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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 June 30, 2002 Commission File No. 0-16751
NTELOS Inc.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 8/12/02 17,318,052
NTELOS Inc.
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, June 30, 2002 and December 31, 2001 3-4
Condensed Consolidated Statements of Operations, Three and Six Months Ended June 30, 2002
and 2001 5
Condensed Consolidated Statements of Cash Flows, Six Months Ended June 30, 2002 and 2001 6
Condensed Consolidated Statements of Shareholders' Equity, Three and Six Months Ended
June 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 14-24
Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION 26-29
SIGNATURES 30-31
2
NTELOS Inc.
Condensed Consolidated Balance Sheets
June 30, 2002 December 31,
(In thousands) (Unaudited) 2001
- ----------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 736 $ 7,293
Restricted cash 13,649 18,069
Accounts receivable, net of allowance 30,922 30,328
Inventories and supplies 2,925 9,619
Other receivables and deposits 3,430 4,669
Prepaid expenses and other 5,047 3,929
Income taxes receivable 1,822 1,945
- ---------------------------------------------------------------------------------------------------
58,531 75,852
- ---------------------------------------------------------------------------------------------------
Investments
Securities and investments 9,456 13,963
Restricted cash 4,515 18,094
- ---------------------------------------------------------------------------------------------------
13,971 32,057
- ---------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land and building 51,098 50,836
Network plant and equipment 476,540 447,585
Furniture, fixtures and other equipment 68,678 65,283
- ---------------------------------------------------------------------------------------------------
Total in service 596,316 563,704
Under construction 18,983 35,753
- ---------------------------------------------------------------------------------------------------
615,299 599,457
Less accumulated depreciation 146,337 133,513
- ---------------------------------------------------------------------------------------------------
468,962 465,944
- ---------------------------------------------------------------------------------------------------
Other Assets
Cost in excess of net assets of business acquired, less accumulated
amortization 135,373 135,635
Other intangibles, less accumulated amortization 16,738 23,677
PCS radio spectrum licenses, less accumulated amortization 419,690 423,181
Other radio spectrum licenses, less accumulated amortization 11,818 11,930
Radio spectrum licenses not in service 9,544 9,935
Deferred charges 19,566 18,675
Deferred tax asset 2,441 --
- ---------------------------------------------------------------------------------------------------
615,170 623,033
- ---------------------------------------------------------------------------------------------------
$1,156,634 $1,196,886
===================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
NTELOS Inc.
Condensed Consolidated Balance Sheets
June 30, 2002 December 31,
(In thousands) (Unaudited) 2001
- ------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 29,196 $ 39,917
Advance billings and customer deposits 11,670 8,889
Accrued payroll 6,328 5,540
Accrued interest 18,608 18,332
Deferred revenue 5,143 5,092
Other accrued liabilities 6,283 4,927
- ------------------------------------------------------------------------------------------------------
77,228 82,697
- ------------------------------------------------------------------------------------------------------
Long-term Debt 628,861 612,416
- ------------------------------------------------------------------------------------------------------
Long-term Liabilities
Deferred income taxes -- 2,200
Retirement benefits 18,668 15,789
Long-term deferred liabilities 45,970 43,624
- ------------------------------------------------------------------------------------------------------
64,638 61,613
- ------------------------------------------------------------------------------------------------------
Minority Interests 905 847
- ------------------------------------------------------------------------------------------------------
Redeemable, Convertible Preferred Stock 275,785 265,747
- ------------------------------------------------------------------------------------------------------
Commitments
Shareholders' Equity
Preferred stock, no par value per share, authorized 1,000
shares; none issued -- --
Common stock, no par value per share, authorized 75,000 shares;
issued 17,294 shares (17,209 in 2001) 182,189 182,093
Stock warrants 22,874 22,874
Accumulated deficit (86,757) (23,201)
Accumulated other comprehensive loss (9,089) (8,200)
- ------------------------------------------------------------------------------------------------------
109,217 173,566
- ------------------------------------------------------------------------------------------------------
$1,156,634 $1,196,886
======================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
NTELOS Inc.
Condensed Consolidated Statements Of Operations
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts) June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- --------------------------------------------------------------------------------------------------------------------
Operating Revenues
Wireless PCS $ 38,545 $ 30,331 $ 74,316 $ 55,596
Wireline communications 24,161 21,908 46,479 41,757
Other communications services 2,188 2,414 4,120 4,728
- -------------------------------------------------------------------------------------------------------------------
64,894 54,653 124,915 102,081
- -------------------------------------------------------------------------------------------------------------------
Operating Expenses
Cost of wireless sales (exclusive of items shown 12,225 12,678 24,448 22,726
separately below)
Maintenance and support 16,695 15,932 33,586 29,760
Depreciation and amortization 20,658 18,387 43,753 36,240
Customer operations 15,461 15,961 31,232 30,752
Corporate operations 4,804 4,865 10,658 9,742
Restructuring charge 1,426 -- 2,693 --
- -------------------------------------------------------------------------------------------------------------------
71,269 67,823 146,370 129,220
- -------------------------------------------------------------------------------------------------------------------
Operating Loss (6,375) (13,170) (21,455) (27,139)
Other Income (Expenses)
Equity loss from investee - WV PCS Alliance -- -- -- (1,286)
Gain on sale of assets 2,782 -- 4,737 --
Interest expense (19,884) (19,250) (38,888) (37,447)
Other income (expense) (1,599) 987 (1,732) 4,015
- -------------------------------------------------------------------------------------------------------------------
(25,076) (31,433) (57,338) (61,857)
Income Tax Benefit (2,000) (11,147) (3,569) (22,570)
- -------------------------------------------------------------------------------------------------------------------
(23,076) (20,286) (53,769) (39,287)
Minority Interests in Losses of Subsidiaries 222 1,311 251 3,058
- -------------------------------------------------------------------------------------------------------------------
Net Loss (22,854) (18,975) (53,518) (36,229)
Dividend requirements on preferred stock 5,019 4,690 10,038 9,377
- -------------------------------------------------------------------------------------------------------------------
Loss Applicable to Common Shares $(27,873) $(23,665) $(63,556) $(45,606)
===================================================================================================================
Net Loss per Common Share - Basic and Diluted $ (1.61) $ (1.40) $ (3.69) (2.86)
Average shares outstanding - basic and diluted 17,260 16,857 17,240 15,972
===================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
- -----------------------------------------------------------------------------------------------------
(In thousands) June 30, 2002 June 30, 2001
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(53,518) $(36,229)
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on disposition of assets (4,737) --
Depreciation 41,987 25,506
Amortization 1,766 10,734
Recognition of impairment loss on securities 1,158 --
Non-cash restructuring charge 1,620 --
Deferred taxes (4,072) (23,723)
Retirement benefits and other 781 2,764
Interest payable from restricted cash 13,650 13,649
Accrued interest income on restricted cash (201) (2,452)
Equity loss from PCS Alliance -- 1,286
Accretion of loan discount and origination fees 2,387 2,107
Changes in assets and liabilities from operations, net of effects of
acquisitions and dispositions:
(Increase) decrease in accounts receivable (594) 403
Decrease in inventories and supplies 6,694 2,330
(Increase) decrease in other current assets 121 (249)
Changes in income taxes 123 2,463
Decrease in accounts payable (10,950) (14,223)
Increase in other accrued liabilities 6,970 2,431
Increase (decrease) in other current liabilities 2,240 (156)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 5,425 (13,359)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (52,267) (53,759)
Proceeds from sale of discontinued operation -- 3,500
Investments in PCS Alliances -- (634)
Cash on hand in merged entity -- 4,096
Advances to PCS Alliances -- (2,960)
Deposit refunds on assets -- 8,000
Proceeds from sale of assets 26,708 2,975
Other (873) (93)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,432) (38,875)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 55,000
Borrowings under line of credit, net 21,000 --
Additional payments on other debt instruments (5,720) (1,665)
Net proceeds from issuance of stock 251 398
Other (1,181) --
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,450 53,733
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (6,557) 1,499
Cash and cash equivalents:
Beginning 7,293 1,637
- -----------------------------------------------------------------------------------------------------
Ending $ 736 $ 3,136
=====================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
NTELOS Inc.
