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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
-------------
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 ___
---
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 - June 30, 2003 (Unaudited) and
December 31, 2002............................................................1
Condensed Consolidated Statements of Operations and Comprehensive
Loss (Unaudited) - Three and Six Months Ended June 30, 2003 and 2002.........2
Consolidated Statements of Member's Interest - Six Months Ended
June 30, 2003 (Unaudited)....................................................3
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 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.......................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risks...................25
Item 4. Controls and Procedures.......................................................26
Part II - Other Information
Item 1. Legal Proceedings.............................................................27
Item 6. Exhibits and Reports on Form 8-K..............................................27
Signature...................................................................................27
i
Part I
ITEM 1 - FINANCIAL STATEMENTS
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, 2003 December 31, 2002
------------- -----------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 22,906 $ 19,954
Accounts receivable, less allowance for uncollectible accounts
of $1,840 and $2,792 in 2003 and 2002, respectively 11,223 12,347
Receivables, primarily from interexchange carriers, less
allowance for uncollectible accounts of $875 and $1,693
in 2003 and 2002, respectively 7,589 7,796
Rural Telephone Finance Cooperative stock to be redeemed 1,354 2,039
Other current assets 5,607 5,550
-------- --------
Total current assets 48,679 47,686
-------- --------
Telephone plant and equipment 473,793 471,929
Less accumulated depreciation and amortization (135,057) (112,564)
-------- --------
Telephone plant and equipment, net 338,736 359,365
-------- --------
Other assets:
Rural Telephone Finance Cooperative stock, at cost 42,659 44,013
Goodwill, net of accumulated amortization of $41,259
in 2003 and 2002 366,332 366,332
Other assets 24,756 26,075
-------- --------
Total other assets 433,747 436,420
-------- --------
Total assets $ 821,162 $ 843,471
======== ========
Liabilities and member's capital
Current liabilities:
Accounts payable and accrued expenses $ 38,314 $ 37,361
Other current liabilities 5,083 7,543
Current portion of long-term debt 28,656 27,613
-------- --------
Total current liabilities 72,053 72,517
-------- --------
Noncurrent liabilities:
Long-term debt 619,461 633,955
Other liabilities 74,129 74,509
-------- --------
Total noncurrent liabilities 693,590 708,464
-------- --------
Total liabilities 765,643 780,981
Redeemable minority interest 4,000 5,000
Member's capital:
Member's interest 251,284 251,284
Accumulated deficit (199,765) (193,639)
Accumulated other comprehensive loss - (155)
-------- --------
Total member's capital 51,519 57,490
-------- --------
Total liabilities and member's capital $ 821,162 $ 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues:
Local service $ 32,879 $ 34,152 $ 65,865 $ 68,798
Long distance service 4,521 4,322 8,661 8,125
Internet and enhanced data service 4,391 3,920 8,731 7,327
Transport service 669 888 1,335 1,724
Miscellaneous telecommunications service
and equipment 3,570 1,548 6,578 4,781
-------- -------- -------- --------
Total operating revenues 46,030 44,830 91,170 90,755
-------- -------- -------- --------
Operating expenses:
Cost of services 12,297 14,605 23,333 29,020
Depreciation and amortization 13,136 12,139 25,490 24,448
Selling, general and administrative expenses 9,831 11,697 19,125 22,024
-------- -------- -------- --------
Total operating expenses 35,264 38,441 67,948 75,492
-------- -------- -------- --------
Net operating income 10,766 6,389 23,222 15,263
Interest expense (15,066) (16,087) (30,735) (32,163)
Other income (expense), net 618 (22) 1,118 535
-------- -------- -------- --------
Loss before income taxes and minority
interest expense (3,682) (9,720) (6,395) (16,365)
Income tax expense (benefit) 77 (388) (269) 1,082
-------- -------- -------- --------
Loss before minority interest expense (3,759) (9,332) (6,126) (17,447)
Minority interest expense - - - (275)
-------- -------- -------- --------
Net loss (3,759) (9,332) (6,126) (17,722)
Other comprehensive income (loss):
Unrealized losses on marketable
equity securities - (2,108) (198) (2,802)
Reclassification adjustment for losses
included in net loss 140 - 353 -
-------- -------- -------- --------
Other comprehensive income (loss) 140 (2,108) 155 (2,802)
-------- -------- -------- --------
Comprehensive loss $ (3,619) $ (11,440) $ (5,971) $ (20,524)
======== ======== ======== ========
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 - (6,126) - (6,126)
Other comprehensive loss:
Unrealized losses on marketable
equity securities - - (198) (198)
Reclassification adjustment for realized
losses included in net loss - - 353 353
--------- ---------- ------ --------
Balance at June 30, 2003 (unaudited) $ 251,284 $ (199,765) $ - $ 51,519
========= ========== ====== ========
See Notes to Condensed Consolidated Financial Statements.
