SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003 Commission File No. 0-16751
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NTELOS Inc. (Debtor-in-Possession)
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 5/14/03 17,780,248
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NTELOS Inc. (Debtor-in-Possession)
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, March 31, 2003 and December
31, 2002 3-4
Condensed Consolidated Statements of Operations, Three Months Ended
March 31, 2003 and 2002 5
Condensed Consolidated Statements of Cash Flows, Three Months Ended
March 31, 2003 and 2002 6
Condensed Consolidated Statements of Shareholders' Deficit, Three
Months Ended March 31, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8-17
Management's Discussion and Analysis of Financial Condition and
Results of Operations 18-31
Quantitative and Qualitative Disclosures about Market Risk 32
Controls and Procedures 32
PART II. OTHER INFORMATION 33
SIGNATURES 34
Certifications Pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act 35-36
2
NTELOS Inc. (Debtor-in-Possession)
Condensed Consolidated Balance Sheets
March 31, 2003 December 31,
(In thousands) (Unaudited) 2002
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Assets
Current Assets
Cash and cash equivalents $ 24,839 $ 12,216
Accounts receivable, net of allowance of $20,851 ($23,170 in 2002) 33,013 33,748
Inventories and supplies 2,039 2,588
Other receivables and deposits 3,049 3,058
Prepaid expenses and other 6,405 3,557
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69,345 55,167
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Investments and Advances
Securities and investments 533 867
Restricted investments 7,829 7,829
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8,362 8,696
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Property, Plant and Equipment
Land and building 51,151 51,026
Network plant and equipment 450,315 437,938
Furniture, fixtures and other equipment 65,177 65,366
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Total in service 566,643 554,330
Under construction 16,828 15,722
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583,471 570,052
Less accumulated depreciation 153,315 135,597
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430,156 434,455
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Other Assets
Goodwill, net 86,016 86,016
Other intangibles, less accumulated amortization of $1,466 ($1,379 in 2002) 1,793 1,879
Radio spectrum licenses in service 107,234 107,234
Other radio spectrum licenses, net 2,441 2,572
Radio spectrum licenses not in service 7,107 7,155
Deferred charges 4,917 18,563
Deferred income taxes 7,485 7,784
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216,993 231,203
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$ 724,856 $ 729,521
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
NTELOS Inc. (Debtor-in-Possession)
Condensed Consolidated Balance Sheets
(In thousands) March 31, 2003 December 31,
(Unaudited) 2002
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Liabilities and Shareholders' Deficit
Current Liabilities
Current Liabilities Not Subject to Compromise
Long-term debt in default and scheduled maturities $ 2,371 $ 623,762
Deferred liabilities - interest rate swap agreements relating to debt in
default - 20,012
Accounts payable 9,470 22,350
Advance billings and customer deposits 11,380 13,013
Accrued payroll 1,620 6,160
Accrued interest 459 19,131
Deferred revenue 1,106 4,455
Income tax payable 106 50
Other accrued liabilities 1,877 5,177
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Total Current Liabilities Not Subject to Compromise 28,389 714,110
Current Liabilities Subject to Compromise 722,417 -
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750,806 714,110
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Long-term Liabilities
Long-term Liabilities Not Subject to Compromise
Long-term debt 11,958 18,960
Other long-term liabilities
Retirement benefits 287 25,542
Long-term deferred liabilities 21,473 26,899
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Total Long-term Liabilities Not Subject to Compromise 33,718 71,401
Long-term Liabilities Subject to Compromise 40,916 -
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74,634 71,401
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Minority Interests 503 523
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Redeemable Convertible Preferred Stock Not Subject to Compromise - 286,164
Redeemable Convertible Preferred Stock Subject to Compromise 298,246 -
Commitments and Contingencies
Shareholders' Deficit
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 17,780
shares (17,780 in 2002) 182,380 182,380
Stock warrants 22,874 22,874
Accumulated deficit (589,673) (532,565)
Accumulated other comprehensive loss (14,914) (15,366)
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(399,333) (342,677)
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$ 724,856 $ 729,521
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
NTELOS Inc. (Debtor-in-Possession)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
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March 31, March 31,
(In thousands, except per share amounts) 2003 2002
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Operating Revenues
Wireless PCS $ 46,782 $ 35,771
Wireline communications 25,130 22,318
Other communication services 1,539 1,932
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73,451 60,021
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Operating Expenses
Cost of wireless sales (exclusive of items shown separately below) 10,780 12,223
Maintenance and support 15,689 16,891
Depreciation and amortization 17,911 23,095
Accretion of asset retirement obligations 152 -
Customer operations 18,065 15,771
Corporate operations 5,665 5,854
Operational and capital restructuring charges 2,427 1,267
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70,689 75,101
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Operating Income (Loss) 2,762 (15,080)
Other Income (Expenses)
Gain on sale of assets - 1,955
Interest expense (contractual interest for the three months ended
March 31, 2003 was $21,836) (15,285) (19,004)
Other expenses (86) (133)
Reorganization items (29,358) -
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(41,967) (32,262)
Income Tax (Benefit) 326 (1,569)
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(42,293) (30,693)
Minority Interests in Losses of Subsidiaries 21 29
=======================================================================================================================
Loss before Cumulative Effect of an Accounting Change (42,272) (30,664)
Cumulative effect of an accounting change 2,754 -
=======================================================================================================================
Net Loss (45,026) (30,664)
Dividend requirements on preferred stock (contractual preferred stock
dividends for the three months ended March 31, 2003 were $5,367) 3,757 5,019
Reorganization item - accretion of preferred stock 8,325 -
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Loss Applicable to Common Shares $ (57,108) $ (35,683)
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Per Common Share - Basic and Diluted:
Loss applicable to common shares before cumulative effect of an
accounting change $ (3.06) $ (2.07)
Cumulative effect of an accounting change (.15) -
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Loss Applicable to Common Shares $ (3.21) $ (2.07)
Average shares outstanding - basic and diluted 17,780 17,220
=======================================================================================================================
Pro forma amounts assuming the accounting change is applied retroactively:
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Loss applicable to common shares $ (54,354) $ (35,929)
Loss applicable to common shares (per share) - basic and diluted $ (3.06) $ (2.09)
See Notes to Condensed Consolidated Financial Statements.
5
NTELOS Inc. (Debtor-in-Possession)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
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(In thousands) March 31, 2003 March 31, 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss $ (45,026) $ (30,664)
Cumulative effect of an accounting change 2,754 -
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Loss before cumulative effect of an accounting change (42,272) (30,664)
Adjustments to reconcile net income to net cash provided by operating
activities:
Non cash reorganization items 28,066 -
Gain on sale of assets - (1,955)
Depreciation and amortization 17,911 23,095
Accretion of asset retirement obligations 152 -
Deferred taxes - (1,820)
Retirement benefits and other 553 784
Net interest expense from restricted cash - 9,100
Accrued interest income on restricted cash - (102)
Accretion of loan discount and origination fees 853 1,072
Changes in assets and liabilities from operations, net of effects of
acquisitions and dispositions:
Decrease (increase) in accounts receivable 735 (1,597)
Decrease in inventories and supplies 549 3,792
(Increase) decrease in other current assets (2,839) 1,412
Changes in income taxes 56 68
Increase in accounts payable 5,944 2,896
Increase (decrease) in other current liabilities 6,097 (142)
Accrued interest expense on debt subject to compromise 8,612 -
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Net cash provided by operating activities 24,417 5,939
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (11,377) (29,120)
Proceeds from sale of assets and other 335 10,606
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Net cash used in investing activities (11,042) (18,514)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 10,000
Additional payments under line of credit (net) and other debt instruments (752) (1,770)
Other - (1,034)
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Net cash (used in) provided by financing activities (752) 7,196
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Increase (decrease) in cash and cash equivalents 12,623 (5,379)
Cash and cash equivalents:
Beginning 12,216 7,293
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Ending $ 24,839 $ 1,914
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
NTELOS Inc. (Debtor-in-Possession)
Condensed Consolidated Statements of Shareholders' Deficit
(Unaudited)
Accumulated
Other Total
Common Stock Accumulated Comprehensive Shareholders'
Shares Amount Warrants Deficit (Loss) Income (Deficit)
(In thousands) Equity
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Balance, December 31, 2001 17,209 $ 182,093 $ 22,874 $ (23,201) $ (8,200) $ 173,566
Comprehensive loss:
Net loss (30,664)
Derivative gain, net of $735 of
deferred tax benefit 1,156
Unrealized loss on securities
available for sale, net of $212
of deferred tax benefit (333)
Comprehensive loss (29,841)
Dividends on preferred shares (5,019) (5,019)
Common stock issuance 4 58 58
Shares issued through
employee stock purchase
plan 29 146 146
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Balance, March 31, 2002 17,242 $ 182,297 $ 22,874 $ (58,884) $ (7,377) $ 138,910
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Balance, December 31, 2002 17,780 $ 182,380 $ 22,874 $ (532,565) $ (15,366) $ (342,677)
Comprehensive loss:
Loss before cumulative effect of an
accounting change (42,272)
Cumulative effect of an accounting
change (2,754)
Derivative gain, net of $299 of
deferred taxes 452
Comprehensive loss (44,574)
Dividends on preferred shares
(contractual preferred stock
dividends for the three months ended
March 31, 2003 were $5,367) (3,757) (3,757)
Reorganization item - accretion of
preferred stock (8,325) (8,325)
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Balance, March 31, 2002 17,780 $ 182,380 $ 22,874 $ (589,673) $ (14,914) $ (399,333)
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See Notes to Condensed Consolidated Financial Statements.
7
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
1. ORGANIZATION
Overview
NTELOS Inc. (debtor-in-possession, hereafter referred to as "NTELOS" or
the "Company") is an integrated communications provider that provides a
broad range of products and services to businesses, telecommunication
carriers and residential customers in Virginia and surrounding states.
The Company's services include wireless digital personal communications
services ("PCS"), local and long distance telephone services, dial-up
Internet access, DSL (high-speed Internet access), paging, and wireline
and wireless cable television.
On March 4, 2003 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the "Debtors"), filed voluntary petitions
for reorganization under Chapter 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the
Eastern District of Virginia (the "Bankruptcy Court"). By order of the
Bankruptcy Court, the Debtors' respective cases are being jointly
administered under the case number 03-32094 (the "Bankruptcy Case") for
procedural purposes only. The Bankruptcy Case was commenced in order to
implement a comprehensive financial restructuring of the Company. Total
assets and liabilities for subsidiaries not included in the Bankruptcy
filing were $1,103,000 and $4,000, respectively as of March 31, 2003.
Additionally, revenues and operating loss for these subsidiaries for the
quarter ended March 31, 2003 were $138,000 and $44,000, respectively.
In the first half of 2002, the Company took a number of restructuring
steps which reduced operating expenses and improved operating results,
financial condition and cash flow. Despite the improved operating
performance resulting from these measures and continued execution of the
Company's business plan, the Company continued to require additional
cash to fund its operating expenses, debt service and capital
expenditures. In the latter half of 2002, the Company actively
negotiated with its debtholders to develop a comprehensive financial
restructuring plan. Despite its efforts, the Company was unable to reach
an agreement with its debtholders on an out-of-court restructuring plan
and, accordingly, on March 4, 2003, the Company filed a petition for
relief under Chapter 11 of the Bankruptcy Code. For more information
regarding the events and circumstances leading up to the Chapter 11
filing, please refer to Note 1 of the notes to the consolidated
financial statements contained in Item 8 of the Company's Form 10-K for
the year ended December 31, 2002 on file with the Securities and
Exchange Commission.
The Company conducts its operations through a number of wholly-owned or
majority-owned subsidiaries. While it implements the proposed
recapitalization, the Company expects its subsidiaries to continue to
operate in the ordinary course of business.
