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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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333-36804
Commission file number
MADISON RIVER CAPITAL, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2156823
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
103 South Fifth Street
Mebane, North Carolina 27302
(Address of Principal Executive Offices, Including Zip Code)
(919) 563-1500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
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MADISON RIVER CAPITAL, LLC
Index to Form 10-Q
Part I - Financial Information Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2002
(Unaudited) and December 31, 2001 1
Condensed Consolidated Statements of Operations and
Comprehensive Loss (Unaudited) - Three and Six Months
Ended June 30, 2002 and 2001 2
Consolidated Statements of Member's Interest - Year Ended
December 31, 2001 and Six Months Ended June 30, 2002
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended June 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures of Market Risks 22
Part II - Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 24
i
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, 2002 December 31, 2001
-------------- -----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 23,079 $ 21,606
Accounts receivable, less allowance for uncollectible accounts
of $2,584 and $1,815 in 2002 and 2001, respectively 13,097 14,305
Receivables, primarily from interexchange carriers, less
allowance for uncollectible accounts of $1,325 and $111
in 2002 and 2001, respectively 7,381 8,826
Other current assets 5,952 6,461
--------- ---------
Total current assets 49,509 51,198
--------- ---------
Telephone plant and equipment 475,312 468,950
Less accumulated depreciation and amortization (95,158) (72,156)
--------- ---------
Telephone plant and equipment, net 380,154 396,794
--------- ---------
Other assets:
Rural Telephone Finance Cooperative stock, at cost 45,274 46,798
Goodwill, net of accumulated amortization of $41,318
in 2002 and 2001, respectively 367,929 367,929
Other assets 29,136 33,859
--------- ---------
Total other assets 442,339 448,586
--------- ---------
Total assets $ 872,002 $ 896,578
========= =========
Liabilities and member's capital
Current liabilities:
Accounts payable and accrued expenses $ 35,502 $ 40,500
Other current liabilities 9,026 6,873
Current portion of long-term debt 33,935 30,408
--------- ---------
Total current liabilities 78,463 77,781
--------- ---------
Noncurrent liabilities:
Long-term debt 640,147 649,610
Other liabilities 70,423 62,969
--------- ---------
Total noncurrent liabilities 710,570 712,579
--------- ---------
Total liabilities 789,033 790,360
Redeemable minority interest 5,000 46,825
Member's capital:
Member's interest 252,684 213,584
Accumulated deficit (171,943) (154,221)
Accumulated other comprehensive (loss) income (2,772) 30
--------- ---------
Total member's capital 77,969 59,393
--------- ---------
Total liabilities and member's capital $ 872,002 $ 896,578
========= =========
See Notes to Condensed Consolidated Financial Statements.
1
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Dollars in thousands)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues:
Local service $ 34,152 $ 35,352 $ 68,798 $ 69,743
Long distance service 4,322 4,050 8,125 8,126
Internet and enhanced data service 3,920 2,477 7,327 4,768
Transport service 888 524 1,724 862
Miscellaneous telecommunications
service and equipment 1,548 3,080 4,781 7,191
-------- -------- -------- --------
Total operating revenues 44,830 45,483 90,755 90,690
-------- -------- -------- --------
Operating expenses:
Cost of services 14,605 17,490 29,020 33,344
Depreciation and amortization 12,139 14,140 24,448 28,206
Selling, general and administrative expenses 11,697 13,590 22,024 29,500
-------- -------- -------- --------
Total operating expenses 38,441 45,220 75,492 91,050
-------- -------- -------- --------
Operating income (loss) 6,389 263 15,263 (360)
Interest expense (16,087) (16,391) (32,163) (32,619)
Other (expense) income, net (22) 1,454 535 (5,984)
-------- -------- -------- --------
Loss before income tax expense and minority
interest expense (9,720) (14,674) (16,365) (38,963)
Income tax benefit (expense) 388 2,745 (1,082) (1,862)
-------- -------- -------- --------
Loss before minority interest expense (9,332) (11,929) (17,447) (40,825)
Minority interest expense - (275) (275) (525)
-------- -------- -------- --------
Net loss (9,332) (12,204) (17,722) (41,350)
Other comprehensive (loss) income:
Unrealized (losses) gains on marketable
equity securities (2,108) 607 (2,802) 204
Reclassification adjustment for losses
included in net loss - - - 4,442
-------- -------- -------- --------
Other comprehensive (loss) income (2,108) 607 (2,802) 4,646
-------- -------- -------- --------
Comprehensive loss $ (11,440) $ (11,597) $ (20,524) $ (36,704)
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
2
MADISON RIVER CAPITAL, LLC
Consolidated Statements of Member's Capital
(Dollars in thousands)
Accumulated
Other
Member's Accumulated Comprehensive
Interest Deficit Income (Loss) Total
-------- ----------- ------------- ---------
Balance at December 31, 2000 $ 213,054 $ (79,292) $ (4,661) $ 129,101
Member's capital contribution 530 - - 530
Net loss - (74,929) - (74,929)
Other comprehensive income - - 4,691 4,691
-------- -------- ------ --------
Balance at December 31, 2001 213,584 (154,221) 30 59,393
Member's capital redemption (2,000) - - (2,000)
Exchange of minority interest
(see Note 10) 41,100 - - 41,100
Net loss - (17,722) - (17,722)
Other comprehensive income - - (2,802) (2,802)
-------- -------- ------ --------
Balance at June 30, 2002 (unaudited) $ 252,684 $ (171,943) $ (2,772) $ 77,969
======== ======== ====== ========
See Notes to Condensed Consolidated Financial Statements.
3
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------
2002 2001
---------- ----------
Operating activities
Net cash provided by (used for) operating activities $ 12,097 $ (29,714)
--------- ---------
Investing activities
Purchases of telephone plant and equipment (6,939) (25,977)
Proceeds from sales of telephone plant and equipment - 13,652
Patronage capital received from Rural Telephone Finance Cooperative 2,570 2,764
Redemption of Rural Telephone Finance Cooperative stock, net 1,524 148
Change in other assets 2,154 8,394
--------- ---------
Net cash used for investing activities (691) (1,019)
--------- ---------
Financing activities
Capital contributions from member - 530
Redemption of member's interest (2,000) -
Redemption of minority interest (1,000) -
Proceeds from long-term debt 4,000 -
Payments on long-term debt (10,024) (5,571)
Change in other long-term liabilities (909) 69
--------- ---------
Net cash used for financing activities (9,933) (4,972)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,473 (35,705)
Cash and cash equivalents at beginning of year 21,606 63,410
--------- ---------
Cash and cash equivalents at end of six month period $ 23,079 $ 27,705
========= =========
See Notes to Condensed Consolidated Financial Statements.
4
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. GENERAL
Madison River Capital, LLC (the "Company"), a wholly-owned subsidiary of Madison
River Telephone Company LLC ("MRTC"), was organized on August 26, 1999 as a
limited liability company under the provisions of the Delaware Limited Liability
Company Act. Under the provisions of this Act, the member's liability is limited
to the Company's assets provided that the member returns to the Company any
distributions received. The Company offers integrated telecommunications
services to business and residential customers in the Gulf Coast, Mid-Atlantic
and Midwest regions of the United States which include local and long distance
voice, high speed data, internet access and fiber transport. These consolidated
financial statements include the financial position and results of operations of
the following subsidiaries of the Company: Madison River Holdings Corp. ("MRH"),
Madison River LTD Funding Corp. ("MRLTDF"), Mebtel, Inc., Gallatin River
Holdings, LLC and its subsidiary, Gulf Coast Services, Inc. and its
subsidiaries, Coastal Communications, Inc. ("CCI") and its subsidiaries, Madison
River Management Company, Mebtel Long Distance Solutions, Inc., Madison River
Long Distance Solutions, Inc., Madison River Communications, LLC ("MRC") and
Gulf Communications, LLC.
Prior to the formation of the Company in 1999, all operations were consolidated
at the parent level. Concurrent with the formation of the Company, all
operations are consolidated at the Company level. The primary purpose for which
the Company was organized was the acquisition, integration and operation of
rural local exchange telephone companies. Since January 1998, the Company has
acquired four rural incumbent local exchange carriers ("ILECs") located in North
Carolina, Illinois, Alabama and Georgia. These rural ILEC operations, which
comprise the Local Telecommunications Division (the "LTD"), served approximately
209,530 voice access and digital subscriber line ("DSL") connections as of June
30, 2002. The operations of the ILECs are subject to federal, state and local
regulation.