3
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
---------- ----------
Operating activities
Net cash provided by operating activities $ 18,022 $ 14,667
-------- --------
Investing activities
Purchases of telephone plant and equipment (4,029) (6,939)
Redemption of Rural Telephone Finance Cooperative stock 2,039 1,524
Change in other assets 1,470 2,154
-------- --------
Net cash used for investing activities (520) (3,261)
-------- --------
Financing activities
Redemption of member's interest - (2,000)
Redemption of minority interest (1,000) (1,000)
Proceeds from long-term debt - 4,000
Payments on long-term debt (13,550) (10,024)
Change in other long-term liabilities - (909)
-------- --------
Net cash used for financing activities (14,550) (9,933)
-------- --------
Net increase in cash and cash equivalents 2,952 1,473
Cash and cash equivalents at beginning of year 19,954 21,606
-------- --------
Cash and cash equivalents at end of six month period $ 22,906 $ 23,079
======== ========
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 ("GRH"), Gulf Coast Services, Inc. and its subsidiaries, Coastal
Communications, Inc. ("CCI") and its subsidiaries, Madison River Management
Company ("MRM"), Mebtel Long Distance Solutions, Inc. ("MLDS"), Madison River
Long Distance Solutions, Inc. ("MRLDS"), 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 along with MLDS and MRLDS comprise the
Local Telecommunications Division (the "LTD"), served approximately 206,982
voice access and digital subscriber line ("DSL") connections as of June 30,
2003. The operations of the ILECs are subject to federal, state and local
regulation.
The Company also operates as an edge-out 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 16,678 voice access and high speed data connections at June 30,
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 second quarter and six-month period ended June 30,
2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
Certain amounts in the June 30, 2002 condensed consolidated financial
statements have been reclassified to conform to the June 30, 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 at:
June 30, December 31,
2003 2002
--------- ------------
(in thousands)
Land, buildings and general equipment $ 58,423 $ 58,144
Central office equipment 156,020 155,350
Poles, wires, cables and conduit 228,285 225,932
Leasehold improvements 2,533 2,533
Software 17,162 16,893
Construction-in-process 11,370 13,077
--------- ---------
Total telephone plant and equipment $ 473,793 $ 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) ("EITF 94-3"), requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 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 ("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)
4. RECENT ACCOUNTING PRONOUNCEMENTS, Continued
In May 2003, the FASB issued Statement of Financial Accounting Standards 150,
Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity ("SFAS 150"). SFAS 150 requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and as
such, SFAS 150 represents a significant change in practice in the accounting
for a number of financial instruments, including mandatorily redeemable
equity instruments and certain equity derivatives that frequently are used in
connection with share repurchase programs. SFAS 150 is effective for public
companies for all financial instruments created or modified after May 31,
2003, and to other instruments at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently assessing the
provisions of SFAS 150 but does not expect adoption of SFAS 150 to have a
material impact on its financial position or results of operations.
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. The
amounts recorded consist primarily of the costs associated with future
obligations on non-cancelable leases for closed sales offices, redundant
network operations centers and future switching facilities, net of any
estimated sublease income, losses from the abandonment of fixed assets and
leasehold improvements associated with those leased facilities and legal
related expenses. As of June 30, 2003, the following amounts were recorded
related to this restructuring charge:
Balance at 2003 Balance at
December 31, 2002 payments June 30, 2003
----------------- ------------- -------------
(in thousands)
Future lease obligations $ 788 $ 136 $ 652
Legal related expenses 31 - 31
---- ---- ----
$ 819 $ 136 $ 683
==== ==== ====
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 June 30, 2003,
the following amounts were recorded related to this restructuring charge:
Balance at 2003 Balance at
December 31, 2002 payments June 30, 2003
----------------- ------------- -------------
(in thousands)
Future lease obligations $ 1,345 $ 49 $ 1,296
Telephone plant and equipment 158 - 158
Employee separation expenses 77 4 73
------- ----- -------
$ 1,580 $ 53 $ 1,527
======= ===== =======
The remaining liability as of June 30, 2003 is recorded as $1.1 million in
accrued expenses and $1.1 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
June 30, 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). $ 11,680 $ 12,103
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at the
RTFC's base rate plus 0.5% (5.15% at June 30, 2003). 5,924 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% (5.15% at June 30, 2003). 951 983
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). 102,486 105,780
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (5.40% at June 30, 2003). 5,557 5,722
RTFC note payable in escalating quarterly principal installments
through August 2013, interest payments due quarterly at the
RTFC's base rate plus 0.75% (5.40% at June 30, 2003). 67,384 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% (5.40% at June 30, 2003). 3,543 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). 122,063 125,561
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% (5.00% at June 30, 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). 99,226 101,734
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% (5.65% at June 30, 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. 2,314 2,326
Unsecured 131/4% senior notes payable, due March 1, 2010, with
interest payable semiannually on March 1 and September 1, net of
debt discount of $2,182 and $2,282, respectively. 197,818 197,718
Other 393 393
-------- --------
648,117 661,568
Less current portion 28,656 27,613
-------- --------
$ 619,461 $ 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. In July
2003, MRLTDF executed an amendment to its loan agreement with the RTFC (the
"Amendment"). Under the terms of the Amendment, the loan agreement is
extended to November 2016. The Amendment also provides a reduction in
scheduled principal payments through 2011 as compared to the existing
agreement with the first scheduled principal payment occurring in the third
quarter of 2004. The Company will continue to make quarterly interest
payments to the RTFC. Annually, beginning in 2005, the Company will be
required to calculate excess cash flow for the LTD, as defined in the
Amendment, using the preceding year's financial results. If the calculation
indicates excess cash flow, the Company will be required to make mandatory
prepayments of principal to the RTFC equivalent to the amount of excess cash
flow. Such mandatory prepayments will be made in the second quarter of the
year in which the calculation is made.