Proposed Restructuring
The Bankruptcy Case was commenced in order to implement a comprehensive
financial restructuring of the Company, including the senior notes due
2010 (the "Senior Notes"), subordinated notes due 2011 and preferred and
common equity securities. As of the date of this report, a plan of
reorganization (the "Plan") has not been submitted to the Bankruptcy
Court.
In order to meet ongoing obligations during the reorganization process,
the Company entered into a $35 million debtor-in-possession financing
facility (the "DIP Financing Facility"), which was approved by final
order of the Bankruptcy Court on March 24, 2003. As of April 11, 2003,
the Company had satisfied all conditions for full access to the DIP
Financing Facility.
The Company anticipates that the Plan will be funded by two sources of
capital: (i) an equity investment made by certain holders of Senior
Notes of an aggregate of $75 million in exchange for new 9% convertible
notes ("New Notes") of the reorganized company and (ii) a credit
facility which permits the Company to continue to have access to its
current $225 million of outstanding term loans with a $36 million
revolver commitment ("Exit Financing Facility"). This Exit Financing
Facility also provides that the term loans and any new borrowings under
the revolver will be at current rates and existing maturities.
On April 10, 2003, the Company entered into a Plan Support Agreement
(the "Plan Support Agreement") with a majority of the lenders under its
Senior Credit Facility. The Plan Support Agreement provides that the
lenders will agree to support a "Conforming Plan," which must include
the following: (i) financing upon emergence from bankruptcy on agreed
terms, (ii) cancellation or conversion into equity of the reorganized
company upon emergence from bankruptcy, of substantially all of the
Company's outstanding debt and equity securities, (iii) outstanding
indebtedness on the effective date of the Plan consisting of only
certain hedge agreements, Exit Financing Facility, New Notes, existing
government loans and certain capital leases, (iv) consummation of the
sale of New Notes on the effective date of the Plan and (v) repayment of
the DIP Financing Facility and the $36 million outstanding under the
revolver.
8
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
On April 10, 2003, the Company also entered into a Subscription
Agreement with certain holders of Senior Notes for the sale of $75
million aggregate principal amount of New Notes. The Plan Support
Agreement and Subscription Agreement are subject to, among other things,
confirmation of a Conforming Plan.
The Plan Support Agreement provides that a Conforming Plan and
accompanying disclosure statement must be filed with the Bankruptcy
Court prior to May 31, 2003 and that a disclosure statement, reasonably
acceptable to the lenders, must be approved by the Bankruptcy Court no
later than August 15, 2003. In addition, the Plan Support Agreement
obligates the Company to have filed a Conforming Plan, solicited votes
and conducted a confirmation hearing prior to September 30, 2003.
For more information regarding the Plan Support Agreement and
Subscription Agreement, including conditions to the consummation of such
agreements, please refer to the Company's Form 8-K dated April 10, 2003,
which attaches copies of the agreements.
The Company believes it is making substantial progress with its
creditors in developing a Plan and the Company anticipates filing a Plan
that will constitute a Conforming Plan prior to May 31, 2003. It is
likely that, in connection with the final Plan, the liabilities of the
Company will be found in the Bankruptcy Case to exceed the fair value of
its assets. This would result in claims being paid at less than 100% of
their face value and holders of preferred stock being entitled to little
or no recovery and holders of common stock being entitled to no
recovery. At this time, it is not possible to predict with certainty the
outcome of the bankruptcy proceedings.
Bankruptcy Proceeding
The Debtors are currently operating their businesses as
debtors-in-possession under the Bankruptcy Code. Pursuant to the
Bankruptcy Code, pre-petition obligations of the Debtors, including
obligations under debt instruments, generally may not be enforced
against the Debtors, and any actions to collect pre-petition
indebtedness are automatically stayed, unless the stay is lifted by the
Bankruptcy Court. The pre-petition obligations of the Debtors are
subject to compromise under a plan of reorganization. As part of the
reorganization process, the Debtors have attempted to notify all known
or potential creditors of the Chapter 11 filings for the purpose of
identifying all pre-petition claims against the Debtors. June 10, 2003
(the "Bar Date") was set by the Court as the date by which creditors,
other than governmental units (as defined by the Bankruptcy Code), are
required to file proof of claims against the Debtors. The bar date for
governmental units to file proof of claims is August 31, 2003. At this
time, the ultimate amount of claims that will be allowed by the Court is
not determinable. In addition, as debtors-in-possession, the Debtors
have the right, subject to the Bankruptcy Court approval and certain
other limitations, to assume or reject executory contracts and unexpired
leases. The Debtors are in the process of reviewing their executory
contracts and unexpired leases to determine which they will reject. The
Debtors cannot presently determine or reasonably estimate the ultimate
liability that may result from rejecting contracts or leases or from the
filing of claims for any rejected contracts or leases, and no provisions
have yet been made for these items. The amount of the claims to be filed
by the creditors could be significantly different than the amount of the
liabilities recorded by the Debtors.
Since the Petition Date, the Debtors have conducted business in the
ordinary course. After developing the Plan, the Debtors will seek the
requisite acceptance of the Plan by impaired creditors and equity
holders, if any, who will receive a distribution under the Plan, and
confirmation of the Plan by the Bankruptcy Court, all in accordance with
the applicable provisions of the Bankruptcy Code. During the pendency of
the Bankruptcy Case, the Debtors may, with the Bankruptcy Court
approval, sell assets and settle liabilities, including for amounts
other than those reflected in the financial statements. The
administrative and reorganization expenses resulting from the Bankruptcy
Case will unfavorably affect the Debtor's results of operations. Future
results of operations may also be adversely affected by other factors
related to the Bankruptcy Case. Except as contemplated by the Plan
Support Agreement, no assurance can be given that the Debtor's creditors
will support the proposed Plan, or that the Plan will be approved by the
Bankruptcy Court. Additionally, there can be no assurance of the level
of recovery to which the Debtors' secured and unsecured creditors will
receive.
9
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
Basis of Presentation
Our consolidated financial statements have been prepared on a going
concern basis of accounting in accordance with accounting principles
generally accepted in the United States. The going concern basis of
presentation assumes that the Company will continue in operation for the
foreseeable future and will be able to realize its assets and discharge
its liabilities in the normal course of business. Because of the
Bankruptcy Case and the circumstances leading to the filing thereof,
there is substantial doubt about the Company's ability to continue as a
going concern. The Company's ability to realize the carrying value of
its assets and discharge its liabilities is subject to substantial
uncertainty. The Company's ability to continue as a going concern
depends upon, among other things, the Company's ability to comply with
the terms of the DIP Financing Facility, confirmation of a plan of
reorganization, availability of exit financing from existing lenders
under the Senior Credit Facility, receipt of additional funding through
the issuance of an aggregate of $75 million of New Notes, and the
Company's ability to generate sufficient cash flows from operations. Our
financial statements do not reflect adjustments for possible future
effects on the recoverability of assets or the amounts that may result
from the outcome of the Bankruptcy Case.
The Company has adopted the provisions of AICPA Statement of Position
90-07 ("Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code") ("SOP 90-07") which apply to the periods after the
March 4, 2003 Chapter 11 filing through the application of fresh start
accounting upon emergence from bankruptcy. Accordingly, at March 31,
2003, the Company has separated its pre-petition liabilities subject to
compromise from those that are not (such as fully secured liabilities
that are expected not to be compromised and post-petition liabilities).
The Company's senior notes, subordinated notes and redeemable
convertible preferred stock were adjusted to the estimated allowable
claims for each of these instruments as of March 31, 2003 in accordance
with SOP 90-07. This adjustment resulted in reorganization items of
$22.4 million consisting of unaccreted balances relating to the value
originally allocated to the attached stock warrants and preferred stock
origination fees. The portion of this relating to preferred stock was
$8.3 million which was separately classified from the other
reorganization items below net loss as "reorganization items - accretion
of preferred stock". Also, deferred charges for loan origination fees
associated with the Senior Credit Facility and Senior Notes of $14.0
million were written off through the recognition of a reorganization
items. In addition, the Company recognized capital restructuring charges
of $1.3 million for professional services related to the Company's
financial reorganization for the period March 4, 2003 to March 31, 2003.
Professional fees for the period January 1, 2003 through March 3, 2003
totaled $2.4 million and continued to be classified within "Operational
and Capital Restructuring Charges" in the March 31, 2003 Statement of
Operations.
Generally, all actions to enforce or otherwise effect repayment of
pre-petition liabilities as well as all pending litigation against the
Debtors are stayed while the Debtors continue their business operations
as debtors-in-possession. Liabilities that may be affected by the Plan
are reported at the amounts expected to be allowed as determined in the
bankruptcy process (referred to as "allowable claims"). An allowable
claim is the amount that is determined to represent a valid claim
against the Company. The final settlement amount may differ
significantly from the allowable claim. In the Bankruptcy Case,
substantially all unsecured liabilities as of the Petition Date are
subject to compromise under a plan of reorganization to be voted on by
impaired creditors and equity holders, if any, who will receive a
distribution under the Plan, and approved by the Bankruptcy Court. The
ultimate amount of and settlement terms for such liabilities are subject
to this approved plan of reorganization and, accordingly, are not
presently determinable. Additionally, pursuant to SOP 90-07,
professional fees associated with the Bankruptcy Case will be expensed
as incurred and reported as reorganization items. Finally, interest
expense and preferred dividends will be reported only to the extent that
they will be paid during the Bankruptcy Case or that it is probable that
they will be an allowed claim. Accordingly, from March 4, 2003 through
March 31, 2003 (period during the first quarter 2003 subsequent to the
Bankruptcy filing), $6.6 million of interest expense and $1.6 million in
preferred dividends, which would have otherwise been recognized, were
not recorded pursuant to these requirements.
These consolidated financial statements do not reflect all of the
adjustments that may occur in accordance with the SOP 90-07. It is
expected that the proposed Plan will result in "Fresh Start" reporting
pursuant to SOP 90-07. Under Fresh Start reporting, the value of the
reorganized Company would be determined based on the amount a willing
buyer would pay for the Company's assets upon confirmation of the Plan
by the Bankruptcy Court. This value would be allocated to specific
tangible and identifiable intangible assets. Liabilities existing as of
the effective date of the Plan would be stated at the present value of
amounts to be paid based on current interest rates.
10
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
2. SIGNIFICANT ACCOUNTING POLICIES
In the Company's opinion, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 2002, which is derived
from audited financial statements, contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of March 31, 2003 and December 31, 2002, the
results of operations for the three months ended March 31, 2003 and 2002
and cash flows for the three months ended March 31, 2003 and 2002. The
results of operations for the three months ended March 31, 2003 and 2002
are not necessarily indicative of the results to be expected for the
full year.
ASSET IMPAIRMENT CHARGES
The Company adopted Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"), and Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), on January 1, 2002.
The Company reported $402.9 million in asset impairment charges in the
fourth quarter of 2002. For more information regarding this testing and
other relevant facts and circumstances related to the asset impairment
charge recorded in the fourth quarter of 2002, please refer to Note 2 of
the notes to the consolidated financial statements contained in Item 8
of the Company's Form 10-K for the year ended December 31, 2002 on file
with the Securities and Exchange Commission.
The Company has considered the existence of further impairment
indicators at March 31, 2003 or after which would require re-measurement
for the purpose of determining whether additional adjustments or
disclosures are required. The Company does not believe that there is
sufficient evidence of impairment indicators to warrant re-measurement
at this time.
After adjustments for the aforementioned asset impairment charges, the
cost and net book value of the remaining goodwill and licenses with
indefinite lives at March 31, 2003 and December 31, 2002 followed by the
totals by reportable unit are indicated in the following table.
