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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2001
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OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to __________
Commission File Number: 0-16751
NTELOS INC.
(Exact Name of Registrant as Specified in Charter)
Virginia 54-1443350
(State of Incorporation) (IRS Employer Identification No.)
P. O. Box 1990
Waynesboro, Virginia 22980
(Address of principal executive offices)
(540) 946-3500
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Register
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 18, 2002, $78,060,933 (In determining this figure, the
registrant has assumed that all of its directors and executive officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purpose. The aggregate market value has been computed based upon the average of
the bid and asked prices as of March 18, 2002.)
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: As of March 18, 2002, 17,227,317 shares
DOCUMENTS INCORPORATED BY REFERENCE
Information from the following documents has been incorporated by
reference in this report:
--- Proxy Statement for 2002 Annual Meeting of Shareholders - PARTS I
AND III
2
PART I
Item 1. BUSINESS
We are a regional integrated communications provider offering a broad
range of wireless and wireline products and services to business and residential
customers in Virginia, West Virginia, Kentucky, Tennessee and North Carolina. We
own our own digital PCS licenses, fiber optic network, switches and routers,
which enable us to offer our customers end-to-end connectivity in many of the
regions we serve.
Our business encompasses both wireless and wireline communications
services:
. Wireless. Our wireless business consists primarily of digital PCS
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services, which we offer in Virginia, West Virginia, North Carolina and
Kentucky. We began offering digital PCS services in late 1997 and
offered analog cellular until July 2000. Our PCS network utilizes
digital CDMA technology. As of December 31, 2001, we owned licenses
covering approximately 10.2 million pops and provided PCS services to
approximately 223,800 subscribers.
. Wireline. We provide ILEC and CLEC services in Virginia, West Virginia
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and Tennessee. As an ILEC, we own and operate a 105-year-old local
telephone company. As of December 31, 2001, our ILEC had approximately
52,000 residential and business access lines installed. As a CLEC, we
serve 15 markets in three states. Since commencing CLEC operations in
mid-1998, we have grown our number of installed business access lines
to approximately 33,600 as of December 31, 2001. In addition, we
provide wireline Internet access through a local presence in Virginia,
West Virginia, Tennessee and North Carolina. We offer high-speed data
services, such as dedicated service and DSL within these three states.
As of December 31, 2001, our Internet customer base totaled
approximately 70,200 dial-up subscribers and 4,000 DSL subscribers.
Our wireless and wireline businesses are supported by our fiber optic
network, which currently includes 1,600 route-miles. This network gives us the
ability to originate, transport and terminate much of our customers'
communications traffic in many of our service markets. We also use our network
to back-haul communications traffic for our retail services and to serve as a
carrier's carrier, providing transport services to third parties for long
distance, Internet and private network services. Our fiber optic network is
connected to and marketed with adjacent fiber optic networks in the mid-Atlantic
region.
See Note 2 of the Notes to Consolidated Financial Statements in Item 8
of this report for financial information about industry segments.
Business Strategy
Our objective is to be the leading integrated communications provider
in our region of operations. The key elements of our business strategy are to:
Increase Market Share by Establishing Service-Driven Customer
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Relationships through a Local Presence. We intend to grow our business by
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leveraging our local presence and continuing our focus on providing high levels
of customer satisfaction. We plan to accomplish this by increasing local retail
outlets in our new markets and a business to business sales team that provides
face-to-face sales and personalized client care. We intend to enhance our local
presence by continuing our support of the communities that we serve, including
corporate and employee participation in community programs, and expanding this
support to our target markets.. We will reinforce our customer relationships by
continuing to provide integrated, personalized customer care in each of our
markets. We intend to do this through our retail locations, which also serve as
customer care centers, and our 24 hours-a-day, 365 days-a-year call centers.
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Accelerate Growth by Offering Bundled Services. We intend to accelerate
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our growth by offering a broad range of communications services in a bundled
package and on a single bill. In 2001 we broadened our service offerings by
offering DSL services to residential customers through the use of line sharing
technology. We believe that by cross-selling multiple products and services, we
are building new customer relationships, strengthening the partnership with
existing customers and increasing customer retention.
Leverage Our Fiber Optic Network, Infrastructure and Technologies. Our
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infrastructure, including our fiber optic network, switches and routers, is a
technologically-advanced communications facility that connects many of our
markets. We intend to offer our broad range of communications services in many
of our markets and deliver those services over infrastructure that we control
and maintain. We also intend to continue using our network to serve as a
carrier's carrier, offering switching and transport services to other
communications carriers. As Internet and data transmission markets grow, we plan
to utilize our network infrastructure to deliver high-speed broadband data
applications to our customers. As new wireless data applications become
available, we also intend to use our PCS bandwidth capacity, which ranges from
10 MHz to 40 MHz in our markets to capitalize on opportunities in the growing
market for wireless Internet access and data transmission.
Recent Developments
We have expanded the geographic region that we serve and focused 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 non-strategic assets and excess PCS spectrum. Transactions that
were completed in 2001 and the first quarter of 2002 include the:
. merger with R&B Communications;
. purchase of PCS spectrum covering 2.9 million pops in Pennsylvania and
Ohio in exchange for WCS spectrum in Virginia;
. increase of our ownership interest in the Virginia and West Virginia
PCS Alliances to 97% and 98%, respectively, through the merger with R&B
Communications and buyout of certain other minority interests;
. sale of our Kingsport, Tennessee PCS licenses;
. entered into agreements for the sale of certain PCS licenses covering
225,000 pops in Pennsylvania, 570,000 pops in West Virginia, and
373,000 pops in Virginia;
. sale of 46 and 24 communications towers in fourth quarter 2001 and
first quarter 2002, respectively; and,
. sales of our 925,789 shares of Illuminet Holdings, Inc. for $30.3
million.
R&B Communications, Inc.
Pursuant to an agreement and plan of merger, we merged with R&B
Communications, Inc. ("R&B Communications") on February 13, 2001, by issuing
approximately 3.7 million shares of our common stock for all of the issued and
outstanding shares of R&B Communications common stock. The merger was a tax-free
reorganization and was accounted for as a purchase.
R&B Communications is an integrated communications provider offering a
broad range of products and services, including ILEC, CLEC, Internet access,
data transmission facilities and paging and long distance telephone services.
NTELOS and R&B Communications have pursued joint initiatives in the Virginia and
West Virginia communications markets for a number of years, including ValleyNet,
a fiber optic consortium, the Virginia PCS
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Alliance, L.C. (the "VA Alliance") and the West Virginia PCS Alliance, L.C. (the
"WV Alliance" and, together with the VA Alliance, the "Alliances"), through
which both of us conduct PCS operations, and acquisitions of several digital PCS
and LMDS wireless spectrum licenses. R&B Communications operates as an ILEC in
Botetourt County, Virginia and offers its CLEC services in Roanoke, Virginia and
the New River Valley of Virginia. The merger also added approximately 200 miles
to our fiber optic network.
Our Wireless Markets
The following table sets forth information as of March 22, 2002,
regarding estimated market pops, market MHz held and total MHz pops in the
digital PCS markets in which we operate and the markets in which we have
licenses but do not yet operate:
Market Name POPs (000) * MHz Held MHz POPs
- ----------- ------------ -------- --------
Operating Markets
Virginia
Charlottesville (1) 215 30 6,450
Danville 170 30 5,100
Harrisonburg 143 20 2,860
Lynchburg 158 30 4,740
Martinsville 89 30 2,670
Norfolk 1,763 20 35,260
Richmond 1,211 20 24,220
Roanoke 640 30 19,200
Staunton/Waynesboro 109 30 3,270
Winchester (1) 158 30 4,740
West Virginia
Beckley (1) 168 40 6,720
Bluefield (1) 177 30 5,310
Charleston 487 30 14,610
Clarksburg-Elkins 194 10 1,940
Fairmont 56 40 2,240
Huntington, WV-Ashland, KY 369 30 11,070
Morgantown 107 25 2,675
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Total Operating Markets 6,214 153,075
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Non-Operational Markets
Virginia
Brunswick-Mecklenburg 45 30 1,350
Fredericksburg 136 10 1,360
West Virginia
Logan 41 30 1,230
Parkersburg, WV-Marietta, OH 182 30 5,460
Wheeling 212 30 6,360
Williamson, WV-Pikeville, KY 186 30 5,580
Ohio
Athens 132 15 1,980
Chillicothe 105 15 1,575
Portsmouth 96 30 2,880
Zanesville-Cambridge 187 15 2,805
Pennsylvania
Altoona 224 15 3,360
Harrisburg 687 10 6,870
Lancaster 457 10 4,570
Reading 356 10 3,560
State College (1) 134 10 1,340
Williamsport (1) 161 10 1,610
York-Hanover 463 10 4,630
Maryland
Cumberland 160 40 6,400
Hagerstown 355 20 7,100
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Total non-operational 4,319 70,020
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Total Wireless Markets 10,533 223,095
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* Source: Kagan's BTA Demographics 2000
(1) The Company has announced the signing of definitive agreements for the sale
of excess PCS spectrum in certain BTAs. The pending agreements are for the
sale of 10 MHz each in the BTAs of Charlottesville and Winchester,
Virginia; Bluefield, West Virginia; State College and Williamsport,
Pennsylvania; and, 20 MHz in Beckley, West Virginia.
Products and Services
We segregate our services into three primary categories: wireline
communications, wireless communications and other communications services.
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The percentage of total sales contributed by each class of service is as
follows:
2001 2000 1999
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Wireline communications 40.2% 51.3% 60.9%
Wireless communications 55.3% 34.4% 7.6%
Other communications services 4.5% 14.3% 31.5%
Wireless
Digital PCS. Our digital PCS packages provide the following affordable
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and reliable services:
. Digital Features. The features of our basic PCS service include voice
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mail with notification, caller ID, call waiting, three-way calling and
call forwarding. For an additional fee, we also provide wireless
Internet access.