Under the Amendment, interest rates on the outstanding term loans are at
their prevailing RTFC fixed or variable base rate plus a 1.0% interest rate
adder, which replaces the existing interest rate adders. Prior to the
Amendment, interest rates on these term loans were at the prevailing RTFC
fixed or variable base rate plus interest rate adders ranging from 0.35% to
0.75%. Had the Amendment been effective as of June 30, 2003, the new 1.0%
interest rate adder would have resulted in a weighted average increase in
existing interest rates of approximately 0.45%. The 1.0% interest rate adder
is subject to performance pricing which will provide for a reduction in the
interest rate adder as the Total Leverage Ratio, as defined in the Amendment,
decreases. The prior interest rate adders had no performance pricing
associated with them. In addition, the financial ratio requirements were
revised under the Amendment including requiring RTFC approvals of capital
expenditure budgets and any acquisitions or disposals of local exchange
assets.
Since April 2003, the fixed interest rates on two of the Company's notes
expired and at June 30, 2003 these notes bore interest at their prevailing
RTFC variable base interest rate plus their corresponding interest rate
adders. The first note, with a balance of $5.9 million at June 30, 2003, had
a fixed interest rate of 8.15% prior to expiration that converted to the
RTFC's variable base rate plus 50 basis points, or 5.15% at June 30, 2003.
The second note, with a balance of $67.4 million at June 30, 2003, carried a
fixed rate of 8.4% before the rate expiration that converted to the RTFC's
variable base rate plus 75 basis points, or 5.4% at June 30, 2003.
The terms of the RTFC loan agreement, including the Amendment, require MRLTDF
to meet and adhere to various financial and administrative covenants on an
annual basis. 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. At June 30, 2003 and December 31, 2002,
MRLTDF was in compliance with the terms and conditions of the loan agreement.
Prior to the Amendment, the loan facilities were secured by a first mortgage
lien on substantially all of the assets and revenues of the LTD. In
addition, substantially all of the outstanding equity interests of the
subsidiaries that comprise the LTD were pledged in support of the facilities.
As part of the Amendment, the RTFC was additionally granted a first mortgage
lien on the assets of MRH, MLDS and MRLDS and the equity interests in those
entities were pledged in support of the loan facilities thereby providing the
RTFC a security interest in all of the assets, revenues and substantially all
of the equity interests of the LTD.
The $31.0 million secured revolving line of credit between the RTFC and
MRLTDF expires in March 2005. Interest is payable quarterly at the RTFC's
line of credit base rate plus 0.5% per annum. At June 30, 2003, MRLTDF had
drawn down $21.0 million under this line of credit with the remaining $10.0
million fully available to MRLTDF.
9
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
6. LONG-TERM DEBT AND LINES OF CREDIT, Continued
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. Under the terms of the Amendment, MRLTDF agreed to secure this
line of credit with the assets of Coastal Utilities, Inc. within six months
of signing the Amendment. This unsecured line of credit currently 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 June 30, 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 (loss) for each segment for
the three and six month periods ended June 30, 2003 and 2002:
Three Month Period Ended Six Month Period Ended
------------------------ ----------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Total revenues:
LTD $ 43,388 $ 41,929 $ 85,591 $ 84,731
ICD 3,718 3,784 7,334 7,747
------- ------- ------- -------
47,106 45,713 92,925 92,478
Less intersegment revenues (1,076) (883) (1,755) (1,723)
------- ------- ------- -------
Total reported revenues $ 46,030 $ 44,830 $ 91,170 $ 90,755
======= ======= ======= =======
Net operating income (loss):
LTD $ 13,946 $ 11,048 $ 28,977 $ 24,091
ICD (3,180) (4,659) (5,755) (8,828)
------- ------- ------- -------
Total reported net operating
income $ 10,766 $ 6,389 $ 23,222 $ 15,263
======= ======= ======= =======
At June 30, 2003 and December 31, 2002, total assets by segment, net of
intersegment investments and other intersegment balances, were as follows:
June 30, December 31,
2003 2002
--------- ------------
(in thousands)
Total assets:
LTD $ 855,943 $ 869,730
ICD 451,986 468,172
---------- ----------
1,307,929 1,337,902
Less intersegment assets (486,767) (494,431)
---------- ----------
Total reported assets $ 821,162 $ 843,471
========== ==========
10
MADISON RIVER CAPITAL, LLC
Notes To Condensed Consolidated Financial Statements, Continued
(Unaudited)
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.
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 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.
References in this Form 10-Q to "we," "us" and "our" mean Madison River
Capital, LLC and its subsidiaries.
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.
12
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 June 30, 2003, we had approximately
223,660 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.
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
81% of expiring contracts during the first six months of 2003.
