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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 March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
----------------------
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 ___
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
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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 - March 31, 2003 (Unaudited) and
December 31, 2002 1
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited) - Three Months Ended March 31, 2003 and 2002 2
Condensed Consolidated Statement of Member's Capital (Unaudited) 3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 23
Certifications 24
i
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Balance Sheets
(Dollars in thousands)
March 31, 2003 December 31, 2002
-------------- -----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 17,613 $ 19,954
Accounts receivable, less allowance for uncollectible accounts
of $2,262 and $2,792 in 2003 and 2002, respectively 11,431 12,347
Receivables, primarily from interexchange carriers, less
allowance for uncollectible accounts of $1,419 and $1,693
in 2003 and 2002, respectively 7,416 7,796
Rural Telephone Finance Cooperative stock to be redeemed 672 2,039
Other current assets 3,441 5,550
-------- --------
Total current assets 40,573 47,686
-------- --------
Telephone plant and equipment 472,841 471,929
Less accumulated depreciation and amortization (124,036) (112,564)
-------- --------
Telephone plant and equipment, net 348,805 359,365
-------- --------
Other assets:
Rural Telephone Finance Cooperative stock, at cost 43,341 44,013
Goodwill, net of accumulated amortization of $41,259
in 2003 and 2002 366,332 366,332
Other assets 25,461 26,075
-------- --------
Total other assets 435,134 436,420
-------- --------
Total assets $ 824,512 $ 843,471
======== ========
Liabilities and member's capital
Current liabilities:
Accounts payable and accrued expenses $ 28,586 $ 37,361
Other current liabilities 7,380 7,543
Current portion of long-term debt 28,130 27,613
-------- --------
Total current liabilities 64,096 72,517
-------- --------
Noncurrent liabilities:
Long-term debt 626,759 633,955
Other liabilities 73,519 74,509
-------- --------
Total noncurrent liabilities 700,278 708,464
-------- --------
Total liabilities 764,374 780,981
Redeemable minority interest 5,000 5,000
Member's capital:
Member's interest 251,284 251,284
Accumulated deficit (196,006) (193,639)
Accumulated other comprehensive loss (140) (155)
-------- --------
Total member's capital 55,138 57,490
-------- --------
Total liabilities and member's capital $ 824,512 $ 843,471
======== ========
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 March 31,
----------------------------
2003 2002
---------- ----------
Operating revenues:
Local service $ 32,986 $ 34,646
Long distance service 4,140 3,803
Internet and enhanced data service 4,340 3,407
Transport service 666 836
Miscellaneous telecommunications service and equipment 3,008 3,233
-------- --------
Total operating revenues 45,140 45,925
-------- --------
Operating expenses:
Cost of services 11,036 14,415
Depreciation and amortization 12,354 12,309
Selling, general and administrative expenses 9,294 10,327
-------- --------
Total operating expenses 32,684 37,051
-------- --------
Net operating income 12,456 8,874
Interest expenses (15,669) (16,076)
Other income, net 500 557
-------- --------
Loss before income taxes and minority interest expense (2,713) (6,645)
Income tax (benefit) expense 346 (1,470)
-------- --------
Loss before minority interest expense (2,367) (8,115)
Minority interest expense - (275)
-------- --------
Net loss (2,367) (8,390)
Other comprehensive (loss) income:
Unrealized losses on marketable equity securities in quarter (198) (694)
Reclassification adjustment for realized losses included in net loss 213 -
-------- --------
Other comprehensive (loss) income 15 (694)
-------- --------
Comprehensive loss $ (2,352) $ (9,084)
======== ========
See Notes to Condensed Consolidated Financial Statements.
2
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statement of Member's Capital
(Dollars in thousands)
Accumulated
Other
Member's Accumulated Comprehensive
Interest Deficit Income (Loss) Total
---------- ----------- ------------- ---------
Balance at December 31, 2002 $ 251,284 $ (193,639) $ (155) $ 57,490
Net loss - (2,367) - (2,367)
Other comprehensive loss:
Unrealized losses on marketable
equity securities - - (198) (198)
Reclassification adjustment for realized
losses included in net loss - - 213 213
--------- ---------- ------- --------
Balance at March 31, 2003 (unaudited) $ 251,284 $ (196,006) $ (140) $ 55,138
========= ========== ======= ========
See Notes to Condensed Consolidated Financial Statements.
3
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Operating activities
Net cash provided by (used for) operating activities $ 3,512 $ (1,343)
------- -------
Investing activities
Purchases of telephone plant and equipment (1,508) (3,283)
Redemption of Rural Telephone Finance Cooperative stock, net 2,039 1,524
Change in other assets 344 (983)
------- -------
Net cash provided by (used for) investing activities 875 (2,742)
------- -------
Financing activities
Redemption of member's interest - (2,000)
Proceeds from long-term debt - 4,000
Payments on long-term debt (6,728) (4,970)
Change in other long-term liabilities - (3)
------- -------
Net cash used for financing activities (6,728) (2,973)
------- -------
Net decrease in cash and cash equivalents (2,341) (7,058)
Cash and cash equivalents at beginning of year 19,954 21,606
------- -------
Cash and cash equivalents at end of first quarter $ 17,613 $ 14,548
======= =======
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 is an established
rural local exchange company providing integrated telecommunications services
to business and residential customers in the Gulf Coast, Mid-Atlantic and
Midwest regions of the United States. Its integrated service offerings
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 its
subsidiary, Gulf Communications, LLC.