(In thousands) Cost Net Book
Value
---------------------------------------------------------------------------------------------
Goodwill $ 93,540 $ 86,016
PCS Radio Spectrum Licenses In Service 107,386 107,234
---------------------------------------------------------------------------------------------
Total Indefinite Lived Assets $ 200,926 $ 193,250
=============================================================================================
Goodwill and Indefinite Lived Assets by
Reporting Unit
---------------------------------------------------
Wireless PCS $ 107,386 $ 107,234
Telephone 68,472 65,463
CLEC - -
Network 4,683 4,683
Internet 12,665 9,833
Other
Wireline Cable 7,720 6,037
Wireless Cable - -
---------------------------------------------------------------------------------------------
Total Indefinite Lived Assets $ 200,926 $ 193,250
=============================================================================================
ACCOUNTING FOR ASSET RETIREMENT OBLIGATION
Effective January 1, 2003, the Company changed its method of accounting
for asset retirement obligations in accordance with FASB Statement No.
143, Accounting for Asset Retirement Obligations. Previously, the
Company had been recognizing amounts related to asset retirement
obligations as operating expense when the specific work was performed.
Under the new accounting method, the Company now recognizes asset
retirement obligations in the period in which they are incurred if a
reasonable estimate of a fair value can be made.
The Company recorded the effect of the adoption of this standard as of
January 1, 2003 in its statement of operations by reporting a $2.8
million charge for the cumulative effect of this accounting change.
11
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
There is no income tax impact on this amount as the $1.1 million income
tax benefit is fully offset by the related valuation reserve (see Note
6). Additionally, $5.6 million of asset retirement obligations and
retirement obligation assets with the net book value of $2.7 million
were recorded. In addition to the cumulative effect impact reported in
the statement of operations, the Company reported depreciation charges
related to the retirement obligation assets and accretion expenses
related to the asset retirement obligations for the quarter ended March
31, 2003 of $.1 million and $.2 million, respectively.
The Company enters into long term leasing arrangements primarily
pertaining to tower sites and retail store locations in its wireless
segment. Additionally, in its wireline operations, the Company enters
into various facility co-location agreements and is subject to locality
ordinances. In both cases, the Company constructs assets at these
locations and, in accordance with the terms of many of these agreements,
the Company is obligated to restore the premises to its original
condition at the conclusion of the agreements, generally at the demand
of the other party to these agreements. The Company recognized the fair
value of a liability for an asset retirement obligation and capitalized
that cost as part of the cost basis of the related asset, depreciating
it over the useful life of the related asset. The following table
describes all changes to the Company's asset retirement obligation
liability (in thousands):
$ -
Asset retirement obligation at December 31, 2002
Liability recognized in transition 5,484
Accretion of asset retirement obligations 152
----------------
Asset retirement obligation at March 31, 2003 $ 5,636
================
The pro forma asset retirement obligation liability balances as if SFAS
No. 143 had been adopted when the asset retirement obligations were
incurred (rather than January 1, 2003) are as follows (in thousands):
2003 2002
--------------------- ----------------------
Pro forma amounts of liability for asset retirement $5,484 $4,815
obligation at January 1
Pro forma amounts of liability for asset retirement
obligation at March 31 $5,636 $4,945
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and follows the
disclosure only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. The Company has elected to apply the disclosure only
provisions of SFAS No. 123 and the revised disclosure requirements of
SFAS No. 148.
Had compensation cost been recorded based on the fair value of awards at
the grant date, the pro forma impact on the Company's loss applicable to
common shares and loss per common share - basic and diluted would have
been as follows (in thousands except per share amounts):
March 31, 2003 March 31,
2002
------------------------------------------------------------------------------------------
Loss applicable to common shares, as reported $ (57,108) $ (35,683)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method, net of tax 325 427
------------------------------------------------------------------------------------------
Pro forma loss applicable to common shares $ (57,433) $ (36,110)
==========================================================================================
Loss applicable to common shares (per share):
Basic and diluted - as reported $ (3.21) $ (2.07)
Basic and diluted - pro forma $ (3.23) $ (2.10)
FINANCIAL STATEMENT CLASSIFICATION
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform to
classifications adopted in 2003.
12
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
3. 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 other communications
services operations. Additionally, certain unallocated corporate related
items that, in management's opinion do not provide direct benefit to the
operating segments, are included in the Other segment. Total unallocated
corporate operating expenses were $5.3 million and $2.1 million for the
three month periods ended March 31, 2003 and 2002, respectively. Within
the current year amount is $2.4 million of pre-petition
bankruptcy-related professional service fees and within the prior year
amount is $1.3 million of operational restructuring charges. Both of
these amounts are classified as operational and capital restructuring
charges in the statement of operations.
Depreciation and amortization of corporate assets is included in the
"Other" column in the tables below. This amounted to $.1 million and $.1
million for the quarters ended March 31, 2003 and 2002, respectively, of
the total "Other" depreciation and amortization.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. These segments are described
in more detail in Note 4 of the notes to the consolidated financial
statements in Item 8 of the Company's Form 10-K for the year ended
December 31, 2002 on file with the Securities and Exchange Commission.
13
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
(In thousands) Telephone Network CLEC Internet Wireless PCS Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
As of and for the three months ended March 31, 2003
- ---------------------------------------------------
Operating Revenues $ 12,717 $ 1,762 $ 6,050 $ 4,601 $ 46,782 $ 1,539 $ 73,451
Operating Income (Loss) 6,303 364 1,232 971 (2,312) (3,796) 2,762
Less: Reconciling items to arrive
at EBITDA(1), a non-GAAP measure:
Depreciation & Amortization 2,440 909 842 767 12,590 363 17,911
Accretion of asset retirement
obligations 2 1 8 - 141 - 152
----------------------------------------------------------------------------------------------
EBITDA 8,745 1,274 2,082 1,738 10,419 (3,433) 20,825
----------------------------------------------------------------------------------------------
Total Segment Assets 142,464 35,980 33,287 16,833 386,428 15,705 630,697
Corporate Assets 94,159
-----------------
Total Assets $ 724,856
=================
Total Expenditures for Long-Lived
Segment Assets(2) $ 965 $ 299 $ 610 $ 639 $ 8,327 $ 537 $ 11,377
As of and for the three months ended March 31, 2002
- ---------------------------------------------------
Operating Revenues $ 10,509 $ 2,243 $ 4,943 $ 4,622 $ 35,771 $ 1,933 $ 60,021
Operating (Loss) Income 4,456 971 (168) (263) (17,951) (2,125) (15,080)
Less: Reconciling items to arrive
at EBITDA1, a non-GAAP measure:
Depreciation &Amortization 1,807 700 710 982 18,196 700 23,095
----------------------------------------------------------------------------------------------
EBITDA 6,263 1,671 542 719 245 (1,425) 8,015
----------------------------------------------------------------------------------------------
Total Segment Assets 142,022 58,087 32,239 17,420 771,170 31,033 1,051,971
Corporate Assets 116,767
-----------------
Total Assets $ 1,168,738
=================
Total Expenditures for Long-Lived
Segment Assets(2) $ 1,161 $ 1,827 $ 1,357 $ 543 $ 23,014 $ 1,218 $ 29,120
(1) To supplement its financial statements presented on a GAAP basis, the
Company references non-GAAP measures, such as EBITDA, to measure operating
performance. Management believes EBITDA to be a meaningful indicator of the
Company's performance that provides useful information to investors
regarding the Company's financial condition and results of its operations.
Presentation of EBITDA is consistent with the Company's past practice and
EBITDA is a non-GAAP measure commonly used in the 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.
(2) Includes purchases of long-lived assets other than deferred charges and
deferred tax assets.
4. LONG TERM DEBT IN DEFAULT AND OTHER LONG-TERM DEBT
On March 4, 2003, the Company and certain of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (see Note 1). In addition, the Company did not
make the scheduled semi-annual interest payments due on February 18,
2003 on its 13% senior notes due 2010 ("Senior Notes") and 13.5%
subordinated notes due 2011 ("Subordinated Notes") of $18.2 million and
$6.4 million, respectively. As a result of the bankruptcy filing, a
default for non-payment of these interest payments and non-compliance
with a debt to capitalization covenant under its credit agreement, dated
July 26, 2000, as amended (also referred to as "Senior Credit
Facility"), the Company has classified borrowings under its Senior
Credit Facility, Senior Notes and Subordinated Notes as current
liabilities within the caption "Long-term debt in default and scheduled
maturities" at December 31, 2002 and within current liabilities subject
to compromise at March 31, 2003.
The Company has borrowed $261 million as of December 31, 2002 and March
31, 2003 under its Senior Credit Facility. The Company was in default of
the debt to total capitalization covenant requirement at December 31,
14
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
2002. This covenant was not met due to the significant asset impairment
charges recognized in the fourth quarter of 2002. Accordingly, due to
this and other issues noted above, access to the Senior Credit Facility
was restricted and the debt, along with the other debt instruments
containing cross-default provisions were listed as current obligations
at December 31, 2002. At March 31, 2003, all of the debt, except for the
6.25% to 7.0% notes payable secured by certain PCS radio spectrum
licenses ($7.7 million at March 31, 2003, the current portion of which
is $1.9 million, and $8.2 million at December 31, 2002) and the senior
secured 5.0% to 6.05% notes payable ($6.6 million at March 31, 2003, the
current portion of which is $.5 million, and $6.7 million at December
31, 2002), was classified as current, within the liabilities subject to
compromise caption. The debt will remain subject to compromise under the
requirements of SOP 90-07 pending consummation of the Company's plan of
reorganization. Additionally, under the provisions of 90-07, interest
expense and preferred dividends will be reported only to the extent that
they will be paid during the Bankruptcy Case or that it is probable that
they will be an allowed claim. Accordingly, from March 4, 2003 through
March 31, 2003(period during the first quarter 2003 subsequent to the
bankruptcy filing), $6.6 million of interest expense and $1.6 million in
preferred dividends, which would have otherwise been recognized, were
not recorded pursuant to these requirements.
In order to meet ongoing obligations during the reorganization process,
the Company entered into a $35 million debtor-in-possession financing
facility (the "DIP Financing Facility"), subject to Bankruptcy Court
approval. On March 5, 2003, the Bankruptcy Court granted first priority
mortgages, security interests, liens (including priming liens), and
super priority claims on substantially all of the assets of the Debtors
to secure the this Facility. On March 24, 2003, the Bankruptcy Court
entered a final order authorizing the Company to access up to $35
million under the DIP Financing Facility and, as of April 11, 2003, the
Company satisfied all other conditions to obtain full access to the DIP
Financing Facility. At March 31, 2003 and through the date of this
filing, the Company has not borrowed against this facility.
On April 10, 2003, the Company entered into a Subscription Agreement
with certain holders of Senior Notes for the sale of $75 million
aggregate principal amount of New Notes (Note 1). Additionally, the
Company anticipates that its plan of reorganization will be funded by
the Exit Financing Facility (Note 1). This Exit Financing Facility
provides that the term loans and any new borrowings under the revolver
will be at current rates and existing maturities.
5. SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
On May 6, 2003, the Company closed on the sale of its Portsmouth
Virginia call center building for $6.9 million. This 100,000 square foot
facility housed part of the Company's wireless customer care center and
certain other support personnel, as well as provided $.7 million of
rental income from third party tenants. The Company will continue to
occupy 7,000 square feet of the facility through a 7 year operating
lease agreement. The customer care center is currently being
transitioned to other Company owned or leased facilities. As defined in
the April 17, 2003 court orders approving this transaction, the net
proceeds from this sale were paid against the senior credit facility.