The Company also operates as a competitive local exchange carrier ("CLEC") in
markets in North Carolina, Illinois and Louisiana, as well as providing fiber
transport services to large businesses and other carriers, primarily in the
southeastern United States. The CLEC and fiber transport operations form the
Integrated Communications Division (the "ICD") and that division served
approximately 16,580 voice access and DSL connections at June 30, 2002.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and are in the form prescribed by
the Securities and Exchange Commission in instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should be read
in conjunction with the audited financial statements of the Company as of and
for the year ended December 31, 2001. Such financial statements are included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001 filed with the Securities and Exchange Commission on April 1, 2002. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month and six month periods ended June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.
Certain amounts in the condensed consolidated financial statements presented for
prior periods have been reclassified to conform to the June 30, 2002
presentation. These reclassifications had no effect on net loss or member's
capital as previously reported.
5
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
3. TELEPHONE PLANT AND EQUIPMENT
Telephone plant and equipment consisted of the following at:
June 30, December 31,
2002 2001
--------- ------------
(in thousands)
Land, buildings and general equipment $ 65,375 $ 63,978
Central office equipment 142,282 130,098
Poles, wires, cables and conduit 231,228 224,577
Leasehold improvements 2,567 2,484
Software 16,932 17,308
Construction-in-process 16,928 30,505
------- -------
Total telephone plant and equipment $ 475,312 $ 468,950
======= =======
4. GOODWILL
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed
to have indefinite lives will no longer be amortized after December 31, 2001 but
will be subject to annual impairment tests in accordance with the statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company expects
that application of the nonamortization provisions of the statements will result
in a decrease in amortization expense of approximately $16.5 million per year.
The Company determined that the goodwill related to its acquisitions, net of
accumulated amortization, was not impaired as of January 1, 2002. During 2002,
the Company will perform the required impairment tests in accordance with the
statements. The Company does not believe that the results of these tests will
have a material impact on its financial position, net loss or cash flows.
However, if an impairment of the carrying value of goodwill is indicated by the
tests performed in accordance with this standard, then a corresponding charge
will be recorded as part of operating expenses on the statement of operations.
In previous years, the Company's goodwill, which reflects the excess of the
purchase price paid for the Company's acquisitions over the fair value of the
assets acquired, was amortized using the straight-line method over 25 years. For
the second quarter and the six months ended June 30, 2001, had the Company been
subject to the provisions of the statements, net loss would have been reported
as follows (in thousands):
For the quarter ended June 30, 2001 For the six months ended June 30, 2001
----------------------------------- --------------------------------------
Amortization Amortization
As reported expense Pro forma As reported expense Pro forma
----------- ------------ --------- ----------- ------------ ---------
Net loss $ (12,204) $ 4,159 $ (8,045) $ (41,350) $ 8,350 $ (33,000)
======== ====== ======= ======== ====== ========
6
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
5. EQUITY METHOD INVESTMENTS
On March 15, 2002, Georgia PCS Management, L.L.C., a limited liability company
in which the Company owned approximately 15% of the outstanding member interests
and accounted for as an equity method investment, was acquired by US Unwired
Inc., a publicly traded Sprint PCS affiliate. In exchange for its ownership
interest in Georgia PCS, the Company received approximately 800,000 shares of US
Unwired Class A common stock. The shares are subject to certain restrictions
that limit the ability of the Company to dispose of them for a specified period
of time and will be accounted for as an available for sale marketable equity
security.
During the second quarter of 2002, the Company recognized an impairment charge
of $2.1 million on an investment in an unconsolidated company, USCarrier
Telecom, LLC, that is accounted for using the equity method of accounting. The
impairment charge was recognized for a decline in the fair value of the
investment deemed to be other than temporary and is included in "Other (expense)
income, net" in the accompanying Condensed Consolidated Statements of Operations
and Comprehensive Loss.
6. RECENT ACCOUNTING PRONOUNCEMENT
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 121 and
establishes a single accounting model for long-lived assets to be disposed of by
sale as well as resolves certain implementation issues related to SFAS 121. The
Company adopted SFAS 144 as of January 1, 2002. Adoption of SFAS 144 did not
have a material impact on the financial position, net loss or cash flows of the
Company. However, if an impairment of the carrying value of any long-lived
assets is indicated by the tests performed in accordance with this standard,
then a corresponding charge will be recorded as part of operating expenses on
the statement of operations.
7. RESTRUCTURING CHARGE
In the fourth quarter of 2001, a subsidiary of the Company, MRC, recorded a $2.8
million restructuring charge associated with the subsidiary's decision to reduce
its sales and marketing efforts and eliminate redundant support services. The
charge was recognized in accordance with EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The amounts recorded
consist primarily of the costs associated with future obligations on non-
cancelable leases for closed sales offices, redundant network operations centers
and future switching facilities, net of any estimated sublease income, losses
from the abandonment of fixed assets and leasehold improvements associated with
those leased facilities and legal related expenses.
As of June 30, 2002, the following amounts were recorded:
Balance at 2002 Balance at
December 31, 2001 payments June 30, 2002
----------------- -------- -------------
(in thousands)
Future lease obligations $ 1,918 $ 677 $ 1,241
Legal related expenses 200 - 200
------- ------- -------
$ 2,118 $ 677 $ 1,441
======= ======= =======
The remaining liability as of June 30, 2002 is recorded as $668,000 in accrued
expenses and $773,000 in other long-term liabilities.
7
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
8. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit outstanding consisted of the following at:
June 30, December 31,
2002 2001
---------- ------------
(in thousands)
First mortgage notes collateralized by substantially all LTD assets:
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at a
fixed rate of 6.5% (rate expires September 2003). $ 12,512 $ 12,906
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at a
fixed rate of 8.15% (rate expires April 2003). 6,345 6,545
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at the
RTFC's base rate plus 0.5% (5.8% at June 30, 2002). 1,014 1,043
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at a
fixed rate of 6.7% (rate expires November 2004). 108,954 112,014
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (6.05% at June 30, 2002). 5,880 6,031
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at a
fixed rate of 8.4% (rate expires April 2003). 71,184 71,684
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (6.05% at June 30, 2002). 3,749 3,846
RTFC note payable in escalating quarterly principal installments
through August 2014, interest payments due quarterly at a
fixed rate of 8.4% (rate expires October 2004). 128,941 132,207
RTFC note payable in escalating quarterly principal installments
through February 2015, interest payments due quarterly at a
fixed rate of 8.5% (rate expires April 2005). 104,145 106,462
RTFC secured line of credit loan, maturing March 2005 with
interest payments due quarterly at the RTFC's line
of credit base rate plus 0.5% (6.75% at June 30, 2002). 21,000 17,000
RTFC unsecured line of credit loan, maturing March 2005 with interest
payments due quarterly at the RTFC's line of credit base
rate plus 1.0% (7.25% at June 30, 2002). 10,000 10,000
Mortgage note payable in monthly installments of $18 with a
balloon payment of $2,238 in April 2006, interest at a
fixed rate of 8%, secured by land and building. 2,340 2,349
Unsecured 131/4% senior notes payable, due March 1, 2010, with
interest payable semiannually on March 1 and September 1, net of
debt discount of $2,375 and $2,462, respectively. 197,625 197,538
Other 393 393
-------- --------
674,082 680,018
Less current portion 33,935 30,408
-------- --------
$ 640,147 $ 649,610
======== ========
8
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
8. LONG-TERM DEBT AND LINES OF CREDIT, Continued
The loan facilities provided by the Rural Telephone Finance Cooperative (the
"RTFC") are primarily with MRLTDF, a subsidiary of the Company. The facilities
are secured by a first mortgage lien on substantially all of the property,
assets and revenue of the LTD. In addition, substantially all of the
outstanding equity interests of the subsidiaries that comprise the LTD are
pledged in support of the facilities.
The terms of the RTFC loan agreement require MRLTDF to meet and adhere to
various financial and administrative covenants. MRLTDF is, among other things,
(i) restricted from declaring or paying dividends to MRH, its parent, under
specified circumstances; (ii) limited in its ability to make intercompany loans
or enter into other affiliated transactions; and (iii) restricted from incurring
additional indebtedness above certain amounts without the consent of the RTFC.
MRLTDF is required to test its compliance with certain financial ratios defined
in the loan agreement on an annual basis. At June 30, 2002 and December 31,
2001, MRLTDF was in compliance with the terms and conditions of the loan
agreement.