. Nationwide Service. Our nationwide roaming agreements and dual-mode
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handsets allow our customers to roam on wireless networks of other
wireless providers. We have a nationwide roaming agreement with Sprint
that allows our PCS customers to make and receive calls when roaming on
the Sprint digital CDMA network.
. Advanced Handsets. We offer single, dual and tri-mode handsets
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employing CDMA technology, which allow customers to make and receive
calls on both CDMA PCS and analog frequency bands. These handsets allow
roaming on digital or analog networks where our digital PCS service is
not available. These handsets are equipped with preprogrammed features
such as speed dial and last number redial.
. Extended Battery Life. The CDMA handsets that we offer provide extended
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battery life. These handsets generally offer four days of standby and
two and one-half hours of talk time battery life. Handsets operating on
a digital system are capable of saving battery life while turned on but
not in use, improving efficiency and extending the handset's use.
. Enhanced Voice Quality. Our CDMA technology offers enhanced voice
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quality and clarity, powerful error correction, less susceptibility to
call fading and enhanced interference rejection, as compared to analog
cellular systems, all of which result in fewer dropped calls.
. Privacy and Security. Our PCS services provide secure voice
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transmissions encoded into a digital format, designed to prevent
eavesdropping and unauthorized cloning of subscriber identification
numbers.
. Customer Care. We offer customer care 24 hours-a-day, 365 days-a-year.
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Customers can call our toll-free customer care number from anywhere.
Our PCS handsets can be preprogrammed with a speed dial feature that
allows customers to easily reach customer care at any time. Our local
retail stores also serve as customer contact centers, where customers
can receive personalized customer service.
. Simple Rate Plans. Customers can select from rate plans that include
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expanded local, state or regional one-rate calling areas. Our business
and residential PCS customers can also bundle nationwide toll-free
calling and Internet access at a discount with their basic PCS
services.
. nAdvance Plans. Our new advanced billing product, called nAdvance, is a
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hybrid product designed to serve the growing segment of customers
preferring post-pay-type rate plans within a pay in advance
environment. After paying an activation fee, these accounts enjoy the
same basic features as traditional post-pay customers, including night
and weekend options, nationwide long distance, and the ability to add
roadside assistance and
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other options. Account balances are replenished monthly by automatic
credit card billing or electronic bank draft. A one-year contract and a
monthly service fee apply.
Wholesale Wireless Services. We provide digital PCS services on a
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wholesale basis to other PCS service providers. We have a ten-year agreement
with Horizon Personal Communications, Inc., a Sprint affiliate, to provide
wholesale PCS services through a contiguous 13 BTA footprint. These BTAs include
Charlottesville, Danville, Lynchburg, Martinsville, Roanoke, and
Staunton-Waynesboro, Virginia; Beckley, Bluefield, Charleston,
Clarksburg-Elkins, Fairmont, and Morgantown, West Virginia; Huntington, West
Virginia-Ashland, Kentucky. Horizon uses our network to provide retail service
to its customers in these BTAs. The agreement with Horizon was amended in the
third quarter of 2001. This amendment provides pricing changes, includes minimum
monthly revenue commitments from July 2001 through December 2003, and additional
revenue for minutes of use that exceed predetermined thresholds. As part of this
amendment, our subsidiaries have agreed to comply with certain network upgrades
to 3G1XRTT technology. This new technology will be deployed in these wholesale
BTAs in a two phase build out plan. The first phase is scheduled to be completed
by July 2002 and the second phase is scheduled to be completed by August 2003.
In addition to the wholesale services discussed above, a related Network
Services agreement provides for roaming services for Horizon and Sprint end
users.
New Products and Services. We recently began offering our PCS customers
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mobile Internet access, which they can utilize by connecting their wireless
handsets to a laptop or other handheld device. Our wireless Internet access
enables PCS customers to send and receive e-mail or other information any time
they are on a CDMA network. Our CDMA technology also supports direct Internet
access from a handset. We are currently developing this product and expect it to
become widely marketed with the availability of data-capable handsets.
Wireline
Our wireline communications services include ILEC and CLEC services,
Internet access, including high-speed DSL and dial-up, and data transmission
services. We also own and operate a fiber optic cable network, switches and
routers through which we deliver many of our services.
ILEC and CLEC. We currently provide ILEC and CLEC services in Virginia,
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West Virginia and Tennessee. As an ILEC, we own and operate a 105-year-old
telephone company in western Virginia that serves business and residential
customers. In February 2001, through our merger with R&B Communications, we
acquired the R&B ILEC, a 100-year-old telephone company in southwestern Virginia
that serves business and residential customers. As a CLEC, we serve business
customers in 15 markets with interconnection agreements with Verizon and Sprint.
We offer our ILEC and CLEC customers voice services that include the
following:
. Custom Calling Features. We offer a broad range of custom calling
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features, including call waiting, continuous redialing, caller ID and
voice mail.
. Centrex Services. We offer our business customers Centrex services,
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which replace a customer's private branch exchange, or PBX, system. In
lieu of a PBX system, our Centrex services provide the switching
function, along with multiple access lines.
. Long Distance Services. We provide long distance within the local
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access transport area served by our ILEC. We offer domestic and
international long distance services to our ILEC and CLEC customers
through resale arrangements with interexchange carriers such as AT&T
and MCI WorldCom.
. Internet. We provide Internet access services in Virginia, West
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Virginia, Tennessee and North Carolina. We offer our Internet customers
value-added services that include the following:
. Local Dial-Up Internet Access. We offer dial-up Internet access through
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59 local Internet points of presence. We offer multiple e-mail
accounts, free software and personal disk space.
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. Dedicated Internet Access. We provide dedicated high-speed Internet
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connectivity, including frame relay, ATM and leased line services.
. High-Speed DSL Access. We offer DSL Internet access. DSL technology
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enables a customer to receive high-speed Internet access through its
copper telephone line.
. Web Hosting. We host over 3,200 domains on both UNIX and Windows NT
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servers. In addition to Web hosting, we offer Web site design and
development through NetAccess. Domain services, collocation agreements
and Internet marketing services are also available.
. Fiber Optic Network. We own and operate a fiber optic cable network.
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Our fiber optic network provides a backbone for the delivery of our
ILEC, CLEC, Internet access and digital PCS services to business and
residential customers. Our network enables us to originate, transport
and terminate communications traffic within our service territory,
facilitating our ability to control quality and contain network
operating costs. A portion of our network is a part of a fiber network
managed by ValleyNet, a partnership of us and three other nonaffiliated
communications companies that have interconnected their networks to
create a 912 route-mile, nonswitched, fiber optic network from
Carlisle, Pennsylvania, through the Interstate 81 corridor in Virginia,
to Johnson City, Tennessee. It also includes branches from Winchester
to Herndon, Virginia and Waynesboro to Charlottesville, Virginia.
ValleyNet is a member of DDR Broadband, LLC which provides fiber routes
in North Carolina, South Carolina, Georgia, and Florida. The ValleyNet
network is connected to and marketed with other adjacent fiber
networks, including GPU Telecom Services, Inc., Kentucky Data Link and
America's Fiber Network, creating approximately 11,000 route-miles of
connected fiber optic network that serves ten states.
We also use our network to serve as a carrier's carrier, leasing
capacity on our network to other communications carriers for the provision of
long distance services, private network facilities and Internet access. In
addition, we are a minority owner of a newly formed fiber optic cable joint
venture, America's Fiber Network, LLC, which controls an approximately
7,000-mile network extending from New York to Chicago to Johnson City,
Tennessee. We are also a regional partner in the nationwide signaling system
network operated by Illuminet Holdings, Inc. As a regional partner, we lease
capacity to Illuminet on our mated pair of signal transfer points.
Other
We own and operate wireless cable systems in the Charlottesville, Roanoke
Valley, Shenandoah Valley and Richmond, Virginia markets. These systems
currently provide wireless cable service to approximately 8,400 customers. We
offer our subscribers up to 25 basic cable channels, including ESPN, CNN, TBS
and MTV, and one to three premium channels, including HBO, the Disney Channel
and Showtime. The Company also operates a 750 MHz wireline cable system in
Allegheny County, Virginia with a similar product offering. There are currently
approximately 6,800 wireline cable subscribers. We also provide our customers
with paging services that cover most of Virginia. As of December 31, 2001, we
had approximately 14,700 paging customers. We offer numeric, alphanumeric,
tone-only and tone and voice paging services, as well as wide-area paging.
Sales and Marketing
We use several sales channels to distribute our products and services.
These channels include company-owned retail stores and kiosks, a direct and
telesales sales force and third-party indirect sales agents. We seek to have a
strong retail presence in the markets that we serve, and therefore focus our
sales efforts on our retail locations. Each of our retail locations is staffed
with locally-based sales and customer service representatives. We use our retail
locations to provide face-to-face personalized product sales and client care. We
also have account representatives assigned to the small to medium-sized business
market segment and other account representatives assigned to the large business
market segment.
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Our marketing strategy focuses on our position as an integrated
communications provider. Our strategy is comprised of the following key
elements, which apply to each of our products and services across all of our
markets:
. provide value-added products and services through bundled packages;
. provide exceptional customer service; and,
. serve as a strong corporate citizen and integral part of the community.
We seek to use these elements to position us as a customer's first
choice for complete communications solutions.
We strengthen our local presence through corporate and employee support
of the communities in our markets. We participate in local charities, community
organizations and chambers of commerce. We use our local presence to pursue an
aggressive branding campaign, primarily by advertising through radio, newspapers
and television. Our target demographics are individuals in the 25 to 54 year-old
range and small to medium-sized businesses.
Network Infrastructure and Technology
Wireless
Wireless digital signal transmission is accomplished through one of
three protocols: CDMA, TDMA or GSM, none of which are compatible. We deliver our
PCS services through CDMA technology. Our CDMA network includes four wireless
switches with seven centralized base station controllers, or CBSCs, supporting
more than 700 base transceiver stations, or BTSs and 70 repeaters. We collocate
a 3Com inter-working unit with each switch to enable wireless data access. We
use various configurations of Lucent BTS equipment in VA East and Motorola BTS
equipment in VA West and West Virginia, as well as cell site repeaters, to
provide cost-efficient radio frequency coverage. We enhance PCS backhaul
facilities through the use of Tellabs digital access cross-connect systems, or
DACS, equipment located at strategic BTS locations. The DACSs consolidate the
T-1 facilities from multiple BTSs for efficient backhaul to the wireless switch.
