<PAGE>
Filed with the Securities and Exchange Commission on June 23, 2000
Registration No. 333-36804
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
MADISON RIVER CAPITAL, LLC
Delaware 4813 56-2156823
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
103 South Fifth Street
Mebane, North Carolina 27302
(919) 563-1500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
MADISON RIVER FINANCE CORP.
Delaware 4813 56-2183107
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
103 South Fifth Street
Mebane, North Carolina 27302
(919) 563-1500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Paul H. Sunu Copy to:
Chief Financial Officer and Secretary Gary P. Cullen, Esq.
--Madison River Capital, LLC Skadden, Arps, Slate, Meagher & Flom
Chief Financial Officer and Secretary-- (Illinois)
Madison River Finance Corp. 333 W. Wacker Dr.
103 South Fifth Street Chicago, Illinois 60606
Mebane, North Carolina 27302
(919) 563-1500
(Name, address, including zip code, and
telephone
number, including area code, of agent
for service)
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class Amount to be Offering Price Offering Price Registration
of Securities to be Registered Registered Per Unit (1) (1) Fee (2)
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<S> <C> <C> <C> <C>
Series B 13 1/4% Senior Notes due 2010 .... $200,000,000 100% $200,000,000 $52,800 (3)
------------------------------------------------------------------------------------------------------
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(1) Estimated pursuant to Rule 457 solely for the purpose of calculating the
registration fee.
(2) Pursuant to Rule 457(f)(2), the registration fee has been calculated using
the book value of the securities being registered.
(3) Previously paid.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
WILL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
WILL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This registration statement covers the registration of an aggregate
principal amount of $200,000,000 of 13 1/4% Series B Senior Notes due 2010 of
Madison River Capital, LLC and Madison River Finance Corp., which will have
been registered under the Securities Act pursuant to a registration statement
of which this prospectus is a part, that may be exchanged for equal principal
amounts of Madison River's outstanding 13 1/4% Series A Senior Notes due 2010.
This registration statement also covers the registration of the exchange notes
for resale by Goldman, Sachs & Co. in market-making transactions. The complete
prospectus relating to the exchange offer follows immediately after this
explanatory note. Following the exchange offer prospectus are some pages of the
prospectus relating solely to these market-making transactions, including an
alternate outside front cover page, an additional risk factor entitled "Risk
Factors--Related to the Notes--You may find it difficult to sell your exchange
notes" to be used instead of the section entitled "Risk Factors Related to the
Exchange Offer," an alternate section entitled "Use of Proceeds," an alternate
section entitled "Plan of Distribution" and an alternate back cover page. In
addition, the market-making prospectus will not include the following captions,
or the information set forth under these captions, in the exchange offer
prospectus: "Summary--The Exchange Offer," "The Exchange Offer" and "Important
United States Federal Tax Considerations." All other sections of the exchange
offer prospectus will be included in the market-making prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these notes until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these notes, and it is not soliciting an offer to buy these +
+notes in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated June 23, 2000.
PROSPECTUS
[LOGO]
Madison River Capital, LLC
Madison River Finance Corp.
Exchange Offer for
$200,000,000
13 1/4% Senior Notes Due 2010
-----------
The Exchange Offer
.The exchange offer expires at 5:00 p.m., New York City time, on ,
2000, unless we extend the expiration date.
-----------
For a discussion of factors that you should consider before exchanging your
outstanding notes, see "Risk Factors" beginning on page 11.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------
, 2000
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
As a result of this exchange offer, we will become subject to the
informational requirements of the Securities Exchange Act of 1934. As a result,
we will be required to file annual, quarterly and special reports and other
information with the Securities and Exchange Commission. You may read and copy
any of these reports, statements and other information that we may file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call 1-800-SEC-0330 for further information on the
public reference rooms. Our filings will also be available to the public from
commercial document retrieval services and at the web site maintained by the
SEC at http://www.sec.gov. The indenture governing the notes requires us to
file reports and other information required to be filed under the Exchange Act
with the SEC and provide such information to you, upon request, regardless of
whether we are subject to the reporting requirements of the Exchange Act.
We have filed a registration statement on Form S-4 to register with the SEC
the exchange notes to be issued in exchange for the outstanding notes. This
prospectus is part of that registration statement. As allowed by the SEC's
rules, this prospectus does not contain all of the information you can find in
the registration statement or the exhibits to the registration statement.
Statements contained in this prospectus concerning the provisions of documents
are not necessarily summaries of all provisions of those documents. If we have
filed any other document as an exhibit to the registration statement, you
should read the exhibit for a more complete understanding of the document or
matter.
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SUMMARY
The following summary is intended to highlight certain information contained
elsewhere in this prospectus. This summary is not intended to be a complete
statement of all material facts of the offering and is qualified in its
entirety by the more detailed information and historical and pro forma
financial information, including the notes relating to that information,
appearing elsewhere in this prospectus. Madison River Finance Corp., a wholly
owned subsidiary of Madison River Capital, LLC, has only nominal assets, does
not conduct any operations and has been formed solely to act as co-issuer of
the notes. For convenience, throughout this prospectus, the words "Madison
River," "we," "us," "our" or similar words refer to Madison River Capital, LLC,
Madison River Finance Corp. and all of their subsidiaries except where the
context otherwise requires. "Madison River Capital" refers solely to Madison
River Capital, LLC and "Madison River Finance" refers to Madison River Finance
Corp. References in this document to the acquisition of "Coastal
Communications" refer to the acquisition of Coastal Utilities, Inc. and its
subsidiary by Madison River which took place on March 30, 2000.
About Madison River
We are an established and rapidly growing provider of integrated
communications services and solutions that focuses on markets in the Gulf
Coast, Mid-Atlantic and Midwest regions of the United States. Our integrated
service offering to business and residential customers includes voice, high
speed data, fiber transport and Internet access. We currently operate in North
Carolina, Alabama, Illinois and Georgia. We have a reputation for delivering
high quality services and being highly responsive to our customers, which we
and our predecessors have established as providers of communications services
and solutions in these markets for over fifty years. As of March 31, 2000, we
served approximately 193,000 access lines. For the three month period ended
March 31, 2000, we would have generated $40.7 million in revenue on a pro forma
basis after giving effect to the acquisition of Coastal Communications as if it
was consummated on January 1, 2000. For the year ended December 31, 1999, we
would have generated $166.9 million in revenue on a pro forma basis after
giving effect to the acquisitions of Gulf Coast Services and Coastal
Communications as if they were consummated on January 1, 1999.
We are growing our customer base of businesses and residential multiple
dwelling units around our regional centers and along our 2,200 route-mile fiber
optic network by building on our established customer base, strong local
presence, state of the art technology and experienced local sales and operating
professionals. From our switches and our fiber transport networks, we are able
to address over 2.3 million access lines in attractive secondary markets such
as Greensboro, Raleigh-Durham, Mobile and Peoria. In order to further expand
the services available to our existing customers and to attract new customers,
we are aggressively developing high speed broadband service offerings utilizing
advanced bandwidth enhancing technologies such as asynchronous transfer mode,
or ATM, digital subscriber line, or DSL, and fiber optic networks. The number
of access lines we serve has increased faster than industry averages.
Our customer base is comprised of approximately 54,000 business and 139,000
residential access lines, 43,000 long distance customers and 27,000 Internet
access customers. Our network platform includes eight Nortel DMS digital
switches, one Siemens digital switch and five Nortel ATM switches. We currently
have interconnection agreements with BellSouth, GTE and Ameritech. We have been
certified as a Competitive Local Exchange Carrier (CLEC) in four states. In
addition, we have been certified as an Incumbent Local Exchange Carrier (ILEC)
in four states, and are qualified to provide long distance services in ten
states. Our 2,200 route-mile fiber optic network serves as the backbone to
allow us to offer competitive data and voice transport and Internet access
services to
1
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our existing and future customers and, we believe will also provide revenue
opportunities from providing transport services to other carriers.
Our equity holders are affiliates of Madison Dearborn Partners, Goldman,
Sachs & Co. and Providence Equity Partners and certain members of our
management. We have grown since our formation in 1996 through the acquisition
of four local telephone companies (ILECs) and fiber transport assets in our
current regions of operation.
Recent Developments.
On January 18, 2000, the member of Madison River Capital resolved to
contribute up to an additional $24.0 million in equity to Madison River Capital
from time to time as requested; however, the member of Madison River Capital is
not legally obligated to make such contribution.
On March 30, 2000, Coastal Communications, Inc., a subsidiary of Madison
River Capital, LLC, consummated the acquisition of 100% of the outstanding
stock of Coastal Utilities, Inc. and its wholly owned subsidiary, Coastal Long
Distance Services, Inc. Subsequent to completion of the acquisition, Coastal
Utilities became a wholly owned subsidiary of Coastal Communications. Purchase
accounting has been used to account for the acquisition.
Located in Hinesville, Georgia, approximately 23 miles southwest of
Savannah, Coastal Utilities is a rural local exchange carrier providing service
to Liberty County, Long County and Bryan County, including the cities of
Hinesville, Richmond Hills, Keller, Midway, Flemington, Allenhurst,
Walthorville and the Fort Stewart Military Reservation. Coastal Utilities
serves approximately 41,000 access lines and provides local exchange service,
custom calling features, long distance, dial-up Internet service, and customer
premise equipment, sales and services. For the year ended December 31, 1999,
Coastal Utilities had revenues of $36.8 million. As of March 31, 2000,
approximately 180 people were employed by Coastal Utilities.
Coastal Communications paid Daniel M. Bryant, G. Allan Bryant and The
Michael E. Bryant Life Trust $130.0 million in cash for all of the outstanding
stock of Coastal Utilities, pending post-closing adjustments. In addition,
Daniel M. Bryant, G. Allan Bryant and The Michael E. Bryant Life Trust received
Series A non-voting common stock and Series B non-voting common stock of
Coastal Communications in the face amount of $10.0 million and $5.0 million,
respectively. The Series A and Series B non-voting common stock have put and
call features exercisable by the holders and Coastal Communications. Based on
the put and call features, the holders of Series B non-voting common stock have
the right to put their shares for $35.0 million, and we have until April 2002
to repurchase the stock. The holders of Series A non-voting common stock may
put their shares to Coastal Communications in December 2005 for $17.7 million.
If the Series B shares are not put or called and repurchased in 2002, the
holders may put or we may call the stock pursuant to the terms of a
shareholders agreement.
To finance the acquisition, Coastal Utilities entered into secured term
facilities for $118.7 million and an unsecured revolving line of credit for
$10.0 million with the Rural Telephone Finance Cooperative. The term facilities
are composed of a $108.7 million, fifteen year facility and a $10.0 million,
interest only, five year facility. The term facilities and the line of credit
bear interest at the RTFC base rate plus 50 basis points and 100 basis points
for term loans and revolving lines of credit, respectively, with the right to
convert the fifteen year facility, at our option under certain circumstances,
into a fixed rate. Coastal Utilities converted the $108.7 million facility to a
fixed rate of 8.5% per annum through April 2005. Madison River Capital provided
the remaining required capital for the acquisition from its available cash. See
"Description of Other Indebtedness."
2
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Our principal executive offices are located at 103 South Fifth Street,
Mebane, North Carolina 27302, and our telephone number at that address is (919)
563-1500.
The Exchange Offer
On February 17, 2000, we privately placed $200.0 million of 13 1/4% senior
notes due 2010. We sold the outstanding notes to the following initial
purchasers:
. Goldman, Sachs & Co.,
. Bear, Stearns & Co. Inc.,
. Chase Securities Inc. and
. Morgan Stanley & Co. Incorporated.
These initial purchasers then sold the outstanding notes to institutional
investors.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchasers of the outstanding notes. Under
the registration rights agreement, we must deliver this prospectus to you and
must complete this exchange offer on or before [ . ], 2000. If this exchange
offer does not take place on or before [ . ], 2000, we must pay liquidated
damages to the holders of the outstanding notes until this exchange offer is
completed.
You may exchange your outstanding notes for exchange notes, which have
substantially identical terms. The exchange offer satisfies your rights under
the registration rights agreement. After the exchange offer is completed, you
will not be entitled to any exchange or registration rights with respect to
your outstanding notes, except under limited circumstances.
<TABLE>
<C> <S>
The Exchange Offer............... We are offering to exchange $200.0 million
principal amount of 13 1/4% senior exchange
notes which have been registered under the
Securities Act, for your outstanding 13
1/4% senior notes.
To exchange your outstanding notes, you
must properly tender them, and we must
accept them. We will exchange all
outstanding notes that you validly tender
and do not validly withdraw.
Resales.......................... We believe that you can offer for resale,
resell and otherwise transfer the exchange
notes without complying with the
registration and prospectus delivery
requirements of the Securities Act if:
. you acquire the exchange notes in the
ordinary course of your business;
. you are not participating, do not intend
to participate, and have no arrangement
or understanding with any person to
participate, in the distribution of the
exchange notes; and
. you are not an "affiliate" of ours, as
defined in Rule 405 of the Securities
Act.
By executing the letter of transmittal, or
by agreeing to the terms of the letter of
transmittal, you represent to us that you
satisfy each of these conditions. If you do
not satisfy any of these conditions and you
transfer any exchange note without
delivering a proper prospectus or without
qualifying for a
</TABLE>
3
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<TABLE>
<C> <S>
registration exemption, you may incur
liability under the Securities Act. We do
not assume this liability nor will we
indemnify you against this liability.
If a broker-dealer acquires exchange notes
for its own account in exchange for
outstanding notes, and it acquired the
outstanding notes through market-making or
other trading activities, the broker-dealer
must acknowledge that it will deliver a
proper prospectus when any exchange notes
are transferred. A broker-dealer may use
this prospectus for an offer to resell,
resale or other retransfer of the exchange
notes.
Expiration Date; Withdrawal The exchange offer expires at, and you may
Rights.......................... withdraw your tender of outstanding notes
at any time before, 5:00 p.m., New York
City time, on [ . ], 2000 unless we extend
the expiration date.
Procedures for Tendering
Outstanding Notes............... We issued the outstanding notes as global
securities.
When we issued the outstanding notes, we
deposited them with Norwest Bank Minnesota,
National Association, as custodian. Norwest
Bank issued a certificateless depositary
interest in the outstanding notes, which
represents a 100% interest in the
outstanding notes, to The Depository Trust
Corporation (DTC). Beneficial interests in
the outstanding notes, which direct or
indirect participants in DTC hold through
the certificateless depositary interest,
are shown on records that DTC maintains in
book-entry form.
If you wish to accept the exchange offer,
you must take the following steps, unless
you use an agent's message in connection
with a book-entry transfer:
. complete and sign the letter of
transmittal or a facsimile thereof, in
accordance with the instructions
contained in this prospectus and the
letter of the transmittal, and
. mail or deliver the letter of
transmittal, together with the
outstanding notes and any other required
documents, to the appropriate exchange
agent at the addresses set forth in this
prospectus and in the letter of
transmittal.
You must deliver these documents before
5:00 p.m., New York City time, on the
expiration date.
Do not send letters of transmittal and
certificates representing outstanding notes
to us or to DTC. Send these documents only
to the appropriate exchange agent.
Special Procedures for Beneficial
Owners.......................... If:
.you beneficially own outstanding notes,
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4
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<TABLE>
<C> <S>
. these notes are registered in the name of
a broker, dealer, commercial bank, trust
company or other nominee, and
. you wish to tender your outstanding notes
in the exchange offer,
please contact the registered holder as
soon as possible and instruct it to tender
on your behalf and comply with our
instructions set forth elsewhere in this
prospectus.
Guaranteed Delivery Procedures If you wish to tender your outstanding
for Outstanding Notes........... notes, and:
. time will not permit you to deliver the
required documents to the appropriate
exchange agent by the expiration date, or
. you cannot complete the procedure for
book-entry transfer on time, or
. you cannot deliver certificates for
registered notes on time,
you may tender your outstanding notes
pursuant to the procedures described in the
section entitled "The Exchange Offer" under
the heading "Procedures for Tendering
Outstanding Notes--Guaranteed Delivery."
Appraisal or Dissenters' Rights.. You do not have any appraisal or
dissenters' rights in the exchange offer.
If you do not tender your outstanding notes
or we reject your tender, you will not be
entitled to any further registration rights
under the registration rights agreement,
except under limited circumstances.
However, your notes will remain outstanding
and entitled to the benefits of the
indenture.
U.S. Federal Income Tax Your exchange of outstanding notes for
Considerations.................. exchange notes is not a taxable exchange
for United States federal income tax
purposes. You will not recognize any
taxable gain or loss or any interest income
as a result of the exchange.
Use of Proceeds.................. We will not receive any proceeds from the
exchange of notes pursuant to the exchange
offer.
Exchange Agent................... Norwest Bank Minnesota, National
Association is serving as the exchange
agent for the outstanding notes in the
exchange offer. The address, telephone
number and facsimile number of the exchange
agent are listed in the section of this
prospectus entitled "The Exchange Offer"
under the heading "Exchange Agent" and in
the letter of transmittal.
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5
<PAGE>
Summary of the Exchange Notes
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes, except that the exchange notes will be registered
under the Securities Act. As a result, the exchange notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damage provisions contained in the outstanding notes. The exchange
notes represent the same debt as the outstanding notes. Both the outstanding
notes and the exchange notes are governed by the same indenture, and the
indenture is governed by New York law.
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<C> <S>
Issuers.......................... Madison River Capital, LLC and Madison
River Finance Corp.
Total Amount of Notes Offered.... $200.0 million in principal amount of 13
1/4% Senior Notes due 2010.
Maturity......................... March 1, 2010.
Interest......................... Annual rate -- 13 1/4%.
Payment frequency -- every six months on
March 1 and September 1.
First payment -- September 1, 2000.
Ranking.......................... The exchange notes will:
. be unsecured senior obligations of
Madison River;
. rank senior to any future subordinated
indebtedness which expressly provides
that it will be subordinated to the
exchange notes;
. rank equal in right of payment with all
of our existing and future
unsubordinated, unsecured debts.
. rank junior to all our secured debt, to
the extent of the value of the assets
securing the debt; and
. also rank behind all existing and future
third-party indebtedness (including any
credit facilities) and other liabilities
of Madison River's subsidiaries.
As of March 31, 2000:
. Madison River Capital had no other
indebtedness; and
. the exchange notes were effectively
subordinated to liabilities and
obligations of Madison River Capital's
subsidiaries of $476.2 million.
Optional Redemption.............. On or after March 1, 2005, we may redeem
some or all of the exchange notes at any
time at the redemption prices listed in the
"Description of the Exchange Notes" section
under the heading "Optional Redemption."
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Before March 1, 2003, we may redeem up to
35% of the exchange notes with the proceeds
of certain public equity offerings by, or
strategic investments in, Madison River
Capital or its direct parent at the price
listed in the "Description of the Exchange
Notes" section under the heading "Optional
Redemption."
Mandatory Offer to Repurchase.... If we sell assets under certain
circumstances, or upon certain change of
control events, we must offer to repurchase
the exchange notes at the prices listed in
the "Description of the Exchange Notes"
section under the heading "Repurchase at
the Option of Holders."
Basic Covenants of Indenture..... The indenture, among other things,
restricts our ability and the ability of
our subsidiaries to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase
our member interests;
. make various investments;
. 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;
. dispose of all or substantially all of
our assets and the assets of our
subsidiaries; and
. enter into transactions with affiliates.
These covenants are subject to a number of
important limitations and exceptions. For
more details, see "Description of the
Exchange Notes" section under the heading
"Certain Covenants."
Absence of a Public Market for
the Exchange Notes.............. The exchange notes will be new securities
for which there will not initially be a
market. As a result, the development or
liquidity of any market for the exchange
notes may not occur. The initial purchasers
have advised us that they currently intend
to make a market in the exchange notes.
However, you should be aware that the
initial purchasers are not obligated to do
so. In the event such a market may develop,
the initial purchasers may discontinue it
at any time without notice. We do not
intend to apply for a listing of the
exchange notes on any securities exchange
or on any automated dealer quotation
system.
</TABLE>
Risk Factors
You should carefully consider the information set forth under the caption
"Risk Factors" beginning on page 11 and all the other information in this
prospectus before deciding whether to participate in the exchange offer.
7
<PAGE>
Summary Financial and Operating Data
The following table presents summary historical and pro forma financial and
operating data about us. Prior to the formation of Madison River Capital, LLC
in September 1999, the operations were consolidated at the Madison River
Telephone Company, LLC level. Concurrent with the formation of Madison River
Capital as a subsidiary of Madison River Telephone Company, all operations were
consolidated at the Madison River Capital level. All historical operations
presented in these financial statements prior to the formation of Madison River
Capital include the combined financial statements of the operating
subsidiaries. The historical data for 1997 represents the operations of Madison
River and its predecessor, Mebcom Communications. Madison River was organized
on April 5, 1996 as a limited liability company for the primary purpose of
acquiring and operating local exchange telephone companies. From the date of
organization through 1997, Madison River had not engaged in any revenue
producing activities and was a development stage company. In January 1998,
Madison River acquired Mebcom Communications and its subsidiary, Mebtel, Inc.,
a local exchange company. Since Madison River had no telephone operations prior
to this acquisition, Mebcom is considered the predecessor to Madison River for
accounting purposes. In November 1998, Madison River acquired the operations of
Gallatin River.
The 1999 unaudited pro forma data gives effect to the sale of the
outstanding notes, the acquisition of Gulf Coast Services in September 1999 and
the acquisition of Coastal Communications in March 2000, and related financings
for each acquisition, as if all of these transactions had been consummated on
January 1, 1999. The 2000 unaudited pro forma data gives effect to the sale of
the outstanding notes and the acquisition and related financing of Coastal
Communications in March 2000 as if these transactions had been consummated on
January 1, 2000. The pro forma data is derived from the Unaudited Pro Forma
Consolidated Financial Information of Madison River, Gulf Coast Services and
Coastal Communications, which is included elsewhere in this prospectus. The
unaudited pro forma data does not purport to be indicative of the results that
would have been obtained had such transactions been completed as of the assumed
dates and for the periods presented nor are they necessarily indicative of
results that may be obtained in the future. You should read this information
together with "Unaudited Pro Forma Consolidated Financial Information,"
"Selected Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Madison River Capital's,
Mebcom's, Gulf Coast Services' and Coastal Communications' consolidated
financial statements and the notes relating to those statements included
elsewhere in this prospectus.
8
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<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------------------------------------- ------------------------------------
Historical Pro Forma Historical Pro Forma
--------------------------------------- ------------ ----------------------- ------------
1997 1997 1998 1999 1999 2000
Mebcom Madison Madison Madison 1999 Madison Madison 2000
(a) River (b) River (c) River (d) Consolidated River (e) River (f) Consolidated
------- --------- --------- --------- ------------ ----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(dollars in thousands, except for ratios and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 6,379 $ -- $ 16,864 $ 81,517 $166,852 $ 16,490 $ 31,605 $ 40,701
Operating Expenses:
Cost of services and
selling, general and
administrative
expenses............ 4,259 949 12,157 54,517 121,360 9,478 22,333 27,926
Depreciation and
amortization........ 715 12 4,177 21,508 43,884 4,224 8,217 10,681
------- ------ -------- --------- -------- -------- -------- --------
Total operating
expenses.............. 4,974 961 16,334 76,025 165,244 13,702 30,550 38,607
------- ------ -------- --------- -------- -------- -------- --------
Operating income
(loss)................ 1,405 (961) 530 5,492 1,608 2,788 1,055 2,094
Interest expense....... (409) (31) (3,893) (22,443) (63,896) (3,793) (12,205) (15,946)
Other income (g)....... 286 19 481 3,386 18,343 81 893 1,468
------- ------ -------- --------- -------- -------- -------- --------
Income (loss) before
income taxes.......... 1,282 (973) (2,882) (13,565) (43,945) (924) (10,257) (12,384)
Income tax (provision)
benefit............... (480) -- (52) (1,625) (2,336) 539 (2,236) (2,213)
------- ------ -------- --------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item.... 802 (973) (2,934) (15,190) (46,281) (385) (12,493) (14,597)
Minority interest...... -- -- -- -- (1,000) -- -- (250)
------- ------ -------- --------- -------- -------- -------- --------
Income (loss) before
extraordinary item.... 802 (973) (2,934) (15,190) (47,281) (385) (12,493) (14,847)
Extraordinary item..... -- -- (173) -- -- -- -- --
------- ------ -------- --------- -------- -------- -------- --------
Net income (loss)...... $ 802 $ (973) $ (3,107) $ (15,190) $(47,281) $ (385) $(12,493) $(14,847)
======= ====== ======== ========= ======== ======== ======== ========
Balance Sheet Data (at period
end) (h):
Cash and cash
equivalents........... $ 2,668 $7,698 $ 6,354 $ 83,729 n/a $ 5,386 $ 90,523 n/a
Telephone, plant and
equipment, net........ 6,980 69 89,486 293,322 n/a 90,095 349,360 n/a
Total assets........... 13,073 8,021 285,763 785,290 n/a 285,920 977,089 n/a
Long-term debt,
including
current portions ..... 5,522 -- 219,876 535,611 n/a 219,246 674,366 n/a
Total member's capital
(i)................... 4,364 6,885 54,070 165,994 n/a 54,676 153,501 n/a
Other Financial Data:
Capital expenditures... $ 1,385 $ 4 $ 6,056 $ 37,756 n/a $ 3,003 $ 11,090 n/a
Net cash provided by
(used in) operating
activities............ 2,887 (529) 3,582 12,938 n/a 1,628 (5,815) n/a
EBITDA (j)............. 2,120 (949) 4,707 27,000 45,492 7,012 9,272 12,775
Adjusted pro forma
EBITDA (j)............ -- -- -- -- 60,820 -- -- 13,731
Ratio of earnings to
fixed
charges (k)........... 4.1 -- -- -- -- -- -- --
Other Operating Data:
Access lines........... 9,031 -- 91,311 150,000 n/a 93,756 193,726 n/a
Employees.............. 51 6 248 745 n/a 248 923 n/a
</TABLE>
Note:
(a) Represents the historical consolidated financial information of Mebcom.
(b) Represents the historical consolidated financial information of Madison
River Capital.
(c) Represents the historical consolidated financial information of Madison
River Capital which includes the results of operations of Madison River
Capital and its subsidiaries, including Mebcom (acquired on January 1,
1998) and Gallatin River (acquired on November 1, 1998).
(d) Represents the historical consolidated financial information of Madison
River Capital, which includes the results of operations of Madison River
Capital and its subsidiaries, including Gulf Coast Services (acquired on
September 29, 1999).
(e) Represents the historical consolidated financial information of Madison
River Capital for the three months ended March 31, 1999, which includes the
results of operations of Madison River Capital and its subsidiaries.
(f) Represents the historical consolidated financial information of Madison
River Capital for the three months ended March 31, 2000, which includes the
results of operations of Madison River Capital and its subsidiaries,
including Coastal Communications (acquired on March 30, 2000).
9
<PAGE>
(g) Other income for the pro forma consolidated year ended December 31, 1999
consists primarily of interest income, proceeds from life insurance on a
deceased officer at Coastal Communications and gain on disposal of assets
of Gulf Coast Services, all of which are reflected in the historical
financial statements for the respective entity.
(h) Pro forma balance sheet data as of December 31, 1999 and March 31, 2000 is
not applicable as the offering of the outstanding notes, the acquisitions
of Gulf Coast Services and Coastal Communications and the related
financings for each acquisition are reflected in the historical balance
sheet as of March 31, 2000.
(i) Includes member's interest and accumulated deficit.
(j) EBITDA consists of operating income (loss) before depreciation and
amortization. Adjusted pro forma EBITDA is calculated by adding to pro
forma EBITDA (a) a non-recurring non-cash compensation expense associated
with Gulf Coast Services' employee stock ownership plan ("ESOP") (See "Note
3 to Gulf Coast Services, Inc. Consolidated Statements of Operations and
Cash Flows"), (b) non-cash compensation expense incurred in connection with
certain long-term incentive awards that were granted to certain employees
(See "Note 8 to Madison River Capital, LLC's Consolidated Financial
Statements"), (c) one-time costs incurred in connection with identifying
and remediating computer systems that were not Year 2000 compliant and
improving and developing our information technology infrastructure and (d)
one-time expenses associated with evaluating potential acquisitions of
assets being disposed of by Regional Bell Operating Companies that we
decided not to pursue.
EBITDA and Adjusted pro forma EBITDA are presented because we believe they
are frequently used by investors and other interested parties in the
evaluation of a company's ability to meet its future debt service, capital
expenditures and working capital requirements. However, other companies in
our industry may present EBITDA and Adjusted pro forma EBITDA differently
than we do. EBITDA and Adjusted pro forma EBITDA are not measurements of
financial performance under generally accepted accounting principles and
should not be considered as alternatives to cash flows from operating
activities as measures of liquidity or alternatives to net earnings as
indicators of our operating performance or any other measures of performance
derived in accordance with generally accepted accounting principles. EBITDA
is not calculated in the same manner as in the indenture with respect to the
notes. See the Consolidated Statements of Cash Flows included in our
financial statements.
The following table summarizes the impact of these adjustments to EBITDA for
the periods indicated to calculate Adjusted pro forma EBITDA:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
Pro Forma Pro Forma
Consolidated Consolidated
----------------- ------------------
<S> <C> <C>
EBITDA (as defined)................... $45,492 $12,775
Adjustments:
Gulf Coast Services' ESOP expense... 12,392 --
Management incentive plan expense... 2,576 956
Systems conversion/Y2K compliance
expense............................ 194 --
One-time transaction expenses....... 166 --
------- -------
Adjusted pro forma EBITDA............. $60,820 $13,731
======= =======
</TABLE>
(k) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and fixed charges (other than capitalized interest) by
fixed charges. Fixed charges consist of interest charges, amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense the Company
believes to be representative of interest. For the years ended December 31,
1997, 1998 and 1999, the pro forma year ended December 31, 1999, the three
months ended March 31, 1999 and 2000, and the pro forma three months ended
March 31, 2000, earnings of Madison River were insufficient to cover fixed
charges by $973, $2,882, $13,565, $43,945, $924, $10,257 and $12,384,
respectively.
10
<PAGE>
RISK FACTORS
You should carefully consider each of the following factors and all of the
other information set forth in this prospectus before deciding whether to
participate in the exchange offer. The risks and uncertainties described below
are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently believe to be immaterial may also adversely
affect our business.
Risk Factors Relating to Madison River
We have a limited operating history upon which you can evaluate our
performance.
We began operations in January 1998. Accordingly, we have a limited
operating history upon which you can base an evaluation of our performance and
your investment in the notes, including the reliability of our network and
future financial results. Our viability, profitability and growth will depend
upon successful implementation of our business plan. We cannot assure you that
we will successfully implement our business plan. While we have a current base
of approximately 193,000 access lines and operate over 2,200 route-miles of
fiber optic cable, we are still in the early stages of our operations. The
prospects for our success must be considered in light of the risks often
encountered in the establishment of a new business in an industry subject to
rapid technological and price changes and filled with many competitors.
Our significant amount of indebtedness could limit our operational flexibility
or otherwise affect our financial health.
We now have a significant amount of indebtedness. As of March 31, 2000, we
had:
. Total indebtedness of $674.4 million;
. Member's capital of $153.5 million;
. Debt to equity ratio of 4.4 to 1; and
. For the year ended December 31, 1999 and the three months ended March 31,
2000, our pro forma earnings would have been insufficient to cover our
fixed charges by $43.9 million and $12.4 million, respectively.
The indenture governing the notes limits our ability to undertake certain
transactions. The covenants in the indenture restrict our ability to:
. incur additional indebtedness;
. pay dividends on, redeem or repurchase our member interests;
. make various investments;
. sell certain assets or utilize certain asset sale proceeds;
. create certain liens or use assets as security in other transactions;
. enter into certain transactions with affiliates; and
. merge or consolidate with or into other companies, or dispose of all or
substantially all of our assets and the assets of our subsidiaries.
11
<PAGE>
These covenants are subject to a number of important exceptions. In
addition, our existing credit facilities contain (and credit facilities that
we may enter into in the future may contain) other and more restrictive
covenants, including covenants limiting our ability to incur debt and make
capital expenditures and limiting our subsidiaries' ability to make
distributions or pay dividends to us. In addition, these covenants may require
us to meet or maintain specified financial ratios and tests. Our ability to
meet these financial ratios could be affected by events beyond our control,
and no assurance can be given that we will be able to comply with these
provisions. A breach of any of these covenants could result in a default under
these credit facilities and/or the indenture. See "Description of the Notes--
Certain Covenants."
Our substantial indebtedness could have important consequences for you. For
example, it could:
. make it more difficult for us to satisfy our obligations with respect to
the notes;
. limit our flexibility to adjust to changing market conditions, reduce our
ability to withstand competitive pressures and increase our vulnerability
to general adverse economic and industry conditions;
. limit our ability to borrow additional amounts for working capital,
capital expenditures, research and development costs, future business
opportunities and other general corporate requirements or hinder us from
obtaining such financing on terms favorable to us or at all;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts, future business
opportunities and other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. make us vulnerable to increases in prevailing interest rates.
We may incur substantial additional indebtedness in the future. This could
further exacerbate the risks described above. The terms of our current
indebtedness do not fully prohibit us from incurring other indebtedness. Our
credit facilities currently permit additional borrowing of up to $38.8
million, and all of those borrowings would be effectively senior to the notes.
We may not be able to increase our business and revenues.
Consumers may not purchase our services. Our success will depend on our
ability to expand our current customer base, penetrate our target markets and
otherwise implement our business plan. Expansion of our customer base depends
on marketplace acceptance of our communications services and the willingness
of prospective customers to switch to our services from their current
carriers, which may be limited by the fact that some of our competitors have
long-standing relationships with customers and resources that are far greater
than ours.
We need to increase the volume of traffic on our network. We must increase
the volume of voice, data and Internet transmission on our network at the
prices we anticipate in order to realize the anticipated cash flow, operating
efficiencies and cost benefits of our network. If we do not develop long term
commitments with new customers, or maintain our relationships with current
customers, we will be unable to increase traffic on our network which could
adversely affect our business and our ability to achieve sufficient cash flow
to service the notes.
Prices may decline. The prices that we can charge our customers for network
services, including wholesale fiber capacity and voice telecommunications
services, could decline due to the following factors, among others:
12
<PAGE>
. installation by us and our competitors, some of which are expanding
capacity on their existing networks or developing new networks, of fiber
and related equipment that provides substantially more transmission
capacity than needed;
. recent technological advances that permit substantial increases in, or
better usage of, the capacity of transmission media;
. reduced differentiation in product quality and service resulting in
increased price competition; and
. strategic alliances or similar transactions that decrease industry
participants' costs.
Our ability to compete effectively will also depend upon our continued
ability to maintain price competitiveness.
We may not be successful in efficiently managing the growth of our business.
Our business plan will, if successfully implemented, result in rapid expansion
of our operations, which may place a significant strain on our management,
financial and other resources. To achieve and sustain growth we must, among
other things, monitor operations, control costs, maintain regulatory
compliance, maintain effective quality controls and significantly expand our
internal management, technical, provisioning, information, billing, customer
service and accounting systems.
We cannot guarantee that we will successfully obtain, integrate and use the
employee, management, operational and financial resources necessary to manage a
developing and expanding business in an evolving, regulated and increasingly
competitive industry.
We may not be able to achieve desired operating efficiencies from our
information and billing systems. Sophisticated information and billing systems
are vital to our growth and ability to monitor and control costs, bill
customers, process customer orders, provision customer service and achieve
operating efficiencies. We currently rely on internal systems and third party
vendors to provide our information and processing systems. Some of our billing,
customer service and management information systems have been developed by
third parties for us and may not perform as anticipated. Our plans for
developing and implementing our information and billing systems rely primarily
on the delivery of products and services by third party vendors. We may not be
able to develop new business, identify revenues and expenses, service
customers, collect revenues or develop and maintain an adequate work force if
any of the following occurs:
. vendors fail to deliver proposed products and services in a timely and
effective manner or at acceptable costs;
. we fail to identify adequately our information and processing needs;
. our related processing or information systems fail;
. we fail to upgrade systems when necessary; and
. we fail to integrate our systems with those of our major customers.
In addition, our right to use these systems is dependent upon license
agreements with third party vendors. Some of these agreements may be
cancellable by the vendor and the cancellation or nonrenewable nature of these
agreements could impair our ability to process orders or bill our customers.
Since we rely on third party vendors to provide some of these services, any
switch in vendors could potentially be costly and affect operating
efficiencies.
We are dependent on market acceptance of DSL-based services. We expect that
an increasing amount of our revenue will come from providing digital subscriber
line, or DSL-based services. The market for business, telecommuter and
residential Internet access is in the early stages of development. Because we
offer and expect to expand our offering of services to a new and evolving
market and because current and future competitors are likely to introduce
competing services, it is
13
<PAGE>
difficult for us to predict the rate at which this market will grow. Various
providers of high-speed digital communications services are testing products
from various suppliers for various applications, and it is unclear if digital
subscriber lines will offer the same or more attractive price-performance
characteristics. The markets for our services could fail to develop, grow more
slowly than anticipated or become saturated with competitors.
Development of our competitive local operations will negatively impact our cash
flow and financial results.
Our business plan includes expanding our operations to new markets where we
will operate as a competitive local exchange carrier offering local and long
distance voice, high-speed data, Internet access and transport services over
our fiber networks. The development of our CLEC business and the acquisition,
installation and expansion of our networks in new markets require significant
expenditures, and we must make a substantial portion of those expenditures
before we realize any revenue. We expect these necessary capital expenditures
to increase as we continue to implement our business plan and attempt to
provide competitive services in our target expansion markets. As a result of
these expenditures, together with the associated high initial service costs of
providing service in new markets, we expect to have negative cash flow and
operating losses from our expansion operations which will materially decrease
our EBITDA until we establish an adequate revenue base. We cannot be certain
that we will establish an adequate revenue base in each of our target markets
or in our target markets as a whole. Growth and profitability in our expansion
operations may also require interconnection and resale terms and pricing which
depend on federal and state regulatory decisions and court interpretations of
legislation, all of which are outside of our control.
We have risks relating to our network.
Rapidly changing communications technology and other factors may require us
to expand or adapt our network in the future. We expect that new products and
technologies will emerge as the telecommunications industry is subject to rapid
and significant changes in technology, and we cannot predict the effect of
these technological changes on our business. Further new technologies and
products may not be compatible with our existing technologies and systems.
These changes could require us to incur significant expenditures. New products
and technologies may (1) reduce the prices for our services or (2) be superior
to, and render obsolete, the products and technologies we use. If we do not
replace or upgrade our technology and equipment that becomes obsolete, we will
not be able to compete effectively because we will not be able to meet customer
expectations. We cannot assure you that technological changes in the
communications industry will not have a material adverse effect on our business
and our ability to achieve sufficient cash flow to service the notes. We may
not be able to obtain timely access to new technology on satisfactory terms, or
incorporate new technology into our systems in a cost effective manner, or at
all.
In addition to technological advances, other factors could require us to
further expand or adapt our network, including (1) an increasing number of
customers; (2) demand for greater data transmission capacity; and (3) changes
in our customers' service requirements. Expanding or adapting our network could
require substantial additional financial, operational and managerial resources,
any of which may not be available to us.
Furthermore, due to the limited development of our DSL-based services, the
ability of our network to connect and manage a substantial number of end users
at high digital transmission speeds is still unknown. While peak digital data
transmission speeds across our network between a central office and the end
user can exceed 1.1 megabits per second, the actual data transmission speed
over our network could be significantly slower due to:
. the type of DSL technology deployed;
14
<PAGE>
. the distance from end user to a central office;
. the condition and configuration of the telecommunications line utilized;
. the existence of and number of data transmission impediments on telephone
company copper lines;
. the gauge of copper lines; and
. the presence and severity of interfering transmissions on nearby lines.
For example, we are not certain whether we can successfully deploy higher DSL
speeds through digital loop carrier systems which, because they connect copper
lines to a fiber link, currently limit DSL service to as slow a speed as 128
kilobits per second.
Because we rely on incumbent local telephone companies to overcome technical
limitations associated with loop carrier systems in service areas outside our
own, we cannot assure you that we will be able to successfully deploy high-
speed DSL service to all areas in our markets. As a result, our network may not
be able to achieve and maintain the highest possible digital transmission
speed. Our failure to achieve or maintain high-speed digital transmissions
would have a material adverse effect on our business.
Network disruptions could adversely affect our operating results. The
success of our operations will require that our network provide competitive
reliability, capacity and security. Some of the risks to our network and
infrastructure include:
. physical damage;
. power loss from, among other things, adverse weather conditions;
. capacity limitations;
. software defects;
. breaches of security, including sabotage, tampering, computer viruses,
break-ins; and
. other disruptions that are beyond our control.
Disruptions or system failures may cause interruptions in service or reduced
capacity for customers. If service is not restored in a timely manner,
agreements with our customers may obligate us to provide credits or other
remedies to them, and this would reduce our revenues. Service disruptions could
also damage our reputation with customers causing us to lose existing customers
or have difficulty attracting new ones. Many of our customers' communications
needs are extremely time sensitive, and delays in signal delivery may cause
significant losses to a customer using our network.
We may not complete our network efficiently and on time. Our continued
ability to provide communications services and our ability to increase revenues
and make a profit will depend in part upon the successful, timely and cost
effective completion and enhancement of our network into our target markets
where we plan to compete as a competitive local service provider.
We need to obtain and maintain the necessary rights-of-way for our network.
As of March 31, 2000, we have acquired all necessary nonexclusive right-of-way
agreements covering ILEC and CLEC operations in existence. However, we may need
to obtain supplemental rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install conduit and related telecom equipment for the expansion of our
network into our target markets, where we plan to compete as a competitive
local service provider. We may not be successful in obtaining and maintaining
these right-of-way agreements or obtaining these agreements on acceptable terms
whether in new markets or in our existing markets. Some of these agreements may
be short-term or revocable at will, and we cannot assure you that we will
continue to have access to existing rights-of-way after they have expired or
terminated. Although we believe that alternative supplemental rights-of-way
will be available, if any of these agreements were terminated or could not be
renewed, we may be forced to remove our fiber optic cable from under the
streets or abandon our networks.
15
<PAGE>
Our utility right-of-way agreements are subject to certain conditions and
limitations on access and use and are subject to termination upon customary
default provisions. In some cases, these agreements require our fiber network
to be moved or removed in the event that the utility needs its right-of-way for
public utility purposes or no longer owns its right-of-way. We may not be able
to maintain all of our existing rights and permits or obtain and maintain the
additional rights and permits needed to implement our business plan. In
addition, our failure to maintain the necessary rights-of-way, franchises,
easements, licenses and permits may result in an event of default under certain
of our credit facilities.
Our ability to protect our proprietary technology is limited and
infringement claims against us could impact our ability to conduct our
business. We currently rely on a combination of copyright, trademark and trade
secret laws and contractual confidentiality provisions to protect the
proprietary information that we have developed. Our ability to protect our
proprietary technology is limited, and we cannot assure you that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. Also, we cannot be certain that
the intellectual property that local telephone companies or others claim to
hold and that may be necessary for us to provide our services will be available
on commercially reasonable terms. If we were found to be infringing upon the
intellectual property rights of others, we might be required to enter into
royalty or licensing agreements, which may be costly or not available on
commercially reasonable terms. If successful, a claim of infringement against
us and our inability to license the infringed or similar technology on terms
acceptable to us could adversely affect our business.
Expanding our services entails a number of risks.
Currently, we operate our business and provide our services almost
exclusively as a local telephone company. We are expanding our business by
providing new services to existing customers and by entering into new markets
to serve new customers as a competitive local and integrated communications
service provider. As we expand into new telecommunications businesses and enter
into new markets, we will face certain additional risks, including increased
legal and regulatory risks. The telecommunications businesses in which we
compete and our target markets are highly competitive and, as a new entrant, we
may be disadvantaged. The success of our entry into new telecommunications
businesses and markets will be dependent upon, among other things, our ability
to:
. integrate new equipment and software into our networks;
. design and/or obtain fiber optic network routes;
. obtain regulatory approval;
. develop strategic alliances or relationships;
. hire and train qualified personnel; and
. enhance our billing, back-office and information systems.
We may not be successful in expanding our services or entering new markets.
In addition, demand and market acceptance for any new products and services we
introduce, whether in existing or new markets, are subject to a high level of
uncertainty. Our inability to expand our services or to enter new markets
effectively could have a material adverse effect on our business.
We may need to raise more capital to expand our business.
In order to expand our fiber optic network and enter our target markets, we
may need to raise more capital. Additional capital could be needed for: (1)
network engineering and design, the
16
<PAGE>
installation of conduit and fiber, and the acquisition and installation of
switches and other network hardware and software, in connection with expanding
our network; (2) acquisition of additional rights-of-way; (3) expansion of
sales and marketing, and the development of billing and information systems;
and (4) hiring and training employees to service a larger customer base.
Based on our business plan, we believe that the net proceeds from the sale
of the outstanding notes, existing equity commitments, available borrowings
under our credit facility, cash and investments on hand and our cash flow from
operations will be adequate to meet our foreseeable liquidity needs for the
next two years. However, there is no guarantee that we will not need additional
capital earlier. While possible sources of additional capital include
commercial bank borrowings, vendor financing or the sale or issuance of equity
and debt securities to one or more strategic investors, our ability to arrange
additional capital and the cost of any financing will depend upon many factors,
some of which are beyond our control. We may be unable to raise additional
capital, and such failure to do so could have a material adverse effect on our
business.
We depend on key personnel.
Our business is dependent upon a small number of key executive officers. We
have entered into employment, confidentiality and noncompetition agreements
with Messrs. J. Stephen Vanderwoude, James D. Ogg, Paul H. Sunu, Donald K.
Roberton and Bruce J. Becker providing for employment of each executive for a
five year period, subject to termination by either party (with or without
cause) on 30 days' prior written notice, and an agreement not to compete with
us for a maximum period of up to fifteen months, following termination for
cause or voluntary termination of employment. We have not entered into
employment agreements with any other key executives.
We cannot guarantee that we will be able to attract or retain other skilled
management personnel in the future. The loss of the services of key personnel,
or the inability to attract additional qualified personnel, could have a
material adverse effect on our business and results of operation.
We face risks associated with our strategy of growth through acquisitions.
Our current business plan contemplates growth from future acquisitions. Any
future acquisitions will depend on our ability to identify suitable acquisition
candidates, to negotiate acceptable terms for their acquisition and to finance
those acquisitions. We will also face competition for suitable acquisition
candidates which may increase our costs and limit the number of suitable
acquisition candidates. In addition, future acquisitions by us could result in
the incurrence of debt or contingent liabilities, which could have a material
adverse effect on our business, and our ability to achieve sufficient cash flow
to service the notes. Any future acquisitions could also expose us to increased
risks, including, among others:
. the difficulty of assimilating the acquired operations and personnel;
. the potential disruption of our ongoing business and diversion of
resources and management time;
. the inability to generate revenues from acquired businesses sufficient to
offset acquisition costs;
. the inability of management to maintain uniform standards, controls,
procedures and policies;
. the risks of entering markets in which we have little or no direct prior
experience;
. the impairment of relationships with employees or customers as a result
of changes in management; and
. the impairment of supplier relationships.
As a result, we cannot be sure that any acquisitions will occur or that any
acquisitions, if made, would be successfully integrated into our operations.
17
<PAGE>
To date, we have grown through the acquisition of local telephone companies
and other operating assets. Our future operations depend largely upon our
ability to manage our growing business successfully. Our management team will
have to manage a more complex and larger number of operations than we have
previously operated. There can be no assurance that we will be successful in
integrating the various acquisitions. In addition, we may discover information
in the course of the integration of these acquisitions which may have an
adverse effect on our business and results of operations.
Year 2000 issue.
An issue exists for all companies that rely on computers after January 1,
2000. The "year 2000" problem is the result of the past practice in the
computer industry of computer programs using two digits rather than four to
define the applicable year. This practice will result in incorrect results when
computers perform arithmetic operations, comparisons or data field sorting
involving years later than 1999. Any of our computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
During 1999, we planned, inventoried and evaluated systems, remediated,
replaced where and when necessary and tested such remediation and replacements.
We used internal information systems technology, personnel and other personnel.
As a result, we experienced no year 2000 related issues on January 1, 2000. We
recognize that there may be residual effects related to year 2000 issues. Our
assessment of our year 2000 readiness will be ongoing as we continue to develop
our operating systems and rely on third party systems or additional third party
systems. We do not have any way to assess the costs related to remediation of
any residual year 2000 effect. We intend to use internal resources for such
remediation where possible. We may in the future identify a significant
internal or external year 2000 related residual issue which, if not remedied in
a timely manner, could have a material adverse effect on our business,
financial condition and results of operations.
Risk Factors Relating to the Telecommunications Industry
We face significant competition in our current and target markets.
We currently operate primarily as an incumbent local telephone company in an
industry that is highly competitive. However, due to the rural, low-density
characteristics of our existing operating areas, the high cost of entry into
these markets and the lack of concentration of medium and large business users,
we believe that compared to most other local exchange carriers, we have
historically faced relatively less competition in our existing markets. As
characteristics of our markets change, the likelihood of local competitors
entering our markets may increase.
Significant and potentially larger competitors could enter our markets at
almost any time. We may face competition from future market entrants, including
competitive local service providers, cable television companies, electric
utilities, microwave carriers, wireless telecommunications providers, Internet
service providers and private networks built by large end users and
municipalities. Increased competition could lead to price reductions, fewer
large-volume sales, reduced operating margins and loss of market share.
In addition, in each of the cities where we anticipate providing competitive
local services, the services we offer will compete principally with the
services offered by the incumbent local provider serving that area. These local
telephone companies have long-standing relationships with their customers and
have the potential to subsidize competitive services from monopoly service
revenues. The Federal Communications Commission's, or the "FCC's,"
interconnection decisions and the Telecommunications Act of 1996 (the "Telecom
Act") provide local telephone companies with
18
<PAGE>
increased pricing flexibility for their services and other regulatory relief,
which could adversely effect our competitive local operations. The local
telephone companies with which we compete may be allowed by regulators to lower
rates for their services, engage in substantial volume and term discount
pricing practices for their customers, or seek to charge us substantial fees
for interconnection to their networks.
Our success in our target service area depends upon our ability to increase
our share of the carrier services market by providing high quality services at
competitive prices. Many potential competitors have, and some potential
competitors are likely to enjoy, substantial competitive advantages, including
the following:
. greater name recognition;
. greater financial, technical, marketing and other resources;
. more extensive knowledge of the telecommunications business and industry;
and
. well established relationships with a larger installed base of current
and potential customers.
Local telephone companies can also adversely affect the pace at which we add
new customers to our competitive local business by prolonging the process of
providing unbundled network elements, collocations, intercompany trunks and
operations support system interfaces, which allow the electronic transfer
between local telephone companies and competitive carriers of needed
information about customer accounts, service orders and repairs. Although the
Telecom Act requires local telephone companies to provide the unbundled network
elements, interconnections and operations support system interfaces needed to
allow the customers of competitive carriers and other new entrants to the local
exchange market to obtain service comparable to that provided by the local
telephone companies to their own customers in terms of installation time,
repair response time, billing and other administrative functions, in many cases
the local telephone companies have not complied with the mandates of the
Telecom Act to the satisfaction of many competitors. In addition, the
interconnection regulations may be affected by the outcome of pending court
decisions and FCC rulemaking.
We face particular risks relating to our long distance business.
As part of our offering of bundled telecommunications services to our
customers, we offer long distance services. The long distance business is
extremely competitive and prices have declined substantially in recent years
and we expect prices to continue to decline. In addition, the long distance
industry has historically had a high average churn rate, as customers
frequently change long distance providers in response to the offering of lower
rates or promotional incentives by competitors. We rely on other carriers to
provide transmission and termination services for all of our long distance
traffic. We must enter into resale agreements with long distance carriers to
provide us with transmission services. These agreements typically provide for
the resale of long distance services on a per-minute basis and may contain
minimum volume commitments. Negotiation of these agreements involves estimates
of future supply and demand for transmission capacity as well as estimates of
the calling patterns and traffic levels of our future customers. In the event
we fail to meet our minimum volume commitments, we may be obligated to pay
underutilization charges and in the event we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means. The incurrence of any underutilization charges, rate increases
or termination charges could have a material adverse effect on our business and
our ability to achieve sufficient cash flow to service the notes.
We may not be able to compete effectively with the RBOCs in the provision of
long distance services.
Federal law currently prohibits RBOCs from providing certain types of long
distance telephone service in most states. However, this restriction may be
removed by the FCC if an RBOC meets
19
<PAGE>
certain specified conditions for a particular state and the FCC determines that
removal of the restriction is in the public interest. On December 22, 1999,
Bell Atlantic received approval from the FCC to provide long distance services
in New York State. On April 5, 2000, SBC filed a petition to provide long
distance services in Texas. If RBOCs obtain permission to provide these
services in more states, or if they are able to enter into teaming agreements
with others to circumvent these restrictions, our business could be adversely
affected. It would remove the major incentive RBOCs have to cooperate with
companies like ours to foster competition within their service areas, and it
would permit the RBOCs to offer both long distance and local exchange services,
a competitive advantage which companies like ours currently are able to offer
in those regions.
We are subject to extensive government regulation.
We are subject to varying degrees of federal, state and local regulation.
Changes in these regulations could materially increase our compliance costs or
prevent us from implementing our business plan. Regulation of the
telecommunications industry is changing rapidly, which affects our
opportunities, competition and other aspects of our business. The regulatory
environment varies substantially from state to state. In the states in which we
provide service, we are generally required to obtain and maintain certificates
of authority from regulatory bodies and file tariffs where we offer intrastate
services.
