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 September 30, 2002 Commission File No. 0-16751
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NTELOS Inc.
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 11/14/02 17,633,533
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NTELOS Inc.
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, September 30, 2002 and
December 31, 2001 3-4
Condensed Consolidated Statements of Operations, Three and Nine
Months Ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 2002 and 2001 6
Condensed Consolidated Statements of Shareholders' Equity, Three
Quarterly Periods Ended September 30, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 8-13
Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-25
Quantitative and Qualitative Disclosures about Market Risk 26
Controls and Procedures 27
PART II. OTHER INFORMATION 28
SIGNATURES 29-30
2
NTELOS Inc.
Condensed Consolidated Balance Sheets
September 30, 2002 December 31,
(In thousands) (Unaudited) 2001
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Assets
Current Assets
Cash and cash equivalents $ 543 $ 7,293
Restricted cash - 18,069
Accounts receivable, net of allowance 31,205 30,328
Inventories and supplies 4,207 9,619
Other receivables and deposits 3,133 4,669
Prepaid expenses and other 4,122 3,929
Income taxes receivable 1,827 1,945
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45,037 75,852
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Investments
Securities and investments 9,036 13,963
Restricted cash - 18,094
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9,036 32,057
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Property, Plant and Equipment
Land and building 51,306 50,836
Network plant and equipment 494,311 447,585
Furniture, fixtures and other equipment 65,602 65,283
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Total in service 611,219 563,704
Under construction 15,614 35,753
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626,833 599,457
Less accumulated depreciation 167,719 133,513
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459,114 465,944
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Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization 134,466 135,635
Other intangibles, less accumulated amortization 15,593 23,677
Radio spectrum licenses in service 419,755 423,181
Other radio spectrum licenses 11,681 11,930
Radio spectrum licenses not in service 9,466 9,935
Deferred charges 18,497 18,675
Deferred tax asset 8,167 -
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617,625 623,033
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$ 1,130,812 $ 1,196,886
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See Notes to Condensed Consolidated Financial Statements.
3
NTELOS Inc.
Condensed Consolidated Balance Sheets
(In thousands) September 30, 2002 December 31,
(Unaudited) 2001
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 27,836 $ 39,917
Advance billings and customer deposits 12,248 8,889
Accrued payroll 6,651 5,540
Accrued interest 6,412 18,332
Deferred revenue 4,741 5,092
Other accrued liabilities 7,206 4,927
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65,094 82,697
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Long-term Debt 629,728 612,416
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Long-term Liabilities
Deferred income taxes - 2,200
Retirement benefits 19,224 15,789
Long-term deferred liabilities 50,483 43,624
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69,707 61,613
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Minority Interests 650 847
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Redeemable, Convertible Preferred Stock 280,975 265,747
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Commitments and Contingencies
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 17,527 shares (17,209 in 2001) 182,286 182,093
Stock warrants 22,874 22,874
Accumulated deficit (108,015) (23,201)
Accumulated other comprehensive loss (12,487) (8,200)
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84,658 173,566
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$ 1,130,812 $ 1,196,886
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See Notes to Condensed Consolidated Financial Statements.
4
NTELOS Inc.
Condensed Consolidated Statements Of Operations
(Unaudited)
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Three Months Ended Nine Months Ended
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(In thousands except per share amounts) September 30, September 30, September 30, September 30,
2002 2001 2002 2001
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Operating Revenues
Wireless PCS $ 40,790 $ 31,996 $ 115,106 $ 87,592
Wireline communications 24,190 21,513 70,669 63,270
Other communications services 3,122 2,552 7,242 7,280
68,102 56,061 193,017 158,142
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Operating Expenses
Cost of wireless sales (exclusive of items shown 12,706 11,901 37,154 34,627
separately below)
Maintenance and support 15,528 16,252 49,114 46,012
Depreciation and amortization 21,321 23,150 65,074 59,390
Customer operations 17,831 16,029 49,063 46,781
Corporate operations 4,033 4,806 14,691 14,548
Restructuring charge - - 2,693 -
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71,419 72,138 217,789 201,358
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Operating Loss (3,317) (16,077) (24,772) (43,216)
Other Income (Expenses)
Equity loss from investee - WV PCS Alliance - - - (1,286)
Gain on sale of assets 3,735 22,261 8,472 22,967
Interest expense (19,674) (19,542) (58,565) (56,989)
Other income (expense) (264) 733 (1,996) 4,042
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(19,520) (12,625) (76,861) (74,482)
Income Tax Benefit (3,286) (4,075) (6,855) (26,645)
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(16,234) (8,550) (70,006) (47,837)
Minority Interests in Losses of Subsidiaries 166 - 417 3,058
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Net Loss (16,068) (8,550) (69,589) (44,779)
Dividend requirements on preferred stock 5,190 4,849 15,228 14,226
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Loss Applicable to Common Shares $ (21,258) $ (13,399) $ (84,817) $ (59,005)
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Net Loss per Common Share - Basic and Diluted $ (1.23) $ (0.79) $ (4.91) $ (3.62)
Weighted average shares outstanding - basic and diluted 17,332 16,890 17,271 16,282
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See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
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(In thousands) September 30, 2002 September 30, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (69,589) $ (44,779)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on disposition of assets and investments (8,472) (22,967)
Depreciation 62,448 42,001
Amortization 2,626 17,389
Recognition of impairment loss on securities 1,261 -
Non-cash restructuring charge 1,620 -
Deferred taxes (7,644) (28,318)
Retirement benefits and other 1,663 (897)
Interest payable from restricted cash 22,750 27,300
Accrued interest income on restricted cash (238) (3,164)
Equity loss from PCS Alliances - 1,286
Accretion of loan discount and origination fees 3,492 3,174
Changes in assets and liabilities from operations, net of
effects of acquisitions and dispositions:
Increase in accounts receivable (954) (3,032)
Decrease in inventories and supplies 5,322 1,538
Decrease (increase) in other current assets 1,302 (4,822)
Changes in income taxes 118 3,074
Decrease in accounts payable (12,435) (15,496)
Increase (decrease) in other accrued liabilities 5,099 (4,334)
Increase in other current liabilities 2,697 1,736
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Net cash provided by (used in) operating activities 11,066 (30,311)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (62,989) (72,680)
Proceeds from sale of discontinued operation - 3,500
Investments in PCS Alliances - (687)
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 31,116 26,992
Other (820) (988)
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Net cash used in investing activities (32,693) (34,727)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 23,466 76,000
Additional payments under lines of credit (net) and other
debt instruments (7,756) (2,943)
Net proceeds from issuance of stock 348 533
Other (1,181) (1,218)
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Net cash provided by financing activities 14,877 72,372
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(Decrease) increase in cash and cash equivalents (6,750) 7,334
Cash and cash equivalents:
Beginning 7,293 1,637
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Ending $ 543 $ 8,971
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See Notes to Condensed Consolidated Financial Statements.
6
NTELOS Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited)
Accumulated Accumulated
Common Stock Deficit/ Other Total
----------------------- Retained Comprehensive Shareholders'
(In thousands) Shares Amount Warrants Earnings Income Equity
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Balance, December 31, 2000 13,132 $ 45,272 $ 22,874 $ 59,355 $ 8,458 $ 135,959
Comprehensive loss:
Net loss (17,254)
Cash flow hedge:
Cumulative effect of the adoption of SFAS No.
133, net of $2,489 deferred tax benefit (3,900)
Derivative loss, net of $1,523 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
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Balance, March 31, 2001 16,855 $ 177,224 $ 22,874 $ 37,414 $ 625 $ 238,137
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Comprehensive loss:
Net loss (18,975)
Cash flow hedge:
Cumulative effect of the adoption of SFAS No.
