NTELOS HOLDINGS CORP. - FORM 10-Q - October 31, 2014

Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - NTELOS HOLDINGS CORP.Financial_Report.xls
EX-31.1 - EXHIBIT - NTELOS HOLDINGS CORP.ntls-x9302014xex311.htm
EX-32.1 - EXHIBIT - NTELOS HOLDINGS CORP.ntls-x9302014xex321.htm
EX-32.2 - EXHIBIT - NTELOS HOLDINGS CORP.ntls-x9302014xex322.htm
EX-31.2 - EXHIBIT - NTELOS HOLDINGS CORP.ntls-x9302014xex312.htm
Table of Contents                    

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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: 000-51798 
 
NTELOS Holdings Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
36-4573125
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1154 Shenandoah Village Drive, Waynesboro, Virginia 22980
(Address of principal executive offices) (Zip Code)
(540) 946-3500
(Registrant’s telephone number, including area code)
 
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.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
  
Accelerated filer
 
ý
Non-accelerated filer
£
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
There were 21,606,257 shares of the registrant’s common stock outstanding as of the close of business on October 28, 2014.

Table of Contents                    

NTELOS HOLDINGS CORP.
TABLE OF CONTENTS
 
Page Number
 

1
Table of Contents                    

PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.
NTELOS Holdings Corp.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except per share amounts)
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current Assets
 
 
 
Cash
$
105,788

 
$
88,441

Restricted cash
2,167

 
2,167

Accounts receivable, net
38,737

 
37,741

Inventories and supplies
19,655

 
23,962

Deferred income taxes
8,522

 
10,650

Prepaid expenses
11,951

 
15,891

Other current assets
935

 
4,916

 
187,755

 
183,768

Securities and Investments
1,522

 
1,499

Property, Plant and Equipment, net
335,637

 
319,376

Intangible Assets
 
 
 
Goodwill
63,700

 
63,700

Radio spectrum licenses
131,825

 
131,834

Customer relationships and trademarks, net
5,282

 
6,985

Deferred Charges and Other Assets
11,539

 
9,089

TOTAL ASSETS
$
737,260

 
$
716,251

LIABILITIES AND EQUITY
 
 
 
Current Liabilities
 
 
 
Current portion of long-term debt
$
5,835

 
$
5,410

Accounts payable
30,537

 
24,748

Dividends payable
—

 
9,034

Advance billings and customer deposits
14,080

 
14,055

Accrued expenses and other current liabilities
25,863

 
26,344

 
76,315

 
79,591

Long-Term Debt
520,779

 
484,956

Retirement Benefits
14,417

 
11,995

Deferred Income Taxes
57,300

 
62,893

Other Long-Term Liabilities
38,525

 
33,023

 
631,021

 
592,867

Commitments and Contingencies


 


Equity


 


Preferred stock, par value $.01 per share, authorized 100 shares, none issued
—

 
—

Common stock, par value $.01 per share, authorized 55,000 shares; 21,614 shares issued and 21,595 shares outstanding (21,519 shares issued and 21,510 shares outstanding at December 31, 2013)
214

 
214

Additional paid in capital
30,562

 
44,462

Treasury stock, at cost, 19 shares (9 shares at December 31, 2013)
(281
)
 
(147
)
Retained earnings
928

 
—

Accumulated other comprehensive loss
(2,440
)
 
(1,246
)
Total NTELOS Holdings Corp. Stockholders’ Equity
28,983

 
43,283

Noncontrolling Interests
941

 
510

 
29,924

 
43,793

TOTAL LIABILITIES AND EQUITY
$
737,260

 
$
716,251

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2
Table of Contents                    

NTELOS Holdings Corp.
Condensed Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Operating Revenues
$
119,638

 
$
130,912

 
$
359,515

 
$
370,116

Operating Expenses
 
 
 
 
 
 
 
Cost of sales and services
56,881

 
49,580

 
159,963

 
141,020

Customer operations
25,381

 
26,502

 
78,383

 
78,321

Corporate operations
8,580

 
10,850

 
31,610

 
31,294

Depreciation and amortization
18,473

 
16,559

 
57,469

 
55,458

Gain on sale of intangible assets
—

 
—

 
—

 
(4,442
)
 
109,315

 
103,491

 
327,425

 
301,651

Operating Income
10,323

 
27,421

 
32,090

 
68,465

Other Expense
 
 
 
 
 
 
 
Interest expense
(8,371
)
 
(7,480
)
 
(24,644
)
 
(22,232
)
Other expense, net
(29
)
 
(430
)
 
(1,194
)
 
(649
)
 
(8,400
)
 
(7,910
)
 
(25,838
)
 
(22,881
)
Income before Income Taxes
1,923

 
19,511

 
6,252

 
45,584

Income Taxes
767

 
8,340

 
2,517

 
18,464

Net Income
1,156

 
11,171

 
3,735

 
27,120

Net Income Attributable to Noncontrolling Interests
(352
)
 
(588
)
 
(1,161
)
 
(1,658
)
Net Income Attributable to NTELOS Holdings Corp.
$
804

 
$
10,583

 
$
2,574

 
$
25,462

Earnings per Share Attributable to NTELOS Holdings Corp.
 
 
 
 
 
 
 
Basic
$
0.04

 
$
0.50

 
$
0.12

 
$
1.21

Weighted average shares outstanding - basic
21,119

 
21,047

 
21,100

 
20,987

Diluted
$
0.04

 
$
0.48

 
$
0.12

 
$
1.17

Weighted average shares outstanding - diluted
21,894

 
21,910

 
21,706

 
21,708

Cash Dividends Declared per Share - Common Stock
$
—

 
$
0.42

 
$
0.84

 
$
1.26

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3
Table of Contents                    

NTELOS Holdings Corp.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Net Income Attributable to NTELOS Holdings Corp.
$
804

 
$
10,583

 
$
2,574

 
$
25,462

Other Comprehensive Income:
 
 
 
 
 
 
 
Amortization of unrealized (gain)/loss from defined benefit plans, net of $172 and $516 of deferred income taxes in 2014, respectively ($42 and $125 in 2013, respectively)
(270
)
 
66

 
(812
)
 
196

Unrecognized loss from defined benefit plans, net of $243 of deferred income taxes in 2014
—

 
—

 
(382
)
 
—

Comprehensive Income Attributable to NTELOS Holdings Corp.
534

 
10,649

 
1,380

 
25,658

Comprehensive Income Attributable to Noncontrolling Interests
352

 
588

 
1,161

 
1,658

Comprehensive Income
$
886

 
$
11,237

 
$
2,541

 
$
27,316

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4
Table of Contents                    

NTELOS Holdings Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
Cash flows from operating activities
 
 
 
Net income
$
3,735

 
$
27,120

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
57,469

 
55,458

Gain on sale of intangible assets
—

 
(4,442
)
Deferred income taxes
(2,696
)
 
16,099

Equity-based compensation
2,244

 
4,223

Amortization of loan origination costs and debt discount
2,033

 
2,092

Write off of unamortized debt issuance costs
895

 
—

Loss on interest swap derivatives
219

 
525

Retirement benefits and other
1,806

 
1,357

Changes in operating assets and liabilities
 
 
 
Accounts receivable
(996
)
 
20,469

Inventories and supplies
4,307

 
(4,887
)
Other current assets
1,472

 
(1,431
)
Income taxes
5,730

 
—

Accounts payable
1,496

 
5,336

Other current liabilities
822

 
(1,379
)
Retirement benefit (contributions)/distributions
599

 
(391
)
Net cash provided by operating activities
79,135

 
120,149

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(67,711
)
 
(65,159
)
Restricted cash pledged for letter of credit
—

 
(2,167
)
Proceeds from sale of intangible assets
—

 
4,644

Other, net
2,337

 
(214
)
Net cash used in investing activities
(65,374
)
 
(62,896
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt, net of original issue discount
187,655

 
—

Debt issuance and refinancing costs
(3,551
)
 
—

Repayments on senior secured term loans
(152,127
)
 
(3,750
)
Cash dividends paid on common stock
(27,235
)
 
(18,025
)
Capital distributions to Noncontrolling Interests
(731
)
 
(1,222
)
Other, net
(425
)
 
444

Net cash provided by/(used in) financing activities
3,586

 
(22,553
)
Increase in cash
17,347

 
34,700

Cash, beginning of period
88,441

 
76,197

Cash, end of period
$
105,788

 
$
110,897

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5
Table of Contents                    

NTELOS Holdings Corp.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)
 
(In thousands)
Common
Shares
 
Treasury
Shares
 
Common
Stock
 
Additional
Paid In
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
NTELOS
Holdings
Corp.
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2013
21,519

 
9

 
$
214

 
$
44,462

 
$
(147
)
 
$
—

 
$
(1,246
)
 
$
43,283

 
$
510

 
$
43,793

Equity-based compensation *
76

 
10

 


 
2,690

 
(134
)
 

 

 
2,556

 

 
2,556

Cash dividends declared

 

 

 
(16,590
)
 

 
(1,646
)
 

 
(18,236
)
 

 
(18,236
)
Capital distribution to Noncontrolling Interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(730
)
 
(730
)
Net income attributable to NTELOS Holdings Corp.