While our competitive local telephone and long distance businesses are
subject to government regulation, our incumbent local telephone businesses, in
particular, are highly regulated at both the federal and state levels. In
general, our incumbent local telephone businesses operate under regulations
limiting their rates of return on interstate and intrastate services. For
interstate services, the FCC periodically reviews the reasonableness of the
allowed rate-of-return these businesses may charge and may reduce such allowed
rate-of-return. In addition, the FCC is in the process of reforming the rules
that govern how these businesses charge long distance companies for completion
of interstate calls. If reforms already adopted with respect to larger
incumbent local telephone companies are applied to our incumbent local
telephone businesses, they could reduce the interstate costs recovered from
interstate access charges.
As a condition to its approval of Gallatin River Communications' acquisition
of Sprint Corporation's Illinois incumbent local telephone exchanges, the
Illinois Commerce Commission required Gallatin River Communications to file, in
an undocumented, informal proceeding, an informational earnings report covering
its first full calendar year of operations by April 2000. Gallatin River
Communications filed the required report on April 1, 2000. The information
supplied could be used by the Illinois Commerce Commission's staff to initiate
a proceeding to lower our intrastate rates, which may adversely affect our
business and results of operations.
The Telecom Act requires incumbent local telephone companies to enter into
agreements to interconnect with, sell unbundled network elements to, and sell
services for resale to, competitive telephone companies. Our ability to compete
in the local exchange market as a competitive local telephone company may be
adversely affected by the incumbent's pricing of such offerings and related
terms, such as the availability of operation support systems and local number
portability, and would be adversely affected if such requirements of the
Telecom Act were repealed. Depending on the implementation of the Telecom Act,
our incumbent local telephone businesses may be forced to interconnect with,
and sell such services and elements to, competitors at prices that do not fully
recover our costs of providing such services.
With the passage of the Telecom Act, the regulation of our services has been
subject to numerous administrative proceedings at the federal and state level,
litigation in federal and state courts, and legislation in federal and state
legislatures. We cannot predict the outcome of the various proceedings,
litigation and legislation or whether and to what extent they may adversely
affect our business or operations.
20
<PAGE>
Many other aspects of our services and operations are subject to federal and
state regulation, including the introduction and pricing of new services,
contributions to universal service funds and our use of radio frequencies. We
currently receive revenues as a result of state and federal universal service
fund contributions and make payments to such funds. If these programs are
modified or discontinued, we may be adversely affected.
Risk Factors Relating to the Notes
Our ability to service our indebtedness will depend on our ability to generate
cash.
Our ability to make payments on and to refinance our indebtedness, including
the notes, and to fund planned capital expenditures, will depend on our ability
to generate cash in the future, our success in our financial and operating
performance, on our ability to successfully implement our business plan and our
ability to access the cash flow of our subsidiaries. This, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow
from operations, that currently anticipated cost savings and operating
improvements will be realized on schedule or that future borrowings will be
available to us under our credit facilities in an amount sufficient to enable
us to pay our indebtedness, including the notes, or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, including
the notes on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including our credit facilities and the
notes, on commercially reasonable terms or at all. In addition, we may be
forced to reduce or delay planned product improvement initiatives and capital
expenditures, sell assets, or obtain additional equity capital.
We may be unable to access the cash flow of our subsidiaries since certain
of our subsidiaries are parties to credit or other borrowing agreements that
restrict the payment of dividends, and such subsidiaries are likely to continue
to be subject to such restrictions and prohibitions for the foreseeable future.
In addition, future agreements governing the terms of our subsidiaries'
indebtedness may restrict our subsidiaries' ability to pay dividends to us. See
"Description of Other Indebtedness" and footnote 4 to the Consolidated
Financial Statements of Madison River Capital, LLC. As a result, we may be
unable to receive cash through dividends, distributions or other payments from
our subsidiaries sufficient to pay principal of and interest on the notes.
Madison River Capital is a holding company, and the notes will be structurally
subordinate to the indebtedness of the issuers' subsidiaries.
Madison River Capital is a holding company with no direct operations, and
its principal assets consist of the equity interests of its operating
subsidiaries. We are dependent upon dividends and other payments from our
subsidiaries to generate the funds necessary to meet our obligations, including
the payment of principal of and interest on the notes. Our subsidiaries,
however, are legally distinct from us, and our subsidiaries will have no
obligation, contingent or otherwise, to pay amounts due pursuant to the notes
or to make funds available to us for such payment. Because our subsidiaries do
not guarantee the notes, any right of the issuers to receive assets of any
subsidiary upon the subsidiary's liquidation or reorganization (and consequent
right of the holders of the notes to participate in the distribution or realize
proceeds from those assets) will be effectively subordinated to the claims of
the creditors of any such subsidiary in liquidation or reorganization. The
ability of our subsidiaries to make payments to us will be subject to, among
other things, the availability of funds, the terms of those subsidiaries'
indebtedness (which limits their ability to pay dividends or make
distributions) and applicable state laws. Claims of our subsidiaries'
creditors, including trade creditors,
21
<PAGE>
will generally have priority as to the assets of the subsidiaries over the
claims of the holders of Madison River Capital's indebtedness, including the
notes. Accordingly, the notes will be effectively subordinated to the
liabilities (including the credit facilities, trade payables and other
indebtedness) of our subsidiaries.
The holders of a majority of the notes have the right to waive defaults under
and to modify the indenture.
Subject to certain limitations specified in the indenture, the holders of a
majority in principal amount of the notes then outstanding have the right to:
. waive certain existing defaults or events of default;
. waive compliance with certain provisions of the indenture or the notes;
. modify or supplement the indenture; and
. direct the time, method and place of conducting any proceeding for any
remedy available to the trustee under the indenture.
These provisions of the indenture could allow actions affecting the notes to
be taken without the approval of all of the holders of the notes and thus may
have an adverse effect on the holders of the notes who do not approve of such
actions.
We may not be able to obtain financing necessary to complete a change of
control offer under the indenture.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all notes then outstanding. For
example, under the terms of Madison River Telephone Company's Operating
Agreement, at any time on or after January 2, 2006, certain members may require
Madison River Telephone Company to purchase all of their redeemable member
units at an amount equal to the fair market value of such units. Such an event
could result in a "Change of Control" under the indenture. However, it is
possible that we will not have sufficient funds at the time of the change of
control to make the required repurchase of notes or that restrictions in our
credit facilities will not allow such repurchases. In particular, a change of
control may cause an acceleration of the indebtedness outstanding under our
credit facilities, in which case such indebtedness would be required to be
repaid in full before redemption or repurchase of the notes. Certain important
corporate events, however, such as a leveraged recapitalization, which would
increase the level of our indebtedness, would not constitute a "Change of
Control" under our credit facilities. See "Description of the Notes--Repurchase
at the Option of Holders."
Risk Factors Related to the Exchange Offer
Your failure to exchange your outstanding notes may limit your ability to
transfer your notes.
We did not register the outstanding notes under the Securities Act or any
state securities laws, and we do not intend to do so after the exchange offer.
As a result, outstanding notes may be transferred only in limited circumstances
under the securities laws. If you do not exchange your outstanding notes in the
exchange offer by following the procedures described in this prospectus, you
will lose your right to have the outstanding notes registered under the
Securities Act, with some exceptions. If you continue to hold outstanding notes
after the exchange offer, you may be unable to sell them. Outstanding notes
that are not tendered or are tendered but not accepted will, following the
exchange offer, continue to be subject to the existing transfer restrictions.
You may find it difficult to sell your exchange notes.
While the outstanding notes are presently eligible for trading in the PORTAL
market of the NASD by qualified institutional buyers, there is no existing
market for the exchange notes, and we do not
22
<PAGE>
intend to apply for listing of the exchange notes on any securities exchange or
on any automated dealer quotation system. Although the initial purchasers have
informed us that they intend to make a market in the exchange notes, they are
not obligated to do so and may discontinue any such market at any time without
notice. In addition, such market making activity may be limited during the
exchange offer or during an offering under a shelf registration statement
should we decide to file one. As a result, we can make no assurances to you as
to the development, maintenance or liquidity of any market for the exchange
notes, your ability to sell the exchange notes or the price at which you may be
able to sell the exchange notes. If such markets were to exist, future trading
prices of the exchange notes may be lower than their principal amount or
purchase price and will depend on many factors, including, among other things,
prevailing interest rates, our operating results and the market for similar
securities. Historically, the market for securities similar to the exchange
notes, including non-investment grade debt, has been subject to disruptions
that have caused substantial volatility in the prices of such securities. We
cannot assure you that, if a market develops, it will not be subject to similar
disruptions. Such a disruption may adversely affect such liquidity and trading
markets independent of our financial performance and prospects.
Goldman Sachs may be deemed to be an affiliate of ours and, as such, may be
required to deliver a current market-maker prospectus and otherwise comply with
the registration requirements of the Securities Act in connection with any
secondary market sale of the exchange notes, which may affect its ability to
continue market-making activities. Pursuant to a registration rights agreement,
we have agreed to file a registration statement that would allow Goldman Sachs
to engage in market-making transactions in the exchange notes. We have agreed
to keep the market-making registration statement effective for as long as
Goldman Sachs may be required to deliver a prospectus in connection with its
secondary transactions in the exchange notes. We have agreed to pay
substantially all the costs and expenses related to the registration statement.
There can be no assurance that the interests of Goldman Sachs will not conflict
with the interests of the holders of the notes.
You may be subject to backup withholding on your exchange notes.
Backup withholding at a 31% rate will generally apply to payments with
respect to the exchange notes to non-U.S. holders if the non-U.S. holder fails
to furnish required information certification to us or our paying agent and
fails to otherwise establish an exemption. Any amounts withheld will be allowed
as a refund or a credit against your federal income tax liability, if any, if
you follow the procedures of the IRS for obtaining refunds or credits. You
should read the section entitled "Important United States Federal Income Tax
Considerations" under the heading "Information Reporting and Backup
Withholding" for information on how you can avoid backup withholding
requirements.
23
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical fact, included in this
prospectus are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "estimate," "anticipate," "plan," "seek" or
"believe." 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 future performance could differ materially from such
statements. Factors that could cause such or contribute to such differences
include, but are not limited to:
. the uncertainties and potential delays associated with integrating the
operations of Gulf Coast Services and Coastal Communications;
. the uncertainties and potential delays associated with our planned
expansion into competitive local service;
. the passage of legislation or court decisions adversely affecting the
telecommunications industry;
. our ability to repay our outstanding indebtedness;
. competition in the telecommunications industry; and
. the advent of new technology.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this prospectus. 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 date of this prospectus
or to reflect the occurrence of unanticipated events. Important factors that
could cause our actual results to differ materially from our expectations are
discussed under "Risk Factors" and elsewhere in this prospectus. All subsequent
written and oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the
statements in those sections.
MARKET AND INDUSTRY DATA
Market data used throughout this prospectus was obtained from internal
Madison River surveys and industry surveys and publications. Industry surveys
and publications generally state that the information contained therein has
been obtained from sources believed to be reliable, but there can be no
assurance as to the accuracy and completeness of the information. We have not
independently verified the market data. Similarly, internal Madison River
surveys, while believed to be reliable, have not been verified by any
independent sources.
USE OF PROCEEDS
We will receive no cash proceeds from the exchange of notes pursuant to the
exchange offer. The exchange offer is intended to satisfy our obligations under
the registration rights agreement.
24
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization on an actual
basis as of March 31, 2000:
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Other Indebtedness" and our consolidated financial statements, including the
related notes thereto, and other financial data appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------
Actual
--------------
(in thousands)
<S> <C>
Cash and cash equivalents........................................ $ 90,523
========
Borrowings under credit facilities .............................. 473,768
Outstanding notes................................................ 197,274
Miscellaneous.................................................... 3,324
--------
Total long-term debt (1)....................................... 674,366
Redeemable minority interest..................................... 45,000
Member's capital
Member's interest.............................................. 185,700
Accumulated deficit............................................ (32,199)
--------
Total member's capital....................................... 153,501
--------
Total capitalization......................................... $872,867
========
</TABLE>
--------
(1) Excludes any potential borrowings under any undrawn credit facilities
totalling $38.8 million.
25
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables contain selected financial and operating data of
Madison River as of and for each of the three years in the period ended
December 31, 1999 and for the period from April 5, 1996 (inception) to December
31, 1996 and as of and for the three month periods ended March 31, 1999 and
2000, and for its predecessor, Mebcom, as of and for each of the three years in
the period ending December 31, 1997. Prior to the formation of Madison River
Capital, LLC in September 1999, the operations of the operating subsidiaries
were consolidated at the Madison River Telephone Company, LLC level. Concurrent
with the formation of Madison River Capital as a subsidiary of Madison River
Telephone Company, all operations were consolidated at the Madison River
Capital level. These amounts, except for the three month periods ended March
31, 1999 and 2000, were derived from audited consolidated financial statements
of these companies. The selected financial data presented, as of and for the
three month periods ended March 31, 1999 and 2000, was derived from our
unaudited financial statements. In the opinion of management, the unaudited
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations at the dates and for the periods so
presented. The results of operations for the three month period ended March 31,
2000 are not necessarily indicative of the operating results to be expected for
the entire year. The following information should be read in conjunction with,
and is qualified in its entirety by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the notes thereto and the other financial and
operating data included elsewhere in this prospectus.
26
<PAGE>
MADISON RIVER CAPITAL, LLC
Selected Financial and Operating Data
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------------------- -----------------------
1996 1997
------------------- -------------------
1998 1999 1999 2000
1995 Madison Madison Madison Madison Madison Madison
Mebcom (a) Mebcom(a) River (b) Mebcom(a) River (b) River (c) River (d) River (e) River (f)
---------- --------- --------- --------- --------- --------- --------- ----------- -----------
(dollars in thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues............... $ 5,003 $ 5,435 $ -- $ 6,379 $ -- $ 16,864 $ 81,517 $16,490 $ 31,605
Operating Expenses:
Cost of services and
selling, general and
administrative
expenses............. 3,642 3,756 429 4,259 949 12,157 54,517 9,478 22,333
Depreciation and
amortization......... 571 765 2 715 12 4,177 21,508 4,224 8,217
------- ------- ------ ------- ------ -------- -------- ------- --------
Total operating
expenses............... 4,213 4,521 431 4,974 961 16,334 76,025 13,702 30,550
------- ------- ------ ------- ------ -------- -------- ------- --------
Operating income
(loss)................. 790 914 (431) 1,405 (961) 530 5,492 2,788 1,055
Interest expense....... (442) (428) (16) (409) (31) (3,893) (22,443) (3,793) (12,205)
Other income........... 498 388 11 286 19 481 3,386 81 893
------- ------- ------ ------- ------ -------- -------- ------- --------
Income (loss) before
income taxes........... 846 874 (436) 1,282 (973) (2,882) (13,565) (924) (10,257)
Income tax (provision)
benefit................ (185) (226) -- (480) -- (52) (1,625) 539 (2,236)
------- ------- ------ ------- ------ -------- -------- ------- --------
Income (loss) before
extraordinary item..... 661 648 (436) 802 (973) (2,934) (15,190) (385) (12,493)
Extraordinary item..... -- -- -- -- -- (173) -- -- --
------- ------- ------ ------- ------ -------- -------- ------- --------
Net income (loss)...... $ 661 $ 648 $ (436) $ 802 $ (973) $ (3,107) $(15,190) $ (385) $(12,493)
======= ======= ====== ======= ====== ======== ======== ======= ========
Balance Sheet Data (at
period end):
Cash and cash
equivalents............ $ 947 $ 1,974 $ 532 $ 2,668 $7,698 $ 6,354 $ 83,729 $ 5,386 $ 90,523
Telephone plant and
equipment, net......... 6,264 6,390 77 6,980 69 89,486 293,322 90,095 349,360
Total assets........... 11,660 12,437 615 13,073 8,021 285,763 785,290 285,920 977,089
Long-term debt,
including current
portions............... 5,996 5,747 -- 5,522 -- 219,876 535,611 219,246 674,366
Total member's
capital................ 2,913 3,562 160 4,364 6,885 54,070 165,994 54,676 153,501
Other Financial Data:
Capital expenditures... $ 713 $ 951 $ 79 $ 1,385 $ 4 $ 6,056 $ 37,756 $ 3,003 $ 11,090
Net cash provided by
(used in) operating
activities............. 1,013 1,585 (376) 2,887 (529) 3,582 12,938 1,628 (5,815)
EBITDA (g)............. 1,361 1,679 (429) 2,120 (949) 4,707 27,000 7,012 9,272
Ratio of earnings to
fixed charges (h)...... 2.9 3.0 -- 4.1 -- -- -- -- --
</TABLE>
Note:
(a) Represents the historical consolidated financial information of Mebcom.
(b) Represents the historical consolidated financial information of Madison
River Capital.
(c) Represents the historical consolidated financial information of Madison
River Capital which includes the results of operations of Madison River
Capital and its subsidiaries, including Mebcom (acquired on January 1,
1998) and Gallatin River (acquired on November 1, 1998).
(d) Represents the historical consolidated financial information of Madison
River Capital, which includes the results of operations of Madison River
Capital and its subsidiaries, including Gulf Coast Services (acquired on
September 29, 1999).
(e) Represents the historical consolidated financial information of Madison
River Capital for the three months ended March 31, 1999, which includes
the results of operations of Madison River Capital and its subsidiaries.
(f) Represents the historical consolidated financial information of Madison
River Capital for the three months ended March 31, 2000, which includes
the results of operations of Madison River Capital and its subsidiaries,
including Coastal Communications (acquired on March 30, 2000).
(g) EBITDA consists of operating income (loss) before depreciation and
amortization. EBITDA is presented because we believe it is frequently used
by investors and other interested parties in the evaluation of a company's
ability to meet its future debt service, capital expenditures and working
capital requirements. However, other companies in our industry may present
EBITDA differently than we do. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to cash flows from operating activities or
as a measure of liquidity or as an alternative to net earnings as an
indicator of our operating performance or any other measure of performance
derived in accordance with generally accepted accounting principles. See
the Consolidated Statements of Cash Flows included in our financial
statements.
(h) The ratio of earnings to fixed charges is computed by dividing income
before income taxes and fixed charges (other than capitalized interest) by
fixed charges. Fixed charges consist of interest charges, amortization of
debt expense and discount or premium related to indebtedness, whether
expensed or capitalized, and that portion of rental expense the Company
believes to be representative of interest. For the years ended December
31, 1996, 1997, 1998 and 1999 and for the three months ended March 31,
1999 and 2000, earnings of Madison River were insufficient to cover fixed
charges by $436, $973, $2,882, $13,565, $924 and $10,257, respectively.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma consolidated statements of operations
of Madison River for the three months ended March 31, 2000 and the year ended
December 31, 1999 give effect on a pro forma basis to the following
transactions:
. the acquisition of Gulf Coast Services in September 1999;
. the acquisition of Coastal Communications in March 2000; and
. the issuance of the outstanding notes, and the related increase in
interest expense.
The 2000 unaudited pro forma data gives effect to the issuance of the
outstanding notes and the acquisition and related financing of Coastal
Communications in March 2000 as if these transactions had been consummated on
January 1, 2000. The 1999 unaudited pro forma data gives effect to the issuance
of the outstanding notes, the acquisition of Gulf Coast Services in September
1999 and the acquisition of Coastal Communications in March 2000, and related
financings for each acquisition, as if all of these transactions had been
consummated on January 1, 1999. The pro forma adjustments are based on the
historical financial statements of Madison River and the acquired businesses
recorded using the purchase method of accounting, which allocates the aggregate
purchase price to the assets acquired and liabilities assumed based upon their
respective fair values. The excess of the purchase price over the fair value of
assets acquired, net of liabilities assumed, has been recorded as goodwill. We
believe that the allocations set forth herein are reasonable; however, they are
subject to revision as additional information becomes available. Our detailed
assumptions and estimates are described in the accompanying supplemental notes.
The 1999 and 2000 pro forma information is not intended to be indicative of
the actual results that would have been achieved had the acquisitions in fact
been consummated on January 1, 1999 or at January 1, 2000, respectively, nor
does it purport to be indicative of our future consolidated operating results.
Such pro forma financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Other Indebtedness," the consolidated financial
statements and notes thereto of Madison River, Gulf Coast Services and Coastal
Communications, and the other financial data appearing elsewhere in this
prospectus.
28
<PAGE>
MADISON RIVER CAPITAL, LLC
Unaudited Pro Forma Consolidated Statement of Operations
Three Month Period Ended March 31, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical
-------------------------- Pro forma Pro forma
Consolidated(a) Coastal(b) Adjustments Totals
--------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Local service............ $ 24,539 $7,371 $ -- $ 31,910
Long distance service.... 2,737 477 -- 3,214
Internet and enhanced
data service............ 1,030 534 -- 1,564
Transport service........ -- -- -- --
Miscellaneous
telecommunications
service and equipment... 3,384 745 -- 4,129
Provision for
uncollectible accounts.. (85) (31) -- (116)
-------- ------ ------- --------
Total operating
revenues............... 31,605 9,096 -- 40,701
Operating expenses:
Cost of goods sold and
direct costs............ 10,272 2,174 -- 12,446
Depreciation and
amortization............ 8,217 1,397 1,067 (c) 10,681
Selling, general and
administrative
expenses................ 12,061 3,419 -- 15,480
-------- ------ ------- --------
Total operating
expenses............... 30,550 6,990 1,067 38,607
-------- ------ ------- --------
Net operating income....... 1,055 2,106 (1,067) 2,094
Interest expense........... (12,205) (1,045) (2,696)(d) (15,946)
Other income, net.......... 893 575 -- 1,468
-------- ------ ------- --------
(Loss) income before income
taxes and minority
interest.................. (10,257) 1,636 (3,763) (12,384)
Income tax expense......... (2,236) (569) 592 (e) (2,213)
-------- ------ ------- --------
(Loss) income before
minority interest......... (12,493) 1,067 (3,171) (14,597)
Minority interest.......... -- -- (250)(f) (250)
-------- ------ ------- --------
Net (loss) income.......... $(12,493) $1,067 $(3,421) $(14,847)
======== ====== ======= ========
</TABLE>
29
<PAGE>
MADISON RIVER CAPITAL, LLC
Notes to Unaudited Pro Forma Consolidated Statement of Operations
Three Month Period Ended March 31, 2000
(Dollars in Thousands)
(a) This column represents Madison River's historical results of operations
for the three month period ended March 31, 2000.
(b) This column represents Coastal Communications' historical results of
operations for the period from January 1, 2000 to March 30, 2000, prior to
its acquisition.
(c) This adjustment represents (i) an increase in Coastal Communications'
depreciation as a result of the purchase of a building at the closing of
the Coastal Communications acquisition, (ii) a decrease in Coastal
Communications' depreciation as a result of the sale of certain property
at the closing of the Coastal Communications acquisition, (iii) the
amortization of debt issuance costs related to the offering of the
outstanding notes, and (iv) additional goodwill resulting from the
acquisition of Coastal Communications, as if the transactions had been
consummated at January 1, 2000. For purposes of the pro forma
presentation, the goodwill related to the Coastal Communications
acquisition was computed as the excess of the purchase price over the net
assets acquired excluding long-term debt based on its balance sheet as of
March 30, 2000. The goodwill associated with the above acquisition is
amortized over twenty-five years and the debt issuance costs are amortized
over the ten year life of the notes. The following table sets forth the
details of the depreciation and amortization adjustments:
<TABLE>
<CAPTION>
Three Month
Period Ended
March 31, 2000
--------------
<S> <C>
Increased depreciation related to purchase of a building.... $ 27
Decreased depreciation related to sale of certain property.. (4)
------
Net depreciation adjustment................................. 23
------
Goodwill amortization related to Coastal Communications
acquisition................................................ 925
Amortization of outstanding notes issuance costs............ 119
------
Net amortization adjustment................................. 1,044
------
$1,067
======
</TABLE>
Included in the assets of Gulf Coast Services that we purchased was fiber
recorded at a value of $90.0 million, which was not placed in service as of
March 31, 2000. If the fiber had been placed in service on January 1, 2000,
we would have recorded additional depreciation expense of $0.9 million for
the three month period.
(d) This adjustment represents additional interest expense on (i) the debt
financing with the RTFC related to the acquisition of Coastal
Communications and (ii) the offering of the outstanding notes on February
17, 2000, assuming the related debt was outstanding beginning on January
1, 2000. As of March 31, 2000, Madison River's long-term debt was $674.4
million. Madison River had $463.8 million of 15 year credit facilities
outstanding at a combination of fixed and variable rates with RTFC which
includes $108.7 million of long term debt to finance the Coastal
Communications acquisition borrowed on March 30, 2000. In addition,
Madison River also has a five-year, $10.0 million secured line of credit
outstanding at a variable interest rate with RTFC related to the Coastal
Communications acquisition drawn on March 30, 2000. Interest expense on
the $177.8 million term loan related to Gulf Coast Services acquisition
financing from January 1, 2000 to the date of the outstanding notes
offering, at which time it was repaid in full with the proceeds from the
outstanding notes offering, was eliminated for the three month period
ended March 31, 2000. The following table sets forth the details of the
interest expense adjustment:
30
<PAGE>
MADISON RIVER CAPITAL, LLC
Notes to Unaudited Pro Forma Consolidated Statement of Operations
Three Month Period Ended March 31, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Month
Period Ended
March 31, 2000
--------------
<S> <C>
Indebtedness related to Coastal Communications acquisition.. $ 2,525 (1)
Outstanding notes offering.................................. 3,330 (2)
Exclusion of Gulf Coast Services acquisition financing
repaid with the outstanding notes proceeds................. (2,114)(3)
Elimination of Coastal Communications' debt prior to
acquisition................................................ (1,045)(3)
-------
Net interest adjustment..................................... $ 2,696
=======
</TABLE>
--------
(1) Based on $108.7 million principal amount at a fixed rate of 8.5% and
$10.0 million principal amount at a variable rate assumed to be 8.7%
each for the three-month period.
(2) Based on $200.0 million principal amount at a stated fixed rate of
13.25% plus amortization of the discount for the period from January 1,
2000 to February 17, 2000, the date of the senior notes offering.
(3) Based on amounts reported in the historical financial statements.
(e) This adjustment reflects the impact of the pro forma interest expense on
the income tax provision for the three month period ended March 31, 2000.
The $3.3 million pro forma interest expense related to the outstanding
notes offering and the $2.1 million pro forma interest expense related to
the Gulf Coast Services acquisition financing do not have a tax impact as
it is recorded on Madison River Capital which is a limited liability
company.
(f) This adjustment represents the stated dividends on the redeemable minority
interest in Coastal Communications for the three month period ended March
31, 2000.
31
<PAGE>
MADISON RIVER CAPITAL, LLC
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical
----------------------------------- Pro Forma Pro Forma
Consolidated(a) Gulf(b) Coastal(c) Adjustments Totals
--------------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Local service......... $ 68,813 $29,488 $30,294 $ -- $128,595
Long distance
service.............. 2,292 8,322 1,822 -- 12,436
Internet and enhanced
data service......... 998 1,401 1,878 -- 4,277
Transport service..... -- -- -- -- --
Miscellaneous
telecommunications
service and
equipment............ 10,999 9,546 2,836 -- 23,381
Provision for
uncollectible
accounts............. (1,585) (191) (61) -- (1,837)
-------- ------- ------- -------- --------
Total operating
revenues........... 81,517 48,566 36,769 -- 166,852
Operating expenses:
Cost of goods sold and
direct costs......... 24,909 27,743 8,720 -- 61,372
Depreciation and
amortization......... 21,508 6,575 6,084 9,717 (d) 43,884
Selling, general and
administrative
expenses............. 29,608 17,593 12,787 -- 59,988
-------- ------- ------- -------- --------
Total operating
expenses........... 76,025 51,911 27,591 9,717 165,244
-------- ------- ------- -------- --------
Net operating income
(loss)................. 5,492 (3,345) 9,178 (9,717) 1,608
Interest expense........ (22,443) (1,769) (4,021) (35,663)(e) (63,896)
Other income, net....... 3,386 10,262 4,695 -- 18,343
-------- ------- ------- -------- --------
(Loss) income before
income taxes and
minority interest...... (13,565) 5,148 9,852 (45,380) (43,945)
Income tax expense...... (1,625) (3,215) (2,444) 4,948 (f) (2,336)
-------- ------- ------- -------- --------
(Loss) income before
minority interest...... (15,190) 1,933 7,408 (40,432) (46,281)
Minority interest....... -- -- -- (1,000)(g) (1,000)
-------- ------- ------- -------- --------
Net (loss) income....... $(15,190) $ 1,933 $ 7,408 $(41,432) $(47,281)
======== ======= ======= ======== ========
</TABLE>
32
<PAGE>
MADISON RIVER CAPITAL, LLC
Notes to Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1999
(Dollars in Thousands)
(a) This column represents Madison River's historical results of operations for
the year ended December 31, 1999, including the operating results of its
Gulf Coast Services subsidiary for the three month period from the date of
acquisition through December 31, 1999.
(b) This column represents Gulf Coast Services' historical results of
operations for the period from January 1, 1999 to September 29, 1999, prior
to its acquisition.
(c) This column represents Coastal Communications' historical results of
operations for the year ended December 31, 1999.
(d) This adjustment represents (i) an increase in Coastal Communications'
depreciation as a result of the purchase of a building at the closing of
the Coastal Communications acquisition, (ii) a decrease in Coastal
Communications' depreciation as a result of the sale of certain property at
the closing of the Coastal Communications acquisition, (iii) the
amortization of debt issuance costs related to the offering of the
outstanding notes, (iv) the amortization of debt issuance costs related to
additional indebtedness with RTFC and (v) additional amortization of
goodwill resulting from the acquisitions of Gulf Coast Services and Coastal
Communications, as if the transactions had been consummated at January 1,
1999. For the purposes of the pro forma presentation, the goodwill related
to the Coastal Communications acquisition was computed as the excess of the
purchase price over the net assets acquired excluding long-term debt based
on its balance sheet as of March 31, 2000. The goodwill associated with the
above acquisition is amortized over 25 years; the debt issuance costs are
amortized over the ten year life of the senior notes; and the RTFC debt
financing costs are amortized over 5 to 15 years. The following table sets
forth the details of the depreciation and amortization adjustments.
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Increased depreciation related to purchase of a
building.............................................. $ 105
Decreased depreciation related to sale of certain
property.............................................. (15)
------
Net depreciation adjustment.......................... 90
------
Goodwill amortization related to Gulf Coast Services
acquisition........................................... 5,211
Goodwill amortization related to Coastal Communications
acquisition........................................... 3,701
------
Net goodwill amortization adjustment................. 8,912
------
Senior notes offering cost amortization................ 712
Debt financing cost amortization for Gulf Coast
Services acquisition.................................. 2
Debt financing cost amortization for Coastal
Communications acquisition............................ 1
------
Net financing costs amortization adjustment.......... 715
------
Total depreciation and amortization adjustment....... $9,717
======
</TABLE>
Included in the assets of Gulf Coast Services that we purchased was fiber
recorded at a value of $90.0 million, which was not placed in service as of
December 31, 1999. If the fiber had been placed in service on January 1,
1999, we would have recorded additional depreciation expense of $3.6
million for the year ended December 31, 1999.
(e) This adjustment represents additional interest expense on (i) the debt
financings related to the acquisitions of Gulf Coast Services and Coastal
Communications and (ii) the offering of the outstanding notes, assuming the
related debt was outstanding beginning on January 1, 1999. As of December
31, 1999, Madison River had $534.7 million of 15 year credit facilities
outstanding
33
<PAGE>
MADISON RIVER CAPITAL, LLC
Notes to Unaudited Pro Forma Consolidated Statement of Operations--(Continued)
Year Ended December 31, 1999
(Dollars in Thousands)
at a combination of fixed and variable rates with RTFC and, as of March 30,
2000, obtained an additional $108.7 million long term debt and $10.0
million secured line of credit from RTFC to finance the Coastal
Communications acquisition. The interest rate on Madison River's term loans
ranged from 6.8% to 9.05% at December 31, 1999. The year-to-date interest
expense on the $177.8 million term loan related to Gulf Coast Services
acquisition financing was eliminated for the year ended December 31, 1999,
as it was repaid in full with the proceeds from the outstanding notes
offering. The following table sets forth the details of the interest
expense adjustment:
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Indebtedness related to Gulf Coast Services acquisition.. $ 8,719 (1)
Indebtedness related to Coastal Communications
acquisition............................................. 10,099 (2)
Outstanding notes offering............................... 26,662 (3)
Exclusion of Gulf Coast Services acquisition financing
repaid with the notes proceeds.......................... (4,027)(4)
Elimination of Gulf Coast Services' debt prior to
acquisition............................................. (1,769)(4)
Elimination of Coastal Communications' debt prior to
acquisition............................................. (4,021)(4)
-------
Net interest adjustment.................................. $35,663
=======
</TABLE>
--------
(1) Based on $138.4 million principal amount at a fixed rate of 8.4% for
the period from January 1, 1999 to September 29, 1999.
(2) Based on $108.7 million principal amount at a fixed rate of 8.5% and
$10.0 million principal amount at a variable rate assumed to be 8.6%,
each for the twelve-month period.
(3) Based on $200.0 million principal amount at a stated fixed rate of
13.25% plus amortization of the discount.
(4) Based on amounts reported in the historical financial statements.
(f) This adjustment reflects the impact of the pro forma interest expense on
the income tax provision for the year ended December 31, 1999. The $26.7
million pro forma interest expense related to the outstanding notes
offering and the $4.0 million pro forma interest expense related to the
Gulf Coast Services acquisition financing do not have a tax impact as it
is recorded on Madison River Capital which is a limited liability company.
(g) This adjustment represents the stated dividends on the redeemable minority
interest in Coastal Communications for the year ended December 31, 1999.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data," "Unaudited Pro Forma Consolidated Financial
Information" and Madison River Capital's, Gulf Coast Services' and Coastal
Communications' consolidated financial statements, including the notes related
thereto, and other financial data appearing elsewhere in this prospectus.
Certain statements set forth below constitute "forward-looking statements" that
involve risks and uncertainties. During our existence, we have completed
multiple acquisitions of telecommunications companies and assets. As a result,
we believe that period-to-period comparisons of our financial results to date
are not necessarily meaningful and should not be relied upon as an indication
of future performance. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including those set forth under "Risk Factors" or in other parts of this
prospectus.
Overview
We are an established and rapidly growing provider of integrated
communications services and solutions that focuses on markets in the Gulf
Coast, Mid-Atlantic and Midwest regions of the United States. Our integrated
service offerings to business and residential customers include voice, high-
speed data, fiber transport and Internet access. We currently operate in North
Carolina, Alabama, Illinois and Georgia. We have a reputation for delivering
high quality services and being highly responsive to our customers, which we
and our predecessors have established as providers of communications services
and solutions in these markets for over fifty years.
Since our inception, our principal activities have been to acquire,
integrate, operate and improve the operation of local telephone companies in
secondary markets. Through these acquisitions, we have acquired businesses with
positive cash flow, government and regulatory authorizations and
certifications, operating support systems, management and key personnel and
facilities.
Our current business plan is focused on developing our existing markets and
expanding, initially, from those established markets into 14 markets,
including:
. Mid-Atlantic: Greensboro, Raleigh, Durham, Cary and Winston-Salem, North
Carolina.
. Midwest: Peoria, Bloomington-Normal, Decatur and Springfield, Illinois.
. Gulf Coast: Mobile and Montgomery, Alabama; Biloxi, Mississippi;
Pensacola, Florida; and New Orleans, Louisiana.
Our parent company, Madison River Telephone Company, LLC, was founded in
April 1996 by a management team led by J. Stephen Vanderwoude, former president
and Chief Operating Officer of Centel Corporation. In January 1998, Madison
River Telephone Company acquired all of the outstanding common stock of Mebcom
Communications, Inc., our predecessor, a North Carolina telecommunications
provider for $23.0 million. Prior to the date of the Mebcom acquisition,
Madison River Telephone Company was a development stage company with no revenue
and principal activities consisting of procuring governmental authorizations,
raising capital, hiring management and other key personnel and pursuing
acquisition opportunities. Madison River Capital, LLC was formed as a wholly-
owned subsidiary of Madison River Telephone Company in September 1999 to serve
as a holding company for our operations.
In November 1998, we acquired certain assets and liabilities from Central
Telephone Company of Illinois, a local exchange company, for $232.0 million
which we refer to as the "Gallatin River"
35
<PAGE>
acquisition. We acquired Gulf Coast Services, a telecommunications provider
located in the southeastern United States, in September 1999 for $312.6
million. In March 2000, we acquired all of the outstanding capital stock of
Coastal Communications for $130.0 million in cash and issued Series A non-
voting common stock in the face amount of $10.0 million and Series B non-voting
common stock in the face amount of $5.0 million of Coastal Communications with
put and call features exercisable by the holders and us. See "--Liquidity and
Capital Resources" below for further discussion.
As a result of our limited operating history as a combined company, there is
limited operating and financial data about us upon which to base an evaluation
of our performance.
Factors Affecting Future Operations
The following is a discussion of the primary factors that we believe will
affect our operations over the next few years.
Revenues
To date, our revenues have been derived principally from the sale of local
and long distance communications services to customers in our existing markets.
Our voice services accounted for approximately 86.3% of our total revenues for
the three month period ended March 31, 2000. We intend to generate revenue from
voice services (local and long distance), dedicated fiber transport, Internet
access/enhanced data and other services.
We currently expect that a substantial portion of our revenues will be
generated from the sale of these communications services to customers in our
existing markets and, as we expand, to businesses and residential multi-
dwelling units in our new markets. We will continue to offer bundled services
and intend to continue to competitively price our services in each of our
markets. In addition, we intend to continue to offer combined service discounts
designed to give customers incentives to buy bundled services pursuant to long-
term contracts.
Over the next three years, we expect to derive a growing percentage of our
revenues from the sale of fiber transport services to major telecommunications
carriers and non-facilities based carriers. The majority of our 2,200 mile
fiber optic route connects Dallas and Atlanta, two of the four Tier I Network
Access Points. Further, the route connects other metropolitan areas such as
Houston and New Orleans. We expect this business will be price driven, and, as
a result, we will competitively price these services to gain market share.
Expenses
Historically, our operating expenses have remained relatively consistent
from period to period. As we expand into new markets, our operating expenses
will be less predictable. In the near term, we expect that our primary
operating expenses for our expansion markets will consist of cost of services
and selling, general and administrative expenses.
Cost of goods sold and direct costs
Our cost of goods sold and direct costs include:
. plant specific costs and expenses, such as inspection, testing and
conditioning, repairing telephone cable and poles;
. non-plant specific costs, such as provisioning, network, administrative,
power and engineering;
36
<PAGE>
. the cost of leasing unbundled copper loop lines and high capacity digital
lines from the ILECs to connect our customers and other carriers'
networks to our network;
. the cost of leasing transport from ILECs or other providers where our
fiber transport capacity is not available;
. the cost of collocating in ILEC central offices; and
. the cost of purchasing and installing electronics on our fiber network.
We have already entered into interconnection agreements with Bell South, GTE
and Ameritech. Other interconnection agreements may be required and
certifications by state regulators would be required in states where we are not
certified as a competitive provider.
We have a resale agreement with Global Crossing to provide long distance
transmission services. This agreement contains minimum volume commitments.
Although we believe that we will meet these commitments and expect to
experience lower cost per minute usage rates as volume increases, we may be
required to obtain capacity through more expensive means.
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 currently employ a professional sales team and intend to expand this team
to fulfill our expansion initiative. We offer a competitive compensation
package based on minimum quota sales and incentives for long-term contracts and
bundled services. To date, we have been able to recruit experienced
telecommunications sales professionals. It may not be possible to replicate the
sales structure in other target markets due to competition for qualified sales
professionals in the markets into which we are expanding.
We have operating support and other back office systems that we use to
enter, schedule, provision, track customer orders, test services and interface
with trouble management, inventory, billing, collection and customer care
service systems for our access lines in our established operations. As we
expand into new markets, we may review and consider the benefits offered by the
latest generation of systems, and we expect that our operations support systems
and customer care expenses may also increase.
As a result of our limited operating history as a consolidated company and
the number and timing of our acquisitions, there is limited operating and
financial data about us upon which to base an evaluation of our performance.
Although we expect to maintain positive EBITDA (operating income (loss) before
depreciation and amortization) as we expand from our established markets,
operating losses in the markets into which we intend to expand will materially
decrease our EBITDA. Further, our expansion plans require additional capital
expenditures necessary to deliver high quality integrated communications
services and solutions. Thus, we expect our free cash flow at times to be
negative. Although we are currently projecting an increase in revenues, our
revenues may not increase or even continue at their current levels, and we may
not achieve or maintain profitability or generate cash from operations in
future periods at the levels we currently project or at all. Our actual future
operating results will differ from our current projections, and those
differences may be material.
37
<PAGE>
Pro Forma Results of Operations
The pro forma statement of operations for the three month period ended March
31, 2000 has been prepared to give effect to the issuance of the outstanding
notes and subsequent application of the proceeds in February 2000, and the
Coastal Communications acquisition we consummated in March 2000, as if these
transactions occurred on January 1, 2000. The pro forma statement of operations
for the year ended December 31, 1999 has been prepared to give effect to the
Gulf Coast Services acquisition we consummated in September 1999, the issuance
of the outstanding notes and subsequent application of the proceeds in February
2000, and the Coastal Communications acquisition we consummated in March 2000,
as if these transactions had occurred on January 1, 1999.
Three Months Ended March 31, 2000
Pro forma revenues for the three months ended March 31, 2000 were $40.7
million. Pro forma operating expenses for the three months ended March 31, 2000
were $38.6 million, resulting in an operating margin of 5.1%. Cost of goods
sold and direct costs represented 30.6% of total revenues; selling, general and
administrative expenses represented 38.0% of total revenues; and depreciation
and amortization expenses represented 26.2% of total revenues. Amortization
expense consisted primarily of goodwill amortization resulting from
acquisitions.
Pro forma interest expense for the three months ended March 31, 2000 was
$15.9 million, or 39.2% of total revenues. Interest expense was primarily
attributable to the indebtedness related to acquisitions and the offering of
the outstanding notes.
Pro forma net loss for the three months ended March 31, 2000 was $14.8
million, or 36.5% of total revenues. Pro forma EBITDA for the quarter ended
March 31, 2000 was $12.8 million, or 31.4% of total revenues.
Year Ended December 31, 1999
Pro forma revenues for the year ended December 31, 1999 were $166.9 million.
Pro forma operating expenses for the year ended December 31, 1999 were
$165.2 million, resulting in an operating margin of 1.0%. Cost of goods sold
and direct costs represented 36.8% of total revenues; selling, general and
administrative expenses represented 36.0% of total revenues; and depreciation
and amortization expenses represented 26.3% of total revenues. Amortization
expense consisted primarily of goodwill amortization resulting from
acquisitions.
Pro forma interest expense for the year ended December 31, 1999 was $63.9
million, or 38.3% of total revenues. Interest expense was primarily
attributable to the indebtedness related to acquisitions and the offering of
the outstanding notes.
Pro forma net loss for the year ended December 31, 1999 was $47.3 million,
or 28.3% of total revenues. Pro forma EBITDA for the year ended December 31,
1999 was $45.5 million, or 27.3% of total revenues.
Historical Results of Operations
Three Months Ended March 31, 2000 compared to Three Months Ended March 31,
1999
In September 1999, we acquired Gulf Coast Services. As a result of this
acquisition, we believe that our historical financial statements for the
quarters ended March 31, 1999 and 2000 are not directly comparable. The
operating results for the quarter ended March 31, 2000 include three months of
operations of Gulf Coast Services, whereas the operating results for the
quarter ended March 31, 1999 do not.
38
<PAGE>
Total revenues increased $15.1 million to $31.6 million for the three months
ended March 31, 2000 from $16.5 million for the same period of 1999 and is
attributed principally to a full quarter of operations of Gulf Coast Services
in 2000. The increase resulting from revenues of Gulf Coast Services accounted
for $13.6 million, or 90.3% of the net increase. The remaining increase was
primarily due to stronger revenues from private label long distance and
Internet and enhanced data services. Revenues from voice services, which are
comprised of local, network access and long distance service, as a percentage
of total revenues, was approximately 88.9% and 86.3% for the quarters ended
March 31, 1999 and 2000, respectively.
Total operating expenses increased $16.8 million from $13.7 million, or
83.1% of total revenues in the first three months of 1999, to $30.6 million, or
96.7% of total revenues in the first three months of 2000. The increase is
attributed to the inclusion of three months of operations of Gulf Coast
Services and the expansion of the Internet and CLEC business. The inclusion of
Gulf Coast Services' operating expenses accounted for $12.5 million, or 74.2%,
and the expansion of the Internet and CLEC business accounted for $4.1 million,
or 24.3% of the net increase in operating expenses, respectively. Cost of goods
sold and direct costs, as a percentage of total revenues, increased from 24.2%
in the first three months of 1999 to 32.5% in the first three months of 2000,
and selling, general and administrative expenses, which consist of other taxes,
customer and corporate operations, as a percentage of total revenues, increased
from 33.3% in the first three months of 1999 to 38.2% in the first three months
of 2000. Depreciation and amortization expense, as a percentage of total
revenues, increased slightly from 25.6% in the first three months of 1999 to
26.0% in the first three months of 2000.
Net operating income decreased $1.7 million from $2.8 million, or 16.9% of
total revenues in the first three months of 1999, to $1.1 million, or 3.3% of
total revenues in the first three months of 2000. The decrease in net operating
income margin was directly attributable to the increase in operating expenses
as a percentage of total revenues.
Interest expense increased $8.4 million from $3.8 million, or 23.0% of total
revenues in the first three months of 1999, to $12.2 million, or 38.6% of total
revenues in the first three months of 2000. The increase in interest expense
was primarily due to the financing associated with the acquisition of Gulf
Coast Services and the offering of the outstanding notes.
Net loss increased $12.1 million from $0.4 million, or 2.3% of total
revenues in the first three months of 1999, to $12.5 million, or 39.5% of total
revenues in the first three months of 2000, as a result of the factors
discussed above. EBITDA increased $2.3 million from $7.0 million, or 42.5% of
total revenues in the first three months of 1999, to $9.3 million, or 29.3% of
total revenues in the first three months of 2000.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
In January and November 1998 and September 1999, we acquired Mebcom,
Gallatin River and Gulf Coast Services, respectively. As a result of the
acquisitions, we believe that our historical financial statements for the year
ended December 31, 1998 and 1999 are not directly comparable. The operating
results for the year ended December 31, 1999 include twelve months of
operations of Mebcom and Gallatin River, and three months of operations of Gulf
Coast Services, whereas the operating results for the year ended December 31,
1998 include twelve months of operations of Mebcom and only two months of
operations of Gallatin River.
Total revenues increased $64.7 million to $81.5 million for the year ended
December 31, 1999, attributed to a full year of operations of Gallatin River in
1999 versus two months in 1998, and the inclusion of three months of operations
of Gulf Coast Services in 1999. The change in Gallatin River's revenue
accounted for $46.7 million, or 72.3% of the net increase; Gulf Coast Services'
revenue accounted for $14.8 million, or 22.9% of the net increase. The
remaining increase was
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primarily due to an approximate $2 million increase in miscellaneous revenue as
directory advertising revenues increased. Revenues from voice services, which
is comprised of local, network access and long distance service, as a
percentage of total revenues, was approximately 87.9% and 87.2% for 1998 and
1999, respectively.
Total operating expenses increased $59.7 million from $16.3 million, or
96.9% of total revenues in 1998, to $76.0 million, or 93.3% of total revenues
in 1999. The increase is primarily due to a full year of operations of Gallatin
River in 1999 versus two months in 1998, the inclusion of three months of
operations of Gulf Coast Services, and the expansion of internet and CLEC
business. The change in Gallatin River's operating expenses accounted for $39.2
million, or 65.7% of the net increase; Gulf Coast Services' operating expenses
accounted for $12.9 million, or 21.6% of the net increase; and the expansion of
internet and CLEC business accounted for $6.8 million, or 11.4% of the net
increase in operating expenses. Cost of goods sold and direct costs, as a
percentage of total revenues, increased from 24.2% in 1998 to 30.6% in 1999,
whereas selling, general and administrative expenses, as a percentage of total
revenues, decreased from 47.9% in 1998 to 36.3% in 1999. Depreciation and
amortization expense, as a percentage of total revenues, increased slightly
from 24.8% in 1998 to 26.4% in 1999. Goodwill amortization expense increased
$6.5 million to $8.2 million in 1999 as a result of the acquisitions of
Gallatin River in November 1998 and Gulf Coast Services in September 1999.
Net operating income increased $5.0 million from $0.5 million, or 3.1% of
total revenues in 1998, to $5.5 million, or 6.7% of total revenues in 1999. The
increase in net operating income margin was directly attributable to the
decrease in operating expenses as a percentage of total revenues.
Interest expense increased $18.6 million from $3.9 million, or 23.1% of
total revenues in 1998, to $22.4 million, or 27.5% of total revenues in 1999.
The increase in interest expense was primarily due to the financings associated
with the acquisitions of Gallatin River and Gulf Coast Services.
Net loss increased $12.1 million from $3.1 million, or 18.4% of total
revenues in 1998, to $15.2 million, or 18.6% of total revenues in 1999, as a
result of the factors discussed above. EBITDA increased $22.3 million from $4.7
million, or 27.9% of total revenues in 1998, to $27.0 million, or 33.1% of
total revenues.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Prior to January 1998, we were a development stage company and did not have
any revenues. In January 1998 and November 1998, we acquired Mebcom and
Gallatin River, our initial operating entities. As a result of these
acquisitions, we believe that our historical financial statements for the years
ended 1997 and 1998 are not directly comparable. The operating results of 1998
include a full year of operations of Mebcom and two months of operations of
Gallatin River, whereas 1997 has no operating revenues but incurred expenses
due to the early development stage activities of the business.
Total operating revenues increased to $16.9 million in 1998, primarily due
to the acquisition of Mebcom, which accounted for $7.8 million in revenues, and
the acquisition of Gallatin River, which accounted for $9.0 million in revenues
for two months. Total revenues for 1998 included $14.8 million of revenues, or
87.9%, from voice services.
Total operating expenses increased $15.4 million from $1.0 million in 1997
to $16.3 million in 1998, primarily due to the acquisition of Mebcom, which
incurred $6.8 million in operating expenses, and the acquisition of Gallatin
River, which incurred $8.5 million in operating expenses for two months. Net
operating margin represents 3.1% of total revenues in 1998. Cost of goods sold
and
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direct costs accounted for $4.1 million, or 24.2% of total revenues; selling,
general and administrative expenses accounted for $8.1 million, or 47.9% of
total revenues; and depreciation and amortization expense accounted for $4.2
million, or 24.8% of total revenues in 1998. Goodwill amortization for 1998
associated with these acquisitions totaled $1.7 million, or 10.1% of revenues.
Interest expense increased approximately $3.9 million from $31.4 thousand in
1997 to $3.9 million in 1998, primarily attributable to the incurrence of
indebtedness of $23.3 million in January 1998 and $196.9 million in October
1998 with RTFC, to finance the acquisitions of Mebcom and Gallatin River and
related working capital. Total interest expense for 1998 represented 23.1% of
total revenues.
We incurred an extraordinary loss of $0.2 million in 1998, which was a
prepayment penalty arising from an early payoff of indebtedness with Rural
Telephone Bank.
Net loss increased $2.1 million from $1.0 million in 1997 to $3.1 million in
1998 as a result of the factors discussed above whereas, EBITDA increased $5.7
million from negative $1.0 million in 1997 to positive $4.7 million in 1998,
which represents 27.9% of total revenues for 1998.
Liquidity and Capital Resources
We are a holding company with no business operations of our own. Our only
significant assets are the capital stock/member interests of our subsidiaries.
Accordingly, our only sources of cash to pay our obligations are cash on hand,
distributions from our subsidiaries from their net earnings and cash flow. Even
if our subsidiaries determine to pay a dividend on or make a distribution in
respect of their capital stock/member interest, we cannot assure you that our
subsidiaries will generate sufficient cash flow to pay such a dividend or
distribute such funds or that they will be permitted to pay such dividend or
distribution under the terms of their credit facilities.
Since our inception, we have funded our operations and growth through cash
flow from operations, borrowings and equity contributions from our members. Our
balance sheet reflected positive working capital of $5.2 million, $63.2 million
and $69.3 million at December 31, 1998 and 1999 and March 31, 2000,
respectively.
Operating Activities. For the years ended December 31, 1998 and 1999, we
generated cash from operating activities of $3.6 million and $12.9 million,
respectively. For the three months ended March 31, 2000, we used cash in
operating activities of $5.8 million. Net cash used in operating activities for
the three months ended March 31, 2000 is attributed to our net loss for the
same period and a decrease in accounts payable. Net cash generated from
operating activities for 1999 was primarily attributable to the increase in
depreciation and amortization and accrued expenses. Net cash generated from
operating activities for 1998 was primarily attributable to the increase in
accounts payable, accrued expenses and depreciation and amortization expenses
resulting from the acquisition of Mebtel and Gallatin River. For the year ended
December 31, 1997, we used $0.5 million of cash in operating activities during
our development stage.
Investing Activities. For the years ended December 31, 1997, 1998 and 1999
and the three months ended March 31, 2000, we used cash in investing activities
of $3.7 thousand, $269.9 million, $374.6 million and $126.8 million,
respectively. Investing activities for the three month period ended March 31,
2000 were primarily attributable to the acquisition of Coastal Communications,
net of cash acquired, for $115.9 million and purchases of telephone plant and
equipment. Investing activities for 1999 were primarily attributable to the
acquisition of Gulf Coast Services, net of cash acquired, for $310.5 million
and purchases of telephone plant and equipment and stock in RTFC. Investing
activities for 1998 consisted primarily of the acquisition of Mebcom for $21.0
million in cash and the acquisition of Gallatin River for $232.0 million in
cash. The remaining cash used in investing activities for 1998 was spent on
purchases of telephone plant and equipment and stock in RTFC.
