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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 September 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 - September 30, 2002
(Unaudited) and December 31, 2001 1
Condensed Consolidated Statements of Operations and
Comprehensive Loss (Unaudited) - Three and Nine Months
Ended September 30, 2002 and 2001 2
Consolidated Statements of Member's Capital - Year Ended
December 31, 2001 and Nine Months Ended September 30, 2002
(Unaudited) 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September 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 12
Item 3. Quantitative and Qualitative Disclosures of Market Risks 24
Item 4. Controls and Procedures............................................25
Part II - Other Information
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
Signature 26
Certifications...............................................................27
i
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2002 2001
-------------- -----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 12,275 $ 21,606
Accounts receivable, less allowance for uncollectible accounts
of $2,982 and $1,815 in 2002 and 2001, respectively 12,822 14,305
Receivables, primarily from interexchange carriers, less
allowance for uncollectible accounts of $1,427 and $111
in 2002 and 2001, respectively 7,377 8,826
Other current assets 6,782 6,461
-------- --------
Total current assets 39,256 51,198
-------- --------
Telephone plant and equipment 477,442 468,950
Less accumulated depreciation and amortization (106,832) (72,156)
-------- --------
Telephone plant and equipment, net 370,610 396,794
-------- --------
Other assets:
Rural Telephone Finance Cooperative stock, at cost 46,052 46,798
Goodwill, net of accumulated amortization of $41,259
in 2002 and $41,318 in 2001 367,060 367,929
Other assets 26,865 33,859
-------- --------
Total other assets 439,977 448,586
-------- --------
Total assets $ 849,843 $ 896,578
======== ========
Liabilities and member's capital
Current liabilities:
Accounts payable and accrued expenses $ 30,672 $ 40,500
Other current liabilities 8,786 6,873
Current portion of long-term debt 25,705 30,408
-------- --------
Total current liabilities 65,163 77,781
-------- --------
Noncurrent liabilities:
Long-term debt 641,052 649,610
Other liabilities 72,227 62,969
-------- --------
Total noncurrent liabilities 713,279 712,579
-------- --------
Total liabilities 778,442 790,360
Redeemable minority interest 5,000 46,825
Member's capital:
Member's interest 252,684 213,584
Accumulated deficit (186,297) (154,221)
Accumulated other comprehensive income 14 30
-------- --------
Total member's capital 66,401 59,393
-------- --------
Total liabilities and member's capital $ 849,843 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues:
Local service $ 34,412 $ 35,025 $ 103,210 $ 104,768
Long distance service 4,187 4,121 12,312 12,247
Internet and enhanced data service 3,971 2,671 11,298 7,439
Transport service 899 1,116 2,623 1,978
Miscellaneous telecommunications
service and equipment 3,376 3,855 8,157 11,046
-------- -------- -------- --------
Total operating revenues 46,845 46,788 137,600 137,478
-------- -------- -------- --------
Operating expenses:
Cost of services 14,527 18,623 43,547 51,967
Depreciation and amortization 13,453 13,933 37,901 42,139
Selling, general and administrative expenses 15,028 12,759 37,052 42,259
-------- -------- -------- --------
Total operating expenses 43,008 45,315 118,500 136,365
-------- -------- -------- --------
Operating income 3,837 1,473 19,100 1,113
Interest expense (15,986) (16,104) (48,149) (48,723)
Other (expense) income, net (3,382) 322 (2,847) (5,662)
-------- -------- -------- --------
Loss before income tax expense and minority
interest expense (15,531) (14,309) (31,896) (53,272)
Income tax benefit (expense) 1,177 1,037 95 (825)
-------- -------- -------- --------
Loss before minority interest expense (14,354) (13,272) (31,801) (54,097)
Minority interest expense - (275) (275) (800)
-------- -------- -------- --------
Net loss (14,354) (13,547) (32,076) (54,897)
Other comprehensive income (loss):
Unrealized (losses) gains on marketable
equity securities (1,694) (62) (4,465) 241
Reclassification adjustment for losses
included in net loss 4,480 - 4,449 4,343
-------- -------- -------- --------
Other comprehensive income (loss) 2,786 (62) (16) 4,584
-------- -------- -------- --------
Comprehensive loss $ (11,568) $ (13,609) $ (32,092) $ (50,313)
======== ======== ======== ========
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 - (32,076) - (32,076)
Other comprehensive loss - - (16) (16)
-------- -------- ------ --------
Balance at September 30, 2002 (unaudited) $ 252,684 $ (186,297) $ 14 $ 66,401
======== ======== ====== ========
See Notes to Condensed Consolidated Financial Statements.