The $31.0 million secured revolving line of credit between the RTFC and MRLTDF
expires in March 2005. Interest is payable quarterly at the RTFC's line of
credit base rate plus 0.5% per annum. At June 30, 2002, MRLTDF had drawn down
$21.0 million under this line of credit with the remaining $10.0 million fully
available to MRLTDF. In addition, Coastal Utilities, Inc. has a fully-drawn
$10.0 million unsecured revolving line of credit from the RTFC that also expires
in March 2005. This unsecured line of credit contains an annual paydown
provision which requires that the balance outstanding against the line of credit
be reduced to zero for five consecutive days in every 360-day period. Interest
is payable quarterly at the RTFC's line of credit base rate plus 1.0% per annum.
MRLTDF also has available a $7.8 million term loan facility with the RTFC. In
accordance with the terms of the loan facility, MRLTDF is required to purchase
subordinated capital certificates equivalent to 10% of the amount advanced under
this term loan and may use proceeds from the facility to finance the
subordinated capital certificates purchase. Interest on this facility is
payable at the lender's base rate plus 0.35% per annum. MRLTDF had no borrowings
under this facility at June 30, 2002.
Under the terms of the indenture that governs the senior notes, the Company must
comply with certain financial and administrative covenants. The Company is,
among other things, restricted in its ability to (i) incur additional
indebtedness, (ii) pay dividends, (iii) redeem or repurchase equity interests,
(iv) make various investments or other restricted payments, (v) create certain
liens or use assets as security in other transactions, (vi) sell certain assets
or utilize certain asset sale proceeds, (vii) merge or consolidate with or into
other companies or (viii) enter into transactions with affiliates. At June 30,
2002, the Company was in compliance with the terms of the senior notes
indenture.
9. SEGMENT INFORMATION
The Company is a provider of integrated communications services and solutions.
The Company's operations are classified into two reportable business segments,
the LTD and the ICD. Although both segments provide telecommunication services,
the segments are managed by separate management teams, and their financial and
operating results are evaluated separately by the chief operating decision
maker. The reporting segments follow the same accounting principles and
policies used for the Company's consolidated financial statements. The
following tables summarize the revenues and net operating income (loss) for each
segment for the three and six month periods ended June 30, 2002 and 2001:
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Total revenues
LTD $ 41,929 $ 43,439 $ 84,731 $ 87,155
ICD 3,784 2,890 7,747 4,838
------- ------- ------- -------
45,713 46,329 92,478 91,993
Less intersegment revenues (883) (846) (1,723) (1,303)
------- ------- ------- -------
Total reported revenues $ 44,830 $ 45,483 $ 90,755 $ 90,690
======= ======= ======= =======
9
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
9. SEGMENT INFORMATION, Continued
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net operating income (loss):
LTD $ 11,048 $ 9,567 $ 24,091 $ 18,609
ICD (4,659) (9,304) (8,828) (18,969)
------- ------- ------- -------
Total reported net operating
income (loss) $ 6,389 $ 263 $ 15,263 $ (360)
======= ======= ======= =======
At June 30, 2002 and December 31, 2001, total assets by segment, net of
intersegment investments and other intersegment balances, were as follows:
June 30, December 31,
2002 2001
---- ----
(in thousands)
Total assets:
LTD $ 901,148 $ 895,912
ICD 503,031 506,239
---------- ----------
1,404,179 1,402,151
Less intersegment assets (532,177) (505,573)
---------- ----------
Total reported assets $ 872,002 $ 896,578
========== ==========
10. MINORITY INTEREST
As part of the consideration paid in the acquisition of Coastal Utilities, Inc.,
the Company issued to the former shareholders of Coastal Utilities 300 shares of
Series A non-voting common stock and 300 shares of Series B non-voting common
stock of CCI in the face amount of $10.0 million and $5.0 million, respectively.
The Series A and Series B stock had put and call features defined pursuant to
the terms of a shareholders agreement and exercisable by the holders and CCI.
In February 2001, the holders of the Series B stock notified the Company of
their exercise of the put option.
On April 10, 2002, Madison River Telephone Company, the parent of the Company,
completed an agreement with the former shareholders of Coastal Utilities that,
among other things, modified certain provisions of the CCI shareholders
agreement. Under the terms of the new agreement, the former shareholders
exchanged all of their Series B stock and 40% of their Series A stock in CCI for
18.0 million Class A member units in MRTC valued at $1 per unit and three term
notes issued by MRTC, in the aggregate principal amount of $20.0 million,
payable over eight years and bearing interest at approximately 8.4% per annum.
In addition, CCI redeemed 30 shares of Series A stock retained by the former
shareholders for $33,333.33 per share, or approximately $1.0 million, at the
closing of the transaction. Under the terms of CCI's amended shareholders
agreement, the former shareholders have the right, beginning May 31, 2003 and
ending September 30, 2007, to require CCI to redeem their remaining 150 shares
of Series A stock, for an aggregate total of $5.0 million, in increments not to
exceed 30 shares at $33,333.33 per share, or an aggregate value of $1.0 million,
in any thirteen-month period.
The Company has reflected an increase in member's interest of $41.1 million as a
result of the transaction. The increase in member's interest consists primarily
of the $38.0 million in equity and notes payable that MRTC exchanged for a
portion of the minority shareholders' equity interests. In addition, the
Company recognized an increase in equity of $3.1 million for the difference
between the $47.1 million carrying value of the minority interest before the
transaction and the $44.0 million in value held by the minority shareholders
after the transaction.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking statements"
that involve risks and uncertainties. Forward-looking statements generally can
be identified by the use of forward-looking words such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "plan," "seek" or "believe," or by
discussion of strategy that involves risks and uncertainties. We believe that
the expectations reflected in such forward-looking statements are accurate.
However, we cannot assure you that such expectations will occur. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including, but not limited to:
* the competition in and the financial stability of the telecommunications
industry;
* the passage of legislation, court decisions or regulatory changes adversely
affecting the telecommunications industry;
* our ability to repay our outstanding indebtedness;
* our ability to raise additional capital on acceptable terms and on a timely
basis; and
* the advent of new technology.
For more information, see the "Risk Factors" section beginning on page 14 of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No.
333-36804) filed with the Securities and Exchange Commission.
Except as required by law, we are not obligated to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the filing of this Form 10-Q or to reflect the occurrence of
unanticipated events.
Included in our discussion and analysis of our operating results are comparisons
of EBITDA. EBITDA consists of operating income (loss) before depreciation and
amortization and is presented because we believe it is frequently used by
investors and other interested parties in the evaluation of a company's ability
to meet its future debt service, capital expenditure and working capital
requirements. However, other companies in our industry may present EBITDA
differently than we do. EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be considered as
an alternative to cash flows from operating activities as a measure of liquidity
or as an alternative to net earnings as an indicator of our operating
performance or any other measures of performance derived in accordance with
generally accepted accounting principles.
References in this Form 10-Q to "we," "us" and "our" mean Madison River Capital,
LLC and its subsidiaries.
Overview
We are an established rural local exchange company providing communications
services and solutions to business and residential customers in the Gulf Coast,
Mid-Atlantic and Midwest regions of the United States. Our integrated service
offerings include local and long distance voice, high-speed data, Internet
access and fiber transport. At June 30, 2002, we had approximately 226,110
voice and DSL connections in service.
We are organized into two operating divisions, the LTD and the ICD. The LTD is
responsible for the integration, operation and development of our established
markets that consist of four ILECs acquired since January 1998. The ILECs are
located in North Carolina, Illinois, Alabama and Georgia. The ICD is
responsible for developing and managing our target markets as a CLEC. In
addition, the ICD is building a transport business focusing on providing
transport and IP transit services to other carriers and large businesses. The
ICD is building its base of customers around the LTD's currently established
operations and along its approximately 2,300 route miles of fiber optic network.
We are currently certified in ten states as a CLEC (North Carolina, South
Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas, Tennessee
and Illinois) and in 11 states as a long distance provider (North Carolina,
South Carolina, Georgia, Florida, Alabama, Mississippi, Louisiana, Texas,
Tennessee, Kentucky and Illinois).
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The majority of our fiber optic network comprises a long-haul network in the
southeast United States that connects Atlanta, Georgia and Dallas, Texas, two of
the four Tier I Network Access Points. Further, the route connects other
metropolitan areas such as Mobile and Montgomery, Alabama; Biloxi, Mississippi;
New Orleans, Louisiana; and Houston, Texas. The Company has designated Atlanta
and Dallas as its Internet egress points.
