SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 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 (IRS 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 8/14/01 16,880,078
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EXPLANATORY NOTE
This Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 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 $1.7 million for the three and six months ended
June 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 $.7 million for the three and six
months ended June 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, June 30, 2001 and
December 31, 2000 4-5
Condensed Consolidated Statements of Operations, Three and Six
Months Ended June 30, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows, Six Months Ended
June 30, 2001 and 2000 7
Condensed Consolidated Statements of Shareholders' Equity, Three
and Six Months Ended June 30, 2001 and 2000 8
Notes to Condensed Consolidated Financial Statements 9-14
Management's Discussion and Analysis of Financial Condition and
Results of Operations 15-24
SIGNATURE 25
3
NTELOS Inc.
Condensed Consolidated Balance Sheets
June 30, 2001
(Unaudited December 31,
(In thousands) and restated) 2000
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Assets
Current Assets
Cash and cash equivalents $ 3,136 $ 1,637
Restricted cash 13,648 20,121
Accounts receivable, net of allowance of $10,219 ($5,100 in 2000) 32,870 24,268
Inventories and supplies 6,270 7,896
Other receivables and deposits - 11,500
Prepaid expenses and other 3,859 3,178
Income tax receivable - 2,930
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59,783 71,530
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Investments and Advances
Advances to affiliates 1,295 66,210
Securities and investments 40,759 17,405
Restricted cash 39,707 50,903
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81,761 134,518
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Property and Equipment
Land and building 42,289 26,988
Network plant and equipment 414,297 293,024
Furniture, fixtures, and other equipment 47,073 39,539
Radio spectrum licenses 457,159 428,317
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Total in service 960,818 787,868
Under construction 64,268 47,072
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1,025,086 834,940
Less accumulated depreciation 117,088 86,335
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907,998 748,605
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Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization of $8,223 ($4,253 in 2000) 133,662 45,861
Other intangibles, less accumulated amortization of $4,870 ($3,554 in 2000) 19,150 44,043
Deferred charges 20,028 26,586
Radio spectrum licenses not in service 13,718 7,874
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186,558 124,364
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$ 1,236,100 $ 1,079,017
==========================================================================================================================
See Notes to Condensed Consolidated Financial Statements
4
NTELOS Inc.
Condensed Consolidated Balance Sheets
June 30, 2001
(Unaudited and December 31,
(In thousands) Restated) 2000
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 31,974 $ 33,119
Advance billings and customer deposits 8,294 6,697
Accrued payroll 2,393 2,420
Accrued interest 18,298 20,894
Deferred revenue 6,267 4,843
Other accrued liabilities 6,499 7,362
Accrued income taxes payable 144 -
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73,869 75,335
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Long-Term Debt 618,353 556,287
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Long-Term Liabilities
Deferred income taxes 12,394 37,505
Retirement benefits 16,758 12,017
Other 36,386 13,750
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65,538 63,272
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Minority Interests 278 1,258
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Redeemable, Convertible Preferred Stock 256,282 246,906
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Commitments
Shareholders' Equity
Preferred stock - -
Common stock 177,476 45,272
Stock warrants 22,874 22,874
Retained earnings 13,749 59,355
Unrealized gain on securities available for sale and cash flow hedge, net 7,681 8,458
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221,780 135,959
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$ 1,236,100 $ 1,079,017
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc.
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Six Months Ended
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June 30, 2001 June 30, June 30, 2001 June 30,
(In thousands except per share amounts) (Restated) 2000 (Restated) 2000
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Operating Revenues
Wireless communications $ 30,331 $ 2,331 $ 55,596 $ 4,115
Wireline communications 21,908 14,303 41,757 27,780
Other communications services 2,414 4,883 4,728 10,233
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54,653 21,517 102,081 42,128
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Operating Expenses
Cost of sales (exclusive of items shown separately below) 12,678 2,490 22,726 4,857
Maintenance and support 15,933 6,181 29,760 11,687
Depreciation and amortization 18,387 3,409 36,240 6,751
Customer operations 15,961 3,793 30,752 7,391
Corporate operations 4,865 2,058 9,742 4,158
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67,823 17,931 129,220 34,844
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Operating Income (Loss) (13,170) 3,586 (27,139) 7,284
Other Income (Expenses)
Equity loss from PCS investees
VA PCS Alliance - (1,315) - (2,839)
WV PCS Alliance - (1,673) (1,286) (3,817)
Interest expense (19,250) (550) (37,447) (1,010)
Other income, principally interest 987 57 4,015 99
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(31,433) 105 (61,857) (283)
Income Taxes (Benefit) (11,147) 84 (22,570) (87)