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Financing Activities. For the years ended December 31, 1997, 1998 and 1999
and the three months ended March 31, 2000, net cash provided by financing
activities was $7.7 million, $265.0 million, $439.0 million and $139.4 million,
respectively. Net cash provided by financing activities for the three month
period ended March 31, 2000 consisted of $318.3 million of loan proceeds,
including $197.3 million, net of discount, from the offering of the outstanding
notes, $118.7 million from RTFC to finance the Coastal Communications
acquisition, and $2.4 million from a mortgage loan on the building acquired in
the Coastal Communications acquisition. These amounts were offset by the
repayment of long-term debt of $179.6 million, which included the repayment of
the $177.8 million term loan from RTFC. Net cash provided by financing
activities for 1999 consisted of $127.1 million of equity contributions from
our member and $316.2 million of loan proceeds from RTFC. Most of the cash
provided by financing activities for 1999 was invested in the acquisition of
Gulf Coast Services. Included in cash provided by financing activities for 1998
were $227.1 million of loan proceeds from RTFC, and $50.3 million of equity
contributions from our member. Most of the cash provided by financing
activities for 1998 was invested in the acquisitions of Mebcom and Gallatin
River in 1998. Net cash provided by financing activities for 1997 came from
capital contributions from our member.
We or our subsidiaries currently have outstanding term and revolving credit
facilities with RTFC, which were entered into in connection with the
acquisitions of Mebcom, Gallatin River, Gulf Coast Services and, as of March
30, 2000, Coastal Communications.
In connection with the Mebcom acquisition, on January 16, 1998, Mebtel,
Inc., our wholly owned subsidiary, entered into a secured credit facility with
the RTFC consisting of a $23.3 million term loan and a $1.0 million revolving
line of credit. The term facility matures in January 2013, and the line of
credit matures in January 2003. A total of $22.6 million was funded from the
term loan at the closing of the acquisition. The term facility bears interest
at the base rate of RTFC plus 50 basis points, with the right to convert, at
our option under certain circumstances, into a fixed rate. In accordance with
the credit facility, we have converted $15.0 million of the facility into a
fixed rate of 6.8% per annum through September 2003. In April 2000, we
converted the remaining variable portion of the facility in the amount of $7.2
million into a fixed rate of 8.55% per annum through April 2003. At March 31,
2000, $21.4 million was outstanding under this term facility.
In connection with the Gallatin River acquisition, on November 1, 1998,
Gallatin River Communications, LLC, and Madison River Communications, Inc.
(renamed Madison River Management Company effective March 6, 2000) our wholly
owned subsidiaries, entered into a secured credit facility with the RTFC
consisting of a $123.2 million term facility and $10.0 million revolving line
of credit by Gallatin River Communications and a $73.7 million term facility by
Madison River Management Company. The term loans were fully funded at the
closing of the acquisition. The term facilities mature in October 2013, and the
line of credit matures in October 2003. The term facilities bear interest at
the base rate of RTFC's stated variable rate plus 75 basis points, with the
right to convert, at our option under certain circumstances, into a fixed rate.
In accordance with the credit facility, we have converted $123.2 million of the
facility into a fixed rate of 7.0% per annum through November 2004. In April
2000, we converted the $73.7 million term facility into a fixed rate of 8.8%
per annum through April 2003. At March 31, 2000, $121.9 million and $73.4
million, respectively, were outstanding under these term facilities.
To finance the Gulf Coast Services acquisition, on September 29, 1999, we
entered into a secured term facility with the RTFC for $177.8 million, and our
subsidiary, Gulf Telephone Company, entered into secured term facilities for
$138.4 million and $7.8 million and a revolving line of credit for $10.0
million with the RTFC. The $138.4 million and $177.8 million term facilities
were fully funded at the closing of the acquisition, and the $7.8 million term
facility is available to Gulf Telephone Company for working capital and capital
expenditures. In February 2000, we repaid in full our $177.8 million term
facility with proceeds from the outstanding notes offering. The term facilities
with Gulf Telephone Company mature in September 2014, and the line of credit
matures in September 2004. Gulf Telephone Company's term facilities bear
interest at the base rate of RTFC's stated variable
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rate plus 35 basis points, with the right to convert, at our option under
certain circumstances, into a fixed rate. In accordance with the credit
facility, we have converted the $138.4 million term facility into a fixed rate
of 8.4% per annum through October 2004. At March 31, 2000, $138.4 million was
outstanding under this term facility.
On February 17, 2000, we privately placed $200.0 million of the outstanding
notes. We used the proceeds of the offering to repay our $177.8 million secured
term facility with RTFC related to the Gulf Coast acquisition, to finance a
portion of the Coastal acquisition and for general corporate and working
capital purposes.
To finance the Coastal Communications acquisition, on March 30, 2000, our
subsidiary, Coastal Utilities, entered into secured term facilities for $118.7
million and a $10.0 million unsecured revolving line of credit with the RTFC.
The term facilities are composed of a $108.7 million, fifteen year facility and
a $10.0 million, interest only, five year facility. The term facilities and the
line of credit bear interest at the RTFC base rate plus 50 basis points for
term loans and 100 basis points for revolving lines of credit, respectively,
with the right to convert the fifteen year facility, at our option under
certain circumstances, into a fixed rate. In accordance with the credit
facility, we have converted the $108.7 million term facility into a fixed rate
of 8.5% per annum through April 2005. At March 31, 2000, $108.7 million and
$10.0 million, respectively, were outstanding under the facilities.
In addition to the $130.0 million in cash paid for the acquisition of
Coastal Communications, we also issued to the former shareholders of Coastal
Communications Series A non-voting common stock and Series B non-voting common
stock of Coastal Communications in the face amount of $10.0 million and $5.0
million, respectively. The Series A and Series B non-voting common stock have
put and call features exercisable by the holders and us. Based on the put and
call features, the holders of the Series B non-voting common stock have the
right to put their shares for $35.0 million, and we have until April 2002 to
repurchase the stock. The holders of Series A non-voting common stock may put
their shares to Coastal Communications in December 2005 for $17.7 million. If
the Series B shares are not put or called and repurchased in 2002, the holders
may put or we may call the stock pursuant to the terms of a shareholders
agreement.
Our business will require significant capital to fund capital expenditures,
working capital needs, debt service and cash flow deficits. In the near term,
we expect that our primary uses of cash will include the purchase and
installation of:
. electronics for our fiber optic network;
. digital ATM switches; and
. transmission equipment collocated in ILEC central offices.
Our expenditures will also include:
. real estate expenses in connection with our network facilities and
operations;
. the development and integration of OSS and other automated back office
systems;
. the upgrade and maintenance of our current network infrastructure;
. sales and marketing;
. corporate overhead; and
. personnel development.
We currently estimate that cash required to fund these capital expenditures
will be approximately $143.4 million through the end of 2001. For the three
months ended March 31, 2000, capital expenditures were $11.1 million. We
currently project that the net proceeds from the sale of the
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outstanding notes, existing equity commitments, available borrowings under our
credit facilities, cash and investments on hand and our cash flow from
operations will be sufficient to finance our currently contemplated expansion
initiatives in the Gulf Coast, Mid-Atlantic and Midwest regions of the United
States. 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;
. the success of our expansion initiatives;
. the demand for our services in our existing markets;
. our ability to acquire, develop and integrate the necessary OSS and other
back office systems; and
. regulatory, technological and competitive developments.
We may be unable to access the cash flow of our subsidiaries since certain
of our subsidiaries are parties to credit or other borrowing agreements that
restrict the payment of dividends, and such subsidiaries are likely to continue
to be subject to such restrictions and prohibitions for the foreseeable future.
In addition, future agreements governing the terms of our subsidiaries'
indebtedness may restrict our subsidiaries' ability to pay dividends to us.
Under the terms of Madison River Telephone's Operating Agreement, at any
time on or after January 2, 2006, certain members may require Madison River
Telephone to purchase all of their units at an amount equal to the fair market
value of the units. Subject to compliance with the restrictions contained in
our credit facilities and the indenture with respect to the notes, we may make
distributions to Madison River Telephone to satisfy this obligation. In
addition, as early as April 2002, we may be required to pay up to $35.0 million
to redeem a portion of the minority interests in Coastal Communications.
To the extent that our development 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, RTFC financing, vendor financing or the private or
public sales of equity and debt securities. We cannot assure you that we will
generate sufficient cash flow from operations in the future, that anticipated
revenue growth will be realized or that future borrowings or equity
contributions will be available in amounts sufficient to service our
indebtedness and make anticipated capital expenditures. Failure to obtain any
such financing could require us to significantly reduce our planned capital
expenditures and scale back our expansion plans, either of which could have a
material adverse effect on our projected financial condition and results of
operations.
Year 2000
During 1999, we planned, inventoried and evaluated systems, remediated,
replaced where and when necessary and tested such remediation and replacements.
We used internal information systems technology, personnel and other personnel.
As a result, we experienced no year 2000 related issues on January 1, 2000. We
recognize that there may be residual effects related to year 2000 issues. Our
assessment of our year 2000 readiness will be ongoing as we continue to develop
our operating systems and rely on third party systems or additional third party
systems. We do not have any way to assess the costs related to remediation of
any residual year 2000 effect. We intend to use internal resources for such
remediation where possible. We may in the future identify a significant
internal or external year 2000 related residual issue which, if not remedied in
a timely manner, could have a material adverse effect on our business,
financial condition and results of operations.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities," (SFAS
133) which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 was amended by SFAS No. 137 and is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. We do not expect that the adoption of SFAS No. 133 will have a material
impact on our consolidated financial statements.
Quantitative and Qualitative Disclosure of Market Risks
Although we invest our short-term excess cash balances, the nature and
quality of these investments are restricted under our internal investment
policies. These investments are limited primarily to U.S. Treasury agreement
and agency securities, certain time deposits and high quality repurchase
agreements and commercial paper. We do not invest in any derivative or
commodity type instruments. Accordingly, we are subject to minimal market risk
on our investments.
Our long term secured debt facilities with the RTFC amortize over a 15-year
period. As of April 30, 2000, we have fixed rate secured debt with the RTFC of
$463.8 million at a blended rate of 8.07%. The fixed rates on the facilities
expire from 2003 to 2005 at which time they will be adjusted. We have $10.0
million of variable rate secured debt with the RTFC. Changes in interest rates
would have an immaterial impact on the variable portion of our facility. The
outstanding notes have a stated fixed rate of 13.25%. Accordingly, we are
subject to only minimal interest rate risk on our long-term debt.
As part of the Coastal Communications acquisition, we acquired a stock
investment with a fair value, as of April 6, 2000, of $23.6 million for which
we are subject to market risk.
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BUSINESS
Our Business
We are an established and rapidly growing provider of integrated
communications services and solutions that focuses on markets in the Gulf
Coast, Mid-Atlantic and Midwest regions of the United States. Our integrated
service offering to business and residential customers includes voice, high
speed data, fiber transport and Internet access. We currently operate in North
Carolina, Alabama, Illinois and Georgia. We have a reputation for delivering
high quality services and being highly responsive to our customers, which we
and our predecessors have established as providers of communications services
and solutions in these markets for over fifty years. As of March 31, 2000, we
served approximately 193,000 access lines. For the three month period ended
March 31, 2000, we would have generated $40.7 million in revenue on a pro forma
basis after giving effect to the acquisition of Coastal Communications as if it
was consummated on January 1, 2000. For the year ended December 31, 1999, we
would have generated $166.9 million in revenue on a pro forma basis after
giving effect to the acquisitions of Gulf Coast Services and Coastal
Communications as if they were consummated on January 1, 1999.
We are growing our customer base of businesses and residential multiple
dwelling units around our regional centers and along our 2,200 route-mile fiber
optic network by building on our established customer base, strong local
presence, state of the art technology and experienced local sales and operating
professionals. From our switches and our fiber transport networks, we are able
to address over 2.3 million access lines in attractive secondary markets such
as Greensboro, Raleigh-Durham, Mobile and Peoria. In order to further expand
the services available to our existing customers and to attract new customers,
we are aggressively developing high speed broadband service offerings utilizing
advanced bandwidth enhancing technologies such as asynchronous transfer mode,
or ATM, digital subscriber line, or DSL, and fiber optic networks. The number
of access lines we serve has increased faster than industry averages.
Our customer base is comprised of approximately 54,000 business and 139,000
residential access lines, 43,000 long distance customers and 27,000 Internet
access customers. Our network platform includes eight Nortel DMS digital
switches, one Siemens digital switch and five Nortel ATM switches. We currently
have interconnection agreements with BellSouth, GTE and Ameritech. We have been
certified as a CLEC in four states. In addition, we have been certified as an
ILEC in four states and are qualified to provide long distance services in ten
states. Our 2,200 route-mile fiber optic network serves as the backbone to
allow us to offer competitive data and voice transport and Internet access
services to our existing and future customers, and we believe will also provide
revenue opportunities from providing transport services to other carriers.
Our equity holders are affiliates of Madison Dearborn Partners, Goldman,
Sachs & Co. and Providence Equity Partners and certain members of our
management. We have grown since our formation in 1996 through the acquisition
of four local telephone companies and fiber transport assets in our current
regions of operation.
Our Markets
Our established and target markets are predominantly secondary markets. We
believe customers in certain secondary markets have significant demand for a
comprehensive service offering, which is not yet fully provided. The above
average industry growth in our markets demonstrates the need and potential for
a provider of a full range of communications solutions. We believe the markets
we have targeted for expansion will experience rapid growth, similar to our
established markets, in their demand for telecommunications services. We
believe that our thorough knowledge of the markets in our regions, established
operations and reputation for a high standard of
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service give us a competitive advantage over potential entrants in the markets
we serve. We expect continued growth in our established markets where the lower
population density favors the incumbent local provider because of the high cost
of build-out relative to major urban markets. In the markets we are targeting
for expansion, we believe we will be able to build upon our operations
infrastructure, full suite of services, brand name recognition and reputation
for quality customer service to successfully enter these markets.
Management
Our management team has extensive experience in telecommunications, network
engineering and operations, customer care, sales and marketing, project
development and finance. J. Stephen Vanderwoude, our Chairman and Chief
Executive Officer, has extensive experience in the telecommunications industry,
including serving as President and Chief Operating Officer and a Director of
Centel Corporation and President and Chief Operating Officer of the Local
Telecommunications division of Sprint Corporation. Many of the other members of
the management team have prior telecommunications industry experience,
including positions at Sprint Corporation, Centel Corporation, Citizen's
Utilities and ICG Telecommunications. Our management team averages more than 30
years of experience in the telecommunications industry. We believe the skill
and experience of our management team will continue to provide significant
benefits to us as we continue to enhance and expand our service offerings.
Our Business Strategy
Our objective is to be the preeminent regional provider of integrated
communications services in the Gulf Coast, Mid-Atlantic and Midwest regions of
the United States. During the first quarter of 2000, we completed a strategic
reorganization of our business into two operating divisions, the Local
Telecommunications Division ("LTD") and the Integrated Communications Division
("ICD"). The LTD is responsible for the operation, integration and development
of our established markets. The ICD is responsible for developing and expanding
our target markets and transport business. The key elements of our strategy
include:
Expanding our established regional presence. We are focused on expanding our
base of services and reputation to serve the increasing needs of customers in
our established markets and to enter new markets within our regions. We believe
that we can capitalize on opportunities in select markets which have
traditionally been underserved and become a preeminent regional communications
provider. By pursuing a regional strategy, we are building on our established
operational and network infrastructure and our management expertise.
Continuing to deliver superior communications services. We intend to
continue to deliver superior communications services through our integrated
regional platform. We believe our performance advantage is derived from:
Superior delivery of a full suite of services: We provide customers with
a full suite of services. We have the ability to provide an array of
integrated services in voice, high-speed data, fiber transport and Internet
access, all on one bill. Our value-added services include DSL service,
voice mail, caller identification and conference bridge services. In most
instances, we believe our customer care and service delivery are better
than the services currently provided by the Regional Bell Operating
Companies, or RBOCs, and other incumbent providers.
Economies of scale: We have centralized many business and back office
functions including procurement, regulatory, finance, accounting, legal and
human resources, which creates economies of scale while maintaining local
management and customer service functions in our operating locations. This
allows us to serve our customers in a more cost-effective manner.
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Regional fiber optic network: Our 2,200 route-mile fiber network is a
state of the art fiber communications backbone interconnecting our markets,
which allows us to deliver high speed broadband applications to our
customers cost-effectively. The network will allow us to transport our and
other carriers' data for termination or interconnection in major markets
such as Atlanta, Dallas, Houston and New Orleans. A full service network
control center, operating twenty-four hours a day, seven days a week, to be
located in Dallas, Texas will provide backbone surveillance and performance
monitoring for all core and edge network devices by the second quarter of
year 2000.
Extensive local market knowledge: We have dedicated and experienced
senior managers and customer service representatives located in each region
with an extensive knowledge of the dynamics of their specific markets. In
addition, we customize our operations to fit the requirements of each
locale. We believe this approach will continue to produce better than
average growth in customer lines, increased service penetration in acquired
accounts and greater customer retention. Operating under local brand names,
such as Mebtel Communications, Gallatin Communications, GulfTel and Coastal
Communications, is a part of our marketing strategy.
Providing additional services. We seek to provide additional services and
integrated communications solutions efficiently to our established base of
customers and to customers in new markets. We intend to accomplish this by:
Marketing value-added services to our established customer base: As an
established provider of high quality, reliable services, we are pursuing a
strategy of bundling our products to provide customers a full range of
communications products through a single provider. For example, in our
North Carolina market we have increased our penetration of the long
distance market by an average of 1.5% per month by targeting our existing
customers since we began offering private label long distance service in
July 1999.
Delivering integrated communications services to businesses and
residential multiple dwelling units in our expansion markets: We believe
that offering integrated communications services appeals to customers in
businesses and residential multiple dwelling units who seek to select from
a full suite of services including voice, high speed data, dedicated fiber
transport, Internet access, conference bridge and voice mail, all on one
bill. Our existing network, including our fiber communications backbone,
along with our established operational infrastructure and management depth
allow us immediate access to customers in our target markets. By utilizing
the operations infrastructure in our established markets in combination
with leased or owned fiber, we believe we can execute a capital efficient
strategy to serve new markets effectively. In addition, we intend to
utilize our owned fiber backbone to target wholesale customers including
inter-exchange carriers, competitive access providers, Internet service
providers, competitive local exchange carriers and wireless carriers.
Growing through selective acquisitions. In addition to internal growth, we
believe that we can continue to grow our business by engaging in selective
acquisitions of value enhancing assets. Only those candidates that meet our
rigorous selection criteria will be considered for acquisition. Among other
criteria, we consider: current and historical operating performance; geographic
location of network and proximity to our established or expansion markets;
demographic profile of market; quality of infrastructure and facilities;
regulatory environment and outlook; integration; management; and opportunities
to provide integrated communications services.
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Organization
The following chart sets forth our current structure:
[ORGANIZATION CHART OF MADISON RIVER]
--------
(/1/Gulf)Long Distance, Inc. and Gulf Telephone Company are wholly-owned
subsidiaries of Gulf Coast Services, Inc.
(/2/Gallatin)River Communications LLC is a wholly-owned subsidiary of Gallatin
River Holdings, LLC.
(/3/Madison)River Capital, LLC owns 100% of the voting stock of Coastal
Communications, Inc. Non-affiliated parties own the remaining interests of
Coastal Communications, Inc.
(/4/Coastal)Long Distance Services, Inc. is a wholly-owned subsidiary of
Coastal Utilities, Inc.
Products and services
We currently provide integrated communications services to business and
residential customers and transport services to end users and other data and
voice carriers.
Integrated communications services. We seek to capitalize on our local
presence and network infrastructure by offering a full suite of integrated
communications services in voice, high-speed data, fiber transport, Internet
access and long distance services, as well as value-added features such as call
waiting, caller identification, DSL, voicemail and conference bridge services,
all on one bill.
Outside of the markets in which we are an incumbent local provider, we
intend to provide a full suite of integrated data-centric and voice-centric
communications services in a number of secondary markets. In many cases these
markets are within a reasonable proximity of our existing markets or our
network infrastructure. We have recently entered into new markets, such as
Raleigh-Durham, Cary, Chapel Hill and Greensboro, North Carolina, and have
plans to enter into other new markets such as Peoria and Springfield, Illinois
by the end of the year 2000.
Set forth below are brief descriptions of our communications services:
Voice. As of March 31, 2000, we provided local exchange service as an
incumbent local telephone company in areas serving approximately 193,000
access lines. We offer all of our local telephone subscribers value-added
features such as call waiting, call forwarding, conference calling, speed
dialing, caller identification and call blocking. As of December 31, 1999,
approximately 46% of our access lines subscribed to one or more of our
value added features. We offer local exchange services in all of the
markets in which we currently provide telecommunications services and
expect to offer local services in a total of 16 markets by
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December 31, 2000. We also offer a full range of retail long distance
services, including traditional switched and dedicated long distance, toll
free calling, international, calling card and operator services. Over time,
as part of our expansion strategy, we expect to supplement our own
switching facilities and existing regional fiber optic network by using the
unbundled network elements of incumbent local exchange carriers or other
competitive local service providers in the surrounding areas. On a pro
forma basis, our voice services accounted for approximately 86.3% of our
total revenues for the three months ended March 31, 2000.
In connection with our offering of local services, we have entered into
Interconnection Agreements with Ameritech (for Illinois), GTE (for Illinois
and North Carolina) and BellSouth (for all nine BellSouth States), to (1)
resell the interconnector's local exchange services and (2) interconnect
our network with the interconnector's network for the purpose of
immediately gaining access to the unbundled network elements necessary to
provide local exchange services and DSL. The Interconnection Agreements
contain provisions which grant us the right to obtain the benefit of any
arrangements entered into during the term of the Interconnection Agreements
between the interconnectors and any other carrier that materially differs
from the rates, terms or conditions of our Interconnection Agreements.
Under the Interconnection Agreements, we may resell one or more unbundled
network elements of the interconnectors at agreed upon prices. The
BellSouth and Ameritech Interconnection Agreements call for reciprocal
compensation associated with the transport and termination of
interconnected local traffic, excluding Internet service provider traffic.
The GTE agreement uses the "bill and keep" method of compensation for the
transport and termination of interconnected local traffic.
Data services. We provide high quality data services to our customers
primarily using ATM switches distributed strategically throughout our
network, enabling customers to use a single network connection to
communicate with multiple sites throughout our fiber optic network. We will
continue to seek, through strategic business relationships with other
providers, to interconnect our fiber optic network with the fiber optic
networks of other companies. We anticipate increasing demand for data
services in the future and expect that in the future a larger percentage of
our revenues will be derived from the sale of dedicated and multipoint data
services. We also provide high speed and high quality DSL services in all
of our markets.
Internet access, Intranet services and Web development. We also provide
dedicated ATM Internet access and Intranet services, electronic mail and
Web development services. We expect that businesses in the secondary
markets in which we operate will require faster Internet access and larger
bandwidth in the future, and we intend to offer products that will meet
that demand.
Other Services. We sell and install customer premise equipment such as
telephones and office private branch exchange systems for customers in our
markets. We also print, publish and sell advertising in local telephone
directories in markets where we are also the ILEC.
Transport services. We intend to provide services to major
telecommunications carriers and non-facilities based carriers that have
switches but do not own transmission facilities, to transport their already-
switched traffic between local access and transport areas, or LATAs. Digital
data and voice transmitted over a long-haul circuit for a customer are
generally routed by the customer through a switch to a receiving terminal in
our network. We transmit the signals over a long-haul circuit to the terminal
where the signals are to exit our network. The signals are then routed by the
customer through another switch and to the call recipient through a local
exchange carrier. We will provide DS-1, DS-3 and OC-N services. OC-N services
are used for very high capacity inter-city connectivity and specialized high
speed networking. The interface between our network and the customer's
facilities will be by either local exchange carrier or a direct connection
between our network and the facilities of the customer. We intend to bill the
customers a fixed monthly rate depending on the capacity and length of the
circuit, regardless of the amount the circuit is actually used. Our transport
facilities will be continually monitored by our network control center.
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Sales and marketing
Our marketing approach emphasizes locally managed, customer oriented sales,
marketing and service. As of March 31, 2000, the sales and marketing group was
comprised of 23 direct sales personnel in our existing markets. We intend to
expand our locally managed sales and marketing approach in each of our markets.
We have local staff and provide sales and customer support services in the
community. We believe that local presence facilitates a direct connection to
the community, which improves customer satisfaction and loyalty. From time to
time, we retain third-party telemarketers for specific purposes.
We or our predecessors have been serving these markets for at least five
decades. We intend to open additional offices in our larger markets as we
expand our operations. Our direct sales force targets medium and large
businesses as well as residential multi-tenant units. We perform detailed
demographic studies which enable us to identify customers we believe will
benefit most from our services. This approach improves sales productivity by
eliminating a majority of non-productive cold calls. Our sales personnel make
direct calls to prospective and existing business customers, conduct analyses
of business customers' usage histories and service needs, and demonstrate how
our service package will improve a customer's communications capabilities and
costs. Our sales personnel work closely with our network engineers and
information systems consultants to design new service products and
applications, such as xDSL and wholesale transport services. Our local offices
are primarily responsible for coordinating service and customer premise
equipment installation activities. Our technicians survey customer premises to
assess building entry, power and space requirements and coordinate delivery,
installation and testing of equipment.
Our sales force is trained to emphasize our customer focused sales and
customer service efforts, including our 24 hours a day, 365 days a year
customer service center, which a customer may call with any question or problem
regarding our services. Our employees answer customer service calls directly
rather than requiring customers to use an automated queried message system. We
believe our emphasis on a "single point of contact" for meeting the customers'
telecommunications needs, as well as our ability to provide a fully integrated
monthly billing statement for local, long distance, 800, international, voice
mail, Internet access and calling card service, is very appealing to our
prospective customers. Our ATM-based services are fully monitored for service
performance by systems in our network operating centers, enabling us to provide
preventative as well as corrective maintenance.
We seek to maintain and enhance the strong brand identity and reputation
that each of our local telephone companies enjoys in the communities that it
serves, as we believe this is a significant competitive advantage. For example,
in each of our major areas of operation, we market Internet access and presence
through our local brand names, madisonriver.net, mebtel.net, mebtel.com,
gallatinriver.com, coastal-online.com and gulfnet.com. As we market new
services, or reach out from our established markets, we will seek to use our
brand identities to attain increased recognition with potential customers.
Network
We offer full facilities-based services in each of our markets. We own and
operate a fully integrated telecommunications network comprised primarily of
five ATM core switches, capable of handling both voice and data, and nine TDM
digital central office switches in our three regions of operation. Our network
also includes a 2,200 route-mile fiber optic network predominately based in the
southeastern United States. We currently own all of our network facilities and
believe that our ownership creates strategic value for the company. We continue
to expand our network and look to identify new markets for other network
expansion opportunities and will consider potential network facility
acquisitions from time to time.
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We believe our proven Operational Support Systems (OSS) and Customer
Care/Billing systems allow us to meet or exceed our customers' expectations.
These OSSs include inter-company provisioning (Metasolve) and trading partner
electronic data exchange systems (DSET), which offer a rapid exchange of
mission critical data needed to provision and support the expansion of our
competitive local services customer base. Our OSSs are scalable to accommodate
our planned growth and expansion.
Switching Strategy. Our switch deployment strategy in our competitive local
operations incorporates both TDM switching devices as well as newer ATM "soft
switch" platforms. Using Nortel Network's Passport and Succession technology,
supported by high density wave division multiplexing, or HDWDM, fiber optic
transport, we are building a next generation ATM network. TDM switching systems
components are deployed as public switched telephone network interface vehicles
through newly available integrated ATM friendly modules in Nortel's DMS 500 and
ATM edge devices. We deliver both switched and non-switched data-centric and
voice-centric services to our targeted business and residential market segments
in a robust, cost effective, single solution package. Because of the growth in
customer demand for data-centric products, our ability to compete in the market
place is substantially improved by our single integrated voice-centric and
data-centric ATM delivery medium.
Presently, we have deployed two DMS500 Passport and Succession based host
systems in North Carolina and Illinois. In each case, we have extended our
switching footprint, employing ATM transport and "soft switch" remote
technology in lieu of TDM and pulse code modulation, or PCM, switching and
transport options. We believe our strategy of rapidly moving into nearby
markets, using an extensive SONET transport network based on the latest ATM
technology while leasing "last mile" digital qualified local loop facilities
from the incumbent local carrier, creates a highly competitive and robust
telecommunications alternative to traditional local high speed data and voice
services. In addition, deployment of remote ATM "soft switches" along our
existing fiber optic routes, in lieu of TDM remotes or host switching systems,
enables us to expand our network footprint in a cost effective and timely
manner with limited exposure to premature obsolescence.
A basic foundation of our switch and private line deployment tactic is
predicated on ATM's ability to handle single point and multi-point data-centric
transport alternatives. We believe this, together with our capacity to
dynamically allocate bandwidth between voice and data demands at the edge
device level, positions us on the leading edge of providing telecommunication
customer products and solutions.
We anticipate an increase in our voice and data handling capacity on our
existing local, inter-city and inter-state fiber network by deploying ATM
transport alternatives across our southeast fiber routes that increase voice
traffic through-put to at least four times that of obsolete PCM schemes.
Host switching systems will be strategically placed on our fiber route in
New Orleans, Louisiana and Mobile, Alabama. From there we intend to move across
our fiber network, deploying ATM remote switching devices in Biloxi,
Mississippi and Montgomery, Alabama. We plan to include Pensacola, Florida,
Dallas and Houston, Texas and Atlanta, Georgia as well as yet to be identified
small cities and rural areas along our existing routes.
Fiber Optic Facilities. Our owned high capacity fiber network in the Gulf
Coast region is capable of reaching over 20 major points of presences in six
southeastern states (Alabama, Florida, Louisiana, Mississippi, Georgia and
Texas). Presently, it extends approximately 2,000 route-miles linking Dallas to
Atlanta along a route touching a number of southern and southeastern cities
such as Houston, Texas; Baton Rouge and New Orleans, Louisiana; Biloxi,
Mississippi; Mobile and Montgomery, Alabama; and Pensacola, Tallahassee and
Lake City, Florida.
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In our fiber optic network in the Mid-Atlantic region, there are
approximately 575,000 business access lines within the reach of our existing
local service area. To reach these potential customers, we are developing an
intercity fiber optic network stretching 254 route miles from Raleigh-Durham
through the Research Triangle area to Winston-Salem, North Carolina. We
acquired this fiber through indefeasible rights of use arrangements lasting 20
years, as well as optical windows with providers of wholesale fiber capacity.
Serving as the backbone of our Gulf Coast and Mid-Atlantic regions, this
high capacity optical network allows us to offer a full range of data-centric
and voice-centric integrated communications services to our existing and
targeted customers, including other communications carriers. Our network offers
electronic diversity as well as diverse access routing.
Our fiber network's advanced fiber and transmission electronics provide us
with lower operating and maintenance costs compared with older fiber systems
that are typical in commercial use today. In addition, we have entered into
irrevocable rights of use and joint construction contracts, which have and will
continue to reduce our net cost per fiber mile.
Our network control center located in Mebane, North Carolina monitors all of
our networks in the Mid-Atlantic region from one location. A similar operation
has been established in Galesburg, Illinois for our markets in that region. In
addition, we will establish a full service network control center in Dallas,
Texas, which will provide backbone surveillance and performance monitoring for
all our core and edge devices by the end of the second quarter of 2000. These
three centers will provide support for each other as well.
Industry overview and competition
Over the past several years, the telecommunications industry has undergone
significant structural change. Many of the largest service providers have
achieved growth through acquisitions and mergers. These combinations have
provided access to new markets, new products and economies of scale. Despite
this consolidation, the number of new entrants is increasing and small new
entrants are gaining market share from the large and established providers, in
part, because the demand for all types of telecommunications services has been
increasing, with especially rapid growth in high-speed data services, including
the Internet.
The 1982 antitrust consent decree between AT&T and the U.S. Department of
Justice strongly influenced the current structure of the communications
industry. The consent decree was intended, among other things, to spur
competition in providing long distance service and supplying telecommunications
equipment. The Telecommunications Act of 1996 replaced the restrictions on the
RBOCs from the 1982 consent decree and enhanced the development of competition
in telecommunications services. The Telecommunications Act of 1996, among other
provisions:
. prohibits states from enforcing barriers to entry;
. requires most ILECs to interconnect with competing carriers on
nondiscriminatory terms;
. requires most ILECs to lease parts of their networks, including the
telephone lines that connect an end-user to a local exchange carrier's
switch, to competing carriers at cost-based prices; and
. requires most ILECs to provide service at wholesale rates to competing
carriers for resale to end-users.
By allowing providers to offer additional services, the Telecommunications Act
of 1996 also stimulated competition for virtually all communications services,
including local exchange service, long distance service and enhanced services.
Providers are increasingly bundling these services and providing one-stop
shopping for end-user customers.
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The rural and small urban ILEC industry is composed of a very large number
of relatively small independent companies. According to the United States
Telephone Association, there are over 1,300 independent telephone companies
with less than 25,000 access lines in the U.S. A majority of these small
telephone companies operate in sparsely populated rural areas where competition
from CLECs or wireless telecommunications companies (such as cellular or PCS
providers) is limited due to the generally unfavorable economics of
constructing and operating such competitive systems.
Most ILECs in rural and small urban markets are owned by families or small
groups of individuals and were founded soon after the expiration of Alexander
Graham Bell's patent in the 1890's. We believe that the owners of these small
companies are increasingly interested in selling such companies as the growing
technical, administrative and regulatory complexities of the local telephone
business challenge the capabilities of the existing management. In addition,
certain large telephone companies are selling many of their small rural
exchanges to focus their attention on their major metropolitan operations that
generate the bulk of their consolidated revenue and which are increasingly
threatened by competition. As a result of these circumstances, we believe that
we have, and in the future will have, numerous opportunities to acquire rural
and small urban telephone operations currently owned by the large telephone
companies.
Since the enactment of the Communications Act of 1934, federal and state
regulations promoting the widespread availability of telephone service have
allowed rural and small urban telephone companies to maintain advanced
technology while keeping prices affordable for customers. This policy
commitment was reaffirmed and expanded by the universal service provisions of
the Telecommunications Act of 1996. In light of the high cost per access line
of installing lines and switches and providing telephone service in sparsely
populated areas, a system of cost recovery mechanisms has been established to,
among other things, keep customer telephone charges at a reasonable level and
yet allow owners of such telephone companies to earn a fair return on their
investment. These cost recovery mechanisms, which are less available to larger
telephone companies, have resulted in robust telecommunications networks in
many rural and small urban areas, and such capabilities deter entry by
potential competitors in these small markets.
In markets where we implement our CLEC strategy, we will be subject to
competition from ILECs in those markets, as well as other CLECs, including
cable television operators, other ILECs operating outside their traditional
service areas, long distance carriers and wireless carriers. In addition, we
may compete against other CLECs for customer business. The ongoing
consolidation in the telecommunications industry could change the nature of our
competitive environment.
Employees
As of March 31, 2000, our work force consisted of 923 full time employees.
Approximately 169 of our employees are represented by collective bargaining
agreements with the International Brotherhood of Electrical Workers (IBEW) and
with the Communications Workers of America (CWA). Our labor agreement with the
CWA, covering employees of Gallatin River in Galesburg, Illinois expires on
April 30, 2002. Our labor agreements with the IBEW, covering employees of
Gallatin River in Dixon and Pekin, Illinois expire on November 30, 2002 and
September 30, 2002, respectively. There can be no assurance that, upon the
expiration of existing collective bargaining or similar agreements, new
agreements will be reached without union action or that any such new agreements
will be on terms satisfactory to us. We believe that our future success will
depend on our continued ability to attract and retain highly skilled and
qualified employees. We believe that our relations with our employees are good.
Properties
We own offices and space in a number of locations within our three regions
of operation, primarily for our central office switches, network monitoring,
customer service centers, sales offices and network equipment installations.
Our corporate headquarters and accounting center are located
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in 20,980 square feet of leased space in Mebane, North Carolina. The lease for
most of this space (including our renewal options) will expire in approximately
thirteen years. We believe our current facilities are adequate to meet our
needs in our existing markets for the foreseeable future.
Legal proceedings
On September 29, 1999, our parent company, Madison River Telephone Company,
LLC acquired all of the stock of Gulf Coast Services, Inc. On October 5, 1999,
nine former employees of a subsidiary of Gulf Coast, who had elected to retire
and receive cash distributions for their interests in an employee stock
ownership plan (ESOP) in 1996 and 1997 filed a class action lawsuit in Alabama
state court alleging breach of fiduciary duty, suppression, and
misrepresentation against, among others, Gulf Coast and its subsidiary.
Defendants removed the case to federal court, where it is currently pending as
Bobby Grimes, et al. v. Gulf Telephone Co., et al., CV-99-1006 (U.S. District
Court for the Southern District of Alabama). The complaint alleged that the
defendants failed to disclose to plaintiffs' ongoing negotiations for the sale
of the company and that the true value of their ESOP interests was higher than
the amounts offered to them in connection with their early retirement.
Plaintiffs have, since the inception of the case, filed an amended complaint on
November 18, 1999 adding ten additional named plaintiffs, and seeking class
certification, the establishment of a constructive trust to distribute proceeds
from the sale of Gulf Coast to the plaintiffs, and a preliminary injunction to
stop Gulf Coast from making any further distributions from the ESOP. The
plaintiffs are also seeking unspecified compensatory and punitive damages, and
attorneys fees as a result of defendants' alleged breach of fiduciary duty,
self dealing, misrepresentation and fraudulent inducement to retire and forego
the benefits of continued employment in connection with the plaintiffs'
retirement elections and ESOP distributions. On December 6, 1999, defendants
moved to dismiss plaintiffs' amended complaint on the ground that it failed to
state any claim upon which relief could be granted. Defendants' motion is
currently pending with the court.
On June 1, 2000, the parties filed a release and settlement with the court
pursuant to which they agreed to resolve this lawsuit and release each other
from all claims. Under the terms of the settlement, the defendants will
establish a $5.16 million fund to pay members of a class consisting of all
persons whose employment with Gulf Coast terminated in 1996 or 1997 and
received a distribution of their ESOP interests. The settlement provides that
class members will receive amounts ranging from $225 to $815 per share based on
their former holdings of Gulf Coast stock depending on when they left Gulf
Coast and whether or not they participated in an early retirement program. On
June 15, 2000, the court entered an order certifying the plaintiff class,
preliminarily approving the settlement, approving notice to the class, and
setting a fairness hearing for July 21, 2000, at which the parties intend to
seek final approval of the terms of the settlement from the court. Under the
terms of the court's order, class members have until July 31, 2000 to submit
claims against the settlement fund; class members may object to the terms of
the settlement, provided they do so in writing by July 14, 2000 and appear at
the fairness hearing; and class members may also opt out of the settlement by
giving notice on or before July 14, 2000. If former holders of more than 10% of
the Gulf Coast shares formerly held by the class members opt out of the
settlement, defendants may, at their discretion, withdraw from the settlement.
Madison River anticipates that the settlement will be approved by the court
and that all or substantially all of the plaintiff's claims will be resolved
through the settlement. Madison River does not expect to provide any of the
funding for the settlement, as the parties contemplate that these funds will be
paid on the defendants' behalf from an escrow account established in connection
with the sale of Gulf Coast by the sellers of Gulf Coast. The escrow account
holds sufficient funds to pay the anticipated cost of the settlement to all of
the defendants.
We are not aware of any other material litigation against us. We are
involved in numerous regulatory proceedings before various public utilities
commissions, as well as before the FCC.
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REGULATION
Overview
We are subject to regulation by federal, state and local government
agencies. At the federal level, the Federal Communications Commission generally
has jurisdiction over interstate and international telecom services. State
public service commissions, commonly referred to as "PSCs," generally exercise
jurisdiction over intrastate telecom services. The FCC does not directly
regulate enhanced services and has preempted certain inconsistent state
regulation of enhanced services. Additionally, municipalities and other local
government agencies regulate limited aspects of our business, such as use of
government owned rights of way, construction permits and building codes. The
following description covers some of the major regulations affecting us, but
there are numerous other areas of regulation which influence our business.
Federal regulation
Our provision of services must comply with the requirements of the
Communications Act of 1934, as amended by the Telecom Act. Pursuant to this
statute, the FCC regulates the rates and terms for interstate access services,
which are an important source of revenues for our ILEC subsidiaries. This
federal statute also creates opportunities for us by promoting competition in
telecom services. The Telecom Act has changed and will continue to change the
marketplace for telecom services. Among its more significant provisions, the
Telecom Act (1) removes legal barriers to entry into local exchange services,
(2) requires ILECs to interconnect with competitors, (3) establishes procedures
for ILEC entry into other services, such as long distance for the Regional Bell
Operating Companies (RBOCs), and (4) directs the FCC to establish an explicit
subsidy mechanism for the preservation of universal service.
Access Charges. The FCC regulates interstate access charges, which are the
ILECs' charges for use of their exchange facilities in originating or
terminating interstate transmissions. Interstate access charges are structured
pursuant to FCC rules as a combination of flat monthly end-user charges, usage
sensitive charges paid by inter-exchange carriers, and flat monthly inter-
exchange carrier charges.
For larger ILECs, the FCC ordered a multi-year transition in the structure
of interstate access charges, which is designed to lead to lower usage
sensitive charges. The FCC adopted these rules in May 1997, and they were
upheld on court review in August 1998. The FCC issued a notice of proposed
rulemaking in May 1998 proposing to adopt similar rules for the access charges
of smaller ILECs, including our subsidiaries, but has not yet adopted an order
in this proceeding. On August 5, 1999, the FCC adopted an order and further
notice of proposed rulemaking aimed at additional pricing flexibility and other
deregulation for large ILECs' interstate access services, particularly special
access and dedicated transport. On May 31, 2000, the FCC adopted new rules
which apply to larger LECs and become effective on July 1, 2000. These rules
require lower switched access rates, higher end user rates and establish
additional universal service funding support for the larger LECs.
The FCC regulates the levels of interstate access charges through price caps
for larger ILECs and through various forms of rate regulation for smaller
ILECs. The FCC's rules require that affiliated ILECs employ price caps on an
all-or-none basis. For 1999, our ILEC subsidiaries elected not to apply federal
price caps. Instead, these subsidiaries employ rate-of-return regulation for
interstate access charges. Mebtel and Coastal Communications filed tariffs for
interstate traffic sensitive access services which became effective on July 1,
1999. Gallatin River and Gulf Coast Services filed interstate traffic sensitive
tariffs to be effective on July 1, 2000. All four ILECs will continue to
participate in interstate common line tariffs filed by the National Exchange
Carrier Association for a pool of small LECs. Association tariff rates are
established based on the pooling carriers' expenses incurred and investment and
a regulated rate of return. The current authorized rate of return for such
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interstate access services is 11.25%, which was prescribed in 1990. The FCC
initiated a rulemaking
proceeding in October 1998 considering whether to represcribe the authorized
rate of return for ILECs employing such regulation. While the outcome and
timing of this proceeding are uncertain, it could lead to a reduction in the
authorized rate of return and consequently a decrease in our revenues from
interstate access services.
Removal of Entry Barriers. Prior to enactment of the Telecom Act, many
states limited the services that could be offered by a company competing with
an ILEC. The Telecom Act generally prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect
of prohibiting any entity from providing any interstate or intrastate telecom
service. However, states can modify conditions of entry into areas served by
rural telephone companies where the PSC has determined that certain universal
service protections must be satisfied. The federal law should enable us to
provide a full range of local exchange and inter-exchange services in most
areas of any state. Because the Telecom Act reduces the barriers to entry by
all potential competitors, the level of competition in all the markets we serve
as an ILEC or CLEC will likely increase. See "Business--Industry Overview and
Competition."
Interconnection with LEC and Access to Other Facilities. The Telecom Act
imposes a number of access and interconnection requirements on all local
exchange providers, including CLECs, with additional requirements imposed on
ILECs. These requirements ensure access to certain networks under reasonable
rates, terms and conditions. Specifically, LECs must provide the following:
. Resale. All LECs generally may not prohibit or place unreasonable
restrictions on the resale of their services.
. Telephone Number Portability. Telephone number portability enables a
customer to keep the same telephone number when the customer switches
LECs.
. Dialing Parity. All LECs must provide dialing parity, which allows
customers to route their calls to a telecommunications provider without
having to dial special access codes.
. Access to Rights-of-Way. All LECs must provide access to their poles,
ducts, conduits and rights-of-way on a reasonable, nondiscriminatory
basis.
. Reciprocal Compensation. The duty to provide reciprocal compensation
means that each LEC on whose network a call originates must reasonably
compensate each LEC on whose network the call terminates.
All of our LEC subsidiaries have implemented full equal access capabilities.
Our ILEC subsidiaries have not received a request to implement local number
portability. The FCC's rules require an ILEC to use reasonable efforts to
implement this capability after receiving such request.
In addition, all ILECs must provide the following, subject to possible
exemptions for rural telephone companies based on economic or technical
burdens:
. Resale. An ILEC must offer its retail local exchange services to
resellers at a wholesale rate that is less than the retail rate charged
to end-users.
. Unbundling of Network Elements. ILECs must offer access to various
unbundled elements of their networks.
. Collocation. ILECs must provide physical collocation, which allows CLECs
to install and maintain their own network termination equipment in ILEC
central offices, or functionally equivalent forms of interconnection
under some conditions.
As defined in the Telecom Act, all of our subsidiaries qualify as rural
telephone companies. Therefore, they have an exemption from the ILEC
interconnection requirements until they receive a
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bona fide request for interconnection and the PSC lifts the exemption. However,
Gallatin River has agreed with its state regulators that it will not contest
requests by CLECs for such interconnection arrangements. State commissions have
jurisdiction to review certain aspects of interconnection and resale
agreements.
The FCC has adopted rules for unbundled offerings of the ILECs' network
elements and pricing these services to CLECs. In January 1999, the United
States Supreme Court upheld the FCC's authority to adopt pricing rules for
unbundled network elements and resale by CLECs and upheld the FCC's rules
allowing CLECs to pick-and-choose among provisions in interconnection
agreements that ILECs enter into with other CLECs. While the Supreme Court
established that the FCC has the authority to adopt pricing rules for unbundled
network elements, the courts have not yet resolved the validity of the specific
pricing guidelines based on total service long-run incremental costs that the
FCC adopted. Further, the Supreme Court instructed the FCC to reconsider an
earlier determination regarding the extent to which ILECs are required to
unbundle elements of their networks. In September 1999, the FCC adopted an
order identifying which network elements ILECs are required to provide to
CLECs. On March 17, 2000, the D.C. Circuit Court of Appeals upheld some of the
FCC's collocation rules but vacated and remanded the FCC's interpretation of
"necessary" and "physical collocations." GTE and the BOC's have agreed to abide
by their existing collocation practices while the FCC decides the issues on
remand.
The Telecom Act requires utilities to provide access to their poles, ducts,
conduits and rights-of-way to telecom carriers on a nondiscrimination basis. On
June 10, 1999, the FCC initiated a regulatory proceeding seeking comment from
the public on a number of issues related to access for telecommunications
providers to multi-tenant buildings. The FCC seeks to adopt rules which will
increase competition in telecommunications services. We cannot predict the
outcome of the various pending FCC proceedings or their effects on our
business.
RBOC Entry into Long Distance Services. Our principal competitor for local
services in each area where we operate as a CLEC is an ILEC. In many of these
areas, the ILEC is a RBOC. The Telecom Act allows the RBOCs to enter into
providing long distance services within their own local service regions upon
satisfaction of a 14-point checklist of competitive requirements. To date, the
FCC has granted only one RBOC petition for entry in a particular state and has
denied several other of these petitions. On December 22, 1999, the FCC granted
Bell Atlantic approval to provide long distance services in New York State. On
April 5, 2000, SBC filed a petition to provide long distance services in Texas.
Although several of the RBOCs are in the process of attempting to show their
compliance with these requirements in various states, the timing of filing of
other such petitions with the FCC and the timing of their approval for entry
into the in-region long distance service business in any one state is
uncertain. In addition, federal legislation has been introduced to allow the
RBOCs to provide long distance Internet and high-speed data services.
Relaxation of Regulation. Through a series of proceedings, the FCC has
decreased the regulatory requirements applicable to carriers which do not
dominate their markets. All providers of domestic interstate services other
than ILECs are classified as non-dominant carriers. Our subsidiaries which are
operating as non-dominant carriers are subject to relatively limited regulation
by the FCC. Among other things, these subsidiaries must offer interstate
services at just and reasonable rates in a manner that is not unreasonably
discriminatory.
In 1996, the FCC issued an order requiring non-dominant inter-exchange
carriers to cease filing and to withdraw their tariffs for domestic inter-
exchange services. This order was upheld by a federal appeals court on April
28, 2000. Non-dominant interstate carriers will no longer be able to rely on
tariffs as a means of specifying the prices, terms and conditions under which
they offer interstate services. In June 1997, the FCC issued another order
allowing non-dominant LECs to withdraw their
58
<PAGE>
interstate access tariffs. Moreover, in March 1999, the FCC adopted rules that
require long distance carriers to make specific public disclosures on the
carriers' Internet web sites. The effective date of these rules was delayed
until after the court's decision on the appeal in the FCC's detariffing order.
Universal Service. The FCC is required to establish a "universal service"
program to ensure that affordable, quality telecommunications services are
available to all Americans. The Telecommunications Act sets forth policies and
establishes certain standards in support of universal service, including that
consumers in rural areas should have access to telecommunications and
information services that are reasonably comparable in rates and other terms to
those services provided in urban areas. A new universal service support
mechanism for larger ILECs went into effect on January 1, 2000. The FCC has
stated that it intends to review universal service support mechanisms for
smaller ILECs in a subsequent proceeding. Our contribution to federal universal
service support is assessed against our interstate end-user telecommunications
revenues.
We are required to contribute to state universal service programs, in
addition to the federal program. Our contribution for such state programs is
assessed against our intrastate revenues. Although many states are likely to
adopt an assessment methodology similar to the federal methodology, states are
free to calculate telecommunications service provider contributions in any
manner they choose as long as the process is not inconsistent with the FCC's
rules.
Internet. The FCC has to date treated Internet service providers (ISPs) as
enhanced service providers rather than common carriers. As such, ISPs have been
exempt from various federal and state regulations, including the obligation to
pay access charges and contribute to universal service funds. The FCC has
determined that both dedicated and dial-up calls from a customer to an ISP are
interstate, not local, calls, and, therefore, are subject to the FCC's
jurisdiction. On March 24, 2000, the D.C. Circuit Court of Appeals vacated and
remanded this determination so that the FCC can explain more clearly why such
calls are not considered local. In addition, several states are considering
this issue, and at least one state has held that the originating LEC is not
required to pay reciprocal compensation for such calls.
Customer Information. The Telecom Act and FCC rules adopted thereunder
protect the privacy of certain information about telecom customers that a
carrier like us acquires by virtue of our provision of telecom services to such
customers. Protected information includes information related to the quantity,
technical configuration, type, destination and the amount of use of a telecom
service. A carrier may not use such information acquired through one of its
service offerings to market certain other service offerings without the
approval of the affected customers. These restrictions may affect our ability
to market a variety of packaged services to existing customers.
Slamming. A customer may change service providers at any time, but the FCC
and some states regulate this process and require that specific procedures be
followed. When these procedures are not followed, particularly if the change is
unauthorized or fraudulent, the process is known as "slamming." The FCC has
levied substantial fines for slamming and has recently increased the penalties
for slamming, although no such fines have been assessed against us.
State regulation
Most states have some form of certification requirement which requires
telecom providers to obtain authority from the PSC prior to offering common
carrier services. Our operating subsidiaries in Alabama, Illinois, North
Carolina and Georgia are ILECs and are certified in those states to provide
local telephone services.
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<PAGE>
PSCs generally regulate the rates ILECs charge for intrastate services,
including rates for intrastate access services paid by providers of intrastate
long distance services. ILECs must file tariffs setting forth the terms,
conditions and prices for their intrastate services. Under the Telecom Act,
PSCs have jurisdiction to arbitrate and review negotiations between ILECs and
CLECs regarding the prices ILECs charge for interconnection of network elements
with, and resale of services by, CLECs, in accordance with rules set by the
FCC. See "Business--Regulation--Federal Regulation." PSCs may also formulate
rules regarding taxes and fees imposed on providers of telecommunications
services within their respective states to support state universal service
programs.
In Alabama, Gulf Telephone is subject to regulation by the Alabama Public
Service Commission. Gulf Telephone must have tariffs approved by and on file
with that commission for basic, non-basic and interconnection services.
The Illinois Commerce Commission (ICC) regulates Gallatin River. Gallatin
River provides services pursuant to tariffs that are filed with, and subject to
the approval of, the ICC. The rates for these services are regulated on a rate
of return basis by the ICC, although Gallatin River has some pricing
flexibility with respect to services that have been deemed competitive by the
ICC, such as digital centrex, high capacity digital service, wide area
telephone service (WATS), and digital data services. The ICC has approved
several interconnection agreements under the Telecom Act between Gallatin River
and mobile wireless carriers. Gallatin River is required to support state
universal service programs and is subject to ICC rules implementing these and
the federal universal service programs.
In North Carolina, our operating subsidiary Mebtel is regulated by the North
Carolina Utilities Commission. Mebtel provides service pursuant to tariffs that
are filed with, and subject to the approval of, that commission. Effective
January 1, 2000, a price cap plan applies to Mebtel's rates for intrastate
services, replacing rate of return regulation. Mebtel is subject to commission
rules implementing state and federal universal service programs.
In Georgia, Coastal Communications is regulated by the Georgia Public
Service Commission. Passage of the Telecommunications and Competition
Development Act of 1995 in Georgia significantly changed that commission's
regulatory responsibilities. Instead of setting prices for telecommunications
services, the commission now manages and facilitates the transition to
competitive markets, establishes and administers a universal access fund,
monitors rates and service quality, and mediates disputes between competitors.
A price cap plan applies to Coastal Communications' rates for intrastate
services.