133, net of $2,489 of deferred tax benefit 5,695
Derivative gain, net of $1,523 deferred tax
obligation 1,361
Comprehensive loss (11,919)
Dividends on preferred shares (4,690) (4,690)
Common stock issuance pursuant to R&B merger 12 106 106
Shares issued through employee stock purchase plan 7 146 146
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Balance, June 30, 2001 16,874 $ 177,476 $ 22,874 $ 13,749 $ 7,681 $ 221,780
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Comprehensive loss:
Net loss (8,550)
Cash flow hedge:
Realization of gain due to sale of equity
interest in Illuminet Holdings, Inc., net of
$8,138 of deferred tax obligation (12,805)
Derivative loss, net of $3,231 deferred tax
benefit (5,076)
Comprehensive loss (26,431)
Dividends on preferred shares (4,849) (4,849)
Stock issuance for purchase of minority interest 20 350 350
Common stock issuance pursuant to R&B merger 3 - -
Shares issued through employee stock purchase plan 11 136 136
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Balance, September 30, 2001 16,908 $ 177,962 $ 22,874 $ 350 $ (10,200) $ 190,986
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Balance, December 31, 2001 17,209 $ 182,093 $ 22,874 $ (23,201) $ (8,200) $ 173,566
Comprehensive loss:
Net loss (30,664)
Cash flow hedge:
Derivative gain, net of $735 deferred tax
obligation 1,156
Unrealized loss on securities available for sale,
net of $212 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
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Balance, March 31, 2002 17,242 $ 182,297 $ 22,874 $ (58,884) $ (7,377) $ 138,910
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Comprehensive loss:
Net loss (22,854)
Cash flow hedge:
Derivative loss, net of $1,380 deferred tax
benefit (2,168)
Reclassification of unrealized loss to realized
loss, included in net income 444
Unrealized loss on securities available for sale,
net of $8 deferred tax benefit 12
Comprehensive loss (24,566)
Dividends on preferred shares (5,019) (5,019)
Common stock issuance, net (6) (213) (213)
Shares issued through employee stock purchase plan 58 105 105
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Balance, June 30, 2002 17,294 $ 182,189 $ 22,874 $ (86,757) $ (9,089) $ 109,217
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Comprehensive loss:
Net loss (16,068)
Cash flow hedge:
Derivative loss, net of $2,205 deferred tax
benefit (3,463)
Reclassification of unrealized loss to realized
loss, included in net income 65
Comprehensive loss (19,466)
Dividends on preferred shares (5,190) (5,190)
Shares issued through employee stock purchase plan 233 97 97
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Balance, September 30, 2002 17,527 $ 182,286 $ 22,874 $ (108,015) $ (12,487) $ 84,658
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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 September 30,
2002 and December 31, 2001, the results of operations for the three and
nine months ended September 30, 2002 and 2001 and cash flows for the
nine months ended September 30, 2002 and 2001. The results of operations
for the nine months ended September 30, 2002 and 2001 are not
necessarily indicative of the results to be expected for the full year.
ACCOUNTING FOR INTANGIBLE ASSETS
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, assembled workforce intangible asset and
other 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, assembled workforce and PCS radio spectrum
licenses on January 1, 2002. The cost and net book value of these assets
at September 30, 2002 followed by the totals by reportable unit as
determined under SFAS No. 142 guidelines are indicated in the following
table:
(In thousands) Cost Net Book Value
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Goodwill $ 145,634 $ 134,466
PCS Radio Spectrum Licenses In Service 436,523 419,755
Assembled Workforce 1,800 940
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Total Indefinite Lived Assets $ 583,957 $ 555,161
==================================================================================================
Indefinite Lived Assets by Reporting Unit
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Wireless PCS $ 464,070 $ 444,592
Telephone 68,472 65,463
Network 26,769 25,582
Internet 12,665 9,833
Other
Wireless Cable 4,260 3,654
Wireline Cable 7,721 6,037
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Total Indefinite Lived Assets $ 583,957 $ 555,161
==================================================================================================
Amortization of indefinite lived intangible assets was $4.1 million
($2.8 million after tax) and $15.0 million ($9.4 million after tax) for
the three and nine months ended September 30, 2001. Therefore, the pro
forma loss applicable to common shares for the three and nine months
ended September 30, 2001 adjusted for the impact of SFAS No. 142 was
$10.6 million ($.63 per common share) and $49.6 million ($3.05 per
common share). The Company continues to amortize intangible assets
related to tower franchise rights and an employment agreement,
non-compete agreements and customer lists from past acquisitions which
have a book value of $15.8 million as of September 30, 2002. For those
intangible assets that will continue to be amortized, the expected
amortization is as follows: $4.3 million in 2003, $4.2 million in 2004,
$4.2 million in 2005, $.7 million in 2006, $.4 million in 2007 and $2.9
million thereafter.
During the quarter ended June 30, 2002, the Company completed the
required impairment tests of goodwill and intangible assets with
indefinite lives as of January 1, 2002. The Company performed testing of
wireless goodwill and the wireless assembled workforce intangible asset
utilizing a combination of a discounted cash flow method and other
market valuation methods. The Company's testing of PCS radio spectrum
licenses and goodwill in the other reporting units utilized a discounted
cash flow method. The discounted cash flow method involved long term
cash flow projections using numerous assumptions and estimates related
to these projections. The Company engaged an independent appraisal firm
to perform valuation work related to the PCS radio spectrum licenses,
goodwill and assembled workforce on the wireless segment. Based on the
fair value testing of the licenses, the Company determined that there
was no impairment to the PCS radio spectrum licenses as of January 1,
2002 and through June 30, 2002. The Company also completed the
transitional impairment testing as of January 1, 2002 for goodwill and
the assembled workforce during the second quarter of 2002. Based on this
testing, no impairment exists on goodwill or the assembled workforce
intangible asset as of January 1, 2002. No further SFAS No. 142 testing
was performed for the quarter ended September 30, 2002 based on our
assessment that no material impairment indicators existed subsequent to
8
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
the completion of the work performed as of June 30, 2002 which would
require re-testing as of September 30, 2002. The Company will perform
the annual SFAS No. 142 testing of all goodwill and indefinite lived
intangible assets as of October 1, 2002 for the year ended December 31,
2002. The annual impairment testing as of October 1, 2002 has not yet
been completed.
OTHER NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that
a liability associated with an exit or disposal activity be recognized
at its fair value when the liability has been incurred, and supercedes
EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." Under EITF
Issue No. 94-3, certain exit costs were accrued upon management's
commitment to an exit plan, which was generally before an actual
liability had been incurred. The Company will adopt SFAS No. 146 on
January 1, 2003. The Company recognized $1.3 million and $1.4 million in
restructuring costs in the first and second quarter 2002, respectively,
based on management's commitment and other requirements under existing
accounting guidance. Had the Company reported these charges under SFAS
No. 146, the timing of recognition would have been impacted as the
related liabilities would have been recognized when incurred.
FINANCIAL STATEMENT CLASSIFICATIONS
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 September 30, 2002, accounts
receivable is shown net of $21.4 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 $22.3 million at September 30, 2002 ($18.5 million at
December 31, 2001). Additionally, PCS radio spectrum licenses and other
radio spectrum licenses are shown net of accumulated amortization of
$16.8 million and $4.1 million, respectively, at September 30, 2002
($17.2 million and $3.8 million, respectively, at December 31, 2001).
Radio spectrum licenses for areas where the licenses are being used in
operations had historically been classified in the property, plant and
equipment section of the balance sheet. In order to better conform with
industry practice, these assets, along with their related accumulated
amortization, have been reclassified to the other assets section of the
balance sheet for all periods presented.
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, other communications services
operations and leasing income from third party leases of excess building
space. Additionally, certain unallocated corporate related items that,
in management's opinion, do not provide direct benefit to the operating
segments, are included in Other. Total unallocated corporate operating
expenses excluding depreciation and amortization were $1.1 million and
$.4 million for the three month period ended September 30, 2002 and
2001, respectively, and were $5.6 million and $1.4 million for the nine
month period ended September 30, 2002 and 2001, respectively. The amount
for the nine month period ended September 30, 2002 includes a
restructuring charge of $2.7 million (Note 8).
Depreciation and amortization of corporate assets is included in the
"Other" column in the tables below. This amounted to $38,000 and $.5
million for the quarters ended September 30, 2002 and 2001,
respectively, of the total "Other" depreciation and amortization. For
the nine months ended September 30, 2002 and 2001, depreciation and
amortization of corporate assets totaled $.2 million and $.9 million,
respectively.
In the table that follows, segment revenues are shown net of
intersegment revenues.
9
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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.
