S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 6, 2005.

Registration No. 333-            


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

NTELOS Holdings Corp.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

4813

(Primary Standard Industrial

Classification Code Number)

 

36-4573125

(I.R.S. Employer

Identification Number)

 


 

401 Spring Lane, Suite 300

PO Box 1990

Waynesboro, Virginia 22980

Telephone: (540) 946-3500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


 

Michael B. Moneymaker

Executive Vice President, Chief Financial Officer, Treasurer and Secretary

NTELOS Holdings Corp.

401 Spring Lane, Suite 300

P.O. Box 1990

Waynesboro, Virginia 22980

Telephone: (540) 946-3500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

Copies to:

 

David M. Carter

R. Mason Bayler, Jr.

Hunton & Williams LLP

Bank of America Plaza, Suite 4100

600 Peachtree Street, N.E.

Atlanta, Georgia 30308-2216

Telephone: (404) 888-4000

 

                

Geraldine A. Sinatra

Dechert LLP

4000 Bell Atlantic Tower

1717 Arch Street

Philadelphia, PA 19103-2793

Telephone: (215) 994-4000

 

Marc D. Jaffe

Rachel W. Sheridan

Latham & Watkins LLP

885 Third Avenue, Suite 1000

New York, New York 10022-4834

Telephone: (212) 906-1200

                

 


 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

 


 

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of Securities to be Registered   

Proposed Maximum Aggregate

Offering Price (1) (2)

   Amount of Registration Fee

Common Stock, par value $0.01 per share

   $ 175,000,000    $ 20,598.00

 

(1) Includes shares that may be purchased by the underwriters upon exercise of their option to purchase additional shares of common stock.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 


 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.



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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject To Completion. Dated October 6, 2005.

 

PROSPECTUS

 

                     Shares

 

LOGO

 

NTELOS Holdings Corp.

 

Common Stock

 


 

We are offering                      shares of our common stock in this initial public offering. No public market currently exists for our common stock.

 

We have applied to have our common stock listed for trading on The Nasdaq National Market under the symbol “NTLS.” We anticipate that the initial public offering price will be between $             and $             per share.

 

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 8.

 

     Per Share

   Total

Public offering price

   $                         $                     
 

Underwriting discount

   $                         $                     
 

Proceeds, before expenses, to us

   $                         $                     

 

The underwriters have the option to purchase up to an additional                      shares of common stock at the initial public offering price less the underwriting discount, to cover over-allotments.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares on or about                     , 2005.

 


 

LEHMAN BROTHERS

BEAR, STEARNS & CO. INC.

 


 

The date of this prospectus is                                     , 2005.


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No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

Through and including                     , 2005 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 


 

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   8

Special Note Regarding Forward-Looking Statements

   27

Use of Proceeds

   28

Dividend Policy

   29

Capitalization

   30

Dilution

   31

Unaudited Pro Forma Condensed Consolidated Financial Data

   32

Selected Historical and Pro Forma Consolidated Financial and Operating Data

   39

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   44
     Page

Business

   75

Management

   97

Principal Stockholders

   113

Certain Relationships and Related Transactions

   114

Description of Certain Debt

   116

Description of Capital Stock

   119

Shares Eligible for Future Sale

   121

Certain United States Tax Consequences to Non-U.S. Holders of Common Stock

   123

Underwriting

   126

Validity of the Common Stock

   130

Experts

   130

Available Information

   130

Index to Consolidated Financial Statements

   F-1

 


 

MARKET AND OTHER DATA

 

Market data and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms and other published independent sources. Some data are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources, including information provided to us by the U.S. Census Bureau. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness.

 

This prospectus contains trademarks, service marks and trade names of companies and organizations other than us. NTELOS® and other trademarks are registered trademarks of NTELOS Inc. and certain of our other subsidiaries.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” and our consolidated financial statements and the notes relating thereto included elsewhere in this prospectus. Unless otherwise noted or unless the context otherwise requires, references to “NTELOS,” “the company,” “we,” “us” and “our” refer to NTELOS Holdings Corp., a Delaware corporation, together with our consolidated subsidiaries.

 

We are a leading provider of wireless and wireline communications services to consumers and businesses in Virginia and West Virginia under the NTELOS brand name. We concentrate on providing services that we believe represent high growth opportunities for us. For the year ended December 31, 2004, we recognized operating revenues of $341.7 million, which represents a compound annual growth rate from 2001 to 2004 of approximately 15%. For the six months ended June 30, 2005, we recognized operating revenues of $188.9 million, which represented an increase of 14% over the same period in 2004.

 

Our wireless operations are composed of an NTELOS branded retail business and a wholesale business that we operate under an exclusive contract with Sprint Nextel Corp, or Sprint Nextel. We believe our regional focus and contiguous footprint provide us with a differentiated competitive position relative to our primary competitors, all of which are national providers. Our wireless revenues have experienced a 23% compound annual growth rate from 2001 to 2004 and accounted for approximately 72% of our total revenues for the six months ended June 30, 2005. Our wireless operating income has grown from a loss of approximately $(80.2) million in 2001 to approximately $20.7 million in 2004, and for the six months ended June 30, 2005, our wireless operating income was $16.5 million, an increase of $9.0 million, or approximately 119.5%, over the same period in 2004. We hold digital wireless personal communication services, or PCS, licenses to operate in 29 basic trading areas, or BTAs, with a licensed population of 8.5 million, and we have deployed a network using code division multiple access technology, or CDMA, in 19 BTAs which currently cover a total population, which we refer to as covered POPs, of 4.9 million potential subscribers. As of June 30, 2005, our wireless retail business had approximately 326,000 NTELOS branded subscribers, representing a 6.6% penetration of our covered POPs. In 2004 we entered into a seven-year exclusive network agreement to be a wholesale provider of network services for Sprint Spectrum, the wireless subsidiary of Sprint Nextel. Under this agreement, which we refer to as the Strategic Network Alliance, we are the exclusive PCS network service provider through July 2011 to all Sprint Nextel wireless services offered to approximately 3 million POPs in our western Virginia and West Virginia service area, which we deliver over our CDMA third generation, or 3G, one times radio transmission technology, or 1xRTT, network, utilizing our own spectrum. For the six months ended June 30, 2005, we realized wholesale revenues of $29.9 million, primarily related to the Strategic Network Alliance, representing an increase of 28% over the same period in 2004 when we provided similar services under a predecessor agreement to one of Sprint Nextel’s affiliate partners.

 

Founded in 1897, our wireline business and its predecessor organizations have a long history of providing exceptional telephone service in rural Virginia. Our wireline communications business is conducted through two subsidiaries that qualify as rural telephone companies under the Telecommunications Act of 1996. These two rural telephone companies, which we refer to as our RLECs, provide wireline communications services to residential and business customers in the western Virginia communities of Waynesboro, Covington, Clifton Forge and portions of Botetourt and Augusta Counties. As of June 30, 2005, we operated approximately 48,000 RLEC telephone access lines and approximately 13,000 broadband access connections in our markets, and we had completed the investment required to offer digital subscriber line, or DSL, services in 90% of our footprint. In 1998, we began to leverage our wireline network infrastructure to offer competitive local exchange carrier, or CLEC, communication services in Virginia and West Virginia outside our RLEC footprint, and as of June 30,

 

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2005, we served customers with approximately 43,000 CLEC access line connections. Our CLEC business markets and sells local, long distance, and high-speed data services almost exclusively to business customers, with residential service limited to bundled service offerings with DSL. We also own a 1,900 mile regional fiber-optic network which directly connects our networks with many of the largest markets in the mid-Atlantic region. Our wireline operations have historically generated stable, strong free cash flow and experienced operating income margins of 37% and 35% for 2004 and the six months ended June 30, 2005, respectively.

 

Competitive Strengths

 

Our wireless business is positioned for continued growth.    We are the only wireless operator focused primarily on the Virginia and West Virginia regional footprint, and we believe we have successfully positioned our own retail NTELOS brand as the “Best Value in Wireless” promoting the services as offering “The Most Minutes Across Town and Across America.” We maintain a broad physical retail sales presence in our region, which currently includes 68 point-of-sale locations, significantly more than any other wireless provider in our operating region. We believe our commitment to maintaining a local presence in the markets we serve has allowed us to deliver outstanding customer service and further reinforces our “hometown” brand image. We believe the ongoing integration of SunCom subscribers into Cingular’s operations in our region positions us as the leading service provider in our markets pursuing a branded regional value strategy. As a result of our current product offerings and our focus on selling higher value rate plans, we have increased our retail subscribers and average revenues per unit/handset, or ARPU, from approximately 294,000 and $47.27 at June 30, 2004 to 326,000 and $51.85 at June 30, 2005. In addition, our recently expanded data services resulted in data ARPU of $1.59 for the six months ended June 30, 2005, an increase from $0.15 for the same period in 2004. We believe our current market position, retail distribution presence and product offerings will allow us to successfully increase our market penetration and aggressively grow our subscriber base in the future.

 

We have an attractive regional wireless footprint.    Our contiguous wireless footprint includes substantial portions of Virginia and West Virginia as well as portions of Kentucky, Tennessee, Ohio and North Carolina. We believe this large regional footprint and our attractive national reciprocal roaming rates allow us to successfully address the mobile communications needs of the potential customers within our service area. We are currently the only wireless company operating a 100% CDMA network covering our entire regional footprint. Within our coverage footprint, we have extensive network coverage of interstates and major highways, allowing us to provide a high quality customer experience and generate increasing usage from Sprint Nextel subscribers in the Strategic Network Alliance service area. There are over 90 colleges and universities located within our market coverage area, including 10 universities with student populations greater than 10,000 each, including the University of Virginia, Virginia Tech, West Virginia University, Marshall University and James Madison University.

 

We have a long term Strategic Network Alliance with Sprint Nextel.    We are the exclusive PCS network service provider through July 2011 for all Sprint Nextel wireless services delivered in the Strategic Network Alliance service area. This arrangement has provided our wireless operations with an attractive wholesale revenue stream and has generated significant growth. We enjoy attractive contribution margins on our revenues from Sprint Nextel, as the compensation that we receive from Sprint Nextel for these services is meaningfully higher than our incremental operating cost to provide these services. The Strategic Network Alliance also permits our NTELOS branded customers to access Sprint Nextel’s national wireless network and long distance termination services at favorable rates and allows us to offer our own NTELOS branded national rate plans on a more competitive and more profitable basis. In addition, we expect that the combined Sprint Nextel will focus its future business to more fully utilize the capabilities of the CDMA network technology platform for which we are the exclusive network provider within our Strategic Network Alliance service area.

 

We have a well-established and financially strong regional wireline business that generates substantial and stable cash flows.    Our local telephone companies have over 100 years of market presence in the local rural communities in which they operate, with a reputation for superior customer service. Our local telephone network

 

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serves as a platform from which we have launched additional wireline businesses, including CLEC, internet and wholesale network services. We have been prudent in expanding our wireline operations into adjacent markets by leveraging our existing capital investment and routing traffic on our existing communications network. By leveraging these investments to enhance and expand our capabilities, we can maximize our returns on capital deployed and focus on targeting high margin business customers. Over the past three years, we have generated significant incremental cash flow as a result of these investments. Our RLEC operations have also benefited from a favorable regulatory environment and have consistently outperformed the service benchmarks set by the Virginia State Corporation Commission, or SCC. Our operating income for our wireline operations has been consistent and predictable in recent periods.

 

We leverage our brand, network and backoffice across multiple products.    We operate a broad collection of network assets across our footprint, including seven switching sites, 1,900 miles of fiber optic cable, and 842 wireless cell sites, which allows us to maximize efficiency across our wireless and wireline operations. We also operate an integrated backoffice that supports billing, customer service, provisioning and network management across the wireless and wireline operations. Our backoffice infrastructure and services are flexible and scalable for future growth and allow us to benefit from greater scale efficiency than would otherwise be the case for a stand-alone wireless or wireline operator.

 

We have an experienced management team.    Our executive officers average more than 20 years of experience in the telecommunications industry. A majority of these officers have been with us for over 10 years. Our management team has extensive experience operating our business and has communications industry relationships which provide us with a competitive advantage.

 

Business Strategy

 

Our fundamental business goal is to increase shareholder value. We seek to do so by continuing to deliver rapid, sustainable growth in operating revenues and operating income. We plan to achieve our goal by capitalizing on our competitive strengths and focusing on the following strategic objectives:

 

    Grow our NTELOS branded retail wireless operations by further expanding network coverage and delivering new products and services that increase subscriber penetration and profitability per subscriber;

 

    Continue our close cooperation with Sprint Nextel to facilitate greater usage of our network through our Strategic Network Alliance;

 

    Realize the cash flow benefits from previous capital investments in our wireline operations and network assets; and

 

    Continue to leverage our network and backoffice functions by further increasing our customer penetration and usage within our markets.

 

Recent Developments

 

On January 18, 2005, NTELOS Inc. entered into an agreement with Citigroup Venture Capital Equity Partners, L.P., or CVC, and certain of its affiliates, collectively referred to herein as the CVC Entities, and Quadrangle Capital Partners LP, or Quadrangle, and certain of its affiliates, collectively referred to herein as the Quadrangle Entities, through which the CVC Entities and the Quadrangle Entities acquired control of NTELOS Inc. The transaction was completed on May 2, 2005.

 

Additional Information

 

Our principal executive offices are located at 401 Spring Lane, Suite 300, Waynesboro, Virginia 22980. The telephone number for our principal executive offices is (540) 946-3500. Our internet address is www.NTELOS.com. This internet address is provided for informational purposes only, and the information at this internet address is not a part of this offering memorandum.

 

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The Offering

 

Common stock offered by us

                     shares

 

Total common stock outstanding after this offering

                     shares

 

Use of proceeds

We will receive net proceeds from the sale of our common stock in this offering, after deducting the underwriting discount and other estimated expenses, of approximately $             million. We intend to use the net proceeds that we will receive in this offering:

 

    to terminate the advisory agreements with the CVC Entities and the Quadrangle Entities; and

 

    the remainder for general corporate purposes, including working capital and capital expenditures made in the ordinary course of business, possible repayment of indebtedness and possible distributions to existing stockholders.

 

See “Use of Proceeds” and “Certain Relationships and Related Transactions.”

 

Dividend policy

We do not anticipate paying any periodic dividends on our common stock in the foreseeable future. See “Dividend Policy.”

 

Voting rights

The holders of our common stock will be entitled to one vote per share on all matters submitted to a vote of our stockholders.

 

Proposed Nasdaq National Market symbol

“NTLS”

 

Certain relationships and related transactions

Please read “Certain Relationships and Related Transactions” for a discussion of business relationships between us and related parties and “Underwriting” for a discussion of business relationships between us and the underwriters.

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” and all other information set forth in this prospectus before investing in our common stock.

 


 

Except as otherwise noted, the number of shares of our common stock to be outstanding after this offering excludes shares reserved for future issuance under our equity incentive plan, our director option plan and our employee stock purchase plan. See “Management—Benefit Plans.”

 

Except as otherwise noted, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

 

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Summary Historical and Pro Forma Consolidated Financial and Operating Data

 

We were formed in January 2005 by the CVC Entities and the Quadrangle Entities for the purpose of acquiring NTELOS Inc. We entered into an agreement to acquire NTELOS Inc. in January 2005. In accordance with this agreement, we acquired 24.9% of the NTELOS Inc. common stock on February 24, 2005, and we completed our acquisition of NTELOS Inc. on May 2, 2005. NTELOS Inc. filed a Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division on March 4, 2003. The plan of reorganization for NTELOS Inc. became effective on September 9, 2003. We refer to NTELOS Inc. prior to its reorganization as the predecessor company and following the reorganization through May 1, 2005 as the predecessor reorganized company.

 

The summary historical financial and operating data for the predecessor company for the year ended December 31, 2002, has been derived from the audited consolidated financial statements and related notes thereto of the predecessor company included elsewhere in this prospectus. The summary historical financial and operating data for NTELOS Inc. for the year ended December 31, 2003, has been derived from the audited consolidated financial statements and related notes thereto of the predecessor company for the period from January 1, 2003 through September 9, 2003, and the audited consolidated financial statements and related notes thereto of the predecessor reorganized company for the period from September 10, 2003 through December 31, 2003, included elsewhere in the prospectus.

 

The summary unaudited pro forma financial and operating data for NTELOS Holdings Corp. as of and for the six months ended June 30, 2005 and the year ended December 31, 2004, have been prepared to give pro forma effect to the following, as if they had occurred on January 1, 2004:

 

    our acquisition of NTELOS Inc. in 2005 and the refinancing of our credit facilities;

 

    our conversion from a limited liability company to a corporation; and

 

    the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the application of such net proceeds as described under “Use of Proceeds.”

 

The summary unaudited pro forma financial and operating data are for informational purposes only and should not be considered indicative of actual results that would have been achieved had the transactions described above for which we are giving pro forma effect actually been completed on the dates or for the periods indicated. The summary unaudited pro forma financial and operating data are also not necessarily indicative of the results to be expected for the full year or any future period. The summary unaudited pro forma financial and operating data do not purport to predict balance sheet data, results of operations, cash flows or other data as of any future date or for any future period. A number of factors may affect our actual results. See “Risk Factors.”

 

The following information is qualified by reference to and should be read in conjunction with “Capitalization,” “Unaudited Pro Forma Condensed Consolidated Financial Data,” “Selected Historical and Pro Forma Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

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Summary Historical and Pro Forma Consolidated Financial and Operating Data

 

   

Historical

NTELOS Inc.


   

Pro Forma

NTELOS Holdings Corp.


 
   

Year Ended

December 31, 2002


   

Year Ended

December 31, 2003


   

Year Ended

December 31, 2004


   

Six Months

Ended

June 30, 2005


 
Statement of Operations Data:   (dollars in thousands)     (dollars in thousands)  

Operating revenues:

                               

Wireless communications

  $ 171,495     $ 199,535     $ 234,682     $ 135,068  

Wireline communications

    98,220       103,537       105,251       53,342  

Other communications services

    9,151       4,882       1,769       467  
   


 


 


 


    $ 278,866     $ 307,954     $ 341,702     $ 188,877  
   


 


 


 


Operating expenses:

                               

Cost of wireless sales (exclusive of items shown below)

  $ 48,868     $ 46,949     $ 47,802     $ 28,369  

Maintenance and support

    64,408       60,840       62,929       31,738  

Depreciation and amortization

    82,924       70,084       78,371       43,035  

Gain on sale of assets

    (8,472 )                 (8,742 )

Asset impairment charges

    402,880       545              

Accretion of asset retirement obligation

          662       680       350  

Customer operations

    82,146       88,274       82,812       43,600  

Corporate operations

    17,914       24,614       28,742       13,469  

Capital and operational restructuring charges

    4,285       2,427       798       15,523  
   


 


 


 


    $ 694,953     $ 294,395     $ 302,134     $ 167,342  
   


 


 


 


Operating income (loss)

    (416,087 )     13,559       39,568       21,535  

Other income (expenses):

                               

Interest expense

    (78,351 )     (32,437 )     (46,428 )     (23,491 )

Other income (expenses)

    (1,454 )     332       4,040       2,274  

Reorganization items

          168,891       81        
   


 


 


 


      (495,892 )     150,345       (2,739 )     318  

Income tax (benefit)

    (6,464 )     964       1,001       569  
   


 


 


 


      (489,428 )     149,381       (3,740 )     (251 )

Minority interests in (income) losses of subsidiaries

    481       69       34       (18 )
   


 


 


 


      (488,947 )     149,450       (3,706 )     (269 )

Income (loss) before cumulative effect of an accounting change

                               

Cumulative effect of an accounting change

          (2,754 )            
   


 


 


 


Net (loss) income

  $ (488,947 )   $ 146,696     $ (3,706 )   $ (269 )
   


 


 


 


Net (loss) income per common share—

                               

Basic

  $       $       $       $    

Diluted

  $       $       $       $    

Weighted average common shares outstanding—

                               

Basic

  $       $       $       $    

Diluted

  $       $       $       $    

Other data—consolidated:

                               

Capital expenditures

  $ 73,164     $ 58,520     $ 60,074     $ 32,331  

Other data—wireless communications:

                               

Operating Income (loss)

  $ (410,177 )   $ (14,789 )   $ 12,323     $ 14,357  

Depreciation and amortization

    61,141       47,556       52,956       29,168  

Gain on sale of assets

    (3,076 )                 (51 )

Asset impairment charges

    366,950                    

Accretion of asset retirement obligation

          610       605       350  

Capital expenditures

  $ 49,330     $ 37,098     $ 35,764     $ 18,647  

Wholesale revenues

  $ 33,886     $ 32,916     $ 51,581     $ 29,918  

Total subscribers at period end

            286,368       302,155       326,435  

Other data—wireline communications:

                               

Operating Income

  $ 11,073     $ 37,436     $ 34,385     $ 17,029  

Depreciation and amortization

    18,338       20,783       24,365       13,215  

Gain on sale of assets

                      (21 )

Asset impairment charges

    20,900                    

Accretion of asset retirement obligation

          52       49       17  

Capital expenditures

  $ 20,575     $ 17,061     $ 18,551     $ 9,938  

Total access lines

            77,665       77,332       77,258  

DSL/Broadband connection

            7,463       10,648       12,455  

 

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NTELOS Holdings Corp.

