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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
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2002
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 _
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.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES _ NO X
As of April 7, 2003, 17,780,248 shares of NTELOS Inc. common stock, no par
value, were outstanding and the aggregate market value of such common stock held
by non-affiliates* (based upon the average of the bid and asked prices of such
common stock as of June 28, 2002) was $29,959,718.
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*Calculated by excluding all shares held by executive officers and directors of
the registrant without conceding that all such persons are "affiliates" of the
registrant for purposes of federal securities laws.
PART I
ITEM 1. BUSINESS
GENERAL
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 are a digital PCS licensee, and we own a fiber optic network,
switches and routers, which enable us to offer our customers end-to-end
connectivity in many of the regions we serve.
REORGANIZATION PROCEEDINGS
On March 4, 2003 (the "Filing Date"), we and certain of our
subsidiaries (collectively, the "Debtors") filed separate voluntary petitions in
the United States Bankruptcy Court for the Eastern District of Virginia,
Richmond Division (the "Court") for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). The Chapter 11 cases (the
"Cases") are being jointly administered under case number 03-32094. The Debtors
are managing their businesses in the ordinary course as debtors-in-possession
subject to the control and supervision of the Court.
We believe that our financial difficulties, and the events leading
up to the Chapter 11 Case, are attributable to a number of factors. The dramatic
downturn in the economy generally in the latter half of 2001 and in 2002, and
the telecommunications sector in particular, adversely impacted our ability to
build our revenue base and generate funds adequate to meet our debt servicing
requirements at the holding company level. Further we and our subsidiaries have
grown dramatically since our founding, through acquisitions and capital
expenditures, which has left us highly leveraged and thus vulnerable to general
adverse economic and industry conditions. As a debtor-in-possession, we are
authorized to continue to operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the approval of the
Court, after notice and an opportunity to be heard.
At first day hearings, the Court entered orders that, among other
things, granted authority to continue to pay employee salaries, wages and
benefits, and to honor warranty and service obligations to customers. On March
5, 2003, the Court also granted interim approval to access up to $10 million of
a $35 million senior secured debtor-in-possession financing facility (the "DIP
Financing Facility") to meet ongoing obligations in connection with regular
business operations, including obligations to employees and prompt payment to
vendors for goods and services. The full $35 million DIP commitment was subject
to final court approval, certain state regulatory approvals and the lenders'
receiving satisfactory assurances regarding the proposed $75 million investment
in the Company by certain holders of senior notes upon emergence from
bankruptcy. On March 24, 2003, the Court entered a final order approving the DIP
Financing Facility and authorizing the Debtors to utilize up to $35 million
under the DIP Financing Facility. Subsequent to March 24, 2003, the Company
satisfied all other conditions to full access to the DIP Financing Facility. A
description of the DIP Financing Facility appears in Item 7. Management's
Discussion and Analysis--Bankruptcy Proceeding.
Under the Bankruptcy Code, actions to collect pre-petition
indebtedness, as well as most other pending litigation, are stayed. Absent an
order of the Court, substantially all pre-petition liabilities are subject to
settlement under a plan of reorganization to be voted upon by creditors and
equity holders, if it is determined that equity holders will receive a
distribution under the plan, and approved by the Court. Although the Debtors
expect to file a reorganization plan or plans that provide for emergence from
bankruptcy in 2003, there can be no assurance that a reorganization plan or
plans will be proposed by the Debtors or confirmed by the Court, or that any
such plan(s) will be consummated. As provided by the Bankruptcy Code, the
Debtors initially have the exclusive right to propose a plan of reorganization
for 120 days. If the Debtors fail to file a plan of reorganization during such
period or fail to obtain an extension from the Court during such period or if
such plan is not accepted by the required number of creditors and, if
applicable, equity holders, any party in interest may subsequently file its own
plan of reorganization for the Debtors. A plan of reorganization must be
confirmed by the Court, upon certain findings being made by the Court which are
required by the Bankruptcy Code. The Court may
confirm a plan notwithstanding the non-acceptance of the plan by an impaired
class of creditors and, if applicable, equity holders, if certain requirements
of the Bankruptcy Code are met.
Under the Bankruptcy Code, we may assume or reject executory
contracts, including lease obligations, subject to the approval of the Court and
certain other conditions. In this context, "assumption" means that the Debtors
agree to perform their obligations and cure certain existing defaults under an
executory contract and "rejection" means that the Debtors are relieved from
their obligations to perform further under an executory contract and are subject
only to a claim for damages for the breach thereof. Any claim for damages
resulting from the rejection of an executory contract is treated as a general
unsecured claim in the Cases. Parties affected by these rejections may file
claims with the Court in accordance with the reorganization process.
Generally, pre-Filing Date claims against the Debtors will fall into
two categories: secured and unsecured, including certain contingent or
unliquidated claims. Under the Bankruptcy Code, a creditor's claim is treated as
secured only to the extent of the value of the collateral securing such claim,
with the balance of such claim being treated as unsecured. Unsecured and
partially secured claims do not accrue interest after the Filing Date. A fully
secured claim, however, may accrue interest after the Filing Date until the
amount due and owing to the secured creditor, including interest accrued after
the Filing Date, is equal to the value of the collateral securing such claim.
The amount and validity of pre-Filing Date contingent or unliquidated claims,
although presently unknown, ultimately may be established by the Court or by
agreement of the parties. Parties who believe they have contingent or
unliquidated claims against the Debtors will be compelled to assert such claims
in the bankruptcy proceeding or otherwise will lose the right to assert such
claims. As a result additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant. No provision has been included in
the accompanying financial statements for such potential claims and additional
liabilities that may be filed on or before June 10, 2003, the date fixed by the
Court as the last day to file proofs of claim.
The United States Trustee ("U.S. Trustee") has appointed a
creditors' committee representing the unsecured creditors and, in accordance
with the provisions of the Bankruptcy Code, both the U.S. Trustee and the
committee have the right to be heard on all matters that come before the Court.
The Debtors expect that the appointed committee will play an important role in
the Cases and the negotiation of the terms of any plan or plans of
reorganization. There can be no assurance that this committee will support our
position in the bankruptcy proceedings or the plan of reorganization once
proposed, and disagreements between us and the committee could protract the
bankruptcy proceedings, could negatively impact our ability to operate during
bankruptcy and could delay our emergence from bankruptcy. The Debtors are
required to bear certain of the committee's costs and expenses, including those
of their counsel and other advisors.
Our objective is to achieve the highest possible recoveries for all
creditors and shareholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found in the Cases to exceed the fair value of their assets.
This could result in claims being paid at less than 100% of their face value. In
addition, we anticipate that holders of equity securities would be entitled to
little or no recovery and that their claims would be cancelled for little or no
consideration. At this time, it is not possible to predict the outcome of the
Cases, in general, or the effect of the Cases on the businesses of the Debtors
or on the interests of creditors and shareholders.