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(20,286) 21 (39,287) (196)
Minority Interests in Losses (Earnings) of Subsidiaries 1,311 (32) 3,058 (105)
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Loss from continuing operations (18,975) (11) (36,229) (301)
Income from discontinued operations, net of tax - 348 - 687
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Net Income (Loss) (18,975) 337 (36,229) 386
Dividend requirements on preferred stock 4,690 - 9,377 -
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Income (Loss) applicable to common shares $ (23,665) $ 337 $ (45,606) $ 386
================================================================================================================================
Loss from continuing operations per common share - basic and
diluted $ (1.40) $ ( - ) $ (2.86) $ (0.02)
Income from discontinued operations per common share - basic and
diluted - 0.03 - 0.05
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Net Income (Loss) per common share - basic and diluted $ (1.40) $ 0.03 $ (2.86) $ 0.03
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Average shares outstanding - basic 16,857 13,101 15,972 13,084
Average shares outstanding - diluted 16,857 13,101 15,972 13,084
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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)
Six Months Ended
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(In thousands) June 30, 2001
(Restated) June 30, 2000
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Cash flows from operating activities
Net income (loss) $ (36,229) $ 386
Deduct income from discontinued operation - 687
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Loss from continuing operations (36,229) (301)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 31,062 5,871
Amortization 5,178 880
Deferred taxes (23,723) (412)
Retirement benefits and other 2,764 (1,420)
Accrued interest on long-term debt 17,527 -
Accrued interest income on restricted cash (2,452) -
Equity loss from PCS Alliances 1,286 6,656
Accretion of loan discount and origination fees 2,107 -
Changes in assets and liabilities from operations, net of effects of acquisitions and dispositions:
(Increase) decrease in accounts receivable 403 (1,554)
(Increase) decrease in materials and supplies 2,330 (140)
Increase in other current assets (249) (404)
Changes in income taxes 2,463 2,122
Decrease in accounts payable (14,223) (634)
Increase (decrease) in other accrued liabilities (1,447) 518
Increase (decrease) in other current liabilities (156) 390
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Net cash provided by (used in) continuing operations (13,359) 11,572
Net cash used in discontinued operation - (73)
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Net cash provided by (used in) operating activities (13,359) 11,499
Cash flows from investing activities
Purchases of property and equipment (53,759) (17,185)
Proceeds from sale of discontinued operation 3,500 -
Investments in PCS Alliances (634) (3,892)
Cash on hand in merged entity 4,096 -
Advances to (repayments from) PCS Alliances (2,960) 2,100
Deposit refunds (deposit) on assets 8,000 (100)
Proceeds from sale of towers and investments 2,975 3,200
Purchase of minority interest (93) (7,400)
Acquisition of Internet company and subscribers - (1,356)
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Net cash used in investing activities (38,875) (24,633)
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Cash flows from financing activities
Proceeds from issuance of long-term debt 55,000 -
Cash dividends - (1,501)
Payments on senior notes - (12,727)
Additional borrowing (payments) under lines of credit (net) and other debt instruments (1,665) 26,609
Net proceeds from exercise of stock options 398 804
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Net cash provided by financing activities 53,733 13,185
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Increase in cash and cash equivalents 1,499 51
Cash and cash equivalents:
Beginning 1,637 198
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Ending $ 3,136 $ 249
====================================================================================================================================
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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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 5,695
obligation
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
====================================================================================================================================
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 as of June 30, 2001
and December 31, 2000, the results of operations for the three and six
months ended June 30, 2001 and 2000 and cash flows for the six months
ended June 30, 2001 and 2000. The results of operations for the six
months ended June 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 six month period ended June 30, 2001, the Company reported
derivative losses of $1.0 million, net of $.7 million deferred tax
benefit. The related $8.1 million liability is classified in other
long-term liabilities.
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 10Q-A is being filed to amend the previously
reported Form 10Q for the fiscal period ended June 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 writedown 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, $1.4 million in additional depreciation is reflected
in the quarter ended March 31, 2001 and $.3 million in additional
depreciation is reflected in this quarter ended June 30, 2001. The
decrease in depreciation in the quarter ended June 30, 2001 as compared
to the quarter ended March 31, 2001 is due to the decision made in the
second quarter of 2001 to extend the useful life of the relevant assets
to the middle of 2002.
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 $.7 million in
amortization associated with this write-up for the three and six months
ended June 30, 2001, respectively.