(in thousands) Telephone Network CLEC Internet Wireless PCS Other Total
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For the three months ended September 30, 2002
---------------------------------------------
Revenues $ 12,091 $ 2,010$ 5,513 $ 4,576 $ 40,790 $ 3,122 $ 68,102
EBITDA* 8,653 1,645 1,674 1,354 3,845 833 18,004
Depreciation &
Amortization 1,963 820 1,470 1,203 15,387 478 21,321
Operating Loss 6,690 825 204 151 (11,542) 355 (3,317)
For the three months ended September 30, 2001
---------------------------------------------
Revenues $ 10,929 $ 2,403$ 3,804 $ 4,377 $ 31,996 $ 2,552 $ 56,061
EBITDA* 6,873 1,951 (226) 353 (2,968) 1,090 7,073
Depreciation &
Amortization 2,843 1,069 609 996 17,016 617 23,150
Operating Loss 4,030 882 (835) (643) (19,984) 473 (16,077)
As of and for the nine months ended September 30, 2002
------------------------------------------------------
Revenues $ 34,329 $ 6,378$ 16,106 $ 13,856 $ 115,106 $ 7,242 $ 193,017
EBITDA* 23,024 5,058 3,270 3,181 7,756 (1,987) 40,302
Depreciation &
Amortization 5,582 2,303 2,987 2,672 49,787 1,743 65,074
Operating Loss 17,442 2,755 283 509 (42,031) 3,730 (24,772)
Total Segment Assets 134,466 53,403 30,510 17,064 723,944 18,788 978,175
Corporate Assets 152,637
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Total Assets $ 1,130,812
================
As of and for the nine months ended September 30, 2001
------------------------------------------------------
Revenues $ 31,472 $ 6,318$ 12,445 $ 13,035 $ 87,592 $ 7,280 $ 158,142
EBITDA* 20,039 5,087 1,261 667 (13,705) 2,825 16,174
Depreciation
&Amortization 7,616 2,644 1,748 2,905 42,844 1,633 59,390
Operating Loss 12,423 2,443 (487) (2,238) (56,549) 1,192 (43,216)
Total Segment Assets 128,768 53,295 30,108 18,220 805,104 32,101 1,067,596
Corporate Assets 142,531
----------------
Total Assets $ 1,210,127
================
* 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 January 2002, the Company has purchased additional
minority interest in the VA Alliance and the WV Alliance and, at
September 30, 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.
10
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
4. MERGER AND ACQUISITIONS
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 was 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
$95.3 million, $68.5 million of which was allocated to goodwill in the
telephone segment and the remaining $26.8 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. LONG-TERM DEBT
The Company has a $100 million revolving credit facility as part of its
Senior Credit Facility. As of September 30, 2002, the Company had
borrowed $23.5 million under this revolver. Availability of the
remaining amount of this facility to fund capital expenditures and
interest payments is subject to compliance with the covenants, terms and
conditions, including accuracy of representations and warranties, of the
Senior Credit Facility.
Regarding the Senior Credit Facility covenants, the 2002 annual minimum
EBITDA level is $49.6 million and includes quarterly rolling twelve
month thresholds. At September 30, 2002, we were in compliance with all
of our financial covenant requirements and we anticipate compliance
through the remainder of 2002. At September 30, 2002, our rolling twelve
month EBITDA, as adjusted per the covenant definition, was $45.9
million, inclusive of $18.0 million for the third quarter of 2002. Based
on current EBITDA levels, the Company expects EBITDA for the remaining
three months of 2002 to be in excess of the $8.0 million needed in order
to comply with the EBITDA covenant at December 31, 2002.
Beginning in the quarter ending March 31, 2003, our Senior Credit
Facility requires compliance with leverage and senior leverage ratios
and interest and fixed charge coverage ratios. In 2003, under our
current operating plan, we anticipate growth in PCS subscribers at
levels comparable to 2002, average revenue per unit ("ARPU") levels
consistent with 2002, and continued lowering of PCS customer churn in
order to create significant growth in cash flow from our wireless
segment. We also anticipate continued revenue growth from our wireline
segments and continuing cost containment measures. However, this
operating plan would result in a violation of the Company's Senior
Credit Facility covenants in 2003 due to lower than originally
forecasted ARPU levels resulting from increased competition and
competitive pricing and the significant up-front, acquisition costs
associated with continued PCS subscriber growth. Thus, in order to
pursue this plan, the Company will need to amend its covenants, alter
its existing capital structure, generate cash flow from non-core asset
divestitures, or seek additional capital resources.
Alternatively, if these efforts are unsuccessful, in order to attempt to
comply with the 2003 covenants, the Company would pursue a plan to
increase short-term operating cash flows by reducing PCS subscriber
growth, thereby reducing the related costs of acquiring new subscribers,
to result in moderate to flat net growth in PCS subscribers and forego
growth in its lower margin residential Internet dial-up business.
Concurrent with this reduction in growth, operating expenses would be
reduced accordingly. In addition, this alternative plan would require
significant further cost reduction and containment measures, as well as
reduction and deferral of capital expenditures. The alternative plan,
while increasing short-term operating cash flows, would adversly impact
long-term operating cash flows.
In addition, the Company's next semi-annual interest payment on its
senior and subordinated notes is due February 15, 2003. The availability
of funds to make these payments would be subject to continued
availability of the revolving credit facility.
The Company has engaged UBS Warburg as its financial advisor to analyze
its business plan for 2003 and beyond and address the Company's capital
structure. Also, the Company has commenced discussions with the
administrative agent for the Senior Credit Facility with respect to the
Company's business plan, capital structure, covenants and access to the
revolving credit.
The financial statements in this report have been prepared on a going
concern basis. If the Company were to be unsuccessful in addressing its
capital structure and covenants, we would not have sufficient financial
resources and our ability to make scheduled interest and principal
payments on our senior and subordinated notes would be significantly
impaired. If this were to occur, in early 2003 there could arise
substantial doubt about our ability to continue as a going concern. In
addition, there would likely be an adverse impact on our valuation of
certain long-lived assets, including radio spectrum licenses and
goodwill, which would likely result in impairment charges associated
with the carrying values of these assets. The accompanying financial
statements do not reflect any adjustments to the carrying value of the
Company's net assets or the amount and classification of liabilities.
Such adjustments would be necessary in the event that the Company is not
able to continue as a going concern.
11
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
6. 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 and the quarters ending
September 30, 2001 and 2002, in accordance with the terms and conditions
set forth in the senior note indenture. The semi-annual payment made
August 15, 2002 is the final payment made from restricted cash.
Additionally, see Note 4 above for the non-cash merger transaction with
R&B.
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 excess 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 radio spectrum
licenses for proceeds of $12.0 million, recognizing a $2.8 million gain.
In May 2002, the Company sold its 3% minority partnership interest in
America's Fiber Network LLC ("AFN") for proceeds of $2.6 million,
recognizing a $.2 million loss on the transaction. Concurrently, the
Company purchased the use of approximately 700 new route miles of fiber
contiguous to, or an extension of, our existing fiber for $2.6 million.
In July 2002, the Company sold certain other excess PCS radio spectrum
licenses for proceeds of $3.6 million, recognizing a $3.6 million gain.
In July 2002, the Company agreed to terms with telegate AG, the
purchaser of NTELOS' directory assistance operation in 2000, to release
telegate AG from certain building lease obligations related to that
transaction. In consideration, the Company received $.9 million in cash
and $.2 million in furniture and fixtures. This $1.1 million settlement
was reported in operating revenues within the other communications
services line. The original lease term was five years with annual lease
revenue of $.8 million, which was reported in operating revenues within
the other communication services line as well. In 2002, prior to the
termination settlement, the Company recorded lease revenue of $.5
million.
Over the course of the nine month period ended September 30, 2002, the
Company sold various investments for $1.6 million, which approximated
the related investment carrying values. Additionally, during the second
quarter of 2002, the Company recognized a $1.1 million permanent
impairment loss associated with its investment in Worldcom Inc.