Local government authorizations
We may be required to obtain from municipal authorities street opening and
construction permits or operating franchises to install and expand fiber optic
facilities in certain cities. We have obtained such municipal franchises in our
ILEC territories in Alabama, North Carolina, Illinois and Georgia. In some
cities, subcontractors or electric utilities with which we have contracts may
already possess the requisite authorizations to construct or expand our
networks.
Some jurisdictions where we may provide service require license or franchise
fees based on a percent of certain revenues. There are no assurances that
jurisdictions that do not currently impose fees will not seek to impose fees in
the future. The Telecom Act requires jurisdictions to charge nondiscriminatory
fees to all telecom providers, but it is uncertain how quickly this requirement
will be implemented by particular jurisdictions in which we operate or plan to
operate, especially regarding materially lower fees that may be charged to
ILECs.
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<PAGE>
MANAGEMENT
Board of Managers and Executive Officers
We are managed by our sole member, Madison River Telephone Company. The
Board of Managers of Madison River Capital consists of the following nine
members: J. Stephen Vanderwoude, James D. Ogg, Paul H. Sunu, James N. Perry,
Jr., James H. Kirby, Sanjeev K. Mehra, Joseph P. DiSabato, Mark A. Pelson and
Albert J. Dobron, Jr. At present, all managers are appointed by certain groups
of members of Madison River Telephone Company. The members holding a majority
of the member units of the group consisting of Madison Dearborn Partners'
affiliates, the group consisting of Goldman Sachs' affiliates, and the group
consisting of Providence Equity Partners' affiliates, are each entitled to
appoint up to two individuals affiliated with it to the Board. The members
holding a majority of the member units held by those individuals in management
subject to employment agreements are entitled to appoint up to three
individuals to the Board of Managers, at least two of whom must be J. Stephen
Vanderwoude, James D. Ogg, Paul H. Sunu or Donald K. Roberton. In the event
that an appointed Manager ceases to serve as a member of the Board of Managers,
the resulting vacancy on the Board of Managers must be filled by a person
appointed by the members that appointed the withdrawn manager.
The following table sets forth certain information regarding the members of
the Board of Managers, executive officers and key operations personnel of
Madison River Capital and its operating subsidiaries.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
J. Stephen Vanderwoude.. 56 Managing Director--Chairman and Chief Executive
Officer
James D. Ogg............ 61 Managing Director
Chairman and Chief Executive Officer, Local
Telecommunications Division
Paul H. Sunu............ 44 Managing Director--Chief Financial Officer
Donald K. Roberton...... 58 Managing Director
Chairman and Chief Executive Officer,
Integrated Communications Division
Kenneth Amburn.......... 57 Managing Director
Chief Operating Officer, Local
Telecommunications Division
Bruce J. Becker......... 54 Managing Director--Chief Technology Officer
Michael T. Skrivan...... 46 Managing Director--Revenues
Craig J. Stapel......... 39 Managing Director--Chief Marketing Officer
Joseph P. DiSabato...... 33 Member of Board of Managers
Albert J. Dobron, Jr.... 31 Member of Board of Managers
James H. Kirby.......... 32 Member of Board of Managers
Sanjeev K. Mehra........ 41 Member of Board of Managers
Mark A. Pelson.......... 38 Member of Board of Managers
James N. Perry, Jr...... 39 Member of Board of Managers
</TABLE>
61
<PAGE>
The following sets forth certain biographical information with respect to
the members of our Board of Managers and our executive officers:
Mr. J. Stephen Vanderwoude serves as Managing Director--Chairman and Chief
Executive Officer and was a founding member of Madison River Telephone Company
in 1996. He has over 33 years of telecommunications experience including
serving as President and Chief Operating Officer and a Director of Centel
Corporation and President and Chief Operating Officer and the Local
Telecommunications division of Sprint Corporation. He has also served as
President and Chief Executive Officer and director of Powerhouse Technologies,
Inc. from 1994 to 1995. He is currently a director of Centennial Communications
and First Midwest Bancorp.
Mr. James D. Ogg serves as Managing Director--Chairman and Chief Executive
Officer of the Local Telecommunications Division and was a founding member of
Madison River Telephone Company in 1996. He has over 40 years of
telecommunications experience including serving as President of Centel--
Illinois and Vice President and General Manager of Centel--Virginia and
Centel--North Carolina. Mr. Ogg has also served as Vice President for
Governmental Relations for Centel Corporation. In this capacity, Mr. Ogg was
responsible for advocacy of corporate policy on telecommunications, cable and
electric businesses before Congress and federal regulatory agencies. Mr. Ogg
has successfully testified in or managed seventeen rates cases and brings
extensive experience in dealing with federal and state regulatory processes.
Mr. Ogg was retired from Sprint Corporation, the acquiror of Centel, from 1994
to 1996.
Mr. Paul H. Sunu serves as Managing Director--Chief Financial Officer and
Secretary and was a founding member of Madison River Telephone Company in 1996.
Mr. Sunu is a certified public accountant and a member of the Illinois Bar with
18 years of experience in finance, tax, treasury, securities and law. From 1991
to 1996, Mr. Sunu served as Senior Vice President, CFO and General Counsel for
RHR International Company, a management consulting firm with 16 profit centers
located in North America, Europe and Russia. Mr. Sunu has also served as
President and is one of four principals who established JMG Financial Group, a
tax and investment consulting firm. The four principals of JMG established
Equity Partners, Ltd., a real estate acquisitions and management firm. Today,
Equity Partners is known as Great Lakes REIT, a New York Stock Exchange
company.
Mr. Donald K. Roberton serves as Managing Director--Chairman and Chief
Executive officer of the Integrated Communications Division and was a founding
member of Madison River Telephone Company in 1996. He has over 39 years of
telecommunications experience including serving as Vice President--
Telecommunications and Assistant to the Chairman and Vice President--Strategic
Development, Telecommunications for Citizens Utilities from 1990 to 1996. In
these capacities, Mr. Roberton negotiated the acquisition of 500,000 access
lines from GTE and 130,000 access lines from ALLTEL, increasing Citizens'
holdings to nearly 800,000 access lines. Mr. Roberton also negotiated the
initial entry of Citizens Utilities into Hungarian Telephone and Cable
Corporation. As a result, he served as a Director and Vice Chairman of
Hungarian Telephone and Cable Company. Prior to his service with Citizens
Utilities, Mr. Roberton served as Vice President--West Division for Centel
Corporation and was responsible for P&L, sales, engineering, construction,
installation and maintenance. As Vice President--Customer Service for Centel,
he established the first remote monitoring system for observing PABXs
nationwide.
Mr. Kenneth Amburn serves as Managing Director--Chief Operating Officer of
the Local Telecommunications Division, joining Madison River in 1998. He has
over 35 years of telecommunications experience including service as Vice
President--Operations for Centel--Texas where he had oversight for operations
involving over 280,000 access lines and for customer services, network
maintenance, construction, and overall business operations for Texas. Mr.
Amburn has also served as Vice President, East Region Telecommunications for
Citizens Utilities where he was responsible for establishing the operations and
completing the transition of 1,400 employees to
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<PAGE>
Citizens Utilities in connection with the 500,000 access line purchase from
GTE. In addition, Mr. Amburn established entrepreneurial operations through his
service with Network Construction Services, Inc. as Executive Vice President
and a member of the Board of Directors from 1995 to 1998.
Mr. Bruce J. Becker serves as Managing Director--Chief Technology Officer
for Madison River Telephone Company, joining Madison River in 1999. He has over
36 years of telecommunications experience including serving as the Senior Vice
President of Operations and Planning for ICG Telecommunications and CIO for
ICG's Telecommunications Group from 1995 to 1997. Prior to that time, Mr.
Becker served in various roles for Centel Corporation, including Vice President
of Strategic and Technical Planning, General Manager of Network Engineering and
Operations for Centel's Nevada and Texas Region, General Manager of Operational
Planning and Marketing for Centel--Nevada and General Network and Switching
Manager Centel--Texas. Most recently, from 1997 to 1998, Mr. Becker founded and
served as President of BTC Partners LTD., a telecommunications consulting firm
providing services to an array of CLECs, ILECs, CATV providers,
telecommunications and data transport equipment manufacturers and investment
groups. Mr. Becker has also served as a voting director of the T1 Committee, a
director on the UNLV School of Engineering Board, a senior member of Northern
Telecom's technical advisory board, an active member of USTA and has testified
as an expert witness at the state and federal level on numerous rate and
technology proceedings and inquiries.
Mr. Michael T. Skrivan serves as Managing Director--Revenues for Madison
River Telephone Company, joining Madison River in 1999. He is a certified
public accountant and a certified management accountant with 22 years of
experience in the telecommunications industry. Prior to joining Madison River
Telephone Company, Mr. Skrivan was a founding member in the consulting firm of
Harris, Skrivan & Associates, LLC, which provides regulatory and financial
services to local exchange carriers from 1995 to 1999. Mr. Skrivan was also an
executive with Illinois Consolidated Telephone Company for nine years, holding
positions in regulatory, strategic planning, marketing and customer service. At
Illinois Consolidated, which serves 80,000 access lines, he helped develop
competitive businesses, including wireless services, long distance services,
fiber operations, directory services, operator services, inmate services and
payphone services. Mr. Skrivan began his telecommunications career with Ernst &
Young's Telecommunications Consulting Practice, providing cost-of-service
studies to Independent Telephone Companies throughout the United States.
Mr. Craig J. Stapel serves as Managing Director--Chief Marketing Officer,
joining Madison River in 2000. He has over 13 years of experience in
telecommunications, executive, and sales management including serving as Vice
President of Sales and Marketing with One Stop Telecommunications from 1998 to
1999 where he developed sales strategies which grew revenues from $5 million to
over $18 million in less than one year. He also designed and implemented new
marketing channels that created over 7,000 new business clients in seven
months. Prior to One Stop, Mr. Stapel was President and CEO of The Millennium
Group Telemanagement where he was employed from 1985 to 1998. While at
Millennium Group, he developed the first and largest CLEC in Wisconsin.
Additionally, Mr. Stapel spent eight years, from 1987 to 1994, with MCI
Telecommunications performing marketing, planning, forecasting, training, and
technical functions for nine branch facilities encompassing three states, 130
people, and $65 million in annual revenues.
Mr. Joseph P. DiSabato is a member of the Board of Managers and a Vice
President of Goldman, Sachs & Co. in the Merchant Banking Division where he has
been employed since 1994. Mr. DiSabato serves on the Board of Directors of
several privately held companies on behalf of Goldman Sachs.
Mr. Albert J. Dobron, Jr. is a member of the Board of Managers and an
Associate of Providence Equity Partners since 1999. Mr. Dobron is also an
observer on the Board of Directors of Surebridge,
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<PAGE>
Inc. Prior to that time, Mr. Dobron worked for Morgan Stanley & Co. from 1996
to 1999 in mergers and acquisitions and held positions with the K.A.D.
Companies, a private equity investment group, working primarily in an operating
role with one of the firm's portfolio companies. From 1994 to 1996, he was
earning his Masters of Business Administration degree.
Mr. James H. Kirby is a member of the Board of Managers and a Managing
Director of Madison Dearborn Partners. He joined Madison Dearborn Partners in
1996 and focuses on venture capital and private equity investing in the
communications industry. Prior to his joining Madison Dearborn Partners, Mr.
Kirby was with The Beacon Group from 1995 to 1996 and Lazard Freres & Co from
1993 to 1995 in private equity investing and investment banking. Mr. Kirby
currently serves on the Board of Directors of Completel Europe LLC, Reiman
Holding Company, LLC, and Wireless One Network, L.P.
Mr. Sanjeev K. Mehra is a member of the Board of Managers and a Managing
Director in Goldman Sachs' Merchant Banking Division for the past five years.
He serves on the board of Amscan Holdings, Inc., Pro Medco Management Co. and
on the boards of several portfolio companies. He is a member of the Principal
Investment Area's Investment Committee.
Mr. Mark A. Pelson is a member of the Board of Managers and a Managing
Director of Providence Equity Partners where he has been employed since 1996.
Mr. Pelson is currently also a director of Carrier 1 International S.A.,
GlobeNet Communications Group, MGC Communications, Inc. and Language Line
Holdings, LLC. Prior to joining Providence, Mr. Pelson was a co-founder and
director of TeleCorp, Inc., a wireless telecommunications company from 1994 to
1996. He previously served in various management positions with AT&T, most
recently as a general manager of strategic planning and mergers and
acquisitions.
Mr. James N. Perry, Jr. is a member of the Board of Managers and a Managing
Director and co-founder of Madison Dearborn Partners. Prior to his joining
Madison Dearborn Partners in 1993, Mr. Perry was with First Chicago Venture
Capital for eight years. Mr. Perry concentrates on investments in the
communications industry and currently also serves on the Boards of Directors of
Allegiance Telecom, Inc., @link Networks, Inc., Completel LLC, Clearnet
Communications Inc., Enews.com, Focal Communications Corporation, Omnipoint
Corporation, Orblynx, Inc., Pangea Ltd., Reiman Holding Company, LLC and
Wireless One Network, L.P.
Committees of the Board of Managers
Effective January 2000, the Board of Managers of Madison River Capital
established an Audit Committee and a Compensation Committee. The Audit
Committee, which is comprised of Messrs. Mark Pelson and Joseph DiSabato, is
responsible for overseeing the actions of Madison River Capital's and our
independent auditors and reviewing our internal financial and accounting
controls and policies. The Compensation Committee, which is comprised of
Messrs. James Perry, Sanjeev Mehra and J. Stephen Vanderwoude, is responsible
for determining salaries, incentives and other forms of compensation for
officers and other employees and administers various incentive compensation and
benefit plans. One member of our Compensation Committee, Mr. Vanderwoude, also
serves as our Chairman and Chief Executive Officer.
All executive officers serve at the discretion of the Board of Managers,
subject to the terms of any employment agreements. There are no family
relationships among managers and executive officers.
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<PAGE>
Compensation of Managers and Executive Officers
The following table sets forth certain information regarding the cash and
non-cash compensation paid by Madison River Telephone Company to the Chief
Executive Officer and to each of our four most highly compensated executive
officers other than the Chief Executive Officer, whose combined salary and
bonus exceeded $100,000 during the fiscal year ended December 31, 1999
(collectively, the "Named Executive Officers"). The managers of Madison River
Capital do not receive any compensation for serving as a manager.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
----------------------------------- ------------
Securities
Underlying
Other Annual Unit Option All Other
Name Year Salary Bonus Compensation Grants Compensation(/1/)
---- ---- -------- -------- ------------ ------------ ----------------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
J. Stephen Vanderwoude.. 1999 $189,800 $111,000 -- -- $245,833
James D. Ogg............ 1999 160,646 50,004 -- -- 58,333
Paul H. Sunu............ 1999 160,014 90,000 -- -- 41,667
Donald K. Roberton...... 1999 157,824 60,000 -- -- 58,334
Bruce J. Becker......... 1999 160,000 -- -- -- --
</TABLE>
--------
(/1/Represents)compensation deferred from previous years.
401(k) Savings Plans
In 1998, we established a 401(k) savings plan covering substantially all of
our employees that meet certain age and employment criteria. Pursuant to the
plan, eligible employees may elect to reduce their current compensation by up
to 15% of eligible compensation. We have agreed to contribute an amount equal
to 50% of employee contributions for the first 6% of compensation contributed
on behalf of all participants. We made matching contributions of approximately
$480,000 and $23,600 in 1999 and 1998, respectively. The 401(k) plan is
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended, so that contributions by employees or by us to the plan, and income
earned on plan contributions, are not taxable to employees until withdrawn and
our contributions are deductible by us when made.
Long-Term Incentive Plan
In 1998, we adopted a long-term incentive plan arrangement which provides
for annual incentive awards for certain employees as approved by the Board of
Directors. Under the terms of the plan, annual awards are expensed over the
succeeding twelve months after the award is determined. The incentive awards
vest automatically at the time of a qualified event as defined under the plan.
Vested awards are payable under certain circumstances as defined under the
long-term incentive plan arrangement. We recognized compensation expense of
$956,000, $2,576,000 and $313,000 in the three months ended March 31, 2000 and
years ended December 31, 1999 and 1998, respectively, related to the long-term
incentive awards.
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<PAGE>
Pension Plan
In May 1998, we adopted a noncontributory defined benefit pension plan,
which was transferred to us from our subsidiary Mebtel, Inc. The plan covers
all full-time employees who have met certain age and service requirements and
provides benefits based upon the participants' final average compensation and
years of service. Our policy is to fund the maximum allowable contribution by
the Internal Revenue Service and comply with the funding requirements of the
Employee Retirement Income Security Act of 1974.
Employment Agreements
We have entered into employment, confidentiality and noncompetition
agreements with Messrs. J. Stephen Vanderwoude, James D. Ogg, Paul H. Sunu,
Donald K. Roberton and Bruce J. Becker providing for employment of each
executive for a five-year period, subject to termination by either party (with
or without cause) on 30 days' prior written notice. The agreements also provide
that employees may not disclose any confidential information while employed by
us or thereafter. Additionally, the agreements provide that the employees will
not compete with us for a period of up to a maximum of fifteen months following
termination for cause or voluntary termination of employment.
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<PAGE>
PRINCIPAL MEMBERS
All of Madison River Capital's outstanding member units are owned by Madison
River Telephone Company. Madison River Capital owns all of the outstanding
stock in Madison River Finance Corp. The following table sets forth certain
information regarding the beneficial ownership of Madison River Telephone
Company's member units as of May 31, 2000 by (A) each holder known by Madison
River Telephone Company to beneficially own five percent or more of such member
units, (B) each executive officer of Madison River Telephone Company and (C)
all executive officers as a group. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Options or warrants to purchase
member units that are currently exercisable or exercisable within 60 days of
May 31, 2000 are deemed to be outstanding and to be beneficially owned by the
person holding such options or warrants for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
Number of Class A
Units, Warrants
or Options Held
Name by Member Percentage of Units
---- ----------------- -------------------
<S> <C> <C>
J. Stephen Vanderwoude......... 3,562,490.34(/1/)(/2/) 1.87%
James D. Ogg................... 1,347,417.81(/1/)(/2/) *
Paul H. Sunu................... 1,280,417.81(/1/)(/2/) *
Donald K. Roberton............. 1,280,417.81(/1/)(/2/) *
Bruce J. Becker................ 1,017,979.98(/1/)(/2/) *
Madison Dearborn Partners
group(/3/).................... 76,741,108.44 40.00%
Goldman Sachs group(/4/)....... 63,623,748.90 33.33%
Providence Equity Partners
group(/5/).................... 41,991,674.13 22.00%
ORVS Madison River............. 5,089,899.91 2.67%
All officers and managers as a
group (13 persons)............ 190,439,635.20 100.00%
</TABLE>
--------
* Represents less than one percent (1%).
(/1/) Excludes the following incentive interests granted to management, the
vesting of which is contingent upon the occurrence of certain liquidity
events, including the sale of the company or an initial public offering:
<TABLE>
<CAPTION>
Class B Units Class C Units
------------- -------------
<S> <C> <C>
J. Stephen Vanderwoude........................ 3,000 1,550
James D. Ogg.................................. 1,500 1,150
Paul H. Sunu.................................. 1,000 1,150
Donald K. Roberton............................ 1,000 1,150
Bruce J. Becker............................... -- 770
Madison River Long Term Incentive Plan........ 3,500 4,230
</TABLE>
(/2/) Includes the following units which are owned by ORVS Madison River but
beneficial ownership of which is attributable to each officer: J. Stephen
Vanderwoude--1,017,979.98; James D. Ogg--1,017,979.98; Paul H. Sunu--
1,017,979.98; Donald K. Roberton--1,017,979.98; and Bruce J. Becker--
1,017,979.98.
(/3/) Includes 392,610 units which Madison Dearborn Capital Partners, L.P.
has the right to acquire upon conversion of existing indebtedness and
76,348,498.44 units held by Madison Dearborn Capital Partners II, L.P.
(/4/) Includes 33,156,361.07 units held by GS Capital Partners II, L.P.;
6,763,005.37 units held by GSCPII Mad River Holding, L.P.; 1,472,418.89
units held by GSCPII Germany Mad River Holding, L.P.; 15,869,587.80 units
held by GSCPII Offshore Mad River Holding, L.P.; 2,079,542.26 units held by
Bridge Street Fund 1997, L.P.; and 4,282,833.51 units held by Stone Street
Fund 1997, L.P.
(/5/) Includes 41,991,674.13 units held by Providence Equity Partners, L.P.
and Providence Equity Partners II L.P.
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<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
The following is a summary of the material terms of some of our
indebtedness. This description does not purport to be complete and is subject
to, and qualified in its entirety by reference to, all provisions of the
agreements evidencing such indebtedness. Terms used and not defined herein have
the meanings given to them in the agreements described.
Gulf Coast Credit Facility--LEC Portion
To finance the LEC portion of the Gulf Coast Services acquisition, our
subsidiary, Gulf Telephone Company (a wholly-owned subsidiary of Gulf Coast
Services, Inc.) borrowed funds in a total available amount of $156.2 million in
the aggregate under a credit facility with the Rural Telephone Finance
Cooperative (RTFC). This facility consists of the following (dollars in
millions):
<TABLE>
<CAPTION>
Amount Outstanding
as of Maximum Spread to
Availability March 31, 2000 Term RTFC "base" Rate(/1/)(/2/)
------------ ------------------ -------- --------------------------
<S> <C> <C> <C> <C>
Term A Facility......... -- $138.4 15 years 35 bps(/3/)
Term B Facility......... $ 7.8 -- 15 years 35 bps
Revolving Credit
Facility............... $10.0 -- 5 years 50 bps
</TABLE>
--------
(/1/) Pricing subject to reduction based on achievement of a specified
leverage ratio and certain other factors.
(/2/) The RTFC "base" rate is the rate established by the RTFC from time to
time for loans similarly classified.
(/3/) In accordance with the credit facility, $138.4 million of the facility
has been converted into a fixed rate of 8.4% through October 2004.
The $10.0 million revolving credit facility was made available to us for
general corporate purposes. The $138.4 million Term A Facility was drawn at the
closing of the Gulf Coast Services acquisition and was used (i) to fund a
portion of the cost of acquiring the stock in the Gulf Coast Services
acquisition, including transaction expenses (including the repayment of
outstanding indebtedness of Gulf Coast Services and its subsidiaries), (ii) to
fund working capital, and (iii) to purchase RTFC Subordinated Capital
Certificates equal to 10% of the total amount we borrowed from the RTFC under
the Term A Facility. The $7.8 million Term B Facility is available to fund Gulf
Telephone Company's working capital and capital expenditures; however, as of
September 28, 2001, the RTFC may, in its sole discretion, stop advancing funds
under the Term B facility.
This credit facility is secured by (i) a perfected security interest in
substantially all of the assets of Gulf Telephone Company (including all of the
equity interests in its subsidiaries other than Gulf Communications, LLC) and
(ii) a pledge of all of the equity interests in Madison River Capital, Madison
River Management Company, Mebtel, Inc., Gulf Coast Services, Inc., Gulf
Telephone Company, Gulf Long Distance, Inc., Gallatin River Communications, LLC
and Gallatin River Holdings, LLC (only to the extent held by Madison River
Capital) held by the respective direct parent companies or members of each
entity. This credit facility is also unconditionally guaranteed by Gulf Long
Distance, Inc. The guaranty is secured by a perfected security interest in
substantially all of the assets of Gulf Long Distance, Inc. The facility
contains customary negative covenants as well as financial covenants,
including:
. Minimum annual times-interest-earned ratios,
. Minimum debt service coverage ratios,
. Maximum leverage ratios, and
. Prohibition on the declaration or payment of dividends or other
distributions to shareholders, if the borrower does not maintain a
current ratio of 1.25 or more and does not meet a minimum net worth test,
without the written consent of RTFC.
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The RTFC Subordinated Capital Certificates we purchased at the closing of
the Gulf Coast Services acquisition are non-interest-bearing, equity
certificates that are amortized annually to maintain certificate amounts equal
to 10% of the outstanding balance of the new credit facilities. Amortization of
the certificates begins approximately one year after we purchased them and will
be paid to us in cash.
In addition, we will receive a share of 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 RTFC's gross margins. RTFC
currently makes these capital payments in both cash and in additional patronage
capital certificates.
Gulf Coast Services also has a $4.0 million revolving credit facility with
CoBank. In connection with the acquisition of Gulf Coast Services, we received
a $4.0 million note receivable from the sellers related to this debt. The
balance on the facility was $0.5 million at March 31, 2000. We intend to pay
the remaining balance in the near term and to terminate the 8.75% credit
facility.
Mebtel Financing
To finance, among other things, the acquisition of Mebtel, Inc., Mebtel,
Inc. borrowed approximately $23.3 million under a credit facility with the
RTFC. This credit facility consists of the following (dollars in millions):
<TABLE>
<CAPTION>
Amount Outstanding
as of Maximum Spread to
New Credit Facility Availability March 31, 2000 Term RTFC "base" Rate (/1/)(/2/)
------------------- ------------ ------------------ -------- ---------------------------
<S> <C> <C> <C> <C>
First Term Facility..... -- $14.2 15 years 50 bps(/3/)
Second Term Facility.... -- $ 7.2 15 years 50 bps(/4/)
Revolving Credit
Facility............... $1.0 -- 5 years --
</TABLE>
--------
(/1/) Pricing subject to reduction based on achievement of a specified
leverage ratio and certain other factors.
(/2/) The RTFC "base" rate is the rate established by the RTFC from time to
time for loans similarly classified.
(/3/) In accordance with the credit facility, the $14.2 million facility has
been converted into a fixed rate of 6.80% through September 2003.
(/4/) In accordance with the credit facility, the $7.2 million facility has
been converted into a fixed rate of 8.55% through April 2003.
The First Term Facility was made available to us (i) to fund a portion of
the cost to acquire the stock of Mebtel, (ii) to refinance existing
indebtedness owed to Rural Utilities Service and Rural Telephone Bank and (iii)
to purchase RTFC Subordinated Capital Certificates equal to 5% of the total
amount borrowed under the First Term Facility. The Second Term Facility was
made available to us (i) for general corporate purposes and (ii) to purchase
RTFC Subordinated Capital Certificates equal to 5% of the total amount borrowed
under the Second Term Facility.
This credit facility is secured by a perfected first priority security
interest in substantially all of the assets of Mebtel. The facility contains
customary negative covenants as well as financial covenants, including:
. Minimum annual times-interest-earned ratio,
. Minimum debt service coverage ratio,
. Maximum leverage ratio, and
. Prohibition on the declaration or payment of dividends or other
distributions to shareholders, without written consent to RTFC, if Mebtel
does not meet a minimum net worth test or exceeds certain cash margin
ratios.
As of March 31, 2000, Mebtel, Inc. was precluded from paying dividends to
Madison River Capital without the consent of the RTFC.
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The RTFC Subordinated Capital Certificates that we agreed to purchase
pursuant to the terms of the First and Second Term Facilities are non-interest
bearing equity certificates that are amortized annually to maintain an
aggregate certificate amount equal to 5% of the outstanding balance of the
First and Second Term Facilities. Amortization of each certificate begins
approximately one year after we purchase it and will be refunded in cash to us.
In addition, we will receive a share of 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 RTFC's gross margins. RTFC
currently makes these capital payments in cash and in patronage capital
certificates.
Gallatin River Financing
To finance the Central Illinois Telephone acquisition, our affiliates
Gallatin River Communications, LLC and Madison River Management Company,
borrowed approximately $206.9 million in the aggregate under separate credit
facilities (collectively, the "GRC and MRC Credit Facilities") with RTFC. The
GRC and MRC Credit Facilities consist of the following (dollars in millions):
<TABLE>
<CAPTION>
Amount Outstanding Maximum Spread to
as of RTFC
Availability March 31, 2000 Tenor "base" Rate(/1/)(/2/)
------------ ------------------ -------- ---------------------
<S> <C> <C> <C> <C>
GRC Term Facility....... -- $121.9 15 years 75 bps(/3/)
GRC Revolving Facility.. $10.0 -- 5 years 50 bps
MRC Term Facility....... -- $ 73.4 15 years 75 bps(/4/)
</TABLE>
--------
(/1/) Pricing subject to reduction based on achievement of a specified
leverage ratio and certain other factors.
(/2/) The RTFC "base" rate is the rate established by the RTFC from time to
time for loans similarly classified.
(/3/) In accordance with the credit facility, the $121.9 million facility
has been converted into a fixed rate of 7.00% through November 2004.
(/4/) In accordance with the credit facility, the $73.4 million facility has
been converted into a fixed rate of 8.8% through April 2003.
The $10.0 million GRC Revolving Facility was made available to us for
general corporate purposes. The $196.9 million Term Facilities to Gallatin
River Communications and Madison River Management Company were drawn at the
closing of the Central Illinois Telephone acquisition and were used to fund a
portion of the cost of acquiring certain assets of Central Telephone Company of
Illinois, including transaction expenses, to fund working capital, and to
purchase RTFC Subordinated Capital Certificates equal to 5% of the total amount
we borrowed under the term facilities from the RTFC. These facilities are
unconditionally guaranteed by Gallatin River Holdings, LLC, which guaranty is
secured by a perfected security interest in substantially all of the assets of
Gallatin River Holdings, LLC.
The GRC Credit Facility is secured by a perfected security interest in
substantially all of the assets of Gallatin River Communications, the MRC
Credit Facility is secured by a perfected security interest in substantially
all of the assets of Madison River Management Company, and, each of the MRC and
GRC facilities are secured by a pledge of all the equity interests in Madison
River Capital, Gallatin River Holdings, LLC, Gallatin River Communications LLC,
Mebtel, Inc., Madison River Management Company, and Gulf Coast Services, Inc.
These credit facilities contain customary negative covenants as well as
financial covenants, including:
. Minimum annual times-interest-earned ratios,
. Minimum debt service coverage ratios,
. Maximum leverage ratios, and
. Prohibition on the declaration or payment of dividends or other
distributions to shareholders, if the borrower does not maintain a
current ratio of 1.25 or more and does not meet a minimum net worth test,
without the written consent of RTFC.
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The RTFC Subordinated Capital Certificates we purchased at the closing of
the Gallatin River acquisition are non-interest bearing equity certificates
that are amortized annually to maintain certificate amounts equal to 5% of the
outstanding balance of the new credit facilities. Amortization of the
certificates begins approximately one year after we purchased them and will be
paid in cash to us.
In addition, we will receive a share of 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 RTFC's gross margins. RTFC
currently makes these capital payments in cash and in patronage capital
certificates.
Coastal Communications Financing
To finance the acquisition of Coastal Communications, Coastal Utilities,
Inc. borrowed approximately $128.7 million in the aggregate under a credit
facility with RTFC. The credit facility consists of the following (dollars in
millions):
<TABLE>
<CAPTION>
Amount Outstanding
as of Maximum Spread to
Availability March 31, 2000 Tenor RTFC "base" Rate(/1/)
------------ ------------------ -------- ---------------------
<S> <C> <C> <C> <C>
Term Facility........... -- $108.7 15 years 50 bps(/2/)
Secured Revolving Credit
Facility............... -- $ 10.0 5 years 50 bps
Unsecured Revolving
Credit Facility........ $10.0 -- 5 years 100 bps
</TABLE>
--------
(/1/) The RTFC "base" rate is the rate established by the RTFC from time to
time for loans similarly classified.
(/2/) In accordance with the credit facility, the $108.7 million facility
has been converted into a fixed rate of 8.50% through April 2005.
The $10.0 million Unsecured Revolving Credit Facility was made available to
us for general corporate purposes. The $108.7 million Term Facility and the
$10.0 million Secured Revolving Credit Facility were drawn at the closing of
the Coastal Communications acquisition and were used to: fund a portion of the
cost of acquiring the outstanding common stock of Coastal Utilities, Inc.,
including transaction expenses; fund working capital; and purchase RTFC
Subordinated Capital Certificates equal to 10% of the total amount we borrowed
under the term facility from the RTFC.
The credit facility is secured by a perfected security interest in
substantially all of the assets of Coastal Utilities, Inc. and a pledge of all
of the equity interests of its wholly-owned subsidiary, Coastal Long Distance
Services, Inc. In addition, Coastal Communications, Inc. pledged all of the
equity interests of Coastal Utilities, Inc. These credit facilities contain
customary negative covenants as well as financial covenants, including:
. Minimum annual times-interest-earned ratios,
. Minimum debt service coverage ratios,
. Maximum leverage ratios, and
. Prohibition on the declaration or payment of dividends or other
distributions to shareholders if the borrower does not maintain a current
ratio of 1.25 or more and does not meet a minimum net worth test, without
the written consent of RTFC.
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<PAGE>
The RTFC Subordinated Capital Certificates we purchased at the closing of
the Coastal Communications acquisition are non-interest bearing equity
certificates that are amortized annually to maintain certificate amounts equal
to 10% of the outstanding balance of the new credit facilities. Amortization of
the certificates begins approximately one year after we purchased them and will
be paid in cash to us.
In addition, we will receive a share of 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 RTFC's gross margins. RTFC
currently makes these capital payments in cash and in patronage capital
certificates.
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<PAGE>
THE EXCHANGE OFFER
Purpose of the Exchange Offer
On February 17, 2000, we privately placed $200.0 million of 13 1/4% senior
notes due 2010. Simultaneously with the sale of the outstanding notes, we
entered into a registration rights agreement relating to the outstanding notes.
We entered into the registration rights agreements with the initial purchasers
of the outstanding notes--Goldman, Sachs & Co., Chase Securities Inc., Morgan
Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. Under this registration
rights agreement, we agreed to file a registration statement regarding the
exchange of the outstanding notes for notes with terms identical in all
material respects. We also agreed to use our reasonable best efforts to cause
that registration statement to become effective with the SEC. A copy of the
registration rights agreement has been filed with the SEC as an exhibit to the
Form S-4 registration statement of which this prospectus is a part.
We are conducting the exchange offer to satisfy our contractual obligations
under the registration rights agreement. The form and terms of the exchange
notes are the same as the form and terms of the outstanding notes, except that
the exchange notes will be registered under the Securities Act. As a result,
the exchange notes will not bear legends restricting their transfer and will
not contain the registration rights and liquidated damage provisions contained
in the outstanding notes. The outstanding notes provide that, if a registration
statement relating to the exchange offer has not been filed by May 17, 2000 and
declared effective by August 15, 2000, we will pay liquidated damages on the
outstanding notes. Upon the completion of the exchange offer, you will not be
entitled to any liquidated damages on your outstanding notes or any further
registration rights under the registration rights agreement, except under
limited circumstances. The exchange offer is not extended to holders of
outstanding notes in any jurisdiction where the exchange offer does not comply
with the securities or blue sky laws of that jurisdiction.
In this section entitled "The Exchange Offer," the term "holder" means:
. any person in whose name the outstanding notes are registered on our
books or
. any other person who has obtained a properly completed bond power from
the registered holder, or
. any person whose outstanding notes are held of record by DTC and who
wants to deliver these outstanding notes by book-entry transfer at DTC.
Terms of the Exchange Offer
We are offering to exchange up to $200.0 million total principal amount of
exchange notes for the same total principal amount of outstanding notes. The
outstanding notes must be tendered properly on or before the expiration date,
which is defined below, and not withdrawn. In exchange for outstanding notes
properly tendered and accepted, we will issue a like total principal amount of
up to $200.0 million in exchange notes.
The expiration date of the exchange offer is 5:00 p.m., New York City time,
on [ . ], 2000 for the outstanding notes, unless we extend the exchange offer.
The exchange offer is not conditioned upon holders tendering a minimum
principal amount of outstanding notes. As of the date of this prospectus,
$200.0 million aggregate principal amount of outstanding notes are outstanding.
You do not have any appraisal or dissenters' rights in the exchange offer.
If you do not tender outstanding notes or you tender outstanding notes that we
do not accept, your outstanding notes will remain outstanding. Any outstanding
notes will be entitled to the benefits of the indenture under
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<PAGE>
which they were, and the exchange notes will be, issued. The outstanding notes
will not, however, be entitled to any further registration rights under the
registration rights agreement, except under limited circumstances. See the
section entitled "Risk Factors" under the heading "Risks Factors Related to the
Exchange Offer--Your failure to exchange your outstanding notes may limit your
ability to transfer your notes" for more information regarding notes
outstanding after the exchange offer.
After the expiration date, we will return to you any tendered outstanding
notes that we did not accept for exchange.
You will not have to pay brokerage commissions or fees or transfer taxes for
exchanging your outstanding notes if you follow the instructions in the letter
of transmittal. We will pay the charges and expenses, other than those taxes
described below, in the exchange offer. See "--Fees and Expenses" below for
further information regarding fees and expenses.
Neither the Issuers nor the Issuers' board of managers or board of directors
recommends you to tender or not tender outstanding notes in the exchange offer.
In addition, we have not authorized anyone to make any recommendation. You must
decide whether to tender in the exchange offer and, if so, the aggregate amount
of outstanding notes to tender.
We have the right, in accordance with applicable law, at any time:
. to delay the acceptance of the outstanding notes;
. to terminate the exchange offer if we determine that any of the
conditions to the exchange offer have not occurred or have not been
satisfied;
. to extend the expiration date of the exchange offer and keep all
outstanding notes tendered other than those notes properly withdrawn; and
. to waive any condition or amend the terms of the exchange offer.
If we materially change the exchange offer, or if we waive a material
condition of the exchange offer, we will promptly distribute a prospectus
supplement to you disclosing the change or waiver. We also will extend the
exchange offer as required by Rule 14e-1 under the Securities Exchange Act of
1934.
If we exercise any of the rights listed above, we will promptly give oral or
written notice of the action to the exchange agent, as defined below under the
heading "--Exchange Agent," and we will issue a release to appropriate news
agencies. In the case of an extension, an announcement will be made no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
Acceptance of Outstanding Notes for Exchange; Issuance of Exchange Notes
We will issue to the exchange agent exchange notes for outstanding notes
tendered and accepted and not withdrawn promptly after the expiration date. The
exchange agent might not deliver the exchange notes to all tendering holders at
the same time. The timing of delivery depends upon when the exchange agent
receives and processes the required documents.
We will be deemed to have exchanged outstanding notes validly tendered and
not withdrawn when we give oral or written notice to the exchange agent of our
acceptance. The exchange agent is an agent for us for receiving tenders of
outstanding notes, letters of transmittal and related documents. The exchange
agent is also an agent for tendering holders for receiving outstanding notes,
letters of transmittal and related documents and transmitting exchange notes to
validly tendering holders. If for any reason, we:
. delay the acceptance or exchange of any outstanding notes, or
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<PAGE>
. extend the exchange offer, or
. are unable to accept or exchange notes,
then the exchange agent may, on our behalf and subject to Rule 14e-1(c) under
the Exchange Act, retain tendered notes. Notes that the exchange agent retains
may not be withdrawn, except according to the withdrawal procedures outlined
below in the section entitled "--Withdrawal Rights."
In tendering outstanding notes, you must warrant in the letter of
transmittal or in an agent's message, which is described below, that:
. you have full power and authority to tender, exchange, sell, assign and
transfer outstanding notes,
. we will acquire good, marketable and unencumbered title to the tendered
outstanding notes, free and clear of all liens, restrictions, charges and
other encumbrances, and
. the outstanding notes tendered for exchange are not subject to any
adverse claims or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents that we or the exchange agent requests to
complete the exchange, sale, assignment and transfer of the outstanding notes.
Procedures for Tendering Outstanding Notes
Valid Tender
You may tender your outstanding notes by book-entry transfer or by other
means. For book-entry transfer, you must deliver to the exchange agent either:
. a properly completed and duly executed letter of transmittal, including
all other documents that the letter of transmittal requires, or
. an agent's message, meaning a message transmitted to the appropriate
exchange agent by DTC and forming a part of a book-entry confirmation,
stating that you agree to be bound by the terms of the letter of
transmittal.
You must deliver your letter of transmittal or agent's message by mail,
facsimile, hand delivery or overnight carrier to the exchange agent on or
before the expiration date.
In addition, to complete a book-entry transfer, you must also either:
. have DTC transfer the outstanding notes into the exchange agent's account
at DTC using the ATOP procedures for transfer and obtain a confirmation
of the transfer, or
. follow the guaranteed delivery procedures described below under the
heading "--Guaranteed Delivery."
If you tender fewer than all of your outstanding notes, you should fill in
the amount of outstanding notes tendered in the appropriate box on the letter
of transmittal. If you do not indicate the amount tendered in the appropriate
box, we will assume you are tendering all outstanding notes that you hold.
For tendering your outstanding notes other than by book-entry transfer, you
must deliver a completed and signed letter of transmittal to the exchange
agent. Again, you must deliver the letter of transmittal by mail, facsimile,
hand delivery or overnight carrier to the exchange agent on or before the
expiration date. In addition, to complete a valid tender, you must:
. deliver your outstanding notes to the exchange agent on or before the
expiration date, or
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<PAGE>
. follow the guaranteed delivery procedures set forth below under the
heading "--Guaranteed Delivery."
Delivery of required documents by whatever method you choose is at your sole
risk. Delivery is complete when the exchange agent actually receives the items
to be delivered. Delivery of documents to DTC in accordance with their
procedures or to us does not constitute delivery to the exchange agent. If
delivery is by mail, we recommend registered mail, return receipt requested,
properly insured, or an overnight delivery service. In all cases, you should
allow sufficient time to ensure timely delivery.
Signature Guarantees
You do not need to endorse certificates for the outstanding notes or provide
signature guarantees on the letter of transmittal unless:
(1) someone other than the registered holder tenders the certificate, or
(2) you complete the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" in the letter of transmittal.
In the case of (1) or (2) above, you must sign your outstanding note or
provide a properly executed bond power. The signature on the bond power and on
the letter of transmittal must be guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act as an "eligible guarantor
institution." Eligible guarantor institutions include:
. a bank;
. a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
. a credit union;
. a national securities exchange, registered securities association or
clearing agency; or
. a savings association that is a participant in a securities transfer
association.
Guaranteed Delivery
If you want to tender outstanding notes in the exchange offer and:
. the certificates for the outstanding notes are not immediately available,
. all required documents are unlikely to reach the exchange agent on or
before the expiration date or
. a book-entry transfer cannot be completed in time,
the outstanding notes may be tendered if you comply with the following
guaranteed delivery procedures:
. your tender is made by or through an eligible guarantor institution;
. you deliver a properly completed and signed notice of guaranteed
delivery, like the form provided with the letter of transmittal, to the
appropriate exchange agent on or before the expiration date; and
. you deliver the certificates or a confirmation of book-entry transfer and
a properly completed and signed letter of transmittal to the exchange
agent within three New York Stock Exchange trading days after the notice
of guaranteed delivery is executed.
You may deliver the notice of guaranteed delivery by hand, facsimile or mail
to the exchange agent. You must include a guarantee by an eligible guarantor
institution in the form described in the notice.
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<PAGE>
Our acceptance of properly tendered outstanding notes is a binding agreement
between you and Madison River upon the terms and subject to the conditions of
the exchange offer.
Determination of Validity
We will resolve all questions regarding the form of documents, validity,
eligibility, time of receipt and acceptance for exchange of any tendered
outstanding notes. Our resolution of these questions as well as our
interpretation of the terms and conditions of the exchange offer, including the
letter of transmittal, is final and binding on all parties. A tender of
outstanding notes is invalid until all irregularities have been cured or
waived. Neither Madison River, any affiliates or assigns of Madison River, the
exchange agent nor any other person is under any obligation to give notice of
any irregularities in tenders, and they are not liable for failing to give any
such notice. We reserve the absolute right, in our sole and absolute
discretion, to reject any tenders determined to be in improper form or
unlawful. We also reserve the absolute right to waive any of the conditions of
the exchange offer or any condition or irregularity in the tender of
outstanding notes by any holder. We need not waive similar conditions or
irregularities in the case of other holders.
If any letter of transmittal, endorsement, bond power, power of attorney, or
any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person must indicate that capacity when signing. In addition, unless
waived by us, the person must submit proper evidence satisfactory to us, in our
sole discretion, of his or her authority to so act.
If you beneficially own outstanding notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
or custodian, you should contact that entity promptly if you want to
participate in the exchange offer.
Resales of Exchange Notes
We are exchanging the outstanding notes for exchange notes in reliance upon
the staff of the SEC's position, set forth in interpretive letters to third
parties in other similar transactions. We will not seek our own interpretive
letter. As a result, we cannot assure you that the staff will take the same
position on this exchange offer as it did in interpretive letters to other
parties. Based on the staff's letters to other parties, we believe that holders
of exchange notes, other than broker-dealers, can offer the exchange notes for
resale, resell and otherwise transfer the exchange notes without delivering a
prospectus to prospective purchasers. However, you must acquire the exchange
notes in the ordinary course of business and have no intention of engaging in a
distribution of the exchange notes, as a "distribution" is defined by the
Securities Act.
If you are an "affiliate" of Madison River or you intend to distribute
exchange notes, or if you are a broker-dealer who purchased outstanding notes
from Madison River to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, you:
. cannot rely on the staff's interpretations in the above mentioned
interpretive letters;
. cannot tender outstanding notes in the exchange offer; and
. must comply with the registration and prospectus delivery requirements of
the Securities Act to transfer the outstanding notes, unless the sale is
exempt.
In addition, if you are a broker-dealer who acquired outstanding notes for
your own account as a result of market-making or other trading activities and
you exchange the outstanding notes for exchange notes, you must deliver a
prospectus with any resales of the exchange notes.
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If you want to exchange your outstanding notes for exchange notes, you will
be required to affirm that you:
. are not an "affiliate" of Madison River;
. are acquiring the exchange notes in the ordinary course of your business;
. have no arrangement or understanding with any person to participate in a
distribution of the exchange notes, within the meaning of the Securities
Act; and
. are not a broker-dealer, are not engaged in, and do not intend to engage
in, a distribution of the exchange notes, within the meaning of the
Securities Act.
In addition, we may require you to provide information regarding the number
of "beneficial owners" of the outstanding notes within the meaning of Rule 13d-
3 under the Exchange Act. Each broker-dealer that receives exchange notes for
its own account must acknowledge that it acquired the outstanding notes for its
own account as the result of market-making activities or other trading
activities. Each broker-dealer must further agree that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of exchange notes. By making this acknowledgment and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" under the Securities Act. Based on the staff's position in
interpretive letters issued to third parties, we believe that broker-dealers
who acquired outstanding notes for their own accounts as a result of market-
making activities or other trading activities may fulfill their prospectus
delivery requirements with respect to the exchange notes with a prospectus
meeting the requirements of the Securities Act. Accordingly, a broker-dealer
may use this prospectus to satisfy such requirements. We have agreed that a
broker-dealer may use this prospectus for a period ending 180 days after the
expiration date of the exchange offer. You should read the section entitled
"Plan of Distribution" for further information about the use of this prospectus
by broker-dealers. A broker-dealer intending to use this prospectus in the
resale of exchange notes must notify us, on or prior to the expiration date,
that it is a participating broker-dealer. This notice may be given in the
letter of transmittal or may be delivered to the appropriate exchange agent.
Any participating broker-dealer who is an "affiliate" of Madison River may not
rely on the staff's interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act when reselling
exchange notes.
Each participating broker-dealer exchanging outstanding notes for exchange
notes agrees that, upon receipt of notice from us:
(a) that any statement contained or incorporated by reference in this
prospectus makes the prospectus untrue in any material respect,
(b) that this prospectus omits to state a material fact necessary to
make the statements contained or incorporated by reference in this
prospectus, in light of the circumstances under which they were made, not
misleading, or
(c) of the occurrence of other events specified in the registration
rights agreement,
the participating broker-dealer will suspend the sale of exchange notes. Each
participating broker-dealer agrees not to resell the exchange notes until:
(1) we have amended or supplemented this prospectus to correct the
misstatement or omission and we furnish copies of the amended or
supplemented prospectus to the participating broker-dealer, or
(2) we give notice that the sale of the exchange notes may be resumed.
If we give notice suspending the sale of exchange notes, it shall extend the
180-day period during which this prospectus may be used by a participating
broker-dealer by the number of days between the date we give notice of
suspension and the date participating broker-dealers receive copies of the
amended or supplemented prospectus or the date we give notice resuming the sale
of exchange notes.
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Withdrawal Rights
You can withdraw tenders of outstanding notes at any time on or before the
expiration date.
For a withdrawal to be effective, you must deliver a written, telegraphic,
telex or facsimile transmission of a notice of withdrawal or an agent's message
to the appropriate exchange agent on or before the expiration date. The notice
of withdrawal must specify the name of the person tendering the outstanding
notes to be withdrawn, the total principal amount of outstanding notes
withdrawn, and the name of the registered holder of the outstanding notes if
different from the name of the person tendering the outstanding notes. If you
delivered outstanding notes to an exchange agent, you must submit the serial
numbers of the outstanding notes to be withdrawn, and the signature on the
notice of withdrawal must be guaranteed by an eligible guarantor institution,
except in the case of outstanding notes tendered for the account of an eligible
guarantor institution. If you tendered outstanding notes as a book-entry
transfer, the notice of withdrawal must specify the name and number of the
account at DTC to be credited with the withdrawal of outstanding notes. You
must deliver the notice of withdrawal to the appropriate exchange agent by
written, telegraphic, telex or facsimile transmission, or by an agent's
message. You may not rescind withdrawals of tender. Outstanding notes properly
withdrawn may again be tendered at any time on or before the expiration date.
We will determine all questions regarding the validity, form and eligibility
of withdrawal notices. Our determination will be final and binding on all
parties. Neither Madison River, any affiliate or assign of Madison River, the
exchange agent nor any other person is under any obligation to give you notice
of any irregularities in any notice of withdrawal, and they are not liable for
failing to give any such notice. Withdrawn outstanding notes will be returned
to you after withdrawal.
Interest on Exchange Notes
The exchange notes will bear interest at a rate of 13 1/4% per annum.
Interest is payable semi-annually on March 1 and September 1 of each year.
Holders of exchange notes will receive interest from the date of initial
issuance of the exchange notes, plus an amount equal to the accrued interest on
the outstanding notes. Interest on the outstanding notes accepted for exchange
will cease to accrue upon issuance of the exchange notes.
Conditions to the Exchange Offer
We do not need to exchange any outstanding notes, may terminate the exchange
offer or may waive any conditions to the exchange offer or amend the exchange
offer, if any of the following conditions has occurred:
. the staff of the SEC no longer allows the exchange notes to be offered
for resale, resold and otherwise transferred by holders without
compliance with the registration and prospectus delivery provisions of
the Securities Act;
. a governmental body passes any law, statute, rule or regulation which, in
our opinion, prohibits or prevents the exchange offer;
. the SEC or any state securities authority issues a stop order suspending
the effectiveness of the registration statement or initiates or threatens
to initiate a proceeding to suspend the effectiveness of the registration
statement; or
. we are unable to obtain any governmental approval that we believe is
necessary to complete the exchange offer.
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If we reasonably believe that any of the above conditions has occurred, we may:
. terminate the exchange offer, whether or not any outstanding notes have
been accepted for exchange,
. waive any condition to the exchange offer or
. amend the terms of the exchange offer in any respect.
If our waiver or amendment materially changes the exchange offer, we will
promptly disclose the waiver or amendment through a prospectus supplement. We
will distribute the prospectus supplement to the registered holders of the
outstanding notes. The prospectus supplement will also extend the exchange
offer as required by Rule 14d-1 of the Exchange Act.
Exchange Agent
We appointed Norwest Bank Minnesota, National Association as exchange agent
for the exchange offer. You should direct questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for a notice of guaranteed delivery to the exchange
agent addressed as follows:
By hand:
By registered or By regular mail or courier: Norwest Bank Minnesota,
certified mail: Norwest Bank Minnesota, N.A. N.A.
Norwest Bank Minnesota, Corporate Trust Operations Northstar East Building
N.A. MAC N9303-121 608 2nd Avenue South
Corporate Trust 6th & Marquette Avenue 12th Floor,
Operations Minneapolis, MN 55479 Corporate Trust
MAC N9303-121 Services
P.O. Box 1517 Facsimile Transmissions: Minneapolis, MN 55479
Minneapolis, MN 55480 (Eligible Guarantor Institutions Only)
(612) 667-4927
Attn: Corporate Trust Services
If you deliver letters of transmittal or any other required documents to an
address or facsimile number other than those listed above, your tender is
invalid.
Fees and Expenses
We will pay the exchange agent reasonable and customary fees for their
services and reasonable out-of-pocket expenses. We will also pay brokerage
houses and other custodians, nominees and fiduciaries their reasonable out-of-
pocket expenses for sending copies of this prospectus and related documents to
holders of outstanding notes, and for handling or tendering for their
customers.
We will pay the transfer taxes for the exchange of the outstanding notes in
the exchange offer. If, however, exchange notes are delivered to or issued in
the name of a person other than the registered holder, or if a transfer tax is
imposed for any reason other than for the exchange of outstanding notes in the
exchange offer, then the tendering holder will pay the transfer taxes. If a
tendering holder does not submit satisfactory evidence of payment of taxes or
exemption from taxes with the letter of transmittal, the taxes will be billed
directly to the tendering holder.
We will not make any payment to brokers, dealers or other nominees
soliciting acceptances in the exchange offer.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the
outstanding notes. Accordingly, we will not recognize any gain or loss on the
exchange for accounting purposes. We intend to amortize the expenses of the
exchange offer and issuance of the outstanding notes over the term of the
notes.
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DESCRIPTION OF THE NOTES
General
The outstanding notes were, and the exchange notes will be, issued under an
indenture, dated as of February 17, 2000, among Madison River Capital, LLC,
Madison River Finance Corp. and Norwest Bank Minnesota, National Association,
as trustee under the indenture. The indenture is governed by New York law. The
terms of the exchange notes are the same as the terms of the outstanding notes,
except that we registered the exchange notes under the Securities Act. As a
result, their transfer is not restricted like transfer of the outstanding
notes. In addition, holders of the exchange notes are not entitled to rights
under the registration rights agreement. In this section entitled "Description
of the Notes," the word "Madison River" refers only to Madison River Capital,
LLC and not to any of its subsidiaries, and the word "Finance" refers only to
Madison River Finance Corp. and not to any of its subsidiaries, and the word
"Issuers" refers collectively to Madison River and Finance. You can find the
definitions of certain capitalized terms used in this section under the
subheading entitled "--Certain Definitions" below.