3
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30,
--------------------------------
2002 2001
---------- ----------
Operating activities
Net cash provided by (used for) operating activities $ 14,993 $ (40,876)
-------- --------
Investing activities
Purchases of telephone plant and equipment (11,161) (34,352)
Proceeds from sales of telephone plant and equipment - 13,547
Patronage capital received from Rural Telephone Finance Cooperative 2,570 2,764
Redemption of Rural Telephone Finance Cooperative stock, net 746 148
Change in other assets 185 12,085
-------- --------
Net cash used for investing activities (7,660) (5,808)
-------- --------
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 11,778 7,000
Payments on long-term debt (25,172) (10,372)
Change in other long-term liabilities (270) (80)
-------- --------
Net cash used for financing activities (16,664) (2,922)
-------- --------
Net decrease in cash and cash equivalents (9,331) (49,606)
Cash and cash equivalents at beginning of year 21,606 63,410
-------- --------
Cash and cash equivalents at end of nine month period $ 12,275 $ 13,804
======== ========
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 ("MRM"), 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 MRTC. 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 208,100
voice access and digital subscriber line ("DSL") connections as of September 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 provides 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 16,790 voice access and DSL connections at September 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 nine-month periods ended September 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 September 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:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Land, buildings and general equipment $ 63,604 $ 63,978
Central office equipment 145,226 130,098
Poles, wires, cables and conduit 231,539 224,577
Leasehold improvements 2,542 2,484
Software 16,794 17,308
Construction-in-process 17,737 30,505
-------- --------
Total telephone plant and equipment $ 477,442 $ 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 can no longer be amortized after December 31, 2001 but
are subject to annual impairment tests in accordance with the statements. Other
intangible assets 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.
During the third quarter of 2002, the Company elected to decommission a switch
and remove it from service. Net goodwill associated with the switch of
$868,000, which represented the excess of the purchase price paid for the switch
over its fair market value at the date of purchase, was deemed to be impaired
and was charged to amortization expense in accordance with the statements.
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 third quarter and the nine months ended September 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 third quarter ended For the nine months ended
September 30, 2001 September 30, 2001
----------------------------------- --------------------------------------
Amortization Amortization
As reported expense Pro forma As reported expense Pro forma
----------- ------------ --------- ----------- ------------ ---------
Net loss $ (13,547) $ 4,092 $ (9,455) $ (54,897) $ 12,442 $ (42,455)
======== ====== ======= ======== ====== ========
6
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
5. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit outstanding consisted of the following at:
September 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). $ 12,309 $ 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). 6,243 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 September 30, 2002). 998 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). 107,381 112,014
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 September 30, 2002). 5,802 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). 70,934 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 September 30, 2002). 3,699 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). 127,265 132,207
RTFC note payable in escalating quarterly principal installments
beginning in November 2003 through August 2014 (initial quarterly
installment of $129), interest due quarterly at the RTFC's base rate
plus 0.35% (5.65% at September 30, 2002). 7,778 -
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). 102,952 106,462
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 September 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%. - 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. 2,332 2,349
Unsecured 13 1/4% senior notes payable, due March 1, 2010, with
interest payable semiannually on March 1 and September 1, net of
debt discount of $2,329 and $2,462, respectively. 197,671 197,538
Other 393 393
-------- --------
666,757 680,018
Less current portion 25,705 30,408
-------- --------
$ 641,052 $ 649,610
======== ========
7
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
5. 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 September 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 September 30, 2002, MRLTDF had drawn
down $21.0 million under this line of credit with the remaining $10.0 million
fully available to MRLTDF.
During the third quarter of 2002, Coastal Utilities, Inc. repaid a fully-drawn
$10.0 million unsecured revolving line of credit from the RTFC. The unsecured
line of credit remains fully available to Coastal Utilities, Inc. and 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.
Also, during the third quarter of 2002, MRLTDF borrowed $7.8 million under an
available term loan facility with the RTFC. In accordance with the terms of the
loan facility, MRLTDF purchased subordinated capital certificates equivalent to
10% of the amount advanced under this term loan, or approximately $778,000, and
used 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, or 5.65% at September 30, 2002.
Under the terms of the indenture that govern 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 September
30, 2002, the Company was in compliance with the terms of the senior notes
indenture.
6. AVAILABLE FOR SALE MARKETABLE EQUITY SECURITY
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 Company valued the shares at their fair
market value of $5.1 million at the date of the exchange. The shares are
subject to certain restrictions that limit the ability of the Company to dispose
of them for a specified period of time.