As of June 30, 2005


         Actual    

       Pro Forma    

     (in thousands)

Balance Sheet Data:

             

Cash and cash equivalents

   $ 19,989    $ 168,252

Property and equipment, net

   $ 340,379    $ 340,379

Total assets

   $ 868,254    $ 1,016,517

Total debt and convertible notes

   $ 630,329    $ 630,329

Total stockholders’ equity

   $ 124,964    $ 273,227

(1) Ratio calculated by dividing operating income (loss) on a consolidated basis by operating revenues on a consolidated basis.
(2) Calculated by dividing operating income (loss) for wireless communications by operating revenues for wireless communications.
(3) Calculated by dividing operating income for wireline communications by operating revenues for wireline communications.

 

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RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the specific factors set forth below, as well as the other information set forth elsewhere in this prospectus, before purchasing the common stock offered hereby. Our business, financial condition or results of operations could be materially adversely affected by any or all of these risks.

 

Risks Relating to Our Business

 

Our substantial leverage could adversely affect our financial health.

 

We are highly leveraged. As of June 30, 2005, our total outstanding debt on a consolidated basis, including capital lease obligations, is approximately $630.3 million. Our substantial indebtedness could adversely affect our financial health and business and future operations by, among other things:

 

    making it more difficult for us to satisfy our obligations with respect to our indebtedness;

 

    increasing our vulnerability to adverse economic and industry conditions by making it more difficult for us to react quickly to changing conditions;

 

    limiting our ability to obtain any additional financing we may need to operate, develop and expand our business;

 

    requiring us to dedicate a substantial portion of any cash flows from operations to service our debt, which reduces the funds available for operations and future business opportunities;

 

    potentially making us more highly leveraged than our competitors, which could potentially decrease our ability to compete in our industry;

 

    exposing us to risks inherent in interest rate fluctuations because some of our borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business, and the industry in which we operate.

 

The ability to make payments on our debt will depend upon our subsidiaries’ future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. If the cash flows from our subsidiaries operating activities are insufficient to service our debt obligations, we may take actions, such as delaying or reducing capital expenditures, attempting to restructure or refinance our debt, selling assets or operations or seeking additional equity capital. Any or all of these actions may not be sufficient to allow us to service our debt obligations. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. The NTELOS Inc. senior secured credit facilities limit our or our subsidiaries’ ability to take several of these actions. Our failure to generate sufficient funds to pay our debts or to successfully undertake any of these actions could, among other things, materially adversely affect the market value of the securities offered hereby and our ability to repay our obligations under our indebtedness.

 

The terms of our indebtedness impose operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions.

 

The terms of our indebtedness impose operating and financial restrictions on us. These restrictions generally contain limitations on our ability to:

 

    incur additional indebtedness;

 

 

    pay dividends or make other distributions or repurchase or redeem our stock or subordinated indebtedness;

 

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    make certain investments;

 

    create liens;

 

    enter into transactions with affiliates; and

 

    consolidate, merge or sell all or substantially all of our assets.

 

We cannot assure you that those covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities.

 

We will require a significant amount of cash, which may not be available to us, to service our debt and fund our other liquidity needs.

 

Our ability to make payments on, or to refinance or repay, our debt, fund planned capital expenditures and expand our business will depend largely upon our future operating performance. Our future operating performance is subject to general economic, financial, competitive, legislative and regulatory factors, as well as other factors that are beyond our control. Our business may not generate enough cash flow, or future borrowings may not be available to us under the NTELOS Inc. senior secured credit facilities or otherwise, in an amount sufficient to enable us to pay our debt or fund our other liquidity needs. If we are unable to generate sufficient cash to service our debt requirements, we will be required to refinance the NTELOS Inc. senior secured credit facilities. We may not be able to refinance any of our debt, including the NTELOS Inc. senior secured credit facilities, under such circumstances, on commercially reasonable terms or at all. If we are unable to refinance our debt or obtain new financing under these circumstances, we would have to consider other options, including, sales of certain assets to meet our debt service requirements, sales of equity and negotiations with our lenders to restructure the applicable debt.

 

NTELOS Inc.’s senior secured credit facilities could restrict our ability to do some of these things. If we are forced to pursue any of the above options under distressed conditions, our business could be adversely affected.

 

The telecommunications industry is generally characterized by rapid development, introduction of new technologies, substantial regulatory changes and intense competition, any of which could cause us to suffer price reductions, customer losses, reduced operating margins and/or loss of market share.

 

The telecommunications industry has been, and we believe will continue to be, characterized by several trends, including the following:

 

    rapid development and introduction of new technologies and services, such as voice-over-internet protocol, or VoIP, push-to-talk services, or “push-to-talk,” location based services such as GPS mapping technology and high speed data services, including streaming video, mobile gaming and other applications;

 

    substantial regulatory change due to the continuing implementation of the Telecommunications Act of 1996, or Telecommunications Act, which amended the Communications Act of 1934, as amended, or Communications Act, which included changes designed to stimulate competition for both local and long distance telecommunications services;

 

    increased competition within established markets from current and new market entrants that may provide competing or alternative services;

 

    an increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or access to wider geographic markets; and

 

    the blurring of traditional dividing lines between, and the bundling of, different services, such as local telephone, long distance, wireless, video, data and internet services.

 

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We expect competition to intensify as a result of new competitors and the development of new technologies, products and services. Some or all of these risks may cause us to have to spend significantly more in capital expenditures than we currently anticipate in order to keep existing, and attract new, customers. Many of our voice and data competitors, such as cable providers, wireless service providers, internet access providers and long distance carriers have brand recognition and financial, personnel, marketing and other resources that are significantly greater than ours. In addition, due to consolidation and strategic alliances within the telecommunications industry, we cannot predict the number of competitors that will emerge, especially as a result of existing or new federal and state regulatory or legislative actions. Such increased competition from existing and new entities could lead to price reductions, loss of customers, reduced operating margins and/or loss of market share.

 

As competition develops and technology evolves, and as a result of the FCC’s continuing implementation of the Telecommunications Act, the FCC, federal and state regulation of the telecommunications industry is changing rapidly. We anticipate that this state of regulatory flux will persist in the future, as the FCC and state regulators respond to competitive, technological, and legislative developments by modifying their existing regulations or adopting new ones.

 

Taken together or individually, new or changed regulatory requirements affecting any or all of the wireless, local, and long distance industries may harm our business and restrict the manner in which we operate our business. The enactment of new adverse regulation or regulatory requirements may slow our growth and have a material adverse effect upon our business, results of operations and financial condition. We cannot assure you that changes in current or future regulations adopted by the FCC or state regulators, or other legislative, administrative or judicial initiatives relating to the communications industry, would not have a material adverse effect on our business, results of operations and financial condition. In addition, pending congressional legislative efforts to reform the Communications Act may cause major industry and regulatory changes that are difficult to predict.

 

The NTELOS Inc. senior secured credit facilities impose operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking some corporate actions.

 

The NTELOS Inc. senior secured credit facilities impose operating and financial restrictions on our subsidiaries. These restrictions generally:

 

    restrict our subsidiaries’ ability to incur additional indebtedness;

 

    restrict our subsidiaries from entering into transactions with affiliates;

 

    restrict our subsidiaries’ ability to consolidate, merge or sell all or substantially all of their assets;

 

    impose financial covenants relating to the business of our subsidiaries, including leverage and interest coverage ratios;

 

    require our subsidiaries to use specified amounts of excess cash flow to repay indebtedness if our leverage ratio reaches specified levels;

 

    restrict our subsidiaries’ ability to grant dividends; and

 

    restrict our subsidiaries’ ability to make capital expenditures.

 

We cannot assure you that those covenants will not adversely affect our ability to pay dividends, finance our future operations or capital needs or pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the NTELOS Inc. senior secured credit facilities. If a default occurs, our indebtedness under the NTELOS Inc. senior secured credit facilities could be declared immediately due and payable. As a result of general economic conditions, conditions in the lending markets, the results of our business or for any other reason, we may elect or be required to amend or refinance our indebtedness, at or prior to maturity, or enter into additional agreements for senior indebtedness. See “Description of Certain Debt—NTELOS Inc. Senior Secured Credit Facilities” for additional information.

 

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Wireless Telecommunications

 

We face substantial competition in the wireless telecommunications industry generally from competitors with substantially greater resources than we have that may be able to offer new technologies, services covering a broader geographical area and lower prices, which could decrease our profitability and cause prices for our services to continue to decline in the future.

 

We operate in an increasingly competitive environment. Our wireless business faces intense competition from other wireless providers, including Verizon Wireless, ALLTEL, Cellular One, T-Mobile, Cingular Wireless, U.S. Cellular and Sprint Nextel (including its affiliates and resellers, such as Virgin Mobile USA). Competition for customers is based principally upon services and features offered, system coverage, technical quality of the wireless system, price, customer service and network capacity. Our ability to compete will depend, in part, on our ability to anticipate and respond to various competitive factors affecting the telecommunications industry.

 

Many of our competitors are, or are affiliated with major communications companies that have substantially greater financial, technical and marketing resources than we have. These competitors may have greater name recognition and more established relationships with a larger base of current and potential customers and, accordingly, we may not be able to compete successfully. We expect that increased competition will result in more competitive pricing. Consolidation continues in the wireless industry with the recent combinations of Sprint and Nextel and AT&T Wireless and Cingular. Cingular Wireless, a national wireless company with significant resources, recently acquired the Virginia assets of Suncom, one of our main competitors in this market. Companies that have the resources to sustain losses for some time have an advantage over those companies without access to these resources. We cannot assure you that we will be able to achieve or maintain adequate market share or revenue or compete effectively in any of our markets. We believe we may have benefited and may continue to benefit by adding new subscribers following a consolidation of competitors in our market that has resulted in post-consolidation service disruption to customers of the competitors involved. These benefits may be temporary, however, and we may not be able to sustain this additional growth or retain these new customers.

 

Over the last three years, the per-minute rate for wireless services has declined. Competition may cause the prices for wireless products and services to continue to decline in the future. As per-minute rates continue to decline, our revenues and cash flows may be adversely impacted.

 

Over the past three years capital spending on our network has been primarily focused on meeting the growing capacity demands of our customers. As a result, we have spent very little capital expanding our footprint with new cell sites or enhancing our existing footprint to improve in-building coverage or to resolve coverage holes. We expect in the future to spend more capital on our network in order to expand our service area and maintain our high level of customer service.

 

We expect competition to intensify as a result of the rapid development of new technologies, including improvements in the capacity and quality of digital technology, such as the move to 3G wireless technologies. Several wireless carriers, including Verizon Wireless and Sprint Nextel, have announced plans to upgrade all or parts of their 3G networks to include “Evolution Data Optimized” 3G 1x-EVDO technology, or EVDO, which provides broadband wireless services at rates faster than the 3G 1xRTT technology we use in our western Virginia and West Virginia markets and faster than the second generation, or 2G, technology we currently use in our eastern Virginia market. Many wireless carriers have also added “push-to-talk” which allows subscribers to talk to each other quickly with a single push of a button, and some are developing technology to permit wireless handset video transmission. Such technological advances and industry changes could cause the technology used on our network to become dated. We may not be able to respond to such changes and implement new technology on a timely basis or at an acceptable cost. To the extent that we do not keep pace with technological advances, fail to offer technologies comparable to those of our competitors or fail to respond timely to changes in competitive factors in our industry, we could lose existing customers and experience a decline in revenues and net income. Each of these factors and sources of competition discussed above could have a material adverse effect on our business, financial condition and results of operations.

 

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Our future success will depend on our ability to add a sufficient number of new wireless customers.

 

The wireless industry generally has experienced a decline in customer growth rates due to saturation. Our future success will depend on our ability to continue expanding our current customer base, penetrate our target markets, sell additional services and otherwise capitalize on wireless opportunities. We must increase our subscriber base without excessively reducing the prices we charge to realize the anticipated cash flow, operating efficiencies and cost benefits of our network.

 

If we experience a high rate of wireless customer turnover or seek to prevent significant customer turnover, our revenues could decline and our costs could increase.

 

Many wireless providers in the U.S. have experienced and have sought to prevent a high rate of customer turnover. The rate of customer turnover may be the result of several factors, including limited network coverage, reliability issues such as blocked or dropped calls, handset problems, inability to roam onto third-party networks at competitive rates, or at all, price competition and affordability, customer care concerns, wireless number portability requirements that allow customers to keep their wireless phone number when switching between service providers and other competitive factors. In addition, customers could elect to switch to another carrier that has service offerings dependent on newer network technology. We cannot assure you that our strategies to address customer turnover will be successful. If we experience a high rate of wireless customer turnover or seek to prevent significant customer turnover or fail to replace lost customers, our revenues could decline and our costs could increase which could have a material adverse effect on our business, financial condition and operating results.

 

The loss of our largest customer, Sprint Nextel, a decrease in its usage or a demand by Sprint Nextel that we provide new products or services may result in lower revenues or higher expenses.

 

Sprint Nextel (and its predecessor in our area, Horizon PCS) accounted for approximately 15% of our operating revenues for the year ended December 31, 2004 and 16% of our operating revenues for the six months ended June 30, 2005. If we were to lose Sprint Nextel as a customer, or if Sprint Nextel reduced its usage or became financially unable to pay our charges, our revenues could decline, which could cause our business, financial condition and operating results to suffer. The impact on us of the recent merger of Sprint and Nextel cannot be predicted at this time but could be substantial. One effect could be a request that we offer new products and services to Sprint Nextel customers. Also, the merger of Sprint and Nextel triggers the ability of stockholders of Nextel Partners Inc., a wireless affiliate of Sprint Nextel, to sell their shares to Sprint Nextel. Such a sale could result in the ownership of Nextel Partners by Sprint Nextel. Unlike Sprint Nextel, Nextel Partners owns a wireless network in all of the territory covered by our Strategic Network Alliance. Any future migration by Sprint Nextel of CDMA customers to their integrated digital enhanced network, or iDEN, technology could result in a decline in the usage of our network by Sprint Nextel and could cause an adverse impact on our business, financial condition and operating results.

 

The pricing arrangement under our Strategic Network Alliance with Sprint Nextel may fluctuate which could result in lower revenues.

 

Under the Strategic Network Alliance with Sprint Nextel, after an initial pricing term in which the price Sprint Nextel is required to pay us is set by the agreement, our price structure with Sprint Nextel will fluctuate under a formula tied to a national wireless retail customer revenue yield. In addition, Sprint Nextel prices its national calling plans based on its business objectives and it could set price levels or change other characteristics of its plans in a way that may not be economically advantageous for our business or may result in reduction of usage from Sprint Nextel customers.

 

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If Sprint Nextel does not succeed, our business may not succeed.

 

If Sprint Nextel has a significant service disruption, fails to operate its business in an efficient manner or suffers a weakening of its brand name, our operating results would likely be negatively impacted. If Sprint Nextel should have significant financial problems, our business would suffer material adverse consequences, which could include termination or revision of our Strategic Network Alliance.

 

If the roaming rates we pay for our customers’ usage of third party networks increase, our operating results may decline.

 

Many of our competitors have national networks which enable them to offer roaming and long-distance telephone services to their subscribers at a lower cost. We do not have a national network, and we must pay other carriers a per-minute charge for carrying roaming and long-distance calls made by our subscribers. To remain competitive, we absorb a substantial portion of the roaming and long-distance charges without increasing the prices we charge to our subscribers. We have entered into roaming agreements with other communications providers that govern the roaming rates that we are required to pay. In addition, under the terms of our Strategic Network Alliance, we have favorable roaming rates with Sprint Nextel. If these roaming agreements are terminated, the roaming rates that we are charged may increase and, accordingly, our cash flow and operating results may decline.

 

We may incur significantly higher wireless handset subsidy costs than we anticipate to upgrade existing subscribers.

 

As our subscriber base grows, and technological innovations occur, more existing subscribers will begin to upgrade to new wireless handsets. We subsidize a portion of the price of wireless handsets and incur sales commissions on the sale or upgrade of handsets. The cost of handsets increases as they are able to offer more applications. Furthermore, we generally pay more to purchase handsets than many of our national competitors who buy from manufacturers in large volumes. If more subscribers purchase or upgrade to new wireless handsets than we project, our operating results would be adversely affected.

 

Because we rely heavily on a retail distribution channel, we are subject to risks that could adversely impact our financial condition and operating results.

 

Our strategy emphasizes product and service distribution through retail stores located across our service regions. As of June 30, 2005, we owned or operated 68 retail stores and kiosks. Accordingly, we must successfully manage risks associated with retail operations, including inventory management, internal and external theft, the hiring and retention of qualified and knowledgeable employees, employee turnover and training expenses, collective employee action, and identifying and securing suitable locations. If we are unable to successfully manage any of these factors, there could be a material adverse impact on our business, financial condition and operating results.

 

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

 

Our current roaming partners, larger wireless providers and Sprint Nextel ultimately may build their own digital wireless networks in our service areas or obtain roaming services from alternative sources. Sprint Nextel controls 10 MHz of spectrum within our service territory in the 1900 MHz PCS band. While the terms of the Strategic Network Alliance generally prohibit Sprint Nextel from directly or indirectly commencing construction of, contracting for or launching its own PCS or wireless communications network in the Strategic Network Alliance service area until 180 days prior to termination of the Strategic Network Alliance, it would adversely affect our revenues and operating results if Sprint Nextel or another wireless provider were to do so. Should this occur, use of our networks would decrease and our roaming and/or wholesale revenues would be adversely

 

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affected. Once a digital wireless system is built, there are only marginal costs to carrying an additional call, so a larger number of facility-based competitors in our service areas could stimulate significant price competition, as has occurred in many areas in the U.S., with a resulting reduction in our revenues and operating results.

 

The loss of our licenses could adversely affect our ability to provide wireless services.

