SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002 Commission File No. 0-16751
----------------------- ---------
NTELOS Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
------------------------------
None
- --------------------------------------------------------------------------------
(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
(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 5/14/02 17,242,435
--------------------------
NTELOS Inc.
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, March 31, 2002 and December
31, 2001 3-4
Condensed Consolidated Statements of Operations, Three Months Ended
March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows, Three Months Ended
March 31, 2002 and 2001 6
Condensed Consolidated Statements of Shareholders' Equity, Three
Months Ended March 31, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 8-11
Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-20
Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION 22
SIGNATURES 23-24
2
NTELOS Inc.
Condensed Consolidated Balance Sheets
March 31, 2002 December 31,
(In thousands) (Unaudited) 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 1,914 $ 7,293
Restricted cash 4,549 18,069
Accounts receivable, net of allowance 31,925 30,328
Inventories and supplies 5,827 9,619
Other receivables and deposits 2,111 4,669
Prepaid expenses and other 5,075 3,929
Income taxes receivable 1,877 1,945
- ---------------------------------------------------------------------------------------------------------------------------------
53,278 75,852
- ---------------------------------------------------------------------------------------------------------------------------------
Investments and Advances
Securities and investments 13,605 13,963
Restricted cash 13,515 18,094
- ---------------------------------------------------------------------------------------------------------------------------------
27,120 32,057
- ---------------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land and building 50,953 50,836
Network plant and equipment 460,893 447,585
Furniture, fixtures and other equipment 66,700 65,283
Radio spectrum licenses 456,096 456,038
- ---------------------------------------------------------------------------------------------------------------------------------
Total in service 1,034,642 1,019,742
Under construction 35,296 35,753
- ---------------------------------------------------------------------------------------------------------------------------------
1,069,938 1,055,495
Less accumulated depreciation 163,906 154,440
- ---------------------------------------------------------------------------------------------------------------------------------
906,032 901,055
- ---------------------------------------------------------------------------------------------------------------------------------
Other Assets
Cost in excess of net assets of business acquired, net of accumulated
amortization 135,351 135,635
Other intangibles, net of accumulated amortization 17,915 23,677
Deferred charges 19,463 18,675
Radio spectrum licenses not in service 9,579 9,935
- ---------------------------------------------------------------------------------------------------------------------------------
182,308 187,922
- ---------------------------------------------------------------------------------------------------------------------------------
$ 1,168,738 $ 1,196,886
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
NTELOS Inc.
Condensed Consolidated Balance Sheets
(In thousands) March 31, 2002 December 31,
(Unaudited) 2001
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 42,812 $ 39,917
Advance billings and customer deposits 10,689 8,889
Accrued payroll 5,466 5,540
Accrued interest 6,138 18,332
Deferred revenue 4,755 5,092
Other accrued liabilities 6,449 4,927
- -----------------------------------------------------------------------------------------------------------------------------
76,309 82,697
- -----------------------------------------------------------------------------------------------------------------------------
Long-term Debt 621,179 612,416
- -----------------------------------------------------------------------------------------------------------------------------
Long-term Liabilities
Deferred income taxes 921 2,200
Retirement benefits 16,745 15,789
Long-term deferred liabilities 43,061 43,624
- -----------------------------------------------------------------------------------------------------------------------------
60,727 61,613
- -----------------------------------------------------------------------------------------------------------------------------
Minority Interests 847 847
- -----------------------------------------------------------------------------------------------------------------------------
Redeemable, Convertible Preferred Stock 270,766 265,747
- -----------------------------------------------------------------------------------------------------------------------------
Commitments
Shareholders' Equity
Preferred stock, no par value per share, authorized 1,000
shares; none issued - -
Common stock, no par value per share, authorized 75,000 shares; issued
17,242 shares (17,209 in 2001) 182,297 182,093
Stock warrants 22,874 22,874
Accumulated deficit (58,884) (23,201)
Accumulated other comprehensive loss (7,377) (8,200)
- -----------------------------------------------------------------------------------------------------------------------------
138,910 173,566
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,168,738 $ 1,196,886
=============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
NTELOS Inc.
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended
- -----------------------------------------------------------------------------------------------------------------------
March 31, March 31,
(In thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Operating Revenues
Wireless PCS $ 35,771 $ 25,265
Wireline communications 22,318 19,915
Other communication services 1,932 2,384
- -----------------------------------------------------------------------------------------------------------------------
60,021 47,564
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Cost of wireless sales (exclusive of items shown separately below) 12,223 10,184
Maintenance and support 16,891 13,828
Depreciation and amortization 23,095 17,853
Customer operations 15,771 14,791
Corporate operations 5,854 4,877
Restructuring charge 1,267 -
- -----------------------------------------------------------------------------------------------------------------------
75,101 61,533
- -----------------------------------------------------------------------------------------------------------------------
Operating Loss (15,080) (13,969)
Other Income (Expenses)
Equity loss from investee - WV PCS Alliance - (1,286)
Gain on sale of assets 1,955 -
Interest expense (19,004) (18,197)
Other income (expense) (133) 3,028
- -----------------------------------------------------------------------------------------------------------------------
(32,262) (30,424)
Income Tax Benefit (1,569) (11,423)
- -----------------------------------------------------------------------------------------------------------------------
(30,693) (19,001)
Minority Interests in Losses of Subsidiaries 29 1,747
- -----------------------------------------------------------------------------------------------------------------------
Net Loss (30,664) (17,254)
Dividend requirements on preferred stock 5,019 4,687
- -----------------------------------------------------------------------------------------------------------------------
Loss Applicable to Common Shares $ (35,683) $ (21,941)
=======================================================================================================================
Loss per Common Share - Basic and Diluted $ (2.07) $ (1.46)
Average shares outstanding - basic & diluted 17,220 15,075
=======================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands) March 31, 2002 March 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (30,664) $ (17,254)