Finance is a wholly owned subsidiary of Madison River that was incorporated
in Delaware to serve as a co-issuer of the notes. We believe that certain
purchasers of the outstanding notes may not have been permitted to purchase
debt securities of limited liability companies such as Madison River unless a
corporation jointly issues such debt securities. Finance will not have any
substantial operations or assets and will not have any revenues. As a result,
you should not expect Finance to participate in servicing the interest and
principal obligations on the notes. See "--Certain Covenants--Restrictions on
Activities of Finance" below.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they and not this description, define
your rights as holders of the notes. Copies of the indenture and the
registration rights agreement can be obtained by following the instructions
contained in this prospectus in the section "Where You Can Find More
Information." The terms of the notes include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939.
Brief Description of the Notes
The Notes
These notes:
. are general unsecured obligations of the Issuers;
. are equal in right of payment with all existing and future
unsubordinated unsecured indebtedness of the Issuers; and
. are senior in right of payment to any future subordinated
Indebtedness of the Issuers.
The operations of Madison River are conducted through its subsidiaries and,
therefore, Madison River depends on the cash flow of its subsidiaries to meet
its obligations, including its obligations under the notes. The notes will be
effectively subordinated in right of payment to all Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
Madison River's subsidiaries. Any right of Madison River to receive assets of
any of its subsidiaries upon the subsidiary's liquidation or reorganization
(and the consequent right of the holders of the notes to participate in those
assets) will be effectively subordinated to the claims of that subsidiary's
creditors, except to the extent that Madison River is itself recognized as a
creditor of the subsidiary, in which case the claims of Madison River would
still be subordinate in right of payment to any security in the
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assets of the subsidiary and any indebtedness of the subsidiary senior to that
held by Madison River. As of March 31, 2000, Madison River's subsidiaries would
have had approximately $477.1 million of Indebtedness and $2.1 million of trade
payables outstanding.
As of February 17, 2000, all of our subsidiaries will be "Restricted
Subsidiaries." However, under the circumstances described below under the
subheading "Certain Covenants--Designation of Restricted and Unrestricted
Subsidiaries," we will be permitted to designate certain of our subsidiaries as
"Unrestricted Subsidiaries." Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants in the indenture.
Principal, Maturity and Interest
The Issuers will issue notes with a maximum aggregate principal amount of
$200 million. The Issuers will issue notes in denominations of $1,000 and
integral multiples of $1,000. The notes will mature on March 1, 2010.
The Issuers may issue additional notes ("Additional notes") from time to
time after the exchange offer, subject to the provisions of the indenture
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock." The notes and any Additional
notes subsequently issued under the indenture would be treated as a single
class for all purposes under the indenture, including, without limitation,
waivers, amendments, redemptions and offers to purchase.
Interest on the notes will accrue at the rate of 13 1/4% per annum and will
be payable semi-annually in arrears on March 1 and September 1, commencing on
September 1, 2000. The Issuers will make each interest payment to the Holders
of record on the immediately preceding February 15 and August 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a Holder of more than $5.0 million in principal amount of the notes has
given wire transfer instructions to the Issuers, the Issuers will make all
payments of principal, premium, interest and Special Interest, if any, on those
notes in accordance with those instructions. All other payments on these notes
will be made at the office or agency of the paying agent and registrar within
the City and State of New York unless the Issuers elect to make payments of
interest and Special Interest, if any, by check mailed to the Holders at their
address set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as paying agent and registrar. The Issuers
may change the paying agent or registrar without prior notice to the Holders of
the notes, and either Issuer or any of its Subsidiaries may act as paying agent
or registrar.
Transfer and Exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Issuers may
require a Holder to pay any taxes and fees required by law or
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permitted by the indenture. The Issuers are not required to transfer or
exchange any note selected for redemption. Also, the Issuers are not required
to transfer or exchange any note for a period of 15 days before a selection of
notes to be redeemed.
The registered Holder of a note will be treated as the owner of it for all
purposes.
Optional Redemption
At any time prior to March 1, 2003, the Issuers may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes
originally issued under the indenture at a redemption price of 113.250% of the
principal amount thereof, plus accrued and unpaid interest and Special
Interest, if any, to the redemption date, with the net cash proceeds of one or
more Public Equity Offerings by Madison River or the net cash proceeds of a
Strategic Equity Investment in Madison River or a capital contribution to
Madison River's common equity made with the net cash proceeds of a concurrent
Public Equity Offering by, or Strategic Investment in, Madison River's direct
parent; provided that:
(1) at least 65% in aggregate principal amount of notes remains outstanding
immediately after the occurrence of such redemption (excluding notes held
by Madison River and its Subsidiaries); and
(2) the redemption must occur within 60 days of the date of the closing of such
Public Equity Offering or Strategy Equity Investment.
Except pursuant to the preceding paragraph, the notes will not be redeemable
at the Issuers' option prior to March 1, 2005.
After March 1, 2005, the Issuers may redeem all or a part of these notes
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Special Interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on March
1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2005.......................... 106.625%
2006.......................... 104.417%
2007.......................... 102.208%
2008 and thereafter........... 100.000%
</TABLE>
Mandatory Redemption
The Issuers are not required to make mandatory redemption or sinking fund
payments with respect to the notes.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that Holder's notes pursuant to the Change of
Control Offer. In the Change of Control Offer, the Issuers will offer a Change
of Control Payment in cash equal to 101% of the aggregate principal amount of
notes repurchased plus accrued and unpaid interest and Special Interest
thereon, if any, to the date of purchase or, in the case of repurchases of
notes prior to the full Accretion Date, at a purchase price
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equal to 101% of the aggregate principal amount of notes repurchased plus
accrued and unpaid interest and Special Interest thereon, if any, to such date
of repurchase. Within 30 days following any Change of Control, the Issuers will
mail a notice to each Holder briefly describing the transaction or transactions
that constitute a Change of Control and offering to repurchase notes on the
date specified in such notice (the "Change of Control Payment Date"), pursuant
to the procedures required by the indenture and described in such notice.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change
of Control provisions of the indenture, the Issuers will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the Change of Control provisions of the
indenture by virtue of such conflict.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered pursuant
to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of notes or portions thereof being purchased by Madison River.
The paying agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof.
The provisions described above that require the Issuers to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders of the notes to require that the
Issuers repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by the
Issuers and purchases all notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Madison River and its Subsidiaries taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of notes to require the Issuers to
repurchase such notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of Madison River and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
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Asset Sales
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Madison River (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) such fair market value is determined by Madison River's Board of Directors
and evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by Madison River or
such Restricted Subsidiary is in the form of cash or Cash Equivalents. For
purposes of this provision, each of the following shall be deemed to be
cash:
(a) any Indebtedness or other liabilities (as shown on Madison River's or
such Restricted Subsidiary's most recent balance sheet), of Madison
River or any Restricted Subsidiary (other than contingent liabilities
and Indebtedness that is by its terms subordinated to the notes) that
are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases Madison River or such
Restricted Subsidiary from further liability; and
(b) any securities, notes or other obligations received by Madison River or
any such Restricted Subsidiary from such transferee that are (subject
to ordinary settlement periods) converted within 60 days of the
applicable Asset Sale by Madison River or such Restricted Subsidiary
into cash or Cash Equivalents (to the extent of the cash received in
that conversion).
In the event and to the extent that the Net Proceeds received by Madison
River or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after February 17, 2000 in any period of 12 consecutive months
exceed 10% of Consolidated Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet has been provided to the Trustee pursuant to the "Reports" covenant),
then Madison River or the applicable Restricted Subsidiary may apply such Net
Proceeds, within 365 days after the date on which the Net Proceeds so received
exceed 10% of Consolidated Tangible Assets:
(1) to reduce Indebtedness under a Credit Facility;
(2) to reduce other Indebtedness of any of Madison River's Restricted
Subsidiaries;
(3) to acquire all or substantially all of the assets of a Telecommunications
Business;
(4) to the acquisition of Voting Stock of a Person primarily engaged in a
Telecommunications Business from a Person that is not a Subsidiary of
Madison River; provided, that, after giving effect thereto, the Person
whose Voting Stock was so acquired becomes a Restricted Subsidiary of
Madison River;
(5) to make a capital expenditure; or
(6) to acquire other long-term assets that are used or useful in a
Telecommunications Business.
Pending the final application of any such Net Proceeds, Madison River may
temporarily reduce borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Issuers will
make an Asset Sale Offer to all Holders of notes
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and all holders of other Indebtedness that is pari passu with the notes
containing provisions similar to those set forth in the indenture with respect
to offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of notes and such other pari passu
Indebtedness that may be purchased out of the Excess Proceeds. The offer price
in any Asset Sale Offer will be equal to 100% of principal amount plus accrued
and unpaid interest and Special Interest thereon, if any, to the date of
purchase, in accordance with the procedures set forth in the indenture and such
other senior Indebtedness of Madison River. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, Madison River may use such Excess Proceeds
for any purpose not otherwise prohibited by the indenture. If the aggregate
principal amount of notes and such other pari passu Indebtedness tendered into
such Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall
select the notes and such other pari passu Indebtedness to be purchased on a
pro rata basis based on the principal amount of notes and such pari passu
Indebtedness tendered. Upon completion of each Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.
Notwithstanding the three immediately preceding paragraphs, Madison River
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent that (i) at least 75% of
the consideration received by Madison River and its Restricted Subsidiaries in
such Asset Sale consists of cash, assets that would qualify under sections (3)
through (6) of the second preceding paragraph, or any combination of any of the
foregoing and (ii) such Asset Sale is for Fair Market Value; provided that any
such consideration received by Madison River or any of its Restricted
Subsidiaries that constitutes an Investment is made in compliance with the
covenant described below under the caption "Certain Covenants--Restricted
Payments" and any Net Cash Proceeds received by Madison River or any of its
Restricted Subsidiaries in connection with any such Asset Sale are applied in
accordance with the immediately preceding paragraph.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
purchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sales
provisions of the indenture, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Asset Sale provisions of the indenture by virtue of such
conflict.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the Trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days
before the redemption date to each Holder of notes to be redeemed at its
registered address.
Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the Holder thereof
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upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of Madison River's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving Madison River or any of its
Restricted Subsidiaries) or to the direct or indirect holders of Madison
River's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of Madison River or payable to
Madison River or a Restricted Subsidiary of Madison River);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving Madison River) any Equity Interests of Madison River or any
direct or indirect parent of Madison River or any Restricted Subsidiary of
Madison River (other than any such Equity Interests owned by Madison River
or any Restricted Subsidiary of Madison River);
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the notes, except a payment of interest or principal at the Stated
Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in clauses (1) through (3) above and in this clause (4) being
collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) Madison River would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Debt to
Consolidated Cash Flow Ratio test set forth in the first paragraph of the
covenant described below under the caption "--Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(3) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Madison River and its Restricted Subsidiaries
after February 17, 2000 (excluding Restricted Payments permitted by clauses
(2), (3) and (4) of the next succeeding paragraph), shall not exceed, at
the date of determination, without duplication, the sum of:
(a) an amount equal to 100% of Madison River's Consolidated EBITDA since
February 17, 2000 to the end of Madison River's most recently ended
fiscal quarter for which internal financial statements are available
taken as a single accounting period, less the product of 1.5 times
Madison River's Consolidated Interest Expense since February 17, 2000
to the end of Madison River's most recently ended fiscal quarter for
which internal financial statements are available, taken as a single
accounting period; plus
(b) 100% of the aggregate net cash proceeds received by Madison River since
February 17, 2000 as a contribution to its common equity capital or
from the issue or sale of Equity Interests of Madison River (other than
sales of Disqualified Stock) in excess of $24 million
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or from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Madison River
that have been converted into or exchanged for such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of Madison River and other than
Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock); plus
(c) to the extent that any Restricted Investment that was made after
February 17, 2000 is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (i) the cash return of capital with respect to
such Restricted Investment (less the cost of disposition, if any) and
(ii) the initial amount of such Restricted Investment.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend or distribution within 60 days after the date
of declaration thereof, if at said date of declaration such payment would
have complied with the provisions of the indenture;
(2) the making of any Investment or the redemption, repurchase, retirement,
defeasance or other acquisition of any subordinated Indebtedness or
Equity Interests of Madison River in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary
of Madison River) of, Equity Interests of Madison River (other than
Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause
(3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness with the net cash proceeds from an incurrence
of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Madison River
to the holders of its common Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of Madison River or any Restricted Subsidiary
that is held by any current or former employee, director or consultant
(or their estates or the beneficiaries of such estates) of Madison River
or any Subsidiary; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $1.0 million in any twelve-month period;
(6) so long as no Default or Event of Default under the indenture shall have
occurred and be continuing or shall be in existence immediately
thereafter, making loans to members of management of Madison River
pursuant to written agreements with such members, in an aggregate
principal amount not to exceed $1.0 million in the aggregate at any one
time outstanding;
(7) the payment of cash in lieu of the issuance of fractional shares of
common stock upon exercise or conversion of securities exercisable or
convertible into common stock of Madison River;
(8) payments or distributions, in the nature of satisfaction of dissenters'
rights, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions hereof applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of Madison River;
(9) any purchase or acquisition from, or withholding on issuances to, any
employee of Madison River's Capital Stock in order to satisfy any
applicable federal, state or local tax payments in respect of the receipt
of shares of Madison River's Capital Stock;
(10) any withholding on issuances to any employee of Madison River of Madison
River's Capital Stock in order to pay the purchase price of such Capital
Stock or similar instrument pursuant to a stock option, equity incentive
or other employee benefit plan or agreement of Madison River or any of
its Restricted Subsidiaries;
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(11) so long as Madison River is a limited liability company treated as a
partnership or an entity disregarded as separate from its owner for
federal, state and local income tax purposes (and prior to any
distribution of any Tax Amount, Madison River delivers a certificate
prepared by the Tax Amount CPA to such effect), distributions to members
of Madison River in an amount, with respect to any period beginning after
December 31, 1998, not to exceed the Tax Amount with respect to Madison
River for such period;
(12) payments to Holdings for expenses incurred by Holdings in the ordinary
course of business directly relating to the administration of Madison
River or its Restricted Subsidiaries in an amount not to exceed $1.0
million in any fiscal year; and
(13) other Restricted Payments in an aggregate amount not to exceed $2.0
million.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Madison River or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee. The Board of
Directors' determination must be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Issuers shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise (collectively, "incur"), with respect to any Indebtedness (including
Acquired Debt), and Madison River will not issue any Disqualified Stock and
will not permit any of its Restricted Subsidiaries to issue any shares of
preferred stock; provided, however, that Madison River may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock and Madison
River's Restricted Subsidiaries may incur Indebtedness under Credit Facilities
or pursuant to Permitted Telecommunications Financing if, in each case:
(1) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) the Debt to Consolidated Cash Flow Ratio at the time of incurrence of such
Indebtedness or the issuance of such Disqualified Stock, after giving pro
forma effect to such incurrence or issuance as of such date and to the use
of proceeds therefrom as if the same had occurred at the beginning of the
most recently ended four full fiscal quarter period of Madison River for
which internal financial statements are available, would have been no
greater than 6.0 to 1 for Indebtedness incurred on or prior the date that
is eighteen months after February 17, 2000, or no greater than 5.5 to 1 for
Indebtedness incurred after such date.
The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Madison River or any of its Restricted Subsidiaries of
Indebtedness under one or more Credit Facilities in an aggregate principal
amount (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of Madison River and its
Restricted Subsidiaries thereunder) at any one time outstanding not to
exceed an amount equal to $517 million, less the aggregate amount of all
Net Proceeds of Asset Sales
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applied to repay Indebtedness under Credit Facilities pursuant to the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(2) the incurrence by Madison River and its Restricted Subsidiaries of
Existing Indebtedness;
(3) the incurrence by Madison River of Indebtedness represented by the notes;
(4) the incurrence by Madison River or any of its Restricted Subsidiaries of
Indebtedness in connection with Permitted Telecommunications Financing;
(5) the incurrence by Madison River or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace, Indebtedness (other
than intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4) or this clause (5) of this paragraph;
(6) the incurrence by Madison River or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Madison River and any of its
Restricted Subsidiaries; provided, however, that:
(a) if Madison River is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests, other
than directors qualifying shares, that results in any such
Indebtedness being held by a Person other than Madison River or a
Restricted Subsidiary and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either Madison River or a
Restricted Subsidiary; shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Madison River or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause
(6);
(7) the incurrence by Madison River or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this indenture to be outstanding;
(8) the guarantee by Madison River or a Restricted Subsidiary of Madison
River that was permitted to be incurred by another provision of the
indenture;
(9) the incurrence by Madison River of Indebtedness or by a Restricted
Subsidiary of Madison River of Indebtedness not to exceed, at any one
time outstanding, 2.0 times the aggregate net cash proceeds received by
Madison River after February 17, 2000 from the issuance and sale of its
Common Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of Madison River, to the extent such net cash proceeds have
not been used pursuant to clause 3(b) of the second paragraph or clause
(2) of the third paragraph of the covenant described above under the
caption "--Restricted Payments" to make a Restricted Payment or to make a
Permitted Investment pursuant to clause (9) of the definition thereof;
and provided that such Indebtedness (other than Acquired Debt) does not
mature prior to the Stated Maturity of the notes and the Weighted Average
Life to Maturity of such Indebtedness is longer than that of the notes;
(10) the incurrence by Madison River of Indebtedness, to the extent that the
net proceeds thereof are promptly (A) used to repurchase notes tendered
in a Change of Control Offer or (B) deposited to defease all of the notes
as described below under "--Legal Defeasance and Covenant Defeasance;"
(11) the incurrence by Madison River or any of its Restricted Subsidiaries of
Indebtedness constituting reimbursement obligations with respect to
letters of credit issued in the ordinary course of business, including
without limitation, letters of credit in respect of workers' compensation
claims or self-insurance, or other Indebtedness with respect to
reimbursement
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type obligations regarding workers' compensation claims; provided,
however, that upon the drawing of such letters of credit or the incurrence
of such Indebtedness, such obligations are reimbursed within 30 days
following such drawing or incurrence;
(12) Indebtedness arising from agreements of Madison River or a Restricted
Subsidiary of Madison River providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or assumed
in connection with the disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition; provided that (a) such
Indebtedness is not reflected on the balance sheet of Madison River or
any Restricted Subsidiary (contingent obligations referred to in the
footnote or footnotes to financial statements and not otherwise reflected
on the balance sheet will not be deemed to be reflected on such balance
sheet for purposes of this clause (a)) and (b) the maximum assumable
liability in respect of such Indebtedness shall at no time exceed the
gross proceeds including non-cash proceeds (the fair market value of such
non-cash proceeds being measured at the time received without giving
effect to any such subsequent changes in value) actually received by
Madison River and/or such Restricted Subsidiary in connection with such
disposition;
(13) obligations in respect of performance and surety bonds and completion
guarantees provided by Madison River or any Restricted Subsidiary of
Madison River in the ordinary course of business;
(14) the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class
of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; and
(15) the incurrence by Madison River or any of its Restricted Subsidiaries of
additional Indebtedness (in addition to any Indebtedness permitted by
clauses (1) through (14) above or by the first paragraph of this
covenant) in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, not to exceed $25.0 million.
Madison River will not incur any Indebtedness (including Permitted Debt)
that is contractually subordinated in right of payment to any other
Indebtedness of Madison River unless such Indebtedness is also contractually
subordinated in right of payment to the notes on substantially identical
terms; provided, however, that no Indebtedness of Madison River shall be
deemed to be contractually subordinated in right of payment to any other
Indebtedness of Madison River solely by virtue of being unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (15) above, or
is entitled to be incurred pursuant to the first paragraph of this covenant,
Madison River will be permitted to classify such item of Indebtedness on the
date of its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant. Indebtedness
under Credit Facilities outstanding on the date on which notes are first
issued and authenticated under the indenture shall be deemed to have been
incurred on such date in reliance on the exception provided by clause (1) of
the definition of Permitted Debt.
Liens
Madison River will not and will not permit any of its Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist
or become effective any Lien of any kind (other than Permitted Liens) upon any
of their property or assets, now owned or hereafter acquired, unless all
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payments due under the indenture and the notes are secured on an equal and
ratable basis with the obligations so secured until such time as such
obligations are no longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Subsidiaries
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Madison River or any of Madison River's Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by, its
profits, or pay any indebtedness owed to Madison River or any of its
Restricted Subsidiaries;
(2) make loans or advances to Madison River or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Madison River or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on February 17, 2000 and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as
a whole, with respect to such dividend and other payment restrictions than
those contained in such Existing Indebtedness, as in effect on February
17, 2000;
(2) the indenture and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Madison River or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in
the case of Indebtedness, such Indebtedness was permitted by the terms of
the indenture to be incurred by Madison River or such Restricted
Subsidiary;
(5) customary non-assignment provisions in contracts entered into in the
ordinary course of business;
(6) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on the property so acquired of the
nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted Subsidiary
that restricts distributions by such Restricted Subsidiary pending its
sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred pursuant to
the provisions of the covenant described above under the caption "--Liens"
that limit the right of Madison River or any of its Restricted
Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business;
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(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business;
(12) restrictions imposed pursuant to the terms of Indebtedness of a Restricted
Subsidiary of Madison River that was permitted by the indenture to be
incurred; provided that such restrictions, in the written view of the
Board of Directors of Madison River or an executive officer of Madison
River:
(a) are required in order to obtain such financing;
(b) are customary for such financings or, in the absence of industry
customs, reasonable in the view of the Board of Directors or such
executive officer; and
(c) will not materially impair Madison River's ability to make interest
and principal payments as required under the notes.
Merger, Consolidation, or Sale of Assets
Madison River may not, directly or indirectly: (1) consolidate or merge with
or into another Person (whether or not Madison River is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either: (a) Madison River is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Madison River) or to which such sale, assignment, transfer, conveyance or
other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than Madison River) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of Madison River under the Registration Rights Agreement,
the notes and the indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event of Default exists;
and
(4) except in the case of a merger of Madison River with or into a Wholly Owned
Subsidiary of Madison River, Madison River or the Person formed by or
surviving any such consolidation or merger (if other than Madison River),
or to which such sale, assignment, transfer, conveyance or other
disposition shall have been made will, immediately after such transaction
after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Consolidated Cash Flow Ratio test set
forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
In addition, Madison River may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Madison River and its Restricted
Subsidiaries.
Transactions with Affiliates
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
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agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
Madison River or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Madison River or such
Restricted Subsidiary with an unrelated Person; and
(2) Madison River delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.5 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by Madison River or any of its
Restricted Subsidiaries in the ordinary course of business of Madison River
or such Restricted Subsidiary;
(2) transactions between or among Madison River and/or its Restricted
Subsidiaries;
(3) transactions with a Person that is an Affiliate of Madison River solely
because Madison River owns an Equity Interest in such Person;
(4) payment of reasonable fees to directors who are not otherwise Affiliates of
Madison River or any of its Restricted Subsidiaries, and customary
indemnification and insurance arrangements in favor of any director;
(5) sales or issuances of Equity Interests (other than Disqualified Stock) to
Affiliates of Madison River;
(6) Restricted Payments that are permitted by the provisions of the indenture
described above under the caption "--Restricted Payments";
(7) the issuance or sale of Equity Interests (other than Disqualified Stock) of
Madison River; and
(8) loans or advances, not to exceed $2.0 million in the aggregate at any time
outstanding, to employees in the ordinary course of business.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Madison River and its Restricted Subsidiaries
in the Subsidiary so designated will be deemed to be an Investment made as of
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of the covenant described above
under the caption "--Restricted Payments" or Permitted Investments, as
applicable. All such outstanding Investments will be valued at their fair
market value at the time of such designation. That designation will only be
permitted if such Restricted Payment would be permitted at that time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
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Sale and Leaseback Transactions
Madison River will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Madison River or any Restricted Subsidiary may enter into a sale and leaseback
transaction if:
(1) Madison River or such Restricted Subsidiary, as applicable, could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt relating
to such sale and leaseback transaction under the Debt to Consolidated Cash
Flow Ratio test in the first paragraph of the covenant described above
under the caption "--Incurrence of Additional Indebtedness and Issuance of
Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant described above under the caption "--Liens";
(2) the gross cash proceeds of that sale and leaseback transaction are at least
equal to the fair market value, as determined in good faith by the Board of
Directors and set forth in an Officers' Certificate delivered to the
Trustee, of the property that is the subject of such sale and leaseback
transaction; and
(3) the transfer of assets in that sale and leaseback transaction is permitted
by, and Madison River applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "--Asset
Sales."
Restrictions on Activities of Finance
Finance will not hold any material assets, become liable for any material
obligations, other than the notes, or engage in any significant business
activities; provided that Finance may be a co-obligor with respect to
Indebtedness if Madison River is a primary obligor of such Indebtedness and the
net proceeds of such Indebtedness are received by Madison River or one or more
of Madison River's Restricted Subsidiaries other than Finance.
Reports
Whether or not required by the SEC, so long as any notes are outstanding,
the Issuers will furnish to the Holders of notes, within 15 days of the time
periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if Madison River
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by Madison River's certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC on Form
8-K if Madison River were required to file such reports.
If Madison River has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation,
either on the face of the financial statements or in the footnotes thereto, and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Madison
River and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of Madison River.
In addition, following the consummation of the exchange offer, whether or
not required by the SEC, the Issuers will file a copy of all of the information
and reports referred to in clauses (1) and (2) above with the SEC for public
availability within the time periods specified in the SEC's rules and
regulations (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
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Payments for Consent
Madison River will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of notes for or as an inducement to any consent, waiver
or amendment of any of the terms or provisions of the indenture or the notes
unless such consideration is offered to be paid and is paid to all Holders of
the notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or Special
Interest with respect to, the notes;
(2) default in payment when due of the principal of or premium, if any, on the
notes;
(3) failure by Madison River or any of its Subsidiaries (a) to comply for 30
days after notice with the provisions described under the captions "--
Certain Covenants--Restricted Payments," "--Certain Covenants--Incurrence
of Indebtedness and Issuance of Preferred Stock" or (b) to comply with "--
Certain Covenants--Merger, Consolidation or Sale of Assets," "--Repurchase
at the Option of Holders--Change of Control" or "--Repurchase at the Option
of Holders--Asset Sales;"
(4) failure by Madison River or any of its Restricted Subsidiaries for 45 days
after notice from the Trustee or the Holders of 25% or more of the
outstanding notes to comply with any of the other agreements in the
indenture or the notes;
(5) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Madison River or any of its Restricted Subsidiaries
(or the payment of which is guaranteed by Madison River or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after February 17, 2000, if that default:
(a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a
"Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its express
maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(6) failure by Madison River or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $10.0 million, which judgments are not
paid, discharged or stayed for a period of 60 days;
(7) certain events of bankruptcy or insolvency with respect to Madison River or
any of its Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to Madison River, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all notes that are outstanding will become
due and payable immediately without further action or notice. If any other
Event of Default occurs and is continuing, the trustee or the Holders of at
least 25% in principal amount of the then outstanding notes may declare all the
notes to be due and payable immediately.
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Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a
majority in principal amount of the notes then outstanding may direct the
trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest or Special Interest) if it determines that withholding notice is in
their interest.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the trustee, the Holders of a
majority in aggregate principal amount of notes outstanding by written notice
to Madison River and the Trustee, may rescind and annul such declaration and
its consequences if (a) Madison River has paid or deposited with the trustee a
sum sufficient to pay (1) all sums paid or advanced by the trustee under the
indenture and the reasonable compensation, expenses, disbursements and advances
of the trustee, its agents and counsel, (2) all overdue interest on all notes
then outstanding, (3) the principal of and premium, if any, on any notes then
outstanding which have become due otherwise than by such declaration of
acceleration and interest thereon (including Special Interest) at the rate
borne by the notes and (4) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate borne by the notes; (b) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction; and (c) all Events of Default, other than the non-
declaration of acceleration, have been cured or waived as provided in the
indenture. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Special Interest on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Madison River with the
intention of avoiding payment of the premium that Madison River would have had
to pay if Madison River then had elected to redeem the notes pursuant to the
optional redemption provisions of the indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the notes. If an Event of Default occurs prior to
March 1, 2005, by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of Madison River with the intention of avoiding the
prohibition on redemption of the notes prior to March 1, 2005, then the premium
specified in the indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, the Issuers are required to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of Madison River
or any Subsidiary, as such, shall have any liability for any obligations of
Madison River under the notes, the indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder of
notes by accepting a note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the notes. The waiver
may not be effective to waive liabilities under the federal securities laws.
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Legal Defeasance and Covenant Defeasance
The Issuers may, at their option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of Holders of notes then outstanding to receive payments in
respect of the principal of, premium, if any, and interest and Special
Interest on such notes when such payments are due from the trust referred
to below;
(2) the Issuers' obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or
stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Issuers may, at their option and at any time, elect to have
the obligations of the Issuers released with respect to certain covenants that
are described in the indenture ("Covenant Defeasance") and thereafter any
omission to comply with those covenants shall not constitute a Default or Event
of Default with respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Issuers must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest
and Special Interest, if any, on the notes then outstanding on the stated
maturity or on the applicable redemption date, as the case may be, and the
Issuers must specify whether the notes are being defeased to maturity or to
a particular redemption date;
(2) in the case of Legal Defeasance, the Issuers shall have delivered to the
Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Issuers has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since February
17, 2000, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the notes then outstanding will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Issuers shall have delivered to the
Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that the Holders of the notes then outstanding will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or (b) insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
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(5) such Legal Defeasance or Covenant Defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument (other than the indenture) to which Madison River or any of its
Restricted Subsidiaries is a party or by which Madison River or any of its
Restricted Subsidiaries is bound;
(6) the Issuers must have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) the Issuers must deliver to the Trustee an Officers' Certificate stating
that the deposit was not made by the Issuers with the intent of preferring
the Holders of notes over the other creditors of the Issuers with the
intent of defeating, hindering, delaying or defrauding creditors of the
Issuers or others; and
(8) the Issuers must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next three succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in aggregate principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in aggregate principal amount of the
notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or alter
the provisions with respect to the redemption of the notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any note;
(4) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the notes (except a rescission of
acceleration of the notes by the Holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers of
past Defaults or the rights of Holders of notes to receive payments of
principal of or premium, if any, or interest or Special Interest, if any,
on the notes;
(7) waive a redemption payment with respect to any note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders");
(8) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the indenture
relating to subordination that adversely affects the rights of the Holders of
the notes will require the consent of the Holders of at least 75% in aggregate
principal amount of notes then outstanding.
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Notwithstanding the preceding, without the consent of any Holder of notes,
the Issuers and the Trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Madison River's obligations to Holders of
notes in the case of a merger or consolidation or sale of all or
substantially all of Madison River's assets;
(4) to make any change that would provide any additional rights or benefits to
the Holders of notes or that does not adversely affect the legal rights
under the indenture of any such Holder; or
(5) to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has theretofore been deposited in trust and thereafter
repaid to Madison River) have been delivered to the Trustee for
cancellation; or
(b) all notes that have not been delivered to the Trustee for cancellation
have become due and payable by reason of the mailing of a notice of
redemption or otherwise or will become due and payable within one year
and the Issuers have irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust solely for the benefit of the
Holders, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the Trustee for
cancellation for principal, premium and Special Interest, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or shall occur as a result of such deposit and such
deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Issuers are a party or by
which the Issuers are bound;
(3) Madison River has paid or caused to be paid all sums payable by it under
the indenture; and
(4) Madison River has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, Madison River must deliver an Officers' Certificate and an
Opinion of Counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Concerning the Trustee
If the Trustee becomes a creditor of the Issuers, the indenture limits its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the SEC for permission to continue or resign.
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The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to Madison River
Capital, LLC, 103 South Fifth Street, Mebane, North Carolina 27302, Attention:
General Counsel. In addition, we filed the indenture and the registration
rights agreement as exhibits to the Form S-4 of which this prospectus is a
part. See the section in this prospectus entitled "Where You Can Find More
Information" for information regarding how to obtain documents from the SEC.
Book-Entry, Delivery and Form
The notes will be represented by one or more notes in registered, global
form without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes initially will be deposited with the Trustee, as
custodian for DTC in New York, New York and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
notes in certificated form except in the limited circumstances described below.
See "--Depositary Procedures--Exchange of Book-Entry notes for Certificated
Notes." Except in the limited circumstances described below, owners of
beneficial interests in the Global Notes will not be entitled to receive
physical delivery of Certificated Notes (as defined below).
Transfers of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear System ("Euroclear") and
Clearstream Banking, formerly known as Cedel Bank, Societe anonyme ("Cedel")),
which may change from time to time.
Initially, the Trustee will act as paying agent and registrar under the
indenture. The notes may be presented for registration of transfer and exchange
at the offices of the registrar.
Depositary Procedures
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. Madison River takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Madison River that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and
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dealers, banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised Madison River that, pursuant to procedures established
by it,
(a) upon deposit of the Global Notes, DTC will credit the accounts of
Participants with portions of the principal amount of the Global Notes
and
(b) ownership of such interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC, Euroclear and Cedel, if they are Participants in such system, or
indirectly through organizations which are Participants in such system. All
interests in a Global Note, including those held through Euroclear or Cedel,
may be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or Cedel may also be subject to the procedures and
requirements of such systems. The laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to that extent. Because DTC can act only on behalf
of Participants, which in turn act on behalf of Indirect Participants and
certain banks, the ability of a person having beneficial interests in a Global
Note to pledge such interests to persons or entities that do not participate in
the DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interest in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and interest
on the Global Notes will be payable to DTC in its capacity as the registered
Holder of the Global Notes under the indenture. Under the terms of the
indenture, Madison River and the Trustee will treat the persons in whose names
the notes are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently, none
of Madison River, the Trustee or any agent of Madison River has or will have
any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interest in the Global Notes, or for maintaining, supervising or reviewing
any of DTC's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Notes, or
(2) any other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants.
DTC has advised Madison River that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in the principal amount of beneficial interest in the relevant
security as shown on the records of DTC unless DTC has reason to believe it
will not receive payment on such payment date. Payments by the Participants and
the Indirect Participants to the beneficial owners of notes will be
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governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not be
the responsibility of DTC, the Trustee or Madison River. Neither Madison River
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the notes, and Madison River and the
Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interest
in the Global Notes are expected to be eligible to trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will, therefore, settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its Participants. See "--Same Day
Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes
described herein, cross-market transfers between the Participants in DTC, on
the one hand, and Euroclear or Cedel participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Cedel, as the case may be, by its respective depositary; however, such cross-
market transactions will require delivery of instructions to Euroclear or
Cedel, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by delivering or receiving interests in the relevant Global Note in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel.
DTC has advised Madison River that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the relevant Global Notes and
only in respect of such portion of the relevant Global Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for notes in certificated form, and to distribute such notes to
its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among Participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued at
any time. None of Madison River, the Trustee or any of their respective agents
will have any responsibility for the performance by DTC, Euroclear or Cedel or
their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if
(1) DTC (x) notifies Madison River that it is unwilling or unable to continue
as depositary for the Global Notes and Madison River thereupon fails to
appoint a successor depositary or (y) has ceased to be a clearing agency
registered under the Exchange Act,
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(2) Madison River, at its option, notifies the Trustee in writing that it
elects to cause the issuance of the Certificated Notes, or
(3) there shall have occurred and be continuing a Default or Event of Default
with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with customary procedures. In all
cases, Certificated Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of DTC (in accordance with
its customary procedures).
Same Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
the Global Notes (including principal, premium, if any, interest and Special
Interest, if any) be made by wire transfer of immediately available funds to
the accounts specified by the holder of the applicable Global Notes. With
respect to Certificated Notes, Madison River will make all payments of
principal, premium, if any, interest, and Special Interest, if any, by wire
transfer of immediately available funds to the accounts specified by the
holders thereof or, if no such account is specified, by mailing a check to each
such holder's registered address. The notes represented by the Global Notes
will be eligible to trade in DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such notes will, therefore, be
required by DTC to be settled in immediately available funds. Madison River
expects that secondary trading in any certificated notes will also be settled
in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day
(which must be a business day for Euroclear and Cedel) immediately following
the settlement date of DTC. DTC has advised Madison River that cash received in
Euroclear or Cedel as a result of sales of interests in a Global Note by or
through a Euroclear or Cedel participant to a Participant in DTC will be
received with value on the settlement date of DTC but will be available in the
relevant Euroclear or Cedel cash account only as of the business day for
Euroclear or Cedel following DTC's settlement date.
Registration Rights; Special Interest
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the proposed form of registration rights
agreement in its entirety because it, and not this description, defines your
registration rights as Holders of these notes. See "--Additional Information."
The Issuers and the initial purchasers entered into a registration rights
agreement, dated as of February 17, 2000. Pursuant to the registration rights
agreement, the Issuers agreed to file with the SEC the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the exchange notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Issuers will offer to the Holders of Transfer
Restricted Securities pursuant to the exchange offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for the exchange notes.
If:
(1) The Issuers are not
(a) required to file the Exchange Offer Registration Statement; or
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(b) permitted to consummate the exchange offer because the exchange offer
is not permitted by applicable law or SEC policy; or
(2) any Holder of Transfer Restricted Securities notifies the Issuers prior to
the 20th day following consummation of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(b) that it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is
not appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly from the
Issuers or an affiliate of the Issuers,
the Issuers will file with the SEC a Shelf Registration Statement to cover
resales of the notes by the Holders of the notes who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement.
The Issuers will use their best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the SEC.
For purposes of the preceding, "Transfer Restricted Securities" means each
outstanding note until:
(1) the date on which such note has been exchanged by a Person other than a
broker-dealer for an exchange note in the Exchange Offer;
(2) following the exchange by a broker-dealer in the exchange offer of an
outstanding note for an exchange note, the date on which such an exchange
note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement;
(3) the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement; or
(4) the date on which such note is distributed to the public pursuant to Rule
144 under the Securities Act.
The registration rights agreement provides that:
(1) the Issuers will file an Exchange Offer Registration Statement with the SEC
on or prior to May 17, 2000;
(2) the Issuers will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the SEC on or prior to August
15, 2000;
(3) unless the exchange offer would not be permitted by applicable law or SEC
policy, the Issuers will
(a) commence the exchange offer; and
(b) use their best efforts to issue on or prior to 30 business days, or
longer, if required by the federal securities laws, after the date on
which the Exchange Offer Registration Statement was declared effective
by the SEC, exchange notes in exchange for all outstanding notes
tendered prior thereto in the Exchange Offer; and
(4) if obligated to file the Shelf Registration Statement, the Issuers will use
their best efforts to file the Shelf Registration Statement with the SEC on
or prior to 30 days after such filing obligation arises and to cause the
Shelf Registration to be declared effective by the SEC on or prior to 90
days after such obligation arises.
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If:
(1) the Issuers fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing; or
(2) any of such registration statements is not declared effective by the SEC
on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"); or
(3) the Issuers fail to consummate the exchange offer within 30 business days
of the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement; or
(4) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the periods specified in the registration rights agreement (each such
event referred to in clauses (1) through (4) above, a "Registration
Default"),
then the Issuers will pay special interest ("Special Interest") to each Holder
of notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of notes held by such Holder.
The amount of Special Interest will increase by an additional $.05 per week
per $1,000 principal amount of notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Special Interest for all Registration Defaults of $.50 per week per $1,000
principal amount of notes.
All accrued Special Interest will be paid by the Issuers on each Damages
Payment Date to the Global note Holder by wire transfer of immediately
available funds or by federal funds check and to Holders of Certificated Notes
by wire transfer to the accounts specified by them or by mailing checks to
their registered addresses if no such accounts have been specified.
Following the cure of all Registration Defaults, the accrual of Special
Interest will cease.
Holders of outstanding notes will be required to make certain
representations to the Issuers (as described in the registration rights
agreement) in order to participate in the exchange offer and will be required
to deliver certain information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the registration rights
agreement in order to have their outstanding notes included in the Shelf
Registration Statement and benefit from the provisions regarding Special
Interest set forth above. By acquiring Transfer Restricted Securities, a Holder
will be deemed to have agreed to indemnify the Issuers against certain losses
arising out of information furnished by such Holder in writing for inclusion in
any Shelf Registration Statement. Holders of outstanding notes will also be
required to suspend their use of the prospectus included in the Shelf
Registration Statement under certain circumstances upon receipt of written
notice to that effect from the Issuers.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness or Disqualified Stock of any other Person existing at the time
such other Person is merged with or into or became a Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging with or
into, or becoming a Subsidiary of, such specified Person; and
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(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the Voting Stock of a Person shall be deemed to be control. For purposes of
this definition, the terms "controlling," "controlled by" and "under common
control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or rights,
other than sales of inventory in the ordinary course of business consistent
with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Madison River and
its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issuance or sale by Madison River or any of its Restricted Subsidiaries
of Equity Interests in any of Madison River's Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among Madison River and its Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary to Madison River
or to another Restricted Subsidiary;
(4) a transaction that is either a Restricted Payment or Restricted Investment
that is permitted by the covenant described above under the caption "--
Restricted Payments" or a Permitted Investment;
(5) the sale or other disposition of real or personal property or equipment
that has become worn out, obsolete or damaged or otherwise unsuitable or
not required for use in connection with the business of Madison River or
any Restricted Subsidiary, as the case may be;
(6) the sale or other disposition of cash or Cash Equivalents; and
(7) the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire,
whether such right is currently exercisable or is exercisable only upon the
occurrence of a subsequent condition.
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"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock (including common stock and
preferred stock);
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) any other interest, other than straight debt obligations, or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than 365 days from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of 365
days or less from the date of acquisition, bankers' acceptances with
maturities not exceeding 365 days and overnight bank deposits, in each
case, with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within 365 days after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of Madison River and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than a Principal or a Related
Party of a Principal;
(2) the adoption of a plan relating to the liquidation or dissolution of the
Issuers;
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(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than the Principals and their Related Parties becomes
the Beneficial Owner, directly or indirectly, of more than 50% of the
Voting Stock of Madison River, measured by voting power rather than number
of shares; for purposes of this definition a percentage ownership of the
equity securities of a person shall be deemed to be beneficial ownership of
a corresponding percentage of any equity securities beneficially owned by
such person.
(4) the first day on which a majority of the members of the Board of Directors
of Madison River Capital are not Continuing Directors; or
(5) Madison River or Holdings consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, Madison
River or Holdings, in any such event pursuant to a transaction in which any
of the outstanding Voting Stock of Madison River or Holdings is converted
into or exchanged for cash (other than fractional shares), securities or
other property, other than any such transaction where the Voting Stock of
Madison River or Holdings outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person immediately after giving effect to such issuance.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Indebtedness" means, with respect to any Person as of any date
of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the
total amount of Indebtedness of any other Person, to the extent that such
Indebtedness has been Guaranteed by the referent Person or one or more of its
Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
Disqualified Stock of such Person and all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis
in accordance with GAAP.
"Consolidated EBITDA" means, for any period, the consolidated net income of
Madison River and its Restricted Subsidiaries for such period calculated in
accordance with GAAP plus, to the extent such amount was deducted in
calculating such consolidated net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items and the cumulative effects of
changes in accounting principles reducing such consolidated net income,
less all non-cash items, extraordinary items and the cumulative effects of
changes in accounting principles increasing such consolidated net income
(other than the accrual of revenue in the ordinary course of business), all
as determined on a consolidated basis for Madison River and its Restricted
Subsidiaries in conformity with GAAP; and
(6) gains and losses on Asset Sales;
provided that, Consolidated EBITDA shall not include: the net income (or net
loss) of any Person that is not a Restricted Subsidiary, except (I) with
respect to net income, to the extent of the amount of dividends or other
distributions actually paid to Madison River or any of its Restricted
Subsidiaries by
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such Person during such period and (II) with respect to net losses, to the
extent of the amount of investments made by Madison River or any Restricted
Subsidiary in such Person during such period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization or original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations); and
(2) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is guaranteed
by such Person or one of its Restricted Subsidiaries or secured by a Lien
on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon);
"Consolidated Tangible Assets" means, with respect to Madison River, the
total consolidated assets of Madison River and its Restricted Subsidiaries,
less the total intangible assets of Madison River and its Restricted
Subsidiaries, as shown on the most recent internal consolidated balance sheet
of Madison River and such Restricted Subsidiaries calculated on a consolidated
basis in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Madison River or Holdings, as applicable, who:
(1) was a member of such Board of Directors on February 17, 2000; or
(2) was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
"Credit Facilities" means one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Debt to Consolidated Cash Flow Ratio" means, as of any date of
determination, the ratio of (a) the Consolidated Indebtedness of Madison River
as of such date to (b) the Consolidated EBITDA of Madison River for the four
most recent full fiscal quarters ending immediately prior to such date for
which internal financial statements are available, in each case determined on a
pro forma basis after giving effect to all acquisitions or dispositions of
assets made by Madison River and its Subsidiaries from the beginning of such
four-quarter period through and including such date of determination (including
any related financing transactions) as if such acquisitions and dispositions
had occurred at the beginning of such four-quarter period. For purposes of
making the computation referred to above, (i) acquisitions that have been made
by Madison River or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first day
of the reference period and Consolidated EBITDA attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded.
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"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders thereof have the right to require Madison River to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale shall not constitute Disqualified Stock if the terms of such
Capital Stock provide that Madison River may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase or redemption
complies with the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Offer Registration Statement" means the Registration Statement
relating to the exchange offer, including the related Prospectus.
"Existing Indebtedness" means up to $535 million in aggregate principal
amount of Indebtedness of Madison River and its Restricted Subsidiaries in
existence on February 17, 2000, until such amounts are repaid.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors of Madison River, whose determination
shall be evidenced by a resolution thereof set forth in an officers'
certificate delivered to the Trustee; provided that for purposes of clause
(11) of the second paragraph of the covenant described above under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," (x) the fair market value of any security registered under the
Exchange Act shall be the average of the closing prices, regular way, of such
security for the 20 consecutive trading days immediately preceding the sale of
Capital Stock and (y) in the event the aggregate fair market value of any
other property (other than cash or Cash Equivalents) received by Madison River
exceeds $10.0 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm (or, if no such
investment banking firm is qualified to issue such an opinion, by a nationally
recognized appraisal firm or public accounting firm) and set forth in the
written opinion of such firm which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on February 17, 2000.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
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(2) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates.
"Holder" means a Person in whose name a note is registered.
"Holdings" means Madison River Telephone Company, a limited liability
corporation organized under the laws of Delaware.
"Indebtedness" means, with respect to any specified Person, any indebtedness
of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Madison River or any Restricted Subsidiary of Madison River sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Madison River such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of Madison River,
Madison River shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Equity Interests
of such Restricted Subsidiary not sold or disposed of in an amount determined
as provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
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"Net Proceeds" means the aggregate cash proceeds received by Madison River
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, (i) legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, (ii) taxes paid or reasonably
estimated to be payable as a result thereof, (including, for so long as Madison
River is treated as a partnership or an entity disregarded as separate from its
owner for federal, state and local income tax purposes, taxes reasonably
estimated to be payable by, or with respect to the net income of, the members
of Madison River with respect to such members' allocable shares of net income
arising from such Asset Sale); (iii) amounts required to be applied to the
repayment of Indebtedness, other than Indebtedness under a Credit Facility,
secured by a Lien on the asset or assets that were the subject of such Asset
Sale; (iv) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries or joint ventures as a result of
such Asset Sale; and (v) the deduction of appropriate amounts provided by the
seller as a reserve in accordance with GAAP against any liabilities associated
with the assets disposed of in such Asset Sale and retained by Madison River or
any Restricted Subsidiary after such Asset Sale and, without duplication, any
reserves that Madison River's Board of Directors determines in good faith
should be made in respect of the sale price of such asset or assets for post
closing adjustments; provided that in the case of any reversal of any reserve
referred to above, the amount so reserved shall be deemed to be Net Proceeds
from an Asset Sale as of the date of such reversal.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Madison River nor any of its Restricted Subsidiaries
(a) provides credit support of any kind (including any undertaking,
agreement or instrument that would constitute Indebtedness), (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of Madison River or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of Madison River or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means:
(1) any Investment in Madison River or in a Restricted Subsidiary of Madison
River;
(2) any Investment in Cash Equivalents;
(3) any Investment by Madison River or any Restricted Subsidiary of Madison
River in a Person, if as a result of or concurrently with such Investment:
(a) such Person becomes a Restricted Subsidiary of Madison River; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Madison River or a Restricted Subsidiary of Madison
River;
(4) any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales";
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(5) any acquisition of assets solely in exchange for the issuance of Equity
Interests (other than Disqualified Stock) of Madison River;
(6) loans or advances to employees made in the ordinary course of business not
to exceed $2.0 million at any one time outstanding;
(7) securities and other assets received in settlement of trade debts or other
claims arising in the ordinary course of business;
(8) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(9) other Investments in Telecommunications Businesses; provided, that the
aggregate amount of such Investments does not exceed at any time the sum
of
(a) $25.0 million; plus
(b) the amount of Net Proceeds received by Madison River after February
17, 2000 as a capital contribution or from the sale of its Capital
Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of Madison River, except to the extent such Net Proceeds
are used to make Restricted Payments permitted pursuant to clause (2)
of the second paragraph of the "Restricted Payments" covenant or
Investments permitted pursuant to this clause (9); plus
(c) the net reduction in Investments made pursuant to this clause (9)
resulting from distributions on or repayments of such Investments or
from the Net Proceeds from the sale of any such Investment (except in
each case to the extent any such payment or proceeds are included in
the calculation of Consolidated EBITDA) or from such Person becoming a
Restricted Subsidiary; provided, that the net reduction in any such
Investment shall not exceed the amount of such Investment.
(10) any Investment existing as of February 17, 2000, and any amendment,
modification, extension or renewal thereof to the extent such amendment,
modification, extension or renewal does not require Madison River or any
Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith; and
(11) Hedging Obligations entered into in the ordinary course of business and
not for speculative purposes.
"Permitted Liens" means:
(1) Liens securing Indebtedness under Credit Facilities that were permitted by
the terms of the indenture to be incurred;
(2) Liens in favor of Madison River;
(3) Liens on property of a Person existing at the time such Person is merged
with or into or consolidated with Madison River or any Subsidiary of
Madison River; provided that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Madison River or the Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by Madison
River or any Restricted Subsidiary of Madison River, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds, deposits to secure the performance of bids, trade
contracts, government contracts, leases or licenses or other obligations of
a like nature incurred in the ordinary course of business (including
without limitation, landlord Liens on leased properties);
(6) Liens existing on February 17, 2000;
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(7) Liens securing the notes and the indenture;
(8) Liens granted in favor of the Holders of the notes;
(9) Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor.
(10) Liens incurred in the ordinary course of business of Madison River or any
Restricted Subsidiary of Madison River with respect to obligations that do
not exceed $10.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the
value of the property or materially impair the use thereof in the
operation of business by Madison River or such Restricted Subsidiary.
(11) Liens imposed by law, such as carriers', warehousemen's and mechanics'
liens and other similar liens arising in the ordinary course of business
which secure payment of obligations that are not yet delinquent or that
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and for which an appropriate reserve
or provision shall have been made in accordance with GAAP;
(12) easements, rights of way, and other restrictions on use of property or
minor imperfections of title that in the aggregate are not material in
amount and do not in any case materially detract from the property subject
thereto or interfere with the ordinary conduct of the business of Madison
River or its Subsidiaries;
(13) Liens related to Capital Lease Obligations, mortgage financings or
purchase money obligations (including refinancings thereof), in each case
incurred for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of property, plant or
equipment used in the business of Madison River or any Restricted
Subsidiary or a Telecommunications Business, provided that any such Lien
encumbers only the asset or assets so financed, purchased, constructed or
improved;
(14) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
(15) leases or subleases granted to third Persons not interfering with the
ordinary course of business of Madison River;
(16) Liens securing reimbursement obligations with respect to letters of credit
which encumber documents and other property relating to such letters of
credit and the products and proceeds thereof;
(17) Liens on the assets of Madison River to secure Hedging Obligations with
respect to Indebtedness permitted by the Indenture to be incurred;
(18) attachment or judgment Liens not giving rise to a Default or an Event of
Default; and
(19) any interest or title of a lessor under any capital lease or operating
lease.
"Permitted Refinancing Indebtedness" means any Indebtedness of Madison River
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Madison River or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or
accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith);
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(2) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the Holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Madison River or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Permitted Telecommunications Financing" means the incurrence of any
Indebtedness or the issuance of any preferred stock (including Indebtedness
under any Credit Facility entered into with any vendor or supplier or any
financial institution); provided that such Indebtedness is incurred or such
preferred stock is issued solely for the purpose of financing the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of acquiring,
constructing, expanding, developing or improving equipment, inventory, licenses
or network assets (including acquisitions by way of acquisitions of real
property rights, leasehold improvements, Capitalized Leases and acquisitions of
the Capital Stock of a Person that becomes a Restricted Subsidiary of Madison
River to the extent of the fair market value of the equipment, inventory,
licenses or network assets so acquired) after February 17, 2000.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof (including any
subdivision or ongoing business of any such entity or substantially all of the
assets of any such entity, subdivision or business).
"Principals" means Goldman, Sachs & Co., Madison Dearborn Partners and
Providence Equity Partners.
"Prospectus" means the prospectus included in a Registration Statement at
the time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
"Public Equity Offering" means any underwritten public offering of common
stock of Madison River or Holdings in which the net cash proceeds to Madison
River are at least $25.0 million.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) 25% or more of the total issued and outstanding
Common Stock of Madison River immediately following the consummation of such
Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act.