7. INCOME TAXES
The effective tax rate in the three and nine months ended September 30,
2002 was 17.0% and 9.0% as compared to an effective income tax rate at
December 31, 2001 of 35.1%. For the three and nine months ended
September 30, 2002, the Company reported an income tax benefit of $3.3
million and $6.9 million, respectively. This benefit is net of a
valuation allowance recorded at September 30, 2002 of $20.5 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 35.8%. In the prior year, the effective
income tax rate was below the statutory rate primarily due to
non-deductible goodwill. These permanent differences are absent in the
current year (Note 1). However, the current year rate, before the
valuation allowance, is reduced from the statutory rate primarily by
non-deductible basis differences in licenses sold.
8. EARNINGS PER SHARE
The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, was not increased by assumed
conversion of dilutive stock options in the three and nine months ended
September 30, 2002 and 2001 due to the fact that the Company recorded a
net loss for the respective periods. For the nine months ended September
30, 2002, the Company had common stock equivalents from options totaling
79,000 shares and 300,000 stock warrants which would be dilutive. For
the three months ended September 30, 2002, the Company had no common
stock equivalents and 300,000 stock warrants which would be dilutive.
For the three and nine months ended September 30, 2001, the Company had
common stock equivalents from options totaling 40,000 shares and 24,000
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; therefore,
basic and diluted earnings per share are the same. The Company currently
has a total of 1.6 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.
12
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
9. 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. A total of 96 current employees left the
Company as a result of these actions. The employees impacted were
primarily in management, operations, engineering and a number of other
support functions. The plan also involved exiting certain facilities in
connection with the workforce reduction and centralizing certain
functions.
A restructuring charge was reported during the first six months of 2002
for $2.7 million relating to severance costs and pension curtailment
costs for employees affected by the reduction in force activity and
lease termination obligations associated with the exit of certain
facilities. Of the $2.7 million total, $.8 million was paid prior to
September 30, 2002 and $1.9 million remained in the accrual at September
30, 2002.
10. PRO FORMA RESULTS
The pro forma unaudited results of operations for the nine months ended
September 30, 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:
(In thousands, except per share data) Nine Months Ended
September 30, 2001
------------------------------------------------------------------------------------------
Operating revenues $ 163,309
Operating expenses other than depreciation and amortization 147,679
Depreciation and amortization 60,550
Operating loss (44,920)
Net loss (48,073)
Dividend requirements on preferred stock (14,226)
Loss applicable to common shares (62,299)
Loss per common share - basic and diluted $ (3.70)
13
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. Our sales strategy is focused largely on a direct relationship
with our customers through our 65 retail stores located across the regions we
serve as a direct business sales approach. As of September 30, 2002, we had
approximately 251,000 digital PCS subscribers (up from 203,800 at September 30,
2001) and approximately 93,500 combined incumbent local exchange carrier
("ILEC") and competitive local exchange carrier ("CLEC") access lines installed
(up from 82,600 installed lines at September 30, 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 within our existing markets on our core
communications services, primarily digital PCS services, high-speed data
transmission and local telephone services and Internet access, including
dedicated, high-speed DSL and dial-up services. 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 the WV PCS Alliance L.C. ("WV Alliance")(Note
4).
The Company has engaged UBS Warburg as its financial advisor to analyze its
business plan for 2003 and beyond and address the Company's capital structure.
Also, the Company has commenced discussions with the administrative agent for
the Senior Credit Facility with respect to the Company's business plan, capital
structure, covenants and access to the revolving credit facility. See further
discussion in Liquidity and Capital Resource section that follows.
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
results for the three and nine months ended September 30, 2001.
Our critical accounting policies are discussed in detail in the Management's
Discussion and Analysis section of our 2001 Annual Report to Shareholders. We
have not made any significant changes to these policies with the exception of
our accounting for intangible assets. As discussed in Note 1, we 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, we ceased amortization of goodwill, an assembled
workforce intangible asset, and PCS radio spectrum licenses on January 1, 2002.
We performed the required impairment tests of goodwill and intangible assets
with indefinite lives as of January 1, 2002. Additionally, we performed this
impairment testing as of June 30, 2002 for the PCS radio spectrum licenses,
goodwill and assembled workforce on the wireless segment and the goodwill on the
network segment due to the presence of certain changes in market conditions. We
engaged an independent appraisal firm to perform valuation work related to the
PCS radio spectrum licenses and goodwill and assembled workforce on the wireless
segment.
14
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
Our testing of wireless goodwill and our wireless assembled workforce intangible
asset utilized a combination of a discounted cash flow method and other market
valuation methods. In testing our PCS radio spectrum licenses, as well as the
goodwill testing for our reporting units (as defined under the guidance of SFAS
No. 142) other than the wireless reporting unit, we relied on discounted cash
flow valuation models. Market valuation testing was not used in these areas due
to the limited transaction activity in the recent timeframe. Based on current
economic conditions and the volatility of market pricing of the
telecommunications sector, we believe that the discounted cash flow method more
appropriately measures these long-term values. The discounted cash flow method
involved long term cash flow projections using numerous assumptions and
estimates related to these projections. Cash flows were projected over a ten
year time frame and, at the conclusion of this period, we assessed a terminal
value of the PCS radio spectrum licenses and our reporting units. Terminal
values were determined by multiples of cash flow utilizing the Gordon growth
model formula (i.e. 1 divided by discount rate less growth rate). The discount
rates used in each of the discounted cash flow models were specific to the
segment assets being measured. The discount rate used in the testing of the PCS
licenses and the wireless reporting unit goodwill and assembled workforce
intangible asset was determined with the assistance of the independent appraisal
firm. In addition, the values of the PCS radio spectrum licenses were measured
in the aggregate given the contiguous region we serve and the centralized
management, engineering, sales and marketing and reporting functions. Had fair
value testing been performed separately for each individual PCS radio spectrum
license, there would likely have been some licenses with fair value less than
book value and other licenses with book value less than fair value.
Collectively, the projections and assumptions used in this fair value testing
involve risks and uncertainties including but not limited to those discussed
below.
Based on this fair value testing, we determined that there was no impairment to
the PCS radio spectrum licenses or the goodwill and assembled workforce
intangible asset on the wireless and network segments as of January 1, 2002 and
through June 30, 2002. Additionally, goodwill on the other reporting units was
not impaired as of January 1, 2002. No further SFAS No. 142 testing was
performed for the quarter ended September 30, 2002 based on our assessment that
no material impairment indicators existed subsequent to the completion of the
work performed as of June 30, 2002 which would require re-testing as of
September 30, 2002. The Company will perform the annual SFAS No. 142 testing of
all goodwill and indefinite lived intangible assets as of October 1, 2002 for
the year ended December 31, 2002. The annual valuation work as of October 1,
2002 has not yet been completed.
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, continued accuracy
of representations and warranties, 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 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 level;
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; values of
non-strategic assets such as excess PCS and other spectrum licenses may
15
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
fluctuate and are currently below that of recent transactions the Company has
completed; the level of demand for competitive local exchange services in
smaller markets; our ability to manage and monitor billing; possible health
effects of radio frequency transmission; and, the impact of decline in the
Company's stock price and its ability to maintain minimum listing standards of
the NASDAQ stock market. The Company has been notified by NASDAQ that the price
of its common stock does not meet the $1 per share requirement for continued
inclusion on the NASDAQ National Market. NTELOS will have until December 30,
2002 to regain compliance or may choose to apply to transfer to the NASDAQ
SmallCap Market. If such application is made and approved, the Company will be
afforded a 180-calendar day grace period (to March 30, 2003) and may also be
eligible for an additional 180-calendar day grace period, which would expire
September 29, 2003. 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 PCS, consisting of retail, service and wholesale digital PCS
revenues;
o wireline communications, including ILEC service revenues, CLEC service
revenues, Internet, fiber optic network usage (or carrier's carrier
services), 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 revenue from leasing excess building
space.
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, plant and equipment, as well as indirect costs such as
engineering and general administration of property, plant 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 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 gains or losses on sale of investments and other assets.