The shares have been accounted for as an available for sale marketable equity
security. Accordingly, changes in the fair market value of the shares have been
reflected as other comprehensive income or loss. During the third quarter of
2002, the Company deemed that the decline in the fair market value of the shares
from the date of the transaction was other than a temporary decline and
correspondingly recognized a realized loss of $4.5 million related to the
shares. The loss is reflected in other expense in the accompanying Condensed
Consolidated Statements of Operations and Comprehensive Loss.
8
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
7. EQUITY METHOD INVESTMENT
During the second quarter of 2002, the Company recognized an impairment charge
of $2.1 million on an investment in an unconsolidated company, US Carrier
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 in
the accompanying Condensed Consolidated Statements of Operations and
Comprehensive Loss.
8. RESTRUCTURING CHARGES
In the third quarter of 2002, the Company realigned each of the ICD's operating
regions in North Carolina, Illinois and New Orleans as true edge-out operations
of the Company's rural ILECs. The rural ILECs assumed responsibility for
managing and operating the respective operating regions. Accordingly, the
Company recorded a restructuring charge of $2.7 million related to the decision
to realign the ICD's operations under the rural ILECs for the elimination of
redundant management, marketing and support services and the structuring of a
more efficient network. Of the restructuring charge, MRC recognized $2.6
million and MRM recognized $0.1 million. 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 consisted primarily
of the costs associated with future obligations on non-cancelable leases for
certain facilities that will no longer be used, net of estimated sublease
income, the expenses associated with decommissioning a switch, losses from the
abandonment of fixed assets and leasehold improvements associated with those
leased facilities, elimination of certain personnel and related expenses.
As of September 30, 2002, the following amounts were recorded related to this
restructuring charge:
Third quarter 2002
Restructuring charges and Balance at
charge payments September 30, 2002
------------- ------------------ ------------------
Future lease obligations $ 1,541 $ 46 $ 1,495
Telephone plant and equipment 843 685 158
Employee separation expenses 299 59 240
------- ------ -------
$ 2,683 $ 790 $ 1,893
======= ====== =======
In the fourth quarter of 2001, MRC recorded a $2.8 million restructuring charge
associated with its decision to reduce its sales and marketing efforts and
eliminate redundant support services. This charge was also recognized in
accordance with EITF 94-3. 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 September 30, 2002, the following amounts were recorded related to this
restructuring charge:
Balance at 2002 Balance at
December 31, 2001 payments September 30, 2002
----------------- -------- ------------------
(in thousands)
Future lease obligations $ 1,918 $ 962 $ 956
Legal related expenses 200 80 120
------ ------ ------
$ 2,118 $ 1,042 $ 1,076
====== ====== ======
The remaining liability for the restructuring charges as of September 30, 2002
is reflected as $1.3 million in accrued expenses and $1.7 million in other long-
term liabilities.
9
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
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,
financial and operating results of the segments 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 nine month periods ended
September 30, 2002 and 2001:
Three Month Period Ended Nine Month Period Ended
----------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
(in thousands)
Total revenues
LTD $ 44,025 $ 43,523 $ 128,756 $ 130,678
ICD 3,872 4,116 11,619 8,954
------- ------- -------- --------
47,897 47,639 140,375 139,632
Less intersegment revenues (1,052) (851) (2,775) (2,154)
------- ------- -------- --------
Total reported revenues $ 46,845 $ 46,788 $ 137,600 $ 137,478
======= ======= ======== ========
Net operating income (loss):
LTD $ 12,560 $ 9,504 $ 36,651 $ 28,113
ICD (8,723) (8,031) (17,551) (27,000)
------- ------- -------- --------
Total reported net operating
income $ 3,837 $ 1,473 $ 19,100 $ 1,113
======= ======= ======== ========
At September 30, 2002 and December 31, 2001, total assets by segment, net of
intersegment investments and other intersegment balances, were as follows:
September 30, December 31,
2002 2001
------------- ------------
(in thousands)
Total assets:
LTD $ 869,046 $ 895,912
ICD 472,560 506,239
--------- ---------
1,341,606 1,402,151
Less intersegment assets (491,763) (505,573)
--------- ---------
Total reported assets $ 849,843 $ 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 were 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.
10
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
10. MINORITY INTEREST, Continued
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.
11. RECENT ACCOUNTING PRONOUNCEMENT
In August 2001, the Financial Accounting Standards Board ("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. 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.
In April 2002, the FASB issued Statement of Financial Accounting Standards 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB 30. SFAS 145 also amends Statement 13 to
require certain modifications to capital leases be treated as a sale-leaseback
and modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). SFAS 145 is effective for all fiscal years
beginning after May 15, 2002 and will be adopted by the Company in 2003. The
Company does not expect the adoption of SFAS 145 to have a material impact on
the Company's results of operations or financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146, which nullified EITF Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS 146 to have a material impact on the Company's results of operations or
financial position.