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of assets (1,955) -
Depreciation 22,110 15,235
Amortization 985 2,618
Deferred taxes (1,820) (11,230)
Retirement benefits and other 784 1,587
Net interest expense from restricted cash 8,998 7,239
Equity loss from WV PCS Alliance - 1,286
Accretion of loan discount and origination fees 1,072 582
Changes in assets and liabilities from operations, net of effects of
acquisitions and dispositions:
Increase in accounts receivable (1,597) (4,039)
Decrease in inventories and supplies 3,792 4,559
(Increase) decrease in other current assets 1,412 (163)
Changes in income taxes 68 2,548
Increase (decrease) in accounts payable 2,896 (676)
Increase (decrease) in other accrued liabilities (1,645) (5,340)
Increase in other current liabilities 1,503 791
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,939 (2,257)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (29,120) (25,505)
Proceeds from sale of discontinued operation - 3,500
Investments in PCS Alliances - (634)
Cash on hand in merged entity - 4,096
Advances to PCS Alliances - (2,960)
Deposit refunds on assets - 8,000
Proceeds from sale of assets 10,859 1,050
Other (253) (814)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,514) (13,267)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 20,000
Borrowings under line of credit, net 10,000 -
Additional payments on other debt instruments (1,770) (1,652)
Net proceeds from issuance of stock 147 145
Other (1,181) (60)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,196 18,433
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (5,379) 2,909
Cash and cash equivalents:
Beginning 7,293 1,637
- ---------------------------------------------------------------------------------------------------------------------------------
Ending $ 1,914 $ 4,546
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
NTELOS Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited)
Retained Accumulated
Earnings Other Total
Common Stock (Accumulated Comprehensive Shareholders'
(In thousands) Shares Amount Warrants Deficit) Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
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)
Dividends on preferred shares (4,687) (4,687)
Common stock issuance
pursuant to R&B Merger 3,716 131,807 131,807
Shares issued through
Employee Stock Purchase
Plan 7 145 145
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 16,855 $ 177,224 $ 22,874 $ 37,414 $ 625 $ 238,137
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 17,209 $ 182,093 $ 22,874 $ (23,201) $ (8,200) $ 173,566
Comprehensive loss:
Net loss (30,664)
Derivative gain, net of $735 of
deferred tax benefit 1,156
Unrealized loss on securities
available for sale, net of $212
of deferred tax benefit (333)
Comprehensive loss (29,841)
Dividends on preferred shares (5,019) (5,019)
Common stock issuance 4 58 58
Shares issued through
Employee Stock Purchase
Plan 29 146 146
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 17,242 $ 182,297 $ 22,874 $ (58,884) $ (7,377) $ 138,910
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
7
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, 2001, 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 March 31, 2002
and December 31, 2001, the results of operations for the three months
ended March 31, 2002 and 2001 and cash flows for the three months ended
March 31, 2002 and 2001. The results of operations for the three months
ended March 31, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full year.
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Under
these new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with this Statement. Other
intangible assets will continue to be amortized over their useful lives.
Accordingly, the Company ceased amortization of goodwill, an assembled
workforce intangible asset, and PCS radio spectrum licenses on January
1, 2002. The cost and net book value of these assets at March 31, 2002
follows:
(In thousands) Cost Net Book Value
-----------------------------------------------------------------------
Goodwill 147,082 135,351
PCS Radio Spectrum Licenses In Service 446,487 429,009
Assembled Workforce 1,800 1,390
-----------------------------------------------------------------------
Total 595,369 565,750
=======================================================================
Amortization of indefinite lived intangible assets was $4.3 million
($3.1 million after tax) for the first quarter of 2001. Therefore, pro
forma loss applicable to common shares for the first quarter of 2001
adjusted for the impact of SFAS No. 142 was $18.9 million ($1.25 per
common share).
During 2002, the Company will perform the first of the required
impairment tests of goodwill and intangible assets with indefinite lives
as of January 1, 2002. The Company has not yet determined the effect
these tests will have on the earnings and financial position of the
Company. Based on current market conditions, the impact could be
material.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform to
classifications adopted in 2002. At March 31, 2002, accounts receivable
is shown net of $16.4 million allowance for doubtful accounts ($14.0
million at December 31, 2001). Costs in excess of net assets of business
acquired and other intangibles are shown net of accumulated amortization
of $20.5 million at March 31, 2002 ($20.0 million at December 31, 2001).
2. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company manages its business segments with separable management
focus and infrastructures. The "Other" segment is comprised of the
paging operation, all cable operations, and the alarm and other
communications services operations. Additionally, certain unallocated
corporate related items that, in management's opinion don't provide
direct benefit to the operating segments, are included in Other. Total
unallocated corporate operating expenses were $2.1 million and $.5
million for the three month period ended March 31, 2002 and 2001,
respectively. Within this current year amount is $1.3 million of
restructuring charges (Note 8).
Depreciation and amortization of corporate assets is included in the
"Other" column in the tables below. This amounted to $.1 million and $.2
million for the quarters ended March 31, 2002 and 2001, respectively, of
the total "Other" depreciation and amortization.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. These segments are described
in more detail in Note 2 of the Company's 2001 Annual Report to
Shareholders.
8
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
(in thousands) Telephone Network CLEC Internet Wireless PCS Other Total
- -----------------------------------------------------------------------------------------------------------------------
As of and for the three months ended March 31, 2002
- ---------------------------------------------------
Revenues $ 10,509 $ 2,243 $ 4,943 $ 4,622 $ 35,771 $ 1,933 $ 60,021
EBITDA* 6,263 1,671 542 719 245 (1,425) 8,015
Depreciation &
Amortization 1,807 700 710 982 18,196 700 23,095
Total Segment Assets 142,022 58,087 32,239 17,420 771,170 31,033 1,051,971
Corporate Assets 116,767
----------------
Total Assets $ 1,168,738
================
As of and for the three months ended March 31, 2001
- ---------------------------------------------------
Revenues $ 9,712 $ 1,776 $ 4,293 $ 4,134 $ 25,265 $ 2,384 $ 47,564
EBITDA* 6,449 1,367 812 85 (5,743) 914 3,884
Depreciation
&Amortization 1,801 501 502 987 13,512 550 17,853
Total Segment Assets 132,362 52,249 31,175 19,316 799,700 35,658 1,070,460
Corporate Assets 153,151
----------------
Total Assets $ 1,223,611
================
* Operating Income before depreciation and amortization.
3. INVESTMENTS IN WIRELESS AFFILIATES
On February 13, 2001, pursuant to the Company's merger with R&B (Note
4), the Company's common ownership interest increased in the Virginia
PCS Alliance, L.C. ("VA Alliance") from 65% to 91% and increased in the
West Virginia PCS Alliance, L.C. ("WV Alliance") from 45% to 79%. The
Company began consolidating the results of the VA Alliance in 2000 and
began consolidating the results of the WV Alliance on February 13, 2001.
