends.
During the nine month period ended September 30, 2000, net cash provided by
operating activities was $13.0 million, with $14.5 million provided by
operations, $1.0 million used by the net negative changes in operating assets
and liabilities and $.5 million used by discontinued operation. Principal
changes in operating assets and liabilities were as follows: income taxes
receivable decreased $9.5 million from December 31, 1999 to September 30, 2000
due primarily to PCS losses, offset by an $11.1 million tax on gain on sale of
discontinued operation; and accounts payable and other current liabilities
increased $16.3 million due primarily to increases in current liabilities of the
VA Alliance and the VA East operations from the July 25, 2000 transaction date.
Our cash flows used in investing activities for the nine month period ended
September 30, 2001 aggregated $34.7 million and included the following:
. $72.7 million for the purchase of property and equipment;
. $3.5 million of proceeds from the final payment from the sale of the directory
assistance operation (Note 5);
. $4.1 million of cash and cash equivalents on hand at R&B at the time of the
merger;
. $3.0 million of advances to the Alliances;
. $8.0 million of deposits refunded at the conclusion of an FCC license auction
as no additional licenses were purchased from this auction; and,
. $27.0 million received from the sale of investments and towers with an
additional $6.6 million in other receivables at September 30, 2001, which was
received in October 2001.
During the nine month period ended September 30, 2000, our investing activities
included; $34.2 million for the purchase of property and equipment; $408.6
million cash payment on purchase of the PrimeCo VA licenses, assets and
operations; $53.8 million in net advances to the Alliances; $70.3 million
investment in restricted cash, net; $31.7 million of proceeds from sales of
discontinued operation; $3.2 million in proceeds from the sale of towers and
investments; $10.7 million for the purchase of minority interest; $1.4 million
for the purchase of an Internet company and its subscribers; and, $4.6 million
for purchases of investments and other investing activities.
Net cash provided by financing activities for the nine month period ended
September 30, 2001 aggregated $72.4 million, which included the following:
. $76.0 million proceeds from the issuance of long-term debt;
27
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
. $2.9 million in other debt payments; and,
. $1.2 million in debt amendment costs related to the CEI transaction (Note 11).
During the nine month period ended September 30, 2000, net cash provided by
financing activities aggregated $590.0 million, which included; $520.4 million
of proceeds from issuance of long-term debt; $242.5 million of proceeds from
issuance of preferred stock and warrants; $118.6 million in payoff of VA
Alliance debt; $23.5 million of cash outlay to payoff the Company's existing
lines of credit; $17.7 million in payments for investment banking, legal and
other professional services associated with the issuance of long-term debt;
$12.7 million redemption payment on senior notes; $1.5 million used to pay
dividends on common shares; and, $1.1 million of net proceeds from the exercise
of stock options.
Our liquidity needs will be influenced by numerous factors including:
. significantly reduced EBITDA that we expect to continue through at least 2001
as a result of acquiring capital intensive businesses in their early stages,
entering new markets and disposing of businesses that generate positive EBITDA;
. increased capital expenditures to support planned PCS network growth and
customer expansion;
. our own continuing capital expenditures due to our ongoing strategy of
offering our services in new markets, adding new products and services, and
enhancing organic growth;
. significant capital expenditures to become an integrated communications
provider in many of our existing, newly acquired and other potential markets by
offering a broader range of products and services;
. future acquisitions; and,
. significantly increased interest expense.
Our liquidity sources include:
. cash flows from operations, if any;
. approximately $35.9 million at September 30, 2001 held in the escrow account
to fund the next two semi-annual interest payments on the senior notes, the
first of which occurred in February 2001 with the next payment to be made in
February 2002;
. $74 million available under our senior credit facility subject to certain
conditions;
. disposition of additional non-core businesses and assets, such as additional
cell towers owned in VA East and excess PCS spectrum (Note 10), and available
for sale investments; and,
. public and private debt and equity markets.
