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.



Table of Contents

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.


Table of Contents

[Inside Cover Art]


Table of Contents

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.

 

i


Table of Contents

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,

 

1


Table of Contents

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

 

2


Table of Contents

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.

 

3


Table of Contents

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.

 

4


Table of Contents

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.

 

5


Table of Contents

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  

 

6


Table of Contents
    

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.

 

7


Table of Contents

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;

 

8


Table of Contents
    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.

 

9


Table of Contents

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.

 

10


Table of Contents

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.

 

11


Table of Contents

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.

 

12


Table of Contents

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

 

13


Table of Contents

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.

 

14


Table of Contents

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.

 

15


Table of Contents

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

 

16


Table of Contents

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.

 

17


Table of Contents

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

 

18


Table of Contents

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

 

19


Table of Contents

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

 

20


Table of Contents

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

 

21


Table of Contents

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

 

22


Table of Contents

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.

 

23


Table of Contents

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.

 

24


Table of Contents

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.

 

25


Table of Contents

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.

 

26


Table of Contents

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.

 

27


Table of Contents

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.

 

28


Table of Contents

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.

 

29


Table of Contents

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.

 

30


Table of Contents

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.

 

31


Table of Contents

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.

 

32


Table of Contents

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

  $     $       $       $       $       $    

 

33


Table of Contents

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

  $       $       $       $       $       $    

 

34


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.

 

35


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.

 

36


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
    

  

  

 

37


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.

 

38


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.

 

39


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 )
   


 


 


 


 


 


 


 


 


 


 


 

 

40


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  

 

41


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

 

42


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.

 

43


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-

 

44


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.

 

 

45


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;

 

46


Table of Contents
    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

 

47


Table of Contents

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

 

48


Table of Contents

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

 

49


Table of Contents
 

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

 

50


Table of Contents

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.

 

51


Table of Contents

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.

 

52


Table of Contents

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

 

53


Table of Contents

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

 

54


Table of Contents

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.

 

55


Table of Contents

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.

 

56


Table of Contents

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

 

57


Table of Contents

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.

 

58


Table of Contents

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 %
    

  

  

      

Total operating revenues

   $ 307,954    $ 278,866    $ 29,088    10 %
    

  

  

      

 

WIRELESS COMMUNICATIONS REVENUES—Wireless communications revenues increased $28.0 million, or 16%, due primarily to an increase in our NTELOS branded subscriber revenue of $25.7 million, or 20%, and an increase in equipment revenue of $3.4 million, or 36%. Subscriber revenue increased primarily due to continued growth in subscribers and a shift in the subscriber mix toward our higher value PostPay rate plans. Our PostPay ARPU is over twice that of our traditional prepaid products. The increase in equipment revenue is due to the increase in the demand for higher end phones, a higher price on the phone sold under contract, particularly with the inAdvance product and from the sale of phones without a contract where full retail price is charged.

 

In addition to subscriber growth and growth in these related revenues, wholesale revenues generated through the agreement with Horizon PCS decreased $1.0 million, or 3%, from $33.9 million in 2002 to $32.9 million in 2003 driven primarily by unrecognized revenues of approximately $7.2 million due to Horizon PCS’s bankruptcy filing in August 2003, offset by a continual increase in access minutes as Horizon PCS’s marketing focus was on the higher ARPU, minute rich plans.

 

WIRELINE COMMUNICATIONS REVENUES—Wireline communications revenues increased $5.3 million, or 5%, from $98.2 million in 2002 to $103.5 million in 2003.

 

    RLEC Revenues.    RLEC revenues, which include local service, access and toll service, directory advertising and calling feature revenues from our RLEC business increased $5.6 million, or 12%, from $47.8 million in 2002 to $53.4 million in 2003. Access lines decreased by 1,900 lines between the two comparative periods with 50,100 total lines at December 31, 2003; however, carrier access minutes increased by 33.7 million, or 12%, from 2002 to 2003 driving a $6.0 million increase in access revenues due to increased usage by wireless carriers.

 

   

Competitive Wireline Revenues.    Competitive wireline revenues decreased $0.3 million, or 0.5%, from $50.4 million in 2002 to $50.2 million in 2003. Revenues from fiber optic and other long haul transport related network usage decreased $2.2 million, or 33%, from $6.7 million in 2002 to $4.5 million in 2003. This was primarily due to reductions in network rates and usage in 2002. During 2003, we added 5,000 access lines, an 11% increase, finishing the year with 48,800 access lines. In addition to the $1.2 million revenue growth generated from traditional CLEC local service, revenues from private line for business accounts increased $0.7 million, or 18%, from $4.1 million in 2002 to $4.9 million in 2003. Reciprocal compensation revenues (revenues earned for terminating calls from other RLECs or CLECs) and switched access revenues (revenue earned for originating or terminating calls from inter-exchange carriers) decreased $0.2 million to $6.9 million for 2003. The decline in reciprocal compensation rates and the related revenue decline that we have experienced continued throughout 2003. As part of our previously announced expense reduction initiatives, operations were ceased in certain dial-up internet markets and rates were increased in others. Additionally, customer migration to DSL or other high speed

 

59


Table of Contents
 

products contributed to this decline. All of these factors have resulted in a loss of 9,551 dial-up customers and a $1.5 million revenue decline. At the same time, DSL customers grew by 1,374, or 25%. DSL and other broadband revenues increased $1.2 million in 2003 compared to 2002. The DSL and other broadband internet products’ current penetrable market 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 OPERATING REVENUES—Other operating revenues declined $4.3 million, or 47%, from 2002 to 2003, from $9.2 million to $4.9 million due to a lease buy-out revenue recognition of approximately $1.1 million in 2002 related to the lease of a non-core company owned building and the loss of that lease revenue, approximately $2.0 million in 2003, sale of a non-core subsidiary in fourth quarter 2002 and the sale of the wireline cable operations in fourth quarter 2003.

 

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,


   

$ Variance


   

% Variance


 

Operating Expenses


   2003

   2002

     
     (dollars in thousands)  
                               

Wireless PCS

   $ 166,158    $ 156,656     $ 9,502     6  %

Wireline

                             

RLEC

     16,600      15,174       1,426     9  %

Competitive wireline

     28,666      32,734       (4,068 )   (12 )%
    

  


 


     

Total wireline

     45,266      47,908       (2,642 )   (6 )%
    

  


 


     

Other

     9,253      8,772       481     (5 )%
    

  


 


     

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

     220,677      213,336       7,341     3  %

Depreciation and amortization

     70,084      82,924       (12,840 )   15  %

Asset impairment charges

     545      402,880       (402,335 )   99  %

Accretion of asset retirement obligation

     662            662     NM  

Gain on sale of assets

          (8,472 )     8,472     NM  

Capital and operational restructuring charges

     2,427      4,285       (1,858 )   (43 )%
    

  


 


     

Total operating expenses

   $ 294,395    $ 694,953     $ (400,558 )   (58 )%
    

  


 


     

 

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 decreased $400.6 million in 2003 compared to 2002. Of this decrease, $402.9 million is due to the asset impairment charges recorded in 2002 in the wireless PCS and Competitive Wireline segments and in the wireless cable business of $367.0 million, $20.9 million and $15.0 million, respectively. Additionally, depreciation and amortization decreased by $12.8 million due primarily to the asset write-downs taken in 2002 and 2003. Operating expenses, excluding depreciation and amortization, asset impairment charges, accretion of asset retirement obligations, gain on sale of assets and operational and capital restructuring charges increased $7.3 million, or 3%, from $213.3 million for 2002 to $220.7 million for 2003. Increases in these costs in the wireless PCS segment were primarily driven by customer growth. Total wireline operating expenses, excluding depreciation and amortization, asset impairment

 

60


Table of Contents

charges, accretion of asset retirement obligations, gain of sale of assets and operational and capital restructuring charges, decreased $2.6 million primarily due to decreases in network transport and access related expenses due to the significant impact of network efficiency and grooming improvements coupled with favorable settlements and a $0.6 million decrease in operating expense related to the previously disputed and reserved access charges. Additionally, headcount reductions in competitive wireline were made based on the continuing decline of the dial-up business coupled with efficiency improvements in back office administration.

 

COST OF WIRELESS SALES—Cost of wireless sales decreased $2.0 million, or 4%, from $48.9 million in 2002 to $46.9 million in 2003. This decrease is driven by the change in the classification of equipment expense related to customer retention in 2003 as compared to 2002. In 2002, all equipment expenses were classified as cost of wireless sales. However, in order to better conform to industry practice, we charged customer retention related equipment expenses in customer operations in 2003. This retention expense was $8.7 million in 2003. In 2002, these costs were not separately identified. Other wireless cost of sales increased $2.2 million driven by increases in network access, long distance toll and costs of feature sales. Including the effect of the customer retention related reclassification in 2003 out of cost of wireless sales noted above, equipment cost of sales decreased $4.2 million in 2003 as compared to 2002 due primarily to significantly lower retention cost in 2002.

 

MAINTENANCE AND SUPPORT EXPENSES—Maintenance and support expenses decreased $3.6 million, or 6%, from $64.4 million in 2002 to $60.8 million in 2003. This decrease is due to significant network grooming and technological efficiency improvement as well as favorable resolutions to previously reserved access charge disputes noted above and the change in classification of certain regulatory fees from maintenance and support expenses in 2002 to corporate operations expenses in 2003, offset by increases from variable expenses related to customer and network access minute growth.

 

DEPRECIATION AND AMORTIZATION EXPENSES—Depreciation and amortization expenses decreased $12.8 million, or 15%, from $82.9 million in 2002 to $70.1 million in 2003. Of the $402.9 million asset impairment charge recorded in 2002, $29.5 million related to depreciable and amortizable assets. Additionally, through our application of fresh start accounting in connection with our September 9, 2003 emergence from bankruptcy (See Notes 1 and 2 to our Audited Consolidated Financial Statements), we fair valued fixed assets and recorded an additional $57.8 million reduction in the carrying value of fixed assets. Based on these factors offset by the effect of the $58.5 million of asset additions, normal depreciation decreased $3.5 million, or 6%. In addition to this, accelerated depreciation recorded for the planned early retirement of specifically identified assets decreased $8.0 million from 2002 to 2003. We reported accelerated depreciation of $15.0 million for the twelve months ended December 31, 2002 on wireless digital PCS equipment replaced during 2002 or which are scheduled to be replaced in the first half of 2003. In 2003, we recorded the remaining accelerated depreciation on the PCS equipment and on assets in the Portsmouth customer care center which was closed and traffic routed into the other two customer care centers.

 

On January 1, 2002, we adopted 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 (See Note 7 to NTELOS Inc.’s Audited Consolidated Financial Statements). 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 and competitive wireline segments. Amortization of these intangibles from September 10, 2003 through December 31, 2003 was $1.3 million.

 

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. Additionally, we performed impairment testing on other long term assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” during the fourth quarter based on the presence of impairment indicators. In September 2002, we retained a financial advisor to assist us in exploring a variety of restructuring alternatives. Thereafter continued competition in the wireless telecommunications sector

 

61


Table of Contents

resulted in a modification to our long-term business plan, including a reduction in wireless subscriber growth, a decrease in average revenue per wireless subscriber, a slower improvement in subscriber churn and slower growth in wholesale revenues. In addition, capital and lending prospects for telecommunication companies continued to deteriorate. These factors negatively impacted us and the industry sector’s financial projections and market valuations. Accordingly, we recognized impairment on our wireless PCS licenses, goodwill and other intangible assets totaling $350.3 million. Additionally, certain wireless PCS property, plant and equipment was required to be written down to fair value which resulted in a $16.7 million impairment charge. In addition to the impairment recognized in the wireless PCS segment, the network segment goodwill was determined to be impaired resulting in a $20.9 million impairment charge. Finally, licenses, goodwill and property, plant and equipment associated with the wireless cable business were also determined to be impaired resulting in a $15.0 million impairment charge.

 

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 increased $6.1 million, or 7%, from $82.1 million in 2002 to $88.3 million in 2003. As discussed above, $8.7 million of this relates to the classification of wireless customer retention costs in customer operations in 2003 as opposed to cost of wireless sales in the prior year. Other increases were related to wireless PCS customer growth and $0.7 million of transition related costs related to the relocation of customer care personnel from the Portsmouth, Virginia building, sold in May 2003, to other company owned or leased facilities. Offsetting these increases was a decrease in bad debt expense of $6.5 million, from $16.1 million in 2002 to $9.7 million in 2003. Bad debts from the wireless PCS segment were $6.9 million higher in 2002 than 2003 driven by an increased emphasis on higher credit standards and the significant increase in customer churn and receivables aging in 2002, primarily in the VA East PCS market.

 

CORPORATE OPERATIONS EXPENSES—Corporate operations expenses increased $6.7 million, or 37%, from $17.9 million in 2002 to $24.6 million in 2003. This increase is primarily due to a $2.3 million increase in the cost of directors and officers insurance in 2003 during the period of bankruptcy, an increase in performance based incentive compensation in 2003 over 2002 and the classification change mentioned above for certain regulatory fees from maintenance and support to corporate operations expense.

 

CAPITAL AND OPERATIONAL RESTRUCTURING CHARGES—Capital and operational restructuring charges were recorded in the first and second quarters of 2002 based on an approved plan to reduce our workforce by approximately 15% through early retirement incentives, the elimination of certain vacant and budgeted positions and the elimination of some jobs. The plan also involved exiting certain facilities in connection with the workforce reduction and centralizing certain functions. Total costs related to these activities were $2.7 million and were reported during the first and second quarters of 2002. An additional $1.6 million was reported during the fourth quarter of 2002 which was primarily related to capital restructuring. We incurred significant legal and advisory fees in the third and fourth quarter of 2002 in an effort to restructure our debt terms and capital structure. These efforts were unsuccessful and the related costs were expensed accordingly.

 

During the period January 1, 2003 through the March 3, 2003, bankruptcy filing date, additional 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.

 

OTHER INCOME (EXPENSES)

 

Interest expense decreased $46.0 million, or 59%, from $78.4 million in 2002 to $32.4 million in 2003. This decrease is due to the cancellation of the senior and subordinated notes in the Chapter 11 reorganization (See Note 4 to NTELOS Inc.’s Audited Consolidated Financial Statements).

 

62


Table of Contents

Other income (expense) increased by $1.8 million, from a loss of $1.5 million in 2002 to a gain of $0.3 million in 2003. The 2002 loss primarily related to a $1.1 million permanent impairment recorded for our investment in WorldCom, Inc.

 

INCOME TAXES

 

Income tax expense (benefit) decreased $7.5 million, or 115%, from a $6.5 million benefit in 2002 to $1.0 million expense in 2003. In 2002, we had significant income tax net operating losses which were fully reserved. We carried a net operating loss carry forward in 2003 and the income tax expense related to 2003 taxable income is offset by reductions to the tax asset reserves in the same amount. Therefore, the only income tax expense reflected on the 2003 statement of operations relate to state minimum taxes. Minimum tax in 2002 was $1.0 million. The remaining $7.5 million tax benefit in 2002 related to the deferred tax asset for the swap agreement which wasn’t reserved.

 

Our net operating loss at December 31, 2003 was approximately $161 million.

 

Quarterly Results

 

The following table sets forth selected unaudited consolidated quarterly statement of operations data for the four quarters in 2004 and the first two quarters in 2005. To facilitate comparisons with results for other quarters, we have combined the results of NTELOS Inc. from April 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. This unaudited information has been prepared on substantially the same basis as our consolidated financial statements appearing elsewhere in this prospectus and includes all adjustments (consisting of normal recurring adjustments) we believe necessary for a fair statement of the unaudited consolidated quarterly data. The unaudited consolidated quarterly statement of operations data should be read together with the consolidated financial statements and related notes thereto included elsewhere in this prospectus. The results for any quarter are not necessarily indicative of results for any future period, and you should not rely on them as such.

 

63


Table of Contents

NTELOS Inc.

 

Summary Operating Results

 

    Three Months Ended

 
    March 31,
2004


  June 30,
2004


  September 30,
2004


  December 31,
2004


  March 31,
2005


    June 30,
2005


 
    Unaudited  
    (in thousands)  

Operating revenues

                                       

Wireless PCS operations

  $ 53,986   $ 58,755   $ 61,102   $ 60,839   $ 65,643     $ 69,425  

Wireline operations

                                       

RLEC

    13,705     13,791     14,780     14,004     14,361       13,668  

Competitive wireline

    12,520     12,293     12,212     11,946     12,289       13,024  
   

 

 

 

 


 


Wireline total

    26,225     26,084     26,992     25,950     26,650       26,692  
   

 

 

 

 


 


Other operations

    625     490     325     329     277       190  
   

 

 

 

 


 


Total operating revenues

  $ 80,836   $ 85,329   $ 88,419   $ 87,118   $ 92,570     $ 96,307  
   

 

 

 

 


 


Operating expenses

                                       

Wireless PCS operations

  $ 40,558   $ 43,047   $ 42,017   $ 43,176   $ 45,251     $ 45,993  

Wireline operations

                                       

RLEC

    4,049     4,134     4,140     3,708     3,426       3,426  

Competitive wireline

    7,331     7,559     8,224     7,306     8,073       8,177  
   

 

 

 

 


 


Wireline total

    11,380     11,693     12,364     11,014     11,499       11,603  
   

 

 

 

 


 


Other operations

    1,341     1,585     1,031     1,279     1,019       1,244  
   

 

 

 

 


 


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

    53,279     56,325     55,412     55,469     57,769       58,840  

Depreciation and amortization

    15,525     15,902     16,297     17,451     17,504       21,007  

Accretion of asset retirement obligation

    156     176     202     146     189       161  

Gain on sale of assets

                    (5,246 )     (3,496 )

Capital and operational restructuring charges

                798     5,199       10,325  
   

 

 

 

 


 


Total operating expenses

    68,960     72,403     71,911     73,864     75,415       86,837  
   

 

 

 

 


 


Operating income

  $ 11,876   $ 12,926   $ 16,508   $ 13,254   $ 17,155     $ 9,470  
   

 

 

 

 


 


 

64


Table of Contents

The following table sets forth selected unaudited consolidated quarterly statement of operations data as a percentage of total revenues for the four quarters in 2004 and the first two quarters in 2005.

 

    Three Months Ended

 
    March 31,
2004


    June 30,
2004


    September 30,
2004


    December 31,
2004


    March 31,
2005


    June 30,
2005


 
    Unaudited  

Operating revenues

                                   

Wireless PCS operations

  67 %   69 %   69 %   70 %   71 %   72 %

Wireline operations

                                   

RLEC

  17 %   16 %   17 %   16 %   16 %   14 %

Competitive wireline

  15 %   14 %   14 %   14 %   13 %   14 %
   

 

 

 

 

 

Wireline total

  32 %   30 %   31 %   30 %   29 %   28 %
   

 

 

 

 

 

Other operations

  1 %   1 %   0 %   0 %   0 %   0 %
   

 

 

 

 

 

Total operating revenues

  100 %   100 %   100 %   100 %   100 %   100 %
   

 

 

 

 

 

Operating expenses

                                   

Wireless PCS operations

  50 %   50 %   48 %   50 %   49 %   48 %

Wireline operations

                                   

RLEC

  5 %   5 %   5 %   4 %   3 %   4 %

Competitive wireline

  9 %   9 %   9 %   9 %   9 %   8 %
   

 

 

 

 

 

Wireline total

  14 %   14 %   14 %   13 %   12 %   12 %
   

 

 

 

 

 

Other operations

  2 %   2 %   1 %   1 %   1 %   1 %
   

 

 

 

 

 

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

  66 %   66 %   63 %   64 %   62 %   61 %

Depreciation and amortization

  19 %   19 %   18 %   20 %   19 %   22 %

Accretion of asset retirement obligation

  0 %   0 %   0 %   0 %   0 %   0 %

Gain on sale of assets

  0 %   0 %   0 %   0 %   (6 %)   (4 %)

Capital and operational restructuring charges

  0 %   0 %   0 %   1 %   6 %   11 %
   

 

 

 

 

 

Total operating expenses

  85 %   85 %   81 %   85 %   81 %   90 %
   

 

 

 

 

 

Operating income

  15 %   15 %   19 %   15 %   19 %   10 %
   

 

 

 

 

 

 

Liquidity and Capital Resources

 

During the year ended December 31, 2004, and the six months ended June 30, 2005, we funded our working capital requirements and capital expenditures from net cash provided from operating activities and borrowings under the former NTELOS Inc. credit facilities or the NTELOS Inc. senior secured credit facilities, as the case may be. We believe our cash from operations will continue to grow in the future as we continue to execute on our business strategy and increase our subscriber base, particularly in our wireless segment. In addition, the predictability of our cash flow is enhanced by our long-term Strategic Network Alliance with Sprint. See “Business.”

 

As of June 30, 2005, we had approximately $681 million in aggregate long term liabilities consisting of $620 million in outstanding long-term debt and approximately $61 million in other long-term liabilities. On February 24, 2005, NTELOS Inc. borrowed approximately $400 million under a senior secured first lien bank facility and $225 million under a senior secured second lien term loan facility. In addition, we have the ability to borrow under a $35 million revolving credit facility, none of which has been borrowed to date. The proceeds of

 

65


Table of Contents

the NTELOS Inc. senior secured credit facilities were used to payoff the existing debt of NTELOS Inc., finance the tender offer of NTELOS Inc. and to pay fees and expenses incurred in connection with such transactions. The revolving credit facility is available for our working capital requirements and other general corporate purposes. Our blended interest rate on our long-term debt as of June 30, 2005 is 6.8%. The aggregate maturities of our long-term debt, excluding capital lease obligations, based on the contractual terms of the instruments are $4.0 million per year from 2005 through 2009. See “Description Of Certain Debt—NTELOS Inc. Senior Secured Credit Facilities.”

 

We believe that as of June 30, 2005 and currently, we are in compliance with all of our debt covenants. Noncompliance with any one or more of the debt covenants may have an adverse effect on our financial condition or liquidity in the event such noncompliance cannot be cured or should we be unable to obtain a waiver from the lenders.

 

In addition to the long-term debt discussed above, we have assumed debt for certain equipment capital leases entered into in 2000 by NTELOS Inc., all of which mature in 2005. At June 30, 2005, the net present value of these future minimum lease payments was $0.4 million. We also enter into capital leases on vehicles used in our operations with lease terms of 4 to 5 years. At June 30, 2005, the net present value of these future minimum lease payments was $1.2 million.

 

In connection with the acquisition of NTELOS Inc., we recognized approximately $28.3 million in liabilities, including legal, financial, and consulting costs, additional costs associated with accelerated payout of certain retirement obligations and retention obligations, $1.8 million of which remained unpaid at June 30, 2005.

 

During the year ended December 31, 2004, net cash provided by operating activities was approximately $109.6 million. The primary sources of our net cash provided by operating activities included: approximately $38.3 million of net income, changes in operating assets and liabilities totaling approximately $6.6 million and depreciation and amortization of approximately $65.2 million. The principal changes in operating assets and liabilities were as follows: accounts receivable decreased by $4.4 million, or 13.0%, due primarily to improved payment terms under the Strategic Network Alliance and the timing of such payments between the periods; inventories and supplies decreased $6.0 million due to efforts to reduce handset inventory levels in recognition of improvement in handset availability and improved inventory flow coupled with a significantly higher inventory level and related accounts payable at December 31, 2003 from a $5.6 million handset shipment received at year end 2003; an income tax receivable recognized in 2004 as a result of a settlement of certain prior year tax examinations, the proceeds of which will be used as payment against the convertible note payable to the principal owners that was entered into as part of the merger agreement (see Note 7 of our Audited Consolidated Financial Statements); other current assets increased by $1.0 million associated with continued growth in operations; accounts payable decreased by $5.7 million primarily due to the payable associated with the aforementioned year end 2003 inventory shipment; advance billings and customer deposits increased by $1.3 million associated with continued NTELOS branded subscriber growth and the increase in NTELOS branded service offerings that require a deposit; accrued interest decreased by $2.4 million due to the existence at December 31, 2003 of an interest accrual due semi-annually on the $75 million of convertible notes that were converted to equity in 2004; deferred revenues declined by $1.5 million from the amortization of previously deferred activation costs (see revenue accounting policy, Note 4 to our Audited Consolidated Financial Statements); and accrued payroll and other current liabilities increased by $1.7 million due to higher bonus accruals associated with exceeding financial performance objectives and higher accruals, including higher property tax accruals, consistent with continued growth in operations.

 

During the six months ended June 30, 2005, net cash provided by operating activities was approximately $27.8 million. The primary sources of our net cash provided by operating activities included: approximately $(1.2) million of net loss and depreciation and amortization of approximately $38.5 million offset by net negative changes in operating assets and liabilities totaling approximately $13.4 million. In addition, $15.5 million of capital and operational restructuring charges were incurred during the period (see Note 3 to NTELOS Inc.’s

 

66


Table of Contents

Audited Consolidated Financial Statements). The principal changes in operating assets and liabilities from December 31, 2004 to June 30, 2005 were as follows: accounts receivable increased by $0.5 million, or 2%, due primarily to a 14% increase in revenues for the six months ended June 30, 2005 over the same period in 2004 offset by continued improvements in collections; inventories and supplies increased $0.8 million due to timing of PCS handset shipments; other current assets increased $0.6 million due to timing of certain prepaid expense payments; accounts payable decreased by $3.6 million due primarily to timing of capital expenditures and obligations associated with higher inventory levels; advance billings and customer deposits increased by $0.6 million associated with continued NTELOS branded subscriber growth and the increase in NTELOS branded service offerings that require a deposit; deferred revenues declined by $1.5 million from the amortization of previously deferred activation costs (see revenue accounting policy, Note 4 to our Audited Consolidated Financial Statements); and accrued payroll and other current liabilities remained constant due to the timing of annual bonus payments offset by the aforementioned $1.7 million acceleration of certain retirement and retention obligations as a result of the May 2, 2005 merger transaction. Retirement benefit payments in the first six months of 2005 were approximately $9.1 million due primarily to accumulated benefit obligation payments under our non-qualified pension plan made in connection with the acquisition of NTELOS Inc. and increases in contributions to the pension plan as a result of an increase in the accumulated benefit obligation due to the decline in the applicable discount rate and lower than expected return on assets in the plan that did not keep pace with the growth in the pension plan obligations. In 2006, we expect to make approximately $6.4 million in additional retirement benefit payments to our pension plan as a result of these conditions.

 

Our net cash flows used in investing activities for 2004 were approximately $59.6 million and included the following:

 

    $60.1 million for the purchase of property and equipment comprised of (i) approximately $35.8 million related to purchases of equipment and infrastructure to support our growing subscriber base and increase wholesale usage, and maintenance and expansion of our network to support such growth and subscriber base, (ii) approximately $18.6 million to support the growth of the wireline equipment and infrastructure to support the growth in competitive wireline CLEC and broadband data customers and usage and maintenance of the plant and network infrastructure, and (iii) approximately $5.7 million related to information technology and corporate expenditures to enhance and maintain the back office support systems in order to support the continued growth and introduction of new service offerings and applications; offset by

 

    $0.5 million proceeds from miscellaneous asset dispositions (investment sales).

 

Our cash flows used in investing activities for the six months ended June 30, 2005, were approximately $28.7 million and include the following:

 

    $32.3 million for the purchase of property and equipment comprised of (i) approximately $18.6 million related to purchases of equipment and infrastructure to support our growing subscriber base and increase wholesale usage, and maintenance and expansion of our network to support such growth and subscriber base, (ii) approximately $9.9 million to support the growth of the wireline equipment and infrastructure to support the growth in competitive wireline CLEC and broadband data customers and usage and maintenance of the plant and network infrastructure, and (iii) approximately $3.8 million related to information technology and corporate expenditures to enhance and maintain the back office support systems in order to support the continued growth and introduction of new service offerings and applications; offset by

 

    $28.6 million proceeds from the following (i) the sale of excess PCS spectrum in Pennsylvania for $15.5 million, (ii) the sale of MMDS spectrum in Richmond, Virginia for $4.8 million, (iii) the redemption of RTFC subordinated capital certificates of $7.2 million in connection with the payoff of the senior credit facility on February 24, 2005; and (iv) $1.2 million relating to the sale of a building in Winchester, Virginia; and

 

67


Table of Contents
    $25.0 million investment in restricted cash that we subsequently disbursed to fund part of the purchase of the remaining equity securities of NTELOS Inc. in connection with the merger. See Note 2 to NTELOS Inc.’s Audited Consolidated Financial Statements.

 

We expect our aggregate capital expenditures for 2005 to be approximately $91 million. We expect that our capital expenditures associated with our wireless business in 2005 will be approximately $59 million, of which approximately $17 million is for planned wireless network coverage expansion, the expansion of our 3G 1xRTT capabilities and enhancements within the coverage area for improved in-building penetration, which we consider discretionary expansion projects. The remaining $42 million in wireless capital expenditures is targeted to ensure that we have the network capacity to support our projected growth in our NTELOS branded subscribers, increased usage by our existing subscribers and growth in voice and data usage under the Strategic Network Alliance. We expect that our capital expenditures associated with our wireline business in 2005 will be approximately $24 million, of which approximately $5 million is for fiber network expansion and enhancements utilized by our RLEC and competitive wireline operations, which we consider non-recurring capital cost. The remaining $19 million is targeted to provide regular maintenance and support for our regulated RLEC operations and to support the increased minutes of usage, maintenance and growth we project for our competitive wireline voice and data offerings. In addition, we expect to invest approximately $8 million to enhance and maintain our back office support systems to support the continued growth and introduction of new service offerings and applications.

 

We currently are budgeting capital expenditures for 2006 of approximately $85 million. We expect that our capital expenditures associated with our wireless business in 2006 will be approximately $61 million, of which approximately $28 million is for the completion of network wide 3G 1xRTT upgrade, continued incremental network coverage expansion and enhancements within our coverage area for improved in-building penetration, which taken together with the discretionary wireless capital expenditures targeted in 2005 will significantly strengthen our existing competitive position within our markets and allow us to provide 3G 1xRTT CDMA services across 100% of our cell sites. The remaining $33 million in wireless capital expenditures is targeted to maintain our existing networks and provide additional capacity to support our projected growth in our NTELOS branded subscribers and increased usage by existing subscribers and growth in voice and data usage under the Strategic Network Alliance. We expect that our capital expenditures associated with our wireline business in 2006 will be approximately $18 million, which is targeted to provide regular maintenance and support for our RLEC operations and to support the projected growth of our competitive wireline voice and data offerings. In addition, we expect to invest approximately $6 million in enhancements and upgrades to our information technology and corporate expenditures to enhance and maintain the back office support systems to support the continued growth and introduction of new service offerings and applications.

 

Net cash used in financing activities for 2004 aggregated $64.6 million, which primarily represents the following:

 

    $45.8 million in scheduled and required payments and an optional prepayment against several long term debt instruments that were subsequently refinanced in February 2005 in connection with the restructuring;

 

    $10.2 million in payments under our former lines of credit and certain other debt instruments that were subsequently refinanced in February 2005 in connection with the restructuring; and

 

    $8.6 million in payments related to interest paid on certain interest rate swap obligations that were subsequently refinanced in February 2005 in connection with the restructuring.

 

Net cash used in financing activities for the six months ended June 30, 2005, aggregated $13.3 million, which primarily represents the following:

 

    $625.0 million in proceeds from the NTELOS Inc. senior secured credit facilities entered into in February 2005;

 

68


Table of Contents
    $171.3 million in payments related to the pay-off in February 2005 of the former NTELOS Inc. credit facilities that were replaced by the NTELOS Inc. senior secured credit facilities;

 

    $440.0 million in payments related to our self-tender offer for common stock, warrants and options in connection with the restructuring;

 

    $7.3 million in payments on the NTELOS Inc. former credit facilities in connection with certain asset sales and scheduled repayments that were subsequently refinanced in February 2005;

 

    $2.0 million in scheduled repayments on the NTELOS Inc. first lien senior secured credit facility entered into in February 2005;

 

    $4.7 million in payments related to interest paid on certain interest rate swap obligations that were subsequently refinanced in February 2005 in connection with the restructuring; and

 

    $12.8 million in payments related to debt issuance costs related to the NTELOS Inc. senior secured credit facilities entered into in February 2005.

 

The above cash flows are for NTELOS Inc. for the periods indicated. In addition, for the period ended June 30, 2005, we had financing proceeds of $120.0 million from the sale of common stock and $5.8 million from the issuance of convertible notes and investing disbursements of $125.7 million for the purchase of NTELOS Inc.

 

As of December 31, 2004 and June 30, 2005, we had approximately $34.2 million and $20.0 million, respectively, in cash and cash equivalents and working capital (current assets minus current liabilities) of approximately $10.9 million and $7.9 million, respectively. We believe that our existing borrowing availability, our current cash balances and our cash flow from operations will be sufficient to satisfy our working capital and capital expenditure requirements for the foreseeable future.

 

Contractual Obligations and Commercial Commitments

 

We have contractual obligations and commercial commitments that may affect our financial condition. The following table summarizes our significant contractual obligations and commercial commitments as of December 31, 2004, and with respect to our long-term debt obligations the data provided is on a pro forma basis giving effect to our acquisition of NTELOS Inc. in 2005 and the refinancing of our credit facilities:

 

     Payments Due by Period

     Total

    Less than
1 year


    1-3 years

   4-5 years

  

After

5 years


     (in millions)

Long-term debt obligations

   $ 630.8 (1)   $ 9.8 (2)   $ 12.0    $ 101.3    $ 507.7

Capital lease obligations

     1.7       0.9       0.8          

Operating lease obligations

     88.6       17.6       41.3      17.4      12.3

Purchase obligations

     26.7       15.0       11.7          

Other long-term liabilities reflected on NTELOS Holdings Balance sheet under GAAP(3)

                          
    


 


 

  

  

Total

   $ 747.8     $ 43.3     $ 65.8    $ 118.7    $ 520.0
    


 


 

  

  


(1) Includes a $400 million, 6.5 year, first-lien term loan facility and a $225 million, 7 year, second-lien term loan facility.
(2) Includes an approximately $5.8 million payment for the repurchase of certain 10% notes with the proceeds from an anticipated tax refund to be received by us.
(3) Excludes certain accumulated benefit obligation payments under our non-qualified pension plan made in connection with the acquisition of NTELOS Inc. See Note 13 to our Audited Consolidated Financial Statements.

 

69


Table of Contents

Off Balance Sheet Arrangements

 

We do not have any off balance sheet arrangements or financing activities with special purpose entities.

 

Qualitative and Quantitative Disclosures About Market Risk

 

We may choose to have interest accrue on loans outstanding under our $435 million senior secured first lien bank facility consisting of a $400 million term loan B facility, which we refer to as the “Term Loan B Facility”, and a $35 million revolving credit facility, which we refer to as the Revolving Credit Facility, and our $225 million senior secured second lien term loan facility, which we refer to as the Second Lien Facility, based on (a) the higher of ½ of 1% in excess of the federal funds rate and the rate of interest published by the Wall Street Journal as the prime rate, which we refer to as Base Rate Loans, or (b) the Eurodollar rate (adjusted for maximum reserves), which we refer to as Eurodollar Loans, in each case plus an applicable margin. With respect to the Revolving Credit Facility, the applicable margin for the Revolving Credit Facility is determined in accordance with a pricing grid tied to our total leverage ratio. As for the Term Loan B Facility, the applicable margin was initially set at 1.50% per annum in respect of Base Rate Loans and 2.50% per annum in respect of Eurodollar Loans. If our total leverage ratio is lower than 4.0x, the applicable margin is 1.25% per annum in respect of Base Rate Loans and 2.25% per annum in respect of Eurodollar Loans. The applicable margin for the Second Lien Facility is 4.00% per annum in respect of Base Rate Loans and 5.00% per annum in respect of Eurodollar Loans. As of June 30, 2005, $398.0 million was outstanding under the First Lien Facility and $225.0 million was outstanding under the Second Lien Facility. We have other fixed rate, long-term debt totaling $1.6 million as of June 30, 2005.

 

We are exposed to market risks primarily related to interest rates. To manage this exposure and to comply with the terms and conditions of the First Lien Facility, we entered into a three year interest rate swap agreement effective as of February 24, 2005 with a notional amount of $312.5 million. The purpose of this swap agreement is to minimize our exposure to interest rate movements by effectively converting a portion of our long-term debt from variable rate debt to fixed rate debt. Our fixed rate payments due under the swap agreement are calculated at a per annum rate of 4.1066%. Our swap counterparty’s variable rate payments are based on three month U.S. Dollar LIBOR, which was 2.64% for the initial calculation period. The notional amount of the swap agreement does not represent an amount exchanged by the swap counterparty and us and thus is not a measure of our debt obligations. The notional amount is only a measure of our exposure to make fixed rate payments under the swap agreement. Interest rate differentials paid or received under the swap agreement are recognized for GAAP purposes over the three month maturity periods as adjustments to our interest expense. The parent corporation of our counterparty, which is a well known financial institution, has guaranteed the counterparty’s obligations to us under the swap agreement. Our obligations under the swap agreement are secured by substantially all of our real and personal property pursuant to the terms of the First Lien Facility. We have interest rate risk on borrowings under the First Lien Facility and the Second Lien Facility in excess of the $312.5 million covered by the swap agreement. We are exposed to loss if one or more of the counterparties default.

 

At June 30, 2005, we did not have any exposure to credit loss on interest rate swaps. At June 30, 2005, the swap agreement had a fair value of $1.2 million below its face value. At June 30, 2005, our senior bank debt totaled $623.0 million, or $310.5 million over the swap agreement. The effects of a one percentage point change in LIBOR rates would change the fair value of the swap agreement by $7.0 million for a one percentage point increase in the rate (to $5.8 million above face value) and $7.2 million for a one percentage point decrease in the rate (to $8.4 million below face value).

 

At June 30, 2005, our financial assets included cash and cash equivalents of $20.0 million. We believe there are minimal credit risks to us in connection with these financial assets because the counterparties are prominent financial institutions. Further, with respect to the cash and cash equivalents, there are no material market risks because such assets are fixed maturity, high quality instruments. In addition at June 30, 2005, we had securities and investments of $2.6 million which primarily consisted of $2.5 million of Class C stock holdings in the Rural Telephone Bank, which we refer to as RTB, (see Note 10 to our Audited Consolidated Financial Statements).

 

70


Table of Contents

The following sensitivity analysis indicates the impact at June 30, 2005, on the fair value of certain financial instruments, which are potentially subject to material market risks, assuming a ten percent increase and a ten percent decrease in the levels of our interest rates or, in the case of the swap agreement, a one percent increase and a one percent decrease in the interest rates:

 

At June 30, 2005


   Book Value

    Fair Value

    Fair Value
assuming noted
decrease in market
pricing


    Fair Value
assuming noted
increase in market
pricing


Marketable long-term debt

   $ —       $ —       $ —       $ —  

Non-marketable long-term debt

     624.6       624.6       648.3       601.9

Interest rate swaps

     (1.2 )     (1.2 )     (8.4 )     5.8

 

Critical Accounting Policies

 

The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend our business activities. To aid in that understanding, management has identified our critical accounting policies for discussion herein. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

 

Principles of Consolidation

 

We purchased 24.9% of NTELOS Inc. and its subsidiaries on February 24, 2005 and purchased the remaining 75.1% on May 2, 2005. We accounted for the results of operations for NTELOS Inc. from February 24 through May 1, 2005 using the equity method of accounting. For the period commencing on the May 2, 2005 merger date, we consolidated the financial statements of NTELOS Inc. The consolidated financial statements include the accounts of us, NTELOS Inc. and all of its wholly-owned subsidiaries and those limited liability corporations where NTELOS Inc., as managing member, exercises control. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition Policies

 

We recognize revenue when services are rendered or when products are delivered, installed and functional, as applicable. Certain of our services require payment in advance of service performance. In such cases, we record a service liability at the time of billing and subsequently recognizes revenue over the service period.

 

With respect to NTELOS Inc.’s wireline and wireless businesses, we earn revenue by providing access to and usage of its networks. Local service and airtime revenues are recognized as services are provided. Wholesale revenues are earned by providing switched access and other switched and dedicated services, including wireless roamer management, to other carriers. Revenues for equipment sales are recognized at the point of sale. PCS handset equipment sold with service contracts are sold at prices below cost, based on the terms of service contract. We recognize the entire cost of the handsets at the point of sale, rather than deferring such costs over the service contract period.

 

Nonrefundable PCS activation fees and the portion of the activation costs directly related to acquiring new customers (primarily activation costs and sales commissions) are deferred and recognized ratably over the estimated life of the customer relationship ranging from 12 to 24 months in accordance with the SEC Staff Accounting Bulletin 101, as amended by SEC Staff Accounting Bulletin 104, collectively referred to as SAB No. 101. Similarly, in the wireline RLEC and competitive wireline segments, the Company charges nonrefundable activation fees for certain new service activations. Such activation fees and costs are deferred and recognized ratably over 5 years. Direct activation costs exceed activation revenues in all cases. As is allowed within the provisions of SAB No. 101, we deferred these costs up to but not in excess of the related deferred revenue.

 

71


Table of Contents

Effective July 1, 2003, we adopted Emerging Issues Task Force No. 00-21, “Accounting for Revenue Arrangements with Multiple Element Deliverables,” or EITF No. 00-21. The EITF guidance addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a bundled transaction, and the consideration will be measured and allocated to the separate units based on their relative fair values. The adoption of EITF No. 00-21 has required evaluation of each arrangement entered into by us for each type of sales transaction and each sales channel. The adoption of EITF No. 00-21 has resulted in substantially all of the activation fee revenue generated from our owned retail stores and associated direct costs being recognized at the time the related wireless handset is sold and is classified as equipment revenue and cost of equipment, respectively. Upon adoption of EITF No. 00-21, previously deferred revenues and costs were amortized over the remaining estimated life of the subscriber relationship, not to exceed 24 months. Revenue and costs for activations at third-party retail locations and related to our segments other than wireless will continue to be deferred and amortized over the estimated lives as prescribed by SAB No. 104. The balance of our deferred activation fees totaled $1.0 million at the May 2, 2005 merger date. Through purchase accounting, all deferred activation fees were adjusted to zero at that date.

 

Accounts Receivable

 

We sell our services to residential and commercial end-users and to other communication carriers primarily in Virginia and West Virginia. The carrying amount of our trade accounts receivable approximates fair value. We have credit and collection policies to ensure collection of trade receivables and require deposits on certain of our sales. We maintain an allowance for doubtful accounts, which management believes adequately covers all anticipated losses with respect to trade receivables. Actual credit losses could differ from such estimates.

 

Inventories and Supplies

 

Our inventories and supplies consist primarily of items held for resale such as PCS handsets, pagers, wireline business phones and accessories. We value our inventory at the lower of cost or market. Inventory cost is computed on a currently adjusted standard cost basis (which approximates actual cost on a first-in, first-out basis). Market value is determined by reviewing current replacement cost, marketability and obsolescence.

 

Long-lived Asset Recovery

 

Long-lived assets include property and equipment, radio spectrum licenses, long-term deferred charges and intangible assets to be held and used. Long-lived assets, excluding intangible assets with indefinite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144. The criteria for determining impairment for such long-lived assets to be held and used is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets.

 

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over a 50-year life and leasehold improvements, which are categorized with land and building, are depreciated over the shorter of the estimated useful lives or the remaining lease term. Network plant and equipment are depreciated over various lives from 4 to 40 years, with an average life of approximately 13 years. Furniture, fixtures and other equipment are depreciated over various lives from 5 to 18 years.

 

Because we applied purchase accounting on the May 2, 2005 merger date, property, plant and equipment and other long-lived assets were adjusted to fair market value on that date and accumulated depreciation and amortization was reset to zero.

 

72


Table of Contents

We believe that no impairment indicators exist as of June 30, 2005, which would require us to test for impairment in accordance with SFAS No. 144. In the event that there are changes in the planned use of our long- lived assets or our expected future undiscounted cash flows are reduced significantly, our assessment of our ability to recover the carrying value of these assets under SFAS No. 144 could change.

 

Goodwill and Indefinite Lived Intangibles

 

Goodwill, franchise rights and radio spectrum licenses are considered indefinite lived intangible assets. Indefinite lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired. We engaged a third-party valuation advisor to assist in determining our enterprise value at May 2, 2005 and to value these intangible assets based on a combination of established valuation techniques. We assess the recoverability of indefinite lived assets whenever adverse events or changes in circumstances indicate that impairment may have occurred and annually on October 1. At June 30, 2005, no impairment indicators existed which would trigger impairment testing prior to the scheduled annual testing date of October 1. Intangibles with a finite life are classified as other intangibles on the consolidated balance sheets.

 

Accounting For Asset Retirement Obligations

 

Statement of Financial Accounting Standard No. 143, “Accounting for Asset Retirement Obligations,” or SFAS No. 143, establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The fair value of a liability for an asset retirement obligation is to be recognized in the period in which it is incurred if a reasonable estimate can be made. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful life of the asset. We reported accretion expense related to the asset retirement obligations for the period ended June 30, 2005 of $0.1 million.

 

We enter into long-term leasing arrangements primarily for cell sites and retail store locations in our wireless segment. Additionally, in our wireline operations, we enter into various facility co-location agreements and are subject to locality ordinances. In both cases, we construct assets at these locations and, in accordance with the terms of many of these agreements, we are obligated to restore the premises to their original condition at the conclusion of the agreements, generally at the demand of the other party to these agreements. We recognized the fair value of a liability for an asset retirement obligation and capitalized that cost as part of the cost basis of the related asset, depreciating it over the useful life of the related asset.

 

Employee Benefit Plan Assumptions

 

NTELOS Inc. sponsors a non-contributory defined benefit pension plan covering all employees who meet eligibility requirements and were employed by NTELOS Inc. prior to October 1, 2003. The defined benefit pension plan was closed to NTELOS Inc. employees employed on or after October 1, 2003. Pension benefits vest after five years of service and are based on years of service and average final compensation subject to certain reductions if the employee retires before reaching age 65. NTELOS Inc.’s funding policy has been to contribute to the plan based on applicable regulatory requirements. Contributions are intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future.

 

We sponsor a contributory defined contribution plan under Internal Revenue Code Section 401(k) for substantially all employees. Our policy is to contribute 60% of each participant’s annual contribution for contributions up to 6% of each participant’s annual compensation. Company contributions to this plan vest after three years of service. The employee elects the type of investment fund from the equity, bond and annuity alternatives offered by the plan.

 

NTELOS Inc. provides certain health care and life benefits for retired employees that meet eligibility requirements. Employees hired after January 1994 are not eligible for these benefits. Our share of the estimated

 

73


Table of Contents

costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.

 

Income Taxes

 

Deferred income taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Recent Accounting Pronouncements

 

In March 2005, FASB issued Interpretation Number 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,” or FIN 47. FIN 47 clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143 and also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of the fiscal years ending after December 15, 2005. We do not anticipate that the implementation of FIN 47 will have a material impact on our consolidated financial position, results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments,” or SFAS No. 123R. SFAS No. 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. Additionally, compensation expense will be recognized over the remaining employee service period for the outstanding portion of any awards for which compensation expense had not been previously recognized or disclosed under SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123. SFAS No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB No. 25, and its related interpretations. We are required to adopt SFAS No. 123R no later than January 1, 2006. We do not anticipate that the effects of adopting SFAS No. 123R will have a material impact on our consolidated financial positions, results of operations or cash flows.

 

Inflation

 

We believe that inflation has not materially affected our operations.

 

74


Table of Contents

BUSINESS

 

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 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, 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.

 

75


Table of Contents

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 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

 

76


Table of Contents

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 goal is to continue to deliver rapid, sustainable growth in operating revenues and operating income in order to enhance long-term stockholder value. 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.

 

Wireless Business

 

Overview

 

Our wireless business operates a 100% CDMA digital PCS network in Virginia, West Virginia, and portions of Kentucky, Ohio and North Carolina covering 4.9 million POPs (8.5 million licensed POPs in 29 BTAs having an average spectrum depth of 24.3 MHz). We began acquiring PCS spectrum in western Virginia and West Virginia in June 1995 and began operations in Virginia in late 1997 and in West Virginia in late 1998. We entered eastern Virginia in July 2000 with the acquisition of the eastern Virginia assets of PrimeCo Personal Communications, L.P., or PrimeCo, following the Bell Atlantic/GTE merger. As of June 30, 2005, we served approximately 326,000 NTELOS-branded retail subscribers.

 

The footprint of our wireless business in Virginia covers Richmond, Fredericksburg, Hampton Roads/Norfolk, Roanoke, Lynchburg, Charlottesville, Staunton, Harrisonburg, Winchester, Danville and Martinsville, as well as our headquarters in Waynesboro. The footprint of our wireless business also includes Charleston, Huntington, Morgantown, Beckley and Bluefield in West Virginia, Ashland, Kentucky and the Outer Banks of North Carolina.

 

77


Table of Contents

Wireless Strategy

 

The key elements of our wireless strategy include:

 

    Pursuing diversified wireless operations:    We have implemented a diversified wireless strategy consisting of a traditional retail model coupled with our wholesale Strategic Network Alliance with Sprint Nextel. Both businesses leverage the same wireless network and back office infrastructure. Retail provides opportunities for growth through continued subscriber acquisition under the NTELOS brand name. Wholesale provides predictable and high growth revenue and cash flow streams from Sprint Nextel with minimal investment in customer service and no investment in customer acquisition. Together, we believe these operations provide a balanced and diversified portfolio with a strong growth potential. For the six months ended June 30, 2005, 78% of our wireless revenues were generated from our retail operations and 22% from wholesale.

 

    Capitalizing on the NTELOS brand:    We believe the NTELOS brand has strong name recognition in the markets we serve. Our Virginia West wireless region encompasses the area where we have been operating in the communications business for more than a century. The NTELOS brand is also used by both the wireless and wireline business segments in West Virginia. We maintain a visible physical retail presence in our markets which we believe further enhances our customer service and brand recognition. We currently operate 68 retail locations in our market, which is substantially more than any of our competitors.