11
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 September 30, 2002, we had approximately 224,890
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 operates as a
CLEC using an edge-out strategy whereby markets were established in territories
that were in close proximity to our rural ILECs. The ICD currently provides
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. By using an edge-out strategy, the ICD had access to a broad
range of experienced and efficient resources provided by our ILECs to utilize
during the development of its operations. During the third quarter of 2002, we
completed the process by realigning the ICD as a true edge-out operation from
our ILECs, combining the management and operating responsibility for the ICD's
operating regions under the control of the respective ILECs. 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).
12
In addition to its CLEC operations, the ICD has also been developing a transport
business that provides transport and IP transit services to other carriers and
large businesses along its approximately 2,300 route miles of fiber optic
network. The majority of this 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. The ICD's transport business is
currently providing services in Atlanta, Georgia; New Orleans, Louisiana; and
Houston and Dallas, Texas. Because we have found the fiber transport business
to be extremely competitive and price driven, we do not anticipate actively
expanding this line of business at this time. Consequently, the main value
being derived from this fiber optic network is in support of our dial-up and DSL
Internet services provided in both the LTD and the ICD, which use our network to
connect to the Internet.
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 is to focus on
developing a profitable customer base and to generate sustainable positive cash
flow from the division. In order to achieve positive cash flow, 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.
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 voice and
data communications services to customers in our established markets. For the
quarter ended September 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, which
provides services to other carriers and major accounts, will grow revenues only
if certain profit margins are obtained without making significant additional
capital investments and will support our retail Internet service business.
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 are currently
experiencing a decline in the number of voice access lines in service in the
LTD, primarily in the Illinois and Georgia ILECs. A persistent weakness in the
local economies of our Illinois operations has led to the decline in voice
access lines in that market. At Coastal Utilities in Georgia, the loss in voice
access lines is attributable to our proximity to Fort Stewart and the large
number of troop deployments currently ongoing. Though we do not provide
telephone services to Fort Stewart, the effect on the local community from the
deployments in terms of small business growth and lower demand for off-base
housing impacts our operations. The number of DSL subscribers continues to grow
though at a slower sequential rate than we have experienced in the past. This
is primarily due to our achievement of a market penetration for our DSL product
in our markets that is comparable to reported national averages for high-speed
Internet access (DSL and cable modem) penetration and competitive pressures.
13
In the near term, we anticipate that revenues from the ICD will remain fairly
comparable to current levels. We are focusing our efforts on adding only
customers that meet certain profitability criteria and increasing our
profitability and margins for services provided to existing customers when
renegotiating their contracts at expiration.
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.
Recent bankruptcies by interexchange carriers, including MCI WorldCom and Global
Crossing, 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 ourselves against the financial
impact associated with any future bankruptcies of interexchange carriers or
other telecommunication providers.
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.
In developing the ICD, we made a significant investment in the buildout of our
fiber network and asynchronous transfer mode, or ATM, and time division
modulation, or TDM, switching platforms and in the establishment of an efficient
marketing, sales and provisioning infrastructure. As a result, ICD's operating
expenses increased at a significant pace. During much of 2001, we focused our
efforts on resizing the ICD organization to better align it with our market
opportunities and reduce the growth in operating expenses accordingly. As part
of this transition, in the fourth quarter of 2001, the ICD intentionally slowed
the rate at which it was adding new voice and DSL connections in order to allow
the ICD to move more quickly towards generating positive cash flow. With slower
planned growth, fewer sales personnel were needed, and, as a result, fewer
provisioners, sales engineers, customer care and other support personnel were
required. The ICD also reduced its facility and overhead costs. Accordingly,
the ICD significantly reduced its cash utilization. In the third quarter of
this year, we completed the development of the ICD as a true edge-out CLEC by
placing the responsibility of managing and operating the ICD's markets with our
respective ILECs which allowed additional reductions in operating expenses and
overhead. As a result of these efforts, we have experienced significant
reductions in operating expenses in the ICD that are sustainable. 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. Once the ICD begins generating cash from its operations, we
intend to reinvest the cash in the ICD to fund its growth.
Our primary operating expenses consist of cost of services, selling, general and
administrative expenses and depreciation and amortization.
14
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, 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.
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 market our business services through agency relationships and professional
sales people. We market our consumer services primarily through our
professional customer sales and service representatives. We offer competitive
compensation packages including sales commissions and incentives.
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 to accommodate growth in
demand for our services. 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.