The Company made its scheduled semi-annual payment of interest for $18.2
million on the $280 million senior notes out of restricted cash during
the quarter ending March 31, 2002 in accordance with the terms and
conditions set forth in the senior note indenture. See Note 4 above
regarding the default for nonpayment of the semi-annual payment of
interest due February 15, 2003.
During the quarter ended March 31, 2002, the Company sold communication
towers for total proceeds of $8.2 million, deferring a $1.3 million
gain, which is being amortized over the twelve-year leaseback period.
Additionally, the Company sold certain inactive PCS licenses for
proceeds of $2.4 million, recognizing a $2.0 million gain.
6. INCOME TAXES
Income taxes decreased $1.9 million, or 121%, from a tax benefit of $1.6
million for the three months ended March 31, 2002 to tax expense of $.3
million for the three months ended March 31, 2003. The 2002 benefit is
net of a valuation allowance of $11.0 million. The benefit that was
recorded was based on an evaluation of the future realization of
deferred tax assets and the reversal of our deferred tax liabilities.
The deferred tax benefit associated with our interest rate swap
agreement has not been reserved due to the certainty of realization. The
current year tax expense relates to state minimum taxes. At March 31,
2003, the tax asset valuation reserve was $174.0 million which fully
offsets the related deferred income tax net assets generated primarily
from net operating losses except for the portion related to the swap
agreement as discussed above.
15
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
7. EARNINGS PER SHARE
The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, was not increased by assumed
conversion of dilutive stock options in the three months ended March 31,
2003 and 2002 due to the fact that the Company recorded a net loss for
both periods. For the three months ended March 31, 2003 and 2002, the
Company had common stock equivalents from options totaling 6,000 shares
and 145,000 shares, respectively, and stock warrants totaling 286,000
and 299,600, respectively, 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, .9 million
options and all of the warrants are currently exercisable.
8. LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK SUBJECT TO COMPROMISE
Liabilities subject to compromise in the Bankruptcy Case at March 31,
2003 consisted of the following (in thousands):
Current Liabilities Subject to Compromise
Accrued interest on long-term debt $ 27,784
Other current liabilities 38,044
Variable rate senior secured term loans 260,250
13.0% unsecured Senior Notes 276,674
13.5% unsecured Subordinated Notes 95,000
Net present value of long-term capital leases 5,393
Interest rate swap agreements 19,272
---------------------
Total Current Liabilities Subject to Compromise 722,417
---------------------
Long-term Liabilities Subject to Compromise
Net present value of long-term capital leases 4,527
Retirement benefits and other long-term deferred liabilities 36,389
---------------------
Total Long-term Liabilities Subject to Compromise 40,916
---------------------
Redeemable convertible preferred stock 298,246
---------------------
$ 1,061,579
=====================
9. OPERATIONAL AND CAPITAL RESTRUCTURING CHARGES
During the quarter ended March 31, 2003, the Company incurred $3.7
million of legal, financial, and bankruptcy related professional fees in
connection with the Company's comprehensive financial restructuring,
$2.4 million of which relates to the period January 1, 2003 through
March 3, 2003 (period prior to the Bankruptcy filing) and is classified
as operational and capital restructuring charges and the remaining $1.3
million of which relates to the period March 4, 2003 through March 31,
2003 and is classified in reorganization items (Note 1).
In March 2002, the Company approved a plan that would reduce its
workforce by approximately 15% through the offering of early retirement
incentives, the elimination of certain vacant and budgeted positions and
the elimination of some jobs. The plan also involved exiting certain
facilities in connection with the workforce reduction and centralizing
certain functions. Under the accounting provisions of Emerging Issues
Task Force 94-3 (prior to the adoption of SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities"), 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 under the accounting provisions. Had the Company reported
these charges under SFAS No. 146, the timing of recognition during 2002
would have been impacted as the related liabilities would have been
recognized as incurred.
10. COMMITMENTS AND CONTINGENCIES
In late 2002, Horizon disputed certain categories of charges under the
agreement, alleging the Company overcharged Horizon $4.8 million during
the period commencing October 1999 and ending September 2002 and $1.2
million for the period commencing October 2002 and ending December 2002.
Management disagrees with Horizon's allegations.
16
NTELOS Inc. (Debtor-in-Possession)
Notes to Condensed Consolidated Financial Statements
Continued
Horizon withheld these categories of charges from payments made from and
after December 2002 and failed to timely pay their January 2003 invoice
due following the Filing Date. On March 11, 2003, Horizon filed a motion
with the Bankruptcy Court which effected an administrative freeze as to
the amounts payable on the January invoice. On March 12, 2003, the
Company notified Horizon of the failure to make payment on the January
invoice, reserving the right to terminate the agreement in accordance
with the terms thereof. On March 24, 2003, the parties entered a
Stipulation with the Bankruptcy Court pursuant to which Horizon paid the
January invoice and agreed to pay all future invoices and the Company
agreed not to exercise their termination right, assuming all future
payments are made in accordance with the agreement. The Stipulation
further provides that Horizon is permitted to withhold amounts under
monthly invoices in excess of $3 million if it determines in good faith
that such amounts in excess of $3 million represent an overcharge by the
Company, pending resolution of the dispute. In addition, the parties
agreed to continue to discuss and negotiate, in good faith, their
dispute regarding Horizon's claim. Following a 30 day-period, either
party had the right to submit the dispute to arbitration in accordance
with the agreement.
For the three months ended March 31, 2003, Horizon withheld an
additional $.4 million relating to the billings for this time period.
The Company fully reserved for the amounts withheld. Discussions have
continued with Horizon but no significant resolutions have been reached.
On March 28, 2003, Horizon filed its Form 10-K for the year ending
December 31, 2002. This document disclosed that there was substantial
doubt about Horizon's ability to continue as a going concern because of
the probability that Horizon will violate one or more of its debt
covenants in 2003. The Company's future wholesale revenues under the
wholesale network services agreement with Horizon could be materially
impacted if Horizon were unable to continue as a going concern.
In addition to the item discussed above, the Company is periodically
involved in disputes and legal proceedings arising from normal business
activities. In the opinion of management, resolution of these matters
will not have a materially adverse effect on the financial position or
future results of operations of the Company and adequate provision for
any probable losses has been made in our financial statements.
17
NTELOS Inc. (Debtor-in-Possession)
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 66 retail stores and kiosks located
across the regions we serve and a direct business sales approach, our sales
strategy is focused largely on a direct relationship with our customers. As of
March 31, 2003, we had approximately 279,700 digital PCS subscribers (up from
228,300 at March 31, 2002) and approximately 97,800 combined incumbent local
exchange carrier ("ILEC") and competitive local exchange carrier ("CLEC") access
lines installed (up from 87,800 installed lines at March 31, 2002).
We have been focusing 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. We have also divested certain of our non-strategic assets and certain
excess PCS spectrum during 2002. Transactions that were completed in 2002
include:
o sale of substantially all of the assets of our National Alarm
Services business;
o sale of PCS spectrum covering 295,000 POPS in State College and
Williamsport, Pennsylvania;
o sale of minority ownership interest in America's Fiber Network,
LLC;
o sale of excess PCS spectrum covering 373,000 POPS in Winchester
and Charlottesville, Virginia; and,
o sale of excess PCS spectrum covering 436,000 POPS in Altoona and
Johnstown, Pennsylvania and Wheeling, West Virginia.
Transactions completed or pending as of the date of this filing:
o sale of the Portsmouth call center building, closed on May 5,
2003 (Note 5); and,
o sale of the Company's wireline cable business pursuant to an
asset purchase agreement for $8.7 million subject to downward
pricing adjustments for subscribers at closing and with closing
subject to regulatory approvals. Also included in this agreement
was a fiber optic Indefeasible Right to Use ("IRU") agreement for
some joint use fibers owned by the ILEC segment.
Chapter 11 Bankruptcy Filing
Overview
On March 4, 2003 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the "Debtors"), filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Eastern
District of Virginia (the "Bankruptcy Court"). By order of the Bankruptcy Court,
the Debtors' respective cases are being jointly administered under the case
number 03-32094 (the "Bankruptcy Case") for procedural purposes only. The
Bankruptcy Case was commenced in order to implement a comprehensive financial
restructuring of the Company. Total assets and liabilities for subsidiaries not
included in the Bankruptcy filing were $1,103,000 and $4,000, respectively as of
March 31, 2003. Additionally, revenues and operating loss for these subsidiaries
for the quarter ended March 31, 2003 were $138,000 and $44,000, respectively.
In the first half of 2002, the Company took a number of restructuring steps
which reduced operating expenses and improved operating results, financial
condition and cash flow. Despite the improved operating performance resulting
from these measures and continued execution of the Company's business plan, the
Company continued to require additional cash to fund its operating expenses,
debt service and capital expenditures. In the latter half of 2002, the Company
actively negotiated with its debtholders to develop a comprehensive financial
restructuring plan. Despite its efforts, the Company was unable to reach an
agreement with its debtholders on an out-of-court restructuring plan and,
accordingly, on March 4, 2003, the Company filed a petition for relief under
Chapter 11 of the Bankruptcy Code. For more information regarding the events and
18
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
circumstances leading up to the Chapter 11 filing, please refer to Note 1 of the
notes to the consolidated financial statements contained in Item 8 of the
Company's Form 10-K for the year ended December 31, 2002 on file with the
Securities and Exchange Commission.
The Company conducts its operations through a number of wholly-owned or
majority-owned subsidiaries. While it implements the proposed recapitalization,
the Company expects its subsidiaries to continue to operate in the ordinary
course of business.
Proposed Restructuring
The Bankruptcy Case was commenced in order to implement a comprehensive
financial restructuring of the Company, including the senior notes due 2010 (the
"Senior Notes"), subordinated notes due 2011 and preferred and common equity
securities. As of the date of this report, a plan of reorganization (the "Plan")
has not been submitted to the Bankruptcy Court.
In order to meet ongoing obligations during the reorganization process, the
Company entered into a $35 million debtor-in-possession financing facility (the
"DIP Financing Facility"), which was approved by final order of the Bankruptcy
Court on March 24, 2003. As of April 11, 2003, the Company had satisfied all
conditions for full access to the DIP Financing Facility.
The Company anticipates that the Plan will be funded by two sources of capital:
(i) an equity investment made by certain holders of Senior Notes of an aggregate
of $75 million in exchange for new 9% convertible notes ("New Notes") of the
reorganized company and (ii) a credit facility which permits the Company to
continue to have access to its current $225 million of outstanding term loans
with a $36 million revolver commitment ("Exit Financing Facility"). This Exit
Financing Facility also provides that the term loans and any new borrowings
under the revolver will be at current rates and existing maturities.
On April 10, 2003, the Company entered into a Plan Support Agreement (the "Plan
Support Agreement") with a majority of the lenders under its Senior Credit
Facility. The Plan Support Agreement provides that the lenders will agree to
support a "Conforming Plan," which must include the following: (i) financing
upon emergence from bankruptcy on agreed terms, (ii) cancellation or conversion
into equity of the reorganized company upon emergence from bankruptcy, of
substantially all of the Company's outstanding debt and equity securities, (iii)
outstanding indebtedness on the effective date of the Plan consisting of only
certain hedge agreements, Exit Financing Facility, New Notes, existing
government loans and certain capital leases, (iv) consummation of the sale of
New Notes on the effective date of the Plan and (v) repayment of the DIP
Financing Facility and the $36 million outstanding under the revolver.
On April 10, 2003, the Company also entered into a Subscription Agreement with
certain holders of Senior Notes for the sale of $75 million aggregate principal
amount of New Notes. The Plan Support Agreement and Subscription Agreement are
subject to, among other things, confirmation of a Conforming Plan.