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 206,240 voice access and digital
subscriber line ("DSL") connections as of March 31, 2003. 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 served approximately
16,630 voice access and high speed data connections at March 31, 2003.
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, 2002.
Such financial statements are included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002 filed with the Securities
and Exchange Commission on March 31, 2003. The amounts presented in the
condensed consolidated balance sheet as of December 31, 2002 were derived
from the audited financial statements included in the Form 10-K. 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 period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
Certain amounts in the March 31, 2002 condensed consolidated financial
statements have been reclassified to conform to the March 31, 2003
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:
March 31, December 31,
2003 2002
--------- ------------
(in thousands)
Land, buildings and general equipment $ 58,104 $ 58,144
Central office equipment 156,259 155,350
Poles, wires, cables and conduit 226,430 225,932
Leasehold improvements 2,533 2,533
Software 16,893 16,893
Construction-in-process 12,622 13,077
--------- ---------
Total telephone plant and equipment $ 472,841 $ 471,929
========= =========
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement of Financial Accounting Standards
145, Rescission of FASB Statements Nos. 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 No. 4. Extraordinary treatment will be
required for certain extinguishments as provided in APB 30. SFAS 145 also
amends Statement No. 13 to require certain modifications to capital leases be
treated as a sale-leaseback and modified the accounting for sub-leases when
the original lessee remains a secondary obligor (or guarantor). SFAS 145,
effective for all fiscal years beginning after May 15, 2002, was adopted by
the Company on January 1, 2003. The adoption of SFAS 145 did not have a
material impact on the Company's results of operations, financial position or
cash flows.
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.
The Company adopted SFAS 146 effective January 1, 2003 and does not expect
the adoption of SFAS 146 to have a material impact on the Company's results
of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). The Interpretation requires
recognition of liabilities at their fair value for newly issued guarantees
and certain other disclosures. The Company adopted FIN 45 beginning in 2003
and it did not have a material impact on its financial position, results of
operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is
achieved through means other than voting rights, defined as variable interest
entities, or VIEs, and to determine when and which business enterprise should
consolidate the VIE as the "primary beneficiary". This new model applies when
either (1) the equity investors, if any, do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without additional financial support. In addition, FIN 46
requires additional disclosures. This interpretation applies immediately to
VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. It is effective for the first fiscal
year or interim period beginning after June 15, 2003, for VIEs in which an
enterprise holds a variable interest that it acquired before February 1,
2003. The Company is currently assessing the impact of FIN 46 on our
investment in unconsolidated subsidiaries.
6
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
5. RESTRUCTURING CHARGE
In the fourth quarter of 2001, a subsidiary of the Company, MRC, recorded a
$2.8 million restructuring charge associated with the subsidiary's decision
to reduce its sales and marketing efforts and eliminate redundant support
services. The charge was recognized in accordance with EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
amounts recorded consist primarily of the costs associated with future
obligations on non-cancelable leases for closed sales offices, redundant
network operations centers and future switching facilities, net of any
estimated sublease income, losses from the abandonment of fixed assets and
leasehold improvements associated with those leased facilities and legal
related expenses.
As of March 31, 2003, the following amounts were recorded:
2003
Balance at first quarter Balance at
December 31, 2002 payments March 31, 2003
----------------- ------------- --------------
(in thousands)
Future lease obligations $ 788 $ 116 $ 672
Legal related expenses 31 - 31
---- ---- ----
$ 819 $ 116 $ 703
==== ==== ====
In the third quarter of 2002, in completing the development of the ICD as a
true edge-out CLEC, the Company realigned each of the ICD's operating regions
in North Carolina, Illinois and New Orleans under the Company's rural ILECs
in those respective regions. The rural ILECs, therefore, assumed
responsibility for managing and directing the ICD's operations in those
regions. Correspondingly, the Company recognized a restructuring charge of
$2.8 million related to the realignment for the elimination of redundant
management, marketing and support services and the structuring of a more
efficient network. Of the restructuring charge, MRC recognized $2.7 million
and MRM recognized $0.1 million. The charge was recognized in accordance
with EITF 94-3. 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, expenses associated with the elimination of thirty-four
employees, primarily in the ICD, and related expenses.
As of March 31, 2003, the following amounts were recorded related to this
restructuring charge:
2003
Balance at first quarter Balance at
December 31, 2002 payments March 31, 2003
----------------- ------------- --------------
(in thousands)
Future lease obligations $ 1,345 $ 26 $ 1,319
Telephone plant and equipment 158 - 158
Employee separation expenses 77 4 73
------- ----- -------
$ 1,580 $ 30 $ 1,550
======= ===== =======
The remaining liability as of March 31, 2003 is recorded as $0.9 million in
accrued expenses and $1.3 million in other long-term liabilities.
7
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
6. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt and lines of credit outstanding consist of the following at:
March 31, December 31,
2003 2002
---------- ------------
(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). $ 11,893 $ 12,103
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). 6,032 6,138
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at the
RTFC's base rate plus 0.5% (5.75% at March 31, 2003). 967 983
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). 104,148 105,780
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (6.00% at March 31, 2003). 5,641 5,722
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). 69,034 70,684
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (6.00% at March 31, 2003). 3,596 3,648
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). 123,827 125,561
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% (5.60% at March 31, 2003). 7,778 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). 100,493 101,734
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% (6.25% at March 31, 2003). 21,000 21,000
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. 2,320 2,326
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 $2,233 and $2,282, respectively. 197,767 197,718
Other 393 393
-------- --------
654,889 661,568
Less current portion 28,130 27,613
-------- --------
$ 626,759 $ 633,955
======== ========
8
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
6. 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 revenues 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, restricted in its ability to (i) declare or pay dividends to MRH, its
parent, under specified circumstances, (ii) limited in its ability to make
intercompany loans or enter into other affiliated transactions, (iii) sell
assets and make use of the proceeds, and (iv) incur 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 March 31, 2003 and December 31, 2002,
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 March 31, 2003, MRLTDF had
drawn down $21.0 million under this line of credit with the remaining $10.0
million fully available to MRLTDF.