13
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 six months ended June 30, 2003,
approximately 92.2% of our operating revenues came from the LTD and 7.8% 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
six months ended June 30, 2003, the LTD finished with 187,545 voice access
lines in service, which is a decrease of 7,621 voice access lines from
195,166 voice access lines in service at June 30, 2002. The predominant
share of voice access line losses have occurred in our Illinois and Georgia
operations which accounted for approximately 84% 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.
The number of DSL subscribers we serve in the LTD continues to increase. 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 June 30, 2003, we had 19,437 DSL connections in service, an
increase of 5,074 connections from 14,363 DSL connections at June 30, 2002.
Our penetration rate for installed DSL connections reached 10.4% of our LTD
voice access lines at June 30, 2003 compared to 7.4% at June 30, 2002.
We have also been successful in growing our revenues in the LTD by providing
long distance, dial-up Internet and vertical services to our customers. At
June 30, 2003, we had 93,898 long distance accounts and 25,781 dial-up
Internet subscribers. In addition, our penetration rates for voicemail and
caller ID have continued to increase. We are currently in the preliminary
stages of assessing the potential benefits of adding video services to the
suite of products we offer to our customers. Since we are early in the
planning process, at this time we are not certain what types of video
services we may offer, if any, or what types of technology we may use to
deliver these services to our customers.
In the near term, we anticipate that revenues from the ICD will remain fairly
comparable to current levels. At June 30, 2003, the ICD had approximately
15,895 voice access lines and 713 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 six months of
2003, the ICD was successful in renewing approximately 81% of its expiring
contracts with monthly recurring rates that have increased approximately 20%.
In 2002, the ICD was successful in renewing 86% of expiring contracts with a
32% increase in monthly recurring revenues.
14
We will continue to offer bundled services and to competitively price our
services in each of our markets. For example, in our North Carolina ILEC, we
have recently begun offering a plan that includes unlimited local and long
distance calling in the domestic United States for a single monthly fee. 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,
operating income 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.
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. The ICD also focused on grooming its network to
reduce the costs of delivering services to its customers by replacing more
expensive special access circuits with circuits provided for in our
interconnection agreements with the incumbent local exchange carriers.
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. This allowed
for additional reductions in operating expenses as we were able to eliminate
certain redundant operations in the ICD and, as a result, ,we saw a
significant decrease in the ICD's expenses in 2002. The ICD's operating
expenses have remained relatively consistent with operating results achieved
in the fourth quarter of 2002. In ther near term, barring any unforeseen
events, we expect that further decreases in operating expenses, 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.
15
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. The initial agreement
terminated in the second quarter of 2003, but automatically renewed 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.
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.
16
Results of Operations
Six Months ended June 30, 2003 compared to Six Months ended June 30, 2002
Total revenues were $91.2 million and $90.8 million for the six month periods
ended June 30, 2003 and June 30, 2002, respectively. Revenues in the LTD
increased approximately $1.0 million, or 1.2%, to $84.0 million in the first
six months of 2003 from $83.0 million in the first six months of 2002. In
the first six months of 2003, revenues in from Internet and enhanced data
services increased approximately $1.3 million, long distance revenues
increased $0.4 million and miscellaneous revenues increased approximately
$1.6 million compared to the same period in 2002. The increase in Internet
and enhanced data revenues is attributed to an increase in the number of DSL
subscribers. The LTD served 19,437 DSL connections at June 30, 2003, an
increase of 5,074 connections, or 35.3%, from the 14,363 connections in
service at June 30, 2002. Likewise, long distance revenues increased due to
an increase in the number of long distance accounts served. At June 30,
2003, the LTD had 93,898 long distance accounts, an increase of 6,695 long
distance accounts, or 7.7%, from 87,203 accounts served at June 30, 2002.
Finally, the increase in miscellaneous revenues is attributed to the impact
on miscellaneous revenues in the first six months of 2002 from approximately
$1.5 million in bad debts charged against revenues for pre-petition amounts
of two customers, MCI WorldCom and Global Crossing, which filed for
bankruptcy during the second quarter of 2002. No comparable bad debt charges
were recognized in the first six months of 2003. These increases in LTD
revenues were offset by a decrease of $2.3 million in local service revenues.
The decrease in local service revenues is primarily attributable to
anticipated lower network access revenues as a result of lower Universal
Support Fund receipts in the first six months of 2003 compared to the same
period of 2002. In addition, local service revenues were impacted by the
decrease in voice access lines. At June 30, 2003, the LTD served 187,545
voice access lines, a decrease of 7,621 voice access lines, or 3.9%, from
195,166 voice access lines served at June 30, 2002. Revenues in the ICD
decreased approximately $0.6 million, or 7.5%, to $7.1 million in the first
half of 2003 compared to $7.7 million in the first half of 2002. The
decrease is attributed primarily to a $0.5 million decrease in local service
revenues primarily from lower network access revenues. At June 30, 2003 and
2002, the ICD had approximately 16,680 and 16,575 voice access and high speed
connections in service, respectively, representing a 0.6% increase.
Revenues from voice services, which are comprised of local, network access
and long distance service, as a percentage of total revenues, were
approximately 81.7% and 84.8% for the six months ended June 30, 2003 and
2002, respectively. The LTD and the ICD provided approximately 92.2% and
7.8% of total revenues, respectively.