Condensed Consolidated Statements of Shareholders' Equity
(Unaudited)
Accumulated Accumulated
Deficit/ Other Total
Common Stock Retained Comprehensive Shareholders'
(In thousands) Shares Amount Warrants Earnings Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 13,132 $ 45,272 $22,874 $ 59,355 $ 8,458 $135,959
Comprehensive loss:
Net loss (17,254)
Cash flow hedge:
Cumulative effect of the adoption of SFAS No. 133, net
of $2,489 deferred tax benefit (3,900)
Derivative losses, 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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 16,855 $177,224 $22,874 $ 37,414 $ 625 $238,137
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive loss:
Net loss (18,975)
Cash flow hedge:
Unrealized gain on securities available for sale, net
of $3,626 deferred tax obligation 5,695
Derivative gain, net of $866 deferred tax obligation 1,361
Comprehensive loss (11,919)
Dividends on preferred shares (4,690) (4,690)
Common stock exercised, net 12 106 106
Shares issued through employee stock purchase plan 7 146 146
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 16,874 $177,476 $22,874 $ 13,749 $ 7,681 $221,780
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
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 benefit 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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2002 17,242 $182,297 $22,874 $(58,884) $ (7,377) $138,910
- ------------------------------------------------------------------------------------------------------------------------------------
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)
Other, net (6) (213) (213)
Shares issued through employee stock purchase plan 58 105 105
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 17,294 $182,189 $22,874 $(86,757) $ (9,089) $109,217
====================================================================================================================================
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 June 30, 2002 and December 31, 2001, the
results of operations for the three and six months ended June 30, 2002 and
2001 and cash flows for the six months ended June 30, 2002 and 2001. The
results of operations for the six months ended June 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, an assembled workforce intangible asset, and PCS radio spectrum
licenses on January 1, 2002. The cost and net book value of these assets at
June 30, 2002 followed by the totals by reportable unit as determined under
in SFAS No. 142 guidelines is indicated in the following table:
(In thousands) Cost Net Book Value
---------------------------------------------------------------------
Goodwill $146,854 $135,373
PCS Radio Spectrum Licenses In Service 436,457 419,690
Assembled Workforce 1,800 940
---------------------------------------------------------------------
Total Indefinite Lived Assets $585,111 $556,003
=====================================================================
Indefinite Lived Assets by Reporting Unit
---------------------------------------------------------------------
Wireless PCS $464,003 $444,526
Telephone 68,472 65,463
Network 26,769 25,582
Internet 12,621 9,789
Other
Wireless Cable 4,260 3,654
Wireline Cable 7,721 6,037
Alarm Monitoring 1,265 951
---------------------------------------------------------------------
Total Indefinite Lived Assets $585,111 $556,003
=====================================================================
Amortization of indefinite lived intangible assets was $6.0 million ($3.8
million after tax) and $10.3 million ($6.3 million after tax) for the three
and six months ended June 30, 2001. Therefore, the pro forma loss
applicable to common shares for the three and six months ended June 30,
2001 adjusted for the impact of SFAS No. 142 was $19.9 million ($1.18 per
common share) and $39.3 million ($2.46 per common share). Amortization of
intangibles assets over the next five years 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.
The Company has 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 and
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. Additionally, the Company 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 assets
as of January 1, 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.
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 June 30, 2002, accounts receivable is shown net of
$18.4 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
8
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
shown net of accumulated amortization of $21.5 million at June 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 $4.0 million, respectively, at June 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, and the alarm and other communications
services operations. Additionally, certain unallocated corporate related
items that, in management's opinion, don't provide direct benefit to the
operating segments, are included in Other. Total unallocated corporate
operating expenses excluding depreciation and amortization were $2.6
million and $.6 million for the three month period ended June 30, 2002 and
2001, respectively, and were $4.7 million and $1.3 million for the six
month period ended June 30, 2002 and 2001, respectively. Within the current
year amounts noted above, the Company reported $1.4 million and $2.7
million of restructuring charges (Note 8) for the three and six months
ended June 30, 2002, respectively. Additionally, the voicemail assets and
operations were transferred from the Other segment to the Wireless segment
on January 1, 2002 as the Wireless segment is the primary user of these
assets.