Our current business plan is focused on improving cash flows for the enterprise.
Since our inception, our principal activities have been the acquisition,
integration, operation and improvement of ILECs in rural markets. In acquiring
our four ILECs, we purchased businesses with positive cash flow, government and
regulatory authorizations and certifications, operating support systems,
management and key personnel and facilities. The LTD is continuing the
development of these established markets with successful marketing of vertical
services and DSL products and is controlling expenses through the use of
business process management tools. In the ICD, our strategy has shifted to a
business model focused on moving the ICD's operations to a positive cash flow
position faster than was possible with our previous aggressive growth model. In
order to achieve positive cash flow in the ICD, we intentionally slowed the rate
of growth in this division to allow us to capitalize on the revenues generated
by currently installed lines while simultaneously reducing our expenses and
capital expenditures. Once the ICD begins to generate sustainable positive cash
flow, the ICD will then target a rate of growth that can be funded from its own
operations without additional investment in its business. The ICD is providing
services to medium and large customers in three edge-out markets: the Triangle
(Raleigh, Durham and Chapel Hill) and the Triad (Greensboro and Winston-Salem)
in North Carolina; Peoria and Bloomington in Illinois; and the New Orleans,
Louisiana region. The ICD's transport business is focused on developing its
product lines in Atlanta, Georgia; New Orleans, Louisiana; and Houston and
Dallas, Texas.
Factors Affecting Future Operations
The following is a discussion of the primary factors that we believe will affect
our operations over the next few years.
Revenues
To date, our revenues have been derived principally from the sale of local and
long distance communications services to customers in our established markets.
For the quarter ended June 30, 2002, approximately 92% of our operating revenues
came from the LTD. Our business plan is to generate increasing revenues in our
LTD and ICD operations from voice services (local and long distance), Internet
access and enhanced data and other services. Our transport business will focus
on growing revenues by providing services to other carriers and major accounts
without making significant capital investments.
The sale of communications services to customers in our ILEC markets will
continue to provide the predominant share of our revenues for the foreseeable
future while we slow the rate of growth in our ICD operations. We expect that
if we achieve sustainable positive cash flow in our ICD operations that will
allow the ICD to fund its own growth and we are successful in developing and
marketing our fiber transport and Internet egress products, then the ICD's
revenues may grow at a faster pace than the LTD's revenues. This will result in
a growing percentage of our revenues coming from sales of communications
services to medium and large businesses and other carriers in our edge-out
markets. In the near term, we anticipate that any increase in revenues from the
ICD will grow sequentially at a much slower pace than we have experienced in
previous years due to our focus on achieving positive cash flow for that
division.
We will continue to offer bundled services and to competitively price our
services in each of our markets. In addition, we intend to continue to offer
combined service discounts designed to give customers incentives to buy bundled
services pursuant to long-term contracts. The fiber transport business appears
increasingly to be price driven, and, as a result, we may competitively price
these services to gain market share.
Recent bankruptcies by interexchange carriers have impacted our financial
results including revenues, EBITDA and cash flows. The final resolution of
these bankruptcies through the legal process and/or any regulatory changes that
may arise from these events may have a material impact on our business. Without
additional clarification or regulatory changes that recognize the additional
financial burdens placed on LECs, we may be unable to appropriately protect
against the financial impact associated with any future bankruptcies of such
magnitude.
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Expenses
Our ILECs have historically reported fairly consistent operating expenses from
period to period. However, in recent quarters, as we continued to integrate our
ILEC acquisitions and implement business process management tools to control
expenses, we have seen our operating expenses in our ILEC operations decrease.
We seek to maintain the expense reductions that we have achieved in our existing
operations and, with additional efforts, gain some further cost savings in the
LTD, though at a far slower sequential rate than we have recently seen.
During the past two years, we made a significant investment in the ICD with the
buildout of our fiber network and asynchronous transfer mode, or ATM, and time
division modulation, or TDM, switching platforms and establishment of an
efficient marketing, sales and provisioning infrastructure. This resulted in
significant increases in operating expenses in the ICD. During much of 2001, we
worked on resizing the ICD organization to better align it with our market
opportunities and slow the pace of growth in operating expenses accordingly. In
the fourth quarter of 2001, we stated that our business plan for the ICD had
shifted from aggressively growing the number of access lines in service to
focusing on business processes that will allow the division to move more quickly
towards generating positive cash flows. As the basis for this strategy, we have
intentionally slowed the rate at which we are adding new access lines in the
ICD. Accordingly, we have significantly reduced our cash utilization for this
division. With slower planned growth, fewer sales personnel are needed, and, as
a result, fewer provisioners, sales engineers, customer care and other support
personnel are required. In addition, the ICD's capital spending has decreased
significantly. Once the ICD begins generating cash from its operations, we
intend to reinvest the cash in the division to fund its future growth. We have
also addressed the organization of our transport business to better align it
with our cash flow positive strategy. We expect that the ICD's operating
expenses will remain moderately consistent in the near term as the impact of
implementing these changes continue to be reflected in our operating results.
Our primary operating expenses consist of cost of services, selling, general and
administrative expenses and depreciation and amortization.
Cost of services
Our cost of services includes:
* plant specific costs and expenses, such as network and general support
expense, central office switching and transmission expense, information
origination/termination expense and cable and wire facilities expense;
* plant nonspecific costs, such as testing, provisioning, network,
administrative, power and engineering;
* the cost of leasing unbundled copper loop lines and high capacity digital
lines from the ILECs to connect our customers and other carriers' networks
to our network;
* the cost of leasing transport from ILECs or other providers where our fiber
transport capacity is not available;
* the cost of collocating in ILEC central offices; and
* the cost of purchasing and installing electronics on our fiber network.
We have entered into interconnection agreements with BellSouth, Verizon,
Ameritech, Sprint and SBC. Other interconnection agreements may be required, and
certifications by state regulators would be required in states where we are not
certified as a competitive provider.
We have a resale agreement with Global Crossing to provide long distance
transmission services. This agreement contains minimum volume commitments.
Although we believe that we will meet these commitments and expect to experience
lower cost per minute usage rates as volume increases, we may not be successful
in generating adequate long distance business to absorb our minimum volume
commitment and will be required to pay for long distance transmission services
that we are not using.
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Selling, general and administrative expenses
Selling, general and administrative expenses include:
* selling and marketing expenses;
* expenses associated with customer care;
* billing and other operating support systems; and
* corporate expenses.
We employ a professional sales team in the markets we serve. We offer a
competitive compensation package based on minimum quota sales and incentives for
long-term contracts and bundled services. In addition, we also market our
services through agency relationships.
We have operating support and other back office systems that we use to enter,
schedule, provision and track customer orders, test services and interface with
trouble management, inventory, billing, collection and customer care service
systems for the access lines in our operations. We may review and consider the
benefits offered by the latest generation of systems, and, if we implement new
systems, we expect that our operating support systems and customer care expenses
may increase.
As a result of our limited operating history as a consolidated company and the
number and timing of our acquisitions, there is limited operating and financial
data about us upon which to base an evaluation of our performance. Although we
expect to maintain positive EBITDA as an enterprise as we expand from our
established markets, operating losses in our edge-out markets in which the ICD
operates have materially decreased our EBITDA in recent quarters and may
continue to lower our EBITDA over the near-term as we work to make the ICD
EBITDA positive. Further, our business plan requires additional capital
expenditures necessary to deliver high quality integrated communications
services and solutions. We anticipate that most of our capital expenditures will
be directed at maintaining our existing networks and for success-based ATM
equipment purchases in the ICD. Although we are currently projecting an increase
in revenues, our revenues may not increase or even continue at their current
levels, and we may not achieve or maintain our target levels for expenses or
profitability. We may not be able to generate cash from operations in future
periods at the levels we currently project or at all. Our actual future
operating results may differ from our current projections, and those differences
may be material.
Critical Accounting Policies
Revenue Recognition
Revenues are recognized when the corresponding services are provided regardless
of the period in which they are billed. Recurring local service revenues are
billed one month in advance, and recognition is deferred until the service has
been provided. Nonrecurring revenues, such as long distance toll charges and
other usage based billings, are billed in arrears and are recognized when
earned.