Total operating expenses decreased $7.5 million from $75.5 million, or 83.2%
of total revenues in the first six months of 2002, to $67.9 million, or 74.5%
of total revenues in the first six months of 2003. 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. The remaining decrease is attributable to other expense
reductions in both the LTD and the ICD. In the LTD, operating expenses
decreased $3.9 million, or 6.6%, to $55.0 million in the first six months of
2003 from $58.9 million in the first six months of 2002. Approximately $2.1
million of the decrease is the result of the pension curtailment gain in the
first quarter of 2003. Excluding the impact of the pension curtailment gain,
operating expenses in the first six months of 2003 would have decreased $1.7
million, or 2.9%, compared to the first six months of 2002. The remaining
decrease is due to expense reductions from business process improvements. In
the ICD, operating expenses in the first six months of 2003 were
approximately $3.7 million lower than the first six months of 2002.
Approximately $0.6 million of the decrease is the result of the pension
curtailment gain. 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.
17
Net operating income increased approximately $7.9 million from $15.3 million,
or 16.8% of total revenues in the first six months of 2002, to $23.2 million,
or 25.5% of total revenues in the first six months of 2003. The increase is
primarily attributable to expense reductions taken in both the LTD and the
ICD. Net operating income in the LTD increased $4.9 million, or 20.3%, to
$29.0 million in the first six months of 2003 from $24.1 million in the first
six months of 2002. For the ICD, the net operating loss improved $3.1
million, or 34.8%, to $5.7 million in the six month period ended June 30,
2003 from $8.8 million in the six month period ended June 30, 2002.
Interest expense decreased $1.5 million to $30.7 million, or 33.7% of total
revenues, in the first six months of 2003 compared to $32.2 million, or 35.4%
of total revenues, in the first six months of 2002. The decrease in interest
expense is attributed to a lower weighted average interest rate and a lower
average outstanding balance of long-term debt during the first six months of
2003 compared to the first six months of 2002.
For the six month period ended June 30, 2003, we had other income of $1.1
million compared to other income of $0.5 million in the six month period
ended June 30, 2002, a change of $0.6 million, or 109.0%. The increase is
attributed to several factors that impacted other income in the prior year.
The first six months of 2002 include an impairment charge of $2.1 million
that reduced the carrying value of an investment accounted for using the
equity method. This was offset by the recognition of a gain on the sale of
assets of $0.6 million related to the disposal of two exchanges in Illinois
in 2001 and approximately $0.9 million in interest income related to certain
income tax refunds. No comparable transactions were recorded in the first
six months of 2003.
Our net loss improved $11.6 million from a net loss of $17.7 million, or
19.5% of total revenues, in the first six months of 2002, to $6.1 million, or
6.7% of total revenues, in the first six months of 2003, as a result of the
factors discussed above. The LTD had net income of $13.0 million in the first
six months of 2003 compared to net income of $4.8 million in the first six
months of 2002, an increase of $8.2 million. For the six month periods ended
June 30, 2003 and 2002, the ICD had a net loss of $19.2 million and $22.5
million, respectively, an improvement of $3.3 million.
Three Months Ended June 30, 2003 compared to Three Months Ended June 30, 2002
Our total revenues increased $1.2 million, or 2.7%, to $46.0 million for the
three months ended June 30, 2003 from $44.8 million for the three months
ended June 30, 2002. Revenues in the LTD for the second quarter of 2003 were
$42.5 million, a $1.4 million, or 3.5%, increase from the revenues for the
second quarter of 2002 of $41.1 million. The increase is primarily
attributed to a $1.9 million increase in miscellaneous revenues and a $0.4
million increase in Internet and enhanced data revenues offset by a $1.0
million decrease in local service revenues. The increase in miscellaneous
revenues resulted from the impact on the 2002 second quarter miscellaneous
revenues of bad debt charges of $1.5 million for pre-petition amounts of two
customers that filed for bankruptcy. The increase in Internet and enhanced
data revenues reflects the increase in the number of DSL subscribers over the
prior year. The decrease in local service revenues in the second quarter of
2003 compared to the same period in 2002 is the result of expected decreases
in network access revenues. For the three months ended June 30, 2003, the
ICD had revenues of $3.5 million, a $0.2 million, or 5.9%, decrease from
revenues of $3.7 million for the three months ended June 30, 2002. The
increase is primarily attributed to a $0.2 million decrease in transport
revenues. Due to the highly competitive nature of this business currently,
the ICD is not actively trying to expand this business at this time.
Consequently, the main value being derived from the ICD's 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.
Revenues from voice services, as a percentage of total revenues, were
approximately 81.3% and 85.8% for the three months ended June 30, 2003 and
2002, respectively.
18
Our total operating expenses decreased $3.2 million from $38.4 million, or
85.8% of total revenues, in the three month period ended June 30, 2002 to
$35.3 million, or 76.6% of total revenues, in the three month period ended
June 30, 2003. Operating expenses in the LTD were $28.5 million in the three
months ended June 30, 2003 and $30.0 million in the three months ended June
30, 2002, a decrease of $1.5 million, or 4.9%. The decrease is attributed to
a decrease in selling, general and administrative expenses of approximately
$1.2 million in the second quarter of 2003 compared to the second quarter of
2002 primarily from lower long-term incentive plan expenses. Long-term
incentive plan expenses accrued in the second quarter of 2003 and 2002 were
$0.9 million and $1.9 million, respectively, or a decrease of $1.0 million.