16
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 and Nine Months Ended September 30, 2002
Compared to Three and Nine Months Ended September 30, 2001
OVERVIEW
EBITDA increased $10.9 million or 155%, from $7.1 million for the three months
ended September 30, 2001 to $18.0 million for the three months ended September
30, 2002 and EBITDA increased $24.1 million or 149%, from $16.2 million for the
nine months ended September 30, 2001 to $40.3 million for the nine months ended
September 30, 2002. Operating loss decreased $12.8 million or 79%, from a loss
of $16.1 million to a loss of $3.3 million for the three months ended September
30, 2001 and 2002, respectively. Operating loss decreased $18.4 million or 43%,
from $43.2 million for the nine months ended September 30, 2001 to $24.8 million
for the nine months ended September 30, 2002. Included in the 2002 three and
nine month results was a lease termination fee of $1.1 million reported in the
Other segment (Note 6) and $.7 million of accelerated depreciation related to
certain CLEC equipment due to early replacement during the period or based on
scheduled early replacement later in 2002. Included in the nine months ended
September 30, 2002 was accelerated depreciation of $15.3 million ($2.9 million
for the third quarter 2002 and $1.8 million in the three and nine months ended
September 30, 2001) on certain PCS assets due to early replacement during the
period or based on scheduled early replacement later in 2002 or 2003,
restructuring charges of $2.7 million, all of which were recorded in the first
and second quarter 2002, and a $15.0 million ($4.1 million for third quarter
2002) reduction in amortization of intangibles due to the adoption of SFAS No.
142 (Note 1). Excluding these items from the respective periods in which they
occurred, EBITDA increased $9.8 million (138%) and operating loss decreased $9.4
million (92%) in third quarter 2002 compared to third quarter 2001. Excluding
these same items for the nine months ended September 30, 2002 as compared to the
comparable nine month period in 2001, EBITDA increased $25.7 million (159%) and
operating loss decreased $19.2 million (73%).
WIRELESS PCS OVERVIEW - The PCS segment added 42,000 customers in the third
quarter 2002, up 31% from 32,100 gross additions in the third quarter 2001.
Total net customer additions for the third quarter 2002 were 13,000, more than
double the 5,200 in third quarter 2001 and 35% greater than the net additions
from the previous quarter. Average monthly revenue per subscriber ("ARPU")
remained relatively constant and cost of acquisition per gross customer addition
decreased approximately 15% for the three and nine month periods, while
wholesale and roaming revenues increased $3.8 million (78%) and $8.0 million
(55%) for the respective three and nine month periods ended September 30, 2002
as compared to 2001. These factors, along with cost containment initiatives
resulted in revenue and EBITDA growth of $8.8 million (27%) and $6.8 million
(230%), respectively, for the third quarter 2002 compared to the third quarter
2001. Similar operational trends were present for the nine months ended
September 30, 2002 as compared to 2001, resulting in revenue and EBITDA growth
of $27.5 million (31%) and $21.5 million, respectively, over the prior year
respective periods. EBITDA growth significantly outpaced revenue growth, as
operating expense growth lagged revenue growth due to reductions in costs of
acquisition per gross addition mentioned above, a reduction in roaming expenses,
and focused cost containment measures, as well as the leveraging of the fixed
infrastructure.
WIRELINE COMMUNICATIONS OVERVIEW - Wireline communications services realized
revenue improvement of $2.7 million and $7.4 million for the three and nine
months ended September 30, 2002 over the comparative periods ended September 30,
2001, which translated to EBITDA improvement of $4.4 million and $7.5 million,
respectively for the three and nine month periods. EBITDA margin over the three
and nine month periods increased from 42% and 43%, respectively, in 2001 to 55%
and 49%, respectively, in 2002. These results are driven by growth in ILEC
17
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
minutes (15%), combined CLEC and DSL customer growth (40%), significant cost
reductions associated with the CLEC and Internet market restructuring where we
have limited or discontinued services in low volume, high cost areas, as well as
other restructuring activity in all wireline segments (Note 9). The third
quarter 2002 was the first full quarter of savings from the restructuring cost
reductions which is offset by the fact that the prior year excluded R&B
operations for the period prior to the February 13, 2001 merger date.
OTHER COMMUNICATION SERVICES OVERVIEW - Other communications services revenue
increased $.6 million for the three months ended September 30, 2002 as compared
to the three months ended September 30, 2001 and declined $38,000 for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001. The third quarter comparative increase is due to the $1.1 million one
time lease termination fee reported in the third quarter 2002 (Note 6).
Excluding this one time lease termination fee, revenues declined $.5 million and
$1.1 million for the three and nine month periods ended September 30, 2002 as
compared to the respective prior year periods. These declines are due 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)
and from the decline in paging revenues. EBITDA was down $.3 million for the
third quarter 2002 compared to third quarter 2001 and $4.8 million for the nine
months ended September 30, 2002 compared to the nine months ended September 30,
2001. The restructuring charge (Note 9 and as discussed below) accounted for
$2.7 million of the nine month change. The exclusion of voicemail and a decline
in the paging business accounted for $.4 million and $1.0 million of the three
and nine month declines, respectively. The balance of the decline prior to the
$1.1 million lease termination fee noted above primarily pertains to unallocated
corporate expenses related to insurance and certain professional fees.
OPERATING REVENUE
Three Months Ended September 30, Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
$ % $ %
($'s in 000's) 2002 2001 Variance Variance 2002 2001 Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Wireless $ 40,790 $ 31,996 $ 8,794 27% $ 115,106 $ 87,592 $ 27,514 31%
ILEC 12,091 10,929 1,162 11% 34,329 31,472 2,857 9%
Network 2,010 2,403 (393) (16%) 6,378 6,318 60 1%
CLEC 5,513 3,804 1,709 45% 16,106 12,445 3,661 29%
Internet 4,576 4,377 199 5% 13,856 13,035 821 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Wireline 24,190 21,513 2,677 12% 70,669 63,270 7,399 12%
Other 3,122 2,552 570 22% 7,242 7,280 (38) (1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 68,102 $ 56,061 $ 12,041 21% $ 193,017 $ 158,142 $ 34,875 22%
WIRELESS PCS REVENUES -- Digital PCS customers grew 47,200, or 23%, from the end
of the third quarter 2001 to the end of the third quarter 2002. ARPU was down
slightly (2%) for the three months ended September 30, 2002 compared to 2001,
reflecting an increase in the number of lower ARPU shared plan customers.
However, ARPU grew $1.98, from $43.36 for the nine months ended September 30,
2001 to $45.34 for the nine months ended September 30, 2002 due primarily to a
shift in the customer mix to a higher percentage of post-pay type plans versus
pre-pay plans (from 74% at September 30, 2001 to 92% at September 30, 2002).
Revenue from our wholesale and roaming agreements, primarily from our network
services agreement with Horizon, increased $3.8 million or 78%, from $5.0
million for the third quarter of 2001 to $8.8 million for the third quarter of
2002. Wholesale and roaming revenues increased $9.7 million or 67%, from $14.3
million for the nine months ended September 30, 2001 to $24.0 million for the
nine months ended September 30, 2002. In addition to this, 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,
which inflated the nine month growth percentage 3% (i.e. on a pro forma basis,
the nine month growth was 28%). The combination of these and other factors
resulted in increased total PCS revenues of $8.8 million for the third quarter
2002 compared to the third quarter 2001, and $27.5 million for the nine months
ended September 30, 2002 compared to the prior year nine month period.
18
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
WIRELINE COMMUNICATIONS REVENUES--Wireline communications revenues increased
$2.7 million, or 12%, for the three months ended September 30, 2002 compared to
the 2001 comparative period and increased $7.4 million, or 12%, for the nine
months ended September 30, 2002 compared to the same period in the prior year.
CLEC and ILEC comprised a majority of this increase, as indicated in the revenue
chart above.
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 $1.2 million, or 11%,
and $2.9 million, or 9%, for the three and nine months ended September 30, 2002
compared to the prior year three and nine month comparative periods. In the
first quarter 2001, revenues from the R&B ILEC prior to consolidation were $1.3
million. Therefore, pro forma ILEC revenues for the nine month periods increased
$1.6 million or 5%. Bad debt expense increased $.7 million in the nine months
ended September 30, 2002 versus 2001 due to increases to carrier access
receivable reserves from carriers with financial difficulties (pre-petition
uncollected receivables from Worldcom Inc. are fully reserved at September 30,
2002 in this and the other relevant segments). Adjusting for these factors,
growth was approximately 7% during the nine month comparative periods. This
growth is due to minutes of use growth driving up access revenues, which grew
$29.3 million, or 15%, over the nine month comparative periods, offset by a
decrease in toll revenue and insignificant growth in local revenue.
o Fiber Optic Network Usage Revenues. Revenues from fiber optic network usage
operations decreased $.4 million or 16%, in the three month comparative periods,
but increased $60,000, or 1%, in the nine month comparative periods. In the
first quarter of 2001, revenues from R&B Network prior to consolidation were $.6
million. Therefore, on a pro forma basis revenues decreased $.5 million over the
nine month comparative periods. This was primarily due to reductions in network
rates and the loss of certain traffic in the second half of 2001 and in 2002,
partially offset by growth in usage.
o CLEC Revenues. CLEC revenues increased $1.7 million, or 45%, and $3.7 million,
or 29%, for the three and nine months ended September 30, 2002 compared to 2001.