The Company also has a $10.0 million unsecured line of credit that is fully
available to Coastal Utilities, Inc., a subsidiary of CCI, 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.
Under the terms of the indenture that governs the senior notes, the Company
must comply with certain financial and administrative covenants. The Company
is, among other things, restricted in its ability to (i) incur additional
indebtedness, (ii) pay dividends, (iii) redeem or repurchase equity
interests, (iv) make various investments or other restricted payments, (v)
create certain liens or use assets as security in other transactions, (vi)
sell certain assets or utilize certain asset sale proceeds, (vii) merge or
consolidate with or into other companies and (viii) enter into transactions
with affiliates. At March 31, 2003, the Company was in compliance with the
terms of the senior notes indenture.
7. 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 for each segment for the
three month periods ended March 31, 2003 and 2002:
Three month period ended
--------------------------
March 31, March 31,
2003 2002
--------- ---------
(in thousands)
Total revenues:
LTD $ 42,203 $ 42,802
ICD 3,616 3,963
------- -------
45,819 46,765
Less intersegment revenues (679) (840)
------- -------
Total reported revenues $ 45,140 $ 45,925
======= =======
9
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
7. SEGMENT INFORMATION, Continued
Three month period ended
--------------------------
March 31, March 31,
2003 2002
--------- ---------
(in thousands)
Net operating income (loss):
LTD $ 15,031 $ 13,043
ICD (2,575) (4,169)
------- -------
Total reported net operating
income (loss) $ 12,456 $ 8,874
======= =======
At March 31, 2003 and December 31, 2002, total assets by segment, net of
intersegment investments and other intersegment balances, were as follows:
March 31, December 31,
2003 2002
--------- ------------
(in thousands)
Total assets:
LTD $ 856,033 $ 869,730
ICD 452,802 468,172
---------- ----------
1,308,835 1,337,902
Less intersegment assets (484,323) (494,431)
---------- ----------
Total reported assets $ 824,512 $ 843,471
========== ==========
8. PENSION CURTAILMENT
During the first quarter of 2003, the Company notified its employees who are
not members of bargaining units that the accrual of benefits in the non-
contributory, defined benefit pension plan, sponsored by MRTC, in which the
employees participated was frozen effective February 28, 2003. As a result
of this action, Statement of Financial Accounting Standards No. 88,
Employer's Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits became effective. The curtailment
resulted in an immediate net gain of $2.8 million, of which $2.7 million was
recognized as a reduction of pension expenses in the first quarter and $0.1
million as a reduction of capital expenditures. The impact of the gain will
be allocated between the Company and its subsidiaries, who also participate
in the plan. Although the pension plan is frozen, the Company has a
continued obligation to fund the plan and will continue to recognize an
annual net periodic pension expense while the plan is still in existence.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking statements"
that involve risks and uncertainties. Forward-looking statements generally
can be identified by the use of forward-looking words such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "plan," "seek" or "believe," or
by discussion of strategy that involves risks and uncertainties. We believe
that the expectations reflected in such forward-looking statements are
accurate. However, we cannot assure you that such expectations will occur.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including, but not
limited to:
* the competition in, and the financial stability of, the
telecommunications industry;
* the passage of legislation, court decisions or regulatory changes
adversely affecting the telecommunications industry;
* our ability to repay our outstanding indebtedness;
* our ability to raise additional capital on acceptable terms and on a
timely basis; and
* the advent of new technology.
For more information, see the "Risk Factors" section beginning on page 16 of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002
(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.
This Form 10-Q contains certain discussions regarding EBITDA that is computed
as operating income (loss) before depreciation and amortization. This
measure is a non-GAAP financial measure, defined as a numerical measure of a
Registrant's financial performance that excludes or includes amounts so as to
be different than the most directly comparable measure calculated and
presented in accordance with GAAP in the statement of operations, the balance
sheet or the statement of cash flows of the Registrant. Pursuant to the
requirements of Regulation G, we have provided a reconciliation of EBITDA to
its most directly comparable GAAP financial measure, which we consider to be
operating income, for the quarters ended as follows:
March 31, March 31,
2003 2002
--------- ---------
Operating income $ 12,456 $ 8,874
Depreciation and amortization 12,354 12,309
-------- --------
EBITDA $ 24,810 $ 21,183
======== ========
Although EBITDA is a non-GAAP financial measure, we consider this measure to
be a key operating metric of our business. We use this measure in our
planning and budgeting processes, to monitor and evaluate our financial and
operating results and to measure the performance of our separate divisions.
In computing this measure, we exclude depreciation and amortization from
operating income as these expenses do not require cash from operations to
settle.