The remaining decreases in operating expenses in the LTD reflect expense
reductions as a result of business process improvements. In the ICD,
operating expenses decreased $1.7 million, or 20.2%, to $6.7 million in the
second quarter of 2003 from $8.4 million in the second quarter of 2002. The
decrease is attributed to lower cost of services and selling, general and
administrative expenses from expense reductions taken in the ICD in the prior
year as it implemented its strategy to slow its growth.
Our net operating income for the three month period ended June 30, 2003
increased approximately $4.4 million to $10.8 million from $6.4 million for
the three month period ended June 30, 2002. As a percentage of total
revenues, our net operating income was 23.4% in the second quarter of 2003
and 14.3% in the second quarter of 2002. The increase in net operating
income is primarily attributed to reductions in operating expenses in both
the LTD and the ICD. Net operating income in the LTD in the second quarter
of 2003 was $14.0 million, an increase of $2.9 million, or 26.2%, from $11.1
million in the second quarter of 2002. For the ICD, net operating loss in
the second quarter of 2003 and 2002 was $3.2 million and $4.7 million,
respectively, an improvement of $1.5 million, or 31.8%.
Interest expense decreased $1.0 million, or 6.4%, to $15.1 million for the
second quarter of 2003 compared to $16.1 million in the second quarter of
2002. Interest expense represented 32.7% and 35.9% of total revenues in the
second quarter of 2003 and 2002, respectively. The decrease is attributed to
lower interest expense in the LTD from a lower average outstanding balance
and lower weighted-average interest rates in the second quarter of 2003
compared to the second quarter of 2002.
For the second quarter of 2003, we had other income of $0.6 million compared
to other expense of $22,000 in the second quarter of 2002. The increase is
attributed to several factors that impacted other income in the second
quarter of the prior year. Included in the second quarter of 2003 is an
impairment charge of $2.1 million that reduced the carrying value of an
investment accounted for using the equity method. This impairment charge was
offset by the recognition of a gain on the sale of assets of $0.6 million
related to the disposal of two exchanges in Illinois in 2001 and
approximately $0.9 million in interest income related to certain income tax
refunds also recorded in the second quarter of 2002. We did not recognize
any comparable transactions in the second quarter of 2003.
Our net loss improved $5.6 million to $3.8 million, or 8.2% of total
revenues, in the three months ended June 30, 2003 from $9.3 million, or 20.8%
of total revenues, in the three months ended June 30, 2002. Net income in
the LTD was $6.1 million in the second quarter of 2003 compared to net income
of $2.1 million for the second quarter of 2002, an increase of $4.0 million,
or 188.9%. The net loss in the ICD was $9.9 million for the second quarter
of 2003 compared to a net loss of $11.4 million for the second quarter of
2002, an improvement of $1.5 million, or 13.8%.
Liquidity and Capital Resources
We are a holding company with no business operations of our own. Since our
inception, we have funded our operations through cash flow generated by our
subsidiaries, long-term debt borrowings and equity contributions from our
member. 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.
19
Operating Activities. For the six months ended June 30, 2003 and 2002, we
generated cash from operating activities of $18.0 million and $14.7 million,
respectively. The increase of $3.3 million in the first six months of 2003
compared to the first six months of 2002 is attributable to an improvement in
our net loss of $3.2 million from business process improvements in the LTD
and cost reductions in the ICD..
Investing Activities. For the six months ended June 30, 2003, we used cash
for investing activities in the amount of $0.5 million compared to cash used
for investing activities of $3.3 million in the six month period ended June
30, 2002. Cash used in investing activities in the first six months of 2003
was primarily for the purchase of telephone plant and equipment in the amount
of $4.0 million. This was offset by $2.0 million received from the
redemption of RTFC subordinated capital certificates and $1.5 million from
changes in other assets. For the six months ended June 30, 2002, we used
cash primarily for purchases of telephone plant and equipment of $6.9
million. This was offset by proceeds from the redemption of RTFC
subordinated capital certificates of $1.5 million and changes in other assets
of $2.1 million.
Financing Activities. For the six months ended June 30, 2003, net cash used
in financing activities was $14.6 million and consisted of payments on long-
term debt of $13.6 million and the redemption of $1.0 million in minority
interest. For the six months ended June 30, 2002, net cash used for
financing activities was $9.9 million and consisted primarily of payments on
long-term debt of $10.0 million.