Depreciation and amortization of corporate assets is included in the
"Other" column in the tables below. This amounted to $36,000 and $.3
million for the quarters ended June 30, 2002 and 2001, respectively, of the
total "Other" depreciation and amortization. For the six months ended June
30, 2002 and 2001, depreciation and amortization of corporate assets
totaled $.2 million and $.5 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
--------------------------------------------------------------------------------------------------------------------
For the three months ended
June 30, 2002
Revenues $ 11,729 $ 2,126 $ 5,649 $ 4,657 $ 38,545 $ 2,188 $ 64,894
EBITDA* 8,108 1,742 1,054 1,108 3,666 (1,395) 14,283
Depreciation &
Amortization 1,812 783 807 487 16,206 563 20,658
For the three months ended
June 30, 2001
Revenues $ 10,831 $ 2,205 $ 4,509 $ 4,363 $ 30,331 $ 2,414 $ 54,653
EBITDA* 6,717 1,769 675 229 (4,993) 820 5,217
Depreciation &
Amortization 3,079 1,093 672 950 12,013 580 18,387
As of and for the six months ended
June 30, 2002
Revenues $ 22,238 $ 4,370 $10,592 $ 9,279 $ 74,316 $ 4,120 $ 124,915
EBITDA* 14,371 3,413 1,596 1,827 3,911 (2,820) 22,298
Depreciation &
Amortization 3,619 1,483 1,517 1,469 34,400 1,265 43,753
Total Segment Assets 134,644 56,717 29,222 17,333 734,721 26,798 999,435
Corporate Assets 157,199
----------
Total Assets $1,156,634
==========
As of and for the six months ended
June 30, 2001
Revenues $ 20,543 $ 3,915 $ 8,641 $ 8,658 $ 55,596 $ 4,728 $ 102,081
EBITDA* 13,166 3,136 1,487 314 (10,737) 1,735 9,101
Depreciation
&Amortization 5,023 1,661 1,174 1,937 25,525 920 36,240
Total Segment Assets 133,768 55,789 31,921 18,734 802,814 33,677 1,076,703
Corporate Assets 159,397
----------
Total Assets $1,236,100
==========
* 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 June 30, 2002, the Company has purchased additional minority
interest in the VA Alliance and the WV Alliance and, at June 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.
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 is being accounted for using the purchase method of
accounting and was valued at $131.8 million, or $35.47 per share based on
the average share price for the two days preceding May 18, 2000, the date
the merger terms were agreed to and announced. The purchase
10
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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
Regarding our Senior Credit Facility covenants, the 2002 annual EBITDA
minimum level is $49.6 million and includes quarterly rolling twelve month
thresholds. This is a significant increase over our 2001 EBITDA levels of
$20.5 million. At June 30, 2002, our rolling twelve month EBITDA, as
adjusted per the covenant definition, was $35.0 million, inclusive of $15.6
million for the second quarter of 2002. EBITDA of $26.0 million for the
remaining six months of 2002 is needed in order to comply with the EBITDA
covenant at December 31, 2002. At June 30, 2002, we were in compliance with
all of our financial covenant requirements and we anticipate compliance
through the remainder of 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, we anticipate increasing levels
of PCS subscribers and ARPU growth, and continued lowering of PCS 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. Achievement of these results,
together with generation of cash flow from non-core asset divestitures,
reduction in future capital expenditures, or implementation of further cost
containment measures will be necessary to ensure covenant compliance,
liquidity and access to borrowings under our Senior Credit Facility during
2003 and beyond. If we are unable to achieve these results and are unable
to implement any of these additional steps, we may have to delay or abandon
some of our anticipated capital expenditures, substantially modify our
operating plans, expedite the sale of non-strategic assets, reduce or
refinance our indebtedness or otherwise alter our existing capital
structure, raise additional capital through the issuance of additional
shares of common stock or securities convertible into or exercisable for
shares of common stock, or seek additional capital resources. In this
event, we may not have sufficient financial resources and our ability to
make interest and principal payments on our senior and subordinated notes
could be significantly impaired.
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, in accordance with the terms and
conditions set forth in the senior note indenture. The semi-annual interest
payment due in August 2002 will be 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.
Over the course of the six month period ended June 30, 2002, the Company
sold various investments for $1.6 million, which approximated the related
investment carrying values. Additionally, during the quarter ended June 30,
2002, the Company
11
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
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 six months ended 2002 was 8.0% and
6.3% as compared to an effective income tax rate at December 31, 2001 of
35.1%. For the three and six months ended June 30, 2002, the Company
reported an income tax benefit of $2.0 million and $3.6 million,
respectively. This benefit is net of a valuation allowance recorded at June
30, 2002 of $16.5 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 35.1%. 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 six months ended June 30, 2002 and
2001 due to the fact that the Company recorded a net loss for the
respective periods. For the three months ended June 30, 2002 and 2001, the
Company had common stock equivalents from options totaling 1,000 shares and
102,000 shares, respectively, and 300,000 stock warrants which would be
dilutive. For the six months ended June 30, 2002 and 2001, the Company had
common stock equivalents from options totaling 179,000 shares and 76,000
shares, respectively, and 300,000 stock warrants which would be dilutive.
However, these common stock equivalents are antidilutive as additional
shares would decrease the computed loss per share information and
therefore, basic and diluted earnings per share are the same. The Company
currently has a total of 1.6 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.
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 in the first quarter of 2002 for $1.3
million relating to severance costs for employees notified in the first
quarter 2002 and estimated lease obligations associated with the exit of
certain facilities. During the second quarter of 2002, $1.4 million of
additional charges were recorded representing severance and pension
curtailment costs for employees notified in the second quarter of 2002, as
well as refinements to facilities costs recorded in the first quarter of
2002. Of the $2.7 million total, $.4 million was paid prior to June 30,
2002 and $2.3 million remained in the accrual at June 30, 2002.
12
NTELOS Inc.
Notes to Condensed Consolidated Financial Statements
Continued
10. PRO FORMA RESULTS
The pro forma unaudited results of operations for the six months ended June
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:
Six Months Ended
(In thousands, except per share data) June 30, 2001
------------------------------------------------------------------------------
Operating revenues $107,248
Operating expenses other than depreciation and amortization 98,250
Depreciation and amortization 37,828
Operating loss (28,830)
Net loss (38,485)
Dividend requirements on preferred stock (9,377)
Loss applicable to common shares (47,862)
Loss per common share - basic and diluted $ (2.99)
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. Additionally, through our 60 retail stores located across the
regions we serve and a direct business sales approach, our sales strategy is
focused largely on a direct relationship with our customers. As of June 30,
2002, we had approximately 238,000 digital PCS subscribers (up from 198,700 at
June 30, 2001) and approximately 90,900 combined incumbent local exchange
carrier ("ILEC") and competitive local exchange carrier ("CLEC") access lines
installed (up from 78,400 installed lines at June 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 on our core communications services, primarily
digital PCS services, Internet access, including dedicated, high-speed DSL and
dial-up services, high-speed data transmission and local telephone services
within our existing markets. In February 2001, the Company completed closing of
the merger agreement with R&B, an integrated communications provider in a
geographic market contiguous to ours, and commensurate therewith, began
consolidating the results of the WV Alliance (Note 4).