The Plan Support Agreement provides that a Conforming Plan and accompanying
disclosure statement must be filed with the Bankruptcy Court prior to May 31,
2003 and that a disclosure statement, reasonably acceptable to the lenders, must
be approved by the Bankruptcy Court no later than August 15, 2003. In addition,
the Plan Support Agreement obligates the Company to have filed a Conforming
Plan, solicited votes and conducted a confirmation hearing prior to September
30, 2003.
For more information regarding the Plan Support Agreement and Subscription
Agreement, including conditions to the consummation of such agreements, please
refer to the Company's Form 8-K dated April 10, 2003, which attaches copies of
the agreements.
The Company believes it is making substantial progress with its creditors in
developing a Plan and the Company anticipates filing a Plan that will constitute
a Conforming Plan prior to May 31, 2003. It is likely that, in connection with
the final Plan, the liabilities of the Company will be found in the Bankruptcy
Case to exceed the fair value of its assets. This would result in claims being
paid at less than 100% of their face value and holders of preferred stock being
entitled to little or no recovery and holders of common stock being entitled to
no recovery. At this time, it is not possible to predict with certainty the
outcome of the bankruptcy proceedings.
19
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
Bankruptcy Proceeding
The Debtors are currently operating their businesses as debtors-in-possession
under the Bankruptcy Code. Pursuant to the Bankruptcy Code, pre-petition
obligations of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
pre-petition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The pre-petition obligations of the Debtors are subject to
compromise under a plan of reorganization. As part of the reorganization
process, the Debtors have attempted to notify all known or potential creditors
of the Chapter 11 filings for the purpose of identifying all pre-petition claims
against the Debtors. June 10, 2003 (the "Bar Date") was set by the Court as the
date by which creditors, other than governmental units (as defined by the
Bankruptcy Code), are required to file proof of claims against the Debtors. The
bar date for governmental units to file proof of claims is August 31, 2003. At
this time, the ultimate amount of claims that will be allowed by the Court is
not determinable. In addition, as debtors-in-possession, the Debtors have the
right, subject to the Bankruptcy Court approval and certain other limitations,
to assume or reject executory contracts and unexpired leases. The Debtors are in
the process of reviewing their executory contracts and unexpired leases to
determine which they will reject. The Debtors cannot presently determine or
reasonably estimate the ultimate liability that may result from rejecting
contracts or leases or from the filing of claims for any rejected contracts or
leases, and no provisions have yet been made for these items. The amount of the
claims to be filed by the creditors could be significantly different than the
amount of the liabilities recorded by the Debtors.
Since the Petition Date, the Debtors have conducted business in the ordinary
course. After developing the Plan, the Debtors will seek the requisite
acceptance of the Plan by impaired creditors and equity holders, if any, who
will receive a distribution under the Plan, and confirmation of the Plan by the
Bankruptcy Court, all in accordance with the applicable provisions of the
Bankruptcy Code. During the pendency of the Bankruptcy Case, the Debtors may,
with the Bankruptcy Court approval, sell assets and settle liabilities,
including for amounts other than those reflected in the financial statements.
The administrative and reorganization expenses resulting from the Bankruptcy
Case will unfavorably affect the Debtor's results of operations. Future results
of operations may also be adversely affected by other factors related to the
Bankruptcy Case. Except as contemplated by the Plan Support Agreement, no
assurance can be given that the Debtor's creditors will support the proposed
Plan, or that the Plan will be approved by the Bankruptcy Court. Additionally,
there can be no assurance of the level of recovery to which the Debtors' secured
and unsecured creditors will receive.
Basis of Presentation
Our consolidated financial statements have been prepared on a going concern
basis of accounting in accordance with accounting principles generally accepted
in the United States. The going concern basis of presentation assumes that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and discharge its liabilities in the normal course of
business. Because of the Bankruptcy Case and the circumstances leading to the
filing thereof, there is substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to realize the carrying value
of its assets and discharge its liabilities is subject to substantial
uncertainty. The Company's ability to continue as a going concern depends upon,
among other things, the Company's ability to comply with the terms of the DIP
Financing Facility, confirmation of a plan of reorganization, availability of
exit financing from existing lenders under the Senior Credit Facility, receipt
of additional funding through the issuance of an aggregate of $75 million of New
Notes, and the Company's ability to generate sufficient cash flows from
operations. Our financial statements do not reflect adjustments for possible
future effects on the recoverability of assets or the amounts that may result
from the outcome of the Bankruptcy Case.
The Company has adopted the provisions of AICPA Statement of Position 90-07
("Financial Reporting by Entities in Reorganization Under the Bankruptcy Code")
("SOP 90-07") which apply to the periods after the March 4, 2003 Chapter 11
filing through the application of fresh start accounting upon emergence from
bankruptcy. Accordingly, at March 31, 2003, the Company has separated its
pre-petition liabilities subject to compromise from those that are not (such as
fully secured liabilities that are expected not to be compromised and
post-petition liabilities). The Company's senior notes, subordinated notes and
redeemable convertible preferred stock were adjusted to the estimated allowable
claims for each of these instruments as of March 31, 2003 in accordance with SOP
90-07. This adjustment resulted in reorganization items of $22.4 million
consisting of unaccreted balances relating to the value originally allocated to
20
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
the attached stock warrants and preferred stock origination fees. The portion of
this relating to preferred stock was $8.3 million which was separately
classified from the other reorganization items below net loss as "reorganization
items - accretion of preferred stock". Also, deferred charges for loan
origination fees associated with the Senior Credit Facility and Senior Notes of
$14.0 million were written off through the recognition of a reorganization
items. In addition, the Company recognized capital restructuring charges of $1.3
million for professional services related to the Company's financial
reorganization for the period March 4, 2003 to March 31, 2003. Professional fees
for the period January 1, 2003 through March 3, 2003 totaled $2.4 million and
continued to be classified within "Operational and Capital Restructuring
Charges" in the March 31, 2003 Statement of Operations.
Generally, all actions to enforce or otherwise effect repayment of pre-petition
liabilities as well as all pending litigation against the Debtors are stayed
while the Debtors continue their business operations as debtors-in-possession.
Liabilities that may be affected by the Plan are reported at the amounts
expected to be allowed as determined in the bankruptcy process (referred to as
"allowable claims"). An allowable claim is the amount that is determined to
represent a valid claim against the Company. The final settlement amount may
differ significantly from the allowable claim. In the Bankruptcy Case,
substantially all unsecured liabilities as of the Petition Date are subject to
compromise under a plan of reorganization to be voted on by impaired creditors
and equity holders, if any, who will receive a distribution under the Plan, and
approved by the Bankruptcy Court. The ultimate amount of and settlement terms
for such liabilities are subject to this approved plan of reorganization and,
accordingly, are not presently determinable. Additionally, pursuant to SOP
90-07, professional fees associated with the Bankruptcy Case will be expensed as
incurred and reported as reorganization items. Finally, interest expense and
preferred dividends will be reported only to the extent that they will be paid
during the Bankruptcy Case or that it is probable that they will be an allowed
claim. Accordingly, from March 4, 2003 through March 31, 2003 (period during the
first quarter 2003 subsequent to the Bankruptcy filing), $6.6 million of
interest expense and $1.6 million in preferred dividends, which would have
otherwise been recognized, were not recorded pursuant to these requirements.
These consolidated financial statements do not reflect all of the adjustments
that may occur in accordance with the SOP 90-07. It is expected that the
proposed Plan will result in "Fresh Start" reporting pursuant to SOP 90-07.
Under Fresh Start reporting, the value of the reorganized Company would be
determined based on the amount a willing buyer would pay for the Company's
assets upon confirmation of the Plan by the Bankruptcy Court. This value would
be allocated to specific tangible and identifiable intangible assets.
Liabilities existing as of the effective date of the Plan would be stated at the
present value of amounts to be paid based on current interest rates.
OTHER DISCUSSIONS
To supplement its financial statements presented on a GAAP basis, throughout
this document the Company references non-GAAP measures, such as EBITDA, to
measure operating performance. Management believes EBITDA to be a meaningful
indicator of the Company's performance that provides useful information to
investors regarding the Company's financial condition and results of its
operations. Presentation of EBITDA is consistent with the Company's past
practice and EBITDA is a non-GAAP measure commonly used in the 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. A reconciliation of EBITDA to operating loss is provided
in Note 3 of the Notes to the Condensed Consolidated Financial Statements
included in this Form 10-Q.
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 these businesses. Unlike our ILEC business, these newer
businesses have significant start-up costs associated with expansion into new
markets, introduction of new service offerings throughout the regions we serve
and significant competitive pricing pressures, which results in lower operating
margins. 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.
21
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
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, 2002, under "Factors Affecting Future Performance". 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: our ability to develop,
prosecute, confirm and consummate a plan of reorganization; our ability to
operate under debtor-in-possession financing; our ability to maintain vendor,
lessor and customer relationships while in bankruptcy; our substantial debt
obligations and our ability to service those obligations, even after the
proposed reorganization; the additional expenses associated with bankruptcy as
well as the possibility of unanticipated expenses; 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; the capital intensity of the wireless telephone
business; retention of our existing customer base, including our wholesale
customers, especially Horizon; our ability to attract new customers, and
maintain or 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; weakening demand for wireless and wireline
communications services; rapid changes in technology; adverse changes in the
roaming rates we charge and pay; adverse changes in rates we pay to ILECs for
collocation and unbundled network elements; fluctuations in the values of
non-strategic assets such as excess PCS and other spectrum licenses, which are
currently below that of recent transactions we have completed; the level of
demand for competitive local exchange services in smaller markets; our ability
to manage and monitor billing; possible health effects of radio frequency
transmission; and the impact of decline in our stock price and subsequent
de-listing by the NASDAQ stock market. 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 expressed
or implied by such 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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are discussed in Note 3 of the notes to the
consolidated financial statements contained in Item 8 of the Company's Form 10-K
for the year ended December 31, 2002 on file with the Securities and Exchange
Commission. Additionally, see Note 2 of the Notes to the Condensed Consolidated
Financial Statements contained in Item 1 herein.
OPERATING REVENUES
Our revenues, net of bad debt expense, are generated from the following
categories:
o wireless PCS, consisting of retail, service and wholesale digital
PCS revenues;
o wireline communications, including ILEC service revenues, CLEC
service revenues, Internet, fiber optic network usage (or
carrier's carrier services), and long distance revenues; and,
o other communications services revenues, including revenues from
paging, wireless and wireline cable television, our sale and
lease of communications equipment and revenue from leasing excess
building space.
OPERATING EXPENSES
Our operating expenses are generally incurred from the following
categories:
22
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
o cost of sales, exclusive of other operating expenses shown
separately, including digital PCS handset equipment costs which
we sell to our customers at a price below our cost, and
usage-based access charges, including long distance, roaming
charges, and other direct costs;
o maintenance and support expenses, including costs related to
specific property, plant and equipment, as well as indirect costs
such as engineering and general administration of property, plant
and equipment;
o depreciation and amortization, including depreciable long lived
property, plant and equipment and amortization of intangible
assets where applicable (Note 2);
o accretion of asset retirement obligation ("ARO") (Note 2);
o customer operations expenses, including marketing, product
management, product advertising, selling, billing, publication of
a regional telephone directory, customer care and directory
services;
o corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information technology,
human resources and other general and administrative expenses;
and,
o operational and capital restructuring charges associated with
capital restructuring and organizational initiatives, workforce
reductions and exiting certain facilities.