The following is a summary of the effects this restatement has on the
June 30, 2001 financial statements (amounts in 000's except Earnings Per
Share):
9
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
June 30, 2001
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Excerpt from Condensed Consolidated Originally Increase
Balance Sheet (Restated) Reported (decrease)
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Network plant and equipment $ 414,297 $ 406,761 $ 7,536
Radio Spectrum Licenses 457,159 446,476 10,683
Less accumulated depreciation 117,088 110,563 6,525
Net property and equipment 907,998 896,304 11,694
Costs in excess of net assets of business acquired 133,662 100,768 32,894
Radio Spectrum Licenses in Other Assets 13,718 9,968 3,750
Deferred income taxes 12,394 12,202 192
Common Stock 177,476 129,520 47,956
Retained Earnings 13,749 13,559 190
Three Months Ended
June 30, 2001
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Excerpt from Condensed Consolidated Originally Increase
Statements of Income (Restated) Reported (decrease)
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Depreciation and amortization $ 18,387 $ 17,610 $ 777
Operating loss (13,170) (12,393) 777
Income taxes (11,147) (10,872) 275
Loss from continuing operations (18,975) (18,473) 502
Net loss (18,975) (18,473) 502
Loss applicable to common shares (23,665) (23,163) 502
Loss from continuing operations per common
share-basic and diluted $ (1.40) $ (1.37) $ 0.03
Loss per common share-basic and diluted $ (1.40) $ (1.37) $ 0.03
Six Months Ended
June 30, 2001
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Excerpt from Condensed Consolidated Statements Originally Increase
Statements of Income (Restated) Reported (decrease)
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Depreciation and amortization $ 36,240 $ 33,809 $ 2,431
Operating loss (27,139) (24,708) 2,431
Income taxes (22,570) (21,636) 934
Loss from continuing operations (36,229) (34,732) 1,497
Net loss (36,229) (34,732) 1,497
Loss applicable to common shares (45,606) (44,109) 1,497
Loss from continuing operations per common
share-basic and diluted $ (2.86) $ (2.76) $ 0.10
Loss per common share-basic and diluted $ (2.86) $ (2.76) $ 0.10
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.
10
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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For the three months ended June 30, 2001
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Revenues $ 10,831 $ 2,205 $ 4,705 $ 4,167 $ 30,331 $ - $ 2,414 $ 54,653
EBITDA* 6,717 1,769 675 229 (4,994) - 821 5,217
Depreciation &
Amortization 3,079 1,093 672 950 12,013 - 580 18,387
For the three months ended June 30, 2000
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Revenues $ 8,022 $ 1,003 $ 1,930 $ 3,348 $ 2,332 $ 2,169 $ 2,713 $ 21,517
EBITDA* 5,486 662 (331) (249) (579) 1,105 901 6,995
Depreciation &
Amortization 1,041 521 26 737 - 208 876 3,409
Telephone Network CLEC Internet Wireless PCS Analog Other Total
(in thousands) Cellular
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As of and for the six months ended June 30, 2001
- ------------------------------------------------
Revenues $ 20,543 $ 3,915 $ 8,998 $ 8,301 $ 55,596 $ - $ 4,728 $ 102,081
EBITDA* 13,166 3,135 1,487 313 (10,737) - 1,737 9,101
Depreciation &
Amortization 5,023 1,661 1,174 1,937 25,525 - 920 36,240
Total Segment Assets 133,768 55,789 31,921 18,734 802,814 - 33,677 1,076,703
Corporate Assets 159,397
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Total Assets $ 1,236,100
===============
As of and for the six months ended June 30, 2000
- -------------------------------------------------
Revenues $ 15,991 $ 1,872 $ 3,545 $ 6,372 $ 4,115 $ 4,847 $ 5,386 $ 42,128
EBITDA* 10,979 1,236 (543) (579) (1,236) 2,442 1,736 14,035
Depreciation &
Amortization 2,067 738 255 1,465 - 412 1,814 6,751
Total Segment Assets 47,267 22,582 8,543 19,358 - 5,811 44,378 147,939
Corporate Assets 95,324
---------------
Total Assets $ 243,263
===============
* Operating Income (loss) before depreciation and amortization.
3. INVESTMENTS IN WIRELESS AFFILIATES
As of June 30, 2001, the Company had a 91% 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).
As of June 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 accounted for
this investment under the equity method of accounting. As a result of
the R&B merger, the Company's ownership interest increased from 45% to
79%. As such, the Company commenced consolidating the WV Alliance as of
the February 13, 2001 merger date (Note 4).
11
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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 June 30, 2001, the advance is reflected
as an inter-company obligation which is eliminated from the Company's
balance sheet pursuant to the 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.
As of February 13, 2001, the Company assumed debt of $7.3 million from
R&B 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., which is located in the Richmond and Hampton Roads areas of
Virginia ("PrimeCo VA"). The Company acquired PrimeCo VA 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 such, 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 were $6.8 million, $1.1 million and $.4 million, respectively,
for the six months ended June 30, 2000 and $3.5 million, $.5 million and
$.2 million, respectively, for the three months ended June 30, 2000.
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
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.
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.
7. INCOME TAXES
The effective tax rate in the six months ended June 30, 2001 was 38.4%
as compared to an effective income tax rate at December
12
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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 $5.0 million. Additionally, the Company's net operating loss
carryforward was approximately $20 million at December 31, 2000 and, at
June 30, 2001, is estimated to be approximately $47 million by 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.
8. 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 337,000 and
76,000 shares for the three and six months ended June 30, 2000 to
reflect the assumed conversion of dilutive stock options. For the three
and six months ended June 30, 2001, the Company had common stock
equivalents from options totaling 102,000 and 76,000 shares,
respectively, and 300,000 stock warrants for these three and six 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 the
same. The Company currently has a total of 1.1 million options
outstanding and 1.3 million warrants outstanding to acquire shares of
common stock. Of these, 365,000 options and no warrants are currently
exercisable.
