Exhibit 99.1
WEST VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL REPORT
DECEMBER 31, 2000
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INDEPENDENT AUDITOR'S REPORT 1
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FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of cash flows 4-5
Statements of members' equity (deficit) 6
Notes to financial statements 7-10
To the Management Committee
West Virginia PCS Alliance, L.C.
Waynesboro, Virginia
We have audited the accompanying balance sheets of West Virginia PCS Alliance,
L.C. as of December 31, 2000 and 1999, and the related statements of operations,
members' equity (deficit) and cash flows for each of the years in the three-year
period ended December 31, 2000. These financial statements are the
responsibility of the Alliance's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of West Virginia PCS Alliance,
L.C. as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 22, 2001
1
WEST VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31,
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2000 1999
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Current Assets
Cash and cash equivalents $ 9,297 $ 8,120
Accounts receivable, net of allowance of $1,884,379
($99,915 in 1999) 2,843,532 832,763
Other receivables 693,336 175,376
Inventories 1,124,378 1,281,241
Prepaid expenses 194,489 69,049
----------------- ---------------
Total current assets 4,865,032 2,366,549
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Subordinated Capital Certificates - 2,506,255
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Property and Equipment
Land and building 948,060 942,988
Network plant and equipment 38,734,829 33,898,373
Furniture, fixtures and other equipment 2,153,569 1,330,005
Radio spectrum licenses 7,096,309 6,132,100
----------------- ---------------
Total in service 48,932,767 42,303,466
Under construction 15,958,134 5,436,007
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64,890,901 47,739,473
Less accumulated depreciation 4,966,234 2,317,215
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59,924,667 45,422,258
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Other Assets
Radio spectrum licenses 1,999,386 2,844,772
Other 97,579 356,894
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2,096,965 3,201,666
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$ 66,886,664 $ 53,496,728
================= ===============
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 4,416,858 $ 1,819,567
Due to affiliates - 1,059,198
Accrued payroll 295,133 59,797
Advance billings 534,174 27,550
Accrued interest - 5,434
Other accrued liabilities 189,134 104,530
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Total current liabilities 5,435,299 3,076,076
Long-Term Liabilities
Long-term debt 66,422,839 51,125,102
Deferred gain on sale and leaseback transaction 13,678,099 -
----------------- ---------------
80,100,938 51,125,102
Commitments
Members' Deficit (18,649,573) (704,450)
Common membership interests ----------------- ---------------
(18,649,573) (704,450)
----------------- ---------------
$ 66,886,664 $ 53,496,728
================= ===============
See Notes to Financial Statements.
2
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
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Operating revenues:
Subscriber revenue $ 9,530,152 $ 2,095,693 $ 46,293
Wholesale revenue 2,598,972 209,978 -
Equipment sales 1,061,752 681,398 65,388
Other 32,269 1,846 -
----------------- -------------------- ----------------
13,223,145 2,988,915 111,681
----------------- -------------------- ----------------
Operating expenses:
Cost of goods sold 9,074,979 3,065,469 218,943
Maintenance and support 6,647,243 4,129,714 610,106
Depreciation and amortization 2,316,164 2,067,618 258,959
Customer operations 7,534,164 4,094,039 1,308,767
Corporate operations 2,130,276 1,743,683 817,984
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27,702,826 15,100,523 3,214,759
----------------- -------------------- ----------------
Loss before other income (expense) (14,479,681) (12,111,608) (3,103,078)
Other income (expense):
Interest expense (4,215,693) (1,175,868) -
Other expense (670,749) - -
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(4,886,442) (1,175,868) -
----------------- -------------------- ----------------
Net Loss $ (19,366,123) $ (13,287,476) $ (3,103,078)
================= ==================== ================
See Notes to Financial Statements.
3
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------- ------------------ -----------------
Cash Flows From Operating Activities
Net loss $ (19,366,123) $ (13,287,476) $ (3,103,078)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 3,025,517 2,059,396 254,849
Amortization 5,481 8,222 4,110
Amortization of deferred gain on sale and
leaseback transaction (714,834) - -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts and other receivables (2,528,729) (834,237) (173,902)
Inventories 156,863 (1,052,091) (229,150)
Prepaid expenses (125,440) 5,096 (74,145)
Increase (decrease) in:
Accounts payable 1,762,037 518,754 682,086
Advance billings and customer deposits 506,624 18,180 9,371
Accrued interest (5,434) 908 4,526
Other accrued liabilities 319,940 85,710 2,489
---------------- ------------------ -----------------
Net cash used in operating activities (16,964,098) (12,477,538) (2,622,844)
---------------- ------------------ -----------------
Cash Flows From Investing Activities
Proceeds from sale of towers 25,671,354 - -
Decrease (increase) in deferred charges/credits 454,800 (95) (10,803)
Purchase of property and equipment (27,561,224) (26,076,196) (13,997,039)
Increase in radio spectrum licenses - (87,826) (3,994)
Decrease (increase) in patronage capital certificates 44,000 (141,580) -
---------------- ------------------ -----------------
Net cash used in investing activities (1,391,070) (26,305,697) (14,011,836)
---------------- ------------------ -----------------
Cash Flows From Financing Activities
Equity issuance costs - - (2,232)
Capital contributions 1,421,000 1,421,000 -
Advances from (repayments to) affiliates (1,059,198) (2,433,226) 3,426,045
Borrowings on revolving credit agreements, net - - 1,000,000
Repayment of long-term borrowings (49,132,190) - -
Proceeds from long-term borrowings, net 67,126,732 39,793,327 7,825,520
---------------- ------------------ -----------------
Net cash provided by financing activities 18,356,345 38,781,101 12,249,333
---------------- ------------------ -----------------
Net decrease in cash and cash equivalents 1,177 (2,134) (4,385,347)
Cash and cash equivalents:
Beginning 8,120 10,254 4,395,601
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Ending $ 9,297 $ 8,120 $ 10,254
================ ================== =================
See Notes to Financial Statements.