 

Our wireless licenses are generally valid for ten years from the effective date of the license. Licensees may renew their licenses for additional ten-year periods by filing renewal applications with the FCC. Our wireless licenses expire in various years. The renewal applications are subject to FCC review and potentially public comment to ensure that the licensees meet their licensing requirements and comply with other applicable FCC mandates. We applied for and were granted renewal of seven of these licenses in 2005. If we fail to file for renewal of other of our licenses at the appropriate time or fail to meet any regulatory requirements for renewal, we could be denied a license renewal and, accordingly, our ability to continue to provide service in that license area would be adversely affected. In addition, many of our licenses are subject to interim or final construction requirements. While the licensees have generally met “safe harbor” standards for ensuring such benchmarks are met, we have relied on, and will in the future rely on, “substantial service” thresholds for meeting build-out requirements. In such cases, there is no guarantee that the FCC will find our construction sufficient to meet the applicable construction requirement, in which case the FCC could terminate our license and our ability to continue to provide service in that license area would be adversely affected.

 

Our failure to comply with regulatory mandates could adversely affect our ability to provide wireless services.

 

The FCC regulates the licensing, operation, acquisition and sale of the licensed spectrum that is essential to our business. Future changes in regulation or legislation for commercial mobile radio services, which include specialized mobile radio, cellular and personal communications services, among other services, could impose significant additional costs on us either in the form of direct out of pocket costs or additional compliance obligations. Failure to comply with regulations imposed on our services or licenses could result in the revocation of our licenses or other sanctions, fines or obligations.

 

Our compliance with existing regulatory requirements, such as Enhanced 911, or E911, and Communications Assistance for Law Enforcement Act, or CALEA, depends on the availability of necessary equipment or software. In addition, the Cellular Telecommunications and Internet Association, or CTIA, on behalf of the wireless industry, has petitioned the FCC for an extension or waiver of the requirement that 95% of the wireless customer base have E911 location-capable handsets by December 31, 2005. If the FCC fails to act on the CTIA petition, we may not be able to meet the 95% requirement by the end of 2005. Failure to comply with any of these regulatory requirements may have an adverse effect on our licenses or operations and could result in sanctions, fines or other penalties.

 

The licensing of additional spectrum by the FCC may adversely affect our ability to compete in providing wireless services.

 

The FCC, from time to time, auctions additional radio spectrum that may be suitable for services that compete, directly or indirectly, with our wireless offerings. For example, in the summer of 2006, the FCC intends to auction an additional 90 MHz of radio spectrum for “Advanced Wireless Services” that can be used for services like our wireless offerings. We may also participate in such auctions in order to obtain spectrum necessary to increase the capacity of our systems or to allow us to offer new services. Thus, the auction of new spectrum may adversely impact our business by creating new competitors, enhancing the ability of our existing competitors to offer services we cannot offer, requiring the company to expend additional funds to acquire spectrum necessary for continued growth, or restricting our growth because we cannot acquire additional necessary spectrum.

 

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If we lose the right to install our equipment on wireless cell sites or are unable to renew expiring leases for wireless cell sites on favorable terms or at all, our business and operating results could be adversely impacted.

 

As of June 30, 2005, approximately 88% of our base stations were installed on leased cell site facilities, with approximately 45% installed on facilities owned by American Tower and Crown Communications. A large portion of these cell sites are leased from a small number of large cell site companies pursuant to master agreements that govern the general terms of our use of that company’s cell sites. If a master agreement with one of these cell site companies were to terminate, or if one of these cell site companies were unable to support our use of its cell sites, we would have to find new sites or rebuild the affected portion of our network. In addition, the concentration of our cell site leases with a limited number of cell site companies could adversely affect our operating results and financial condition if we are unable to renew our expiring leases with these cell site companies either on terms comparable to those we have today or at all. If any of the cell site leasing companies with which we do business were to experience severe financial difficulties, or file for bankruptcy protection, our ability to use cell sites leased from that company could be adversely affected. If a material number of cell sites were no longer available for our use, our financial condition and operating results could be adversely affected.

 

We cannot predict the effect of technological changes on our business.

 

The wireless telecommunications industry is experiencing significant technological change. We believe our continued success will depend, in part, on our ability to anticipate or adapt to technological changes and to offer, on a timely basis, services that meet customer demands. We cannot assure you that we will obtain access to new technology on a timely basis or on satisfactory terms. Our failure to obtain access to new technology could have a material adverse effect on our business, financial condition and operating results.

 

For us to keep pace with these technological changes and remain competitive, we must continue to make significant capital expenditures to our integrated communications system. Customer acceptance of the services that we offer will continually be affected by technology-based differences in our product and service offerings. For example, we are unable to offer many high speed data applications offered by our competitors who have upgraded to EVDO technology. In addition, “push-to-talk” is becoming increasingly popular as it allows subscribers to save time on dialing or connecting to a network. The most popular “push-to-talk” feature is offered by Sprint Nextel. Verizon Wireless, U.S. Cellular and ALLTEL also have introduced “push-to-talk” services. Each of these companies competes with us in many of our wireless markets. We do not offer our customers a “push-to-talk” service. As demand for this service continues to grow, and if we do not offer the technology, we may have difficulty attracting and retaining subscribers, which will have an adverse effect on our business.

 

In addition, other technologies may decrease demand for our services. For example, other service providers have announced plans to develop a Wi-Fi or Wi-Max enabled handset. Such a handset would permit subscribers to communicate using voice and data services with their handset using VoIP technology in any area equipped with a wireless internet connection, or hot spot, potentially bypassing our network. The number of hot spots in the U.S. is growing rapidly, with some major cities and urban areas being covered entirely. The availability of VoIP or another alternative technology to our subscribers could greatly reduce the usage of our network, which would have an adverse effect on our financial condition and operating results.

 

To accommodate next generation advanced wireless products such as “push-to-talk,” high-speed data and high-bandwidth streaming video, we would be required to make significant technological changes to our network. We also may be required to purchase additional spectrum. We cannot assure you that we could make these technological changes or gain access to this spectrum at a reasonable cost or at all. Failure to provide these services could have a material adverse effect on our ability to compete with wireless carriers offering these new technologies.

 

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The possible health effects of radio frequency emission may adversely affect the demand for wireless telephone services.

 

Media reports have suggested that, and studies have been undertaken to determine whether, certain radio frequency emissions from wireless telephones may be linked to various health concerns, including cancer, and may interfere with heart pacemakers and other medical devices. In addition, lawsuits have been filed against other participants in the wireless industry alleging various adverse health consequences as a result of wireless phone usage. Concerns over radio frequency emissions and interference may have the effect of discouraging the use of wireless telephones, which could have an adverse effect upon our business. In recent years, the FCC has updated the guidelines and methods it uses for evaluating human exposure to radio frequency emissions from radio equipment, including wireless telephones. The FCC also is investigating claims that digital technologies specifically pose health concerns and cause interference with hearing aids and other medical devices.

 

The risks associated with using wireless telephones while driving may lead to increased legislation or liability for accidents, which may have an adverse impact on our financial condition and our operating results.

 

There is substantial interstate highway traffic in our coverage area. There may be safety risks associated with the use of wireless phones while driving. Studies have indicated that using wireless devices while driving may impair a driver’s attention. Concerns over these asserted safety risks and the effect of any legislation that may be adopted in response to these risks could limit our ability to market and sell our wireless service. Proposed legislation in the U.S. Congress would seek to withhold a portion of federal funds from any state that does not enact legislation prohibiting an individual from using a wireless telephone while driving a motor vehicle. In addition, many state and local legislative bodies have passed, and others are considering, legislation to restrict or make illegal the use of wireless telephones while driving motor vehicles. Moreover, there are laws in certain states that limit or ban the use of headsets while driving motor vehicles. Concerns over safety risks and the effect of future legislation, if adopted and enforced in the areas we serve, could limit our ability to market and sell our wireless services. In addition, these concerns and this legislation may discourage use of our wireless devices and decrease our revenues from customers who now use their wireless telephones while driving. Further, litigation relating to accidents, deaths or serious bodily injuries allegedly incurred as a result of wireless telephone use while driving could result in damage awards against telecommunications providers, adverse publicity and further governmental regulation. Any or all of these results, if they occur, could have a material adverse effect on our financial condition and operating results.

 

Wireline Telecommunications

 

Our RLEC businesses face substantial competition from competitors that are less heavily regulated than we are, which could increase our expenses or force us to lower prices, causing our revenues and operating results to decline.

 

As the RLEC for the western Virginia communities of Waynesboro, Clifton Forge, Covington and portions of Botetourt and Augusta Counties, Virginia, we currently compete with a number of different providers, many of whom are unregulated or less heavily regulated than we are. Our RLEC subsidiaries qualify as rural local telephone companies under the Communications Act and are, therefore, exempt from many of the most burdensome obligations to facilitate the development of competition, such as the obligation to sell unbundled elements of our network to our competitors at low, “forward-looking” prices that the Communications Act places on larger carriers. Nevertheless, our RLEC subsidiaries face significant competition, particularly from competitors that do not need to rely on access to our network to reach their customers. For example, wireless providers continue to increase their market share and pose a significant competitive risk to our business. Further, cable providers that serve our markets, such as Comcast (as the apparent purchaser of assets of Adelphia Communications Corporation), are likely to offer wireline voice services to their cable customers. Cable providers have had significant success in other markets offering wireline voice services and any new offering of

 

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services in our RLEC markets by such a cable company or other VoIP providers could significantly harm our business. Furthermore, if our rural exemption were removed, CLECs could more easily enter our RLEC markets. Moreover, the regulatory environment governing wireline local operations has been, and we believe will likely continue to be, very liberal in its approach to promoting competition and network access.

 

Consistent with the experience of other RLECs, our RLECs have experienced a reduction in access lines caused by, among other things, customer migration to broadband internet service from dial-up internet service (resulting in a disconnection of “second lines”), wireless competition and business customer migration from Centrex services to IP-based and other PBX services using fewer lines. As penetration rates of these technologies increase in our markets, our revenues could decline. Our RLECs experienced a net loss of 782 access lines in the six months ended June 30, 2005, or 1.6% of our access lines served in 2004, and a net loss of 1,824 access lines in 2004, or 3.8% of our access lines served in 2003. A continued net loss of access lines could impact our revenues and operating results.

 

Our RLEC business is subject to several regulatory regimes and consequently faces substantial regulatory burdens and uncertainties.

 

Many of our competitors are unregulated or less heavily regulated than we are. For example, VoIP technology is used to carry voice communications services over a broadband internet connection. The FCC has ruled that VoIP services are jurisdictionally interstate and that some VoIP arrangements (those not using the Public Switched Telephone Network) are not subject to regulation as telephone services. The United States Supreme Court in the Brand X case recently upheld the FCC’s ruling that cable broadband internet services are not subject to common carrier telecommunications regulation. In addition, the SCC imposes service quality obligations on our RLECs and requires us to adhere to prescribed service quality standards, but many of our competitors are not subject to these standards. These standards measure the performance of various aspects of our business. If we fail to meet these standards, the SCC may impose fines or penalties or take other actions that may impact our revenues or increase our costs. Our RLECs have met or exceeded these service quality standards in recent years, including 2004 and the six months ended June 30, 2005.

 

Cable companies and other VoIP providers are able to compete with our RLECs even though the “rural exemption” under the Telecommunications Act is in place. If this exemption were removed CLECs could more easily enter our RLEC markets. Moreover, the regulatory environment governing wireline local operations has been, and we believe will likely continue to be, very liberal in its approach to promoting competition and network access.

 

Regulatory developments that we cannot predict could increase our costs or reduce our revenues, including the wireline revenues we receive from network access charges and the federal Universal Service Fund.

 

There are many proceedings underway at the FCC that could substantially affect our costs and revenues, as well as those of our competitors, and we cannot predict the outcome of those proceedings. Some of the most significant include:

 

Intercarrier Compensation.    For the year ended December 31, 2004 and the six months ended June 30, 2005, approximately $35 million and $18 million, respectively, of our RLEC revenues came from network access charges, which are paid to us by long distance and wireless carriers for originating and terminating calls in the areas we serve. These revenues are highly profitable for us. The amount of access charge revenues that we receive is based on rates set by the FCC for interstate long distance calls and the SCC for intrastate long distance calls. Such access rates are subject to change. Our federal access charges are periodically reset by the FCC. The SCC could conduct rate cases and/or “earnings” reviews, which could result in rate changes.

 

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The FCC has reformed and continues to reform the structure of the federal access charge system. The FCC has an active proceeding addressing access and other intercarrier payments. Interested parties filed comments in this proceeding in the spring and summer of 2005 and various members of the FCC have indicated an intention to further reform the intercarrier compensation system. In October 2001, the FCC took some steps to reform the system to reduce interstate access charges paid by long distance carriers and shift that portion of cost recovery, which historically had been based on minutes-of-use, to flat-rate, monthly per line charges on end-user customers. Although these changes were implemented on a revenue neutral basis (with commensurate increases in other charges and Universal Service Fund support), there is no assurance that future changes in access charge rates will be implemented on a revenue neutral basis. It is unknown what additional changes, if any, the FCC may eventually adopt.

 

Currently, VoIP providers generally do not pay us access charges for calls that originate or terminate on our network. Therefore, expanded use of VoIP technology could reduce the access or intercarrier revenues received by RLECs like us. The FCC is currently considering the extent to which VoIP providers should be obligated to pay, or entitled to receive, access charges, but we cannot predict the timing or ultimate result of this proceeding. If VoIP providers continue not to pay access charges to us, our revenues and operating results could be adversely affected to the extent that users substitute VoIP calls for traditional wireline communications.

 

Additionally, the intrastate access charges we receive may be reduced as a result of SCC regulatory action. The SCC in early 2005 ordered Verizon in Virginia to eliminate the carrier common line component of its intrastate access charges by February 1, 2006. The SCC did not extend that holding to RLECs like us. Nevertheless, reduced access revenues (caused by regulatory or market forces or both) could adversely affect our business, revenues or profitability.

 

Universal Service Fund.    The FCC is currently examining the way in which it collects carrier contributions to the federal Universal Service Fund. Today, as a telecommunications carrier, we contribute a percentage of our revenues, including DSL revenues, to the Universal Service Fund, which supports the delivery of services to high-cost areas and low-income consumers, as well as to schools, libraries, and rural health care providers. Many of our competitors, such as VoIP and cable broadband internet service providers, are not subject to this obligation. Any FCC reform of this system could cause these competitors to become subject to contribution obligations, but also could increase our own obligations. We cannot predict the outcome of this proceeding.

 

For the year ended December 31, 2004 and the six months ended June 30, 2005, we received approximately $5.3 million and $2.3 million, respectively, in payments from the federal Universal Service Fund in connection with our RLEC operations. The FCC is examining its Universal Service Fund rules and may change the amount of Universal Service Fund support available to carriers. The FCC may change its rules and reduce the amount of funding ultimately available to our RLECs. There can be no assurance that we will continue to receive the current level of Universal Service Fund revenues in the future. Loss of Universal Service Fund revenues could adversely affect our operating results.

 

In addition, under the Telecommunications Act, our competitors can obtain the same per-line level of federal Universal Service Fund subsidies as we do, without regard for whether their costs of providing service are similar to ours, if either the FCC or the SCC determines that granting these subsidies to competitors would be in the public interest and the competitors offer and advertise certain telephone services as required by the Telecommunications Act. The FCC has allowed such designation as an “Eligible Telecommunications Carrier” to several wireless carriers in Virginia, including us, in all or part of our RLECs’ service territory. Under current rules, any Universal Service Fund payments to our competitors would not affect the level of support received by our RLECs, but this could change as a result of future FCC reform of the Universal Service Fund.

 

In December 2004, Congress suspended the application of a law called the Antideficiency Act to the Universal Service Fund until December 31, 2005. The Antideficiency Act prohibits government agencies from making financial commitments in excess of their funds on hand. Currently, the Universal Service Fund administrator makes commitments to fund recipients in advance of collecting the contributions from carriers that

 

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will pay for these commitments. The FCC has not determined whether the Antideficiency Act would apply to payments to our RLECs. Congress is now considering whether to extend the current temporary legislation that exempts the Universal Service Fund from the Antideficiency Act. If it does not grant this extension, however, the Universal Service Fund support payments to our RLECs may be delayed or reduced in the future, or contributors to the fund, including us, could see their contribution obligations rise significantly.

 

Our CLEC operations face substantial competition and uncertainty relating to its interconnection agreements with the ILEC networks covering the CLEC markets we serve.

 

Our CLEC operations compete primarily with ILECs, including Verizon and Sprint Nextel, and, to a lesser extent, other CLECs, including MCI, TelCove (formerly Adelphia Business Solutions and KMC Telecom), Fibernet, USLEC and Cox. We will continue to face competition from other current and future market entrants.

 

We have interconnection agreements with the ILEC networks covering each market in which our CLEC serves. We are required to negotiate amendments to, extensions of, or replacements for these agreements as they expire. Additionally, we may be required to negotiate new interconnection agreements in order to enter new markets in the future. We may not be able to successfully negotiate amendments to existing agreements, negotiate new interconnection agreements, renew our existing interconnection agreements, opt in to new agreements or successfully arbitrate replacement agreements for interconnection on terms and conditions acceptable to us. Our inability to do so would adversely affect our existing operations and opportunities to expand our CLEC business in existing and new markets. As the FCC modifies, changes and implements rules related to unbundling of ILEC network elements and collocation of competitive facilities at ILEC central offices, we generally have to renegotiate our interconnection agreements to implement those new or modified rules. The FCC on December 15, 2004 revised its rules concerning ILECs’ obligations to unbundle and make network elements available to other carriers for use in providing local telecommunications services. The FCC, among other things, modified the availability of certain high-capacity loops (i.e. DS-1 and DS-3) and dedicated transport in markets meeting particular density criteria. Because our CLECs serve in more rural markets, our operations were unaffected by the FCC’s December 15, 2004 ruling. Our CLECs, however, may be unfavorably affected by future FCC rule changes and may be unable to negotiate successfully modifications to its interconnection agreements without arbitration or litigation.

 

Our competitors have substantial business advantages over our CLEC operations, and we may not be able to compete successfully.

 

The regional Bell operating companies and other large ILECs such as Sprint Nextel dominate the current market for business and consumer telecommunications services and have a virtual monopoly on telephone lines. These companies represent the dominant competition in much of our target service areas, and we expect this competition to intensify. The large ILECs have established brand names and reputations for high quality service in their service areas, possess sufficient capital to rapidly improve and deploy new equipment, own their telephone lines and can bundle digital data services with their existing analog voice services and other services, such as long-distance, wireless and video services, to achieve economies of scale in serving customers. Moreover, the large ILECs are aggressively implementing “win-back” programs to regain access line customers lost to competitors and use bundled services to assist in those programs. We pose a competitive risk to the large ILECs that serve our CLEC markets and, as both our competitors and our suppliers, they have no motivation to respond in a timely manner to our requests or to assist in the enhancement of the services we provide to our CLEC customers.

 

We face substantial competition in our internet and data services business from market participants that offer high speed data services and face regulatory uncertainty, each of which may adversely affect our business and results of operations.

 

We currently offer our internet and data services in rural markets and face competition from other internet and data service providers, including cable companies. The internet industry is characterized by the absence of

 

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significant barriers to entry and rapid growth in internet usage among customers. As a result, we expect that our competition will increase from market entrants offering high-speed data services, including DSL, cable and wireless access. Our competition includes:

 

    cable modem services offered by cable providers;

 

    ILECs, such as Verizon and the ILEC affiliates of Sprint Nextel (particularly for DSL services), in our CLEC territories; and

 

    local, regional and national internet service providers, or ISPs, both wireline and wireless.

 

Many of our competitors have financial resources, corporate backing, customer bases, marketing programs and brand names that are greater than ours. Additionally, competitors may charge less than we do for internet services, causing us to reduce, or preventing us from raising, our fees.