From this date to March 31, 2002, the Company has purchased additional
minority interest in the VA Alliance and the WV Alliance and, at March
31, 2002, held common interests of 97% and 98%, respectively.
The VA Alliance is a PCS provider serving a 1.7 million populated area
in central and western Virginia. The WV Alliance is a PCS provider
serving a 2.0 million populated area in West Virginia and parts of
eastern Kentucky, southwestern Virginia and eastern Ohio.
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 was
$95.5 million, $68.5 million of which was allocated to goodwill in the
telephone segment and the remaining $27 million was allocated to
goodwill in the network segment. Additionally, fair value adjustments of
$14.4 million were made to certain PCS licenses in which R&B held an
ownership interest. As of February 13, 2001, the Company assumed debt of
$7.3 million from R&B payable in the years 2001 through 2026.
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.
5. SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
The Company made scheduled semi-annual payments of interest for $18.2
million on the $280 million senior notes out of restricted cash during
the quarters ending March 31, 2001 and 2002, in accordance with the
terms and conditions set forth in the senior note indenture.
Additionally, see Note 4 above for the non-cash merger transaction with
R&B.
9
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
During the quarter ended March 31, 2002, the Company sold communication
towers for total proceeds of $8.2 million, deferring a $1.3 million gain
which is being amortized over the twelve year leaseback period.
Additionally, the Company sold certain inactive PCS licenses for
proceeds of $2.4 million, recognizing a $2.0 million gain.
On March 6, 2002, the Company entered into an amendment to its $325
million Senior Secured Term Loan (also referred to as the "Senior Credit
Facility") which amended certain covenants and terms of the agreement
(discussed more fully in Note 6 of the Company's 2001 Annual Report to
Shareholders) for a fee of $1.2 million. This fee was deferred and is
being amortized to interest expense over the life of this loan.
In April 2002, the Company sold certain excess PCS licenses for proceeds
of $12.0 million, recognizing a $3.3 million gain.
6. INCOME TAXES
The effective tax rate in the first quarter of 2002 was 4.9% as compared
to an effective income tax rate at December 31, 2001 of 35.1%. During
the first quarter of 2002, the Company reported an income tax benefit of
$1.6 million. This benefit is net of a valuation allowance recorded
during this period of $11.0 million. This valuation allowance takes into
consideration the Company's projected tax losses for the year, the
existence of an unrealized loss associated with the interest rate swap
agreement and the deferred tax financial position. The allowance was
required based on lack of certainty that the net operating loss tax
assets will be recoverable within the statutory carryforward period. The
current year rate, absent the valuation allowance, was 39.0%. In the
prior year, the effective income tax rate was below the statutory rate
primarily due to non-deductible goodwill. Due to absence of these
permanent differences (Note 1), the current year rate before the
valuation allowance is near statutory rate.
7. 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 not increased by assumed
conversion of dilutive stock options in the three months ended March 31,
2002 and 2001 due to the fact that the Company recorded a net loss for
both periods. For the three months ended March 31, 2002 and 2001, the
Company had common stock equivalents from options totaling 145,000
shares and 51,000 shares, respectively, and 300,000 stock warrants which
would be dilutive. However, these common stock equivalents are
antidilutive as additional shares would decrease the computed loss per
share information and therefore, basic and diluted earnings per share
are the same. The Company currently has a total of 1.5 million options
outstanding and 1.3 million warrants outstanding to acquire shares of
common stock. Of these, .6 million options and all of the warrants are
currently exercisable.
8. RESTRUCTURING CHARGE
In March 2002, the Company approved a plan that would reduce its
workforce by approximately 15% through the offering of early retirement
incentives, the elimination of certain vacant and budgeted positions and
the elimination of some jobs. The plan also involved exiting certain
facilities in connection with the workforce reduction and centralizing
certain functions. A restructuring charge was reported in the first
quarter of 2002 for $1.3 million relating to severance costs for
employees notified in the first quarter 2002 and estimated lease
obligations associated with the exit of certain facilities. An estimated
$1.8 million of additional charges will be recorded in the second
quarter of 2002 for severance and pension curtailment costs for
employees notified in the second quarter of 2002.
9. PRO FORMA RESULTS
The pro forma unaudited results of operations for the three months ended
March 31, 2001, assuming consummation, as of January 1, 2001, of the
transactions more fully described in the Note 4 above and in the Notes
to the Consolidated Financial Statements in the Company's 2001 Annual
Report are as follows:
10
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
(In thousands, except per share data) Three Months Ended
March 31, 2001
------------------------------------------------------------------------------------
Operating revenues $ 52,731
Operating expenses other than depreciation and amortization 48,950
Depreciation and amortization 19,015
Operating loss (15,234)
Net loss (18,894)
Dividend requirements on preferred stock 4,849
Loss applicable to common shares $ (23,743)
Loss per common share - basic and diluted $ (1.43)
11
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Overview
We are a leading regional integrated communications provider offering a broad
range of wireless and wireline products and services to business and residential
customers primarily in Virginia and West Virginia and in portions of certain
other adjoining states. 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. Additionally, through our 57 retail stores located across the
regions we serve and a direct business sales approach, our sales strategy is
focused largely on a direct relationship with our customers. As of March 31,
2002, we had approximately 228,300 digital PCS subscribers (up from 186,100 at
March 31, 2001) and approximately 87,800 combined incumbent local exchange
carrier ("ILEC") and competitive local exchange carrier ("CLEC") access lines
installed (up from 75,600 installed lines at March 31, 2001).
Historically, we have derived much of our revenues and EBITDA (earnings before
interest, taxes, depreciation and amortization) 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 and EBITDA are
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, introduction of new service offerings throughout the
regions we serve and significant competitive pricing pressures. As we continue
to grow these businesses, we expect these operating margins to improve but to
continue to be lower than those realized before these other businesses were
significant to the Company's consolidated operations.
We completed a majority of our geographic expansion in 2001 and are continuing
to focus 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
within our existing markets. In February 2001, the Company completed closing of
the merger agreement with R&B, an integrated communications provider in a
geographic market contiguous to ours, and commensurate therewith, began
consolidating the results of WV Alliance (Note 4).