 

    Offering the best value proposition in-region:    Our wireless services are designed to offer exceptional value to customers who live and travel predominately in our wireless coverage area. We have a unique coverage footprint for our wireless business that efficiently serves the mobile communications needs of a large portion of our covered population. This efficiency allows us to offer greater monthly on-net usage than other regional or national providers at similar prices. We have also recently begun to offer national calling plans. Our relationships with Sprint Nextel and other carriers allow us to provide these national plans at competitive prices.

 

    Capitalizing on our Strategic Network Alliance with Sprint Nextel:    We benefit from Sprint Nextel’s success in driving demand for voice and data wireless services. This generates a recurring revenue stream which allows us to more than cover the cost of our network. One key benefit from our wholesale agreement with Sprint Nextel is that they target customers with a national service offering while we target customers with a regional value strategy. We also benefit from the growth in multiple complementary customer segments without incurring the customer acquisition costs for Sprint Nextel’s gross additions. We have no overhead burden or revenue sharing payable to Sprint Nextel.

 

    Data strategy:    In June 2004, we began offering high speed data services in our 3G 1xRTT markets and certain data services to 2G and PrePay customers. High-speed data connectivity and the popularity of downloadable Binary Runtime Environment for Wireless, or BREW, applications open new marketing segments such as businesses, teens, and gaming, providing additional opportunities for revenue enhancement. At June 30, 2005, 62% of our cell sites were enabled for 3G 1xRTT data service. We expect to upgrade the remainder of our cell sites by June 30, 2006, at which time we will have seamless 3G 1xRTT capability across our footprint. Data revenues have grown as a portion of total wireless revenues, and we believe there are opportunities for continued growth in data services.

 

78


Table of Contents

Spectrum

 

We hold licenses for all of the 1900 MHz PCS spectrum used in our network. At June 30, 2005, we operated our CDMA network in 19 BTAs with licensed POPs of 7.0 million with an average spectrum depth of 24 MHz. We also hold licenses in ten additional BTAs which are currently classified as excess spectrum. Subsequent to June 30, 2005, we have begun to offer our services in the Portsmouth, Ohio BTA. The following table shows a BTA-by-BTA breakdown of our 1900 MHz PCS spectrum position.

 

NTELOS’ Spectrum Position (POPs in thousands)

as of June 30, 2005

 

BTA #


  

BTA Name


   PCS
Spectrum
Block


   Licensed
POPs(1)


    Covered
POPs(1)


   MHz

 

Virginia East

                           

    156

   Fredericksburg, VA    E    167.8     86.7    10  

    324

   Norfolk, VA    B    1,847.6     1,651.2    20  

    374

   Richmond, VA    B    1,250.5     995.8    20  

    374

   Richmond, VA—Partitioned Counties    B    50.8 (4)        30  
              

 
  

     Subtotal         3,265.9     2,733.7    19 (2)
              

 
  

Virginia West

                           

      75

   Charlottesville, VA    C    236.1     153.5    20  

    104

   Danville, VA    B    177.2     96.1    30  

    179

   Hagerstown, MD    E/F    374.3     177.4    20  

    183

   Harrisonburg, VA    D/E    158.4     105.7    20  

    266

   Lynchburg, VA    B    167.7     133.4    30  

    284

   Martinsville, VA    B    96.0     64.0    30  

    376

   Roanoke, VA    B    687.9     481.6    30  

    430

   Staunton, VA    B    114.7     103.8    30  

    479

   Winchester, VA    C    167.9     153.0    20  
              

 
  

     Subtotal         2,180.2     1,468.5    26 (2)
              

 
  

West Virginia

                           

      35

   Beckley, WV    B/F    167.6     58.5    30  

      48

   Bluefield, WV    B    169.4     42.7    30  

      73

   Charleston, WV(3)    A/B    488.6     228.5    30  

      82

   Clarksburg, WV    E    190.8     75.3    10  

    137

   Fairmont, WV    C/F    56.8     40.3    40  

    197

   Huntington, WV    B    370.5     205.4    30  

    306

   Morgantown, WV    C/F    112.3     66.8    25  
              

 
  

     Subtotal         1,556.0     717.5    30 (2)
              

 
  

     Total Operating Spectrum         7,002.1     4,919.7    24  
              

 
  

Excess

                           

    471

   Wheeling, WV    C    207.6     NA    30  

    474

   Williamson, WV—Pikeville, KY    B    175.5     NA    30  

      23

   Athens, OH    A    131.9     NA    15  

      80

   Chillicothe, OH    A    102.3     NA    15  

    100

   Cumberland, MD    C/D    163.5     NA    40  

    259

   Logan, WV    B/F    37.7     NA    40  

    342

   Parkersburg, WV—Marietta, OH    C/F    182.5     NA    40  

    359

   Portsmouth, OH    B    94.1     NA    30  

    487

   Zanesville—Cambridge, OH    A    190.1     NA    15  

      12

   Altoona, PA    C    224.7     NA    15  
              

 
  

     Subtotal         1,509.9          24 (2)
              

 
  

     Total(5)         8,512.0     4,919.7    24.3  
              

 
  


(1) Source: June 2004 Census POPs.
(2) Weighted average MHz based on licensed POPs.
(3) “A” block excludes Kanawha and Putnam counties.
(4) Partitioned POPs not included in subtotal.
(5) NTELOS has executed definitive agreements to purchase 10 MHz of spectrum in the Clarksburg, WV BTA and to sell 10 MHz of spectrum in the Beckley, WV BTA and one county within the Charleston, WV BTA. These transactions are subject to FCC approval and other customary closing conditions.

 

79


Table of Contents

Other Spectrum

 

In addition to PCS spectrum, we hold wireless communications service, or WCS, licenses in Columbus, OH, multichannel multipoint distribution service, or MDS/MMDS, licenses in western Virginia and local multipoint distribution service, or LMDS, licenses in portions of Virginia, Kentucky, West Virginia and Maryland.

 

Wireless Operations

 

Wireless Retail Business

 

Overview.    We offer wireless voice and data products and services to retail customers throughout our footprint under the NTELOS brand name. Many of our service plans target the local value segment, focusing on customers who will use their wireless phone primarily in their home market. We offer these customers value by providing unlimited and large numbers of minutes and premier customer service across our network. We have also recently begun to offer national calling plans for those customers who will use their phone outside of their home market. Our relationships with Sprint Nextel and other carriers allow us to provide these national plans at competitive prices. We offer customers a variety of PostPay plans, as well as Pay in Advance and traditional PrePay alternatives. PostPay represents the bulk of our retail subscribers and the primary focus of our marketing efforts. As of June 30, 2005, PostPay represented 55% of gross additions year-to-date and 76% of total subscribers. Due to the higher churn in non-PostPay segments, we will continue to emphasize marketing to PostPay customers.

 

Service Offerings.    The chart below briefly describes the plans and provides a breakdown of subscribers as of June 30, 2005:

 

Product


   Retail
Subscribers


   % of
Subscribers


   

Description


PostPay

   246,446    76 %  

•      Family of Plans

               

•      Long Distance, Roaming, Features

               

•      1- or 2-Year Service Agreement

               

•      Allows Shared Lines

Pay in Advance

   71,914    22 %  

•      PostPay-Like Plans with Buckets of Minutes

               

•      Pay in Advance (Access and Features)

               

•      Competitive Cost of Entry

               

•      Long Distance, Roaming, Features

               

•      1-Year Service Agreement; No Credit Check

PrePay (“nStant Minutes”)

   8,075    2 %  

•      Traditional Prepay

               

•      No Service Agreement

               

•      Pay-As-You-Go

 

    PostPay.    Traditional PostPay plans are our most popular service offerings and account for approximately 76% of the base of our wireless customers. The family of PostPay plans, called HomeFreeSM, range in price from $25.99 to $99.99 per month and include both anytime and night & weekend buckets of minutes. Select plans also offer nationwide roaming minutes as part of the package through our roaming agreements with other wireless providers. HomeFreeSM plans are available with one- or two-year service agreements and most can accommodate up to four shared lines for additional monthly service fees. All plans give customers access to the entire 100% digital PCS NTELOS network and include nationwide long distance calling.

 

80


Table of Contents
    Pay in Advance.

 

    inAdvance.    The inAdvance product is our second largest wireless consumer product. A hybrid alternative positioned to look like PostPay but operate like PrePay, inAdvance targets credit-challenged, no-credit customers, including teens and students. inAdvance offers a pay-in-advance monthly billing option combined with PostPay-like rate plans, which include low cost-per-minute rates, unlimited text mess aging, voice mail and free long distance calling on most plans. inAdvance service plans range from $29.99 per month to $69.99 per month and require a one-year service agreement. Customers pay their monthly charges in advance, eliminating the need for credit checks and bad debt exposure. Payment can be made by credit card, bank draft or cash.

 

    HomeFree “No Roam.”    HomeFree “No Roam” is our most recent rate plan, introduced in December 2004. The product targets mid to low credit customers and serves as a “bridge” product between traditional PostPay and PrePay plans. Customers get a monthly bill, but must pre pay for the service. Additional credit risk is reduced through the elimination of roaming and data capabilities. Customers opting for this service receive the same promotional handset offers as PostPay, but must pay a $100 deposit.

 

    PrePay (“nStant Minutes”).    We offer a traditional pay-as-you-go PrePay service plan called nStant Minutes, which currently comprises approximately 2% of our customer base. This plan gives customers an affordable, convenient PCS service with no monthly fees, no annual contract and no credit check. Minutes are purchased in advance and are replenished as needed by cash, credit card or prepaid cards.

 

Sales, Marketing and Customer Care.    We target customers by offering them the “best value” available in a wireless provider. We have a simple marketing message for our wireless products: “The Most Minutes Across Town or Across America.” We target persons between the ages of 21 and 54 who use their phone primarily in their home market. Although we offer roaming options, our belief is that many customers use their phone primarily in and around their home area. We do not target heavy roamers such as business executives or national corporations, although we have introduced national plans which take advantage of our access to the national Sprint Nextel wireless network under the Strategic Network Alliance.

 

We promote our PostPay product almost exclusively in our marketing communications. PrePay plans target only certain segments where a majority of the population would not want or qualify for PostPay service.

 

Advertising is focused on driving traffic to the company-owned retail stores and inside sales representatives. Approximately 81%, or $10.0 million, of our $12.3 million marketing budget in 2004 was spent on media advertising (which includes print, television, radio, out-of-home and internet), 13% was spent on point of sale collateral and merchandising, 6% was spent to sponsor events and public relations, and the remaining amount we spent on miscellaneous marketing activities.

 

Company-owned distribution is a key component of our wireless growth strategy, with strong supporting distribution from indirect agent locations which extend our wireless retail points of presence. The focus on company-owned distribution is evidenced by wireless customer acquisitions. In 2003, 72% of gross additions were derived from direct sales channels. For the year ended December 31, 2004, gross additions acquired through direct channels increased to 76% through 68 company-owned retail locations. The trend of increased direct distribution mix in our wireless business continued in the six months ended June 30, 2005 with 76% of gross additions being acquired through direct channels. Our direct distribution is supported by regional agents with 285 points of presence.

 

Our wireless customer care call centers are located in Waynesboro and Daleville, Virginia. We operate a single virtual call center, supporting a reduction in headcount and uniform customer service across our region. Business operations are supported by an integrated systems infrastructure. We provide customer care and operations representatives with incentives to upsell additional products and features. Also, we utilize a retention team to focus on either renewing or maintaining our customers.

 

81


Table of Contents

Wireless Wholesale Business

 

Overview.    We provide digital PCS services on a wholesale basis to other PCS providers, most notably Sprint Nextel. In 2004, wholesale revenues were $51.6 million. For the six months ended June 30, 2005, wholesale revenues were $29.9 million compared to $23.4 million for the same period in 2004. Our wireless wholesale business began in 1999 when we signed a 10-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. As a part of Horizon PCS’s restructuring, in June 2004 Sprint bought out Horizon PCS’s interest in the approximately 95,000 Sprint-branded subscribers in Horizon PCS’s territories which are serviced by our network. We subsequently entered into the Strategic Network Alliance with Sprint Nextel. The Strategic Network Alliance expires on July 31, 201l, which includes automatic five-year extensions unless the agreement’s notice provisions are exercised.

 

Our Strategic Network Alliance with Sprint Nextel.    In 2004, we entered into the Strategic Network Alliance with Sprint Spectrum, a subsidiary of Sprint Nextel. Under the terms of our Strategic Network Alliance with Sprint Nextel, we are the exclusive PCS network service provider for all Sprint Nextel products and services in the following markets: Charlottesville, Danville, Lynchburg, Martinsville, Roanoke and Staunton-Waynesboro, Virginia; Beckley, Bluefield, Charleston, Clarksburg/Elkins, Fairmont, Huntington and Morgantown, West Virginia; and Ashland, Kentucky. Our CDMA network encompasses approximately 3.0 million POPs in these markets. The Strategic Network Alliance prohibits Sprint Nextel from directly or indirectly commencing construction of, contracting for or launching its own PCS or wireless communications network in these regions prior to 180 days prior to the termination of the agreement. The Sprint Nextel overbuild prohibition is automatically renewable together with the term of the Strategic Network Alliance for successive, five-year terms, expiring 180 days prior to the termination date of each renewal period. In addition, Sprint Nextel may construct its own cell sites or take such other action to provide geographic coverage in a portion of a market served by us where our network does not offer coverage, and Sprint Nextel requests that we provide coverage and we decline.

 

Under the Strategic Network Alliance, Sprint Nextel is required to pay us a per minute or per megabit rate for the voice and data services, respectively, that we provide to Sprint Nextel branded subscribers and the subscribers of mobile network operator partners of Sprint Nextel, such as Virgin Mobile and Qwest, who live in or travel through the Strategic Network Alliance service area. The Strategic Network Alliance specifies a series of usage rates for various types of services. Sprint Nextel pays a Travel rate to NTELOS for each voice minute of use by Sprint Nextel subscribers or MVNO partners of Sprint Nextel who use the NTELOS network for voice service while traveling in the Strategic Network Alliance service areas. Sprint Nextel also pays a Home rate to NTELOS for each voice minute of use by a Sprint Nextel subscriber who is a local subscriber in the Strategic Network Alliance service area. Sprint Nextel also pays a Data rate for each megabit of data service consumed by either a Sprint Nextel Home subscriber or a Sprint Nextel Travel subscriber within the Strategic Network Alliance service area. The agreement provides us with a price protection period of 1 year on the Travel rate per MOU, 3 years on the voice rate per MOU for Home subscribers, and 2 years for the per megabit Data rate. After the initial pricing term, our price structure with Sprint Nextel will fluctuate under a formula tied to Sprint Nextel’s national wireless retail customer revenue yield. The Strategic Network Alliance also permits our NTELOS branded customers to access Sprint Nextel’s national wireless network at reciprocal rates as the Sprint Nextel Travel rates.

 

The Strategic Network Alliance provides that the PCS service we provide to Sprint Nextel customers will be of a quality and clarity no worse than what we provide to our customers. We are not required under the Strategic Network Alliance to make any future investment in high speed data transfer technology or any other significant network upgrade requested by Sprint Nextel to support its customers unless Sprint Nextel and we agree in advance of such investment to the compensation to be provided to us by Sprint Nextel for making such investment. However, the Strategic Network Alliance does provide that we must augment or expand our facilities, including implementing commercially reasonable network upgrades, at our expense to provide the products and services supported by us as of the execution date of the Strategic Network Alliance and to maintain

 

82


Table of Contents

compliance with performance specifications set forth in the Strategic Network Alliance. Sprint Nextel has agreed to reimburse us for certain costs we incur in connection with the development and implementation of a long-term network solution which enables us to provide Sprint Nextel customers with WLNP. In addition, Sprint Nextel must reimburse us for a proportional amount of the expenses we incur to comply with all future network obligations mandated by governmental authorities or new industry standards, such as mobile equipment identifiers, or MEIDs.

 

Wireless Network

 

Network Technology.    We have deployed CDMA digital PCS technology in each of our geographic regions. In Virginia West (excepting Harrisonburg and Winchester) and West Virginia, we have deployed a 3G 1xRTT network with high speed data capabilities.

 

Switching Centers.    We employ four Mobile Switching Centers, or MSCs: two in the Virginia East region, one in the Virginia West region and one in West Virginia. The following table shows our switching center equipment:

 

Switching Center Equipment


Region


  

Location


  

Equipment


Virginia East

   Richmond, VA   

•      Lucent 5ESS and ECP Switch Complex

         

•      Alcatel 3-1-0 6130 DACS

         

•      UTStarcom voicemail platform

         

•      VeriSign prepay platform (Smartpay)

         

•      Company-owned facility

     Norfolk, VA   

•      Lucent 5ESS and ECP Switch Complex

         

•      Alcatel 3-1-0 6130 DACS

         

•      Glenayre 4240 voicemail platform

         

•      VeriSign prepay platform (Smartpay)

         

•      Company-owned facility

Virginia West

   Waynesboro, VA   

•      Nortel MTX Switch

         

•      Motorola Cell Site Base Station Controllers (four)

         

•      Tellabs 3-1-0 532L DACS

         

•      Glenayre 4240 voicemail platform

         

•      VeriSign prepay platform (Smartpay)

         

•      Company-owned facility

West Virginia

   Charleston, WV   

•      Nortel MTX Switch

         

•      Motorola Cell Site Base Station Controllers (three)

         

•      Tellabs 3-1-0 532L DACS

         

•      Glenayre 4240 voicemail platform

         

•      VeriSign prepay platform (Smartpay)

         

•      Leased facility (current term through 2013)

 

Intelligent Network.    We have deployed a Lucent Intelligent Network solution consisting of a mated pair Service Control Point, or SCP, and an Enhanced Services Manager, or ESM. There are several key software applications residing on the SCPs including mated Stand-alone Home Location Registers, or SHLRs, Short Messaging Service Center, or SMSC, and Over-the-Air-Function, or OTAF.

 

Cell Sites.    As of June 30, 2005, there were 842 cell sites in operation, of which 65 were repeaters. We own 90 of these cell sites and lease the remainder. Approximately 45% of these cell sites are installed on facilities owned by Crown Communications and American Tower. We entered into master lease agreements with Crown Communications and American Tower in 2000 and 2001, respectively, with initial 5 and 12 year lease terms, respectively, and options to renew. Approximately 60% of our cell sites are 3G 1xRTT capable.

 

83


Table of Contents

Network Performance.    We currently process 51 million calls per week and demonstrate strong network operational performance metrics. For the six months ended June 30, 2005, network performance has averaged less than 1.2% daily dropped calls and less than 0.2% blocked calls during the busy hour. Cell site availability as of June 30, 2005, exceeds 99.9%. We currently exceed Sprint Nextel’s network performance standards in the regions underlying the Strategic Network Alliance with Sprint Nextel.

 

Wireline Business

 

Overview

 

Founded in 1897 as the Clifton Forge-Waynesboro Telephone Company, our wireline business and its predecessor organizations have a long history of providing exceptional telephone service in the rural Virginia areas of Waynesboro, Covington, Clifton Forge and, with the acquisition of R&B Communications in 2001, Botetourt County. We divide our wireline business into two operations: RLEC and Competitive Wireline (CLEC/Network and internet). As an RLEC, we own and operate two local telephone companies and serve three rural Virginia regions. As a CLEC, we provide service to 16 areas in Virginia, West Virginia and Tennessee. Additionally, we offer both dial-up internet and high-speed broadband services in Virginia, West Virginia and Tennessee. As of June 30, 2005, we had approximately 140,000 access lines and data connections.

 

Our wireline business is supported by an extensive 1,900 mile fiber optic network. The network gives us the ability to originate, transport and terminate much of our customers’ communications traffic in many of our service areas. We utilize the network to back-haul communications traffic for retail services and to serve as a carrier’s carrier, providing transport services to third-parties for long distance, internet, wireless and private network services. Our fiber optic network is connected to and marketed with adjacent fiber optic networks in the mid-Atlantic region.

 

Wireline Strategy

 

The key elements of our wireline strategy include:

 

    Capitalizing on significant local presence:    We seek to extend the reach of our wireline business by capitalizing on our scalable local communications network and significant local presence. Our ability to deliver a broad range of communications services over infrastructure that we control and maintain has been an important driver of our success. As such, we aim to provide services on an “on-net” basis as frequently as possible. We have no unbundled network element platform, or UNE-P, customers. Similarly, we believe our emphasis on customer service and strengthening regional relationships has provided us with a distinct advantage over some of our larger, national competitors. We believe we are also well-positioned to utilize our platform to grow into adjacent areas and to capitalize on existing assets and capabilities.

 

    Increase penetration of value-added services:    We have been growing the wireline business by developing and introducing new IP-enabled products, including integrated voice/data access technology and metro ethernet, increasing the penetration of value-added bundled voice and data services and enhancing the availability of broadband connectivity. We believe these initiatives have provided us with an enhanced competitive position in our wireline regions.

 

    Capitalizing on owning and operating our own network:    Our wireline operating regions are contiguous and are managed by a centralized network operations center. Our network infrastructure and supporting services form a communications backbone over which we deliver RLEC, CLEC, internet access and digital PCS services. Owning and operating our own network facilities enhances our ability to control the quality of our products and services and to generate operating efficiencies and economies of scale. We deploy new technology such as DWDM transport backbones, Gigabit Ethernet data core and CISCO BTS 10200 soft switch to increase operating efficiencies and to provide a platform for the delivery of new services to our customers.

 

84


Table of Contents
    Taking advantage of infrastructure development:    We believe that we have been among the leaders in the communications industry in infrastructure development in a rural market. We upgraded and began to provide digital switched-based voice service to customers in 1986. We have installed fiber optic cable between our host and remote switching units. The digital fiber network provides improved transmission quality and reliability, lowers costs and the ability to offer a broader range of communication services and products. We continue to offer leading edge data transport services and broadband internet access. In recognition of our leadership, NTELOS was named IP Innovator of the Year at the 2004 United States Telephone Association annual meeting. In addition, between 1999 and 2001 we made significant capital investments to enable us to provide broadband services and competitive access services within our region. Over the past three years, we have generated significant incremental cash flows as a result of these investments.

 

    Focus on high margin customers:    We intend to continue to focus on high-margin customers, including educational institutions such as colleges and universities, health care providers and governmental entities.

 

Wireline Operations

 

RLEC.    We provide RLEC services to business and residential customers in three rural Virginia areas. We have owned and operated a 108-year-old telephone company in western Virginia since its inception in 1897. Additionally, we acquired a 105-year-old telephone company in southwestern Virginia through our acquisition of R&B Communications in 2001. In line with our dedication to exceptional customer service, our performance is substantially better than all customer service metrics set by the Virginia SCC.

 

Competitive Wireline.    Our CLEC/Network operations includes both the results of our CLEC business and our wholesale carrier’s carrier network. The CLEC business was launched in 1998 and currently serves 16 areas in Virginia and West Virginia. We market almost exclusively to business customers with residential service limited to bundled service offerings with DSL. As of June 30, 2005, we had 43,774 CLEC lines in service, virtually all of which were business lines.

 

The CLEC operations are based on an “edge-out” strategy that seeks to take advantage of our RLEC network in order to deliver a high incremental return on investment to our core wireline business. Technicians, vehicles, operations and support systems, network planning and engineering, billing and core network assets are shared among the wireline segments. Furthermore, our CLEC brand benefits from wireless, internet, and other wireline marketing efforts we undertake across our operating areas.

 

In addition to utilizing a successful “edge-out” strategy, our CLEC business has also benefited from a commitment to an “on-net” access strategy for a true facilities-based approach. We have been careful in our decision to expand the CLEC network and generally require proven customer demand to dictate such investment choices. As a result, on-net access lines have been increasing as a percentage of the total lines. As of June 30, 2005, 52.3% of lines are served via leased T-1s or are on our network totally, 46.2% are leased voice-grade loops (UNE-Loop) and only 1.5% are resale lines. In addition to the higher-margin revenues that are characteristic of on-net expansion, we have also been able to deliver other competitive services such as high-bandwidth internet access and metro transport services as a direct result of on-net connectivity growth. Our dedication to the facilities-based strategy, combined with our commitment to customer service, has proven successful in attracting large customers in key vertical markets. Specifically, the education, healthcare, and government sectors have been particularly receptive to our CLEC business model.

 

Like the CLEC, our wholesale network operation adds incremental revenue to the wireline business at low incremental costs. Through our wholesale carrier’s carrier network, we offer other carriers access to our 1,900 route miles which provide connectivity to major retail cities. We sell backhaul services to major carriers. Through interconnections with other regional fiber networks, we are able to extend our network east to Richmond, Virginia, to Carlisle, Pennsylvania, and Washington, D.C. and to areas south of Greensboro, North

 

85


Table of Contents

Carolina. The wholesale business model is consistent with our strategy of maximizing utilization of our owned network to provide a standalone revenue stream and to reduce operating costs for our retail operations.

 

We launched our internet business in Virginia in 1995. The internet business has grown both organically and via acquisitions. Presently, we provide internet services in Virginia, West Virginia and Tennessee. We have implemented aggressive pricing strategies to help offset dial-up losses and are seeing strong growth in all of our broadband products. Furthermore, we have been able to leverage our broadband network to launch new IP-enabled services for our business customers. As of June 30, 2005, our broadband network consisted of approximately 10,100 DSL lines, 600 dedicated business access lines, 1,700 portable broadband lines and 200 other connections. We sell DSL in the CLEC footprint in bundled packages that also include local and long distance telephone services.

 

We have access to MMDS spectrum within Virginia through license ownership or long-term leases in Charlottesville, Lynchburg, Roanoke, Harrisonburg and Winchester. In late 2003, we launched a wireless, high-speed internet access service, also known as “portable broadband,” using this spectrum. This service provides DSL-like internet access speeds without the need for any hardwired connection to the home or business. This service complements the DSL coverage footprint in our RLEC areas and greatly expands the number of potential broadband customers in CLEC areas.

 

Products and Services

 

We offer a wide variety of voice services to our RLEC and CLEC customers, including:

 

Voice Service

  

•      Business and residential telephone service

Centrex

  

•      Replaces customers’ private branch exchange (PBX) system

    

•      Provides the switching function, along with multiple access lines

Primary Rate ISDN Services

  

•      High capacity connections between customers’ PBX equipment and public switched telephone network

Long Distance Service

  

•      Domestic and international long distance services to RLEC and CLEC customers

    

•      Uses network facilities or provides through resale arrangements with interexchange carriers such as MCI

Customer Calling Features

  

•      Call waiting

    

•      Caller ID

    

•      Voice mail (can be integrated with our PCS service)

 

In addition to traditional voice services, we provide internet access and data services including:

 

High-Speed DSL Access

  

•      DSL technology enables a customer to receive high-speed internet access through a copper telephone line

Portable Broadband Access

  

•      Wireless offering to customers providing a portable broadband connection

    

•      Up to 1.5 Mbps for downloads and 550 kbps for uploads

Dedicated Internet Access

  

•      Dedicated high-speed internet connectivity

 

86


Table of Contents

Web Hosting

  

•      Domain services, collocation agreements and internet marketing services are also available

Local Dial-up Internet Access

  

•      Offers multiple e-mail accounts, free software and personal disk space

Integrated Access

  

•      New IP-Enabled Product offering that combines voice and data services over a dedicated broadband facility

    

•      Allows customers to dynamically allocate bandwidth to maximize voice and data transmissions

Metro Ethernet

  

•      Ethernet connectivity among multiple locations in the same city or region

    

•      Speed ranging from 1.5 Mbps to 1Gbps

Frame Relay / ATM

  

•      Private switched high-speed data connections for multiple-location business within a region

Hi-cap Private Line Service

  

•      High-capacity facilities provided to end users and carriers for voice and data applications

 

Sales, Marketing and Customer Care

 

We largely focus our wireline marketing efforts on residential customers in the RLEC segment and institutional customers in the CLEC segment. In particular, marketing is centered on selling bundles and higher revenue-generating services to maximize penetration, ARPU and retention. We seek to capitalize on the NTELOS brand name, positive service reputation and local presence of its sales and service personnel in our wireline marketing efforts.

 

We utilize our own personnel to sell wireline products and services to our customers. We retain account executives to cultivate relationships with mid-size to large business customers in our RLEC and CLEC market areas. The wholesale business is supported by a dedicated channel team and ValleyNet partnership resources. We use an inside sales group to handle residential and small business voice and broadband sales. We maintain a wireline retail presence in Waynesboro, Daleville, and Covington, Virginia to allow walk-in payments and provide new services to RLEC customers.

 

Our wireline customer care call centers are located in Waynesboro and Daleville, Virginia. Following integration of the separate R&B Communications and NTELOS billing and information systems, we created a single virtual call center, supporting a reduction in headcount and uniform customer service across our region. Business operations are supported by an integrated systems infrastructure. We provide customer care and operations representatives with incentives to upsell additional products and features. Also, when customers’ contracts are near expiration or customers call in to discontinue service, our retention team focuses on either renewing or “saving” those customers.

 

Plant and Equipment

 

Our wireline network includes two Lucent 5ESS digital switches, which provide end-office functions for both the RLEC and CLEC businesses in Virginia. Our Waynesboro, Virginia switch also acts as an access tandem for our RLEC, CLEC and portions of our wireless traffic. We have twelve remote switching modules deployed throughout our RLEC territory and three more supporting our CLEC areas. Another Lucent 5ESS digital switch, located in Charleston, supports the CLEC business in West Virginia. VITAL, a company for which we serve as the managing partner, acts as a regional node on VeriSign’s nationwide SS7 network using a pair of Tekelec signal transfer points located on our premises.

 

87


Table of Contents

We use Lucent, Tellabs and Ciena digital loop carriers throughout our RLEC and CLEC access network. For DSL service in the RLEC and CLEC areas, we primarily use Cisco and Paradyne equipment. Our centralized network operating center monitors wireline, wireless and data networks on a continuous basis using a Harris network management system. We provide ATM, Frame Relay, metro Ethernet and IP-enabled voice and transport services using a soft switch, routers and other equipment from Cisco Systems, Inc.

 

Competition

 

Many communications services can be provided without incurring a short-run incremental cost for an additional unit of service. As a result, once there are several facilities-based carriers providing a service in a given market, price competition is likely and can be severe. We have experienced price competition, which is expected to continue. In each of our service areas, additional competitors could build facilities. If additional competitors build facilities in our service areas, this price competition may increase significantly.

 

Wireless

 

We compete in our territory with both digital and analog service providers. Several wireless carriers compete in portions of our market areas, including Sprint Nextel and its affiliates (including Virgin Mobile USA), Verizon Wireless, ALLTEL, Cingular Wireless, T Mobile, Cellular One and U.S. Cellular, and affiliates of some of these companies. Many of these competitors have financial resources and customer bases greater than ours. Many of them have more established infrastructures, marketing programs and brand recognition. In addition, some of our competitors offer coverage in areas not serviced by our PCS network, or, because of their calling volumes or their affiliations with, or ownership of, wireless providers, offer roaming rates lower than ours. We expect these competitors will continue to build and upgrade their own networks in areas in which we operate. We also face competition from resellers, which provide wireless service to customers but do not hold FCC licenses or own facilities.

 

Wireline

 

Several factors have resulted in increased competition in the local telephone market, including:

 

    expansion of wireless networks and pricing plans which offer very high usage at a fixed cost, resulting in wireless substitution;

 

    growing customer demand for alternative products and services;

 

    technological advances in the transmission of voice, data and video;

 

    development of fiber optics and digital technology;

 

    legislation and regulations, including the Telecommunications Act, designed to promote competition; and

 

    approval of “271” petitions by the Regional Bell Operating Companies authorizing them to provide long distance services in all U.S. jurisdictions.

 

As the RLEC for Waynesboro, Clifton Forge, Covington and portions of Botetourt and Augusta Counties, Virginia, we are subject to competition, including from wireless carriers and cable companies. Although no CLECs have entered our incumbent markets to compete with us, it is possible that one or more may enter our markets. The regulatory environment governing RLEC operations has been, and we believe will likely continue to be, very liberal in its approach to promoting competition and network access. Other sources of potential competition include cable providers and wireless service providers. VoIP based carriers like Vonage could take voice customers from our RLECs using existing broadband connections (such as DSL or cable modem connections).

 

88


Table of Contents

Our CLEC operations compete primarily with ILECs and, to a lesser extent, other CLECs. ILECs in our markets, Verizon and Sprint, have initiated aggressive “win-back” strategies. Although certain CLEC companies have exited from our markets, we continue to face competition in our CLEC markets from several other CLECs, including TelCove (formerly Adelphia Business Solutions and KMC Telecom), Fibernet, USLEC and Cox. We also face, and will continue to face, competition from other current and potential future market entrants.

 

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

 

    access and content providers, such as America Online;

 

    local, regional and national internet service providers such as AT&T, MCI and Sprint Nextel;

 

    incumbent local telephone companies, such as Verizon and Sprint Nextel (particularly for DSL services); and

 

    cable modem services offered by incumbent cable providers such as Comcast (as the apparent purchaser of assets of Adelphia Communications Corporation in Virginia), Cox, Rapid and Charter.

 

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.

 

Properties

 

We are headquartered in Waynesboro, Virginia and own offices and facilities in a number of locations within our operating markets. We believe that our current facilities are adequate to meet our needs in our existing markets for the foreseeable future. The table below provides the location, description and approximate square footage of our material owned properties.

 

Location


  

Property Description


   Approximate Square
Footage


Harrisonburg, VA

   CLEC POP    2,500

Waynesboro, VA

   Retail Store    4,000

Richmond, VA

   Wireless Switch Building    4,608

Norfolk, VA

   Wireless Switch Building    4,970

Troutville, VA

   Wireline Switch Building    8,400

Clifton Forge, VA

   Wireline Switch Building    12,000

Covington, VA

   Wireline Service Center    13,000

Waynesboro, VA

   Wireless Switch Building    15,000

Clifton Forge, VA

   Call Center Building (surplus)    15,620

Waynesboro, VA

   Wireline Service Center    20,000

Daleville, VA

   Regional Operations Center    21,000

Covington, VA

   Wireline Switch Building    30,000

Waynesboro, VA

   Corporate Headquarters    30,000

Waynesboro, VA

   Wireline Switch Building    30,000

Waynesboro, VA

   Customer Care Building    31,000

Waynesboro, VA

   Corporate Support Building    51,000

Daleville, VA

   Wireline Service Center    9,400

 

We also lease the following material properties:

 

    Our Charleston, West Virginia regional operations center (wireless and wireline switching) under an Office Lease Agreement with Option to Purchase by and between Eagan Management Company and CFW Communications Company d/b/a NTELOS Inc., dated December 11, 1998; and

 

89


Table of Contents
    Our Daleville, Virginia customer care facility under a Lease Agreement by and between The Layman Family LLC and R&B Communications, Inc., dated May 1, 2000, and First Amendment to Lease Agreement, dated May 30, 2003.

 

Employees

 

As of June 30, 2005, we employed 1,213 full-time and 34 part-time persons. Of these employees, 74 are covered by a collective bargaining agreement for a portion of our wireline operation. This agreement expires June 30, 2008. We believe that we have good relations with our employees.

 

Legal Proceedings

 

We are involved in routine litigation in the ordinary course of our business. We do not believe that any pending or threatened litigation of which we are aware would have a material adverse effect on our financial condition or results of operations.

 

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. All of the claims asserted in the bankruptcy proceeding have been satisfied in accordance with the terms of the plan of reorganization, except the priority tax claim asserted by Henrico County, Virginia. Henrico County asserted a priority tax claim in the amount of $173,817 against NTELOS Inc. on May 13, 2003. NTELOS Inc. objected to and disputed Henrico County’s claim in its entirety. Since its initial filing in the bankruptcy matter, Henrico County has asserted an amended claim against NTELOS Inc. totaling $1,289,270 for alleged collected but unpaid consumer utility taxes for the period of July 2000 to December 31, 2003. In addition, Henrico County claims these errors continue through the present date. NTELOS Inc. has attempted to negotiate Henrico County’s claim, believing that a large percentage of the consumer utility taxes that were allegedly not remitted to Henrico County were remitted to the City of Richmond or other Virginia localities. NTELOS Inc. also believes that Henrico County’s estimate of allegedly unremitted taxes is overstated. We are considering whether to proceed to litigate the validity and amount of Henrico County’s claim, as well as claims we have against the City of Richmond and other Virginia localities for refunds of taxes remitted thereto. It is too early in that process to speak to the likelihood of success in any litigation currently considered or that may be commenced.

 

Regulation

 

The following summary does not describe all present and proposed federal and state legislation and regulations affecting the telecommunications industry. Some legislation and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals which could change the manner in which this industry operates. Neither the outcome of any of these developments, nor their potential impact on us, can be predicted at this time. Regulation can change rapidly in the telecommunications industry, and such changes may have an adverse effect on us in the future. See “Risk Factors.”

 

Regulation Overview

 

Our communications services are subject to varying degrees of federal, state and local regulation. Under the Communications Act, as amended by the Telecommunications Act, the FCC has jurisdiction over interstate and international common carrier services, over certain aspects of interconnection between carriers for the provision of competitive local services, and over the allocation, licensing, and regulation of wireless services. The Federal Aviation Administration regulates the location, lighting and construction of antenna structures. Our common carrier services are regulated to different degrees by state public service commissions, and local authorities have jurisdiction over public rights-of-way and antenna structures. In recent years, the regulation of the communications industry has been in a state of transition as Congress and state legislatures have passed laws seeking to foster greater competition in communications markets and various of these measures have been challenged in court.

 

90


Table of Contents

Many of the services we offer are unregulated or subject only to minimal regulation. Our internet services are not considered to be common carrier services, although the regulatory treatment of internet services, including VoIP services, is evolving and still uncertain. Our wireless service is a commercial mobile radio service, or CMRS, and subject to FCC regulation as common carriage. The states are preempted from engaging in entry or rate regulation of CMRS, although the states may regulate other terms and conditions of such offerings.

 

Pursuant to the Communications Act, there are certain services that large ILECs are required by state and federal regulators to provide to our CLEC operations. The obligations of these ILECs to provide such services are in flux and could be further altered or removed by new legislation, regulations or court order.

 

Federal Regulation of the Wireless Communications Industry

 

The licensing, construction, modification, operation, sale, ownership and interconnection arrangements of wireless communications networks are regulated to varying degrees by the FCC, Congress, state regulatory agencies, the courts and other governmental bodies. Because we operate PCS systems, decisions by such bodies could have a significant impact on the competitive market structure among wireless providers and on the relationships between wireless providers and other carriers. These mandates may impose significant financial obligations on us and on other wireless providers. We are unable to predict the scope, pace or financial impact of legal or policy changes that could be adopted in these proceedings. Some examples of the kinds of regulation to which we are subject are presented below.

 

Licensing of PCS Systems.    Broadband PCS licenses, such as those held by our subsidiaries, were generally originally awarded for specific geographic market area and for one of six specific spectrum blocks. The geographic license areas utilized included BTAs and collections of BTAs known as major trading areas, or MTAs, although geographic partitioning policies have permitted licensees to subdivide and transfer those original licenses into other geographic areas. The spectrum blocks awarded were originally either 30 MHz or 10 MHz licenses, although spectrum disaggregation rules have permitted licensees to subdivide such licenses into smaller bandwidths.

 

All PCS licenses have a 10-year term, at the end of which they must be renewed. The FCC’s rules provide a formal presumption that a PCS license will be renewed, called a “renewal expectancy,” if the PCS licensee (1) has provided substantial service during its past license term, and (2) has substantially complied with applicable FCC rules and policies and the Communications Act. The FCC defines substantial service as service which is sound, favorable and substantially above a level of mediocre service that might only minimally warrant renewal. If a licensee does not receive a renewal expectancy, then the FCC will accept competing applications for the license renewal period and, subject to a comparative hearing, may award the license to another party.

 

Under existing law, no more than 20% of an FCC PCS licensee’s capital stock may be owned, directly or indirectly, or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. If an FCC PCS licensee is controlled by another entity, as is the case with our ownership structure, up to 25% of that entity’s capital stock may be owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. Foreign ownership above the 25% holding company level may be allowed should the FCC find such higher levels not inconsistent with the public interest. The FCC has ruled that higher levels of foreign ownership in CMRS licensees, even up to 100%, are presumptively consistent with the public interest with respect to investors from certain nations. If our foreign ownership were to exceed the permitted level, the FCC could revoke our wireless licenses, although we could seek a declaratory ruling from the FCC allowing the foreign ownership or take other actions to reduce our foreign ownership percentage in order to avoid the loss of our licenses. We have no knowledge of any present foreign ownership in violation of these restrictions.

 

PCS Construction Requirements.    All PCS licensees must satisfy buildout deadlines and geographic coverage requirements within five and/or ten years after the license grant date. Under the FCC’s original rules, these initial

 

91


Table of Contents

requirements are met for 10 MHz licenses when adequate service is offered to at least one-quarter of the population of the licensed area, or the licensee provides substantial service, within five years, and for 30 MHz licenses when adequate service is offered to at least one-third of the population within five years and two-thirds of the population within ten years. The FCC’s policies have now been modified, however, and 30 MHz licensees are permitted to make a demonstration of substantial service to meet the ten year build-out requirement. Failure to comply with these coverage requirements could cause the revocation of a provider’s wireless licenses or the imposition of fines and/or other sanctions.

 

Transfer and Assignment of PCS Licenses.    The Communications Act and FCC rules require the FCC’s prior approval of the assignment or transfer of control of a license for a PCS system, with limited exceptions, and the FCC may prohibit or impose conditions on assignments and transfers of control of licenses. Non-controlling interests in an entity that holds an FCC license generally may be bought or sold without FCC approval. Although we cannot assure you that the FCC will approve or act in a timely fashion upon any future requests for approval of assignment or transfer of control applications that we file, we have no reason to believe that the FCC would not approve or grant such requests or applications in due course. Because an FCC license is necessary to lawfully provide PCS service, if the FCC were to disapprove any such filing, our business plans would be adversely affected.

 

Pursuant to an order released in December 2001, as of January 1, 2003, the FCC rules no longer impose explicit limits on the amount of PCS and other commercial mobile radio service, or CMRS, spectrum that an entity may hold in a particular geographic market. The FCC now engages in a case-by-case review of transactions that involve the consolidation of spectrum licenses.

 

General FCC Obligations.    The FCC has a number of other complex requirements and proceedings that affect the operation, and that could increase the cost or diminish the revenues, of our business.

 

For example, the FCC requires CMRS carriers to make available emergency 911 services to subscribers, including enhanced emergency 911 services that provide the caller’s telephone number and detailed location information to emergency responders, as well as a requirement that emergency 911 services be made available to users with speech or hearing disabilities. Our obligations to implement these services occur in phases and on a market-by-market basis as emergency service providers request the implementation of enhanced emergency 911 services in their locales. Meeting these requirements will impose certain costs on us, and is partially dependent on the progress of our equipment vendor in making such handsets available at the rate at which our customers swap out their old handsets for newer models. Many carriers in the CMRS industry, including us, do not expect to be compliant with the FCC’s December 2005 deadline to ensure that 95% of all subscriber handsets in service nationwide on our system can deliver subscriber location information. For this reason, several representatives of the CMRS industry have sought industry-wide relief from this deadline. Absent such relief via a waiver or otherwise, a failure to comply with these enhanced 911 requirements could subject us to significant monetary penalties. In addition, in some states, we may not be able to recover our costs of implementing such enhanced 911 capabilities.

 

FCC rules also require that local exchange carriers and most CMRS providers, including PCS providers, allow customers to change service providers without changing telephone numbers. For CMRS providers, this mandate is referred to as wireless local number portability, or WLNP. The FCC also has adopted rules governing the porting of wireline telephone numbers to wireless carriers. We may not be able to recover our costs of implementing number portability. In addition, number portability may have increased positive or negative effects on our business by making it easier for customers to switch among carriers.

 

The FCC has the authority to order interconnection between CMRS operators and ILECs, and FCC rules provide that all local exchange carriers must enter into reciprocal compensation arrangements with CMRS carriers for the exchange of local traffic, whereby each carrier compensates the other for terminating local traffic originating on the other carrier’s network. As a CMRS provider, we are required to pay reciprocal compensation to a wireline local exchange carrier that transports and terminates a local call that originated on our network.

 

92


Table of Contents

Similarly, we are entitled to receive reciprocal compensation when we transport and terminate a local call that originated on a wireline local exchange network. We negotiate interconnection arrangements for our network with major ILECs and smaller RLECs. If an agreement cannot be reached, under certain circumstances, parties to interconnection negotiations can submit outstanding disputes to state authorities for arbitration. Negotiated interconnection agreements are subject to state approval. The FCC’s interconnection rules and rulings, as well as state arbitration proceedings, will directly impact the nature and costs of facilities necessary for the interconnection of our network with other telecommunications networks. They will also determine the amount of revenue we receive for terminating calls originating on the networks of local exchange carriers and other telecommunications carriers. The FCC is currently considering changes to the local exchange-CMRS interconnection and other so-called intercarrier compensation schemes, and the outcome of such proceedings may affect the manner in which we are charged or compensated for the exchange of traffic.

 

The FCC historically has required that CMRS providers permit customers of other carriers to roam “manually” on their networks, for example, by supplying a credit card number, provided that the roaming customer’s handset is technically capable of accessing the roamed-on network. The FCC recently initiated an inquiry as to whether CMRS carriers, including us, must provide “automatic” roaming, which allows roaming customers to place calls as they do in their home coverage area, by simply entering a phone number and pressing “send.” The outcome of this proceeding could affect the availability, terms and conditions of existing and future roaming arrangements into which we enter with other wireless carriers.

 

Pursuant to the Communications Act, all telecommunications carriers that provide interstate telecommunications services, including CMRS providers like us, are required to make an “equitable and non-discriminatory contribution” to support the cost of federal universal service programs. These programs are designed to achieve a variety of public interest goals, including affordable telephone service nationwide, as well as subsidizing telecommunications services for schools and libraries. Contributions are calculated on the basis of each carrier’s interstate end-user telecommunications revenue. The Communications Act also permits states to adopt universal service regulations not inconsistent with the Communications Act or the FCC’s regulations, including requiring CMRS providers to contribute to their universal service funds. Additional costs may be incurred by us and ultimately by our subscribers as result of our compliance with these required contributions.

 

The Communications Assistance for Law Enforcement of 1994, or CALEA, requires all telecommunications carriers, including wireless carriers, to ensure that their equipment is capable of permitting the government, pursuant to a court order or other lawful authorization, to intercept any wire and electronic communications carried by the carrier to or from its subscribers. CALEA remains subject to FCC implementation proceedings. Compliance with the requirements of CALEA, further FBI requests, and the FCC’s rules could impose significant additional direct and/or indirect costs on us and other wireless carriers.

 

Wireless networks also are subject to certain FCC and FAA regulations regarding the relocation, lighting and construction of transmitter towers and antennas and are subject to regulation under the National Environmental Policy Act, the National Historic Preservation Act, and various environmental regulations. Compliance with these provisions could impose additional direct and/or indirect costs on us and other licensees. The FCC’s rules require antenna structure owners to notify the FAA of structures that may require marking or lighting, and there are specific restrictions applicable to antennas placed near airports.

 

We also are subject or potentially subject to number pooling rules; rules governing billing and subscriber privacy; rate averaging and integration requirements; and rules requiring us to offer equipment and services that are accessible to and usable by persons with disabilities. Some of these requirements pose technical and operational challenges to which we, and the industry as a whole, have not yet developed clear solutions. These requirements are all the subject of pending FCC or judicial proceedings, and we are unable to predict how they may affect our business, financial condition or results of operations.

 

We also must satisfy FCC requirements relating to technical and reporting matters. One such requirement is the coordination of proposed frequency usage with adjacent wireless users, permittees and licensees in order to

 

93


Table of Contents

avoid electrical interference between adjacent networks. In addition, the height and power of base radio transmitting facilities of certain wireless providers and the type of signals they emit must fall within specified parameters.

 

State Regulation and Local Approvals

 

The states in which we operate generally have agencies or commissions charged under state law with regulating telecommunications companies, and local governments generally seek to regulate placement of transmitters and rights of way. While the powers of state and local governments to regulate wireless carriers are limited to some extent by federal law, we will have to devote resources to comply with state and local requirements. For example, state and local governments generally may not regulate our rates or our entry into a market, but are permitted to manage public rights of way, for which they can require fair and reasonable compensation. Nevertheless, some states have attempted to assert certification requirements that we believe are in conflict with provisions of the Communications Act that prohibit states from regulating entry of wireless carriers.

 

States may also impose certain surcharges on our customers that could make our service, and the service of other wireless carriers, more expensive. In addition, a number of states and localities have banned, or are considering banning or restricting, the use of wireless phones while driving a motor vehicle.

 

Under the Communications Act, state and local authorities maintain authority over the zoning of sites where our antennas are located. These authorities, however, may not legally discriminate against or prohibit our services through their use of zoning authority. Therefore, while we may need approvals for particular sites or may not be able to choose the exact location for our sites we do not foresee significant problems in placing our antennas at sites in our territory.

 

Federal Regulation of Interconnection and Interexchange Services

 

The Telecommunications Act requires all common carriers (including wireless carriers) to interconnect on a non-discriminatory basis with other carriers, imposes additional requirements on wireline local exchange carriers, and imposes even more comprehensive requirements on the largest ILECs. The latter must provide access to their networks to competing carriers. Among other things, the Communications Act requires these large ILECs to provide physical collocation to competitors to allow them to place qualifying equipment in ILEC central offices; to “unbundle” certain elements of local exchange network facilities and provide these Unbundled Network Elements, or UNEs, to CLECs at low, “forward-looking” prices; and to establish reciprocal compensation for the transport and termination of local traffic. The FCC’s recent decision to eliminate the UNE Platform, or UNE-P, as well as the availability of UNE transport and high capacity UNE loops in some very urban areas has had no material affect on our CLEC operations.

 

ILEC operating entities that serve fewer than 50,000 lines are “rural telephone companies” under the definition in the Communications Act and are exempt from these additional requirements unless and until such exemption is removed by the state regulatory body. Each of our RLEC operations is considered separately and each is currently exempt from the requirements imposed on the largest ILECs.