 

 

 

 

 
2,574

 

 
2,574

 

 
2,574

Amortization of unrealized gain from defined benefit plans, net of $516 of deferred income taxes

 

 

 

 

 

 
(812
)
 
(812
)
 

 
(812
)
Unrecognized loss from defined benefit plans, net of $243 of deferred income taxes
 
 
 
 
 
 
 
 
 
 
 
 
(382
)
 
(382
)
 
 
 
(382
)
Comprehensive income attributable to Noncontrolling Interests

 

 

 

 

 

 

 
—

 
1,161

 
1,161

Balance, September 30, 2014
21,595

 
19

 
$
214

 
$
30,562

 
$
(281
)
 
$
928

 
$
(2,440
)
 
$
28,983

 
$
941

 
$
29,924

 
*
Includes restricted shares issued, employee stock purchase plan issuances, shares issued through 401(k) matching contributions, stock options exercised and other activity.
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

6
Table of Contents                    

NTELOS Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
 
Note 1. Organization

NTELOS Holdings Corp. (hereafter referred to as “Holdings Corp.” or the “Company”), through NTELOS Inc., its wholly owned subsidiary (“NTELOS Inc.”) and its subsidiaries, is a regional provider of digital wireless communications services to consumers and businesses primarily in Virginia, West Virginia and certain portions of surrounding states. The Company’s primary services are wireless voice and data digital personal communications services (“PCS”) and 4G long term evolution data services ("LTE Services"), (collectively "PCS/LTE") provided through NTELOS branded retail operations and on a wholesale basis to other PCS providers, most notably through an arrangement with Sprint Spectrum L.P. (“Sprint Spectrum”), and Sprint Spectrum on behalf of and as an agent for certain of its affiliates (collectively “Sprint”), which arrangement is referred to herein as the “Strategic Network Alliance” or "SNA." See Note 11 for additional information regarding this arrangement. The Company does not have any independent operations.

Note 2. Basis of Presentation and Other Information
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position have been included.
The results of operations for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). These financial statements should be read in conjunction with the Company’s 2013 Form 10-K.

Reclassifications
Certain amounts in prior periods have been reclassified to conform to the current period presentation. Effective September 30, 2014, the Company changed the classification of certain costs related to equipment incentives to retain existing customers from customer operations to cost of sales and services to better align our presentation with other wireless carriers. The reclassification resulted in an increase of $7.7 million and $21.0 million in cost of sales and services and a corresponding decrease in customer operations expenses for the three and nine months ended September 30, 2013, respectively. Additionally, certain information technology (“IT”) costs attributable to supporting billing and internal network and communication services were changed from cost of sales and services to customer operations and corporate operations also to align our presentation with other wireless carriers. The reclassification resulted in a decrease of $3.2 million and $9.5 million in cost of sales and services for the three and nine months ended September 30, 2013, respectively, and an increase in customer operations expenses of $0.5 million and $1.7 million and an increase in corporate operations expenses of $2.7 million and $7.8 million for the three and nine months ended September 30, 2013, respectively. Net income has not been affected by these reclassifications.

Revenue Recognition
The Company recognizes revenue when services are rendered or when products are delivered and functional, as applicable. Certain services of the Company require payment in advance of service performance. In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue ratably over the service period. The Company bills customers certain transactional taxes on service revenues. These transactional taxes are not included in reported revenues as they are recognized as liabilities at the time customers are billed.
The Company earns retail and wholesale revenues by providing access to and usage of its networks. Retail and certain wholesale revenues are recognized as services are provided. In long term contracts certain fixed elements are required to be recognized on a straight-line basis over the term of the agreement. Revenues for equipment sales are recognized at the point of sale. Wireless handsets and other devices sold with service contracts are generally sold at prices below cost, based on the terms of the service contracts. The Company recognizes the entire cost of the handsets at the time of sale.

7
Table of Contents                    

On August 15, 2014, the Company launched its Equipment Installment Plan ("EIP"), which offers customers the option to pay for their devices over 24 months with no service contract. Additionally, after a specified period of time, customers have the right to trade in the original device for a new device and have the remaining unpaid balance satisfied. For customers that elect the EIP option, the Company recognizes revenue at the point of sale for the full retail price of the device, net of the estimated fair value of imputed interest and the estimated loss on trade-in.
The Company evaluates related transactions to determine whether they should be viewed as multiple deliverable arrangements, which impact revenue recognition. Multiple deliverable arrangements are presumed to be bundled transactions and the total consideration is measured and allocated to the separate units based on their relative selling price with certain limitations. The Company has determined that sales of handsets with service contracts related to these sales generated from Company-operated retail stores are multiple deliverable arrangements. Accordingly, substantially all of the nonrefundable activation fee revenues (as well as the associated direct costs) are allocated to the wireless handset and are recognized at the time of the sale, based on the fact that the handsets are generally sold well below cost and thus appropriately allocated to the point of sale based on the relative selling price evaluation. However, revenue and certain associated direct costs for activations sold at third-party retail locations are deferred and amortized over the estimated life of the customer relationship as the Company is not a principal in the transaction to sell the handset and therefore any activation fees charged are fully attributable to the service revenues.
The Company recognizes revenue in the period that persuasive evidence of an arrangement exists, delivery of the product has occurred or services have been rendered, it is able to determine the amount and when the collection of such amount is considered probable.
Cash
The Company’s cash was held in market rate savings accounts and non-interest bearing deposit accounts. The total held in market rate savings accounts at September 30, 2014 and December 31, 2013 was $52.5 million and $36.5 million, respectively. The remaining $53.3 million and $51.9 million of cash at September 30, 2014 and December 31, 2013, respectively, was held in non-interest bearing deposit accounts.

Restricted Cash
The Company is eligible to receive up to $5.0 million in connection with its winning bid in the Connect America Fund's Mobility Fund Phase I Auction ("Auction 901"). Pursuant to the terms of Auction 901, the Company was required to obtain a Letter of Credit (“LOC”) for the benefit of the Universal Service Administrative Company (“USAC”) to cover each disbursement plus the amount of the performance default penalty (10% of the total eligible award). USAC may draw upon the LOC in the event the Company fails to demonstrate the required coverage by the applicable deadline in 2016. The Company obtained the LOC in the amount of $2.2 million, representing the first disbursement of $1.7 million received in September 2013, plus the performance default penalty of $0.5 million. In accordance with the terms of the LOC, the Company deposited $2.2 million into a separate account at the issuing bank to serve as cash collateral. Such funds will be released when the LOC is terminated without being drawn upon by USAC.

Allowance for Doubtful Accounts
The Company includes bad debt expense in customer operations expense in the unaudited condensed consolidated statements of operations. Bad debt expense for the three months ended September 30, 2014 and 2013 was $3.4 million and $3.9 million, respectively. Bad debt expense for the nine months ended September 30, 2014 and 2013 was $10.7 million and $11.1 million, respectively. The Company’s allowance for doubtful accounts was $6.5 million at both September 30, 2014 and December 31, 2013.

Accrued Expenses and Other Current Liabilities

(In thousands)
September 30, 2014
 
December 31, 2013
Accrued interest
$
85

 
$
4,584

Accrued payroll
5,157

 
5,842

Accrued taxes
9,138

 
4,949

Other
11,483

 
10,969

Total
$
25,863

 
$
26,344





8
Table of Contents                    


Pension Benefits and Retirement Benefits Other Than Pensions
The total expense recognized for the Company’s defined benefit and nonqualified pension plans was $0.1 million for both the three months ended September 30, 2014 and 2013 and $0.1 million and $0.2 million for the nine months ended September 30, 2014 and 2013, respectively, a portion of which related to the amortization of unrealized loss.
The total amount reclassified out of accumulated other comprehensive income related to actuarial (gains)/losses from the defined benefit plans was $(0.3) million and $0.1 million for the three months ended September 30, 2014 and 2013, respectively, and $(0.8) million and $0.2 million for the nine months ended September 30, 2014 and 2013, respectively, all of which has been reclassified to cost of sales and services, customer operations, and corporate operations on the unaudited condensed consolidated statement of income for the respective periods.
Defined benefit pension plan assets were valued at $25.1 million at September 30, 2014.
The Company also sponsors a contributory defined contribution plan under Internal Revenue Code (“IRC”) Section 401(k) for substantially all employees. The Company’s current policy is to make matching contributions in shares of the Company’s common stock.