As mentioned above, the Company references EBITDA (or operating cash flows) as
one measure of operating performance. Management believes EBITDA is a meaningful
indicator of the Company's performance. EBITDA is commonly used in the wireless
communications industry and by financial analysts and others who follow the
industry to measure operating performance. EBITDA should not be construed as an
alternative to operating income or cash flows from operating activities (both of
which are determined in accordance with generally accepted accounting
principles) or as a measure of liquidity.
Discussions throughout the results of operations section refer to comparisons on
a pro forma basis. The actual results in the first quarter of 2001 exclude R&B
and WV Alliance for the period January 1, 2001 to February 13, 2001, the date of
the R&B merger and concurrent consolidation of WV Alliance. Therefore, pro forma
comparisons add R&B and WV Alliance results for this 43 day period to the actual
first quarter 2001 results.
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 that involve
risks and uncertainties. Our actual results could differ materially from those
results anticipated in these forward-looking statements as a result of certain
risk factors, including those set forth in the Form 10-K for the year ended
December 31, 2001, under "Investment Considerations". We wish to caution readers
that these forward-looking statements and any other forward-looking statements
made by us are based on a number of assumptions, estimates and projections
including but not limited to: capital intensity of the wireless telephone
business and our debt structure; our substantial debt obligations and our
ability to service those obligations; restrictive covenants and consequences of
default contained in our financing arrangements; the cash flow and financial
performance of our subsidiaries; the competitive nature of the wireless
telephone and other communications services industries; the achievement of
build-out, operational, capital, financing and marketing plans relating to
12
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
deployment of PCS services; retention of our existing customer base, including
our wholesale customers, our ability to attract new customers, and maintain and
improve average revenue per subscriber; unfavorable economic conditions on a
national and local basis; effects of acts of terrorism or war (whether or not
declared); changes in industry conditions created by federal and state
legislation and regulations; demand for wireless and wireline communications
services; rapid changes in technology; adverse changes in the roaming rates we
charge and pay; our opportunities for growth through acquisitions and
investments and our ability to manage this growth; successful integration of
acquisitions; 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. 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. We are not obligated to update or revise any
forward-looking statements or to advise of any changes in the assumptions on
which they are based, whether as a result of new information, future events or
otherwise.
Revenues
Our revenues, net of bad debt expense, are generated from the following
categories:
o wireless communications, consisting of retail, service and
wholesale digital PCS revenues;
o wireline communications, including telephone revenues, fiber
optic network usage (or carrier's carrier services), Internet,
CLEC service and long distance revenues; and,
o other communications services revenues, including revenues from
paging, wireless and wireline cable television, our sale and
lease of communications equipment and security alarm monitoring
and rental of property and equipment.
Operating Expenses
Our operating expenses are generally incurred from the following
categories:
o cost of sales, exclusive of other operating expenses shown
separately, including digital PCS handset equipment costs which
we sell to our customers at a price below our cost, and
usage-based access charges, including long distance, roaming
charges, and other direct costs;
o maintenance and support expenses, including costs related to
specific property and equipment, as well as indirect costs such
as engineering and general administration of property and
equipment;
o depreciation and amortization, including amortization of
intangible assets where applicable (Note 1) and depreciable long
lived property, plant and equipment;
o customer operations expenses, including marketing, product
management, product advertising, sales, billing, publication of a
regional telephone directory, customer care and directory
services;
o corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information technology,
human resources and other general and administrative expenses;
and,
o restructuring charges associated with organizational initiatives,
workforce reductions and exiting of certain facilities.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest
income and expense, equity loss from the WV Alliance (through February 13,
2001), and gain on sale of investments and assets.
13
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
Income Taxes
Our income tax liability or benefit and effective tax rate increases or
decreases based upon changes in a number of factors, including our pre-tax
income or loss, net operating losses and related carryforwards, valuation
allowances, 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 Months Ended March 31, 2002
Compared to Three Months Ended March 31, 2001
OVERVIEW
EBITDA increased $4.1 million or 106%, from $3.9 million for the three months
ended March 31, 2001 to $8.0 million for the three months ended March 31, 2002.
Operating loss increased $1.1 million, from a loss of $14.0 million to a loss of
$15.1 million for the three months ended March 31, 2001 and 2002, respectively.
Included in the first quarter 2002 results were restructuring charges of $1.3
million, $7.2 million of accelerated depreciation on certain PCS assets due to
early replacement during the quarter or based on scheduled early replacement
later in 2002 or 2003, and a $4.3 million reduction in amortization of
intangibles due to the adoption of SFAS No. 142 (Note 1). Excluding these items,
EBITDA increased $5.4 million (139%) and operating loss decreased $3.0 million
(22%) in the first quarter 2002 compared to first quarter 2001.
WIRELESS PCS OVERVIEW - A 23% growth in customers, an 11% increase in average
monthly revenue per subscriber ("ARPU") and a 90% increase in wholesale and
roaming revenues resulted in revenue growth of $10.5 million or 42% ($8.0
million or 29% on a pro forma basis) in the first quarter of 2002 compared to
the first quarter of 2001. Operating expense before depreciation and
amortization over these periods grew $4.5 million, or 15% ($.8 million or 2% on
a pro forma basis). The rate of expense growth lagged revenue growth
significantly due to reductions in costs of acquisition per gross addition ($17
or 6%), a reduction in incollect roaming expenses, and focused cost containment
measures, as well as the leveraging of the fixed infrastructure. All of these
factors resulted in an EBITDA improvement of $5.9 million, from an EBITDA loss
of $5.7 million in the first quarter of 2001 to positive EBITDA of $.2 million
for the first quarter of 2002. On a pro forma basis, the quarter to quarter
improvement was $7.3 million.
WIRELINE COMMUNICATIONS OVERVIEW - Wireline communications services realized
revenue improvement of $2.4 million which translated to EBITDA improvement of
$.5 million. EBITDA margin over these periods declined slightly from 43.8 % to
41.2%. On a pro forma basis, revenues and EBITDA declined $.1 million and $.6
million, respectively. These results are driven by less than 1% growth in ILEC
access lines, 2001 mid-year reductions in CLEC reciprocal compensation rates and
the recording of certain adjustments related to accounts receivable reserves and
accruals. Reciprocal compensation was down $.8 million in the first quarter 2002
compared to first quarter 2001 and the adjustments noted above totaled $.5
million. Our CLEC and DSL customers increased by 51% and 111%, respectively, as
of March 31, 2002 compared to 2001. This, along with cost control measures,
partially offset the effects of the other items mentioned above.