9. PRO FORMA RESULTS
The pro forma unaudited results of operations for the six months ended
June 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:
Six Months Ended June 30,
---------------------------------
(In thousands, except per share data) 2001 2000
-------------------------------------------------------------------------------------------
Operating revenues $ 107,248 $ 87,263
Operating expenses, before depreciation and amortization 98,250 84,691
Operating loss (28,830) (29,422)
Net loss from continuing operations (38,485) (45,758)
Dividend requirements on preferred stock (9,377) (8,562)
Loss applicable to common shares (47,862) (54,320)
Net loss per common share:
Basic and diluted $ (2.99) $ (3.24)
10. 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, which is
expected to close around year-end 2001, is subject to regulatory and
shareholder approvals and customary closing conditions. The 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 and will be accounted for
as a purchase. The number of shares of Company common stock a CEI
shareholder will receive will float between a range of 1.333 and 2.222,
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 1.333 or
2.222 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
to Welsh, Carson, Anderson & Stone ("WCAS"), an existing preferred
shareholder. The Series E Preferred Stock will have a $21.25 conversion
price, will provide an 8.5% annual coupon rate, compounded
semi-annually, and will 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. 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
13
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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 integrated communications provider 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 to 84,000 and 14,000 access lines,
respectively, throughout central Pennsylvania. Additionally, CEI has
over 38,000 long distance customers, 18,000 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
$25.8 million in 2000 and $14.8 million for the six months ended June
30, 2001.
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. The sale is subject to certain customary closing terms
and conditions.
14
Item 2. NTELOS, Inc.
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 June 30, 2001, we had approximately 198,700 digital PCS
subscribers and approximately 78,400 combined incumbent local exchange carrier
("ILEC") and competitive local exchange carrier ("CLEC") access lines installed.
R&B Communications, Inc. ("R&B"), who we merged with on February 13, 2001,
accounted for 19,100 of the combined ILEC and CLEC lines.
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,
Internet access, including dedicated, high-speed DSL and dial-up services,
high-speed data transmission and local telephone services. Over the last twelve
months, we completed the following:
. closing of the merger agreement with R&B, an integrated communications
provider in a geographic market contiguous to ours and commensurate therewith,
consolidated the WV Alliance (Note 4).
. acquisition of certain PCS licenses currently owned by AT&T that added a
population of 2.5 million in certain markets in Pennsylvania in exchange for WCS
licenses that we own but which were not in service (final closing was in April
2001);
. acquisition of 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");
. issuance and sale of $375 million of senior and subordinated notes;
. closing of $325 million senior credit facility, with $150 million borrowed on
the date of the PrimeCo VA closing, $175 million outstanding at year-end and
$230 million outstanding at June 30, 2001;
. payment of existing senior indebtedness and refinancing of the VA Alliance and
the WV Alliance debt obligations;
. issuance and sale of $250 million of redeemable, convertible preferred stock;
. redemption of the series A preferred membership interest in the VA Alliance
and conversion of the series B preferred membership interest into common
interest;
. dispositions of RSA5 and the analog assets and operations of RSA6 in
connection with the PrimeCo VA acquisition; and,
. disposition 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.
15
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 Transactions mentioned above, the following events (Note 10) have
occurred subsequent to June 30, 2001:
. On July 24, 2001, we signed a definitive merger agreement with Conestoga
Enterprises, Inc. ("CEI"), an ICP with a service area that covers southern and
central Pennsylvania, an area contiguous to our Virginia and West Virginia
operations.
. 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 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.
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 including but
not limited to, 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; continuation of
economic growth and demand for wireless and wireline communications services;
rapid changes in technology; the competitive nature of the wireless telephone
and other communications services industries; the effects of inflation and price
changes not being greater than anticipated; adverse changes in the roaming 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:
. wireless communications, consisting of retail, service and wholesale
digital PCS revenues;
. wireline communications, including telephone revenues, fiber optic
network usage (or carrier's carrier services), Internet, CLEC,
long distance revenues; and,
16
. 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:
. 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;
. 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;
. depreciation and amortization, including amortization of goodwill
and other intangibles from acquisitions, merger and capital
outlays to support continued business expansion;
. customer operations expenses, including marketing, product
management, product advertising, sales, publication of a regional
telephone directory, customer services and directory services;
and,
. corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information technology,
human resources and other general and administrative expenses.
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.