OTHER INCOME (EXPENSES)
Our other income (expenses) are generated (incurred) from interest income and
expense, reorganization items associated with the Bankruptcy and capital
restructuring for the period after the Bankruptcy filing date and gains or
losses on the sale of investments and other 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003
Compared to Three Months Ended March 31, 2002
OVERVIEW
Operating revenues, which are reported net of bad debt expense, increased $13.4
million, or 22%, from $60.0 million for the three months ended March 31, 2002 to
$73.5 million for the three months ended March 31, 2003. Operating income (loss)
improved $17.9 million, from a loss of $15.1 million to income of $2.8 million
for the three months ended March 31, 2002 and 2003, respectively. Included in
the first quarter 2003 results were pre-petition bankruptcy-related operational
and capital restructuring charges of $2.4 million and $2.9 million of
accelerated depreciation on certain PCS assets due to early replacement
scheduled in 2003 and on the Portsmouth call center building which was sold in
May 2003 (Note 5). Included in the first quarter 2002 results were restructuring
charges of $1.3 million and $7.5 million of accelerated depreciation on certain
PCS assets due to early replacement scheduled for later in 2002 or 2003.
Operating income excluding depreciation and amortization, accretion of ARO and
asset impairment charges or as commonly referred to and referred to herein as
"EBITDA" ("earnings before interest, taxes, depreciation and amortization"),
increased $12.8 million (160%).
WIRELESS PCS OVERVIEW - A 23% growth in customers, a 29% increase in wholesale
and roaming revenues and a significant improvement in bad debt expense resulted
in net revenue growth of $11.0 million, or 31%, in the first quarter of 2003
compared to the first quarter of 2002. Operating expense before depreciation and
amortization over these periods grew $.8 million, or 2%. The rate of expense
23
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
growth lagged revenue growth significantly due to reductions in costs of
acquisition per gross addition ($81 or 27%), a reduction in in-collect roaming
and transport access 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 $10.2 million, from $.2 million for the first quarter of
2002 to $10.4 million for the first quarter of 2003.
WIRELINE COMMUNICATIONS OVERVIEW - Wireline communications services realized
revenue improvement of $2.8 million and EBITDA improvement of $4.6 million in
the first quarter of 2003 compared to the first quarter of 2002. EBITDA margin
over these periods increased significantly from 41.2 % to 55.1% due mainly to
incremental revenue growth, cost control measures implemented during 2002 and
improved network efficiency. Our CLEC and DSL customers increased by 28% and
38%, respectively, as of March 31, 2003 compared to March 31, 2002.
OTHER COMMUNICATION SERVICES OVERVIEW - Other communications services revenue
declined $.4 million primarily due to the sale of our National Alarm business in
September 2002 and due to the decline in rental revenues from the loss of
rentals of our directory assistance calling centers in July 2002 as a result of
a lease buyout. EBITDA was down $2.0 million (141%) for the first quarter of
2003 compared to first quarter 2002. The restructuring charges (Note 9 and as
discussed below) account for $1.2 million of this change and the balance is due
primarily to a $.7 million increase in unallocated corporate expenses related to
insurance and certain professional fees.
OPERATING REVENUES
Operating Revenues Three Months Ended March 31,
- ----------------------------------------------------------------------------------------
$ %
($'s in 000's) 2003 2002 Variance Variance
- ----------------------------------------------------------------------------------------
Wireless PCS $ 46,782 $ 35,771 $ 11,011 31%
Wireline
ILEC 12,717 10,509 2,208 21%
Network 1,762 2,243 (481) (21%)
CLEC 6,050 4,943 1,107 22%
Internet 4,601 4,623 (22) N/M
- ----------------------------------------------------------------------------------------
Total Wireline 25,130 22,318 2,812 13%
Other 1,539 1,932 (393) (20%)
- ----------------------------------------------------------------------------------------
Total $ 73,451 $ 60,021 $ 13,430 22%
WIRELESS COMMUNICATIONS REVENUES-Wireless communications revenues increased
$11.0 million, or 31%, due primarily to an increase in PCS subscribers of
51,400, or 23%, from 228,300 at March 31, 2002 to 279,700 at March 31, 2003, a
$2.1 million (29%) increase in wholesale and roaming revenues and a $1.9 million
(52%) improvement in bad debt expense. Average monthly revenue per subscriber
("ARPU", without roaming) remained steady during the first quarters of 2002 and
2003, with overall ARPU at $44.77 and $44.62 at March 31, 2002 and 2003,
respectively, due primarily to pricing pressures on post-pay type plans and a
change in the customer mix among pre-pay, nAdvance and post-pay plans. The
decrease in the percentage of customers that are on pre-pay plans (8% decrease,
to 6% of the total PCS subscriber base) is offset by the decrease in the
percentage of customers that are on post-pay plans (4% decrease, to 71% of the
total PCS subscriber base). Customers with the nAdvance plan grew 13% (41,600
subscribers), to 24% of the total PCS subscriber base. nAdvance plan ARPU is
significantly higher than pre-pay but slightly less than traditional post-pay.
As of March 31, 2003, post-pay type products accounted for 94% of the subscriber
base compared to 86% as of March 31, 2002.
As noted above, wholesale revenues primarily generated through an agreement with
Sprint/Horizon increased $2.1 million, from $7.2 million in the first quarter of
2002 to $9.3 million in the first quarter of 2003. In late 2002, Horizon
disputed certain categories of charges under the agreement, alleging the Company
overcharged Horizon $4.8 million during the period commencing October 1999 and
ending September 2002 and $1.2 million for the period commencing October 2002
and ending December 2002. Horizon withheld these categories of charges from
payments made from and after December 2002 and failed to timely pay their
January 2003 invoice due following the Filing Date. On March 11, 2003, Horizon
24
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
filed a motion with the Bankruptcy Court which effected an administrative freeze
as to the amounts payable on the January invoice. On March 12, 2003, the Company
notified Horizon of the failure to make payment on the January invoice,
reserving the right to terminate the agreement in accordance with the terms
thereof. On March 24, 2003, the parties entered a Stipulation with the
Bankruptcy Court pursuant to which Horizon paid the January invoice and agreed
to pay all future invoices and the Company agreed not to exercise their
termination right, assuming all future payments are made in accordance with the
agreement. The Stipulation further provides that Horizon is permitted to
withhold amounts under monthly invoices in excess of $3 million if it determines
in good faith that such amounts in excess of $3 million represent an overcharge
by the Company, pending resolution of the dispute. In addition, the parties
agreed to continue to discuss and negotiate, in good faith, their dispute
regarding Horizon's claim. Following a 30 day-period, either party had the right
submit the dispute to arbitration in accordance with the agreement.
On March 28, 2003, Horizon filed its Form 10-K for the year ending December 31,
2002. This document disclosed that there was substantial doubt about Horizon's
ability to continue as a going concern because of the probability that Horizon
will violate one or more of its debt covenants in 2003. The Company's future
wholesale revenues under the wholesale network services agreement with Horizon
could be materially impacted if Horizon were unable to continue as a going
concern.
WIRELINE COMMUNICATIONS REVENUES-Wireline communications revenues increased $2.8
million, or 13%, from $22.3 million in the first quarter of 2002 to $25.1
million in the first quarter of 2003.
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 $2.2 million, or 21%,
from $10.5 million for the three months ended March 31, 2002 to $12.7 million
for the three months ended March 31, 2003. Access lines declined slightly over
the respective quarters, with lines totaling 51,900 at March 31, 2002 and 51,800
at March 31, 2003; however, revenue improved due to significant increases in
carrier access minutes from the three months ended March 31, 2002 to 2003 and
due to revenue enhancing network rearrangements. This revenue increase is also
attributable to negative regulatory settlement adjustments in first quarter 2002
($.3 million) and favorable receivable reserve adjustments made in the first
quarter of 2003 ($.3 million) which together accounted for $.6 million of the
quarter over quarter improvement.
Network Revenues. Revenues from fiber optic and other long haul transport
related network usage decreased $.4 million, or 21%, from $2.2 million for the
three months ended March 31, 2002 to $1.8 million for the three months ended
March 31, 2003. This was primarily due to reductions in network rates.
CLEC Revenues. Revenues from CLEC operations increased $1.1 million, or 22%,
from $4.9 million for the three months ended March 31, 2002 to $6.0 million for
the three months ended March 31, 2003. Total access lines increased 10,100, or
28%, from 35,900 at March 31, 2002 to 46,000 at March 31, 2003. In addition to
approximately $.6 million of revenue growth generated from traditional CLEC
services, revenues from private line or dedicated circuits and broadband access
for business accounts increased $.5 million, or 26%, from $1.9 million in the
first quarter of 2002 to $2.4 million in the first quarter of 2003.
Internet Revenues. Revenues from Internet services remained relatively flat at
$4.6 million over the comparative quarters. As part of the Company's previously
announced cost control initiatives, operations were ceased in certain dial-up
Internet markets and rates were increased in others, both of which have resulted
in some loss of dial-up customers. Additionally, in the process of consolidating
multiple billing systems, we recorded dial-up customer adjustments of
approximately 3,100 in third quarter 2002 and a final additional adjustment of
5,000 in fourth quarter 2002; however, these adjustments had no financial
impact. Despite the overall decline in subscribers from the factors noted above,
we grew the number of digital subscriber line ("DSL") customers by 1,700, or
38%, resulting in $.3 million (31%) of DSL revenue growth. Growth in residential
DSL, made possible through line sharing (added in 2001), greatly increased the
size of the market population within the existing geographic markets that we
serve and improved the attractiveness of the DSL product but has lowered the
overall DSL ARPU.
25
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
OTHER COMMUNICATIONS SERVICES REVENUES - Other communications services revenues
decreased $.4 million, or 20%, from $1.9 million to $1.5 million for the three
month periods ending March 31, 2002 and 2003, respectively. This was primarily
due to a decline in rental revenues from the loss of the rentals of our
directory assistance calling centers ($.2 million), as well as the $.1 million
loss of revenue due to the sale of our alarm business in September 2002.
OPERATING EXPENSES
Operating Expenses Three Months Ended March 31,
- ------------------------------------------------------------------------------------------------
%
($'s in 000's) 2003 2002 Variance Variance
- ------------------------------------------------------------------------------------------------
Operating Expenses, excluding Depreciation and Amortization and
- ---------------------------------------------------------------
Accretion of Asset Retirement Obligation
----------------------------------------
Wireless PCS $ 36,363 $ 35,526 $ 837 2%
Wireline
ILEC 3,972 4,246 (274) (6%)
Network 488 572 (84) (15%)
CLEC 3,968 4,401 (433) (10%)
Internet 2,863 3,903 (1,040) (27%)
- ------------------------------------------------------------------------------------------------
Total Wireline 11,291 13,122 (1,831) (14%)
Other 4,972 3,358 1,614 48%
- ------------------------------------------------------------------------------------------------
Sub-Total 52,626 52,006 620 1%
Depreciation & Amortization 17,911 23,095 (5,184) (22%)
Accretion of Asset Retirement
Obligation ("ARO") 152 - 152 NM
- ------------------------------------------------------------------------------------------------
Total $ 70,689 $ 75,101 $ (4,412) (6%)
TOTAL OPERATING EXPENSES - As noted above, total operating expenses decreased
$4.4 million, or 6%, from $75.1 million for the first quarter of 2002 to $70.7
million for the first quarter of 2003. This is primarily attributable to a $5.2
million decrease in depreciation and amortization expense from the $4.6 million
decrease in accelerated depreciation related primarily to the early retirement
of network equipment in connection with the 3G-1XRTT upgrade, much of which
occurred in early 2002. Operating expenses excluding depreciation and
amortization and ARO accretion increased $.6 million, or 1%, from $52.0 million
to $52.6 million for the three months ended March 31, 2002 and 2003,
respectively. Wireline operating expenses, excluding depreciation and
amortization and ARO accretion, decreased $1.8 million, or 14% for the three
months ended March 31, 2002 as compared to 2003. Wireless operating expenses,
excluding depreciation and amortization and ARO accretion, increased $.8
million, or 2% for the three months ended March 31, 2003 as compared to the
three months ended March 31, 2002. Within the wireline business, $1.0 million is
from the Internet segment due primarily to the exit of certain dial-up Internet
markets and integration efficiencies. Operating expenses, excluding depreciation
and amortization, from the other communication service businesses increased $1.6
million due primarily to increases in corporate related professional fees and
insurance costs, as well as the first quarter 2003 operational and capital
restructuring charges of $2.4 million, which exceeded the first quarter 2002
operational and capital restructuring charges of $1.3 million by $1.2 million.