Equity-Based Compensation
The Company accounts for equity-based compensation plans under FASB Accounting Standards Codification (“ASC”) 718, Stock Compensation. Equity-based compensation expense from stock-based awards is recorded with an offsetting increase to additional paid in capital on the unaudited condensed consolidated balance sheet. The Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award and credits compensation for any forfeitures in the reporting period in which the forfeiture occurs.
Total equity-based compensation expense related to all of the Company’s stock-based equity awards for the three and nine months ended September 30, 2014 and 2013 and the Company’s 401(k) matching contributions was allocated as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Cost of sales and services
$
152

 
$
167

 
$
446

 
$
482

Customer operations
258

 
287

 
746

 
851

Corporate operations
(760
)
 
963

 
1,052

 
2,890

Equity-based compensation expense
$
(350
)
 
$
1,417

 
$
2,244

 
$
4,223

Future charges for equity-based compensation related to securities outstanding at September 30, 2014 for the remainder of 2014 and for the years 2015 through 2018 are estimated to be $0.7 million, $1.7 million, $0.8 million, $0.1 million and less than $0.1 million, respectively.
Sale of Intangible Assets
During the nine months ended September 30, 2013, the Company completed the sale of certain intangible assets for approximately $4.6 million. This amount, less fees and expenses of sale, is recorded as a gain of $4.4 million in the unaudited condensed consolidated statements of income for the nine months ended September 30, 2013.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU provides a framework that replaces the existing revenue recognition guidance and is intended to improve the financial reporting requirements. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption being prohibited. The impact of application of this ASU on the Company's financial statements has not been determined.


9
Table of Contents                    

Note 3. Supplemental Cash Flow Information
The following information is presented as supplementary disclosures for the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013:
 
 
Nine Months Ended September 30,
(In thousands)
2014

2013
Cash payments for:



Interest (net of amounts capitalized)
$
27,186


$
15,840

Income taxes
912


3,892

Cash received from income tax refunds
1,434


3,679

Supplemental investing and financing activities:
 
 
 
Additions to property, plant and equipment included in accounts payable
12,564

 
9,138

Borrowings under capital leases
152

 
165

Dividends declared not paid
—

 
9,122


The amount of interest capitalized was immaterial for each of the nine months ended September 30, 2014 and 2013.

Note 4. Property, Plant and Equipment
The components of property, plant and equipment, and the related accumulated depreciation, were as follows:
 
(In thousands)
Estimated Useful
Life
 
September 30, 2014
 
December 31, 2013
Land and buildings *
39 to 50 years
 
$
32,845

 
$
34,223

Network plant and equipment
5 to 17 years
 
506,373

 
471,032

Furniture, fixtures and other equipment
2 to 18 years
 
97,022

 
103,181

 
 
 
636,240

 
608,436

Under construction
 
 
31,785

 
6,430

 
 
 
668,025

 
614,866

Less: accumulated depreciation
 
 
332,388

 
295,490

Property, plant and equipment, net
 
 
$
335,637

 
$
319,376

* Leasehold improvements, which are categorized in land and buildings, are depreciated over the shorter of the estimated useful lives or the remaining lease terms.
Depreciation expense for the three months ended September 30, 2014 and 2013 was $18.3 million and $15.8 million, respectively. Depreciation expense for the nine months ended September 30, 2014 and 2013 was $55.8 million and $53.2 million, respectively. During the quarter ended March 31, 2014, the Company revised the estimated useful lives of certain assets in order to better match our depreciation expense with the periods these assets are expected to generate revenue based on planned and historical service periods. The new estimated useful lives were established based on historical service periods and external benchmark data of these assets. The increase in depreciation expense resulting from this change for the three and nine months ended September 30, 2014 was approximately $0.4 million and $1.1 million, respectively. The Company believes that no impairment indicators existed as of September 30, 2014 that would require it to perform impairment testing.
 
Note 5. Intangible Assets
Indefinite-Lived Intangible Assets
Goodwill and radio spectrum licenses are considered indefinite-lived intangible assets. Indefinite-lived intangible assets are not subject to amortization but instead are tested for impairment annually, on October 1, or more frequently if an event indicates that the asset might be impaired. The Company believes that no impairment indicators existed as of September 30, 2014 that would require it to perform impairment testing.

10
Table of Contents                    

Intangible Assets Subject to Amortization
Customer relationships and trademarks are considered amortizable intangible assets. At September 30, 2014 and December 31, 2013, customer relationships and trademarks were comprised of the following:
 
 
 

September 30, 2014

December 31, 2013
(In thousands)
Estimated
Useful Life

Gross Amount

Accumulated
Amortization

Net

Gross Amount

Accumulated
Amortization

Net
Customer relationships
7 to 8 years

$
36,900


$
(34,224
)

$
2,676


$
36,900


$
(32,871
)

$
4,029

Trademarks
15 years

7,000


(4,394
)

2,606


7,000


(4,044
)

2,956

Total


$
43,900


$
(38,618
)

$
5,282


$
43,900


$
(36,915
)

$
6,985

The Company amortizes its amortizable intangible assets using the straight-line method. Amortization expense for the three months ended September 30, 2014 and 2013 was $0.2 million and $0.8 million, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $1.7 million and $2.3 million, respectively.

Note 6. Long-Term Debt
At September 30, 2014 and December 31, 2013, the Company’s outstanding long-term debt consisted of the following:
 
(In thousands)
September 30, 2014
 
December 31, 2013
Senior secured term loans, net of unamortized debt discount
$
525,680

 
$
489,441

Capital lease obligations
934

 
925

 
526,614

 
490,366

Less: current portion of long-term debt
5,835

 
5,410

Long-term debt
$
520,779

 
$
484,956

Long-Term Debt, Excluding Capital Lease Obligations
On November 9, 2012, NTELOS Inc. entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), which amended and restated, in its entirety, that certain Credit Agreement dated August 7, 2009 (the “Original Credit Agreement”). The Amended and Restated Credit Agreement provided for (1) a term loan A in the aggregate amount of $150.0 million (the “Term Loan A”); and (2) a term loan B in the aggregate amount of $350.0 million (the “Term Loan B” and, together with the Term Loan A, the “Term Loans”).
On January 31, 2014, the Company completed the refinancing of Term Loan A, which converted the outstanding principal balance of $148.1 million of Term Loan A into Term Loan B, and borrowed an additional $40.0 million under Term Loan B. The additional Term Loan B borrowings bear the same interest rate, maturity and other terms as the Company’s existing Term Loan B borrowings. In connection with the refinancing, the Company incurred approximately $3.8 million in creditor and third party fees, of which $3.7 million was deferred and is being amortized to interest expense over the life of the debt using the effective interest method. The Company also deferred $0.5 million in debt discounts related to the new Term Loan B borrowings, which are being accreted to the Term Loan B using the effective interest method over the life of the debt and are reflected in interest expense. Additionally, the Company wrote off a proportionate amount of the unamortized deferred fees and debt discount from the Amended and Restated Credit Agreement totaling $0.5 million and $0.2 million, respectively, which are reflected in other expenses in the condensed consolidated statements of income.

11
Table of Contents                    

The aggregate maturities of long-term debt outstanding at September 30, 2014, excluding capital lease obligations, based on the contractual terms of the instruments were as follows:
 
(In thousands)
Term Loan
Remainder of 2014
$
1,351

2015
5,405

2016
5,405

2017
5,405

2018
5,405

Thereafter
506,725

Total
$
529,696

The Company’s blended average effective interest rate on its long-term debt was approximately 6.4% and 6.0% for the three and nine months ended September 30, 2014 and 2013, respectively.
The Amended and Restated Credit Agreement has a Restricted Payments basket, which can be used to make Restricted Payments (as defined in the Amended and Restated Credit Agreement), including the ability to pay dividends, repurchase stock or advance funds to the Company. This Restricted Payments basket increases by $6.5 million per quarter and decreases by any actual Restricted Payments and by certain investments and any mandatory prepayments on the Term Loans, to the extent the lenders decline to receive such prepayment. In addition, on a quarterly basis the Restricted Payments basket increases by the positive amount, if any, of the Excess Cash Flow (as defined in the Amended and Restated Credit Agreement). For the three months ended September 30, 2014 there was no excess cash flow. The balance of the Restricted Payments basket as of September 30, 2014 was $53.6 million.
Capital Lease Obligations
In addition to the long-term debt discussed above, the Company has entered into capital leases on vehicles with original lease terms of four to five years. At September 30, 2014, the carrying value and accumulated depreciation of these assets was $2.7 million and $1.4 million, respectively. The total net present value of the Company’s future minimum lease payments is $0.9 million. At September 30, 2014, the principal portion of these capital lease obligations was payable as follows: $0.1 million for the remainder of 2014, $0.4 million in 2015, $0.2 million in 2016, $0.1 million in 2017 and less than $0.1 million in 2018 and 2019.

Note 7. Financial Instruments
The Company is exposed to market risks with respect to certain of the financial instruments that it holds. Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the unaudited condensed consolidated financial statements at cost, which approximates fair value because of the short-term nature of these instruments. The fair values of other financial instruments are determined using observable market prices or using a valuation model, which is based on a conventional discounted cash flow methodology and utilizes assumptions of current market conditions. The following is a summary by balance sheet category:
Long-Term Investments
At September 30, 2014 and December 31, 2013, the Company had an investment in CoBank, ACB (“CoBank”) of $1.5 million. This investment is primarily related to a required investment under the Original Credit Agreement and declared and unpaid patronage distributions of restricted equity related to the portion of the term loans previously held by CoBank. This investment is carried under the cost method as it is not practicable to estimate fair value. This investment is subject to redemption in accordance with CoBank’s capital recovery plans.
Interest Rate Derivatives
In February 2013, the Company purchased an interest rate cap for $0.9 million with a notional amount of $350.0 million, which caps the three month Eurodollar rate at 1.0% and expires in August 2015. The Company did not designate the interest rate cap agreement as a cash flow hedge for accounting purposes. Therefore, the change in market value of the agreement is recorded as a gain or loss in other expense. The Company recorded losses of less than $0.1 million and $0.4 million for the three months ended September 30, 2014 and 2013, respectively, and a $0.2 million and $0.5 million loss for the nine months ended September 30, 2014 and 2013, respectively.