Wireline
Our network infrastructure and supporting services form a
communications backbone through which we deliver ILEC, CLEC, Internet access and
digital PCS services. Owning and operating our own network facilities enhances
our ability to control the quality of our products and services and generate
operating efficiencies and economies of scale. One of our operating strategies
has been to deploy new technology to increase operating efficiencies and to
provide a platform for the delivery of new services to our customers. We believe
that we have been among the leaders in the communications industry in
infrastructure development. We began providing digital and private line service
to our customers in 1986. We have installed fiber optic cable between our main
switches and our remote switching units. Our digital fiber network provides
faster call completion, improved transmission quality, lower costs and the
ability to offer a broader range of communications services and products.
Our wireline network includes two Lucent 5ESS digital switches, which
provide end-office and tandem functions for both our ILEC and CLEC businesses in
Virginia. We have twelve remote switching modules deployed throughout our ILEC
territory and three more supporting our CLEC markets. Another Lucent 5ESS
digital switch, located in Charleston, supports our CLEC business in West
Virginia. We act as a regional node on Illuminet's nationwide SS7 network using
a pair of Tekelec signal transfer points.
We use Lucent Any Media and Advanced Fiber Corporation UMC1000 digital
loop carriers throughout our ILEC and CLEC access network. Pairgain
high-bit-rate DSL transport equipment is used to provide T-1 speeds
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where conditioned facilities are not readily available. We provide our voicemail
services on a Glenayre platform. Our network operations center monitors our
wireline, wireless and data networks on a continuous basis using a Harris
network management system. ATM and Frame Relay services are provided in Virginia
markets using two Cisco ATM switches.
Competition
Many communications services can be provided without incurring an
incremental charge for an additional unit of service. For example, there is
virtually no marginal cost for a carrier to transmit a call over its own
network. As a result, once there are several facilities-based carriers providing
a service in a given market, price competition is likely and can be severe. As a
result, we have experienced price competition, which is expected to continue. In
each of our service areas, additional competitors could build facilities. If
additional competitors build facilities in our service areas, this price
competition may increase significantly.
Wireless
We compete in our territory with both wireless analog and wireless
digital communications service providers. Several wireless carriers compete in
portions of our market areas, including Alltel Mobile, AT&T/SunCom, Horizon
Personal Communications, Nextel, Sprint PCS, Verizon Wireless, and affiliates of
some of these companies. Many of these competitors have financial resources and
customer bases greater than ours. Some wireless providers are able to offer free
services, including, among others, free long distance, free incoming calls and
free wireless Internet access. Many of them also have more established
infrastructures, marketing programs and brand names. In addition, some of our
competitors offer coverage in areas not serviced by our PCS network, or, because
of their calling volumes or their affiliations with, or ownership of, wireless
providers, offer roaming rates lower than ours.
We believe that a growing number of PCS operators will likely compete
with us in providing some or all of the services available through our network
and may provide services that we do not. Additionally, we expect that existing
analog cellular providers, some of which have been operational for a number of
years and have significantly greater financial and technical resources and
customer bases than us, will continue to upgrade their systems to provide
digital wireless communication services competitive with ours. We also face
competition from resellers, which provide wireless service to customers but do
not hold FCC licenses or own facilities. We compete with wireless providers that
have greater resources than ours that may build their own digital PCS networks
in areas in which we operate.
In addition, we will compete with paging, dispatch and conventional
mobile telephone companies in our digital PCS markets. Potential users of PCS
systems may find their communications needs satisfied by other current and
developing technologies. One or two-way paging or beeper services that feature
voice messaging and data display, as well as tone-only service, may be adequate
for potential customers who do not need to speak to the caller.
Wireline
ILEC and CLEC Services. Several factors have resulted in increased
----------------------
competition in the local telephone market over the past 16 years, including:
. growing customer demand for alternative products and services;
. technological advances in the transmission of voice, data and video;
. development of fiber optics and digital electronic technology;
. a decline in the level of access charges paid by interexchange carriers
to local telephone companies to access their local networks;
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. legislation and regulations, including the Telecommunications Act of
1996, designed to promote competition; and,
. a decline in the level of reciprocal compensation charges paid by local
telephone companies to CLECs, most significantly for ISP traffic.
As the ILEC for Waynesboro, Clifton Forge, Covington, Troutville,
Fincastle, Eaglerock and Oriskany, Virginia, and the surrounding counties, we
are subject to competition from CLECs. Although no CLECs have entered our
incumbent markets to compete with us, it is possible that one or more may enter
our markets to compete for our largest business customers. The regulatory
environment governing ILEC operations has been and will likely continue to be
very liberal in its approach to promoting competition and network access. Cable
operators are also entering local exchange markets in selected locations. Other
sources of potential competition include wireless service providers.
Our CLEC operations compete primarily with local incumbent telephone
companies and, to a lesser extent, other CLECs. Although certain CLEC companies
have exited from our markets, we continue to face competition in our CLEC
markets from several other CLECs, including Adelphia, Fibernet, and KMC. We also
face, and will continue to face, competition from other current and potential
future market entrants.
Internet. We currently offer our Internet and data services in small,
--------
underserved markets. The Internet industry is characterized by the absence of
significant barriers to entry and the rapid growth in Internet usage among
customers. As a result, we expect that our competition will increase from market
entrants offering high-speed data services, including DSL, cable and wireless
access. We believe this will likely occur as large diversified communications
and media companies acquire ISPs and as ISPs consolidate into larger, more
competitive companies. Our competition includes:
. access and content providers, such as America Online, the Microsoft
Network and Prodigy;
. local, regional and national Internet service providers;
. the Internet services of regional, national and international
communications companies, such as AT&T, BellSouth and MCI WorldCom;
. regional Bell operating companies, such as Verizon; and,
. online services offered by incumbent cable providers.
Many of our competitors have financial resources, corporate backing,
customer bases, marketing programs and brand names that are greater than ours.
Additionally, competitors may charge less than we do for Internet services,
causing us to reduce, or preventing us from raising, our fees.
Miscellaneous
We sell PCS wireless service, on a wholesale basis, to other
communications providers under network service agreements. For the year ended
December 31, 2001, our sale of PCS wireless service to Horizon Personal
Communications, Inc., on a wholesale basis, accounted for approximately 10% of
our consolidated revenue.
Our business generally is not seasonal, except that in the wireless PCS
business we experience higher retail sales volume, and resulting cost of
subscriber acquisition, during the fourth quarter and our roaming traffic is
typically higher in the summer months.
12
No material amounts of extended payment terms are made to customers.
Orders for installation of services are being filled on a current basis. No
material part of the business is done with Government entities. Research and
development is performed by our suppliers.
We believe we are in compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. We do not anticipate any material effect on capital expenditures
for environmental control facilities at any time in the future in order to
maintain its compliance.
We employed over 1,350 regular full-time and part-time persons as of
December 31, 2001.
Regulation
Our communications services are subject to varying degrees of federal,
state and local regulation. Under the Communications Act of 1934, as amended by
the Telecommunications Act of 1996, or the Telecommunications Act, the FCC has
jurisdiction over the regulation of interstate and international common carrier
services, over certain aspects of interconnection between carriers for the
provision of competitive local services, and over the allocation, licensing, and
regulation of radio services. At the federal level, the Federal Aviation
Administration also regulates antenna structures used by us. Our common carrier
services are also regulated to different degrees by state public service
commissions, and local zoning and public works authorities have jurisdiction
over public rights-of-way and antenna structures that can affect the coverage
and speed of roll-out of our services. In recent years, the regulation of the
communications industry has been in a state of transition as the United States
Congress and various state legislatures have passed laws seeking to foster
greater competition in communications markets and various of these measures have
been challenged in court cases. The FCC and state regulatory commissions have
adopted many new rules to implement this legislation and encourage competition.
At present, many of the services we offer are unregulated or subject
only to minimal regulation. Our Internet services are not considered to be
common carrier services, although regulatory treatment of Internet services is
evolving and such services may become subject, at least in part, to some form of
common carrier regulation. Our wireless digital PCS service is considered
commercial mobile radio services ("CMRS") and subject to common carrier
regulation. At this time, however, the FCC has declined to impose any rate
regulation on such services and the states are preempted from engaging in entry
or rate regulation, although the states may regulate the other terms and
conditions of such offerings.
Changes in rules or regulatory policy by the FCC and state regulatory
commissions can have a significant impact on the pricing and competitive aspects
of our services and we could become subject to more pervasive regulations, or
have new aspects of our operations regulated, at any time.
Federal Common Carrier Regulation
Interstate common carriers are subject to obligations under the
Telecommunications Act, including, among other things, requirements to:
. provide service upon reasonable request;
. avoid unjust or unreasonable discriminations among customers;
. obtain prior approval for entry into and exit from certain activities;
and,
. interconnect with other carriers, including obligations to unbundle
service offerings in certain circumstances, and provide reciprocal
compensation.
13
Federal Regulation of the Wireless Communications Industry
The FCC regulates the licensing, construction, operation, acquisition
and interconnection arrangements of wireless communications systems in the
United States. CMRS providers are considered "common carriers" and are subject
to the obligations of such carriers, except where specifically exempted by the
FCC. For example, the FCC has concluded that CMRS providers are entitled to
enter into reciprocal compensation arrangements with local exchange carriers,
but Congress has specifically exempted CMRS providers from the definition of
local exchange carriers, absent specific FCC findings related to individual CMRS
providers.
We also hold certain digital PCS and other radio licenses under the
FCC's rules for designated entities, which enabled us to take advantage of
bidding credits and federal financing because we met certain financial limits.