 

Interconnection Agreements and Recent Regulatory Events.    In order to obtain access to an ILEC network, a CLEC must negotiate an interconnection agreement or “opt-in” to an existing interconnection agreement. These agreements cover, among other items, reciprocal compensation rates and required UNEs. If the parties cannot agree on the terms of an interconnection agreement, the matter is submitted to the applicable state public utility commission or to the FCC for binding arbitration.

 

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, eliminated the mandatory ILEC provisioning of a UNE-P and established a 12 month

 

94


Table of Contents

transition plan for existing customers. The FCC also modified its rules to curtail, in certain markets, the availability to CLECs of high-capacity (i.e., DS-1 and DS-3) UNE loops and UNE dedicated transport. None of the markets in which our CLECs provide service were affected by this curtailment.

 

Access Charges.    The FCC regulates the prices that ILECs and CLECs charge for access to their local telephone networks in originating or terminating interstate transmissions. In 2001, the FCC modified its interstate access rules for RLECs other than the large “price-cap” carriers. The plan adopted by the FCC for these smaller carriers (including our RLECs) was based on a proposal made by an ad hoc coalition referred to as the Multi-Association Group, or MAG, Plan. As it had previously done for the large ILECs, the FCC eliminated the “per-minute” access charges associated with the interstate portion of the loop (i.e., “Carrier Common Line” or “CCL” charges). The FCC replaced these per-minute charges with per-line charges. The rate changes ordered by the FCC were structured to be “revenue neutral” to the carriers. As part of this rate structure, the “cap” on monthly residential subscriber line charge, or SLC, through which carriers recover a portion of their loop costs from their end user customers, was increased to $5.00, and the cap on the business SLC was increased to $9.20, on January 1, 2002. Additional increases in the SLCs took effect in July 2002 and July 2003. To the extent that these increases in the SLCs were insufficient to achieve revenue neutrality for individual RLECs, the FCC established a new component of the federal Universal Service Fund known as the Interstate Common Line, or ICL, fund to make up this revenue shortfall.

 

NTELOS Telephone Company, or NTELOS Telephone, is an “average schedule” company for purposes of interstate access charges. NTELOS Telephone participates in the common line pool tariff administered by the National Exchange Carrier Association, or NECA, and therefore charges SLC rates computed by NECA, but files its own traffic sensitive (i.e., “per-minute”) tariff to establish access rates applicable to switching and transport of telecommunications traffic. R&B Telephone Company is a “rate-of-return” company for purposes of interstate access charges and participates in NECA’s common line pool and NECA’s traffic sensitive pool.

 

Pursuant to the FCC’s order on CLEC interstate access charges issued in 2001, our CLEC’s interstate access charges are now at parity with those of the largest ILECs with which our CLECs compete.

 

In its Intercarrier Compensation docket, the FCC is examining all aspects of intercarrier payments made on both the interstate and intrastate level, including access charges and reciprocal compensation rates for both wireless and wireline carriers of all sizes. It is not known what changes the FCC may make to intercarrier compensation, in what time frame the FCC may make them, and how such changes to intercarrier payments may affect us, or whether we will be able to recover any mandatory reductions in intercarrier charges through increased charges to our subscribers, increased universal service support, or other alternative sources of revenue.

 

Universal Service.    Historically, network access charges were set at levels that subsidized the cost of providing local residential service. The Telecommunications Act requires the FCC to identify and remove such historical “implicit subsidies” of local service subsidy from network access rates, to establish an explicit Universal Service Fund to ensure the continuation of service to high-cost, low-income service areas and to develop a mechanism for the arrangements for payments into that fund by all providers of interstate telecommunications. In 1997, the FCC issued its first order implementing these directives and has continued to refine this implementation in subsequent orders since that time. The FCC’s universal service order established funding mechanisms for high-cost and low-income service areas.

 

Federal universal service fund “high cost” payments are received by our rural RLECs and support the high cost of operations in rural markets. Under universal service rules adopted by the FCC, the funds may be distributed only to a carrier that is designated as an “Eligible Telecommunications Carrier,” or ETC, by the FCC or a state regulatory commission. Our RLECs have been designated as ETCs. Under the Communications Act, however, competitors also can obtain the same per-line support payments as we do without regard for whether the competitor’s cost structure is similar to our own, if the FCC or the SCC determines that granting such support payments to competitors would be in the public interest. Our wireless carrier has been certified as an ETC in

 

95


Table of Contents

Virginia and West Virginia and is receiving universal service fund payments in those states. Several wireless carriers have been designated as ETCs in all or part of our RLEC service territory.

 

The FCC is considering changes to the universal service rules and it is not known how such changes may affect us. See “Risk Factors.”

 

Federal Regulation of Internet and DSL

 

To date, the FCC has treated internet service providers, or ISPs, as enhanced 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 USF. As internet services expand, federal, state and local governments may adopt rules and regulations, or apply existing laws and regulations to the internet.

 

State Regulation of RLEC, CLEC and Interexchange Services

 

Most states require telecommunications providers to obtain authority from state regulatory commissions prior to offering common carrier services. State regulatory commissions generally regulate RLEC rates for intrastate services, including rates for intrastate access services paid by providers of intrastate long distance services. RLECs must file tariffs setting forth the terms, conditions and prices for their intrastate services. Our RLECs are subject to regulation in Virginia by the SCC. Our tariffs are approved by and on file with the SCC for RLEC services in our certificated service territory in and around Waynesboro, Covington and Clifton Forge, Virginia and in portions of Botetourt and Augusta Counties, Virginia. In addition, the SCC establishes service quality requirements applicable to RLECs, including ours, and resolves disputes involving intrastate communications services.

 

The Telecommunications Act preempts state statutes and regulations that restrict entry into the intrastate telecommunications market. As a result, we can provide the full range of competitive intrastate local and long distance services in all states in which we currently operate and in any states into which we may expand. We are certificated as a CLEC in Virginia, West Virginia and Tennessee. Although we file tariffs covering our CLEC services, our rates for such CLEC services generally fluctuate based on market conditions.

 

Local Government Authorizations

 

Certain governmental authorities require permits to open streets for construction and/or franchises to install or expand facilities. We obtain such permits and franchises as required.

 

96


Table of Contents

MANAGEMENT

 

Executive Officers and Directors

 

The following table sets forth certain information, as of June 30, 2005, with respect to our executive officers and directors. All of our officers and directors hold office until their respective successors are elected and qualified or until their earlier resignation or removal.

 

Name


   Age

  

Position


James S. Quarforth

   51   

Chief Executive Officer, President and Chairman of the Board of Directors

Carl A. Rosberg

   52    Executive Vice President, President—Wireless

David R. Maccarelli

   53    Executive Vice President, President—Wireline

Michael B. Moneymaker

   47   

Executive Vice President and Chief Financial Officer, Treasurer and Secretary

Mary McDermott

   50    Senior Vice President—Legal and Regulatory Affairs

Christopher Bloise

   30    Director

Michael Delaney

   50    Director

Andrew Gesell

   38    Director

Michael Huber

   36    Director

Henry Ormond

   32    Director

Steven Rattner

   52    Director

 

Executive Officers

 

James S. Quarforth has served as Chief Executive Officer, President and Chairman of our board of directors since May 2, 2005. Prior to this, Mr. Quarforth served in these capacities with NTELOS Inc. since June 2003 and he has been NTELOS Inc.’s and its subsidiaries’ Chief Executive Officer since May 1, 1999. He served as NTELOS Inc.’s President and Chief Executive Officer from May 1, 1990 to May 1, 1999 and as the Chairman of the Board of Directors of NTELOS Inc. from May 1, 1999 to February 13, 2001. He has been a director of NTELOS Inc. since 1987.

 

Carl A. Rosberg has been our Executive Vice President, President-Wireless, since May 2, 2005. Prior to this, Mr. Rosberg served in this capacity with NTELOS Inc. from June 2003 until May 2, 2005. Mr. Rosberg served as NTELOS Inc.’s Executive Vice President and Chief Operating Officer from February 2001 to June 2003 and as President and Chief Operating Officer from May 1999 to February 2001, when the merger between NTELOS Inc. and R&B Communications, Inc. became effective. From May 1990 to May 1999, he served as Senior Vice President of NTELOS Inc. Prior to joining NTELOS Inc., Mr. Rosberg held senior financial positions with Shenandoah Telecommunications Company.

 

David R. Maccarelli has been our Executive Vice President, President-Wireline, since May 2, 2005. Prior to this, Mr. Maccarelli served in these capacities with NTELOS Inc. from June 2003 until May 2, 2005. Mr. Maccarelli served as NTELOS Inc.’s Senior Vice President—Wireline Engineering and Operations from May 2002 to June 2003. From February 2001 to May 2002, he served as NTELOS Inc.’s Senior Vice President and Chief Technology Officer and from January 1994 to February 2001 as NTELOS Inc.’s Senior Vice President. From January 1993 to December 1993, he served as Vice President—Network Services of NTELOS Inc. From June 1974 to December 1992, he held numerous leadership positions with Bell Atlantic. These positions encompassed operations, engineering, regulatory and business development.

 

97


Table of Contents

Michael B. Moneymaker has been our Executive Vice President and Chief Financial Officer, Treasurer and Secretary since May 2, 2005. Prior to this, Mr. Moneymaker served in these capacities with NTELOS Inc. from June 2003 until May 2, 2005. Mr. Moneymaker served as NTELOS Inc.’s Senior Vice President and Chief Financial Officer, Treasurer and Secretary from May 2000 to June 2003. From May 1999 to May 2000, he served as NTELOS Inc.’s Vice President and Chief Financial Officer, Treasurer and Secretary. From May 1998 to April 1999, he served as NTELOS Inc.’s Vice President and Chief Financial Officer. From October 1995 to April 1998, he served as NTELOS Inc.’s Vice President of Finance. Previously, he was a Senior Manager for Ernst & Young from October 1989 until October 1995.

 

Mary McDermott has been our Senior Vice President—Legal and Regulatory Affairs since May 2, 2005. Prior to this, Ms. McDermott served in these capacities with NTELOS Inc. from August 2001 until May 2, 2005. From March 2000 to August 2001 she served as Senior Vice President and General Counsel of Pathnet Telecommunications, Inc. In April 2001, Pathnet Telecommunications, Inc. filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. From April 1998 to March 2000, she served as Senior Vice President/Chief of Staff for Government Relations for the Personal Communications Industry Association. From May 1994 to April 1998, she served as Vice President—Legal and Regulatory Affairs for the United States Telecom Association.

 

Each of the above executive officers were executive officers, and in the case of Messrs. Quarforth and Rosberg, were also directors, of NTELOS Inc. when it filed a Voluntary Petition under Chapter 11 of the United States Bankruptcy Code in March 2003. NTELOS Inc. emerged from bankruptcy in September 2003.

 

Directors

 

Christopher Bloise has been a director since August 30, 2005. Mr. Bloise has been a Vice President with CVC since 2004. Prior to CVC, Mr. Bloise was the Director of Finance for Focalex, Inc., a technology firm focused on online direct marketing and affiliate services. Prior to Focalex, Mr. Bloise worked at Credit Suisse First Boston in its investment banking division, where he worked on a number of transactions for technology and telecommunications companies.

 

Michael A. Delaney has been a director since May 2, 2005. Mr. Delaney joined Citigroup Venture Capital Ltd., or CVC, a private equity fund management company, in 1989 and has served as a Managing Partner since 1995. Prior to joining CVC, Mr. Delaney worked with Citigroup Investment Bank, an investment banking company, and held various corporate finance positions at General Motors, including manager of acquisitions and divestitures. Mr. Delaney also served in the U.S. Army, retiring as a captain in 1980. Mr. Delaney is also Vice President and Managing Director of Court Square Limited, an entity owned by Citigroup engaged in the leveraged acquisition business. Mr. Delaney is a director of Remy International, Inc., a global component manufacturer, MSX International, Inc., a global provider of outsourced technical business services, and ERICO International Corporation, a designer, manufacturer and marketer of precision-engineered specialty metal products serving global niche product markets.

 

Andrew Gesell has been a director since April 27, 2005. Mr. Gesell has been a Principal of CVC since 2004. Prior to joining CVC, Mr. Gesell worked with Credit Suisse First Boston, an investment banking company, as a Director working with technology companies. Prior to CSFB, Mr. Gesell was a consultant with Ernst & Young, providing bankruptcy and restructuring advisory services.

 

Michael Huber has been a director since April 27, 2005. Since January, 2004, Mr. Huber has served as a Managing Principal of Quadrangle Group LLC. From June 2000 to December 2003, Mr. Huber served as a Vice President of Quadrangle. Prior to joining Quadrangle, Mr. Huber was a Vice President and an Associate in the Media and Communications Group at Lazard. Mr. Huber currently serves on the boards of directors of NuVox Communications, Publishing Group of America, Viziqor Solutions, and as a managing member of Access Spectrum LLC.

 

98


Table of Contents

Henry Ormond has been a director since May 2, 2005. Mr. Ormond has served as a Vice President of Quadrangle since 2003. Prior to joining Quadrangle in 2001, Mr. Ormond was a member of the private equity group at Whitney & Co., where he focused on middle market growth buyouts. Prior to joining Whitney & Co., Mr. Ormond worked at Morgan Stanley in its investment banking division.

 

Steven Rattner has been a director since May 2, 2005. Mr. Rattner is a Managing Principal of Quadrangle. Prior to the formation of Quadrangle in March 2000, Mr. Rattner served as Deputy Chairman and Deputy Chief Executive Officer of Lazard Frères & Co., which he joined as a General Partner in 1989 and where he founded the firm’s Media and Communications Group. Prior to joining Lazard Frères & Co., Mr. Rattner was a Managing Director at Morgan Stanley, where he also founded the firm’s Media and Communications Group. Mr. Rattner is a director of Protection One, Inc., and also serves on the boards of directors of a number of national and local charitable, civic and educational organizations and institutions and of IAC/InterActiveCorp.

 

Family Relationships

 

There are no family relationships between any of our executive officers and directors.

 

Board of Directors

 

Composition of the Board of Directors after the Offering

 

Our certificate of incorporation provides that our board of directors shall consist of such number of directors as determined from time to time by resolution of the board. Upon completion of this offering, the board of directors will consist of eight members. In accordance with the Shareholder’s Agreement, three directors will be designated by each of the CVC Entities and Quadrangle Entities and one director will be the chief executive officer of the Company for so long as he or she is employed by the Company. Further, the Shareholder’s Agreement provides that CVC Entities and the Quadrangle Entities will jointly designate an “independent” director, as the term is defined in the rules of The Nasdaq National Market. Within 90 days of this offering, each of the CVC Entities and Quadrangle Entities will replace one of their non-independent director designees with a director who is “independent” under the rules of The Nasdaq National Market. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors then in office. Each director is elected for a term of one year and serves until a successor is duly elected and qualified or until his or her death, resignation or removal. Pursuant to the Shareholder’s Agreement, each of the CVC Entities and the Quadrangle Entities may designate only two directors if its respective ownership falls below 20%, one director if its respective ownership falls below 10% and no directors if its respective ownership falls below 5%.

 

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.

 

Audit Committee

 

Upon completion of this offering, we will have an audit committee and, as required by SEC and Nasdaq rules, we intend for the audit committee to have a majority of “independent” directors within 90 days of this offering and to be fully independent within one year of this offering. The audit committee will be responsible for:

 

    the appointment, compensation, retention and oversight of the work of the independent auditors engaged for the purpose of preparing and issuing an audit report;

 

    reviewing the independence of the independent auditors and taking, or recommending that our board of directors take, appropriate action to oversee their independence;

 

    approving, in advance, all audit and non-audit services to be performed by the independent auditors;

 

99


Table of Contents
    overseeing our accounting and financial reporting processes and the audits of our financial statements;

 

    establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal control or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;

 

    engaging independent counsel and other advisers as the audit committee deems necessary;

 

    determining compensation of the independent auditors, compensation of advisors hired by the audit committee and ordinary administrative expenses;

 

    reviewing and assessing the adequacy of a formal written charter on an annual basis; and

 

    handling such other matters that are specifically delegated to the audit committee by our board of directors from time to time.

 

Our board of directors will adopt a written charter for our audit committee, which will be posted on our website. KPMG LLP currently serves as our independent accountants.

 

Nominating and Corporate Governance Committee

 

Upon completion of this offering, we will have a nominating and corporate governance committee. We intend to avail ourselves of the “controlled company” exception under the Nasdaq rules, which eliminates the requirement that this committee be comprised entirely of independent directors. The nominating and corporate governance committee will be responsible for:

 

    selecting, or recommending to our board of directors for selection, nominees for election to our board of directors;

 

    making recommendations to our board of directors regarding the size and composition of the board, committee structure and makeup and retirement procedures affecting board members;

 

    monitoring our performance in meeting our obligations of fairness in internal and external matters and our principles of corporate governance; and

 

    such other matters that are specifically delegated to the nominating and corporate governance committee by our board of directors from time to time.

 

Our board of directors will adopt a written charter for our nominating and corporate governance committee, which will specifically address the nominations process and will be posted on our website.

 

Compensation Committee

 

Upon completion of this offering, we will have a compensation committee. We intend to avail ourselves of the “controlled company” exception under the Nasdaq rules, which eliminates the requirement that this committee be comprised entirely of independent directors. The compensation committee will be responsible for:

 

    determining, or recommending to our board of directors for determination, the compensation and benefits of all of our executive officers;

 

    reviewing our compensation and benefit plans to ensure that they meet corporate objectives;

 

    administering our stock plans and other incentive compensation plans; and

 

    such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.

 

Our board of directors will adopt a written charter for our compensation committee, which will be posted on our website.

 

100


Table of Contents

Executive and Director Compensation

 

Our directors and/or the directors of our subsidiaries who are also employed by us do not receive additional compensation for service as directors.

 

The following table sets forth compensation information for certain of our officers whose total annual salary and bonus exceeded $100,000 for the years ended December 31, 2004, 2003 and 2002. These executives are referred to as the “named executive officers” elsewhere in this prospectus.

 

SUMMARY COMPENSATION TABLE

 

        Annual Compensation

  Long-Term Compensation

   
                    Awards

  Payouts

  All Other
Compensation(2)


Name and Principal Position


  Year

  Salary

  Bonus(1)

  Other Annual
Compensation


  Restricted
Stock Value


  Securities
Underlying
Options


  LTIP
Payouts


 
        ($)   ($)   ($)   ($)   (Shs.)   ($)   ($)

James S. Quarforth

  2004   398,826   463,145           0       14,387

    Chief Executive Officer

  2003   370,858   365,518   —     —     332,937   —     12,416

        & President

  2002   362,447   0   —     —     84,000   —     14,218

Carl A. Rosberg

  2004   277,537   254,800           0       11,830

    Executive Vice President,

  2003   250,690   200,000   —     —     158,541   —     9,481

        President—Wireless

  2002   242,824   0   —     —     38,000   —     4,826

David R. Maccarelli

  2004   213,283   195,794           0       10,493

    Executive Vice President,

  2003   181,682   137,000           130,005       8,664

        President—Wireline

  2002   165,830   0           18,000       7,181

Michael B. Moneymaker

  2004   231,433   229,452           0       9,851

    Executive Vice President and Chief Financial Officer,

  2003
2002
  205,414
189,165
  175,000
0
  —  
—  
  —  
—  
  139,515
24,000
  —  
—  
  8,702
4,328

        Treasurer & Secretary

                               

Mary McDermott

  2004   177,645   146,770           0       8,966

    Senior Vice President—

  2003   172,525   111,187   —     —     57,075   —     6,663

        Legal and Regulatory Affairs

  2002   170,666   0   —     —     18,000   —     6,365

(1) Based on achievement of 2002 operating performance objectives, the NTELOS Inc. board of directors initially approved payment of bonuses under the 2002 management incentive plan, such payment to be delayed until December 2003, subject to the Company’s completion of financial restructuring. Thereafter, despite improving operating performance, the board of directors determined not to pay such bonuses for the Company’s officers.
(2) In 2004, we made (a) contributions to the savings plan of $7,380 for James S. Quarforth, $7,380 for Carl A. Rosberg, $7,380 for Michael B. Moneymaker, $7,380 for David R. Maccarelli, and $7,380 for Mary McDermott, (b) group life insurance premium payments of $1,044 for James S. Quarforth, $968 for Carl A. Rosberg, $807 for Michael B. Moneymaker, $743 for David R. Maccarelli, and $620 for Mary McDermott, (c) accidental death and dismemberment payments of $72 for James S. Quarforth, $83 for Carl A. Rosberg, $70 for Michael B. Moneymaker, $64 for David R. Maccarelli, and $53 for Mary McDermott, (d) long-term disability premium payments of $840 for James S. Quarforth, $971 for Carl A. Rosberg, $810 for Michael B. Moneymaker, $747 for David R. Maccarelli, and $622 for Mary McDermott, (e) additional life insurance premium payments of $2,369 for James S. Quarforth, $2,428 for Carl A. Rosberg, $784 for Michael B. Moneymaker, $1,559 for David R. Maccarelli, and $291 for Mary McDermott, and (f) additional long-term disability premium payments of $2,682 for James S. Quarforth.

 

101


Table of Contents
   In 2003, we made (a) contributions to the savings plan of $7,200 for James S. Quarforth, $7,200 for Carl A. Rosberg, $7,200 for Michael B. Moneymaker, $7,200 for David R. Maccarelli, and $5,268 for Mary McDermott, (b) group life insurance premium payments of $1,044 for James S. Quarforth, $832 for Carl A. Rosberg, $647 for Michael B. Moneymaker, $567 for David R. Maccarelli, and $585 for Mary McDermott; (c) accidental death and dismemberment payments of $72 for James S. Quarforth, $72 for Carl A. Rosberg, $56 for Michael B. Moneymaker, $49 for David R. Maccarelli, and $50 for Mary McDermott, (d) long-term disability premium payments of $840 for James S. Quarforth, $667 for Carl A. Rosberg, $520 for Michael B. Moneymaker, $456 for David R. Maccarelli, and $469 for Mary McDermott, (e) additional life insurance premium payments of $1,139 for James S. Quarforth, $710 for Carl A. Rosberg, $279 for Michael B. Moneymaker, $392 for David R. Maccarelli, and $291 for Mary McDermott, and (f) additional long-term disability premium payments of $2,121 for James S. Quarforth.

 

   In 2002, we made (a) contributions to the savings plan of $4,041 for James S. Quarforth, $2,377 for Carl A. Rosberg, $2,115 for Michael B. Moneymaker, $5,671 for David R. Maccarelli, and $4,035 for Mary McDermott, (b) contributions to the deferred compensation plan of $5,570 for James S. Quarforth, $568 for Michael B. Moneymaker, and $935 for Mary McDermott, (c) group life insurance premium payments of $1,044 for James S. Quarforth, $832 for Carl A. Rosberg, $647 for Michael B. Moneymaker, $567 for David R. Maccarelli, and $585 for Mary McDermott; (d) accidental death and dismemberment payments of $72 for James S. Quarforth, $72 for Carl A. Rosberg, $53 for Michael B. Moneymaker, $49 for David R Maccarelli, and $50 for Mary McDermott, (e) long-term disability premium payments of $840 for James S. Quarforth, $835 for Carl A. Rosberg, $666 for Michael B. Moneymaker, $552 for David R. Maccarelli, and $469 for Mary McDermott, (f) additional life insurance premium payments of $1,139 for James S. Quarforth, $710 for Carl A. Rosberg, $279 for Michael B. Moneymaker, $342 for David R. Maccarelli, and $291 for Mary McDermott, and (g) additional long-term disability premium payments of $1,512 for James S. Quarforth.

 

Our named executive officers have not been granted any options to acquire our common stock. As described elsewhere in this prospectus, our named executive officers invested in shares of our Class L common stock following our acquisition of NTELOS Inc.

 

In 2003, when NTELOS Inc. commenced bankruptcy proceedings, our executive officers held options to acquire 636,980 shares of NTELOS Inc. common stock, of which 460,864 were vested including the options granted in 2002 identified in the table above. All of these options were cancelled when NTELOS Inc. emerged from bankruptcy in September 2003. Upon emergence from bankruptcy, NTELOS Inc. granted to our existing executive officers options to acquire NTELOS Inc. common stock as set forth in the above table. All securities of NTELOS Inc., including these options, were acquired in connection with our acquisition of NTELOS Inc.

 

 

102


Table of Contents

Benefit Plans

 

NTELOS Holdings Corp. Equity Incentive Plan

 

The Company originally adopted the NTELOS Holdings Corp. Equity Incentive Plan (the “Equity Incentive Plan”) effective May 2, 2005 to assist the Company and its subsidiaries in attracting and retaining valued employees and consultants. The Equity Incentive Plan has been amended and restated effective as of                     , 2005. The Equity Incentive Plan permits the grant of (i) incentive stock options (“ISOs”); (ii) nonqualified stock options (“NQOs”) (ISOs and NQOs collectively referred to as “Options”); (iii) stock appreciation rights (“SARs”); (iv) restricted stock awards; (v) restricted stock units (“RSUs”); and (vi) incentive awards (collectively “Awards”), as more fully described below.

 

Prior to this offering, NQOs to purchase Class A Common Stock were granted under the Equity Incentive Plan. In connection with this offering, all outstanding NQOs to purchase Class A Common Stock will be converted into NQOs to purchase our Common Stock, par value $0.01 per share (“Common Stock”).

 

All Awards granted under the Equity Incentive Plan are governed by separate written agreements (“Agreements”) between the Company and the participants. No Awards may be granted after May 2, 2015, although Awards granted before that time will remain valid in accordance with their terms.

 

The board of directors of the Company or a committee thereof (the “Committee”) will administer the Equity Incentive Plan. The Committee will designate each eligible individual to whom an Award is to be granted. The Committee has the authority to grant Awards upon such terms and conditions (not inconsistent with the provisions of the Plan), as it may consider appropriate. Any employee, consultant, officer or other service provider of the Company or its subsidiaries is eligible to participate in the Equity Incentive Plan if selected by the Committee. In its discretion, the Committee may delegate all or part of its authority and duties with respect to granting Awards to one or more individuals, provided applicable law so permits. However, the Committee may not delegate its authority with respect to Awards to individuals who are subject to the reporting and other provisions of Section 16 of the Exchange Act or, after the transition period prescribed by the regulations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “ Internal Revenue Code”), with respect to any individual who, as of a taxable year, is our chief executive officer (or is acting in such capacity) or one of our four highest compensated officers (other than our chief executive officer) or is otherwise a “covered employee,” as defined in the regulations under Internal Revenue Code Section 162(m).

 

Subject to certain adjustments, the maximum number of shares of Common Stock that may be issued under the Equity Incentive Plan in connection with Awards is                     . In any calendar year, no participant may receive Options, SARs, restricted stock awards, RSUs or any combination thereof that relate to more than                      shares. No participant may receive an incentive award payment in any calendar year that exceeds $                    . In the event of a reorganization, recapitalization, stock split, spin-off, split-off, split-up, stock dividend, issuance of stock rights, combination of shares, merger, consolidation or any other change in the corporate structure of the Company affecting the Common Stock, or any distribution to stockholders other than a cash dividend, the Committee will make appropriate adjustment in the number and kind of shares authorized by the Equity Incentive Plan and covered under outstanding Awards as it determines appropriate. Shares of our Common Stock subject to Awards that expire unexercised or are otherwise forfeited shall again be available for Awards under the Equity Incentive Plan.

 

An Option entitles the holder to purchase from the Company a stated number of shares of our Common Stock. The Committee will specify the number of shares of Common Stock subject to each Option and the exercise price for such Option. The exercise price may not be less than the fair market value of a share of our Common Stock on the date the Option is granted. An ISO may only be granted to an employee of ours. Any shareholder who beneficially owns more than ten percent of our combined voting power or that of an affiliated company (determined by applying certain attribution rules) shall be considered a 10% shareholder. If we grant ISOs to any 10% shareholder, the exercise price shall not be less than 110% of the fair market value of our

 

103


Table of Contents

Common Stock on the date the Option is granted. Generally, all or part of the exercise price may be paid (i) in cash or by a certified or bank cashier’s check; (ii) if approved by the Committee, by tendering shares of Common Stock; (iii) by any other legal method acceptable to the Committee; or (iv) by any combination of such methods.

 

All Options shall be exercisable in accordance with the terms of the applicable Agreement. The maximum period in which an Option may be exercised shall be determined by the Committee on the date of grant but shall not exceed 10 years. However, if we grant ISOs to any 10% shareholder, then the maximum period in which the option may be exercised is five years. In the case of ISOs, the aggregate fair market value (determined as of the date of grant) of our Common Stock with respect to which such ISOs become exercisable for the first time during any calendar year under any of our plans or the plans of any affiliated companies cannot exceed $100,000. ISOs granted in excess of this limitation will be treated as NSOs.

 

If a participant terminates employment with the Company (or its subsidiaries) due to death or disability, the participant’s unexercised Options may be exercised, to the extent they were exercisable on the termination date, for a period of six months from the termination date or until the expiration of the Option term, if shorter. If the participant terminates employment with the Company (or its subsidiaries) for cause (as defined in the Equity Incentive Plan), all unexercised Options (whether vested or unvested) shall terminate and be forfeited on the termination date. If the participant’s employment terminates for any other reason, any vested but unexercised Options may be exercised by the participant, to the extent exercisable at the time of termination, for a period of 30 days from the termination date (60 days from the termination date if the participant incurs a termination of employment by the Company or its subsidiaries other than for cause) or until the expiration of the Option term, whichever period is shorter. Any Options that are not exercisable at the time of termination of employment shall terminate and be forfeited on the termination date.

 

A SAR can be granted alone or in tandem with an Option. A SAR entitles the holder to receive, upon exercise of the SAR, Common Stock with a fair market value equal to the excess of (i) the fair market value on the date of exercise of each share of Common Stock subject to the exercised portion of the SAR over (ii) the fair market value of each such share on the date of grant of the SAR. A corresponding SAR is granted in tandem with an Option. A corresponding SAR entitles the holder to exercise the Option or the SAR at which time the other related Award shall expire. Upon exercise of the corresponding SAR, the holder is entitled to receive Common Stock with a fair market value equal to the excess of (i) the fair market value on the date of exercise of each share of our Common Stock subject to the exercised portion of the SAR over (ii) the exercise price of the related Option. No participant may be granted corresponding SARs under any of our plans or the plans of any affiliated companies that are related to ISOs which are first exercisable in any calendar year for shares of our Common Stock having an aggregate fair market value (determined as of the date of grant) that exceeds $100,000.

 

A restricted stock award is a grant of shares of our Common Stock, which may be subject to forfeiture restrictions during a restriction period. The Committee will determine the price, if any, to be paid by the participant for each share of Common Stock subject to a restricted stock award. The Committee may condition the expiration of the restriction period upon: (i) the participant’s continued service over a period of time with the Company or its subsidiaries; (ii) the achievement by the participant, the Company or its subsidiaries of any other performance goals set by the Committee; or (iii) any combination of the above conditions as specified in the Agreement. If the specified conditions are not attained, unless otherwise provided in the Agreement, the participant will forfeit the portion of the restricted stock award with respect to which those conditions are not attained, and the underlying Common Stock will be forfeited to the Company. At the end of the restriction period, if the conditions, if any, have been satisfied, the restrictions imposed will lapse with respect to the applicable number of shares. During the restriction period, a participant will have all rights of a stockholder with respect to the restricted stock, including the right to receive dividends and vote the shares; provided, however, that during such period a participant may not transfer or otherwise dispose of shares of restricted stock and the Company shall retain custody of the certificates evidencing such shares of restricted stock. The board of directors of the Company may, in its discretion, modify or accelerate the vesting and delivery of shares of restricted stock.

 

104


Table of Contents

RSUs are granted in reference to a specified number of shares of our Common Stock and entitle the holder to receive, on achievement of specific performance goals established by the Committee and for continued employment as set forth in the applicable Agreement, one share of Common Stock for each such share of Common Stock covered by the RSU.

 

An incentive award is granted in reference to a specified dollar amount. Incentive awards entitle the holder to receive, on achievement of the specified performance goals established by the Committee and for continued employment as set forth in the applicable Agreement: (i) a cash payment, (ii) our Common Stock or (iii) a combination thereof as set forth in the incentive award.

 

Performance goals may be linked to a variety of factors including the participant’s completion of a specified period of employment or service with us or an affiliated company. Additionally, performance goals can include objectives stated with respect to our, an affiliated company’s or a business unit’s (i) total stockholder return, (ii) total stockholder return as compared to total return (on a comparable basis) of a publicly available index, (iii) net income, (iv) pretax earnings, (v) funds from operations, (vi) earnings before interest expense, taxes, depreciation and amortization, (vii) operating margin, (viii) earnings per share, (ix) return on equity, capital, assets or investment, (x) operating earnings, (xi) working capital, (xii) ratio of debt to stockholders equity and (xiii) revenue.

 

The Committee may impose restrictions, including without limitation, confidentiality and non-solicitation restrictions, on the grant, exercise or payment of an Award as it determines appropriate.

 

Generally, Awards granted under the Equity Incentive Plan shall be nontransferable except by will or by the laws of descent and distribution. Nevertheless, to the extent that applicable Agreement so provides, Awards, other than ISOs or their corresponding SARs, may be transferred by the participant to certain family members. The holder of the transferred Award shall be bound by the same terms and conditions that governed the Award during the period held by the participant, except that the transferees may not transfer the Award except by will or the law of descent and distribution.

 

No participant shall have any rights as a stockholder with respect to shares issued pursuant to Options, SARs, RSUs or an incentive award unless and until such awards are settled in shares of our Common Stock.

 

No Option or SAR shall be exercisable, no shares of our Common Stock shall be issued, no certificates for shares of our Common Stock shall be delivered and no payment shall be made under the Equity Incentive Plan except in compliance with all applicable laws.

 

The board of directors of the Company may amend, suspend or terminate the Equity Incentive Plan at any time; provided, however, that no such termination may negatively affect Awards outstanding at the time of the termination without the holder’s permission.

 

In the event of or in anticipation of a change in control (as defined in the Plan) (i) some or all outstanding Options and/or SARs (whether or not then exercisable) may be terminated without any payment therefor, provided the holders are given prior written notice of the termination and an opportunity to exercise their Options or SARs to the extent then exercisable, (ii) some or all outstanding Options and/or SARs (whether or not then exercisable) may be terminated in consideration of a payment with respect to each share of our Common Stock for which the Option (or SAR) is then exercisable, of the excess, if any, of the fair market value on such date of the Common Stock subject to the exercisable portion of the Option (or SAR) over the exercise price (or the fair market value of each such share on the date of grant of the SAR), (iii) outstanding restricted stock awards that are not then vested may be terminated without any payment to the holder thereof and (iv) outstanding RSUs and/or incentive awards that are not then earned and payable may be terminated without any payment to the holder thereof.

 

105


Table of Contents

The Committee, in its sole discretion, has the authority to determine the application of the foregoing provisions.

 

If the grant, vesting, exercisability or payment of any Award granted under the Equity Incentive Plan, either alone or with any other payments from the Company or any affiliate, would subject a participant to any excise taxes and penalties imposed on “excess parachute payments” within the meaning of Section 280G(b)(2) of the Internal Revenue Code or any similar tax imposed by state or local law, then such Award will be reduced if, and only to the extent that, such reduction will allow the participant to receive a greater net after tax amount than the participant would receive without such reduction.

 

NTELOS Holdings Corp. Employee Stock Purchase Plan

 

The Company will establish the NTELOS Holdings Corp. Employee Stock Purchase Plan (the “Purchase Plan”), effective as of                     , 2005. The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the Purchase Plan, each eligible employee can elect to have a portion of his or her compensation for the calendar month withheld to buy shares of Common Stock, subject to certain limits on the number of shares that may be bought. The maximum amount of compensation that can be withheld in each calendar month to buy shares of Common Stock is $             for each $100 of the eligible employee’s annual compensation.

 

The Purchase Plan has reserved for purchase              shares of the Company’s Common Stock. If any right to buy Common Stock granted under the Purchase Plan expires unexercised, the number of shares of Common Stock subject to such right will again be available for purchase. Upon (i) the dissolution or liquidation of the Company, (ii) a merger or consolidation of the Company in which the Company is not the surviving corporation, or (iii) any other similar event or transaction, each participant who holds purchase rights under the Purchase Plan will be entitled to purchase the same relative cash, securities, and/or other property which a holder of Common Stock would be entitled to receive in connection with such transaction.

 

The amount of Common Stock that a participant can buy is limited as follows: (i) no participant may buy in any calendar year more than $25,000 worth of Common Stock, (ii) no participant may buy more than              shares of Common Stock during any calendar month, and (iii) five percent (5%) or more stockholders (after certain constructive attribution rules) may not participate in the Purchase Plan. The purchase price per share of Common Stock will be the lesser of (i) ninety percent (90%) of the fair market value of the Common Stock on the first day of the Participation Period or (ii) ninety percent (90%) of the fair market value of the Common Stock on the last day of the Participation Period.

 

The Company will withhold applicable federal, state, and local taxes from a participant’s compensation or require the participant to remit amounts sufficient to satisfy all such federal, state, and local withholding tax requirements from participation in the Purchase Plan.

 

The Compensation Committee of the Board or the Board itself will administer the Purchase Plan and has full and final authority, in its discretion, to take any action with respect to the Purchase Plan (to the extent not inconsistent with the Purchase Plan).

 

The Board may at any time modify, amend, suspend, or terminate the Purchase Plan or any purchase right granted thereunder; provided, however, that (i) stockholder approval will be required of any amendment to the Purchase Plan to the extent Section 423 of the Internal Revenue Code or other applicable law, rule, or regulation requires stockholder approval (including without limitation any amendment that increases the aggregate number of shares of Common Stock that may be purchased under the Purchase Plan or changes individuals who are eligible to participate in the Purchase Plan); and (ii) no amendment to the Purchase Plan or a purchase right may materially and adversely affect any purchase right outstanding at the time of the amendment without the consent of the holder thereof, except to the extent the Purchase Plan otherwise provides. The Purchase Plan will terminate automatically at the time that all shares of the Common Stock subject to the Purchase Plan have been purchased thereunder.

 

106


Table of Contents

Employment Agreements

 

NTELOS Inc. entered into new employment agreements on May 2, 2005 (the “Effective Date”) with its executive officers, James S. Quarforth, Carl A. Rosberg, David R. Maccarelli, Michael B. Moneymaker and Mary McDermott. These new employment agreements replaced employment agreements previously entered into with such employees. The employment agreements were amended effective                     , 2005 to add the Company as a party, to comply with recent law changes under Section 409A of the Internal Revenue Code and to make certain other changes.

 

Our employment agreement with Mr. Quarforth terminates on January 1, 2010. The term of each of our other employment agreements is four years from the Effective Date. The terms will renew automatically for successive one-year periods, unless either party gives written notice to the other not less than six months prior to the end of the original term (or any subsequent term, as the case may be). Notwithstanding the foregoing, in the event of a change in control of the Company (as defined in the employment agreement), if the executive is still employed by the Company at such time, the remaining term shall be extended by up to 24 months.

 

Each executive is entitled to receive the base salary set forth in such executive’s employment agreement, which will be reviewed annually throughout the term. Under each executive’s respective employment agreement, the following executives receive the following annual current base salary:

 

Name


   Salary

James S. Quarforth

   $ 418,601

Carl A. Rosberg

     282,150

David R. Maccarelli

     225,422

Michael B. Moneymaker

     235,125

Mary McDermott

     182,875

 

In addition to base salary, the executives are entitled to participate in any stock-based incentive compensation program established by the Company and all other employee benefit plans of the Company, including its executive supplemental retirement plan. The executives are also eligible to participate in the team incentive plan of the Company with annual incentive targets of 60% of base salary for Mr. Quarforth, 55% of base salary for Messrs. Rosberg, Maccarelli and Moneymaker and 50% of base salary for Ms. McDermott. In addition to these other benefits, the Company also agrees to pay the premiums on a term life insurance policy for each of its executive officers in accordance with his or her employment agreement.

 

With respect to any options granted to the executives prior to the initial public offering of the Company’s stock, the portion of the options that are to become vested on May 2, 2006 (assuming continued employment) will become vested on the closing of the initial public offering provided the executive is still employed at such time. The remaining options will become vested at the time or times set forth in the applicable option agreements.

 

The executive’s employment agreement will terminate automatically upon his or her death. The Company may terminate the executive’s employment for any disability that has continued for a period aggregating six months within any 12 consecutive months. In addition, the Company may terminate the executive’s employment at any time for “cause” (as defined below) upon written notice, but in no event shall a termination be deemed for cause unless it is within 180 days of when the Company learns of the conduct that constitutes cause and the chief executive officer or the board of directors of the Company concludes that the situation warrants a determination that the executive’s employment terminated for cause. The Company may also terminate the executive’s employment at any time without cause, upon written notice. The executive may terminate his or her employment upon prior written notice not less than 60 days prior to the effective date of such termination. If the executive terminates his or her employment for “good reason” (as defined below) it will be deemed to be a termination of the executive’s employment without cause by the Company. In no event shall any termination of employment by the executive be for “good reason” unless it is within 180 days of when the executive learns of the conduct that constitutes “good reason.”

 

107


Table of Contents

“Cause” generally means any of the following: (i) gross or willful misconduct; (ii) willful and repeated failure to comply with the lawful directives of the board of directors of the Company or any supervisory personnel; (iii) any criminal act or act of dishonesty or willful misconduct that has a material adverse impact on the property, operations, business or reputation of the Company or its subsidiaries or any act of fraud, dishonesty or misappropriation involving the Company or its subsidiaries; (iv) any conviction or plea of guilty or nolo contendere to a felony or a crime involving dishonesty; (v) the material breach of the terms of any confidentiality, non-competition, non-solicitation or employment agreement the executive has with the Company or its subsidiaries; (vi) acts of malfeasance or negligence in a matter of material importance to the Company or its subsidiaries; (vii) the material failure to perform the duties and responsibilities of executive’s position after written notice and a reasonable opportunity to cure (not to exceed 45 days); (viii) grossly negligent conduct; or (ix) activities materially damaging to the Company or its subsidiaries.

 

For purposes of the employment agreement, the executive will also be deemed to be terminated for “Cause” if, in connection with the sale, transfer, conveyance or other disposition of all or substantially all of the assets (whether by asset sale, stock sale, merger, combination or otherwise) of one or more of the material lines of business of the Company (i) one or more of the purchasers in such material line of business sale offers employment to the executive which employment offer would not permit the executive to terminate employment pursuant to the definition of good reason; (ii) the executive declines such employment offer; and (iii) the Company terminates the executive’s employment within six (6) months of the consummation of the material line of business sale. “Material line of business” means any line or lines of business or service or group of services which represent(s) in the aggregate either 25% or more of the consolidated revenues or 25% or more of the consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) of the Company for the twelve-month period ended on the last day of the most recently ended fiscal quarter for the Company.

 

“Good reason” generally means, after written notice by the executive to the board of directors of the Company, and a reasonable opportunity for the Company to cure (not to exceed 45 days) any of the following: (i) the executive’s base salary is not paid or is reduced by more than 10 percent in the aggregate or other than as part of a salary reduction program pursuant to which the base salaries of the Chief Executive Officer, all Executive Vice Presidents and all Senior Vice Presidents are reduced by the same percentage at the same time and for the same period of time; (ii) the executive’s target incentive payments are reduced; (iii) the executive’s job duties and responsibilities are diminished (but a reduction in the size of the Company as a result of a sale of a material line of business shall not alone constitute a diminution in the executive’s job duties and responsibilities and any diminution in the executive’s job duties and responsibilities after the Company gives the executive notice of non-renewal of the employment term shall not be considered “good reason”); (iv) the executive is required to relocate more than 50 miles from Waynesboro, Virginia; (v) the executive is not provided benefits (e.g., health insurance) that are comparable in all material respects to those previously provided to the executive; (vi) the executive is directed by the board of directors or an officer of the Company or an affiliate (or the Company’s successor or an affiliate thereof) to engage in conduct that counsel of the Company (or mutually agreed upon counsel if requested by the executive) has advised is likely to be illegal and that such counsel states with specificity why such direction is likely to be illegal (including a proposal for modification of such direction which in counsel’s opinion would not be likely to be illegal); or (vii) the executive is directed by the board of directors or an officer of the Company or an affiliate (or the Company’s successor or an affiliate thereof) to refrain from acting and counsel of the Company (or mutually agreement upon counsel if requested by the executive) has advised that such failure to act is likely to be illegal and that such counsel states with specificity why such direction is likely to be illegal (including a proposal for modification of such direction which in counsel’s opinion would not be likely to be illegal). If the executive is directed to engage in conduct that he reasonably believes is likely to be to be illegal or to refrain from acting and the executive reasonably believes that refraining to act is likely to be illegal, the executive can express such reservations to the board of directors of the Company or directing officer, and the Company shall, at its expense, engage its counsel (or mutually agreed upon counsel if requested by the executive) to advise as to whether such conduct or failure to act is likely to be illegal. Subject to the 180 day time limit in the employment agreement, if any of the events occur that would entitle the executive to terminate his or her employment for good reason thereunder and the executive does not

 

108


Table of Contents

exercise such right to terminate, any such failure shall not operate to waive the executive’s right to terminate the executive’s employment for any subsequent action or actions, whether similar or dissimilar, that would constitute good reason. For purposes of clarity, it is acknowledged that expiration of the term of the employment agreement (including notice of non-renewal) shall not be considered “good reason” thereunder.

 

If an executive’s employment is terminated for any reason, the executive shall still be entitled to receive the employee benefits to which he or she is entitled pursuant to the terms of the relevant employee benefit plans in which the executive participates. If an executive’s employment is terminated because of disability, the executive shall receive his or her normal compensation for the period of disability prior to termination of employment, and then will be entitled to receive a pro rata portion of his or her incentive payments from the team incentive plan and the “standard termination payments” (which are unreimbursed business and entertainment expenses incurred in accordance with the Company’s policy, and unreimbursed medical and dental expenses and other employee benefits in accordance with relevant employee benefit plans). If any of the executives is terminated, other than for cause or by death or disability, or if any one of them terminates employment for good reason, he or she is entitled to (i) 75% of his or her base salary for Ms. McDermott, 50% for Messrs. Quarforth and Moneymaker and 40% for Messrs. Rosberg and Maccarelli, for a period of time thereafter equal to 24 months (the “termination period”); (ii) a lump sum, determined on a net present value basis, using a reasonable discount rate determined by the board of directors of the Company, equal to the full target incentive payments for the year that includes the termination date multiplied by a fraction, the numerator of which is the number of months in the termination period and the denominator of which is 12; (iii) standard termination payments (as defined above); (iv) continued participation in the employee welfare benefit plans for the executive and his or her dependants (other than disability and life insurance) (which coverage or reimbursements for coverage will cease if the executive and/or the executive’s dependents become participants under an employee welfare benefit plan of another employer that provides the same or similar benefits); and (v) post-retirement medical benefits for the executive and executive’s dependants, regardless of whether they are eligible for them, under the Company’s post-retirement benefit plan. Notwithstanding the foregoing, to the extent necessary to comply with Internal Revenue Code Section 409A, termination payments may be delayed for a period of six months after termination of employment as necessary to avoid any excise tax.

 

If any of the executives is terminated for cause, dies or voluntarily terminates employment other than for good reason, he or she is only entitled to (i) payment of earned and unpaid base salary to the date of termination if terminated for cause, (ii) payment of earned and unpaid incentive payments in the case of death, and (iii) the standard termination payments (as defined above).

 

The employment agreements provide that if any benefits payable or to be provided thereunder and any other payments from NTELOS Inc. or any affiliate would subject the executive to any excise taxes and penalties imposed on “parachute payments” within the meaning of Section 280G(b)(2) of the Internal Revenue Code or any similar tax imposed by state or local law, then such payments or benefits will be reduced (but not in excess of the amounts of payments or benefits payable or to be provided under the agreement) if, and only to the extent that, such reduction will allow the executive to receive a greater net after tax amount than the executive would receive without such reduction.

 

The agreements also provide that, during the executive’s employment and for a period of 24 months after the end of the executive’s employment with the Company (the “non-competition period”), the executive will (i) not compete, directly or indirectly, with the Company or any subsidiary or (ii) solicit certain current and former employees. In consideration of the executive’s non-competition and non-solicitation agreement with respect to periods after termination of employment, the Company will pay the executive an amount equal to 60% of his or her base salary during the non-competition period, in such periodic installments as his or her base salary for Messrs. Rosberg and Maccerelli, 50% for Messrs. Quarforth and Moneymaker and 25% for Ms. McDermott, was being paid immediately prior to termination of employment, but only if the Company has terminated the executive without cause or if the executive has terminated his or her employment for good reason. If the executive breaches any of the non-competition or non-solicitation restrictions, the executive waives and forfeits

 

109


Table of Contents

any and all rights to any further payments under his or her employment agreement and the executive will repay the Company any such consideration and any severance pay or benefits previously received under such agreement. The agreements also prohibit the executives from using any confidential or proprietary information of the Company at any time for any reason not connected to their employment with the Company.

 

Pension Plan/Defined Benefit Plan Disclosure

 

The following table reflects the estimated aggregate retirement benefits to which certain of our executive officers, including each of the named executive officers in the Summary Compensation Table, are expected to be entitled under the provisions of our non-contributory, funded employee retirement plan and the executive supplemental retirement plan (the “Plans”). The table illustrates the amount of aggregate annual retirement benefits payable under the Plans for an executive retiring in 2005 at age 65 computed on a straight life annuity. The amount of benefit assumes that the executive has completed a minimum of 15 years of service. The supplemental benefit amount will not be paid for service of less than 15 years. Additional aggregate benefits are not earned for service in addition to 35 years. Amounts listed will be reduced by social security benefits and offset by employer 401(k) contributions.