12
Table of Contents                    

The following table indicates the difference between face amount, carrying amount and fair value of the Company’s financial instruments at September 30, 2014 and December 31, 2013.
 
 
Face
 
 
 
Carrying
 
Fair
(In thousands)
Amount
 
 
 
Amount
 
Value
September 30, 2014
 
 
 
 
 
 
 
Nonderivatives:
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash
$
105,788

 
  
 
$
105,788

 
$
105,788

Restricted cash
2,167

 
 
 
2,167

 
2,167

Long-term investments for which it is not practicable to estimate fair value
N/A

 
  
 
1,522

 
N/A

Financial liabilities:
 
 
 
 
 
 
 
Senior secured term loan, net of unamortized debt discount
529,696

 
  
 
525,680

 
527,048

Capital lease obligations
934

 
  
 
934

 
934

Derivative related to debt:
 
 
 
 
 
 
 
Interest rate cap asset
350,000

 
* 
 
10

 
10

December 31, 2013
 
 
 
 
 
 
 
Nonderivatives:
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
Cash
$
88,441

 
  
 
$
88,441

 
$
88,441

Restricted cash
2,167

 
 
 
2,167

 
2,167

Long-term investments for which it is not practicable to estimate fair value
N/A

 
  
 
1,499

 
N/A

Financial liabilities:
 
 
 
 
 
 
 
Senior secured term loan, net of unamortized debt discount
493,750

 
  
 
489,441

 
495,848

Capital lease obligations
925

 
  
 
925

 
925

Derivative related to debt:
 
 
 
 
 
 
 
Interest rate cap asset
350,000

 
* 
 
229

 
229

* Notional amount

The fair value of the Term Loans under the Amended and Restated Credit Agreement were derived based on bid prices at September 30, 2014 and December 31, 2013, respectively. The fair value of the derivative instrument was based on a quoted market price at September 30, 2014 and December 31, 2013, respectively. These instruments are classified within Level 2 of the fair value hierarchy described in FASB ASC 820, Fair Value Measurements and Disclosures.
 

13
Table of Contents                    

Note 8. Equity and Earnings Per Share
The computations of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 were as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income applicable to common shares for earnings per share computation
$
804

 
$
10,583

 
$
2,574

 
$
25,462

Denominator:
 
 
 
 
 
 
 
Total shares outstanding
21,595

 
21,497

 
21,595

 
21,497

Less: unvested shares
(459
)
 
(443
)
 
(459
)
 
(443
)
Less: effect of calculating weighted average shares
(17
)
 
(7
)
 
(36
)
 
(67
)
Denominator for basic earnings per common share - weighted average shares outstanding
21,119

 
21,047

 
21,100

 
20,987

Plus: weighted average unvested shares
506

 
444

 
287

 
415

Plus: common stock equivalents of stock options
269

 
419

 
319

 
306

Denominator for diluted earnings per common share - weighted average shares outstanding
21,894

 
21,910

 
21,706

 
21,708


In accordance with FASB ASC 260, Earnings Per Share, unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents, whether paid or unpaid, are considered a “participating security” for purposes of computing earnings or loss per common share pursuant to the two-class method. The Company's unvested restricted stock awards have rights to receive non-forfeitable dividends. For the three and nine months ended September 30, 2014 and 2013, the Company has calculated basic earnings per share using weighted average shares outstanding and the two-class method and determined there was no significant difference in the per share amounts calculated under the two methods.

For the three months ended September 30, 2014 and 2013, the denominator for diluted earnings per common share excludes approximately 2.0 million and 1.8 million shares, respectively and for the nine months ended September 30, 2014 and 2013, 1.5 million and 1.8 million shares, respectively which were related to stock options that were antidilutive for the respective periods presented. In addition, the performance-based portion of the performance stock units ("PSUs") is excluded from diluted earnings per share until the performance criteria are satisfied.
 
Note 9. Stock Plans
The Company has employee equity incentive plans (referred to as the “Employee Equity Incentive Plans”) administered by the Compensation Committee of the Company’s board of directors (the “Committee”), which permits the grant of long-term incentives to employees, including stock options, stock appreciation rights, restricted stock awards, restricted stock units, incentive awards, other stock-based awards and dividend equivalents. The Company also has a non-employee director equity plan (the “Non-Employee Director Equity Plan”). The Non-Employee Director Equity Plan together with the Employee Equity Incentive Plans are referred to as the “Equity Incentive Plans.” Awards under these plans are issuable to employees or non-employee directors as applicable.
During the nine months ended September 30, 2014, the Company issued 347,023 stock options under the Employee Equity Incentive Plans and 27,170 stock options under the Non-Employee Director Equity Plan. The options issued under the Employee Equity Incentive Plans vest one-fourth annually beginning one year after the grant date, and the options issued under the Non-Employee Director Equity Plan cliff vest on the first anniversary of the grant date.
During the nine months ended September 30, 2014, the Company issued 130,146 shares of restricted stock under the Employee Equity Incentive Plans and 10,095 shares of restricted stock under the Non-Employee Director Equity Plan. The restricted shares granted under the Employee Equity Incentive Plans cliff vest on the third anniversary of the grant date. The restricted shares granted under the Non-Employee Director Equity Plan cliff vest on the first anniversary of the grant date. Dividend and voting rights applicable to restricted stock are equivalent to the Company’s common stock.

14
Table of Contents                    

During the nine months ended September 30, 2014, the Company granted 83,151 PSUs under the Employee Equity Incentive Plans to certain key employees. These PSUs vest on December 31, 2016 and are subject to certain performance and market conditions. Each PSU represents the contingent right to receive one share (or more based on maximum achievement) of the Company’s common stock if vesting is satisfied. The PSUs have no voting rights. Dividends, if any, that would have been paid on the underlying shares will be paid as dividend equivalent units on PSUs that vest, on or after the vesting date. At September 30, 2014, the Company had accrued approximately $0.2 million in dividend equivalent units.
The summary of the activity and status of the Company’s stock option awards for the nine months ended September 30, 2014 is as follows:
 
(In thousands, except per share amounts)
Options
 
Weighted
Average
Exercise
Price per
Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Stock options outstanding at January 1, 2014
2,603

 
$
19.45

 
 
 
 
Granted during the period
374

 
13.42

 
 
 
 
Exercised during the period
—

 
—

 
 
 
 
Forfeited during the period
(775
)
 
16.27

 
 
 
 
Stock options outstanding at September 30, 2014
2,202

 
$
19.55

 
4.6 years
 
$
11

Exercisable at September 30, 2014
1,558

 
$
20.93

 
3.1 years
 
$
11

Total expected to vest after September 30, 2014
580

 
$
18.02

 
 
 
 
The fair value of each common stock option award granted during the nine months ended September 30, 2014 was estimated on the respective grant date using a generally accepted valuation model with assumptions related to risk-free interest rate, expected volatility, expected dividend yield and expected terms. The weighted average grant date fair value per share of stock options granted during the nine months ended September 30, 2014 and 2013 was $1.02 and $0.71, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was less than $0.1 million. The total fair value of options that vested during the nine months ended September 30, 2014 and 2013 was $1.5 million and $1.5 million, respectively. As of September 30, 2014, there was $0.8 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.8 years.
The summary of the activity and status of the Company’s restricted stock awards for the nine months ended September 30, 2014 is as follows:
(In thousands, except per share amounts)
Shares
 
Weighted Average  Grant
Date Fair Value per
Share
Restricted stock awards outstanding at January 1, 2014
325

 
$
17.41

Granted during the period
140

 
13.43

Vested during the period
(83
)
 
20.06

Forfeited during the period
(135
)
 
15.97

Restricted stock awards outstanding at September 30, 2014
247

 
$
15.04


At September 30, 2014, there was $1.8 million of total unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of the restricted stock award is equal to the market value of common stock on the date of grant.

15
Table of Contents                    

The summary of the activity and status of the Company’s performance stock unit awards for the nine months ended September 30, 2014 is as follows:
(In thousands, except per share amounts)
Units
 
Weighted Average  Grant
Date Fair Value per
PSU
Performance stock units outstanding at January 1, 2014
110

 
$
12.79

Granted during the period
83

 
9.50

Vested during the period
(8
)
 
12.83

Forfeited during the period
(86
)
 
11.39

Performance stock units outstanding at September 30, 2014
99

 
$
11.24

At September 30, 2014, there was $0.7 million of total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.8 years. The fair value of the PSU is estimated at the grant date using a Monte Carlo simulation model.
In addition to the Equity Incentive Plans discussed above, the Company has an employee stock purchase plan, which commenced in July 2006 with 100,000 shares available. Shares are priced at 85% of the closing price on the last trading day of the month and generally settle on the second business day of the following month. During the nine months ended September 30, 2014 and 2013, 4,669 shares and 4,502 shares, respectively, were issued under the employee stock purchase plan. Compensation expense associated with the employee stock purchase plan for the nine months ended September 30, 2014 and 2013 was immaterial.
 