These rules, however, restrict us from entering into certain transactions and
seeking certain investments that may cause a change in our status. The FCC's
designated entities rules provide for, among other things, a number of
disclosure and trafficking restrictions to ensure that benefits received by
designated entities are not assigned to non-qualifying entities. Licenses set
aside for designated entities cannot be assigned, and control of a designated
entity holding such licenses cannot be transferred except to other designated
entities until the first build-out requirement imposed by the FCC has been
satisfied. If a designated entity licensee seeks to undergo a transfer of
control or to assign its licenses, it may be required to pay back all, or a
portion, of its bidding credits and government financing benefits and to pay off
all debt owed to the federal government.
Federal Regulation of ILEC, CLEC and Interexchange Services
The Telecommunications Act requires all ILECs to interconnect on a
non-discriminatory basis with other carriers, and it imposes additional
requirements on the larger ILECs to provide access to their networks to
competing carriers. Among other things, the Telecommunications Act requires
these ILECs to:
. provide physical collocation, which allows CLECs and other
interconnectors to install and maintain their own network equipment in
ILEC central offices, or virtual collocation if requested or if
physical collocation is demonstrated to be technically infeasible;
. unbundle components of their local service networks so that other
providers of local service can compete for a wider range of local
services;
. establish "wholesale" rates for their services to promote resale by
CLECs and other competitors;
. allow interconnection for the provision of local services at any
technically feasible point; and,
. disclose certain technical information.
ILEC operating entities with fewer than 50,000 lines are "rural telephone
companies" and are exempt from these additional requirements. For purposes of
this definition, each of our ILEC operations are considered separately.
Interconnection Agreements. In order to obtain access to an ILEC's
--------------------------
network, a competitive carrier is required to negotiate an interconnection
agreement with the ILEC covering the network elements it desires to use. In the
event the parties cannot agree, the matter is submitted to the state public
service commission for binding arbitration. The Virginia State Corporation
Commission has determined that it lacks the authority under Virginia law to
arbitrate these disputes pursuant to the federal law. Therefore, the FCC has
conducted several Virginia arbitrations over the past year. The
Telecommunications Act's general interconnection requirements apply to
interexchange carriers and to all other providers of communications services,
although the terms and conditions for interconnection provided by these carriers
are not regulated as strictly as interconnection provided by the ILECs.
Access Charges. The FCC has fundamentally restructured the "access
--------------
charges" that ILECs charge to interexchange carriers and end user customers to
connect to the ILEC's network
14
In late May 2000, the FCC adopted an access reform proposal sponsored
by AT&T and several regional Bell operating companies ("RBOCs"). That plan,
which applies to all price cap-regulated ILECs, has substantially lowered ILEC
switched access charges, restructured charges imposed on end users, and
established an explicit funding mechanism for universal service for these price
cap companies.
On October 11, 2001, the Federal Communications Commission modified its
interstate access rules for incumbent local exchange carriers subject to
rate-of-return regulation, including the NTELOS ILECs. The rate changes ordered
by the FCC in these new access rules are intended to be "revenue neutral" to the
carriers. The FCC stated that its goal in adopting the new access rate structure
is to promote competition and efficiency by better aligning prices with costs.
As part of this new federal rate structure, the residential subscriber line
charge was increased to $5.00, and the business subscriber line charge to $9.20,
on January 1, 2002. The per-minute access rates charged by rate-of-return ILECs
to long distance carriers went down by a proportionate amount on the same date.
The FCC's new access structure calls for additional adjustments to access rates
in July of 2002 with the final implementation steps scheduled for July of 2003.
The FCC's new access plan also calls for the "implicit" high-cost support still
contained in federal access charges to be made "explicit" by shifting it into a
new universal service fund. The implementation of the new fund will begin in
July 2002 and be completed a year later.
Concurrent with the adoption of the new structure for access charges by
rate-of-return ILECs, the FCC began a new proceeding in which the Commission is
examining various mechanisms for giving these ILECs additional pricing
flexibility and also forms of "incentive regulation" that might be appropriate
in a rate of return framework.
State Regulation of ILEC, CLEC and Interexchange Services. Most states
---------------------------------------------------------
have some form of certification requirement which requires telecommunication
providers to obtain authority from state regulatory commissions prior to
offering common carrier services. State regulatory commissions generally
regulate the rates ILECs charge for intrastate services, including rates for
intrastate access services paid by providers of intrastate long distance
services. ILECs must file tariffs setting forth the terms, conditions and prices
for their intrastate services. We are subject to regulation in Virginia by the
State Corporation Commission, or SCC. Our tariffs are approved by and on file
with the SCC for ILEC services in our certificated service territory in and
around Waynesboro and Clifton Forge, Virginia and in the Roanoke and New River
Valleys of Virginia.
The Telecommunications Act preempts state statutes and regulations that
restrict the provision of CLEC services. As a result, we are free to provide the
full range of intrastate local and long distance services in all states which we
currently operate, and in any states into which we may wish to expand. We are
also certified as an CLEC in West Virginia and Tennessee. We provide CLEC
services to businesses in Charlottesville, Roanoke, Harrisonburg, Lexington,
Lynchburg, Staunton and Winchester, Virginia and Huntington and Charleston, West
Virginia and our rates for such CLEC service may fluctuate based on market
conditions. While this action greatly increases our potential customer base, it
also potentially increases the amount of competition to which we may be subject
if the state commission were to determine that our rural exemption should be
removed.
Internet and DSL
In addition in late 1991, the FCC ordered ILECs to share a portion of
the telephone line over which voice service is being provided so that providers
of high speed Internet access and other data services could use a portion for
their services This arrangement, known as "line sharing" was clarified and
reaffirmed by the FCC in January of 2001. This action permits CLECs to obtain
access to the high-frequency portion of the local loop from the ILECs over which
the ILECs provide voice services. As a result, a CLEC will be able to provide
DSL-based services over the same telephone lines simultaneously used by the ILEC
for its voice services, and will no longer need to purchase a separate local
loop from the ILEC in order to provide DSL services. This ruling greatly reduces
the charges that a CLEC must pay to the ILEC for the facilities needed to offer
DSL and so makes it easier for CLECs, including ourselves and our competitors to
provide DSL services.
15
Calls placed by end-users to Internet service providers are subject to
reciprocal compensation payments under most existing interconnection agreements.
On February 26, 1999, the FCC decided that these calls are primarily interstate
traffic for jurisdictional purposes. The United States Court of Appeals for the
District of Columbia Circuit on March 24, 2000 vacated and remanded the FCC's
February 26, 1999 decision and required the FCC to explain the rationale for its
decision.
On April 19, 2001, the FCC issued its decision in the remand, again
deciding that such traffic is interstate in nature and adopting a "transitional"
rate structure for compensation for ISP traffic. For the first six months,
intercarrier compensation of ISP-bound traffic was capped at a rate of
$.0015/minute-of-use (mou). For the 18 months thereafter, the rate will be
capped at $.0010/mou. Thereafter, the rate will be capped at $.0007/mou. A cap
was also imposed on total ISP-bound minutes for which a local exchange carrier
(LEC) may receive this compensation equal to the number of ISP-bound minutes for
which that LEC was previously entitled to compensation, plus a ten percent
growth factor. To identify ISP-bound traffic, the Commission adopts a rebuttable
presumption that traffic exchanged between carriers that exceeds a 3:1 ratio of
terminating to originating traffic is ISP-bound traffic.
Investment Considerations
VARIOUS PROVISIONS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN RISK FACTORS, INCLUDING THOSE SET FORTH BELOW. WE ARE NOT
OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS OR TO ADVISE OF
CHANGES IN THE ASSUMPTIONS ON WHICH THEY ARE BASED, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. ALL FORWARD-LOOKING STATEMENTS SHOULD
BE VIEWED WITH CAUTION. Unless the context requires otherwise, words and phrases
such as "expects," "estimates," "intends," "plans," "believes," "projection,"
"budgeted," "targets," "will continue" and "is anticipated" are intended to
identify forward-looking statements.
Forward Looking Statements
This report and the information incorporated by reference in this
report contain various "forward-looking statements," as defined in Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements are based on the beliefs of
our management, as well as assumptions made by, and information currently
available to, our management. We have based these forward-looking statements on
our current expectations and projections about future events and trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks and uncertainties that may lead to results that
differ materially from those expressed in any forward-looking statement made by
us or on our behalf, including, among other things:
. the capital intensity of the wireless telephone business and
our debt structure;
. our substantial debt obligations and our ability to service
those obligations;
. restrictive covenants and consequences of default contained in
our financing arrangements;
. the cash flow and financial performance of our subsidiaries;
. the competitive nature of the wireless telephone and other
communications services industries;
. the achievement of build-out, operational, capital, financing
and marketing plans relating to deployment of PCS services;
16
. retention of our existing customer base, including our
wholesale customers, 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;
. our opportunities for growth through acquisitions and
investments and our ability to manage this growth;
. successful integration of acquisitions;
. the level of demand for competitive local exchange services in
smaller markets;
. our ability to manage and monitor billing; and,
. possible health effects of radio frequency transmission.
Risk Factors
Significant Financial Leverage
We have a significant level of debt and interest expense. As of
December 31, 2001, we had approximately $622.4 million of indebtedness. As of
December 31, 2001, we also have the ability to incur $100 million of additional
debt under our senior credit facility, subject to various conditions, a portion
of which the company expects to borrow in the future. Further, the indenture
governing our senior notes allows us to incur additional debt under various
circumstances.