"Registration Statement" means any registration statement of Madison River
relating to (a) an offering of exchange notes pursuant to the exchange offer or
(b) the registration for resale of Transfer Restricted Securities pursuant to
the Shelf Registration Statement, in each case, (i) that is filed pursuant to
the provisions of the Registration Rights Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
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"Related Party" with respect to any Principal means:
(1) any controlling stockholder, 50% or more owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal;
or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Shelf Registration Statement" means the Shelf Registration Statement as
defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Strategic Equity Investment" means an investment in Madison River or
Holdings by a company which is primarily engaged in the telecommunications
industry and which has a market capitalization (if a public company) on the
date of such investment in Madison River or Holdings of more than $1.0 billion
or, if not a public company, had total revenues of more than $1.0 billion
during its previous fiscal year.
"Subsidiary" means, with respect to any Person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Tax Amount" means for any taxable period an amount equal to the product of
(1) the Taxable Income of Madison River as determined by the Tax Amount CPA and
(2) the Tax Percentage; provided, however, that in determining the Tax Amount,
the effect thereon of any net operating loss carryforwards that would have
arisen if Madison River were a separate entity shall be taken into account.
"Taxable Income" means, with respect to Madison River for any period, the
hypothetical taxable income or loss of Madison River for such period for
federal income tax purposes computed on the hypothetical assumption that
Madison River is a separate entity as reasonably determined by the Tax Amount
CPA.
"Tax Amount CPA" means a nationally recognized certified public accounting
firm selected by Madison River.
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"Tax Percentage" means, for a particular taxable year, the highest effective
marginal combined rate of federal, state and local income tax, imposed on an
individual or corporate taxpayer, whichever rate is higher, as certified by the
Tax Amount CPA in a certificate filed with the Trustee. The rate of "state
income tax" to be taken into account for purposes of determining the Tax
Percentage for a particular taxable year shall be deemed to be the highest New
York State income tax rate imposed on individuals or corporations for such
year, whichever rate is higher. The rate of "local income tax" to be taken into
account for purposes of determining the Tax Percentage for a particular taxable
year shall be deemed to be the highest New York City income tax rate imposed on
individuals or corporations for such year, whichever rate is higher.
"Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business; provided that the
determination of what constitutes a Telecommunications Business shall be made
in good faith by the Board of Directors of Madison River.
"Transfer Restricted Securities" means each outstanding note, until the
earliest to occur of (a) the date on which such note is exchanged in the
exchange offer and entitled to be resold to the public by the Holder thereof
without complying with the prospectus delivery requirements of the Act, (b) the
date on which such note has been disposed of in accordance with a Shelf
Registration Statement, (c) the date on which such note is disposed of by a
Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (d) the date on which such note is distributable to the
public pursuant to Rule 144(k) under the Act.
"Unrestricted Subsidiary" means any Subsidiary of Madison River that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to
a Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with
Madison River or any Restricted Subsidiary of Madison River unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to Madison River or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of
Madison River;
(3) is a Person with respect to which neither Madison River nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of Madison River or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a director
or executive officer of Madison River or any of its Restricted Subsidiaries
and has at least one executive officer that is not a director or executive
officer of Madison River or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Madison River as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under
the caption "Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an
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Unrestricted Subsidiary for purposes of the indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
Madison River as of such date and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," Madison River
shall be in default of such covenant. The Board of Directors of Madison River
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of Madison River of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (1) such Indebtedness is permitted under the covenant described
under the caption "Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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IMPORTANT UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of important U.S. federal income tax
consequences of the acquisition, ownership and disposition of the exchange
notes as of the date hereof. It deals only with exchange notes held as capital
assets by Holders of the outstanding notes that exchange them for exchange
notes, and does not deal with special situations, such as those of dealers in
securities or currencies, financial institutions, banks, tax-exempt
organizations, insurance companies, holders that are partnerships or other
pass-through entities and holders whose "functional currency" is not the U.S.
dollar, or special rules with respect to "straddle," "conversion," "hedging" or
"constructive sales" transactions. The discussion below is based upon the
Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may
be repealed, revoked or modified, possibly with retroactive effect, so as to
result in federal income tax consequences different from those discussed below.
This discussion is not binding on the IRS or the courts. No ruling has been
sought or will be sought from the IRS with respect to the positions and issues
discussed herein, and there can be no assurance that the IRS will not take a
different position concerning the tax consequences of the purchase, ownership
or disposition of the exchange notes or that any such position would not be
sustained. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR
TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF EXCHANGE NOTES THAT MAY
BE SPECIFIC TO THEM, INCLUDING THE TAX CONSEQUENCES ARISING UNDER ANY STATE,
LOCAL OR FOREIGN LAWS.
As used herein, the term "U.S. holder" means a beneficial owner of an
outstanding note or an exchange note that is for United States federal income
tax purposes:
. a citizen or resident of the United States,
. a corporation created or organized under the laws of the United States or
any political subdivision thereof or therein,
. an estate the income of which is subject to U.S. federal income taxation
regardless of source, or
. a trust if both:
(a) A U.S. court is able to exercise primary supervision over the
administration of the trust, and
(b) one or more U.S. persons have the authority to control all
substantial decisions of the trust.
As used herein, the term "Non-U.S. holder" means a holder of an outstanding
note or an exchange note that is not a U.S. holder.
Exchange Offer
The exchange of the outstanding notes for the exchange notes will not be
treated as an "exchange" for U.S. federal income tax purposes. Accordingly, a
Holder will not recognize any taxable gain or loss on the exchange of
outstanding notes for exchange notes pursuant to the exchange offer, and a
Holder will have the same adjusted tax basis and holding period in the exchange
notes as the Holder had in the outstanding notes exchanged therefor.
U.S. Holders
Interest
Interest on the exchange notes generally will be taxable to a U.S. holder as
ordinary interest income at the time accrued or received in accordance with the
U.S. holder's regular method of accounting for federal income tax purposes.
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Dispositions
Upon the sale, exchange, retirement or other disposition of an exchange
note, a U.S. holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the disposition, not including any
amounts attributable to accrued but unpaid interest income, and such holder's
adjusted tax basis in the exchange note. Such gain or loss generally will be
capital gain or loss. To the extent that the amount realized represents accrued
but unpaid interest, however, such amounts must be taken into account as
interest income, with exchange gain or loss computed as described above. If a
U.S. holder receives foreign currency on such a sale, exchange or retirement,
the amount realized will be based on the U.S. dollar value of the foreign
currency on the date of disposition assuming the exchange notes are not traded
on an established securities market.
For certain non-corporate U.S. holders, including individuals, the rate of
taxation of capital gains will depend upon
. the holder's holding period in the capital asset, with a preferential
rate generally available for capital assets held for more than one year,
and
. the holder's marginal tax rate for ordinary income.
Non-U.S. Holders
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of an exchange note that is a Non-U.S.
holder.
Interest
Payments of interest on an exchange note to any Non-U.S. holder will
generally not be subject to U.S. federal income or withholding tax, provided
that
(1) the holder is not
(a) a direct or indirect owner of 10% or more of the total voting power
of all voting stock of Madison River, taking into account certain
attribution rules or
(b) a controlled foreign corporation related to Madison River through
stock ownership,
(2) such interest payments are not effectively connected with the conduct
by the Non-U.S. holder of a trade or business within the United States
and
(3) Madison River or its paying agent receives
(a) from the Non-U.S. holder, a properly completed Form W-8 BEN, or
substitute Form W-8 BEN, under penalties of perjury which provides
the Non-U.S. holder's name and address and certifies that the Non-
U.S. holder of the exchange note is a Non-U.S. holder or
(b) from a security clearing organization, bank or other financial
institution that holds the exchange notes in the ordinary course of
its trade or business on behalf of the Non-U.S. holder,
certification under penalties of perjury that such a Form W-8 BEN,
or substitute Form W-8 BEN, has been received by it, or by another
such financial institution, from the Non-U.S. holder, and a copy of
the Form W-8 BEN, or substitute Form W-8 BEN, is furnished to the
payor.
A Non-U.S. holder that does not qualify for exemption from withholding under
the preceding paragraph generally will be subject to withholding of U.S.
federal income tax at the rate of 30%, or lower applicable treaty rate, on
payments of interest on the exchange notes.
If the payments of interest on an exchange note are effectively connected
with the conduct by a Non-U.S. holder of a trade or business in the United
States, such payments will be subject to U.S.
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federal income tax on a net basis at the rates applicable to United States
persons generally, and, with respect to corporate holders, may also be subject
to a 30% branch profits tax. If payments are subject to U.S. federal income tax
on a net basis in accordance with the rules described in the preceding
sentence, such payments will not be subject to United States withholding tax so
long as the holder provides us or our paying agent with a properly executed
Form W-8 ECI.
Non-U.S. holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction of
branch profits tax, or other rules different from those described above.
Dispositions
Any gain realized by a Non-U.S. holder on the sale, exchange, retirement or
other disposition of an exchange note generally will not be subject to U.S.
federal income or withholding tax, unless
. such gain is effectively connected with the conduct by such Non-U.S.
holder of a trade or business within the United States,
. the Non-U.S. holder is an individual who is present in the United States
for 183 days or more in the taxable year of the disposition and other
conditions are satisfied, or
. the Non-U.S. holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates.
Federal estate tax
In general, exchange notes held, or treated as held, by an individual who is
a Non-U.S. holder at the time of his or her death will not be subject to U.S.
federal estate tax provided that
. the individual does not actually or constructively own 10% or more of the
total voting power of all voting stock of Madison River and
. income on the exchange notes was not effectively connected with the
conduct by such Non-U.S. holder of a trade or business within the United
States.
Backup Withholding
U.S. federal income tax may be withheld at a rate of 31% on payments made by
us with respect to exchange notes and on payments of proceeds from the sale or
disposition thereof if the Holder fails to furnish his, her or its taxpayer
identification number, fails to certify that he, she or it is exempt from
backup withholding, or the IRS notifies the payor of such amounts that the
Holder is subject to backup withholding. The Holder may be entitled to a
federal income tax credit for the amount of any backup withholding if the
required information is furnished to the IRS.
PLAN OF DISTRIBUTION
The exchange offer is not being made to, nor will we accept surrenders of or
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Based on interpretations by the SEC set forth in no-action letters issued to
third parties, we believe that the exchange notes issued pursuant to the
exchange offer in exchange for the outstanding notes may be offered for resale,
resold and otherwise transferred by holders thereof, other than any holder
which is (A) an "affiliate" of Madison River within the meaning of Rule 405
under the Securities Act, (B) a broker-dealer who acquired notes directly from
Madison River or (C) broker-dealers who acquired notes as a result of market-
making or other trading activities,
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without compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such exchange notes are acquired in the
ordinary course of such holders' business, and such holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such exchange notes. However,
broker-dealers receiving the exchange notes in the exchange offer will be
subject to a prospectus delivery requirement with respect to resales of such
exchange notes. To date, the SEC has taken the position that these broker-
dealers may fulfill their prospectus delivery requirements with respect to
transactions involving an exchange of securities such as the exchange pursuant
to the exchange offer, other than a resale of an unsold allotment from the sale
of the outstanding notes to the initial purchasers, with the prospectus
contained in the exchange offer registration statement. Pursuant to the
registration rights agreement, we have agreed to permit these broker-dealers to
use this prospectus in connection with the resale of such exchange notes. We
have agreed that, for a period of 180 days after the expiration date, we will
make this prospectus, and any amendment or supplement to this prospectus,
available to any broker-dealer that requests such documents in the letter of
transmittal.
Each holder of the outstanding notes who wishes to exchange its outstanding
notes for exchange notes in the exchange offer will be required to make certain
representations to us as set forth in "The Exchange Offer--Resales of Exchange
Notes."
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. This prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for outstanding
notes where such outstanding notes were acquired as a result of market-making
activities or other trading activities. We have agreed that, for a period of
180 days after the consummation of the exchange offer, we will use our
commercially reasonable efforts to make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until [ . ], 2000, all dealers effecting transactions
in the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by broker-
dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the exchange notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such exchange notes. Any broker-
dealer that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer, other than commissions or concessions of any broker-dealers
and will indemnify the holders of the Securities, including any broker-dealers,
against certain liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for us
by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements (and schedule) of Madison River Capital, LLC at December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, as set forth in their report. We have included these financial
statements (and schedule) in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of MEBCOM Communications, Inc. and Subsidiary at December
31, 1997, and for the year then ended, as set forth in their report. We have
included these financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
statements of operations and cash flows of Gulf Coast Services, Inc. for the
period from January 1, 1999 to September 29, 1999 and the two years in the
period ended December 31, 1998, as set forth in their report. We have included
these financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
The consolidated financial statements of Coastal Utilities, Inc. and
Subsidiary as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999 included in this prospectus have been
audited by Golden Associates, independent auditors, as stated in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
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INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MADISON RIVER CAPITAL, LLC
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 and March 31,
2000 (Unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and for the Three Months Ended March 31, 1999 and
2000 (Unaudited)........................................................ F-4
Consolidated Statements of Member's Capital for the Years Ended December
31, 1997, 1998 and 1999 and for the Three Months Ended March 31, 2000
(Unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and for the Three Months Ended March 31, 1999 and
2000 (Unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
Schedule II--Valuation and Qualifying Accounts........................... F-20
MEBCOM COMMUNICATIONS, INC. AND SUBSIDIARY
Report of Independent Auditors........................................... F-21
Consolidated Balance Sheet at December 31, 1997.......................... F-22
Consolidated Statement of Income for the Year Ended December 31, 1997.... F-23
Consolidated Statement of Shareholders' Equity for the Year Ended
December 31, 1997 ...................................................... F-24
Consolidated Statement of Cash Flows for the Year Ended December 31,
1997.................................................................... F-25
Notes to Consolidated Financial Statements............................... F-26
COASTAL UTILITIES, INC. AND SUBSIDIARY
Independent Auditor's Report............................................. F-32
Consolidated Balance Sheets at December 31, 1998 and 1999 and March 30,
2000 (Unaudited)........................................................ F-33
Consolidated Statements of Earnings for the Years Ended December 31,
1997, 1998 and 1999 and for the Period from January 1, 2000 to March 30,
2000 (Unaudited)........................................................ F-35
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999 and for the Period from January 1, 2000
to March 30, 2000 (Unaudited)........................................... F-36
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and for the Period from January 1, 2000 to March 30,
2000 (Unaudited)........................................................ F-37
Notes to Consolidated Financial Statements............................... F-39
GULF COAST SERVICES, INC.
Report of Independent Auditors........................................... F-57
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and for the Period from January 1, 1999 to September 29,
1999.................................................................... F-58
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998, and for the Period from January 1, 1999 to September 29,
1999.................................................................... F-59
Notes to Consolidated Statements of Operations and Cash Flows............ F-60
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Member
Madison River Capital, LLC
We have audited the accompanying consolidated balance sheets of Madison
River Capital, LLC as of December 31, 1999 and 1998, and the related
consolidated statements of operations, member's capital, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index on page F-1.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Madison River
Capital, LLC at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Raleigh, North Carolina /s/ Ernst & Young LLP
February 11, 2000
F-2
<PAGE>
Madison River Capital, LLC
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
March 31,
1998 1999 2000
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 6,354 $ 83,729 $ 90,523
Accounts receivable, less allowance for
uncollectible accounts of $335, $1,087 and
$1,451 in 1998, 1999 and 2000,
respectively................................. 5,073 11,673 13,547
Accounts receivable, primarily from
interexchange carriers....................... 2,572 6,592 7,779
Income tax recoverable........................ 105 -- --
Due from related party........................ 19 54 621
Inventories................................... 684 1,343 2,308
Deferred income taxes......................... 40 48 735
Other current assets.......................... 488 1,436 1,395
-------- -------- --------
Total current assets........................ 15,335 104,875 116,908
Telephone plant and equipment:
Land, buildings and general equipment......... 14,253 48,575 60,922
Central office equipment...................... 30,915 48,345 61,907
Poles, wires, cables and conduit.............. 41,803 80,409 107,339
Leasehold improvements........................ 588 1,372 1,669
Software...................................... 3,213 6,829 7,022
Construction-in-progress...................... 898 121,353 128,887
-------- -------- --------
91,670 306,883 367,746
Accumulated depreciation and amortization..... (2,184) (13,561) (18,386)
-------- -------- --------
Telephone plant and equipment, net............ 89,486 293,322 349,360
Other assets:
Rural Telephone Bank stock, at cost........... 284 8,606 10,078
Rural Telephone Finance Cooperative stock, at
cost......................................... 10,974 42,933 35,976
Goodwill, net of accumulated amortization of
$1,670, $9,840 and $12,710 in 1998,
1999 and 2000, respectively.................. 161,276 326,560 415,998
Receivable from NECA.......................... 6,900 -- --
Deferred income taxes......................... -- 5,131 6,117
Other assets.................................. 1,508 3,863 42,652
-------- -------- --------
Total other assets.......................... 180,942 387,093 510,821
-------- -------- --------
Total assets................................ $285,763 $785,290 $977,089
======== ======== ========
Liabilities and member's capital
Current liabilities:
Accounts payable ............................. $ 1,405 $ 4,160 $ 2,079
Accrued expenses.............................. 6,381 23,766 27,751
Advance billings and customer deposits........ 1,223 3,701 4,402
Other current liabilities..................... 123 609 2,248
Current portion of long-term debt............. 978 9,467 11,138
-------- -------- --------
Total current liabilities................... 10,110 41,703 47,618
Noncurrent liabilities:
Long-term debt................................ 218,898 526,144 663,228
Deferred income taxes......................... 1,213 41,557 50,055
Other liabilities............................. 1,472 9,892 17,687
-------- -------- --------
Total noncurrent liabilities................ 221,583 577,593 730,970
-------- -------- --------
Total liabilities........................... 231,693 619,296 778,588
Redeemable minority interest................... -- -- 45,000
Member's capital:
Member's interest............................ 58,586 185,700 185,700
Accumulated deficit.......................... (4,516) (19,706) (32,199)
-------- -------- --------
Total member's capital...................... 54,070 165,994 153,501
-------- -------- --------
Total liabilities and member's capital...... $285,763 $785,290 $977,089
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Madison River Capital, LLC
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Year ended December Three Months Ended
31, March 31,
------------------------ -----------------------
1997 1998 1999 1999 2000
----- ------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Local service............. $ -- $14,831 $ 68,813 $14,656 $ 24,539
Long distance service..... -- -- 2,292 -- 2,737
Internet and enhanced data
service.................. -- -- 998 13 1,030
Transport service......... -- -- -- -- --
Miscellaneous
telecommunications
service and equipment.... -- 2,145 10,999 2,050 3,384
Provision for
uncollectible accounts... -- (112) (1,585) (229) (85)
----- ------- -------- ------- --------
Total operating
revenues............... -- 16,864 81,517 16,490 31,605
Operating expenses:
Cost of goods sold and
direct costs............. -- 4,083 24,909 3,991 10,272
Depreciation and
amortization............. 12 4,177 21,508 4,224 8,217
Selling, general and
administrative expenses.. 949 8,074 29,608 5,487 12,061
----- ------- -------- ------- --------
Total operating
expenses............... 961 16,334 76,025 13,702 30,550
Net operating income
(loss)..................... (961) 530 5,492 2,788 1,055
Other income................ 19 481 3,386 81 893
----- ------- -------- ------- --------
Income (loss) before
interest and income tax
expense.................... (942) 1,011 8,878 2,869 1,948
Interest expense............ (31) (3,893) (22,443) (3,793) (12,205)
----- ------- -------- ------- --------
Loss before income tax
expense and extraordinary
item....................... (973) (2,882) (13,565) (924) (10,257)
Income tax expense.......... -- (52) (1,625) 539 (2,236)
----- ------- -------- ------- --------
Loss before extraordinary
item....................... (973) (2,934) (15,190) (385) (12,493)
Extraordinary item--loss on
early extinguishment of
debt....................... -- (173) -- -- --
----- ------- -------- ------- --------
Net loss.................... $(973) $(3,107) $(15,190) $ (385) $(12,493)
===== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Madison River Capital, LLC
Consolidated Statements of Member's Capital
(in thousands)
<TABLE>
<CAPTION>
Member's Accumulated
Interest Deficit Total
-------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1996.................... $ 595 $ (436) $ 159
Member's capital.............................. 7,849 -- 7,849
Repurchase of member's capital................ (1) -- (1)
Issuance costs................................ (150) -- (150)
Net loss...................................... -- (973) (973)
-------- -------- --------
Balance at December 31, 1997.................... 8,293 (1,409) 6,884
Member's capital.............................. 50,293 -- 50,293
Repurchase of member's capital................ -- -- --
Net loss...................................... -- (3,107) (3,107)
-------- -------- --------
Balance at December 31, 1998.................... 58,586 (4,516) 54,070
Member's capital.............................. 127,114 -- 127,114
Net loss...................................... -- (15,190) (15,190)
-------- -------- --------
Balance at December 31, 1999.................... 185,700 (19,706) 165,994
Net loss...................................... -- (12,493) (12,493)
-------- -------- --------
Balance at March 31, 2000 (unaudited)........... $185,700 $(32,199) $153,501
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Madison River Capital, LLC
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year ended December 31, March 31,
--------------------------- -----------------------
1997 1998 1999 1999 2000
------ --------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss.................. $ (973) $ (3,107) $(15,190) $ (385) $(12,493)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation............. 12 2,376 11,705 2,394 4,925
Amortization............. -- 1,801 9,804 1,830 3,292
Deferred compensation.... -- 313 2,576 541 956
Deferred income taxes.... -- 296 147 1,364 (1,003)
Rural Telephone Finance
Cooperative Patronage
Capital................. -- -- (342) -- --
Changes in operating
assets and liabilities:
Accounts receivable...... -- (879) 217 (4,195) (757)
Accounts receivable,
primarily from
interexchange carriers.. -- (1,871) (1,283) 2,571 844
Income tax recoverable... -- (105) 52 105 (43)
Due from related party... (249) 1,481 (1,075) 19 --
Inventories.............. -- (94) 22 16 (271)
Other current assets..... -- (1,445) 3,611 (1,309) 159
Accounts payable ........ 71 144 (3,352) (718) (2,242)
Accrued expenses......... 610 4,449 5,631 (544) 323
Advance billings and
customer deposits....... -- 332 500 62 409
Other current
liabilities............. -- (109) (85) (123) 86
------ --------- -------- ------ --------
Net cash provided by (used
in) operating
activities............... (529) 3,582 12,938 1,628 (5,815)
Investing activities
Purchases of telephone
plant in service......... (4) (6,056) (37,756) (3,003) (11,090)
Acquisitions, net of cash
acquired................. -- (252,896) (310,458) -- (115,855)
(Purchase) redemption of
Rural Telephone Finance
Cooperative stock, net... -- (10,974) (31,617) -- 6,959
Change in other assets.... -- -- 5,249 406 (6,775)
------ --------- -------- ------ --------
Net cash used in investing
activities............... (4) (269,926) (374,582) (2,597) (126,761)
Financing activities
Capital contributions from
member................... 7,699 50,293 127,114 992 --
Repurchase of member's
capital.................. (1) -- -- -- --
Proceeds from long-term
debt..................... -- 227,091 316,167 -- 318,336
Payments on long-term
debt..................... -- (13,125) (4,822) (238) (179,581)
Change in other long-term
liabilities.............. -- 742 560 (753) 615
------ --------- -------- ------ --------
Net cash provided by
financing activities..... 7,698 265,001 439,019 1 139,370
------ --------- -------- ------ --------
Net increase (decrease) in
cash and cash
equivalents.............. 7,165 (1,343) 77,375 (968) 6,794
Cash and cash equivalents
at beginning of year..... 532 7,697 6,354 6,354 83,729
------ --------- -------- ------ --------
Cash and cash equivalents
at end of year........... $7,697 $ 6,354 $ 83,729 $5,386 $ 90,523
====== ========= ======== ====== ========
Supplemental disclosures
of cash flow information
Cash paid for interest.... $ 31 $ 3,465 $ 20,879 $3,781 $ 10,354
====== ========= ======== ====== ========
Cash paid for income
taxes.................... $ -- $ 305 $ 2,085 $ -- $ 170
====== ========= ======== ====== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements
December 31, 1999
(amounts in thousands, except for operating and share data, all information
pertaining to the interim periods ended March 31, 2000 and 1999 is unaudited)
1. Summary of Significant Accounting Policies
Description of Business
On August 26, 1999, Madison River Capital, LLC (the "Company"), a wholly-
owned subsidiary of Madison River Telephone Company (the "Parent"), was
organized 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 members return
to the Company any distributions received. Prior to the formation of Madison
River Capital, LLC, the operations of the operating subsidiaries were
consolidated at the Madison River Telephone Company, LLC level. Concurrent with
the formation of Madison River Capital, LLC as a subsidiary of Madison River
Telephone Company, LLC, all operations were consolidated at the Madison River
Capital, LLC level. All historical operations presented in these financial
statements prior to the date of formation of the Company include the combined
financial statements of the following operating subsidiaries: Gallatin River
Holdings, LLC, Gulf Coast Services, Inc., Madison River Communications, Inc.,
Madison River Long Distance Solutions, Inc., MEBTEL, Inc., and Mebtel
Integrated Communications Solutions, LLC.
The Company was formed for the primary purpose of acquiring and operating
local exchange telephone companies throughout the United States. During 1997,
the Company was a development stage company.
In January 1998, the Company acquired MEBCOM Communications, Inc., a North
Carolina local exchange company serving 9,000 access lines, for approximately
$23,000. The purchase price consisted of $21,000 in cash and a $2,000 note
payable to the selling shareholders. In November 1998, the Company acquired
certain assets and liabilities from Central Telephone Company of Illinois, a
local exchange company serving 82,000 access lines, for cash consideration of
approximately $232,000. In September 1999, the Company acquired Gulf Coast
Services, Inc., an Alabama local exchange company serving approximately 50,000
access lines, for cash consideration of approximately $312,600. These
transactions were accounted for using the purchase method of accounting with
results of operations of the acquired companies included in the Company's
operations from the effective dates of acquisition. The Company records
acquired assets and liabilities at their estimated fair value. The excess of
the purchase price over the fair value of net assets acquired is recorded as
goodwill.
Reclassifications
Certain 1997 and 1998 financial statement amounts have been reclassified to
conform with 1999 classifications. These reclassifications had no effect on net
loss or member's capital as previously reported.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
F-7
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Unaudited Interim Financial Statements
The unaudited interim financial statements include all adjustments
(consisting of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position of the
Company as of March 31, 2000 and the results of operations and cash flows for
the three month periods ended March 31, 1999 and 2000. Operating results for
the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for future interim periods or the entire year. All
interim financial data presented is unaudited.
Regulatory Assets and Liabilities
As a regulated entity, the Company is subject to the provisions of Statement
of Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation ("SFAS 71"). Accordingly, the Company records certain
assets and liabilities that result from the effects of the rate-making process,
which would not be recorded under generally accepted accounting principles for
non-regulated entities. These regulatory assets and liabilities relate
primarily to fixed assets and the regulatory impact thereof.
Property, plant and equipment of the Company's regulated telephone
operations has been depreciated using generally the straight line method over
lives approved by regulators. Such depreciable lives have generally exceeded
the depreciable lives used by nonregulated entities. In addition, in accordance
with regulatory accounting, retirements of regulated telephone property have
been charged to accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. These accounting policies have
resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated
Enterprises--Accounting for the Discontinuance of Application of FASB Statement
No. 71," specifies the accounting required when an enterprise ceases to meet
the criteria for application of SFAS 71. SFAS 101 requires the elimination of
the affects of any actions of regulators that have been recognized as assets
and liabilities in accordance with SFAS 71 but would not have been recognized
as assets and liabilities by enterprises in general, along with an adjustment
of certain accumulated depreciation accounts to reflect the difference between
recorded depreciation and the amount of depreciation that would have been
recorded had the Company's telephone operations not been subject to rate
regulation.
The ongoing applicability of SFAS 71 to the Company's regulated telephone
operations is being monitored due to the changing regulatory, competitive and
legislative environments, and it is possible that changes in these areas or in
the demand for regulated services or products could result in the Company's
telephone operations no longer being subject to SFAS 71 in the future. If the
regulated operations of the Company no longer qualify for the application of
SFAS 71, the net adjustments required could result in a material, noncash
charge against earnings.
Cash Equivalents
It is the Company's policy to consider investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Telephone Plant in Service
Telephone plant is stated at cost, which includes certain labor and direct
costs associated with the installation of certain assets.
F-8
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Depreciation is provided using composite straight-line rates, which
approximated 6.54% and 5.42% of average depreciable property for 1999 and 1998,
respectively. Such rates are approved by the Illinois Commerce Commission, the
North Carolina Utilities Commission and the Alabama Public Service Commission,
respectively, for regulated telephone plant in service.
Maintenance, repairs, and minor renewals are primarily expensed as incurred.
Additions, renewals, and betterments are capitalized to telephone plant
accounts. The original cost of depreciable property retired is removed from
telephone plant accounts and charged to accumulated depreciation, which is
credited with the salvage value less removal cost. Under this method, a profit
or loss is not recognized on ordinary retirements of depreciable property.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Preoperating Costs
Costs incurred during the development stage, such as expenses associated
with due diligence on potential acquisitions, have been expensed to operations
as incurred.
Inventories
Inventories are comprised primarily of poles, wires, and telephone equipment
and are stated at the lower of cost (average cost) or market.
Revenues
Network access service revenues are based on long distance service pool
settlements with the National Exchange Carrier Association ("NECA") for service
between states. For service between local access and transport area ("LATA"),
access revenues are based on a bill and keep arrangement. Within the LATA,
originating service revenues are based on a bill and keep arrangement and
terminating service is settled with other local exchange carriers within the
state. The Company provides billing and collection services to interexchange
carriers and provides certain directory advertising services. Local service
revenues are billed monthly in advance and deferred until earned.
Income Taxes
For federal and state income tax purposes, the Company and its subsidiaries,
except for MEBTEL, Inc., Gulf Coast Services, Inc., Madison River Long
Distance, Inc. and Madison River Communications, Inc., which are taxable C
Corporations, are treated as partnerships. Accordingly, income, losses and
credits are passed through directly to the members. The tax provision in the
accompanying financial statements reflects the income tax expense and income
tax accounts attributable to the taxable C Corporation subsidiaries.
F-9
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Allocation of Distributions
Distributions to members, if any, are allocated in accordance with the terms
outlined in the Company's Operating Agreement.
Goodwill
Goodwill resulting from the purchase price for the assets in excess of fair
market value is being amortized using the straight-line method over twenty-five
years. Goodwill was recorded in connection with the acquisitions that occurred
in January 1998, November 1998 and September 1999. The Company recorded
amortization expense related to this goodwill of approximately $8,170 and
$1,670 for the years ended December 31, 1999 and 1998, respectively. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
impairment. If this review by management indicates that the carrying value will
not be recoverable, as determined based on undiscounted cash flows over the
remaining amortization period, the Company would reduce the carrying value by
the estimated shortfall of cash flows on a discounted basis. Based upon the
application of this policy, no impairments were recognized during 1999 and
1998.
Concentration of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company provides an allowance for doubtful receivables based on an analysis of
the likelihood of collection of outstanding amounts. One customer, which is
AT&T, represented 15% and 14% of operating revenues for the years ended
December 31, 1999 and 1998.
Cash Concentration
At December 31, 1999, the Company had approximately $82,812 in cash and cash
equivalents invested in four financial institutions. At December 31, 1998, the
Company had approximately $4,770 in cash invested in two financial
institutions.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("FAS 130"). FAS 130 requires that total comprehensive income and
comprehensive income per share be disclosed with equal prominence as net income
and earnings per share. Comprehensive income is defined as changes in member's
capital exclusive of transactions with owners such as capital contributions and
distributions. The Company adopted this Standard in 1998. Comprehensive income
is equivalent to net income for all years presented.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Investments
and Hedging Activities," ("SFAS No. 133"). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes several
existing standards. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
does not expect that the adoption of SFAS No. 133 will have a material impact
on the consolidated financial statements.
F-10
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
2. Rural Telephone Bank Stock
The Company's investment in Rural Telephone Bank ("RTB") stock is carried at
cost and consists of 10,127 and 1,462 shares of $1,000 par value Class C stock
and 15,861 and 152,781 shares of $1 par value Class B stock at December 31,
1999 and 1998, respectively.
3. Rural Telephone Finance Cooperative Stock
The Company's investment in Rural Telephone Finance Cooperative ("RTFC")
stock is carried at cost and consists of Subordinated Capital Certificates
("SCCs") acquired as a condition of obtaining long-term financing from the
RTFC. The SCCs are redeemed proportionately as the principal is repaid to the
RTFC. The Company receives dividends in the form of patronage capital or SCCs
from RTFC, which the Company records at cost.
4. Long-Term Debt and Lines of Credit
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31 March 31
----------------- --------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Unsecured 13 1/4% senior notes payable, due March
1, 2010, with interest payable semiannually on
March 1 and September 1........................... $ -- $ -- $197,274
First mortgage notes collateralized by
substantially all assets:
RTFC note payable in escalating quarterly
principal installments beginning in February 2000
through 2013 (initial quarterly installment
amount of $1,309), interest payments are due
quarterly at a fixed rate of 7%.................. 123,192 123,192 121,883
RTFC note payable in escalating quarterly
principal installments beginning in February 2000
through August 2013 (initial quarterly
installment amount of $250), interest payments
are due quarterly at the financial institution's
base rate plus .75% (7.8% at December 31, 1999).. 73,684 73,684 73,434
RTFC note payable in escalating quarterly
principal installments beginning in February 1999
through 2012 (initial quarterly installment
amount is $158) plus interest payable at a fixed
rate of 6.8%..................................... 15,000 14,351 14,181
RTFC note payable in escalating quarterly
principal installments beginning in February 1999
through 2012 (initial quarterly installment
amount is $80) plus interest payable at the
financial institution's base rate plus .5% (7.55%
at December 31, 1999)............................ 7,607 7,278 7,192
RTFC note payable in escalating quarterly
principal installments beginning in December 2000
through September 2014 (initial quarterly
installment amount is $1,487), interest at a
fixed rate of 8.4%............................... -- 138,389 138,389
RTFC note payable in escalating quarterly
principal installments beginning in February 2002
through August 2014 (initial quarterly
installment amount is $1,958), interest payments
are due quarterly at the financial institution's
base rate plus 2%. This note was paid in full in
February 2000 (see Note 12)...................... -- 177,778 --
RTFC note payable in escalating quarterly
principal installments beginning in July 2001
through January 2015 (initial quarterly
installment amount is $1,102), interest payments
are due quarterly at a fixed rate of 8.5%........ -- -- 108,689
RTFC secured line of credit loan, maturing March
2005, interest payments are due quarterly at the
financial institution's base rate plus .50%...... -- -- 10,000
Mortgage note payable in 72 monthly installments
of $18 with a balloon payment of $2,238 in April
2006, interest at fixed rate of 8%............... -- -- 2,385
Other............................................. 393 939 939
-------- -------- --------
219,876 535,611 674,366
Less current portion............................. . 978 9,467 11,138
-------- -------- --------
$218,898 $526,144 $663,228
======== ======== ========
</TABLE>
F-11
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Principal maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000............................................................. $ 9,467
2001............................................................. 14,128
2002............................................................. 23,179
2003............................................................. 30,526
2004............................................................. 32,413
Thereafter....................................................... 425,898
--------
$535,611
========
</TABLE>
The Company also has a $10,000 revolving line of credit from the RTFC with a
term up to five years. Interest is payable quarterly at the lender's base rate
plus one-half percent per annum. The Company has no borrowings outstanding
under the line of credit at December 31, 1999 and 1998.
The Company also has a $1,000 revolving line of credit facility with the
RTFC. Interest on outstanding amounts under the line is payable quarterly at
the RTFC's base rate per annum. The Company had no borrowings under the line of
credit at December 31, 1999 and 1998. The line of credit facility is subject to
review for renewal in January 2003.
In 1999, the Company entered into another $10,000 revolving line of credit
with the RTFC for a term up to five years. Interest is payable at the lender's
base rate plus one-half percent per annum. The Company has no borrowings under
the line of credit at December 31, 1999. In addition, the Company has a fifteen
year, $7,800 term loan facility with the RTFC that is available to fund a
wholly-owned subsidiary, Gulf Coast Services', working capital and capital
expenditures. Interest is payable at the lender's base rate plus .35% per
annum. The Company has no borrowings under the facility at December 31, 1999.
Under the terms of the debt agreements, the Company is restricted from
declaring or paying dividends under specified circumstances and is required to
comply with certain financial covenants. At December 31, 1999, substantially
all of the assets of the Company and its subsidiaries were restricted due to
these financial covenants.
The transfer of funds from certain consolidated subsidiaries to the parent
are also restricted by various borrowing agreements. These subsidiaries
generally may advance or loan funds to the parent only if certain financial
ratios and conditions are met. At December 31, 1999, total restricted net
assets of consolidated subsidiaries were approximately $14,900.
The Company estimates that the fair value of long-term debt approximates the
carrying value based upon its effective current borrowing rate for debt with
similar terms and remaining maturities. Disclosure about fair value of
financial instruments is based upon information available to management as of
December 31, 1999. Although management is not aware of any factors that would
significantly affect the fair value of amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date.
5. Leases
The Company leases its office space under operating lease agreements which
expire through 2009. The office leases contain certain provisions for renewal
and also contain certain escalation
F-12
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
clauses. Future minimum lease payments for years subsequent to December 31,
1999 are as follows:
<TABLE>
<S> <C>
2000............................................................... $ 331
2001............................................................... 237
2002............................................................... 221
2003............................................................... 190
2004............................................................... 172
Thereafter......................................................... 275
------
$1,426
======
</TABLE>
Total rent expense was approximately $65, $116 and $319 for the years ended
December 31, 1997, 1998 and 1999, respectively.
6. Income Taxes
Income taxes for the Company's wholly-owned corporate subsidiaries, MEBTEL,
Inc. ("MEBTEL"), Gulf Coast Services, Inc. ("GCSI"), Madison River Long
Distance Solutions, Inc. ("MRLD") and Madison River Communications, Inc.
("MRCI") are calculated using the liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in MEBTEL's, GCSI's, MRLD's
and MRCI's financial statements or tax returns. Deferred income taxes arise
from temporary differences between the income tax basis and financial reporting
basis of assets and liabilities. Components of income tax expense for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----- ------
<S> <C> <C>
Current:
Federal.................................................. $(194) $ 965
State.................................................... (32) 242
Deferred:
Federal.................................................. 249 255
State.................................................... 47 (108)
----- ------
Subtotal................................................... 70 1,354
Investment tax credits, net................................ (18) (18)
Change in valuation allowance.............................. -- 289
----- ------
Total income tax expense................................... $ 52 $1,625
===== ======
</TABLE>
The net income (loss) before taxes of the wholly-owned corporate
subsidiaries for the years ended December 31, 1998 and 1999 was approximately
$(508) and $979, respectively. Differences between reported tax expense
computed by applying the statutory federal income tax rate to loss before
income taxes and reported tax expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1999
----- ------
<S> <C> <C>
Amount computed at statutory rate.......................... $(173) $ 333
Non-deductible goodwill amortization....................... 258 856
Increase in tax valuation allowance........................ -- 289
State income taxes, net of federal benefit................. -- 134
Amortization of investment tax credits..................... (18) (18)
Other, net................................................. (15) 31
----- ------
Total income tax expense................................... $ 52 $1,625
===== ======
</TABLE>
F-13
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
MRCI had a net operating loss carryforward of approximately $2,195 at
December 31, 1999, which will begin to expire in 2018. MRLD had a net operating
loss carryforward of approximately $460 at December 31, 1999, which will begin
to expire in 2019. At December 31, 1999, GCSI and its wholly-owned subsidiary,
Gulf Long Distance, had state net operating loss carry forwards for tax
purposes of $3,700 and $6,000, respectively, which expire beginning in 2000
through 2013 and 2005 through 2013, respectively.
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31 are
as follows:
<TABLE>
<CAPTION>
1998 1999
----------- --------
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits...................... $ -- $ 2,435
Deferred compensation.......................... -- 1,037
Net operating loss carryforwards............... 430 1,513
Other deferred assets.......................... 40 1,012
----------- --------
Total deferred tax assets...................... 470 5,997
Valuation allowance for deferred tax assets.... -- (818)
----------- --------
Net deferred tax assets........................ 470 5,179
Deferred tax liabilities:
Book basis of property, plant and equipment in
excess of tax basis........................... (1,212) (36,602)
Basis difference in investment................. (430) (4,955)
----------- --------
Total deferred tax liabilities................... (1,642) (41,557)
----------- --------
Net deferred tax liabilities..................... $ (1,172) $(36,378)
=========== ========
</TABLE>
7. Benefit Plans
Pension Plan
The Company adopted a noncontributory defined benefit pension plan, which
was transferred to the Company from its wholly-owned subsidiary, MEBTEL, Inc.,
in May 1998, that covers all full-time employees who have met certain age and
service requirements. The plan provides benefits based on participants' final
average compensation and years of service. The Company's policy is to fund the
maximum contribution allowable by the Internal Revenue Code and comply with the
funding requirements of the Employee Retirement Income Security Act of 1974.
During 1998, the plan reflected the impact of a reduction in the number of
MEBTEL employees covered by the plan which significantly reduced the projected
benefit obligation.
The Company adopted the Statement of Financial Accounts Standards No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits which
standardizes disclosure requirements for pensions and other postretirement
benefits, eliminates certain disclosures and requires some additional
information.
F-14
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
The following table sets forth the funded status of the Company's pension
plan and amounts recognized in the Company's financial statements at December
31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefits:
Accumulated benefit obligation...................... $(1,154) $(1,572)
======= =======
Projected benefit obligation........................ $(1,252) $(1,690)
Plan assets at fair value, principally marketable
securities......................................... 2,028 2,036
------- -------
Plan assets in excess of projected benefit
obligation......................................... 776 346
Unrecognized prior service costs.................... -- 28
Unrecognized net obligation......................... 20 18
Unrecognized net actuarial gain..................... (638) (554)
------- -------
Net pension (costs) prepaid....................... $ 158 $ (162)
======= =======
</TABLE>
Weighted-average assumptions used are as follows:
<TABLE>
<CAPTION>
December
31,
-----------
1998 1999
----- -----
<S> <C> <C>
Plan discount rates........................................... 7.50% 7.50%
Rates of increase in future compensation levels............... 3.00% 3.00%
Expected long-term rates of return on assets.................. 8.00% 8.00%
</TABLE>
The following table sets forth the net periodic pension cost for the
Company:
<TABLE>
<CAPTION>
December
31,
------------
1998 1999
----- -----
<S> <C> <C>
Service cost................................................ $ 54 $ 418
Interest cost............................................... 84 90
Estimated return on plan assets............................. (162) (162)
Net amortization and deferral............................... (32) (26)
----- -----
Net periodic pension costs (benefit)...................... $ (56) $ 320
===== =====
</TABLE>
Changes in plan assets:
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Fair value of plan assets at beginning of year............ $1,966 $2,028
Actual return on plan assets, net......................... (103) 22
Contributions............................................. 165 --
Distributions............................................. -- (14)
------ ------
Fair value of plan assets at end of year................ $2,028 $2,036
====== ======
</TABLE>
F-15
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Changes in benefit obligations:
<TABLE>
<CAPTION>
December 31
--------------
1998 1999
------ ------
<S> <C> <C>
Net benefit obligation at beginning of year............... $1,844 $1,252
Service cost.............................................. 54 418
Interest cost............................................. 84 90
Actuarial gain............................................ (730) (56)
Gross benefits paid....................................... -- (14)
------ ------
Net benefit obligation at end of year................... $1,252 $1,690
====== ======
</TABLE>
Postretirement Benefit Other Than Pensions
GCSI provides medical coverage to retirees and their dependents through a
traditional indemnity plan administered by a third party. The plan provisions
are the same as those for active participants. Eligibility to participate in
the retiree medical plan upon retirement is defined as age 55 with 25 years of
service.
GCSI requires retirees to contribute 10% of medical, dental and eye care
premium rates. The additional cost of the plan is absorbed by GCSI. GCSI's
retirees also receive free local phone service and a $100 long distance credit
per month. GCSI does not anticipate any changes in the cost-sharing provisions
of the existing written plan, and there is no commitment to increase monetary
benefits. The plan is unfunded.
The following table sets forth the funded status of GCSI's plan and amounts
recognized in GCSI's financial statements at December 31, 1999:
<TABLE>
<S> <C>
Change in benefit obligation:
Accumulated plan benefit obligation at September 30, 1999.... $ 5,882
Service cost................................................. 77
Interest cost................................................ 114
Plan participants' contributions............................. 2
Actuarial gain............................................... (573)
Benefits paid................................................ (32)
-------
Net accumulated plan benefit obligation at December 31,
1999........................................................ $ 5,470
=======
Change in plan assets:
Fair value of plan assets at September 30, 1999.............. $ --
Employer contribution........................................ 30
Plan participants' contributions............................. 2
Benefits paid................................................ (32)
-------
Fair value of plan assets at December 31, 1999............... $ --
=======
Funded status.................................................. $(5,470)
Unrecognized net gain.......................................... (573)
-------
Accrued postretirement benefit cost............................ $(6,043)
=======
</TABLE>
F-16
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Postretirement Benefit Cost for September 30,
1999 through December 31, 1999:
<TABLE>
<S> <C>
Service cost..................................................... $ 77
Interest cost.................................................... 114
------
Net periodic postretirement benefit cost.......................... $ 191
======
Weighted-average assumptions for 1999:
Discount rate.................................................... 8.00%
Initial medical trend rate....................................... 9.00%
Initial dental and vision trend rate............................. 8.00%
Ultimate trend rate.............................................. 5.00%
Years to ultimate trend rate..................................... 8
Other information:
One percent increase in trend rates:
Effect on service and interest cost.............................. $ 46
Effect on accumulated plan benefit obligation.................... 1,033
One percent decrease in trend rates:
Effect on service and interest cost.............................. (35)
Effect on accumulated plan benefit obligation.................... (806)
</TABLE>
401(k) Savings Plans
During 1998, the Company established a 401(k) savings plan covering
substantially all employees who meet certain age and employment criteria.
Employees may elect to contribute up to 15% of their compensation to the plan.
The Company matches the first 6% of compensation deferred at the rate of 50% of
employee contributions. The Company made matching contributions of
approximately $24 in 1998 and $480 in 1999.
8. Long-Term Incentive Plan
In 1998, the Company adopted a long-term incentive plan arrangement which
provides for annual incentive awards for certain employees as approved by the
Board of Directors. Under the terms of the plan, awards are earned over the
succeeding twelve months after the award eligibility is determined.
Incentive awards vest automatically at the time of a qualified event as
defined under the plan. Vested awards are payable under certain circumstances
as defined under the long-term incentive plan arrangement. The Company
recognized compensation expense of $313 and $2,576 in the years ended December
31, 1998 and 1999, respectively, related to the long-term incentive awards.
9. Acquisitions
The following unaudited pro forma summary of consolidated results of
operations has been prepared as if the acquisition of Gulf Coast Services, Inc.
occurred on January 1, 1998 and the acquisitions of MEBCOM Communications, Inc.
and certain assets and liabilities from Central Telephone Company of Illinois
occurred on January 1, 1997 (see Note 1).
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Total operating revenues..................... $57,536 $127,951 $130,082
Income (loss) before extraordinary item...... $ 6,846 $(56,173) $(49,577)
Extraordinary item........................... -- (173) --
------- -------- --------
Net income (loss)............................ $ 6,846 $(56,346) $(49,577)
======= ======== ========
</TABLE>
F-17
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
These pro forma results do not purport to be indicative of the results that
would have actually been obtained if the respective businesses had been
acquired as of January 1, 1997 and January 1, 1998, respectively, or of results
that may occur in the future.
10. Segments
The Company has one reportable segment under the requirements of Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information."
Revenues by product line are disclosed in the Consolidated Statement of
Operations. All operations and assets are based in the United States.
11. Commitments and Contingencies
Under the terms of Madison River Telephone Company's Operating Agreement, at
any time on or after January 2, 2006, certain members may require Madison River
Telephone Company to purchase all of their redeemable member units in an amount
equal to the fair market value of such units. Such an event could result in
Madison River Capital and its subsidiaries being required to fund this
obligation of the Parent.
On October 5, 1999, nine former employees of Gulf Coast Services, Inc.
("GCSI"), who had elected to retire and receive cash distributions for their
interests in the GCSI Employee Stock Ownership Plan ("ESOP") in 1996 and 1997
filed a class action lawsuit in Alabama state court alleging breach of
fiduciary duty, suppression, and misrepresentation against GCSI and its
subsidiaries. The complaint alleged that GCSI failed to disclose to plaintiffs'
ongoing negotiations for the sale of GCSI and that the true value of their ESOP
interests were higher than the amounts offered to them in connection with their
early retirement. Plaintiffs have filed an amended complaint on November 18,
1999, and sought class certification, the establishment of a constructive trust
to distribute proceeds from the sale of GCSI to the plaintiffs, and a
preliminary injunction seeking to stop GCSI from making further distributions
from the ESOP. The plaintiffs are also seeking unspecified compensatory and
punitive damages, and attorneys fees as a result of defendants' alleged breach
of fiduciary duty, self dealing, misrepresentation, and fraudulent inducement
to retire and forego the benefits of continued employment in connection with
the plaintiffs' retirement elections and ESOP distributions. On December 6,
1999, the Company, moved to dismiss plaintiffs' amended complaint on the ground
that it failed to state any claim upon which relief could be granted. The
Company's motion is currently pending with the Court.
The Company believes the plaintiffs' allegations are without merit and
intends to defend against them vigorously. Additionally, the Company believes
it is adequately covered by indemnification agreements with the former
shareholders of GCSI for any potential liability resulting from this lawsuit.
Consequently, the Company does not believe that the resolution of this
litigation will have a material adverse effect on its financial condition,
results of operations or cash flows.
F-18
<PAGE>
Madison River Capital, LLC
Notes to Consolidated Financial Statements (continued)
12. Subsequent Events
During February 2000, the Company completed a private debt offering for
$200,000 of Senior Notes at 13.25% per annum which mature in 2010. The net
proceeds were approximately $190,147, reflecting a bond discount of $2,738 and
estimated issuance costs of $7,115. These funds were used primarily to repay
$160,000 of RTFC indebtedness, which was comprised of $177,778 of principal
less $17,778 in proceeds from the redemption of the Company's investment in
RTFC stock applied towards the repayment of the debt.
13. Subsequent Events (Unaudited)
During March 2000, the Company, through its wholly-owned subsidiary Coastal
Communications, Inc. ("Coastal Communications"), completed its acquisition of
all of the outstanding stock of Coastal Utilities, Inc., a Georgia local
exchange company. The Company paid $130,000 in cash and issued Series A non-
voting common stock and Series B non-voting common stock of Coastal
Communications in the face amount of $10,000 and $5,000, respectively. The
Series A and Series B non-voting common stock have put and call features
exercisable by the holders and Coastal Communications. Based on the put and
call features, the holders of the Series B non-voting common stock have the
right to put their shares for $35,000, and the Company has until April 2002 to
repurchase the stock. The holders of Series A non-voting common stock may put
their shares to Coastal Communications in December 2005 for $17,700. If the
Series B shares are not put or called and repurchased in 2002, the holders may
put or the Company may call the stock pursuant to the Company's Shareholder
Agreement. This transaction was accounted for under the purchase method of
accounting.
F-19
<PAGE>
Madison River Capital, LLC
Schedule II--Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999
(In Thousands)
<TABLE>
<CAPTION>
Additions
--------------------------
Additions
Balance at Charged to Additions Deductions Balance at
Beginning Costs and Due to from End
of Period Expenses Acquisitions(a) Reserves of Period
---------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Allowance for
uncollectible
accounts............ $ -- $ -- $ -- $ -- $ --
===== ======= ===== ======== =======
Year ended December 31,
1998:
Allowance for
uncollectible
accounts............ $ -- $ 111 $ 240 $ (16) $ 335
===== ======= ===== ======== =======
Year ended December 31,
1999:
Allowance for
uncollectible
accounts............ $ 335 $ 1,585 $ 261 $ (1,094) $ 1,087
===== ======= ===== ======== =======
</TABLE>
Note:
(a) This column represents additions due to the acquisitions of Mebcom,
Gallatin River and Gulf Coast Services.
F-20
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
MEBCOM Communications, Inc.