Across all businesses, continued operating expense reductions driven by the
operational restructuring in early 2002 and continued improvements in network
efficiency and other cost control initiatives aided in holding operating
expenses down from year to year despite continued customer growth noted in the
preceding revenue discussions.
COST OF WIRELESS SALES - Cost of wireless sales decreased $1.4 million, or 12%,
from $12.2 million for the three months ended March 31, 2002 to $10.8 million
for the three months ended March 31, 2003. This decrease was achieved despite a
2,200 increase in the number of gross customer additions during the respective
periods (39,200 in the first quarter 2002 compared to 41,400 in the first
quarter 2003). Cost of acquisition ("COA") per gross addition decreased 24% from
$300 in the first quarter 2002 to $228 in the first quarter 2003. Cost of
acquisition includes handset subsidy, which relates to Cost of Wireless Sales,
and marketing costs, advertising costs, sales commissions and sales management
costs, which are classified as Customer Operations Expenses (discussed below).
Beginning in first quarter 2003, certain costs associated with handset
replacements for existing customers became classified as retention costs (in
Customer Operations Expenses) and are no longer included in the cost of
acquisition calculation. The impact of this change for first quarter 2003 is a
26
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
reduction in cost of acquisition of approximately $24 per gross addition
(reclassification of approximately $1.0 million from Cost of Wireless Sales to
Customer Operations Expenses). Previous periods have not been restated to
reflect this change. The Company's average selling price for handsets (and
related accessories) with service contracts was approximately $57.66 in the
first quarter of 2002 and $86.48 in the first quarter 2003 and the average
related inventory cost was $161.66 and $127.49 for the three months ended March
31, 2002 and 2003, respectively, for a subsidy of $104.00 per unit in first
quarter 2002 and $41.01 per unit in first quarter 2003. Additionally, a decrease
in customer churn, from 5.09% (3.98% for the post-pay customers) in the first
quarter 2002 to 3.45% (2.72% for post-pay customers) in the first quarter 2003
also contributed to holding cost of wireless sales significantly below the
related revenue increase.
MAINTENANCE AND SUPPORT EXPENSES - Maintenance and support expenses decreased
$1.2 million, or 7%, from $16.9 million to $15.7 million for the three months
ended March 31, 2002 and 2003, respectively. Contributing to the decrease were
staff reductions, cost containment measures across all segments and improved
efficiency in network and transport costs (i.e. network grooming), offset by
increased unbundled network elements ("UNE's") and transport costs due to CLEC
customer growth.
DEPRECIATION AND AMORTIZATION EXPENSES - Depreciation and amortization expenses
decreased $5.2 million, or 22%, from $23.1 million for the first quarter 2002 to
$17.9 million for the first quarter 2003. Contributing to this decrease was $7.5
million of accelerated depreciation recorded in the first quarter of 2002 on
wireless digital PCS equipment (primarily from early retirements related to the
3G-1XRTT upgrade), which was either replaced during the first quarter of 2002 or
was scheduled to be replaced over the remainder of 2002 and into the first half
of 2003. This accelerated depreciation continued through the remainder of 2002
and will continue in 2003 on the assets scheduled to be retired during 2003. In
the first quarter 2003, accelerated depreciation on 3G-1XRTT related early
retirements was $1.7 million and the accelerated depreciation on the Portsmouth
call center building was $1.2 million (due to the sale of this building in May
2003 - Note 5). Additionally, there was a decrease in depreciable assets of $12
million due to the asset impairment charges recorded in the fourth quarter 2002
on property, plant and equipment in the Eastern Virginia PCS market.
ACCRETION OF ASSET RETIREMENT OBLIGATIONS - Accretion of asset retirement
obligations was $.2 million for the quarter ended March 31, 2003. This charge is
recorded in order to accrete the estimated asset retirement obligation over the
life of the related asset up to its future expected settlement cost. This
relates to the adoption of SFAS No. 143 (Note 2) on January 1, 2003.
CUSTOMER OPERATIONS EXPENSES - Customer operations expenses increased $2.3
million, or 15%, from $15.8 million in the first quarter of 2002 to $18.1
million in the first quarter of 2003. This was due primarily to the 23% increase
in customers from March 31, 2002 to March 31, 2003. Offsetting this increase,
customer operations related COA expenses such as marketing costs, advertising
costs, sales commissions and sales management costs decreased from cost
containment efforts related to advertising and marketing expenses and a shift in
the sales channel mix from the more expensive indirect channel to the direct
channel.
CORPORATE OPERATIONS EXPENSES - Corporate operations expenses decreased $.2
million, or 3%, from $5.9 million to $5.7 million for the three months ended
March 31, 2002 and 2003, respectively. This decrease is primarily due to
personnel reductions in corporate related back office functions, offset by
increases in insurance costs and fees for other professional services not
directly related to the financial restructuring.
OPERATIONAL AND CAPITAL RESTRUCTURING CHARGES - Operational and capital
restructuring charges of $2.4 million were recorded in the first quarter of 2003
relating to professional fees incurred for the period January 1, 2003 through
March 3, 2003 in connection with the comprehensive financial restructuring which
ultimately resulted in our bankruptcy petition filing on March 4, 2003. These
costs represent legal and advisory fees related to the restructuring of our debt
and capital structure and will continue to be incurred while the Company is in
bankruptcy. Charges of this nature for the period March 4, 2003 through March
31, 2003 totaled $1.3 million and were recorded in reorganization items below
operating income in accordance with SOP 90-7 (Note 1). In the first quarter of
2002, a restructuring charge was recorded 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.
27
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
OTHER INCOME (EXPENSES)
- -----------------------
We reported $2.0 million in gains on the sale of assets in the first quarter
2002 related to the sale of PCS licenses (Note 5). No transactions of this
nature occurred in the first quarter 2003.
Interest expense decreased $3.7 million, or 20%, from $19.0 million to $15.3
million for the three months ended March 31, 2002 and 2003, respectively. This
decrease is due to the fact that $6.6 million of interest expense which would
have been recorded against the unsecured senior and subordinated notes was not
reported based on our application of the provisions of SOP 90-07 (Notes 1 and
4).
Reorganization items totaling $29.4 million were recorded for the three months
ended March 31, 2003 in accordance with the provisions of SOP 90-07 (Note1). A
breakdown of these changes is as follows (in thousands):
Description Amount
- --------------------------------------------------------------------------------
Professional fees and expenses $ 1,292
Write-up of Senior Notes and Subordinated Notes to their
expected allowable claim 14,117
Write-off of deferred debt issuance costs 13,949
- -------------------------------------------------------------------------------
Total reorganization items $ 29,358
Other income (expense) remained relatively flat from the first quarter of
2002 to the first quarter of 2003.
INCOME TAXES
- ------------
Income taxes decreased $1.9 million, or 121%, from a tax benefit of $1.6 million
for the three months ended March 31, 2002 to tax expense of $.3 million for the
three months ended March 31, 2003. The 2002 benefit is net of a valuation
allowance of $11.0 million. The benefit that was recorded was the income
statement tax effect of the change in our interest rate swap obligation. The tax
benefit from this was not reserved due to the certainty of realization. The
current year tax expense relates to state minimum taxes. At March 31, 2003, the
tax asset valuation reserve was $174.0 million which fully offsets the related
income tax net assets generated primarily from net operating losses except for
the portion related to the swap agreement as discussed above.
MINORITY INTERESTS IN LOSSES (EARNINGS) OF SUBSIDIARIES
- -------------------------------------------------------
Minority interests in losses remained relatively flat and were immaterial in
both the current and prior year comparative quarters.
DIVIDEND REQUIREMENTS ON PREFERRED AND PREFERRED STOCK REORGANIZATION ITEM
- ---------------------------------------------------------------------------
Dividend requirements on preferred stock decreased $1.3 million, from $5.0
million in the first three months of 2002 to $3.7 million in the first three
months of 2003. This decrease is due to the fact that $1.6 million of preferred
stock dividends and issuance cost accretion which otherwise would have been
recorded in the first quarter 2003 was not recorded based on our application of
the SOP 90-07 provisions.
In addition to the above, we recorded a reorganization item of $8.3 million
representing accretion of the preferred stock to its expected allowable claim.
28
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
The Company issued $250 million of redeemable convertible preferred stock in
July 2000. The preferred stock accrues dividends at rates of 8.5% and 5.5% per
annum for the Series B preferred and Series C preferred, respectively, which is
payable semi-annually on June 30 and December 31. If dividends are not paid in
cash, the unpaid amount is added to the accreted value of the preferred stock.
As of March 31, 2003, all dividends have been paid in kind. In addition to the
dividend accruals, accretion of the issuance costs is recorded in dividend
requirements on preferred stock. This amounted to $.3 million in the first
quarter 2002 and $.2 million in the first quarter 2003.
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to market risks with respect to certain of the financial
instruments that it holds. These financial instruments and the Company's
exposure to market risk and interest rate changes will likely be significantly
altered based on the aforementioned Bankruptcy Case. The Company has limited
investments which are subject to significant long-term market risk as they are
primarily high grade, fixed rate instruments. With respect to long-term debt
instruments, at March 31, 2003 the Company had $395.9 million (or 60% of total
long-term debt), which are fixed rate instruments. While changes in interest
rates impact the fair value of these instruments, there is no impact to earnings
and cash flows. The remaining $260.3 million of long-term debt represents
borrowings against the Senior Credit Facility. Of the $260.3 million, the
interest rate risk of $162.5 million is managed by two interest rate swap
agreements. The remaining $97.8 million of outstanding credit facility debt is
subject to interest rate risks. Currently, the variable interest rate is
significantly below those covered by the interest rate swap agreements. As the
variable interest rate is based on the one month LIBOR rate, we are most
vulnerable to changes in these short-term rates. Of the $656.2 million of total
long-term debt, $641.8 million is subject to compromise (Notes 1, 4, and 8)
LIQUIDITY AND CAPITAL RESOURCES
In September 2002, we retained UBS Warburg as our financial advisor to assist us
in exploring a variety of restructuring alternatives. Thereafter, continued
competition in the wireless telecommunications sector resulted in a modification
to the assumptions used in our long-term business plan, including a reduction in
wireless subscriber growth, a decrease in average revenue per wireless
subscriber, slower improvement in subscriber churn and slower growth in
wholesale revenues. In addition, capital and lending prospects for
telecommunication companies continued to deteriorate. On November 29, 2002, we
entered into an amendment and waiver with the lenders under the Senior Credit
Facility, which restricted the amounts that we could borrow and waived our
obligation to make certain representations in order to submit a borrowing
request. Without an extension of the waiver, we did not have access to the
Senior Credit Facility following January 31, 2003. During this period, we were
actively negotiating with our debtholders to develop a comprehensive financial
restructuring plan. As a result of the above factors and current market
conditions, we were unable to reach an agreement with our debtholders on an
out-of-court restructuring plan and, accordingly, on March 4, 2003, we filed a
petition for relief under Chapter 11 of the Bankruptcy Code.