 

Annual Retirement Benefits Payable for Respective Years of Service


Average

Annual
Compensation


   15 Years

   20 Years

   25 Years

   30 Years

   35 Years

$200,000

   $100,000    $115,000    $130,000    $145,000    $160,000

$300,000

   $150,000    $172,500    $195,000    $217,500    $240,000

$400,000

   $200,000    $230,000    $260,000    $290,000    $320,000

$500,000

   $250,000    $287,500    $325,000    $362,500    $400,000

$600,000

   $300,000    $345,000    $390,000    $435,000    $480,000

$700,000

   $350,000    $402,500    $455,000    $507,500    $560,000

$800,000

   $400,000    $460,000    $520,000    $580,000    $640,000

$900,000

   $450,000    $517,500    $585,000    $652,500    $720,000

 

The number of credited years of service as of December 31, 2004 for James S. Quarforth, David R. Maccarelli, Carl A. Rosberg, Michael B. Moneymaker, and Mary McDermott is 25 years, 13 years, 17 years, 10 years, and 4 years, respectively.

 

Director Compensation

 

After this offering, all independent directors will receive a retainer of $             per year, payable monthly. In addition, each independent director will receive an initial one-time grant of              options to purchase shares of our common stock with an exercise price of $            . Additionally, the chairperson of our audit committee will receive an annual retainer of $            . Each independent director will also receive $             for each board meeting and shareholder meeting attended in person and $             if attended telephonically in lieu of attending in person. For attendance at board committee meetings, each independent director will receive $             for attending in person or $             for attending telephonically in lieu of attending in person. We will reimburse each of our directors for reasonable travel and other expenses incurred in connection with attending all board and board committee meetings.

 

Directors Option Plan

 

The Company adopted the NTELOS Holdings Corp. Director Stock Option Plan (the “Director Plan”) effective                     , 2005 to assist the Company in attracting and retaining qualified and experienced individuals for service as directors. The Director Plan provides for automatic grants of nonqualified stock options to the individuals serving as directors of the Company. No options may be granted under the Director Plan after                     , 2015, although options granted before that time will remain valid in accordance with their terms. The board of directors of the Company will administer the Director Plan.

 

110


Table of Contents

Subject to certain adjustments, the maximum number of shares of Common Stock that may be issued under the Director Plan is              shares of Common Stock. In the event of a reorganization, recapitalization, stock split, spin-off, split-off, split-up, stock dividend, issuance of stock rights, combination of shares, merger, consolidation or any other change in the corporate structure of the Company affecting the Common Stock, or any distribution to stockholders other than a cash dividend, the board of directors will make appropriate adjustments in the number and kind of shares authorized by the Director Plan and any outstanding options as it determines appropriate. Shares of our Common Stock that expire unexercised shall again be available for awards of options under the Director Plan.

 

All grants of options under the Director Plan will be automatic and nondiscretionary (except that the board of directors may decrease the number of shares subject to options to be granted under the Director Plan and extend the vesting term of such options) and subject to the terms and conditions provided in the Director Plan. All options granted under the Director Plan will be evidenced by a separate written agreement between the Company and the director (an “Agreement”) that will set forth such other terms, conditions and restrictions as the board of directors may determine to be appropriate.

 

Subject to the provisions of the Director Plan, each director who is elected or appointed to the board of directors of the Company shall be granted on the date of election or appointment to office a nonqualified option to purchase              shares of Common Stock (or such lower number as the board of directors shall determine). Additionally, subject to the provisions of the Director Plan, each director serving as a director, as of the first business day of each fiscal year of the Company, shall be granted at such time an option to purchase an additional              shares of Common Stock (or such lower number as the board of directors shall determine). If at any time there are not sufficient shares of Common Stock reserved under the Director Plan for grants of such options, the options to be granted thereunder at such time shall be proportionately adjusted.

 

Subject to earlier termination, all options granted under the Director Plan will expire no later than ten years from their date of grant. The exercise price for each share of our Common Stock may not be less than the fair market value of our Common Stock on the date the option is granted. Options granted under the Director Plan become exercisable with respect to         % (or such lesser percentage as is approved by the board of directors) of the shares of Common Stock subject to the option on each annual anniversary of the date of grant, provided the director is still serving on the board of directors at that time, until the option becomes fully exercisable, provided the option does not expire by its terms before that time. The exercise price for an option granted under the Director Plan may be paid (i) in cash or by a certified or bank cashier’s check; (ii) if approved by the board of directors, by tendering shares of Common Stock; (iii) by any other legal method acceptable to the board of directors; or (iv) by any combination of such methods.

 

No director shall have any rights as a stockholder with respect to shares covered by options under the Director Plan unless and until such options are settled in shares of Common Stock. No option shall be exercisable, no shares of Common Stock shall be issued, and no certificates for shares of Common Stock shall be delivered except in compliance with all applicable laws. The board of directors of the Company may amend, suspend, or terminate the Director Plan at any time; provided, however, that no such termination may negatively effect options outstanding at the time of the termination without the directors’ permission.

 

Any option granted to a director whose status as a director is terminated because of death or disability may be exercised, to the extent exercisable on the date of death or disability, at any time within 12 months after the date of such termination or prior to the date on which the option expires by its terms, whichever is earlier.

 

The option of a director whose status as a director terminates because of removal from the board of directors on or within one year after a change in control (as defined in the Plan), may be exercised, to the extent exercisable on the date of such termination, at any time within six months after the date of such termination or prior to the date on which the option expires by its terms, whichever is earlier.

 

111


Table of Contents

Any option granted to a director whose status as a director is terminated for any reason other than as specified above may be exercised, to the extent exercisable on the date of such termination, within three months after the date of such termination or prior to the date on which the option expires by its terms, whichever is earlier.

 

The board of directors may accelerate the exercisability of the option of any director whose status as a director terminates because of removal on or within one year after a change in control. In the event of a change in control, the board of directors (i) may declare that some or all outstanding options previously granted shall terminate as of a date on or before the change in control without any payment, provided the board gives prior written notice to the holders of the options and gives them the right to exercise them before such date to the extent then exercisable and/or (ii) may terminate some or all outstanding options on consummation of a change in control in consideration of payment to the holder of each option, with respect to each share of Common Stock to which the option is then exercisable, of the excess of the fair market value on such date of the shares of Common Stock subject to the option over the option exercise price.

 

Generally, options granted under the Director Plan shall be nontransferable except by will or by the laws of descent and distribution. Nevertheless, to the extent the applicable Agreement so provides, an option may be transferred by a director to certain family members. The holder of an option transferred pursuant to these provisions shall be bound by the same terms and conditions that governed such option during the period that it was held by the director. However, such transferee may not transfer the option except by will or the laws of descent and distribution.

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our compensation committee. No interlocking relationship exists between any member of the board of directors or any member of the compensation committee of any other company.

 

Director and Officer Indemnification and Limitation on Liability

 

Our certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporation Law and except as otherwise provided in our by-laws, none of our directors shall be liable to us or our stockholders for monetary damages for a breach of fiduciary duty. In addition, our certificate of incorporation provides for indemnification of any person who was or is made, or threatened to be made, a party to any action, suit or other proceeding, whether criminal, civil, administrative or investigative, because of his or her status as a director or officer of NTELOS, or service as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at our request to the fullest extent authorized under the Delaware General Corporation Law against all expenses, liabilities and losses reasonably incurred by such person. Further, our certificate of incorporation provides that we may purchase and maintain insurance on our own behalf and on behalf of any other person who is or was a director, officer or agent of NTELOS or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.

 

112


Table of Contents

PRINCIPAL STOCKHOLDERS

 

The following table sets forth information, as of the date of this prospectus, regarding the beneficial ownership of our common stock: (1) immediately prior to the consummation of this offering; (2) assuming all of the issued and outstanding Class A common stock and Class L common stock has been reclassified as the common stock, and (3) as adjusted to reflect the sale of the shares of common stock in this offering by:

 

    each person that is a beneficial owner of more than 5% of our outstanding common stock;

 

    each of our named executive officers;

 

    each of our directors; and

 

    all directors and named executive officers as a group.

 

Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on                      shares of our common stock outstanding as of the date of this prospectus, and                      shares of common stock outstanding after the completion of this offering. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this prospectus are considered outstanding and beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless indicated otherwise in the footnotes, the address of each individual listed in the table is c/o NTELOS Holdings Corp., 401 Spring Lane, Suite 300, PO Box 1990, Waynesboro, Virginia 22980.

 

    

Number of

Shares Owned Prior to

this Offering


  

Number of

Shares Owned After this

Offering**


Name and Address of Beneficial Owner


     Number  

         %      

       Number    

         %      

Directors, named executive officers and stockholders owning more than 5%:

                   

Quadrangle Capital Partners LP

    375 Park Avenue

    New York, NY 10152

                   

Citigroup Venture Capital Equity Partners, L.P.

    399 Park Avenue

    New York, NY 10043

                   

Chistopher Bloise

                   

Michael Delaney

                   

Andrew Gesell

                   

Michael Huber

                   

Henry Ormond

                   

Steven Rattner

                   

James S. Quarforth

                   

Carl A. Rosberg

                   

Michael B. Moneymaker

                   

David R. Maccarelli

                   

Mary McDermott

                   

All directors and named executive officers as a group

                   

* Less than 1%
** Assumes underwriters have not exercised their option to purchase additional shares.

 

113


Table of Contents

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Shareholders Agreement

 

On May 2, 2005, we entered into a shareholders agreement with the CVC Entities, the Quadrangle Entities and management shareholders. The shareholders agreement provides that our board of directors will consist of seven directors, including three designees of the CVC Entities, three designees of the Quadrangle Entities and our chief executive officer. Our board of directors may not take certain significant actions, such as a merger or sale of assets in excess of $1 million, incurrences of indebtedness, amendments of organizational documents and certain other matters, subject to certain specified exceptions, without the approval of a majority of the board of directors which shall include at least two board designees of each of the CVC Entities and the Quadrangle Entities.

 

The shareholders agreement covers matters of corporate governance, restrictions on transfer of our securities, tag-along rights, rights to compel a sale, preemptive rights, rights to compel a liquidity event, registration rights and information rights.

 

Upon completion of this offering, the board of directors will consist of eight members. In accordance with the Shareholder’s Agreement, three directors will be designated by each of the CVC Entities and Quadrangle Entities and one director will be the chief executive officer of the Company for so long as he or she is employed by the Company. Further, the Shareholder’s Agreement provides that CVC Entities and the Quadrangle Entities will jointly designate an “independent” director, as the term is defined in the rules of The Nasdaq National Market. Within 90 days of this offering, each of the CVC Entities and Quadrangle Entities will replace one of their non-independent director designees with a director who is “independent” under the rules of The Nasdaq National Market. Any additional directorships resulting from an increase in the number of directors may only be filled by the directors then in office. Each director is elected for a term of one year and serves until a successor is duly elected and qualified or until his or her death, resignation or removal. Pursuant to the Shareholder’s Agreement, each of the CVC Entities and the Quadrangle Entities may designate only two directors if its respective ownership falls below 20%, one director if its respective ownership falls below 10% and no directors if its respective ownership falls below 5%.

 

Advisory Agreements

 

We were formed in January 2005 by the CVC Entities and the Quadrangle Entities for the purpose of acquiring NTELOS Inc. In connection with the acquisition, we entered into advisory agreements with each of CVC Management LLC and Quadrangle Advisors LLC, pursuant to which each may provide financial, advisory and consulting services to us. In exchange for these services, CVC Management LLC and Quadrangle Advisors LLC are each entitled to an annual advisory fee of $1.0 million per year, paid quarterly, plus out-of-pocket expenses, for the remaining term of the advisory agreements. At the closing of the acquisition of NTELOS Inc., CVC Management LLC and Quadrangle Advisors LLC each received transaction fees totaling approximately $3,750,000, plus reasonable out-of-pocket expenses. In addition, CVC Management LLC and Quadrangle Advisors LLC are each entitled to a transaction fee in connection with the consummation of each acquisition, divestiture or financing in an amount equal to 0.50% of the aggregate value of such transaction. There are no minimum levels of service required to be provided pursuant to the advisory agreements. Each advisory agreement has an initial term of ten years and automatically renews for successive one-year terms, subject to termination by either party upon written notice 90 days prior to the expiration of the initial term or any extension thereof. Each advisory agreement includes customary indemnification provisions in favor of each of CVC Management LLC and Quadrangle Advisors LLC.

 

These advisory agreements will be terminated in connection with this offering for an aggregate consideration of $13.4 million. Certain provisions in the advisory agreements, including indemnification, will survive such termination.

 

114


Table of Contents

Stock Subscription Agreements

 

In connection with the acquisition of NTELOS Inc., members of management were given an opportunity to purchase shares of Class L common stock and Class A common stock through subscription agreements that were entered into in connection with the NTELOS Holdings Corp. Equity Incentive Plan, dated May 2, 2005, which sets forth restrictions regarding the Class L common stock and Class A common stock. See “Principal Stockholders.”

 

Purchase of Notes

 

At the closing of the acquisition of NTELOS Inc., the CVC Entities and the Quadrangle Entities, along with other shareholders including directors Delaney, Gesell and Bloise lent to us $5,755,000 in the aggregate. For a description of the terms of these notes, see “Description of Certain Debt—10% Notes.”

 

Employment Agreements

 

At the closing of the acquisition of NTELOS Inc., we entered into employment agreements with certain members of our management. For a description of the terms of these employment agreements, see “Management—Employment Agreements.”

 

115


Table of Contents

DESCRIPTION OF CERTAIN DEBT

 

NTELOS Inc. Senior Secured Credit Facilities

 

On February 24, 2005 NTELOS Inc. entered into a senior secured first lien bank facility in an aggregate principal amount of up to $435 million, which we refer to as the First Lien Facility, and a senior secured second lien term loan facility in an aggregate principal amount of up to $225 million, which we refer to as the Second Lien Facility, provided by a syndicate of lenders arranged by Morgan Stanley Senior Funding, Inc., or Morgan Stanley, and Bear, Stearns & Co. Inc., as joint lead arrangers. Morgan Stanley is the administrative agent for each of the First Lien Facility and the Second Lien Facility. The First Lien Facility consists of a $400 million term loan B facility, or the Term Loan B Facility, and a $35 million revolving credit facility, or the Revolving Credit Facility. The Second Lien Facility consists of a $225 million term loan. The following is a summary of certain provisions of the First Lien Facility and the Second Lien Facility. We refer to the First Lien Facility and the Second Lien Facility collectively herein as NTELOS Inc.’s senior second credit facilities.

 

The proceeds of the Term Loan B Facility and Second Lien Facility were used to finance the recapitalization and the tender offer and to pay fees and expenses incurred in connection with such transactions. NTELOS Inc. expects to use the Revolving Credit Facility for its working capital requirements and other general corporate purposes.

 

The final maturity of the Term Loan B Facility is August 24, 2011. Loans under the Term Loan B Facility must be repaid during the final year of the facility in equal quarterly amounts, subject to amortization of approximately 1% per year prior to such final year. The final maturity of the Revolving Credit Facility is February 24, 2010 and all loans outstanding under the Revolving Credit Facility must be repaid in full on this date. The final maturity of the Second Lien Facility is February 24, 2012 and all loans outstanding under the Second Lien Facility must be repaid on this date.

 

NTELOS Inc. may voluntarily prepay any portion of the First Lien Facility at any time without premium or penalty, except that it must reimburse the lenders for any funding losses. NTELOS Inc. may voluntarily prepay any portion of the Second Lien Facility at any time subject to reimbursement of the lenders for any funding losses and in the case of any such prepayment prior to February 24, 2007, subject to the following premiums: (a) from February 24, 2005 to but excluding February 24, 2006, 2.00%; and (b) from February 24, 2006 to but excluding February 24, 2007, 1.00%.

 

NTELOS Inc. is required to prepay the Term Loan B Facility out of cash it receives from the following events:

 

    subject to exceptions for sales in the ordinary course of business, amounts reinvested in its businesses, net cash proceeds not exceeding $10 million in the aggregate for any fiscal year, certain pending transactions, and anticipated receipts and other exceptions to be negotiated, 100% of net cash proceeds (i) from sales of property and assets and (ii) of “Extraordinary Receipts,” such as tax refunds, indemnity payments, pension reversions and certain insurance proceeds; and

 

    if the total leverage ratio exceeds 3.0x, (a) 100% of net cash proceeds from the issuance of additional debt (with exceptions), (b) 50% (stepping down to 25% if the total leverage ratio is 4.0x or less) of net cash proceeds from the issuance of additional equity (with exceptions) and (c) 75% (stepping down to 50% if the total leverage ratio is 4.25x but more than 3.0x) of excess cash flow.

 

NTELOS Inc. must make an offer to prepay the Second Lien Facility with the proceeds of any asset sales that, in any period of 12 consecutive months, (i) exceed 15% of consolidated total assets and (ii) are not, within twelve months after receipt, used to prepay indebtedness under the First Lien Facility or reinvested in replacement assets.

 

NTELOS Inc. may choose to have interest accrue on loans outstanding under the First Lien Facility and the Second Lien Facility based on (a) the higher of  1/2 of 1% in excess of the federal funds rate and the rate of

 

116


Table of Contents

interest published by the Wall Street Journal as the prime rate, or Base Rate Loans, or (b) the Eurodollar rate (adjusted for maximum reserves), or Eurodollar Loans, in each case plus an applicable margin. With respect to the Revolving Credit Facility, the applicable margin for the Revolving Credit Facility is determined in accordance with a pricing grid tied to the total leverage ratio of NTELOS Inc. As for the Term Loan B Facility, the applicable margin was initially set at 1.50% per annum in respect of Base Rate Loans and 2.50% per annum in respect of Eurodollar Loans. If the total leverage ratio of NTELOS Inc. is lower than 4.0x, the applicable margin is 1.25% per annum in respect of Base Rate Loans and 2.25% per annum in respect of Eurodollar Loans. The applicable margin for the Second Lien Facility is 4.00% per annum in respect of Base Rate Loans and 5.00% per annum in respect of Eurodollar Loans. The lenders under each of the First Lien Facility and the Second Lien Facility have the right to increase all interest rates by 2.00% per annum at any time when there is an event of default under the First Lien Facility or the Second Lien Facility, as applicable.

 

In addition, NTELOS Inc. must pay (i) certain up-front fees, (ii) administrative agent’s fees and (iii) with respect to the First Lien Facility, unused commitment fees and letter of credit fees. The unused commitment fee is equal to  1/2 of 1% per annum on the unused portion of each lender’s share of the Revolving Credit Facility, payable (a) quarterly in arrears and (b) on the date of termination or expiration of the commitments. Letter of credit fees are payable on the aggregate stated amounts of letters of credit at a rate equal to the applicable margin over the Eurodollar rate applicable at the time to revolving credit loans that bear interest based on LIBOR paid proportionately to all lenders, plus an additional fronting fee to the issuing bank.

 

The obligations of NTELOS Inc. under the First Lien Facility and the Second Lien Facility are secured by substantially all of its assets, including real property but excluding assets of NTELOS Telephone Inc., Roanoke & Botetourt Telephone Company and VITAL. With respect to each of the First Lien Facility and the Second Lien Facility, NTELOS Inc. pledged for the lenders’ benefit its equity interests in all of its direct and indirect wholly-owned subsidiaries and Virginia PCS Alliance, L.C. The subsidiaries of NTELOS Inc. (other than NTELOS Telephone Inc., Roanoke & Botetourt Telephone Company and VITAL) guaranteed the obligations of NTELOS Inc. under each of the First Lien Facility and the Second Lien Facility and pledged their assets to secure their guarantees. The lien and security interest of the lenders under the Second Lien Facility are second in priority to the liens of the lenders under the First Lien Facility.

 

During the term of the First Lien Facility, NTELOS Inc. is also bound by certain financial covenants, specifically a maximum ratio of total debt outstanding to EBITDA, a minimum interest coverage ratio and maximum capital expenditures. The Second Lien Facility is subject to covenants which are customary for high yield bond financings.

 

In addition, NTELOS Inc. is required to make financial statements and other reports available to the lenders under each of the First Lien Facility and the Second Lien Facility on a regular basis and there are limits on its ability and the ability of its subsidiaries to incur additional debt, grant liens on its property, repurchase its own stock or prepay other debt, make loans to or investments in others, merge and consolidate, sell, transfer or otherwise dispose of assets, acquire other businesses or enter into joint ventures, engage in transactions with its affiliates (other than subsidiary guarantors), amend its organizational documents, create new subsidiaries, change the nature of its business, become a general partner in a partnership, prepay, redeem or repurchase debt, grant negative pledges, engage in speculative transactions or change its accounting policies or reporting practices.

 

Further, the provisions of the First Lien Facility and the Second Lien Facility restrict the ability of NTELOS Inc. to declare dividends and make other distributions to its shareholders. NTELOS Inc. is permitted to declare and pay dividends payable to holders of its common stock at any time, but it may only declare and pay cash dividends in an amount up to $40 million and for so long as the leverage ratio does not exceed 3.0x and certain other conditions are satisfied.

 

In addition, NTELOS Inc. was required pursuant to the First Lien Facility to obtain interest rate protection for a notional amount equal to no less than $312.5 million for a period of at least three years.

 

117


Table of Contents

The First Lien Facility and the Second Lien Facility each contain customary events of default, including non-payment, breaches of affirmative and negative covenants, making materially incorrect representations and warranties, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, monetary judgment defaults, ERISA defaults and change in control.

 

10% Notes

 

In connection with our acquisition of NTELOS Inc. on May 2, 2005, we issued $5,755,000 aggregate principal amount of notes due 2010, or the 10% Notes. The 10% Notes bear interest at 10% per year, payable quarterly, and mature on May 2, 2010. Any interest that is unpaid on the last day of a calendar quarter will accrue additional interest at the rate of 10% per year.

 

The 10% Notes must be prepaid in whole or in part without premium or penalty upon receipt of cash in connection with an anticipated tax refund to be received by us and proceeds from the sale of certain identified assets. The 10% Notes may be prepaid in whole or in part without premium or penalty at any time. Any optional prepayment shall be made on a pro rata basis to all of the holders of the 10% Notes.

 

The holders of the 10% Notes representing 51% or more of the principal amount of outstanding 10% Notes, may elect at any time, on behalf of all of the noteholders, for any or all of the outstanding and unpaid principal and unpaid interest, to be converted into fully paid and nonassessable shares of our Class L common stock, at a conversion price equal to $11.00 (subject to adjustment in the event of a stock split, reverse stock split, reclassification or stock dividend).

 

118


Table of Contents

DESCRIPTION OF CAPITAL STOCK

 

General Matters

 

Our authorized capital stock currently consists of 1,000,000 shares of Class A common stock, par value $0.01 per share, 14,000,000 shares of Class L common stock, par value $0.01 per share, and 100,000 shares of preferred stock, par value of $0.01 per share. As of                     , 2005, there were                      shares of Class A common stock,                      shares of Class L common stock and                      shares of preferred stock issued and outstanding. Prior to the completion of this offering, we will amend and restate our certificate of incorporation to reclassify our Class A common stock and Class L common stock as common stock.

 

All of our existing stock is, and the shares of common stock being offered by us in this offering will be, upon payment therefor, validly issued, fully paid and nonassessable. This discussion set forth below describes the most important terms of our capital stock, certificate of incorporation and by-laws as will be in effect upon completion of this offering. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our certificate of incorporation and by-laws, copies of which have been filed as exhibits to the registration statement of which the prospectus is a part, and to the applicable provisions of the Delaware General Corporation law.

 

Common Stock

 

Set forth below is a brief discussion of the principal terms of our common stock:

 

Dividend Rights

 

Holders of our common stock are entitled to receive ratably dividends, if as and when dividends are declared from time to time by our board of directors out of funds legally available for that purpose, after payment of dividends required to be paid on outstanding preferred stock, if any. The terms of our indebtedness impose restrictions on our ability to declare dividends on our common stock.

 

Voting Rights

 

Each outstanding share of our common stock will be entitled to one vote on all matters submitted to a vote of stockholders.

 

Preemptive or Similar Rights

 

Our common stock will not be entitled to preemptive or other similar subscription rights to purchase any of our securities.

 

Right to Receive Liquidation Distributions

 

Upon our liquidation, dissolution or winding up, the holders of our common stock will be entitled to receive pro rata our assets which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.

 

Nasdaq Listing

 

We intend to apply to include the common stock for trading on The Nasdaq National Market under the symbol “NTLS.”

 

Preferred Stock

 

Our board of directors may, without further action by our stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of preferred stock

 

119


Table of Contents

would reduce the amount of funds available for the payment of dividends on shares of common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation, dissolution or winding-up before any payment is made to the holders of shares of common stock. Under specified circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, the board of directors, without stockholder approval, may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of common stock. Upon consummation of the offering, there will be no shares of preferred stock outstanding, and we have no present intention to issue any shares of preferred stock.

 

Registration Rights

 

We have entered into a registration rights agreement pursuant to which we have agreed to register shares of our common stock received by certain of our stockholders prior to this offering. For a description of our obligations under this agreement, see “Certain Relationships and Related Transactions—Shareholders Agreement.”

 

Anti-takeover Effects of our Certificate of Incorporation and By-laws

 

Our certificate of incorporation and by-laws will contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and which may have the effect of delaying, deferring or preventing a future takeover or change in control of the company unless such takeover or change in control is approved by the board of directors.

 

These provisions include:

 

Advance Notice Procedures

 

Our by-laws will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our Secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the by-laws will not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the by-laws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the company.

 

Authorized but Unissued Shares

 

Our authorized but unissued shares of common stock and preferred stock will be available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.

 

Transfer Agent and Registrar

 

                                                  will be appointed as the transfer agent and registrar for our common stock upon completion of this offering.

 

120


Table of Contents

SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the common stock. Upon completion of this offering there will be              shares of common stock outstanding, excluding approximately              million shares of common stock underlying outstanding stock options and rights. Of these shares,              shares of common stock expected to be sold in this offering will be freely transferable without restriction or further registration under 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, which shares will be subject to the volume limitations and other restrictions of Rule 144 described below. Of the remaining              shares of common stock outstanding,              shares of common stock held by our executive officers, directors and current stockholders will be subject to the lock-up arrangements described below. These shares 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.

 

Lock-Up Agreements: Restrictions on Transfer

 

In connection with this offering, we, our executive officers, directors and stockholders will enter into 180-day lock-up agreements with the underwriters of this offering under which neither we nor they may, for a period of 180 days after the date of this prospectus, directly or indirectly sell, dispose of or hedge any shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock without the prior written consent of Lehman Brothers and Bear Stearns. This 180-day period is subject to extension as described under “Underwriting.”

 

Rule 144

 

In general, under Rule 144, a person (or persons whose shares are required to be aggregated), including an affiliate, who has beneficially owned shares of our common stock for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares of our common stock that does not exceed the greater of:

 

    1% of the number of shares of common stock then outstanding, which will equal approximately              shares of our common stock after the closing of this offering; or

 

    the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Sales under Rule 144 also are subject to manner-of-sale provisions, notice requirements and the availability of current public information about us.

 

Rule 144(k)

 

Under paragraph (k) of Rule 144, a person who is not our affiliate at any time during the three months preceding a sale and who has beneficially owned the shares of any class of securities proposed to be sold for at least two years is entitled to sell such shares without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144. The two-year holding period includes the holding period of any prior owner who is not our affiliate. Therefore, unless otherwise restricted, shares covered by Rule 144(k) may be sold at any time.

 

Rule 701

 

In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchased shares of common stock from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering, or who purchased shares of common stock from us after that

 

121


Table of Contents

date upon the exercise of options granted before that date, are eligible to resell such shares in reliance upon Rule 144 90 days after we become subject to the reporting requirements of the Exchange Act. If such person is not an affiliate, such sale may be made subject only to the manner of sale provisions of Rule 144. If such a person is an affiliate, such sale may be made under Rule 144 without compliance with its one-year minimum holding period, but subject to the other Rule 144 restrictions.

 

Registration Rights

 

Beginning 180 days after the date of this offering, holders of approximately              restricted shares of our common stock will be entitled to registration rights described above. For more detailed information regarding these registration rights, see “Certain Relationships and Related Transactions—Shareholders Agreement.” Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by “affiliates,” as that term is defined in Rule 144, immediately upon the effectiveness of such registration.

 

122


Table of Contents

CERTAIN UNITED STATES TAX CONSEQUENCES

TO NON-U.S. HOLDERS OF COMMON STOCK

 

The following discussion of certain U.S. federal income and estate tax considerations relevant to Non-U.S. Holders of our common stock is for general information only.

 

As used in this prospectus, the term “Non-U.S. Holder” is a beneficial owner of our common stock other than:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation or other entity taxable as a corporation under U.S. federal income tax laws created or organized in or under the laws of the United States, any state of the United States or the District of Columbia;

 

    an estate the income of which is subject to U.S. federal income tax purposes regardless of its source; or

 

    a trust that is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or a trust that has validly elected to be treated as a domestic trust under applicable Treasury regulations.

 

If a partnership, including any entity treated as a partnership for U.S. federal income tax purposes, is a holder of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A holder that is a partnership, and partners in such partnership, should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our common stock.

 

This discussion does not consider:

 

    U.S. federal income, estate or gift tax consequences other than as expressly set forth below;

 

    any state, local or foreign tax consequences;

 

    the tax consequences to the stockholders, beneficiaries or holders of other beneficial interests in a Non-U.S. Holder;

 

    special tax rules that may apply to selected Non-U.S. Holders, including without limitation, partnerships or other pass-through entities for U.S. federal income tax purposes, banks or other financial institutions, insurance companies, dealers in securities, traders in securities, tax-exempt entities and certain former citizens or residents of the United States;

 

    special tax rules that may apply to a Non-U.S. Holder that holds our common stock as part of a “straddle, “hedge” or “conversion transaction;” or

 

    a Non-U.S. Holder that does not hold our common stock as a “capital asset” within the meaning of Section 1221 of the Internal Revenue Code (generally, property held for investment).

 

The following discussion is based on provisions of the Internal Revenue Code, applicable Treasury regulations and administrative and judicial interpretations, all as of the date of this prospectus, and all of which are subject to change, retroactively or prospectively. We have not requested a ruling from the U.S. Internal Revenue Service or an opinion of counsel with respect to the U.S. federal income tax consequences of the purchase, ownership or disposition of our common stock to a Non-U.S. Holder. There can be no assurance that the U.S. Internal Revenue Service will not take a position contrary to such statements or that any such contrary position taken by the U.S. Internal Revenue Service would not be sustained.

 

You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation as well as any tax consequences arising under the U.S. federal estate or gift tax rules or under the laws of any state, local, foreign or other taxing jurisdiction or under any applicable tax treaty.

 

123


Table of Contents

Dividends

 

Distributions paid on shares of our common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, it will constitute a return of capital that is applied against and reduces, but not below zero, a Non-U.S. Holder’s adjusted tax basis in the shares of our common stock on which the distribution is made. To the extent a distribution exceeds both our current and accumulated earnings and profits and the non-U.S. Holder’s adjusted basis in that common stock, the distribution will constitute gain on the common stock. See “—Gain on Disposition of Common Stock.” Except as described below, the dividends on our common stock paid to a Non-U.S. Holder generally will be subject to withholding of U.S. federal income tax at a 30% rate on the gross amount of the dividend or such lower rate as may be provided by an applicable income tax treaty.

 

Dividends that are effectively connected with a Non-U.S. Holder’s conduct of a trade or business in the United States or (if specified by an applicable income tax treaty) are attributable to a permanent establishment or fixed base in the United States, known as “U.S. trade or business income,” are generally not subject to the 30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal Revenue Service form with the payor. However, U.S. trade or business income, net of specified deductions and credits, generally is taxed at the same graduated rates as applicable to U.S. persons. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as specified by an applicable income tax treaty.

 

A Non-U.S. Holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements prior to the distribution date. In general, Non-U.S. Holders must provide the withholding agent with a properly executed IRS Form W-8BEN claiming an exemption from or reduction in withholding under an applicable income tax treaty. Applicable Treasury regulations provide alternative methods for satisfying this requirement. Under these Treasury regulations, in the case of common stock held by a foreign intermediary (other than a “qualified intermediary”) or a foreign partnership (other than a “withholding foreign partnership”), the foreign intermediary or partnership, as the case may be, generally must provide an IRS Form W-8IMY and an appropriate certification by each beneficial owner or partner. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

 

A Non-U.S. Holder that is eligible for a reduced rate of U.S. federal withholding tax or exclusion from withholding under an income tax treaty, but did not timely provide required certifications or satisfy other requirements, may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the U.S. Internal Revenue Service.

 

Gain on Disposition of Common Stock

 

A Non-U.S. Holder generally will not be subject to U.S. federal income tax (or withholding thereof) in respect of gain recognized on a disposition of our common stock unless:

 

    the gain is U.S. trade or business income;

 

    the Non-U.S. Holder is an individual who is present in the United States for more than 182 days in the taxable year of the disposition and meets certain other requirements; or

 

    we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. Holder held our common stock.

 

A Non-U.S. Holder that is an individual will be subject to tax on gain that is U.S. trade or business income under regular graduated U.S. federal income tax rates. A Non-U.S. Holder that is a corporation will be subject to

 

124


Table of Contents

tax on gain that is U.S. trade or business income under regular graduated U.S. federal income tax rates and, in addition, may be subject to the branch profits tax on its effectively connected earnings and profits for the taxable year, which would include such gain, at a rate of 30% or at such lower rate as specified by an applicable income tax treaty. A Non-U.S. Holder that is an individual described in the second bullet above will be subject to a flat 30% tax on gain derived from the disposition of our common stock, which may be offset by U.S. source capital losses (even though the Non-U.S. Holder is not considered a resident of the United States).

 

Generally, a corporation is a “United States real property holding corporation” if the fair market value of its “Unites States real property interests” equals or exceeds 50% of the sum of the fair market value of all its real property interests plus its other assets used or held for use in a trade or business. We believe we are not and are not likely to become a United States real property holding corporation. If we are or were to become one, the tax relating to stock in a “United States real property holding corporation” generally will not apply to a Non-U.S. Holder that beneficially owns, at all times during the applicable five-year or shorter period, no more than 5% of our common stock, provided that our common stock is regularly traded on an established securities market.

 

U.S. Federal Estate Tax

 

Common stock owned or treated as owned by an individual who is a Non-U.S. Holder at the time of death will be included in such individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise.

 

Information Reporting and Backup Withholding Tax

 

We (or a paying agent) must report annually to the U.S. Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to that holder and the tax withheld with respect to those dividends. Copies of the information returns reporting those dividends and the amount of tax withheld may also be made available under the provisions of an applicable treaty to the tax authorities in the country in which the Non-U.S. Holder is a resident.

 

U.S. federal backup withholding, currently at a 28% rate, generally will not apply to payments of dividends made by us or our paying agents, as such, to a Non-U.S. Holder if the holder has provided the required certification that the holder is not a U.S. person (usually satisfied by providing an IRS Form W-8BEN) or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not exempt from backup withholding tax.

 

Proceeds from the disposition of shares of common stock paid to or through the U.S. office of a broker generally will be subject to backup withholding and information reporting unless the Non-U.S. Holder certifies that it is not a U.S. person (usually on an IRS Form W-8BEN) or otherwise establishes an exemption. Payments of the proceeds from a disposition effected outside the United States by or through a non-U.S. broker generally will not be subject to information reporting or backup withholding. However, information reporting, but generally not backup withholding, will apply to such a payment if the broker has certain connections with the United States unless the broker has documentary evidence in its records that the beneficial owner is a Non-U.S. Holder and specified conditions are met or an exemption is otherwise established.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder that result in an overpayment of taxes generally will be refunded, or credited against the holder’s U.S. federal income tax liability, if any, provided required information is timely furnished to the U.S. Internal Revenue Service.

 

Non-U.S. Holders should consult their own tax advisors regarding the application of information reporting and backup withholding in their particular circumstance and the availability of, and procedure for obtaining, an exemption from information reporting and backup withholding.

 

125


Table of Contents

UNDERWRITING

 

Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, each of the underwriters named below, for whom Lehman Brothers Inc. and Bear, Stearns & Co. Inc. are acting as representatives, has severally agreed to purchase from us, on a firm commitment basis, subject only to the conditions contained in the underwriting agreement, the number of shares of common stock shown opposite its name below:

 

Underwriters


   Number of
shares


Lehman Brothers Inc.

    

Bear, Stearns & Co. Inc.

    
    

Total

    
    

 

The underwriting agreement provides that the underwriters’ obligations to purchase our common stock depend on the satisfaction of the conditions contained in the underwriting agreement, which include:

 

    if any shares of common stock are purchased by the underwriters, then all of the shares of common stock the underwriters agreed to purchase must be purchased;

 

    the representations and warranties made by us to the underwriters are true;

 

    there is no material change in the financial markets; and

 

    we deliver customary closing documents to the underwriters.

 

Commissions and Expenses

 

The following table summarizes the underwriting discounts and commissions that we will pay to the underwriter. The underwriting discount is the difference between the initial price to the public and the amount the underwriters pay to purchase the shares from us. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional              shares. The underwriting discounts and commissions equal         % of the public offering price.

 

     No
exercise


   Full
exercise


Per share

   $                 $             

Total

             

 

The representatives have advised us that the underwriters propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, that may include the underwriters, at the public offering price less a selling concession not in excess of $             per share. The underwriters may allow, and the selected dealers may re-allow, a discount from the concession not in excess of $             per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms.

 

We estimate that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $             million. We will pay such expenses.

 

Option to Purchase Additional Shares

 

We have granted the underwriters an option to purchase up to an aggregate of              additional shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option at any time, and from time to time, until 30 days after the date of the underwriting agreement.

 

126


Table of Contents

To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares of common stock proportionate to that underwriter’s initial commitment as indicated in the preceding table, and we will be obligated, under the over-allotment option, to sell the additional shares of common stock to the underwriters.

 

Lock-Up Agreements

 

We, all of our directors and executive officers and holders of more than   % of our outstanding stock have agreed that, without the prior written consent of each of Lehman Brothers Inc. and Bear, Stearns & Co. Inc., we and they will not directly or indirectly, offer, pledge, announce the intention to sell, sell, contract to sell, sell an option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of any common stock or any securities that may be converted into or exchanged for any common stock, enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock, make any demand for or exercise any right or file or cause to be filed a registration statement with respect to the registration of any shares of common stock or securities convertible, exercisable or exchangeable into common stock or any of our other securities or publicly disclose the intention to do any of the foregoing for a period of 180 days from the date of this prospectus other than permitted transfers.

 

The 180-day restricted period described in the preceding paragraph will be extended if:

 

    during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event; or

 

    prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,

 

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event.

 

Offering Price Determination

 

Prior to the offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the representatives and us. In determining the initial public offering price of our common stock, the representatives will consider:

 

    prevailing market conditions;

 

    estimates of our business potential and earnings prospects;

 

    our historical performance and capital structure;

 

    the history and prospects for the industry in which we compete;

 

    an overall assessment of our management; and

 

    the consideration of these factors in relation to market valuation of companies in related businesses.

 

Indemnification

 

We have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and liabilities incurred in connection with the directed share program referred to below, and to contribute to payments that the underwriters may be required to make for these liabilities.

 

127


Table of Contents

Discretionary Shares

 

The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed         % of the total number of shares of our common stock offered by them.

 

Stabilization, Short Positions and Penalty Bids

 

The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Exchange Act:

 

    Over-allotment involves sales by the underwriters of shares of common stock in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option, in whole or in part, or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

    Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

 

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

The Nasdaq National Market

 

We have applied to list our shares of common stock for quotation on The Nasdaq National Market under the symbol “NTLS.”

 

128


Table of Contents

Foreign Securities Laws Restrictions

 

Each underwriter has represented and agreed that:

 

    it has neither offered nor sold and prior to the date six months after the date of issue of the common shares will neither offer nor sell any common shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;

 

    it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of any of the common shares in circumstances in which section 21(1) of the FSMA does not apply to Transportation Technologies Industries, Inc.; and

 

    it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the common shares in, from or otherwise involving the United Kingdom.

 

The shares are not and will not be offered in the Netherlands other than to (i) persons who trade or invest in securities in the conduct of their profession or trade (which includes banks, securities intermediaries (including dealers and brokers), insurance companies, pension funds, other institutional investors and commercial enterprises which as an ancillary activity regularly invest in securities.

 

Stamp Taxes

 

Purchasers of the shares of our common stock offered in this prospectus may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus. Accordingly, we urge you to consult a tax advisor with respect to whether you may be required to pay those taxes or charges, as well as any other tax consequences that may arise under the laws of the country of purchase.

 

Electronic Distribution

 

A prospectus in electronic format may be made available on Internet sites or through other online services maintained by one or more of the underwriters and/or selling group members participating in the offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, depending upon the particular underwriter or selling group member, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations.

 

Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s website and any information contained in any other website maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as underwriter or selling group member and should not be relied upon by investors.

 

Relationships

 

Some of the underwriters and their affiliates have provided, and may provide in the future, investment banking, lending and other financial advisory services for us in the ordinary course of business for which they have received or would receive customary compensation.

 

In particular, Bear Stearns Corporate Lending Inc., an affiliate of Bear, Stearns & Co. Inc., has acted as Syndication Agent, lender, Joint Lead Arranger and Joint Bookrunner under NTELOS Inc.’s senior secured credit facilities, and has received certain fees for its services.

 

Lehman Brothers also advised the Quadrangle Entities in its acquisition, along with the CVC Entities, of a controlling stake in NTELOS Inc. for which it received customary fees.

 

129


Table of Contents

VALIDITY OF THE COMMON STOCK

 

The validity of the common stock offered hereby will be passed upon for us by Hunton & Williams LLP. The underwriters are represented by Latham & Watkins LLP.

 

EXPERTS

 

The consolidated financial statements of NTELOS Holdings Corp. as of June 30, 2005 and for the period January 14, 2005 (inception) to June 30, 2005, and the consolidated financial statements of NTELOS Inc. and subsidiaries as of June 30, 2005 (Successor Company), December 31, 2004 (Predecessor Reorganized Company) and December 31, 2003 (Predecessor Reorganized Company), and for the period May 2, 2005 to June 30, 2005 (Successor Company), the period January 1, 2005 to May 1, 2005 (Predecessor Reorganized Company), the year ended December 31, 2004 (Predecessor Reorganized Company), the period September 10, 2003 to December 31, 2003 (Predecessor Reorganized Company), and the period January 1, 2003 to September 9, 2003 (Predecessor Company), have been included herein in reliance upon the reports of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. KPMG’s audit report covering NTELOS Inc. contains an explanatory paragraph that states, effective September 9, 2003, the Company was reorganized under a plan of reorganization confirmed by the United States Bankruptcy Court for the Eastern District of Virginia. In connection with its reorganization, the Company applied fresh start accounting on September 9, 2003. The audit report contains an additional explanatory paragraph which refers to a change in accounting for asset retirement obligations in 2003.

 

The consolidated financial statements of NTELOS Inc. for the year ended December 31, 2002, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

AVAILABLE INFORMATION

 

Upon completion of this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any documents filed by us at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings with the SEC are also available to the public through the SEC’s Internet website at http://www.sec.gov. After this offering, we expect to provide annual reports to our stockholders that include financial information reported on by our independent public accountants.

 

We have filed a registration statement on Form S-1 with the SEC. This prospectus is a part of the registration statement and does not contain all of the information in the registration statement. Whenever a reference is made in this prospectus to any of our contracts or other documents, please be aware that such reference is not necessarily complete and that you should refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may review a copy of the registration statement at the SEC’s public reference room in Washington, D.C., as well as through the SEC’s Internet website.

 

130


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Audited Consolidated Financial Statements

    

NTELOS Holdings Corp.

    

Independent Auditors’ Report

   F-2

Consolidated Balance Sheet as of June 30, 2005

   F-3

Consolidated Statement of Operations for the period January 14, 2005 (inception) through June 30, 2005

   F-5

Consolidated Statement of Cash Flows for the period January 14, 2005 (inception) through June 30, 2005

   F-6

Consolidated Statement of Stockholders’ Equity for the period January 14, 2005 (inception) through June 30, 2005

   F-7

Notes to Consolidated Financial Statements

   F-8

NTELOS Inc.

    

Independent Auditors’ Reports

   F-29

Consolidated Balance Sheets for the Successor Company as of June 30, 2005 and for the Predecessor Reorganized Company as of December 31, 2004 and 2003

   F-31

Consolidated Statements of Operations for the Successor Company for the period May 2, 2005 through June 30, 2005, for the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 to December 31, 2003 and for the Predecessor Company for the period January 1, 2003 to September 9, 2003 and for the year ended December 31, 2002

   F-33

Consolidated Statements of Cash Flows for the Successor Company for the period May 2, 2005 through June 30, 2005, for the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 to December 31, 2003 and for the Predecessor Company for the period January 1, 2003 to September 9, 2003 and for the year ended December 31, 2002

   F-34

Consolidated Statements of Shareholder’s Equity (Deficit) for the Successor Company for the period May 2, 2005 through June 30, 2005, for the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 to December 31, 2003 and for the Predecessor Company for the period January 1, 2003 to September 9, 2003 and for the year ended December 31, 2002

   F-36

Notes to Consolidated Financial Statements

   F-38

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors

NTELOS Holdings Corp.:

 

We have audited the accompanying consolidated balance sheet of NTELOS Holdings Corp. (the Company) as of June 30, 2005 and the related consolidated statements of operations, cash flows and stockholders’ equity for the period January 14, 2005 (inception) to June 30, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NTELOS Holdings Corp. as of June 30, 2005, and the results of their operations and their cash flows for the period January 14, 2005 (inception) to June 30, 2005, in conformity with U.S. generally accepted accounting principles.

 

/s/ KPMG LLP

 

October 6, 2005

Richmond, Virginia

 

F-2


Table of Contents

NTELOS Holdings Corp.

 

Consolidated Balance Sheet

 

(In thousands)


   June 30, 2005

Assets

      

Current Assets

      

Cash and cash equivalents

   $ 19,989

Accounts receivable, net of allowance of $13,309

     29,943

Inventories and supplies

     4,492

Other receivables and deposits

     3,493

Income tax receivable

     5,555

Prepaid expenses and other

     5,893
    

       69,365
    

Securities and Investments

     2,617
    

Property, Plant and Equipment

      

Land and buildings

     33,537

Network plant and equipment

     273,671

Furniture, fixtures and other equipment

     28,523
    

Total in service

     335,731

Under construction

     16,880
    

       352,611

Less accumulated depreciation

     12,232
    

       340,379
    

Other Assets

      

Goodwill

     167,520

Franchise rights

     32,000

Other intangibles, less accumulated amortization of $2,481

     120,569

Radio spectrum licenses in service

     121,992

Other radio spectrum licenses

     1,356

Radio spectrum licenses not in service

     8,033

Deferred charges

     4,423
    

       455,893
    

     $ 868,254
    

 

 

See accompanying Notes to Consolidated Financial Statements.

 

F-3


Table of Contents

NTELOS Holdings Corp.

 

Consolidated Balance Sheet

 

(In thousands)


   June 30, 2005

 

Liabilities and Stockholders’ Equity

        

Current Liabilities

        

Current portion of long-term debt

   $ 4,763  

Convertible notes payable to Stockholders

     5,755  

Accounts payable

     20,219  

Advance billings and customer deposits

     14,262  

Accrued payroll

     6,712  

Accrued interest

     623  

Deferred revenue

     340  

Income tax payable

     185  

Other accrued taxes

     3,232  

Other accrued liabilities

     5,482  
    


       61,573  
    


Long-term Liabilities

        

Long-term debt

     619,811  

Other long-term liabilities:

        

Retirement benefits

     32,423  

Deferred income taxes

     12,448  

Deferred liabilities—interest rate swap

     1,155  

Long-term deferred liabilities

     15,472  
    


       681,309  
    


Minority Interests

     408  
    


Commitments and Contingencies

        

Stockholders’ Equity

        

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

      

Class L common stock, par value $.01 per share, authorized 14,000 shares; 11,364 shares issued and outstanding (liquidation value of $125,837)

     124,999  

Class A common stock, par value $.01 per share, authorized 1,000 shares, 735 shares issued and outstanding

     735  

Accumulated deficit

     (770 )
    


       124,964  
    


     $ 868,254  
    


 

See accompanying Notes to Consolidated Financial Statements.

 

F-4


Table of Contents

NTELOS Holdings Corp.

 

Consolidated Statement of Operations

 

(In thousands)


   January 14, 2005
(inception) through
June 30, 2005


 

Operating Revenues

        

Wireless communications

   $ 45,242  

Wireline communications

     17,834  

Other communication services

     124  
    


       63,200  
    


Operating Expenses

        

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

     9,666  

Maintenance and support

     10,654  

Depreciation and amortization

     14,713  

Accretion of asset retirement obligation

     98  

Customer operations

     14,330  

Corporate operations

     4,643  

Capital restructuring charges

     120  
    


       54,224  
    


Operating Income

     8,976  

Other Income (Expenses)

        

Equity share of net loss from NTELOS Inc.

     (1,213 )

Interest expense

     (7,893 )

Other income

     125  
    


       (8,981 )
    


       (5 )

Income Tax Expense

     734  
    


       (739 )

Minority Interests in Income of Subsidiaries

     (31 )
    


Net Loss

   $ (770 )
    


 

See accompanying Notes to Consolidated Financial Statements.

 

F-5


Table of Contents

NTELOS Holdings Corp.

 

Consolidated Statement of Cash Flows

 

     January 14, 2005
(inception) through
June 30, 2005


 

Cash flows from operating activities

        

Net loss

   $ (770 )

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Depreciation

     12,232  

Amortization

     2,481  

Accretion

     98  

Retirement benefits and other

     1,976  

Equity share of net loss from NTELOS Inc.