At June 30, 2003, we had negative working capital of $23.4 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 July 31, 2003:
Payments Due by Period
Total Year 1 Years 2-3 Years 4-5 Thereafter
--------------------------------------------------------------------------
Long-term debt $ 648,117 $ 26 $ 42,058 $ 18,770 $ 587,263
Operating leases 9,972 2,180 3,825 2,569 1,398
Redemption of minority
interest 4,000 1,000 2,000 1,000 -
--------- --------- --------- --------- ---------
Material contractual
cash obligations $ 662,089 $ 3,206 $ 47,883 $ 22,339 $ 588,661
========= ========= ========= ========= =========
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 June 30, 2003, we had approximately $426.6 million in term loans
outstanding with the RTFC. Of this amount, $335.5 million in term loans bear
fixed interest rates that range between 6.5% and 8.5%, with a weighted
average rate approximating 7.84%. The fixed interest rates expire at various
times, beginning in September 2003 through April 2005, depending on the terms
of the note. Upon the expiration of the fixed interest rate, the note will
will then bear interest at a variable rate. 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 $91.1 million in term loans have variable interest rates that range
from 5.0% to 5.4% at June 30, 2003, or a weighted average interest rate of
5.3%. Since April 2003, the fixed interest rates expired on two of our notes
and at June 30, 2003 these notes bore interest at the RTFC's base interest
rate for long-tem debt plus their corresponding interest rate adders. The
first note, with a balance of $5.9 million at June 30, 2003, had a fixed
interest rate of 8.15% prior to expiration that converted to the RTFC's base
rate plus 50 basis points, or 5.15% at June 30, 2003. The second note, with
a balance of $67.4 million at June 30, 2003, carried a fixed rate of 8.4%
before the rate expiration and converted to the RTFC's base rate plus 75
basis points, or 5.4% at June 30, 2003.
20
In July 2003, MRLTDF executed an amendment to its loan agreement with the
RTFC which, among other things, allows us greater operating flexibility
through an increase in our available liquidity. Under the terms of the
amendment, our loan agreement is extended to November 2016. The amendment
also provides us with a reduction in scheduled principal payments through
2011 as compared to our existing agreement. We will not make any quarterly
principal payments, only quarterly interest payments, though the second
quarter of 2004. Beginning in the third quarter of 2004, we will begin
making scheduled principal payments in amounts as outlined in the amendment.
We also may be required to make annual prepayments of principal based on our
financial results. Annually, beginning in 2005, we will calculate the LTD's
excess cash flow, as defined in the amendment, using the preceding year's
financial results. If the calculation indicates excess cash flow, we must
make a mandatory prepayment equivalent to that excess cash flow to reduce the
principal outstanding to the RTFC. The payment will be required to be made
by the second quarter of the year in which the calculation is made.
Effective with completion of the amendment, interest rates on our outstanding
term loans are now at their prevailing RTFC fixed or variable base rates plus
a 1.0% interest rate adder, which replaces the existing interest rate adders.
Prior to the amendment, interest rates on these term loans were at their
prevailing RTFC fixed or variable base rate plus interest rate adders ranging
from 0.35% to 0.75%. Had the amendment been in place at June 30, 2003, the
new 1.0% interest rate adder would have resulted in a weighted average
increase in existing interest rates of approximately 0.45%. The 1.0%
interest rate adder is subject to performance pricing which will provide for
a reduction in the interest rate adder as our Total Leverage Ratio, as
defined in the amendment, decreases. The interest rate adder will remain at
1.0% while the Total Leverage Ratio is greater than 5.0 to 1.0. It decreases
to 0.75% when the Total Leverage Ratio is between 4.0 to 1.0 and 5.0 to 1.0
and decreases to 0.5% when the Total Leverage Ratio is less than 4.0 to 1.0.
The prior interest rate adders had no performance pricing associated with
them.
In addition, certain of our covenants were revised under the amendment, but
we will continue to test our compliance with our financial ratios defined in
the amendment on an annual basis. In addition to our financial ratios, our
covenants require that we obtain RTFC approval of a forward-looking, three-
year capital expenditure budget on an annual basis and any acquisitions or
disposals of local exchanges. Our covenants regarding payment of dividends
by MRLTDF and GRH remained substantially the same as under the existing
agreement. In addition, the amendment allows us to repurchase our senior
notes without RTFC consent in amounts not to exceed $2.0 million per quarter
and $6.0 million per year.
Finally, as part of the amendment, RTFC was granted a first mortgage lien on
the assets of MRH, MLDS and MRLDS and the equity interests in those entities
were pledged in support of the loan facilities. The loan facilities as a
whole are secured by a first mortgage lien on 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.
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 June 30, 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 paid 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.
21
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 5.65% at June 30,
2003. We had advanced $21.0 million against this line of credit at June 30,
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 that is available for
general corporate purposes to Coastal Utilities, Inc. 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. Under the terms of the
amendment as discussed above, we have agreed to provide the RTFC with a
security interest in the assets of Coastal Utilities, Inc. to secure this
line of credit.
As discussed above, the terms of the RTFC loan agreement, as amended, require
MRLTDF to meet and adhere to various financial and administrative covenants.
MRLTDF is, among other things, limited in its ability to declare or pay
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 amendment and 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 our obligations. MRLTDF is required
to test its compliance with certain financial ratios on an annual basis. At
June 30, 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 June 30, 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 to our member, 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 June 30, 2003, we were in compliance with the terms of
our 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.
22
Capital Requirements
We 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 and related expenses.