Network access service revenues are based on universal service funding and
charges to interexchange carriers for switched and special access services and
are recognized in the period when earned. Our rural ILEC subsidiaries
participate in revenue sharing arrangements, sometimes referred to as pools,
with other telephone companies for interstate revenues and for certain
intrastate revenues. Such sharing arrangements are funded by national universal
service funding, toll revenue and/or access charges in the interstate market.
Revenues earned through the sharing arrangements are initially recorded based on
our estimates. These estimates are then subject to adjustment in future
accounting periods as refined operating results become available. Traffic
sensitive and special access revenues for interstate services are billed under
tariffs approved by the appropriate regulatory authority and retained by us.
Revenues from billing and collection services provided to interexchange
carriers, advertising sold in telephone directories and the sale and maintenance
of customer premise equipment are recorded as miscellaneous revenues. These
revenues are recognized when the service has been provided or over the life of
the contract, as appropriate.
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Goodwill
Goodwill represents the excess of the purchase price of our acquisitions over
the fair value of the net assets acquired and has an indefinite life. The
carrying value of goodwill is reviewed on an annual basis or if facts and
circumstances suggest impairment. If our review indicates that an impairment of
goodwill exists, as determined based on a comparison of the implied fair value
of goodwill to its carrying value, we would reduce the carrying value by the
difference.
Allowance for Uncollectible Accounts
We evaluate the collectibility of our accounts receivable based on a combination
of factors. In circumstances where we are aware of a specific customer's
inability to meet its financial obligations to us, such as a bankruptcy filing
or substantial down-grading of credit scores, we record a specific allowance
against amounts due to reduce the net recognized receivable to the amount we
reasonably believe will be collected. For all other customers, we reserve a
percentage of the remaining outstanding accounts receivable balance as a general
allowance based on a review of specific customer balances, our trends and
experience with prior receivables, the current economic environment and the
length of time the receivables are past due. If circumstances change, we will
review the adequacy of the allowance, and our estimates of the recoverability of
amounts due us could be reduced by a material amount.
Results of Operations
Six Months ended June 30, 2002 compared to Six Months ended June 30, 2001
Total revenues were $90.8 million and $90.7 million for the six month periods
ended June 30, 2002 and June 30, 2001, respectively. Revenues in the LTD
decreased approximately $3.0 million, or 3.5%, to $83.0 million in the first six
months of 2002 from $86.0 million in the first six months of 2001. Revenues
from Internet dial-up services, digital subscriber line services (DSL) and high
speed special access services increased approximately $2.1 million from the
prior year primarily due to an increase in the number of DSL subscribers. This
increase was offset by decreases of $2.1 million in local service revenues and
$2.6 million in miscellaneous revenues. The decrease in local service revenues
is primarily attributable to anticipated lower network access revenues at Gulf
Coast Services as a result of lower Universal Support Fund receipts in the first
six months of 2002 compared to the same period of 2001 and the impact from the
sale of 4,280 voice access lines comprising the Staunton and Livingston
exchanges in Illinois in May 2001. The decrease in miscellaneous revenues is
primarily attributable to bad debt charges taken in the second quarter of 2002
that approximated $1.5 million for pre-petition amounts of two customers that
filed for bankruptcy. Revenues in the ICD increased approximately $3.0 million,
or 64.5%, to $7.7 million in the first half of 2002 compared to the first half
of 2001 and is the result of an increase in the number of voice access and DSL
lines in service and growth in our transport business. At June 30, 2002 and
2001, the ICD had approximately 16,600 and 12,800 voice access and DSL
connections in service, respectively, representing a 30% increase. In addition,
revenues from transport services in the first six months of 2002 were $1.7
million compared to revenues from transport services of $0.9 million in the
first six months of 2001.
Revenues from voice services, which are comprised of local, network access and
long distance service, as a percentage of total revenues, were approximately
84.8% and 85.9% for the six months ended June 30, 2002 and 2001, respectively.
The LTD and the ICD provided approximately 91.5% and 8.5% of total revenues,
respectively.
15
Total operating expenses decreased $15.6 million from $91.1 million, or 100.4%
of total revenues in the first six months of 2001, to $75.5 million, or 83.2% of
total revenues in the first six months of 2002. The decrease is primarily
attributable to expense reductions in both the LTD and the ICD and our adoption
of a new accounting standard in the first quarter of 2002. In the LTD,
operating expenses decreased approximately $8.5 million, or 12.5%, to $58.9
million in the first six months of 2002 from $67.4 million in the first six
months of 2001. The decrease is primarily attributable to the $6.7 million
decrease in depreciation and amortization expense in the first six months of
2002 compared to the same period in 2001 as a result of our adoption of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 141, Business Combinations (FAS 141) in the first quarter of 2002.
Under the guidelines of FAS 141, companies no longer amortize the goodwill
carried on their balance sheets. Through December 31, 2001, we amortized our
goodwill, which is the amount by which the purchase price we paid for our
acquisitions exceeded the fair value of the net assets we acquired, on a
straight-line basis over 25 years. In the first six months of 2001, this method
of accounting for goodwill resulted in approximately $8.3 million in
amortization expense. Beginning on January 1, 2002, we no longer amortized our
goodwill but will perform required impairment tests of the carrying value of our
goodwill as provided for in the new accounting standards. We do not believe
that the results of these impairment tests will have a material impact on our
financial position, net loss or cash flows. In addition, the LTD's selling,
general and administrative expenses decreased approximately $1.5 million in the
first half of 2002 compared to the first half of 2001. Expense reductions of
$2.7 million were offset by higher non-cash long-term incentive plan expenses of
$1.2 million. In the ICD, operating expenses in the first six months of 2002
were approximately $7.1 million lower than the first six months of 2001. This
decrease is a result of the ICD's expense reductions implemented as part of its
strategy to achieve positive cash flow as quickly as possible.
Net operating income (loss) increased approximately $15.7 million from a net
operating loss of $0.4 million, or 0.4% of total revenues in the first six
months of 2001, to net operating income of $15.3 million, or 16.8% of total
revenues in the first six months of 2002. The increase is primarily attributable
to expense reductions taken in both the LTD and the ICD. Net operating income
in the LTD increased $5.5 million, or 29.5% , to $24.1 million in the first six
months of 2002 from $18.6 million in the first six months of 2001. For the ICD,
the net operating loss improved $10.2 million, or 53.5%, to $8.8 million in the
six month period ended June 30, 2002 from $19.0 million in the six month period
ended June 30, 2001.
Interest expense decreased $0.4 million to $32.2 million, or 35.4% of total
revenues, in the first six months of 2002 compared to $32.6 million, or 36.0% of
total revenues, in the first six months of 2001. The decrease in interest
expense is primarily attributable to a lower weighted average interest rate
offsetting a higher average outstanding balance of long-term debt during the
first six months of 2002 compared to the first six months of 2001.
For the six month period ended June 30, 2002, we had other income of
approximately $0.5 million compared to other expense of $6.0 million in the six
month period ended June 30, 2001, a change of $6.5 million. The difference is
primarily attributable to realized losses on the disposal of an equity security
investment in the first quarter of 2001 of approximately $8.7 million for which
no comparable losses were recognized in the first six months of 2002. An
impairment charge of $2.1 million taken against the carrying value of an
investment accounted for using the equity method is also included in other
income for 2002.
Our net loss improved $23.7 million from a net loss of $41.4 million, or 45.6%
of total revenues, in the first six months of 2001, to $17.7 million, or 19.5%
of total revenues, in the first six months of 2002, as a result of the factors
discussed above. The LTD had net income of $4.8 million in the first six months
of 2002 compared to a net loss of $9.3 million in the first six months of 2001,
an improvement of $14.1 million. For the six month periods ended June 30, 2002
and 2001, the ICD had a net loss of $22.5 million and $32.1 million,
respectively, an improvement of $9.6 million. Our EBITDA increased $11.9
million from $27.8 million, or 30.7% of total revenues, in the first six months
of 2001, to $39.7 million, or 43.8% of total revenues, in the first six months
of 2002. The increase in EBITDA is primarily attributable to the expense
reductions achieved in both the LTD and the ICD.
16
Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001
Total revenues decreased $0.7 million, or 1.4%, to $44.8 million for the three
months ended June 30, 2002 from $45.5 million for the same period of 2001.
Revenues in the LTD for the second quarter of 2002 were $41.1 million, a $1.6
million decrease from the total revenues for the second quarter of 2001 of $42.7
million. The decrease is primarily attributable to bad debt charges of $1.5
million for pre-petition amounts of two customers that filed for bankruptcy.