OTHER COMMUNICATION SERVICES OVERVIEW - Other communications services revenue
declined $.5 million primarily from the movement of voicemail assets and
operations out of other communications services to the wireless PCS segment
(which is the primary user of this service). This accounted for $.3 million of
the decline and the balance is from the declining cable businesses which are not
actively marketed. EBITDA was down $2.3 million for the first quarter of 2002
compared to first quarter 2001. The restructuring charge (Note 8 and as
discussed below) accounts for $1.3 million of the total. The exclusion of
voicemail and a decline in the paging businesses accounted for $.4 million.
Finally, unallocated corporate expenses related to insurance and certain
professional fees were up $.3 million in the current over the prior year
comparable period.
14
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
OPERATING REVENUES
Operating revenues increased $12.4 million, or 26%, from $47.6 million for the
three months ended March 31, 2001 to $60.0 million for the three months ended
March 31, 2002.
WIRELESS PCS REVENUES -- Digital PCS customers grew 42,200, or 23%, from the end
of the first quarter 2001 to the end of the first quarter 2002. Over this same
period, ARPU grew $4.28, from $40.49 for the first quarter of 2001 to $44.77 for
the first quarter of 2002 due primarily to a shift in the customer mix to a
higher percentage of post-pay type plans versus pre-pay plans (from 66% at March
31, 2001 to 86% at March 31, 2002). Additionally, wholesale and roaming
revenues, primarily from our network services agreement with Horizon, were $7.2
million for the first quarter of 2002 compared to $3.8 million for the first
quarter of 2001. Also, the WV Alliance was consolidated on February 13, 2001.
Therefore, the first quarter 2001 excluded $2.5 million of revenues from the WV
Alliance for the first 43 days of 2001. The combination of these and other
factors resulted in increased revenues of $10.5 million, from $25.3 million to
$35.8 million for the quarters ended March 31, 2001 and 2002, respectively. On a
pro forma basis, revenues increased $8.0 million in the current quarter over the
prior year comparative quarter.
WIRELINE COMMUNICATIONS REVENUES--Wireline communications revenues increased
$2.4 million, or 12%, from $19.9 million to $22.3 million for the three months
ended March 31, 2001 and 2002, respectively. Wireline revenues decreased $.1
million, or .5%, from $22.4 million to $22.3 million on a pro forma basis for
the three months ended March 31, 2001 and 2002, respectively.
o Telephone Revenues. Telephone (Incumbent Local Exchange or "ILEC") revenues,
which include local service, access and toll service, directory advertising and
calling feature revenues from our ILEC business increased $.8 million, or 8%,
from $9.7 million for the three months ended March 31, 2001 to $10.5 million for
the three months ended March 31, 2002. In the first quarter 2001, revenues from
the R&B ILEC prior to consolidation were $1.3 million. Therefore, ILEC revenues
were down $.5 million during these periods on a pro forma comparative basis.
This decline is due primarily to $.3 million in regulatory settlement
adjustments and receivable reserve adjustments.
o Fiber Optic Network Usage Revenues. Revenues from fiber optic network usage
operations increased $.4 million, or 26%, from $1.8 million for the three months
ended March 31, 2001 to $2.2 million for the three months ended March 31, 2002.
Of this increase, $.6 million is attributable to the consolidation of R&B
Network in February 2001. Therefore, on a pro forma basis, network revenues were
down $.2 million due to reductions in network rates and the loss of certain
traffic in the second half of 2001, offset by growth in usage.
o CLEC Revenues. CLEC revenues increased $.8 million, or 20%, from $4.1 million
for the three months ended March 31, 2001 to $4.9 million for the three months
ended March 31, 2002. Of this increase, $.5 million is attributable to excluded
revenues from R&B CLEC prior to the first quarter 2001 consolidation and $1.1
million is due to customer growth, as total CLEC customers increased 12,200,
from 23,700 at March 31, 2001 to 35,900 at March 31, 2002. These factors were
partially offset by a decline in reciprocal compensation of $.8 million, from
$1.4 million in the first quarter 2001 to $.6 million in the first quarter 2002,
due to a decline in rates in mid-year 2001.
o Internet Revenues. Revenues from Internet services increased $.3 million, or
8%, from $4.3 million to $4.6 million for the three months ended March 31, 2001
and 2002, respectively. The consolidation of R&B Internet in February 2001
accounted for $.1 million of the total increase. Internet subscribers increased
10,400 or 16%, in first quarter 2002 over first quarter 2001, with DSL customer
additions accounting for 2,300 of this total, from 2,000 customers at March 31,
2001 to 4,300 customers at March 31, 2002.
OTHER COMMUNICATION SERVICES REVENUES--Other communications services revenues,
including other R&B operations, decreased $.5 million, or 19%, from $2.4 million
to $1.9 million for the three month periods ended March 31, 2001 and 2002,
respectively, due to the factors noted in "Other Communication Services
Overview" section above.
15
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
OPERATING EXPENSES
TOTAL OPERATING EXPENSES--Total operating expenses increased $13.6 million, or
22%, from $61.5 million in the first quarter of 2001 to $75.1 million for the
first quarter 2002. Of this total increase, $5.2 million pertained to an
increase in depreciation and amortization expense, $2.9 million of which relates
to the net effect of accelerated depreciation and the effects of SFAS 142 on
amortization of intangible assets (see further discussion below in "Depreciation
and Amortization" section). Additionally, $6.1 million is from the exclusion of
R&B and WV Alliance from the operating expenses in the first 43 days of 2001. Of
the remaining $2.3 million increase, $1.3 million is from the restructuring
charge and the balance represents a 2% increase driven primarily from costs
associated with serving and maintaining the overall increase in customer base
and network assets. Operating expenses excluding depreciation and amortization
increased $8.3 million, or 19%, from $43.7 million to $52.0 million for the
three months ended March 31, 2001 and 2002, respectively. Pro forma operating
expenses excluding depreciation and amortization increased $3.1 million, or 6%.