     1,213  

Changes in assets and liabilities from operations, net of effect of acquisitions and dispositions:

        

Decrease in accounts receivable

     2,878  

Increase in inventories and supplies

     (396 )

Decrease in other current assets

     473  

Changes in income taxes

     (37 )

Decrease in accounts payable

     (636 )

Increase in other current liabilities

     (6,903 )

Retirement benefit payments

     (1,164 )
    


Net cash provided by operating activities

     11,445  
    


Cash flows from investing activities

        

Purchases of property, plant and equipment

     (12,232 )

Purchase of ownership interest in NTELOS Inc., net of cash acquired

     (103,765 )
    


Net cash used in investing activities

     (115,997 )
    


Cash flows from financing activities

        

Proceeds from sale of common stock

     119,979  

Proceeds from issuance of convertible notes

     5,755  

Scheduled repayments on long-term debt

     (1,080 )

Other

     (113 )
    


Net cash provided by financing activities

     124,541  
    


Increase in cash and cash equivalents

     19,989  

Cash and cash equivalents:

        

Beginning of period

      
    


End of period

   $ 19,989  
    


 

See accompanying Notes to Consolidated Financial Statements.

 

F-6


Table of Contents

NTELOS Holdings Corp.

 

Consolidated Statement of Stockholders’ Equity

 

    Common Shares

  Membership
Interests—
Project
Holdings LLC


    Class L

  Class A

  Accumulated
Deficit


    Total
Stockholders’
Equity


 

(In thousands)


  Common

    Class L

  Class A

         

Balance, January 14, 2005 (inception)

                                                 

Sale of membership interests

  100             $ 35,690     $   $   $     $ 35,690  

Conversion of membership interests of Project Holdings LLC to Class L shares in NTELOS Holdings Corp.

  (100 )   3,245         (35,690 )     35,690                    

Issuance of Class L and Class A Common Stock

        8,119   735             89,309     735             90,044  

Comprehensive loss:

                                                 

Net loss

                                      (770 )     (770 )
   

 
 
 


 

 

 


 


Balance, June 30, 2005

      11,364   735   $     $ 124,999   $ 735   $ (770 )   $ 124,964  
   

 
 
 


 

 

 


 


 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

F-7


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements

 

Note 1.    Organization

 

NTELOS Holdings Corp. (hereafter referred to as “Holdings Corp.” or the “Company”) was incorporated on January 14, 2005 by Quadrangle Capital Partners LP and Citigroup Venture Capital Equity Partners, L.P. (collectively referred to as the “Buyers” or “Investors”) to acquire the stock of NTELOS, Inc. and its subsidiaries (collectively referred to as NTELOS Inc.). On January 18, 2005, Holdings Corp. entered into an agreement with NTELOS Inc. and certain of its shareholders (the “Transaction Agreement”) pursuant to which NTELOS Inc. would be acquired by Holdings Corp. at a price of $40.00 per share of common stock.

 

On February 24, 2005, Holdings Corp. purchased 24.9% of NTELOS Inc. common stock and stock warrants. On May 2, 2005, pursuant to the Transaction Agreement, the Company acquired all of NTELOS Inc.’s remaining common shares, warrants and vested options by means of a merger. As further discussed in Note 2, following completion of the merger transaction on May 2, 2005, NTELOS Inc. became a wholly owned subsidiary of Holdings Corp. Accordingly, the Company began consolidating the results of NTELOS Inc. into its financial statements on this date. From the date of its initial 24.9% investment in NTELOS Inc. to May 1, 2005, the Company accounted for the operating results of NTELOS Inc. under the equity method of accounting.

 

NTELOS Holdings Corp., through NTELOS Inc., is an integrated communications provider that provides a broad range of products and services to businesses, telecommunication carriers and residential customers in Virginia, West Virginia and surrounding states. The Company’s primary services are wireless digital personal communications services (“PCS”), local and long distance telephone services, broadband network services and high-speed broadband Internet access (such as DSL and wireless modem). NTELOS Holdings Corp. does not have any independent operations.

 

Note 2.    Acquisition

 

Holdings Corp. is accounting for the merger in accordance with the purchase method of accounting under the provisions of Statement of Financial Accounting Standards No 141, Business Combinations (“SFAS No. 141”). The combined purchase price of $125.7 million, inclusive of closing costs of $12.1 million, was financed through the issuance of $35.7 million of common stock in the initial closing (which was subsequently cancelled and replaced by approximately 3.2 million shares of Class L common stock), and an additional $89.3 million for Class L common stock (8.1 million shares) and the issuance of $.7 million in Class A common stock (.7 million shares) both of which were issued in the final closing. Pursuant to the terms of the Transaction Agreement, $25.0 million of cash of NTELOS Inc. was used as part of the consideration to purchase the remaining equity. In addition, the Company issued $5.8 million 10% Convertible Notes to the Investors and used these proceeds toward financing the acquisition (Note 11). Proceeds from a $5.6 million income tax receivable and $.2 million of expected proceeds from a pending asset sale must be used if and when collected to pay down these convertible notes.

 

The Company’s cost of acquiring NTELOS Inc. totaled $125.7 million and has been used to establish a new accounting basis for the Company’s consolidated assets and liabilities. Excluding $12.1 million used to pay transaction closing costs, these proceeds were used to purchase all of the equity of NTELOS Inc.

 

The Company engaged a third party valuation advisor to assist the Company in determining the fair value of the Company at May 2, 2005. The valuation advisor valued all of the Company’s assets and liabilities except for current assets and liabilities related to operating activity and certain other items that have a readily determinable fair value. This work was performed as of the merger date and included the valuation of property, plant and equipment, identifiable intangible assets, long-term debt, favorable or unfavorable leases and other contractual obligations. The principle valuation techniques employed by the valuation advisor utilized a variety and combination of methods such as a market approach, cost approach and income approach. The valuations were

 

F-8


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

prepared based on a number of projections, assumptions, risk assessments, industry and economic tables and other factors. In accordance with the provisions of purchase accounting, the historical common stock and retained earnings were eliminated. The Company has not yet completed the allocation of the purchase accounting to the subsidiaries underlying the business segments, the completion of which may result in further purchase accounting refinements. The Company plans to complete the purchase price allocation on or before December 31, 2005.

 

The excess of purchase price over the estimated fair value of net assets acquired resulted in $169.2 million of goodwill. The allocation of purchase consideration was as follows:

 

Current assets

   $ 65,653

Investments

     2,609

Property, plant and equipment

     340,519

Goodwill

     169,248

Franchise rights

     32,000

Definite-lived intangible assets

     123,050

Radio spectrum license

     131,244

Deferred charges

     4,630
    

Total Assets

     868,953

Current liabilities

     50,381

Long-term debt

     631,408

Other long-term liabilities

     61,053

Minority interest

     377
    

Net assets acquired at May 2, 2005

   $ 125,734
    

 

In connection with the merger, NTELOS Inc. recorded approximately $28.3 million in liabilities, including legal, financial, and consulting costs, additional costs associated with accelerated payout of certain retirement obligations and retention obligations, $1.8 million of which remained unpaid at June 30, 2005. Of the total amount incurred, $15.5 million was recorded as capital and operational restructuring charges in the six month period ended June 30, 2005. In addition to this, $12.8 million relates to debt issuance costs of the new first and second lien term loans which was originally included in deferred charges but was eliminated on May 2, 2005 through purchase accounting (Note 6).

 

Also in connection with the merger and application of purchase accounting, the Company determined the fair value of the lease terms for all of its significant leasing arrangements which includes leases on retail locations, cell sites and certain other business office locations. Based on this, the Company recorded a $4.3 million favorable lease asset (included in the caption “deferred charges”) and $7.3 million unfavorable lease liability (included in the caption “Other long-term liabilities”). These assets and liabilities will be amortized to rent expense (included in the operating expense line item “maintenance and support”) over the lives of the underlying lease agreements.

 

The Company entered into advisory agreements with CVC Management LLC and Quadrangle Advisors LLC (the “Advisors”) whereby the Advisors will provide advisory and other services to the Company for a period of ten years for a combined annual advisory fee of $2.0 million. The Company recognized $.3 million of advisory fees as corporate operations expense from the merger date through June 30, 2005. Under certain conditions set forth in these agreements, the Company could terminate these agreements prior to their expiration. However, should that occur, the Company would be required to pay a termination fee equal to the present value of future scheduled payments.

 

F-9


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 3.    Investment in NTELOS Inc.

 

Pursuant to the merger between Holding Corp. and NTELOS Inc. on May 2, 2005, the Company’s ownership in NTELOS Inc. increased from 24.9% (held from February 24, 2005 to May 1, 2005) to 100%. From February 24, 2005 through May 1, 2005 the Company accounted for its investment in NTELOS Inc. under the equity method of accounting. On May 2, 2005, the Company began consolidating NTELOS Inc.

 

Summarized financial information for NTELOS Inc. for the period February 24, 2005 through May 1, 2005 is contained in the following table:

 

Condensed Statement of Operations

 

(In thousands)


   For the period February 24,
2005 through May 1, 2005


 

Operating Revenues

        

Wireless communications

   $ 50,519  

Wireline communications

     19,385  

Other communications services

     170  
    


       70,074  

Operating Expenses

        

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

     10,670  

Maintenance and support

     11,690  

Depreciation and amortization

     13,430  

Gain on sale of assets

     (3,487 )

Accretion of asset retirement obligation

     139  

Customer operations

     16,087  

Corporate operations

     4,261  

Capital restructuring charges

     10,991  
    


       63,781  
    


Operating Income

     6,293  

Other Income (Expense)

        

Other income

     197  

Other expenses, principally interest, net

     (8,821 )
    


       (2,331 )

Income tax Expense

     2,555  

Minority Interest in Losses of Subsidiaries

     (13 )
    


Net Loss

   $ (4,873 )
    


Company’s Share of Net Loss recorded as equity loss from NTELOS Inc.

   $ (1,213 )
    


 

Note 4.    Significant Accounting Policies

 

ACCOUNTING ESTIMATES:    The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

F-10


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

PRINCIPLES OF CONSOLIDATION:    As noted in Note 1 above, the Company purchased a 24.9% ownership interest in NTELOS Inc. and its subsidiaries on February 24, 2005 and purchased the remaining 75.1% ownership interest on May 2, 2005. The Company accounted for the results of operations for NTELOS Inc. from February 24 through May 1, 2005 using the equity method of accounting. For the period commencing on May 2, 2005, the Company consolidated the financial statements of NTELOS Inc. The consolidated financial statements include the accounts of the Company, NTELOS Inc. and all of its wholly-owned subsidiaries and those limited liability corporations where NTELOS Inc., as managing member, exercises control. All significant intercompany accounts and transactions have been eliminated.

 

REVENUE RECOGNITION:    The Company recognizes revenue when services are rendered or when products are delivered, installed and functional, as applicable. Certain services of the Company require payment in advance of service performance. In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue over the service period.

 

With respect to the Company’s wireline and wireless businesses, the Company earns revenue by providing access to and usage of its networks. Local service and airtime revenues are recognized as services are provided. Wholesale revenues are earned by providing switched access and other switched and dedicated services, including wireless roamer management, to other carriers. Revenues for equipment sales are recognized at the point of sale. PCS handset equipment sold with service contracts are sold at prices below cost, based on the terms of service contract. The Company recognizes the entire cost of the handsets at the time of sale, rather than deferring such costs over the service contract period.

 

Nonrefundable PCS activation fees and the portion of the activation costs directly related to acquiring new customers (primarily activation costs and sales commissions) are deferred and recognized ratably over the estimated life of the customer relationship ranging from 12 to 24 months in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin 101 as amended by Securities and Exchange Commission’s Staff Accounting Bulletin 104 (collectively referred to as “SAB No. 104” below). Similarly, in the rural local exchange carrier (“RLEC”) and competitive wireline segments, the Company charges nonrefundable activation fees for certain new service activations. Such activation fees and costs are deferred and recognized ratably over 5 years. Direct activation costs exceed activation revenues in all cases. The Company defers direct activation costs up to but not in excess of the related deferred revenue.

 

Effective July 1, 2003, NTELOS Inc. adopted Emerging Issues Task Force No. 00-21 (“EITF No. 00-21”), Accounting for Revenue Arrangements with Multiple Element Deliverables. The EITF guidance addresses how to account for arrangements that involve multiple deliverables, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a bundled transaction, and the consideration will be measured and allocated to the separate units based on their relative fair values. The adoption of EITF No. 00-21 has required evaluation of each type of arrangement entered into by the Company for each type of sales transaction and each sales channel. The adoption of EITF No.00-21 has resulted in substantially all of the activation fee revenue generated from Company-owned retail stores and associated direct costs being recognized at the time the related wireless handset is sold and is classified as equipment revenue and cost of equipment, respectively. Upon adoption of EITF No. 00-21, previously deferred revenues and costs were amortized over the remaining estimated life of the subscriber relationship, not to exceed 24 months. Revenue and costs for activations at third party retail locations and related to the Company’s segments other than wireless continue to be deferred and amortized over the estimated lives as prescribed by SAB No. 104. The balance of deferred activation fees at June 30, 2005 was less than $.1 million.

 

CASH AND CASH EQUIVALENTS:    The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash

 

F-11


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

investments with high credit quality financial institutions. At times, such investments may be in excess of the FDIC insurance limit. At June 30, 2005, total cash equivalents, consisting of a business investment deposit account and other amounts on deposit, were $20.0 million.

 

TRADE ACCOUNTS RECEIVABLE:    The Company sells its services to residential and commercial end-users and to other communication carriers primarily in Virginia and West Virginia. The carrying amount of the Company’s trade accounts receivable approximates fair value. The Company has credit and collection policies to ensure collection of trade receivables and requires deposits on certain sales. The Company maintains an allowance for doubtful accounts which management believes adequately covers all anticipated losses with respect to trade receivables. Actual credit losses could differ from such estimates. The Company includes bad debt expense in customer operations expenses in the consolidated statement of operations. Bad debt expense for the consolidation period May 2 through June 30, 2005 was $1.4 million.

 

SECURITIES AND INVESTMENTS:    Investments held by the Company are typically required holdings purchased in connection with debt instruments or are acquired through settlement of a receivable. The Company’s current senior debt holdings prohibit speculative investment purchases. Management’s policy for investments is to determine the appropriate classification of securities at the date of purchase and continually thereafter. As of June 30, 2005, all investments are accounted for under the cost method as the Company does not have significant ownership in equity securities (aside from its 100% equity interest in NTELOS Inc.) and there is no ready market. Information regarding these and all other investments is reviewed continuously for evidence of impairment in value.

 

PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS:    Long-lived assets include property and equipment, radio spectrum licenses, long-term deferred charges and intangible assets to be held and used. Long-lived assets, excluding intangible assets with indefinite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). The criteria for determining impairment for such long-lived assets to be held and used is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets. If the carrying value exceeds the estimated undiscounted cash flows, the impairment is measured as the excess of carrying value over the estimated fair value.

 

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over a 50-year life and leasehold improvements, which are categorized with land and building, are depreciated over the shorter of the estimated useful lives or the remaining lease terms. Network plant and equipment are depreciated over various lives from 4 to 40 years, with an average life of approximately 13 years. Furniture, fixtures and other equipment are depreciated over various lives from 5 to 18 years.

 

Goodwill, franchise rights and radio spectrum licenses are considered indefinite lived intangible assets. Indefinite lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired. The Company assesses the recoverability of indefinite lived assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred. At June 30, 2005, no impairment indicators existed that would trigger impairment testing prior to the scheduled annual testing date of October 1.

 

F-12


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Intangibles with a finite life are classified as other intangibles on the consolidated balance sheets. At June 30, 2005, other intangibles were comprised of the following:

 

($’s in thousands)


   Estimated
Life


   Fair Value at
May 2, 2005


  

Amortization for
the period

May 2 through
June 30, 2005


   Net Book
Value at
June 30,
2005


Customer relationships

   3 to 15 yrs.    $ 113,400    $ 2,375    $ 111,025

Trademarks

   15 yrs.    $ 9,650    $ 106    $ 9,544

 

ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS:    Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”) establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The fair value of a liability for an asset retirement obligation is to be recognized in the period in which it is incurred if a reasonable estimate can be made. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful life of the asset.

 

The Company reported accretion expense related to the asset retirement obligations for the period May 2, 2005 through June 30, 2005 of $.1 million.

 

The Company enters into long-term leasing arrangements primarily for tower sites and retail store locations in its wireless segment. Additionally, in its wireline operations, the Company enters into various facility co-location agreements and is subject to locality ordinances. In both cases, the Company constructs assets at these locations and, in accordance with the terms of many of these agreements, the Company is obligated to restore the premises to their original condition at the conclusion of the agreements, generally at the demand of the other party to these agreements. The Company recognized the fair value of a liability for an asset retirement obligation and capitalized that cost as part of the cost basis of the related asset, depreciating it over the useful life of the related asset. The following table describes the changes to the Company’s asset retirement obligation liability, which is included in long-term deferred liabilities:

 

(In thousands)


    

Asset retirement obligation on the May 2, 2005 merger date

   $ 7,341

Accretion of asset retirement obligations

     98
    

Asset retirement obligation at June 30, 2005

   $ 7,439
    

 

INVENTORIES AND SUPPLIES:    The Company’s inventories and supplies consist primarily of items held for resale such as PCS handsets, pagers, wireline business phones and accessories. The Company values its inventory at the lower of cost or market. Inventory cost is computed on a currently adjusted standard cost basis (which approximates actual cost on a first-in, first-out basis). Market value is determined by reviewing current replacement cost, marketability and obsolescence.

 

DEFERRED FINANCING COSTS:    Deferred financing costs are amortized using the straight-line method, which approximates the effective interest method, over a period equal to the term of the related debt instrument.

 

ADVERTISING COSTS:    The Company expenses advertising costs and marketing production costs as incurred.

 

PENSION BENEFITS:    NTELOS Inc. sponsors a non-contributory defined benefit pension plan covering all employees who meet eligibility requirements and were employed by NTELOS Inc. prior to October 1, 2003.

 

F-13


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

The defined benefit pension plan was closed to NTELOS Inc. employees employed on or after October 1, 2003. Pension benefits vest after five years of service and are based on years of service and average final compensation subject to certain reductions if the employee retires before reaching age 65. NTELOS Inc.’s funding policy has been to contribute to the plan based on applicable regulatory requirements. Section 412 of the Internal Revenue Code and ERISA Section 302 establishes a minimum funding requirements for defined benefit pension plans whereby the funded current liability percentage must be at least 90% of the current liability in order to prevent noticing to members of an underfunded plan. Contributions are made to stay above this threshold and are intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future.

 

The Company also sponsors a contributory defined contribution plan under Internal Revenue Code Section 401(k) for substantially all employees. The Company’s policy is to contribute 60% of each participant’s annual contribution for contributions up to 6% of each participant’s annual compensation. Company contributions to this plan vest after three years of service.

 

RETIREMENT BENEFITS OTHER THAN PENSIONS:    NTELOS Inc. provides certain health care and life benefits for retired employees that meet eligibility requirements. Employees hired after January 1994 are not eligible for these benefits. The Company’s share of the estimated costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.

 

INCOME TAXES:    Deferred income taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

STOCK-BASED COMPENSATION:    The Company accounts for stock-based employee compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and follows the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and the revised disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of SFAS No. 123.

 

Had compensation cost been recorded based on the fair value of awards at the grant date, the pro forma impact on the Company’s net loss would have been as follows (dollars in thousands):

 

     January 14, 2005
(inception) through
June 30, 2005
 

Net loss, as reported

   $ (770 )

Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax

     1  
    


Net loss, pro forma

   $ (771 )
    


 

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions: dividend rate of 0%; risk-free interest rate of 3.84%; an expected life of 5 years; and, a price volatility factor of 43.0%.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS:    Statement of Financial Accounting Standard No. 107, Disclosure About Fair Value of Financial Instruments (“SFAS No. 107”), requires certain disclosures

 

F-14


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

regarding the fair value of financial instruments. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at cost which approximates fair value because of the short-term maturity of these instruments. The fair values of other financial instruments are based on quoted market prices or discounted cash flows based on current market conditions.

 

Statement of Financial Accounting Standard No. 133, as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133 and 138”), requires all derivatives to be measured at fair value and recognized as either assets or liabilities on the Company’s balance sheet. Changes in the fair values of derivative instruments are recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments (Note 9).

 

RECENT ACCOUNTING PRONOUNCEMENTS:    In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies the term “conditional asset retirement obligation” as used in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” and also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not anticipate that the implementation of FIN 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. Additionally, compensation expense will be recognized over the remaining employee service period for the outstanding portion of any awards for which compensation expense had not been previously recognized or disclosed under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”). SFAS No. 123R replaces SFAS No. 123 and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and its related interpretations.

 

The Company is required to adopt SFAS No 123R no later than January 1, 2006. The Company does not believe that the effects of adoption will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Note 5.    Disclosures About Segments of an Enterprise and Related Information

 

The Company manages its business segments with separable management focus and infrastructures.

 

Wireless PCS:    The Company’s wireless PCS business carries digital phones and services, marketed in the retail and business-to-business channels throughout much of Virginia and West Virginia. The Company’s wireless PCS segment operates in three primary markets: Virginia East, Virginia West and West Virginia. The Virginia East market covers a populated area of 3.3 million people primarily in the Richmond and Hampton Roads areas of Virginia through Richmond 20MHz, LLC, a wholly owned subsidiary. The region was added in July 2000 from the PrimeCo VA acquisition. The Virginia West market currently serves a populated area of 2.2 million people in central and western Virginia primarily through the Virginia PCS Alliance, L.C. (“VA Alliance”), a 97% majority owned Limited Liability Company. The West Virginia market is served by West Virginia PCS Alliance, L.C. (“WV Alliance”), a wholly owned limited liability company, and currently serves a populated area of 1.6 million people primarily in West Virginia, but extending to parts of eastern Kentucky, southwestern Virginia and eastern Ohio. In addition to the markets indicated above, the Company has licenses, which are not currently active, that cover a populated area of 1.4 million people at June 30, 2005.

 

F-15


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

In addition to the end-user customer business, the Company provides roaming services to other PCS providers and has a wholesale network access agreement with Sprint PCS, Inc. which NTELOS Inc. entered into in June 2004. Revenue from these wholesale service agreements was $10.0 million for the period May 2, 2005 through June 30, 2005.

 

RLEC:    The Company has two RLEC businesses subject to the regulations of the State Corporation Commission of Virginia. NTELOS Inc. has owned one of these for over 100 years and the other was added in early 2001 through a merger with R&B Communications, Inc. These businesses serve several areas in western Virginia, are fully integrated and are managed as one consolidated operation. Principal products offered by this segment are local wireline telephone service, which includes advanced calling features, network access, long distance toll and directory advertising.

 

Competitive wireline:    In addition to the RLEC services, the Company directly or indirectly owns 1,900 route miles of fiber optic network and provides transport services for long distance, Internet and private network services. Much of this network is located in regions that the Company sells products and services or provides connections for and between markets the Company serves. The Company’s network is connected and marketed through Valley Network Partnership (“ValleyNet”), a partnership of three nonaffiliated communications companies that have interconnected their networks to a nonswitched, fiber optic network. The ValleyNet network is connected to and marketed with other adjacent fiber networks creating a connected fiber optic network serving the ten state mid-Atlantic region, stretching from Pennsylvania to Florida north to south and west as far as Charleston, WV.

 

The Company also offers competitive local exchange carrier (“CLEC”) services. Through its wholly owned subsidiaries certified in Virginia, West Virginia and Tennessee, it currently provides CLEC service in 16 geographic markets. The Company has a facilities based strategy, offering broadband service applications such as Ethernet, PRI connections and competitive access utilizing its fiber network. Over 35% of the Company’s CLEC lines are completely on its network. Also within this segment, the Company provides Internet access services through a local presence in 57 markets in Virginia, West Virginia, Tennessee and North Carolina. Through internal growth and acquisition, the Company significantly expanded its Internet Service Provider (“ISP”) business and customer base during the period 1998 through 2002. The Company’s focus with internet has shifted to concentrate efforts on broadband service offerings. Dedicated high-speed access, Digital Subscriber Line (“DSL”) and portable broadband are the primary broadband products.

 

These operations are a single segment due to the interdependence of network and other assets and functional support. In addition, many of the services within these product offerings are or can be either data or voice or both. The distinction lies in the transport medium and protocol, with the actual service received by the customer being essentially the same. Based on this evolution of these products, these products are now managed as one consolidated operation.

 

Other:    Other communications services ( “Other”) includes certain unallocated corporate related items, as well as results from the Company’s paging and other communication services businesses, which are not considered separate reportable segments. Total unallocated corporate operating expenses were $.8 million for the period May 2, 2005 through June 30, 2005

 

The Company has one customer that accounted for 18% of its revenue. Revenue from this customer was primarily derived from a wireless PCS wholesale contract and RLEC and competitive wireline segments’ network access.

 

F-16


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Summarized financial information for the Company’s reportable segments is shown in the following table. On the Statement of Operations, the wireless communications revenue caption is exclusively comprised of the wireless PCS segment and the wireline communications revenue captions is comprised of the RLEC and the competitive wireline segments.

 

(in thousands)

As of June 30, 2005 and for the period May 2, 2005 through
June 30, 2005


   Wireless PCS

   RLEC

   Competitive
Wireline


   Other

    Total

Operating Revenues

   $ 45,242    $ 9,195    $ 8,639    $ 124     $ 63,200

Operating Income (Loss)

     4,287      4,395      1,321      (1,027 )     8,976

Depreciation & Amortization

     10,265      2,549      1,847      52       14,713

Accretion of Asset Retirement Obligation

     119                (21 )     98

Capital Restructuring Charges

                          120       120

Total Segment Assets

     487,467      204,163      97,618      1,383       790,631

Corporate Assets

                                  77,623
                                 

Total Assets

                                $ 868,254
                                 


Note: The table above includes the period May 2, 2005 through June 30, 2005 only as Holding Corp. consolidated NTELOS Inc. beginning May 2, 2005. Prior to this, the only activity on the Holding Corp. statement of operations was the 24.9% equity share of NTELOS Inc.’s results of operations.

 

Note 6.    Long-Term Debt

 

As of June 30, 2005 the Company’s outstanding long-term debt consisted of the following:

 

(In thousands)


   June 30,
2005


First Lien Term Loan

   $ 398,000

Second Lien Term Loan

     225,000

Capital lease obligations

     1,574
    

       624,574

Less current portion

     4,763
    

Long-Term Debt

   $ 619,811
    

 

Long-term debt, excluding capital lease obligations

 

In connection with its acquisition of NTELOS Inc. on May 2, 2005, Holdings Corp. assumed approximately $625.7 million in debt including $624.0 million of Senior Secured Credit Facilities (the “Facilities”) and $1.7 million of capital lease obligations. As of June 30, 2005 the outstanding debt balance consisted of $623.0 million in the Facilities and $1.6 million in capital lease obligations.

 

The Facilities include (i) a $400 million, 6.5 year, first-lien term loan facility (the “First Lien Term Loan”), (ii) a $35 million, 5-year, revolving credit facility (the “Revolving Credit Facility”), and (iii) a $225 million, 7 year, second-lien term loan facility (the “Second Lien Term Loan”). NTELOS Inc. entered into the Facilities on February 24, 2005 and borrowed $625 million under the First and Second Term Loans on that date. The proceeds from the borrowing were used to pay off a majority of NTELOS Inc.’s existing debt and the existing interest rate swap agreements for an aggregate disbursement of approximately $183 million.

 

F-17


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

The First Lien Term Loan matures in 6.5 years, with quarterly repayments of $1 million for the initial 5.5 years, with the remainder due in equal quarterly payments over the year prior to maturity. The Revolving Credit Facility provides for borrowings up to $35 million for five years and is payable in full at maturity. The Second Lien Term Loan matures in 7 years and is payable in full at maturity. The First Lien Term Loan bears interest at rates 2.5% above the Eurodollar rate or 1.5% above the Federal Funds rate, with a 25 basis point reduction in each of these rates when the Company’s leverage ratio is equal to or less than 4.0:1.0, as defined in the agreement. The Second Lien Term Loan bears interest at rates 5.0% above the Eurodollar rate or 4.0% above the Federal Funds rate. Interest on the First and Second Lien Term Loans is due and payable monthly. The First Lien Term Loan and Revolving Credit Facility are secured by a first priority pledge of substantially all property and assets of the Company and all material subsidiaries, as guarantors, excluding the regulated RLEC companies. The Second Lien Term Loan is secured by a second priority interest in all collateral pledged to the First Lien Term Loan and Revolving Credit Facility. The First Lien Term Loan contains various restrictions and conditions including covenants relating to leverage and interest coverage ratio requirements and a limitation on future capital expenditures by NTELOS Inc. and its subsidiaries and dividends by NTELOS Inc. to the Company. The Second Lien Term Loan contains various restrictions and conditions including customary incurrence based covenants. The Second Lien Term Loan contains a 2% prepayment premium prior to its first anniversary date and a 1% prepayment premium prior to its second anniversary date.

 

In connection with the transactions described above, NTELOS Inc. deferred debt issuance costs of approximately $12.8 million which were being amortized to interest expense over the life of the Facilities. Amortization of these costs for the February 24 through May 1, 2005 (accounted for by the Company under the equity method of accounting) was $.4 million. At May 2, 2005, the Company had a $12.4 million unamortized balance of debt financing costs related to the First Lien Term Loan and the Second Lien Term Loan. Through purchase accounting, the deferred financing fees were considered in determining the fair value of the debt and thus this balance was eliminated.

 

The Company’s blended interest rate on its long-term debt as of June 30, 2005 is 6.8%.

 

The aggregate maturities of long-term debt outstanding at June 30, 2005, excluding capital lease obligations, based on the contractual terms of the instruments are $4.0 million per year from 2005 through 2009, $97.3 million in 2010 and $507.7 million thereafter.

 

Capital lease obligations

 

In addition to the long-term debt discussed above, Holdings Corp. assumed debt for certain equipment capital leases entered into in 2000 by NTELOS Inc., all of which mature in 2005. At June 30, 2005, the net present value of these future minimum lease payments was $.4 million. The Company also enters into capital leases on vehicles used in its operations with lease terms of 4 to 5 years. At June 30, 2005, the net present value of these future minimum lease payments is $1.2 million which is net of the amounts representing interest of $.1 million. As of June 30, 2005 the principal portion of these obligations are as follows: $.2 million in the remainder of 2005, $.4 million in 2006, $.2 million in 2007 and less than $.1 million thereafter.

 

Note 7.    Convertible Notes Payable to Stockholders

 

The Company issued 10% convertible notes to certain of its stockholders on May 2, 2005, the proceeds of which were used toward financing the acquisition (Note 2). The notes were issued at face value, accrue interest quarterly at a rate of 10% per annum and are due in five years. Principal or accrued interest shall not be made during the term of the note unless such payment is paid on a pro rata basis to all noteholders. The notes must be prepaid in whole or in part without premium or penalty upon receipt of cash from the $5.6 million income tax receivable or $.2 million of expected proceeds from a pending asset sale. Additionally, other optional

 

F-18


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

prepayments may be made at any time without premium or penalty. This note is convertible to Class L Common Shares at the option of a majority of the noteholders at any time on or after the date of issuance at a conversion price equal to $11.00 per share. The Company has classified the Convertible Notes as current given the anticipated collection within the next twelve months of the income tax receivable of $5.6 million, which is classified as a current asset.

 

Note 8.    Supplementary Disclosures of Cash Flow Information

 

The following information is presented as supplementary disclosures for the consolidated statements of cash flows for the periods indicated below.

 

(In thousands)


   May 2, 2005
through June 30,
2005


Cash payments for:

      

Interest

   $ 9,707

Income taxes, net of refunds received

     306

Pension and other retirement plan contributions and distributions

   $ 1,164

 

Note that the Company accounted for the operating results of NTELOS Inc. within these financial statements under the equity method of accounting for the period prior to the May 2, 2005 merger closing, afterwhich the Company owned 100% of NTELOS Inc. and consolidated NTELOS Inc. into the Company’s financial statements.

 

Within the cash payments for interest amounts in the above table, $.8 million relate to interest paid on the interest rate swap agreements for the period May 2 through June 30, 2005.

 

Pursuant to the Transaction Agreement, NTELOS Inc. was required to move proceeds from the sale of certain assets into a segregated account and disbursed these funds on the May 2, 2005 merger closing date as part of the consideration used to purchase the remaining security interest not owned by the Buyers. The amount paid to the former NTELOS Inc. shareholders from this account was $25.0 million.

 

Note 9.    Financial Instruments

 

The Company is exposed to market risks with respect to certain of the financial instruments that it holds. The following is a summary by balance sheet category:

 

Cash and Short Term Investments

 

The carrying amount approximates fair value because of the short-term maturity of those instruments.

 

Long Term Investments

 

At June 30, 2005, the Company’s principal investment security was $2.5 million of C stock holdings in the Rural Telephone Bank (“RTB”). In connection with the Company’s application of purchase accounting, this asset was valued based on discounted cash flow of anticipated future dividends based on historical trends of RTB dividend payments to the class C stock. All of the investments carried under the cost method at June 30, 2005 are high quality instruments. For all periods prior to June 30, 2005, a reasonable estimate of fair value could not be made without incurring excessive costs investments with no quoted market prices. Additional information regarding the Company’s investments is included in Note 10.

 

F-19


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Interest Rate Swaps

 

NTELOS Inc. entered into a new interest rate swap agreement with a notional amount of $312.5 million in order to manage its exposure to interest rate movements by effectively converting a portion of its long-term debt from variable to fixed rates. This swap agreement has maturities up to three years and involves the exchange of fixed rate payments for variable rate payments without the effect of leverage and without the exchange of the underlying face amount. Fixed interest rate payments are at a per annum rate of 4.1066%. Variable rate payments are based on three month US dollar LIBOR. The weighted average LIBOR rate applicable to this agreement was 3.21% on the May 2, 2005 merger transaction closing date and 3.52% on June 30, 2005. The notional amounts do not represent amounts exchanged by the parties, and thus are not a measure of exposure to the Company. The amounts exchanged are based on the notional amounts and other terms of the swaps.

 

On May 2, 2005, the swap agreement had a fair value of $.7 million and on June 30, 2005, the fair value was $1.2 million. The Company did not designate this swap as a cash flow hedge for accounting purposes and therefore recorded the changes in market value of the swap agreement as charges to interest expense for the applicable periods.

 

The fair value of the interest rate swap agreement is based on a dealer quote. Neither the Company nor the counterparties, which are prominent banking institutions, are required to collateralize their respective obligations under these swaps. The Company is exposed to loss if the counterparty defaults. At June 30, 2005, the Company had no exposure to credit loss on interest rate swaps.

 

The Company does not believe that any reasonably likely change in interest rates would have a material adverse effect on the financial position, the results of operations or cash flows of the Company. All interest rate swaps are reviewed with and, when necessary, are approved by the Company’s Board of Directors.

 

Debt Instruments

 

On June 30, 2005, the Company’s first and second lien term loans totaled $623.0 million. Of this amount, $310.5 million was not subject to the new swap agreement. Therefore, the Company had variable rate exposure related to this amount. As indicated in the table below, the Company believes the face value of the senior debt approximates its fair value.

 

The following table indicates the difference between face amount, carrying amount and fair value of the Company’s financial instruments at June 30, 2005.

 

Financial Instruments (In thousands)


   Face amount

    Carrying amount

   Fair value

June 30, 2005

                     

Nonderivatives:

                     

Financial assets:

                     

Cash and short-term investments

   $ 19,989     $ 19,989    $ 19,989

Long-term investments for which it is:

                     

Practicable to estimate fair value

   $ N/A     $ 2,500    $ 2,500

Not practicable to estimate fair value

     N/A       117      117

Financial liabilities:

                     

Non-marketable long-term debt

   $ 624,574       624,574      624,574

Derivatives relating to debt:

                     

Interest rate swaps

   $ 312,500 *   $ 1,155    $ 1,155

* Notional amount

 

F-20


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 10.    Securities and Investments

 

The Company’s principal investment at June 30, 2005 is $2.5 million of class C stock holdings in the RTB. This was a required investment for NTELOS Inc. related to the 5.0% to 6.05% notes payable NTELOS Inc. held with RTB. This debt was paid in full on February 24, 2005. On March 1, 2005, NTELOS Inc. converted approximately 44% of its original restricted, non-dividend paying class B stock investment into the dividend paying class C stock investment. On July 31, 2005, substantially all of the remaining 56% of the class B stock was converted into class C stock. In connection with the Company’s application of purchase accounting, this asset was valued based on discounted cash flow of anticipated future dividends based on historical trends for RTB dividend payments to the class C stock. The Company and its valuation advisor determined this to be the most appropriate method of valuing this investment due to the relative illiquid nature of the investment.

 

Note 11.    Stockholders’ Equity

 

The Company’s authorized capital consists of preferred stock and two classes of common stock—Class L and Class A. As of June 30, 2005, the following preferred and common stock were authorized and outstanding:

 

(In thousands)


   Shares Authorized

   Shares Outstanding

Preferred Stock

   100   

Class A Common Stock

   1,000    735

Class L Common Stock

   14,000    11,364

 

The shares of Class A common stock were purchased by employees of the Company on the May 2, 2005 merger date. The shares were purchased at a price of $1 per share and vest one-forth annually over four years. The Company estimated the fair value of this stock to be $1 per share. In determining this, the Company’s management considered a number of factors, including a third party valuation analysis. Since the issuance price was determined to be equal to the fair market value of the shares, the Company recorded no compensation expense in the period ended June 30, 2005 for this stock issuance.

 

Upon termination of an employee, the Company and/or, if approved by the Board of Directors, the holders of Class L shares have the right and option to repurchase within 90 days of the termination date (on a pro-rata basis) the unvested portion of the employees’ Class A shares at adjusted cost price (as defined in the Shareholders Agreement) and the vested portion at fair market value.

 

Except as described below, all shares of each class of common stock are identical and entitle the holders thereof to the same rights and privileges.

 

Any distributions, except for the repurchase of any stock held by an employee of the Company, are first made to the holders of Class L shares equal to the aggregate unpaid yield plus the original cost of the shares, less any previous distributions representing a return of capital. The unpaid yield (totaling approximately $2.1 million at June 30, 2005) is at a rate of 10% per annum, calculated quarterly, based upon an adjusted original cost of $11 per share, less any distributions representing a return of capital, plus the accumulated unpaid yield for all prior quarters.

 

The holders of Class L and Class A common shares have the general right to vote for all purposes as provided by law. Each holder of Class L and Class A common shares is entitled to one vote for each share held.

 

The original investments made by the Investors on February 24, 2005 totaling $35.7 million were made to the limited liability corporation “Project Holdings LLC” in the form of membership interests. On April 27, 2005, NTELOS Holdings Corp. was formed with Projects Holdings LLC being converted to Holdings Corp. and the former membership interest being converted to Class L Common Stock of Holdings Corp.

 

F-21


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 12.    Income Taxes

 

The components of income tax expense are as follows for the period indicated below:

 

(In thousands)


  

January 14, 2005
through

June 30, 2005


Current tax expense (benefit):

      

Federal

   $

State

     190
    

       190
    

Deferred tax expense (benefit):

      

Federal

     460

State

     84
    

       544
    

     $ 734
    

 

Total income tax expense was different than an amount computed by applying the graduated statutory federal income tax rates to income before taxes. The reasons for the differences are as follows:

 

(In thousands)


   January 14, 2005
through June 30, 2005


 

Computed tax expense at statutory rate of 35%

   $ (13 )

Nontaxable equity loss

     425  

Nondeductible charges

     45  

State income taxes, net of federal income tax benefit

     178  

Other

     99  
    


     $ 734  
    


 

Net deferred income tax assets and liabilities consist of the following components at June 30:

 

(In thousands)


   2005

 

Deferred income tax assets:

        

Retirement benefits other than pension

   $ 3,892  

Pension

     6,931  

Net operating loss

     47,478  

Licenses

     33,486  

Debt Issuance and discount

     4,966  

Interest Rate Swap

     449  

Accrued expenses

     3,548  

Other

     1,674  
    


Gross deferred tax assets

     102,424  

Valuation allowance

     (16,428 )
    


Net deferred tax assets

     85,996  
    


Deferred income tax liabilities:

        

Property and equipment

     40,103  

Intangibles

     57,668  

Investments

     673  
    


       98,444  
    


Net deferred income tax liabilities

   $ 12,448  
    


 

F-22


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2004. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

 

The Company has available net operating losses (“NOL’s”) of approximately $232.5 million, of which approximately $153.2 million (as adjusted for realized built-in losses occurring post-confirmation of NTELOS Inc.) originated from the NTELOS Inc. subsidiary group and existed at emergence from its bankruptcy. These NOL’s, and the adjustments related to realized built-in losses, are subject to an annual utilization limitation of approximately $9.2 million. Subsequent to NTELOS Inc.’s emergence from bankruptcy and through May 2, 2005, the NTELOS Inc. subsidiary group incurred additional NOL’s of approximately $84.9 million. These NOL’s, in addition to amounts which are subject to the first limitation, are subject to an annual limitation of $1.6 million (prior to adjustment for realized built-in gains occurring after the merger). Due to the limited carryforward life of NOL’s and the amount of the annual limitation, it is unlikely that we will be able to realize in excess of $43 million of NOL’s existing prior to our emergence from bankruptcy. However, the NOL’s that accumulated since our emergence are expected to be realized due to the anticipation of recognizing certain built-in gains in future periods.

 

The NTELOS Inc. subsidiary group filed amended returns during 2004 to carryback other available NOL’s totaling approximately $17.8 million. These amended returns were filed following the conclusion of a federal tax examination. This examination was settled as a no change audit report for the years 1998 and 1999.

 

SFAS No. 109 establishes guidelines for companies that realize the benefits of an acquired enterprise’s deferred tax assets in future periods. These provisions require that any subsequent reduction in a deferred tax asset valuation allowance, as a result of realizing a benefit of pre-acquisition deferred tax assets, be first credited to goodwill, then credited to other non-current identifiable intangible assets and then, if these assets are reduced to zero, credited directly to expense. Goodwill of approximately $.5 million was reduced currently to reflect the expected benefit to be received from utilizing pre-acquisition NOL’s.

 

F-23


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 13.    Pension Plans and Other Postretirement Benefits

 

NTELOS Holdings Corp. sponsors several qualified and nonqualified pension plans and other postretirement benefit plans (“OPEB’s”) for its employees. The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets and a statement of the funded status as of and for the period ended June 30, 2005, and the classification of amounts recognized in the consolidated balance sheets:

 

As of June 30, 2005 and for the period May 2, 2005

through June 30, 2005 (In thousands)


   Defined
Benefit
Pension Plan


    Other
Postretirement
Benefit Plan


 

Change in benefit obligations:

                

Benefit obligations, beginning

   $ 45,082     $ 10,043  

Service cost

     455       25  

Interest cost

     412       92  

Actuarial (gain) loss

     22       183  

Benefits paid

     (333 )     (62 )
    


 


Benefit obligations, ending

   $ 45,638     $ 10,281  
    


 


Change in plan assets:

                

Fair value of plan assets, beginning

   $ 26,046     $  

Actual return on plan assets

     666        

Employer contributions

           62  

Benefits paid

     (333 )     (62 )
    


 


Fair value of plan assets, ending

   $ 26,379     $  
    


 


Funded status:

                

Funded status

   $ (19,259 )   $ (10,281 )

Unrecognized net actuarial gain (loss)

     (288 )     183  
    


 


Accrued benefit cost

   $ (19,547 )   $ (10,098 )
    


 



* Note: The table above includes only the period May 2, 2005 through June 30, 2005 since Holding Corp. consolidated NTELOS Inc. beginning May 2, 2005. Prior to this, the only activity on the Holding Corp. statement of operations was the 24.9% equity share of NTELOS Inc.’s results of operations.

 

On the May 2, 2005 merger date, pursuant to the Company’s application of purchase accounting, the Company adjusted its pension and OPEB obligations to fair value. These obligations’ carrying values differ from their fair values due to the existence of unrecognized gains or losses and unamortized prior service costs. At May 2, 2005, the Company’s pension plans contained unrecognized net losses and unrecognized prior service costs of $8.4 million and $.4 million, respectively. Therefore, the Company’s adjustment to fair value increased the pension obligation by $8.8 million. Similarly, the OPEB obligation contained unrecognized net gains of $1.0 million at May 2, 2005. Therefore, the Company’s adjustment to fair value decreased the OPEB obligation by $1.0 million.

 

The accumulated benefit obligation of the Company’s nonqualified pension plan was approximately $2.7 million at June 30, 2005. The Company’s plans for postretirement benefits other than pensions have no plan assets and are closed to new participants.

 

F-24


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

The following table provides the components of net periodic benefit cost for the plans:

 

(In thousands)


   Defined
Benefit
Pension Plan


    Other
Postretirement
Benefit Plan


Components of net periodic benefit cost:

              

Service cost

   $ 455     $ 25

Interest cost

     412       92

Expected return on plan assets

     (355 )    
    


 

Net periodic benefit cost

   $ 512     $ 117
    


 

 

Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants. As noted above, in connection with purchase accounting, these elements of the Company’s accrued benefit costs were adjusted to zero on May 2, 2005.

 

The Company has multiple nonpension post employment benefit plans. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plans are also contributory. These obligations, along with all of the pension plans and other post retirement benefit plans, are NTELOS Inc. obligations assumed by the Company. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after January 1994. The accounting for the plans anticipates that the Company will maintain a consistent level of cost sharing for the benefits with the retirees.

 

The assumptions used in the measurements of the Company’s benefit obligations at June 30, 2005 are shown in the following table:

 

     Defined
Benefit
Pension Plan


    Other Post
Employment
Benefit Plan


 

Discount rate

   5.50 %   5.50 %

Rate of compensation increase

   3.50 %    

 

The assumptions used in the measurements of the Company’s net cost for the Consolidated Statement of Operations fiscal period of May 2, 2005 through June 30, 2005:

 

     Defined
Benefit
Pension Plan


    Other Post
Employment
Benefit Plan


 

Discount rate

   5.50 %   5.50 %

Expected return on plan assets

   8.75 %    

Rate of compensation increase

   3.50 %    

 

The Company reviews the assumptions noted in the above table on an annual basis. These assumptions are reviewed annually or more frequently (such as the May 2, 2005 update) to reflect anticipated future changes in the underlying economic factors used to determine these assumptions. For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate was assumed to decrease gradually each year to a rate of 5.0% for 2011 and remain at that level thereafter.

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect to the net periodic postretirement health care benefit cost of a 1% change on the medical trend rate per future year, while holding all other assumptions constant, would be $.8 million for a 1% increase and $.6 million for a 1% decrease.

 

F-25


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

In December 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. Effective in 2006 there will be a new Medicare Part D benefit, which will make available prescription drug coverage to those over 65. Employers that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D are entitled to an annual subsidy from Medicare, which is equal to 28% of prescription drug costs between $250 and $5,000, for each Medicare-eligible retiree who does not join Part D. The Company and its actuaries have determined that the NTELOS Prescription Drug Plan is at least actuarially equivalent to Medicare Part D.

 

In accordance with FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, issued on May 19, 2004, NTELOS Inc. elected to reflect the effect of this law as of December 31, 2004. This gain was eliminated on May 2, 2005 through purchase accounting as noted above.

 

The Company’s weighted average expected long-term rate of return on pension assets was 8.75% and 9.0%, for the Successor Company period May 2, 2005 through June 30, 2005 and for the Predecessor Reorganized Company period January 1, 2005 through May 1, 2005, respectively. In developing these assumptions, the Company evaluated input from its third party pension plan asset managers, including their review of asset class return expectations and long-term inflation assumptions. The Company also considered its historical 10-year average return (at December 31, 2005 and May 2, 2005), which was in line with the expected long-term rate of return assumptions for the respective periods.

 

The weighted average actual asset allocations and weighted average target allocation ranges by asset category for the Company’s pension plan assets were as follows:

 

     Actual Allocation

    Target
Allocation


 

Asset Category


   June 30, 2005

    December 31,
2004


   

Equity securities

   74 %   75 %   75 %

Bond securities

   26 %   25 %   25 %
    

 

 

Total

   100 %   100 %   100 %
    

 

 

 

It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of asset classes. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. The assets are primarily invested in investment funds that invest in a broad mix of equities and bonds. The allocation between equity and bonds is reset quarterly to the target allocations. The assets are managed with a view to ensuring that sufficient liquidity will be available to meet expected cash flow requirements.

 

The Company expects to contribute $6.3 million to the pension plan in 2006.

 

The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:

 

Year(s)


   Amount
(in thousands)


July 1, 2005 through December 31, 2005

   $ 960

2006

     1,948

2007

     1,922

2008

     1,871

2009

     1,943

2010

     2,047

2011 – 2015

   $ 12,660

 

F-26


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

The Company also sponsors a defined contribution 401(k) plan. The Company’s matching contributions to this plan were $.2 million for the period May 2, 2005 through June 30, 2005.

 

Note 14.    Stock Plans

 

On May 2, 2005, the Company adopted a stock option plan (“Option Plan”) offered to certain key employees. The maximum number of remaining shares of Class A Common Stock that may be issued either under the Option Plan or as additional Class A Common Stock shares is 145,000. Stock options must be granted under the Option Plan at not less than 100% of fair value at the date of grant and have a maximum life of ten years from the date of grant. Options and other awards under the Plan may be exercised in compliance with such requirements as determined by a committee of the Board of Directors. At June 30, 2005, 120,075 options from the Option Plan with an exercise price of $1.00 are outstanding. The options vest one-fourth annually, beginning one year after the grant date.

 

A summary of the activity and status of the Option Plan for the period ended June 30, 2005 is as follows:

 

     Period Ended June 30, 2005

Options


   Shares

   Weighted-
Average
Exercise Price


Outstanding at beginning of period

      $

Granted

   120,075      1.00

Forfeited

       

Cancelled

       

Outstanding at end of period

   120,075    $ 1.00

Exercisable at end of period

       
    

Weighted average fair value per option of options granted during the period

   $0.43
    

 

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions: dividend rate of 0%; risk-free interest rate of 3.84%; expected life of 5 years; and, a price volatility factor of 43.0%.