For the three months ended June 30, 2002, the ICD had revenues of $3.7 million,
a $0.9 million increase from revenues of $2.8 million for the three months ended
June 30, 2001. An increase in the number of voice access and DSL connections
accounted for most of the increase. Revenues from voice services, as a
percentage of total revenues, were approximately 85.8% and 86.6% for the three
months ended June 30, 2002 and 2001, respectively.
Total operating expenses decreased $6.8 million from $45.2 million, or 99.4% of
total revenues, in the three month period ended June 30, 2001 to $38.4 million,
or 85.8% of total revenues, in the three month period ended June 30, 2002.
Operating expenses in the LTD were $30.0 million in the three months ended June
30, 2002 and $33.1 million in the three months ended June 30, 2001, a decrease
of $3.1 million, or 9.4%. The decrease is attributable to a decrease in
amortization expense of approximately $4.2 million as a result of the adoption
of FAS 141, partially offset by an increase in noncash long-term incentive
expenses of $1.4 million. In the ICD, operating expenses decreased $3.7
million, or 30.2%, to $8.4 million in the three months ended June 30, 2002 from
$12.1 million in the three months ended June 30, 2001. The decrease is
attributable to expense reductions taken in the ICD as it implemented its
strategy to slow growth and achieve positive cash flow as quickly as possible.
Net operating income for the three month period ended June 30, 2002 increased
approximately $6.1 million to $6.4 million from $0.3 million for the three month
period ended June 30, 2001. As a percentage of total revenues, net operating
income was 14.3% in the three months ended June 30, 2002 and 0.6% in the three
months ended June 30, 2001. Comparing the three month period ended June 30,
2002 to the three month period ended June 30, 2001, net operating income
increased $1.5 million in the LTD and $4.6 million in the ICD.
Interest expense decreased $0.3 million to $16.1 million for the second quarter
of 2002 compared to $16.4 million in the second quarter of 2001, or 35.9% and
36.0% of total revenues, respectively. The decrease is attributable to lower
weighted-average interest rates in the second quarter of 2002 compared to the
second quarter of 2001.
Net loss improved $2.9 million to $9.3 million, or 20.8% of total revenues, in
the three months ended June 30, 2002 from $12.2 million, or 26.8% of total
revenues, in the three months ended June 30, 2001. Net income in the LTD was
$2.1 million for the three months ended June 30, 2002 compared to net income of
$3.7 million for the three months ended June 30, 2001, a decrease of $1.6
million, or 43.4%. The net loss in the ICD was $11.4 million for the three
months ended June 30, 2002 compared to a net loss of $15.9 million for the three
months ended June 30, 2001, an improvement of $4.5 million, or 28.2%. EBITDA
increased $4.1 million to $18.5 million, or 41.3% of total revenues, in the
three months ended June 30, 2002 from $14.4 million, or 31.7% of total revenues,
in the three months ended June 30, 2001.
Liquidity and Capital Resources
We are a holding company with no business operations of our own. Our only
significant assets are the capital stock/member interests of our subsidiaries.
Accordingly, our only sources of cash to pay our obligations are cash on hand
and distributions from our subsidiaries from their net earnings and cash flow.
Even if our subsidiaries determine to pay a dividend on, or make a distribution
in respect of, their capital stock/member interest, we cannot assure you that
our subsidiaries will generate sufficient cash flow to pay such a dividend or
distribute such funds or that they will be permitted to pay such dividend or
distribution under the terms of their credit facilities. Since our inception,
we have funded our operations and growth through cash flow from operations,
borrowings and equity contributions from our member.
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Operating Activities. For the six months ended June 30, 2002, we generated cash
from operating activities of $12.1 million. For the same period in 2001, net
cash used for operating activities was $29.7 million. The change is
attributable to an improvement in our net loss of $23.7 million in the first six
months of 2002 when compared to the first six months of 2001 primarily resulting
from a reduction in our expenses in both the LTD and the ICD. In addition, the
change in accounts payable and accrued expenses reflected a use of cash that was
approximately $15.1 million higher in the first six months of 2001 compared to
the first six months of 2002. Also, in the first six months of 2002, we
received income tax refunds of approximately $6.5 million for which no
comparable refunds were received in the same period of 2001.
Investing Activities. For the six months ended June 30, 2002, we used cash for
investing activities in the amount of $0.7 million compared to cash used for
investing activities of $1.0 million in the six month period ended June 30,
2001. Cash used in investing activities in the first quarter of 2002 was
attributable to the purchase of telephone plant and equipment in the amount of
$6.9 million. This was offset by $2.6 million in patronage capital dividends
received from the RTFC, $1.5 million from the redemption of RTFC subordinated
capital certificates and $2.1 million from changes in other assets. For the six
months ended June 30, 2001, we used cash primarily for purchases of telephone
plant and equipment of $26.0 million This was offset by proceeds from the sale
of telephone plant and equipment, generated primarily from the sale of
approximately 4,280 access lines in Illinois, of $13.7 million and changes in
other assets of $11.2 million.
Financing Activities. For the six months ended June 30, 2002, net cash used in
financing activities was $9.9 million and consisted primarily of payments on
long-term debt of $10.0 million. For the six months ended June 30, 2001, net
cash used for financing activities was $5.0 million and consisted primarily of
payments on long-term debt of $5.6 million.
At June 30, 2002, we had negative working capital of $29.0 million compared to
negative working capital of $26.6 million at December 31, 2001.
Long-Term Debt and Revolving Credit Facilities
We or our subsidiaries have outstanding term and revolving credit facilities
with the RTFC, which were entered into in connection with the acquisitions of
Mebcom, Gallatin River, Gulf Coast Services and Coastal Communications. In
addition, we have $200.0 million in 131/4% senior notes outstanding that are due
in March 2010, a mortgage note payable on property acquired in the Coastal
Communications acquisition and a miscellaneous note payable.
RTFC Debt Facilities
As of June 30, 2002, we had approximately $442.7 million in term loans
outstanding with the RTFC. Of this amount, $432.1 million has fixed interest
rates that range between 6.5% and 8.5%, with a weighted average rate
approximating 7.94%. The fixed interest rates expire at various times,
beginning April 2003 through April 2005, depending on the terms of the note, at
which time they will convert to a variable rate. We have the ability to fix
these interest rates after the date of expiration at the RTFC's then-prevailing
interest rate for long-tem debt with similar maturities. The remaining $10.6
million in term loans have variable interest rates that range from 5.8% to 6.05%
at June 30, 2002.
At June 30, 2002, we had a $7.8 million term loan fully available to be drawn
with the RTFC. The $7.8 million term facility, which matures on September 29,
2014, is available to fund capital expenditures of Gulf Coast Services.
However, as of December 29, 2003, the RTFC may, in its sole discretion, stop
advancing funds under this facility.
As a condition of obtaining long-term financing from the RTFC, we purchased
subordinated capital certificates ("SCCs") that represent ownership interests in
the RTFC. Depending on the loan agreement, we purchased SCCs equivalent to
either 5% or 10% of the amount borrowed. The RTFC financed the purchase of the
SCCs by increasing the balance advanced for a loan by an amount equal to the
SCCs purchased. In December 2000, we refinanced our outstanding loan agreements
with the RTFC and, at that time, agreed to increase the level of SCCs we owned
to a balance equivalent to 10% of the outstanding balance remaining on all of
the term loans.
At June 30, 2002, we owned $45.3 million in SCCs. The SCCs are redeemed
annually, at par, in an amount equivalent to 10% of the term loan principal that
was repaid in the prior year.
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We also receive a share of the RTFC's net margins in the form of patronage
capital refunds. Patronage capital is allocated based on the percentage that our
interest payments contribute to the RTFC's gross margins. Currently, 70% of the
RTFC's patronage capital allocation is retired with cash after the end of the
year, and 30% is received in the form of patronage capital certificates. The
patronage capital certificates will be retired with cash in accordance with the
RTFC's board-approved rotation cycle.