 

A significant portion of our dial-up internet customer base has transitioned to broadband services. We expect this trend to continue. Where we offer RLEC or, to some extent, CLEC services, we have been able to maintain service to some of these customers through DSL services or service bundles. In those areas of our internet “footprint” where we provide neither RLEC nor CLEC service, we have been unable to retain dial-up internet customers who migrate to broadband services. In 2004 we experienced a 19.8% loss in the number of dial-up internet customers from 2003. Our internet service revenues for the year ended December 31, 2004 decreased to approximately $17.0 million from approximately $18.5 million for the year ended December 31, 2003. Our internet service revenues for the six months ended June 30, 2005 decreased to approximately $8.1 million from approximately $8.8 million for the six months ended June 30, 2004.

 

In connection with our internet access offerings, we could become subject to laws and regulations as they are adopted or applied to the internet. To date, the FCC has treated ISPs as enhanced or information service providers, rather than common carriers. Therefore ISPs are exempt from most federal and state regulation, including the requirement to pay access charges or contribute to the federal Universal Service Fund. As internet services expand, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the internet. The FCC recently issued a decision that harmonizes the regulatory frameworks that apply to broadband access to the internet through telephone and cable providers’ communications networks.

 

General Matters

 

We require additional capital to respond to customer demand and to competition, and if we fail to raise the capital or fail to have continued access to the capital required to build out and operate our planned networks, we may experience a material adverse effect on our business.

 

We require additional capital to build out and operate wireless and wireline networks and for general working capital needs. We expect our aggregate capital expenditures for 2005 and 2006 to be approximately $91 million and $85 million, respectively. Because of our intensely competitive market, we may be required, including under the terms of the Strategic Network Alliance, to expand the technical requirements of our wireless or wireline network or to build out additional areas within our territories that could result in increased capital expenditures. Any such unexpected capital expenditures may adversely affect our business, financial condition and operating results.

 

We are subject to numerous surcharges and fees from federal, state and local governments, and the applicability and amount of these fees is subject to great uncertainty.

 

Telecommunications providers pay a variety of surcharges and fees on their gross revenues from interstate and intrastate services. Interstate surcharges include federal Universal Service Fund fees and common carrier regulatory fees. In addition, state regulators and local governments impose surcharges, taxes and fees on our services and the applicability of these surcharges and fees to our services is uncertain in many cases and jurisdictions may argue as to whether we have correctly assessed and remitted those monies. The division of our

 

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services between interstate services and intrastate services is a matter of interpretation and may in the future be contested by the FCC or state authorities. In addition, periodic revisions by state and federal regulators may increase the surcharges and fees we currently pay. In 2004, the Virginia General Assembly passed legislation that required us to pay state sales taxes on purchases that were previously exempt from those taxes. As a result, we have added a surcharge to our customer bills to recover this increase in our taxes. It also is unknown if our tax burden will be similar to competitors using different technologies to provide similar services.

 

The Federal government and many states apply transaction-based taxes to sales of our products and services and to our purchases of telecommunications services from various carriers. It is possible that our transaction-based tax liabilities could change in the future. We may or may not be able to recover some or all of those taxes from our customers.

 

We rely on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure. If these suppliers or vendors experience problems or favor our competitors, we could fail to obtain sufficient quantities of the products and services we require to operate our businesses successfully.

 

We depend on a limited number of suppliers and vendors for equipment and services relating to our network infrastructure. If these suppliers experience interruptions or other problems delivering these network components on a timely basis, our subscriber growth and operating results could suffer significantly. Our initial choice of a network infrastructure supplier can, where proprietary technology of the supplier is an integral component of the network, cause us effectively to be locked into one or a few suppliers for key network components. As a result, we have become reliant upon a limited number of network equipment manufacturers, including Motorola Inc., Lucent Technologies, Inc. and Cisco Systems, Inc. If alternative suppliers and vendors become necessary, we may not be able to obtain satisfactory and timely replacement supplies on economically attractive terms, or at all.

 

A system failure could cause delays or interruptions of service, which could cause us to lose customers.

 

To be successful, we must provide our customers reliable network service. Some of the risks to our network and infrastructure include:

 

    physical damage to outside plant facilities;

 

    power surges or outages;

 

    software defects;

 

    human error;

 

    disruptions beyond our control, including disruptions caused by terrorist activities or severe weather; and

 

    failures in operational support systems.

 

Network disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose customers and incur expenses.

 

We are dependent on third-party vendors for our information and billing systems. Any significant disruption in our relationship with these vendors could increase our cost and affect our operating efficiencies.

 

Sophisticated information and billing systems are vital to our ability to monitor and control costs, bill customers, process customer orders, provide customer service and achieve operating efficiencies. We currently rely on internal systems and third-party vendors to provide all of our information and processing systems. Some of our billing, customer service and management information systems have been developed by third-parties and may not perform as anticipated. In addition, our plans for developing and implementing our information and

 

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billing systems rely to some extent on the delivery of products and services by third-party vendors. Our right to use these systems is dependent upon license agreements with third-party vendors. Some of these agreements are cancelable by the vendor, and the cancellation or nonrenewable nature of these agreements could impair our ability to process customer information and/or bill our customers. Since we rely on third-party vendors to provide some of these services, any switch in vendors could be costly and affect operating efficiencies.

 

If we lose our senior management, our business may be adversely affected.

 

The success of our business is largely dependent on our executive officers, as well as on our ability to attract and retain other highly qualified technical and management personnel. We believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunications industry, and we cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition and operating results.

 

Unauthorized use of, or interference with, our network could disrupt service and increase our costs.

 

We may incur costs associated with the unauthorized use of our network including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraudulent use of our network may impact interconnection costs, capacity costs, administrative costs, fraud prevention costs and payments to other carriers for fraudulent roaming.

 

Security breaches related to our physical facilities, computer networks, and informational databases may cause harm to our business and reputation and result in a loss of customers.

 

Our physical facilities and information systems may be vulnerable to physical break-ins, computer viruses, theft, attacks by hackers, or similar disruptive problems. If hackers gain improper access to our databases, they may be able to steal, publish, delete or modify confidential personal information concerning our subscribers. In addition, misuse of our customer information could result in more substantial harms perpetrated by third-parties. This could damage our business and reputation, and result in a loss of customers.

 

We are subject to a complex and uncertain regulatory environment that may require us to alter our business plans and may increase our competition.

 

The U.S. communications industry is subject to federal, state and local regulation that is continually evolving. As new communications laws and regulations are issued, we may be required to modify our business plans or operations. We cannot assure you that we can do so in a cost-effective manner. Federal and state regulatory trends in favor of reduced regulation have had, and are likely to continue to have, both positive and negative effects on us and our ability to compete. The regulatory environment governing the operations of ILECs, including our RLECs, has been, and will likely continue to be, very favorable toward promoting competition and network access. Federal or state regulatory changes and any resulting increase in competition may have a material adverse effect on our business prospects, operating results or our ability to service our debt or make distributions to our stockholders.

 

Risks Relating to this Offering

 

There is no existing market for our common stock, and we do not know if one will develop, which could impede your ability to sell your shares and depress our stock price. In addition, market and industry factors may cause fluctuations in our stock price.

 

There has not been a public market for our common stock prior to this offering. We cannot predict the extent to which a trading market will develop or how liquid that market might become. If you purchase shares of

 

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our common stock in this offering, you will pay a price that has not been established in the public trading markets. The initial public offering price will be determined by negotiations between the underwriters and us. You may not be able to resell your shares above the initial public offering price and may suffer a loss on your investment.

 

Factors may adversely affect the market price of our common stock, regardless of our actual operating performance. These factors that could cause fluctuations in our stock price may include, among other things:

 

    actual or anticipated variations in quarterly and annual operating results;

 

    changes in financial estimates by us or changes in financial estimates or recommendations by any securities analysts who might cover our stock;

 

    conditions or trends in our industry or regulatory changes

 

    conditions, trends or changes in the securities marketplace, including trading volumes;

 

    changes in the market valuations of other companies operating in our industry;

 

    technological innovations by us or our competitors;

 

    announcements by us or our competitors of significant acquisitions, strategic partnerships, significant contracts or divestitures;

 

    announcements of investigations, regulatory scrutiny of our operations or lawsuits filed against us;

 

    changes in general conditions in the United States and global economy, including those resulting from war, incidents of terrorism or responses to such events;

 

    loss of one or more significant customers, including Sprint Nextel;

 

    sales of large blocks of our common stock;

 

    changes in accounting principles;

 

    additions or departures of key personnel; and

 

    sales of our common stock, including sales of our common stock by our directors, executive officers or affiliates.

 

The CVC Entities and the Quadrangle Entities will continue to have significant influence over our business after this offering and could delay, deter or prevent a change of control, change in management or business combination that may be beneficial to our stockholders and as a result, may depress the market price of our stock.

 

Upon completion of this offering, the CVC Entities and the Quadrangle Entities will hold approximately                      shares of our common stock, or             % of our outstanding common stock. If the underwriters’ over-allotment is exercised in full, these entities will hold approximately         % of our outstanding common stock. In addition, six of the eight directors that will serve on our board of directors immediately following this offering will be representatives of CVC and Quadrangle. By virtue of such stock ownership and representation on the board of directors, the CVC Entities and the Quadrangle Entities will continue to have a significant influence over day-to-day corporate and management policies and all matters submitted to our stockholders, including the election of the directors, and to exercise significant control over our business, policies and affairs. In addition, we have specifically renounced in our certificate of incorporation any interest or expectancy that the CVC Entities and the Quadrangle Entities will offer to us any investment or business opportunity of which they are aware. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control, change in management or business combination that might otherwise be beneficial to our stockholders and as a result, may depress the market price of our stock.

 

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Our stock price may decline due to the large number of shares eligible for future sale.

 

Sales of substantial amounts of our common stock, or the possibility of such sales, may adversely affect the market price of our common stock. These sales may also make it more difficult for us to raise capital through the issuance of equity securities at a time and at a price we deem appropriate. See “Shares Eligible for Future Sale” for a discussion of possible future sales of common stock.

 

Upon completion of this offering, there will be                      shares of our common stock outstanding. Of these shares,                      shares, including the shares sold in this offering, will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any such shares which may be held or acquired by an “affiliate” of ours, as that term is defined in Rule 144 under the Securities Act, which shares will be subject to the volume limitations and other restrictions of Rule 144. The remaining                      shares of common stock available for future sale will be “restricted securities” within the meaning of Rule 144. Of these restricted securities,                      shares will be freely transferable under Rule 144(k) and the remainder will be eligible for resale subject to the volume, manner of sale and other limitations of Rule 144, in each case immediately upon expiration of the 180-day lock-up period described below.

 

We have granted the CVC Entities, the Quadrangle Entities and certain members of our management the right to require us to register their shares of our common stock, representing over                      shares of our common stock following completion of this offering. Accordingly, the number of shares subject to registration rights is substantial and the sale of these shares may have a negative impact on the market price for our common stock.

 

All shares of common stock held by our current stockholders are subject to lock-up agreements and may not be sold to the public during the 180-day period following the date of this prospectus without the prior written consent of Lehman Brothers Inc. and Bear, Stearns & Co. Inc., as described further under “Underwriting.”

 

Provisions in our charter documents and the General Corporation Law of Delaware could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our common stock.

 

Certain provisions of the General Corporation Law of Delaware, the state in which we are organized, and our certificate of incorporation and by-laws, to be effective immediately prior to this offering, may inhibit a change of control not approved by our board of directors or changes in the composition of our board of directors, which could result in the entrenchment of current management. These provisions include:

 

    advance notice requirements for stockholder proposals and director nominations;

 

    limitations on the ability of stockholders to amend, alter or repeal our by-laws;

 

    limitations on the removal of directors;

 

    the inability of the stockholders to act by written consent (subject to certain exceptions); and

 

    the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine and additional shares of our common stock.

 

We may not pay dividends on our common stock at any time in the foreseeable future.

 

We are a holding company, and our ability to pay dividends may be limited by restrictions upon transfer of funds by our subsidiaries and the terms of our indebtedness and the indebtedness of our subsidiaries. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. We currently have no intention to pay dividends on our common stock at any time in the foreseeable future.

 

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Purchasers of our common stock will experience substantial and immediate dilution in the net tangible book value per share of their investment.

 

Prior investors have paid substantially less per share for our common stock than the price in this offering. The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per share of outstanding common stock immediately after this offering. You will incur immediate and substantial dilution of $             per share in the net tangible book value of our common stock as of June 30, 2005 at an assumed initial public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus). You will incur additional dilution if we issue additional common stock in the future or holders of options to purchase or rights with respect to shares of common stock, whether currently outstanding or subsequently granted, exercise the options or rights following this offering. See “Dilution” for more information.

 

Requirements associated with being a public company will require significant company resources and management attention.

 

After completion of this offering, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the Securities and Exchange Commission, or the SEC. We will also be subject to various other regulatory requirements, including the Sarbanes-Oxley Act of 2002. In addition, upon completion of this offering, we will become subject to the rules of The Nasdaq National Market.

 

We are working with our independent legal, accounting and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public company. These areas include corporate governance, corporate control, internal audit, disclosure controls and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal control over financial reporting. However, these and other measures we may take may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis.

 

In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us and will require the time and attention of management. We currently expect to incur an estimated $             million of incremental operating expenses in our first year of being a public company and an estimated $             million per year thereafter. The incremental costs are estimates, and actual incremental expenses could be materially different from these estimates. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business.

 

We intend to avail ourselves of the “controlled company” exception under the rules of The Nasdaq National Market which eliminates the requirements that we have a majority of independent directors on our board of directors and that we have a compensation committee and a nominating and corporate governance committee composed entirely of independent directors. In addition, we intend to take advantage of certain “grace periods” for newly public companies under certain of the new SEC and Nasdaq rules and regulations, which grace periods will provide us a short period of time after we become a public company before we are required to be in full compliance with these rules and regulations. For example, upon the consummation of this offering, we will not be in full compliance with the SEC and Nasdaq requirements that all of our audit committee members be “independent.” Our ability to satisfy the various requirements before the expiration of the applicable grace periods will depend largely on our ability to attract and retain qualified independent members of our board of directors, particularly to serve on our audit committee, which may be more difficult in light of these new rules and regulations. If we fail to satisfy the various requirements before the expiration of the applicable grace periods, our common stock may be delisted from Nasdaq, which would cause a decline in the trading price of our common stock and impair the ability of the holders of our common stock to sell and buy our common stock in a public market.

 

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In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, we may be unable to provide the required financial information in a timely and reliable manner and may be subject to sanctions by regulatory authorities. The perception of these matters could cause our share price to fall.

 

Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting by the end of December 31, 2007. If we or our independent registered public accounting firm determine that we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by the December 31, 2007 deadline, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or Nasdaq. Any such action could adversely affect our financial results or investors’ confidence in our company, and could cause our stock price to fall. In addition, the controls and procedures that we will implement may not comply with all of the relevant rules and regulations of the SEC and Nasdaq. If we fail to develop and maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner. The perception of these matters could cause our share price to fall.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Any statements contained in this prospectus that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements and should be evaluated as such. The words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “targets,” “projects,” “should,” “may,” “will” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements are contained throughout this prospectus, for example in “Summary,” “Risk Factors,” “Dividend Policy and Restrictions,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and the “Unaudited Pro Forma Condensed Consolidated Financial Data.” Such forward-looking statements reflect, among other things, our current expectations, plans and strategies, and anticipated financial results, all of which are subject to known and unknown risks, uncertainties and factors that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Many of these risks are beyond our ability to control or predict. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this prospectus. Because of these risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

 

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USE OF PROCEEDS

 

Based upon an assumed initial public offering price of $                      per share (the mid-point of the range set forth on the cover page of this prospectus), we estimate that our net proceeds from the sale of                      shares of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering costs of approximately $                     million payable by us, will be approximately $                     million.

 

We intend to use the net proceeds from this offering to terminate our advisory agreements with the CVC Entities and the Quadrangle Entities, and the remainder of the net proceeds will be used for general corporate purposes, including working capital and capital expenditures made in the ordinary course of business, possible repayment of indebtedness and possible distributions to our existing stockholders.

 

The amounts that we actually expend for working capital purposes will vary significantly depending on a number of factors including future revenue growth, if any, and the amount of cash we generate from operations. As a result, we will retain broad discretion in the allocation of the net proceeds of this offering. Pending the uses described herein, we will invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

 

We do not currently intend to pay any periodic cash dividends on our common stock, and instead intend to retain earnings, if any, for future operations and expansion and debt repayment. 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 of our subsidiaries to make dividend payments on our common stock. The amounts available to us to pay cash dividends are restricted by our subsidiaries’ debt agreements. Any decision to declare and pay dividends in the future will be made at the discretion of the board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

 

The table below sets forth our capitalization (i) as of June 30, 2005 and (ii) as adjusted to give effect to the sale of shares of our common stock offered by us in this offering at an assumed initial public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus), after deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds therefrom, as if such transaction had occurred on June 30, 2005.

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of June 30, 2005

 
           Actual      

        As Adjusted    

 
     (in thousands, except share data)  

Cash and cash equivalents:

   $ 19,989     $ 168,252  
    


 


Current portion of long-term debt(1):

     10,518       10,518  

Long-term debt:

                

Senior secured first lien term loan

     394,000       394,000  

Senior secured second lien term loan

     225,000       225,000  

Capital lease obligations

     811       811  
    


 


Total long-term debt

     619,811       619,811  
    


 


Total debt

     630,329       630,329  
    


 


Stockholders’ equity:

                

Preferred Stock, par value $.01 per share, authorized 100 shares, none issued and outstanding on an actual basis, none issued and outstanding on an as adjusted basis

            

Class L common stock, par value $.01 per share, authorized 14,000 shares; 11,364 shares issued and outstanding (liquidation value of $125,837) on an actual basis; none issued and outstanding on an as adjusted basis

     124,999        

Class A common stock, par value $.01 per share, authorized 1,000 shares, 735 shares issued and outstanding on an actual basis; none issued and outstanding on an as adjusted basis

     735        

Common Stock, par value $         per share, authorized          shares, none issued and outstanding on an actual basis;          issued and outstanding on an as adjusted basis

           273,997  

Accumulated deficit

     (770 )     (770 )
    


 


Total stockholders’ equity

     124,964       273,227  
    


 


Total capitalization

   $ 755,293     $ 903,556  
    


 



(1) Includes $5,755,000 of outstanding 10% Notes due 2010. The 10% Notes must be prepaid by us upon receipt of an anticipated $5,555,000 federal income tax refund. We expect to receive final governmental approval during October 2005 for the payment of this federal income tax refund. Payment of the remaining $200,000 of the 10% Note is expected to be funded from proceeds of a pending NTELOS Inc. asset sale or future distributions by NTELOS Inc. when permitted by the terms of the first lien term loan. See “Description of Certain Debt—10% Notes.”

 

As of June 30, 2005, there were approximately 46 holders of our common stock.

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of common stock upon completion of this offering.