We expect capital expenditures for the remainder of 2001 to be between $30
million and $40 million. We expect these capital expenditures to be used to:
. support the capital needs of our expanded PCS markets and operations;
. support the capital needed to begin implementation of the third generation
digital PCS technology in markets covered by the Sprint/Horizon agreement; and,
. support potential future expansion of PCS, CLEC and Internet access services.
28
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
We expect capital expenditures for 2002 to be $60 million to $65 million,
exclusive of an estimated $40 million to $45 million to be incurred over the
period from October 2001 to August 2003 in connection with our commitment to
upgrade the Alliance's PCS network to 3G-1XRTT technology (see "Depreciation and
Amortization Expenses" above for additional information).
Based on our assumptions about the future of our operating results, our capital
expenditure needs, and the availability of borrowings under our credit facility
and our other sources of liquidity, we believe that we will have sufficient
resources to fund our existing operations and strategic plans. However, if any
of our assumptions prove incorrect, we may not have sufficient capital resources
or may not remain in compliance with our debt covenants. If so, we may have to
delay or abandon some of our anticipated capital expenditures, modify our
operating plans or seek additional capital resources, including the possible
sale of non-strategic assets, and our ability to make interest and principal
payments would be significantly impaired.
Item 3. Quantitative and qualitative disclosures about market risk
The Company's senior credit facility of $325 million, $251 million of which was
outstanding at September 30, 2001, bears interest at rates 3% to 4% above the
Eurodollar rate or 2.5% to 3% above the federal funds rates. The Company's
unsecured senior notes and unsecured subordinated notes are at fixed interest
rates of 13% and 13.5%, respectively. The Company has other fixed rate,
long-term debt totaling $19.7 million.
The Company is exposed to market risks primarily related to interest rates. To
manage its exposure to interest rate risks and in accordance with conditions of
the senior note indenture, the Company entered into two, five year interest rate
swap agreements with notional amounts of $162.5 million in September 2000. These
swap agreements manage the Company's exposure to interest rate movements by
effectively converting a portion of the long-term debt from variable to fixed
rates. Fixed interest rate payments are at a per annum rate of 6.76%. Variable
rate payments are based on one month US dollar LIBOR. The weighted average LIBOR
rate applicable to these agreements was 2.63% as of September 30, 2001. The
notional amounts do not represent amounts exchanged by the parties, and thus are
not a measure of exposure of the Company. The amounts exchanged are normally
based on the notional amounts and other terms of the swaps. Interest rate
differentials paid or received under these agreements are recognized over the
one-month maturity periods as adjustments to interest expense. The fair values
of our interest rate swap agreements are based on dealer quotes. Neither the
Company nor the counterparties, which are prominent bank institutions, are
required to collateralize their respective obligations under these swaps. The
Company is exposed to loss if one or more of the counterparties default. At
September 30, 2001, the Company had no exposure to credit loss on interest rate
swaps. At September 30, 2001, the swap agreements had a fair value $16.4 million
below their face value. The effects of a one percentage point change in LIBOR
rates would change the fair value of the swap agreements by $5.3 million for a
one percentage point increase in the rate (to $18.9 million below face value)
and $8.0 million for a one percentage point decrease in the rate (to $32.3
million below face value). The Company does not believe that any reasonably
likely change in interest rates would have a material adverse effect on the
financial position, the results of operations or cash flows of the Company.
At September 30, 2001, fair value of the Company's financial assets approximates
their related carrying amounts.
The Company has interest rate risk on the amount above the $162.5 million of
senior bank debt covered by the swap noted above. At September 30, 2001, the
Company senior bank debt totaled $251 million, or $88.5 million over the swap
agreements. A one percentage point change in the Company's variable rate
exposure would result in $.9 million change in interest expense on an annual
basis.
The Company's senior notes are trading at rates well below their book values.
The Company's management believes that the risk of the fair value exceeding the
carrying value of this debt in the foreseeable future is remote due to the
current trading level, as well as market and industry conditions.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of
Waynesboro, Commonwealth of Virginia, on March 14, 2002.
NTELOS Inc.
a Virginia corporation
(Registrant)
By: /s/ James S. Quarforth
---------------------------
James S. Quarforth
Chief Executive Officer
30