In addition to the term loans, we also have a secured line of credit and an
unsecured line of credit with the RTFC. The secured line of credit is a $31.0
million facility that has no annual paydown provisions. The secured line of
credit expires in March 2005 and bears interest at the RTFC base rate for a
standard line of credit plus 50 basis points, or 6.75% at June 30, 2002. We had
advanced $21.0 million against this line of credit at June 30, 2002, and the
remaining $10.0 million is fully available to be drawn. The unsecured line of
credit is a $10.0 million facility at Coastal Utilities, Inc. that is available
for general corporate purposes and expires in March 2005. In addition, under the
terms of the unsecured revolving line of credit agreement, we must repay all
amounts advanced under the facility within 360 days of the first advance and
bring the outstanding amount to zero for a period of five consecutive days in
each 360-day period. The unsecured line of credit was fully advanced at June
30, 2002 and bears interest at the RTFC base rate for a standard line of credit
plus 100 basis points, or 7.25% at June 30, 2002.
The borrower for our loan and secured revolving line of credit agreements with
the RTFC is our subsidiary, Madison River LTD Funding Corp. The loan facilities
are secured by a first mortgage lien on substantially all of the property,
assets and revenue of the LTD. In addition, substantially all of the
outstanding equity interests of the subsidiaries that comprise the LTD are
pledged in support of the facilities. The borrower for the unsecured line of
credit is Coastal Utilities, Inc.
The terms of the RTFC loan agreement require MRLTDF to meet and adhere to
various financial and administrative covenants. MRLTDF is also restricted from
declaring or paying dividends to its parent, Madison River Holdings, is limited
in its ability to make intercompany loans or enter into other affiliated
transactions, and is restricted from incurring additional indebtedness above
certain amounts without the consent of the RTFC. As a result of these
provisions of the loan agreement, any amounts available under the various credit
facilities discussed above may only be available to MRLTDF and its subsidiaries
and not to the Company or its other subsidiaries to fund their obligations.
MRLTDF is required to test its compliance with certain financial ratios on an
annual basis. At December 31, 2001, MRLTDF was in compliance with its financial
ratios. At June 30, 2002, MRLTDF remained in compliance with its other
financial and administrative covenants.
Senior Notes
We currently have $200.0 million in publicly traded 13 1/4% senior notes
outstanding that are due in March 2010. Interest is payable semiannually on
March 1 and September 1 of each year. The senior notes are registered with the
Securities and Exchange Commission and are subject to the terms and conditions
of an indenture. At June 30, 2002, the senior notes had a carrying value of
$197.6 million, which is net of a $2.4 million unamortized discount.
Under the terms of the indenture, we must comply with certain financial and
administrative covenants. Among other things, we are restricted in our ability
to incur additional indebtedness, to pay dividends, to redeem or repurchase
equity interests, to make various investments or other restricted payments, to
create certain liens or use assets as security in other transactions, to sell
certain assets or utilize certain asset sale proceeds, to merge or consolidate
with or into other companies or to enter into transactions with affiliates. At
June 30, 2002, the Company was in compliance with the terms of the senior notes
indenture.
Other Long-Term Debt
Our other indebtedness includes a $2.3 million note payable to the former
shareholders of Coastal Utilities, Inc. for the purchase of a building used in
our operations. The note, which is secured by the building and bears interest
at 8.0%, is being repaid in monthly installments of $17,500 with a balloon
payment of approximately $2.2 million due in April 2006. In addition, we also
have a miscellaneous note payable of $0.4 million that bears interest at 8.0%
and is due on demand.
19
Capital Requirements
Our business will require significant capital to fund working capital needs,
debt service requirements, capital expenditures and cash flow deficits. In the
near term, we expect that our primary uses of cash will include:
* the maintenance of our current network infrastructure;
* the development and integration of operating support systems and other
automated back office systems;
* scheduled principal and interest payments on our long-term debt;
* real estate expenses in connection with our network facilities and
operations;
* sales and marketing expenses;
* corporate overhead; and
* personnel development.
We currently estimate that cash required to fund capital expenditures in 2002
will be less than $14.0 million. For the six months ended June 30, 2002, our
capital expenditures were approximately $7.3 million. Our anticipated use of
cash for capital expenditures in 2002 is significantly less than what we have
incurred in prior years. This is a result of several factors. First, we have
invested a significant amount in capital expenditures during the last two years
to build-out and enhance our network facilities in our markets. Absent major
changes in the technology that we employ, we believe that we have facilities in
place capable of providing a high level of service to our customers without
significant alterations or enhancements. We anticipate that a large portion of
our capital expenditures in 2002 will be directed toward maintaining our
existing facilities. Second, we have experienced and anticipate slower growth
in 2002 for the LTD than experienced in previous years. In addition, our new
business plan for the ICD significantly reduces its rate of growth. Therefore,
there will be less demand to expand our network facilities than we have seen in
the past. After 2002, we expect to see stronger growth in our business, and,
accordingly, we anticipate the level of capital expenditures to
accelerate in those years.
As part of the consideration paid in the Coastal Communications acquisition, we
issued to the former shareholders of Coastal Utilities 300 shares of Series A
non-voting common stock and 300 shares of Series B non-voting common stock of
CCI in the face amount of $10.0 million and $5.0 million, respectively. The
Series A and Series B stock had put and call features that were defined pursuant
to the terms of a shareholders agreement and were exercisable by the holders and
CCI.
On April 10, 2002, Madison River Telephone Company, the parent of the Company,
announced the completion of an agreement with the former shareholders which,
among other things, modified certain provisions of the shareholders agreement.
Under the terms of the agreement, the former shareholders exchanged all of their
Series B stock and 40% of their Series A stock in CCI for 18.0 million Class A
member units in MRTC valued at $1 per unit and three term notes issued by MRTC,
in the aggregate principal amount of $20.0 million, payable over eight years and
bearing interest at approximately 8.4% per annum. In addition, CCI redeemed 30
shares of Series A stock retained by the former shareholders for $33,333.33 per
share, or approximately $1.0 million, at the closing of the transaction. Under
the terms of CCI's amended shareholders agreement, the former shareholders have
the right, beginning May 31, 2003 and ending September 30, 2007, to require CCI
to redeem their remaining 150 shares of Series A stock in increments not to
exceed 30 shares at $33,333.33 per share, or an aggregate value of $1.0 million,
in any thirteen-month period.
Under the terms of Madison River Telephone Company's Operating Agreement, at any
time on or after January 2, 2006, certain members may require MRTC to purchase
all of their member units at an amount equal to the fair market value of the
units. We may be required to fund this obligation of our parent company.
20
Based on our business plan, we currently project that available borrowings under
our credit facilities, cash and investments on hand and our cash flow from
operations will be adequate to meet our foreseeable operational liquidity needs
for the next 12 months. However, our actual cash needs may differ from our
estimates, and those differences could be material. Our future capital
requirements will depend on many factors, including, among others:
* the extent to which we consummate any significant additional acquisitions;
* our success in achieving net positive cash flow in our CLEC operations and
transport business;
* the demand for our services in our existing markets;
* our ability to acquire, develop and integrate the necessary operating
support systems and other back office systems; and
* regulatory, technological and competitive developments.
We may be unable to access the cash flow of our subsidiaries since certain of
our subsidiaries are parties to credit or other borrowing agreements that
restrict the payment of dividends, and those subsidiaries are likely to continue
to be subject to such restrictions and prohibitions for the foreseeable future.
In addition, future agreements governing the terms of our subsidiaries'
indebtedness may restrict our subsidiaries' ability to pay dividends to us.
To the extent that our business plans or projections change or prove to be
inaccurate, we may require additional financing or require financing sooner than
we currently anticipate. Sources of additional financing may include commercial
bank borrowings, other strategic debt financing, sales of non-strategic assets,
vendor financing or the private or public sales of equity and debt securities.
We cannot assure you that we will generate sufficient cash flow from operations
in the future, that anticipated revenue growth will be realized or that future
borrowings or equity contributions will be available in amounts sufficient to
service our indebtedness, fund the payment of any put options when due and make
anticipated capital expenditures. Failure to obtain necessary financing could
require us to significantly reduce our planned capital expenditures and scale
back our expansion plans, either of which could have a material adverse effect
on our projected financial condition and results of operations.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their estimated useful
lives. We adopted the new rules on accounting for goodwill and other intangible
assets as of January 1, 2002. We expect that application of the nonamortization
provisions of the statements will result in a decrease in amortization expense
of approximately $16.5 million per year. We determined that the goodwill
related to our acquisitions, net of accumulated amortization, was not impaired
as of January 1, 2002. During 2002, we will perform the required impairment
tests in accordance with the statements. We do not believe that the results of
these tests will have a material impact on our financial position, net loss or
cash flows.