Wireline operating expenses, excluding depreciation and amortization, increased
$1.9 million, from $11.2 million to $13.1 million for the three months ended
March 31, 2001 and 2002, respectively. Wireless operating expenses, excluding
depreciation and amortization, increased $4.5 million, from $31.0 million for
the three months ended March 31, 2001 to $35.5 million for the three months
ended March 31, 2002. Within the wireline business, $1.4 million of the increase
is from the exclusion of R&B for the first 43 days of 2001, and $.6 million is
from the CLEC segment. Other than the increase from the WV Alliance
consolidation, changes within the wireless businesses netted to an increase of
$.8 million, or 2%. Operating expenses, excluding depreciation and amortization,
from the other communication service businesses increased $1.9 million due
primarily to the $1.3 million restructuring charge and increases in corporate
related professional fees and insurance costs.
COST OF SALES--Cost of sales increased $2.0 million, or 20%, from $10.2 million
for the three months ended March 31, 2001 to $12.2 million for the three months
ended March 31, 2002. The exclusion of the WV Alliance for the first 43 days of
2001 accounted for $1.4 million of this increase. Additionally, handset
insurance costs increased $.4 million due to pricing increases and higher
customer take rates.
MAINTENANCE AND SUPPORT EXPENSES--Maintenance and support expenses increased
$3.1 million, or 22%, from $13.8 million to $16.9 million for the three months
ended March 31, 2001 and 2002, respectively. On a pro forma basis, maintenance
and support expenses increased $1.2 million, or 8%. This increase was primarily
attributable to the increased costs (primarily maintenance and repair costs)
associated with the increased network asset base, which increased $91 million
(25%).
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
increased $5.2 million, or 29%, from $17.9 million for the three months ended
March 31, 2001 to $23.1 million for the three months ended March 31, 2002. On a
pro forma basis, depreciation and amortization expenses increased $4.3 million.
As mentioned above, we reported accelerated depreciation of $7.2 million on
wireless digital PCS equipment replaced during the first quarter 2002 or which
is scheduled to be replaced over the remainder of 2002 and into the first half
of 2003. The 2002 replacement schedule was accelerated within the year resulting
in this significant increase in depreciation during the first three months.
Accelerated depreciation will continue on the assets scheduled to be retired
later this year and next. The quarterly effect of this is expected to be under
$2 million in the second quarter of 2002 and a total of $4 million over the
entire replacement period. In addition to this, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002. In accordance with the
provisions of SFAS 142, we discontinued amortization of goodwill, wireless PCS
spectrum licenses and certain other intangibles as of that date as these assets
are considered indefinite lived intangible assets not subject to amortization.
These assets will be subject to periodic impairment testing which will be
completed later in 2002. Amortization of indefinite lived intangible assets was
$4.3 million for the first quarter of 2001 ($4.9 million on a pro forma basis).
The remaining increase in depreciation is due to an increase in depreciable
assets from March 31, 2001 to March 31, 2002 of $123 million or 27%.
CUSTOMER OPERATIONS EXPENSES--Customer operations expenses increased $1.0
million, or 7%, from $14.8 million in the first quarter of 2001 to $15.8 million
in the first quarter of 2002. On a pro forma basis, customer operations expenses
decreased $.7 million or 4% from the prior year. This decrease is attributable
to lower commissions paid per gross PCS subscriber addition, primarily due to a
decrease in the percent of sales sold through the higher cost indirect channel.
Additionally, we incurred outsource billing costs for the VA East PCS market
through July 2001. After conversion of these customers onto our billing system
and insourcing these billing functions, these costs decreased significantly.
CORPORATE OPERATIONS EXPENSES--Corporate operations expenses increased $1.0
million, or 20%, from $4.9 million to $5.9 million for the three months ended
March 31, 2001 and 2002, respectively. On a pro forma basis, this increase was
16
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
$.8 million or 15%. As mentioned above, most of this relates to corporate
expense increases, particularly related to legal and other professional services
fees (primarily in the ILEC and Other segments), insurance expense, and deferred
benefit cost increases.
RESTRUCTURING CHARGE--A restructuring charge was recorded in the first quarter
of 2002 based on an approved plan to reduce our workforce by approximately 15%
through the offering of early retirement incentives, the elimination of certain
vacant and budgeted positions and the elimination of some jobs. The plan also
involved exiting certain facilities in connection with the workforce reduction
and centralizing of certain functions. The first quarter charge was $1.3 million
which related to severance costs for employees notified in the first quarter
2002 and estimated lease obligations associated with the exit of certain
facilities. An estimated $1.8 million of additional charges will be recorded in
the second quarter of 2002 for severance and pension curtailment costs for
employees notified in the second quarter of 2002. This restructuring will
generate net savings and reduce future expenses by approximately $3.0 million
for the year 2002 and $8.5 million for 2003.
OTHER INCOME (EXPENSES)
Other income (expenses) was comprised of equity loss from WV Alliance (2001
only), a gain on sale of assets (2002 only), interest expense and other income
(expense). Our share of losses from the WV Alliance reported under the equity
method of accounting, which commenced being consolidated on February 13, 2001
concurrent with our merger with R&B, were $1.3 million during the 43 day period
prior to the merger date. Also, in the first quarter of 2002, we recognized a
$2.0 million gain on the sale of certain inactive PCS licenses. Additionally,
interest expense increased $.8 million or 4%, from $18.2 million for the three
months ended March 31, 2001 to $19.0 million for the three months ended March
31, 2002. This increase is due to the increase in the average debt over the
respective periods primarily from capital expenditures needed to support future
growth in excess of cash flow generated from current operations.
Other income (expense) decreased $3.1 million, from income of $3.0 in the first
quarter of 2001 to expense of $.1 million in the first quarter of 2002. The
prior year income was comprised primarily of interest income earned on an
average restricted cash balance of approximately $62 million, interest from
advances to WV Alliance, which averaged approximately $68 million during the
first 43 days of 2001, and other miscellaneous asset retirement gains. During
the first quarter of 2002, interest income for restricted cash was down
significantly due to the reduced average restricted cash balance of
approximately $24 million. This income was offset by other miscellaneous
expenses and asset retirement losses.