Note 10. Income Taxes
Income tax expense for the three and nine months ended September 30, 2014 was $0.8 million and $2.5 million, respectively, representing the statutory tax rate applied to pre-tax income and the effects of certain non-deductible compensation, non-controlling interest, and state minimum taxes. The Company expects its recurring non-deductible expenses to relate primarily to certain non-cash equity-based compensation and other non-deductible compensation. The Company has provided for income taxes using a year to date calculation as it is unable to reliably estimate the annual effective income tax rate.
 
Note 11. Strategic Network Alliance
The Company provides PCS services and has contracted to provide LTE Services on a wholesale basis to other wireless communication providers, most notably through the Strategic Network Alliance ("SNA") with Sprint in which the Company is the exclusive PCS/LTE service provider in the Company’s western Virginia and West Virginia service area (“SNA service area”) for all Sprint Code Division Multiple Access (“CDMA”) and LTE wireless customers. In May 2014 the parties entered into an amended agreement to extend the SNA through at least December 2022. Pursuant to the terms of the SNA, the Company is the exclusive provider of roaming/travel services in the SNA service area and is required to upgrade its network in the SNA service area to provide LTE Services. As part of the amendment, the Company leases spectrum, on a non-cash basis, from Sprint in order to enhance the PCS/LTE services. The non-cash consideration attributable to the leased spectrum is approximately $4.9 million per year. The lease expense is recognized over the term of the lease and recorded within cost of sales and services, with the offsetting consideration recorded within wholesale and other revenue. Additionally, the amended SNA provides the Company access to Sprint’s nationwide 3G and 4G LTE network at rates that are reciprocal to rates paid by Sprint under the amended SNA. The amended SNA provides that a portion of the amount paid by Sprint thereunder is fixed. The fixed fee element of the amended SNA is subject to contractual reductions on August 1, 2015 and annually thereafter starting on January 1, 2016 that will result in a decrease of payments for the fixed fee element. The Company accounts for this fixed fee portion of the revenue earned from the SNA revenue on a straight line basis over the term of the agreement. In addition, these reductions are subject to further upward or downward resets in the fixed fee element. These resets, if any, will be recognized in the period in which it occurs.
The Company generated 30.4% and 37.2% of its revenue from the SNA for the three months ended September 30, 2014 and 2013, respectively. The Company generated 31.3% and 34.7% of its revenue from the SNA for the nine months ended September 30, 2014 and 2013, respectively. SNA revenues for the three and nine months ended September 30, 2013 included $9.0 million in settlements reached with Sprint over billing disputes related to the SNA.
 

16
Table of Contents                    

Note 12. Commitments and Contingencies

On occasion, the Company makes claims or receives disputes related to its billings to other carriers, including billings under the SNA agreement, for access to the Company’s network. These disputes may involve amounts which, if resolved unfavorably to the Company, could have a material effect on the Company’s financial statements. The Company does not recognize revenue related to such matters until the period that it is reasonably assured of the collection of these claims. In the event that a claim is made related to revenues previously recognized, the Company assesses the validity of the claim and adjusts the amount of revenue recognized to the extent that the claim adjustment is considered probable and reasonably estimable.

During 2014, the Company entered into additional multi-year purchase commitments for approximately $95.0 million for certain network equipment, maintenance agreements and software licenses related to its LTE network upgrade.
  
The Company is involved in disputes, claims, either asserted or unasserted, and legal and tax proceedings and filings arising from normal business activities. While the outcome of such matters is currently not determinable, and it is reasonably possible that the cost to resolve such matters could be material, management believes that adequate provision for any probable and reasonably estimable losses has been made in the Company’s unaudited condensed consolidated financial statements.
 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this report are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We use words such as “anticipate,” “believe,” “could,” “should,” “estimate,” “expect,” “intend,” “may,” “predict,” “project,” “target,” and similar terms and phrases, including references to assumptions, to identify forward-looking statements. These forward-looking statements are based on information available to us as of the date any such statements are made, and we assume no obligation to update these forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A, Risk Factors" and elsewhere in this quarterly report and in our Annual Report on Form 10-K for the year ended December 31, 2013 and those described from time to time in our future reports filed with the Securities and Exchange Commission ("SEC").
OVERVIEW
Our summary operating results presented below are before the impact of income taxes and amounts attributable to noncontrolling interests.
Our Business
We are a leading regional provider of digital wireless communications services to consumers and businesses primarily in Virginia and West Virginia, as well as parts of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky. We offer wireless voice and digital data PCS/LTE products and services to retail and business customers under the “NTELOS Wireless” and “FRAWG Wireless” brand names. We conduct our business through NTELOS-branded retail operations, which sell our products and services via direct and indirect distribution channels, and provide network access to other telecommunications carriers, most notably through an arrangement with Sprint Spectrum L.P. (“Sprint Spectrum”), and Sprint Spectrum on behalf of and as an agent for certain of its affiliates (collectively “Sprint”), which arrangement is referred to herein as the “Strategic Network Alliance” or the "SNA."
At September 30, 2014, our wireless retail business had approximately 457,200 subscribers, representing a penetration of approximately 7.6% of our total covered population. Of the 457,200 total retail subscribers, total postpay subscribers were 310,200 at September 30, 2014 compared to 298,000 at September 30, 2013 and total prepay subscribers were 147,000 at September 30, 2014 compared to 159,100 at September 30, 2013.
Our postpay subscriber base has increased by 4% from September 30, 2013 to September 30, 2014 and our prepay subscriber base has decreased by 8% during the same time period. The retail market for wireless broadband mobile services continues to be highly competitive. Our competitors are generally nationwide in scope and have significantly greater resources than us and can be extremely aggressive in product and service pricing as well as promotional initiatives to existing and potential customers.

17
Table of Contents                    

Strategic Network Alliance
We are the exclusive PCS service provider and have contracted to exclusively provide LTE Services in our western Virginia and West Virginia service area (“SNA service area”) for all Sprint Code Division Multiple Access (“CDMA”) and LTE wireless customers. In May 2014 we entered into an amended agreement to extend the SNA through at least December 2022. Pursuant to the terms of the SNA, we are the exclusive provider of roaming/travel services in the SNA service area and are required to upgrade our network in the SNA service area to provide LTE Services. As part of the amendment we lease spectrum, on a non-cash basis, from Sprint in order to enhance the PCS/LTE services. The non-cash consideration attributable to the leased spectrum is approximately $4.9 million per year. The lease expense is recognized over the term of the lease and recorded within cost of sales and services, with the offsetting consideration recorded within wholesale and other revenue. Additionally, the amended SNA provides us access to Sprint’s nationwide 3G and 4G LTE network at rates that are reciprocal to rates paid by Sprint under the amended SNA. The amended SNA provides that a portion of the amount paid by Sprint thereunder is fixed. The fixed fee element of the amended SNA is subject to contractual reductions on August 1, 2015 and annually thereafter starting on January 1, 2016 that will result in a decrease in the fixed fee element. We account for this fixed fee portion of SNA revenue on a straight line basis over the term of the agreement. In addition, these reductions are subject to further upward or downward resets in the fixed fee element. These resets, if any, will be recognized in the period in which it occurs.
For the three months ended September 30, 2014 and 2013, we realized wholesale revenues of $37.3 million and $50.1 million, respectively, of which $36.3 million and $48.6 million, respectively, related to the SNA. For the nine months ended September 30, 2014 and 2013, we realized wholesale revenues of $115.3 million and $132.1 million, respectively of which $112.4 million and $128.4 million, respectively related to the SNA. SNA revenue for the three and nine months ended September 30, 2013 included $9.0 million in settlements reached with Sprint over billing disputes related to the SNA.
Our Operations
We are continuing to make network improvements, particularly within our existing service coverage areas, which includes upgrading our network to fourth generation mobile communications standards / Long Term Evolution wireless technology (“4G LTE”). We launched 4G LTE in several markets in the fourth quarter of 2013 and have continued the deployment during 2014. At September 30, 2014, we had approximately 3.2 million LTE Covered POPs.  By the end of 2014, we expect LTE Covered POPs will grow to approximately 3.3 million, or 55% of our total covered POPs.
We currently offer 33 devices across 11 brands, including Apple iPhone, Motorola, LG, Samsung and HTC products, and offer our customers smartphone operating systems such as Android and iOS. All devices are available for both postpay and prepay/no contract services. We also continue to be committed to improving our distribution strategy with respect to both postpay and prepay service offerings. On August 15, 2014 we launched EIP which offers customers the option to pay for their devices over 24 months and features service plan discounts and no service contracts.