 

As of June 30, 2005, our pro forma net tangible book value was approximately $(301.6) million, or approximately $             per share. Pro forma net tangible book value represents the amount of our total consolidated tangible assets minus our total consolidated liabilities, divided, in the case of pro forma net tangible book value per share, by the shares of our outstanding common stock, on a pro forma basis after giving effect to this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

 

After giving effect to the sale of shares of our common stock in this offering at an assumed initial public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of June 30, 2005 would have been approximately $(153.3) million, or approximately $             per share of our common stock. This represents an immediate increase in net tangible book value of $             per share to our existing stockholders and an immediate dilution in net tangible book value of $             per share to new investors purchasing shares of our common stock at the assumed initial public offering price. If the initial offering price is higher or lower, the dilution to new investors purchasing our common stock will be greater or less, respectively.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of common stock

   $                 

Pro forma net tangible book value per share as of June 30, 2005

   $  

Increase per share attributable to new investors

   $  

Adjusted pro forma net tangible book value per share after this offering

   $  
    

Dilution in net tangible book value per share to new investors

   $  
    

 

The following table summarizes as of June 30, 2005, as adjusted to give effect to this offering, the differences between our existing stockholders and new investors with respect to the number of shares of our common stock issued in this offering, the total consideration paid and the average price per share paid. The calculations with respect to shares purchased by new investors in this offering reflect an assumed initial public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased

    Total Consideration

   

Average Price

Per Share


     Number

   Percentage

    Amount

   Percentage

   

Existing stockholders

            %              %     $                 

New investors

            %              %     $  
    
  

 
  

 

Total

        100 %        100 %   $  
    
  

 
  

 

 

The above table excludes shares of our common stock reserved for issuance pursuant to our equity incentive plan, our director option plan and our employee stock purchase plan and shares issuable pursuant to the underwriter’s over-allotment option. To the extent that such options are exercised or over-allotment shares are issued, there will be further dilution to new investors. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

 

The following unaudited pro forma condensed consolidated financial data have been derived by the application of pro forma adjustments to our historical consolidated financial statements included elsewhere in this prospectus. We are providing the following unaudited pro forma condensed consolidated financial data because our acquisition of NTELOS Inc. in May 2005, including the related refinancing of our credit facilities, and this offering have material effects on our financial information.

 

The unaudited pro forma condensed financial data as of and for the six months ended June 30, 2005 and the year ended December 31, 2004 have been prepared to give pro forma effect to the following, as if they had occurred on January 1, 2004:

 

    our acquisition of NTELOS Inc. in May 2005, and the related refinancing of our credit facilities;

 

    our conversion from a limited liability company to a corporation; and

 

    the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the application of such net proceeds as described under “Use of Proceeds.”

 

The unaudited pro forma condensed consolidated financial data are for informational purposes only and should not be considered indicative of actual results that would have been achieved had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma consolidated financial data necessarily indicative of the results to be expected for the full year or any future period. The unaudited pro forma condensed consolidated financial data do not purport to predict balance sheet data, results of operations, cash flows or other data as of any future date or for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

 

The pro forma adjustments are based on preliminary estimates and currently available information and assumptions that we believe are reasonable. The notes to the unaudited pro forma condensed consolidated statement of operations and balance sheet provide a detailed discussion of how such adjustments were derived and are presented in the unaudited pro forma consolidated financial data. This unaudited pro forma financial data should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Prospectus Summary—The Offering,” “Selected Historical and Pro Forma Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

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NTELOS Holdings Corp.

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the year ended December 31, 2004

 

    NTELOS Holdings Corp.
Historical for the year
ended
December 31, 2004


  NTELOS Inc.
Historical for
the year ended
December 31, 2004


    Recapitalization
Adjustments


    Adjusted
Historical


    Pro Forma
Adjustments


    Pro Forma

 
    (in thousands)  

Operating revenues:

                                             

Wireless communications

  $     —   $ 234,682     $     $ 234,682     $     $ 234,682  

Wireline communications

        105,251             105,251             105,251  

Other communication services

        1,769             1,769             1,769  
   

 


 


 


 


 


          341,702             341,702             341,702  
   

 


 


 


 


 


Operating expenses:

                                             

Cost of wireless sales

        47,802             47,802             47,802  

Maintenance and support

        62,929             62,929             62,929  

Depreciation and amortization

        65,175       13,196  (a)     78,371             78,371  

Accretion of asset retirement obligation

        680             680             680  

Customer operations

        82,812             82,812             82,812  

Corporate operations

        26,942             26,942       1,800  (d)     28,742  

Capital and operational restructuring charges

        798             798             798  
   

 


 


 


 


 


          287,138       13,196       300,334       1,800       302,134  
   

 


 


 


 


 


Operating income (loss)

          54,564       (13,196 )     41,368       (1,800 )     39,568  

Other income (expenses):

                                             

Interest expense, net

        (15,740 )     (30,688 ) (b)     (46,428 )           (46,428 )

Other income (expense)

        374             374       3,666  (f)     4,040  

Reorganization items, net

        81             81             81  
   

 


 


 


 


 


          (15,285 )     (30,688 )     (45,973 )     3,666       (42,307 )
   

 


 


 


 


 


(Loss) income before income taxes and minority interest

        39,279       (43,884 )     (4,605 )     1,866       (2,739 )

Income taxes

        1,001        (g)     1,001        (g)     1,001  
   

 


 


 


 


 


(Loss) income before minority interests

        38,278       (43,884 )     (5,606 )     1,866       (3,740 )

Minority interests in losses of subsidiary

        34             34             34  
   

 


 


 


 


 


Net income (loss)

  $   $ 38,312     $ (43,884 )   $ (5,572 )   $ 1,866     $ (3,706 )
   

 


 


 


 


 


Net (loss) income per common share—

                                             

Basic

  $     $       $       $       $       $    

Diluted

  $     $       $       $       $       $    

Weighted average common shares outstanding—

                                             

Basic

  $     $       $       $       $       $    

Diluted

  $     $       $       $       $       $    

 

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NTELOS Holdings Corp.

 

Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the six months ended June 30, 2005

 

   

NTELOS Holdings Corp.
Historical for

the period
January 14, 2005
through June 30, 2005


    NTELOS Inc.
Historical for
the period
January 1, 2005
through May 1,
2005


    Recapitalization
Adjustments


    Adjusted
Historical


    Pro Forma
Adjustments


    Pro Forma

 
    (in thousands)  

Operating revenues:

                                               

Wireless communications

  $ 45,242     $ 89,826     $     $ 135,068     $     $ 135,068  

Wireline communications

    17,834       35,508             53,342             53,342  

Other communication services

    124       343             467             467  
   


 


 


 


 


 


      63,200       125,677             188,877             188,877  
   


 


 


 


 


 


Operating expenses:

                                               

Cost of wireless sales

    9,666       18,703             28,369             28,369  

Maintenance and support

    10,654       21,084             31,738             31,738  

Depreciation and amortization

    14,713       23,799       4,523  (a)     43,035             43,035  

Gain on sale of assets

          (8,742 )           (8,742 )           (8,742 )

Accretion of asset retirement obligation

    98       252             350             350  

Customer operations

    14,330       29,270             43,600             43,600  

Corporate operations

    4,643       8,259             12,902       567  (d)(e)     13,469  

Capital and operational restructuring charges

    120       15,403             15,523             15,523  
   


 


 


 


 


 


      54,224       108,028       4,523       166,775       567       167,342  
   


 


 


 


 


 


Operating income (loss)

    8,976       17,649       (4,523 )     22,102       (567 )     21,535  

Other income (expenses):

                                               

Equity share of NTELOS Inc. and subsidiaries

    (1,213 )           1,213   (c)                  

Interest expense, net

    (7,893 )     (11,499 )     (4,099 ) (b)     (23,491 )           (23,491 )

Other income (expense)

    125       270             395       1,879  (f)     2,274  
   


 


 


 


 


 


      (8,981 )     (11,229 )     (2,886 )     (23,096 )     1,879       (21,217 )
   


 


 


 


 


 


(Loss) income before income taxes and minority interest

    (5 )     6,420       (7,409 )     (994 )     1,312       318  

Income taxes

    734       8,150       (8,315 ) (g)     569       —  (g)     569  
   


 


 


 


 


 


(Loss) income before minority interests

    (739 )     (1,730 )     906       (1,563 )     1,312       (251 )

Minority interests in (income) losses of subsidiaries

    (31 )     13             (18 )           (18 )
   


 


 


 


 


 


Net income (loss)

  $ (770 )   $ (1,717 )   $ 906     $ (1,581 )   $ 1,312     $ (269 )
   


 


 


 


 


 


Net (loss) income per common share

                                               

Basic

  $              $              $              $              $              $           

Diluted

  $       $       $       $       $       $    

Weighted average common shares outstanding

                                               

Basic

  $       $       $       $       $       $    

Diluted

  $       $       $       $       $       $    

 

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Table of Contents

Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations

 

(a) Represents depreciation and amortization based on asset values determined in accordance with FASB Statement No. 141, “Business Combinations,” and related other authoritative literature as if the acquisition of NTELOS Inc. had occurred as of January 1, 2004.

 

(b) The recapitalization adjustment to interest expense reflects the interest on the $625.0 million of borrowings under the NTELOS Inc. senior secured credit facilities that were entered into on February 24, 2005, as if such borrowing had occurred as of January 1, 2004, less the historical interest expense of debt repaid. The recapitalization adjustment also reflects an adjustment to eliminate amortization of debt issuance costs related to the NTELOS Inc. senior secured credit facilities that were entered into on February 24, 2005 and the subsequent amortization recognized during the period February 24, 2005 through May 1, 2005. This adjustment is a result of the debt issuance costs being adjusted to zero in connection with the accounting for the acquisition that occurred on May 2, 2005.

 

For purposes of determining the recapitalization adjustment, the interest rate on the variable rate borrowings under the NTELOS Inc. senior secured credit facilities was based on a three month LIBOR rate of 3.872% as of August 31, 2005 plus the applicable margin rate of 2.5% on the $400.0 million First Lien Facility and 5.0% on the $225.0 million Second Lien Facility. In addition, the recapitalization adjustment reflects the impact of the interest rate swap agreement with a notional amount of $312.5 million, which effectively converts a portion of the long-term debt from variable to fixed rates, as if such agreement was entered into as of January 1, 2004. Fixed interest rate payments under this agreement are at a per annum rate of 4.1066% and variable rate payments are based on three month U.S. dollar LIBOR which we based on the three month LIBOR rate of 3.872% as of August 31, 2005. The blended interest rate associated with the $625 million of borrowings under the NTELOS Inc. senior secured credit facilities for each of the periods presented was approximately 7.4%.

 

A 0.125% increase or decrease in the assumed interest rate applicable to the combined borrowings under the NTELOS Inc. senior secured credit facilities, exclusive of the interest rate swap agreement, would change the pro forma interest expense and income before taxes by approximately $0.9 million for the year ended December 31, 2004 and approximately $0.5 million for the six months ended June 30, 2005.

 

(c) Represents elimination of the equity share of the losses of NTELOS Inc. and its subsidiaries for the period February 24, 2005 through May 1, 2005 recognized by NTELOS Holdings Corp. prior to the closing on the acquisition on May 2, 2005. For the period February 24, 2005 through May 1, 2005, we held a 24.9% ownership interest in NTELOS Inc. and accounted for the investment under the equity method of accounting.

 

(d) After completion of this offering, we will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the other rules and regulations of the Securities and Exchange Commission, or the SEC. We will also be subject to various other regulatory requirements, including the Sarbanes-Oxley Act of 2002. In addition, upon completion of this offering, we will become subject to the rules of The Nasdaq National Market. We currently expect to incur additional incremental operating expenses, in addition to time and attention of management, to comply with reporting and other requirements applicable to public companies. These incremental costs could include SEC compliance, insurance, corporate secretary, shareholder relations, government relations and non-employee director costs. We estimate these additional incremental costs to be approximately $1.8 million on an annual basis. Actual incremental expenses could be materially different from these estimates. We also cannot predict or estimate the timing of such costs or the degree that our management’s attention to these matters will have on our business.

 

(e) Represents the elimination of advisory fees paid to CVC Management LLC and Quadrangle Advisors LLC prior to June 30, 2005. Pro forma operating results do not reflect the estimated costs to terminate our advisory agreements with CVC Management LLC and Quadrangle Advisors LLC.

 

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Table of Contents
(f) Represents the estimated earnings on invested net proceeds from this offering. Excess funds are assumed to earn a yield of 2.5% per annum.

 

(g) Income tax expense for all periods presented relates primarily to state minimum taxes. We project tax losses during these periods. We have fully reserved deferred tax assets in excess of deferred tax liabilities that are expected to be recognized consistent with the timing of deferred tax asset realization. The pro forma adjustments contemplated in these statements would not change our assessment on this valuation reserve. Accordingly, no tax benefit has been recognized for these pro forma adjustments.

 

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Table of Contents

NTELOS Holdings Corp.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

As of June 30, 2005

 

     NTELOS
Holdings Corp.
Historical


   Pro Forma
Adjustments (a)


   Pro Forma

     (in thousands)

Assets

                    

Current assets

                    

Cash and cash equivalents

   $ 19,989    $ 148,263    $ 168,252

Accounts receivable, net

     29,943           29,943

Inventories and supplies

     4,492           4,492

Other receivables and deposits

     3,493           3,493

Income tax receivable

     5,555           5,555

Prepaid expenses and other

     5,893           5,893
    

  

  

Total current assets

     69,365      148,263      217,628
    

  

  

Securities and investments

     2,617           2,617

Property and equipment, net

     340,379           340,379

Other assets

                    

Goodwill

     167,520           167,520

Franchise rights

     32,000           32,000

Other intangibles, net

     120,569           120,569

Radio spectrum licenses in service

     121,992           121,992

Other radio spectrum licenses

     1,356           1,356

Radio spectrum licenses not in service

     8,033           8,033

Deferred charges

     4,423           4,423
    

  

  

Total other assets

     455,893           455,893
    

  

  

Total assets

   $ 868,254    $ 148,263    $ 1,016,517
    

  

  

Liabilities and Stockholders’ Equity

                    

Current liabilities

                    

Current portion of long-term debt

   $ 4,763    $    $ 4,763

Convertible notes payable to Stockholders

     5,755           5,755

Accounts payable

     20,219           20,219

Advance billings and customer deposits

     14,262           14,262

Other accrued liabilities

     16,574           16,574
    

  

  

Total current liabilities

     61,573           61,573
    

  

  

Long-term debt

     619,811           619,811

Long-term liabilities

                    

Deferred liabilities—interest rate swap

     1,155           1,155

Deferred income taxes

     12,448           12,448

Retirement benefits

     32,423           32,423

Other

     15,472           15,472
    

  

  

Total long-term liabilities

     61,498           61,498
    

  

  

Minority interests

     408           408

Stockholders’ equity

     124,964      148,263      273,227
    

  

  

Total liabilities and stockholders’ equity

   $ 868,254    $ 148,263    $ 1,016,517
    

  

  

 

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Table of Contents

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

The pro forma financial data have been derived by the application of pro forma adjustments to our historical financial statements as of the date noted.

 

(a) Pro forma adjustments related to the completion of this offering, our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby and the application of such net proceeds as described under “Use of Proceeds.”

 

     Equity
Offering
Proceeds(1)


   Transaction Fees
and Expenses(2)


    Advisory
Agreements
Termination(3)


    Total Net
Recapitalization
Adjustments


     (in thousands)

Cash and cash equivalents

   $ 175,000    $ (13,375 )   $ (13,362 )   $ 148,263

Stockholders’ equity

     175,000      (13,375 )     (13,362 )     148,263

(1) We expect to issue $175.0 million of common stock in this offering.
(2) Represents the estimated cost to be incurred in selling the shares of common stock, including underwriter fees, legal, accounting, printing and other related costs. The estimated costs are fully attributable to the new common stock and will be recorded as a reduction to proceeds received and stockholders’ equity.
(3) Represents estimated costs to terminate our advisory agreements with CVC Management LLC and Quadrangle Advisors LLC.

 

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Table of Contents

SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED

FINANCIAL AND OPERATING DATA

 

Historical financial data for NTELOS Inc. for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and for the period from January 1, 2005 to May 1, 2005, and the historical financial data for NTELOS Holdings Corp. for the period from January 14, 2005 to June 30, 2005 are derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. Historical financial data for NTELOS Inc. for the six months ended June 30, 2004 are derived from the unaudited consolidated financial statements of NTELOS Inc.

 

The selected historical and pro forma consolidated financial and operating information may not be indicative of our results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto and the unaudited financial statements and related notes included elsewhere in this prospectus.

 

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Table of Contents

SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

 

    NTELOS INC.

    NTELOS HOLDINGS
CORP.


    PRO FORMA NTELOS
HOLDINGS CORP.


 
    PREDECESSOR COMPANY

   

PREDECESSOR

REORGANIZED COMPANY


     
   

Year

Ended

12/31/2000


   

Year

Ended

12/31/2001


   

Year

Ended

12/31/2002


   

1/1/2003

through

9/9/2003


   

9/10/2003

through

12/31/2003


   

Year

Ended

12/31/2004


    Six Months
Ended
6/30/2004


   

1/1/05

through

5/1/2005


   

1/14/2005

through

6/30/2005


   

Year
Ended

12/31/2004


   

Six Months

Ended

6/30/2005


 
(in thousands)                                                                  

Consolidated Statements of Operations Data:

                                                                                       

Operating revenues:

                                                                                       

Wireless communications

  $ 40,975     $ 127,103     $ 171,495     $ 132,766     $ 66,769     $ 234,682     $ 112,741     $ 89,826     $ 45,242     $ 234,682     $ 135,068  

Wireline communications

    59,408       87,931       98,220       71,103       32,434       105,251       52,310       35,508       17,834       105,251       53,342  

Other communication services

    16,374       9,968       9,151       3,920       962       1,769       1,114       343       124       1,769       467  
   


 


 


 


 


 


 


 


 


 


 


      116,757       225,002       278,866       207,789       100,165       341,702       166,165       125,677       63,200       341,702       188,877  
   


 


 


 


 


 


 


 


 


 


 


Operating expenses:

                                                                                       

Cost of wireless sales (exclusive of items shown separately below)

    18,657       47,808       48,868       31,836       15,113       47,802       23,620       18,703       9,666       47,802       28,369  

Maintenance and support

    31,177       62,508       64,408       42,056       18,784       62,929       30,182       21,084       10,654       62,929       31,738  

Depreciation and amortization

    37,678       82,281       82,924       51,224       18,860       65,175       31,427       23,799       14,713       78,371       43,035  

Gain on sale of assets

    (62,616 )     (31,845 )     (8,472 )                             (8,742 )                 (8,742 )

Asset impairment charge

                402,880       545                                            

Accretion of asset retirement obligation

                      437       225       680       332       252       98       680       350  

Customer operations

    35,230       75,596       82,146       58,041       30,233       82,812       40,614       29,270       14,330       82,812       43,600  

Corporate operations

    11,441       18,586       17,914       18,342       6,272       26,942       15,188       8,259       4,643       28,742       13,469  

Capital and operational restructuring charges

                4,285       2,427             798             15,403       120       798       15,523  
   


 


 


 


 


 


 


 


 


 


 


      71,567       254,934       694,953       204,908       89,487       287,138       141,363       108,028       54,224       302,134       167,342  
   


 


 


 


 


 


 


 


 


 


 


Operating income (loss)

    45,190       (29,932 )     (416,087 )     2,881       10,678       54,564       24,802       17,649       8,976       39,568       21,535  

Other income (expenses):

                                                                                       

Equity loss from investee

    (12,259 )     (1,286 )                                         (1,213 )            

Interest expense

    (31,407 )     (76,251 )     (78,351 )     (26,010 )     (6,427 )     (15,740 )     (8,470 )     (11,499 )     (7,893 )     (46,428 )     (23,491 )

Other income (expenses)

    434       5,679       (1,454 )     (436 )     768       374       (156 )     270       125       4,040       2,274  

Reorganization items, net

                      169,036       (145 )     81       18                   81        
   


 


 


 


 


 


 


 


 


 


 


      (43,232 )     (71,858 )     (79,805 )     142,590       (5,804 )     (15,285 )     (8,608 )     (11,229 )     (8,981 )     (42,307 )     (21,217 )
   


 


 


 


 


 


 


 


 


 


 


      1,958       (101,790 )     (495,892 )     145,471       4,874       39,279       16,194       6,420       (5 )     (2,739 )     318  

Income tax expense (benefit)

    1,326       (34,532 )     (6,464 )     706       258       1,001       730       8,150       734       1,001       569  
   


 


 


 


 


 


 


 


 


 


 


      632       (67,258 )     (489,428 )     144,765       4,616       38,278       15,464       (1,730 )     (739 )     (3,740 )     (251 )

Minority interests in (income) losses of subsidiaries

    1,638       3,545       481       15       54       34       9       13       (31 )     34       (18 )
   


 


 


 


 


 


 


 


 


 


 


Net income (loss) before cumulative effect of accounting change

    2,270       (63,713 )     (488,947 )     144,780       4,670       38,312       15,473       (1,717 )     (770 )     (3,706 )     (269 )

Cumulative effect of accounting change

                      (2,754 )                                          
   


 


 


 


 


 


 


 


 


 


 


Net income (loss)(1)

    2,270       (63,713 )     (488,947 )     142,026       4,670       38,312       15,473       (1,717 )     (770 )     (3,706 )     (269 )

Dividend requirements on predecessor preferred stock

    (8,168 )     (18,843 )     (20,417 )     (3,757 )                                          

Reorganization items—predecessor preferred stock

                      286,772                                            
   


 


 


 


 


 


 


 


 


 


 


Income (loss) applicable to common shares(1)

  $ (5,898 )   $ (82,556 )   $ (509,364 )   $ 425,041     $ 4,670     $ 38,312     $ 15,473     $ (1,717 )   $ (770 )   $ (3,706 )   $ (269 )
   


 


 


 


 


 


 


 


 


 


 


 

 

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Table of Contents
    NTELOS INC.