Our substantial indebtedness poses important consequences to you,
including the risks that:
. we will use a substantial portion of our cash flow from
operations, if any, to pay principal and interest on our debt,
which would reduce the funds available for unanticipated capital
requirements, working capital, capital expenditures and other
general corporate purposes;
. our indebtedness may limit our ability to obtain additional
financing on satisfactory terms, if at all;
. insufficient cash flow from operations may force us to sell
assets, restructure or refinance our debt, or seek additional
equity capital, which we may be unable to do at all or on
satisfactory terms;
. our level of indebtedness may make us more vulnerable to economic
or industry downturns;
. indebtedness under the senior credit facility bears interest at
variable rates, which could create higher debt service
requirements if market interest rates increase;
17
. our failure to comply with the financial and other covenants
applicable to our debt could result in an event of default,
which, if not cured or waived, would have a material adverse
effect on us;
. due to the liens on substantially all of the company's and each
of its subsidiaries' assets and their pledges of stock to secure
the senior credit facility, our lenders may control our assets or
the assets of our subsidiaries in the event of a default; and,
. our debt service obligations increase our vulnerabilities to
competitive pressures, as many of our competitors may be less
leveraged than we are.
Our ability to service our debt obligations will depend on our future
operating performance which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which we cannot
control. If the cash flow from our operating activities is insufficient, we may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations, or seeking
additional equity capital. Any or all of these actions may not be sufficient to
service our debt obligations. Our inability to generate sufficient funds to pay
our debts could, among other things, adversely affect the market value of our
common stock.
If we are unable to meet all of the conditions under our senior credit
facility, we may not be able to draw down funds from our senior lenders and we
may not be able to fund operating losses and working capital needs.
We face substantial competition in the communications industry generally from
competitors with substantially greater resources than us and from competing
technologies.
We operate in an increasingly competitive environment. As a wireless
communications provider, we face intense competition from other wireless
providers, including Sprint and its affiliates, AT&T/SunCom, Verizon Wireless,
ALLTEL, Nextel and Cellular One.
Many of our competitors are, or are affiliated with, major
communications companies that have substantially greater financial, technical
and marketing resources than we have and may have greater name recognition and
more established relationships with a larger base of current and potential
customers, and accordingly, we may not be able to compete successfully. We
expect that increased competition will result in more competitive pricing.
Companies that have the resources to sustain losses for some time have an
advantage over those companies without access to these resources. We cannot
assure you that we will be able to achieve or maintain adequate market share or
revenue or compete effectively in any of our markets.
Competition may cause the prices for wireless products and services to
decline in the future. Our ability to compete will depend, in part, on our
ability to anticipate and respond to various competitive factors affecting the
telecommunications industry.
Additionally, many of our competitors have national networks, which
enable them to offer long-distance telephone services to their subscribers
at a lower cost. Therefore, some of our competitors are able to offer pricing
plans that include "free" long-distance. We do not have a national network, and
we must pay other carriers a per-minute charge for carrying long-distance calls
made by subscribers. To remain competitive, we subsidize the long-distance
charges without increasing the prices we charge to our subscribers.
We expect competition to intensify as a result of the rapid development
of new technologies, including improvements in the capacity and quality of
digital technology, such as the move to third generation, or 3G, wireless
technologies. Technological advances and industry changes could cause the
technology used on our network to become obsolete. We may not be able to respond
to such changes and implement new technology on a timely basis or at an
acceptable cost. To the extent that we do not keep pace with technological
advances or fail to timely
18
respond to changes in competitive factors in our industry, we could experience a
decline in revenue and net income. Each of the factors and sources of
competition discussed above could have a material adverse affect on our
business.
As a wireline telephone business, we face competition from CLEC and
wireless service providers, including Adelphia, Fibernet and Comscape. Many
communications services can be provided without incurring an incremental charge
for an additional unit of service. For example, there is little marginal cost
for a carrier to transmit a call over its own telephone network. As a result,
once there are several facilities-based carriers providing a service in a given
market, price competition is likely and can be severe. As a result, we have
experienced price competition, which is expected to continue. In each of our
service areas, additional competitors could build facilities. If additional
competitors build facilities in our service areas, this price competition may
increase significantly.
As an integrated communications provider, we also face competition in
our business from:
. national and regional Internet service providers;
. cable television companies, including Adelphia; and,
. resellers of communications services and enhanced services
providers.
If we fail to raise the capital required to build-out and operate our planned
networks, we may experience a material adverse effect on our business.
We require significant additional capital to build-out and operate
planned networks and for general working capital needs. We expect our capital
expenditures for 2002 to be approximately $80 million to $95 million in the
aggregate, including approximately $30 million to $35 million relating to a
planned wireless network upgrade to 3G1XRTT technology. Our cash flows from
operations in 2002 will not be enough to cover our anticipated capital
expenditures. We may require additional and unanticipated funds if there are
significant departures from our current business plan, if we have unforeseen
delays, cost overruns, unanticipated expenses due to regulatory changes, if we
incur engineering design changes or other technological risks. Our network
build-out may not occur as scheduled or at the cost we have anticipated. We may
seek to obtain new capital through subsequent public or private equity or debt
financing. However, the capital markets have recently been volatile and
uncertain. These markets may not improve, and we may not be able to access these
markets to raise additional capital on favorable terms, or at all. If we fail to
obtain required new financing, that failure would have a material adverse effect
on our business and our financial condition. For example, if we are unable to
access capital markets, we may have to restrict our activities or sell our
interests in one or more of our subsidiaries or other ventures at a distressed
sale price.
We need to add a sufficient number of new PCS customers to support our PCS
business plans and to generate sufficient cash flow to service our debt.
The wireless industry generally has experienced a decline in customer
growth rates. While this has not been our experience to date, our success will
depend on our ability to continue expanding our current customer base, penetrate
our target markets and otherwise capitalize on wireless opportunities. We must
increase our subscriber base without excessively reducing the prices we charge
to realize the anticipated cash flow, operating efficiencies and cost benefits
of our network.
If we experience a high rate of PCS customer turnover, our costs could increase
and our revenues could decline.
Many PCS providers in the U.S. have experienced a high rate of customer
turnover, even when compared to analog cellular industry averages. The rate of
customer turnover may be the result of several factors, including limited
network coverage, reliability issues such as blocked or dropped calls, handset
problems, inability to roam onto third-party networks at competitive rates, or
at all, price competition and affordability, customer care concerns and other
competitive factors. We cannot assure you that our strategies to address
customer turnover will be
19
successful. A high rate of customer turnover could reduce revenues and increase
marketing costs to attract the minimum number of replacement customers required
to sustain our business plan, which, in turn, could have a material adverse
effect on our business, prospects, operating results and ability to service our
debt.
The loss of significant customers or a decrease in their usage could cause our
revenues to decline.
We sell PCS wireless service on a wholesale basis to other
communications providers under network service agreements. For the year ended
December 31, 2001, Horizon Personal Communications, Inc. accounted for
approximately 10% of our revenue. Our ability to maintain strong relationships
with our principal customers is essential to our future performance. If we lose
a key customer or if any of our key customers reduce their usage or require us
to reduce our prices, our revenue could decline, which could cause our business,
financial condition and operating results to suffer.
Our results of operations may decline if the roaming rates we charge for the use
of our network by outside customers decrease or the roaming rates we pay for our
customers' usage of third party networks increase.
We earn revenues from customers of other wireless communications
providers who enter our service areas and use our network, commonly referred to
as roaming. Roaming rates per minute have declined over the last several years
and we expect that these declines will continue for the foreseeable future.
Similarly, because we do not have a national network, we must pay roaming
charges to other communications providers when our wireless customers use their
networks. We have entered into roaming agreements with other communications
providers that govern the roaming rates that we are permitted to charge and that
we are required to pay. If these roaming agreements are terminated, the roaming
rates we currently charge may further decrease and the roaming rates that we are
charged may increase and, accordingly, our revenues and cash flow may decline.
Certain of our competitors are seeking to reduce access to their
networks through actions pending with the FCC. Moreover, the engineering
standards (AMPS) for the dominant air interface on which PCS customers roam is
currently being considered for elimination by the FCC as part of a streamlining
proceeding. If the FCC eliminates this mandatory standard and cellular operators
cease to offer their AMPS networks for roaming, some PCS customers may have
difficulty roaming in certain markets.
20
Executive Officers of the Company
Name Office Age
---- ------ ---
W. C. Catlett Senior Vice President- Corporate Development 42
J. A. Layman President 50
D. R. Maccarelli Senior Vice President and Chief Technology Officer 49
M. McDermott Senior Vice President-Legal and Regulatory Affairs 47
M. B. Moneymaker Senior Vice President and Chief Financial Officer,
Treasurer and Secretary 44
D. M. Persing Senior Vice President 50
J. S. Quarforth Chief Executive Officer 47
C. A. Richardson Senior Vice President-Wireline Operations 50
C. A. Rosberg Executive Vice President and Chief Operating Officer 49
Information for Mr. Layman, Mr. Quarforth and Mr. Rosberg is included
under the heading "Election of Directors" in the Proxy Statement of the
registrant for its 2002 Annual Meeting of Shareholders which is incorporated
herein by reference.
Mr. Catlett became Senior Vice President - Corporate Development in May
2000. From May 1997 to April 2000 he served as Vice President - Strategy and
Business Development and from January 1994 to April 1997 as Director of Business
Development. From April 1992 until January 1994 he served as Planning and
Regulatory Manager and from May 1990 until April 1992 as Revenue Requirements
Manager.
Mr. Maccarelli became Senior Vice President and Chief Technology
Officer in February 2001. From January 1994 to February 2001 he served as Senior
Vice President. From January 1993 to December 1993, he served as Vice President
- - Network Services. From June 1974 to December 1992 he held numerous leadership
positions with Bell Atlantic. These positions encompassed operations,
engineering, regulatory and business development.
Ms. McDermott became Senior Vice President of Legal and Regulatory
Affairs on August 31, 2001. From March 2000 to August 3, 2001 she served as
Senior Vice President and General Counsel of Pathnet Telecommunications, Inc. On
April 2, 2001, Pathnet Telecommunications, Inc. filed a Voluntary Petition under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the District of Delaware. From April 1998 to March 2000 she
served as Senior Vice President/Chief of Staff for Government Relations for the
Personal Communications Industry Association. From May 1994 to April 1998 she
served as Vice President - Legal and Regulatory Affairs for the United States
Telecom Association.