We also believe that EBITDA is useful to investors because it provides an
analysis of financial and operating results using the same measures that we
use in evaluating our company. We expect that EBITDA provides investors with
the means to evaluate our financial and operating results against other
companies within the telecommunications industry. In addition, we believe
that EBITDA is meaningful to investors in evaluating our ability to meet our
future debt service requirements and fund our capital expenditures and
working capital requirements. Our calculation of EBITDA may not be
consistent with the calculation of EBITDA by other companies in the
telecommunications industry. EBITDA is not a measurement of financial
performance under GAAP and should not be considered as an alternative to
operating income (loss) as an indicator of our operating performance or cash
flows from operating activities as a measure of liquidity or any other
measures of performance derived in accordance with GAAP. In addition, EBITDA
does not take into account changes in certain assets and liabilities,
interest expense or income taxes that can affect our financial results and
cash flows.
References in this Form 10-Q to "we," "us" and "our" mean Madison River
Capital, LLC and its subsidiaries.
11
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 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, subscriber line charges and 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.
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 March 31, 2003, we had approximately
222,870 voice, DSL and high speed data 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 its markets are in
territories that are 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. The management and
operating responsibility for the ICD's operating regions is provided by the
managers 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 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
five 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, we are not 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, DSL
and high speed access 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 to develop these established markets with successful
marketing of vertical services and DSL products and is controlling expenses
through the use of business process management tools and other methods. In
the ICD, our strategy is focused on developing a profitable customer base and
maintaining sustainable positive cash flow from this division. The ICD has
established more rigorous criteria for evaluating new customers and the
desirability of renewing existing contracts. The ICD renewed approximately
84% of expiring contracts during the first quarter of 2003.
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 business and residential customers in our
established ILEC markets. For the quarter ended March 31, 2003, approximately
92.0% of our operating revenues came from the LTD and 8.0% from the ICD. For
the year ended December 31, 2002, approximately 91.7% of our operating
revenues came from the LTD and 8.3% from the ICD. We intend to focus on
continuing 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. 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. We do not anticipate significant growth in
revenues for the ICD as we continue to focus on a business plan that provides
sustainable positive cash flows in that division. 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 primarily continue to
support our retail Internet service business.
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. For the
quarter ended March 31, 2003, the LTD finished with approximately 188,300
voice access lines in service, which is a decrease of 7,390 voice access
lines from approximately 195,690 voice access lines in service at March 31,
2002. We have seen the predominant share of voice access line losses in our
Illinois and Georgia operations which accounted for approximately 85% of the
decrease. A persistent weakness in the local economies that Gallatin River
Communications in Illinois serves has led to the decline in voice access
lines in those markets. At Coastal Utilities in Georgia, the loss in voice
access lines is attributable to the impact of the 3rd Infantry Division's
full troop deployment from Fort Stewart, Georgia. Although the number of
access lines directly related to Fort Stewart is not material, the effect on
the local community from the deployment has affected our operations. The
full extent of the impact is difficult to predict and will vary depending on,
among other factors, the duration of the troop deployment. However, we
estimate that had the troops been deployed for all of 2002, our EBITDA would
have been lower by approximately $2.0 million, our net loss would have been
greater by approximately $1.2 million and our capital expenditures would have
been reduced by approximately $0.5 million.
13
The number of DSL subscribers we serve in the LTD continues to grow and has
reflected some increases in the sequential rate during the past two quarters.
We believe we have been successful in addressing competition from new high
speed Internet access product introductions, particularly by cable operators,
in our markets that occurred during 2002 and slowed the sequential growth of
our DSL product. We believe that our execution of our strategy and our
ability to deliver a quality DSL product in a timely manner has made us the
provider of choice in our markets. Although we cannot be certain, we
anticipate that our DSL product will continue to provide a source of
increasing revenues for the LTD. As of March 31, 2003, we had approximately
17,940 DSL connections in service, an increase of approximately 4,460
connections from 13,480 DSL connections at March 31, 2002. Our penetration
rate for installed DSL connections reached 9.5% of our LTD voice access lines
at March 31, 2003.
We have also been successful in growing our revenues in the LTD from
providing long distance, dial-up Internet and vertical services to our
customers. At March 31, 2003, we had approximately 93,230 long distance
accounts and 26,920 dial-up Internet subscribers. In addition, our
penetration rates for vertical services such as voicemail, caller
identification, call waiting and call forwarding continued to increase during
2002.
In the near term, we anticipate that revenues from the ICD will remain fairly
comparable to current levels. At March 31, 2003, the ICD had approximately
15,910 voice access lines and 720 high speed data connections in service. At
December 31, 2002, the ICD served approximately 16,340 voice access lines and
710 high speed data connections. We are focusing our efforts on only adding
customers that meet certain profitability criteria and on increasing our
profitability and margins for services provided to existing customers when
renegotiating their contracts at expiration. For the first quarter of 2003,
the ICD was successful in renewing approximately 84% of its expiring
contracts with monthly recurring rates that have increased approximately 36%.
In 2002, the ICD was successful in renewing 86% of expiring contracts with a
32% increase in monthly recurring revenues.
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 our revenues,
EBITDA and cash flows. Without additional clarification or regulatory
changes that recognize the additional financial burdens placed on local
exchange carriers, we may be unable to appropriately protect ourselves
against the financial impact on revenues or results of operations and cash
flows associated with any future bankruptcies of interexchange carriers or
other telecommunication providers.
Expenses
The LTD historically has reported fairly consistent operating expenses from
period to period. However, as we continued to integrate our ILEC
acquisitions and implement business process management tools to better manage
expenses, we have seen our operating expenses in our ILEC operations
decrease. In addition, in 2002, the adoption of a new accounting standard
stopped the amortization of our goodwill related to our acquisitions which
resulted in a significant decrease in our operating expenses. Although we
will seek to maintain the expense reductions that we have achieved in the LTD
and, with additional improvements, potentially gain some further cost
savings, we expect these decreases in expenses will be realized at a slower
sequential rate than we have recently experienced.