BUSINESS OPERATIONS
Our business encompasses both wireless and wireline communications
services:
. Wireless. Our wireless business consists primarily of digital PCS
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, 2002, we owned
licenses covering approximately 10.2 million pops and provided PCS
services to approximately 266,500 subscribers.
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. Wireline. We provide ILEC and CLEC services in Virginia and CLEC
services in West Virginia. As an ILEC, we own and operate two local
telephone companies. As of December 31, 2002, our ILECs had
approximately 52,000 residential and business access lines
installed. As a CLEC, we serve 16 markets in three states. Since
commencing CLEC operations in mid-1998, we have grown our number of
installed business access lines to approximately 44,000 as of
December 31, 2002. In addition, we provide dial-up Internet access
through a local presence in Virginia, West Virginia and Tennessee.
We offer high-speed data services, such as dedicated service and DSL
within these three states. As of December 31, 2002, our Internet
customer base totaled approximately 61,500 dial-up subscribers and
5,500 DSL subscribers.
Our wireless and wireline businesses are supported by our fiber
optic network, which currently includes 1,800 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 4 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
Relationships through a Local Presence. We intend to grow our business by
leveraging our local presence and continuing our focus on providing high levels
of customer satisfaction. We plan to accomplish this through our local retail
outlets 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.
Offering of Bundled Services. We offer a broad range of
communications services in a bundled package and on a single bill. 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 infrastructure, including our fiber optic network, switches and routers, is
a technologically-advanced communications system 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 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 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 divested non-strategic assets and certain excess PCS
spectrum. Transactions that were completed in 2002 and the first quarter of 2003
include:
. entering into an agreement for the sale of our Portsmouth,
Virginia call center, subject to Court approval;
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. entering into an agreement for the sale of our wireline
cable business in Alleghany County, Virginia, subject to
Court and franchise authority approval;
. sale of substantially all of the assets of our National
Alarm Services business;
. sale of PCS spectrum covering 295,000 POPS in State College
and Williamsport, Pennsylvania;
. sale of minority ownership interest in America's Fiber
Network, LLC;
. sale of excess PCS spectrum covering 373,000 POPS in
Winchester and Charlottesville, Virginia; and
. sale of excess PCS spectrum covering 672,000 POPS in Altoona
and Johnstown, Pennsylvania and Wheeling, West Virginia.
OUR WIRELESS MARKETS
The following table sets forth information as of March 18, 2003
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:
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MARKET NAME POPS (000) * MHz HELD MHz POPS
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OPERATING MARKETS
Virginia
Charlottesville 224 20 4,476
Danville 167 30 5,016
Fredericksburg 144 10 1,440
Harrisonburg 145 20 2,900
Lynchburg 162 30 4,845
Martinsville 90 30 2,688
Norfolk 1,751 20 35,020
Richmond 1,233 20 24,650
Roanoke 648 30 19,428
Staunton/Waynesboro 109 30 3,267
Winchester 162 20 3,248
West Virginia
Beckley 170 40 6,796
Bluefield 174 30 5,217
Charleston 492 30 14,760
Clarksburg-Elkins 196 10 1,955
Fairmont 56 40 2,240
Huntington, WV-Ashland, KY 369 30 11,061
Morgantown 107 25 2,675
Hagerstown, MD-Martinsburg, WV 361 20 7,226
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Total Operating Markets 6,758 158,908
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NON-OPERATIONAL MARKETS
West Virginia
Logan 40 30 1,203
Parkersburg, WV-Marietta, OH 181 30 5,430
Wheeling 211 30 6,321
Williamson, WV-Pikeville, KY 181 30 5,433
Ohio
Athens 133 15 1,991
Chillicothe 107 15 1,598
Portsmouth 93 30 2,796
Zanesville-Cambridge 188 15 2,819
Pennsylvania
Altoona 225 15 3,378
Harrisburg 695 10 6,945
Lancaster 467 10 4,672
Reading 361 10 3,612
York-Hanover 473 10 4,725
Maryland
Cumberland 158 40 6,335
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Total non-operational 3,513 57,258
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Total Wireless Markets 10,271 216,166
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* Source: Kagan's Wireless Telecom Atlas & Databook 2001
5
PRODUCTS AND SERVICES
We segregate our services into three primary categories: wireline
communications, wireless communications and other communications services.
The percentage of total sales contributed by each class of service is as
follows:
2002 2001 2000
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Wireline communications 36.9% 40.2% 51.3%
Wireless communications 59.7% 55.3% 34.4%
Other communications services 3.4% 4.5% 14.3%
WIRELESS
Digital PCS. Our digital PCS packages provide the following
affordable and reliable services:
. Digital Features. The features of our basic PCS service include
voice mail with notification, caller ID, call waiting, three-way
calling, call forwarding, voice activated dialing and 2 way mobile
messaging. For an additional fee, we also provide wireless Internet
access.
. Nationwide Service. Our nationwide roaming agreements and dual-mode
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 tri-mode handsets 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 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
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
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. 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
expanded local, state or regional one-rate calling areas.
. nAdvance Plans. Our nAdvance plan is a 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,
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nationwide long distance, and the ability to add roadside assistance
and other options. Account balances are replenished monthly by cash
payment, 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
wholesale basis to other PCS service providers. We have a ten-year agreement
commencing August 1999 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 are complying with
certain network upgrades to 3G-1XRTT technology. This new technology is being
deployed in these wholesale BTAs in a two phase build out plan. The first phase
was completed in July 2002 and the second phase is scheduled to be completed by
August 2003. In addition to the wholesale services discussed above, the
agreement provides for roaming services for Horizon and Sprint end users.
New Products and Services. In February 2002, NTELOS introduced
prepay roaming for prepay customers. Traditionally, prepay roaming has presented
significant risk for fraud. However, the product offered by NTELOS generates
real time billing for roaming calls, giving customers the ability to manage
their roaming expense by ending the call when the subscriber depletes their
balance, thus eliminating any fraud risk.
In June 2002, NTELOS introduced StarVoice. This voice-activated
service provides a safe and hands free alternative while driving. Customers
simply activate the service by pressing two buttons on their phone. Once on the
StarVoice platform, customers can simply state names in their directory, or have
numbers dialed for them, to connect the calls.
In the fourth quarter 2002, we launched Mobile Originated SMS in the
Virginia East market, branded as 2 Way Mobile Messaging. This service allows
customers to create and send text messages from their handset. This service will
be released early in the second quarter in the Virginia West and West Virginia
markets.
In late 2001, we began offering our PCS customers 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. Additional data products related to higher speeds and functionality are
under review.
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, and CLEC services in West Virginia and Tennessee. As an ILEC, we own
and operate a 106-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 102-year-old telephone company
in southwestern Virginia that serves business and residential customers. As a
CLEC, we serve business customers in 16 markets.
We offer our ILEC and CLEC customers voice services that include the
following:
. Custom Calling Features. We offer a broad range of custom calling
features, including call waiting, continuous redialing, caller ID
and voice mail.
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. Centrex Services. We offer our business customers Centrex services,
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 offer domestic and international long
distance services to our ILEC and CLEC customers using our network
facilities or through resale arrangements with interexchange
carriers such as MCI WorldCom.