 

Note 15.    Commitments and Contingencies

 

The Company is periodically involved in disputes and legal proceedings arising from normal business activities. In 2004, NTELOS Inc. accrued $1.9 million relating to certain operating tax issues. In addition, although NTELOS Inc. completed its Plan of Reorganization and emerged from its Chapter 11 proceedings in 2003, one dispute with respect to the amount of allowed claim owed by NTELOS Inc. to one of its creditors remains outstanding. While the outcome of this and other such matters are currently not determinable, management does not expect that the ultimate costs to resolve such matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows and adequate provision for any probable losses has been made in our consolidated financial statements.

 

The Company has several operating leases for administrative office space, retail space, tower space, channel rights and equipment, certain of which have renewal options. The leases for retail and tower space have initial lease periods of one to thirty years. These leases are associated with the operation of wireless digital PCS services primarily in Virginia and West Virginia. The leases for channel rights related to the Company’s MMDS spectrum, formerly used by the wireless cable operations and currently used to deliver a portable broadband Internet service, have initial terms of three to ten years. The equipment leases have an initial term of three years.

 

F-27


Table of Contents

NTELOS Holdings Corp.

 

Notes to Consolidated Financial Statements—(Continued)

 

Rental expense for all operating leases was $3.2 million for the period May 2, 2005 through June 30, 2005. The total amount committed under these lease agreements at June 30, 2005 is: $8.8 million for the period July 1, 2005 through December 31, 2005, $15.9 million in 2006, $13.4 million in 2007, $12.0 million in 2008, $11.2 million in 2009, $6.3 million in 2010 and $12.3 million for the years thereafter.

 

Other than the commitments noted separately above, the Company has commitments for capital expenditures of approximately $15 million as of June 30, 2005, all of which are expected to be satisfied prior to December 31, 2005. In addition to this, the Company entered into a purchase agreement with Lucent Technologies in July 2005 which has a $11.7 million purchase commitment that must be satisfied by September 30, 2006.

 

F-28


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors

NTELOS Inc.:

 

We have audited the accompanying consolidated balance sheet of NTELOS Inc. and subsidiaries (the Company) as of June 30, 2005 (Successor Company), December 31, 2004 (Predecessor Reorganized Company) and 2003 (Predecessor Reorganized Company), and the related consolidated statements of operations, cash flows, and shareholder’s equity (deficit) for the period May 2, 2005 to June 30, 2005 (Successor Company), the period January 1, 2005 to May 1, 2005 (Predecessor Reorganized Company), the year ended December 31, 2004 (Predecessor Reorganized Company), the period September 10, 2003 to December 31, 2003 (Predecessor Reorganized Company), and the period January 1, 2003 to September 9, 2003 (Predecessor Company). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NTELOS Inc. and subsidiaries as of June 30, 2005 (Successor Company), December 31, 2004 (Predecessor Reorganized Company) and 2003 (Predecessor Reorganized Company), and the results of their operations and their cash flows for the period May 2, 2005 to June 30, 2005 (Successor Company), the period January 1, 2005 to May 1, 2005 (Predecessor Reorganized Company), the year ended December 31, 2004 (Predecessor Reorganized Company), the period September 10, 2003 to December 31, 2003 (Predecessor Reorganized Company), and the period January 1, 2003 to September 9, 2003 (Predecessor Company), in conformity with U.S. generally accepted accounting principles.

 

As discussed in notes 1 and 4 to the consolidated financial statements, effective September 9, 2003, the Company was reorganized under a plan of reorganization confirmed by the United States Bankruptcy Court for the Eastern District of Virginia. In connection with its reorganization, the Company applied fresh start accounting on September 9, 2003.

 

As discussed in note 5 to the consolidated financial statements, the Company changed its method of accounting for asset retirement obligations in 2003.

 

/s/ KPMG LLP

 

October 6, 2005

Richmond, Virginia

 

F-29


Table of Contents

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and

Shareholders of NTELOS Inc.

 

We have audited the accompanying consolidated statements of operations, shareholders’ equity (deficit), and cash flows of NTELOS Inc. and Subsidiaries for the year ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of the operations, shareholders’ equity (deficit), and cash flows of NTELOS Inc. and Subsidiaries for the year ended December 31, 2002, in conformity with U.S., generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company incurred recurring operating losses and had a working capital deficit at December 31, 2002. In addition, on March 4, 2003, the Company filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. These conditions raised substantial doubt about the Company’s ability to continue as a going concern. Management’s actions in regard to these matters are also described in Note 1 and 4. The 2002 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may have resulted from the outcome of this uncertainty.

 

As discussed in Note 7 to the financial statements, effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets.

 

/s/    Ernst & Young LLP

 

McLean, Virginia

April 11, 2003

 

F-30


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

    Successor
Company


   Predecessor Reorganized Company

($ in thousands)


  June 30, 2005

   December 31, 2004

   December 31, 2003

Assets

                   
 

Current Assets

                   

Cash and cash equivalents

  $ 19,989    $ 34,187    $ 48,722

Accounts receivable, net of allowance of $13,309 ($12,826 in 2004 and $21,573 in 2003)

    29,943      29,403      33,802

Inventories and supplies

    4,492      3,647      9,600

Other receivables and deposits

    3,493      3,652      3,183

Income tax receivable

    5,555      5,529     

Prepaid expenses and other

    5,893      5,155      4,654
   

  

  

      69,365      81,573      99,961
   

  

  

Securities and Investments

                   

Restricted investment

         7,556      7,829

Other securities and investments

    2,617      115      338
   

  

  

      2,617      7,671      8,167
   

  

  

Property, Plant and Equipment

                   

Land and buildings

    33,537      32,797      32,414

Network plant and equipment

    273,671      350,746      300,712

Furniture, fixtures and other equipment

    28,523      36,460      28,622
   

  

  

Total in service

    335,731      420,003      361,748

Under construction

    16,880      12,637      16,487
   

  

  

      352,611      432,640      378,235

Less accumulated depreciation

    12,232      76,511      17,537
   

  

  

      340,379      356,129      360,698
   

  

  

Other Assets

                   

Goodwill

    168,733      30,856      32,954

Franchise rights

    32,000      32,000      32,000

Other intangibles, less accumulated amortization of $2,481 ($6,341 in 2004 and $1,494 in 2003)

    120,569      70,167      75,007

Radio spectrum licenses in service

    121,992      22,111      21,960

Other radio spectrum licenses

    1,356      2,500      2,500

Radio spectrum licenses not in service

    8,033      15,560      15,040

Deferred charges

    4,423      1,890      1,936
   

  

  

      457,106      175,084      181,397
   

  

  

    $ 869,467    $ 620,457    $ 650,223
   

  

  

 

See accompanying Notes to Consolidated Financial Statements.

 

F-31


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

    Successor
Company


   Predecessor Reorganized Company

($’s in thousands)


  June 30, 2005

   December 31, 2004

   December 31, 2003

Liabilities and Shareholder’s Equity

                   
 

Current Liabilities

                   

Current portion of long-term debt

  $ 4,763    $ 10,460    $ 17,860

Deferred liabilities—interest rate swap

         4,749      8,452

Payable to NTELOS Holdings Corp.

    5,755          

Accounts payable

    20,219      23,776      29,471

Advance billings and customer deposits

    14,262      13,667      12,333

Accrued payroll

    6,712      8,065      7,541

Accrued interest

    529      483      2,931

Deferred revenue

    340      1,883      3,428

Income tax payable

    185           56

Other accrued taxes

    3,232      2,545      1,864

Other accrued liabilities

    5,482      5,079      4,542
   

  

  

      61,479      70,707      88,478
   

  

  

Long-term Liabilities

                   

Long-term debt

    619,811      169,791      218,170

Convertible notes

              74,273

Other long-term liabilities:

                   

Retirement benefits

    32,423      30,802      29,925

Deferred income taxes

    12,448      12,448      12,448

Deferred liabilities—interest rate swap

    1,155           5,392

Long-term deferred liabilities

    15,472      18,138      15,432
   

  

  

      681,309      231,179      355,640
   

  

  

Minority Interests

    408      390      558
   

  

  

Commitments and Contingencies

                   
 

Shareholder’s Equity

                   

Predecessor Reorganized Company preferred stock, no par value per share, authorized 1,000,000 shares; none issued

             

Predecessor Reorganized Company common stock, no par value per share, authorized 25,000,000 shares; shares issued and outstanding -13,759,000 shares in 2004 and 10,000,000 in 2003

         272,049      197,727

Successor Company common stock, $.01 par value per share, authorized 1,000 shares, 100 shares issued and outstanding in 2005

    125,734          

Predecessor Reorganized Company stock warrants

         3,150      3,150

Retained earnings

    537      42,982      4,670
   

  

  

      126,271      318,181      205,547
   

  

  

    $ 869,467    $ 620,457    $ 650,223
   

  

  

 

See accompanying Notes to Consolidated Financial Statements.

 

F-32


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Statements of Operations

 

    Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  For the Period
May 2, 2005
to June 30, 2005


    For the Period
January 1, 2005
to May 1, 2005


    December 31, 2004

    September 10, 2003 to
December 31, 2003


    January 1, 2003 to
September 9, 2003


    December 31, 2002

 

Operating Revenues

                                               

Wireless communications

  $ 45,242     $ 89,826     $ 234,682     $ 66,769     $ 132,766     $ 171,495  

Wireline communications

    17,834       35,508       105,251       32,434       71,103       98,220  

Other communication services

    124       343       1,769       962       3,920       9,151  
   


 


 


 


 


 


      63,200       125,677       341,702       100,165       207,789       278,866  
   


 


 


 


 


 


Operating Expenses

                                               

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

    9,666       18,703       47,802       15,113       31,836       48,868  

Maintenance and support

    10,654       21,084       62,929       18,784       42,056       64,408  

Depreciation and amortization

    14,713       23,799       65,175       18,860       51,224       82,924  

Gain on sale of assets

          (8,742 )                       (8,472 )

Asset impairment charge

                            545       402,880  

Accretion of asset retirement obligation

    98       252       680       225       437        

Customer operations

    14,330       29,270       82,812       30,233       58,041       82,146  

Corporate operations

    4,643       8,259       26,942       6,272       18,342       17,914  

Capital and operational restructuring charges

    120       15,403       798             2,427       4,285  
   


 


 


 


 


 


      54,224       108,028       287,138       89,487       204,908       694,953  
   


 


 


 


 


 


Operating Income (Loss)

    8,976       17,649       54,564       10,678       2,881       (416,087 )
   

Other Income (Expense)

                                               

Interest expense

    (7,799 )     (11,499 )     (15,740 )     (6,427 )     (26,010 )     (78,351 )

Other income (expense)

    125       270       374       768       (436 )     (1,454 )

Reorganization items, net

                81       (145 )     169,036        
   


 


 


 


 


 


      (7,674 )     (11,229 )     (15,285 )     (5,804 )     142,590       (79,805 )
   


 


 


 


 


 


      1,302       6,420       39,279       4,874       145,471       (495,892 )
   

Income Tax Expense (Benefit)

    734       8,150       1,001       258       706       (6,464 )
   


 


 


 


 


 


      568       (1,730 )     38,278       4,616       144,765       (489,428 )
   

Minority Interests in (Income) Losses of Subsidiaries

    (31 )     13       34       54       15       481  
   


 


 


 


 


 


Net Income (Loss) before Cumulative Effect of Accounting Change

    537       (1,717 )     38,312       4,670       144,780       (488,947 )

Cumulative effect of accounting change

                            (2,754 )      
   


 


 


 


 


 


Net Income (Loss)

    537       (1,717 )     38,312       4,670       142,026       (488,947 )

Dividend requirements on predecessor preferred stock

                            (3,757 )     (20,417 )

Reorganization items—predecessor preferred stock

                            286,772        
   


 


 


 


 


 


Income (Loss) Applicable to Common Shares

  $ 537     $ (1,717 )   $ 38,312     $ 4,670     $ 425,041     $ (509,364 )
   


 


 


 


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

F-33


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

 

    Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  For the Period
May 2, 2005 to
June 30, 2005


    For the Period
January 1, 2005
to May 1, 2005


    December 31, 2004

    September 10, 2003 to
December 31, 2003


    January 1, 2003 to
September 9, 2003


    December 31, 2002

 

Cash flows from operating activities

                                               

Net income (loss)

  $ 537     $ (1,717 )   $ 38,312     $ 4,670     $ 142,026     $ (488,947 )

Cumulative effect of an accounting change

                            2,754        
   


 


 


 


 


 


      537       (1,717 )     38,312       4,670       144,780       (488,947 )

Professional fees expensed in connection with Chapter 11

                      (145 )     8,057        

Adjustments to reconcile net income to net cash provided by operating activities:

                                               

Gain on disposition of assets

          (8,742 )                       (8,472 )

Non-cash restructuring and reorganization items

          300                   (177,093 )     1,101  

Accrued pre-petition interest expense related to cancelled notes

                            10,322        

Depreciation

    12,232       22,183       60,300       14,580       51,450       79,528  

Amortization

    2,481       1,616       4,875       4,280       (226 )     3,396  

Asset impairment charge

                            545       402,880  

Accretion

    98       252       680       225       437        

Retirement benefits and other

    1,976       9,793       1,580       1,733       52       (5,757 )

Interest Expense payable from restricted cash

                                  25,781  

Amortization of loan origination costs

          180       48       29       849       4,601  

Changes in assets and liabilities from operations, net of effect of acquisitions and dispositions:

                                               

Decrease (increase) in accounts receivable

    2,878       (3,418 )     4,399       (3,912 )     4,145       (3,497 )

(Increase) decrease in inventories and supplies

    (396 )     (449 )     5,953       (6,520 )     (492 )     6,941  

Decrease (increase) in other current assets

    473       (1,052 )     (970 )     (162 )     (639 )     1,942  

Changes in income taxes

    (37 )     196       (30 )     104       (98 )     1,983  

(Decrease) increase in accounts payable

    (636 )     (2,921 )     (1,820 )     14,322       8,033       (17.922 )

Increase (decrease) in other current liabilities

    (6,996 )     8,107       1,336       (2,280 )     4,698       18,457  

Retirement benefit payments

    (1,164 )     (7,980 )     (2,240 )     (3,583 )            
   


 


 


 


 


 


Net cash provided by operating activities before reorganization items

    11,446       16,348       112,423       23,341       54,820       22,015  
   


 


 


 


 


 


Operating cash flows from reorganization items

                                               

Payment of liabilities subject to compromise

                (2,091 )     (11,523 )            

Professional fees paid for services rendered in connection with the Chapter 11 proceeding

    (1 )     (24 )     (708 )     (2,181 )     (4,946 )      
   


 


 


 


 


 


Net cash used in reorganization items

    (1 )     (24 )     (2,799 )     (13,704 )     (4,946 )      
   


 


 


 


 


 


Net cash provided by operating activities

    11,445       16,324       109,624       9,637       49,874       22,015  
   


 


 


 


 


 


 

F-34


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows, Continued

 

    Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  For the Period
May 2, 2005 to
June 30, 2005


    For the Period
January 1, 2005
to May 1, 2005


    December 31, 2004

    September 10, 2003 to
December 31, 2003


    January 1, 2003 to
September 9, 2003


    December 31, 2002

 

Cash flows from investing activities

                                               

Purchases of property, plant and equipment

    (12,232 )     (20,099 )     (60,074 )     (24,334 )     (34,186 )     (73,164 )

Proceeds from sale of property, plant and equipment, investments and radio spectrum licenses

          28,620       496       7,859       6,955       31,116  

Investment in restricted cash

          (24,955 )                        

Other

                                  (355 )
   


 


 


 


 


 


Net cash used in investing activities

    (12,232 )     (16,434 )     (59,578 )     (16,475 )     (27,231 )     (42,403 )
   


 


 


 


 


 


Cash flows from financing activities

                                               

Proceeds from issuance of long-term debt

          625,000                          

Loan repayments associated with debt refinancing

          (171,328 )                        

Proceeds from issuance of convertible notes

                            75,000       36,000  

Payments on senior secured term loans

    (1,000 )     (7,713 )     (45,766 )     (1,924 )     (38,237 )      

Payments under lines of credit (net) and other debt instruments

    (80 )     (556 )     (10,227 )     (6,759 )     (2,462 )     (10,976 )

Payments on deferred liabilities—interest rate swap

          (4,748 )     (8,588 )     (2,951 )            

Tender offer repurchase of common stock, warrants and common stock options

          (439,997 )                        

Net proceeds from issuance of stock

                                  287  

Debt issuance costs

          (12,766 )                        

Other

    (113 )                       (1,966 )      
   


 


 


 


 


 


Net cash (used in) provided by financing activities

    (1,193 )     (12,108 )     (64,581 )     (11,634 )     32,335       25,311  
   


 


 


 


 


 


(Decrease) increase in cash and cash equivalents

    (1,980 )     (12,218 )     (14,535 )     (18,472 )     54,978       4,923  

Cash and cash equivalents:

                                               

Beginning of period

    21,969       34,187       48,722       67,194       12,216       7,293  
   


 


 


 


 


 


End of period

  $ 19,989     $ 21,969     $ 34,187     $ 48,722     $ 67,194     $ 12,216  
   


 


 


 


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

F-35


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Statements of Shareholder’s Equity (Deficit)

 

    Common Stock

                Accumulated Other
Comprehensive
Income


   

Total Shareholder’s

Equity (Deficit)


 

($’s in thousands)


  Shares

    Amount

    Warrants

    Retained Earnings

     

Predecessor Company

                                             

Balance, December 31, 2001

  17,209,000     $ 182,093     $ 22,874     $ (23,201 )   $ (8,200 )   $ 173,566  

Comprehensive loss:

                                             

Net loss

                          (488,947 )                

Cash flow hedge

                                             

Derivative loss, net of $2,687 of deferred taxes

                                  (4,221 )        

Unrealized loss on securities available for sale

                                  (321 )        

Reclassification of unrealized loss to realized loss, included in net income

                                  509          

Minimum pension liability charge

                                  (3,133 )        

Comprehensive loss

                                          (496,113 )

Dividends on preferred shares

                          (20,417 )             (20,417 )

Common stock cancellation

  (2,000 )     (155 )                             (155 )

Shares issued through employee stock purchase plan

  573,000       442                               442  
   

 


 


 


 


 


Balance, December 31, 2002

  17,780,000     $ 182,380     $ 22,874     $ (532,565 )   $ (15,366 )     (342,677 )

Comprehensive income:

                                             

Income before cumulative effect of accounting change

                          144,780                  

Cumulative effect of accounting change

                          (2,754 )                

Derivative gain, net of $1,601 of deferred taxes

                                  2,316          

Comprehensive income

                                          144,342  

Dividends on preferred shares (contractual preferred stock dividends for the period ending September 9, 2003 were $14,351)

                          (3,757 )             (3,757 )

Reorganization item—accretion of preferred stock

                          (8,325 )             (8,325 )

Cancellation of preferred shares upon emergence from bankruptcy

                          295,096               295,096  

Cancellation of predecessor common stock upon emergence from bankruptcy

  (17,780,000 )     (182,380 )                             (182,380 )

Cancellation of predecessor common stock warrants held by senior noteholders and concurring issuance of new common stock

  9,434,000       186,526       (6,889 )                     179,637  

Cancellation of predecessor common stock warrants held by subordinated noteholders and concurring issuance of new common stock

  500,000       9,886       (12,200 )                     (2,314 )

Cancellation of predecessor common stock warrants held by preferred stockholders and concurring issuance of new common stock warrants

                  (635 )                     (635 )

Issuance of new common stock in connection with the issuance of new senior notes

  38,000       750                               750  

Issuance of new common stock in connection with settlement of deferred compensation obligation

  28,000       565                               565  

Cancellation of other predecessor equity interests upon emergence from bankruptcy, net of $6,183 of deferred taxes

                          107,525       13,050       120,575  
   

 


 


 


 


 


Balance, September 9, 2003

  10,000,000     $ 197,727     $ 3,150     $     $     $ 200,877  
   

 


 


 


 


 


 

F-36


Table of Contents

NTELOS Inc. and Subsidiaries

 

Consolidated Statements of Shareholder’s Equity (Deficit), continued

 

     Common Stock

                Accumulated Other
Comprehensive
Income


  

Total Shareholder’s

Equity (Deficit)


 

(In thousands)


   Shares

    Amount

    Warrants

    Retained Earnings

      

Predecessor Reorganized Company

                                             

Balance, September 10, 2003

   10,000,000     $ 197,727     $ 3,150     $     $             —    $ 200,877  

Comprehensive income:

                                             

Net income

                           4,670              4,670  
    

 


 


 


 

  


Balance, December 31, 2003

   10,000,000     $ 197,727     $ 3,150     $ 4,670     $    $ 205,547  

Comprehensive income:

                                             

Net income

                           38,312              38,312  

Cancellation of shares of senior notes not surrendered for conversion

   (34,000 )                                     

Conversion of senior notes

   3,793,000       74,322                              74,322  
    

 


 


 


 

  


Balance, December 31, 2004

   13,759,000     $ 272,049     $ 3,150     $ 42,982     $      318,181  

Comprehensive income (loss):

                                             

Net loss

                           (1,717 )            (1,717 )

Tender offer repurchase of stock, warrants and stock options

   (10,364,000 )     (437,625 )     (2,372 )                    (439,997 )

Tax benefit related to stock option repurchase

           7,829                              7,829  
    

 


 


 


 

  


Balance, May 1, 2005

   3,395,000     $ (157,747 )   $ 778     $ 41,265     $      (115,704 )
    

 


 


 


 

  


Successor Company

                                             

Balance, May 2, 2005

   3,395,000     $ (157,747 )   $ 778     $ 41,265     $      (115,704 )

Successor purchase of stock, warrants and stock options

   (3,395,000 )     157,747       (778 )                    156,969  

Cancellation of other predecessor equity interests on the merger date

                           (41,265 )            (41,265 )

Issuance of new common stock to NTELOS Holdings Corp.

   100       125,734                              125,734  

Comprehensive income:

                                             

Net income

                           537              537  
    

 


 


 


 

  


Balance, June 30, 2005

   100     $ 125,734     $     $ 537     $      126,271  
    

 


 


 


 

  


 

See accompanying Notes to Consolidated Financial Statements.

 

F-37


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Note 1.    Organization

 

NTELOS Inc. (hereafter referred to as “NTELOS” or the “Company”) is an integrated communications provider that provides a broad range of products and services to businesses, telecommunication carriers and residential customers in Virginia, West Virginia and surrounding states. The Company’s primary services are wireless digital personal communications services (“PCS”), local and long distance telephone services, broadband network services, high-speed broadband Internet access (such as Digital Service Line (“DSL”) and wireless modem), and dial-up Internet access.

 

On January 18, 2005, the Company and certain of its shareholders entered into an agreement (the “Transaction Agreement”) pursuant to which the Company would be recapitalized and sold at a price of $40.00 per share of common stock (Note 2). On February 24, 2005, the Company borrowed $625 million from a new $660 million senior secured credit facility 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%, its existing common stock, warrants and options. On May 2, 2005, pursuant to the Transaction Agreement, NTELOS Holding Corp. (“Holdings Corp.”), an entity formed by the third party buyers, acquired all of the Company’s remaining common shares, warrants and options by means of a merger. The recapitalization and sale is described in Note 2.

 

As further discussed in Note 3, effective May 2, 2005, the Company became a 100% owned subsidiary of Holdings Corp. Holdings Corp. is accounting for the merger under the provisions of Statement of Financial Accounting Standards No 141, Business Combinations (“SFAS No. 141”). Holdings Corp.’s cost of acquiring the Company has been used to establish the new accounting basis for the Company’s assets and liabilities effective May 2, 2005. Accordingly, the financial information presented in the consolidated statements of operations, cash flows and shareholder’s equity (deficit) for the period May 2, 2005 to June 30, 2005 is generally not comparable to the financial information presented for the prior periods. The presentation of financial information of the Predecessor Company represents the Company’s financial statements for the specified periods prior to and concluding on May 1, 2005. The presentation of financial information of the Successor Company represents the Company’s financial information for the specified period following May 2, 2005.

 

On March 4, 2003 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). The Company emerged from the Bankruptcy Court proceedings pursuant to the terms of the Plan of Reorganization on September 9, 2003 (the “Effective Date”). Also pursuant to the Plan of Reorganization, the Company has 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, the Company 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 the Company’s assets and liabilities at fair value reflect the application of fresh start accounting applied in accordance with the American Institute of Certified Public Accountants’ Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (“SOP 90-7”).

 

As a consequence of the implementation of fresh start accounting, the financial information presented in the consolidated statements of operations, shareholder’s equity (deficit) and cash flows for periods subsequent to the Effective Date is generally not comparable to the financial information presented for the periods prior to the Effective Date. The Company, as it existed on and prior to September 9, 2003, is referred to as the “Predecessor Company” within these consolidated financial statements, and the Company is referred to as the “Predecessor

 

F-38


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Reorganized Company” for the periods from September 9, 2003 through May 1, 2005. The presentation of consolidated financial information of the Predecessor Company represents the Company’s consolidated financial statements for the specified periods prior to and concluding with the Company’s adoption of fresh start accounting. Details regarding the reorganization transactions and the related fresh start accounting are included in Note 4 below.

 

Note 2.    Merger and Recapitalization Transactions

 

On January 18, 2005, the Company and certain of its shareholders entered into the Transaction Agreement pursuant to which the Company would be recapitalized and sold to Holdings Corp., an entity formed on January 14, 2005 by Quadrangle Capital Partners LP and Citigroup Venture Capital Equity Partners, L.P., (the “Buyers”), at a price of $40.00 per share of common stock. The recapitalization and sale occurred through a series of transactions as set forth below.

 

Under the first step in the transaction, on February 24, 2005 the Company borrowed $625 million from a new $660 million senior secured credit facility and used these proceeds to refinance substantially all of its existing indebtedness and repurchase approximately 10,364,000 shares of common stock, 358,000 shares of common stock warrants and 969,000 shares of common stock options (approximately 75% of each) pursuant to a tender offer for $440 million. The purchase price was $40.00 per share for outstanding common stock, $16.27 per share for common stock issuable pursuant to the exercise of a warrant and $20.23 per share for common stock issuable pursuant to the exercise of vested options. The $16.27 per share price for the warrants and the $20.23 per share option price were derived by taking the difference between their respective strike price and the $40.00 per share price for the common stock shares. After the tender offer buyback, the Company had outstanding approximately 3,396,000 common shares, 117,000 warrants and 327,000 options.

 

On January 24, 2005, the Company provided notice to its common and warrant holders of their rights under the Company’s Shareholders Agreement to participate in the initial sale of securities between the Buyers and significant shareholders (as defined in the “Tag-Along Sale”). On February 24, 2005, immediately after completing the first step of the transaction noted above, Holdings Corp. acquired approximately 821,000 common shares (24.9%) for $40.00 per share and 33,000 warrants (24.9%) for $16.27 per share from certain significant shareholders and other common and warrant holders that elected to participate pursuant to a tag-along offer. As a result of the Tag-Along Sale, the Company’s Shareholders Agreement was amended to provide the Buyers with certain governance rights, including the right to designate two directors to be elected to the Company’s board of directors.

 

On May 2, 2005, pursuant to the Transaction Agreement, Holdings Corp. acquired all of the Company’s remaining common shares, warrants and options by means of a merger. The merger consideration was $40.00 per share of outstanding common stock, $16.27 per share of common stock issuable pursuant to the exercise of a warrant and $20.23 per share of common stock issuable pursuant to the exercise of options, respectively. Following completion of the merger, the Company became a 100% owned subsidiary of Holdings Corp.

 

In addition, pursuant to the terms of the Transaction Agreement, on May 2, 2005, the Company disbursed $25.0 million of restricted cash to purchase the remaining equity securities not owned by the Buyers. The Company has also recognized a payable to Holdings Corp. for $5.8 million representing the Company’s obligation to forward to Holdings Corp. the proceeds from the sale and collection on certain identified assets.

 

Effective with the completion of the merger, the Company’s articles of incorporation were amended and restated resulting in 1,000 authorized common shares and 100 common shares issued and outstanding, with a par value of $0.01 per share.

 

F-39


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 3.    Acquisition

 

Effective May 2, 2005, Holdings Corp.’s cost of acquiring the Company has been used to establish a new accounting basis for the Company’s assets and liabilities. The aggregate cost basis of Holdings Corp.’s equity in the Company was $125.7 million, inclusive of $12.1 million of transaction costs incurred by Holdings Corp.

 

Holdings Corp. is accounting for the merger under the provisions of SFAS No. 141. Holdings Corp.’s cost of acquiring the Company has been used to establish the new accounting basis for the Company’s assets and liabilities. The Company engaged a third party valuation advisor to assist the Company in determining the fair value of the Company at May 2, 2005. The valuation advisor valued all of the Company’s assets and liabilities except for current assets and liabilities related to operating activity and certain other items that have a readily determinable fair value. This work was performed as of the merger date and included the valuation of property, plant and equipment, identifiable intangible assets, long-term debt, favorable or unfavorable leases and other contractual obligations. The principle valuation techniques employed by the valuation advisor utilized a variety and combination of methods such as a market approach, cost approach and income approach. The valuations were prepared based on a number of projections, assumptions, risk assessments, and industry and economic tables and other factors. In accordance with the provisions of purchase accounting, the historical common stock and retained earnings were eliminated. The Company has not yet completed the allocation of the purchase accounting to the subsidiaries underlying the business segments, the completion of which may result in further purchase accounting refinements. The Company plans to complete the purchase price allocation on or before December 31, 2005.

 

A summary of the impact on the Company’s balance sheet from the merger transaction is as follows:

 

     Predecessor
Reorganized
Company


    

Purchase
Accounting
Adjustments

and Closing

Costs


    Successor
Company


(In thousands)


   May 2, 2005

       May 2, 2005

Current assets

   $ 99,256      $ (33,603 )(1)   $ 65,653

Securities and investments

     437        2,172       2,609

Property, plant and equipment

     352,709        (12,190 )     340,519

Goodwill

     30,856        138,392       169,248

Franchise rights

     32,000              32,000

Other intangibles

     68,551        54,499       123,050

Radio spectrum licenses

     29,046        102,198       131,244

Deferred charges

     13,989        (9,359 )     4,630
    


  


 

Total Assets

     626,844        242,109       868,953
    


  


 

Current liabilities

     60,525        (10,144 )     50,381

Long-term debt, including current maturities

     625,653        5,755       631,408

Other long-term liabilities

     55,993        5,060       61,053

Minority interests

     377              377
    


  


 

Net assets at May 2, 2005

   $ (115,704 )    $ 241,438     $ 125,734
    


  


 


(1) The $33.6 million reduction of current assets is the use of $25.0 million of restricted cash and $8.6 million of unrestricted cash for part of the consideration paid for the Predecessor Reorganized Company Stock, including $8.1 million in transaction closing costs and fees and $.5 million of other costs due upon closing of the merger.

 

In connection with the merger, NTELOS Inc. recorded approximately $28.3 million in liabilities, including legal, financial, and consulting costs, additional costs associated with accelerated payout of certain retirement

 

F-40


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

obligations and retention obligations, $1.8 million of which remained unpaid at June 30, 2005. Of the total amount incurred, $15.4 million and $.1 million were recorded as capital and operational restructuring charges in the periods ended May 1, 2005 and June 30, 2005, respectively. In addition to this, $12.8 million relates to debt issuance costs of the new first and second lien term loans which was originally included in deferred charges but was eliminated on May 2, 2005 through purchase accounting (Note 9).

 

Also in connection with the merger and application of purchase accounting, the Company determined the fair value of the lease terms for all of its significant leasing arrangements, which includes leases on retail locations, cell sites and certain other business office locations. Based on this, the Company recorded a $4.3 million favorable lease asset (included in the caption “deferred charges”) and $7.3 million unfavorable lease liability (included in the caption “Other long-term liabilities”). These assets and liabilities will be amortized to rent expense (included in the operating expense line item “maintenance and support”) over the lives of the underlying lease agreements.

 

The Company entered into advisory agreements with CVC Management LLC and Quadrangle Advisors LLC (the “Advisors”) whereby the Advisors will provide advisory and other services to the Company for a period of ten years for a combined annual advisory fee of $2.0 million. The Company recognized $.3 million of advisory fees as corporate operations expense for the period May 2, 2005 to June 30, 2005. Under certain conditions set forth in these agreements, the Company could terminate these agreements prior to their expiration. However, should that occur, the Company would be required to pay a termination fee equal to the present value of future scheduled payments.

 

Note 4.    Reorganization and Fresh Start Accounting

 

On the Effective Date, the Company consummated the Plan of Reorganization and emerged from Chapter 11 reorganization proceedings with a significantly restructured balance sheet. The consummation of the Plan of Reorganization resulted in the following changes in the Company’s capital structure:

 

    The cancellation of its 13% Unsecured Senior Notes (“Senior Notes”) and its 13.5% Unsecured Subordinated Notes (“Subordinated Notes”).

 

    The cancellation of all outstanding shares of its Redeemable, Convertible Preferred Stock (“Preferred Stock”) and its Predecessor Common Stock and stock warrants.

 

    The issuance of $75 million of new 9% convertible notes (“Convertible Notes”) and the repayment of the $32.4 million outstanding revolver balance under its Senior Credit Facility. Additionally, the size of the revolver was decreased from $36 million to $32.4 million.

 

    Reduction in obligations to general unsecured creditors with allowed claims in excess of $10,000 to the net present value of 68% of their allowed claims payable in three installments over two years.

 

As mentioned above, the Company adopted fresh start accounting as of September 9, 2003. Fresh start accounting requires that the Company adjust the historical cost of its assets and liabilities to their fair values as determined by the reorganization value of the Company and that the reorganization value be allocated among the reorganized entity’s net assets in conformity with procedures specified by SFAS No. 141. A reconciliation of the adjustments recorded in connection with the reorganization and the adoption of fresh start is presented below:

 

F-41


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

NTELOS Inc.

 

Condensed Consolidated Balance Sheet as of September 9, 2003

(Unaudited)

 

    Predecessor
Company


  Reclassification
of Liabilities
Subject to
Compromise(6)


 

Effects of

Plan of
Reorganization(3)


    Fresh Start
Accounting
Adjustments(7)


    Predecessor
Reorganized
Company


(In thousands)


  Pre-Confirmation(1)

        Post-Confirmation

Assets

                                 

Current Assets

                                 

Cash and cash equivalents

  $ 26,560   $     —   $ 40,634     $     $ 67,194

Accounts receivable, net

    29,603                     29,603

Inventories and supplies

    3,080                     3,080

Other receivables and deposits

    3,234                     3,234

Prepaid expenses and other

    4,070                     4,070
   

 

 


 


 

Total Current Assets

    66,547         40,634             107,181

Securities and Investments

    8,319         (160 )           8,159

Property, Plant and Equipment, net

    414,673               (57,803 )     356,870

Other Assets

                                 

Goodwill, net

    84,530         (22,875 )     (23,207 )     38,448

Franchise rights

                  32,000       32,000

Other intangibles

    1,210               75,290       76,500

Radio spectrum licenses

    115,686               (76,186 )     39,500

Deferred charges

    4,391         480       (1,423 )     3,448

Deferred income taxes

    6,515               (6,515 )    
   

 

 


 


 

Total Other Assets

    212,332         (22,395 )     (41 )     189,896
   

 

 


 


 

Total Assets

  $ 701,871   $   $ 18,079     $ (57,844 )   $ 662,106
   

 

 


 


 

 

F-42


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

NTELOS Inc.

 

Condensed Consolidated Balance Sheet as of September 9, 2003

(Unaudited)

 

    Predecessor
Company


    Reclassification
of Liabilities
Subject to
Compromise(6)


   

Effects of

Plan of
Reorganization(3)


    Fresh Start
Accounting
Adjustments(7)


    Predecessor
Reorganized
Company


(In thousands)


  Pre-Confirmation(1)

          Post-Confirmation

Liabilities and Shareholders’ Equity (Deficit)

                                     

Current Liabilities

                                     

Current maturities of long-term debt

  $ 2,390     $ 14,218     $     $     $ 16,608

Liabilities subject to compromise

    707,560       (707,560 )                  

Accounts payable

    13,350       18,249       (1,771 )     67       29,895

Advance billings and customer deposits

    12,220       701             107       13,028

Accrued payroll

    3,459       4,804                   8,263

Accrued interest

    834       27,418       (28,219 )           33

Deferred revenue

    850       3,813                   4,663

Other accrued liabilities

    7,595       2,801       (685 )     (433 )     9,278
   


 


 


 


 

Total Current Liabilities

    748,258       (635,556 )     (30,675 )     (259 )     81,768

Liabilities Subject to Compromise

    40,942       (40,942 )                

Long-term Debt

    10,799       621,505       (329,824 )     (882 )     301,598

Long-term Liabilities

                                     

Retirement benefits

    3,321       23,054             6,035       32,410

Deferred income taxes

                      12,448       12,448

Other

    16,005       31,939       (1,752 )     (13,695 )     32,497
   


 


 


 


 

Total Long-term Liabilities

    19,326       54,993       (1,752 )     4,788       77,355
   


 


 


 


 

Minority Interests

    508                         508
   


 


 


 


 

Redeemable Convertible Preferred Stock Subject to Compromise

    298,246             (298,246 )(4)          
   


 


 


 


 

Shareholders’ Equity (Deficit)

                                     

Preferred stock

                           

Common stock

    182,380             197,727       (182,380 )     197,727

Predecessor stock warrants

    22,874             (22,874 )(5)          

Reorganized stock warrants

                    3,150  (4)           3,150

Retained earnings (accumulated deficit)

    (608,098 )           500,573  (2)     107,525      

Accumulated other comprehensive loss

    (13,364 )                 13,364      
   


 


 


 


 

      (416,208 )           678,576       (61,491 )     200,877
   


 


 


 


 

Total Liabilities and Shareholders’ Equity (Deficit)

  $ 701,871     $     $ 18,079     $ (57,844 )   $ 662,106
   


 


 


 


 

 

F-43


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 


(1) The historical balance sheet and the other historical financial statements and data relating to the Predecessor Company do not reflect the effects of fresh start accounting.
(2) This amount reconciles to the consolidated statement of operations as follows:

 

Retained Earnings reorganization net credit adjustments

   $ 500,573  

Less reorganization charges recorded prior to or subsequent to the September 9, 2003 emergence date:

        

Write-off of debt issuance costs in the first quarter 2003

     28,066  

Write-off of Preferred Stock issuance costs in the first quarter 2003

     8,324  

Reorganization professional fees and other, incurred throughout 2003

     8,520  
    


Consolidated Statement of operations—reorganization items, net credit

   $ 455,663  
    


Reorganization items, net credit, January 1, 2003 through September 9, 2003

   $ 169,036  

Reorganization items, net charge , September 10, 2003 through December 31, 2003

     (145 )

Reorganization item—predecessor preferred stock, credit

     286,772  
    


Consolidated Statement of operations—reorganization items, net credit

   $ 455,663  
    


 

(3) The adjustments relate to the issuance of new common stock and stock warrants in exchange for certain outstanding notes and other liabilities and the issuance of Convertible Notes as follows:

 

    The issuance of 9,433,509 shares of New Common Stock with a value of $186.5 million to holders of Senior Notes and 500,000 shares of New Common Stock with a value of $9.9 million to holders of Subordinated Notes. Holders of Senior Notes received 94.3% of the New Common Stock (or approximately 68% on a fully diluted basis after giving effect to the conversion of the Convertible Notes). Holders of Subordinated Notes received 5% of the New Common Stock (or approximately 3.2% on a fully diluted basis after giving effect to the conversion of the Convertible Notes). The gain on discharge of Senior Notes and Subordinated Notes was determined as follows:

 

(In thousands)


   Senior
Notes


    Subordinated
Notes


   Total

 

Accreted balance of outstanding notes

   $ 280,000     $ 95,000    $ 375,000  

Accrued unpaid interest

     20,265       7,153      27,418  

Unamortized note discount

     (3,326 )          (3,326 )
    


 

  


Net carrying balance of cancelled outstanding notes

     296,939       102,153      399,092  

Value of common stock issued

     186,527       9,885      196,412  
    


 

  


Gain on cancellation of outstanding notes

   $ 110,412     $ 92,268    $ 202,680  
    


 

  


 

    Issuance of 28,560 shares of New Common Stock with a value of $564,712 to a former executive pursuant to the Plan of Reorganization.

 

    The issuance of $75.0 million of Convertible Notes with 37,931 shares of New Common Stock, valued at $750,000, to the Participating Noteholders. The Convertible Notes will accrue interest at a rate of 9.0% per annum, payable semi-annually in cash. The Convertible Notes are unsecured and otherwise rank pari passu with all other senior debt. The Convertible Notes are redeemable by the Company during the first two years at a redemption price of 109.0% of face value, for the third year at a redemption price of 104.5% of face value, and redeemable thereafter at face value. The Convertible Notes are convertible at the holders’ option into New Common Stock representing 27.5% of the New Common Stock on an as converted basis, before dilution for conversion of warrants or stock options. Proceeds from the issuance of the Convertible Notes were used to repay approximately $32.4 million of amounts borrowed under the pre-petition Senior Credit Facility revolver loan.

 

F-44


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

(4) Represents the cancellation of $112.5 million Series B Preferred Stock and $137.5 million Series C Preferred Stock. Holders of old Preferred Stock interests received 475,624 New Common Stock Warrants to purchase, at an exercise price of $23.73 per share, New Common Stock representing 3% of the fully diluted New Common Stock as summarized below:

 

(In thousands)


      

Preferred stock

   $ 250,000  

Accrued dividends (paid-in-kind from original issuance)

     48,246  
    


Total carrying balance of preferred stock

     298,246  

Fair value of new warrants

     (3,150 )
    


Net adjustment for settlement of preferred stock

   $ 295,096  
    


 

   The company used the Black-Scholes option pricing model to determine the value assigned to the New Common Stock Warrants as of the Effective Date. For purposes of this calculation the volatility factor was assumed to be 41% and the expected life of the New Warrants was assumed to be its maximum term of five years.

 

(5) Common and preferred stock detachable warrants previously issued to various holders of preferred stock and debt were cancelled in accordance with the Plan of Reorganization. The balances as of September 9, 2003 were as follows:

 

(In thousands)


    

Detachable common stock warrants issued to holders of preferred stock

   $ 3,785

Detachable common stock warrants issued to holders of senior notes

     6,889

Detachable common stock warrants issued to holders of subordinated notes

     12,200
    

Total book value of common stock warrants cancelled

   $ 22,874
    

 

(6) Represents the disposition of unpaid liabilities subject to compromise that remain outstanding following settlement of claims as of the Effective Date. All Priority Tax and Non-Tax Claims, Secured Bank Claims and Convenience Claims have been reclassified and presented in their customary financial statement line items at amounts expected to be paid in the ordinary course of business. General Unsecured Claims that are impaired and that will be liquidated in future periods in accordance with the Plan of Reorganization have been adjusted to the amounts expected to be paid.

 

F-45


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

   Following is an analysis of the reclassification and valuation adjustment:

 

(In thousands)


            

Liabilities subject to compromise, current

           $ 707,560  

Liabilities subject to compromise, long-term

             40,942  
            


Total liabilities subject to compromise

             748,502  

Long-term debt and capital lease obligations

             (264,049 )

Cancellation of long-term debt and related interest

                

Principal balance

   $ (371,674 )        

Accrued interest

     (27,418 )        
    


       

Total debt and interest cancellation

             (399,092 )

Retirement and post-employment benefits

             (23,054 )

Interest rate swap agreement

             (16,220 )

Other long-term liabilities

             (15,719 )

Priority tax and non-tax claims

             (17,359 )

Deferred revenues and customer deposits

             (4,514 )

Other current obligations

             (4,082 )
            


Unsecured claims subject to discount

             4,413  

Recoverable value (68%)

             3,001  
            


Net discount adjustment

             1,412  

Net present value and other settlement adjustments

             359  
            


Total adjustments recognized as reorganization item credit

           $ 1,771  
            


Following is an analysis of the distribution of funds for General Unsecured Claims:

                

Distribution on the Effective Date

           $ 1,351  

Distribution on the first anniversary of the Effective Date

             900  

Distribution on the second anniversary of the Effective Date

             750  
            


Total distributions for General Unsecured Claims

           $ 3,001  
            


 

  (7) The Company has accounted for the reorganization and the related transactions using the principles of “fresh start” accounting as required by SOP 90-7. Following are explanations of the various adjustments:

 

  (a) The Company has estimated a total reorganization value of $535.3 million, with $200.9 million attributable to new shareholders’ equity. This equity value approximates the mid-point of the equity values derived by the use of accepted valuation models and methodologies employed by the Company’s financial advisors. The Company engaged a third party valuation advisor to assist the Company in determining the reorganized enterprise value of the Company at September 9, 2003. In addition to this, the valuation advisor valued all of the Company’s assets and liabilities except for current assets and liabilities related to operating activity and certain other items that have a readily determinable fair value. This work was performed as of the emergence date and included the valuation of property, plant and equipment, identifiable intangible assets, long-term debt, favorable or unfavorable leases or other contractual obligations. The principal valuation techniques employed by the valuation advisor utilized a variety and combination of methods such as a market approach, cost approach and income approach. The valuations were prepared based on a number of projections, assumptions, risk assessments, and industry and economic tables and other factors. In accordance with the provisions of fresh start accounting, the historical common stock and retained earnings were eliminated.

 

F-46


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

  (b) In accordance with SOP 90-7, the reorganization value has been allocated to specific tangible and identifiable intangible assets and liabilities. The excess of the Company’s historical tangible and identified intangible assets over the reorganization value is reflected as an adjustment to record these assets and liabilities at their fair value. As a result of this valuation work, property, plant and equipment, goodwill and radio spectrum licenses were written down by approximately $57.8 million, $23.2 million and $76.2 million, respectively. The write-downs related to radio spectrum licenses and goodwill are largely impacted by the total enterprise value of the underlying segments and the specific identification of intangible assets with specific value, such as the franchise right value associated with the rural local exchange carrier (“RLEC”) segment and the value associated with “other intangible assets” which is comprised of customer intangibles ($67.0 million) and trademarks ($9.5 million). Also, the deferred tax asset related to the interest rate swap agreement was eliminated. In addition to the changes in assets, adjustments were made to certain long-term liabilities, such as deferred gains, various retirement obligations (Note 14), deferred income taxes (Note 12) and long-term debt (Note 9). The balance of post-confirmation goodwill included $5.5 million of goodwill in the wireline cable business which was sold on September 19, 2003.

 

  (c) The amount of shareholders’ equity in the fresh start balance sheet is not an estimate of the trading value of the New Common Stock after confirmation of the Plan, the value of which is subject to many uncertainties. The Company does not make any representation as to the trading value of the New Common Stock and New Warrants issued pursuant to the Plan.

 

Note 5.    Significant Accounting Policies

 

ACCOUNTING ESTIMATES:    The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

FINANCIAL STATEMENT CLASSIFICATION:    Certain amounts in the prior year financial statements have been reclassified, with no effect on net income, to conform to classifications adopted in 2005. The Company has included bad debt expense in customer operations expense for all periods presented. Previously, the Company had reported operating revenues net of bad debt expense.

 

PRINCIPLES OF CONSOLIDATION:    The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and those limited liability corporations where the Company, as managing member, exercises control. All significant intercompany accounts and transactions have been eliminated.

 

REVENUE RECOGNITION:    The Company recognizes revenue when services are rendered or when products are delivered, installed and functional, as applicable. Certain services of the Company require payment in advance of service performance. In such cases, the Company records a service liability at the time of billing and subsequently recognizes revenue over the service period.

 

With respect to the Company’s wireline and wireless businesses, the Company earns revenue by providing access to and usage of its networks. Local service and airtime revenues are recognized as services are provided. Wholesale revenues are earned by providing switched access and other switched and dedicated services, including wireless roamer management, to other carriers. Revenues for equipment sales are recognized at the point of sale. PCS handset equipment sold with service contracts are sold at prices below cost, based on the terms of service contract. The Company recognizes the entire cost of the handsets at the time of sale, rather than deferring such costs over the service contract period.

 

F-47


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Nonrefundable PCS activation fees and the portion of the activation costs directly related to acquiring new customers (primarily activation costs and sales commissions) are deferred and recognized ratably over the estimated life of the customer relationship ranging from 12 to 24 months. Similarly, in the rural local exchange carrier (“RLEC”) and competitive wireline segments the Company charges nonrefundable activation fees for certain new service activations. Such activation fees are deferred and recognized ratably over 5 years. Direct activation costs exceed activation revenues in all cases. The Company defers direct activation costs up to but not in excess of the related deferred revenue.

 

Effective July 1, 2003, the Company adopted Emerging Issues Task Force No. 00-21 (“EITF No. 00-21”), Accounting for Revenue Arrangements with Multiple Element Deliverables. The EITF guidance addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a bundled transaction and the consideration will be measured and allocated to the separate units based on their relative fair values. The adoption of EITF No. 00-21 has required evaluation of each arrangement entered into by the Company for each type of sales transaction and each sales channel. The adoption of EITF No.00-21 has resulted in substantially all of the activation fee revenue generated from Company-owned retail stores and associated direct costs being recognized at the time the related wireless handset is sold and is classified as equipment revenue and cost of equipment, respectively. Upon adoption of EITF No. 00-21, previously deferred revenues and costs continued to be amortized over the remaining estimated life of a subscriber, not to exceed 24 months through the period ended June 30, 2005.

 

Revenue and costs for activations at third party retail locations and related to the Company’s segments other than wireless continue to be deferred and amortized over the estimated lives as prescribed by Securities and Exchange Commission’s Staff Accounting Bulletin 101 as amended by staff accounting Bulletin 104 (collectively referred to as “SAB No. 104”). The adoption of EITF No. 00-21 had the effect of increasing equipment revenue and related customer operations expenses for the Successor Company for the period May 2, 2005 to June 30, 2005 by $.2 million. The effect on the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005, for the year ended 2004 and for the period September 10, 2003 through December 31, 2003 was $.6 million, $.1 million and $.4 million respectively. The effect on the Predecessor Company for the period January 1, 2003 through September 9, 2003 was $.3 million. These revenues and costs otherwise would have been deferred and amortized. The amounts of deferred revenue and costs under SAB No. 104 at June 30, 2005, December 31, 2004 and December 31, 2003 were under $.1 million, $.9 million and $.8 million, respectively. The balance of deferred activation fees totaled $1.0 million at the May 2, 2005 merger date. Through purchase accounting, all deferred activation fees were adjusted to zero at that date.