We currently estimate that cash required to fund capital expenditures in 2003
will be approximately $12.0 million. For the six months ended June 30, 2003,
our capital expenditures were approximately $4.0 million. Our use of cash
for capital expenditures in recent quarters has been significantly less than
we incurred in prior years. This is a result of several factors. First, we
invested a significant amount in capital expenditures during 2000 and 2001 to
build-out and enhance our network facilities in our markets. Absent major
changes in the technology that we employ or the introduction of new product
lines, 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 currently 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. In 2002, MRTC, our parent, completed an agreement with
these former shareholders that, among other things, modified certain
provisions of the shareholders agreement. Under the terms of the agreement,
the former shareholders exchanged certain of their equity interests in CCI
for equity in MRTC and a note payable from MRTC. In addition, CCI redeemed
30 shares of Series A stock in CCI retained by the former shareholders for
$33,333.33 per share, or approximately $1.0 million, at the closing of the
transaction. CCI redeemed an additional 30 shares of Series A stock in June
2003 for approximately $1.0 million. Under the terms of CCI's amended
shareholders agreement, the former shareholders have the right to require CCI
to redeem their remaining 120 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. We expect that the next redemption of
30 shares will take place in July 2004.
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
potentially fund this obligation of our parent company, but we do not have a
contractual obligation to do so.
23
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 borrowing agreements that restrict the
payment of dividends and limit the availability of 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 SFAS 145 which 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 SFAS 146 which nullified EITF 94-3 and requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 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 FIN 45 which 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.
24
In January 2003, the FASB issued 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 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.
In May 2003, the FASB issued SFAS 150 which requires certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity to be classified as liabilities. Many of these
instruments previously were classified as equity or temporary equity and as
such, SFAS 150 represents a significant change in practice in the accounting
for a number of financial instruments, including mandatorily redeemable
equity instruments and certain equity derivatives that frequently are used in
connection with share repurchase programs. SFAS 150 is effective for public
companies for all financial instruments created or modified after May 31,
2003, and to other instruments at the beginning of the first interim period
beginning after June 15, 2003. We are currently assessing the provisions of
SFAS 150 but do not expect adoption of SFAS 150 to have a material impact on
our financial position or results of operations.
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.
As discussed above, MRLTDF executed an amendment with the RTFC in July 2003.
Under the terms of the amendment, our long-term secured debt facilities with
the RTFC will amortize through November 2016. As of July 31, 2003, we had
fixed rate secured debt with the RTFC of $335.5 million at a blended rate of
8.32%. The fixed rates on the facilities expire from September 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 July 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 $112.1
million in term loans and $21.0 million outstanding under a secured line of
credit with the RTFC that bear variable interest rates approximating a
blended average rate of 5.65%. A one percent change in the underlying
interest rates for the variable rate debt would have an impact of
approximately $1.1 million per year on interest expense. Therefore, we are
subject to minimal interest rate risk on our long-term debt while our fixed
rates are in place.
25
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chairman
and Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the
period covered by this report. Based on such evaluation, the Company's
Chairman and Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
(b) Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
26
Part II
Item 1. Legal Proceedings
On May 9, 2001, Life Everlasting, Inc., a former customer of our subsidiary
Madison River Communications, LLC, filed a lawsuit against Madison River
Communications and certain of its current and former employees. The suit
alleged breach of contract, deceptive trade practices, and other charges. In
July 2003, the lawsuit was settled with an immaterial payment being made by
Madison River Communications.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- ----------------------------------------------------------
3.1 Certificate of Formation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-36804)
filed with the Securities and Exchange Commission on May
11, 2000 (the "May Form S-4"))
3.2 Limited Liability Company Agreement of the Registrant
(incorporated by reference to Exhibit 3.2 to the May Form
S-4)
10.30 Amendment to Loan Agreement, dated July 30, 2003, amending
the Loan Agreement dated as of December 29, 2000 by and
between MRLTDF and the RTFC (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on July 31, 2003)
31.1 Certification of Chief Executive Officer of Madison River
Capital, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer of Madison River
Capital, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer of Madison River
Capital, LLC pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Chief Financial Officer of Madison River
Capital, LLC pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
On May 1, 2003, we filed a Current Report on Form 8-K dated May 1, 2003
announcing our first quarter operating and financial results for the
period ended March 31, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MADISON RIVER CAPITAL, LLC
Date: August 14, 2003 /s/ PAUL H. SUNU
------------------------------
Name: Paul H. Sunu
Title: Managing Director, Chief Financial
Officer and Secretary
27
EXHIBIT INDEX
Exhibit
Number Description
------- -------------------------------------------------------------
3.1 Certificate of Formation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-36804) filed with the
Securities and Exchange Commission on May 11, 2000 (the "May
Form S-4"))
3.2 Limited Liability Company Agreement of the Registrant
(incorporated by reference to Exhibit 3.2 to the May
Form S-4)
10.30 Amendment to Loan Agreement, dated July 30, 2003, amending
the Loan Agreement dated as of December 29, 2000 by and
between MRLTDF and the RTFC (incorporated by reference to
Exhibit 99.1 of the Form 8-K filed on July 31, 2003)
31.1 Certification of Chief Executive Officer of Madison River
Capital, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer of Madison River
Capital, LLC pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer of Madison River
Capital, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer of Madison River
Capital, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002