Internet. We provide Internet access services in Virginia, West
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 59 local Internet points of presence. We offer multiple
e-mail accounts, free software and personal disk space.
. Dedicated Internet Access. We provide dedicated high-speed Internet
connectivity, including frame relay, ATM and special service
circuits.
. High-Speed DSL Access. We offer DSL Internet access. DSL technology
enables a customer to receive high-speed Internet access through a
copper telephone line.
. Web Hosting. We host over 950 domains on both LINUX and Windows 2000
servers. Domain services, collocation agreements and Internet
marketing services are also available.
Fiber Optic Network. We own and operate a fiber optic cable network.
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.
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. A
portion of our network is a part of a fiber network managed by ValleyNet, a
partnership of us and two other nonaffiliated communications companies that have
interconnected their networks to create a 1,318 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, in addition to the geographic area covered
by ValleyNet, provides fiber routes in North Carolina, South Carolina, Georgia,
and Florida. The ValleyNet network is also connected to and marketed with other
adjacent fiber networks, including America's Fiber Network, creating
approximately 11,000 route-miles of connected fiber optic network that serves
ten states. We are also a regional partner in the nationwide signaling network
operated by Verisign, Inc. and using the SS-7 protocol. As a regional partner,
we lease capacity to Verisign on our mated pair of signaling data switches.
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 5,800 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, Cinemax, Showtime and
the Disney Channel. We also operate a 750 MHz wireline cable system with
approximately 6,600 subscribers in Alleghany County, Virginia with a similar
product offering. In February 2003, we entered into an agreement for the sale of
the assets of this wireline cable system. We also provide our customers with
paging services that cover most of Virginia. As of December 31, 2002, we had
approximately 10,900 paging customers. We offer numeric, alphanumeric, tone-only
and tone and voice paging services, as well as wide-area paging.
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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.
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 752 base transceiver stations, or BTSs and 72 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 our Virginia East market
and Motorola BTS equipment in Virginia West and West Virginia markets, as well
as cell site repeaters, to provide cost-efficient radio frequency coverage. We
enhance PCS backhaul facilities through the use of Tellabs digital cross-connect
systems, or DCS, equipment located at strategic BTS locations. The DCSs
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 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
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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. For DSL
service in our ILEC and CLEC areas, we use mainly Cisco and Paradyne equipment.
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 using three Cisco ATM switches.
COMPETITION
Many communications services can be provided without incurring a
short-run incremental cost for an additional unit of service. 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. 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 Sprint and its affiliates, including
Horizon Personal Communications, AT&T/SunCom, Verizon Wireless, Cingular, T
Mobile, ALLTEL, Nextel and Cellular One, 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 number of PCS operators will continue to 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.
WIRELINE
ILEC and CLEC Services. Several factors have resulted in increased
competition in the local telephone market, 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 technology;
. a decline in the level of access charges paid by interexchange
carriers to local telephone companies to access their local
networks;
. legislation and regulations, including the Telecommunications Act of
1996, designed to promote competition;
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. approval of the petition by Verizon to provide intrastate, interLATA
long distance service in both Virginia and West Virginia; and,
. a decline in the level of reciprocal compensation charges paid by
incumbent local telephone companies to CLECs, most significantly for
ISP traffic.
As the ILEC for Waynesboro, Clifton Forge, Covington, Troutville,
Fincastle, Eagle Rock and Oriskany, Virginia, and the surrounding counties, we
are subject to competition. 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 MCI, Adelphia Business Solutions,
Fibernet and KMC Telecom. 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. Our competition includes:
. access and content providers, such as America Online;
. local, regional and national Internet service providers;
. incumbent local telephone companies, such as Verizon and Sprint
(particularly for DSL services); and,
. cable modem 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.
EMPLOYEES
We employed over 1,275 regular full-time and part-time persons as of
December 31, 2002.
MISCELLANEOUS
We sell PCS wireless service, on a wholesale basis, to other
communications providers under network service agreements. For the year ended
December 31, 2002, our sale of PCS wireless service to Horizon Personal
Communications, Inc., on a wholesale basis, accounted for approximately 12.4% 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.
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.
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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
remain in compliance.
AVAILABLE INFORMATION
We maintain a website at http://www.ntelos.com. The information on
our website is not, and shall not be deemed to be a part of this report or
incorporated into any other filings we make with the SEC.
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 authorities have jurisdiction over public
rights-of-way and antenna structures. 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.
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 the version of such services resembling traditional telephone
service 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 limited FCC regulation. 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. In addition, there are certain services that the large incumbent local
exchange carriers are required by state and federal regulators to provide to our
CLEC operation. The obligation of these ILECs to provide such services could be
altered or removed by regulators.
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 Congress or the FCC. For example, the FCC has concluded that CMRS
providers are entitled to enter into reciprocal compensation arrangements with
local exchange carriers. 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.
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
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licensee seeks to transfer 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, or a portion of, the debt owed to the federal
government.
FEDERAL REGULATION OF ILEC, CLEC AND INTEREXCHANGE SERVICES
The Telecommunications Act requires all common carriers to
interconnect on a non-discriminatory basis with other carriers, and it imposes
additional requirements on local exchange carriers, and then even more
comprehensive requirements on the largest ILECs to provide access to their
networks to competing carriers. Among other things, the Telecommunications Act
requires these large 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 and provide such
unbundled components to other providers of local service so that
they can compete for a wider range of local services;
. establish "wholesale" rates for their retail services to promote
resale by CLECs and other competitors;
. allow interconnection for the provision of local services at any
technically feasible point;
. disclose certain technical information; and
. establish reciprocal compensation rates for the exchange of local
traffic.
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 and both are exempt from the above listed requirements.
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 reciprocal compensation rates and 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.
Access Charges. 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 were structured to be
"revenue neutral" to the carriers. The FCC stated that its goal in adopting the
new access rate structure was 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. An additional adjustment to rates was
made 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.
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
Botetourt County, Virginia.
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The Telecommunications Act preempts state statutes and regulations
that restrict entry into the intrastate telecommunications market. 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 certified as a CLEC in Virginia, West Virginia and
Tennessee. We provide CLEC services to businesses in Blacksburg/Christiansburg,
Danville, Martinsville, Radford, Charlottesville, Roanoke/Salem, Harrisonburg,
Lexington, Lynchburg, Staunton and Winchester, Virginia and Barboursville,
Huntington, Beckley, Point Pleasant and Charleston, West Virginia. Although we
file tariffs covering our CLEC services, our rates for such CLEC service may
fluctuate based on market conditions.
INTERNET AND DSL
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. Line sharing 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.
On February 20, 2003, the FCC announced as part of the biennial
review of its rules mandated by the Telecommunications Act that it had
reconsidered the status of line sharing. The FCC determined that this high
frequency portion of the loop ("HFPL") would not longer be considered an
unbundled network element which ILECs would be compelled to offer to CLECs.