 

CASH AND CASH EQUIVALENTS:    The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the FDIC insurance limit. At June 30, 2005, December 31, 2004 and December 31, 2003, total cash equivalents, consisting of a business investment deposit account and other amounts on deposit, were $20.0 million, $32.1 million and $46.1 million, respectively.

 

TRADE ACCOUNTS RECEIVABLE:    The Company sells its services to residential and commercial end-users and to other communication carriers primarily in Virginia and West Virginia. The carrying amount of the Company’s trade accounts receivable approximates fair value. The Company has credit and collection policies to ensure collection of trade receivables and requires deposits on certain of its sales. The Company maintains an allowance for doubtful accounts which management believes adequately covers all anticipated losses with respect to trade receivables. Actual credit losses could differ from such estimates. The Company includes bad debt expenses in customer operations expense in the consolidated statement of operations. Bad debt expense for the Successor Company for the period May 2, 2005 to June 30, 2005 was $1.4 million. Bad debt

 

F-48


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

expense for the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 through December 31, 2003 was $2.3 million, $7.2 million and $3.1 million, respectively. Bad debt expense for the Predecessor Company for the period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002 was $6.6 million and $16.1 million, respectively.

 

SECURITIES AND INVESTMENTS:    Investments held by the Company are typically required holdings purchased in connection with debt instruments or are acquired through settlement of a receivable. The Company’s current senior debt holdings prohibit speculative investment purchases. Management’s policy for investments is to determine the appropriate classification of securities at the date of purchase and continually thereafter. Currently, all investments are accounted for under the cost method as the Company does not have significant ownership in equity securities and there is no ready market. Information regarding these and all other investments is reviewed continuously for evidence of impairment in value.

 

PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS:    Long-lived assets include property and equipment, radio spectrum licenses, long-term deferred charges and intangible assets to be held and used. Long-lived assets, excluding intangible assets with indefinite useful lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). The criteria for determining impairment for such long-lived assets to be held and used is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets. If the carrying value exceeds the estimated undiscounted cash flows, the impairment is measured as the excess of carrying value over the estimated fair value.

 

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over a 50-year life and leasehold improvements, which are categorized with land and building, are depreciated over the shorter of the estimated useful lives or the remaining lease terms. Network plant and equipment are depreciated over various lives from 4 to 40 years, with an average life of approximately 13 years. Furniture, fixtures and other equipment are depreciated over various lives from 5 to 18 years.

 

As discussed in Note 2, the Company applied purchase accounting on the acquisition of NTELOS Inc. on May 2, 2005. Accordingly, property, plant and equipment and other long-lived assets were adjusted to fair value on that date and accumulated depreciation and amortization were reset to zero.

 

Goodwill, franchise rights and radio spectrum licenses are considered indefinite lived intangible assets. Indefinite lived intangible assets are not subject to amortization but are instead tested for impairment annually or more frequently if an event indicates that the asset might be impaired. The Company assesses the recoverability of indefinite lived assets annually on October 1 and whenever adverse events or changes in circumstances indicate that impairment may have occurred. At June 30, 2005, no impairment indicators existed that would trigger impairment testing prior to the scheduled annual testing date of October 1.

 

Intangibles with a finite life are classified as other intangibles on the consolidated balance sheets. At June 30, 2005, other intangibles were comprised of the following:

 

($’s in thousands)


   Estimated
Life


   Fair Value at
May 2, 2005


   Amortization for
the period May 2
through June 30,
2005


   Net Book
Value at
June 30,
2005


Customer relationships

   3 to 15 yrs.    $ 113,400    $ 2,375    $ 111,025

Trademarks

   15 yrs.    $ 9,650    $ 106    $ 9,544

 

F-49


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Amortization for other intangibles of the Predecessor Reorganized Company for the period January 1, 2005 to May 1, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 through December 2003 was $1.6 million, $4.9 million and $1.5 million, respectively. Amortization of other intangibles of the Predecessor Company was $.9 million for the period January 1, 2003 through September 9, 2003 and $5.1 million for the year ended December 31, 2002.

 

In 2004, the Company recorded net adjustments of $2.1 million to the Goodwill balances recorded at the September 10, 2003 fresh-start balance sheet date of the Predecessor Reorganized Company primarily relating to the $5.5 million realization of tax net operating loss assets that existed on September 10, 2003 that were previously fully reserved (Note 12), offset by a $3.4 million net charge relating to final fresh start adjustments for the valuation of certain fixed assets and current liabilities.

 

ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS:    In June 2001, the FASB issued Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations (“SFAS No. 143”). SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The fair value of a liability for an asset retirement obligation is to be recognized in the period in which it is incurred if a reasonable estimate can be made. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful life of the asset. SFAS No. 143 was effective for the Company beginning January 1, 2003. Accordingly, effective January 1, 2003, the Company changed its method of accounting for asset retirement obligations. Previously, the Company recognized amounts related to asset retirement obligations as operating expense when the specific work was performed.

 

The Company recorded the effect of the adoption of this standard as of January 1, 2003 in its statement of operations by reporting a $2.8 million charge for the cumulative effect of this accounting change. There is no income tax impact on this amount as the $1.1 million income tax benefit is fully offset by the related valuation allowance (see Note 12). Additionally, $5.6 million of asset retirement obligations were recorded along with the net book value of $2.7 million of retirement obligation assets. In addition to the cumulative effect impact reported in the statement of operations, the Company reported depreciation charges related to the retirement obligation assets and accretion expenses related to the asset retirement obligations for the period ended September 9, 2003 (Predecessor Company) of $.3 million and $.4 million, respectively. These depreciation charges and accretion expenses for the Predecessor Reorganized Company for the period January 1, 2005 through May 1, 2005 were $.2 million and $.3 million respectively, for the year ended 2004 were $.5 million and $.7 million, respectively, and for the period September 10, 2003 through December 31, 2003 were $.1 million and $.2 million, respectively. These depreciation charges and accretion expenses for the Successor Company for the period May 2, 2005 through June 30, 2005 were $.1 million and $.1 million respectively.

 

F-50


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

The Company enters into long-term leasing arrangements primarily for tower sites and retail store locations in its wireless segment. Additionally, in its wireline operations, the Company enters into various facility co-location agreements and is subject to locality ordinances. In both cases, the Company constructs assets at these locations and, in accordance with the terms of many of these agreements, the Company is obligated to restore the premises to their original condition at the conclusion of the agreements, generally at the demand of the other party to these agreements. The Company recognized the fair value of a liability for an asset retirement obligation and capitalized that cost as part of the cost basis of the related asset, depreciating it over the useful life of the related asset. The following table describes the changes to the Company’s asset retirement obligation liability, which is included in long-term deferred liabilities (in thousands):

 

     Successor
Company


   Predecessor
Reorganized
Company


   Predecessor
Reorganized
Company


     June 30,
2005


   December 31,
2004


   December 31,
2003


Asset retirement obligation at end of prior year

   $ 7,082    $ 6,278    $

Liability recognized in transition

               5,484

Additional asset retirement obligations recorded

     7      124      132

Accretion of asset retirement obligations

     350      680      662
    

  

  

Asset retirement obligation at year end

   $ 7,439    $ 7,082    $ 6,278
    

  

  

 

INVENTORIES AND SUPPLIES:    The Company’s inventories and supplies consist primarily of items held for resale such as PCS handsets, pagers, wireline business phones and accessories. The Company values its inventory at the lower of cost or market. Inventory cost is computed on a currently adjusted standard cost basis (which approximates actual cost on a first-in, first-out basis). Market value is determined by reviewing current replacement cost, marketability and obsolescence.

 

DEFERRED FINANCING COSTS:    Deferred financing costs are amortized using the straight-line method, which approximates the effective interest method, over a period equal to the term of the related debt instrument. Deferred financing costs related to the First Lien Term Loan and the Second Lien Term Loan was being amortized over a period of 6 1/2 to 7 years. Amortization of deferred financing costs is included in interest expense and was $.3 million for the Predecessor Reorganized Company period beginning on the February 24, 2005 closing date of the new financing through May 1, 2005. These deferred financing costs, which totaled $12.4 on May 2, 2005, were eliminated upon application of purchase accounting and recording the related debt instrument at fair value.

 

The Company had deferred financing costs associated with previous financings. Amortization of these costs for the Predecessor Reorganized Company period January 1, 2005 to February 23, 2005, for the year ended December 31, 2004 and for the period September 10, 2003 through December 2003 was $.3 million, $.2 million and $.1 million, respectively. Amortization of these costs of the Predecessor Company was $.5 million and $2.5 million, respectively, for the period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002.

 

ADVERTISING COSTS:    The Company expenses advertising costs and marketing production costs as incurred.

 

PENSION BENEFITS:    The Company sponsors a non-contributory defined benefit pension plan covering all employees who meet eligibility requirements and were employed prior to October 1, 2003. The defined benefit pension plan was closed to employees employed on or after October 1, 2003. Pension benefits vest after five years of service and are based on years of service and average final compensation subject to certain

 

F-51


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

reductions if the employee retires before reaching age 65. The Company’s funding policy has been to contribute to the plan based on applicable regulatory requirements. Section 412 of the Internal Revenue Code and ERISA Section 302 establishes a minimum funding requirements for defined benefit pension plans whereby the funded current liability percentage must be at least 90% of the current liability in order to prevent noticing to members of an underfunded plan. Contributions are made to stay above this threshold and are intended to provide not only for benefits based on service to date, but also for those expected to be earned in the future.

 

NTELOS Inc. also sponsors a contributory defined contribution plan under Internal Revenue Code Section 401(k) for substantially all employees. Effective April 1, 2003, the Company reinstated its policy to contribute 60% of each participant’s annual contribution for contributions up to 6% of each participant’s annual compensation. Company contributions to this plan vest after three years of service.

 

RETIREMENT BENEFITS OTHER THAN PENSIONS:    NTELOS Inc. provides certain health care and life benefits for retired employees that meet eligibility requirements. Employees hired after January 1994 are not eligible for these benefits. The Company’s share of the estimated costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the eligible employees’ service periods to the dates they are fully eligible for benefits.

 

INCOME TAXES:    Deferred income taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

STOCK-BASED COMPENSATION:    The Company accounts for stock-based employee compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and follows the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and the revised disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of SFAS No. 123.

 

Upon the effective date of the Plan of Reorganization, all options under the Predecessor Company stock option plan were cancelled and the plan was terminated. On September 16, 2003, the Predecessor Reorganized Company adopted a new stock option plan for purposes of retaining key employees and enabling them to participate in the future success of the Company (Note 15).

 

On February 24, 2005, approximately 75% of the then outstanding stock options were purchased at a price of $20.23 per share issuable pursuant to the settlement of vested options as part of the tender offer transaction. On May 2, 2005, the remaining 25% of the stock options vested pursuant to the change in control terms in the stock option agreements and were purchased at a price of $20.23 per share in connection with the closing of the Merger (Notes 2 and 3).

 

F-52


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Had compensation cost been recorded based on the fair value of awards at the grant date, the pro forma impact on the Company’s net income (loss) would have been as follows (in thousands):

 

     Successor
Company


   Predecessor Reorganized Company

   Predecessor Company

 
     May 2, 2005
through
June 30,
2005


   January 1,
2005 through
May 1, 2005


    Year ended
December 31,
2004


   September 10,
2003 through
December 31,
2003


   January 1,
2003 through
September 9,
2003


   Year ended
December 31,
2002


 

Net income (loss), as reported

   $ 537    $ (1,717 )   $ 38,312    $ 4,670    $ 142,026    $ (488,947 )

Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax

     1      740       739      925      898      1,708  
    

  


 

  

  

  


Net income (loss), proforma

   $ 536    $ (2,457 )   $ 37,573    $ 3,745    $ 141,128    $ (490,655 )
    

  


 

  

  

  


 

The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions: dividend rate of 0%; risk-free interest rate of 3.84% for the period May 2, 2005 through June 30, 2005, 2.5% for all periods in 2003 through May 1, 2005 and 3.04% to 5.05% for 2002; expected life of 5 years for all periods in 2003 through 2005 and 6 years in 2002; and, a price volatility factor of 43.0% for the Successor Company period May 2, 2005 through June 30, 2005 and 65.7% to 92.4% for the Predecessor Company periods ended September 9, 2003 and December 31, 2002. In accordance with the provisions of SFAS No. 123 for non-public companies, a price volatility factor was not required or used for all Predecessor Reorganized Company periods.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS:    Statement of Financial Accounting Standard No. 107, Disclosure About Fair Value of Financial Instruments (“SFAS No. 107”), requires certain disclosures regarding the fair value of financial instruments. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at cost which approximates fair value because of the short-term maturity of these instruments. The fair values of other financial instruments are based on quoted market prices or discounted cash flows based on current market conditions.

 

In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133 and 138”). SFAS Nos. 133 and 138 require all derivatives to be measured at fair value and recognized as either assets or liabilities on the Company’s balance sheet. Changes in the fair values of derivative instruments are recognized in either earnings or comprehensive income, depending on the designated use and effectiveness of the instruments (Note 11).

 

RECENT ACCOUNTING PRONOUNCEMENTS:    In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies the term “conditional asset retirement obligation” as used in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” and also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not anticipate that the implementation of FIN 47 will have a material impact on its consolidated financial position, results of operations or cash flows.

 

F-53


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payments” (“SFAS No. 123R”). SFAS No. 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and measurement based on the grant-date fair value of the award. It requires the cost to be recognized over the period during which an employee is required to provide service in exchange for the award. Additionally, compensation expense will be recognized over the remaining employee service period for the outstanding portion of any awards for which compensation expense had not been previously recognized or disclosed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R replaces SFAS No. 123 and supersedes APB Opinion No. 25 and its related interpretations.

 

The Company is required to adopt SFAS No 123R no later than January 1, 2006. The Company does not believe that the effects of adoption will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Note 6.    Disclosures about Segments of an Enterprise and Related Information

 

The Company manages its business segments with separable management focus and infrastructures.

 

Wireless PCS:    The Company’s wireless PCS business carries digital phones and services, marketed in the retail and business-to-business channels throughout much of Virginia and West Virginia. The Company’s Wireless PCS segment operates in three primary markets: Virginia East, Virginia West and West Virginia. The Virginia East market covers a populated area of 3.3 million people primarily in the Richmond and Hampton Roads areas of Virginia through Richmond 20MHz, LLC, a wholly owned subsidiary. The region was added in July 2000 from the PrimeCo VA acquisition. The Virginia West market currently serves a populated area of 2.2 million people in central and western Virginia primarily through the Virginia PCS Alliance, L.C. (“VA Alliance”), a 97% majority owned Limited Liability Company. The West Virginia market is served by West Virginia PCS Alliance, L.C. (“WV Alliance”), a wholly owned limited liability company, and currently serves a populated area of 1.6 million people primarily in West Virginia, but extending to parts of eastern Kentucky, southwestern Virginia and eastern Ohio. In addition to the markets indicated above, the Company has licenses, which are not currently active, that cover a populated area of 1.4 million people at June 30, 2005.

 

In addition to the end-user customer business, the Company provides roaming services to other PCS providers and has a wholesale network access agreement with Sprint PCS, Inc. entered into in June 2004. Prior to this, the Company had a wholesale network access agreement with Horizon Personal Communications, Inc., a Sprint affiliate (Note 16). Revenue from these wholesale service agreements was $10.0 million, $19.9 million, $51.6 million, $14.3 million, $18.6 million, and $33.9 million for the Successor Company period from May 2, 2005 through June 30, 2005, the Predecessor Reorganized Company period from January 1, 2005 through May 1, 2005, for the year ended 2004 and the period from September 10, 2003 through December 31, 2003, and the Predecessor Company period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002, respectively.

 

RLEC:    The Company has RLEC businesses subject to the regulations of the State Corporation Commission of Virginia. NTELOS Inc. has owned one of these for over 100 years and the other was added in early 2001 through a merger with R&B Communications, Inc. These businesses serve several areas in western Virginia, are fully integrated and are managed as one consolidated operation. Principal products offered by this segment are local service, which includes advanced calling features, network access, long distance toll and directory advertising.

 

Competitive wireline:    In addition to the RLEC services, the Company directly or indirectly owns 1,900 route miles of fiber optic network and provides transport services for long distance, Internet and private network

 

F-54


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

services. Much of this network is located in regions that the Company sells products and services or provides connections for and between markets the Company serves. The Company’s network is connected and marketed through Valley Network Partnership (“ValleyNet”), a partnership of three nonaffiliated communications companies that have interconnected their networks to a nonswitched, fiber optic network. The ValleyNet network is connected to and marketed with other adjacent fiber networks creating a connected fiber optic network serving the ten state mid-Atlantic region, stretching from Pennsylvania to Florida north to south and west as far as Charleston, WV.

 

The Company also offers competitive local exchange carrier (“CLEC”) services. Through its wholly owned subsidiaries certified in Virginia, West Virginia and Tennessee, it currently provides CLEC service in 16 geographic markets. The Company has a facilities based strategy, offering broadband service applications such as Ethernet, PRI connections and competitive access utilizing its fiber network. Over 35% of the Company’s CLEC lines are completely on its network. Also within this segment, the Company provides Internet access services through a local presence in 57 markets in Virginia, West Virginia, Tennessee and North Carolina. Through internal growth and acquisition, the Company significantly expanded its Internet Service Provider (“ISP”) business and customer base during the period 1998 through 2002. The Company’s focus with internet has shifted to concentrate efforts on broadband service offerings. Dedicated high-speed access, Digital Subscriber Line (“DSL”) and portable broadband are the primary broadband products.

 

These operations are a single segment due to the interdependence of network and other assets and functional support. In addition, of the services within these product offerings are or can be either data or voice or both. The distinction lies in the transport medium and protocol, with the actual service received by the customer being essentially the same. Based on this evolution of these products, these products are now managed as one consolidated operation.

 

Other:    Other communications services includes certain unallocated corporate related items, as well as results from the Company’s paging, other communication services and wireline and wireless cable businesses, which are not considered separate reportable segments. The wireline cable business was sold in 2003 (Note 8) and the wireless cable business discontinued its operations in first quarter 2004. Wireless cable was not accounted for as a discontinued operation as the financial position, results of operations and cash flows of this business were immaterial to the consolidated financial statements during 2003 and 2004. Total unallocated corporate operating expenses were $.8 million (inclusive of $.3 million of advisory fee (Note 3), $.9 million, $2.8 million, $.5 million, $5.0 million and $3.9 million for the Successor Company for the period May 2, 2005 through June 30, 2005, the Predecessor Reorganized Company period January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and the period from September 10, 2003 through December 31, 2003, and the Predecessor Company period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002, respectively. In addition, restructuring charges were $.1 million, $15.4 million, $.8 million, $2.4 million and $4.3 million for the Successor Company for the period May 2, 2005 through June 30, 2005, the Predecessor Reorganized Company for the periods January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the Predecessor Company period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002, respectively.

 

The Company has one customer that accounted for greater than 10% of its revenue during the year ended 2004 and the 2005 periods. Revenue from this customer was primarily derived from a wireless PCS wholesale contract and RLEC and competitive wireline segments’ network access. The percent of operating revenue from this customer for the Successor Company period May 2, 2005 through June 30, 2005 was approximately 18% and for the Predecessor Reorganized Company periods January 1, 2005 through May 1, 2005 and for the year ended 2004 were approximately 18% and 10%, respectively.

 

F-55


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Summarized financial information for the Company’s reportable segments is shown in the following table. On the Statement of Operations, the wireless communications revenue caption is exclusively comprised of the wireless PCS segment and the wireline communications revenue captions is comprised of the RLEC and the competitive wireline segments.

 

(in thousands)


  Wireless PCS

    RLEC

  Competitive
Wireline


    Other

    Total

 

Successor Company

                                     

As of June 30, 2005 and for the period May 2, 2005 through June 30, 2005

                                     

Operating Revenues

  $ 45,242     $ 9,195   $ 8,639     $ 124     $ 63,200  

Operating Income (Loss)

    4,287       4,395     1,321       (1,027 )     8,976  

Depreciation & Amortization

    10,265       2,549     1,847       52       14,713  

Accretion of Asset Retirement Obligation

    119                 (21 )     98  

Capital and Operational Restructuring Charges

                    120       120  

Total Segment Assets

    487,467       204,163     97,618       1,383       790,631  

Corporate Assets

                                  78,836  
                                 


Total Assets

                                $ 869,467  
                                 


Predecessor Reorganized Company

                                     

For the period January 1, 2005 through May 2, 2005

                                     

Operating Revenues

  $ 89,826     $ 18,834   $ 16,674     $ 343     $ 125,677  

Operating Income (Loss)

    12,205       10,611     2,595       (7,762 )     17,649  

Depreciation & Amortization

    16,768       3,618     3,308       105       23,799  

Accretion of Asset Retirement Obligation

    231       4     13       4       252  

Gain on Sale of Assets

    (51 )         (21 )     (8,670 )     (8,742 )

Capital and Operational Restructuring Charges

                    15,403       15,403  

As of and for the year ended December 31, 2004

                                     

Operating Revenues

  $ 234,682     $ 56,280   $ 48,971     $ 1,769     $ 341,702  

Operating Income (Loss)

    20,722       28,998     9,773       (4,929 )     54,564  

Depreciation & Amortization

    44,557       11,239     8,740       639       65,175  

Accretion of Asset Retirement Obligation

    605       12     37       26       680  

Capital and Operational Restructuring Charges

                    798       798  

Total Segment Assets

    290,624       154,867     87,101       2,687       535,279  

Corporate Assets

                                  85,178  
                                 


Total Assets

                                $ 620,457  
                                 


As of December 31, 2003 and for the period September 10, 2003 through December 31, 2003

                                     

Operating Revenues

  $ 66,769     $ 17,159   $ 15,275     $ 962     $ 100,165  

Operating Income (Loss)

    138       8,419     2,852       (731 )     10,678  

Depreciation & Amortization

    11,546       3,741     3,267       306       18,860  

Accretion of Asset Retirement Obligation

    201       6     18             225  

Total Segment Assets

    316,720       161,402     82,679       2,931       563,732  

Corporate Assets

                                  86,491  
                                 


Total Assets

                                $ 650,223  
                                 


 

F-56


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

(in thousands)


  Wireless PCS

    RLEC

  Competitive
Wireline


    Other

    Total

 

Predecessor Company

                                     

For the period January 1, 2003 through September 9, 2003

                                     

Operating Revenues

  $ 132,766     $ 36,193   $ 34,910     $ 3,920     $ 207,789  

Operating Income (Loss)

    (14,927 )     18,538     7,627       (8,357 )     2,881  

Depreciation & Amortization

    36,010       6,044     7,731       1,439       51,224  

Accretion of Asset Retirement Obligation

    409       4     24             437  

Asset Impairment Charge

                    545       545  

Capital and Operational Restructuring Charges

                    2,427       2,427  

For the year ended December 31, 2002

                                     

Operating Revenues

  $ 171,495     $ 47,783   $ 50,437     $ 9,151     $ 278,866  

Operating Income (Loss)

    (410,177 )     24,791     (13,718 )     (16,983 )     (416,087 )

Depreciation & Amortization

    61,141       7,817     10,521       3,445       82,924  

Asset Impairment Charge

    366,950           20,900       15,030       402,880  

Gain on Sale of Assets

    (3,076 )               (5,396 )     (8,472 )

Capital and Operational Restructuring Charges

                    4,285       4,285  

 

Note 7.    Asset Impairment Charges

 

The Company has considered the existence of impairment indicators for the period ended June 30, 2005 and has noted none. The Company performed its annual SFAS No. 142 impairment testing on goodwill and indefinite lived intangible assets for 2004 on October 1, 2004. Based on the results of this testing, goodwill and indefinite lived intangible assets were determined to be unimpaired at October 1, 2004. The Company reviewed the results of the October 1, 2004 testing as of December 31, 2004 and concluded that no material changes would have been made to the underlying assumptions that would have resulted in materially different test results from those performed as of October 1, 2004.

 

During the period ended September 9, 2003, the Company determined that there was sufficient evidence of impairment indicators to warrant impairment testing of the Company’s wireline cable operations. Due to the customer decline and its effect on the selling price of this business, the goodwill of this business was determined to be impaired and, therefore, the Company recorded a $.5 million asset impairment charge during the period ended September 9, 2003. The Company closed on the sale of this business on September 19, 2003.

 

As discussed in Note 4, all other long lived assets required to be tested under the provisions of SFAS No. 142 and SFAS No. 144 were revalued in the Company’s application of fresh start accounting. There were no significant changes within the Company or in industry or general economic external factors from the September 9, 2003 reorganization date to October 1, 2003, the date the Company has chosen to perform its annual SFAS No. 142 impairment testing or through December 31, 2003.

 

The Company adopted SFAS No. 142 on January 1, 2002. The Company completed the transitional impairment testing as of January 1, 2002 for goodwill and assembled workforce and determined that no impairment existed as of that date. However, based on changes in market conditions, the competitive landscape and the Company’s future projections, all of which is more fully discussed below, the Company recorded a $365 million asset impairment charge pursuant to SFAS No. 142 testing performed as of October 1, 2002. In addition, the Company recorded a $38 million impairment in property, plant and equipment related to the SFAS No. 144 impairment testing in 2002.

 

F-57


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Year ended December 31, 2002—Predecessor Company

 

During the first quarter of 2003, the Company completed the 2002 annual SFAS No. 142 impairment testing of all goodwill and indefinite lived intangible assets as of October 1, 2002. The Company engaged an independent appraisal firm to perform valuation work related to the PCS radio spectrum licenses, goodwill and the assembled workforce intangible asset within the wireless segment. The Company performed testing of wireless goodwill and the wireless assembled workforce intangible asset utilizing a combination of a discounted cash flow method and other market valuation methods. The Company’s testing of PCS radio spectrum licenses and goodwill in the other reporting units utilized a discounted cash flow method. The discounted cash flow method involved long-term cash flow projections using numerous assumptions and estimates related to these projections. In performing this testing, the Company revised its business and financial forecasts to reflect the current and projected results. During this exercise, revisions to certain of the Company’s short-term and long-term assumptions had a significant impact on the Company’s long-term cash flows. The level of competition in pricing and plan offerings, customer churn rate and other market condition variables negatively affected the Company and the industry sector’s financial projections. Additionally, market valuations continued to decline throughout 2002. Based on this testing, the Company concluded that the wireless radio spectrum licenses required an impairment adjustment of $313.7 million. Additionally, in connection with requirements under SFAS No. 142, the Company determined that there was no intrinsic value of the goodwill and assembled workforce asset and recorded a $24.8 million impairment charge accordingly.

 

In addition to the impairment determined in the wireless PCS segment, the Company’s network segment, which contained $27.6 million of goodwill, was found to be impaired as measured under the provisions of SFAS No. 142. The network segment experienced unfavorable pricing adjustments throughout 2002 that resulted in the lowering of cash flow projections. As noted above, the Company utilized a discounted cash flow model in determining the existence of impairment in this segment. From these updated calculations, the segment’s fair value was determined to be below the carrying value. Upon completing the “memo based” purchase price allocation as required under step 2 of SFAS No. 142, the Company determined the goodwill impairment valuation adjustment to be $20.9 million.

 

The Company’s RLEC segment, which had $65.5 million of goodwill from the R&B Communications merger in 2001, contained two RLEC businesses which were managed as one operating segment as they were operationally integrated and management reviewed results and allocated resources from a consolidated perspective. Therefore, the SFAS No. 142 testing was required to be performed on the total segment (similar to the Company’s network and ISP businesses). Based on this testing, the Company determined that there was no impairment of this goodwill. Had the SFAS No. 142 testing been performed on the R&B RLEC as a stand alone entity, this goodwill would have been impaired and an impairment charge would have been required.

 

In addition to the testing under SFAS No. 142, the Company determined that impairment indicators were present in all of its operating segments under the provisions of SFAS No. 144 (see Note 5, “Significant Accounting Policies” for additional discussions of this standard). Based on the results of the Company’s SFAS No. 144 testing, certain of the wireless PCS segment assets were found to be impaired. Accordingly, the Company determined the fair market value of these assets utilizing the services of the third party appraisal firm. Based on this determination, the Company found the property, plant and equipment to be impaired by $16.7 million, primarily related to cell site and other network plant and equipment. Other finite lived intangible assets consist of the customer list and tower franchise rights originating from the 2000 acquisition of PrimeCo VA. These assets had carrying values of $9.7 million and $2.1 million, respectively, and were being amortized over useful lives of 5 years and 10 years, respectively. The Company determined that the market for these intangible assets had significantly deteriorated and thus, these assets had only marginal or no marketable value. Accordingly, the Company recorded an additional $11.8 million impairment.

 

F-58


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

The Company’s wireless cable business contained goodwill and licenses of $3.7 million and $12.8 million, respectively, and property, plant and equipment totaling $1.4 million. The use of the licenses and long lived assets was primarily for one-way video transmission. This application did not produce sufficient cash flows to recover the carrying value of these assets under SFAS No. 142 and SFAS No. 144. Management had been testing a two-way high speed Internet application which, if deployed, was expected to produce cash flows which would recover the carrying value of the goodwill, licenses and property, plant and equipment. Based on the progress of this new application, certain required FCC approvals over the use of the licensed spectrum which were expected but remain pending at this time, and other factors relating to capital funding and forecasting uncertainties, the Company did not consider this application in performing the impairment testing. Accordingly, the Company recorded a write-down of the goodwill, licenses and property, plant and equipment of $3.7 million, $10.3 million and $1.1 million, respectively.

 

The Company reviewed the results of the October 1, 2002 testing as of December 31, 2002 and concluded that no material changes would have been made to the underlying assumptions that would have resulted in materially different test results from those performed as of October 1, 2002.

 

A summary of the asset impairment charges recorded in 2002 and discussed above follows:

 

(In thousands)


   Historical
Carrying
Value


   Fair value

   Asset
Impairment
Charges


Wireless PCS

                    

Property, Plant and Equipment -VA East Market

   $ 104,808    $ 88,140    $ 16,668

Goodwill and Assembled Workforce

     24,836           24,836

Licenses

     428,066      114,389      313,677

Other Intangibles

     11,769           11,769
    

  

  

Sub-total

     569,479      202,529      366,950

Network Segment Goodwill

     25,582      4,682      20,900

Wireless Cable

                    

Property, Plant and Equipment

     1,383      294      1,089

Goodwill

     3,654           3,654

MMDS Licenses

     12,787      2,500      10,287
    

  

  

Sub-total

     17,824      2,794      15,030
    

  

  

Totals

   $ 612,885    $ 210,005    $ 402,880
    

  

  

 

Note that the table above indicates $104.8 million historical carrying value of wireless PCS property, plant and equipment. This only represents those assets used in the VA East market (formerly PrimeCo VA, acquired in 2000) out of the total $249.5 million of wireless PCS property, plant and equipment. The remaining assets in the Company’s VA West and WV markets were not required to be adjusted to fair value based on the results of the SFAS No. 144 tests of recoverability.

 

Note 8.    Asset Dispositions

 

On November 18, 2004, the Company signed an agreement to sell certain inactive PCS licenses covering a population of approximately 2 million in Pennsylvania for $15.5 million. Each license covered 10 MHz of spectrum. The book value of these licenses was $10.0 million. Final closing occurred in February 2005, with the Company recognizing net proceeds of $15.2 million and recognized a gain of $5.2 million.

 

F-59


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

On November 11, 2004, the Company signed an agreement to sell all of the MMDS spectrum licenses, spectrum leases and wireless cable equipment in the Richmond, VA market for a minimum of $4.2 million and up to $5.0 million, conditioned on the satisfactory completion of certain deliverables. Additionally, the Company assigned all spectrum leases and tower leases for this market to the buyer. The book value of the licenses is $1.5 million and the equipment assets have a book value of less than $.1 million. During the period ending May 1, 2005 the Company closed on the sale of substantially all of these assets and recognized net proceeds of $4.8 million and recognized a gain of $3.5 million.

 

On December 31, 2003, the Company sold a vacant building, the underlying land and certain equipment for its net book value of $1.8 million.

 

On September 19, 2003, the Company closed on the sale of the wireline cable business at its book value of $7.6 million and, in connection with this asset sale, made a mandatory payment on the Senior Credit Facility of $1.9 million. The Company did not reclassify the wireline cable business as a discontinued operation in the statements of operations as the operating results of this business are immaterial to the Company’s consolidated results of operations. The revenues and net loss of the wireline cable business for the period January 1, 2003 through the September 19, 2003 sale date were $1.2 million and $.7 million, respectively, which represent .5% of both the consolidated revenues and net income.

 

On May 6, 2003, the Company closed on the sale of its Portsmouth, Virginia call center building for its book value of $6.9 million. This 100,000 square foot facility housed part of the Company’s wireless customer care center and certain other support personnel, as well as provided $.7 million of annual rental income from third party tenants. The Company continues to occupy 7,000 square feet of the facility through a seven year operating lease agreement. The customer care operations have been transitioned to other Company owned or leased facilities. In connection with this transition, the Company incurred approximately $.7 million of transition related costs such as severance costs, training and duplicated employee costs during the transition period, and additional facility rental expense. In accordance with the April 17, 2003 court orders approving this transaction, the net proceeds from this sale were applied against the $325 million Senior Credit Facility entered into on September 9, 2003 (the “Senior Credit Facility”).

 

In July 2002, the Company agreed to terms with telegate AG, the purchaser of NTELOS’ directory assistance operation in 2000, to release telegate AG from certain building lease obligations related to that transaction. In consideration, the Company received $.9 million in cash and $.2 million in furniture and fixtures. This $1.1 million settlement was reported in operating revenues within the Other Communications Services line. The original lease term was five years with annual lease revenue of $.8 million, which was reported in operating revenues within the Other Communication Services line as well. In 2002, prior to the termination settlement, the Company recorded lease revenue of $.5 million.

 

In May 2002, the Company sold its 3% minority partnership interest in America’s Fiber Network LLC for proceeds of $2.6 million, recognizing a $.2 million loss on the transaction reported in Other Income (Expense) on the Consolidated Statements of Operations. Concurrently, the Company purchased the use of approximately 700 new route miles of fiber contiguous to, or an extension of, the Company’s existing fiber for $2.6 million.

 

In January 2002, the Company sold 24 communications towers for $8.2 million. In 2000 and 2001, the Company sold 197 towers for $63.0 million. In connection with these transactions, the Company has certain future leaseback and other commitments. Accordingly, the gain on these sales was deferred for financial reporting purposes and was being amortized over a ten year expected leaseback period. The remaining unamortized deferred gains totaled $22.2 million on December 31, 2002. On September 9, 2003, the balance of the unamortized deferred gains was $20.2 million. In connection with our application of fresh start accounting, this deferred gain was eliminated and an unfavorable lease obligation of $6.8 million, representing the fair value

 

F-60


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

of the future unfavorable lease term, was recorded. On May 2, 2005, in connection with purchase accounting, this deferred gain was again adjusted to the fair value, along with a calculation for all leases, of the future unfavorable lease term (Note 3).

 

In 2002, the Company sold certain excess PCS licenses for combined proceeds of $18.0 million, recognizing a $8.4 million gain. Additionally, the Company sold various investments in 2002 for $1.6 million, which approximated the related investment carrying values. Finally, the Company recognized a $1.1 million permanent impairment loss in 2002 associated with its investment in WorldCom, Inc. which is classified in Other Income (Expense) in the Consolidated Statements of Operations.

 

Note 9.    Long-Term Debt

 

As of June 30, 2005, December 31, 2004 and December 31, 2003, the Company’s outstanding long-term debt consisted of the following:

 

(In thousands)


   June 30,
2005


   December 31,
2004


   December 31,
2003


First Lien Term Loan

   $ 398,000    $    $

Second Lien Term Loan

     225,000          

Variable rate Senior Credit Facility

          169,176      216,432

6.25% to 7.0% Notes payable secured by certain PCS radio spectrum licenses

          4,413      6,360

5.0% to 6.05% Notes payable secured by certain assets

          4,974      5,095

9.0% Unsecured Senior Convertible Notes

               74,273

Capital lease obligations

     1,574      1,688      8,143
    

  

  

       624,574      180,251      310,303
    

  

  

Less current portion

     4,763      10,460      17,860
    

  

  

Long-Term Debt

   $ 619,811    $ 169,791    $ 292,443
    

  

  

 

Long-term debt, excluding capital lease obligations

 

2005 Financing

 

On February 24, 2005, the Company entered into $660 million of Senior Secured Credit Facilities (the “Facilities”) consisting of (i) a $400 million, 6.5 year, first-lien term loan facility (the “First Lien Term Loan”), (ii) a $35 million, 5-year, revolving credit facility (the “Revolving Credit Facility”), and (iii) a $225 million, 7 year, second-lien term loan facility (the “Second Lien Term Loan”).

 

The Company borrowed $625 million under the First and Second Lien Term Loans and used the proceeds to retire the remaining obligations under its existing $325 million Senior Credit Facility entered into on September 9, 2003 (the “Senior Credit Facility”), the existing interest rate swap agreements, 6.25% to 7.0% Notes payable secured by certain PCS radio spectrum licenses and 5.0% to 6.05% Notes payable secured by certain assets for an aggregate disbursement of approximately $183 million. Based on the Company’s application of fresh start accounting (effective September 9, 2003), the 5.0% to 6.05% notes payable carrying value had been reduced below the face value based on fair value interest rates of 7.1% to 8.9%. At the date of retirement, the difference between face value and carrying value of approximately $.8 million was recorded as a component of interest expense.

 

In connection with the retirement described above, the Company recorded interest expense of approximately $.3 million related to the write-off of deferred debt issuance costs. Additionally, in connection with the

 

F-61


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

retirement of the portion of the original Senior Credit Facility held by RTFC, the investment in RTFC subordinated capital certificates of $7.2 million was netted and accordingly reduced the principal due at the time of the retirement.

 

The First Lien Term Loan matures in 6.5 years, with quarterly payments of $1 million for the initial 5.5 years, with the remainder due in equal quarterly payments over the year prior to maturity. The Revolving Credit Facility provides for borrowings up to $35 million for five years and is payable in full at maturity. The Second Lien Term Loan matures in 7 years and is payable in full at maturity. The First Lien Term Loan bears interest at rates 2.5% above the Eurodollar rate or 1.5% above the Federal Funds rate, with a 25 basis point reduction in each of these rates when the Company’s leverage ratio is equal to or less than 4.0:1.0, as defined in the agreement. The Second Lien Term Loan bears interest at rates 5.0% above the Eurodollar rate or 4.0% above the Federal Funds rate. Interest on the First and Second Lien Term Loans is due and payable monthly. The First Lien Term Loan and Revolving Credit Facility are secured by a first priority pledge of substantially all property and assets of the Company and all material subsidiaries, as guarantors, excluding the regulated telephone companies. The Second Lien Term Loan is secured by a second priority interest in all collateral pledged to the First Lien Term Loan and Revolving Credit Facility. The First Lien Term Loan contains various restrictions and conditions including covenants relating to leverage and interest coverage ratio requirements and a limitation on future capital expenditures and dividends. The Second Lien Term Loan contains various restrictions and conditions including customary incurrence based covenants. The Second Lien Term Loan contains a 2% prepayment premium prior to its first anniversary date and a 1% prepayment premium prior to its second anniversary date.

 

In connection with the transactions described above, NTELOS Inc. deferred debt issuance costs of approximately $12.8 million which were being amortized to interest expense over the life of the Facilities. Amortization of these costs for the February 24 through May 1, 2005 was $.4 million. At May 2, 2005, the Company had a $12.4 million unamortized balance of debt financing costs related to the First Lien Term Loan and the Second Lien Term Loan. Through purchase accounting, the deferred financing fees were considered in determining the fair value of the debt and thus this balance was eliminated.

 

2003 and 2004 Financing

 

On March 4, 2003, the Company and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (see Notes 1 and 4). In addition, the Company did not make the scheduled semi-annual interest payments due on February 18, 2003 on its 13% Senior Notes (“Senior Notes”) due 2010 and 13.5% Subordinated Notes (“Subordinated Notes”) due 2011 of $18.2 million and $6.4 million, respectively.

 

On September 9, 2003, the Company emerged from bankruptcy. In connection with the emergence, the Company cancelled its Senior Notes and Subordinated Notes which had carrying values, net of unamortized discounts, of $276.7 million and $95.0 million, respectively, and total accrued and unpaid interest of $27.4 million (Notes 1 and 4).

 

The Company had a balance outstanding under the Senior Credit Facility of $169.2 million and $216.4 million as of December 31, 2004 and December 31, 2003, respectively. On February 24, 2005, in connection with a series of equity transactions, the Company borrowed $625 million from a new $660 million Senior Secured Credit Facility and used these proceeds to liquidate all of the existing indebtedness with the exception of the capital lease obligations and to repurchase approximately 75% of its existing common stock, warrants and options (Note 2).

 

The Senior Credit Facility outstanding at December 31, 2004 and 2003 contained a tranche A term loan, tranche B term loan, tranche C term loan and a revolving credit facility and was secured by substantially all

 

F-62


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

assets not secured against other senior debt. At December 31, 2004, the amounts outstanding were $19.5 million, $91.0 million, $58.7 million and $0, respectively, with $32.4 million available under the revolving credit facility. At December 31, 2003, the amounts outstanding relative to each of these was $45.4 million, $98.7 million, $72.3 million and $0, respectively, with $32.4 available under the revolving credit facility. Commitment fees are incurred on the unused portion of the revolving credit facility. The Senior Credit Facility loans began maturing in 2002 with a $.5 million principal payment on the tranche B term loan made quarterly beginning in third quarter 2002 and a $1.3 million principal payment on the tranche A term loan made quarterly beginning in third quarter 2003. The Senior Credit Facility had maturities which totaled $7.2 million during 2004. Final maturity was 2008. The Senior Credit Facility also required that a percentage of asset sale proceeds be used to repay the outstanding balance of the tranche A, B and C term loans. For fiscal year 2004 and 2003, net proceeds from assets sales used to paydown the Senior Credit Facility were $.1 million and $8.2 million, respectively. The loans bore interest at rates of 3% to 4% above the Eurodollar rate or 2.5% to 3% above the federal funds rates. The loans contained certain financial covenants and restrictions to their use.

 

On September 30, 2004, the Company made an optional prepayment on the Senior Credit Facility of $40.0 million that reduced the remainder of the required future quarterly mandatory payments due for tranche A and tranche B through 2008 and 2007, respectively.

 

The Company incurred loan origination fees and other closing costs related to the Senior Credit Facility totaling $19.9 million which were classified as deferred charges on the Company’s balance sheet as of December 31, 2002. In accordance with SOP 90-7, these costs were written off and recorded as reorganization items in the first quarter of 2003. Loan origination fees and closing costs for the amended Senior Credit Facility totaling $.5 million were recorded at emergence as deferred charges and are being amortized over the life of the facility and had a net balance of $.3 million at December 31, 2004.

 

On September 9, 2003, the Company issued $75 million of new 9% Unsecured Senior Convertible Notes (“Convertible Notes”), along with 37,931 shares of New Common Stock, valued at 1% of the purchase price or $750,000. The Convertible Notes were recorded net of the $750,000 fair value of common stock and were being accreted as interest expense up to the face value under the effective interest method over the ten year term of the instrument. Interest was paid on the Convertible Notes semi-annually.

 

On September 30, 2004, the Company converted the Convertible Notes to 3,793,116 shares of Common Stock. At the date of conversion, the book value of the Convertible Notes, net of the unaccreted discount, was $74.3 million. Therefore, the book value of the 3.8 million shares of Common Stock issued upon conversion was $19.594 per share.

 

Based on the Company’s application of fresh start accounting, the 5.0% to 6.05% Notes payable carrying value was reduced $.9 million below the face value based on fair value interest rates of 7.1% to 8.9%.

 

Blended interest rates and future maturities

 

The Company’s blended interest rate on its long-term debt as of June 30, 2005, December 31, 2004 and 2003 were 6.8%, 9.6%, and 8.8%, respectively.

 

The aggregate maturities of long-term debt outstanding at June 30, 2005, excluding capital lease obligations, based on the contractual terms of the instruments are $4.0 million per year from 2005 through 2009, $97.3 million in 2010 and $507.7 million thereafter.

 

Capital lease obligations

 

In addition to the long-term debt discussed above, the Company has certain equipment capital leases entered into in 2000, all of which mature in 2005. At June 30, 2005, the net present value of these future minimum lease

 

F-63


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

payments was $.4 million. The Company also enters into capital leases on vehicles used in its operations with lease terms of 4 to 5 years. At June 30, 2005, the net present value of these future minimum lease payments is $1.2 million which is net of the amounts representing interest of $.1 million. As of June 30, 2005 the principal portion of these obligations are as follows: $.2 million in the remainder of 2005, $.4 million in 2006, $.2 million in 2007 and less than $.1 million thereafter.

 

Note 10.    Supplementary Disclosures of Cash Flow Information

 

The following information is presented as supplementary disclosures for the consolidated statements of cash flows for the periods indicated below.

 

    Successor
Company


  Predecessor Reorganized Company

  Predecessor Company

 

(In thousands)


  May 2, 2005
through June 30,
2005


  January 1, 2005
through May 1,
2005


  Year ended
December 31,
2004


  September 10,
2003 through
December 31,
2003


  January 1,
2003 through
September 30,
2003


  Year ended
December 31,
2002


 

Cash payments for:

                                     

Interest

  $ 9,707   $ 7,829   $ 27,563   $ 7,302   $ 15,034   $ 36,187  

Income taxes, net of refunds received

    306     103     1,058     429     529     (1,038 )

Pension and other retirement plan contributions and distributions

  $ 1,164   $ 7,980   $ 2,240   $ 3,583   $   $  

Non-cash financing activity: Conversion of convertible Notes (Note 9)

  $   $   $ 74,322   $   $   $  

 

Within the cash payments for interest amounts in the above table, $.8 million, $1.1 million, $8.9 million, $2.8 million, $6.0 million and $4.9 million relate to interest paid on the interest rate swap agreements for the Successor Company period May 2 through June 30, 2005, the Predecessor Reorganized Company period January 1 through May 1, 2005, for the year ended December 31, 2004, the period from September 10, 2003 through December 31, 2003 and the Predecessor Company period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002 respectively.

 

As discussed in Note 3, pursuant to the Transaction Agreement, the Company was required to move proceeds from the sale of certain assets into a segregated account and disbursed these funds on the May 2, 2005 merger closing date as part of the consideration used to purchase the remaining security interest not owned by the Buyers. The amount paid to the Buyers from this account was $25.0 million. In addition, the Company has recognized a payable to Holdings Corp. for $5.8 million representing the Company’s obligation to remit to Holdings Corp. the proceeds from the sale and collection on certain identified assets. Receipt of these funds is expected prior to December 31, 2005.

 

F-64


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 11.    Financial Instruments

 

The Company is exposed to market risks with respect to certain of the financial instruments that it holds. The following is a summary by balance sheet category:

 

Cash and Short Term Investments

 

The carrying amount approximates fair value because of the short-term maturity of those instruments.

 

Long Term Investments

 

At June 30, 2005, the Company’s principal investment was $2.5 million of C stock holdings in the Rural Telephone Bank (“RTB”). In connection with the Company’s application of purchase accounting, this asset was valued based on discounted cash flow of anticipated future dividends based on historical trends of RTB dividend payments to the class C stock (Note 3). All of the investments carried under the cost method at June 30, 2005 are high quality instruments. For all periods prior to June 30, 2005, a reasonable estimate of fair value could not be made without incurring excessive costs for investments with no quoted market prices. Additional information regarding the Company’s investments is included in Note 13.

 

Interest Rate Swaps

 

Pursuant to the requirements of the new Senior Secured Credit Facility, on February 24, 2005 the Company entered into a new interest rate swap agreement with a notional amount of $312.5 million in order to manage its exposure to interest rate movements by effectively converting a portion of its long-term debt from variable to fixed rates. This swap agreement has maturities up to three years and involves the exchange of fixed rate payments for variable rate payments without the effect of leverage and without the exchange of the underlying face amount. Fixed interest rate payments are at a per annum rate of 4.1066%. Variable rate payments are based on three month US dollar LIBOR. The weighted average LIBOR rate applicable to this agreement was 3.21% on the May 2, 2005 merger transaction closing date and 3.52% on June 30, 2005. The notional amounts do not represent amounts exchanged by the parties, and thus are not a measure of exposure to the Company. The amounts exchanged are based on the notional amounts and other terms of the swaps.

 

For the Predecessor Reorganized Company period February 24, 2005 through May 1, 2005 and the Successor Company period from May 2, 2005 through June 30, 2005 this swap agreement was not designated as a cash flow hedge for accounting purposes per the provisions of SFAS No. 133 and therefore the changes in market value of the swap agreement were recorded as a charge or credit to interest expense.

 

On May 2, 2005, the swap had a fair value of a $.7 million liability. The fair value of the swap agreement at June 30, 2005 was a $1.2 million liability.

 

During September 2000, in accordance with conditions of the Senior Notes, the Company entered into two interest rate swap agreements with aggregate notional amounts of $162.5 million, with maturities of up to 5 years, to manage its exposure to interest rate movements by effectively converting a portion of its long-term debt from variable to fixed rates. The net face amount of interest rate swaps subject to variable rates as of December 31, 2004 and 2003 was $162.5 million. These agreements involve the exchange of fixed rate payments for variable rate payments without the effect of leverage and without the exchange of the underlying face amount. Fixed interest rate payments are at a per annum rate of 6.76%. Variable rate payments are based on one month US dollar LIBOR. The weighted average LIBOR rate applicable to these agreements was 1.67% and 1.24% for 2004 and 2003, respectively. The notional amounts do not represent amounts exchanged by the parties, and thus are not a measure of exposure to the Company. The amounts exchanged are normally based on the

 

F-65


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

notional amounts and other terms of the swaps. The Company retired these swap agreements for $4.1 million on February 24, 2005 commensurate with the retirement of the related Senior Credit Facilities.