Of the nine month increase, $.5 million is attributable to excluded revenues
from R&B CLEC prior to the first quarter 2001 consolidation. Additionally, local
calling and broadband revenues increased $4.0 million for the comparative nine
month periods ($1.3 million for the three month comparative periods) driven by
customer growth, with total CLEC customers increasing 10,900, from 30,700 at
September 30, 2001 to 41,600 at September 30, 2002. For the nine month
comparative periods, the local and broadband revenue increases were partially
offset by a $1.3 million decline in reciprocal compensation due to FCC mandated
rate decreases made in late 2001. Further FCC mandated rate decreases are
scheduled in late 2002.
o Internet Revenues. Revenues from Internet services increased $.2 million, or
5%, for the three month comparative period and increased $.8 million, or 6%, for
the nine months ended September 30, 2002 compared to 2001. During the third
quarter 2002, we completed the consolidation of the billing systems from
acquired Internet companies and, as a result, a dial-up customer adjustment
(reduction) of approximately 3,100 was required. This adjustment had no
financial impact. In addition to this, we had a net 1,100 decrease in customers
during the third quarter 2002 due to our exiting certain dial-up Internet
markets and price increases on certain low-end plans. These actions were taken
as part of the 2002 restructuring initiatives. Dial-up customers totaled 68,200
at September 30, 2002. DSL customers increased 2,500 or 83% as of the third
quarter end 2002 compared to the third quarter end 2001.
OTHER COMMUNICATION SERVICES REVENUES--Other communications services revenues,
including other R&B operations, increased $.6 million for the three month
comparative period and decreased $38,000 for the nine months ended September 30,
2002 compared to 2001. This decrease is due to the factors noted in the "Other
Communication Services Overview" section above.
19
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
OPERATING EXPENSES
Three Months Ended September 30, Nine Months Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
% %
($'s in 000's) 2002 2001 Variance Variance 2002 2001 Variance Variance
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES, excluding Depreciation & Amortization
Wireless 36,945 $ 34,964 $ 1,981 6% $ $ 107,350 $ 101,297 $ 6,053 6%
ILEC 3,438 4,056 (618) -15% 11,305 11,433 (128) -1%
Network 365 452 (87) -19% 1,320 1,231 89 7%
CLEC 3,839 4,030 (191) -5% 12,836 11,184 1,652 15%
Internet 3,222 4,024 (802) -20% 10,675 12,368 (1,693) -14%
- -----------------------------------------------------------------------------------------------------------------------------------
Wireline 10,864 12,562 (1,698) -14% 36,136 36,216 (80) 0%
Other 2,289 1,462 827 57% 9,229 4,455 4,774 107%
- -----------------------------------------------------------------------------------------------------------------------------------
Sub-Total 50,098 48,988 1,110 2% 152,715 141,968 10,747 8%
Depreciation &
Amortization 21,321 23,150 (1,829) (8%) 65,074 59,390 5,684 10%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 71,419 $ 72,138 $ (719) (1%) $ 217,789 $ 201,358 $ 16,431 8%
TOTAL OPERATING EXPENSES--Total operating expenses decreased $.7 million or 1%,
from $72.1 million in the third quarter of 2001 to $71.4 million for the third
quarter 2002. Of this total decrease, $1.8 million pertained to a decrease in
depreciation and amortization expense, including a $2.3 million decrease
relating to the net effect of accelerated depreciation and the effects of SFAS
No. 142 on amortization of intangible assets (see further discussion below in
the "Depreciation and Amortization" section). The remaining difference in total
operating expenses is a net increase, which is from the cost of sales and
customer operations total increase of $2.6 million from customer growth, offset
by a $1.5 million decrease in the combined maintenance and support and corporate
operations categories. The reduction in maintenance and support and corporate
operations expenses are primarily due to cost reductions completed in the second
quarter 2002 and continued cost containment and reduction measures taken from
network optimization.
Total operating expenses increased $16.4 million, or 8%, from $201.4 million for
the nine months ended September 30, 2001 to $217.8 million for the nine months
ended September 30, 2002. Of this increase, $6.1 million is from the exclusion
of R&B and the WV Alliance from operating expenses in the first 43 days of 2001.
Additionally, $5.7 million pertained to an increase in depreciation and
amortization expense with the net effect of accelerated depreciation and the
effects of SFAS No. 142 on amortization of intangible assets being a net
decrease of $.8 million. Finally, $2.7 million is attributable to 2002
restructuring costs. Operating expenses, excluding depreciation and
amortization, from the other communication service businesses for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001 increased primarily due to restructuring charges of $2.7 million,
respectively, and increases in corporate related professional fees and insurance
costs.
COST OF SALES--Cost of sales increased $.8 million, or 7%, from $11.9 million
for the three months ended September 30, 2001 to $12.7 million for the three
months ended September 30, 2002, and increased $2.5 million, or 7%, from $34.6
million for the nine months ended September 30, 2001 to $37.1 million for the
nine months ended September 30, 2002. The exclusion of the WV Alliance for the
first 43 days of 2001 accounted for $1.4 million of the nine month increase.
Therefore, cost of sales only increased $1.1 million, or 3%, after accounting
for this exclusion. Gross PCS customer additions increased 9,900, or 31%, from
32,100 in the third quarter 2001 to 42,000 in the third quarter 2002. Gross PCS
customer additions increased 10,800, or 10%, from 108,300 for the nine months
ended September 30, 2001 to 119,100 for the nine months ended September 30,
2002. The cost of this higher phone sales activity was partially offset by
improved network efficiency, lower handset prices and improved inventory
control.
20
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
MAINTENANCE AND SUPPORT EXPENSES--Maintenance and support expenses decreased $.7
million or 4%, and increased $3.1 million or 7%, from $16.2 million and $46.0
million for the three and nine months ended September 30, 2001, respectively, to
$15.5 million and $49.1 million for the nine months ended September 30, 2002,
respectively. Of the nine month increase, $1.7 million relates to the exclusion
of R&B and the WV Alliance for the first 43 day of 2001 prior to consolidation.
Excluding this, maintenance and support expenses increased 3% for the nine month
comparative periods. This increase was primarily attributable to the increased
costs (primarily maintenance and repair costs) associated with the increased
network asset base, which increased $90 million (22%). Also, CLEC unbundled
network elements ("UNE's") and transport costs increased due to CLEC customer
growth. Conversely, staff reductions in engineering and operations functions,
other restructuring initiatives and network grooming and optimization resulted
in significant cost reductions, offsetting most of the cost increases mentioned
above.
DEPRECIATION AND AMORTIZATION EXPENSES--Depreciation and amortization expenses
decreased $1.8 million or 8%, from $23.1 million for the three months ended
September 30, 2001 to $21.3 million for the three months ended September 30,
2002. Depreciation and amortization increased $5.7 million, or 10%, from $59.4
million to $65.1 million for the nine months ended September 30, 2001 and 2002,
respectively.
As mentioned above, we reported accelerated depreciation of $2.9 million and
$15.3 million for the three and nine months ended September 30, 2002 on wireless
digital PCS equipment replaced during the first nine months of 2002 or which are
scheduled to be replaced over the remainder of 2002 and into the first half of
2003. During the three and nine months ended September 30, 2001, this
accelerated depreciation charge was $1.8 million. The 2002 replacement schedule
was accelerated within the year resulting in this significant increase in
depreciation during these three and nine month periods. Accelerated depreciation
will continue on the assets scheduled to be retired later this year and next.