15
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.
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.
16
Results of Operations
Nine Months ended September 30, 2002 compared to Nine Months ended September 30,
2001
Total revenues for the nine months ended September 30, 2002 were $137.6 million,
an increase of $0.1 million from the $137.5 million in total revenues for the
nine month period ended September 30, 2001. Revenues in the LTD decreased
approximately $2.6 million, or 2.0%, to $126.0 million in the first nine months
of 2002 from $128.6 million in the first nine months of 2001. Revenues from
Internet dial-up services, DSL services and high speed special access services
increased approximately $3.3 million from the prior year due to an increase in
the number of DSL subscribers. This increase was offset by decreases of $2.6
million in local service revenues and $2.9 million in miscellaneous revenues.
The decrease in local service revenues is attributable to anticipated lower
network access revenues at Gulf Coast Services as a result of lower Universal
Support Fund receipts in the first nine 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
that approximated $1.7 million for pre-petition amounts of two customers, MCI
WorldCom and Global Crossing, that filed for bankruptcy in 2002. Revenues in
the ICD increased approximately $2.7 million, or 30.1%, to $11.6 million in the
first nine months of 2002 from $8.9 million in the first nine months of 2001 and
is the result of a higher average number of voice access and DSL connections in
service in 2002 compared to 2001 and growth in our transport business. Revenues
from transport services in the first nine months of 2002 were $2.6 million
compared to revenues from transport services of $2.0 million in the first nine
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
84.0% and 85.1% for the nine months ended September 30, 2002 and 2001,
respectively. The LTD and the ICD provided approximately 91.6% and 8.4% of
total revenues, respectively.
Total operating expenses decreased $17.9 million from $136.4 million, or 99.2%
of total revenues in the first nine months of 2001, to $118.5 million, or 86.1%
of total revenues in the first nine 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 were approximately $89.4 million in the first nine months of
2002, a decrease of approximately $11.1 million, or 11.0%, from $100.5 million
in the first nine months of 2001. The decrease is primarily attributable to the
$9.3 million decrease in depreciation and amortization expense in the first nine
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 (SFAS 141) in the first quarter of
2002. Under the guidelines of SFAS 141, companies are no longer permitted to
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 nine months of
2001, this method of accounting for goodwill resulted in approximately $12.4
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. Cost of
services in the LTD decreased approximately $1.8 million in the first nine
months of 2002 compared to the same period in 2001 primarily as a result of
expense reductions. The LTD's selling, general and administrative expenses were
substantially equivalent in the first nine months of 2002 compared to the first
nine months of 2001. However, selling, general and administrative expenses in
the first nine months of 2002 reflect higher non-cash long-term incentive plan
expenses of approximately $2.6 million and a restructuring charge of $0.1
million. Excluding these items, the LTD's selling, general and administrative
expenses would have decreased approximately $2.8 million, or 9.5%, in the first
nine months of 2002 compared to the first nine months of 2001.
In the ICD, operating expenses in the first nine months of 2002 were
approximately $6.8 million, or 18.9%, lower than the first nine months of 2001,
reflecting the ICD's strategy to achieve positive cash flow as quickly as
possible with a slower targeted growth rate and significant expense reductions.
Cost of services decreased approximately $6.6 million, or 38.5%, primarily as a
result of lower personnel costs and circuit expenses. Selling, general and
administrative expenses decreased $5.2 million, or 42.8%, primarily due to
savings from a smaller sales, marketing and engineering support function.
Included in selling, general and administrative expenses in the first nine
months of 2002 is approximately $2.6 million for a restructuring charge.
Excluding the impact of the restructuring charge, selling, general and
administrative expenses in the ICD would have decreased approximately $7.8
million, or 63.8%. These decreases in cost of services and selling, general
and administrative expenses were offset by an increase in depreciation and
amortization expenses of $5.0 million, or 77.7%.
17
Net operating income increased approximately $18.0 million from net operating
income of $1.1 million, or 0.8% of total revenues in the first nine months of
2001, to net operating income of $19.1 million, or 13.9% of total revenues in
the first nine 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 $8.5 million, or 30.4%, to $36.6 million in the first nine months of
2002 from $28.1 million in the first nine months of 2001. For the ICD, the net
operating loss improved $9.5 million, or 35.0%, to $17.5 million in the nine
month period ended September 30, 2002 from $27.0 million in the nine month
period ended September 30, 2001.
Interest expense decreased $0.6 million to $48.1 million, or 35.0% of total
revenues, in the first nine months of 2002 compared to $48.7 million, or 35.4%
of total revenues, in the first nine 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 nine months of 2002 compared to the first nine months of 2001.