RESULTS OF OPERATIONS – OVERVIEW
Three-Month Results
Operating revenues decreased $11.3 million, or 8.6%, to $119.6 million for the three months ended September 30, 2014 compared to $130.9 million for the three months ended September 30, 2013 consisting of a $1.6 million increase in retail revenues and a $12.8 million decrease in wholesale and other revenues. For the three months ended September 30, 2013, wholesale revenue included $9.0 million in settlements reached with Sprint over billing disputes related to the SNA. Operating income decreased $17.1 million, or 62.4%, to $10.3 million for the three months ended September 30, 2014 compared to $27.4 million for the three months ended September 30, 2013 primarily reflecting the decrease in operating revenue and an increase in operating expenses related primarily to increased equipment costs and an increase in network costs in 2014. Income before income taxes decreased $17.6 million, or 90.1%, to $1.9 million for the three months ended September 30, 2014 compared to $19.5 million for the three months ended September 30, 2013 for the reasons discussed above and an increase in interest expense.
Nine-Month Results
Operating revenues decreased $10.6 million, or 2.9%, to $359.5 million for the nine months ended September 30, 2014 compared to $370.1 million for the nine months ended September 30, 2013 consisting of a $6.4 million increase in retail revenue offset by a $17.0 million decrease in wholesale and other revenues. For the nine months ended September 30, 2013, wholesale revenue included $9.0 million in settlements reached with Sprint over billing disputes related to the SNA. Operating income decreased $36.4 million, or 53.1%, to $32.1 million for the nine months ended September 30, 2014 compared to $68.5 million for the nine months ended September 30, 2013 reflecting the decrease in operating revenue, the increase in operating expenses related to the increase in equipment costs and network expenses in 2014 and the gain on sale of intangible assets in

18
Table of Contents                    

2013. Income before income taxes decreased $39.3 million, or 86.3%, to $6.3 million for the nine months ended September 30, 2014 compared to $45.6 million for the nine months ended September 30, 2013 for the reasons discussed above including an increase in interest expense.
For further detail regarding our operating results, see the Other Overview Discussion and discussions of Results of Operations – Comparison of Three and Nine months ended September 30, 2014 and 2013 below.

Other Overview Discussion
To supplement our financial statements presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we reference the non-GAAP measure Average Revenue per Account ("ARPA") to measure our postpay wireless performance. We use this measure, along with other performance metrics such as subscribers and churn, to gauge operating performance for which our operating managers are responsible and upon which we evaluate their performance.

Our postpay service plan, nControl, introduced in late 2013, is customizable for families and individuals with multiple devices and facilitates the sharing of data, minutes and SMS allowances among these devices. As our customers continue to adopt these plans and add smartphone devices, we focus on ARPA as a leading metric for postpay service revenue. We closely monitor the effects of new rate plans and service offerings on ARPA in order to determine their effectiveness. We believe ARPA provides management useful information concerning the appeal of our rate plans and service offerings and our performance in attracting and retaining high-value customers. ARPA as calculated below may not be similar to ARPA measures of other wireless companies, is not a measurement under GAAP and should be considered in addition to, but not as a substitute for, the information contained in our unaudited condensed consolidated statements of operations.
The table below provides a reconciliation of operating revenues to postpay subscriber revenues used to calculate ARPA for the three and nine months ended September 30, 2014 and 2013.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except ARPA)
2014
 
2013
 
2014
 
2013
Operating revenues
$
119,638

 
$
130,912

 
$
359,515

 
$
370,116

Less: prepay service revenues
(15,521
)
 
(16,478
)
 
(48,687
)
 
(48,344
)
Less: equipment revenues
(9,802
)
 
(6,540
)
 
(23,853
)
 
(18,673
)
Less: wholesale and other adjustments
(37,231
)
 
(50,142
)
 
(115,149
)
 
(132,229
)
Postpay service revenues
$
57,084

 
$
57,752

 
$
171,826

 
$
170,870

 
 
 
 
 
 
 
 
Account Statistics:
 
 
 
 
 
 
 
Postpay ARPA
$
134.18

 
$
136.91

 
$
136.27

 
$
133.64

Postpay accounts (1)
142,100

 
140,200

 
142,100

 
140,200

Postpay subscribers per account (1)
2.2

 
2.1

 
2.2

 
2.1


(1) End of period

ARPA decreased for the three months ended September 30, 2014 as compared to the same period in 2013 as a result of pricing declines driven by the competitive environment and service plan discounts offered with EIP. ARPA increased for the nine months ended September 30, 2014 as compared to the same period in 2013, as a result of the increase in subscribers per account and the increase in smartphone adoption and usage, both driven by our nControl plans and our device line up, offset by competitive pricing pressure and EIP service discounts.  We expect ARPA to continue to be under pressure as our competition stays focused on price incentives and due to increased acceptance of EIP with its associated service plan discounts.

Operating Revenues
Our revenues are generated from the following sources:
•
Retail – subscriber revenues from network access, data services, feature services and equipment sales; and
•
Wholesale and other – primarily wholesale revenue from the SNA and roaming revenue from other telecommunications carriers. Other revenues relate to rent from leasing excess tower and building space.

19
Table of Contents                    

Operating Expenses
Our operating expenses are categorized as follows:
•
Cost of sales and services – includes handset equipment costs to new and existing customers, usage-based access charges, including long distance, roaming charges, and other direct costs incurred in accessing other telecommunications providers’ networks in order to provide telecommunication services to our end-user customers; leased facility expenses for connection to other carriers, leased spectrum, cell sites and switch locations; and engineering and repairs and maintenance expenses related to property, plant and equipment;
•
Customer operations – includes marketing, product management, product advertising, selling, billing, customer care, customer retention and bad debt expenses;
•
Corporate operations – includes taxes other than income; executive, accounting, legal, purchasing, information technology, human resources and other general and administrative expenses, including bonuses and equity-based compensation expense related to stock and option instruments held by certain members of corporate management; accretion of asset retirement obligations; and
•
Depreciation and amortization – includes depreciable long-lived property, plant and equipment and amortization of intangible assets where applicable.
•
Gain on sale of intangible assets - includes the gain from the sale of certain intangible assets.
Other Expense
Other expense includes interest expense on debt instruments, corporate financing costs and debt discounts associated with the repricing and refinancing of our debt instruments and, as appropriate, related charges or amortization of such costs and discounts, changes in the fair value of our interest rate cap and other items such as interest income and fees.
Income Taxes
Income tax expense and effective tax rate increase or decrease based upon changes in a number of factors, including our pre-tax income or loss, non-controlling interest, state minimum tax assessments, and non-deductible expenses.
Noncontrolling Interests in Earnings of Subsidiaries
We own 97% of Virginia PCS Alliance, L.C. (the “VA Alliance”), which provides PCS services to an estimated two million populated area in central and western Virginia. In accordance with the noncontrolling interest requirements in FASB ASC 810-10-45-21, we attribute approximately 3% of VA Alliance net income to these noncontrolling interests. No capital contributions from the minority owners were made during the three and nine months ended September 30, 2014 and 2013. The VA Alliance made $0.2 million and $0.5 million of capital distributions to the minority owners during the three months ended September 30, 2014 and 2013, respectively, and, $0.7 million and $1.2 million of capital distributions to the minority owners during the nine months ended September 30, 2014.

RESULTS OF OPERATIONS – COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
OPERATING REVENUES
The following table identifies our operating revenues for the three months ended September 30, 2014 and 2013:
 
 
Three Months Ended September 30,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Retail revenue
$
81,835

 
$
80,274

 
$
1,561

 
1.9
 %
Wholesale and other revenue
37,803

 
50,638

 
(12,835
)
 
(25.3
)%
Total operating revenues
$
119,638

 
$
130,912

 
$
(11,274
)
 
(8.6
)%

Retail Revenue
Retail revenue improved due to an increase in equipment revenues of $3.3 million, or 49.9%, offset by a decrease in service revenue of $1.7 million, or 2.3%. Postpay service revenue decreased as a result of higher adoption rates on favorable promotional pricing on single line plans as a result of competitive pricing pressures. Prepay service revenues decreased for the three months ended September 30, 2014, as compared to the same period in 2013, as a result of a decline in subscribers and revenue per unit driven by the increased competitive landscape. Equipment revenues increased for the three months ended September 30, 2014 reflecting an increase in retail pricing driven by continued smartphone adoption and the launch of EIP.