Although the FCC found that CLECs would be impaired in their ability to compete
with ILECs in providing broadband services without access to local loops, the
FCC found that access to the entire stand-alone copper loop is sufficient to
overcome this impairment. During a three-year period, CLECs must transition
their existing customer base served via the HFPL to new arrangements. New
customers may be acquired only during the first year of this transition. In
addition, during each year of the transition, the price for the high-frequency
portion of the loop will increase incrementally towards the cost of a loop in
the relevant market. NTELOS is still assessing the impact that this FCC order,
if not modified on reconsideration or appeal, will have on its DSL offering.
FACTORS AFFECTING FUTURE PERFORMANCE
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:
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. our ability to develop, prosecute, confirm and consummate a
plan of reorganization;
. our ability to operate under debtor-in-possession financing;
. our ability to maintain vendor, lessor and customer
relationships while in bankruptcy;
. our substantial debt obligations and our ability to service
those obligations, even after the proposed reorganization;
. the additional expenses associated with bankruptcy as well
as the possibility of unanticipated expenses;
. restrictive covenants and consequences of default contained
in our financing arrangements;
. the cash flow and financial performance of our subsidiaries;
. the competitive nature of the wireless telephone and other
communications services industries;
. the achievement of build-out, operational, capital,
financing and marketing plans relating to deployment of PCS
services;
. the capital intensity of the wireless telephone business;
. retention of our existing customer base, including our
wholesale customers, especially Horizon, our ability to
attract new customers, and maintain or improve average
revenue per subscriber;
. unfavorable economic conditions on a national and local
level;
. effects of acts of terrorism or war (whether or not
declared);
. changes in industry conditions created by federal and state
legislation and regulations;
. weakening demand for wireless and wireline communications
services;
. rapid changes in technology;
. adverse changes in the roaming rates we charge and pay;
. adverse changes in rates we pay to ILECs for collocation and
unbundled network elements;
. fluctuations in the values of non-strategic assets such as
excess PCS and other spectrum licenses, which are currently
below that of recent transactions we have completed;
. the level of demand for competitive local exchange services
in smaller markets;
. our ability to manage and monitor billing;
. possible health effects of radio frequency transmission; and
. the impact of decline in our stock price and subsequent
de-listing by the NASDAQ stock market.
RISK FACTORS
The Cases and any plan of reorganization may have adverse consequences on us and
our stakeholders and/or our reorganization from the Cases may not be successful.
Our objective is to achieve the highest possible recoveries for all
creditors and shareholders, consistent with our ability to pay and the
continuation of our businesses. However, there can be no assurance that we will
be able to attain these objectives or achieve a successful reorganization and
remain a going concern. The consolidated financial statements included elsewhere
in this Report do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities or the effect on existing shareholders' equity that may result from
any plans, arrangements or other actions arising from the Cases, or the possible
inability of the Company to continue in existence. Adjustments necessitated by
such plans, arrangements or other actions could materially impact
15
the Company's financial position and/or our future results of operations.
Further, there can be no assurance that the rights of, and the ultimate payments
to, pre-Filing Date creditors will not be substantially altered.
Additionally, while the Debtors operate their businesses as
debtors-in-possession pursuant to the Bankruptcy Code during the pendency of the
Cases, the Debtors will be required to obtain the approval of the Court prior to
engaging in any transaction outside the ordinary course of business. In
connection with any such approval, creditors and other parties in interest may
raise objections to such approval and may appear and be heard at any hearing
with respect to any such approval. Accordingly, the Debtors may be prevented
from engaging in transactions that might otherwise be considered beneficial to
us. The Court also has the authority to oversee and exert control over the
Debtors' ordinary course operations.
Holders of the Company's equity securities are likely to receive little or no
value for their interests in the plan of reorganization.
Generally, under the provisions of the Bankruptcy Code, holders of
equity interests may not participate under a plan of reorganization unless the
claims of creditors are satisfied in full under the plan or unless creditors
accept a reorganization plan that permits holders of equity interest to
participate. The formulation and implementation of a plan of reorganization
could take a significant period of time, or may be unsuccessful. The ultimate
recovery to preferred securities holders and/or common shareholders, if any,
will not be determined until confirmation of a plan or plans of reorganization.
No assurance can be given as to what values, if any, will be ascribed in the
bankruptcy proceedings to each of these constituencies. A plan of reorganization
could also result in holders of our preferred and common stock receiving no
value for their interests. Because of such possibilities, the value of the
preferred and common stock is highly speculative. Accordingly, we urge that
appropriate caution be exercised with respect to existing and future investments
in any of these securities.
Shareholders may not be able to resell their stock or may have to sell at prices
substantially lower than the price they paid for it.
The trading price for our common stock has been volatile and could
continue to be subject to fluctuations in response to our filing for
reorganization, variations in our operating results, general conditions in the
telecommunications industry or the general economy, and other factors. In
addition, the stock market is subject to price and volume fluctuations affecting
the market price for public companies generally, or within broad industry
groups, which fluctuations may be unrelated to the operating results or other
circumstances of a particular company. Such fluctuations may adversely affect
the liquidity of our common stock, as well as the price that holders may achieve
for their shares upon any future sale. Furthermore, as a result of the delisting
of the Company from Nasdaq National Market, the trading market for our stock has
been materially adversely affected.
Our common stock is currently trading on the Over the Counter
Bulletin Board ("OTCBB"). Continued listing on the OTCBB requires market-maker
sponsorship and there can be no assurance that our common stock will continue to
be traded or that liquidity for our common stock will not be adversely affected.
We have substantial debt that we may not be able to service.
As of December 31, 2002, we had approximately $260.5 million of
outstanding secured indebtedness under our senior credit facility, $25.0 million
of other secured debt, $280.0 million of outstanding senior notes, and $95.0
million of outstanding subordinated notes. Our substantial indebtedness was a
principal factor in our decision to commence the Cases.
Although the terms of a plan of reorganization have not been
determined, we currently anticipate that the plan will result in a substantial
reduction in our indebtedness, with conversion of existing debt securities into
substantially all of the common ownership of the reorganized Company.
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In order to fund operations during the reorganization process, on
March 6, 2003 we entered into the DIP Financing Facility, which currently
provides us with borrowing capacity of up to $35 million and matures in 180
days. If we are unable to make all of the representations and warranties under
our DIP Financing Facility, we may not be able to draw down funds and we may not
be able to fund ongoing operations. If the reorganization process takes longer
than we currently anticipate, we may require additional financing.
We have entered into a plan support agreement with a majority of the
lenders under our senior credit facility. The plan support agreement provides,
among other things, the terms of a post-emergence credit facility ("Exit
Financing Facility") which permits us to continue to have access to our current
$225 million of outstanding term loans with a $36 million revolver commitment.
See Note 1 of the Notes to Consolidated Financial Statements in Item 8 of this
report for a description of the plan support agreement. There can be no
assurance that we will enter into the Exit Financing Facility with such lenders.