For the nine month period ended September 30, 2002, we had other net expenses of
approximately $2.8 million compared to other net expenses of $5.6 million in the
nine month period ended September 30, 2001, a change of $2.8 million. Included
in other expense for the first nine months of 2002 is a $4.5 million realized
loss for a decrease in the fair market value of our investment in US Unwired
Inc. common stock that was deemed to be other than temporary and an impairment
charge of $2.1 million taken against the carrying value of our investment in US
Carrier Telecom, LLC that is accounted for using the equity method. Included in
other net expenses for the first nine months of 2001 are realized losses on the
disposal of an equity security investment in Illuminet, Inc. common stock in the
first quarter of 2001 of approximately $8.7 million.
Our net loss improved $22.8 million from a net loss of $54.9 million, or 39.9%
of total revenues, in the first nine months of 2001, to $32.1 million, or 23.3%
of total revenues, in the first nine months of 2002, as a result of the factors
discussed above. The LTD had net income of $5.8 million in the first nine months
of 2002 compared to a net loss of $8.1 million in the first nine months of 2001,
an improvement of $14.0 million. For the nine month periods ended September 30,
2002 and 2001, the ICD had a net loss of $37.9 million and $46.7 million,
respectively, an improvement of $8.8 million. Our EBITDA increased $13.7
million from $43.3 million, or 31.5% of total revenues, in the first nine months
of 2001, to $57.0 million, or 41.4% of total revenues, in the first nine months
of 2002. The increase in EBITDA is primarily attributable to the expense
reductions achieved in both the LTD and the ICD.
Three Months Ended September 30, 2002 compared to Three Months Ended September
30, 2001
Total revenues for the three months ended September 30, 2002 and 2001 were $46.8
million in each period. Revenues in the LTD for the third quarter of 2002 were
$43.0 million, a $0.4 million, or 1.0%, increase from revenues of $42.6 million
for the third quarter of 2001. The increase is attributable to an increase in
the number of DSL subscribers. Revenues from Internet dial-up services, DSL and
high speed special access services in the third quarter of 2002 increased
approximately $1.2 million from the same period in the prior year. Local
service revenues decreased approximately $0.5 million primarily due to
anticipated lower access revenues at Gulf Coast Services as a result of lower
Universal Support Fund receipts. Miscellaneous revenues for the LTD in the
third quarter of 2002 decreased $0.3 million from the third quarter of 2001
primarily due to bad debt charges of $0.4 million for pre-petition amounts of
MCI WorldCom, that filed for bankruptcy. For the three months ended September
30, 2002, the ICD had revenues of $3.8 million, a $0.4 million decrease from
revenues of $4.2 million for the three months ended September 30, 2001. The
decrease in the number of voice access and DSL connections and the ICD's focus
on more profitable customers accounted for the decrease. Revenues from voice
services, as a percentage of total revenues, were approximately 82.4% and 83.7%
for the three months ended September 30, 2002 and 2001, respectively.
18
Total operating expenses decreased $2.3 million from $45.3 million, or 96.9% of
total revenues, in the third quarter of 2001 to $43.0 million, or 91.8% of total
revenues, in the third quarter of 2002. Operating expenses in the LTD were
$30.4 million in the third quarter of 2002 and $33.1 million in the third
quarter of 2001, a decrease of $2.7 million, or 8.0%. The decrease is
attributable to a decrease in cost of services of $1.6 million, primarily as a
result of expense reductions implemented, and a decrease in amortization expense
of approximately $4.1 million, as a result of the adoption of SFAS 141. These
decreases were partially offset by an increase in depreciation expense of
approximately $1.5 million and higher non-cash long-term incentive expenses of
$1.5 million in the third quarter of 2002 compared to the third quarter of 2001.
In the ICD, operating expenses increased $0.4 million, or 2.8%, to $12.6 million
in the third quarter of 2002 from $12.2 million in the third quarter of 2001.
The increase is attributable to higher depreciation and amortization expenses of
$2.1 million and selling, general and administrative expenses of $0.7 million in
the third quarter of 2002 compared to the third quarter of 2001. Included in
depreciation and amortization expense is approximately $868,000 for the
write-off of goodwill associated with a switch decommissioned in the third
quarter of 2002. The remaining increase is from a higher average base of
telephone plant and equipment in service in the third quarter of 2002 compared
to the third quarter of 2001. The increase in selling, general and
administrative expenses reflects a $2.6 million restructuring charge taken in
the third quarter by the ICD. Excluding the impact of the restructuring charge,
selling, general and administrative expenses in the third quarter of 2002 would
have decreased approximately $1.8 million, or 51.6%, from the third quarter of
2001 due to the ICD's strategy to achieve positive cash flow as quickly as
possible with a slower targeted growth rate and significant expense reductions.