We have audited the accompanying consolidated balance sheet of MEBCOM
Communications, Inc. and Subsidiary, as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of MEBCOM
Communications, Inc. and Subsidiary at December 31, 1997, and the consolidated
results of their operations and cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
Raleigh, North Carolina
January 23, 1998 /s/ Ernst & Young LLP
F-21
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents....................................... $ 2,667,806
Accounts receivable, less allowance for uncollectible accounts
of $55,900..................................................... 596,361
Receivables, primarily from interexchange carriers.............. 401,975
Accounts receivable from officers............................... 1,230,469
Inventory, at average cost...................................... 78,689
-----------
Total current assets.......................................... 4,975,300
Investments and other assets:
Rural Telephone Bank stock, at cost............................. 283,666
Note receivable from affiliate.................................. 54,141
Goodwill........................................................ 89,131
Nonregulated property and equipment, net of accumulated
depreciation of $1,207,011..................................... 375,308
Receivable from sales type leases............................... 93,490
Other assets.................................................... 221,901
-----------
Total investments and other assets............................ 1,117,637
Telephone plant and equipment
Land, buildings and general equipment........................... 3,209,527
Central office equipment........................................ 3,730,359
Poles, wires, cables and conduit................................ 7,457,296
Construction-in-progress........................................ 16,461
-----------
14,413,643
Accumulated depreciation.......................................... (7,433,300)
-----------
Telephone plant and equipment, net................................ 6,980,343
-----------
Total assets.................................................. $13,073,280
===========
Liabilities and shareholders' equity
Current liabilities:
Current portion of long-term debt............................... $ 954,347
Accounts payable................................................ 764,009
Accrued expenses................................................ 155,566
Pension liability............................................... 428,513
Income taxes payable............................................ 346,269
Deferred income taxes .......................................... 34,371
Advance billings and customer deposits.......................... 244,755
-----------
Total current liabilities..................................... 2,927,830
Noncurrent liabilities:
Long-term debt.................................................. 4,567,823
Deferred income taxes........................................... 920,875
Deferred investment tax credits................................. 99,150
Regulatory liability............................................ 27,729
Unearned income--sales type leases.............................. 83,517
Other deferred credits.......................................... 81,939
-----------
Total liabilities............................................. 8,708,863
Shareholders' equity
8% preferred stock, Class B, nonvoting, noncumulative, $100 par
value; authorized 30,000 shares, 989.69 shares issued and
outstanding.................................................... 98,969
Common stock, Class A, voting, $1 par value; authorized 60,000
shares, 480 shares issued and outstanding...................... 480
Common stock, Class B, nonvoting, $1 par value; authorized
110,000 shares, 1,920 shares issued and outstanding............ 1,920
Additional paid-in capital...................................... 260,000
Retained earnings............................................... 4,003,048
-----------
Total shareholders' equity.................................... 4,364,417
-----------
Total liabilities and shareholders' equity.................... $13,073,280
===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------
<S> <C>
Operating revenues:
Sales and lease revenue...................... $ 339,553
Local service................................ 2,096,226
Access service............................... 3,459,667
Long distance service........................ 387,866
Other operating.............................. 206,924
Provision for uncollectible accounts......... (111,108)
----------
Total operating revenues....................... 6,379,128
Operating expenses:
Cost of sales................................ 99,400
Nonallocated salaries and fringe benefits.... 16,069
Plant specific............................... 976,708
Plant nonspecific:
Network and other.......................... 448,176
Depreciation .............................. 701,017
Amortization............................... 14,130
Customer operations.......................... 616,449
Corporate operations......................... 1,905,411
----------
Total operating expenses....................... 4,777,360
----------
Net operating revenue.......................... 1,601,768
Operating taxes:
Federal and state income taxes............... 347,124
Taxes other than income taxes................ 196,526
----------
Total operating taxes.......................... 543,650
----------
Net operating income........................... 1,058,118
Other income (expense):
Loss on sale of investments.................. (208,733)
Other income, net............................ 457,845
Nonregulated income, net..................... 37,264
Federal and state income taxes............... (133,405)
----------
Total other income, net........................ 152,971
----------
Income available for fixed charges............. 1,211,089
Interest expense............................... (408,601)
----------
Net income..................................... $ 802,488
==========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Preferred B Common A Common B
----------------- ---------------- ---------------- Additional
Number Number Number Paid in Retained
of Shares Amount of Shares Amount of Shares Amount Capital Earnings Total
--------- ------- --------- ------ --------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 989.69 $98,969 480 $480 1,920 $1,920 $260,000 $3,200,560 $3,561,929
Net income............. -- -- -- -- -- -- -- 802,488 802,488
------ ------- --- ---- ----- ------ -------- ---------- ----------
Balance at December 31,
1997................... 989.69 $98,969 480 $480 1,920 $1,920 $260,000 $4,003,048 $4,364,417
====== ======= === ==== ===== ====== ======== ========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997
-----------------------
<S> <C>
Operating activities
Net income............................................ $ 802,488
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 715,147
Loss on sale of investments......................... 208,733
Provision for deferred income taxes................. 26,000
Amortization of deferred investment tax credits..... (19,066)
Change in operating assets and liabilities:
Receivables, net.................................. (430,673)
Inventory......................................... 24,930
Other assets...................................... 25,030
Refundable income taxes........................... 82,019
Income taxes payable.............................. 346,269
Unearned income--sales type leases................ 83,517
Accounts payable.................................. 237,583
Accrued expenses.................................. 101,965
Pension liability................................. (436)
Advance billings and customer deposits............ 18,083
----------
Total adjustments............................... 1,419,101
Proceeds from sales of trading securities............. 666,026
----------
Net cash provided by operating activities............. 2,887,615
Investing activities
Proceeds from sales of equipment...................... 141,144
Purchases of telephone plant in service and other
equipment............................................ (1,385,431)
Purchases of Rural Telephone Bank stock............... (10,950)
----------
Net cash used in investing activities................. (1,255,237)
Financing activities
Net (decrease) increase in short-term borrowings...... (130,000)
Payments of long-term debt............................ (1,038,532)
Proceeds from issuance of long-term debt.............. 229,950
----------
Net cash used in financing activities................. (938,582)
----------
Net increase in cash and cash equivalents............. 693,796
Cash and cash equivalents at beginning of year........ 1,974,010
----------
Cash and cash equivalents at end of year.............. $2,667,806
==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1997
1. Summary of Significant Accounting Policies
Description of Business
MEBCOM Communications, Inc., ("MEBCOM" or the "Company") operates in the
telecommunications industry and provides local and long-distance services to
customers who are primarily residents of Alamance and Orange Counties in North
Carolina through its wholly-owned subsidiary MEBTEL, Inc. ("MEBTEL").
Principles of Consolidation
The accompanying consolidated financial statements include amounts for
MEBCOM and its subsidiary MEBTEL. MEBCOM owns 100% of the outstanding common
stock of MEBTEL. All significant intercompany balances and transactions have
been eliminated in consolidation.
Concentration of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is accounts receivable which are unsecured. The
Company provides an allowance for doubtful receivables based on an analysis of
the likelihood of collection of outstanding amounts. Credit losses on accounts
receivable will result only if the Company's actual bad debt expense exceeds
the reserve provided.
One customer, AT&T, represented 13% of total accounts receivable, as of
December 31, 1997.
Telephone Plant in Service
Telephone plant is stated at original cost, which includes certain
capitalized costs consisting of payroll taxes, pension and other fringe
benefits.
Depreciation is provided using composite straight-line rates, which
approximated 5.1% of average depreciable property for 1997. Such rates are
approved by the North Carolina Utilities Commission for regulated telephone
plant in service.
Maintenance, repairs, and minor renewals are primarily charged to
maintenance expense accounts. Additions, renewals, and betterments are
capitalized to telephone plant accounts. The original cost of depreciable
property retired is removed from telephone plant accounts and charged to
accumulated depreciation, which is credited with the salvage value less removal
cost. Under this method, a profit or loss is not recognized on ordinary
retirements of depreciable property.
Goodwill
Goodwill resulting from the purchase of MEBTEL is being amortized using the
straight-line method over a 40-year period.
Regulatory Assets and Liabilities
As a regulated entity, the Company is subject to the provisions of SFAS No.
71, Accounting for the Effects of Certain Types of Regulation. Accordingly, the
Company records certain assets and liabilities that result from the effects of
the rate-making process, which would not be recorded under generally accepted
accounting principles for non-regulated entities. These regulatory assets and
liabilities relate primarily to excess deferred taxes, deferred investment tax
credits and the regulatory impact thereof.
F-26
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Revenues
Access service revenues are based on long-distance service pool settlements
with the National Exchange Carrier Association ("NECA") for service between
states. For service between local access and transport areas ("LATA"), access
revenues are based on a bill and keep arrangement. For service within the LATA,
revenues are pooled and distributed to the various local exchange carriers
within the states. The Company provides billing and collection services to
interexchange carriers and provides certain directory advertising services.
Local service revenues are billed monthly in advance and deferred until the
month earned.
Income Taxes
The Company and MEBTEL file a consolidated federal income tax return.
Deferred income taxes are provided for temporary differences between book
and tax basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable
to the periods in which the differences are expected to affect taxable income.
Income taxes are allocated between operating income and other income based on
the source of the income that generated the tax.
Investment tax credits related to telephone plant have been deferred and
amortized as a reduction of federal income tax expense over the estimated
useful lives of the assets giving rise to the credits.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Rural Telephone Bank Stock
The Company's investment in Rural Telephone Bank ("RTB") stock is carried at
cost and consists of five shares of $1,000 par value Class C stock and
1,456,347 shares of $1 par value Class B stock at December 31, 1997. As a
condition to obtaining long-term financing from the RTB, 283,666 shares were
acquired and additional shares have been received through patronage refunds in
the form of stock dividends. Class B stock must be held by the borrower until
the loan is repaid and is not transferable. The loan was repaid in full in
January 1998.
F-27
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
3. Debt and Line of Credit
Long-term debt at December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
First mortgage notes collateralized by telephone plant in service
fixed assets:
2.0% Rural Utilities Service ("RUS") notes, due in quarterly
installments to 2005............................................. $ 353,077
5.5% RTB notes, due in monthly and quarterly installments to
2008............................................................. 965,809
6.75% RTB notes, due in monthly installments to 2002.............. 2,046,702
6.40% RTB note, due in monthly installments to 2002............... 1,037,188
6.88% RTB notes, due in monthly installments to 2022.............. 192,276
6.42% RTB note, due in monthly installments to 2022............... 264,934
6.54% RTB note, due in monthly installments to 2022............... 229,056
Bank note:
Note payable to bank due in monthly installments of $5,400,
including interest, through 1998. Interest is at the bank's prime
rate (8.50% at December 31, 1997)................................ 59,390
Notes to former shareholder:
9% unsecured notes due in quarterly installments of $66,457,
including interest, through 1999................................. 373,738
----------
Total long-term debt............................................ 5,522,170
Less current portion of long-term debt.......................... 954,347
----------
Long-term debt, excluding current portion....................... $4,567,823
==========
</TABLE>
The Company had a $130,000 outstanding unsecured note payable to a bank
which was repaid in full during 1997.
The Company has a $600,000 revolving line-of-credit with a bank which was
repaid in full during 1997.
The RUS and RTB first mortgage notes are collateralized by substantially all
of MEBTEL's telephone plant in service.
During 1997, the Company paid interest of approximately $377,000.
F-28
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Pension Plan
The Company has a noncontributory defined benefit pension plan that covers
all full-time employees who have met certain age and service requirements. The
plan provides benefits based on participants' final average compensation and
years of service. The Company's policy is to fund the maximum contribution
allowable by the Internal Revenue Code and comply with the funding requirements
of the Employee Retirement Income Security Act. The following table sets forth
the funded status of the Company's pension plan and amounts recognized in the
Company's financial statements at December 31, 1997:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Actuarial present value of accumulated plan benefits:
Accumulated benefit obligation, including vested benefits of
$990,372 in 1997................................................ $(1,049,638)
===========
Projected benefit obligation....................................... $(2,216,460)
Plan assets at fair value, principally marketable securities....... 1,965,873
-----------
Projected benefit obligation less plan assets...................... (250,587)
Unrecognized net obligation........................................ 28,598
Unrecognized net gain.............................................. (206,524)
-----------
Net accrued pension costs.......................................... $ (428,513)
===========
</TABLE>
Net periodic pension cost for the Company in 1997 is as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Service cost-benefit earned during the period................... $138,369
Interest cost on projected benefit obligation................... 144,983
Actual return on plan assets.................................... (343,925)
Net amortization and deferral................................... 218,258
--------
Net periodic pension cost....................................... $157,685
========
</TABLE>
The assumed discount rate used in the determination of the actuarial present
value of accumulated plan benefits was 7.5% for 1997. The assumed long-term
rate of return on plan assets was 8% for 1997 and the assumed rate of
compensation increase was 5% for 1997.
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Changes in plan assets:
Fair value of plan assets at beginning of year ............. $1,463,827
Actual return on plan assets, net .......................... 343,925
Contributions............................................... 158,121
Distributions............................................... --
----------
Fair value of plan assets at end of year...................... $1,965,873
==========
<CAPTION>
1997
----------
<S> <C>
Changes in benefit obligations:
Net benefit obligation at beginning of year................. $1,933,108
Service cost................................................ 138,369
Interest cost............................................... 144,983
Gross benefits paid......................................... --
----------
Net benefit obligation at end of year......................... $2,216,460
==========
</TABLE>
F-29
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
5. Income Taxes
Components of federal and state income tax expense are as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Included in operating taxes:
Current:
Federal..................................................... $258,530
State....................................................... 45,623
Deferred:
Federal..................................................... 36,526
State....................................................... 6,445
--------
Total........................................................... 347,124
Included in other income (expenses):
Current:
Federal..................................................... 113,395
State....................................................... 20,010
Deferred:
Federal..................................................... --
State....................................................... --
--------
Total........................................................... 133,405
--------
Total income tax expense........................................ $480,529
========
</TABLE>
Total income tax expense differs from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Amount computed at statutory rate............................... $436,226
State income taxes, net of federal income tax benefits.......... 56,452
Dividends received deduction.................................... (13,345)
Amortization of investment tax credit........................... (19,065)
Other, net...................................................... 20,261
--------
Total income tax expense........................................ $480,529
========
</TABLE>
F-30
<PAGE>
MEBCOM Communications, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Net current income tax assets (liabilities):
Investments.............................................. $ (79,648)
Other.................................................... 45,277
-----------
Total...................................................... $ (34,371)
===========
Net noncurrent income tax assets (liabilities):
Employee benefit plan.................................... $ 177,833
Deferred investment tax credits.......................... 40,885
Property, plant and equipment, primarily due to
depreciation differences................................ (1,139,593)
-----------
Total...................................................... $ (920,875)
===========
</TABLE>
During 1997, the Company paid approximately $279,000 in income taxes.
6. Receivables From Related Parties
At December 31, 1997, the Company had an unsecured note receivable totaling
$54,141 from a company affiliated through common ownership. The note is due in
equal installments of $642, including interest at 7.125% for 120 months. The
balance of the note receivable was collected in full in 1998.
At December 31, 1997, the Company had unsecured accounts receivable from
officers totaling $1,230,469. The receivables are noninterest-bearing and are
due upon demand.
7. Subsequent Events
In January 1998, all of the outstanding capital stock of the Company was
acquired by Madison River Capital for a purchase price of $21.3 million plus
the assumption of approximately $2.0 million of existing indebtedness of the
Company. Also, the Company's investment in Rural Telephone Bank Class B stock
has been converted to Class C stock. Madison River Capital has merged the
Company and the Parent into one corporation with the Company as the surviving
entity.
F-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Coastal Utilities, Inc.
Hinesville, Georgia
We have audited the accompanying consolidated balance sheets of Coastal
Utilities, Inc. and its Subsidiary as of December 31, 1999 and 1998 and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for the years ended December 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Coastal
Utilities, Inc. and its Subsidiary as of December 31, 1999 and 1998, and the
results of its consolidated operations and its cash flows for the years ended
December 31, 1999, 1998 and 1997 in conformity with generally accepted
accounting principles.
GOLDEN ASSOCIATES
Certified Public Accountants
March 23, 2000
Hinesville, Georgia
F-32
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 30,
----------------------- ---------------
1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash................................. $ 1,673,486 $ 3,122,038 $ 7,871,168
Working cash advance................. 7,650 7,850 10,150
Temporary investments (Note 2)....... 5,485,608 9,881,820 4,306,272
Due from customers and agents, net of
allowance for doubtful accounts of
$381,890 in 1999, $322,383 in 1998
and $433,222 in 2000................ 936,980 1,228,604 866,495
Interest receivable.................. -- -- --
Due from other carriers.............. 1,606,583 2,226,137 2,030,641
Other receivables.................... 267,212 485,326 192,853
Current portion of net investment in
direct-financing, sales-type leases
(Note 11)........................... 57,848 65,355 57,698
Material and supplies (Note 1)....... 694,407 672,500 693,623
Claims for income tax refunds........ -- 590,778 524,542
Prepaid expenses..................... 396,863 151,344 138,980
----------- ----------- -----------
TOTAL CURRENT ASSETS............... 11,126,637 18,431,752 16,692,422
----------- ----------- -----------
OTHER INVESTMENTS (Note 2)............. 15,636,089 18,924,499 19,129,639
----------- ----------- -----------
NET INVESTMENT IN DIRECT-FINANCING,
SALES-TYPE LEASES (Note 11)........... -- -- --
----------- ----------- -----------
INVESTMENT IN TELEPHONE PLANT (Note 1)
Telephone plant in service........... 81,185,729 85,783,321 85,142,706
Less accumulated depreciation........ 36,705,834 40,337,900 41,140,419
----------- ----------- -----------
Net plant in service................. 44,479,895 45,445,421 44,002,287
Telephone plant under construction... 1,544,903 1,039,278 2,074,461
Nonoperating plant................... 441,670 439,500 439,500
----------- ----------- -----------
TOTAL TELEPHONE PLANT.............. 46,466,468 46,924,199 46,516,248
DEFERRED CHARGES
Deferred charges--other.............. 3,188,511 3,198,473 3,248,467
Deferred tax asset--minimum pension
liability (Note 8).................. -- 1,650,036 1,650,036
----------- ----------- -----------
TOTAL ASSETS........................... $76,417,705 $89,128,959 $87,286,812
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED BALANCE SHEETS--CONTINUED
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31, March 30,
-------------------------- ----------------
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Short-term borrowing and debt
maturing within one
year (Notes 3 & 4)............. $ 2,522,591 $ 3,779,186 $ 3,220,511
Accounts payable (Note 18)...... 1,827,665 1,808,693 1,857,725
Customers' deposits............. 254,915 280,283 291,963
Other current liabilities (Note
19)............................ 1,253,362 1,165,300 915,725
Accrued taxes................... 74,757 -- --
Accrued income taxes............ 3,018,724 -- --
Unmatured interest.............. 56,300 760,614 714,645
------------ ------------ -----------
TOTAL CURRENT LIABILITIES..... 9,008,314 7,794,076 7,000,569
------------ ------------ -----------
Long-term debt (Note 3)........... 55,400,419 59,448,340 58,904,272
Deferred income taxes (Note 8).. 1,764,159 2,757,762 2,599,903
Other liabilities (Note 7)...... 1,846,135 2,275,447 2,816,061
Unfunded accumulated pension
benefit obligation............. -- 4,125,089 2,162,483
COMMITMENTS AND CONTINGENCIES
(Note 10)
STOCKHOLDERS' EQUITY (Note 9)
Preferred stockholders' equity
Series A 8% preferred stock,
cumulative, $100 par value,
1,704 shares issued and
outstanding.................... 440,500 440,500 440,500
Series B 12% preferred stock,
cumulative, $100 par value,
4,086 shares issued and
outstanding 1,057,200 1,057,200 1,057,200
Common stockholders' equity
Common stock, Class A, $10 par
value, 21,111 shares issued and
outstanding.................... 528,600 528,600 528,600
Common stock, Class B, $10 par
value, 88,659 shares issued and
outstanding.................... 2,220,120 2,220,120 2,220,120
Retained earnings--unreserved... 40,066,589 46,991,609 48,058,263
Accumulated other comprehensive
income......................... 252,944 (2,342,509) (2,383,884)
Treasury stock, at cost......... (36,167,275) (36,167,275) (36,167,275)
------------ ------------ -----------
TOTAL STOCKHOLDERS' EQUITY.... 8,398,678 12,728,245 13,753,524
------------ ------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............. $ 76,417,705 $ 89,128,959 $87,236,812
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
December 31,
------------------------------------- March 30,
1997 1998 1999 2000
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUE........... $31,146,570 $33,573,175 $36,769,161 $9,096,071
COST OF GOODS SOLD.......... 117,823 250,165 126,050 40,337
OPERATING EXPENSE........... 22,672,528 25,153,189 26,685,494 6,702,723
----------- ----------- ----------- ----------
NET OPERATING INCOME BEFORE
OPERATING TAXES............ 8,356,219 8,169,821 9,957,617 2,353,011
----------- ----------- ----------- ----------
OPERATING TAXES
Federal and State income
taxes (Note 8)........... 1,585,555 1,554,557 1,810,869 348,931
Other operating taxes..... 760,855 835,800 779,398 247,125
----------- ----------- ----------- ----------
TOTAL OPERATING TAXES... 2,346,410 2,390,357 2,590,267 596,056
----------- ----------- ----------- ----------
NET OPERATING INCOME........ 6,009,809 5,779,464 7,367,350 1,756,955
----------- ----------- ----------- ----------
OTHER INCOME AND (EXPENSE)
Other income.............. -- 441,313 -- --
Interest and dividend
income................... 2,236,545 9,742,423 1,416,426 131,888
Miscellaneous income
(loss)................... 22,529 (33,441) (54,423) 418,352
Life insurance on lives of
officers................. 320,983 155,187 (18,289) 91,381
Life insurance proceeds
(Note 17)................ -- -- 3,601,313 --
Miscellaneous income
charges.................. (230,109) (146,823) (250,143) (66,409)
Federal and State income
taxes--non-operating
(Note 8)................. (541,152) (3,240,273) (633,355) (220,057)
Other non-operating
taxes.................... (45) -- -- --
----------- ----------- ----------- ----------
TOTAL OTHER INCOME AND
EXPENSE................ 1,808,751 6,918,386 4,061,529 355,155
----------- ----------- ----------- ----------
INCOME BEFORE INTEREST...... 7,818,560 12,697,850 11,428,879 2,112,110
----------- ----------- ----------- ----------
INTEREST
Interest on long-term
debt..................... 3,417,344 3,936,445 3,987,214 1,040,500
Other interest
deductions............... 22,194 25,439 33,714 4,956
----------- ----------- ----------- ----------
TOTAL INTEREST.......... 3,439,538 3,961,884 4,020,928 1,045,456
----------- ----------- ----------- ----------
NET INCOME.................. 4,379,022 8,735,966 7,407,951 1,066,654
----------- ----------- ----------- ----------
OTHER COMPREHENSIVE INCOME
BEFORE TAX
Unrealized holding gains
arising during period.... 4,744,826 421,572 220,907 (66,450)
Minimum pension liability
adjustment............... -- -- (4,125,089) --
----------- ----------- ----------- ----------
TOTAL OTHER
COMPREHENSIVE INCOME
BEFORE TAX............. 4,744,826 421,572 (3,904,182) (66,450)
----------- ----------- ----------- ----------
Income tax expense related
to items of other
comprehensive income..... (1,897,930) (168,628) 1,561,673 (25,075)
----------- ----------- ----------- ----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX................. 2,846,896 252,944 (2,342,509) (41,375)
----------- ----------- ----------- ----------
COMPREHENSIVE INCOME........ $ 7,225,918 $ 8,988,910 $ 5,065,442 $1,025,279
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Accumulated Other Retained Earnings
Series A Series B Class A Class B Paid In Capital Comprehensive Income Unreserved
-------- ---------- -------- ---------- --------------- -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996....... $440,500 $1,057,200 $528,600 $2,220,120 $ (2,583,637) $ 1,487,238 $27,329,602
Prior period adjustment
(Note 13)............... -- -- -- -- -- -- 746,422
Net income--1997........ -- -- -- -- -- -- 4,379,022
Unrealized holdings
Gain(Loss) (Note 2)..... -- -- -- -- -- 1,359,658 --
Dividend declared
Common stock ($2.31 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (512,375)
Preferred stock ($8 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (27,240)
Preferred stock ($12
per share), net of
Treasury stock......... -- -- -- -- -- -- (98,064)
Purchase of Treasury
Stock.................. -- -- -- -- (2,583,637) -- --
-------- ---------- -------- ---------- ------------ ----------- -----------
December 31, 1997....... $440,500 $1,057,200 $528,600 $2,220,120 $ (5,167,274) $ 2,846,896 $31,817,367
Prior period adjustment
(Note 13)............... -- -- -- -- -- -- 290,920
Net income--1998........ -- -- -- -- -- -- 8,735,966
Unrealized holdings
Gain(Loss) (Note 2)..... -- -- -- -- -- (2,593,952) --
Dividend declared
Common stock ($2.97 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (652,360)
Preferred stock ($8 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (27,240)
Preferred stock ($12
per share), net of
Treasury stock......... -- -- -- -- -- -- (98,064)
Purchase of Treasury
Stock................... -- -- -- -- (31,000,001) -- --
-------- ---------- -------- ---------- ------------ ----------- -----------
December 31, 1998....... $440,500 $1,057,200 $528,600 $2,220,120 $(36,167,275) $ 252,944 $40,066,589
Prior period adjustment
(Note 13)............... -- -- -- -- -- -- (178,722)
Net income -1999........ -- -- -- -- -- -- 7,407,951
Unrealized holdings
Gain(Loss) (Note 2)..... -- -- -- -- -- (120,400) --
Dividend declared
Common stock ($2.20 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (241,494)
Preferred stock ($8 per
share), net of Treasury
stock.................. -- -- -- -- -- -- (13,632)
Preferred stock ($12
per share), net of
Treasury stock......... -- -- -- -- -- -- (49,033)
Minimum Pension
Liability Adjustment.... -- -- -- -- -- (2,475,053) --
-------- ---------- -------- ---------- ------------ ----------- -----------
December 31, 1999....... $440,500 $1,057,200 $528,600 $2,220,120 $(36,167,275) $(2,342,509) $46,991,609
Net income--March 30,
2000 (unaudited)........ -- -- -- -- -- -- 1,066,654
Unrealized holdings Gain
(Loss)--(unaudited)..... -- -- -- -- -- (41,375) --
Dividend declared--
unaudited............... -- -- -- -- -- -- --
Common stock ($2.20 per
share), net of Treasury
stock--(unaudited)..... -- -- -- -- -- -- --
Preferred stock ($8 per
share), net of Treasury
stock--(unaudited)..... -- -- -- -- -- -- --
Preferred stock ($12
per share), net of
Treasury stock--
(unaudited)............ -- -- -- -- -- -- --
Minimum Pension
Liability Adjustment--
(unaudited)............. -- -- -- -- -- -- --
-------- ---------- -------- ---------- ------------ ----------- -----------
March 30, 2000--
(unaudited)............. $440,500 $1,057,200 $528,600 $2,220,120 $(36,167,275) $(2,363,884) $48,058,263
======== ========== ======== ========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31, March 30,
------------------------------------- -------------------
1997 1998 1999 2000
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED
FOR) OPERATING
ACTIVITIES
Net income........... $ 4,379,022 $ 8,735,966 $ 7,407,951 $1,066,654
Adjustments to
reconcile net income
to net cash provided
by operating
activities
Depreciation and
amortization........ 5,759,980 5,998,675 6,083,680 1,397,080
Provision for losses
on due from
customers and
agents.............. 27,610 83,074 59,507 51,332
Prior period
adjustment.......... 746,422 290,920 (178,772) --
Additional pension
liability........... -- -- (2,475,053) --
Increase (decrease)
in unamortized
investment credit... (121,135) (101,101) (43,151) (7,141)
Deferred income
taxes............... 1,819,360 (2,025,680) (656,443) (157,859)
Deferred compensation
retirement benefit.. (31,298) (436,618) 556,005 546,738
(Increase) decrease
in prepaid pension.. (1,470,861) (261,584) (430,039) --
Increase (decrease)
in deferred credit
pension............. -- -- 4,125,089 (1,962,606)
(Increase) decrease
in:
Due from customers
and agents........ (38,392) (257,879) (351,131) 310,777
Interest
receivable........ 10,466 19,463 -- --
Due from other
carriers.......... 68,071 (144,513) (619,555) 195,496
Other receivables.. (230,437) 41,950 (218,114) 292,474
Materials and
supplies.......... 20,777 170,180 21,908 (21,123)
Claims for income
tax refunds....... (671,005) -- (3,605,940) 66,236
Prepaid expenses... 24,416 (14,357) 245,518 12,364
Increase (decrease)
in:
Accounts payable... 259,079 (389,803) (18,855) (190,030)
Customers'
deposits.......... (1,521) 20,909 25,368 11,680
Other current
liabilities....... 126,699 88,817 (88,063) (249,575)
Taxes other than
taxes on income... (144,321) 74,630 (74,875) 239,061
Income taxes
payable........... (495,398) 3,828,132 (3,562) --
Unmatured
interest.......... (592) (87,396) 704,314 (45,969)
----------- ----------- ----------- ----------
NET CASH FROM
(USED FOR)
OPERATING
ACTIVITIES...... 10,036,942 15,633,785 10,465,797 1,555,589
----------- ----------- ----------- ----------
CASH FLOWS FROM (USED
FOR) INVESTING
ACTIVITIES
Extension and
replacement of
plant............... (5,555,958) (6,933,917) (7,034,120) (989,129)
Purchase of
nonoperating plant.. -- (176,145) 2,170 --
Proceeds from
disposal of plant... 340,277 337,465 490,540 --
(Increase) in other
investments......... (1,318,104) (1,093,400) 2,986,071 (205,140)
Decrease in deferred
charges............. 152,217 832,127 420,077 (49,994)
Leases receivable.... 77,584 25,068 (21,017) 14,938
Purchase of
investments......... (434,117) (474,161) (6,274,480) --
OID-USTN Holdings.... (35,598) -- -- --
(Increase) Decrease
in temporary
investments......... (596,109) 18,621,148 (4,396,211) 5,575,548
Sale of World Access
Stock............... 150,000 210,000 -- --
Increase (decrease)
in unrealized
holdings............ 1,359,658 (2,593,952) (120,400) (41,375)
----------- ----------- ----------- ----------
NET CASH FROM
(USED FOR)
INVESTING
ACTIVITIES...... (5,860,150) 8,754,233 (13,947,370) 4,304,848
----------- ----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
December 31, March 30,
----------------------------------- --------------------
1997 1998 1999 2000
---------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED
FOR) FINANCING
ACTIVITIES
Advances to GA PCS
Mgt, LLC............ -- -- 1,174,200 (396,175)
Advances to US
Carrier............. -- -- 801,359 --
Advances from RUS.... 2,137,000 -- -- --
Advance from RTFC.... -- 57,543,843 5,000,000 --
Advance from
NationsBank of GA... -- -- -- --
Pay off of Long-term
debt to RUS......... (1,297,724) (25,856,228) -- --
Pay off of Long-term
debt to RTB......... (675,159) (24,138,339) -- --
Repayment of debt to
RTFC................ -- -- (1,454,376) (544,068)
Repayment of debt to
NationsBank of GA... (1,216,667) (216,667) (216,667) (162,500)
Cash dividends paid
to stockholders..... (637,679) (777,664) (304,159) --
Increase (decrease)
in deferred revenue
from leases......... (20,313) (4,516) 3,904 (3,981)
Increase (decrease)
in deferred interest
from leases......... (18,202) (11,867) 9,606 (3,301)
Increase (decrease)
in deferred
credits............. 26,346 (14,076) (83,541) 1,017
(Increase) decrease
in treasury stock... (2,583,638) (31,000,001) -- --
---------- ----------- ---------- ----------
NET CASH FROM
(USED FOR)
FINANCING
ACTIVITIES...... (4,286,036) (24,475,515) 4,930,326 (1,109,008)
---------- ----------- ---------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (109,244) (87,496) 1,448,753 4,751,429
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR..... 1,877,876 1,768,632 1,681,136 3,129,889
---------- ----------- ---------- ----------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR.................. $1,768,632 $ 1,681,136 $3,129,889 $7,881,318
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Note 1--Significant Accounting Policies
A. Nature of operations
The Company is a telephone utility (local exchange carrier) which provides a
variety of telecommunications services within an area designated by the Georgia
Public Service Commission (GPSC). This area includes all of Liberty County, a
portion of Long County, a portion of Bryan County which includes Richmond Hill
and Keller, and all of the Fort Stewart Military Reservation. The Company,
through its wholly owned subsidiary, Coastal Long Distance Services, Inc.,
offers long distance and Internet access services to its subscribers within the
above defined areas. The Company constructs the plant necessary to provide
telecommunication services to consumers.
B. Accounting procedures
The Company follows the accrual basis of accounting as provided by the
Federal Communications Commission Rules and Regulations for Class A Telephone
Companies.
C. Inventories
The Company records inventory of materials and supplies, telephone store and
business systems at average cost.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Material and supplies
Telephone operations--at average cost....... $475,030 $339,486 $323,980
Phone store--Hinesville--at cost............ 47,680 61,715 43,088
Business systems--at average cost........... 341,877 293,206 305,432
-------- -------- --------
$864,587 $694,407 $672,500
======== ======== ========
</TABLE>
D. Allowance for doubtful accounts
The Company uses the reserve method in accounting for doubtful accounts. The
allowance is based on prior years' experience.
E. Depreciation
The Company provides for depreciation on the straight-line basis using class
rates applied to depreciable property. The percentages of annual provisions for
depreciation to the average balances of depreciable property were 8% in 1999,
1998 and in 1997.
F. Revenue
The Company recognizes revenue when earned. The structure of the Company's
revenue is as follows:
1. Local service revenues are generated from the provision of local exchange
and local private line revenues.
F-39
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
2. Network access revenues are received from interexchange carriers that use
the local network. These revenues are also received from Southern Bell on the
intrastate intralata jurisdiction under the primary carrier concept. These
revenues are in the form of switched access and special access revenues.
3. Operator services revenue is produced by a contractual agreement between
the Company, Coastal Long Distance Services, Inc. on the inter/intralata
jurisdiction and Southern Bell on the intralata jurisdiction.
4. Billing and collection revenues are produced by agreements with
Illuminet, Independent NECA Services, Southern Bell and Coastal Long Distance
Services, Inc. (a wholly owned subsidiary of the Company). The Company uses
Independent NECA Services to administer AT&T and Sprint billing and
collections. The Company uses Illuminet to administer MCI and various other
carriers' casual billing.
5. Other miscellaneous income consists of regulated and deregulated revenue
items such as lease and sale of customer premise equipment, directory
advertising and public telephone revenues.
6. Coastal Long Distance Services, Inc. (a wholly owned subsidiary of the
Company) generates revenue from toll and Internet access services provided to
its subscribers.
Certain revenues derived from local services are billed monthly in advance
and are recognized the month when the services are provided. Revenues derived
from other telecommunications services which include network access, operator
services, and toll services are recognized monthly as services are provided.
Allowances for uncollectible billed services are adjusted monthly. Directory
advertising and other miscellaneous revenues are recognized monthly as earned.
G. Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
H. Telephone Plant
The investment in Telephone Plant is stated at original cost. For plant
dedicated to providing regulated telecommunications services, depreciation is
based on the remaining life method of depreciation and straight-line composite
rates determined on the basis of equal life groups of certain categories of
telephone plant acquired in a given year. When depreciable telephone plant is
disposed of, the original cost less net salvage value is charged to accumulated
depreciation. The cost of other property, plant and equipment is depreciated
using either straight-line or accelerated methods over the estimated useful
lives of the assets. Gains or losses on disposal of other depreciable property,
plant and equipment are recognized in the year of disposition as an element of
Other Income, net.
I. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, after elimination of all significant
intercompany balances and transactions.
F-40
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
J. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
K. Unaudited Interim Consolidated Financial Statements
In the opinion of the Company's management, the consolidated balance sheet
as of March 30, 2000, the consolidated statements of earnings and cash flows
for the three months ended March 30, 2000 and the consolidated statement of
stockholders' equity for the three months ended March 30, 2000 contain all of
the adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information set forth therein. The results of operations for
the three months ended March 30, 2000 are not necessarily indicative of the
results for any other period.
Note 2--Investments
A. Temporary Investments
Temporary investments are composed of cash and highly liquid securities
invested with NationsBank of Georgia and SunTrust Bank. These accounts are
available-for-sale and are reported at the aggregate fair value. The gross
unrealized holding gain (loss) for 1999, 1998 and 1997 were $220,907,
($4,323,253) and $2,266,096, respectively.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1998 1999
----------- ---------- ----------
<S> <C> <C> <C>
NationsBank of Georgia................. $19,838,235 $ -- $ --
SunTrust Bank.......................... 3,533,971 3,789,002 3,724,677
Barnett Bank........................... 300,000 -- --
Coastal Bank........................... 43,627 29,366 49,123
Heritage Bank.......................... 125,131 1,100,075 4,642,124
Bryan Bank & Trust..................... 261,939 556,952 1,441,290
First Citizens Bank.................... 3,853 10,213 24,606
----------- ---------- ----------
Total Temporary Investment........... $24,106,756 $5,485,608 $9,881,820
=========== ========== ==========
</TABLE>
F-41
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
B. Other Investments
Other investments at December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Rural Telephone Bank--Class B Stock.... $ 1,466,120 $ 1,466,878 $ --
Rural Telephone Bank--Class C Stock.... 5,000 5,000 1,471,878
Cash Value of Life Ins. Policies on
officers.............................. 12,144,457 13,262,759 9,088,535
Less Loans related to Insurance
Policies.............................. (1,514,958) (1,539,860) (351,707)
Rural Telephone Finance Cooperative
Patronage Capital..................... 37,347 37,347 37,347
Rural Telephone Finance Coop (SCC's)... -- -- 3,146,651
Communications Satellite Stock, at
cost, 2000 shares of common stock..... 2,000 2,000 2,000
Coastal Electronics Stock, at cost,
1000 shares of common stock........... 1,000 1,000 1,000
Illuminet, Inc., at cost, 117,934
shares of Class A common stock........ 939,282 939,447 939,242
Savannah Independent PCS Group, at
cost.................................. 622,380 734,080 --
Georgia PCS Management, LLC, at cost,
15.0571% of Ownership................. 350,465 635,260 3,070,960
Restor Industries (World Access)....... 210,000 -- --
US Carrier Telecom, LLC, at cost,
7.642% of Ownership................... 15,435 92,178 1,518,593
----------- ----------- -----------
Total Other Investments................ $14,278,528 $15,636,089 $18,924,499
=========== =========== ===========
</TABLE>
The investment in Rural Telephone Bank (RTB) Stock includes a stock dividend
of $6,420,261. In the years before 1977, these dividends were treated as
income. For the years 1977 through 1999, the dividends were offset by a
valuation account. As of February 16, 1999, the Company requested that RTB
Class B stock be converted into RTB Class C stock. As of December 31, 1999, the
Company has 1,187,477 shares of Class B stock with par value $1 per share and
15,028 shares of Class C stock with a par value of $1,000 per share.
This results in the RTB investment being shown on the Company's books as
follows:
<TABLE>
<S> <C>
RTB investment (including stock dividends).................. $ 16,215,477
Contra RTB investment..................................... (14,743,599)
------------
Total RTB investment.................................... $ 1,471,878
============
</TABLE>
The Company owns 117,934 shares of Illuminet Class A Stock. The stock is
currently in a "lock up" period for 180 days from the date of the initial
public offering (IPO). At the end of the lock up period, April 5, 2000, all
Class A Common Stock will automatically convert 4 to 1 into publicly tradable
shares of common stock. At such date, the Company will hold 471,736 shares of
Illuminet common stock.
F-42
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
During 1995, the Company adopted SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. All securities held by the Company
are classified as available-for-sale. These securities are reported at the
aggregate fair value. There are no gross unrealized holding gains (losses) for
1999, 1998 and 1997. Cost approximates aggregate fair value.
Note 3--Long-Term Debt
Long-term debt at December 31, 1999, 1998 and 1997, was as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage notes payable, due in
installments
Rural Utilities Service
2% payable to 2005......... $ 785,153 $ -- $ --
5% payable to 2013......... 25,071,074 -- --
Rural Telephone Bank
6 1/2% payable to 2012..... 6,221,688 -- --
7 1/2% payable to 2011..... 3,480,661 -- --
8% payable to 2007......... 2,605,037 -- --
9% payable to 2021......... 11,830,953 -- --
NationsBank of Georgia
8.05% payable to 2000...... 595,834 379,167 162,500
Mortgage notes payable, due in
installments
Rural Telephone Finance
Capital
Patronage Capital--A01..... -- 57,543,843 46,016,372
Patronage Capital--A02..... -- -- 4,947,997
Patronage Capital--A03..... -- -- 10,125,098
Capital Requirements
Georgia PCS Management,
LLC.......................
Equity Subscription
Agreement................. -- -- 1,174,200
US Carrier Telecom, LLC.... -- -- 801,359
Less current portions.......... (2,334,191) (2,522,591) (3,779,186)
----------- ----------- -----------
$48,256,209 $55,400,419 $59,448,340
=========== =========== ===========
</TABLE>
Principal retirements on the above debt for the next five years will be
approximately:
<TABLE>
<CAPTION>
Year Ended
----------
<S> <C>
2000.......................................................... $ 3,779,186
2001.......................................................... 2,959,056
2002.......................................................... 2,672,016
2003.......................................................... 3,299,591
2004.......................................................... 3,512,428
-----------
$16,222,277
===========
</TABLE>
F-43
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
All assets of the Company are pledged as security for long-term debt to
RTFC.
During 1998, the Company paid off all debt to the Rural Electrification
Administration (REA) and also to the Rural Telephone Bank (RTB). This was
accomplished by obtaining 3 notes and a secured revolving line of credit from
the Rural Telephone Cooperative (RTFC) in the total amount of $80,000,000. The
detail of these borrowing is as follows:
<TABLE>
<S> <C>
GA 543-A-01................................................... $46,500,000
GA 543-A-02................................................... 5,000,000
GA 543-A-03................................................... 20,500,000
Line of Credit................................................ 8,000,000
-----------
$80,000,000
===========
</TABLE>
The three notes are payable in quarterly installments based upon level debt
service (no principal deferral) for the GA 543-A-01 and GA 543-A-02 loans and
level debt service with principal payments deferred for a period of three years
for the GA 543-A-03 loan. The secured revolving line of credit is also payable
quarterly.
The interest rate is equal to Prevailing Bank Prime Rate plus one and one-
half percent per annum or such lesser total rate per annum as may be fixed by
the Lender (RTFC) from time to time. Prevailing Bank Prime Rate is defined as
that bank prime rate published in the "Money Rates" column of any edition of
The Wall Street Journal which the Lender (RTFC) determines in its discretion to
be the representative bank prime rate on the day preceding the day on which an
adjustment in the interest rate hereof shall become effective. Coastal
Utilities, Inc has currently drawn down $61,089,467.
The Company shall also purchase Subordinate Capital Certificates (SCC's) in
the aggregate and shall not exceed the following amounts:
<TABLE>
<S> <C>
GA 543-A-01.................................................... $2,325,000
GA 543-A-02.................................................... 250,000
GA 543-A-03.................................................... 1,025,000
----------
$3,600,000
==========
</TABLE>
Unless otherwise requested in writing by the Company prior to the initial
Advance and approved by the Lender, the Borrower agrees to purchase SCC's
either with:
1. each Advance in the amount of 5% of each such Advance, and each such SCC
shall be paid for with proceeds of such Advance or
2. by making payments with Company's own funds in 20 equal quarterly
installments, commencing with the first full quarter following the initial
Advance. The SCCs shall bear no interest and shall mature in accordance with
the terms there of.
F-44
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
RTFC requires that the Company will not, in any one calendar year, without
the prior approval in writing of the lender (1) declare or pay any dividends or
make any other distributions to its stockholders with respect to its capital
stock; (ii) purchase or redeem or retire any of its capital stock; or (iii) pay
any management fees or if already paying a management fee, pay an increase in
management fees unless with respect to any of the foregoing (after giving
effect to such transaction) (1) (a) the Company maintains a Current Ratio of
not less than 1.25; and (b) the Company meets the Minimum Net Worth Test or (2)
(a) the Company maintains a Current Ratio of not less than 1.25; (b) the
Company maintains a minimum Net Worth to total assets of not less than twenty-
five percent (25%) and (c) the payment of such dividend, the making of such
distribution, or the purchase, redemption or retirement of such stock,
individually or in the aggregate does not exceed twenty-five percent (25%) of
the prior year-end Cash Margins in any one fiscal year or (3) for the payment
of dividends up to $500,000 in any fiscal year, the Company maintains a Current
Ratio of not less than 1.25. In no event may the Company make any such
distribution or payment when there is unpaid any due installment of principal
and/or interest or if the Company is otherwise in material default of any
provision of this agreement or would be in material default hereunder as a
result of such distribution or payment.
Note 4--Concentration of Credit Risk
The Company provides telecommunications service to customers within its
prescribed area. Management reviews past due accounts on a monthly basis and
requires deposits on account based on credit evaluation. Credit losses have
been within management's expectations.
The Company has deposits of $8,996,247 exceeding the amounts insured by the
FDIC at 3 financial institutions. The Company has deposits of $282,934 which
are insured by the FDIC.
Note 5--Pension Plan
Coastal Utilities, Inc. has a defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's compensation for the five highest consecutive calendar years
of earnings. The Company's funding policy is to contribute annually the amount
needed to satisfy the minimum funding standards in ERISA.
F-45
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
The following table sets forth the plan's funded status and amounts
recognized in the Company's statement of financial position at December 31,
1999.
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $7,494,814 in 1999 ........................ $ 8,015,499
Plan assets at fair value............................... 6,052,893
------------
Unfunded accumulated benefits........................... $ 1,962,606
============
Projected benefit obligation............................ $(10,480,991)
Plan assets at fair value............................... 6,052,893
Items not yet recognized in earnings:
Unrecognized net obligation (net asset) at January 1,
1999................................................... --
Unrecognized prior service cost......................... --
Unrecognized net (gain) loss............................ 6,590,581
------------
(Accrued)/prepaid pension cost.......................... $ 2,162,483
============
</TABLE>
Weighted-average assumptions used as December 31, 1999 as follows:
<TABLE>
<S> <C>
Plan discount rates--pre-retirement............................... 7.50%
Plan discount rates--post-retirement.............................. 6.50%
Rates of increase in future compensation levels................... 3.00%
Expected long-term rates of return assets......................... 8.00%
</TABLE>
F-46
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
The following table sets forth the net period pension cost for the Company
in 1999:
<TABLE>
<S> <C>
Service cost................................................. $ 345,777
Interest cost................................................ 695,813
Actual return on plan assets................................. 189,488
Net amortization and deferral................................ 347,058
Net asset gain (loss) during the period deferred for later
recognition................................................. (707,178)
-----------
Net periodic pension cost (benefit)...................... $ 870,958
===========
Changes in Plan assets:
Fair value of plan assets at beginning of year............. $ 6,794,744
Actual return on plan assets, net.......................... (189,488)
Contributions.............................................. 1,300,997
Distributions.............................................. (1,853,360)
-----------
Fair value of plan assets at end of year..................... $ 6,052,893
===========
Change in benefit obligations:
Net benefit obligation at beginning of year................ $ 7,506,050
Actuarial Restatement...................................... 2,187,024
Service cost............................................... 345,777
Interest cost.............................................. 695,813
Gross benefits cost........................................ (1,853,360)
Actuarial gain (loss)...................................... 1,599,687
-----------
Net benefit obligation at end of year.................... $10,480,991
===========
</TABLE>
During 1992, the Company elected to change the pension plan year to a
calendar year. Previously, the pension plan was on a fiscal year ending
September 30. The plan was amended and restated on October 20, 1994. The
restated plan was effective as of October 1, 1989, and such Plan fully reflects
the provisions of the 1986 Tax Reform Act and subsequent rules and regulations.
The Company provides a Salary Reduction Plan for eligible employees.
Employer and employee contributions are discretionary. Employee contributions
are not to exceed in total 16% of the total compensation earned by plan
participants for the year. Employer contributions are not to exceed 50% of each
participant's contribution up to a contribution of 6% of compensation. These
limitations are further restricted in that they shall not exceed the annual
deductible limit for contributions to a qualified profit-sharing plan as set
forth in Section 404(a)(3) of the Internal Revenue Code as limited by Section
404(j) of the Internal Revenue Code.
During 1999, 1998 and 1997, the Company provided for $170,489, $142,264 and
$136,592 in contributions, respectively. The Salary Reduction Plan is tax
exempt under Section 401(k) of the Internal Revenue Code.
F-47
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Note 6--Earnings Per Share
Earnings per common share are computed on total shares of common stock
outstanding at the end of the year, after giving effect to dividends on
preferred stock.
The Series A preferred stock issue was effective December 31, 1974, and the
Series B preferred stock issue was effective August 7, 1985 and quarterly
dividends are cumulative from that date.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME.................................... $4,379,022 $8,735,966 $7,407,951
Less dividend on preferred stock
4,405 shares at $8, net of treasury stock... 27,240 27,240 13,632
10,572 shares at $12, net of treasury
stock...................................... 98,064 98,064 49,032
---------- ---------- ----------
AVAILABLE FOR COMMON STOCK.................... $4,253,718 $8,610,662 $7,345,287
========== ========== ==========
Earnings per share............................ $ 19.38 $ 39.22 $ 66.92
========== ========== ==========
</TABLE>
Note 7--Deferred Credits
Deferred credits at December 31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Unamortized investment credits................ $ 312,981 $ 211,880 $ 168,729
Other deferred credits........................ 132,430 118,353 34,812
Deferred compensation retirement benefit...... 1,952,520 1,515,902 2,071,906
---------- ---------- ----------
$2,397,931 $1,846,135 $2,275,447
========== ========== ==========
</TABLE>
The items that give rise to unamortized investment credits and deferred
income taxes are more fully explained in Note 8.
Note 8--Income Taxes
At December 31, 1994, the Company had net investment tax credit carry
forwards for income tax purposes of approximately $582,220, which expire in
years 1995 through 2003. These carry forwards resulted from prior year
acquisitions.
The net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes are reflected in deferred income taxes. For 1998 income
tax reporting, an Alternative Minimum Tax Credit of $34,357 was indefinitely
available to reduce future regular taxes. For financial statement reporting,
the credit was recognized as a deferred tax asset. The Alternative Minimum Tax
Credit was used in 1998 to offset the Company's income tax liability. The
deferred tax asset has been reversed.
F-48
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Minimum pension liability.................... $ -- $ -- $1,650,036
Deferred compensation-retirement benefit..... 297,676 415,433 628,850
Post retirement benefits..................... 28,209 -- --
Bad debt allowances.......................... 283,811 315,397 334,976
Alternative minimum tax...................... -- -- --
Other........................................ 104,437 107,714 183,365
---------- ---------- ----------
Total deferred tax assets.................. 714,133 838,544 2,797,227
Deferred tax liabilities:
Accelerated tax depreciation................. 2,017,699 1,741,098 1,777,250
Other........................................ 2,486,274 861,605 2,127,703
---------- ---------- ----------
Total deferred liabilities................. 4,503,973 2,602,703 3,904,953
---------- ---------- ----------
Net deferred tax liabilities............... $3,789,840 $1,764,159 $1,107,726
========== ========== ==========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Operating
Federal--regular tax...... $1,360,345 $1,139,838 $ 825,786
State..................... 252,839 204,205 133,139
Non-Operating
Federal--regular tax...... 746,043 2,755,956 538,357
Federal--alternative
minimum tax.............. -- -- --
State..................... 131,645 484,316 94,998
---------- ---------- ----------
Total current........... $2,490,872 $4,584,315 $1,592,280
========== ========== ==========
Deferred:
Operating
Federal--regular tax...... $ (200,939) $ 264,872 $ 750,141
State..................... (42,093) 46,742 144,954
Amortization of investment
tax credits.............. (121,135) (101,101) (43,151)
Non-Operating
Federal--regular tax...... -- -- --
Federal--alternative
minimum tax.............. -- -- --
State..................... -- -- --
---------- ---------- ----------
Total deferred.......... $ (364,167) $ 210,513 $ 851,944
========== ========== ==========
</TABLE>
F-49
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
The reconciliation of income tax attributable to continuing operations
computed at the federal statutory tax rate to the Company's effective income
tax expense is:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal statutory rate.............. $1,840,016 $3,919,772 $1,452,741
State and local income taxes, net of
federal benefit........................... 330,472 692,753 256,348
Other, net................................. (320,384) (401,012) 116,809
---------- ---------- ----------
$1,850,104 $4,211,513 $1,825,898
========== ========== ==========
</TABLE>
Note 9--Stockholders' Equity
The certificate of incorporation of Coastal Utilities, Inc. authorizes
issuance of stock as follows:
<TABLE>
<CAPTION>
Authorized Outstanding Par Value
---------- --------------------- ---------
Stockholders Treasury
------------ --------
<S> <C> <C> <C> <C>
Preferred Stock
Series A........................... 50,000 1,704 2,701 $100
Series B........................... 50,000 4,086 6,486 $100
Common Stock
Class A............................ 300,000 21,111 31,749 $ 10
Class B............................ 900,000 88,659 133,353 $ 10
</TABLE>
Dividends on Series A preferred stock at the rate of $8 per share per annum
and on Series B preferred stock at the rate of $12 per share per annum are
cumulative and preferential to the payment of dividends on Class A and Class B
common stock. Preferred stock is callable at $105 per share. In the event of
liquidation, the holders of preferred stock are entitled to receive $100 per
share before any distributions on behalf of Class A and Class B common stock.
Note 10--Commitments and Contingencies
The Company leases data processing equipment which is accounted for as
operating leases. In addition, the Company leases business premises under
operating leases from Bryant Realty, an entity owned by major stockholders. The
amount of rent paid to Bryant Realty in 1999 was $599,998. The business
premises leases have five to seven year terms, each with renewal options.
The following is a schedule of minimum future rentals required under
operating leases payable as of December 31, 1999.
<TABLE>
<CAPTION>
Year ended
----------
<S> <C>
2000.......................................................... $ 742,195
2001.......................................................... 606,711
2002.......................................................... 606,711
2003.......................................................... 559,997
2004.......................................................... 559,997
----------
Total Minimum Future Rentals................................ $3,075,611
==========
</TABLE>
F-50
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
The Financial Accounting Standards Board issued SFAS 107, "Disclosures
about Fair Values of Financial Instruments," which requires entities to
disclose the estimated current value of their financial instruments.
Disclosure will be required for both assets and liabilities and for on-and
off-balance sheet items.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and short term investments
The carrying amount approximates fair value because of the short maturity
of those instruments.
Long-term investments
The fair values of these investments are estimated based on cost
approximating aggregate fair value.
Long-term debt
The fair value of the Corporation's long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the current
rates offered to the Corporation for debt of the same remaining maturities.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- -----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash and short-term
investments............ $25,875,388 $25,875,388 $ 7,166,744 $ 7,166,744 $13,011,708 $13,011,708
Long-term investments
estimated fair value... 14,278,528 14,278,528 15,636,089 15,636,089 18,924,499 18,924,499
Long-term debt.......... 48,256,209 48,256,209 55,400,419 55,400,419 59,448,340 59,448,340
</TABLE>
During 1998, Georgia Independent PCS Corporation and Savannah Independent
PCS Corporation were in the process of completing an asset transfer and
subsequent liquidation of 100% interest to Georgia PCS Management, LLC, a
single-member limited liability company, which was completed as of March 26,
1999. Coastal Utilities, Inc. holds a 15.071% interest in the combined entity,
Georgia PCS Management, LLC as of December 31, 1999.