During the past eighteen months, the ICD has been focused on aligning its
organization with its market opportunities in order to develop a business
plan that will allow it to achieve sustainable positive cash flow. An
important part of this strategy was the decision, in the fourth quarter of
2001, to slow the rate at which the ICD was adding new voice and high speed
data connections. 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. In addition, certain fixed
facility and overhead costs were reduced or eliminated. In addition, the ICD
focused on the grooming of its network to reduce the costs of delivering
services to its customers. The ICD reworked its network, replacing more
expensive special access circuits with circuits provided for in our
interconnection agreements with the incumbent local exchange carriers.
14
In the third quarter of 2002, we completed the transformation of the ICD as a
true edge-out CLEC by placing the responsibility for managing and operating
the ICD's markets with the managers of our respective ILECs which allowed for
additional reductions in operating expenses. As a result of these changes in
the ICD's business, we saw a significant decrease in the ICD's expenses in
2002. Based on our current business model, we expect that the ICD's
operating expenses should remain relatively consistent with current levels
achieved in the fourth quarter of 2002 and, barring any unforeseen events,
that any further decreases, if any, should be minimal.
Our primary operating expenses consist of cost of services, selling, general
and administrative expenses and depreciation and amortization.
Cost of services
Our cost of services includes:
* plant specific costs and expenses, such as network and general support
expense, central office switching and transmission expense, information
origination/termination expense and cable and wire facilities expense;
* plant nonspecific costs, such as testing, provisioning, network,
administration, 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; and
* the cost of collocating in ILEC central offices.
We have entered into interconnection agreements with BellSouth, Verizon,
Ameritech, Sprint and SBC which allow, among other things, the ICD to lease
unbundled network elements from these ILECs, at contracted rates contained in
the interconnection agreements. The ICD uses these network elements to
connect its customers with its network. Other interconnection agreements may
be required by the ICD. In addition, the ICD currently has the necessary
certifications to operate in the states where it has customers.
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. This agreement terminates in
the second quarter of 2003, but automatically renews for 90 day periods
unless either party cancels the contract upon providing 90 days written
notice. We are currently procuring services for future periods, and, at this
time, the costs and related terms under which we purchase long distance
telecommunications services for resale have not been determined. However, we
do not expect any material, adverse changes from any changes in our new
service contract.
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 direct sales
people. We market our consumer services primarily through our customer sales
and service representatives. We offer competitive compensation packages
including sales commissions and incentives.
15
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.
Depreciation and amortization expenses
We recognize depreciation expense for our telephone plant and equipment that
is in service and is used in our operations, excluding land which is not
depreciated. Depreciation is calculated using composite straight-line rates.
As we are a regulated entity, such rates are approved by the public utility
commissions in the states where we have regulated telephone plant in service.
Amortization expense is recognized primarily for our intangible assets
considered to have finite lives on a straight-line basis.
Results of Operations
Quarter Ended March 31, 2003 compared to Quarter Ended March 31, 2002
Total revenues for the quarter ended March 31, 2003 were $45.1 million, a
decrease of $0.8 million, or 1.7%, from total revenues of $45.9 million for
the quarter ended March 31, 2002. The decrease is attributable to a $0.4
million decrease in revenues in the LTD and in the ICD. For the first
quarter of 2003, the LTD reported revenues of $41.5 million, a decrease of
$0.4 million, or 1.0%, from revenues in the first quarter of 2002 of $41.9
million. The decrease in revenues consists primarily of a $1.3 million
decrease in local service revenues offset by a $0.9 million increase in
Internet and enhanced data revenues. Local service revenues reflect the
impact of the decrease in voice access lines and lower network access
revenues in the first quarter of 2003 compared to the same quarter in the
prior year. Voice access lines at March 31, 2003 were lower by approximately
7,390 lines, or 3.8%, from voice access lines at March 31, 2002. The increase
in Internet and enhanced data revenues are primarily the result of an
increase in DSL connections. DSL connections at March 31, 2003 increased
approximately 4,460 connections, or 33.1%, from DSL connections at March 31,
2002. The ICD's revenues in the first quarter of 2003 were $3.6 million, a
decrease of $0.4 million, or 9.1%, from revenues of $4.0 million in the first
quarter of 2002. The decrease is attributed primarily to a decrease in the
number of voice access lines in service during the first quarter of 2003
compared to the same period in 2002. The ICD finished the first quarter of
2003 with approximately 15,910, or 3.0% fewer voice access lines in service
than it had at the end of the first quarter of 2002. In addition, the ICD
anticipates losing a customer in North Carolina with approximately 800 lines
and approximately $24,000 in monthly recurring revenues in the second quarter
of 2003 due to a merger.
Revenues from voice services, which are comprised of local, network access
and long distance services, as a percentage of total revenues, were
approximately 82.2% and 83.7% for the quarters ended March 31, 2003 and 2002,
respectively. The LTD and the ICD provided approximately 92.0% and 8.0% of
total revenues, respectively.
Total operating expenses decreased $4.4 million from $37.1 million, or 80.7%
of total revenues in the first quarter of 2002, to $32.7 million, or 72.4% of
total revenues in the first quarter of 2003. The decrease is primarily
attributable to expense reductions in both the LTD and the ICD.