20
Table of Contents                    

Wholesale and Other Revenue
Wholesale and roaming revenues decreased $12.8 million, or 25.3%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, primarily reflecting a $12.3 million decrease in revenue from the SNA. Excluding the $9.0 million dispute settlement in the three months ended September 30, 2013, revenue under the SNA decreased $3.3 million, or 8.4%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. This decrease is primarily the result of the amended terms of the SNA that took affect in May 2014. We expect this year over year trend to continue. Roaming revenues from carriers other than Sprint declined $0.5 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.
OPERATING EXPENSES
The following table identifies our operating expenses for the three months ended September 30, 2014 and 2013:
 
 
Three Months Ended September 30,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Cost of sales and services
$
56,881

 
$
49,580

 
$
7,301

 
14.7
 %
Customer operations
25,381

 
26,502

 
(1,121
)
 
(4.2
)%
Corporate operations
8,580

 
10,850

 
(2,270
)
 
(20.9
)%
Depreciation and amortization
18,473

 
16,559

 
1,914

 
11.6
 %
Total operating expenses
$
109,315

 
$
103,491

 
$
5,824

 
5.6
 %
Cost of Sales and Services – Cost of sales and services increased $7.3 million, or 14.7%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 due to increases in cell site expenses, data roaming and equipment cost of sales, totaling $5.3 million, or 12.3%, as a result of on-going costs to support subscriber and usage growth, and $1.2 million in spectrum lease expenses related to the SNA agreement.
Customer Operations – Customer operations expense decreased $1.1 million, or 4.2%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 driven by a reduction in bad debt expense of $0.5 million, or 11.8%, as a result of improved accounts receivable aging and lower write offs of terminated accounts, and a reduction in other general selling expenses of $0.6 million, or 2.9%.
Corporate Operations – Corporate operations expense decreased $2.3 million, or 20.9%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 primarily driven by lower salary and equity compensation charges related to recent executive separations.
Depreciation and Amortization – Depreciation and amortization expenses increased $1.9 million, or 11.6%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 due to an increase in depreciable assets placed in service.
OTHER EXPENSE
Interest expense increased $0.9 million, or 11.9%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 due to the increased loan amount and a higher blended average effective interest rate associated with the January 2014 debt refinancing.
Other expenses decreased $0.4 million primarily as a result of no gain or loss recorded on the interest rate cap for the three months ended September 30, 2014 as compared to a $0.4 million loss for the three months ended September 30, 2013.

INCOME TAXES
Income tax expense for the three months ended September 30, 2014 and 2013 was $0.8 million and $8.3 million, respectively, representing the statutory tax rate applied to pre-tax income and the effects of certain non-deductible compensation, non-controlling interest, and state minimum taxes. We have provided for income taxes using a year to date calculation as we are unable to reliably estimate the annual effective income tax rate.


21
Table of Contents                    

RESULTS OF OPERATIONS – COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
OPERATING REVENUES
The following table identifies our operating revenues for the nine months ended September 30, 2014 and 2013:
 
 
Nine Months Ended September 30,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Retail revenue
$
242,697

 
$
236,294

 
$
6,403

 
2.7
 %
Wholesale and other revenue
116,818

 
133,822

 
(17,004
)
 
(12.7
)%
Total operating revenues
$
359,515

 
$
370,116

 
$
(10,601
)
 
(2.9
)%

Retail Revenue
Retail revenue improved primarily due to an increase in equipment revenues of $5.2 million, or 27.7% and subscriber service revenues of $1.2 million, or 0.6%. The increase in subscriber service revenues reflects an increase in the average subscriber base and an increase in ARPA. ARPA increased for the nine months ended September 30, 2014, as compared to the same period in 2013, as a result of the increase in subscribers per account and the increase in smartphone adoption and usage, both driven by our nControl plans and our device line up, offset by competitive pricing pressure and EIP service discounts.  Prepay service revenues increased for the nine months ended September 30, 2014, as compared to the same period in 2013, as a result of an increase in our prepay subscriber base. Equipment revenues increased for the nine months ended September 30, 2014 and reflected an increase in retail pricing driven by continued smartphone adoption and the launch of EIP.
Wholesale and Other Revenue
Wholesale and roaming revenues decreased $17.0 million, or 12.7%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily reflecting a $16.0 million decrease in revenue from the SNA. Excluding the $9.0 million dispute settlement in the nine months ended September 30, 2013, revenue under the SNA decreased $7.0 million, or 5.9%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. This decrease is primarily the result of the amended terms of the SNA that took place in May 2014. We expect this year over year trend to continue. Roaming revenues from carriers other than Sprint declined $0.8 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
OPERATING EXPENSES
The following table identifies our operating expenses for the nine months ended September 30, 2014 and 2013:
 
 
Nine Months Ended September 30,
 
 
 
 
(In thousands)
2014
 
2013
 
$ Variance
 
% Variance
Cost of sales and services
$
159,963

 
$
141,020

 
$
18,943

 
13.4
%
Customer operations
78,383

 
78,321

 
62

 
0.1
%
Corporate operations
31,610

 
31,294

 
316

 
1.0
%
Depreciation and amortization
57,469

 
55,458

 
2,011

 
3.6
%
Gain on sale of intangible assets
—

 
(4,442
)
 
4,442

 
—
%
Total operating expenses
$
327,425

 
$
301,651

 
$
25,774

 
8.5
%
Cost of Sales and Services – Cost of sales and services increased $18.9 million, or 13.4%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, due to increases in cell site expenses, data roaming expense and equipment cost of sales, totaling $15.8 million, or 13.0%, as a result of on-going costs to support subscriber and usage growth, and $2.1 million in spectrum lease expenses related to the new SNA agreement.
Customer Operations – Customer operations expense increased $0.1 million, or 0.1%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 due to an increase in other general selling expenses.
Corporate Operations – Corporate operations expense decreased $0.3 million, or 1.0%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 driven by lower salary and equity compensation charges related to recent executive separations, offset by additional legal and advisory fees related to the debt refinancing and SNA contract amendment.

22
Table of Contents                    

Depreciation and Amortization – Depreciation and amortization expenses increased $2.0 million, or 3.6%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 due to an increase in depreciable assets placed in service.
Gain on Sale of Intangible Assets – Gain on sale of intangible assets consists of a $4.4 million gain for the nine months ended September 30, 2013 due to the sale of certain intangible assets.
OTHER EXPENSE
Interest expense increased $2.4 million, or 10.8%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 is due to the increased loan amount and a higher blended average effective interest rate associated with the January 2014 debt refinancing.
Other expenses increased $0.5 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily as a result of a $0.9 million charge related to the write off of a proportionate amount of the unamortized deferred debt issuance costs associated with the refinancing in January 2014.


INCOME TAXES
Income tax expense for the nine months ended September 30, 2014 and 2013 was $2.5 million and $18.5 million, respectively, representing the statutory tax rate applied to pre-tax income and the effects of certain non-deductible compensation, non-controlling interest, and state minimum taxes. We have provided for income taxes using a year to date calculation as we are unable to reliably estimate the annual effective income tax rate.

LIQUIDITY AND CAPITAL RESOURCES
Overview
We historically have funded our working capital requirements, capital expenditures and other payments from cash on hand and net cash provided from operating activities.
As of September 30, 2014, we had $105.8 million of cash, compared to $88.4 million as of December 31, 2013, of which $52.5 million was held in market rate savings accounts (including $9.6 million held by the Company which is not restricted for certain payments by the Amended and Restated Credit Agreement). The remaining balance of $53.3 million was held in non-interest bearing accounts. The commercial bank that held substantially all of our cash at September 30, 2014 has a rating A1 on long term deposits by Moody’s. Our working capital (current assets minus current liabilities) was $111.4 million as of September 30, 2014 compared to $104.2 million as of December 31, 2013.
As of September 30, 2014, we had $631.0 million in aggregate long-term liabilities, compared to $592.9 million as of December 31, 2013, consisting of $520.8 million in long-term debt, including capital lease obligations, and approximately $110.2 million in other long-term liabilities consisting primarily of retirement benefits, deferred income taxes and asset retirement obligations. Further information regarding long-term debt obligations at September 30, 2014 is provided in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements.
We have a Restricted Payments basket under the terms of the Amended and Restated Credit Agreement, which can be used to make Restricted Payments, including dividends and stock repurchases. The Restricted Payments basket increases by $6.5 million per quarter plus an additional quarterly amount for Excess Cash Flow, if any (as defined in the Amended and Restated Credit Agreement) and decreases by any actual Restricted Payments and by certain investments and debt prepayments made after the date of the Amended and Restated Credit Agreement. For the quarter ended September 30, 2014 there was no excess cash flow. The balance of the Restricted Payments basket as of September 30, 2014 was $53.6 million.
The Amended and Restated Credit Agreement also permits incremental commitments of up to $125.0 million (the “Incremental Commitments”) of which up to $35.0 million can be in the form of a revolving credit facility. The ability to incur the Incremental Commitments is subject to various restrictions and conditions, including having a Leverage Ratio (as defined in the Amended and Restated Credit Agreement) not in excess of 4.50:1.00 at the time of incurrence (calculated on a pro forma basis). As of September 30, 2014, there were no commitments associated with the Incremental Commitments.
We are a holding company that does not operate any business of our own. As a result, we are dependent on cash dividends and distributions and other transfers from our subsidiaries in order to make dividend payments or to make other distributions to our stockholders, including by means of a stock repurchase. Amounts that can be made available to us to pay cash dividends or repurchase stock are restricted by the Amended and Restated Credit Agreement.