While we anticipate that much of our unsecured indebtedness will be
converted into equity or otherwise cancelled in the reorganization process, we
will continue to have substantial debt following our emergence from bankruptcy,
including borrowings under our senior credit facility, and other secured debt
and obligations under our new convertible notes.
The subscription agreement for a $75 million investment in new notes by certain
of our senior noteholders may not be completed if certain conditions are not
satisfied.
The subscription agreement executed by certain of our senior
noteholders for an aggregate of $75 million of our new 9.0% senior convertible
notes, is subject to, among other things, such senior noteholders' reasonable
satisfaction with the final terms of the plan of reorganization. Satisfaction of
certain conditions are out of our control. Accordingly, even though we have
entered into a plan support agreement with a majority of the lenders under our
senior credit facility, there can be no assurance that the new investment will
be completed.
We face substantial competition in the telecommunications 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,
Cingular, ALLTEL, Nextel, T Mobile 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 continue 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 absorb the long-distance charges
without increasing the prices we charge to our subscribers.
17
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 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
effect on our business.
As a wireline telephone business, we face competition from CLEC and
wireless service providers. Many communications services can be provided without
incurring a short-run incremental cost 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; and,
. resellers of communications services and enhanced services
providers.
If we fail to raise the capital or fail to have continued access to the capital
required to build-out and operate our planned networks, we may experience a
material adverse effect on our business.
We require additional capital to build-out and operate planned
networks and for general working capital needs. We expect our capital
expenditures for 2003 to be approximately $58 million to $66 million in the
aggregate, including approximately $8 million to $10 million relating to a
planned wireless network upgrade to 3G-1XRTT technology. We may require
additional and unanticipated funds if there are significant industry, market or
other economic developments not contemplated by 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 believe that proceeds from the issuance of $75 million of new
convertible notes and the availability of the $36.0 million revolver under the
senior credit facility will provide such additional funds; however, there can be
no assurance that the new convertible notes will be issued or that the senior
credit facility will be in place.
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 and we experienced such a decline in 2002 as well. Our
future 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. 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 successful. A high rate of
customer turnover could reduce revenues and
18
increase marketing and customer acquisition 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.
For the year ended December 31, 2002, Horizon Personal
Communications, Inc. accounted for approximately 12.4% of our revenue. In late
2002, Horizon notified us that it disputed certain categories of charges
invoiced to Horizon. In connection with this dispute, on March 24, 2003, we
filed a Stipulation with the Court pursuant to which we agreed with Horizon to
negotiate in good faith toward resolution of the dispute. If we are unable to
resolve this dispute through negotiations, either party may submit the dispute
to arbitration in accordance with the agreement. A description of the
Stipulation appears in Item 4. Legal Proceedings. Our ability to maintain strong
relationships with Horizon and our other principal customers is essential to our
future performance. If we lose Horizon or any other key customers or if Horizon
or any of our other key customers reduce their usage, require us to reduce our
prices or are financially unable to pay our charges, our revenue could decline,
which could cause our business, financial condition and operating results to
suffer.
Our larger competitors and/or wholesale customers may build networks in our
markets, which may result in decreased revenues and severe price-based
competition.
Our current roaming partners, larger wireless providers and/or
wholesale customers might build their own digital PCS networks in our service
areas. Should this occur, use of our networks would decrease and our roaming
and/or wholesale revenues would be adversely affected. Once a digital PCS system
is built out, there are only marginal costs to carrying an additional call, so a
larger number of competitors in our service areas could introduce significantly
higher levels of price competition and reduce our revenues, as has occurred in
many areas in the United States. Over the last three years, the per-minute rate
for wireless services has declined. We expect this trend to continue into the
foreseeable future. As per-minute rates continue to decline, our revenues and
cash flows may be adversely impacted.
Our largest customer may face severe financial problems.
On March 28, 2003, Horizon filed its Form 10-K for the year ending
December 31, 2002. In this report, Horizon disclosed that there was substantial
doubt about its ability to continue as a going concern because of the
probability that Horizon will violate one or more of its debt covenants in 2003.
Our future wholesale revenues under the wholesale network services agreement
with Horizon could be materially impacted if Horizon was to be unable to
continue as a going concern.
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.
The proposed recapitalization will reduce favorable tax attributes.
Although we do not believe that implementation of our proposed
recapitalization will itself result in significant tax liability, it likely will
reduce substantially the amount of our existing net operating loss carryovers
and could result in limitations on our ability to use remaining loss carryovers
and built-in losses. The reduction of, and
19
potential limitations on our ability to use, such favorable tax attributes could
adversely affect our financial position in future years.
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 Switch Facility 4,100
Directory Service Center (1) 15,700
Cloverdale, VA Wireline Switch Facility 772
Covington, VA Wireline Switch Facility 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
Harrisonburg, VA Wireline Switch Facility (4) 3,000
Norfolk, VA Wireless Switch Facility 5,000
Oriskany, VA Wireline Switch Facility 100
Portsmouth, VA Customer Care Center (3) 100,000
Potts Creek, VA Wireline Switch Facility 500
Richmond, VA Wireless Switch Facility 5,000
Troutville, VA Wireline Switch Facility 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 Switch Facility 36,200
Plant Service Center 8,750
Winchester, VA Directory Service Center (1)(2) 17,500
- ----------
20
(1) These facilities were leased to telegate AG, the buyer of
our directory service operations, until July 2002, at which
time we released telegate AG from its lease obligations.
Following the release, these facilities have not been
occupied. See Note 7 of the Notes to Consolidated Financial
Statements in Item 8 of this report for information about
the release.
(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. A wireline switch is located in this building
serving the Winchester CLEC Market.
(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. In March 2003, we entered into an
agreement for the sale of this property and building,
subject to Court approval.
(4) Approximately 2,600 square feet is leased to Security
Concepts Inc. The remaining space houses a wireline switch
serving the Harrisonburg CLEC Market and one office for a
salesperson.
LEASED FACILITIES
ADMINISTRATIVE
Approximate
Location Property Description Square Footage
--------------- ---------------------------------------------- --------------
Richmond, VA Wireless Corporate Support 10,976
Charleston, WV Wireless/Wireline Corporate Support and Switch 24,000
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 19 retail
stores and 20 kiosks in the Virginia East Market, 17 retail stores and 12 kiosks
in the Virginia West Market, and 13 retail stores and 16 kiosk in the West
Virginia Market.
CELL SITES
Substantially all of our operational cell sites are leased.
ITEM 3. LEGAL PROCEEDINGS
During the pendency of the Cases, all pending litigation against the
Debtors is stayed. See Item 1. "Business - Reorganization Proceedings" for a
discussion of the reorganization proceedings. Such discussion is incorporated
herein by reference.