4
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
--------------- ------------------ ------------------
Supplemental Schedule of Noncash Investing and Financing
Activities
Noncash increases in property and equipment consisting
primarily of accrued construction costs and reallocation of
prior year other intangible costs $ 1,680,640 $ 618,726 $ 6,661,939
=============== ================== ==================
Subordinated capital certificates acquired by long-term
borrowings $ - $ 2,094,386 $ 411,869
=============== ================== ==================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 4,196,223 $ 1,781,822 $ 178,627
=============== ================== ==================
See Notes to Financial Statements.
5
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 2000, 1999 and 1998
Common
Membership
Interests
--------------------
Balance as of December 31, 1997 $ 14,290,224
Issuance costs (25,120)
Net loss (3,103,078)
--------------------
Balance as of December 31, 1998 11,162,026
Capital contributions 1,421,000
Net loss (13,287,476)
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Balance as of December 31, 1999 (704,450)
Capital contributions 1,421,000
Net loss (19,366,123)
--------------------
====================
Balance as of December 31, 2000 $ (18,649,573)
====================
See Notes to Financial Statements.
6
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The West Virginia PCS Alliance, L.C. ("Alliance") was organized in 1997 pursuant
to the provisions of the Virginia Limited Liability Company Act. The Alliance
was formed to fund, establish and operate a business to design, construct, own,
operate and maintain a personal communications system to provide personal
communications services ("PCS") in West Virginia. Operations commenced during
September 1998, prior to which the Alliance was in the development stage. Its
major activities through September 1998 were limited to acquiring PCS radio
spectrum licenses, designing and constructing a personal communications system
and obtaining equity capital. The Alliance completed its first full year of
operations in 1999.
NTELOS Inc. ("NTELOS") is responsible for managing and operating the Alliance
pursuant to the terms and conditions of the service agreement and within the
framework of the approved operating and capital business plan. NTELOS holds a
45% common member interest in the Alliance.
The following is a summary of the Alliance's significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity with
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generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: The Alliance considers all highly liquid cash
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investments with a purchased maturity of three months or less to be cash
equivalents. At times such investments may be in excess of federally-insured
amounts.
Inventories: Inventories include PCS telephone equipment held for resale that
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are stated at the lower of average cost or market.
Property and Equipment: Property and equipment is stated at cost and depreciated
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using the straight-line method over the estimated useful lives. Buildings are
depreciated over a 50 year life. Network plant and equipment are depreciated
over various lives from 5 to 17 years, with an average life of approximately 10
years for the category. Furniture, fixtures and other equipment are depreciated
over various lives from 3 to 24 years. Radio spectrum licenses, which are for
areas where the licenses are being used in operations, are amortized over a life
of 40 years. The Alliance has other radio spectrum licenses that are included in
other assets until such licenses are placed in service. Assets under
construction primarily represent costs incurred for the construction of cell
sites, including allocated overhead costs.
Revenue recognition: The Alliance earns revenue by providing access to and usage
- -------------------
of its personal communications network. Local service and airtime revenues are
recognized as services are provided. Other revenues for equipment sales are
recognized at the point of sale. Handset equipment is sold below cost. Prices
are based on the service contract period. The Alliance recognizes the entire
cost of the handsets at the point of sale, rather than deferring such costs over
the service contract.
7
NOTES TO FINANCIAL STATEMENTS
Fair value of financial instruments: The fair value of financial instruments
- ------------------------------------
recorded on the balance sheets is not significantly different than the carrying
amounts.
Income taxes: The Alliance is treated as a partnership for income tax purposes.
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The Internal Revenue Code and applicable state statutes provide that income and
expenses of a partnership are not separately taxable, but rather accrue directly
to the members as provided by agreement. Accordingly, no provision for federal
or state income taxes has been made in the financial statements.
Financial statement classifications: Certain amounts on the 1999 and 1998
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financial statements have been reclassified, with no effect on net loss or
members' equity, to conform with classifications adopted in 2000.