23
Table of Contents                    

Cash Flows from Operations
The following table summarizes our cash flows from operations for the nine months ended September 30, 2014 and 2013, respectively: 
 
Nine Months Ended September 30,
(In thousands)
2014
 
2013
Net cash provided by operating activities
$
79,135

 
$
120,149

Net cash used in investing activities
(65,374
)
 
(62,896
)
Net cash provided by/(used in) financing activities
3,586

 
(22,553
)

Operating Activities
Our cash flows from operating activities for the nine months ended September 30, 2014 of $79.1 million decreased $41.0 million, or 34.1%, compared to the cash flows from operating activities of $120.1 million for the nine months ended September 30, 2013. The decrease is due to a decrease in operating income and cash provided by changes in working capital. Cash provided by changes in working capital decreased of $4.3 million, or 24.2%, for the nine months ended September 30, 2014, due to the effect of the reversal of the accrual as a result of the settlement with Sprint and timing of payments received under the SNA during the nine months ended September 30, 2013, offset by an increase in accounts payable due to timing of payments on invoices related to our 4G LTE expansion and a decrease in inventory due to lower purchases of devices.
Investing Activities
As we continue to upgrade our network, we invested $67.7 million in capital expenditures for the nine months ended September 30, 2014. This was in line with the $65.2 million of capital expenditures for the same period last year. Included in the capital spending for the nine months ended September 30, 2014 was $56.5 million of expenditures for additional capacity to support our projected growth, and $10.9 million to maintain our existing networks and other business needs. We currently expect capital expenditures for full year 2014 to be approximately $105.0 million.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2014 was $3.6 million compared to net cash used in financing activities of $22.6 million for the nine months ended September 30, 2013. Included in the financing activity for the nine months ended September 30, 2014 was $39.5 million net proceeds from the January 2014 debt refinancing, offset by $27.2 million in cash dividends, $3.5 million in debt issuance costs and $4.0 million of principal payments on the long term debt. On May 22, 2014, the board of directors, in order to support our LTE network expansion and wholesale and retail growth initiatives, eliminated the quarterly dividend. Any decision to declare future dividends will be made at the discretion of the board of directors and will depend on, among other things, our results of operations, cash requirements, investment opportunities, financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We believe that our current cash balances of $105.8 million, our cash flows from operations and other capital resources will be sufficient to satisfy our working capital requirements, capital expenditures, interest costs, required debt principal payments prior to maturity, and stock repurchases, if any, through our stock repurchase plan, for the foreseeable future.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements or financing activities with special purpose entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks primarily related to interest rates. Aggregate maturities of long-term debt outstanding under the Amended and Restated Credit Agreement, based on the contractual terms of the instruments, were $529.7 million at September 30, 2014. Under this facility the Term Loan bears interest at a rate equal to either 4.75% above the Eurodollar Rate (as defined in the Amended and Restated Credit Agreement) or 3.75% above the Base Rate (as defined in the Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement provides that the Eurodollar Rate shall never be less than 1.00% per annum and the Base Rate shall never be less than 2.00% per annum. We also have other fixed rate, long-term debt in the form of capital leases totaling $0.9 million as of September 30, 2014.
In February 2013, we purchased an interest rate cap for $0.9 million with a notional amount of $350.0 million. The interest rate cap reduces our exposure to changes in the three-month Eurodollar rate by capping the rate at 1.0%. The interest rate cap agreement expires in August 2015.

24
Table of Contents                    

At September 30, 2014, our financial assets included cash of $105.8 million and restricted cash of $2.2 million. Securities and investments totaled $1.5 million at September 30, 2014.

The following sensitivity analysis estimates the impact on the fair value of certain financial instruments, which are potentially subject to material market risks, at September 30, 2014, assuming a ten percent increase and a ten percent decrease in the levels of our interest rates:
 
(In thousands)
Book Value
 
Fair Value
 
Estimated fair
value  assuming
noted decrease
in  market
pricing
 
Estimated fair
value  assuming
noted increase
in  market
pricing
Senior secured term loan, net of unamortized debt discount
$
525,680

 
$
527,048

 
$
540,826

 
$
513,677

Capital lease obligations
934

 
934

 
1,027

 
841

Our Amended and Restated Credit Agreement accrues interest based on the Eurodollar Rate plus an applicable margin (currently 475 bps). LIBOR for purposes of this facility floats when it exceeds the floor of 1.00%. At September 30, 2014, an immediate 10% increase or decrease to LIBOR would not have an effect on our interest expense as the variable LIBOR component would remain below the floor. In addition, at September 30, 2014 we had approximately $52.5 million of cash held in a market rate savings account. An immediate 10% increase or decrease to the market interest rate would not have a material effect on our cash flows.
 

Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of the end of the period covered by this quarterly report of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and our principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25
Table of Contents                    

PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings.
We are involved in routine litigation in the ordinary course of our business. We do not believe that any pending or threatened litigation of which we are aware would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this quarterly report, including the updated risk factors below, as well as other information in our subsequent filings with the SEC, you should carefully consider the risks discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in this quarterly report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse affect on our business, financial condition and/or future results.

Revised Form 10-K Risk Factors related to the Strategic Network Alliance

The loss of our largest wholesale customer, Sprint, could materially adversely affect our business, financial condition and operating results.

We generated approximately 31.3% of our operating revenues for the nine months ended September 30, 2014 from the SNA with Sprint. In May 2014 the parties reached an amended agreement to extend the SNA through December 2022. If we were to lose Sprint as a customer, including as a result of termination of the SNA as a result of our failure to upgrade to 4G LTE in accordance with the terms therein, or if Sprint were to become financially unable to pay our charges, our business, financial condition and operating results would suffer material adverse consequences due to lost revenues and decreased cash flows.
 
The pricing arrangements under our SNA with Sprint may fluctuate and there could be a decrease in the usage of our networks by Sprint customers, either of which could result in a decline in our wholesale revenues.

Under the SNA, our wholesale revenues are based on usage of our network by Sprint’s customers. In May 2014 the parties reached an amended agreement to extend the SNA through December 2022. The billable fixed fee element of the new agreement is subject to contractual reductions on August 1, 2015 and annually thereafter starting on January 1, 2016 that will result in a decrease of payments for the fixed fee element. Sprint could make changes to its subscriber contracts and national calling plans that could result in a decline in its overall subscriber base or Sprint may choose to manage its customers or distribution in our territories differently or take steps that reduce customer data or voice usage of our network. Additionally, we could experience migration by Sprint of its customers to non-CDMA technology or see a decline in the usage of our network by Sprint if we are unable to meet their customer demand for data services or fail to successfully design, build and deploy new technologies and services. If any or all of such events were to occur, or if, for any other reason, fewer Sprint customers were using our network or we experience lower usage of our network by Sprint, we could experience reduced revenues from Sprint.

Under the SNA with Sprint, there are provisions, including rate reset provisions, which could, and have, resulted in disputes from time to time. There is a dispute resolution process provided in the agreement which historically the parties have used in order to resolve open disputes. However, there can be no assurance that any future disputes will be resolved to our satisfaction and it is possible that the dispute resolution process might yield a result that would potentially lower Sprint’s payment obligations, which could have a material adverse effect on our business, financial condition and operating results.

Our largest competitors and Sprint may build networks in our markets or use alternative suppliers, which may result in decreased revenues and severe price-based competition.

The national carriers are investing substantial capital to deploy the necessary equipment to deliver 3G and 4G LTE enhanced services, and our current roaming partners, larger wireless providers and Sprint ultimately may build or expand their own wireless networks in our service areas or obtain roaming services from alternative sources. Additionally, if any current or potential roaming partner or new alternative facilities-based provider were to launch or expand networks in our markets, we could experience increased price competition and potential loss of roaming business, which would adversely affect our revenues and operating results.



26
Table of Contents                    

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In August 2009, the Company’s board of directors authorized management to repurchase up to $40.0 million of the Company’s common stock. The Company did not purchase any shares of its common stock during the three months ended September 30, 2014 under the authorization. The approximate dollar value of shares that may yet be purchased under the plan was $23.1 million at September 30, 2014. Amounts available to the Company to repurchase stock are restricted by the Amended and Restated Credit Agreement. The authorization does not have an expiration date.
 

Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.

27
Table of Contents                    

Item 6.
Exhibits.
 
Exhibit
No.
  
Description
 
 
31.1*
  
Certification of Rodney D. Dir, President and Chief Operation Officer, Pursuant to Rule 13a-14(a).
 
 
31.2*
  
Certification of Stebbins B. Chandor Jr., Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary, Pursuant to Rule 13a-14(a).
 
 
32.1*
  
Certification of Rodney D. Dir, President and Chief Operating Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2*
  
Certification of Stebbins B. Chandor Jr., Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS*
  
XBRL Instance Document.
 
 
101.SCH*
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL*
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB*
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE*
  
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Filed herewith.

28
Table of Contents                    

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
NTELOS HOLDINGS CORP.
 
 
 
Dated: October 31, 2014
By:
/s/ Rodney D. Dir
 
 
Rodney D. Dir
 
 
President and Chief Operating Officer
 
 
(Principal Executive Officer)
 
 
 
Dated: October 31, 2014
By:
/s/ Stebbins B. Chandor Jr.
 
 
Stebbins B. Chandor Jr.
 
 
Executive Vice President and Chief Financial Officer, Treasurer and Asst. Secretary
 
 
(Principal Financial Officer)
 
 
 
Dated: October 31, 2014
By:
/s/ John Turtora
 
 
John Turtora
 
 
Vice President and Controller
 
 
(Principal Accounting Officer)

29

Stock widget

Investing forum

NTELOS HOLDINGS CORP. Reports