As mentioned above, the Company references EBITDA (or operating cash flows) as
one measure of operating performance. Management believes EBITDA is a meaningful
indicator of the Company's performance. EBITDA is commonly used in the wireless
communications industry and by financial analysts and others who follow the
industry to measure operating performance. EBITDA should not be construed as an
alternative to operating income or cash flows from operating activities (both of
which are determined in accordance with generally accepted accounting
principles) or as a measure of liquidity.
Discussions throughout the results of operations section refer to comparisons on
a pro forma basis. The actual results in the first quarter of 2001 exclude R&B
and WV Alliance for the period January 1, 2001 to February 13, 2001, the date of
the R&B merger and concurrent consolidation of WV Alliance. Therefore, pro forma
comparisons add R&B and WV Alliance results for this 43 day period to the actual
results for the three and six months ended June 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 in 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 and
for the goodwill and assembled workforce intangible asset 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
14
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
firm to perform valuation work related to the PCS radio spectrum licenses and
goodwill and assembled workforce on the wireless segment.
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 discounted cash flows 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 10 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 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 value of the PCS radio spectrum licenses was measured in the aggregate given
the contiguous region we serve and the centralized management, engineering and
sales and marketing functions and centralized reporting. 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.
The discussion and analysis herein should be read in conjunction with the
financial statements and the notes thereto included herein. Much of the
discussion in this section involves forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
results anticipated in these forward-looking statements as a result of certain
risk factors, including those set forth in the Form 10-K for the year ended
December 31, 2001, under "Investment Considerations". We wish to caution readers
that these forward-looking statements and any other forward-looking statements
made by us are based on a number of assumptions, estimates and projections
including but not limited to: capital intensity of the wireless telephone
business and our debt structure; our substantial debt obligations and our
ability to service those obligations; restrictive covenants and consequences of
default contained in our financing arrangements; the cash flow and financial
performance of our subsidiaries; the competitive nature of the wireless
telephone and other communications services industries; the achievement of
build-out, operational, capital, financing and marketing plans relating to
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; the level of demand for competitive local exchange services in
smaller markets; our ability to manage and monitor billing; and, possible health
effects of radio frequency transmission. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof. We are not obligated to update or revise any
forward-looking statements or to advise of any changes in the assumptions on
which they are based, whether as a result of new information, future events or
otherwise.
15
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
Revenues
Our revenues, net of bad debt expense, are generated from the following
categories:
. wireless PCS, consisting of retail, service and wholesale digital PCS
revenues;
. wireline communications, including telephone revenues, fiber optic
network usage (or carrier's carrier services), Internet, CLEC service
and long distance revenues; and,
. other communications services revenues, including revenues from
paging, wireless and wireline cable television, our sale and lease of
communications equipment and security alarm monitoring and rental of
property and equipment.
Operating Expenses
Our operating expenses are generally incurred from the following
categories:
. 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;
. 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;
. depreciation and amortization, including amortization of intangible
assets where applicable (Note 1) and depreciable long lived property,
plant and equipment;
. customer operations expenses, including marketing, product management,
product advertising, sales, billing, publication of a regional
telephone directory, customer care and directory services;
. corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information technology,
human resources and other general and administrative expenses; and,
. restructuring charges associated with organizational initiatives,
workforce reductions and exiting of certain facilities.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest income
and expense, equity loss from the WV Alliance (through February 13, 2001), and
gains or losses on sale of investments and assets.
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.
16
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
Results of Operations
Three and Six Months Ended June 30, 2002
Compared to Three and Six Months Ended June 30, 2001
OVERVIEW
EBITDA increased $9.1 million or 174%, from $5.2 million for the three months
ended June 30, 2001 to $14.3 million for the three months ended June 30, 2002
and EBITDA increased $13.2 million or 145%, from $9.1 million for the six months
ended June 30, 2001 to $22.3 million for the six months ended June 30, 2002.
Operating loss decreased $6.8 million or 52%, from a loss of $13.2 million to a
loss of $6.4 million for the three months ended June 30, 2001 and 2002,
respectively. Operating loss decreased $5.7 million or 21%, from $27.1 million
for the six months ended June 30, 2001 to $21.4 million for the six months ended
June 30, 2002. Included in the second quarter 2002 results were restructuring
charges of $1.4 million ($2.7 million for the six months ended June 30, 2002),
$5.3 million of accelerated depreciation on certain PCS assets due to early
replacement during the quarter or based on scheduled early replacement later in
2002 or 2003 ($12.4 million for the six months ended June 30, 2002), and a $6.0
million reduction in amortization of intangibles due to the adoption of SFAS No.
142 (Note 1) ($10.3 million for the six months ended June 30, 2002). Excluding
these items, EBITDA increased $10.5 million (201%) and operating loss decreased
$7.5 million (57%) in the second quarter 2002 compared to second quarter 2001.
Excluding these same unusual items for the six months ended June 30, 2002 as
compared to the comparable six month period in 2001, EBITDA increased $15.9
million (175%) and operating loss decreased $10.5 million (39%).
WIRELESS PCS OVERVIEW - A 20% growth in customers, an 8% increase in average
monthly revenue per subscriber ("ARPU"), a 19% decrease in cost of acquisition
per gross customer addition and a 43% increase in wholesale and roaming revenues
resulted in revenue growth of $8.2 million or 27% for the second quarter of 2002
compared to the second quarter of 2001. Similar trends were present for the six
months ended June 30, 2002 and compared to 2001, resulting in revenue growth of
$18.7 million or 34% over the respective periods. Operating expense before
depreciation and amortization over the three month comparative periods decreased
$.4 million or 1%. Operating expenses before depreciation and amortization
increased $4.1 million or 6%, from $66.3 million for the six months ended June
30, 2001 to $70.4 million for the six months ended June 30, 2002. The rate of
expense growth lagged revenue growth significantly due to reductions in costs of
acquisition per gross addition mentioned above, a reduction in incollect roaming
expenses, and focused cost containment measures, as well as the leveraging of
the fixed infrastructure. All of these factors resulted in an EBITDA improvement
of $8.7 million and $14.6 million for the three and six months ended June 30,
2002, respectively, from a 2001 EBITDA loss of $5.0 million and $10.7 million,
respectively, to positive EBITDA in 2002 of $3.7 million and $3.9 million,
respectively.
WIRELINE COMMUNICATIONS OVERVIEW - Wireline communications services realized
revenue improvement of $2.3 million and $4.7 million for the three and six
months ended June 30, 2002 over the comparative periods ended June 30, 2001,
which translated to EBITDA improvement of $2.6 million and $3.1 million,
respectively for the three and six month periods. EBITDA margin over the three
and six month periods increased from 42.9% and 43.4%, respectively, to 49.7% and
45.6%, respectively. These results are driven by growth in ILEC minutes, CLEC
and DSL customer growth (47% and 109%, respectively) and significant cost
reductions associated with the overall restructuring activity (Note 8) and in
the CLEC and Internet market restructuring where we have limited or discontinued
services in low volume, high cost areas. These results were achieved despite the
decrease in reciprocal compensation of $.7 million and $1.4 million in the three
and six month periods ended June 30, 2002 compared to 2001.