 
   

Year Ended

December 31, 2002


   

Year Ended

December 31, 2003


   

Year Ended

December 31, 2004


   

Six Months Ended

June 30, 2004


   

Six Months Ended

June 30, 2005


 
    (dollars in thousands, other than ARPU and CPGA data)  

Other data—consolidated:

                                       

Capital expenditures

  $ 73,164     $ 58,520     $ 60,074     $ 33,201     $ 32,331  

Other data—wireless communications:

                                       

Operating Income (Loss)

  $ (410,177 )   $ (14,789 )   $ 20,722     $ 7,513     $ 16,492  

Depreciation and amortization

    61,141       47,556       44,557       21,321       27,033  

Gain on sale of assets

    (3,076 )     —         —         —         (51 )

Asset impairment charge

    366,950       —         —         —         —    

Accretion of asset retirement obligation

    —         610       605       303       350  

Capital expenditures

  $ 49,330     $ 37,098     $ 35,764     $ 21,230     $ 18,647  

Wholesale revenues

  $ 33,886     $ 32,916     $ 51,581     $ 23,382     $ 29,918  

PostPay subscribers at period end

            209,876       232,781       219,598       246,446  

Total subscribers at period end

            286,368       302,155       294,017       326,435  

PostPay ARPU(2)

                  $ 50.39     $ 48.93     $ 53.47  

Total ARPU(2)

                  $ 48.30     $ 47.27     $ 51.85  

Total data ARPU(2)

                  $ 0.36     $ 0.15     $ 1.59  

CPGA(3)

                  $ 382     $ 374     $ 352  

PostPay churn(4)

                    2.3 %     2.3 %     2.1 %

Total churn(4)

                    3.3 %     3.2 %     2.9 %

Covered POPs at period end(5)

    4,817       4,860       4,903       4,881       4,919  

Other data—wireline communications:

                                       

Operating Income

  $ 11,073     $ 37,436     $ 38,771     $ 19,363     $ 18,922  

Depreciation and amortization

    18,338       20,783       19,979       9,873       11,322  

Gain on sale of assets

    —         —         —         —         (21 )

Asset impairment charge

    20,900       —         —         —         —    

Accretion of asset retirement obligation

    —         52       49       —         17  

Capital and operational restructuring charges

    —         —         —         —         —    

Capital expenditures

    20,575       17,061       18,551       9,091       9,938  

Total access lines(6)

            77,665       77,332       77,348       77,258  

DSL/Broadband connections

            7,488       10,648       8,821       12,455  

 

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Table of Contents
    NTELOS INC.

  NTELOS HOLDINGS
CORP.


   

As of

December 31,

2000


 

As of

December 31,

2001


 

As of

December 31,

2002


   

As of

December 31,

2003


 

As of

December 31,

2004


 

As of

June 30, 2005

Actual


 

As of

June 30, 2005

Pro Forma


    (in thousands)

Balance Sheet Data:

                                           

Cash and cash equivalents

  $ 1,637   $ 7,293   $ 12,216     $ 48,722   $ 34,187   $ 19,989   $ 168,252

Property and equipment, net

    329,055     465,944     434,455       360,698     356,129     340,379     340,379

Total assets

    1,079,017     1,196,886     729,521       650,223     620,457     868,254     1,016,517

Total debt, net

    556,287     612,416     642,722       310,303     180,251     630,329     630,329

Redeemable convertible preferred stock

    246,906     265,747     286,164       —       —       —       —  

Total stockholders’ equity

    135,959     173,566     (342,677 )     205,547     318,181     124,964     273,227

(1) Excludes income from discontinued operation, net of tax of $0.4 million and gain on sale of discontinued operation, net of tax of $16.0 million for the year ended December 31, 2000.

 

(2) Average monthly revenues per handset/unit in service, or ARPU, is an industry metric that measures service revenues per period divided by the weighted average number of handsets in service during that period. ARPU as defined below may not be similar to ARPU measures of other 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 statement of operations. We believe that ARPU provides useful information concerning the appeal of our rate plans and service offerings and our performance in attracting and retaining high value customers. The table below provides a reconciliation of subscriber revenues used to calculate ARPU, PostPay ARPU, total data ARPU and PostPay data ARPU to wireless communications revenue shown in our consolidated statements of operations.

 

(dollars in thousands, other than ARPU data )


  

Year Ended

December 31, 2004


    Six Months Ended June 30,

 
               2004        

            2005        

 

Wireless communications revenues

   $ 234,682     $ 112,741     $ 135,068  

Less: equipment revenues from sales to new customers

     (10,195 )     (5,376 )     (6,222 )

Less: equipment revenues from sales to existing customers

     (2,145 )     (1,026 )     (1,737 )

Less: wholesale revenues

     (51,581 )     (23,382 )     (29,918 )

Plus (less): other revenues and adjustments

     (823 )     (324 )     695  
    


 


 


Wireless gross subscriber revenues

   $ 169,938     $ 82,633     $ 97,886  

Less: paid in advance and prepay subscriber revenues

     (37,358 )     (19,960 )     (20,601 )

Plus (less): adjustments

     80       106       (809 )
    


 


 


Wireless gross PostPay subscriber revenues

   $ 132,660     $ 62,779     $ 76,476  
    


 


 


Average subscribers

     293,219       291,351       314,644  

ARPU

   $ 48.30     $ 47.27     $ 51.85  
    


 


 


Average PostPay subscribers

     219,382       213,845       238,357  

PostPay ARPU

   $ 50.39     $ 48.93     $ 53.47  
    


 


 


Wireless gross subscriber revenues

   $ 169,938     $ 82,633     $ 97,886  

Less: wireless voice and other feature revenues

     (168,678 )     (82,365 )     (94,877 )
    


 


 


Wireless data revenues

   $ 1,260     $ 268     $ 3,009  
    


 


 


Average subscribers

     293,219       291,351       314,644  

Total data ARPU

   $ 0.36     $ 0.15     $ 1.59  
    


 


 


 

(3)

CPGA is cost per gross addition and summarizes the average cost to acquire new customers during the period. CPGA is a non-GAAP financial measure that is computed by adding the income statement component of merchandise cost of sales, which is included in cost of wireless sales expense, and sales and marketing, which is included in customer operations expense and reduces that amount by the equipment revenues from sales to new customers, which is included in wireless communications revenues. The net result of these components is then divided by the gross subscriber additions during the period. We believe CPGA is a useful measure used to compare our average cost to acquire a new subscriber to that of other wireless communications providers, although other wireless communications providers may include or exclude certain items from their calculations which may make the comparison less meaningful. The inclusion of merchandise

 

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Table of Contents
 

cost of sales net of the equipment revenues from sales to new customers is critical to our understanding of how much it costs us to acquire a new subscriber. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following table calculates CPGA from our consolidated financial statements (excluding subscriber data):

 

    

Year Ended

December 31, 2004


    Six Months Ended June 30,

 

(dollars in thousands, except CPGA)


           2004      

          2005      

 

Cost of wireless sales

   $ 47,802     $ 23,620     $ 28,369  

Less: access, roaming, and other cost of sales

     (26,363 )     (12,798 )     (15,454 )
    


 


 


Merchandise cost of sales

   $ 21,439     $ 10,822     $ 12,915  
    


 


 


Customer operations

   $ 82,812     $ 40,614     $ 43,600  

Less: wireline and other segment expenses

     (13,700 )     (7,644 )     (6,952 )

Less: wireless customer care, billing, bad debt and other expenses

     (29,344 )     (14,115 )     (15,483 )
    


 


 


Sales and marketing

   $ 39,768     $ 18,855     $ 21,165  
    


 


 


Merchandise cost of sales

   $ 21,439     $ 10,822     $ 12,915  

Sales and marketing

     39,768       18,853       21,165  

Less: equipment revenues from sales to new customers

     (10,195 )     (5,376 )     (6,222 )
    


 


 


Total CPGA costs

   $ 51,012     $ 24,301     $ 27,858  
    


 


 


Gross subscriber additions

     133,417       64,895       79,204  

CPGA

   $ 382     $ 374     $ 352  
    


 


 


 

(4) Total churn is the rate of customer turnover expressed as a percentage of our overall average customers for the reporting period. Customer turnover includes both customers that elected voluntarily to discontinue using our service and customers that were involuntarily terminated from using our service because of non-payment. Total churn is calculated by dividing the number of customers that discontinue service by our overall average customers for the reporting period and dividing the result by the number of months in the period. PostPay churn is the churn rate of our PostPay customers during the period measured. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(5) We hold PCS licenses to operate in 29 BTAs, with a licensed population of 8.5 million, and we have deployed a CDMA network in 19 BTAs which currently cover a total population, which we refer to as covered POPs, of the number of potential subscribers reflected in the table.
(6) Includes RLEC and competitive wireline access lines and bundles.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition in conjunction with our “Unaudited Pro Forma Condensed Consolidated Financial Data,” our “Selected Historical and Pro Forma Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward looking statements that involve risks and uncertainties. For additional information regarding some of these risks and uncertainties that affect our business and the industry in which we operate, please see “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a leading provider of wireless and wireline communications services to consumers and businesses in Virginia and West Virginia under the NTELOS brand name. We concentrate on providing services that we believe represent high growth opportunities for us. For the year ended December 31, 2004, we recognized operating revenues of $341.7 million, which represents a compound annual growth rate from 2001 to 2004 of approximately 15%. For the six months ended June 30, 2005, we recognized operating revenues of $188.9 million, which represented an increase of 14% over the same period in 2004.

 

Our wireless operations are composed of an NTELOS branded retail business and a wholesale business that we operate under an exclusive contract with Sprint Nextel Corp, or Sprint Nextel. We believe our regional focus and contiguous footprint provide us with a differentiated competitive position relative to our primary competitors, all of which are national providers. Our wireless revenues have experienced a 23% compound annual growth rate from 2001 to 2004 and accounted for approximately 72% of our total revenues for the six months ended June 30, 2005. Our wireless operating income has grown from a loss of approximately ($80.2) million in 2001 to approximately $20.7 million in 2004, and for the six months ended June 30, 2005, our wireless operating income was $16.5 million, an increase of $9.0 million, or approximately 119.5%, over the same period in 2004. We hold digital PCS licenses to operate in 29 BTAs, with a licensed population of 8.5 million, and we have deployed a network using CDMA in 19 BTAs which currently consists of a covered POPs of 4.9 million potential subscribers. As of June 30, 2005, our wireless retail business had approximately 326,000 NTELOS branded subscribers, representing a 6.6% penetration of our covered POPs. In 2004 we entered into a seven-year exclusive network agreement to be a wholesale provider of network services for Sprint Spectrum, the wireless subsidiary of Sprint Nextel. Under the Strategic Network Alliance, we are the exclusive PCS network service provider through July 2011 to all Sprint Nextel wireless services offered to approximately 3 million POPs in our western Virginia and West Virginia service area, which we deliver over our CDMA 3G 1xRTT network utilizing our own spectrum. For the six months ended June 30, 2005, we realized wholesale revenues of $29.9 million, primarily related to the Strategic Network Alliance, representing an increase of 28% over the same period in 2004 when we provided similar services under a predecessor agreement to one of Sprint Nextel’s affiliate partners.

 

Founded in 1897, our wireline business and its predecessor organizations have a long history of providing exceptional telephone service in rural Virginia. Our wireline communications business is conducted through two subsidiaries that qualify as rural telephone companies under the Telecommunications Act. These two RLECs provide wireline communications services to residential and business customers in the western Virginia communities of Waynesboro, Covington, Clifton Forge and portions of Botetourt and Augusta Counties. As of June 30, 2005, we operated approximately 48,000 RLEC telephone access lines and approximately 13,000 broadband access connections in our markets, and we had completed the investment required to offer DSL services in 90% of our footprint. In 1998, we began to leverage our wireline network infrastructure to offer CLEC communication services in Virginia and West Virginia outside our RLEC footprint, and as of June 30, 2005, we served customers with approximately 43,000 CLEC access line connections. Our CLEC business markets and sells local, long distance, and high-speed data services almost exclusively to business customers, with residential service limited to bundled service offerings with DSL. We also own a 1,900 mile regional fiber-

 

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Table of Contents

optic network which directly connects our networks with many of the largest markets in the mid-Atlantic region. Our wireline operations have historically generated stable, strong free cash flow and experienced operating income margins of 37% and 35% for 2004 and the six months ended June 30, 2005, respectively.

 

We were formed in January 2005 by the CVC Entities and the Quadrangle Entities for the purpose of acquiring NTELOS Inc., a regional integrated communications provider with over 100 years of operating history. On January 18, 2005, we entered into an agreement to acquire NTELOS Inc. In accordance with this agreement, we acquired 24.9% of the NTELOS Inc. common stock on February 24, 2005 and we completed our acquisition of NTELOS Inc. on May 2, 2005. See Notes 1 and 2 to our audited consolidated financial statements for further discussion of the merger and recapitalization of NTELOS Inc. that occurred concurrent with the merger transaction.

 

For purposes of this discussion, and to provide comparable period financial results for the six months ended June 30, 2004 and 2005, we have combined the results of NTELOS Inc. from January 1, 2005 to May 1, 2005 with our results from May 2, 2005 to June 30, 2005. We had no operating activities prior to the acquisition of NTELOS Inc.

 

On March 4, 2003, NTELOS Inc. and certain of its subsidiaries, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. NTELOS Inc. emerged from the Bankruptcy Court proceedings pursuant to the terms of the plan of reorganization on September 9, 2003. To facilitate comparisons with full year 2004 and 2002 operating results, we have presented the results of NTELOS Inc. operations for 2003 for the predecessor and predecessor reorganized company on a combined basis representing results for the twelve months ended December 31, 2003. We believe this comparison provides the most practical way to comment on the results of operations.

 

Other Overview Discussion

 

To supplement our financial statements presented under generally accepted accounting principles, or GAAP, basis, throughout this document we reference non-GAAP measures, such as ARPU, to measure operating performance.

 

 

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Table of Contents

Average monthly revenues per handset/unit in service, or ARPU, is an industry metric that measures service revenues per period divided by the weighted average number of handsets in service during that period. ARPU as defined below may not be similar to ARPU measures of other 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 statement of operations. We believe that ARPU provides useful information concerning the appeal of our rate plans and service offerings and our performance in attracting and retaining high value customers. The table below provides a reconciliation of subscriber revenues used to calculate ARPU to wireless communications revenues shown in our consolidated statements of operations.

 

(dollars in thousands, other than ARPU data)


   Six Months Ended
June 30,


 
   2004

    2005

 

Wireless communications revenues

   $ 112,741     $ 135,068  

Less: equipment revenues from sales to new customers

     (5,376 )     (6,222 )

Less: equipment revenues from sales to existing customers

     (1,026 )     (1,737 )

Less: wholesale revenues

     (23,382 )     (29,918 )

Plus (less): other revenues and adjustments

     (324 )     695  
    


 


Wireless gross subscriber revenues

   $ 82,633     $ 97,886  

Less: paid in advance and prepay subscriber revenues

     (19,960 )     (20,601 )

Plus (less): adjustments

     106       (809 )
    


 


Wireless gross PostPay subscriber revenues

   $ 62,779     $ 76,476  
    


 


Average subscribers

     291,351       314,644  

ARPU

   $ 47.27     $ 51.85  
    


 


 

Operating Revenues

 

Our revenues are generated from the following categories:

 

    wireless PCS, consisting of retail revenues from PostPay and PrePay plan access, data services, equipment revenues and feature services; and wholesale revenues from the Strategic Network Alliance and roaming from other carriers;

 

    wireline communications, including RLEC service revenues, CLEC service revenues, internet, fiber optic network usage (or carrier’s carrier services), and long distance revenues; and

 

    other communications services revenues, including revenues from paging, our sale and lease of communications equipment and revenue from leasing excess building space.

 

Operating Expenses

 

Our operating expenses are generally incurred from the following categories:

 

    cost of wireless sales, exclusive of other operating expenses shown separately, including digital PCS handset equipment costs which, in keeping with industry practice, we sell to our customers at a price below our cost, and usage-based access charges, including long distance, roaming charges, and other direct costs incurred in accessing other telecommunications providers networks in order to provide wireless services to our end-use customers;

 

    maintenance and support expenses, including costs related to specific property, plant and equipment, as well as indirect costs such as engineering and general administration of property, plant and equipment; leased facility expenses for connection to other carriers, cell sites and switch locations;

 

    depreciation and amortization, including depreciable long lived property, plant and equipment and amortization of intangible assets where applicable;

 

    accretion of asset retirement obligation, or ARO;

 

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    customer operations expenses, including marketing, product management, product advertising, selling, billing, publication of a regional telephone directory, customer care, directory services and bad debt expenses;

 

    corporate operations expenses, including taxes other than income, executive, accounting, legal, purchasing, information technology, human resources and other general and administrative expenses; and

 

    operational and capital restructuring charges associated with our acquisition of NTELOS Inc., capital restructuring and organizational initiatives, workforce reductions and exiting certain facilities.

 

Other Income (Expenses)

 

Our other income (expenses) are generated (incurred) from interest income and expense, our equity share of the income of NTELOS Inc. from our 24.9% investment in NTELOS Inc. for the period February 24, 2005 through May 1, 2005, reorganization items associated with our prior bankruptcy filing and capital restructuring for the period after the bankruptcy filing date and gains or losses on the sale of investments and other assets.

 

Income Taxes

 

Our income tax liability or benefit and effective tax rate increases or decreases based upon changes in a number of factors, including our pre-tax income or loss, net operating losses and related carryforwards, valuation allowances, alternative minimum tax credit carryforwards, state minimum tax assessments, gain or loss on the sale of assets and investments, write-down of assets and investments, non-deductible amortization and other tax deductible amounts.