Approximately $2.7 million of the decrease is the result of a one-time, non-
cash gain from a pension curtailment in the first quarter of 2003. Accrual
of benefits by qualified plan participants in our non-contributory, defined
benefit pension plan was frozen in the first quarter of 2003. As a result,
Statement of Financial Accounting Standards No. 88, Employer's Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits became effective. The pension curtailment resulted in
an immediate net gain of $2.8 million, of which $2.7 million resulted in a
reduction in pension expenses and $0.1 million went to reduce capital
additions. The gain was recognized in the first quarter of 2003 and
allocated between the subsidiaries who participate in the plan. Although
further accrual of benefits by plan participants is frozen, we have a
continuing obligation to fund the plan and continue to recognize net periodic
pension expense. Approximately $2.1 million of the net gain was recognized
as a reduction of pension expenses in the LTD and $0.6 million as a reduction
of pension expenses in the ICD. If we exclude the impact of the pension
curtailment gain, operating expenses in the first quarter of 2003 would have
decreased $1.7 million, or 4.4%, compared to the first quarter of 2002.
16
In the ICD, operating expenses in the first quarter of 2003 were $6.2
million, which is $2.0 million, or 24.1%, lower than operating expenses of
$8.2 million in the first quarter of 2002. Approximately $0.6 million of the
decrease is attributed to the impact of the pension curtailment gain
discussed above. The remainder of the decrease in operating expenses
reflects the ICD's strategy to achieve positive cash flow with a slower
targeted growth rate and significant cost reductions as well as the
realignment of its operations under the responsibility of the LTD. The LTD's
operating expenses in the first quarter of 2003 were $26.5 million, which is
$2.4 million, or 8.3%, lower than operating expenses of $28.9 million in the
first quarter of 2002. Approximately $2.1 million of the decrease is the
result of the impact of the pension curtailment gain. The remaining decrease
is the result of benefits gained from business process management
enhancements and tighter controls on operating expenses partially offset by a
$1.8 million increase in non-cash, long-term incentive plan expenses.
Cost of services, as a percentage of total revenues, decreased from 31.4% in
the first quarter of 2002 to 24.5% in the first quarter of 2003, or 26.5%
when we exclude the impact of the pension curtailment. Selling, general and
administrative expenses, as a percentage of total revenues, decreased from
22.5% in the first quarter of 2002 to 20.6% in the first quarter of 2003, and
increased to 24.6% when we remove the effect of the pension curtailment.
Depreciation and amortization expense, as a percentage of total revenues,
increased from 26.8% in the first quarter of 2002 to 27.4% in the first
quarter of 2003.
Net operating income increased $3.6 million, or 40.4%, from $8.8 million in
the first quarter of 2002, or 19.3% of total revenues to $12.4 million in the
first quarter of 2003, or 27.6% of total revenues. The ICD's net operating
loss decreased $1.6 million, from a net operating loss of $4.2 million in the
first quarter of 2002 to a net operating loss of $2.6 million in the first
quarter of 2003. The LTD's net operating income in the first quarter of 2002
was $13.0 million compared to $15.0 million in the first quarter of 2003, an
increase of $2.0 million, or 15.2%. Lower operating expenses accounted for
the improvement in each division.
Interest expense decreased $0.4 million from $16.1 million, or 35.0% of total
revenues in the first quarter of 2002, to $15.7 million, or 34.7% of total
revenues in the first quarter of 2003. The decrease is attributed to a lower
weighted average balance of long-term debt outstanding in the first quarter
of 2003 compared to the first quarter of 2002. In the near term, we
anticipate our interest expense to decrease further due to expiration of the
fixed rates in April 2003 on two of our term loans with the Rural Telephone
Finance Cooperative. The first note, with a balance of $6.0 million at March
31, 2003 and bearing a fixed interest rate prior to expiration of 8.15%
converted to the RTFC's base rate plus 50 basis points, or approximately
5.75% currently. The second note, with a balance of $69.0 million at March
31, 2003 and bearing a fixed rate of 8.4% before the rate expiration
converted to the RTFC's base rate plus 75 basis points, or approximately 6.0%
currently. We estimate the cash interest savings to be approximately $1.1
million in 2003 if the RTFC rates remain at their current levels.
Other income was $0.5 million in the first quarter of 2003 compared to $0.6
million in the first quarter of 2002, a decrease of $0.1 million.
Net loss decreased $6.0 million from $8.4 million, or 18.3% of total
revenues, in the first quarter of 2002, to $2.4 million, or 5.2% of total
revenues, in the first quarter of 2003, as a result of the factors discussed
above. EBITDA increased $3.6 million from $21.2 million, or 46.1% of total
revenues, in the first quarter of 2002, to $24.8 million, or 55.0% of total
revenues, in the first quarter of 2003. The improvement in net loss and
EBITDA is attributed to lower expenses in both the LTD and the ICD which
include the gain from the pension curtailment.
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
interests, 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.
17
Operating Activities. For the quarter ended March 31, 2003, we generated cash
from operating activities of $3.5 million and for the quarter ended March 31,
2002, we used cash in operating activities of $1.3 million. The change is
attributable primarily to a lower net loss of $6.0 million in the first
quarter of 2003 compared to the first quarter of 2002. This was offset
partially by an increase of $1.5 million to $8.5 million in net cash used in
operating activities for changes in operating assets and liabilities in the
first quarter of 2003 from $7.0 million in the first quarter of 2002 .