Results of Operations
Three and Six Months Ended June 30, 2001
Compared to Three and Six Months Ended June 30, 2000
OVERVIEW
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreased $1.8 million, or 25%, from $7.0 million to $5.2 million and $4.9
million, or 35%, from $14.0 million to $9.1 million for the respective three and
six month periods ended June 30, 2001 as compared to 2000. Operating income
(loss) decreased $16.8 million from income of $3.6 million to a $13.2 million
loss for the three months ended June 30, 2000 and 2001, respectively. Operating
income (loss) decreased $34.4 million from income of $7.3 million to a $27.1
million loss for the six months ended June 30, 2000 and 2001, respectively. Pro
forma EBITDA improved $1.8 million, or 53%, from $3.4 million to $5.2 million
and $6.4 million, from $2.6 million to $9.0 million, for the three and six
months ended June 30, 2000 and 2001, respectively. These results reflect
relatively steady pro forma year over year improvement in the wireline and
wireless businesses. Additionally, pro forma EBITDA for the second quarter of
2001 improved $1.4 million over the first quarter of 2001 results and has shown
steady improvements over the last three quarters. Pro forma operating loss
17
increased $.2 million from a loss of $28.4 million for the six months ended June
30, 2000 to a loss of $28.6 million for the six months ended June 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 $60.0 million ($20.0 million on a pro forma
basis). Negative operating margins from early to 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 VA Alliance and WV Alliance reduced income
from operations to a loss position in 2001 as compared to the operating income
recognized in the prior year comparable period. For the six months ended June
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%
and 45%, respectively). However, the Company reported 100% of the VA Alliance
operating results for the six month period ended June 30, 2001 and 100% of the
WV Alliance operating results for the period from February 14, 2001 to June 30,
2001 (period after consolidation) in the details of the statement of operations.
Net loss applicable to common shares for the three months ended June 30, 2001
was $23.7 million, which included $19.3 million in interest expense. Net loss
applicable to common shares for the six months ended June 30, 2001 was $45.6
million, which included $37.4 million in interest expense and $1.3 million in
equity losses from the WV Alliance for the period prior to consolidation.
Net income for the three months ended June 30, 2000 was $.3 million, which
included equity losses from the Alliances of $3.0 million and $.3 million of
income from discontinued operations, net of taxes. Net income for the six months
ended June 30, 2000 was $.4 million, which included equity losses from the
Alliances of $6.7 million, interest expense of $1.0 million and $.7 million of
income from discontinued operations, net of taxes.
OPERATING REVENUES
Operating revenues increased $33.2 million, or 154%, from $21.5 million for the
three months ended June 30, 2000 to $54.7 million for the three months ended
June 30, 2001. Operating revenues increased $60.0 million, or 142%, from $42.1
million to $102.1 million for the six months ended June 30, 2000 and 2001,
respectively.
WIRELESS COMMUNICATIONS REVENUES--Wireless communications revenues increased
$28.0 million from $2.3 million to $30.3 million for the three months ended June
30, 2000 and 2001, respectively, and increased $51.5 million from $4.1 million
to $55.6 million for the six months ended June 30, 2000 and 2001, respectively.
This increase is primarily due to the acquisition of PrimeCo VA, the
consolidation of the VA Alliance which occurred 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 $22.9 million, or 82%, of the
total three month increase and $44.3 million, or 86%, of the total six month
increase. The consolidation of the WV Alliance in February 2001 also added $5.8
million and $8.4 million to the year over year revenues for the three and six
month periods ended June 30, 2001 as compared to 2000, respectively. Pro forma
revenues increased $6.5 million from $23.8 million to $30.3 million for the
three months ended June 30, 2000 and 2001, respectively, and $13.1 million from
$45.0 million to $58.1 million for the six months ended June 30, 2000 and 2001,
respectively.
On a pro forma basis, we increased PCS subscribers by 47,200, from 151,500 as of
June 30, 2000 to 198,700 as of June 30, 2001. This increase in subscribers
translated to a $6.0 million year over year revenue increase. Additionally,
wholesale revenue increased $8.0 million. A partial offset to these factors was
a decrease in average revenue per unit ("ARPU") of $4.32, or 9%, from $45.87 for
the six months ended June 30, 2000 to $41.55 for the six months ended June 30,
2001. This primarily resulted from competition and changes in the mix of prepay
and postpay customers and promotional introductory rates offered in the initial
months of certain postpay rate plans.
18
WIRELINE COMMUNICATIONS REVENUES--Wireline communications revenues
increased $7.6 million, or 53%, from $14.3 million to $21.9 million for the
three months ended June 30, 2000 and 2001, respectively, and increased $14.0
million, or 50%, from $27.8 million for the six months ended June 30, 2000 to
$41.8 million for the six months ended June 30, 2001. Wireline revenues
increased $3.4 million, or 19%, from $18.5 million to $21.9 million on a pro
forma basis for the three months ended June 30, 2000 and 2001, respectively.
Wireline revenues increased $8.2 million, or 23%, from $36.0 million to $44.2
million on a pro forma basis for the six months ended June 30, 2000 and 2001,
respectively. These increases represent a more than 80% growth in the CLEC
business for the three and six month comparable periods, followed by significant
growth in the Internet, ILEC and Network businesses.