Mr. Moneymaker became Senior Vice President and Chief Financial
Officer, Treasurer and Secretary in May 2000. From May 1999 to April 2000 he
served as Vice President and Chief Financial Officer, Treasurer and Secretary.
From May 1998 to April 1999 he served as Vice President and Chief Financial
Officer. From October 1995 to April 1998 he served as Vice President of Finance.
Previously, he was a Senior Manager for Ernst and Young from October 1989 until
October 1995.
Ms. Persing became Senior Vice President in April 2000. From May 1998
to April 2000 she served as Vice President - Human Resources. From December 1995
to March 1998, she was employed by PrimeCo Personal Communications as Vice
President of Customer Care. From June 1974 to January 1994, she held numerous
leadership positions with AT&T. These positions encompassed customer care,
directory assistance, human resources, network engineering, software development
and large project management. From August 1994 to November 1995, she served as
operations manager for NTELOS' directory assistance operation.
21
Mr. Richardson became Senior Vice President-Wireline Operations in
February 2001. Previously, he served as Senior Vice President of R&B
Communications from October 1998 to January 2001 and as Vice President-Network
Services from January 1990 to September 1998.
Item 2. PROPERTIES
We are headquartered in Waynesboro, VA and own offices and facilities
in a number of locations within our operating markets. We believe that our
current facilities are adequate to meet our needs in our existing markets for
the foreseeable future. The table below provides the location, description and
approximate square footage of our material properties.
Owned Facilities
Approximate
Location Property Description Square Footage
-------- -------------------- --------------
Clifton Forge, VA Wireline Exchange Building and Equipment 4,100
Directory Service Center (1) 15,700
Cloverdale, VA Remote Wireline Switch Facility 772
Covington, VA Wireline Exchange Building and Equipment 18,000
Plant Service Center 11,900
Daleville, VA Executive Offices 15,000
Warehouse 7,500
Fincastle, VA Wireline Switch Facility 900
Eagle Rock, VA Wireline Switch Facility 1,000
Norfolk, VA Wireless Switch Facility 5,000
Oriskany, VA Remote Wireline Switch Facility 100
Portsmouth, VA Customer Care Center (3) 100,000
Potts Creek, VA Wireline Exchange Building and Equipment 500
Richmond, VA Wireless Switch Facility 5,000
Troutville, VA Main Wireline Switch Location 8,240
Waynesboro, VA Corporate Headquarters 26,000
Wireless Switch and Operations Building 16,750
Customer Care Center 31,000
Corporate Support Services Building 50,000
Retail Store 6,400
Directory Service Center (1) 15,700
Wireline Exchange Building and Equipment 36,200
Plant Service Center 8,750
Winchester, VA Directory Service Center (1) (2) 17,500
(1) Each of these facilities is being leased to telegate AG, the buyer of
our directory service operations.
22
(2) This directory assistance call center is housed in an approximately
33,000 square foot building. Of that 33,000 square feet, approximately
15,500 square feet is not renovated and available for directory
assistance or other expansion needs.
(3) The customer care operations is housed in approximately a 30,000 square
foot portion of the building. The remaining 70,000 square feet is
leased to outside third parties with varying expiration dates that
correspond with our projected expansion needs.
Leased Facilities
Administrative
--------------
Location Property Description Approximate
-------- -------------------- Square Footage
--------------
Chesterfield, VA Wireless Corporate Support 17,574
Charleston, WV Wireless/Wireline Corporate 24,000
Support and Switch Facility
Waynesboro, VA Warehouse 19,500
We also lease several other local business office facilities throughout our
operating region with the largest facility consisting of about 8,000 square
feet.
Retail
- ------
We lease retail space throughout our operating region consisting of a mix of
retail store fronts and smaller kiosks units. We have approximately 13 retail
stores and 7 kiosks in the Virginia East Market, 19 retail stores and 2 kiosks
in the Virginia West Market, and 12 retail stores and 1 kiosk in the West
Virginia Market.
Cell Sites
- ----------
Substantially all of our operational cell sites are on leased structures.
Item 3. LEGAL PROCEEDINGS
In June 1999, we commenced an arbitration against the vendor who
provided our previous PCS billing system. The claim alleged that the vendor
breached certain agreements and committed fraud in relation to its installation
and maintenance of billing software for us. The claim sought in excess of $2.8
million in damages. In April 2000, the vendor filed a response to the claim and,
in addition, filed counterclaims seeking damages from us relating to the
installation and maintenance of the same software. The vendor's counterclaims
exceeded $2.5 million in damages. On November 5, 2001, we entered into a
settlement agreement with respect to this matter, pursuant to which each of the
parties agreed to dismiss their respective claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ending December 31, 2001.
23
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of NTELOS Inc. is listed in the NASDAQ National
Market. The number of registered shareholders totaled 3,591 as of December 31,
2001. The range of stock prices for the two most recent fiscal years is included
in a table under the heading "Quarterly Review" in the Annual Report of NTELOS
Inc. to its Shareholders for the year ended December 31, 2001 and is
incorporated herein by reference. No other dividends were paid in 2000 or 2001.
Under restrictions related to the Company's debt financing, the Company
has discontinued payment of dividends to common shareholders effective for the
quarter ending June 30, 2000. This will allow the Company to retain future
earnings, if any, to fund the development and growth of its businesses and
service its debt obligations.
During 2001, the Company entered into agreements to purchase membership
interests in the Virginia Alliance and the West Virginia Alliance from minority
members which are regional telecommunications companies. In exchange for the
membership interests, the Company issued an aggregate of 320,000 shares of its
common stock. The shares were issued in private placements under Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA AND FIVE YEAR GROWTH COMPARISON
NTELOS Inc. and Subsidiaries
($ and shares In thousands,
except per share amounts) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $ 215,063 $ 113,519 $ 69,830 $ 58,163 $ 50,196
Operating cash flow/1/ 20,504 20,252 27,945 29,447 26,149
Income taxes (benefit) (34,532) 1,326 2,622 4,587 6,813
Equity loss from PCS investees (1,286) (12,259) (11,366) (6,466) (834)
Gain on sale of assets 31,845 62,616 8,318 -- 5,077
Income (loss) from continuing operations (63,713) 2,270 5,891 6,856 11,301
Income (loss) applicable to common shares (82,556) 10,471 6,493 8,508 12,221
Income (loss) from continuing operations (5.02) (0.45) 0.45 0.52 0.87
per share-diluted
Net income (loss) per common share - (5.02) 0.80 0.50 0.65 0.94
diluted
Cash dividends per common share -- 0.11475 0.459 0.435 0.412
Investment in property, plant and equipment 1,055,495 834,940 175,226 146,655 131,322
Total assets 1,196,886 1,079,017 218,002 154,334 147,743
Long-term debt 612,416 556,287 37,685 19,774 24,606
Redeemable, convertible preferred stock $ 265,747 $ 246,906 $ -- $ -- $ --
Average number of common
shares outstanding - diluted 16,442 13,106 13,113 13,094 13,056
Number of employees 1,395 1,218 981 743 567
Number of common shareholders 3,613 3,092 2,977 2,998 2,884
/1/ Operating income before depreciation and amortization. See Management's
Discussion and Analysis for additional factors to consider in using this
measure.
24
Item 7. 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 in Virginia, West Virginia, Kentucky, Tennessee and North Carolina. 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. As of December 31, 2001, we had
approximately 223,800 digital personal communication services ("PCS")
subscribers and approximately 85,600 combined incumbent local exchange carrier
(" ILEC") and competitive local exchange carrier (" CLEC") access lines
installed.
Historically, we have derived much of our revenues and EBITDA (earnings before
interest, taxes, depreciation and amortization and asset write-down and
impairment charges) from our ILEC services. As a result of our increasing focus
on and growth in digital PCS, Internet access and CLEC services, a significant
portion of our operating revenues are being generated by businesses other than
our ILEC. These newer businesses have generated lower operating margins due to
start-up costs associated with expansion into new markets and introduction of
new service offerings throughout the region.
We have recently significantly expanded the scope of the geographic markets that
we serve and have focused 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.
As mentioned above, the Company references EBITDA as one measure of operating
performance. Management believes EBITDA is a meaningful indicator of the
Company's performance. EBITDA is commonly used in the wireless communications
industry and by financial analysts and others who follow the industry to measure
operating performance. EBITDA should not be construed as an alternative to
operating income or cash flows from operating activities (both of which are
determined in accordance with generally accepted accounting principles) or as a
measure of liquidity.
During 2000, we completed the following:
. acquisition of the wireless licenses, assets and operations of PrimeCo
Personal Communications, L.P. ("PrimeCo") in the Richmond and Hampton Roads,
Virginia markets ("PrimeCo VA" and also referred to within our operations as
"VA East");
. issuance and sale of $375 million of Unsecured Senior Notes and Unsecured
Subordinated Notes ("Senior Notes" and "Subordinated Notes", respectively);
. closing of $325 million Senior Secured Term Loan (also referred to as the
"Senior Credit Facility"), with $150 million borrowed on the date of the
PrimeCo VA closing, $175 million outstanding at year-end 2000 and $225
million outstanding at year-end 2001;
. payment of existing senior indebtedness and refinancing of the VA Alliance
and the WV Alliance debt obligations;
. issuance and sale of $250 million of redeemable, convertible preferred stock;
. redemption of the Series A preferred membership interest in the VA Alliance
and conversion of the Series B preferred membership interest into common
interest;
. dispositions of RSA5 and the analog assets and operations of RSA6 in
connection with the PrimeCo VA acquisition; and,
. disposition of our directory assistance operation.
Collectively, these events, together with the R&B merger discussed below, are
referred to as the "Transactions" elsewhere in this document. All references to
"Notes" relates to the disclosures contained in the footnotes to the Company's
audited financial statements.