Investing Activities. For the quarter ended March 31, 2003, net cash provided
by investing activities was $0.9 million and consisted primarily of $2.0
million in cash received from the redemption of subordinated capital
certificates by the RTFC and was partially offset by the purchase of
telephone plant and equipment in the amount of $1.5 million. For the quarter
ended March 31, 2002, net cash used for investing activities was $2.7 million
and was used primarily for the purchase of telephone plant and equipment in
the amount of $3.3 million.
Financing Activities. For the quarter ended March 31, 2003, net cash used in
financing activities was $6.7 million and consisted of payments on long-term
debt. For the quarter ended March 31, 2002, net cash used in financing
activities was $3.0 million and consisted primarily of payments on long-term
debt of $5.0 million and redemption of our equity interests from our parent,
MRTC, of $2.0 million. This was offset by the proceeds from long-term debt
of $4.0 million.
At March 31, 2003, we had negative working capital of $23.5 million compared
to negative working capital of $24.8 million at December 31, 2002. The
following table contains a summary of our material contractual cash
obligations as of March 31, 2003:
Payments Due by Period
Total Year 1 Years 2-3 Years 4-5 Thereafter
--------------------------------------------------------------------------
Long-term debt $ 654,889 $ 28,130 $ 82,834 $ 71,653 $ 472,272
Operating leases 10,634 2,174 3,961 2,624 1,875
Redemption of minority
interest 5,000 1,000 2,000 2,000 -
--------- --------- --------- --------- ---------
Material contractual
cash obligations $ 670,523 $ 31,304 $ 88,795 $ 76,277 $ 474,147
========= ========= ========= ========= =========
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 outstanding $200.0 million in 13 1/4% senior notes 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 March 31, 2003, we had approximately $433.4 million in term loans
outstanding with the RTFC. Of this amount, $415.4 million bear 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 in April 2003 up through April 2005, depending on the terms of the
note, at which time the note will convert to a variable rate. Upon
expiration of these fixed interest rates, we have the ability to allow the
rates to remain variable or to fix the interest rates at the RTFC's then-
prevailing base interest rate for long-tem debt with similar maturities. The
remaining $18.0 million in term loans have variable interest rates that range
from 5.6% to 6.0% at March 31, 2003, or a weighted average interest rate of
5.9%. As discussed previously, the fixed interest rates expired on two of
our notes in April 2003. The first note, with a balance of $6.0 million at
March 31, 2003 and bearing a fixed interest rate of 8.15% prior to expiration
converted to the RTFC's base rate plus 50 basis points, or approximately
5.75% currently. The second note, with a balance of $69.0 million at March
31, 2003 and carrying a fixed rate of 8.4% before the rate expiration
converted to the RTFC's base rate plus 75 basis points, or approximately 6.0%
currently. If we elect to keep the rates on these notes variable in the near
term, we estimate the cash interest savings to be approximately $1.1 million
in 2003 if the RTFC rates remain at their current levels.
18
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 held to a balance equivalent to 10% of the outstanding balance
remaining on all of the term loans.
At March 31, 2003, we owned $44.0 million in SCCs. The SCCs are redeemed for
cash on an annual basis, at par, in an amount equivalent to 10% of the term
loan principal that was repaid in the prior year. In March 2003 and 2002,
the RTFC redeemed approximately $2.0 million and $1.5 million, respectively,
of our SCCs.
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 6.25% at March 31,
2003. We had advanced $21.0 million against this line of credit at March 31,
2003, 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. Under the terms of the unsecured revolving line of credit agreement, we
must repay all amounts advanced under this 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 is
fully available to be drawn and 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, MRLTDF. 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 debt 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, MRH,
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 line of
credit facilities discussed above may only be available to MRLTDF and its
subsidiaries and not to us or our other subsidiaries to fund obligations.
MRLTDF is required to test its compliance with certain financial ratios on an
annual basis. At March 31, 2003, MRLTDF was in compliance with the terms of
its loan agreement with the RTFC.
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 March 31, 2003, the senior notes had a
carrying value of $197.8 million, which is net of a $2.2 million unamortized
discount.
Under the terms of the indenture, we must comply with certain financial and
administrative covenants. Among other things, we are restricted in our
ability to incur additional indebtedness, pay dividends, redeem or repurchase
equity interests, make various investments or other restricted payments,
create certain liens or use assets as security in other transactions, sell
certain assets or utilize certain asset sale proceeds, merge or consolidate
with or into other companies or enter into transactions with affiliates. At
March 31, 2003, we were in compliance with the terms of our senior notes
indenture.
19
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
We will require significant capital to fund our 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:
* scheduled principal and interest payments on our long-term debt;
* the maintenance and growth of our current network infrastructure;
* the maintenance, upgrade, development and integration of operating
support systems and other automated back office systems;
* 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 2003
will be less than $14.0 million. For the first quarter ended March 31, 2003,
our capital expenditures were approximately $1.5 million. Our use of cash
for capital expenditures in the first quarter of 2003 and in 2002 was
significantly less than we have incurred in prior years. This is a result of
several factors. First, we invested a significant amount in capital
expenditures during the previous 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 2003 will be directed toward maintaining our existing
facilities. Second, we have experienced slower growth in recent quarters 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. During 2003, 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 CCI acquisition in March 2000, we
issued to the former shareholders of Coastal Utilities 300 shares of Series A
non-voting common stock and 300 shares of Series B non-voting common stock of
CCI in the face amount of $10.0 million and $5.0 million, respectively. The
Series A and Series B stock had put and call features that were defined
pursuant to the terms of a shareholders agreement and were exercisable by the
holders and CCI.