The effect of this is expected to be approximately $1.6 million during fourth
quarter 2002 and approximately $1.5 million in 2003. In third quarter 2002, we
also recognized $.7 million of accelerated depreciation related to shortening
the lives of certain CLEC equipment due to capacity limitations.
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 the
assembled workforce intangible asset as of that date as these assets are
considered indefinite lived intangible assets not subject to amortization;
instead, these assets are subject to periodic impairment testing (Note 1).
Amortization of indefinite lived intangible assets was $4.1 million for the
third quarter of 2001 and $15.0 million for the nine months ended September 30,
2001 ($15.6 million on a pro forma basis). The remaining increase in
depreciation is due to an increase in depreciable assets from September 30, 2001
to September 30, 2002 of $101 million, or 20%.
CUSTOMER OPERATIONS EXPENSES--Customer operations expenses increased $1.8
million, or 11%, and increased $2.3 million, or 5%, from $16.0 million and $46.8
million for the three and nine months ended September 30, 2001 to $17.8 million
and $49.1 million for the three and nine months ended September 30, 2002. On a
pro forma basis, customer operations expenses increased from the prior year by
$.9 million or 2% for the nine month comparative periods. This increase is
driven by the 10% increase in the number of gross PCS subscriber additions in
the current period compared to the prior year nine month period partially offset
by improvements in the selling cost per gross addition. The third quarter 2002
$1.8 million increase is attributable to higher commissions paid in the third
quarter related to the significant increase in PCS customer additions (31%) in
the third quarter 2002 compared to third quarter 2001 and an increase in the
number of sales occurring from the higher cost indirect sales channel over the
prior quarters of this year. 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.
21
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
CORPORATE OPERATIONS EXPENSES--Corporate operations expenses decreased $.8
million, or 16%, from $4.8 million to $4.0 million for the three months ended
September 30, 2001 and 2002, respectively. Corporate operations expense
increased $.2 million or 1%, from $14.5 million for the nine months ended
September 30, 2001 to $14.7 million for the nine months ended September 30,
2002. On a pro forma basis, corporate operations expenses decreased $.6 million,
or 4%. As mentioned above, legal and other professional services fees and
insurance expenses increased (primarily in the ILEC and Other segments), offset
by personnel reductions in corporate related back office functions.
RESTRUCTURING CHARGE--Restructuring charges were recorded in the first and
second quarters 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 certain functions. These charges totaled
$2.7 million. This restructuring is expected to generate net savings and reduce
future expenses by approximately $3.0 million for the year 2002 and $8.5 million
for 2003. We realized the first full quarter of these savings in the third
quarter of 2002.
OTHER INCOME (EXPENSES)
Other income (expenses) was comprised of equity loss from WV Alliance (2001
only), gains on sale of assets, 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, we recognized $4.7 million of gains in the first six
months of 2002 and $3.7 million in gains in the third quarter of 2002 primarily
from the sale of certain excess PCS licenses. In the nine months ended September
30, 2001, we sold our Illuminet Holdings, Inc. stock, recognizing a $23.0
million gain.
Interest expense increased $.2 million, or 1%, from $19.5 million for the three
months ended September 30, 2001 to $19.7 million for the three months ended
September 30, 2002. Interest expense increased $1.6 million, or 3%, from $57.0
million for the nine months ended September 30, 2001 to $58.6 million for the
nine months ended September 30, 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. The rate of increase decreased significantly during the third
quarter compared to the first and second quarters due to the improved cash flows
generated from operations (both from increased EBITDA and improvements in
working capital) and a reduction in capital expenditures.
Other income (expense) decreased $1.0 million, from income of $.7 million in the
third quarter 2001 to expense of $.3 million in the third quarter 2002. For the
nine month comparative periods, other income (expense) decreased $6.0 million,
from $4.0 million of income as of September 30, 2001 to $2.0 million of expense
as of September 30, 2002. The prior year income was comprised primarily of
interest income earned on an average restricted cash balance of approximately
$54 million, interest from advances to the WV Alliance, which averaged
approximately $68 million during the first 43 days of 2001, and other
miscellaneous asset retirement gains. During the nine months ended September 30,
2002, interest income for restricted cash was down significantly due to the
reduced average restricted cash balance of approximately $18 million. This
income was offset by a $1.1 million permanent impairment recorded for our
investment in Worldcom Inc., other corporate financing costs and miscellaneous
non-operating expenses.
INCOME TAXES
Income tax benefits decreased $.8 million, from a tax benefit of $4.1 million
for the three months ended September 30, 2001 to a tax benefit of $3.3 million
for the three months ended September 30, 2002. Income tax benefits decreased
$19.7 million, from a tax benefit of $26.6 million for the nine months ended
September 30, 2001 to a tax benefit of $6.9 million for the nine months ended
September 30, 2002. The 2002 benefit is net of a valuation allowance recorded
during the nine months ended September 30, 2002 of $20.5 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 both years. Offsetting these factors in the current year is the
non-deductible basis differences in licenses sold, which reduced the rate from
the statutory rate. As a result, the effective tax rate was 35.8% in 2002,
excluding the impact of the $20.5 million valuation reserve (Note 6), compared
to 37.3% in 2001.
22
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
LIQUIDITY AND CAPITAL RESOURCES
We have funded our working capital requirements and capital expenditures from
net cash provided by operating activities and borrowings under credit
facilities. At September 30, 2002, we had $76.5 million in unused borrowings
available under our Senior Secured Term Loan (also referred to as the "Senior
Credit Facility") subject to continued compliance with covenants and terms and
conditions, including accuracy of representations and warranties, under the
facility. Interest payments of $22.5 million on our Senior Notes through August
2002 were paid from restricted cash. All future interest payments will be
financed by operations or borrowed under our Senior Credit Facility. The next
payment of interest on the Senior Notes is due February 15, 2003. The Senior
Note interest is due semi-annually in the amount of $18.2 million every February
15 and August 15. We borrowed $2.5 million during the third quarter 2002 and
$23.5 million in the nine months ended September 30, 2002 against our $100
million line of credit under the Senior Credit Facility.
OPERATING CASH FLOWS
During the nine month period ended September 30, 2002, net cash provided by
operating activities was $11.1 million, with $9.9 million provided by operations
plus net positive changes in operating assets and liabilities totaling $1.2
million. Within the $9.9 million provided by operations, one of the reconciling
items adjusting net income to net cash is an adjustment for $22.5 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. The principal
changes in operating assets and liabilities were as follows: accounts receivable
increased by $1.0 million or 3% due primarily to a 20% increase in revenues in
the third quarter of 2002 over the fourth quarter 2001 offset by improved
receivable turnover; inventories and supplies decreased $5.3 million due to
efforts to reduce handset inventory levels in recognition of improvement in
handset availability and off peak sales volumes; other assets decreased by $1.3
primarily from a decrease in non-trade receivables; and, current liabilities
decreased a total of $4.6 million due to the timing of payments.
During the nine month period ended September 30, 2001, net cash used in
operating activities was $30.3 million, with $9.0 million used by operations and
a net increase in net operating assets totaling $21.3 million. Principal changes
in operating assets and liabilities were as follows: accounts receivable
increased $3.0 million; inventories and supplies decreased $1.5 million due to
the reduction in inventory levels from the quantities on hand at year-end in
support of seasonal sales activity through February; other current assets were
up $4.8 million, primarily related to increases in other receivables related to
various non-trade activity; income taxes went from a receivable at the 2000
year-end of $2.9 million to a $.1 million payable position at September 30, 2001
due to the receipt of the year end receivable and the state minimum tax payable
at September 30, 2001; and, accounts payable and other liabilities (excluding
additional payables from R&B and the WV Alliance) decreased by $18.1 million due
to the timing of payments at and around the respective period ends.
Our cash flows used in investing activities for the nine months ended September
30, 2002 aggregated $32.7 million and primarily included $63.0 million for
capital expenditures, $25.0 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 $31.1 million in proceeds primarily from
the sale of communications towers and excess PCS licenses.
Our cash flows used in investing activities for the nine month period ended
September 30, 2001 aggregated $34.7 million and included the following:
o $72.7 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;
o $4.1 million of cash and cash equivalents on hand at R&B at the time of the
merger;
o $3.0 million of advances to the Alliances;
23
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
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,
o $27.0 million received from the sale of investments and towers with an
additional $6.6 million in other receivables at September 30, 2001, which
was received in October 2001.