Note 2. Long-Term Debt and Subordinated Capital Certificates
Long-term debt consists of the following as of December 31:
2000 1999
--------------- ----------------
Due to Affiliate - NTELOS $ 66,422,839 $ -
Vendor supported loan - RTFC - 50,125,102
Line of credit - RTFC - 1,000,000
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$ 66,422,839 $ 51,125,102
=============== ================
In July 2000, the Alliance entered into a $104 million Note Agreement with
NTELOS that is secured by substantially all assets of the Alliance. Initial
borrowings of $49.1 million were used to payoff the Alliance's indebtedness to
the Rural Telephone Finance Cooperative (RTFC). The payoff included a prepayment
fee of $.3 million. The Alliance's debt obligation to NTELOS matures in 2008,
has no scheduled maturity payments over the next five years and bears interest
at a rate equal to NTELOS' borrowing rate under its Senior Credit Facility (3%
to 4% above the Eurodollar rate or 2.5% to 3% above the federal funds rate, or
12.3% at December 2000).
In July 2000, the Alliance paid off its vendor supported loan and line of credit
with proceeds of the note with NTELOS mentioned above.
The Rural Telephone Finance Cooperative (RTFC) allocates a large percentage of
its annual margins to its patrons. A majority portion of the allocation is
returned to the borrowers in cash. The remainder is issued to borrowers in the
form of patronage capital certificates, which are retired in cash on an RTFC
board approved cycle. In 2000, the Alliance recorded a receivable in the amount
of $243,800 for the 2000 cash distribution that is reflected in Other
Receivables on the Alliance's balance sheet. The net present value of the total
patronage capital certificates was $97,600 at December 31, 2000 and is a
Non-current Asset.
Note 3. Dispositions
In 2000, the Alliance sold 85 towers for $25.9 million to Crown Castle
International Corp (Crown). In connection with this transaction, the Alliance
has certain future lease back and other commitments (Note 5). Accordingly, the
gain on these sales has been deferred for book purposes and is being amortized
over the expected 10 year life of the leaseback agreement.
8
NOTES TO FINANCIAL STATEMENTS
Note 4. Capital Structure
The Alliance's authorized capitalization consists of one class of membership
interest, which consists of 1,242,002 units issued for a total of $14,316,000
before $50,900 of related issuance costs. This issuance is defined as the
initial "Capital Contribution". Members have made additional contributions of
$2,842,000. Total contributed capital of $17,107,100, less cumulative net losses
from operations of $35,756,700 comprise members' equity at December 31,2000 of
$18,649,600.
Additional future cash contributions may be required from the members on the
same terms and conditions of their initial Capital Contribution. If any member
fails to make the additional contributions, their existing capital account
balance may be redeemed at 25% of the then outstanding balance and amounts
forfeited would be allocated among the remaining common members.
Pursuant to the terms of the RTFC debt facility, the members entered into equity
subscription agreements that obligate them to contribute additional equity of
$5.7 million in the aggregate. Such additional equity contributions are to be
made in four annual installments of $1.4 million ending in 2002 for the purchase
of common Membership units at fair market value.
In January 2001, the members contributed $1.4 million to the Alliance,
purchasing 78,944.4 Common Membership units.
Note 5. Commitments
The Alliance leases property for cell site locations and retail stores. Leases
for cell site locations vary in term from five to ten years. Leases for retail
store locations vary in term from three to eight years. Certain cell site
location leases have been prepaid and are being amortized on a straight-line
basis over the total lease term. The annual lease expense for the years ended
December 31, 2000, 1999 and 1998 was approximately $1,590,000, $768,800 and
$180,000, respectively. The total amount committed under these lease agreements
is $2,681,900 in 2001, $2,559,800 in 2002, $2,469,400 in 2003, $2,297,600 in
2004, $635,100 in 2005 and $142,800 for the years thereafter.
Note 6. Related Party Transactions.
All transactions of the Alliance are administered by NTELOS. In accordance with
the service contract, NTELOS provided engineering, construction and other
services to the Alliance in the amount of $2,262,600 in 2000, $1,385,800 in 1999
and $933,600 in 1998. Of the total charges, $2,000,600, $1,273,700 and $380,700
were expensed in 2000, 1999 and 1998, respectively. The remaining amounts of
$262,000, $112,100 and $552,900 were capitalized in 2000, 1999 and 1998,
respectively. NTELOS also provided certain corporate services for the Alliance
in the amount of $1,762,800 in 2000, $1,168,000 in 1999 and $553,200 in 1998.
All of the 2000 and 1999 charges were expensed. Of the total 1998 charges,
$436,000 was expensed and $117,200 was capitalized during the construction and
start up period. Corporate services include executive, finance, accounting,
human resources, information management and marketing services. Such services
are charged to the Alliance at cost.
In addition, NTELOS advances funds to the Alliance to cover expenditures
incurred. The net advances are included in long term debt in 2000 and in due to
affiliates in 1999 on the accompanying balance sheets. Interest on outstanding
advances totaled $3,278,100 in 2000 and $194,000 in 1999.
9
NOTES TO FINANCIAL STATEMENTS
Switch access and switching equipment and services totaling $979,600 in 2000,
$972,800 in 1999 and $1,115,000 in 1998 were provided at cost by the Virginia
PCS Alliance, L.C. (an entity related by common ownership and management). All
2000 and 1999 charges were expensed. Of the total 1998 charges, $375,900 was
expensed and $739,100 was capitalized.