INCOME TAXES
Income tax benefits decreased $9.8 million, from a tax benefit of $11.4 million
for the three months ended March 31, 2001 to a tax benefit of $1.6 million for
the three months ended March 31, 2002. The 2002 benefit is net of a valuation
allowance recorded during this period of $11.0 million. Additionally, with the
adoption of SFAS No. 142, we no longer have the permanent differences associated
with non-deductible goodwill. Also, we are subject to state minimum taxes in
2002. As a result, the effective tax rate approximates the statutory rates in
2002, excluding the impact of the $11.0 million valuation reserve (Note 6).
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. At March 31, 2002, we had $90 million in unused borrowings available
17
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
under our Senior Secured Term Loan (also referred to as the "Senior Credit
Facility"). We borrowed $10 million against our $100 million lines of credit
under the Senior Credit Facility in the first quarter of 2002.
OPERATING CASH FLOWS
During the first quarter of 2002, net cash provided by operating activities was
$5.9 million, with $.5 used in operations offset by net positive changes in
operating assets and liabilities totaling $6.4 million. Within the $.5 million
used in operations, one of the reconciling items adjusting net income to net
cash is an adjustment for $9.0 million which represents interest expense paid
from restricted cash, net of interest income earned from this restricted cash.
This is reflected as an adjustment to reconcile net income to net cash since the
payment of interest on the Senior Notes is paid out of restricted cash through
August 15, 2002. Therefore, as these interest payments will be paid from cash
for periods after August 15, 2002, this will not be an adjustment to reconcile
net income to net cash in periods after August 15, 2002. The principal changes
in operating assets and liabilities were as follows: accounts receivable
increased by $1.6 million or 5% due primarily to a 5% increase in revenues over
the fourth quarter 2001; inventories and supplies decreased $3.8 million due to
efforts to reduce handset inventory levels in recognition of improvement in
handset availability; other current assets decreased $1.4 million primarily due
to favorable collections experience of other receivables; increase in current
liabilities totaling $2.8 million due to a $3.2 million decrease in interest
accrued on the Senior Subordinate Notes due to the $6.4 February semi-annual
interest payment offset by $6.0 million in increased current liabilities due to
the timing of other payments at the respective period ends.
During the first quarter of 2001, net cash used in operating activities was $2.3
million, with less than $.1 million provided by operations offset by a net
reduction of operating assets and liabilities totaling $2.3 million. Principal
changes in operating assets and liabilities were as follows: accounts receivable
increased $4.0 million, primarily due to the increase in revenues of $9.6
million from customer additions during the fourth quarter of 2000 and first
quarter 2001; inventories and supplies decreased $4.6 million due to year end
inventory stock build up being sold through the first quarter busy sales season;
income taxes went from a receivable at the 2001 year-end of $2.9 million to a
$.2 million payable position at March 31, 2001 due to the receipt of the year
end receivable and the state minimum tax payable at March 31, 2001; and,
accounts payable and other liabilities (including additional payables from R&B
and the WV Alliance) decreased by $5.2 million, with accrued interest from
Senior Subordinate Notes decreasing by $3.9 million due to the $7.1 million
February semi-annual interest payment and $1.3 million from the timing of other
payments.
Our cash flows used in investing activities for the first quarter of 2002
aggregated $18.5 million and primarily included $29.1 million for first quarter
capital expenditures, $9.9 million of which is for the wireless upgrade to
3G-1XRTT technology in the western markets in support of the Horizon wholesale
network services agreement, offset by $10.9 million in proceeds from the sale of
communications towers and inactive PCS licenses.
Our cash flows used in investing activities for the first quarter of 2001
aggregated $13.3 million and include the following:
o $25.5 million for the purchase of property and equipment;
o $3.5 million of proceeds from the final payment from the sale of the
directory assistance operation in 2000;
o $4.1 million of cash and cash equivalents on hand at R&B at the time of the
merger;
o $3.6 million of net additional advances to and investment in the WV
Alliance from January 1, 2001 to the February 13, 2001 transaction date
(Note 4), after which the entire amounts of the advances and the investment
were included in the WV Alliance acquisition and were eliminated in
consolidation;
o $8.0 million of deposits refunded at the conclusion of an FCC license
auction as no additional licenses were purchased from this auction; and,
18
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
o $1.1 million received from the sale of four towers in West Virginia.
Net cash provided by financing activities for the first quarter 2002 aggregated
$7.2 million, which included $10 million of additional borrowings against the
Senior Credit Facility, a $1.8 million use of cash for scheduled principal
payments on other long-term debt, and $1.2 million used to pay loan amendment
fees.
Net cash provided by financing activities for the first quarter of 2001
aggregated $18.4 million, which included $20 million in additional draws against
the Senior Credit Facility and a $1.7 million use of cash for other debt
payments, primarily on capital leases.
Throughout 2002, we anticipate increasing levels of PCS subscribers and ARPU
growth, continued lowering of PCS churn, positive cash flow from our wireless
segment, continued revenue growth from our wireline segments and continuing cost
containment measures. Achievement of these results is important to ensure
long-term liquidity and continued access to borrowings under our Senior Credit
Facility. In addition, our liquidity needs will be impacted by:
o capital expenditures required to deploy 3G-1XRTT technology in certain of
the VA Alliance and WV Alliance markets;
o capital expenditures required to support customer growth and wholesale
usage to provide sufficient PCS capacity;
o capital expenditures required to support access line growth in existing
markets; and,
o significant interest expense associated with current and increasing debt
levels.
Regarding our Senior Credit Facility covenants, the 2002 annual EBITDA minimum
level is $49.6 million and includes quarterly rolling twelve month thresholds.
This is a significant increase over our 2001 EBITDA levels of $20.5 million. At
March 31, 2002, we were in compliance with all of our financial covenant
requirements.
Our liquidity sources include:
o cash flow from operations;
o approximately $18.1 million held in the escrow account to fund the August
15, 2002 interest payment on our Senior Notes;
o $90 million available under our Senior Credit Facility as of March 31,
2002, subject to compliance with amended covenant requirements;
o disposition of additional non-strategic businesses and assets, such as
additional sales of excess PCS spectrum and other types of spectrum, such
as WCS, LMDS and MMDS. The Company holds PCS licenses in 17 markets where
service is currently being provided and 20 markets where service is not
currently being provided. In many cases we own licenses covering spectrum
in excess of what will be needed to execute our business plan for the
foreseeable future. In 2001, the Company sold $11.6 million of excess
spectrum for a gain of $8.6 million and has sold additional inactive or
excess PCS spectrum for proceeds of $14.5 million in 2002 to date ($2.5
million of which closed in the first quarter 2002 and $12.0 million of
which closed in April 2002) and has announced definitive agreements for
other spectrum sales worth $7.1 million which are expected to close over
the next six months of 2002; and,
o public and private debt and equity markets.