Cost of services in the third quarter of 2002 for the ICD decreased $2.5
million, or 39.8%, from the third quarter of 2001, again as a result of a slower
targeted growth rate.
Net operating income for the three month period ended September 30, 2002
increased approximately $2.3 million, or 160.5%, to $3.8 million from $1.5
million for the three month period ended September 30, 2001. As a percentage of
total revenues, net operating income was 8.2% in the third quarter of 2002 and
3.1% in the third quarter of 2001. Net operating income in the LTD in the third
quarter of 2002 was $12.6 million, an increase of $3.1 million, or 32.2%,
compared to $9.5 million in the third quarter of 2001. The net operating loss
in the ICD increased $0.7 million, or 8.6%, to $8.7 million in the third quarter
of 2002 from $8.0 million in the third quarter of 2001.
Interest expense decreased $0.1 million to $16.0 million for the third quarter
of 2002 compared to $16.1 million in the third quarter of 2001, or 34.1% and
34.4% of total revenues, respectively. The decrease is attributable to lower
weighted-average interest rates in the third quarter of 2002 compared to the
third quarter of 2001.
Other expense in the third quarter of 2002 was $3.4 million compared to other
income of $0.3 million in the third quarter of 2001. The difference is due
primarily to a $4.5 million loss realized in the third quarter of 2002 for a
decrease in the fair market value of an investment in US Unwired Inc. common
stock that was deemed to be other than temporary. No comparable expenses were
recognized in the third quarter of 2001.
The net loss in the third quarter of 2002 was $14.4 million compared to a net
loss of $13.6 million in the third quarter of 2001, a change of $0.8 million, or
6.0%. Net income in the LTD was $1.0 million for the three months ended
September 30, 2002 compared to net income of $1.1 million for the three months
ended September 30, 2001, a decrease of $0.1 million, or 9.9%. The net loss in
the ICD was $15.4 million for the three months ended September 30, 2002 compared
to a net loss of $14.7 million for the three months ended September 30, 2001, a
decrease of $0.7 million, or 4.7%. EBITDA increased $1.9 million to $17.3
million, or 36.9% of total revenues, in the third quarter of 2002 from $15.4
million, or 32.9% of total revenues, in the third quarter of 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.
19
Operating Activities. For the nine months ended September 30, 2002, we generated
net cash from operating activities of $15.0 million. For the same period in
2001, net cash used for operating activities was $40.9 million. For the first
nine months of 2002, our net loss before non-cash charges such as depreciation,
amortization, long-term incentive plan expenses and investment writedowns
reflect cash provided of $18.3 million compared to a use of cash of $12.0
million in the first nine months of 2001, a change of $30.3 million. The change
is primarily a result of a reduction in operating 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 $17.1 million higher in the first
nine months of 2001 compared to the first nine months of 2002. Also, in the
first nine 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 nine months ended September 30, 2002, we used net
cash for investing activities in the amount of $7.7 million compared to net cash
used for investing activities of $5.8 million in the nine month period ended
September 30, 2001. Net cash used in investing activities in the first nine
months of 2002 was attributable to the purchase of telephone plant and equipment
in the amount of $11.1 million. This was offset by $2.6 million in patronage
capital dividends received from the RTFC, $0.7 million from the net change in
RTFC subordinated capital certificates and $0.2 million from changes in other
assets. For the nine months ended September 30, 2001, we used net cash in
investing activities primarily for purchases of telephone plant and equipment of
$34.4 million. This was offset by proceeds of $13.5 million from the sale of
telephone plant and equipment, generated primarily from the sale of
approximately 4,280 access lines in Illinois, approximately $2.8 million in
patronage capital dividends received from the RTFC, and changes in other assets
of $12.1 million.
Financing Activities. For the nine months ended September 30, 2002, net cash
used in financing activities was $16.7 million and consisted primarily of
payments on long-term debt of $25.2 million, a redemption of Class A member's
interests of $2.0 million and a redemption of a minority interest in Coastal
Communications of $1.0 million. These uses were offset by proceeds from long-
term debt borrowings of $11.8 million. For the nine months ended September 30,
2001, net cash used for financing activities was $2.9 million and consisted
primarily of payments on long-term debt of $10.4 million, offset by long-term
debt borrowings of $7.0 million.