. Telephone Revenues. Telephone revenues, which include local service, access
and toll service, directory advertising and calling feature revenues from our
ILEC business increased $2.8 million, or 35%, from $8.0 million for the three
months ended June 30, 2000 to $10.8 million for the three months ended June 30,
2001. Telephone revenues increased $4.5 million, or 28%, from $16.0 million for
the six months ended June 30, 2000 to $20.5 million for the six months ended
June 30, 2001. The consolidation of R&B Telephone in the first quarter of 2001
accounted for $2.5 million (89%) and $3.8 million (85%) of the three and six
month increase, respectively, over the period ended June 30, 2000. On a pro
forma basis for the comparable six month periods, ILEC revenues were up 6.9% due
to a 1% increase in access lines and a 7% increase in carrier access minutes.
. Fiber Optic Network Usage Revenues. Revenues from fiber optic network usage
operations increased $1.2 million, or 120%, and $2.0 million, or 109%, from $1.0
million and $1.9 million for the three and six months ended June 30, 2000,
respectively, to $2.2 million and $3.9 million for the three and six months
ended June 30, 2001, respectively. Of the increase for the three and six months
ended June 30, 2000 and 2001, $1.2 million and $1.9 million, respectively, or
essentially 100% of the increases, is attributable to the consolidation of R&B
Network in February 2001.
. CLEC Revenues. CLEC revenues increased $2.8 million, or 144%, from $1.9
million for the three months ended June 30, 2000 to $4.7 million for the three
months ended June 30, 2001 and increased $5.5 million, or 154%, from $3.5
million for the six months ended June 30, 2000 to $9.0 million for the six
months ended June 30, 2001. Of the increase for the three and six month periods
ended June 30, 2001 as compared to 2000, $.7 million (26%) and $1.3 million
(23%), respectively, is attributable to the consolidation of R&B CLEC in
February 2000 and $.2 million (9%) and $.7 (13%) million, respectively, is due
to increased revenues from NA Communications, which was reclassified in both
periods from the Internet segment to provide uniform reporting within the
organization. Excluding the R&B market, which increased 2,500 lines (51%), CLEC
access lines increased 6,600, or 53%. Additionally, reciprocal compensation
revenues for the comparable six month periods increased $1.4 million, from $1.2
million to $2.6 million.
. Internet Revenues. Revenues from Internet services increased $.8 million, or
25%, and $1.9 million, or 30%, from $3.3 million and $6.4 million to $4.1
million and $8.3 million for the three and six months ended June 30, 2000 and
2001, respectively. The consolidation of R&B Internet in February 2001 accounted
for $.2 million and $.3 million of the total increase for the three and six
month periods, respectively. Internet subscribers increased 7,800, or 13%, in
second quarter 2001 over second quarter 2000, with DSL customer additions
accounting for 1,300 of this total, from 1,000 customers at June 30, 2000 to
2,300 customers at June 30, 2001.
OTHER COMMUNICATIONS SERVICES REVENUES--Other communications services revenues,
including other R&B, decreased $2.5 million, or 51%, from $4.9 million to $2.4
million for the three month periods ended June 30, 2000 and 2001, respectively,
and decreased $5.5 million, or 54%, from $10.2 million to $4.7 million for the
six month periods ended June 30, 2000 and 2001, respectively.
. Other Wireless Revenues. Other wireless revenues consist of revenues from
analog cellular, paging and voicemail. These revenues decreased $2.3 million, or
81%, and $5.2 million, or 82%, from $2.9 million and $6.3 million for the three
and six months ended June 30, 2000 to $.6 million and $1.1 million for the three
and six months ended June 30, 2001. 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 $2.2 million for
the three months ended June 30, 2000 and $4.8 million for the six months ended
June 30, 2000. Voicemail and paging revenue decreased $.2 million, or 25%, from
$.7 million for the three months ended June 30, 2000 to $.5 million for the
three months ended June 30, 2001 and decreased $.4 million, or 24%, from $1.5
million for the six months ended June 30, 2000 to $1.1 million for the six
months ended June 30, 2001 due to the 25% decrease in paging customers.
19
. Cable and other Revenues. Cable revenues, including wireless and wireline
cable, decreased $.1 million, or 9%, and $.2 million, or 9%, from $1.0 million
and $2.0 million for the three and six months ended June 30, 2000 to $.9 million
and $1.8 million for the three and six months ended June 30, 2001. Other
communications services revenues remained flat for the three months ended June
30, 2001 as compared to the three months ended June 30, 2000; however, revenues
decreased $.2 million, or 6%, from $1.9 million for the six months ended June
30, 2000 to $1.7 million for the six months ended June 30, 2001.
OPERATING EXPENSES
TOTAL OPERATING EXPENSES--Total operating expenses increased $49.9 million from
$17.9 million to $67.8 million for the three months ended June 30, 2000 and
2001, respectively, and increased $94.4 million from $34.8 million for the six
months ended June 30, 2000 to $129.2 million for the six months ended June 30,
2001. Of this increase, $15 million and $29.5 million relates to the increase in
depreciation and amortization for the three and six month periods. Of the
remaining increase for the comparable six month periods, $66.1 million relates
to operating expenses other than depreciation and amortization from the VA
Alliance, WV Alliance, VA East and R&B, all of which were consolidated into our
results after June 30, 2000. Additionally, operating expenses increased by a
total of $1.2 million in our operations which were present in both of the
comparable six month periods. These increases were offset by the $2.5 million
decrease attributable to analog cellular operation which was disposed of in July
2000.