We expect capital expenditures for the remainder of 2002 to be between $45
million and $55 million. We expect these capital expenditures to be used to:
o deploy 3G-1XRTT technology in certain of the VA Alliance and WV Alliance
markets;
o support network capacity and coverage demands of VA East, VA Alliance and
WV Alliance operations;
o support customer growth in CLEC and Internet access services; and,
o support back office tools in order to improve customer satisfaction and
improve our internal controls and efficiencies.
19
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
Approximately $30 million to $35 million of these incurred-to-date and
anticipated 2002 capital expenditures are based on an obligation within our
wholesale agreement with Sprint/Horizon to build out a 3G-1XRTT network in
certain markets. The estimated total cost of this build-out is approximately $40
million to $45 million which will be completed by 2003.
VA East and the Alliances have substantially satisfied their FCC build-out
requirements. Accordingly, aside from the 3G-1XRTT network upgrade commitment,
the expenditures forecast noted above is primarily driven by the expected need
to support customer growth and wholesale usage. To the extent that this customer
growth and wholesale usage is less than expected, our capital expenditures will
be reduced. Since these are generally capacity related expenditures to support
customer growth, it is uncertain when these proposed uses will be initiated or
completed.
Based on our assumptions about the future of our operating results, including
positive EBITDA from our wireless PCS operations in 2002, our capital
expenditure needs, and the availability of borrowings under our Senior Credit
Facility and our other sources of liquidity, we believe that we will have
sufficient financial resources to fund our existing and currently anticipated
operational plans. However, if any of our assumptions prove incorrect, we may
not have sufficient financial resources or may not be able to access current
availability under our Senior Credit Facility. If so, we may have to delay or
abandon some of our anticipated capital expenditures, modify our operating
plans, expedite the sale of non-strategic assets or seek additional capital
resources, and our ability to make interest and principal payments on our senior
and subordinated notes could be significantly impaired.
20
NTELOS Inc.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's Senior Credit Facility of $325 million, $235 million of which was
outstanding at March 31, 2002, 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 $17.9 million at March 31, 2002.
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. The net face amount of interest rate swaps subject to variable rates as
of March 31, 2002 and December 31, 2001 was $162.5 million. These agreements
involve the exchange of fixed rate payments for variable rate payments without
the effect of leverage and without the exchange of the underlying face amount.
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 1.88% as of March 31, 2002. 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 March 31, 2002,
the Company had no exposure to credit loss on interest rate swaps. At March 31,
2002 and December 31, 2001, the swap agreements had a fair value $11.2 million
and $13.1 million, respectively, below their face value. These amounts are
recorded as long-term liabilities at the respective period ends. The effects of
a one percentage point change in LIBOR rates would change the fair value of the
swap agreements by $6.2 million for a one percentage point increase in the rate
(to $5.0 million below face value) and $6.4 million for a one percentage point
decrease in the rate (to $17.6 million below face value).
The Company has interest rate risk on the amount above the $162.5 million of
senior bank debt covered by the swap noted above. At March 31, 2002, the Company
senior bank debt totaled $235 million, or $72.5 million over the swap
agreements.
The Company's senior notes are trading at rates well below their book values.
The Company's management believes that the risk of the fair value exceeding the
carrying value of this debt in the foreseeable future is remote due to the
current trading level, as well as market and industry conditions.
At March 31, 2002, the Company's financial assets included cash and cash
equivalents of $1.9 million, restricted cash of $18.1 million and securities and
investments of $13.6 million. With respect to the cash and cash equivalents and
the restricted cash, as well as $9.2 million of the investments, there are no
material market risks as these are fixed rate, fixed maturity instruments. Also,
we believe there are minimal credit risks as the counterparties are prominent
financial institutions. Additionally, our $2.8 million 3% minority interest
investment in America's Fiber Network L.L.C. ("AFN") was sold in April 2002 for
proceeds of $2.6 million. The remaining $1.6 million of investments are in
equity securities. These investments are treated as available for sale.
Accordingly, these investments are marked to market and at March 31, 2002, we
have recorded a $.3 million unrealized loss, net of $.2 million tax benefit,
related to these investments. The Company is exposed to market and credit risks
with these investments. However, we do not believe that this risk is material to
our financial position or will be material to the results of future operations.
21
NTELOS Inc.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Not applicable
(B) Reports on Form 8-K
Form 8-K dated February 6, 2002, pertaining to presentations to be
made by Mr. James S. Quarforth, Chief Executive Officer, and Mr.
Michael B. Moneymaker, Chief Financial Officer, at investor
meetings, providing an overview of NTELOS' strategy, transactions
and certain performance through 2001 and guidance for 2002.
Form 8-K dated February 11, 2002, pertaining to presentations to be
made by Mr. James S. Quarforth, Chief Executive Officer, and Mr.
Michael B. Moneymaker, Chief Financial Officer, at investor
meetings, providing an overview of NTELOS' strategy, transactions
and certain performance through 2001 and guidance for 2002.
Form 8-K dated March 6, 2002, announcing that on March 6, 2002, the
Company's entered into Amendment No. 3 (the "Amendment") to the
Credit Agreement, dated as of July 26, 2000, as amended (the
"Credit Agreement"). The Amendment modifies certain financial
covenants and other provisions of the Credit Agreement.
Form 8-K dated March 13, 2002, providing an overview of NTELOS'
strategy, operations and performance through fiscal year 2001 and
includes certain projections and guidance for 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NTELOS Inc.
May 14, 2002 /s/J. S. Quarforth
-------------------------------------------------
J. S. Quarforth, Chief Executive Officer
May 14, 2002 /s/M. B. Moneymaker
------------------------------------------------
M. B. Moneymaker, Senior Vice President and
Chief Financial Officer, Treasurer and Secretary
23