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 supersedes SFAS 121 and establishes a single accounting model for long-
lived assets to be disposed of by sale as well as resolves certain
implementation issues related to SFAS 121. We adopted SFAS 144 as of January 1,
2002. Adoption of SFAS 144 did not have a material impact on our financial
position, net loss or cash flows. However, if an impairment of the carrying
value of any long-lived assets is indicated by the tests performed in accordance
with this standard, then a corresponding charge will be recorded as part of our
operating expenses on the statement of operations.
21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Although we invest our short-term excess cash balances, the nature and quality
of these investments are restricted under our internal investment policies.
These investments are limited primarily to U.S. Treasury agency securities,
certain time deposits and high quality repurchase agreements and commercial
paper. We do not invest in any derivative or commodity type instruments.
Accordingly, we are subject to minimal market risk on our investments.
Our long term secured debt facilities with the RTFC amortize over a 15-year
period. As of June 30, 2002, we had fixed rate secured debt with the RTFC of
$432.1 million at a blended rate of 7.94%. The fixed rates on the notes expire
from April 2003 to April 2005 at which time they will be adjusted. We have $10.6
million in term notes and $31.0 million under lines of credit with the RTFC that
bear variable interest approximating a blended average rate of 6.7%. A one
percent change in the underlying interest rates for the variable rate debt would
have an immaterial impact of less than $420,000 per annum on interest expense.
The senior notes have a stated fixed rate of 13.25%. Accordingly, we are subject
to only minimal interest rate risk on our long-term debt while our fixed rates
are in place.
22
Part II
Item 1. Legal Proceedings
(a) Our subsidiary, Gulf Coast Services, sponsors an Employee Stock Ownership
Plan ("ESOP") that was the subject of an application before the Internal Revenue
Service ("IRS") for a compliance statement under the Voluntary Compliance
Resolution Program. The application was filed with the IRS on May 17, 2000.
According to the application, Gulf Coast Services made large contributions to
the ESOP and to its 401(k) plan during 1997 and 1998, which caused the two
plans to allocate amounts to certain employees in excess of the limits set forth
in Section 415 of the Internal Revenue Code of 1986, as amended (the "Code").
The administrative committees for both plans sought to comply with the
requirements of Code Section 415 by reducing employees' allocations under the
ESOP before any reductions of allocations under the 401(k) plan. Although
this approach was consistent with Treasury Regulations under Code Section 415,
it may not have been consistent with the terms of the plan documents. The
application requested a compliance statement to the effect that any failure to
comply with the terms of the plans would not adversely affect the plans' tax-
qualified status, conditioned upon the implementation of the specific
corrections set forth in the compliance statement.
We estimated that the cost to the ESOP of the corrective allocation described
above was approximately $3.3 million. In the application, Gulf Coast Services
requested that the assets held in the Section 415 Suspense Account and in the
ESOP Loan Suspense Account be used by the ESOP for the correction. The 415
Suspense Account had an approximate value of $1.6 million, and the ESOP Loan
Suspense Account had a value in excess of the $1.7 million needed for the full
correction. However, based on discussions with the IRS and upon the
recommendation of our advisors, during the second quarter of 2001, we withdrew
our proposal to use the assets in the ESOP Loan Suspense Account as a source of
funds to satisfy the obligation. Shortly thereafter, the IRS issued our Section
415 Compliance Statement and provided us with 150 days to institute the
corrective actions. The correction period was then subsequently extended for
thirty days to December 17, 2001. During the course of making the corrections
as required by the compliance statement, additional administrative errors in the
operation of the ESOP were found that affected years beginning January 1, 1995
through December 31, 1999. The newly discovered operational failures were
interrelated with and directly affected the failures subject to the original
compliance statement, and, therefore, the corrections under the original
compliance statement could not be accurately completed.
In response to these new errors, we are currently undergoing an extensive review
of the ESOP administration for the plan years 1995 through 1999. As part of
this process, on June 7, 2002, we submitted a new application for a compliance
statement under the Walk-In-Closing Agreement Program with the IRS. The new
application restates our proposed corrections to be made for the operational
failures disclosed in the first application as well as addresses our proposed
corrections for the additional failures found in the administration of the ESOP.
We are uncertain as to the timing for completing this process or the ultimate
outcome of our new application with the IRS.
In June 2002, we secured the transfer of $1.7 million from the escrow account,
established in connection with our acquisition of Gulf Coast Services, to the
ESOP as required by the initial application. If future amounts are required to
be contributed to the ESOP to comply with the Code, we will pursue other options
currently available to us to obtain reimbursement of those funds, which may
include seeking additional reimbursement from the escrow account. However,
there is no assurance that we will be able to obtain any reimbursement from
another source, and, therefore, we may be required to contribute to the Plan the
funds needed to make up any shortfall. We do not believe that any future amounts
required to be contributed to the ESOP as part of this corrective action will
have a material adverse effect on our financial condition, results of operations
or cash flows.
(b) On July 11, 2002, MCI WorldCom Communications, Inc. filed suit against
Madison River Communications, LLC in the General Court of Justice Superior Court
Division, Mecklenburg County, North Carolina (Civil Action No. 02-CVS-11454).
Shortly thereafter, on July 21, 2002, WorldCom, Inc. and 200 of its
subsidiaries filed for Chapter 11 bankruptcy protection with the United States
Bankruptcy Court for the Southern District of New York (Chapter 11 Case No. 02-
13533). In the Civil Action, WorldCom claims that it delivered
telecommunications facilities and services for which it is entitled to in excess
of $1.8 million. The Company refutes these assertions, intends to vigorously
defend this matter and, if permitted by the Bankruptcy Court, may seek to lift
the automatic stay and file appropriate counterclaims against WorldCom.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------------------------------------------------------
3.1 Certificate of Formation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-36804) filed with the
Securities and Exchange Commission on May 11, 2000 (the "May
Form S-4"))
3.2 Limited Liability Company Agreement of the Registrant
(incorporated by reference to Exhibit 3.2 to the May Form S-4)
10.1.4 Amendment No. 1 to the Shareholders Agreement, dated April 10,
2002, by and among Coastal Communications, Inc. and Daniel M.
Bryant, G. Allan Bryant and The Michael E. Bryant Life Trust
(incorporated by reference to Exhibit 10.1.4 to the
Registrant's Current Report on Form 8-K dated April 10, 2002
(the "April Form 8-K"))
10.28 Exchange Agreement, dated as of April 10, 2002, by and among
Madison River Telephone Company, LLC, Coastal Communications,
Inc., Daniel M. Bryant, G. Allan Bryant and The Michael E.
Bryant Life Trust (incorporated by reference to Exhibit 10.28
of the April Form 8-K)
(b) Reports on Form 8-K
On April 11, 2002, we filed a Current Report on Form 8-K dated April 10,
2002 announcing the completion of the transaction with the former
shareholders of Coastal Utilities, Inc. to exchange certain shares of their
stock in Coastal Communications, Inc. for an equity interest in, and notes
payable from, Madison River Telephone Company.
On May 3, 2002, we filed a Current Report on Form 8-K dated May 1, 2002
announcing our first quarter operating and financial results for the period
ended March 31, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MADISON RIVER CAPITAL, LLC
Date: August 14, 2002 /s/ PAUL H. SUNU
-----------------------------------
Name: Paul H. Sunu
Title: Managing Director, Chief
Financial Officer and Secretary
24
EXHIBIT INDEX
Exhibit
Number Description
------- -----------------------------------------------------------
3.1 Certificate of Formation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-36804) filed with the
Securities and Exchange Commission on May 11, 2000 (the "May
Form S-4"))
3.2 Limited Liability Company Agreement of the Registrant
(incorporated by reference to Exhibit 3.2 to the May Form S-4)
10.1.4 Amendment No. 1 to the Shareholders Agreement, dated April 10,
2002, by and among Coastal Communications, Inc. and Daniel M.
Bryant, G. Allan Bryant and The Michael E. Bryant Life Trust
(incorporated by reference to Exhibit 10.1.4 to the
Registrant's Current Report on Form 8-K dated April 10, 2002
(the "April Form 8-K"))
10.28 Exchange Agreement, dated as of April 10, 2002, by and among
Madison River Telephone Company, LLC, Coastal Communications,
Inc., Daniel M. Bryant, G. Allan Bryant and The Michael E.
Bryant Life Trust (incorporated by reference to Exhibit 10.28
of the April Form 8-K)