Net cash provided by financing activities for the first nine months of 2002
aggregated $14.9 million, which included $23.5 million of additional borrowings
against the Senior Credit Facility, a $7.8 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 nine month period ended
September 30, 2001 aggregated $72.4 million, which included $76.0 million
proceeds from the issuance of long-term debt, $2.9 million in other debt
payments and $1.2 million in debt amendment costs.
Our liquidity needs will be impacted by:
o capital expenditures required to complete the deployment of 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 CLEC access line growth in
existing markets;
o increasing professional fees from third party advisors and consultants;
and,
o significant interest expense associated with current and increasing debt
levels for which we no longer have restricted cash to pay.
Our liquidity sources include:
o cash flow from operations;
o $76.5 million available under our Senior Credit Facility as of September
30, 2002, subject to compliance with 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 19 markets where
service is currently being provided and 14 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, we sold $11.6 million of excess spectrum for a
gain of $8.6 million and have sold additional inactive or excess PCS
spectrum for proceeds of $18.1 million in 2002 to date ($2.5 million of
which closed in the first quarter 2002, $12.0 million of which closed in
April 2002 and $3.6 million which closed in July 2002); and,
o public and private debt and equity markets.
We expect capital expenditures for the remainder of 2002 to be between $12
million and $17 million and between $62 million and $68 million in 2003 under
our current operating plan. 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,
o support back office tools in order to improve customer satisfaction and
improve our internal controls and efficiencies.
Approximately $36 to $39 million of these which have been either incurred during
2001 and 2002 or are anticipated in the fourth quarter of 2002 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.
24
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
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.
The Company has a $100 million revolving credit facility as part of its Senior
Credit Facility. As of September 30, 2002, the Company had borrowed $23.5
million under this revolver. Availability of the remaining amount of this
facility to fund capital expenditures and interest payments is subject to
compliance with the covenants, terms and conditions, included accuracy of
representations and warranties, of the Senior Credit Facility.
Regarding the Senior Credit Facility covenants, the 2002 annual minimum EBITDA
level is $49.6 million and includes quarterly rolling twelve month thresholds.
At September 30, 2002, we were in compliance with all of our financial covenant
requirements and we anticipate compliance through the remainder of 2002. At
September 30, 2002, our rolling twelve month EBITDA, as adjusted per the
covenant definition, was $45.9 million, inclusive of $18.0 million for the third
quarter of 2002. Based on current EBITDA levels, the Company expects EBITDA for
the remaining three months of 2002 to be in excess of the $8.0 million needed in
order to comply with the EBITDA covenant at December 31, 2002.
Beginning in the quarter ending March 31, 2003, our Senior Credit Facility
requires compliance with leverage and senior leverage ratios and interest and
fixed charge coverage ratios. In 2003, under our current operating plan, we
anticipate growth in PCS subscribers at levels comparable to 2002, average
revenue per unit ("ARPU") levels consistent with 2002, and continued lowering of
PCS customer churn in order to create significant growth in cash flow from our
wireless segment. We also anticipate continued revenue growth from our wireline
segments and continuing cost containment measures. However, this operating plan
would result in a violation of the Company's Senior Credit Facility covenants in
2003 resulting from lower than originally forecasted ARPU levels due to
increased competition and competitive pricing and the significant up-front,
acquisition costs associated with continued PCS subscriber growth. Thus, in
order to pursue this plan, the Company will need to amend its covenants, alter
its existing capital structure, generate cash flow from non-core asset
divestitures, or seek additional capital resources.
Alternatively, if these efforts are unsuccessful, in order to attempt to comply
with the 2003 covenants, the Company would pursue a plan to pursue a plan to
increase short-term operating cash flows by reducing PCS subscriber growth,
thereby reducing the related costs of acquiring new subscribers, to result in
moderate to flat net growth in PCS subscribers and forego growth in its lower
margin residential Internet dial up business. Concurrent with this reduction in
growth, operating expenses would be reduced accordingly. In addition, this
alternative plan would require significant further cost reduction and
containment measures, as well as reduction and deferral of capital expenditures.
This alternative plan, while increasing short-term operating cash flows, would
adversely impact long-term operating cash flows.
In addition, the Company's next semi-annual interest payment on its senior and
subordinated notes is due February 15, 2003. The availability of funds to make
these payments would be subject to continued availability of the revolving
credit facility.
The Company has engaged UBS Warburg as its financial advisor to analyze its
business plan for 2003 and beyond and address the Company's capital structure.
Also, the Company has commenced discussions with the administrative agent for
the Senior Credit Facility with respect to the Company's business plan, capital
structure, covenants and access to the revolving credit facility.
The financial statements in this report have been prepared on a going concern
basis. If the Company were to be unsuccessful in addressing its capital
structure and covenants, we would not have sufficient financial resources and
our ability to make scheduled interest and principal payments on our senior and
subordinated notes would be significantly impaired. If this were to occur, in
early 2003 there could arise substantial doubt about our ability to continue as
a going concern. In addition, there would likely be an adverse impact on our
valuation of certain long-lived assets, including radio spectrum licenses and
goodwill, which would likely result in impairment charges associated with the
carrying values of these assets. The accompanying financial statements do not
reflect any adjustments to the carrying value of the Company's net assets or the
amount and classification of liabilities. Such adjustments would be necessary in
the event that the Company is not able to continue as a going concern.
This alternative plan, while increasing short-term operating cash flows, would
adversely impact long-term operating cash flows. The accompanying financial
statements do not reflect any adjustments to the carrying value of the Company's
net assets or the amount and classification of liabilities. Such adjustments
would be necessary in the event that the Company is not able to continue as a
going concern.
25
NTELOS Inc.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's Senior Credit Facility of $325 million, $248.5 million of which
was outstanding at September 30, 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, with a total book and
face value of $356.6 million and $375 million, respectively, are at fixed
interest rates of 13% and 13.5%, respectively. The Company has other fixed rate,
long-term debt totaling $24.6 million at September 30, 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 September 30, 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 1.84% as of September 30, 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 September 30,
2002, the Company had no exposure to credit loss on interest rate swaps. At
September 30, 2002 and December 31, 2001, the swap agreements had a fair value
$20.4 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 $5.3 million for a one percentage point increase
in the rate (to $15.1 million below face value) and $5.5 million for a one
percentage point decrease in the rate (to $25.9 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 September 30, 2002, the
Company's senior bank debt totaled $248.5 million, or $86 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 September 30, 2002, the Company's financial assets included cash and cash
equivalents of $.5 million and securities and investments of $9.0 million. With
respect to the cash and cash equivalents, as well as virtually all of the
securities and 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. We do
not believe that this risk is material to our financial position or will be
material to the results of future operations.
26
NTELOS Inc.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
27
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
None
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 August 14, 2002, certification by Mr. James S.
Quarforth pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Form 8-K dated August 15, 2002, pertaining to the update of the
April 29, 2002 Form 8-K guidance originally filed on April 29, 2002
provided by Mr. James S. Quarforth, Chief Executive Officer, and
Mr. Michael B. Moneymaker, Chief Financial Officer, during the
second quarter 2002 earnings conference call held on August 14,
2002.
Form 8-K dated November 8, 2002, pertaining to the issuance of its
third quarter earnings press release, the engagement of UBS Warburg
as its financial advisor and a modification to the amended and
restated shareholders agreement.
28
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.
November 13, 2002 /s/J. S. Quarforth
-------------------------------------------------
J. S. Quarforth, Chief Executive Officer
November 13, 2002 /s/M. B. Moneymaker
-------------------------------------------------
M. B. Moneymaker, Senior Vice President and
Chief Financial Officer, Treasurer and Secretary
29
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James S. Quarforth, Chief Executive Officer of the company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NTELOS Inc. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ James S. Quarforth
James S. Quarforth
Chief Executive Officer
30
CERTIFICATION PURSUANT TO
RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael B. Moneymaker, Chief Financial Officer of the company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NTELOS Inc. (the
"registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
7. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
8. The registrant's other certifying officers and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Michael B. Moneymaker
Michael B. Moneymaker
Chief Financial Officer
31