On a proforma basis, operating expenses, excluding depreciation and
amortization, increased $7.5 million, or 18%, in the three months ended June 30,
2001 as compared to the three months ended June 30, 2000 and increased $13.7
million, or 16%, in the six months ended June 30, 2001 as compared to the six
months ended June 30, 2000. During these same comparative periods, revenues
increased by 20% and 23%, respectively.
COST OF SALES--Cost of sales increased $10.2 million from $2.5 million for the
three months ended June 30, 2000 to $12.7 million for the three months ended
June 30, 2001 and increased $17.8 million from $4.9 million for the six months
ended June 30, 2000 to $22.7 million for the six months ended June 30, 2001.
Cost of sales as a percent of wireless sales decreased significantly, from over
100% to just over 40% for the three and six 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
$9.7 million, or 158%, from $6.2 million to $15.9 million for the three months
ended June 30, 2000 and 2001, respectively, and increased $18.1 million, or
155%, from $11.7 million to $29.8 million for the six months ended June 30, 2000
and 2001, respectively. This increase was primarily attributable to the
explosive growth by acquisition in the wireless segment, as this accounted for
$6.7 million of the total three month increase and $13.1 million of the total
six month increase. In addition, CLEC accounted for $2.3 million of the total
three month increase and $3.7 million of the total six 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. For the periods ended, maintenance
and support expenses as a percent of total revenues were flat at 29%.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
increased $15.0 million from $3.4 million to $18.4 million for the three months
ended June 30, 2000 and 2001, respectively, and increased $29.4 million from
$6.8 million to $36.2 million for the six months ended June 30, 2000 and 2001,
respectively. Of the total six month increase, $10.1 million is from
amortization of goodwill, other intangible assets and licenses, primarily from
the acquisition activity. The digital PCS acquisitions and R&B merger, none of
which were included in the results for the period ended June 30, 2000, accounted
for $17.0 million and $2.6 million, respectively, of depreciation for the six
month period ending June 30, 2001.
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CUSTOMER OPERATIONS EXPENSES--Customer operations expenses increased $12.2
million and $23.4 million, from $3.8 million and $7.4 million for the three and
six months ended June 30, 2000, respectively, to $16.0 million and $30.8 million
for the three and six months ended June 30, 2001, respectively. Of this total
increase, $10.9 million and $22.7 million occurred in the wireless segment from
the VA Alliance, WV Alliance, and VA East acquisitions for the three and six
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 stores 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 adding new customers. As a percent of total revenue, customer
operations expenses increased from 18% to 30% over the related six month periods
ended June 30, 2000 and 2001, respectively.
CORPORATE OPERATIONS EXPENSES--Corporate operations expenses increased $2.8
million, from $2.1 million to $4.9 million for the three months ended June 30,
2000 and 2001, respectively, and increased $5.5 million, from $4.2 million to
$9.7 million for the six months ended June 30, 2000 and 2001, respectively. This
was due to the growth in the infrastructure needed to support the acquired PCS
businesses ($3.5 million for the three month increase and $6.9 million for the
six month increase). Additionally, R&B accounted for $.4 million of the total
corporate operations expense increase for the comparable six 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. As a percent of total revenue, corporate operations
expenses remained constant at 10%.
OTHER INCOME (EXPENSES)
Total other expenses increased $14.8 million from a net other expense of $3.5
million for the three months ended June 30, 2000 to a net other expense of $18.3
million for the three months ended June 30, 2001 and increased $27.2 million
from a net other expense of $7.5 million for the six months ended June 30, 2000
to a net other expense of $34.7 million for the six months ended June 30, 2001.
This is primarily due to interest from debt with a face value of between $577
million and $640 million during the six months ended June 30, 2001 as compared
to debt of less than $52 million during the comparable prior year period.
Interest expense increased $18.7 million and $36.4 million, from $.6 million and
$1.0 million for the three and six months ended June 30, 2000, respectively, to
$19.3 million and $37.4 million for the three and six months ended June 30,
2001. As noted above, 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). Other
income, principally interest increased $.9 million and $3.9 million from $.06
million and $.1 million for the three and six months ended June 30, 2000 to $1.0
million and $4.0 million for the three and six months ended June 30, 2001,
respectively. This increase is due to the interest earned on restricted cash
during the six months ended June 30, 2001, as well as gains of $.7 million from
the sale of Illuminet Holding, Inc. ("Illuminet") stock during the second
quarter of 2001.
Our share of losses from the VA Alliance was $1.3 million for the three months
ended June 30, 2000 and $2.8 million for the six months ended June 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 $11.2 million from a tax liability of $.08 million
for the three months ended June 30, 2000 to a tax benefit of $11.1 million for
the three months ended June 30, 2001. Income tax benefits increased $22.5
million from a tax benefit of $.09 million for the six months ended June 30,
2000 to a tax benefit of $22.6 million for the six months ended June 30, 2001.