 

Minority Interests in Losses (Earnings) of Subsidiaries

 

Our minority interest relates to an RLEC segment investment in a partnership that owns certain signaling equipment and provides service to a number of small RLECs. We have a 97% majority interest in the Virginia PCS Alliance L.C., or the VA Alliance, that provides PCS services to a 1.9 million populated area in central and western Virginia. The VA Alliance has incurred significant operating losses since it initiated PCS services in 1997. We have recognized a minority interest credit adjustment only to the extent of capital contributions from the 3% minority owners. Such amounts, and amounts related to the RLEC segment minority interest, are not material for all periods presented.

 

Results of Operations

 

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

 

OVERVIEW

 

Operating revenues increased $22.7 million, or 14%, from $166.2 million for the six months ended June 30, 2004 to $188.9 million for the six months ended June 30, 2005. Operating income improved $1.8 million, or 7%, from $24.8 million for the six months ended June 30, 2004 to $26.6 million for the prior year period.

 

As a result of an 11% growth in subscribers, a 10% increase in ARPU and a 30% increase in wholesale revenue, primarily under our Strategic Network Alliance, our gross wireless operating revenues increased $22.3 million, or 20%, for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Total wireless operating expenses before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges over these periods grew $7.6 million, or 9%, driven by a $4.7 million increase in cost of sales due to a 22% increase in gross subscriber additions and the implementation of data products in the first six months of 2005. Other wireless operating expenses increased by

 

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4% or $2.0 million for the six months ended June 30, 2005, compared to the six months ended June 30, 2004, primarily due to increased retention costs of the larger subscriber base and selling expenses associated with the increase in gross additions.

 

Wireline communications services realized revenue improvement of $1.0 million, or 2%, in the first six months of 2005 compared to the first six months of 2004. Wireline operating expenses before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges were flat, at $23.1 million. Our RLEC customers decreased by 4% as of June 30, 2005 compared to June 30, 2004. Our CLEC and Broadband customers increased by 8% and 41%, respectively, as of June 30, 2005 compared to June 30, 2004 and our dial-up internet customers declined by 18% as of June 30, 2005 compared to June 30, 2004.

 

Other communications services revenue declined $0.6 million, from $1.1 million for the first six months of 2004 to $0.5 million for the first six months of 2005 due to the exit of our wireless cable business in the first quarter of 2004 and reduced equipments sales in communications services.

 

OPERATING REVENUES

 

     Six
Months Ended June 30,


   $ Variance

    % Variance

 

Operating Revenues


   2005

   2004

    
     (dollars in thousands)  

Wireless PCS

   $ 135,068    $ 112,741    $ 22,327     20 %

Wireline

                            

RLEC

     28,029      27,497      532     2 %

Competitive wireline

     25,313      24,813      500     2 %
    

  

  


     

Total wireline

     53,342      52,310      1,032     2 %

Other

     467      1,114      (647 )   (58 )%
    

  

  


     

Total

   $ 188,877    $ 166,165    $ 22,712     14 %
    

  

  


     

 

WIRELESS COMMUNICATIONS REVENUES-Wireless communications revenues increased $22.3 million, or 20%, from the six months ended June 30, 2004 to the six months ended June 30, 2005, primarily due to an increase in our NTELOS branded net subscriber revenue of $14.2 million, or 17%, and a $6.9 million, or 30%, increase in wholesale and roaming revenues. Subscriber revenues reflected subscribers growth of 11%, or 32,418 subscribers, from 294,017 at June 30, 2004 to 326,435 at June 30, 2005 and an increase in ARPU from $47.27 to $51.85 for the six months ended June 30, 2004 and June 30, 2005, respectively. The increase in ARPU was driven in part by increased data revenue per subscriber. Gross subscriber additions were 22% greater in the first six months of 2005, at 79,204, compared to 64,895 for the first six months of 2004. Reductions in PostPay and total monthly subscriber churn also contributed to the net subscriber growth as PostPay churn declined from 2.3% to 2.1% and total churn declined from 3.2% to 2.9% for the first six months of 2004 and 2005, respectively The increase in wholesale revenues was driven by increased voice and data usage under the Strategic Network Alliance as wholesale revenues grew 30% from $23.0 million for the six month period ending June 30, 2004 to $29.9 million for the six month period ending June 30, 2005. Our wholesale revenues are derived primarily from the voice and data usage by Sprint Nextel customers who live in the Strategic Network Alliance service area, our Home wholesale subscribers, and those customers of Sprint Nextel, and affiliates of Sprint Nextel such as Virgin Mobile and Qwest, who use our voice and data services while traveling through the Strategic Network Alliance service area.

 

Our wireless wholesale business began in 1999 when we signed a ten-year agreement with Horizon PCS to carry Horizon PCS’s traffic in our territories in western Virginia and West Virginia. On August 15, 2003, Horizon PCS filed for Chapter 11 bankruptcy protection. On June 15, 2004, Sprint purchased from Horizon PCS

 

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the 97,000 PCS subscribers in the markets covered by our wholesale network service agreement. We refer to these subscribers together with new subscribers acquired by Sprint Nextel in the Strategic Network Alliance coverage area as Home wholesale subscribers. NTELOS Inc. and Sprint Nextel executed a new seven-year exclusive wholesale agreement, concurrent with this transaction which we refer to herein as the Strategic Network Alliance. While management believes the merger of Sprint and Nextel will likely have a positive impact for our wholesale business, the level of future wholesale revenue to be generated under this agreement is uncertain. Further, it is possible that there will be additional consolidation among the Sprint Nextel network affiliates and the potential impact of any such future consolidation is unknown. See “Risk Factors.”

 

On June 15, 2004, Horizon PCS and its debtor affiliates sold their economic interests in their PCS subscribers in this geographic area to Sprint Nextel. At the time of the transaction there were 97,000 Home subscribers in this area. During the period June 2003 through August 15, 2003, the date Horizon PCS filed for bankruptcy protection, we were not paid for wholesale services and did not recognize $7.2 million of related revenue for this period. Additionally, we had several pricing disputes with Horizon PCS relating to periods up through August 15, 2003, and continued to have disputes through June 5, 2004. On June 5, 2004, we entered into a settlement agreement with Horizon PCS resolving disputes over the pricing and payment for voice, data and other services provided to Horizon PCS for the period from August 15, 2003 to June 15, 2004. Pursuant to this settlement, we retained all payments actually made by Horizon PCS for services rendered during the period commencing August 15, 2003 and ending December 30, 2003, and received payment of approximately $3.9 million per month from Horizon PCS for services rendered during the period commencing January 1, 2004 and ending up through June 15, 2004.

 

WIRELINE COMMUNICATIONS REVENUES-Wireline communications revenues increased $1.0 million, or 2%, from $52.3 million for the six months ended June 30, 2004 to $53.3 million for the six months ended June 30, 2005.

 

    RLEC Revenues.    RLEC revenues, which include local service, access and toll service, directory advertising and calling feature revenues from our RLEC customers increased $0.5 million, or 2%, from $27.5 million for the six months ended June 30, 2004, to $28.0 million for the six months ended June 30, 2005. Access lines decreased 4% over the respective periods, with lines totaling 49,400 at June 30, 2004 and 47,500 at June 30, 2005. These line losses are reflective of reduction in Centrex lines, wireless substitution and the closings of small local dial-up ISPs who were our customers. These losses, to date, do not reflect the introduction of competitive voice service offerings, such as from cable companies or CLECs, in our markets. Should this type of competition be introduced in the future, our RLEC line loss may increase and related revenues may be adversely impacted. Somewhat offsetting revenue losses related to access line loss was a $1.5 million, or 9% improvement in access revenues, driven by increases in carrier access minutes from the six months ended June 30, 2004, to the six months ended June 30, 2005, due primarily to the growth in usage by wireless carriers. Due to a bi-annual reduction in rates charged for tandem switching, effective July 1, 2005, we will have lower pricing in future periods. We expect this July 1, 2005 price reduction to adversely impact access revenues by approximately $2.9 million when annualized; however, we expect our continued increase in carrier access minutes to offset the dollar amount of any reduction in the per minute pricing going forward.

 

   

Competitive Wireline Revenues.    Competitive wireline total operating revenues, including revenues from CLEC, network and internet operations increased $0.5 million, or 2%, from $24.8 million for the six months ended June 30, 2004, to $25.3 million for the six months ended June 30, 2005. Revenue from transport services in the CLEC/Network increased by $1.7 million, or 88%, over the comparative periods. Revenues from CLEC local access increased by 4%, consistent with access line growth, from 27,714 to 29,086 at June 30, 2004 and June 30, 2005, respectively. Losses of dial-up subscribers continued with 8,050 fewer customers at June 30, 2005, than at June 30 2004, a loss of 18%. Dial-up revenues reflected this loss and previous price reductions for this product with a $1.4 million or 28% loss from the six months ended June 30, 2004 to June 30, 2005. Customer increases for Broadband products, including DSL, dedicated internet and wireless broadband, totaled 41% and Broadband

 

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revenues increased from $3.4 million for the six months ended June 30, 2004 to $4.1 million for the six months ended June 30, 2005. The market for DSL and other broadband internet products in our regions is significantly smaller than that of the dial-up product and thus increases in revenues on these products has trailed that of the decline in dial-up revenues.

 

OTHER COMMUNICATIONS SERVICES REVENUES—Other communications services revenue declined $0.6 million, from $1.1 million for the six months ended June 30, 2004, to $0.5 million for the six months ended June 30, 2005, due to the exit of our wireless cable business in the first quarter of 2004 and reduced equipments sales in communication services.

 

OPERATING EXPENSES

 

The following table identifies our operating expenses on a business segment basis, consistent with the table presenting operating revenues above:

 

     Six Months Ended
June 30,


            

Operating Expenses


   2005

    2004

   $ Variance

    % Variance

 
     (dollars in thousands)  

Wireless PCS

   $ 91,244     $ 83,605    $ 7,639     9 %

Wireline

                             

RLEC

     6,852       8,183      (1,331 )   (16 )%

Competitive wireline

     16,250       14,890      1,360     9 %
    


 

  


     

Total wireline

     23,102       23,073      29     0 %

Other

     2,263       2,924      (661 )   (23 )%
    


 

  


     

Operating expenses, before depreciation and amortization, accretion of asset retirement obligation, gain on sale of assets and capital and operational restructuring charges

     116,609       109,602      7,007     6 %

Depreciation and amortization

     38,512       31,427      7,085     23 %

Accretion of asset retirement obligation

     350       332      18     5 %

Gain on sale of assets

     (8,742 )            (8,742 )   (100 )%

Capital and operational restructuring charges

     15,523            15,523     100 %
    


 

  


     

Total operating expenses

   $ 162,252     $ 141,361    $ 20,891     15 %
    


 

  


     

 

The following describes our operating expenses on an aggregate basis and on a basis consistent with our financial statement presentation.

 

TOTAL OPERATING EXPENSES—As noted above, total operating expenses increased $20.9 million, or 15%, from $141.4 million for the six months ended June 30, 2004 to $162.3 million for the six months ended June 30, 2005. Depreciation and amortization increased by 23% from $31.4 million for the six months ended June 30, 2004, to $38.5 million for the six months ended June 30, 2005. This is primarily attributable to the increased depreciation and amortization associated with the increased carrying values of long-lived assets due to the revaluation of assets as of the May 2, 2005 merger date and accelerated depreciation recorded for certain wireless switching assets which have been scheduled for replacement related to newly planned network upgrades. Operating expenses before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges increased $7.0 million, or 6%, from $109.6 million to $116.6 million for the six months ended June 30, 2004 and 2005, respectively. Wireless operating expenses, before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and

 

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operational and capital restructuring charges increased $7.6 million, or 9%, for the six months ended June 30, 2004, as compared to the six months ended June 30, 2004, due to direct costs associated with a higher subscriber base and a 22% increase in customer gross additions for the six months ended June 30, 2005, compared to the same period in 2004. Wireline operating expenses, before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges were flat for the six months ended June 30, 2005, as compared to the six months ended June 30, 2004. Operating expenses, before depreciation and amortization, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges, from the other communication service businesses decreased $0.7 million, or 23% from the six months ended June 30, 2004, to the six months ended June 30, 2005.

 

COST OF WIRELESS SALES—Cost of wireless sales increased $4.7 million, or 20%, from $23.6 million for the six months ended June 30, 2004 to $28.4 million for the six months ended June 30, 2005. Equipment cost of sales, or COS, increased $2.1 million primarily due to the year over year increase in the number of gross customer additions. Cell site access, toll and other wireless COS increased $2.7 million, or 21%, over the comparative periods related to the increased subscriber base.

 

MAINTENANCE AND SUPPORT EXPENSES—Maintenance and support expenses increased $1.5 million, or 5%, from $30.2 million to $31.7 million for the six months ended June 30, 2004 and 2005, respectively. The primary driver of this expense increase is related to transport and access expense which increased due to the wireless PCS and wireline CLEC growth. Cell site costs also increased for wireless reflecting the larger subscriber base and the addition of a limited number of sites. We had 16 new cell sites under construction at June 30, 2005 in connection with planned network expansion and enhancements. Accordingly, when these and future cell sites are placed in service, we expect these costs to increase in future periods.

 

DEPRECIATION AND AMORTIZATION EXPENSES—Depreciation and amortization expenses increased $7.1 million, or 23%, from $31.4 million for the six months ended June 30, 2004 to $38.5 million for the six months ended June 30, 2005. As of the May 2, 2005 merger date, the Company revalued its long-lived assets. The increase in the depreciable and amortizable basis of these assets contributed to the increased depreciation and amortization expense for the period from May 2, 2005 through June 30, 2005. Depreciation expense was accelerated for the first six months of 2005 for certain wireless switching assets which have been scheduled for replacement or elimination related to newly planned network upgrades including a 2G to 3G upgrade for numerous cell sites in our Virginia East wireless markets. As we continue to exit the paging business, depreciation expense was accelerated for certain assets related to the paging network.

 

ACCRETION OF ASSET RETIREMENT OBLIGATIONS—Accretion of asset retirement obligations remained flat at $0.3 million over the respective six-month periods ended June 30, 2004 and 2005. This charge is recorded in order to accrete the estimated asset retirement obligation over the life of the related asset up to its future expected settlement cost.

 

CUSTOMER OPERATIONS EXPENSES—Customer operations expenses increased $3.0 million, or 7%, from $40.6 million for the six months ended June 30, 2004 to $43.6 million for the six months ended June 30, 2005. This increase is related to the direct costs associated with the 22% increase in wireless PCS gross customer additions in the comparative periods including employee and agent sales commissions and advertising expenses. Also, customer retention costs were higher reflecting the larger wireless subscriber base.

 

CORPORATE OPERATIONS EXPENSES—Corporate operations expenses decreased $2.3 million, or 15%, from $15.2 million to $12.9 million for the six months ended June 30, 2004 and 2005, respectively. This decrease is primarily due to a $1.9 million operating tax accrual relating to certain unbilled locality taxes and $0.6 million of legal and professional fees related to the Horizon PCS settlement and our Sprint wholesale agreement recorded in 2004 and which were not recurring in 2005.

 

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CAPITAL AND OPERATIONAL RESTRUCTURING CHARGES—Capital and operational restructuring charges of $15.5 million were recorded in the first six months of 2005 for legal and advisory fees relating to the restructuring of our debt and capital structure. On January 18, 2005, NTELOS Inc. and certain of its shareholders entered into an agreement pursuant to which NTELOS Inc. would be recapitalized and sold to us. We were formed in contemplation of this transaction. On February 24, 2005, NTELOS Inc. borrowed $625 million from the new $660 million senior secured credit facilities and used these proceeds to refinance substantially all of its existing indebtedness and repurchase, pursuant to a tender offer of $440 million or approximately 75% of its existing common stock, warrants and options. On May 2, 2005, we acquired all of NTELOS Inc.’s remaining common shares, warrants and options by means of a merger. The recapitalization and sale is described in Note 2 to NTELOS Inc.’s June 30, 2005 audited financial statements.

 

OTHER INCOME (EXPENSES)

 

Interest expense increased $10.8 million, or 127%, from $8.5 million to $19.3 million for the six months ended June 30, 2004 and 2005, respectively. The increase was due to the signing of our new $660 million senior secured credit facilities on February 24, 2005. The proceeds of the $660 million senior secured credit facilities were used to repay the outstanding balance of the existing $325 million senior credit facility and other senior secured debt obligations (See Note 2 to NTELOS Inc.’s Audited Consolidated Financial Statements). Interest expense relating to the $325 million senior credit facility for the six months ended June 30, 2005 was $1.5 million, compared to $4.9 million for the same period in 2004. Interest expense relating to our new $625 million facility was $13.8 million for the six months ended June 30, 2005. The increase was also due to the inclusion of $2.5 million of interest rate swap payments and fair value adjustments in interest expense for the six months ended June 30, 2005 compared to a $0.5 million reduction in interest expense for the same period in 2004. Concurrent with the inception of the new $625 million NTELOS Inc. senior secured credit facilities we entered into an interest rate swap agreement with a notional amount of $312.5 million. This interest rate swap agreement was not designated as an interest rate hedge instrument for accounting purposes and therefore the changes in the market value of the swap agreement were recorded as a charge or credit to interest expense. At emergence from bankruptcy on September 9, 2003, we had a $162.5 million swap agreement with a notional amount of $162.5 million related to the $325 million senior credit facility and elected not to designate the swap agreement as an interest rate hedge instrument for accounting purposes, therefore the payments were recorded as a reduction of the associated swap agreement obligation. Changes between the fair value and carrying value of the previous swap obligation were also included as adjustments to interest expense.

 

We recorded gains on sale of assets totaling $8.7 million for the six months ended June 30, 2005. This consisted primarily of the February 2005 sale of certain inactive PCS licenses covering populations in Pennsylvania resulting in a gain of approximately $5.2 million, and the sale of the MMDS spectrum licenses, spectrum leases and wireless cable equipment in the Richmond, Virginia market, resulting in a gain of approximately $3.1 million. See Note 8 to NTELOS Inc.’s Audited Consolidated Financial Statements.

 

INCOME TAXES

 

Income taxes increased from $0.7 million, representing state minimum taxes for the six months ended June 30, 2004 to $8.9 million in 2005. This significant increase is the result of continued recognition of state minimum taxes, incurrence of $12.6 million of non-deductible transaction costs associated with our recent merger and the reversal of tax valuation reserves generated by originating deferred tax liabilities in 2004.

 

We had $232.5 million of available net operating losses at June 30, 2005, all of which will be subject to an annual utilization limit of $1.6 million (prior to adjustment for realization of built-in gains that existed as of our recent merger). Due to the limited carry forward life of net operating losses and the amount of the annual limitation, it is unlikely that we will be able to realize in excess of $43 million of the $153.2 million of our net operating losses existing prior to our emergence from bankruptcy. See Note 12 to NTELOS Inc.’s Audited Consolidated Financial Statements.

 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

OVERVIEW

 

As discussed below, pursuant to NTELOS Inc.’s reorganization on September 9, 2003, NTELOS Inc. issued new common stock of the Reorganized NTELOS Inc. and cancelled all previously outstanding securities. NTELOS Inc.’s former senior noteholders owned approximately 94% of the new common stock on September 9, 2003. The remaining stock was issued to former subordinated noteholders and purchasers of NTELOS Inc.’s new convertible notes in settlement of other claims and equity interests, as provided in the joint plan of reorganization.

 

On March 4, 2003, NTELOS Inc. and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Eastern District of Virginia, which we refer to as the Bankruptcy Court. NTELOS Inc. emerged from the Bankruptcy Court proceedings pursuant to the terms of the plan of reorganization on September 9, 2003.