During 2001, we completed the following:
25
. closed on the merger agreement with R&B Communications, Inc. ("R&B") an
integrated communications provider in a geographic market contiguous to ours;
. substantially increased our ownership interest in the VA and WV Alliances to
approximately 97% and 98%, respectively;
. completed the VA East integration and transition which included establishment
of the NTELOS brand, introduction of new rate plans, addition of a new
customer care call center, conversion of customer billing and the integration
of back office functions. In VA East, the network was expanded, the direct
sales channel was enhanced and the customer base was re-positioned to over
75% post-pay from 51% at the end of 2000;
. acquired PCS spectrum licenses that added a population of 2.9 million in
certain markets in Pennsylvania, Ohio and West Virginia;
. sold our investment in Illuminet Holdings, Inc. for proceeds of $30.6
million, recognizing a pre-tax gain of $23.0 million;
. amended the Sprint/Horizon wholesale agreement, resulting in a $40-$45
million capital commitment to implement 3G-1XRTT technology across the
Alliances' network in exchange for a 30 month minimum guaranteed wholesale
revenue of $76 million which commenced July 1, 2001;
. sold 46 communications towers for $15.6 million in 2001 and 24 towers during
the first quarter of 2002 for $8.2 million;
. sold excess PCS spectrum in one market for proceeds of $11.6 million,
recognizing a pre-tax gain of $8.6 million;
. executed definitive agreements for the sale of excess PCS spectrum in several
markets for an aggregate value of $21.6 million, with closing subject to FCC
approval;
. added six new markets to the Company's CLEC operations and two new
co-locations in existing markets to support customer growth. Also, 300 new
route miles of fiber became operational to further our end-to-end
connectivity strategy;
. introduced a new PCS hybrid product, "nAdvance", which offers post-pay plan
features in a pay in advance arrangement;
. introduced DSL line sharing where the Company is not required to lease a
separate line from the incumbent provider, but instead pays incremental fees
to use bandwidth on the existing copper running to the customer;
. opened 12 new retail locations; and,
. in March 2002, certain terms and prospective financial covenants
of the $325 million Senior Credit Facility were amended (see Liquidity and
Capital Resources herein).
We have accounted for the directory assistance operation disposed of in July
2000 as a discontinued operation. Therefore, the directory assistance operating
results are separated in the financial statements from the results of continuing
operations and are separately discussed after the income taxes in the results of
operations section below.
As a result of the Transactions and the various effective dates of each (Notes
4, 5, 6 and 7), 2001 annual and quarterly results differ significantly from 2000
and 1999 annual and quarterly results. The first quarter of 2001 differed
significantly from the last three quarters of 2001 as the R&B merger and the WV
Alliance consolidation occurred February 13, 2001. Similarly, the fourth quarter
of 2000 differed significantly from the first three quarters of 2000 as the VA
East acquisition and the VA Alliance consolidation were consummated on July 26,
2000. We reported significant losses from operations after the second quarter of
2000 due to the following:
26
. addition of the VA East operations and the consolidation of the VA Alliance
in July 2000 and the consolidation of the WV Alliance in February 2001, both
of which generated significant losses during 2000 and 2001;
. increased amortization of goodwill, acquired licenses and other
intangibles from the PCS acquisitions and the merger with R&B; and,
. interest expense increased significantly due to the additional debt and
preferred equity financing noted.
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 under "Investment
Considerations." We wish to caution readers that these forward-looking
statements and any other forward-looking statements made by us are based on a
number of assumptions, estimates and projections including but not limited to:
capital intensity of the wireless telephone business and our debt structure; our
substantial debt obligations and our ability to service those obligations;
restrictive covenants and consequences of default contained in our financing
arrangements; the cash flow and financial performance of our subsidiaries; the
competitive nature of the wireless telephone and other communications services
industries; the achievement of build-out, operational, capital, financing and
marketing plans relating to deployment of PCS services; retention of our
existing customer base, including our wholesale customers, our ability to
attract new customers, and maintain and improve average revenue per subscriber;
unfavorable economic conditions on a national and local level; effects of acts
of terrorism or war (whether or not declared); changes in industry conditions
created by federal and state legislation and regulations; demand for wireless
and wireline communications services; rapid changes in technology; adverse
changes in the roaming rates we charge and pay; our opportunities for growth
through acquisitions and investments and our ability to manage this growth;
successful integration of acquisitions; the level of demand for competitive
local exchange services in smaller markets; our ability to manage and monitor
billing; and, possible health effects of radio frequency transmission. Investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that any significant
deviations from these assumptions could cause actual results to differ
materially from those in the above and other forward-looking statements.
Forward-looking statements included herein are as of the date hereof. We are not
obligated to update or revise any forward-looking statements or to advise of any
changes in the assumptions on which they are based, whether as a result of new
information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend our business activities. To aid
in that understanding, management has identified our critical accounting
policies for discussion herein. These policies have the potential to have a more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
Revenue Recognition Policies - As discussed in Note 1, we recognize operating
revenues as services are provided or when products are delivered. In connection
with recording revenue, estimates and assumptions are required in determining
the expected conversion of the revenue streams to cash collected. The reserve
estimation process requires that management make assumptions based on historical
results, future expectations, the economical and competitive environment,
changes in the creditworthiness of our customers, and other relevant factors.
27
Long-lived Asset Recovery - Long-lived assets, consisting primarily of property,
plant and equipment and intangibles, comprise a significant portion of our total
assets. Costs associated directly with the uncompleted assets where we engage in
the related construction include employee related costs and interest expense
incurred during the construction period and are capitalized. Changes in
technology or changes in our intended use of these assets may cause the
estimated period of use or the value of these assets to change. We perform
reviews once a year or more frequently, as management deems necessary, to
confirm the appropriateness of estimated economic useful lives for each category
of property, plant and equipment. Additionally, long-lived assets, including
goodwill and intangibles, are reviewed for impairment whenever events or changes
in circumstances have indicated that their carrying amounts may not be
recoverable. Estimates and assumptions used in both setting depreciable lives
and testing for recoverability require both judgment and estimation. When assets
are sold, retired or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and a gain or loss is recognized.
Further discussions on these accounting policies are found in Note 1.
Goodwill and Intangibles - We have had significant merger and acquisition
activity in 2000 and 2001 (see Note 4 and the discussion on the "Transactions"
above). In all cases, we have recorded the transactions under the purchase
accounting method. Purchase accounting requires extensive use of accounting
estimates and judgements to allocate the purchase price to the fair market value
of the assets and liabilities purchased. In our recording of the transactions, a
significant portion of our cost in excess of the book value of net assets
acquired has been allocated to licenses and goodwill. Also, amounts have been
allocated to other identifiable intangible assets such as non-compete
agreements, customer lists, assembled workforce, tower franchise rights and
employment agreements. Finite useful lives were assigned to these intangibles
and they will be amortized over their remaining lives. As with any intangible
asset, future write downs may be required if the value of these assets becomes
impaired. Further, the applications of SFAS No. 142 will change our methodology
and may result in impairment charges upon adoption of SFAS No. 142 or in periods
subsequent to adoption. See discussions on SFAS No. 142 in New Accounting
Pronouncements below and in Note 1.
Employee Benefit Plan Assumptions - Retirement benefits are a significant cost
of doing business and yet represent obligations that will be settled far in the
future. Retirement benefit accounting is intended to reflect service periods
based on the terms of the plans and the investment and funding decisions made by
the Company. The accounting requires that management make assumptions regarding
such variables as the return on assets, the discount rate, and future health
care costs. Changes in these key assumptions can have a significant impact on
the projected benefit obligation, funding requirements and periodic benefit cost
incurred by the Company. Our policies and key assumptions are discussed in Note
14.
Income Taxes - Our estimates of income taxes and the significant items giving
rise to the deferred assets and liabilities are shown in Note 12. These reflect
our assessment of actual future taxes to be paid on items
28
reflected in the financial statements, giving consideration to both timing and
probability of these estimates. Actual income taxes could vary from these
estimates due to future changes in income tax law or on results from final
Internal Revenue Service review of our tax returns. We have generated
significant NOLs in 2001 and the net deferred tax liability was $2.2 million. We
have evaluated the realizability of the related deferred tax asset base in light
of anticipated future results. In 2002, we will record a valuation allowance
against deferred tax assets should management determine the realizability of the
tax asset to be uncertain.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
SFAS No. 133, as amended by SFAS Nos. 137 and 138, is effective for fiscal years
beginning January 1, 2001. SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge designated by the transaction. We
currently make minimal use of derivative instruments as defined by SFAS No. 133.
The only such instruments at December 31, 2001 are the interest rate swap
agreements discussed above.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS No.
141"). SFAS No. 141 requires all business combinations initiated after June 30,
2001, to be accounted for using the purchase method of accounting. Prior to the
issuance of SFAS No. 141, companies accounted for mergers and acquisitions using
one of two methods: pooling of interests or the purchase method. We have
accounted for acquisitions using the purchase method and do not believe the
issuance of SFAS No. 141 will have a material effect on the Company's future
results of operations or financial position.
In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS No. 142"). SFAS No. 142 is effective for fiscal years beginning
January 1, 2002. SFAS No. 142 requires companies to segregate identifiable
intangible assets acquired in a business combination from goodwill. The
remaining goodwill and other intangible assets deemed to have indefinite lives
are no longer subject to amortization over their estimated useful lives.
However, the carrying amount of the goodwill must be assessed at least annually
for impairment using a fair value based test. Goodwill attributable to equity
method investments will also no longer be amortized but is still subject to
impairment analysis using existing guidance for equity method investments. For
the goodwill and intangible assets in place as of December 31, 2001, we believe
the adoption of SFAS No. 142 may have a material effect on our results of
operations and financial position.
In June 2001, the FASB also approved SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143"). SFAS No. 143 establishes accounting
standards for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. The fair value of a
liability for an asset retirement obligation is to be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized and included as part of the carrying
value of the long-lived asset and amortized over the useful life of the asset.
SFAS No. 143 will be effective for the Company beginning on January 1, 2003.
Accordingly, we have not determined the impact that SFAS No. 143 will have on
our future results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), that addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This pronouncement establishes a single accounting model, based on the framework
established in SFAS No. 121, for the recognition and measurement of the
impairment of long-lived assets to be held and used or to be disposed of by
sale. The Company will adopt SFAS No. 144 at the beginning of fiscal 2002. The
Company is in the process of evaluating the impact of this pronouncement and
management does not expect the adoption will have a material impact on the
Company's financial position, results of operations or cash flows.