On April 10, 2002, MRTC, our parent, announced the completion of an agreement
with the former shareholders that, 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 MRTC's Operating Agreement, at any time on or after
January 16, 2006, certain members may require MRTC to purchase all of their
member units at an amount equal to the fair market value of the units. We may
be required to fund this obligation of our parent company.
20
Based on our business plan, we currently project that available borrowings
under our credit facilities, cash and investments on hand and our cash flow
from operations will be adequate to meet our foreseeable operational
liquidity needs, 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 maintaining a net positive cash flow in our ICD
operations;
* the demand for our services in our existing markets;
* our ability to acquire, maintain, develop, upgrade 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 or making intercompany loans and
investments, and those subsidiaries are likely to continue to be subject to
such restrictions and prohibitions for the foreseeable future. In addition,
future agreements that our subsidiaries may enter into governing the terms of
indebtedness may restrict our subsidiaries' ability to pay dividends or
advance cash in any other manner 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 provide adequate working capital, service
our indebtedness or make anticipated capital expenditures. Failure to obtain
adequate financing, if necessary, could require us to significantly reduce
our operations or level of capital expenditures which could have a material
adverse effect on our projected financial condition and results of
operations.
Recent Accounting Pronouncements
In April 2002, the FASB issued Statement of Financial Accounting Standards
145, Rescission of FASB Statements Nos. 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 No. 4. Extraordinary treatment will be
required for certain extinguishments as provided in APB 30. SFAS 145 also
amends Statement No. 13 to require certain modifications to capital leases be
treated as a sale-leaseback and modified the accounting for sub-leases when
the original lessee remains a secondary obligor (or guarantor). SFAS 145 was
effective for all fiscal years beginning after May 15, 2002. We adopted SFAS
145 effective January 1, 2003 and adoption did not have a material impact on
our financial position, results of operations or cash flows.
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 SFAS 146 were effective for
exit or disposal activities that were initiated after December 31, 2002. We
do not expect the adoption of SFAS 146 to have a material impact on our
financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). The Interpretation requires
recognition of liabilities at their fair value for newly issued guarantees
and certain other disclosures. We adopted FIN 45 beginning in 2003 and it did
not have a material impact on our financial position, results of operations
or cash flows.
21
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), the primary objective of which is to
provide guidance on the identification of entities for which control is
achieved through means other than voting rights, defined as variable interest
entities, or VIEs, and to determine when and which business enterprise should
consolidate the VIE as the "primary beneficiary". This new model applies when
either (1) the equity investors, if any, do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without additional financial support. In addition, FIN 46
requires additional disclosures. This interpretation applies immediately to
VIEs created after January 31, 2003 and to VIEs in which an enterprise
obtains an interest after that date. It is effective for the first fiscal
year or interim period beginning after June 15, 2003, for VIEs in which an
enterprise holds a variable interest that it acquired before February 1,
2003. We are currently assessing the impact of FIN 46 on our investment in
unconsolidated subsidiaries.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 March 31, 2003, we had fixed rate secured debt with the RTFC of
$415.4 million at a blended rate of 7.94%. The fixed rates on the facilities
expire from April 2003 to April 2005 at which time they will convert to
variable rates. In addition, we have two miscellaneous notes that total $2.7
million at March 31, 2003 with each bearing fixed rate interest at 8.0%. Our
senior notes have a stated fixed rate of 13.25%. In addition to our fixed
rate facilities, we have $18.0 million in term loans and $21.0 million under
a secured line of credit with the RTFC that bear variable interest rates
approximating a blended average rate of 6.0%. 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 year on interest expense. Accordingly, we
are subject to only minimal interest rate risk on our long-term debt while
our fixed rates are in place.
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.
22
Part II
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)
99.1 Section 1350 Certification of Chief Executive Officer
99.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
On January 3, 2003, we filed a Current Report on Form 8-K dated
January 3, 2003 containing a press release announcing our expectations
of the impact the full troop deployment from Fort Stewart will have on
the operations of Coastal Utilities, Inc., our rural local exchange
carrier located in Hinesville, Georgia.
On January 28, 2003, we filed a Current Report on Form 8-K containing
a presentation made on January 8, 2003 by J. Stephen Vanderwoude,
Chief Executive Officer of Madison River Capital, LLC, and Paul H.
Sunu, Chief Financial Officer of Madison River Capital, LLC, at the
JPMorgan Annual High Yield Conference 2003 in New Orleans, Louisiana.
On March 11, 2003, we filed a Current Report on Form 8-K dated March
6, 2003 containing a press release announcing our financial and
operating results for the fourth quarter and year ended December 31,
2002.
On March 20, 2003, we filed a Current Report on Form 8-K containing a
presentation made on March 20, 2003 by Paul H. Sunu, Chief Financial
Officer of Madison River Capital, LLC, at the Lehman Brothers High
Yield Conference in Orlando, Florida.
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: May 15, 2003 /s/ PAUL H. SUNU
---------------------------------------
Name: Paul H. Sunu
Title: Managing Director, Chief
Financial Officer and Secretary
23
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: May 15, 2003 By: /s/ J. STEPHEN VANDERWOUDE
------------ -------------------------------
J. Stephen Vanderwoude
Chairman and Chief Executive
Officer
24
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: May 15, 2003 By: /s/ PAUL H. SUNU
--------------------------------
Paul H. Sunu
Chief Financial Officer
25
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)
99.1 Section 1350 Certification of Chief Executive Officer
99.2 Section 1350 Certification of Chief Financial Officer
26