At September 30, 2002, we had negative working capital of $25.9 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 13 1/4% 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 September 30, 2002, we had approximately $445.4 million in term loans
outstanding with the RTFC. Of this amount, $427.1 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 $18.3
million in term loans have variable interest rates that range from 5.65% to
6.05% at September 30, 2002, or a weighted average interest rate of 5.9%.
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.
20
At September 30, 2002, we owned $46.1 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.
During the third quarter, we drew down the amount available under a $7.8 million
term loan with the RTFC. In accordance with the terms of the loan facility, we
purchased SCCs equivalent to 10% of the amount advanced under this term loan, or
approximately $778,000, using proceeds from the facility to finance the SCCs
purchase. Interest on this facility is payable at the lender's base rate plus
0.35% per annum, or 5.65% at September 30, 2002.
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 and 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 September 30, 2002.
We had advanced $21.0 million against this line of credit at September 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, which
was fully advanced in the fourth quarter of 2001, was repaid in the third
quarter of 2002 and is fully available to be drawn. The unsecured line of credit
bears interest at the RTFC base rate for a standard line of credit plus 100
basis points.
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, among other
things, restricted from declaring or paying dividends to its parent, Madison
River Holdings, limited in its ability to make intercompany loans or enter into
other affiliated transactions and 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 these
financial ratios. At September 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 September 30, 2002, the senior notes had a carrying value
of $197.7 million, which is net of a $2.3 million unamortized discount.
21
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
September 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.
Capital Requirements
Our business will require significant capital to fund working capital needs,
including our working capital deficit, 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 and growth 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 nine months ended September 30, 2002,
our capital expenditures were approximately $10.9 million. Our anticipated use
of cash for capital expenditures in 2002 is significantly less than 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
business plan for the ICD has significantly reduced its rate of growth.
Therefore, there is minimal demand to expand our network facilities. After
2002, the demand for expansion of our network facilities will be assessed, in
part, using factors such as the increase in demand for access lines and
communications services and the introduction of new technologies that will
provide an appropriate return on capital invested.
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.
22
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.
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,
including funding our negative working capital position, 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 which could
have a material adverse effect on our projected financial condition and results
of operations.
23
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.
In April 2002, the FASB issued Statement of Financial Accounting Standards 145,
"Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB 30. SFAS 145 also amends Statement 13 to
require certain modifications to capital leases be treated as a sale-leaseback
and modifies the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). SFAS 145 is effective for all fiscal years
beginning after May 15, 2002, and we will adopt it for 2003. We do not expect
the adoption of SFAS 145 to have a material impact on our results of operations
or financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
SFAS 146, which nullified EITF Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. We do not expect the adoption of SFAS 146 to
have a material impact on our results of operations or financial position.
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 September 30, 2002, we had fixed rate secured debt with the RTFC
of $427.1 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 $18.3 million in term notes and $21.0 million under a line of credit with
the RTFC that bear variable interest rates approximating a blended average rate
of 6.3%. A one percent change in the underlying interest rates for the variable
rate debt would have an immaterial impact of less than $400,000 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.
24
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's Chairman and Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of a date
within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company required to be included in the Company's
periodic filings under the Exchange Act.
Changes in Internal Controls
Since the Evaluation Date, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
Part II
Item 1. Legal Proceedings
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, MCI WorldCom claims that it delivered telecommunications
facilities and services to Madison River Communications, LLC for which it is
entitled to in excess of $1.8 million. The Company refutes these assertions, is
vigorously defending this matter and, if permitted by the Bankruptcy Court, may
seek to lift the automatic stay and file appropriate counterclaims against MCI
WorldCom.
25
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)
(b) Reports on Form 8-K
On August 5, 2002, we filed a Current Report on Form 8-K dated August 1, 2002
announcing our second quarter and six month operating and financial results for
the period ended June 30, 2002.
On August 14, 2002, we filed a Current Report on Form 8-K dated August 14, 2002
containing the certifications, accompanying the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2002, of the Registrant's
Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
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: November 14, 2002 /s/ PAUL H. SUNU
-----------------------------------
Name: Paul H. Sunu
Title: Managing Director, Chief
Financial Officer and Secretary
26
CERTIFICATIONS
--------------
I, J. Stephen Vanderwoude, the Chairman and Chief Executive Officer of Madison
River Capital, LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Madison River
Capital, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 By: /s/ J. STEPHEN VANDERWOUDE
----------------- -------------------------------------
J. Stephen Vanderwoude
Chairman and Chief Executive Officer
27
I, Paul H. Sunu, the Chief Financial Officer of Madison River Capital, LLC,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Madison River
Capital, LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002 By: /s/ PAUL H. SUNU
----------------- --------------------------------------
Paul H. Sunu
Chief Financial Officer
28
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)