In late 2002, Horizon Personal Communications, Inc. disputed certain
categories of charges under the Network Services Agreement with West Virginia
PCS Alliance, L.C. and Virginia PCS Alliance, L.C. (collectively, the
"Alliances"), alleging that the Alliances overcharged Horizon $4.8 million
during the period commencing October 1999 and ending September 2002 and $1.2
million for the period commencing October 2002 and ending December 2002. Horizon
withheld these categories of charges from payments made from and after December
2002 and failed to timely pay their January 2003 invoice due following the
Filing Date. On March 11, 2003, Horizon filed a motion with the Court which
effected an administrative freeze as to the amounts payable on the January
invoice. On March 12, 2003, the Alliances notified Horizon of the failure to
make payment on the January invoice, reserving the right to terminate the
agreement in accordance with the terms thereof. On March 24, 2003, the parties
entered a Stipulation with the Court pursuant to which Horizon paid the January
invoice and agreed to pay all future invoices and the Alliances agreed not to
exercise their termination right, assuming all future payments are made in
accordance with the agreement. The Stipulation further provides that Horizon is
permitted to withhold amounts under monthly invoices in
21
excess of $3 million if it determines in good faith that such amounts in excess
of $3 million represent an overcharge by the Alliances, pending resolution of
the dispute. In addition, the parties agreed to continue to discuss and
negotiate, in good faith, their dispute regarding Horizon's claim. To the extent
the dispute remains unresolved after 30 days, either party may submit the
dispute to arbitration in accordance with the agreement.
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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On March 13, 2003, our common stock was delisted from the Nasdaq
National Market following announcement of our filing of a voluntary petition
under Chapter 11 of the Bankruptcy Code. Our common stock is currently trading
on the Over-the-Counter Bulletin Board under the symbol "NTLOQ.OB." The number
of registered shareholders totaled 3,658 as of December 31, 2002.
We have not paid any dividends on our common stock during the two
most recent fiscal years. In accordance with the Bankruptcy Code, the DIP
Financing Facility and our senior credit facility, we are not permitted to pay
any dividends or purchase any of our stock.
The following table shows, for the periods indicated, the high and
low closing bid prices for our common stock as reported by the Nasdaq National
Market.
2002 2001
------------------------- -------------------------
HIGH LOW HIGH LOW
----------- ----------- ----------- -----------
First Quarter $ 15.61 $ 3.55 $ 24.88 $ 15.44
Second Quarter 4.42 1.11 30.06 17.02
Third Quarter 1.66 0.14 26.75 6.85
Fourth Quarter 0.73 0.21 15.49 7.66
As a result of the bankruptcy filing and the subsequent delisting by NASDAQ, our
common stock closed on the OTCBB on April 7, 2003 at $.06.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes our recent financial information and supplementary
data. For further information, refer to our Consolidated Financial Statements
and Notes to Consolidated Financial Statements in Item 8. Financial Statements
and Supplemental Data, of this Report.
NTELOS INC. AND SUBSIDIARIES
(In thousands, except per share amounts) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 262,727 $ 215,063 $ 113,519 $ 69,830 $ 58,163
Depreciation and amortization 82,924 82,281 37,678 11,323 9,472
Asset impairment charges 402,880 -- -- 3,951 --
Operating (loss) income (424,559) (61,777) (17,426) 12,671 19,975
Income taxes (benefit) (6,464) (34,532) 1,326 2,622 4,587
Equity loss from PCS investees -- (1,286) (12,259) (11,366) (6,466)
Gain on sale of assets 8,472 31,845 62,616 8,318 --
22
Income (loss) from continuing operations (488,947) (63,713) 2,270 5,891 6,856
Income (loss) applicable to common shares (509,364) (82,556) 10,471 6,493 8,508
Income (loss) from continuing operations
per share-diluted (29.34) (5.02) (0.45) 0.45 0.52
Net income (loss) per common share -
diluted (29.34) (5.02) 0.80 0.50 0.65
Cash dividends per common share -- -- 0.115 0.459 0.435
EBITDA/1/ 61,245 20,504 20,252 27,945 29,447
Investment in property, plant and equipment 570,052 599,457 406,623 159,748 138,955
Total assets 729,521 1,196,886 1,079,017 218,002 154,334
Debt - Current and long-term/2/ 642,722 612,416 556,287 37,685 19,774
Redeemable, convertible preferred stock $ 286,164 $ 265,747 $ 246,906 $ -- $ --
Average number of common shares
outstanding - diluted 17,358 16,442 13,106 13,113 13,094
Number of employees 1,278 1,395 1,218 981 743
Number of common shareholders of record 3,658 3,613 3,092 2,977 2,998
- ----------
/1/ Operating (loss) income before depreciation and amortization and asset
impairment charges. See Management's Discussion and Analysis for additional
factors to consider in using this measure. A reconciliation of operating
(loss) income to EBITDA (a non-GAAP measure) follows:
Operating (loss) income $ (424,559) $ (61,777) $ (17,426) $ 12,671 $ 19,975
Depreciation and amortization 82,924 82,281 37,678 11,323 9,472
Asset impairment charges 402,880 -- -- 3,951 --
--------------- ------------- ------------- ------------ -------------
EBITDA $ 61,245 $ 20,504 $ 20,252 $ 27,945 $ 29,447
--------------- ------------- ------------- ------------ -------------
/2/ At December 31, 2002, approximately $623.8 million of the Company's
long-term debt was classified as current due to the bankruptcy filing and
other scheduled maturities. See Management's Discussion and Analysis for
additional information.
23
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 primarily in Virginia and West Virginia and in portions of certain
other adjoining states. We own our own digital PCS licenses, fiber optic
network, switches and routers, which enables us to offer our customers
end-to-end connectivity in the regions that we serve. This facilities-based
approach allows us to control product quality and generate operating
efficiencies. Our sales strategy is focused largely on a direct relationship
with our customers through our 97 retail stores and kiosks located across the
regions we serve as a direct business sales approach. As of December 31, 2002,
we had approximately 266,500 digital PCS subscribers (up from 223,800 at
December 31, 2001) and approximately 95,800 combined incumbent local exchange
carrier ("ILEC") and competitive local exchange carrier ("CLEC") access lines
installed (up from 85,600 installed lines at December 31, 2001).
We have been focusing our growth efforts on our core communications services,
primarily digital PCS services, Internet access, including dedicated, high-speed
DSL and dial-up services, high-speed data transmission and local telephone
services. We have also divested non-strategic assets and certain excess PCS
spectrum. Transactions that were completed in 2002 include:
. sale of substantially all of the assets of our National
Alarm Services business;
. sale of PCS spectrum covering 295,000 million POPS in State
College and Williamsport, Pennsylvania;
. sale of minority ownership interest in America's Fiber
Network, LLC;
. sale of excess PCS spectrum covering 373,000 million POPS in
Winchester and Charlottesville, Virginia; and
. sale of excess PCS spectrum covering 436,000 million POPS in
Altoona and Johnstown, Pennsylvania and Wheeling, West
Virginia.
CHAPTER 11 BANKRUPTCY FILING
On March 4, 2003 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the "Debtors"), filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Eastern
District of Virginia (the "Bankruptcy Court"). By order of the Bankruptcy Court,
the Debtors' respective cases are being jointly administered under the case
number 03-32094 (the "Bankruptcy Case") for procedural purposes only. The
Bankruptcy Case was commenced in order to implement a comprehensive financial
restructuring of the Company.