OTHER COMMUNICATION SERVICES OVERVIEW - Other communications services revenue
declined $.2 million or 9% for the three months ended June 30, 2002 as compared
to the three months ended June 30, 2001 and $.6 million or 13% for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001,
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). EBITDA was down $2.2 million for the second quarter of 2002
compared to second quarter 2001 and $4.6 million for the six months ended June
30, 2002 compared to the six months ended June 30, 2001. The restructuring
charge (Note 8 and as discussed below) accounts for $1.4 million of the second
quarter total and $2.7 million of the six month total. The exclusion of
voicemail and a decline in the
17
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
paging businesses accounted for $.2 million and $.6 million of the three and six
month declines, respectively. The balance of the decline primarily pertains to
unallocated corporate expenses related to insurance and certain professional
fees.
OPERATING REVENUE
Three Months Ended June 30, Six Months Ended June 30,
- ----------------------------------------------------------------------------------------------------
% %
($'s in 000's) 2002 2001 Variance Variance 2002 2001 Variance Variance
- ----------------------------------------------------------------------------------------------------
Wireless $38,545 $30,331 $ 8,214 27% $ 74,316 $ 55,596 $18,720 34%
ILEC 11,729 10,831 898 8% 22,238 20,543 1,695 8%
Network 2,126 2,205 (79) -4% 4,370 3,915 455 12%
CLEC 5,649 4,509 1,140 25% 10,592 8,641 1,951 23%
Internet 4,657 4,363 294 7% 9,279 8,658 621 7%
- ----------------------------------------------------------------------------------------------------
Wireline 24,161 21,908 2,253 10% 46,479 41,757 4,722 11%
Other 2,188 2,414 (226) -9% 4,120 4,728 (608) -13%
- ----------------------------------------------------------------------------------------------------
Total $64,894 $54,653 $10,241 19% $124,915 $102,081 $22,834 22%
WIRELESS PCS REVENUES - Digital PCS customers grew 39,300, or 20%, from the end
of the second quarter 2001 to the end of the second quarter 2002. Over this same
period, ARPU grew $3.45, from $42.60 for the second quarter of 2001 to $46.05
for the second quarter of 2002 due primarily to a shift in the customer mix to a
higher percentage of post-pay type plans versus pre-pay plans (from 73% at June
30, 2001 to 89% at June 30, 2002). Additionally, wholesale and roaming revenues,
primarily from our network services agreement with Horizon, were $8.0 million
for the second quarter of 2002 compared to $5.6 million for the second quarter
of 2001. These same factors were the keys to the growth in the six month period
ended June 30, 2002 as compared to the same six month period of 2001. 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 six month growth
percentage 5% (i.e. on a pro forma basis, the six month growth was 28%). The
combination of these and other factors resulted in increased revenues of $8.2
million, from $30.3 million to $38.5 million for the quarters ended June 30,
2001 and 2002, respectively, and $18.7 million, from $55.6 million to $74.3
million for the six months ended June 30, 2001 and 2002, respectively.
WIRELINE COMMUNICATIONS REVENUES - Wireline communications revenues increased
$2.3 million or 10%, from $21.9 million to $24.2 million for the three months
ended June 30, 2001 and 2002, respectively. Wireline revenues increased $4.7
million or 11%, from $41.8 million for the six months ended June 30, 2001 to
$46.5 million for the six months ended June 30, 2002.
.. 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 $.9 million, or 8%,
from $10.8 million for the three months ended June 30, 2001 to $11.7 million for
the three months ended June 30, 2002. Telephone revenues also increased $1.7
million, or 8%, during the six 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 increased $.6 million or 2%. During the first
quarter of 2002, we recorded $.3 million in additional regulatory and receivable
reserves, much of which were reversed in the second quarter due to favorable
resolutions concluded in the second quarter. However, bad debts expense did
increase $.4 million in six months ended June 30, 2002 versus 2001 due to
increases to carrier access receivable reserves from carriers with financial
difficulties (uncollected receivables from Worldcom Inc. are fully reserved at
June 30, 2002 in this and the other relevant segments). Adjusting for these
factors, growth was approximately 5% during the six month comparative periods.
18
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
.. Fiber Optic Network Usage Revenues. Revenues from fiber optic network usage
operations decreased $.1 million or 4%, in the three month comparative periods
but increased 12% in the six 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 $.1 million. This was
primarily due to reductions in network rates and the loss of certain traffic in
the second half of 2001, offset by growth in usage.
.. CLEC Revenues. CLEC revenues increased $1.1 million or 25% and $2.0 million or
23% for the three and six months ended June 30, 2002 compared to 2001. Of this
increase, $.5 million is attributable to excluded revenues from R&B CLEC prior
to the first quarter 2001 consolidation. Additionally, $2.7 million of the six
month increase ($1.5 million for the three month comparative period increase) is
from primarily local calling and broadband revenues driven by customer growth,
with total CLEC customers increasing 12,400, from 26,500 at June 30, 2001 to
38,900 at June 30, 2002. These factors were partially offset by a decline in
reciprocal compensation of $.7 million and $1.4 million, from $1.3 million and
$2.6 million for the three and six months ended June 30, 2001 to $.6 million and
$1.2 million for the three and six months ended June 30 2002, due to a decline
in rates in mid-year 2001.
.. Internet Revenues. Revenues from Internet services increased $.3 million, or
7% for the three month comparative period and increased $.6 million or 7% for
the six months ended June 30, 2002 compared to 2001. Internet subscribers
increased 10,100 or 15%, in second quarter 2002 over second quarter 2001, with
DSL customer additions accounting for 2,500 of this total, from 2,300 customers
at June 30, 2001 to 4,800 customers at June 30, 2002.
OTHER COMMUNICATION SERVICES REVENUES - Other communications services revenues,
including other R&B operations, decreased $.2 million, or 9% for the three month
comparative period and decreased $.6 million or 13% for the six months ended
June 30, 2002 compared to 2001. This decrease is due to the factors noted in
"Other Communication Services Overview" section above.