 

As discussed in Note 2 to NTELOS Inc.’s Audited Consolidated Financial Statements, NTELOS Inc. implemented the fresh start provisions, or fresh start, of the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” as of September 9, 2003. We refer to this as fresh start accounting. Pursuant to the Plan of Reorganization, NTELOS Inc. recognized income and credits from reorganization items relating to the cancellation of its senior notes, subordinated notes, preferred stock, and the reduction in and timing of amounts payable to certain unsecured creditors, net of the concurrent issuance of related new common stock and new common stock warrants. In addition, under fresh start accounting, NTELOS Inc. recognized adjustments for cancellation of its old common stock and old common stock warrants and elimination of its accumulated deficit and accumulated other comprehensive loss as of September 9, 2003. These adjustments, as well as the adjustments made to record NTELOS Inc.’s assets and liabilities at fair value reflect the application of fresh start accounting made to the reorganized NTELOS Inc. as of September 9, 2003.

 

As a consequence of the implementation of fresh start reporting on September 9, 2003 (See Note 2 to our Audited Consolidated Financial Statements), the financial information presented in the consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the period beginning on September 10, 2003 and ending on December 31, 2003 is generally not comparable to the financial information presented for the prior periods. The presentation of financial information of the predecessor represents NTELOS Inc.’s financial statements for the specified periods prior to and concluding with NTELOS Inc.’s adoption of fresh start accounting. The presentation of financial information of the predecessor reorganized NTELOS Inc. represents NTELOS Inc.’s financial information for the specified period following NTELOS Inc.’s adoption of fresh start reporting.

 

In order to create meaningful year over year comparisons, the year ended December 31, 2003 represents the combination of the predecessor NTELOS Inc. (representing results from January 1, 2003 through September 9, 2003) and the reorganized company (representing results from September 10, 2003 through December 31, 2003).

 

Operating revenues increased $33.7 million, or 11%, from $308.0 million in 2003 to $341.7 million in 2004. Operating income improved by $41.0 million, from $13.6 million in 2003 to $54.6 million in 2004. Capital restructuring charges of $0.8 million and $2.4 million were recorded in 2004 and 2003, respectively. The significant increase in operating income is due primarily to the $35.1 million improvement in wireless revenue and a 2% reduction in total operating expenses largely related to a $4.9 million decrease in depreciation and amortization expense, reflecting the revaluation of NTELOS Inc.’s assets and the related reduction in the fixed asset carrying value of $57.8 million in connection with fresh start accounting in 2003. Income applicable to common shares for 2004 was $38.3 million as compared to $429.7 million in 2003. The 2003 income applicable to common shares included $455.7 million in reorganization items, net gain pursuant to NTELOS Inc.’s plan of

 

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reorganization and the related application of fresh start accounting. Additionally, interest expense and dividend requirements on predecessor NTELOS Inc. preferred stock decreased $16.7 million and $3.8 million, respectively, also related to the Plan of Reorganization, application of fresh start accounting and the significantly lower level of debt carried by the predecessor reorganized NTELOS Inc.

 

OPERATING REVENUES

 

     Twelve Months Ended
December 31,


            

Operating Revenues


   2004

   2003

   $ Variance

    % Variance

 
     (dollars in thousands; after inter-company eliminations)  

Wireless PCS

   $ 234,682    $ 199,535    $ 35,147     18 %

Wireline

                            

RLEC

     56,280      53,352      2,928     5 %

Competitive wireline

     48,971      50,185      (1,214 )   (2 )%
    

  

  


     

Total wireline

     105,251      103,537      1,714     2 %

Other

     1,769      4,882      (3,113 )   (64 )%
    

  

  


     

Total operating revenues

   $ 341,702    $ 307,954    $ 33,748     11 %
    

  

  


     

 

WIRELESS COMMUNICATIONS REVENUES—Wireless communications revenues increased $35.1 million, or 18%, due to an increase in our NTELOS branded subscriber revenue of $17.2 million, or 11%, and an increase in wholesale revenue of $18.7 million, or 57%. Subscriber revenue grew primarily due to the addition of approximately 16,000 subscribers, an increase in monthly ARPU and a shift in the subscriber mix toward our higher value rate plans. PostPay subscribers comprised approximately 73% of the subscriber base at December 31, 2003 and grew to approximately 77% of the base by December 31, 2004.

 

In addition to subscriber growth and growth in these related revenues, wholesale revenues generated primarily through an agreement with Horizon PCS in 2003 and the first half of 2004, and subsequently with Sprint Nextel beginning in June 2004, increased $18.7 million, or 57%, from $32.9 million in 2003 to $51.6 million in 2004 driven primarily by increases in access minutes on our networks and the growth in the number of Sprint Nextel subscribers who live in the Strategic Network Alliance service area. We also have unrecognized revenues of approximately $7.2 million in 2003 due to Horizon PCS’s bankruptcy filing in August 2003. We continued to provide digital PCS services on a wholesale basis to Horizon PCS through June 15, 2004 and to Sprint Nextel commencing on June 16, 2004. Our wholesale revenues are derived primarily from the voice and data usage by Sprint Nextel customers who live in the Strategic Network Alliance service area, our Home subscribers, and those customers of Sprint Nextel, and affiliates of Sprint Nextel such as Virgin Mobile and Qwest, who use our voice and data services while traveling throughout our Strategic Network Alliance service area.

 

Horizon PCS had disputed certain categories of charges under our Strategic Network Alliance, alleging we overcharged Horizon PCS in the approximate amount of not less than $3.9 million plus interest, costs and expenses during the period commencing October 1999 and ending September 2002. Horizon PCS withheld these categories of charges from payments made from and after December 2002 and failed to timely pay their January 2003 invoice due following our bankruptcy date. On March 11, 2003, Horizon PCS filed a motion with the Bankruptcy Court which affected an administrative freeze as to the amounts payable on the January invoice. On March 12, 2003, we notified Horizon PCS of the failure to make payment on the January invoice, reserving the right to terminate the agreement with Horizon PCS in accordance with the terms thereof. On March 24, 2003, the parties entered a stipulation with the Bankruptcy Court pursuant to which Horizon PCS paid the January invoice and agreed to pay all future invoices and we agreed not to exercise our termination right, assuming all future

 

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payments are made in accordance with the agreement with Horizon PCS. The stipulation further provided that Horizon PCS was permitted to withhold amounts under monthly invoices in excess of monthly minimums ($3.0 million monthly through September 30, 2003 and $3.9 million monthly for the fourth quarter 2003) if it determined in good faith that such amounts in excess of the monthly minimums represented an overcharge by us, pending resolution of the dispute.

 

On July 30, 2003, Horizon PCS announced that it closed 19 stores and terminated approximately 300 employees. On August 15, 2003, Horizon PCS filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. At that point, Horizon PCS had not paid the monthly base amounts due ($3.0 million per month as discussed above) for June 2003 and July 2003 and the total base amount unpaid for the period ending August 15, 2003 (pre-petition period) was $7.2 million. In September 2004, we received cash and stock with a combined value of $1.5 million in final settlement for Horizon PCS’s pre-petition receivables. We also reversed approximately $455,000 of reserves related to Horizon PCS’s pre-petition disputed issues resolved by this settlement.

 

WIRELINE COMMUNICATIONS REVENUES—Wireline communications revenues increased $1.7 million, or 2%, from $103.5 million in 2003 to $105.3 million in 2004.

 

    RLEC Revenues.    RLEC revenues, which include local service, access and toll service, directory advertising and calling feature revenues from our RLEC business increased $2.9 million, or 5%, from $53.4 million in 2003 to $56.3 million in 2004. Access lines decreased 1,800 between the two comparative periods with 48,300 total lines at December 31, 2004; however, carrier access minutes increased by 56.7 million, or 18% from 2003 to 2004 driving a $3.2 million increase in access revenues primarily due to increased usage by wireless carriers.

 

    Competitive Wireline Revenues.    Competitive Wireline revenues decreased from $50.2 million in 2003 to $49.0 million in 2004. During 2004, we added 2,700 CLEC access lines, a 7% increase, finishing the year with 42,100 access lines (not including inter-company lines), resulting in a $0.5 million revenue growth generated from traditional CLEC local service. Revenues from private line for business accounts increased $0.5 million, or 10%, from $4.9 million in 2003 to $5.4 million in 2004. Reciprocal compensation revenues (revenues earned for terminating calls from other RLEC’s or CLEC’s) and switched access revenues (revenue earned for originating or terminating calls from inter-exchange carriers) decreased $0.7 million to $1.6 million for 2004. Although switched access minutes grew in 2004, rate reductions resulted in an overall revenue decline. The expected erosion of dial-up internet subscribers continued with a loss of 10,058 of these customers in 2004, with an associated revenue loss of $3.2 million. In May 2004, we introduced a $9.95 (monthly) dial-up offer requiring automatic credit-card payment resulting in lower gross additions but a stable churn and improvements in bad debt experience. Our broadband products (DSL, dedicated internet and portable broadband), conversely, all experienced strong growth in 2004. Broadband customers increased by 42% from 7,626 in 2003 to 10,809 in 2004. Competitive pricing pressures in DSL prevented broadband revenue growth from completely offsetting the dial-up loss, but broadband revenue increased by $1.7 million, or 30%, from $5.5 million in 2003 to $7.2 million in 2004. Long distance revenues increased from $2.5 million in 2003 to $3.4 million in 2004 driven by customer growth of 28%, from 25,453 to 32,531 for years ending 2003 and 2004, respectively.

 

OTHER OPERATING REVENUES—Other operating revenues declined $3.1 million, or 64%, from 2003 to 2004, from $4.9 million to $1.8 million due to our sale of the wireline cable operations in fourth quarter 2003 and the exit from the wireless cable business in first quarter 2004.

 

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OPERATING EXPENSES

 

The following table identifies our operating expenses on a business segment basis, consistent with the table presenting operating revenues above.

 

     Twelve Months Ended
December 31,


            

Operating Expenses


   2004

   2003

   $ Variance

    % Variance

 
     (dollars in thousands)  

Wireless PCS

   $ 168,798    $ 166,158    $ 2,640     2 %

Wireline

                            

RLEC

     16,030      16,600      (570 )   (3 )%

Competitive wireline

     30,420      28,666      1,754     6 %
    

  

  


     

Total wireline

     46,450      45,266      1,184     3 %
    

  

  


     

Other

     5,237      9,253      (4,016 )   43 %
    

  

  


     

Operating expenses, before depreciation and amortization, asset impairment charges, accretion of asset retirement obligation, gain on sale of assets and capital and operational restructuring charges

     220,485      220,677      (192 )   0 %

Depreciation and amortization

     65,175      70,084      (4,909 )   (7 )%

Asset impairment charges

          545      (545 )   NM  

Accretion of asset retirement obligation

     680      662      18     3 %

Capital and operational restructuring charges

     798      2,427      (1,629 )   (67 )%
    

  

  


     

Total operating expenses

   $ 287,138    $ 294,395    $ (7,257 )   (2 )%
    

  

  


     

 

The following describes our operating expenses on an aggregate basis and on a basis consistent with our financial statement presentation.

 

TOTAL OPERATING EXPENSES—Total operating expenses decreased 2%, from $294.4 million in 2003 to $287.1 million in 2004, due largely to a $4.9 million decrease in depreciation and amortization expense, reflecting the revaluation of NTELOS Inc.’s assets and the related asset write-down of $57.8 million in connection with fresh start accounting in 2003. Operating expenses, excluding depreciation and amortization, asset impairment charges, accretion of asset retirement obligations and operational and capital restructuring charges decreased $0.2 million from $220.7 million for 2003 to $220.5 million for 2004. Increases in these costs in the wireless PCS segment were primarily driven by customer growth. Increases in these costs in the wireline segment were concentrated in the competitive wireline segment and were largely related to higher UNE loop and transport costs and those expenses related to customer growth such as selling expenses and long-distance cost-of-sales associated with continued subscriber growth and increased usage by existing subscribers. Consolidated bad-debt expense decreased $2.5 million from $9.7 million in 2003 to $7.2 million in 2004 with wireless bad debt improving $1.0 million due to improved collections efforts. Wireline bad debt improved $1.4 million due to customer bankruptcies in 2003.

 

COST OF WIRELESS SALES—Cost of wireless sales increased $0.9 million, or 2%, from $46.9 million in 2003 to $47.8 million in 2004. Equipment COS decreased by 7%, from $23.2 million in 2003 to $21.4 million in 2004. Subscriber gross additions decreased by 15% from 2003 to 2004, but sales shifted more to PostPay sales with higher handset subsidies. The decrease in equipment COS was slightly more than offset, however, by an increase in access COS of 11%, from $23.8 million in 2003 to $26.4 million in 2004 driven by increases in network access, long distance toll and costs of feature sales associated with continued growth in subscribers combined with increased usage by existing subscribers.

 

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MAINTENANCE AND SUPPORT EXPENSES—Maintenance and support expenses increased $2.1 million, or 3%, from $60.8 million in 2003 to $62.9 million in 2004. This increase significantly lags the 11% increase in total operating revenues as we continue to benefit from significant network grooming and technological efficiency improvements made in 2002, 2003 and 2004. Variable expenses in this category increased consistent with customer and network access minute growth.

 

DEPRECIATION AND AMORTIZATION EXPENSES—Depreciation and amortization expenses decreased $4.9 million, or 7%, from $70.1 million in 2003 to $65.2 million in 2004. Through the application of fresh start accounting in connection with the September 9, 2003 emergence from bankruptcy, we fair valued fixed assets and recorded a $57.8 million reduction in the carrying value of our fixed assets accordingly. In 2003, we recorded accelerated depreciation on certain PCS equipment and on assets in the Portsmouth, Virginia customer care center, the operations of which were consolidated into the other two customer care centers. The PCS replacement was primarily in connection with the 3G 1xRTT upgrade required by an amendment to the Network Services Agreement with Horizon PCS (now Sprint Nextel). The impact of this accelerated depreciation and the asset write-downs was partially offset by depreciation expense related to $60.1 million of capital additions in 2004.

 

On January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142. In accordance with the provisions of SFAS 142, we discontinued amortization of goodwill, wireless PCS spectrum licenses and the assembled workforce intangible asset as of that date, as these assets are considered indefinite lived intangible assets and are subject to periodic impairment testing rather than amortization. In connection with fresh start accounting applied on the September 9, 2003 bankruptcy emergence date, we recorded customer intangibles of $67.0 million on the RLEC, CLEC, and competitive wireline segments. Amortization of these intangibles from September 10, 2003 through December 31, 2003 was $1.3 million compared to $4.9 million in 2004.

 

ASSET IMPAIRMENT CHARGES—During the first quarter of 2003, we completed the 2002 annual SFAS No. 142 impairment testing of all goodwill and indefinite lived intangible assets as of October 1, 2002. We recorded an asset impairment charge in 2003 of $0.5 million relating to the impairment of goodwill in the wireline cable business due to the decline in customers prior to the sale of this business in September 2003.

 

CUSTOMER OPERATIONS EXPENSES—Customer operations expenses decreased $5.5 million, or 6%, from $88.3 million in 2003 to $82.8 million in 2004. Reduced wireless sales through the agent sales channel resulted in a $0.5 million year-over-year reduction in agent commission expense. In addition, wireless retention and fraud management costs were reduced in 2004 through our focused cost control initiatives. Bad debt expense on a consolidated basis decreased $2.5 million, from $9.7 million in 2003 to $7.2 million in 2004.

 

CORPORATE OPERATIONS EXPENSES—Corporate operations expenses increased $2.3 million, or 10%, from $24.6 million in 2003 to $26.9 million in 2004. This increase is primarily due to a $1.9 million operating tax accrual relating to certain unbilled locality taxes and $0.6 million of legal and professional fees related to the Horizon PCS settlement and the Strategic Network Alliance contract recorded in 2004.

 

CAPITAL AND OPERATIONAL RESTRUCTURING CHARGES—During the period January 1, 2003 through the March 3, 2003 bankruptcy filing date, legal, advisor and other professional fees were incurred which totaled $2.4 million in the continued effort to restructure our debt terms and capital structure. Related fees of this nature that were incurred during the bankruptcy period were classified as reorganization items. Capital restructuring charges for 2004 totaled $0.8 million for legal and advisory fees relating to the 2005 restructuring of our debt and capital structure.

 

OTHER INCOME (EXPENSES)

 

Interest expense decreased by $16.7 million, or 51%, from $32.4 million to $15.7 million for the years ended December 31, 2003 and 2004, respectively. The decrease was due to the cancellation of the senior and

 

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subordinated notes in connection with our reorganization in 2003 (see Note 4 to NTELOS Inc.’s Audited Consolidated Financial Statements). In addition, as further described in Note 11 to NTELOS Inc’s Audited Consolidated Financial Statements, the change in the hedge designation of the swap agreements upon emergence from bankruptcy, also contributed to the change in interest expense.

 

NTELOS Inc. recorded $168.9 million of reorganization items in 2003 related to the filing of and emergence from Chapter 11 bankruptcy. See Note 4 to NTELOS Inc.’s Audited Consolidated Financial Statements.

 

INCOME TAXES

 

Income tax expense remained at approximately $1 million for 2003 and 2004. We have been incurring net operating losses for the last several years. The benefits of these net operating losses have been fully reserved and therefore have not been recognized in the statement of operations. Income tax expense for each year represents state minimum taxes which are based on revenues from certain telecommunication sources.

 

We had $220.5 million of available net operating losses at December 31, 2004, of which $150.7 million were subject to an annual utilization limit of $9.2 million.

 

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

 

OVERVIEW

 

In order to create meaningful year-over-year comparisons, the year ended December 31, 2003 represents the combination of predecessor NTELOS Inc. (representing results from January 1, 2003 through September 9, 2003) and predecessor reorganized NTELOS Inc. (representing results from September 10, 2003 through December 31, 2003).

 

Operating revenues increased $29.1 million, or 10%, from $278.9 million in 2002 to $308.0 million in 2003. Operating income (loss) changed by $402.5 million, from a $416.1 million loss in 2002 to income of $13.6 million in 2003.

 

Wireless PCS revenues increased $28.0 million, or 16%, RLEC revenues increased $5.6 million, or 12%, and competitive wireline revenues decreased $.3 million, or 1%. The significant decrease in operating losses is due primarily to the $402.9 million asset impairment charge recorded in 2002. Additionally, depreciation and amortization decreased $12.8 million due to a revaluation of our assets and reduction in carrying value of fixed assets of $57.8 million in connection with fresh start accounting. Additionally, accelerated depreciation related to early retirement of fixed assets decreased $8.0 million in 2003 as compared to 2002. Much of this accelerated depreciation relates to the 3G 1xRTT PCS network.

 

Income applicable to common shares for 2003 was $429.7 million as compared to a $509.4 million loss in 2002. The 2003 income applicable to common shares included $455.7 million in reorganization items, net gain pursuant to our Plan of Reorganization and the related application of fresh start accounting (see Note 4 to NTELOS, Inc.’s Audited Consolidated Financial Statements). Income applicable to common shares in 2002 included a $402.9 million asset impairment charge. Additionally interest expense and dividend requirements on predecessor NTELOS Inc. preferred stock decreased $45.9 million and $16.7 million, respectively, also reflecting the Plan of Reorganization, application of fresh start accounting and the significantly lower level of debt carried by predecessor reorganized NTELOS Inc.

 

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OPERATING REVENUES

 

     Twelve Months Ended
December 31,


  

$ Variance


  

% Variance


 

Operating Revenues


   2003

   2002

     
     (dollars in thousands)  

Wireless PCS

   $ 199,535    $ 171,495    $ 28,040    16 %

Wireline

                           

RLEC

     53,352      47,783      5,569    12 %

Competitive wireline

     50,185      50,437      (252)    (0) %
    

  

  

      

Total wireline

     103,537      98,220      5,317    5 %
    

  

  

      

Other

     4,882      9,151      (4,269)    47 %