In the first half of 2002, the Company took a number of restructuring steps to
improve operating results, financial condition and conserve cash on hand by
reducing its operating expenses, including a reduction in workforce, an early
retirement program, termination of certain services in selected unprofitable
locations, and curtailing or deferring certain capital expenditures. Despite the
improved operating performance resulting from these measures and continued
execution of the Company's business plan, the Company continues to require
additional cash to fund its operating expenses, debt service and capital
expenditures.
In September 2002, the Company retained UBS Warburg as its financial advisor to
assist the Company in exploring a variety of restructuring alternatives.
Thereafter, continued competition in the wireless telecommunications sector
resulted
24
in a modification to the Company's long-term business plan, including a
reduction in wireless subscriber growth, a decrease in average revenue per
wireless subscriber, a slower improvement in subscriber churn and slower growth
in wholesale revenues. In addition, capital and lending prospects for
telecommunication companies continued to deteriorate. On November 29, 2002, the
Company entered into an amendment and waiver with the lenders under the Senior
Credit Facility which restricted the amounts that the Company could borrow and
waived the Company's obligation to make certain representations in order to
submit a borrowing request. Without an extension of the waiver, the Company did
not have access to the Senior Credit Facility following January 31, 2003. During
this period, the Company was actively negotiating with its debtholders to
develop a comprehensive financial restructuring plan. The Company was unable to
reach an agreement with its debtholders on an out-of-court restructuring plan
and, accordingly, on March 4, 2003, the Company filed a petition for relief
under Chapter 11 of the Bankruptcy Code.
The Company conducts its operations through a number of wholly-owned or
majority-owned subsidiaries. While it implements the proposed recapitalization,
the Company expects its subsidiaries to continue to operate in the ordinary
course of business.
Proposed Restructuring
The Bankruptcy Case was commenced in order to implement a comprehensive
financial restructuring of the Company, including the senior notes due 2010 (the
"Senior Notes"), subordinated notes due 2011 and preferred and common equity
securities. As of the date of this report, a plan of reorganization (the "Plan")
has not been submitted to the Bankruptcy Court.
In order to meet ongoing obligations during the reorganization process, the
Company entered into a $35 million debtor-in-possession financing facility (the
"DIP Financing Facility"), subject to Bankruptcy Court approval. On March 5,
2003, the Bankruptcy Court granted access to up to $10 million of the DIP
Financing Facility, with access to the full $35 million subject to final
Bankruptcy Court approval, certain state regulatory approvals and the banks'
receiving satisfactory assurances regarding the senior noteholders' proposed $75
million investment in the Company upon emergence from bankruptcy. On March 24,
2003, the Bankruptcy Court entered a final order authorizing the Company to
access up to $35 million under the DIP Financing Facility and, as of April 11,
2003, the Company satisfied all other conditions to full access to the DIP
Financing Facility.
The Company anticipates that the Plan will be funded by two sources of capital:
(i) an equity investment made by certain holders of Senior Notes of an aggregate
of $75 million in exchange for new 9% convertible notes ("New Notes") of the
reorganized company and (ii) a credit facility which permits the Company to
continue to have access to its current $225 million of outstanding term loans
with a $36 million revolver commitment ("Exit Financing Facility"). This Exit
Financing Facility also provides that the term loans and any new borrowings
under the revolver will be at current rates and existing maturities.
On April 10, 2003, the Company entered into a Plan Support Agreement (the "Plan
Support Agreement") with a majority of the lenders under its Senior Credit
Facility. The Plan Support Agreement provides that the lenders will agree to
support a "Conforming Plan," which must include the following: (i) financing
upon emergence from bankruptcy on agreed terms, (ii) cancellation of, or
conversion into equity of the reorganized company upon emergence from bankruptcy
of, substantially all of the Company's outstanding debt and equity securities,
(iii) outstanding indebtedness on the effective date of the Plan consisting of
only certain hedge agreements, Exit Financing Facility, New Notes, existing
government loans and certain capital leases, (iv) consummation of the sale of
New Notes on the effective date of the Plan and (v) repayment of the DIP
Financing Facility and the $36 million outstanding under the revolver.
On April 10, 2003, the Company also entered into a Subscription Agreement with
certain holders of Senior Notes for the sale of $75 million aggregate principal
amount of New Notes. The Plan Support Agreement and Subscription Agreement are
subject to, among other things, confirmation of a Conforming Plan.
The Plan Support Agreement provides that a Conforming Plan and accompanying
disclosure statement must be filed with the Bankruptcy Court prior to May 31,
2003 and that a disclosure statement, reasonably acceptable to the lenders, must
be
25
approved by the Bankruptcy Court no later than August 15, 2003. In addition, the
Plan Support Agreement obligates the Company to have filed a Conforming Plan,
solicited votes and conducted a confirmation hearing prior to September 30,
2003.
While a Plan has not been submitted, the Company anticipates that the Plan will
constitute a Conforming Plan, with the conversion of existing debt securities
into common ownership of the reorganized Company. The Company also anticipates
that the holders of common stock of the Company will be entitled to little or no
recovery. Accordingly, the Company anticipates that all, or substantially all,
of the value of all investments in the Company's common stock will be lost.
Bankruptcy Proceeding
In conjunction with the commencement of the Bankruptcy Case, the Debtors sought
and obtained several first day orders from the Bankruptcy Court which were
intended to enable the Debtors to operate in the normal course of business
during the Bankruptcy Case. The most significant of these orders (i) authorize
access to up to $10 million of its $35 million debtor-in-possession financing
facility (the "DIP Financing Facility") with Wachovia Bank, (ii) permit the
Debtors to operate their consolidated cash management system during the
Bankruptcy Case in substantially the same manner as it was operated prior to the
commencement of the Bankruptcy Case, (iii) authorize payment of pre-petition
employee salaries, wages, and benefits and reimbursement of pre-petition
employee business expenses, (iv) authorize payment of pre-petition sales,
payroll, and use taxes owed by the Debtors, and (iv) authorize payment of
certain pre-petition obligations to customers.
On March 5, 2003, the Bankruptcy Court entered an interim order authorizing the
Debtors to enter into the DIP Financing Facility, and to grant first priority
mortgages, security interests, liens (including priming liens), and super
priority claims on substantially all of the assets of the Debtors to secure the
DIP Financing Facility. At first day hearings, the Court entered orders that,
among other things, granted authority to continue to pay employee salaries,
wages and benefits, and to honor warranty and service obligations to customers.
On March 24, 2003, the Bankruptcy Court entered a final order approving the DIP
Financing Facility and authorizing the Debtors to utilize up to $35 million
under the DIP Financing Facility. The full $35 million DIP commitment was
subject to final Court approval, certain state regulatory approvals and the
lenders' receiving satisfactory assurances regarding the proposed $75 million
investment in the Company by certain holders of Senior Notes upon emergence from
bankruptcy. Subsequent to March 24, 2003, the Company satisfied all other
conditions to obtain full access to the DIP Financing Facility. The DIP
Financing Facility is available to meet ongoing financial obligations in
connection with the Company's regular business operations, including obligations
to vendors, customers and employees during the Bankruptcy Case.