OPERATING EXPENSES, excluding Depreciation & Amortization
Three Months Ended June 30, Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------------
% %
($'s in 000's) 2002 2001 Variance Variance 2002 2001 Variance Variance
- ---------------------------------------------------------------------------------------------------
Wireless $34,879 $35,324 (445) -1% $ 70,405 $66,333 $4,072 6%
ILEC 3,621 4,114 (493) -12% 7,867 7,377 490 7%
Network 384 436 (52) -12% 957 779 178 23%
CLEC 4,595 3,834 761 20% 8,996 7,154 1,842 26%
Internet 3,549 4,134 (585) -14% 7,452 8,344 (892) -11%
- ---------------------------------------------------------------------------------------------------
Wireline 12,149 12,518 (369) -3% 25,272 23,654 1,618 7%
Other 3,584 1,594 1,989 125% 6,940 2,993 3,947 132%
- ---------------------------------------------------------------------------------------------------
Total $50,611 $49,436 $1,175 2% $102,617 $92,980 $9,637 10%
TOTAL OPERATING EXPENSES - Total operating expenses increased $3.4 million or
5%, from $67.8 million in the second quarter of 2001 to $71.2 million for the
second quarter 2002. Of this total increase, $2.3 million pertained to an
increase in depreciation and amortization expense, including a $.7 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 increase is
primarily attributable to the $1.4 million second quarter 2002 restructuring
charges. Total operating expenses increased $17.2 million or 13%, from $129.2
million for the six months ended June 30, 2001 to $146.4 million for the six
months ended June 30, 2002. Of this increase, $6.1 million is from the exclusion
of R&B and the WV Alliance from the operating expenses in the first 43 days of
2001. Additionally, $7.5 million pertained to an increase in depreciation and
amortization expense, $2.1 million of which relates to the net effect of
accelerated depreciation and the effects of SFAS No. 142 on
19
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
amortization of intangible assets. Finally, $2.7 million is attributable to 2002
restructuring costs. Operating expenses, excluding depreciation and
amortization, from the other communication service businesses for the three and
six months ended June 30, 2002 as compared to the three and six months ended
June 30, 2001 increased primarily due to restructuring charges of $1.4 million
and $2.7 million, respectively, and increases in corporate related professional
fees and insurance costs.
COST OF SALES - Cost of sales decreased $.5 million or 4%, from $12.7 million
for the three months ended June 30, 2001 to $12.2 million for the three months
ended June 30, 2002, and increased $1.7 million or 8%, from $22.7 million for
the six months ended June 30, 2001 to $24.4 million for the six months ended
June 30, 2002. The exclusion of the WV Alliance for the first 43 days of 2001
accounted for $1.4 million of the six-month increase. Additionally, higher phone
sales were offset by improved network efficiency, lower handset prices and
improved inventory control.
MAINTENANCE AND SUPPORT EXPENSES - Maintenance and support expenses increased
$.8 million or 5%, and $3.8 million or 13%, from $15.9 million and $29.8 million
for the three and six months ended June 30, 2001, respectively, to $16.7 million
and $33.6 million for the six months ended June 30, 2002, respectively. Of the
six 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 7% for the six 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 $62 million (15%). Also, CLEC unbundled network
elements ("UNE's") and transport costs increased due to the CLEC customer growth
which was offset by staff reductions in engineering and operations functions
across all segments.
DEPRECIATION AND AMORTIZATION EXPENSES - Depreciation and amortization expenses
increased $2.3 million or 12%, from $18.4 million for the three months ended
June 30, 2001 to $20.7 million for the three months ended June 30, 2002.
Depreciation and amortization increased $7.5 million or 21%, from $36.2 million
to $43.7 million for the six months ended June 30, 2001 and 2002, respectively.
As mentioned above, we reported accelerated depreciation of $5.3 million and
$12.4 million for the three and six months ended June 30, 2002 on wireless
digital PCS equipment replaced during the first six months of 2002 or which are
scheduled to be replaced over the remainder of 2002 and into the first half of
2003. The 2002 replacement schedule was accelerated within the year resulting in
this significant increase in depreciation during these three and six 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 under $2
million during the balance of 2002 and a total of less than $4 million over the
entire replacement period. In addition to this, we adopted SFAS No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002. In accordance with the
provisions of SFAS 142, we discontinued amortization of goodwill, wireless PCS
spectrum licenses and the assembled workforce intangible asset as of that date
as these assets are considered indefinite lived intangible assets not subject to
amortization. These assets are subject to periodic impairment testing (Note 1).
Amortization of indefinite lived intangible assets was $6.0 million for the
second quarter of 2001 and $10.3 million for the six months ended June 30, 2001
($11.9 million on a pro forma basis). The remaining increase in depreciation is
due to an increase in depreciable assets from June 30, 2001 to June 30, 2002 of
$93 million or 18%.
CUSTOMER OPERATIONS EXPENSES - Customer operations expenses decreased $.5
million or 3%, and increased $.5 million or 2%, from $16.0 million and $30.7
million for the three and six months ended June 30, 2001 to $15.5 million and
$31.2 million for the three and six months ended June 30, 2002. On a pro forma
basis, customer operations expenses decreased from the prior year by $.9
million or 3% for the six month comparative periods. This decrease is
attributable to lower commissions paid per gross PCS subscriber addition,
primarily due to a decrease in the percent of sales sold through the higher cost
indirect channel. Additionally, we incurred outsource billing costs for the VA
East PCS market through July 2001. After conversion of these customers onto our
billing system and insourcing these billing functions, these costs decreased
significantly.
CORPORATE OPERATIONS EXPENSES - Corporate operations expenses decreased $.1
million, or 1%, from $4.9 million to $4.8 million for the three months ended
June 30, 2001 and 2002, respectively. Corporate operations expense increased $.9
million or 9%, from $9.7 million for the six months ended June 30, 2001 to $10.6
million for
20
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
the six months ended June 30, 2002. On a pro forma basis, this increase was $.2
million or 2%. As mentioned above, most of this relates to increases in legal,
other professional services fees (primarily in the ILEC and Other segments) and
insurance expenses, 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. The first quarter charge
was $1.3 million, which related to severance costs for employees notified in the
first quarter 2002 and estimated lease obligations associated with the exit of
certain facilities. The charges for the second quarter totaled $1.4 million,
which related primarily to severance for employees notified in the second
quarter of 2002 and pension curtailment costs. 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.
OTHER INCOME (EXPENSES)
Other income (expenses) was comprised of equity loss from WV Alliance (2001
only), a gain on sale of assets (2002 only), interest expense and other income
(expense). Our share of losses from the WV Alliance reported under the equity
method of accounting, which commenced being consolidated on February 13, 2001
concurrent with our merger with R&B, were $1.3 million during the 43 day period
prior to the merger date. Also, we recognized a $2.0 million gain in the first
quarter of 2002 and a $2.8 million gain in the second quarter of 2002 on the
sale of certain excess PCS licenses. Additionally, interest expense increased
$.6 million or 3%, from $19.3 million for the three months ended June 30, 2001
to $19.9 million for the three months ended June 30, 2002. Interest expense
increased $1.5 million or 4%, from $37.4 million for the six months ended June
30, 2001 to $38.9 million for the six months ended June 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.