29
OPERATING REVENUES
- ------------------
Our operating revenues, net of bad debt expense, are generated from the
following categories:
. wireless communications, consisting of retail, service and wholesale digital
PCS revenues;
. wireline communications, including telephone service, fiber optic network
usage (or carrier's carrier services), Internet, CLEC service, and long
distance revenues; and,
. other communications services revenues, including revenues from paging,
voicemail, wireless and wireline cable television, our sale and lease of
communications equipment and security alarm monitoring and rental of property
and equipment, primarily to tenants of certain company owned facilities.
Through the disposition date of July 26, 2000, analog cellular revenues are
included in this category.
OPERATING EXPENSE
- -----------------
Our operating expenses are generally incurred from the following categories:
. cost of wireless sales, exclusive of other operating expenses shown
separately, include digital PCS handset equipment costs, usage-based access
charges, including long distance, roaming charges, and other direct costs. We
sell handsets to our customers at a price below our cost;
. maintenance and support expenses, including costs related to specific
property and equipment, as well as indirect costs such as engineering and
general administration of property and equipment;
. depreciation and amortization, including amortization of goodwill from
acquired assets and capital outlays to support continued business expansion;
. asset impairment charge, if applicable;
. customer operations expenses, including marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services and directory services; and,
. corporate operations expenses, including taxes other than income, executive,
accounting, legal, purchasing, information management, human resources and
other general and administrative expenses.
OTHER INCOME (EXPENSES)
- -----------------------
Our other income (expenses) are generated (incurred) from interest income and
expense, equity loss from the VA Alliance (through July 25, 2000) and WV
Alliance (through February 13, 2001) (collectivity, the "Alliances" or "PCS
investees"), gain on sale of assets and other financing costs.
30
INCOME TAXES
- ------------
Our income tax liability and effective tax rate increases or decreases based
upon changes in a number of factors, including our pre-tax income or loss,
losses sustained by the Alliances, net operating losses and related
carryforwards, 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
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
OVERVIEW
- --------
Operating revenues, which are reported net of bad debt expense, increased $101.6
million, or 89%, from $113.5 million in 2000 to $215.1 million in 2001. EBITDA
increased $.2 million, or 1%, from $20.3 million in 2000 to $20.5 million in
2001. Operating loss increased $44.4 million, from a loss of $17.4 million in
2000 to a loss of $61.8 million in 2001.
The combination of digital PCS customers from acquisitions and significant
customer additions over the two year period, wireline growth from the R&B
merger, internal growth and growth in CLEC and Internet customers contributed to
the year over year 89% increase in revenue. PCS revenues increased $79.7 million
(204%), ILEC revenues increased $10.6 million (33%), CLEC revenues increased
$8.4 million (93%) and network and Internet revenues increased $5.0 million
(135%) and $4.2 million (31%), respectively, from 2000 to 2001. Bad debt expense
increased $6.9 million (212%), from $3.2 million in 2000 to $10.1 million in
2001. Of this increase, $6.1 million is from the wireless PCS segment, driven by
the significant increase in customer and revenue growth and higher than normal
pre-paid customer churn, primarily occurring in the VA East PCS market (see
Wireless PCS operating revenue section below for further discussion).
EBITDA remained relatively flat from 2000 to 2001 due to the inclusion of the VA
East and VA Alliance operations for the full year 2001 as compared to the
partial year 2000 and the consolidation of the WV Alliance in early 2001. These
businesses generated EBITDA losses of $6.8 million and $17.5 million for 2000
and 2001, respectively. In addition to these comparative differences, digital
PCS customer additions exceeded prior year customer additions on a pro forma
basis by 9,100, or 20% and with this, additional related costs of acquiring new
PCS subscribers were incurred (discussed above) of approximately $3 million.
These factors were offset by the inclusion of the R&B operation, which generated
positive EBITDA of $9.1 million in 2001. On a pro forma basis, EBITDA improved
$15.1 million, from $5.3 million in 2000 to $20.4 million in 2001, $7.1 million
of which is from the PCS operations and $8.9 million are from the wireline
operations, relatively evenly distributed between ILEC, CLEC, Internet and
Network.
The significant increase in operating loss is primarily attributable to
increased amortization of intangibles associated from acquisition activity of
$6.7 million, depreciation increases from inclusion of the acquired entities and
the post-acquisition growth in property, plant and equipment within these
operations of $32.0 million, and $.4 million increased depreciation from
property and equipment growth in the other operations, net of decreases in the
other wireless operations from the disposition of the analog cellular operation
in July 2000.
Net loss applicable to common shares for 2001 was $82.6 million, which included
equity losses from the Alliances of $1.3 million, $23.0 million gain on sale of
securities available for sale, $8.6 million gain on sale of a PCS spectrum
license and $2.2 million of merger termination fees, net of fees and expenses.
Net income applicable to common shares for 2000 was $10.5 million, which
included $62.6 million of gains from the sale of our RSA6 analog assets and
operations and our limited partnership interest in RSA5, $16.4 million of income
and gain on sale of discontinued operation, as well as equity losses from the
Alliances of $12.3 million.
31
OPERATING REVENUES
- ------------------
Operating revenues increased $101.6 million, or 89%, from $113.5 million in 2000
to $215.1 million in 2001.
WIRELESS COMMUNICATIONS REVENUES-Wireless communications revenues increased
$79.7 million, from $39.1 million in 2000 to $118.8 million in 2001. This
increase is primarily due to the acquisition of PrimeCo VA and the consolidation
of the VA Alliance (Note 4), which occurred on July 26, 2000. The acquisition of
PrimeCo VA (now referred to as the VA East market) and the consolidation of the
VA Alliance accounted for $54.9 million, or 69%, of the total increase. The
consolidation of the WV Alliance in February 2001 accounted for $21.5 million,
or 27%, of the total increase. We increased PCS subscribers by 180,500, from
43,300 at the beginning of 1999 to 223,800 by the end of 2001. This increase is
comprised of growth from acquisitions (approximately 145,600) and comparative
period to period growth (34,900) over this two year period. Average monthly
revenue per subscriber ("ARPU", without roaming) trended upward during 2001,
with ARPU at $52 for the fourth quarter of 2001 as compared to $46 for fourth
quarter of 2000, reflecting the development of higher-end rate plans. Partially
offsetting these growth factors was a pre-pay ARPU decrease during 2001 with the
planned shift in customer mix from pre-pay to post-pay. As of December 31, 2001,
post-pay type products accounted for 82% of the subscriber base compared to 64%
as of the year end 2000.
In addition to subscriber growth and growth in these related revenues, wholesale
revenues generated through an agreement with Sprint/Horizon increased $12.1
million, from $7.0 million in 2000 to $19.1 million in 2001 (see Liquidity and
Capital Resources section for discussion on the amendment to this agreement).
Pro forma year over year total increase for VA East, VA Alliance and WV Alliance
was $26.2 million, or 31%, reflecting the aforementioned subscriber growth, ARPU
improvements and growth in wholesale revenues.
WIRELINE COMMUNICATIONS REVENUES-Wireline communications revenues increased
$28.2 million, or 48%, from $58.3 million in 2000 to $86.5 million in 2001.
. Telephone Revenues. Telephone revenues, which include local service, access
and toll service, directory advertising and calling feature revenues from our
ILEC business increased $10.6 million, or 33%, from $32.2 million in 2000 to
$42.8 million in 2001. This increase was primarily due to the consolidation
of R&B in February 2001, which contributed $9.1 million of the total ILEC
revenue in 2001, and growth in carrier access minutes. Access lines remained
essentially flat throughout 2001 as lines totaled 52,036 at year end 2001,
just 77 lines ahead of the prior year end. On a pro forma basis, ILEC
operating revenues increased $2.9 million, or 7%, from $41.2 million in 2000
to $44.1 million in 2001, driven by growth in carrier access minutes.
. Network Revenues. Revenues from fiber optic and other long haul transport
related network usage increased $5.0 million, or 135%, from $3.7 million in
2000 to $8.7 million in 2001. The primary cause for the increase was the
consolidation of R&B in February 2001, which contributed fiber optic network
revenue of $4.6 million in 2001. On a pro forma basis, network revenue grew
$1.1 million, or 14%, from $8.2 million in 2000 to $9.3 million in 2001 due
to increased network usage.
. CLEC Revenues. Revenues from CLEC operations increased $8.3 million, or 93%,
from $9.0 million in 2000 to $17.3 million in 2001. The addition of R&B in
February 2001 accounted for $3.1 million, or 37%, of the total increase.
During 2001, we added 19,000 access lines, finishing the year with 33,600
access lines. Of these additions, 6,400, or 32%, were added as a result of
the R&B merger. On a pro forma basis, CLEC revenues grew $6.1 million, or
52%, from $11.8 million in 2000 to $17.9 million in 2001 reflecting access
line growth. In addition to revenue growth generated from traditional CLEC
services, revenues from private line or dedicated circuits for business
accounts increased $2.7 million.
32
Additionally, reciprocal compensation revenues (revenues earned for
terminating calls from other ILECs or CLECs) were $3.7 million for both 2000
and 2001. However, a significant reduction in rates in mid-2001 caused a
significant decline in reciprocal compensation revenues in the second half of
2001.
. Internet Revenues. Revenues from Internet services increased $4.1 million, or
31%, from $13.4 million in 2000 to $17.7 million in 2001. We added a total of
13,400 subscribers during 2001, with 74,200 dial-up and DSL subscribers at
year-end. This was achieved from customer growth within our existing markets
(11,200 subscribers, or 84% of the total growth) and growth through the
merger with R&B (2,100 subscribers, or 16% of the total growth). We grew the
number of digital subscriber lines ("DSL") customers by 2,349, or 142%, which
accounted for $2.5 million, or 60% of the revenue growth. We