The Debtors are currently operating their businesses as debtors-in-possession
under the Bankruptcy Code. Pursuant to the Bankruptcy Code, pre-petition
obligations of the Debtors, including obligations under debt instruments,
generally may not be enforced against the Debtors, and any actions to collect
pre-petition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The pre-petition obligations of the Debtors are subject to
settlement under a plan of reorganization. In addition, as
debtors-in-possession, the Debtors have the right, subject to the Bankruptcy
Court approval and certain other limitations, to assume or reject executory
contracts and unexpired leases. In this context, "assumption" means that the
Debtors agree to perform their obligations and cure all existing defaults under
the contract or lease, and "rejection" means that the Debtors are relieved from
their obligations to perform further under the contract or lease, but are
subject to a claim for damages for the breach thereof. Any damages resulting
from rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Bankruptcy Case unless such claims were secured
prior to the Petition Date. The Debtors are in the process of reviewing their
executory contracts and unexpired leases to determine which, if any, they will
reject. The Debtors cannot presently determine or reasonably estimate the
ultimate liability that may result from rejecting contracts or leases or from
the filing of claims for any rejected contracts or leases, and no provisions
have yet been made for these items. The amount of the claims to be filed by the
creditors could be significantly different than the amount of the liabilities
recorded by the Debtors.
Since the Petition Date, the Debtors have conducted business in the ordinary
course. As noted above, early in 2002 the Company completed an operational
restructuring (see Note 19) and, accordingly, does not contemplate further
26
operational restructuring at this time. After developing the Plan, the Debtors
will seek the requisite acceptance of the Plan by impaired creditors and equity
holders, if it is determined that equity holders will receive a distribution
under the Plan, and confirmation of the Plan by the Bankruptcy Court, all in
accordance with the applicable provisions of the Bankruptcy Code. During the
pendency of the Bankruptcy Case, the Debtors may, with the Bankruptcy Court
approval, sell assets and settle liabilities, including for amounts other than
those reflected in the financial statements. The administrative and
reorganization expenses resulting from the Bankruptcy Case will unfavorably
affect the Debtor's results of operations. Future results of operations may also
be adversely affected by other factors related to the Bankruptcy Case. No
assurance can be given that the Debtor's creditors will support the proposed
Plan, or that the Plan will be approved by the Bankruptcy Court. Additionally,
there can be no assurance of the level of recovery to which the Debtors' secured
and unsecured creditors will receive.
BASIS OF PRESENTATION
Our consolidated financial statements have been prepared on a going concern
basis of accounting in accordance with accounting principles generally accepted
in the United States. The going concern basis of presentation assumes that the
Company will continue in operation for the foreseeable future and will be able
to realize its assets and discharge its liabilities in the normal course of
business. Because of the Bankruptcy Case and the circumstances leading to the
filing thereof, there is substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to realize the carrying value
of its assets and discharge its liabilities is subject to substantial
uncertainty. The Company's ability to continue as a going concern depends upon,
among other things, the Company's ability to comply with the terms of the DIP
Financing Facility, confirmation of a plan of reorganization, availability of
exit financing from existing lenders under the Senior Credit Facility, receipt
of additional funding through the issuance of an aggregate of $75 million of New
Notes, and the Company's ability to generate sufficient cash flows from
operations. Our financial statements do not reflect adjustments for possible
future effects on the recoverability of assets or the amounts and
classifications of liabilities that may result from the outcome of the
Bankruptcy.
Our consolidated financial statements do not reflect adjustments that may occur
in accordance with the AICPA Statement of Position 90-07 ("Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code") ("SOP 90-07"), which
the Company will adopt for its financial reporting in periods ending after
emergence from bankruptcy, assuming the Company will continue as a going
concern. In the Bankruptcy Case, substantially all unsecured liabilities as of
the Petition Date are subject to settlement under a plan of reorganization to be
voted on by creditors and equity holders, if it is determined that equity
holders will receive a distribution under the Plan, and approved by the
Bankruptcy Court. It is expected that the proposed Plan will result in "Fresh
Start" reporting pursuant to SOP 90-7. Under Fresh Start reporting, the value of
the reorganized Company would be determined based on the amount a willing buyer
would pay for the Company's assets upon confirmation of the Plan by the
Bankruptcy Court. This value would be allocated to specific tangible and
identifiable intangible assets. Liabilities existing as of the effective date of
the plan of reorganization would be stated at the present value of amounts to be
paid based on current interest rates. For financial reporting purposes for
periods ending after the Bankruptcy filing, those liabilities and obligations
whose treatment and satisfaction is dependent on the outcome of the Bankruptcy
Case will be segregated and classified as Liabilities Subject to Compromise in
the consolidated balance sheet under SOP 90-07.
Generally, all actions to enforce or otherwise effect repayment of pre-petition
liabilities as well as all pending litigation against the Debtors are stayed
while the Debtors continue their business operations as debtors-in-possession.
The ultimate amount of and settlement terms for such liabilities are subject to
an approved plan of reorganization and, accordingly, are not presently
determinable. Pursuant to SOP 90-07, professional fees associated with the
Bankruptcy Case will be expensed as incurred and reported as reorganization
costs. Also, interest expense and preferred dividends will be reported only to
the extent that they will be paid during the Bankruptcy Case or that it is
probable that they will be an allowed claim.
BACKGROUND INFORMATION
We closed on numerous significant transactions during 2000 and 2001, which
significantly impact the comparability of the annual results of operations for
the three years ended December 31, 2002. A summary of these transactions
follows.
27
During 2000, we completed the following:
. acquisition of the wireless PCS 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 an aggregate of $375 million of
Unsecured Senior Notes and Unsecured Subordinated Notes
("Senior Notes" and "Subordinated Notes", respectively);
. closing of $325 million Senior Secured Term Loans (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 Virginia PCS Alliance, L.C. ("VA Alliance") and the West
Virginia PCS Alliance, L.C. (the "WV Alliance, and
collectively, the "Alliances") 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 Virginia RSA5 Limited Partnership interest
and the analog assets and operations of Virginia RSA6
Cellular Limited Partnership in connection with the PrimeCo
VA acquisition; and,
. disposition of our directory assistance operation.
We completed a majority of our geographic expansion in 2001. In February 2001,
the Company completed closing of the merger agreement with R&B Communications,
Inc. (R&B"), an integrated communications provider in a geographic market
contiguous to ours, and commensurate therewith, began consolidating the results
of the WV Alliance (Note 6).
We 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.
Collectively, these 2000 and 2001 events 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.
As a result of the Transactions and the various effective dates of each (Notes
5, 6, 7, 8 and 9), 2002 annual and quarterly results differ significantly from
2001 and 2001 results differ significantly from 2000 results. The first quarter
of 2001 di