 

The fair values of the interest rate swap agreements are based on dealer quotes. At June 30, 2005, the Company had no exposure to credit loss on interest rate swaps. The fair value of the interest rate swap agreements at June 30, 2005, December 31, 2004 and 2003 was a liability of $1.2 million, $4.7 million and $13.8 million, respectively.

 

Neither the Company nor the counterparties, which are prominent banking institutions, are required to collateralize their respective obligations under these swaps. The Company is exposed to loss if one or more of the counterparties default. At December 31, 2004 and 2003, the Company had no exposure to credit loss on interest rate swaps.

 

The Company does not believe that any reasonably likely change in interest rates would have a material adverse effect on the financial position, the results of operations or cash flows of the Company. All interest rate swaps are reviewed with and, when necessary, are approved by the Company’s Board of Directors.

 

Debt Instruments

 

On June 30, 2005, the Company’s First and Second Lien Term Loans totaled $623.0 million. Of this amount, $310.5 million was not subject to the new swap agreement. Similarly, on December 31, 2004, the Company’s Senior Credit Facility totaled $169.2 million. Of this amount, $6.7 million was not subject to the former swap agreements. Therefore, the Company had variable rate exposure related to this amount. As indicated in the table below, the Company believes the face value of the senior debt approximates its fair value.

 

F-66


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

The following table indicates the difference between face amount, carrying amount and fair value of the Company’s financial instruments at June 30, 2005, and December 31, 2004 and 2003:

 

Financial Instruments (In thousands)


   Face amount

    Carrying amount

   Fair value

June 30, 2005

                     

Nonderivatives:

                     

Financial assets:

                     

Cash and short-term investments

   $ 19,989     $ 19,989    $ 19,989

Long-term investments for which it is:

                     

Practicable to estimate fair value

   $ N/A     $ 2,500    $ 2,500

Not practicable to estimate fair value

     N/A       117      117

Financial liabilities:

                     

Non-marketable long-term debt

   $ 624,574       624,574      624,574

Derivatives relating to debt:

                     

Interest rate swaps

   $ 312,500 *   $ 1,155    $ 1,155

December 31, 2004

                     

Nonderivatives:

                     

Financial assets:

                     

Cash and short-term investments

   $ 34,187     $ 34,187    $ 34,187

Long-term investments for which it is:

                     

Practicable to estimate fair value

   $ N/A     $ 7,556    $ 7,556

Not practicable to estimate fair value

     N/A       115      115

Financial liabilities:

                     

Non-marketable long-term debt

   $ 181,021       180,251      180,251

Derivatives relating to debt:

                     

Interest rate swaps

   $ 162,500 *   $ 4,749    $ 4,749

December 31, 2003

                     

Nonderivatives:

                     

Financial assets:

                     

Cash and short-term investments

   $ 48,722     $ 48,722    $ 48,722

Long-term investments for which it is:

                     

Practicable to estimate fair value

   $ N/A     $ 7,829    $ 7,829

Not practicable to estimate fair value

     N/A       338      338

Financial liabilities:

                     

Non-marketable long-term debt and convertible notes

   $ 312,159       310,303      310,303

Derivatives relating to debt:

                     

Interest rate swaps

   $ 162,500 *   $ 13,844    $ 13,844

* Notional amount

 

F-67


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 12.    Income Taxes

 

The components of income tax expense (benefit) are as follows for the periods indicated below:

 

    Successor
Company


  Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  May 2, 2005
through
June 30,
2005


  January 1, 2005
through May 1,
2005


  Year ended
December 31,
2004


    September 10,
2003 through
December 31,
2003


    January 1, 2003
through
September 9,
2003


    Year Ended
December 31,
2002


 

Current tax expense (benefit):

                                           

Federal

  $   $   $     $     $     $  

State

    190     379     1,001       258       706       957  
   

 

 


 


 


 


      190     379     1,001       258       706       957  
   

 

 


 


 


 


Deferred tax expense (benefit):

                                           

Federal

    460     6,082     12,567       1,513       51,084       (137,775 )

State

    84     1,264     2,381       293       9,360       (25,131 )

Valuation allowance for temporary differences

          425     (14,948 )     (1,806 )     (60,444 )     155,485  
   

 

 


 


 


 


      544     7,771                       (7,421 )
   

 

 


 


 


 


    $ 734   $ 8,150   $ 1,001     $ 258     $ 706     $ (6,464 )
   

 

 


 


 


 


 

Total income tax expense (benefit) was different than an amount computed by applying the graduated statutory federal income tax rates to income before taxes. The reasons for the differences are as follows:

 

    Successor
Company


  Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  May 2, 2005
through
June 30,
2005


  January 1, 2005
through May 1,
2005


  Year Ended
December 31,
2004


    September 10,
2003 through
December 31,
2003


   

January 1, 2003
through

September 9,
2003


    Year Ended
December 31,
2002


 

Computed tax expense (benefit) at statutory rate of 35%

  $ 445   $ 2,252   $ 13,748     $ 1,706     $ 50,915     $ (173,394 )

Nondeductible reorganization items

    45     4,405                 3,692        

State Income taxes, net of federal income tax benefit

    178     1,068     2,201       358       6,543       (15,713 )

Nondeductible asset impairments

                              26,951  

Valuation allowance for temporary differences

        425     (14,948 )     (1,806 )     (60,444 )     155,485  

Other, net

    66                           207  
   

 

 


 


 


 


    $ 734   $ 8,150   $ 1,001     $ 258     $ 706     $ (6,464 )
   

 

 


 


 


 


 

F-68


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Net deferred income tax assets and liabilities consist of the following components at June 30, 2005 and December 31, 2004 and December 31, 2003:

 

(In thousands)


   June 30, 2005

    December 31, 2004

    December 31, 2003

 

Deferred income tax assets:

                        

Retirement benefits other than pension

   $ 3,892     $ 4,314     $ 4,128  

Pension

     6,931       4,862       5,114  

Net operating loss

     47,478       86,072       139,171  

Alternative minimum tax credit carryforwards

                 709  

Licenses

     33,486       68,916       76,826  

Interest rate swap

     449       1,847       5,385  

Debt issuance and discount

     4,966       4,318       4,374  

Accrued expenses

     3,548       4,946       4,737  

Federal and state tax credits

                 403  

Other

     1,674       2,603       2,390  
    


 


 


Gross deferred tax assets

     102,424       177,878       243,237  

Valuation allowance

     (16,428 )     (111,741 )     (195,960 )
    


 


 


Net deferred tax assets

     85,996       66,137       47,277  
    


 


 


Deferred income tax liabilities:

                        

Property and equipment

     40,103       36,969       18,100  

Intangibles

     57,668       39,812       41,625  

Investments

     673       1,804        
    


 


 


       98,444       78,585       59,725  
    


 


 


Net deferred income tax liabilities

   $ 12,448     $ 12,448     $ 12,448  
    


 


 


 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2004. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Income tax expense for 2003 and 2004 relate primarily to state minimum taxes.

 

The Company realized substantial cancellation of indebtedness income as a result of the discharge of existing indebtedness in accordance with the Plan of Reorganization during 2003. The amount of the cancellation of indebtedness income was equal to the difference between the fair market value of any property (including new common stock) received by holders of indebtedness and the adjusted issue price (plus the amount of any accrued but unpaid interest) of the indebtedness exchanged for such property. Realized cancellation of indebtedness income that occurs in a case under the Bankruptcy Code is not recognized for income tax purposes. However, the amount excluded from gross income is applied to reduce tax attributes of the debtor.

 

The Internal Revenue Service has issued new temporary regulations that modify the attribute reduction methodology related to certain discharge of indebtedness income that consolidated groups must follow. These

 

F-69


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

regulations provide for a multi-tiered look-through approach that reduces consolidated net operating losses (“NOL’s”) and all other consolidated tax attributes, including consolidated tax attributes that are attributable to members other than the debtor member. As a result of these new regulations, the Company was required to reduce certain tax attributes, including its NOL’s, certain other losses, credit carryforwards (if any), and the tax basis in its assets. These attributes were reduced based on certain elections finalized during 2004 in connection with the filing of the 2003 federal income tax return.

 

In 2004, the Company reduced available net operating losses (“NOL’s”) by approximately $177.4 million, unused tax credits of $1.1 million, and other asset basis by approximately $5.0 million. As a result of the tax elections noted above, and the amended returns discussed below, the Company had remaining available NOL’s of approximately $143.1 million (prior to adjustment for realized built-in losses occurring post-confirmation) at emergence from bankruptcy. These NOL’s, and the adjustments related to realized built-in losses, are subject to an annual utilization limitation of approximately $9.2 million. These NOL’s will be further limited by the annual limitation discussed below relating to our recent merger.

 

The Company filed amended returns during 2004 to carryback other available NOL’s totaling approximately $17.8 million. These amended returns were filed following the conclusion of our federal tax examination for the years 1998 and 1999.

 

Subsequent to emergence and through the effective date of our merger (Note 2), the Company has incurred additional NOL’s of approximately $84.9 million. These NOL’s, in addition to amounts which are subject to the first limitation, are subject to an annual limitation of $1.6 million (prior to adjustment for realized built-in gains occurring after the merger). Due to the limited carryforward life of NOL’s and the amount of the annual limitation, it is unlikely that we will be able to realize in excess of $43 million of NOL’s existing prior to our emergence from bankruptcy. However, the NOL’s that accumulated since our emergence are expected to be realized due to the anticipation of recognizing certain built-in gains in future periods.

 

SFAS No. 109 establishes guidelines for companies that qualify for fresh start accounting under SOP 90-7 and have a valuation allowance on their net deferred tax assets at the date of emergence from bankruptcy. These provisions require that any subsequent reduction in a deferred tax asset valuation allowance, as a result of realizing a benefit of preconfirmation deferred tax assets, be first credited to goodwill, then credited to other identifiable intangible assets existing at the date of fresh start accounting and then, if these assets are reduced to zero, credited directly to additional paid in capital. At December 31, 2004, the Company has reduced its deferred tax asset valuation allowance related to the preconfirmation deferred tax asset by $5.5 million related to the anticipated refunds from the amended returns discussed above. Goodwill was reduced by a similar amount.

 

SFAS No. 109 requires that any subsequent reduction in a deferred tax asset valuation allowance, as a result of realizing a benefit of pre-acquisition deferred tax assets, be first credited against goodwill, then credited to other non-current identifiable intangible assets and then, if these assets are reduced to zero, credited directly to expense. Goodwill of approximately $.5 million was reduced currently to reflect the expected benefit to be received from utilizing pre-acquisition NOL’s.

 

F-70


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 13.    Securities and Investments

 

Investments consist of the following:

 

    

Type of Ownership


   Carrying Value

(In thousands)


      June 30,
2005


   December 31,
2004


   December 31,
2003


Cost Method:

                         

Restricted investments

  

Cooperative subordinated capital certificates

   $    $ 7,556    $ 7,829

Cash surrender value of life insurance policies

  

Guaranteed rate government securities

               225

Other

  

Equity securities

     2,617      115      113
         

  

  

          $ 2,617    $ 7,671    $ 8,167
         

  

  

 

The Company acquired RTFC subordinated capital certificates (“SCC”) of $7.5 million concurrent with the tranche C Senior Credit Facility borrowings of $75 million. The debt instrument required the Company to purchase SCC’s equal to 10% of the tranche C term loan of the Senior Credit Facility. The SCC’s are nonmarketable securities, stated at historical cost and included in restricted investments. As the RTFC loans are repaid, the SCC’s are refunded through a cash payment to maintain a 10% SCC to outstanding loan balance ratio. At December 31, 2004 and 2003, the carrying value of SCC’s was $7.2 million and $7.5 million, respectively. In connection with the refinancing and RTFC loan payoff on February 24, 2005, these SCC’s were redeemed in full.

 

The Company’s principal investment at June 30, 2005 is $2.5 million of class C stock holdings in the RTB. This was a required investment related to the 5.0% to 6.05% notes payable NTELOS Inc. held with RTB. This debt was paid in full on February 24, 2005 (Note 2). On March 1, 2005, the Company converted approximately 44% of its original restricted, non-dividend paying class B stock investment into the dividend paying class C stock investment. On July 31, 2005, substantially all of the remaining 56% of the class B stock was converted into class C stock. In connection with the Company’s application of purchase accounting, this asset was valued based on discounted cash flow of anticipated future dividends based on historical trends for RTB dividend payments to the class C stock. The Company and its valuation advisor determined this to be the most appropriate method of valuing this investment due to the relative illiquid nature of the investment.

 

F-71


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 14.    Pension Plans and Other Postretirement Benefits

 

The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans (“OPEB’s”) for its employees. The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets and a statement of the funded status as of and for the period ended June 30, 2005 and for the years ended December 31, 2004 and 2003, and the classification of amounts recognized in the consolidated balance sheets:

 

     Defined Benefit Pension Plan

 
     Successor Company

    Predecessor Reorganized Company

 

(In thousands)


   June 30, 2005

    December 31, 2004

    December 31, 2003

 

Change in benefit obligations:

                        

Benefit obligations, beginning

   $ 37,875     $ 33,741     $ 27,694  

Service cost

     1,215       2,040       1,573  

Interest cost

     1,151       1,968       1,809  

Amendment

     449              

Actuarial (gain) loss

     6,373       1,926       4,454  

Benefits paid

     (1,425 )     (1,800 )     (1,789 )
    


 


 


Benefit obligations, ending

   $ 45,638     $ 37,875     $ 33,741  
    


 


 


Change in plan assets:

                        

Fair value of plan assets, beginning

   $ 22,595     $ 20,388     $ 16,389  

Actual return on plan assets

     1,547       1,767       2,205  

Employer contributions

     3,662       2,240       3,583  

Benefits paid

     (1,425 )     (1,800 )     (1,789 )
    


 


 


Fair value of plan assets, ending

   $ 26,379     $ 22,595     $ 20,388  
    


 


 


Funded status:

   $ (19,259 )   $ (15,280 )   $ (13,353 )

Unrecognized net actuarial gain

     (288 )     2,197       195  
    


 


 


Accrued benefit cost

   $ (19,547 )   $ (13,083 )   $ (13,158 )
    


 


 


     Other Postretirement Benefit Plan

 
     Successor Company

    Predecessor Reorganized Company

 

(In thousands)


   June 30, 2005

    December 31, 2004

    December 31, 2003

 

Change in benefit obligations:

                        

Benefit obligations, beginning

   $ 9,737     $ 10,610     $ 9,712  

Service cost

     70       165       166  

Interest cost

     282       623       640  

Actuarial (gain) loss

     543       (1,422 )     258  

Benefits paid

     (351 )     (239 )     (166 )
    


 


 


Benefit obligations, ending

   $ 10,281     $ 9,737     $ 10,610  
    


 


 


Change in plan assets:

                        

Fair value of plan assets, beginning

   $     $     $  

Employer contributions

     351       239       166  

Benefits paid

     (351 )     (239 )     (166 )
    


 


 


Fair value of plan assets, ending

   $     $     $  
    


 


 


Funded status:

                        

Funded status

   $ (10,281 )   $ (9,737 )   $ (10,610 )

Unrecognized net actuarial gain

     183       (1,423 )      
    


 


 


Accrued benefit cost

   $ (10,098 )   $ (11,160 )   $ (10,610 )
    


 


 


 

F-72


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

On September 9, 2003, pursuant to the Company’s application of fresh start accounting upon emergence from bankruptcy (Note 4), and then again on May 2, 2005, pursuant to the Company’s application of purchase accounting upon the merger transaction (Note 2 and 3), the Company adjusted its pension and OPEB obligations to fair value. These obligations’ carrying values differ from their fair values due to the existence of unrecognized gains or losses and unamortized prior service costs.

 

At September 9, 2003, the Company’s pension plan contained unrecognized prior service costs and unrecognized net losses of $.6 million and $7.8 million, respectively. Therefore, the Company’s adjustment to fair value increased the pension obligation by $8.4 million. Similarly, the OPEB obligation was adjusted to fair value resulting in a decreased in the OPEB obligation by the $1.5 million unrecognized net gains as of that date.

 

Effective January 1, 2005, the Plans benefit formula was amended for a cost of living adjustment which resulted in an unrecognized prior service cost of $.4 million. At May 2, 2005, the Company’s unrecognized prior service costs and unrecognized net losses were $.4 million and $8.4 million, respectively. Therefore, the Company’s adjustment to fair value increased the pension obligation by $8.8 million. Similarly, the OPEB obligation was adjusted to fair value resulting in a decreased in the OPEB obligation by the $1.0 million unrecognized net gains as of that date.

 

The following table provides the components of net periodic benefit cost for the plans:

 

    Defined Benefit Pension Plan

 
    Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  May 2, 2005
through
June 30,
2005


    January 1,
2005 through
May 1, 2005


    Year Ended
December 31,
2004


    September 10,
2003 through
December 31,
2003


    January 1,
2003 through
September 30,
2003


    Year Ended
December 31,
2002


 

Components of net periodic benefit cost:

                                               

Service cost

  $ 455     $ 760     $ 2,040     $ 491     $ 1,082     $ 1,450  

Interest cost

    412       739       1,968       565       1,244       1,619  

Expected return on plan assets

    (355 )     (711 )     (1,843 )     (472 )     (1,039 )     (1,975 )

Amortization of prior service cost

                            292       54  

Recognized net actuarial gain

          10                          

Voluntary Early Retirement Cost

                                  1,098  
   


 


 


 


 


 


Net periodic benefit cost

  $ 512     $ 798     $ 2,165     $ 584     $ 1,579     $ 2,246  
   


 


 


 


 


 


 

F-73


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

    Other Post Employment Benefit Plan

 
    Successor
Company


   Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  May 2, 2005
through June 30,
2005


   January 1,
2005 through
May 1, 2005


    Year Ended
December 31,
2004


  September 10,
2003 through
December 31,
2003


    January 1,
2003 through
September 30,
2003


    Year Ended
December 31,
2002


 

Components of net periodic benefit cost:

                                            

Service cost

  $ 25    $ 44     $ 165   $ 52     $ 114     $ 175  

Interest cost

    92      190       623     200       440       661  

Recognized net actuarial gain

         (14 )         (5 )     (11 )     (12 )
   

  


 

 


 


 


Net periodic benefit cost

  $ 117    $ 220     $ 788   $ 247     $ 543     $ 824  
   

  


 

 


 


 


 

Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.

 

The Company has multiple nonpension post employment benefit plans. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plans are also contributory. Eligibility for the life insurance plan is restricted to active pension participants age 50-64 as of January 5, 1994. Neither plan is eligible to employees hired after January 1994. The accounting for the plans anticipates that the Company will maintain a consistent level of cost sharing for the benefits with the retirees.

 

The assumptions used in the measurements of the Company’s benefit obligations at June 30, 2005, December 31, 2004, 2003 and 2002 are shown in the following table:

 

     Defined Benefit Pension Plan

    Other Post Employment Benefit Plan

 
       2005  

      2004  

      2003  

      2005  

      2004  

      2003  

 

Discount rate

   5.50 %   6.00 %   6.00 %   5.50 %   6.00 %   6.00 %

Rate of compensation increase

   3.50 %   3.50 %   3.50 %            
    

 

 

 

 

 

 

The assumptions used in the measurements of the Company’s net cost for the Consolidated Statement of Operations fiscal periods in 2005, 2004, 2003 and 2002:

 

    Defined Benefit Pension Plan

 
    Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


  May 2, 2005
through
June 30, 2005


    January 1,
2005 through
May 1, 2005


    Year Ended
December 31,
2004


    September 10,
2003 through
December 31,
2003


    January 1,
2003 through
September 30,
2003


    Year Ended
December 31,
2002


 

Discount rate

  5.50 %   6.00 %   6.00 %   6.75 %   6.75 %   7.25 %

Expected return on plan assets

  8.75 %   9.00 %   9.00 %   9.00 %   9.00 %   10.00 %

Rate of compensation increase

  3.50 %   3.50 %   3.50 %   3.50 %   3.50 %   4.75 %

 

F-74


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

     Other Post Employment Benefit Plan

 
     Successor
Company


    Predecessor Reorganized Company

    Predecessor Company

 

(In thousands)


   May 2, 2005
through
June 30, 2005


    January 1,
2005 through
May 1, 2005


    December 31,
2004


    September 10,
2003 through
December 31,
2003


    January 1,
2003 through
September 30,
2003


    December 31,
2002


 

Discount rate

   5.50 %   6.00 %   6.00 %   6.75 %   6.75 %   7.25 %

 

The Company reviews the assumptions noted in the above table on an annual basis. These assumptions are reviewed annually to reflect anticipated future changes in the underlying economic factors used to determine these assumptions. For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2005. The rate was assumed to decrease gradually each year to a rate of 5.0% for 2011 and remain at that level thereafter.

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The effect to the net periodic postretirement health care benefit cost of a 1% change on the medical trend rate per future year, while holding all other assumptions constant, would be $0.8 million for a 1% increase and $0.6 million for a 1% decrease.

 

During 2002, the Company offered an early retirement incentive to eligible employees, resulting in 23 employees accepting early retirement at a cost to the plan of $1.1 million.

 

In December 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. Effective in 2006 there will be a new Medicare Part D benefit, which will make available prescription drug coverage to those over 65. Employers that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D are entitled to an annual subsidy from Medicare, which is equal to 28% of prescription drug costs between $250 and $5,000, for each Medicare-eligible retiree who does not join Part D. The Company and its actuaries have determined that the NTELOS Prescription Drug Plan is at least actuarially equivalent to Medicare Part D.

 

In accordance with FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, issued on May 19, 2004, the Company elected to reflect the effect of this law as of December 31, 2004. Accordingly, the Company realized a $1.2 million gain related to the Medicare Act subsidy. This gain was being accounted for as an unrecognized actuarial gain amortized over ten years beginning in 2005. In connection with the purchase accounting as of May 2, 2005, the post retirement plan obligation was fair valued and the actuarial gain eliminated accordingly.

 

The Company’s weighted average expected long-term rate of return on pension assets was 8.75% and 9.0%, for the Successor Company period May 2, 2005 through June 30, 2005 and the Predecessor Reorganized Company period January 1, 2005 through May 1, 2005, respectively. In developing these assumptions, the Company evaluated input from its third party pension plan asset managers, including their review of asset class return expectations and long-term inflation assumptions. The Company also considered its historical 10-year average return (at December 31, 2005 and May 2, 2005), which was in line with the expected long-term rate of return assumptions for the respective periods.

 

F-75


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

The weighted average actual asset allocations and weighted average target allocation ranges by asset category for the Company’s pension plan assets were as follows:

 

     Actual Allocation

    Target
Allocation


 

Asset Category


   June 30, 2005

    December 31,
2004


    December 31,
2003


   

Equity securities

   74 %   75 %   75 %   75 %

Bond securities

   26 %   25 %   25 %   25 %
    

 

 

 

Total

   100 %   100 %   100 %   100 %
    

 

 

 

 

It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of asset classes. The investment risk of the assets is limited by appropriate diversification both within and between asset classes. The assets are primarily invested in investment funds that invest in a broad mix of equities and bonds. The allocation between equity and bonds is reset quarterly to the target allocations. The assets are managed with a view to ensuring that sufficient liquidity will be available to meet expected cash flow requirements.

 

The Company expects to contribute $6.3 million to the pension plan in 2006.

 

The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:

 

Year(s)


   Amount

     (in thousands)

July 1, 2005 through December 31, 2005

   $ 960

2006

     1,948

2007

     1,922

2008

     1,871

2009

     1,943

2010

     2,047

2011 - 2015

   $ 12,660

 

Other benefit plans

 

The accumulated benefit obligation of the Company’s nonqualified pension plan was approximately $2.7 million, $6.5 million and $6.0 million at June 30, 2005, December 31, 2004 and 2003, respectively, $4.2 million of which was paid out on February 24, 2005, concurrent with the recapitalization (Note 2). On May 2, 2005, an additional $.8 million was paid out commensurate with the merger and related change of control provisions of the plan. The Company’s plans for postretirement benefits other than pensions have no plan assets and are closed to new participants.

 

The Company also sponsors a defined contribution 401(k) plan. The Company’s matching contributions to this plan were $.2 million for the Successor Company period May 2, 2005 through June 30, 2005. The Company’s matching contributions to this plan were $.3 million, $.8 million and $.3 million for the Predecessor Reorganized Company period of January 1, 2005 through May 1, 2005, for the year ended December 31, 2004 and for the period from September 10, 2003 through December 31, 2003, respectively. The Company’s matching contributions to this plan for the Predecessor Company period January 1, 2003 through September 9, 2003 and for the year ended December 31, 2002 were $.3 million and $.2 million, respectively. The Company ceased matching contributions to the defined contribution plan for the period April 1, 2002 through March 31, 2003 as part of the actions taken in a 2002 operational restructuring plan. Company matching contributions were reinstated on April 1, 2003.

 

F-76


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

Note 15.    Stock Plans

 

On May 2, 2005, Holding Corp. adopted a stock option plan offered to certain key employees of NTELOS Inc. At June 30, 2005, 120,075 options from the Option Plan with an exercise price of $1.00 are outstanding. The options vest one-fourth annually, beginning one year after the grant date.

 

Upon the effective date of the Plan of Reorganization, all options under the Predecessor Company stock option plan were cancelled and the plan was terminated. On September 16, 2003, the Predecessor Reorganized Company adopted a new stock option plan (“Option Plan”) for purposes of retaining key employees and enabling them to participate in the future success of the Company. The maximum number of shares of Common Stock that could be issued under the Option Plan and to which options may relate is 1,585,414 shares of Common Stock. The Predecessor Reorganized Company also adopted a new Non-Employee Director’s Stock Option Plan (“Director’s Plan”) which provided for the grant of stock options to a non-employee director and provided the non-employee director the opportunity to receive stock options in lieu of a retainer fee. A maximum of 160,000 shares of common stock could be issued upon the exercise of options granted under the Director’s Plan. Hereinafter the Option Plan and Directors Plan may be referred to as the “Plans”. Stock options granted under the Plans could not be for less than 100% of fair value at the date of grant and had a maximum life of ten years from the date of grant. Options and other awards under the Plans could be exercised in compliance with such requirements as determined by a committee of the Board of Directors. At December 31, 2003, 1,298,295 options were granted from the Plans with an exercise price of $19.77. One-third of the options vest immediately, one-third vest one year after the grant date and the remaining one-third vests two years after the grant date.

 

On February 24, 2005, in connection with the first step of the merger and recapitalization transactions (Note 2), the Company repurchased approximately 969,000 shares (approximately 75%) of the common stock options outstanding for $20.23 per share for common stock issuable pursuant to the exercise of vested options. On May 2, 2005, pursuant to the Transaction Agreement, the Buyers acquired all of the Company’s remaining options for $20.23 per share of common stock issuable pursuant to the exercise of options.

 

F-77


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

A summary of the activity and status of the Plans for Predecessor Reorganized Company for the period ended May 1, 2005, the year ended December 31, 2004, the period September 10, 2003 through December 31, 2003 and for the Predecessor Company period January 1, 2003 through September 9, 2003 and the year ended December 31, 2002 are as follows (in thousands except per option amounts):

 

    Predecessor Reorganized Company

  Predecessor Company

    January 1, 2005
through May 1, 2005


  Year Ended
December 31, 2004


  September 10, 2003 to
December 31, 2003


  January 1, 2003 to
September 9, 2003


  Year Ended
December 31, 2002


    Shares

    Weighted-
Average
Exercise
Price


  Shares

    Weighted-
Average
Exercise
Price


  Shares

  Weighted-
Average
Exercise
Price


  Shares

    Weighted-
Average
Exercise
Price


  Shares

    Weighted-
Average
Exercise
Price


Outstanding at beginning of period

  1,296,245     $ 19.77   1,298,295     $ 19.77     $   1,569,916     $ 18.28   1,146,001     $ 25.24

Granted

                  1,298,295     19.77           544,657       4.03

Exercised

  (1,296,245 )     19.77                              

Forfeited

          (2,050 )     19.77                 (120,742 )     20.09

Cancelled

                        (1,569,916 )            

Outstanding at end of period

          1,296,245       19.77   1,298,295     19.77           1,569,916       18.28
   

 

 

 

 
 

 

 

 

 

Exercisable at end of period

      $   865,530     $ 19.77   432,765   $ 19.77       $   656,591     $ 25.09
   

 

 

 

 
 

 

 

 

 

Weighted average fair value per option of options granted during the period

  N/A   N/A   $2.80   N/A   $2.75

 

Note 16.    Commitments and Contingencies

 

Operating Leases

 

The Company has several operating leases for administrative office space, retail space, tower space, channel rights and equipment, certain of which have renewal options. The leases for retail and tower space have initial lease periods of one to thirty years. These leases are associated with the operation of wireless digital PCS services primarily in Virginia and West Virginia. The leases for channel rights related to the Company’s MMDS spectrum, formerly used by the wireless cable operations and currently used to deliver a portable broadband Internet service, have initial terms of three to ten years. The equipment leases have an initial term of three years. Rental expense for all operating leases was $3.2 million for the period May 2, 2005 through June 30, 2005, $6.2 million for the period January 1, 2005 through May 1, 2005, $18.0 million for the year ended 2004, $12.0 million for the period January 1 through September 9, 2003, $5.1 million for the period September 10, 2003 through December 31, 2003 and $14.7 million for the year ended 2002. The total amount committed under these lease agreements at June 30, 2005 is: $8.8 million for the period July 1, 2005 through December 31, 2005, $15.9 million in 2006, $13.4 million in 2007, $12.0 million in 2008, $11.2 million in 2009, $6.3 million in 2010 and $12.3 million for the years thereafter.

 

Other Commitments and Contingencies

 

The Company provided digital PCS services on a wholesale basis to Horizon Personal Communications, Inc. (“Horizon”), a Sprint PCS affiliate, in certain contiguous geographic areas the Company serves through the period ended June 15, 2004. On June 15, 2004, Horizon and its debtor affiliates sold their economic interests in their PCS subscribers in this geographic area to Sprint PCS. The Company entered into a seven-year definitive agreement to continue providing digital PCS services on a wholesale basis to Sprint PCS.

 

F-78


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

On June 5, 2004, the Company entered into a settlement agreement with Horizon resolving disputes over the pricing and payment for voice, data and other services provided to Horizon for the period from August 15, 2003 to June 15, 2004. Pursuant to this settlement, the Company retained all payments actually made by Horizon for services rendered during the period commencing August 15, 2003 and ended December 31, 2003, and received payment of $3.866 million per month from Horizon for services rendered during the period commencing January 1, 2004 and ending June 15, 2004. The Company made adjustments during 2004 to recognize the outcome of this settlement and the related settlement costs.

 

This settlement did not resolve disputed categories of charges under the Network Services Agreement for the period prior to August 15, 2003 (the “pre-petition period” under Horizon’s bankruptcy case) as well as the matters submitted to arbitration by both parties (other than the parties dispute as to the appropriate pricing for services provided during the period commencing January 1, 2004 through June 15, 2004). On August 26, 2004, the Company reached agreement with Horizon on the amount of its pre-petition period allowed claim. On September 23, 2004, Horizon’s bankruptcy reorganization plan (the “Horizon Plan”) was confirmed. Accordingly, the Company recognized revenue of $2.1 million in 2004 representing the value of the cash and Horizon stock that was received by the Company in October 2004 pursuant to the terms of the Horizon Plan and on account of the Company’s pre-petition period allowed claim and related revenue reserve adjustments. The Horizon stock received in this settlement was sold in October 2004.

 

The Company is periodically involved in disputes and legal proceedings arising from normal business activities. During the second quarter of 2004, the Company accrued a charge of $1.9 million in corporate operations expense relating to certain operating tax issues. In addition, although the Company has consummated its Plan of Reorganization and emerged from its Chapter 11 proceedings, one dispute with respect to the amount of allowed claim owed by the Company to one of its creditors remains outstanding. While the outcome of this and other such matters are currently not determinable, management does not expect that the ultimate costs to resolve such matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows and adequate provision for any probable losses has been made in our consolidated financial statements.

 

Other than the commitments noted separately above, the Company has commitments for capital expenditures of approximately $15 million as of June 30, 2005, all of which are expected to be satisfied prior to fiscal year ended December 31, 2005. In addition to this, the Company entered into a purchase agreement with Lucent Technologies in July 2005 which has a $11.7 million purchase commitment that must be satisfied by September 30, 2006.

 

Note 17.    Capital and Operational Restructuring Charges

 

During the Predecessor Reorganized Company period January 1, 2005 through May 1, 2005 and for the fiscal year 2004, the Company recorded $15.4 million and $.8 million, respectively, of capital restructuring charges. During the Successor Company period May 2, 2005 through June, the Company recorded an additional $.1 million of capital restructuring charges. These charges relating to legal, financial and consulting costs, accelerated payout of certain retirement obligations, and retention related costs, all of which are directly attributable to the refinancing and merger transactions. In addition to this, the Company incurred $12.8 million of debt issuance costs associated with the new first and second lien term loans which were capitalized and were being amortized over the life of the loans but which were subsequently eliminated through purchase accounting.

 

During the period January 1, 2003 through September 9, 2003, the Company incurred $11.3 million of legal, financial, and bankruptcy related professional fees in connection with the Company’s comprehensive financial restructuring. The portion of these professional fees which relate to the period January 1, 2003 through March 3, 2003 (period prior to the Bankruptcy filing) was $2.4 million and is classified as operational and capital

 

F-79


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

restructuring charges. The remaining $8.9 million of these professional fees from March 4, 2003 through September 9, 2003 are classified in reorganization items. These reorganization items were $.3 million for the period September 10, 2003 through December 31, 2003.

 

In 2002, the Company approved a plan that would reduce its workforce by approximately 15% through the offering of early retirement incentives, the elimination of certain vacant and budgeted positions and the elimination of some jobs. The plan also involved exiting certain facilities in connection with the workforce reduction and centralizing certain functions. Under the accounting provisions of Emerging Issues Task Force 94-3 (prior to the adoption of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities), restructuring charges were reported totaling $2.7 million.

 

Note 18.    Quarterly Financial Information (Unaudited)

 

Quarterly financial information for the Successor Company period May 1, 2005 through June 30, 2005, the Predecessor Reorganized Company periods January 1, 2005 through May 1, 2005, fiscal year 2004, and September 10, 2003 through December 31, 2003, and for the Predecessor Company periods January 1, 2005 through September 9, 2003 and the fiscal year 2002 is presented below:

 

Quarterly Review

NTELOS Inc.

 

     Predecessor Reorganized
Company


    Successor
Company


(In thousands)


   First
Quarter


    April 1,
2005 to
May 1, 2005


    May 2, 2005
to June 30,
2005


2005

                      

Operating Revenues

   $ 92,570     $ 33,107     $ 63,200

Operating Income

     17,155       494       8,976

Net Income (Loss)

     4,917       (6,634 )     537
 

Depreciation and Amortization

     17,504       6,295       14,713

Accretion of Asset Retirement Obligation

     189       63       98

Gain on Sale of Assets1

     (5,246 )     (3,496 )    

Capital and Operational Restructuring Charges

     5,199       10,204       120

 

     Predecessor Reorganized Company

(In thousands)


   First
Quarter


   Second
Quarter


   Third
Quarter


   Fourth
Quarter


2004

                           

Operating Revenues2

   $ 80,836    $ 85,329    $ 88,419    $ 87,118

Operating Income3

     11,876      12,926      16,508      13,254

Net Income

     5,789      9,684      11,704      11,135

Depreciation and Amortization

     15,525      15,902      16,297      17,451

Accretion of Asset Retirement Obligation

     156      176      202      146

Capital and Organizational Restructuring Charges

                    798

 

F-80


Table of Contents

NTELOS Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements—(Continued)

 

     Predecessor Company

   Predecessor Reorganized
Company


 

(In thousands)


   First
Quarter


    Second
Quarter


    7/1/03 to
9/9/03


       9/10/03 to    
9/30/03


    Fourth
    Quarter    


 

2003

                                       

Operating Revenues4

   $ 75,787     $ 75,190     $ 56,812    $ 18,473     $ 81,692  

Operating Income (Loss)

     2,762       (733 )     852      1,450       9,228  

Reorganization items, net

     (29,358 )     (3,968 )     202,362      (59 )     (86 )

Net Income (Loss)

     (45,026 )     (11,427 )     198,479      (208 )     4,878  

Dividend requirements on predecessor preferred stock

     3,757                         

Reorganization items—predecessor preferred stock

     (8,325 )           295,097             

Income (Loss) Applicable to Common Shares

     (57,108 )     (11,427 )     493,576      (208 )     4,878  

Depreciation and Amortization

     17,911       20,187       13,126      4,145       14,715  

Accretion of Asset Retirement Obligation

     152       171       114      35       190  

Asset Impairment Charge

                 545             

Capital and Organizational Restructuring Charges

     2,427                         

 

     Predecessor Company

 

(In thousands)


   First
Quarter


    Second
Quarter


    Third
Quarter


    Fourth
Quarter


 

2002

                                

Operating Revenues

   $ 64,263     $ 69,376     $ 72,430     $ 72,797  

Operating (Loss) Income

     (13,125 )     (3,593 )     418       (399,787 )

Net Loss

     (30,664 )     (22,854 )     (16,068 )     (419,361 )

Dividend Requirements on Predecessor Preferred Stock

     5,019       5,019       5,189       5,190  

Loss Applicable to Common Shares

     (35,683 )     (27,873 )     (21,257 )     (424,551 )

Depreciation and Amortization

     23,095       20,658       21,321       17,850  

Asset Impairment Charge

                       402,880  

Gain on Sale of Assets5

     (1,955 )     (2,782 )     (3,735 )      

Capital and Organizational Restructuring Charges

     1,267       1,426             1,592  

1 The Company received $15.5 million in proceeds and recognized a $5.2 million in gain associated with the sale of certain PCS spectrum licenses in the first quarter 2005. Additionally, the Company received $4.8 million in proceeds and recognized a $3.5 million gain on the sale of certain MMDS radio spectrum licenses in the second quarter 2005.
2 Revenues in the second quarter 2004 includes approximately $2.0 million to adjust for the settlement of Horizon PCS billings during the first quarter 2004.
3 Operating expenses for the second quarter 2004 include $1.8 million accrued to reflect an estimated utility tax liability.
4 The Company did not recognize wholesale wireless revenues in the second and third quarters 2003 of $3.0 million and $4.2 million, respectively, since collection was not considered probable prior to Horizon filing Chapter 11 bankruptcy in August 2003.
5 The Company received $2.4 million in proceeds and recognized a $2.0 million gain associated with the sale of certain PCS spectrum licenses in the first quarter 2002. In the second quarter 2002, the Company received proceeds of $12.0 million and recognized a $2.8 million gain on the sale of certain other PCS spectrum licenses. In the third quarter 2002, the Company received proceeds of $3.6 million on the sale of certain other PCS spectrum licenses, recognizing a $3.6 million gain.

 

F-81


Table of Contents

 

                     Shares

 

LOGO

 

NTELOS Holdings Corp.

 

Common Stock

 


 

PROSPECTUS

 


 

 

 

LEHMAN BROTHERS BEAR, STEARNS & CO. INC.

 

                 , 2005

 

 

 


Table of Contents

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following is a statement of estimated expenses, to be paid solely by the Registrant, of the issuance and distribution of the securities being registered hereby (other than underwriting discounts and commissions):

 

Securities and Exchange Commission registration fee

   $ 20,598.00

NASD filing fee

     18,000

Nasdaq Stock Market application fees

         *

Blue Sky fees and expenses (including attorneys’ fees and expenses)

         *

Printing expenses

         *

Accounting fees and expenses

         *

Transfer agent’s fees and expenses

         *

Legal fees and expenses

         *

Miscellaneous expenses

         *
    

Total

   $     *
    


* To be provided by amendment.

 

Item 14. Indemnification of Directors and Officers.

 

The Registrant is incorporated under the laws of the State of Delaware. Section 145 (“Section 145”) of the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (the “DGCL”), provides that a Delaware corporation may indemnify any persons who were, are or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify any persons who are, were or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reasons of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation’s best interests, provided that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred.

 

Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the corporation would otherwise have the power to indemnify him under Section 145.

 

II-1


Table of Contents

Section 102(b)(7) of the DGCL permits a corporation to include in its certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the directors’ duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to unlawful payment of dividends and unlawful stock purchase and redemption) or (iv) for any transaction from which the director derived an improper personal benefit.

 

The Registrant’s certificate of incorporation provides that to the fullest extent permitted by the DGCL and except as otherwise provided in its by-laws, none of the Registrant’s directors shall be liable to it or its stockholders for monetary damages for a breach of fiduciary duty. In addition, the Registrant’s certificate of incorporation provides for indemnification of any person who was or is made or threatened to be made a party to any action, suit or other proceeding, whether criminal, civil, administrative or investigative, because of his or her status as a director or officer of the Registrant, or service as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at the request of the Registrant to the fullest extent authorized under the DGCL against all expenses, liabilities and losses reasonably incurred by such person. Further, all of the directors and officers of the Registrant are covered by insurance policies maintained and held in effect by the Registrants against certain liabilities for actions taken in their capacities as such, including liabilities under the Securities Act.

 

In addition to these provisions in our certificate of incorporation, we have entered into indemnification agreements with each of our executive officers and directors, a form of which will be filed with the Securities and Exchange Commission as an exhibit to this registration statement. The indemnification agreements provide our directors and executive officers with further indemnification to the maximum extent permitted by the DGCL.

 

In addition, we provide indemnification to certain of our directors who are affiliated with the CVC Entities and the Quadrangle Entities under the advisory agreements. See “Certain Relationships and Related Transactions—Advisory Agreements.”

 

II-2


Table of Contents

Item 15. Recent Sales of Unregistered Securities.

 

The table set forth below lists the securities sold by us since our formation on January 14, 2005.

 

Individual or Group Name*


   Type of Security

   Date

    Number of
Shares


   Consideration
per Share


Named Executive Officers (including shares held in trust or by immediate family)

                      

David R. Maccarelli

   Class A Common Stock    5/02/05     96,806.00    $ 1.00

Mary McDermott

   Class A Common Stock    5/02/05     38,637.00    $ 1.00

Michael B. Moneymaker

   Class A Common Stock    5/02/05     103,888.00    $ 1.00

James Quarforth

   Class A Common Stock    5/02/05     270,423.00    $ 1.00

Carl A. Rosberg

   Class A Common Stock    5/02/05     118,056.00    $ 1.00

Other management and employees, as a group (including shares held in trust or by immediate family)

   Class A Common Stock    5/02/05     117,233.00    $ 1.00

Named Executive Officers (including shares held in trust or by immediate family)

                      

David R. Maccarelli

   Class L Common Stock    5/02/05     22,760.00    $ 11.00

Mary McDermott

   Class L Common Stock    5/02/05     10,124.00    $ 11.00

Michael B. Moneymaker

   Class L Common Stock    5/02/05     24,425.00    $ 11.00

James Quarforth

   Class L Common Stock    5/02/05     63,579.00    $ 11.00

Carl A. Rosberg

   Class L Common Stock    5/02/05     27,756.00    $ 11.00

Other management and employees, as a group (including shares held in trust or by immediate family)

   Class L Common Stock    5/02/05     29,512.00    $ 11.00

Non-Officer Directors, as a group

                      

Christopher D. Bloise

   Class L Common Stock    4/27/05 **   1,295.94    $ 11.00

Michael A. Delaney

   Class L Common Stock    4/27/05 **   10,367.52    $ 11.00

Andrew S. Gesell

   Class L Common Stock    4/27/05 **   1,943.91    $ 11.00

Non-Officer Directors, as a group

                      

Christopher D. Bloise

   Class L Common Stock    5/02/05     3,048.58    $ 11.00

Michael A. Delaney

   Class L Common Stock    5/02/05     24,388.68    $ 11.00

Andrew S. Gesell

   Class L Common Stock    5/02/05     4,572.88    $ 11.00

CVC and Quadrangle Entities

                      

Citigroup Venture Capital Equity Partners LP

   Class L Common Stock    4/27/05 **   1,536,568.52    $ 11.00

Citigroup Venture Capital Equity Partners LP

   Class L Common Stock    5/02/05     3,765,952.67    $ 11.00

CVC Executive Fund LP

   Class L Common Stock    4/27/05 **   14,124.06    $ 11.00

CVC Executive Fund LP

   Class L Common Stock    5/02/05     34,567.77    $ 11.00

CVC/SSB Employee Fund LP

   Class L Common Stock    4/27/05 **   15,851.93    $ 11.00

CVC/SSB Employee Fund LP

   Class L Common Stock    5/02/05     38,796.62    $ 11.00

Quadrangle Capital Partners-A LP

   Class L Common Stock    4/27/05 **   432,194.51    $ 11.00

Quadrangle Capital Partners-A LP

   Class L Common Stock    5/02/05     1,052,954.89    $ 11.00

Quadrangle Capital Partners LP

   Class L Common Stock    4/27/05 **   1,128,145.15    $ 11.00

Quadrangle Capital Partners LP

   Class L Common Stock    5/02/05     2,766,587.41    $ 11.00

Quadrangle Select Partners LP

   Class L Common Stock    4/27/05 **   61,935.32    $ 11.00

Quadrangle Select Partners LP

   Class L Common Stock    5/02/05     150,875.89    $ 11.00

Non-Director CVC Affiliates, as a group

   Class L Common Stock    4/27/05 **   42,078.10    $ 11.00

Non-Director CVC Affiliates, as a group

   Class L Common Stock    5/02/05     99,135.99    $ 11.00

* Certain of the individuals referenced below have disclaimed beneficial ownership of certain of these securities.
** Prior to April 27, 2005, NTELOS Holdings Corp. operated as a Delaware limited liability company. The investor’s original contribution date was February 24, 2005, and subsequently on April 27, 2005, pursuant to a plan of conversion was converted into the number of shares of Class L Common Stock of NTELOS Holdings Corp. set forth above, based on a conversion ratio of the contribution amount divided by $11.00.

 

II-3


Table of Contents

The sales of the above securities were exempt from the registration requirements of the Securities Act in reliance on Section 4(2) of the Securities Act, Regulation D or Rule 701 promulgated thereunder as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701.

 

Item 16. Exhibits and Financial Statement Schedules.

 

Exhibits.

 

The attached Exhibit Index is incorporated by reference herein.

 

Financial Statement Schedules.

 

Schedule II. Valuation and Qualifying Accounts.

 

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

 

Item 17. Undertakings.

 

(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

(c) The undersigned registrant hereby undertakes that:

 

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

 

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-4


Table of Contents

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, NTELOS Holdings Corp. has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waynesboro, Commonwealth of Virginia, on October 6, 2005.

 

NTELOS Holdings Corp.

By:

 

/s/ James S. Quarforth


Name:  

James S. Quarforth

Title:  

President and Chief Executive Officer

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS, that each officer and director of NTELOS Holdings Corp. whose signature appears below constitutes and appoints James S. Quarforth and Michael B. Moneymaker, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him or her and in his or her name, place and stead, in any and all capacities, to execute any or all amendments including any post-effective amendments and supplements to this Registration Statement, and any additional Registration Statement filed pursuant to Rule 462(b), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

* * * *

 

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form S-1 and Power of Attorney have been signed by the following persons in the capacities indicated on October 6, 2005.

 

Signature


  

Title


/s/ James S. Quarforth


James S. Quarforth

  

President and Chief Executive Officer (Principal Executive Officer) and Director

/s/ Michael B. Moneymaker


Michael B. Moneymaker

  

Chief Financial Officer (Principal Financial and Accounting Officer)

/s/ Christopher Bloise


Christopher Bloise

  

Director

/s/ Michael Delaney


Michael Delaney

  

Director

/s/ Andrew Gesell


Andrew Gesell

  

Director

/s/ Michael Huber


Michael Huber

  

Director

 

II-5


Table of Contents

Signature


  

Title


/s/ Henry Ormond


Henry Ormond

  

Director

/s/ Steven Rattner


Steven Rattner

  

Director

 

II-6


Table of Contents

EXHIBIT INDEX

 

Exhibit No.

  

Description


1.1*   

Form of Underwriting Agreement.

3.1   

Certificate of Incorporation of NTELOS Holdings Corp. (“Holdings”).

3.2   

By-laws of Holdings.

4.1*   

Form of Certificate of Common Stock of Holdings.

4.2*   

Shareholders Agreement, dated as of May 2, 2005, by and among Holdings and the shareholders listed on the signature pages thereto.

5.1*   

Opinion of Hunton & Williams LLP.

10.1*   

First Lien Credit Agreement, dated as of February 24, 2005.

10.2*   

Second Lien Credit Agreement, dated as of February 24, 2005.

10.3*   

Employment Agreement, dated as of May 2, 2005, between NTELOS Inc. and James S. Quarforth.

10.4*   

Employment Agreement, dated as of May 2, 2005, between NTELOS Inc. and Michael B. Moneymaker.

10.5*   

Employment Agreement, dated as of May 2, 2005, between NTELOS Inc. and Carl A. Rosberg.

10.6*   

Employment Agreement, dated as of May 2, 2005, between NTELOS Inc. and David R. Maccarelli.

10.7*   

Employment Agreement, dated as of May 2, 2005, between NTELOS Inc. and Mary McDermott.

10.8*   

Holdings Equity Incentive Plan.

10.9*   

Holdings Employee Stock Purchase Plan

10.10*   

Resale Agreement by and among West Virginia PCS Alliance, L.C., Virginia PCS Alliance, L.C., NTELOS Inc. and Sprint Spectrum L. P.

21.1   

Subsidiaries of Holdings.

23.1   

Consent of Ernst & Young LLP.

23.2   

Consent of KPMG LLP.

23.3*   

Consent of Hunton & Williams LLP (included in Exhibit 5.1).

24.1   

Powers of Attorney (included in Part II of the Registration Statement).


* To be filed by amendment.

 

II-7