As of September 1, 1999, the Company signed a guaranty in the amount of
$3,969,752 and a related equity subscription agreement in the amount of
$1,399,800 for Georgia PCS Management, LLC. This guaranty represents 15.47% of
the total loan outstanding with the Rural Telephone
F-51
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Finance Cooperative for Georgia PCS Management, LLC. The loan documents for
this transaction were signed on September 1, 1999.
The agreement provides for capital contributions to be made by the Company
in the amount of $1,399,800. Of this total amount, $225,600 was contributed
during 1999 and recorded as an increase subsequently as follows:
<TABLE>
<CAPTION>
Year Ended
----------
<S> <C>
2000........................................................... $ 587,100
2001........................................................... 587,100
----------
$1,174,200
==========
</TABLE>
As of December 31, 1999, the additional $1,174,200 required by the equity
subscription agreement was recorded as a current and long-term liability as
indicated above and as a corresponding increase in the investment on the books
of the Company.
The Company has also signed a letter of commitment with USCarrier Telecom,
LLC which provides for capital contributions for the year 2000 in the amount of
$757,350. The Company has also committed to an additional contribution of
$44,009 that was refused by another member.
Note 11--Capital Leases
The Company is a lessor of business telephone systems under agreements
expiring at various dates through 2003. The majority of the leases are direct-
financing sales-type leases. The lessees have a bargain purchase option at the
end of the lease term. The Company has accounted for the leases as capital
leases. The Company's net investment in the direct-financing, sales-type leases
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Total minimum lease payments....................... $136,666 $111,598 $132,615
Estimated executory costs & related profit......... 34,597 30,081 33,985
-------- -------- --------
Minimum lease payments receivable.................. 102,069 81,517 98,630
Unearned interest.................................. 35,537 23,670 33,275
-------- -------- --------
Net investment in direct-financing, sales-type
leases............................................ $ 66,532 $ 57,847 $ 65,355
======== ======== ========
</TABLE>
Future minimum lease payments receivable under the capital lease agreements
are:
<TABLE>
<S> <C>
2000............................................................ $ 53,376
2001............................................................ 33,140
2002............................................................ 22,821
2003............................................................ 19,301
--------
Total Minimum Lease Payments Receivable....................... $128,638
========
</TABLE>
F-52
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Note 12--Supplemental Cash Flow Information
The following supplemental information is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 95 "Statement of
Cash Flows:"
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................... $2,338,535 $4,049,280 $ 3,316,614
Income taxes........................... 1,762,000 1,239,500 1,966,330
---------- ---------- -----------
$4,100,535 $5,288,780 $ 5,282,944
========== ========== ===========
Schedule of Non Cash Investing and
Financing Activities:
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Deferred charges....................... $ 152,217 $ 832,127 $(1,742,406)
Leases receivable...................... 77,584 25,068 21,908
Deferred revenue from leases........... (20,313) (4,516) 3,904
Deferred interest from leases.......... (18,202) (11,867) 9,606
Deferred credits....................... 26,346 14,076 (83,541)
---------- ---------- -----------
$ 217,632 $ 854,888 $(1,790,529)
========== ========== ===========
</TABLE>
Note 13--Prior Period Adjustment
During 1999, a correction was made to a deferred tax liability related to a
prepaid pension asset. The net effect was to decrease net income by $178,772.
During 1998, a correction was made to the income calculation for the
Company. This correction was made prior to the filing of the 1997 corporate
income tax return. The correction was due to a timing difference between book
and tax income. The effect of the correction was to increase net income by
$112,148. A correction was also made to a deferred tax liability related to a
prepaid pension asset. The net effect was to increase net income by $178,772.
During 1997, a correction was made to the income calculation for the
Company. This correction was made prior to the filing of the 1996 corporate
income tax return. The correction was due to a timing difference between book
and tax income. The effect of the correction was to increase net income by
$4,166. A correction was also made to recognize prepaid pension cost of
$1,237,094 and the related tax effect of $494,838.
Note 14--Related Parties
During 1993, the Company created a wholly-owned subsidiary, Coastal Long
Distance Services, Inc. The subsidiary is engaged in the long distance reseller
business. Because the subsidiary is wholly-owned, the results of its operations
have been consolidated with the Company's on the basis indicated in Note 1.
F-53
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Note 15--Post Retirement Benefits Other Than Pensions
In December 1991, the Financial Accounting Standards Board issued SFAS 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions", which
Coastal Utilities was required to adopt by 1995.
The statement requires employers, among other things, to accrue the cost of
providing post retirement benefits other than pensions. This accrual should be
made during the period the employees are expected to earn the benefits.
Currently, Coastal Utilities has no post retirement benefits that fall
within the scope of SFAS 106. However, the Company provides deferred
compensation retirement benefits to selected employees on an individual-by-
individual basis. Accordingly, these benefits do not fall within the scope of
SFAS 106. The deferred compensation retirement benefits have been computed
based on the present value of the future benefits expected to be provided to
each employee covered at an 8% discount rate. The Company's long-term liability
is $2,071,906, $1,515,902, and $1,308,321 at December 31, 1999, December 31,
1998 and 1997 respectively. The cost of these benefits will be amortized over
the remaining years of service to retirement age 65 for those employees
covered.
The Company also provides health and life insurance to selected retirees on
an individual-by-individual basis. Accordingly, these benefits do not fall
within the scope of SFAS 106. The cost of these benefits is expensed currently.
The Company also provides a death benefit only deferred compensation to
selected employees. This is provided for in the form of life insurance for
officers. The cost of this benefit is expensed currently through life insurance
expense.
Note 16--Treasury Stock
During December 1998, the Company purchased stock owned by G. Allan Bryant,
Daniel M. Bryant, and Thomas J. Ratcliffe, Jr. as co-trustees under the
declaration of trust for Glenn E. Bryant Dated November 21, 1997 approved by
the Probate Court and Superior Court of Liberty County for $31,000,000. A
detail of shares purchased follows:
<TABLE>
<CAPTION>
Dollar
Number of Shares Amount
---------------- -----------
<S> <C> <C>
Preferred Stock A.................................. 1,701 $ 1,801,935
Preferred Stock B.................................. 4,086 568,365
Common Stock A..................................... 21,109 9,269,500
Common Stock B..................................... 88,661 19,360,200
------- -----------
Total Shares..................................... 115,557 $31,000,000
======= ===========
</TABLE>
F-54
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
During February 1997, the Company purchased stock owned by Glenn E. Bryant
for $2,583,638. A detail of shares purchased follows:
<TABLE>
<CAPTION>
Number of Shares Dollar Amount
---------------- -------------
<S> <C> <C>
Preferred Stock A................................ 500 $ 92,052
Preferred Stock B................................ 1,200 29,035
Common Stock A................................... 5,320 473,533
Common Stock B................................... 22,346 1,989,018
------ ----------
Total Shares................................... 29,366 $2,583,638
====== ==========
</TABLE>
The Company purchased all of the stock owned by Trudie P. Bryant for
$2,583,638 in September 1996. A detail of shares purchased follows:
<TABLE>
<CAPTION>
Number of Shares Dollar Amount
---------------- -------------
<S> <C> <C>
Preferred Stock A................................ 500 $ 92,052
Preferred Stock B................................ 1,200 29,035
Common Stock A................................... 5,320 473,533
Common Stock B................................... 22,346 1,989,018
------ ----------
Total Shares................................... 29,366 $2,583,638
====== ==========
</TABLE>
Note 17--Life Insurance Proceeds
During 1999, the Company received life insurance proceeds of $7,436,505 upon
the death of a key officer and major stockholder. This resulted in a reduction
of cash value of life insurance policies on officers in the amount of
$3,748,188 and an increase in other income of $3,601,313.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
---------- ---------- --------
<S> <C> <C> <C>
Life insurance premiums..................... $ 844,582 $ 993,276 $802,272
Change in cash value........................ (1,165,565) (1,148,463) (820,561)
---------- ---------- --------
Net cost of life insurance on lives of
officers................................... $ (320,983) $ (155,187) $(18,289)
========== ========== ========
</TABLE>
Note 18--Accounts Payable
Accounts Payable are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Accounts Payable--Trade...................... $ 566,049 $ 541,453 $ 630,149
Accounts Payable--Other (Future Plant)....... 959,988 366,584 319,397
Accounts Payable--Pension.................... -- -- --
Accounts Payable--Settlements................ 608,321 957,880 690,065
Taxes Payable Other Than Income.............. 83,109 14,762 151,880
911 and Dual Relay Payable................... -- (53,014) 17,202
---------- ---------- ----------
Total...................................... $2,217,467 $1,827,665 $1,808,693
========== ========== ==========
</TABLE>
F-55
<PAGE>
COASTAL UTILITIES, INC. AND SUBSIDIARY
GEORGIA 543
Hinesville, Georgia
Notes to Consolidated Financial Statements (continued)
December 31, 1999, 1998 and 1997
Note 19--Other Current Liabilities
Other Current Liabilities as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Advanced Billing & Payment................... $ 215,408 $ 269,829 $ 253,270
Dividends Payable............................ 159,420 194,416 76,040
Other Accrued Liabilities--Payroll........... 237,998 295,836 324,946
Other Liabilities--
Compensated Absences......................... 479,524 489,281 407,044
Other Current Liabilities.................... 4,000 4,000 4,000
Deferred Compensation Retirement Benefit--
Current..................................... 68,196 -- 100,000
---------- ---------- ----------
Total...................................... $1,164,546 $1,253,362 $1,165,300
========== ========== ==========
</TABLE>
F-56
<PAGE>
Report of Independent Auditors
Board of Directors
Gulf Coast Services, Inc.
We have audited the accompanying consolidated statements of operations and
cash flows of Gulf Coast Services, Inc. for the period from January 1, 1999 to
September 29, 1999 and the years ended December 31, 1998 and 1997. These
statements of operations and cash flows are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements of
operations and cash flows based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the statements of
operations and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of operations and cash flows. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated statements of operations and cash flows
referred to above present fairly, in all material respects, the consolidated
results of operations and cash flows of Gulf Coast Services, Inc. for the
period from January 1, 1999 to September 29, 1999 and the years ended December
31, 1998 and 1997, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young, LLP
Raleigh, North Carolina
January 7, 2000
F-57
<PAGE>
Gulf Coast Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period from
January 1,
1999 to Year ended December 31,
September -------------------------
29, 1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Operating revenues:
Local service ....................... $12,933,804 $16,063,197 $ 14,387,177
Network access service .............. 15,608,169 20,407,211 19,778,609
Long distance service ............... 8,674,409 8,962,849 8,213,108
Miscellaneous ....................... 3,712,681 4,705,772 4,153,061
Nonregulated ........................ 7,827,526 18,249,683 2,713,724
Provision for uncollectible accounts
.................................... (190,919) (324,676) (249,232)
----------- ----------- ------------
Total operating revenues .......... 48,565,670 68,064,036 48,996,447
Operating expenses:
Plant specific ...................... 12,670,997 13,491,079 12,219,778
Plant nonspecific ................... 6,002,695 4,149,814 4,326,540
Depreciation ........................ 6,489,574 8,203,558 7,824,929
Amortization ........................ 86,059 93,930 94,373
Customer operations ................. 5,212,648 5,115,980 6,537,255
Corporate operations ................ 10,146,452 8,293,776 7,785,608
Other taxes ......................... 696,728 1,356,451 905,302
Nonregulated ........................ 10,605,627 11,133,391 2,761,310
----------- ----------- ------------
Total operating expenses .......... 51,910,780 51,837,979 42,455,095
----------- ----------- ------------
Net operating (loss) income ........... (3,345,110) 16,226,057 6,541,352
Other income (expense):
Other income, net ................... 299,104 658,261 864,295
Share of losses of equity investee .. -- (6,592,302) (7,123,827)
Gain on disposal of assets .......... 9,962,895 1,267,527 --
----------- ----------- ------------
Total other income (expense), net
.................................. 10,261,999 (4,666,514) (6,259,532)
----------- ----------- ------------
Income before interest and income tax
expense .............................. 6,916,889 11,559,543 281,820
Interest expense ...................... 1,769,302 3,162,713 3,004,148
----------- ----------- ------------
Net income (loss) before income taxes
...................................... 5,147,587 8,396,830 (2,722,328)
Income tax expense .................... 3,214,551 5,884,065 907,944
----------- ----------- ------------
Net income (loss) ..................... 1,933,036 2,512,765 (3,630,272)
Other comprehensive income:
Unrealized gain (loss) on available
for sale securities 271,607 (292,708) (402,573)
----------- ----------- ------------
Comprehensive income ................ $ 2,204,643 $ 2,220,057 $ (4,032,845)
=========== =========== ============
</TABLE>
See accompanying notes.
F-58
<PAGE>
Gulf Coast Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Year ended December 31,
January 1, 1999 to -------------------------
September 29, 1999 1998 1997
------------------ ----------- ------------
<S> <C> <C> <C>
Operating activities
Net income (loss) .............. $ 1,933,036 $ 2,512,765 $ (3,630,272)
Adjustments to reconcile net in-
come (loss) to net
cash provided by operating ac-
tivities:
Gain on disposal of assets ... (9,962,895) (1,267,527) --
ESOP compensation ............ 12,341,000 547,440 530,331
Share of losses of equity
investee .................... -- 6,592,302 7,123,826
Depreciation and amortization
............................. 6,575,633 8,595,385 7,919,302
Deferred income taxes ........ (16,698) 1,069,596 725,347
Amortization of investment tax
credit ...................... (117,000) (156,000) (156,000)
Changes in operating assets
and liabilities:
Accounts receivable ........ (820,195) (2,128,491) (3,343,669)
Inventories ................ 236,133 237,050 (146,812)
Refundable income taxes .... -- 628,791 136,674
Prepaid expenses ........... (150,416) (109,451) 69,129
Costs in excess of billings
........................... 2,169,634 (2,169,634) --
Other assets ............... (156,549) (864,315) 36,032
Accounts payable and accrued
expenses .................. 13,015,594 2,290,885 2,841
Customer deposits .......... (67,298) 9,643 41,955
Due to Madison River ....... 1,094,515 -- --
Income taxes payable ....... 1,962,572 1,185,841 82,837
Unearned revenue ........... 197,901 192,665 --
Postretirement benefit obli-
gation .................... 558,043 1,075,798 1,036,925
Deferred compensation pay-
able ...................... (512,864) (476,959) (43,843)
Other liabilities .......... (494) (785,836) 786,331
----------- ----------- ------------
Net cash provided by operating
activities .................... 28,279,652 16,979,948 11,170,934
Investing activities
Investment in DigiPH ........... -- (3,218,503) (2,050,000)
Proceeds from sale of DigiPH ... 6,500,000 -- --
Decrease (increase) in invest-
ments ......................... 202,123 (141,800) 748,894
Purchases of property, plant and
equipment ..................... (42,494,403) (19,838,187) (10,479,175)
Proceeds from the sale of prop-
erty, plant
and equipment.................. 1,405,324 3,538,352 119,908
Notes receivable from employees
............................... 197,285 (34,331) (5,922)
----------- ----------- ------------
Net cash used in investing ac-
tivities ...................... (34,189,671) (19,694,469) (11,666,295)
Financing activities
Proceeds from long-term debt ... 27,581,000 9,936,884 4,597,825
Principal payments on long-term
debt .......................... (2,155,210) (3,062,490) (4,705,085)
Proceeds from issuance of common
stock ......................... 88,230 90,158 19,940
Purchase of common stock........ -- (51,510) --
Distributions to shareholders... (8,190,000) -- --
----------- ----------- ------------
Net cash provided by (used in)
financing activities .......... 17,324,020 6,913,042 (87,320)
----------- ----------- ------------
Increase (decrease) in cash and
cash equivalents .............. 11,414,001 4,198,521 (582,681)
Cash and cash equivalents at be-
ginning of year ............... 5,392,004 1,193,483 1,776,164
----------- ----------- ------------
Cash and cash equivalents at end
of year ....................... $16,806,005 $ 5,392,004 $ 1,193,483
=========== =========== ============
Supplemental disclosures of cash
flow information
Cash paid for interest ......... $ 1,769,302 $ 3,469,236 $ 2,870,646
=========== =========== ============
Cash paid for income taxes ..... $ 2,337,000 $ 3,150,000 $ 800,000
=========== =========== ============
</TABLE>
See accompanying notes.
F-59
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows
September 29, 1999
1. Accounting Policies
Description of Business
Gulf Coast Services, Inc. (the Company) was formed in December 1984. The
Company has two wholly-owned subsidiaries, Gulf Telephone Company (GTC) and
Gulf Long Distance, Inc. (GLD). GTC provides communication services to
businesses and residences in southeast Alabama. GLD was formed on July 18, 1990
and serves as a reseller of toll telephone services.
GTC is subject to regulation by the Federal Communications Commission
("FCC") and the Alabama Public Service Commission ("PSC"). Pending and future
regulatory actions may have a significant impact on the Company's future
operations and financial condition.
Effective September 29, 1999, all of the outstanding Common Stock of the
Company was acquired by Gulf Merger Corporation ("GMC"), a wholly-owned
subsidiary of Madison River Capital, LLC ("Madison River") for cash
consideration of $312 million.
Principles of Consolidation
The Consolidated Statements of Operations and Cash Flows include the
accounts of the Company and its wholly-owned subsidiaries on the accrual basis.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Accounting
GTC maintains accounts for its regulated activities in accordance with the
Uniform System of Accounts prescribed for telephone companies by the FCC. The
Consolidated Statements of Operations of the Company are prepared in accordance
with the provisions of Statement of Financial Accounting Standards No. 71,
Accounting for the Effect of Certain Types of Regulation.
Depreciation and Fixed Asset Retirements
Depreciation of the original cost of depreciable telecommunications plant in
service is provided using composite straight-line rates approximating 8% during
the period from January 1, 1999 to September 29, 1999 and the years ended
December 31, 1998 and 1997. When property subject to depreciation is retired or
otherwise disposed of in the normal course of business, its cost, together with
cost of removal less salvage, is charged to the allowance for depreciation.
Costs for repairs and maintenance are expensed as incurred.
Depreciation expense includes amortization of assets recorded under a
capital lease.
Telecommunication Services Revenues
Revenues are recognized when services are provided. Intrastate network
access service revenues are based upon a tariff filed with the PSC. The Company
participates in a revenue pool with other telephone companies for interstate
revenue. Such pools are funded by toll revenue and by access charges in the
interstate market. Revenues earned through the pooling process are initially
recorded based on estimates. The Company recorded adjustments to its estimates,
based on settlements of prior years' revenues, which increased revenues by
approximately $525,000, $683,000 and $959,000, respectively, during the period
from January 1, 1999 to September 29, 1999 and the years ended December 31,
1998 and 1997.
F-60
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
Network Construction Services Revenues
The Company provides network construction services and installs fiber optic
communications services for inter-exchange carriers and other communications
entities as well as for its own use. These revenues were recorded as
nonregulated revenue in the accompanying Consolidated Statement of Operations.
The Company accounts for long-term construction contracts relating to the
development of telecommunications networks using the percentage of completion
method. Under this method, costs and revenues generally are recognized as the
contract progresses toward completion.
The Company recorded an asset of approximately $2,170,000 for costs incurred
in excess of billings relating to network construction at December 31, 1998.
The Company billed and collected all costs and estimated earnings during 1999.
There are no costs in excess of billings related to the construction contracts
as of September 29, 1999 since all projects were substantially complete at that
time.
Gain on Disposals of Assets
During 1998 and 1999, the Company entered into various agreements to provide
indefeasible rights of use of multiple fibers along its network in exchange for
either cash or an indefeasible right of use to the other parties' fibers. The
Company evaluated each transaction separately and accounted for transactions
that represented the exchange of fiber with third parties as non-monetary
exchanges of similar productive assets with no gain recognized. The Company
recognized a gain or loss for cash transactions for the difference between the
cash received and the carrying value of the asset.
Concentrations of Credit Risk and Major Customers
The Company derives the majority of its operating revenues from customers in
southern Alabama. Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of accounts receivable.
The Company's allowance for doubtful accounts is based upon management's
estimates and historical experience. In situations where the Company deems
appropriate, prepayment and/or cash deposits are required for the provision of
services.
Substantially all of the Company's revenues were from communications and
related services. Approximately $4,041,000, $5,000,000, and $7,500,000,
respectively, of the Company's operating revenue for the period from January 1,
1999 to September 29, 1999 and years ended December 31, 1998 and 1997 were
derived from services provided to customers of AT&T. The revenues were received
primarily from access charges, but also included revenues for operator, billing
and collection, and other interexchange services.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes", which requires an asset and liability approach to accounting for income
taxes. Under the provisions of SFAS 109, the Company adjusts existing deferred
income tax amounts annually, using current tax rates, for the estimated future
tax effects attributable to temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
The Company accounts for investment tax credits on the deferred method.
Investment tax credits realized are deferred and amortized to operating income
ratably over the lives of the respective assets qualifying for the credit.
F-61
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from those estimates.
Allowance for Funds Used During Construction
Regulatory commissions allow the Company to capitalize an allowance for
funds used during construction, which includes both interest and return on
equity components. Such amounts are reflected as a cost of constructing certain
plant assets. The allowance for funds capitalized was approximately $669,000,
$134,000 and $247,000 during the period from January 1, 1999 to September 29,
1999 and the years ended 1998 and 1997, respectively.
Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform with the
1999 financial statement presentation. These reclassifications had no effect on
net income or loss or shareholders' equity as previously reported.
Advertising Expenses
The Company accounts for advertising costs in accordance with the Statement
of Position No. 93-7, Reporting on Advertising Costs. Advertising costs are
expensed as incurred. Advertising expenses amounted to approximately $384,000,
$316,000 and $248,000, respectively, for the period from January 1, 1999 to
September 29, 1999 and the years ended December 31, 1998 and 1997.
Comprehensive Income
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130 "Reporting Comprehensive Income." The Statement requires the
Company to provide disclosure of amounts related to comprehensive income as
prescribed by the Statement. The Company has disclosed comprehensive income on
its consolidated Statement of Operations for each period presented.
The FASB also issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information." This statement requires that the Company
disclose certain information about its major business lines as well as certain
geographic information.
2. Share of Losses of Equity Investee
The Company had a 50% equity investment in DigiPH Holding, Inc. ("DigiPH").
DigiPH was formed to acquire personal communications services ("PCS") licenses
in the FCC C block auctions. DigiPH bid for and, in May 1996, won FCC licenses
to provide PCS services in areas extending along the Gulf of Mexico westward
from Destin, Florida through Fort Walton Beach and Pensacola, Florida; Mobile,
Alabama; Biloxi, Gulfport, and Pascagoula, Mississippi; and north through the
Hattiesburg, Laurel, Meridian and Columbus/Starkville, Mississippi metropolitan
areas. DigiPH's successful bids totaled $74.7 million, net of bidding credits,
and was financed by 10-year government notes at 7% interest. DigiPH began
offering partial PCS service in the fourth quarter of 1997 and began offering
full service in all areas during 1998.
F-62
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
During 1998, the Company reduced the carrying value of its investment in
DigiPH to $0 as its share of DigiPH's losses exceeded its investment and
recognized a liability for its future funding obligation to DigiPH since its
share of DigiPH's losses exceeded the carrying amount of the investment. In
September 1999, the Company sold its investment interest in DigiPH and
recognized a $10.5 million gain on the sale.
3. Employee Stock Ownership Plan
The Company sponsors an employee stock ownership plan ("ESOP") which
complies with provisions of the Internal Revenue Code and the Employee
Retirement Income Security Act ("ERISA"). All employees of the Company may
participate after completing a year of service and attaining the age of
nineteen. Vesting begins after three years of service and benefits are fully
vested after an employee has completed seven years of service.
The Company has agreed to voluntarily contribute (in cash or Company common
stock) 2.3% of the participants' basic annual compensation to the plan. The
Company has the right under the plan to discontinue such contributions at any
time and terminate the plan. The Company can make additional contributions at
the discretion of the Board of Directors.
The Trustees, except when subject to the Company or Advisory Committee
direction, have full discretion and authority with regard to the investment of
the trust fund and may invest in securities of the Company.
Cash contributions of approximately $328,000, $2,588,000 and $2,458,000 were
recorded for nine-month period ended September 29, 1999 and the years ended
1998 and 1997, respectively, which were in excess of the minimum amount
required by the plan. The Company expensed these amounts when contributed.
The ESOP purchased 15,151 shares of Company stock for $3,000,000, $2,000,000
of which was financed through a bank note. This note payable is to be repaid in
annual installments with final maturity on March 1, 2002 and is guaranteed
unconditionally by the Company. Inasmuch as the Company has guaranteed the
unpaid balance of the borrowing, it is recorded as debt of the Company with a
corresponding reduction of stockholders' equity.
The ESOP shares initially were pledged as collateral for the ESOP debt. As
the debt is repaid, shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The debt
of the ESOP was recorded as debt and the shares pledged as collateral were
reported as unallocated stock of ESOP on the balance sheet. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the current market price of the shares. ESOP compensation
expense was approximately $12,391,947, $730,029 and $776,535 for the period
from January 1, 1999 to September 29, 1999 and the years ended December 31,
1998 and 1997, respectively. A summary of the ESOP shares at the end of each
period is presented below:
<TABLE>
<CAPTION>
December 31,
September 29, ---------------------
1999 1998 1997
------------- ---------- ----------
<S> <C> <C> <C>
Allocated shares of common stock.......... 34,167 32,736 31,265
Shares of common stock released........... 4,873 1,431 1,471
Unreleased shares of common stock......... -- 4,873 6,304
------- ---------- ----------
Total ESOP shares ...................... 39,040 39,040 39,040
======= ========== ==========
Fair value of unreleased shares........... $ -- $2,485,000 $2,704,000
======= ========== ==========
</TABLE>
F-63
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
Furthermore, the ESOP is obligated to repurchase vested shares from
employees upon retirement. At September 29, 1999, the fair value of the
released and allocated shares subject to a repurchase obligation is
$109,312,000 and the outstanding debt on the ESOP is $857,000. Fair market
value of the unreleased shares and projected repurchase obligation is based on
an independent valuation of the GCS common stock comprising a minority interest
of the outstanding common stock. This value may not necessarily reflect the
value a third party would pay to acquire a controlling equity interest in the
Company. In November 1999, a partial distribution was made to ESOP participants
as the Company is in the process of terminating the Plan.
4. Employee Benefit Plan
In 1996, the Company established a defined contribution 401(k) plan covering
employees who have completed at least 1000 hours of service during the first 12
consecutive months of employment or during any plan year thereafter, and are
age 19 or older.
The Company may elect to match a portion of the participant's elective
deferral. The Company made contributions of $224,208, $306,818 and $293,831
during the period from January 1, 1999 to September 29, 1999 and the years
ended 1998 and 1997, respectively.
5. Income Taxes
Differences between total income tax expense for the periods and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:
<TABLE>
<CAPTION>
Period from
January 1, Year ended December
1999 to 31,
September 29, ----------------------
1999 1998 1997
------------- ---------- ----------
<S> <C> <C> <C>
Income tax (benefit) at statutory rate
on pre-tax income (loss).............. $ 1,750,179 $2,854,923 $ (925,592)
Amortization of deferred investment tax
credits .............................. (117,000) (156,000) (156,000)
Effect of state income tax deduction .. (101,176) (142,746) (82,819)
Nondeductible expenses, primarily ESOP
compensation expense ................. 4,200,177 316,084 --
Change in valuation allowance related
primarily to ownership of equity
investee.............................. (2,815,832) 2,238,318 2,133,602
Other ................................. -- 353,645 (304,831)
----------- ---------- ----------
Total federal income tax .............. 2,916,348 5,464,224 664,360
State income tax ...................... 298,203 419,842 243,584
----------- ---------- ----------
$ 3,214,551 $5,884,066 $ 907,944
=========== ========== ==========
</TABLE>
F-64
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
The components of federal and state income tax provisions are as follows:
<TABLE>
<CAPTION>
Period from
January 1, Year ended December
1999 to 31,
September 29, ---------------------
1999 1998 1997
------------- ---------- ---------
<S> <C> <C> <C>
Federal:
Current ............................. $3,048,498 $4,386,409 $ 196,215
Deferred ............................ (15,150) 952,379 728,781
Investment tax credits............... (117,000) (156,000) (156,000)
---------- ---------- ---------
2,916,348 5,182,788 768,996
State:
Current ............................. 299,751 584,060 243,584
Deferred ............................ (1,548) 117,217 (104,636)
---------- ---------- ---------
Total ............................... $3,214,551 $5,884,065 $ 907,944
========== ========== =========
</TABLE>
6. Postretirement Benefits Other than Pensions
The Company provides medical coverage to retirees and their dependents
through a traditional indemnity plan administered by a third party. The plan
provisions are the same as those for active participants. Eligibility to
participate in the retiree medical plan upon retirement is defined as age 55
with 25 years of service. A plan amendment adopted in 1995 lowered the age
requirement from 65 in 1994 to 55 in 1995.
The Company requires retirees to contribute 10% of medical, dental and eye
care premium rates. Additional costs of the plan are paid by the Company.
Additionally, the Company's retirees also receive free local phone service and
a $100 long distance credit per month. Costs related to providing free
telephone service are expensed as incurred. The Company does not anticipate any
changes in the cost-sharing provisions of the existing written plan and there
is no commitment to increase monetary benefits. The plan is unfunded.
The Company has adopted Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
which standardizes disclosure requirements for pensions and other
postretirement benefits, eliminates certain disclosures and requires certain
additional information to be disclosed.
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Period from
January 1,
1999 to Year ended December 31,
September 29, -----------------------
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Net periodic postretirement benefit
cost............................... $731,000 $ 1,192,698 $ 1,106,300
Employer contributions ............. 328,200 116,900 92,300
Plan participant contributions ..... -- 10,800 2,100
Benefits paid ...................... 149,800 127,700 94,400
</TABLE>
F-65
<PAGE>
Gulf Coast Services, Inc.
Notes to Consolidated Statements of Operations and Cash Flows (continued)
7. Commitments and Contingencies
On October 5, 1999, nine former employees of the Company, who had elected to
retire and receive cash distributions for their interests in the ESOP in 1996
and 1997 filed a class action lawsuit in Alabama state court alleging breach of
fiduciary duty, suppression, and misrepresentation against the Company and its
subsidiaries. The complaint alleged that the Company failed to disclose to
plaintiffs' ongoing negotiations for the sale of the Company and that the true
value of their ESOP interests were higher than the amounts offered to them in
connection with their early retirement. Plaintiffs have filed an amended
complaint on November 18, 1999 and sought class certification, the
establishment of a constructive trust to distribute proceeds from the sale of
the Company to the plaintiffs, and a preliminary injunction seeking to stop the
Company from making further distributions from the ESOP. The plaintiffs are
also seeking unspecified compensatory and punitive damages, and attorneys fees
as a result of defendants' alleged breach of fiduciary duty, self dealing,
misrepresentation, and fraudulent inducement to retire and forego the benefits
of continued employment in connection with the plaintiffs' retirement elections
and ESOP distributions. On December 6, 1999, the Company, moved to dismiss
plaintiffs' amended complaint on the ground that it failed to state any claim
upon which relief could be granted. Defendants' motion is currently pending
with the Court.
The Company believes the plaintiffs' allegations are without merit and
intends to defend against them vigorously. Additionally, the Company believes
it will be entitled to indemnification from its former shareholders for any
potential liability resulting from this lawsuit. Consequently, the Company does
not believe that the resolution of their litigation will have a material
adverse effect in its financial condition.
8. Accumulated Other Comprehensive Income
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Available-for-Sale
Securities
------------------
<S> <C>
Balance at January 1, 1997................................. $ --
Unrealized loss on available-for-sale securities......... (402,573)
---------
Balance at December 31, 1997............................... (402,573)
Unrealized loss on available-for-sale securities......... (292,708)
---------
Balance at January 1, 1998................................. (695,281)
Unrealized gain on available-for-sale securities......... 271,607
---------
Balance at September 29, 1999.............................. $(423,674)
=========
</TABLE>
9. Related Party Transactions
At September 29, 1999, the Company had amounts due to Madison River totaling
$1,094,515. These were costs paid by Madison River in connection with the
acquisition (see Note 1).
10. Year 2000 (Unaudited)
The Company completed all Year 2000 readiness work prior to December 31,
1999. The Company incurred approximately $7,500,000 in preparation costs for
Year 2000 issue and does not expect to incur any additional material
expenditures in the future.
F-66
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by Madison River. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates or any offer to sell
or the solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of Madison River
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
Until [ . ], 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to the unsold
allotments or subscriptions.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information...................................... i
Summary.................................................................. 1
Risk Factors............................................................. 11
Forward-Looking Statements............................................... 24
Market and Industry Data................................................. 24
Use of Proceeds.......................................................... 24
Capitalization........................................................... 25
Selected Financial and Operating Data.................................... 26
Unaudited Pro Forma Consolidated Financial Information................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Business................................................................. 46
Regulation............................................................... 56
Management............................................................... 61
Principal Members........................................................ 67
Description of Other Indebtedness........................................ 68
The Exchange Offer....................................................... 73
Description of the Notes................................................. 81
Important United States Federal Tax Considerations....................... 120
Plan of Distribution..................................................... 122
Legal Matters............................................................ 124
Experts.................................................................. 124
Index to Consolidated Financial Statements............................... F-1
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OFFER TO EXCHANGE
ALL OUTSTANDING
SERIES A
13 1/4% SENIOR NOTES
DUE 2010
FOR
SERIES B
13 1/4% SENIOR NOTES
DUE 2010
---------------
[Madison River Communications Logo]
---------------
Madison River Capital, LLC
Madison River Finance Corp.
---------------
PROSPECTUS
---------------
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these notes until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these notes, and it is not soliciting an offer to buy these +
+notes in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE FRONT COVER PAGE FOR MARKET-MAKING PROSPECTUS]
Subject to Completion, dated June 23, 2000.
PROSPECTUS
[LOGO]
Madison River Capital, LLC
Madison River Finance Corp.
-----------
Terms of the 13 1/4% Series B Senior Notes Due 2010
Interest Ranking
The notes bear interest The notes are unsecured,
at a fixed annual rate of senior obligations of
13 1/4%. Interest will be Madison River and rank
paid on each March 1 and junior to all of our
September 1 commencing secured debt.
September 1, 2000.
Optional Redemption
Maturity
At any time on or after March 1, 2005, we may
redeem some or all of the notes at the prices
specified herein.
The notes will mature on March 1, 2010.
Mandatory Offer to Repurchase
In addition, on or prior to March 1, 2003, we may
If we undergo a specific redeem up to 35% of the notes at the prices
kind of change of specified herein, but only with the net cash
control, we must offer to proceeds from certain equity offerings.
repurchase the notes at
the prices specified
herein.
-----------
Investing in the notes involves a high degree of risk. See "Risk Factors"
beginning on page [ . ] for a discussion of certain factors that you should
consider in connection with an investment in the notes.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
This prospectus has been prepared for and will be used by Goldman, Sachs &
Co. in connection with offers and sales of the notes in market-making
transactions. These transactions may occur in the open market or may be
privately negotiated, at prices related to prevailing market prices at the time
of sale or at negotiated prices. Goldman, Sachs & Co. may act as principal or
agent in these transactions. Madison River will not receive any of the proceeds
of such sales of the notes but will bear the expenses of registration.
Goldman, Sachs & Co.
-----------
, 2000.
A-1
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
You may find it difficult to sell your exchange notes.
There is no existing trading market for the exchange notes, and we cannot
assure you about the future development of a market for the exchange notes or
the ability of the holders of the exchange notes to sell their exchange notes
or the price at which such holders may be able to sell their exchange notes. If
such a market were to develop, the exchange notes could trade at prices that
may be higher or lower than their initial offering price depending on many
factors, including, among other things, prevailing interest rates, our
operating results and the market for similar securities. Historically, the
market for securities similar to the exchange notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. We cannot assure you that, if a
market develops, it will not be subject to similar disruptions. Although it is
not obligated to do so, Goldman, Sachs & Co. intends to make a market in the
exchange notes. Any such market-making activity may be discontinued at any
time, for any reason, without notice at the sole discretion of Goldman, Sachs &
Co. No assurance can be given as to the liquidity of or the trading market for
the exchange notes.
Goldman, Sachs & Co. may be deemed to be an affiliate of ours and, as such,
may be required to deliver a prospectus in connection with its market-making
activities in the exchange notes. Pursuant to the registration rights
agreement, we have agreed to file and maintain a registration statement that
would allow Goldman, Sachs & Co. to engage in market-making transactions in the
exchange notes. Subject to certain exceptions, the registration statement will
remain effective for as long as Goldman, Sachs & Co. may be required to deliver
a prospectus in connection with market-making transactions in the exchange
notes. We have agreed to bear all the costs and expenses related to such
registration statement.
A-2
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the exchange
notes by Goldman, Sachs & Co. in market-making transactions. We will not
receive any of the proceeds from such transactions.
A-3
<PAGE>
[ALTERNATE PAGE FOR MARKET-MAKING PROSPECTUS]
PLAN OF DISTRIBUTION
This prospectus is to be used by Goldman, Sachs & Co. in connection with
offers and sales of the exchange notes in market-making transactions effected
from time to time. Goldman, Sachs & Co. may act as a principal or agent in such
transactions, including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form
of discounts and commissions, including from both counterparties when it acts
as agent for both. Such sales will be made at prevailing market prices at the
time of sale, at prices related thereto or at negotiated prices.
Certain affiliates of Goldman, Sachs & Co. purchased Class A Units of our
sole parent Madison River Telephone Company, which in the aggregate constitute
33.3% of the equity ownership of Madison River Telephone. Goldman, Sachs & Co.
has informed Madison River that it does not intend to confirm sales of the
exchange notes to any accounts over which it exercises discretionary authority
without the prior specific written approval of such transactions by the
customer.
We have been advised by Goldman, Sachs & Co. that, subject to applicable
laws and regulations, Goldman, Sachs & Co. currently intends to make a market
in the exchange notes following completion of the Exchange Offer. However,
Goldman, Sachs & Co. is not obligated to do so and any such market-making may
be interrupted or discontinued at any time without notice. In addition, such
market-making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act. There can be no assurance that an active trading
market will develop or be sustained. See "Risk Factors--Trading Market for the
Exchange Notes."
Goldman, Sachs & Co. and their respective affiliates may in the future
engage in commercial and/or investment banking transactions with Madison River
and its affiliates. Goldman, Sachs & Co. acted as an initial purchaser in
connection with the initial sale of the outstanding notes and received a
customary underwriting discount in connection with that transaction.
Goldman, Sachs & Co. and Madison River have entered into a registration
rights agreement with respect to the use by Goldman, Sachs & Co. of this
prospectus. Pursuant to such agreement, we agreed to bear all registration
expenses incurred under such agreement and to indemnify Goldman, Sachs & Co.
against certain liabilities, including liabilities under the Securities Act.
A-4
<PAGE>
[ALTERNATE BACK COVER PAGE FOR MARKET-MAKER PROSPECTUS]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by Madison River. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates or any offer to sell
or the solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of Madison River
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
Until [ . ], 2000, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to the unsold
allotments or subscriptions.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Where You Can Find More Information...................................... i
Summary..................................................................
Risk Factors.............................................................
Forward-Looking Statements...............................................
Market and Industry Data.................................................
Use of Proceeds..........................................................
Capitalization...........................................................
Selected Financial and Operating Data....................................
Unaudited Pro Forma Consolidated Financial Information...................
Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................
Business.................................................................
Regulation...............................................................
Management...............................................................
Principal Members........................................................
Description of Other Indebtedness........................................
Description of the Notes.................................................
Plan of Distribution.....................................................
Legal Matters............................................................
Experts..................................................................
Index to Consolidated Financial Statements............................... F-1
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TERMS OF
THE SERIES B
13 1/4% SENIOR NOTES
DUE 2010
---------------
[Madison River Communications Logo]
---------------
Madison River Capital, LLC
Madison River Finance Corp.
---------------
PROSPECTUS
---------------
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Madison River Capital, LLC's Limited Liability Company Agreement provides
that the company will indemnify its sole member, or any person that is or was
serving as an officer, director, principal, member, employee or agent of the
member or the company, and will have the power to indemnify its other agents,
to the fullest extent permitted by the Limited Liability Company Act of the
State of Delaware (the "LLCA"), as amended from time to time (but, in the case
of any such amendment, only to the extent that such amendment permits the
company to provide broader indemnification rights than such law permitted the
company to provide immediately prior to such amendment). As of the date of the
registration statement, Section 18-108 of the LLCA provides as follows:
"Subject to such standards and restrictions, if any, as are set forth in
its limited liability company agreement, a limited liability company may,
and shall have the power to, indemnify and hold harmless any member or
manager or other person from and against any and all claims and demands
whatsoever."
Madison River Finance Corp.'s Certificate of Incorporation and By-Laws
provide that the corporation will indemnify its officers and directors, and
will have the power to indemnify its other agents, to the full extent permitted
by law. As of the date of this registration statement, Section 145 of the
General Corporation Law of the State of Delaware (the "GCL") provides as
follows:
"(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
the person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in
a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon
II-1
<PAGE>
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon determination that indemnification of
the present or former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct
set forth in subsections (a) and (b) of this section. Such determination
shall be made, with respect to a person who is a director or officer at the
time of such determination, (1) by a majority vote of the directors who are
not parties to such action, suit or proceeding, even though less than a
quorum, or (2) by a committee of such directors designated by majority vote
of such directors, even though less than a quorum, or (3) if there are no
such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys' fees) incurred by former
directors and officers or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not
the corporation would have the power to indemnify such person against such
liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its
separate existence had continued.
II-2
<PAGE>
(i) For purposes of this section, references to "other enterprises' shall
include employee benefit plans; references to "fines' shall include any
excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation' shall
include any services as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner not opposed to the best interests of the
corporation' as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees)."
Section 102(b)(7) of the GCL, permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(1) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
pursuant to Section 174 of the General Corporation Law of the State of Delaware
(the "GCL") (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions), or (4) for any
transaction from which the director derived an improper personal benefit.
Madison River Capital, LLC maintains directors' and officers' liability
insurance.
Item 21. Exhibits and Financial Statement Schedules
(a) Reference is made to the Exhibit Index which immediately precedes the
exhibits filed with this Registration Statement, which is incorporated herein
by reference.
(b) Not Applicable.
(c) Not Applicable.
Item 22. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrants pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrants hereby undertake to supply by means of a
posteffective amendment all information concerning a transaction, and the
company being acquired involved therein that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change in such information in the registration
statement; provided, however, that the registrant need not file a post-
effective amendment to include the information required to be included
by subsection (i) or (ii) if such information is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Mebane, State of North Carolina, on June 23, 2000.
Madison River Capital, LLC
/s/ J. Stephen Vanderwoude
By: _________________________________
J. Stephen Vanderwoude
Managing Director, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No.1 to the Registration Statement has been signed by the following persons in
the capacities indicated, on June 23, 2000.
<TABLE>
<S> <C>
/s/ J. Stephen Vanderwoude
___________________________________________
J. Stephen Vanderwoude
Managing Director, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Paul H. Sunu
___________________________________________
Paul H. Sunu
Managing Director, Chief Financial Officer
and Secretary
(Principal Financial Officer)
/s/ John T. Hogshire
___________________________________________
John T. Hogshire
Vice President and Controller
(Principal Accounting Officer)
*
___________________________________________
Joseph P. DiSabato
Manager
*
___________________________________________
Albert J. Dobron, Jr.
Manager
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
*
___________________________________________
James H. Kirby
Manager
*
___________________________________________
Sanjeev K. Mehra
Manager
*
___________________________________________
James D. Ogg
Managing Director
*
___________________________________________
Mark A. Pelson
Manager
*
___________________________________________
James N. Perry, Jr.
Manager
</TABLE>
/s/ Paul H. Sunu
*By: ___________________________
Paul H. Sunu
Attorney-in-fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Mebane, State of North Carolina, on June 23, 2000.
Madison River Finance Corp.
/s/ J. Stephen Vanderwoude
By: _________________________________
J. Stephen Vanderwoude Director,
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated, on June 23, 2000.
<TABLE>
<S> <C>
/s/ J. Stephen Vanderwoude
___________________________________________
J. Stephen Vanderwoude
Director, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Paul H. Sunu
___________________________________________
Paul H. Sunu
Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ John T. Hogshire
___________________________________________
John T. Hogshire
Vice President and Controller
(Principal Accounting Officer)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description of Exhibit
-------- ----------------------
<C> <S> <C>
3.1* Certificate of Formation of Madison River Capital, LLC
3.2* Limited Liability Company Agreement of Madison River Capital,
LLC
3.3* Certificate of Incorporation of Madison River Finance Corp.
3.4* By-Laws of Madison River Finance Corp.
4.1* Form of the Outstanding Notes
4.2* Form of the Exchange Notes
4.3* Purchase Agreement, dated as of February, 17, 2000, between
Madison River Capital, LLC, Madison River Finance Corp. and
Goldman, Sachs & Co., Bear, Stearns & Co., Inc., Chase
Securities Inc. and Morgan Stanley & Co. Incorporated
4.4* Indenture, dated as of February 17, 2000, between Madison
River Capital, LLC, Madison River Finance Corp. and Norwest
Bank Minnesota, National Association
4.5* Exchange and Registration Rights Agreement, dated as of
February 17, 2000, between Madison River Capital, LLC, Madison
River Finance Corp. and Goldman, Sachs & Co., Bear, Stearns &
Co. Inc., Chase Securities Inc. and Morgan Stanley & Co.
Incorporated
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
10.1* Contribution and Stock Purchase Agreement, dated November 23,
1999, by and among, Madison River Telephone Company, LLC,
Coastal Communications, LLC, Coastal Utilities, Inc., Daniel
M. Bryant, G. Allan Bryant and The Michael E. Bryant Life
Trust
10.1.1* First Amendment to Contribution and Stock Purchase Agreement,
dated March 20, 2000, by and among, Madison River Telephone
Company, LLC, Coastal Communications, LLC, Coastal Utilities,
Inc., Daniel M. Bryant, G. Allan Bryant and The Michael E.
Bryant Life Trust
10.1.2* Second Amendment to Contribution and Stock Purchase Agreement,
dated March 29, 2000, by and among, Madison River Telephone
Company, LLC, Coastal Communications, LLC, Coastal Utilities,
Inc., Daniel M. Bryant, G. Allan Bryant and The Michael E.
Bryant Life Trust
10.1.3* Shareholders Agreement, dated March 30, 2000, by and among
Coastal Communications, Inc. and Daniel M. Bryant, G. Allan
Bryant, The Michael E. Bryant Life Trust and Madison River
Capital, LLC
10.2* Agreement and Plan of Merger, dated May 9, 1999, by and
between Madison River Telephone Company, LLC and Gulf Coast
Services, Inc.
10.2.1* First Amendment to Agreement and Plan of Merger, dated July 2,
1999, by and between Madison River Telephone Company, LLC and
Gulf Coast Services, Inc.
10.2.2* Second Amendment to Agreement and Plan of Merger, dated August
24, 1999, by and between Madison River Telephone Company, LLC
and Gulf Coast Services, Inc.
10.2.3* Third Amendment to Agreement and Plan of Merger, dated
September 28, 1999, by and between Madison River Telephone
Company, LLC and Gulf Coast Services, Inc.
10.3* Asset Purchase Agreement, dated April 21, 1998, among Madison
River Telephone Company, LLC, Gallatin River Communications
L.L.C., Central Telephone Company of Illinois and Centel
Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description of Exhibit
-------- ----------------------
<C> <S> <C>
10.3.1* Amendment No. 1 to Asset Purchase Agreement, dated September
22, 1998, by and between Gallatin River Communications, LLC,
Madison River Telephone Company, LLC, Central Telephone
Company of Illinois and Centel Corporation
10.3.2* Amendment No. 2 to Asset Purchase Agreement, dated October 29,
1998, by and between Gallatin River Communications, LLC,
Madison River Telephone Company, LLC, Central Telephone
Company of Illinois and Centel Corporation
10.4* Stock Purchase Agreement, dated September 12, 1997, by and
among Madison River Telephone Company, LLC and Mebcom
Communications, Inc. and its stockholders
10.5* Employment Agreement, dated April 17, 1996, between Madison
River Telephone Company, LLC and J. Stephen Vanderwoude
10.5.1* First Amendment to Employment Agreement, dated October 8,
1996, between Madison River Telephone Company, LLC and J.
Stephen Vanderwoude
10.5.2* Second Amendment to Employment Agreement, dated January 24,
1997, between Madison River Telephone Company, LLC and J.
Stephen Vanderwoude
10.5.3* Third Amendment to Employment Agreement, dated October 16,
1997, between Madison River Telephone Company, LLC and J.
Stephen Vanderwoude
10.5.4* Fourth Amendment to Employment Agreement, dated September 15,
1999, between Madison River Telephone Company, LLC and J.
Stephen Vanderwoude
10.6* Employment Agreement, dated April 17, 1996, between Madison
River Telephone Company, LLC and James D. Ogg
10.6.1* First Amendment to Employment Agreement, dated October 8,
1996, between Madison River Telephone Company, LLC and James
D. Ogg
10.6.2* Second Amendment to Employment Agreement, dated January 24,
1997, between Madison River Telephone Company, LLC and James
D. Ogg
10.6.3* Third Amendment to Employment Agreement, dated October 16,
1997, between Madison River Telephone Company, LLC and James
D. Ogg
10.6.4* Fourth Amendment to Employment Agreement, dated September 15,
1999, between Madison River Telephone Company, LLC and James
D. Ogg
10.7* Employment Agreement, dated August 1, 1996, between Madison
River Telephone Company, LLC and Donald K. Roberton
10.7.1* First Amendment to Employment Agreement, dated January 24,
1997, between Madison River Telephone Company, LLC and Donald
K. Roberton
10.7.2* Second Amendment to Employment Agreement, dated October 16,
1997, between Madison River Telephone Company, LLC and Donald
K. Roberton
10.7.3* Third Amendment to Employment Agreement, dated September 15,
1999, between Madison River Telephone Company, LLC and Donald
K. Roberton
10.8* Employment Agreement, dated June 4, 1996, between Madison
River Telephone Company, LLC and Paul H. Sunu
10.8.1* First Amendment to Employment Agreement, dated October 8,
1996, between Madison River Telephone Company, LLC and Paul H.
Sunu
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description of Exhibit
-------- ----------------------
<C> <S> <C>
10.8.2* Second Amendment to Employment Agreement, dated January 24,
1997, between Madison River Telephone Company, LLC and Paul H.
Sunu
10.8.3* Third Amendment to Employment Agreement, dated October 16,
1997, between Madison River Telephone Company, LLC and Paul H.
Sunu
10.8.4* Fourth Amendment to Employment Agreement, dated September 15,
1999, between Madison River Telephone Company, LLC and Paul H.
Sunu
10.9* Employment Agreement, dated September 28, 1999, between
Madison River Telephone Company, LLC and Bruce J. Becker
10.10* Terms of the Madison River Telephone Company, LLC Long Term
Incentive Plan effective November 1, 1998
10.11* Loan Agreement and Promissory Notes, dated as of September 29,
1999, between Gulf Telephone Company and the Rural Telephone
Finance Cooperative (the "RTFC")
10.12* Secured Revolving Line of Credit Agreement, dated as of
September 29, 1999, between Gulf Telephone Company and the
RTFC
10.13* Loan Agreement, dated as of January 16, 1998, between Mebtel,
Inc. and the RTFC
10.14* Secured Revolving Line of Credit Agreement, dated as of
January 16, 1998, between Mebtel, Inc. and the RTFC
10.15* Loan Agreement, dated as of October 30, 1998, between Gallatin
River Communications, LLC and the RTFC
10.16* Loan Agreement, dated as of October 30, 1998, between Madison
River Communications, Inc. and the RTFC
10.17* Secured Revolving Line of Credit Agreement, dated as of
October 30, 1998, between Gallatin River Communications, LLC
and the RTFC
10.18* Loan Agreement, dated as of March 29, 2000, between Coastal
Utilities, Inc. and the RTFC
10.19* Secured Revolving Line of Credit Agreement, dated as of March
29, 2000, between Coastal Utilities, Inc. and the RTFC
10.20* Unsecured Revolving Line of Credit Agreement, dated as of
March 29, 2000, between Coastal Utilities, Inc. and the RTFC
10.21 Interconnection Agreement, dated December 18, 1998, between
BellSouth Telecommunications Inc. and Mebtel Integrated
Communications Solutions, LLC
10.22 Interconnection, Resale and Unbundling Agreement, dated as of
October 13, 1999 between GTE North Incorporated, GTE South
Incorporated and Mebtel Integration Communication Solutions,
Inc.
10.23 Interconnection Agreement, dated as of August 31, 1999, by and
between Ameritech Information Industry Services and Mebtel
Integrated Communications Solutions, LLC
10.24 Interconnection, Resale and Unbundling Agreement, dated as of ,
September 27, 1999 between GTE South Incorporated and Mebtel
Integration Communication Solutions, Inc.
12.1 Statements re: Computation of Earnings to Fixed Charges
21.1* Subsidiaries of the Registrants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Description of Exhibit
-------- ----------------------
<C> <S> <C>
23.1 Consent of Ernst & Young LLP
23.2 Consent of Golden Associates
23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)
(contained in its opinion filed as Exhibit 5.1 hereto)
24.1* Power of Attorney (included in signature page hereto)
25.1* Statement of Eligibility and Qualification of Norwest Bank
Minnesota, National Association, on Form T-1 under the Trust
Indenture Act of 1939, as amended
27.1 Financial Data Schedule
99.1* Form of Letter of Transmittal
99.2* Form of Instruction to Registered Holder and/or Depository
Trust Company Participant to Beneficial Owner
99.3* Form of Notice of Guaranteed Delivery
</TABLE>
--------
*Previously filed.