This increase was primarily due to the change in the pre-tax income for the
comparable periods. The effective tax rate for six months ended June 30, 2001
was a 38.4% benefit, as compared to the expense rate for the six months ended
June 30, 2000 of 48.9%. The 2000 rate was significantly above statutory rates
due to the impact of nondeductible goodwill from the NetAccess 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).
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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
$39 million from the sale of certain towers and PCS licenses (Note 10). In
addition, since July 1, 2001, the Company has received proceeds of $10.3 million
from the sale of Illuminet stock. At June 30, 2001, we had $95 million in unused
borrowings available under our senior credit facility. We borrowed an additional
$35 million against our senior credit facility in the second quarter of 2001.
OPERATING CASH FLOWS
During the six month period ended June 30, 2001, net cash used in operating
activities was $13.4 million, with $2.5 million used in operations and net
negative changes in operating assets and liabilities totaling $10.9 million.
Principle changes in operating assets and liabilities were as follows:
inventories and supplies decreased $2.3 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; income taxes went from a
receivable at the 2000 year end of $2.9 million to a $.1 million payable
position at June 30, 2001 due to the receipt of the year end receivable and the
state minimum tax payable at June 30, 2001; and, accounts payable and other
liabilities (excluding additional payables from R&B and the WV Alliance)
increased by $15.8 million due to the timing of payments at and around the
respective period ends.
During the six month period ended June 30, 2000, net cash provided by operating
activities was $11.5 million, with $11.3 million provided by operations, $.3
million provided by the net positive changes in operating assets and liabilities
and $.1 million provided by discontinued operations. Principal changes in
operating assets and liabilities were as follows: income taxes went from a $2.0
million asset at December 31, 1999 to a $.1 million liability on June 30, 2000;
and accounts payable decreased $.6 million due to the timing of payments.
Our cash flows used in investing activities for the six month period ended June
30, 2001 aggregated $38.9 million and include the following:
. $53.8 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 repayments from 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,
. $3.0 million received from the sale of towers and investments.
During the six month period ended June 30, 2000, our investing activities
included:
. $17.2 million in property and equipment;
. $3.9 million in investments in the Alliances;
. $2.1 million in net advances to the Alliances;
. $3.2 million in proceeds from the sale of towers and investments;
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. $7.4 million for the purchase of minority interest; and,
. $1.4 million for the purchase of an Internet company and its subscribers.
Net cash provided by financing activities for the six month period ended June
30, 2001 aggregated $53.7 million, which includes the following:
. $55 million in additional draws against the senior credit facility; and,
. $1.7 million in other debt payments.
During the six month period ended June 30, 2000, net cash provided by financing
activities aggregated $13.2 million, which included $1.5 million used to pay
dividends on common shares, $12.7 million for payment on senior debt, and a net
of $26.6 million of borrowings against the line of credit outstanding during
this period.
Under restrictions related to the new debt financing (see Note 6 in our 2000
Annual Report), we discontinued payment of dividends to common shareholders
effective for the quarter ending June 30, 2000. This was done to allow us to
retain future earnings, if any, to fund the development and growth of our
businesses and to service our debt obligations.
As a result of the Transactions, 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.
As a result of the Transactions, our liquidity sources include:
. cash flows from operations, if any;
. approximately $53.3 million at June 30, 2001 held in the escrow account to
fund the next three semi-annual interest payments on the senior notes, the first
of which occurred in February 2001 with the next payment to be made in August
2001;
. $95 million available under our new credit facility subject to certain
conditions;
. public and private debt and equity markets; and,
. 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.
We expect capital expenditures for the remainder of 2001 to be between $50
million and $60 million. We expect these capital expenditures to be used to:
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. support the capital needs of our expanded PCS markets and operations;
. support potential future expansion of PCS, CLEC and Internet access services;
and,
. add office space and furnishings to support employee additions commensurate
with the growth in our strategic businesses.
Based on our assumptions about the future of our operating results, our capital
expenditure needs, many of which are discretionary, and the availability of
borrowings under our new 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 convenants. If so, we may have to delay or abandon some of our anticipated
capital expenditures and our ability to make interest and principal payments on
the notes would be significantly impaired.
Item 3. Quantitative and qualitative disclosures about market risk
The Company's senior credit facility of $325 million, $230 million of which was
outstanding at June 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 $34.4 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 3.835% as of June 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 June 30, 2001,
the Company had no exposure to credit loss on interest rate swaps. At June 30,
2001, the swap agreements had a fair value $8.1 million below their face value.
The effects of a 1% change in LIBOR rates would change the fair value of the
swap agreements by $6.3 million for a 1% increase in the rate (to $1.8 million
below face value) and $6.4 million for a 1% decrease in the rate (to $14.4
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 June 30, 2001, fair value of the Company's financial assets approximates
their related carrying amounts.
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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
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