Other income (expense) decreased $2.6 million, from income of $1.0 million in
the second quarter of 2001 to expense of $1.6 million in the second quarter of
2002. For the six month comparative periods, other income (expense) decreased
$5.7 million, from $4.0 million of income as of June 30, 2001 to $1.7 million of
expense as of June 30, 2002. The prior year income was comprised primarily of
interest income earned on an average restricted cash balance of approximately
$59 million, interest from advances to WV Alliance, which averaged approximately
$68 million during the first 43 days of 2001, and other miscellaneous asset
retirement gains. During the six months ended June 30, 2002, interest income for
restricted cash was down significantly due to the reduced average restricted
cash balance of approximately $22 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 $9.1 million, from a tax benefit of $11.1 million
for the three months ended June 30, 2001 to a tax benefit of $2.0 million for
the three months ended June 30, 2002. Income tax benefits decreased $19.0
million, from a tax benefit of $22.6 million for the six months ended June 30,
2001 to a tax benefit of $3.6 million for the six months ended June 30, 2002.
The 2002 benefit is net of a valuation allowance recorded during the six months
ended June 30, 2002 of $16.5 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 2002.
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 35.1% in 2002, excluding the impact of the
$16.5 million valuation reserve (Note 6), compared to 35.1% in 2001.
21
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 June 30, 2002, we had $79 million in unused borrowings available
under our Senior Secured Term Loan (also referred to as the "Senior Credit
Facility"). We borrowed $21 million against our $100 million lines of credit
under the Senior Credit Facility in the six months ended June 30, 2002.
OPERATING CASH FLOWS
During the six month period ended June 30, 2002, net cash provided by operating
activities was $5.4 million, with $.8 million provided by operations plus net
positive changes in operating assets and liabilities totaling $4.6 million.
Within the $.8 million provided by operations, one of the reconciling items
adjusting net income to net cash is an adjustment for $13.4 million which
represents interest expense paid from restricted cash, net of interest income
earned from this restricted cash. This is reflected as an adjustment to
reconcile net income to net cash since the payment of interest on the Senior
Notes is paid out of restricted cash through August 15, 2002. Therefore, as
these interest payments will be paid from operating cash for periods after
August 15, 2002, this will not be an adjustment to reconcile net income to net
cash in periods after August 15, 2002. The principal changes in operating assets
and liabilities were as follows: accounts receivable increased by $.6 million or
2% due primarily to a 14% increase in revenues in the second quarter of 2002
over the fourth quarter 2001 offset by improved receivable turnover; inventories
and supplies decreased $6.7 million due to efforts to reduce handset inventory
levels in recognition of improvement in handset availability and off peak sales
volumes; and, current liabilities decreased a total of $1.7 million due to the
timing of payments.
During the six month period ended June 30, 2001, net cash used in operating
activities was $13.4 million, with $6.4 million used by operations and a net
increase in net operating assets totaling $7.0 million. Principal changes in
operating assets and liabilities were as follows: inventories and supplies
decreased $2.3 million due to the reduction in inventory levels from the
quantities on hand at year-end in support of seasonal sales activity through
February; income taxes went from a receivable at the 2000 year-end of $2.9
million to a $.1 million payable position at June 30, 2001 due to the receipt of
the year end receivable and the state minimum tax payable at June 30, 2001; and,
accounts payable and other liabilities (excluding additional payables from R&B
and the WV Alliance) decreased by $11.9 million due to the timing of payments at
and around the respective period ends.
Our cash flows used in investing activities for the six months ended June 30,
2002 aggregated $26.4 million and primarily included $52.2 million for capital
expenditures, $21.7 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 $26.7 million in proceeds from the sale of
communications towers and excess PCS licenses.
Our cash flows used in investing activities for the six months ended June 30,
2001 aggregated $38.9 million and include the following:
.. $53.8 million for the purchase of property, plant and equipment;
.. $3.5 million of proceeds received in 2001 from the final payment from the sale
of the directory assistance operation in 2000;
.. $4.1 million of cash and cash equivalents on hand at R&B at the time of the
merger;
.. $3.0 million of net additional advances to and investment in the WV Alliance
from January 1, 2001 to the February 13, 2001 transaction date (Note 4), after
which the entire amounts of the advances and the investment were included in the
WV Alliance acquisition and were eliminated in consolidation;
.. $8.0 million of deposits refunded at the conclusion of an FCC license auction
as no additional licenses were purchased from this auction; and,
22
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
.. $3.0 million received from the sale of towers and investments.
Net cash provided by financing activities for the first six months of 2002
aggregated $14.5 million, which included $21.1 million of additional borrowings
against the Senior Credit Facility, a $5.7 million use of cash for scheduled
principal payments on other long-term debt, and $1.2 million used to pay loan
amendment fees.
Net cash provided by financing activities for the first six months of 2001
aggregated $53.7 million, which included $55.0 million in additional draws
against the Senior Credit Facility and a $1.7 million use of cash for other debt
payments, primarily on capital leases.
Our liquidity needs will be impacted by:
.. capital expenditures required to deploy 3G-1XRTT technology in certain of
the VA Alliance and WV Alliance markets;
.. capital expenditures required to support customer growth and wholesale
usage to provide sufficient PCS capacity;
.. capital expenditures required to support access line growth in existing
markets; and,
.. significant interest expense associated with current and increasing debt
levels.
Our liquidity sources include:
.. cash flow from operations;
.. approximately $18.1 million held in the escrow account to fund the August
15, 2002 interest payment on our Senior Notes;
.. $79 million available under our Senior Credit Facility as of June 30, 2002,
subject to compliance with amended covenant requirements;
.. disposition of additional non-strategic businesses and assets, such as
additional sales of excess PCS spectrum and other types of spectrum, such
as WCS, LMDS and MMDS. The Company holds PCS licenses in 17 markets where
service is currently being provided and 20 markets where service is not
currently being provided. In many cases we own licenses covering spectrum
in excess of what will be needed to execute our business plan for the
foreseeable future. In 2001, the Company sold $11.6 million of excess
spectrum for a gain of $8.6 million and has sold additional inactive or
excess PCS spectrum for proceeds of $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,
.. public and private debt and equity markets.