As a result of the bankruptcy filing, we no longer have the ability during the
pendency of the bankruptcy filing to make additional borrowings under the Senior
Credit Facility. However, the Company has access to the $35 million DIP
Financing Facility described in the preceding overview section. The DIP
Financing Facility is available to meet ongoing financial obligations in
connection with our regular business operations, including obligations to
vendors, customers and employees during the Bankruptcy Case. Additionally, at
March 31, 2003, we had $24.8 million of cash available to fund current operating
needs.
During the first quarter of 2003, net cash provided by operating activities was
$24.4 million, with $5.3 million provided by operations plus net positive
changes in operating assets and liabilities totaling $19.1 million.
Depreciation, amortization and accretion of the asset retirement obligation
totaled $18.1 million. The principal changes in operating assets and liabilities
were as follows: accounts receivable decreased by $.7 million due to improvement
in receivable turnover; inventories and supplies decreased $.5 million due to
efforts to reduce handset inventory levels in recognition of improvement in
handset availability and improved inventory flow; other assets and income taxes
increased by $2.8 million primarily from a $1.9 million insurance prepayment and
from other vendor related deposits; and, accounts payable and other current
liabilities, including liabilities subject to compromise, increased a total of
$20.5 million due to the timing of payments, significantly impacted by the
bankruptcy stay on pre-petition liabilities (Note 1).
During the first quarter of 2002, net cash provided by operating activities was
$5.9 million, with $.5 million used in operations offset by net positive changes
in operating assets and liabilities totaling $6.4 million. Within the $.5
million used in operations, one of the reconciling items adjusting net income to
net cash is an adjustment for $9.1 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 was paid out of restricted
cash through August 15, 2002. The principal changes in operating assets and
liabilities were as follows: accounts receivable increased by $1.6 million, or
5%, due primarily to a 5% increase in revenues over the fourth quarter 2001;
inventories and supplies decreased $3.8 million due to efforts to reduce handset
inventory levels in recognition of improvement in handset availability; other
current assets decreased $1.4 million primarily due to favorable collections
experience of other receivables; and, current liabilities increased $2.8 million
due to a $3.2 million decrease in interest accrued on the Senior Subordinated
Notes due to the $6.4 million February semi-annual interest payment offset by
$6.0 million in increased current liabilities due to the timing of other
payments at the end of the respective periods.
29
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
Our cash flows used in investing activities for the first quarter of 2003
aggregated $11.0 million and primarily included $11.3 million for first quarter
capital expenditures, offset by $.3 million in proceeds from the sale of
investments.
Our cash flows used in investing activities for the first quarter of 2002
aggregated $18.5 million and included the following:
o $29.1 million for first quarter capital expenditures, $9.9 million of which
was for the wireless upgrade to 3G-1XRTT technology in the western markets
in support of the Horizon wholesale network services agreement; and,
o $10.6 million in proceeds from the sale of communications towers and
inactive PCS licenses (Note 5).
Net cash provided by financing activities for the first quarter of 2003
aggregated $.8 million which represents scheduled principal payments on other
long-term debt.
Net cash provided by financing activities for the first quarter of 2002
aggregated $7.2 million, which included $10.0 million of additional borrowings
against the Senior Credit Facility, a $1.8 million use of cash for scheduled
principal payments on other long-term debt, and $1.0 million primarily used to
pay loan amendment fees.
In 2003, we anticipate capital restructuring upon the emergence from bankruptcy
which, if consummated as described in "Chapter 11 Bankruptcy Filing" above, will
significantly improve the level of leverage and reduce cash outflows for
interest payments from the planned conversion or extinguishment of the Senior
Notes and Subordinated Notes, will result in the securing of $75 million of new
9.0% convertible notes of the reorganized Company ("New Notes"), and will result
in lower average interest rates on the remaining debt. From an operational
standpoint, we anticipate a continued increase in PCS subscribers, continued
improvement in cash flows in most of the operating segments, particularly in the
wireless segment, and continued revenue growth from our wireline segments.
Consummation of a plan of reorganization and achievement of these results is
important to ensure long-term liquidity and continued access to borrowings under
our Senior Credit Facility.
In addition, our liquidity needs will be impacted by:
o capital expenditures required to complete the deployment of 3G-1XRTT
technology in certain of the VA Alliance and WV Alliance markets
(approximately $10 million);
o capital expenditures required to support customer growth and wholesale
usage to provide sufficient PCS capacity;
o capital expenditures required to support access line growth in existing
markets;
o significant interest expense associated with debt;
o expenditures required to settle pre-petition obligations in accordance with
an approved plan of reorganization; and,
o financial advisory, legal and other professional fees incurred during the
bankruptcy.
30
NTELOS Inc. (Debtor-in-Possession)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Continued
Our liquidity sources assume:
o cash flow from operations;
o $35 million available under our DIP Financing Facility, subject to
compliance with financial, business and reporting covenant requirements
during the pendency of the Bankruptcy Case;
o $75 million of proceeds from the planned issuance of New Notes; and,
o disposition of additional non-strategic businesses and assets, including
$6.9 million from the sale of the Company's Portsmouth Virginia call center
building and $8.7 million from the planned sale of the wireline cable
operation. As defined in the April 17, 2003 court orders approving these
transactions, the net proceeds from these sales are required to be paid
against the pre-petition balances of the senior credit facility and against
the DIP facility in their order of priority.
o In addition, 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.
We expect capital expenditures for the year 2003 to be between $58 million and
$66 million. We expect these capital expenditures to be used to:
o complete deployment of 3G-1XRTT technology in certain of the VA Alliance
and WV Alliance markets;
o support network capacity and coverage demands of VA East, VA Alliance and
WV Alliance operations;
o support customer and usage growth in ILEC, CLEC and Internet access
services; and,
o support back office tools in order to improve customer satisfaction and
improve our internal controls and efficiencies.
Approximately $8 to $10 million of these anticipated 2003 capital expenditures
are based on an obligation within our wholesale agreement with Sprint/Horizon to
complete the build out of a 3G-1XRTT network in certain markets. VA East and the
Alliances have substantially satisfied their FCC build-out requirements.
Accordingly, aside from the 3G-1XRTT network upgrade commitment, the
expenditures forecast noted above is primarily driven by the expected need to
support customer growth and wholesale usage. To the extent that this customer
growth and wholesale usage is less than expected, our capital expenditures will
be reduced. Since these are generally capacity related expenditures to support
customer growth, it is uncertain when these proposed uses will be initiated or
completed.
Subject to consummation of a restructuring plan, as described above, and based
on our assumptions about the future of our operating results and our capital
expenditure needs, we believe that we will have sufficient financial resources
to fund our existing and currently anticipated operational plans. However, if
any of our assumptions prove incorrect, or we are unable to consummate the
aforementioned plan of reorganization, we would not have sufficient financial
resources to continue as a going concern.
31
NTELOS Inc. (Debtor-in-Possession)
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's $260.3 million of outstanding borrowings under the Senior Credit
Facility bears interest at rates 3% to 4% above the Eurodollar rate or 2.5% to
3% above the federal funds rates. The Company's Senior Notes and Subordinated
Notes are at fixed interest rates of 13% and 13.5%, respectively. The Company
has other fixed rate, long-term debt totaling $24.2 million at March 31, 2002.
The Company is exposed to market risks primarily related to interest rates. To
manage its exposure to interest rate risks and in accordance with conditions of
the senior note indenture, the Company entered into two, five year interest rate
swap agreements with notional amounts of $162.5 million in September 2000. These
swap agreements manage the Company's exposure to interest rate movements by
effectively converting a portion of the long-term debt from variable to fixed
rates. The net face amount of interest rate swaps subject to variable rates as
of March 31, 2002 and 2003 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 1.36% as of March 31, 2002. The notional amounts do not
represent amounts exchanged by the parties, and thus are not a measure of
exposure of the Company. The amounts exchanged are normally based on the
notional amounts and other terms of the swaps. Interest rate differentials paid
or received under these agreements are recognized over the one-month maturity
periods as adjustments to interest expense. The fair values of our interest rate
swap agreements are based on dealer quotes. Neither the Company nor the
counterparties, which are prominent bank institutions, are required to
collateralize their respective obligations under these swaps. The Company is
exposed to loss if one or more of the counterparties default. At March 31, 2003,
the Company had minor exposure to credit loss on interest rate swaps. At March
31, 2002 and 2003, the swap agreements had a fair value $11.2 million and $19.3
million, respectively, below their combined face value. The effects of a one
percentage point change in LIBOR rates would change the fair value of the swap
agreements by $4.1 million for a one percentage point increase in the rate (to
$15.2 million below face value) and $4.2 million for a one percentage point
decrease in the rate (to $23.5 million below face value). The interest rate swap
liability at March 31, 2003 has been classified as a current liability (within
the liabilities subject to compromise) as a result of the bankruptcy filing and
a cross-default as a result of non-compliance with the debt to capitalization
rates under the Senior Credit Facility. The Company has interest rate risk on
the borrowings in excess of the $162.5 million of senior bank debt covered by
the swap noted above. At March 31, 2003, the Company's senior bank debt totaled
$260.3 million, or $97.8 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 filing of
the Bankruptcy Cases.
At March 31, 2003, the Company's financial assets included cash and cash
equivalents of $24.8 million and securities and investments of $8.4 million,
$7.8 million of which are restricted. With respect to the cash and cash
equivalents, as well as $8.0 million of the investments, there are no material
market risks as these are fixed maturity, high quality instruments. Also, we
believe there are minimal credit risks as the counterparties are prominent
financial institutions.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules
13a-14(c) and 15-d-14(c)) as of a date ("Evaluation Date") within 90 days
before the filing of this quarterly report on Form 10-Q, have concluded
that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made
known to them by others within those entities.
(b) Change in Internal Controls
There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
32
NTELOS Inc.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
During the pendency of the Bankruptcy Case, all pending litigation is
stayed. See Note 1 to the Notes to Condensed Consolidated Financial
Statements included in this Form 10-Q.
Item 2. Changes In Securities
In connection with the Company's comprehensive financial restructuring,
the Company did not make the semi-annual interest payments of $18.2
million and $6.4 million due February 18, 2003 on its Senior Notes and
Subordinated Notes, respectively. On March 4, 2003, the Company and
certain of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code. As a result of
the Bankruptcy Case, no principal or interest payments will be made on
the Senior Notes or Subordinated Notes until a plan of reorganization
defining the payment terms has been approved by the Bankruptcy Court.
Additional information regarding the Bankruptcy Case is set forth
elsewhere in this Form 10-Q, including Note 1 to the Condensed
Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K
Form 8-K dated February 18, 2003, pertaining to a press release
announcing that the Company was in active discussions with its
debtholders concerning a comprehensive financial restructuring plan
and that, in connection with these discussions, the Company would
not make the scheduled semi-annual interest payments due February
18, 2003, on its senior and subordinated notes.
Form 8-K dated March 4, 2003, pertaining to a press release
announcing that the Company filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NTELOS Inc.
May 15, 2003 /s/J. S. Quarforth
--------------------------------------------------
J. S. Quarforth, Chief Executive Officer
May 15, 2003 /s/M. B. Moneymaker
--------------------------------------------------
M. B. Moneymaker, Senior Vice President and
Chief Financial Officer, Treasurer and Secretary
34
Certification of the Chief Executive Officer
I, James S. Quarforth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NTELOS Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ James S. Quarforth
--------------------------------
James S. Quarforth
Chief Executive Officer
35
Certification of the Chief Financial Officer
I, Michael B. Moneymaker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NTELOS Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the auditors and the audit committee
of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003 By: /s/ Michael B. Moneymaker
--------------------------------
Michael B. Moneymaker
Chief Financial Officer
36