We expect capital expenditures for the remainder of 2002 to be between $30
million and $40 million. We expect these capital expenditures to be used to:
.. deploy 3G-1XRTT technology in certain of the VA Alliance and WV Alliance
markets;
.. support network capacity and coverage demands of VA East, VA Alliance and
WV Alliance operations;
.. support customer growth in CLEC and Internet access services; and,
.. support back office tools in order to improve customer satisfaction and
improve our internal controls and efficiencies.
Approximately $30 million to $35 million of these incurred-to-date and
anticipated 2002 capital expenditures are based on an obligation within our
wholesale agreement with Sprint/Horizon to build out a 3G-1XRTT network in
certain markets. The estimated total cost of this build-out is approximately $40
million to $45 million which will be completed by 2003.
VA East and the Alliances have substantially satisfied their FCC build-out
requirements. Accordingly, aside from the 3G-1XRTT network upgrade commitment,
the expenditures forecast noted above is primarily driven by the expected need
to support customer growth and wholesale usage. To the extent that this customer
growth and wholesale usage is less than expected, our capital expenditures will
be reduced. Since these are generally capacity
23
NTELOS Inc.
Item 2. Management's Discussion And Analysis
Of Financial Condition And Results Of Operations
Continued
related expenditures to support customer growth, it is uncertain when these
proposed uses will be initiated or completed.
Regarding our Senior Credit Facility covenants, the 2002 annual EBITDA minimum
level is $49.6 million and includes quarterly rolling twelve month thresholds.
This is a significant increase over our 2001 EBITDA levels of $20.5 million. At
June 30, 2002, our rolling twelve month EBITDA, as adjusted per the covenant
definition, was $35.0 million, inclusive of $15.6 million for the second quarter
of 2002. EBITDA of $26.0 million for the remaining six months of 2002 is needed
in order to comply with the EBITDA covenant at December 31, 2002. At June 30,
2002, we were in compliance with all of our financial covenant requirements and
we anticipate compliance through the remainder of 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, we anticipate increasing levels of PCS
subscribers and ARPU growth, and continued lowering of PCS 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. Achievement of these results, together with
generation of cash flow from non-core asset divestitures, reduction in future
capital expenditures, or implementation of further cost containment measures
will be necessary to ensure covenant compliance, liquidity and access to
borrowings under our Senior Credit Facility during 2003 and beyond. If we are
unable to achieve these results and are unable to implement any of these
additional steps, we may have to delay or abandon some of our anticipated
capital expenditures, substantially modify our operating plans, expedite the
sale of non-strategic assets, reduce or refinance our indebtedness or otherwise
alter our existing capital structure, raise additional capital through the
issuance of additional shares of common stock or securities convertible into or
exercisable for shares of common stock, or seek additional capital resources. In
this event, we may not have sufficient financial resources and our ability to
make interest and principal payments on our senior and subordinated notes could
be significantly impaired.
24
NTELOS Inc.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's Senior Credit Facility of $325 million, $246 million of which was
outstanding at June 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 book and face
value of $356.1 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 $26.7 million at June 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 June 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 June 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 June 30, 2002,
the Company had no exposure to credit loss on interest rate swaps. At June 30,
2002 and December 31, 2001, the swap agreements had a fair value $14.8 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 $9.5 million below face value) and $5.5 million for a one percentage point
decrease in the rate (to $20.3 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 June 30, 2002, the
Company's senior bank debt totaled $246 million, or $83.5 million over the swap
agreements.
The Company's senior notes are trading at rates well below their book values.
The Company's management believes that the risk of the fair value exceeding the
carrying value of this debt in the foreseeable future is remote due to the
current trading level, as well as market and industry conditions.
At June 30, 2002, the Company's financial assets included cash and cash
equivalents of $.7 million, restricted cash of $18.1 million and securities and
investments of $9.5 million. With respect to the cash and cash equivalents and
the restricted cash, as well as $9.3 million of the investments, there are no
material market risks as these are fixed rate, fixed maturity instruments. Also,
we believe there are minimal credit risks as the counterparties are prominent
financial institutions. The remaining $.2 million of investments are in equity
securities treated as available for sale. The Company is exposed to market and
credit risks with these investments. However, we do not believe that this risk
is material to our financial position or will be material to the results of
future operations.
25
NTELOS Inc.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
At the regular Annual Meeting of the Shareholders held May 21, 2002, Class
II Directors J.B. Mitchell, Sr., J.S. Quarforth, J.B. Williamson, III, and
L.B. Sorrel, being the same as the nominees in the proxy solicitation, were
elected.
In addition to the election of board members mentioned above, the
shareholders voted and approved one other proposal.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
================================================================================
ABSTENTIONS
/BROKER NON-
NOMINEE FOR AGAINST VOTES
- --------------------------------------------------------------------------------
J.B. Mitchell, Sr. (Class II) 19,626,256 849,841 0
- --------------------------------------------------------------------------------
J.S. Quarforth (Class II) 19,354,695 1,121,403 0
- --------------------------------------------------------------------------------
J.B. Williamson, III (Class II) 19,601,212 874,886 0
- --------------------------------------------------------------------------------
L.B. Sorrel (Class II) (1) 6,382,613 0 0
- --------------------------------------------------------------------------------
OTHER PROPOSALS
- --------------------------------------------------------------------------------
To ratify the selection of Ernst & Young 20,221,631 130,593 123,873
LLP as independent accountants
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Reflects the vote of holders of preferred stock only.
The following continued in their capacity as directors: P.H. Arnold, A.J.
de Nicola, W.W. Gibbs, A.W. Hamill, J.A. Layman, J.N. Neff, and C.A.
Rosberg.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit No. Description
----------- -----------
10.1.4* Letter agreement amendment dated April 11, 2002 to the Credit
Agreement, dated July, 6 2000, between NTELOS Inc., Morgan
Stanley & Co. Incorporated, as Administrative
26
NTELOS Inc.
Part II. OTHER INFORMATION
Agent, the Subsidiary Guarantors and the other Agents and
Lenders party thereto.
- ----------
* Filed herewith.
(B) Reports on Form 8-K
Form 8-K dated April 29, 2002, pertaining to presentations to be made
by Mr. James S. Quarforth, Chief Executive Officer, and Mr. Michael B.
Moneymaker, Chief Financial Officer, at investor meetings, providing
an overview of NTELOS' strategy, transactions and certain performance
through 2001 and guidance for 2002.
27
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.
August 14, 2002 /s/ J. S. Quarforth
----------------------------------------
J. S. Quarforth, Chief Executive Officer
August 14, 2002 /s/ M. B. Moneymaker
------------------------------------------------
M. B. Moneymaker, Senior Vice President and
Chief Financial Officer, Treasurer and Secretary
28