===============================================================================
Filed Pursuant to Rule 424(b)(3)
Registration Number 333-36804
PROSPECTUS SUPPLEMENT
(To Prospectus dated
June 27, 2000)
MADISON RIVER CAPITAL, LLC
MADISON RIVER FINANCE CORP.
--------------------------
13-1/4% Series B Senior Notes Due 2010
Attached hereto and incorporated by reference herein is our Quarterly
Report on Form 10-Q for the nine month period ended September 30, 2000. This
Prospectus Supplement is not complete without, and may not be delivered or
utilized except in connection with, the Prospectus, dated June 27, 2000, with
respect to the 13-1/4% Series B Senior Notes Due 2010, including any amendments
or supplements thereto.
--------------------------
Investing in the notes involves a high degree of risk. See "Risk Factors"
beginning on page 8 of the accompanying Prospectus 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.
--------------------------
December 15, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- --------------
----------------------------------
333-36804
Commission file number
Madison River Capital, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2156823
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
103 South Fifth Street
Mebane, North Carolina 27302
(Address of Principal Executive Offices, Including Zip Code)
(919) 563-1500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
================================================================================
<PAGE>
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
------
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2000 (Unaudited) and December
31, 1999............................................................................ 1
Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months
Ended September 30, 2000 and 1999................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended
September 30, 2000 and 1999......................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited).................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 9
Item 3. Quantitative and Qualitative Disclosure of Market Risks............................. 18
Part II - Other Information
Item 1. Legal Proceedings................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................................... 20
Signature............................................................................................ 20
</TABLE>
<PAGE>
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 53,134 $ 83,729
Accounts receivable, less allowance for uncollectible accounts of
$1,176 and $1,087 in 2000 and 1999, respectively 13,695 11,673
Accounts receivable, primarily from interexchange carriers 11,438 6,592
Income tax recoverable 393 54
Inventories 2,578 1,343
Other current assets 3,181 1,484
------------- -----------
Total current assets 84,419 104,875
------------- -----------
Telephone plant and equipment 409,325 306,883
Less accumulated depreciation and amortization (29,368) (13,561)
------------- -----------
Telephone plant and equipment, net 379,957 293,322
------------- -----------
Other assets:
Rural Telephone Bank stock, at cost 10,078 8,606
Rural Telephone Finance Cooperative stock, at cost 35,737 42,933
Goodwill, net of accumulated amortization of $21,753 and
$9,840 in 2000 and 1999, respectively 413,585 326,560
Deferred income taxes 1,902 5,131
Other assets 30,447 3,863
------------------ -----------------
Total other assets 491,749 387,093
------------------ -----------------
Total assets $ 956,125 $ 785,290
================== ==================
Liabilities and member's capital
Current liabilities:
Accounts payable and accrued expenses $ 44,104 $ 27,926
Advance billings and customer deposits 7,572 3,701
Other current liabilities 383 609
Current portion of long-term debt 15,021 9,467
------------------ -----------------
Total current liabilities 67,080 41,703
------------------ -----------------
Noncurrent liabilities:
Long-term debt 655,141 526,144
Deferred income taxes 43,676 41,557
Other liabilities 20,867 9,892
------------------ -----------------
Total noncurrent liabilities 719,684 577,593
------------------ -----------------
Total liabilities 786,764 619,296
Redeemable minority interest 45,500 -
Member's capital:
Member's interest 189,591 185,700
Accumulated deficit (60,278) (19,706)
Accumulated other comprehensive income (5,452) -
------------------ -----------------
Total member's capital 123,861 165,994
------------------ -----------------
Total liabilities and member's capital $ 956,125 $ 785,290
================== =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Operations
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
Local service $ 34,710 $ 13,719 $ 91,079 $43,477
Long distance service 4,439 36 10,276 36
Internet and enhanced data service 1,889 161 4,725 225
Transport service 23 - 23 -
Miscellaneous telecommunications service and equipment 4,558 2,268 13,208 6,533
Provision for uncollectible accounts (83) (258) (520) (1,141)
------------- --------- ---------- ---------
Total operating revenues 45,536 15,926 118,791 49,130
Operating expenses:
Cost of goods sold and direct costs 18,457 5,393 43,072 13,254
Depreciation and amortization 13,197 4,251 34,039 13,439
Selling, general and administrative expenses 14,784 7,151 40,279 19,335
------------- -------- -------- -------
Total operating expenses 46,438 16,795 117,390 46,028
------------- -------- -------- -------
Operating (loss) income (902) (869) 1,401 3,102
Interest expense (16,421) (3,890) (45,040) (11,469)
Other income, net 2,302 1,126 5,014 482
------------- --------- -------- ----------
Loss before income tax and minority interest (15,021) (3,633) (38,625) (7,885)
Income tax (expense) benefit (811) 62 (1,447) 879
------------- --------- --------- ---------
Loss before minority interest (15,832) (3,571) (40,072) (7,006)
Minority interest (250) - (500) -
------------- ---------- --------- ---------
Net loss $ (16,082) $ (3,571) $ (40,572) $(7,006)
============= ========== ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
MADISON RIVER CAPITAL, LLC
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities
Net cash provided by operating activities $ 1,189 $ 6,834
-------------- -----------
Investing activities
Purchases of telephone plant and equipment (58,218) (14,496)
Acquisition, net of cash acquired (116,963) (310,458)
Redemption (purchase) of Rural Telephone Finance Cooperative stock, net 7,300 (31,616)
Change in other assets (4,664) 5,039
-------------- ------------
Net cash used in investing activities (172,545) (351,531)
-------------- -----------
Financing activities
Capital contributions from member 3,892 127,100
Proceeds from long-term debt 318,336 316,167
Payments on long-term debt (183,854) (728)
Change in other long-term liabilities 2,387 741
-------------- -----------
Net cash provided by financing activities 140,761 443,280
-------------- -----------
Net (decrease) increase in cash and cash equivalents (30,595) 98,583
Cash and cash equivalents at beginning of year 83,729 6,354
-------------- -----------
Cash and cash equivalents at end of nine month period $ 53,134 $ 104,937
-------------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
MADISON RIVER CAPITAL, LLC AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
(Dollars in thousands, except share and operating data)
(Unaudited)
1. GENERAL
Madison River Capital, LLC, a wholly-owned subsidiary of Madison River Telephone
Company, LLC, and its subsidiaries are providers of integrated communications
services and solutions to business and residential customers that include voice,
high speed data, fiber transport and Internet access. Prior to the formation of
Madison River Capital in September 1999, operations were consolidated at the
Madison River Telephone Company 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. Madison River Telephone
Company 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 Telephone Company had
not engaged in any revenue producing activities and was a development stage
company. In January 1998, Madison River Telephone Company acquired Mebcom
Communications and its subsidiary, Mebtel, Inc., a local exchange company.
Madison River Capital and its subsidiaries are referred to herein as the
Company.
The Company focuses on markets in the Gulf Coast, Mid-Atlantic and Midwest
regions of the United States. The Company is organized into two operating
divisions, the Local Telecommunications Division ("LTD") and the Integrated
Communications Division ("ICD"). The LTD is responsible for the integration,
operation and development of the Company's established markets which consist of
four incumbent local exchange carriers ("ILECs") acquired since January 1998.
The ILECs are located in North Carolina, Illinois, Alabama and Georgia. The ICD
is responsible for developing and expanding the Company's target markets and
transport business as a competitive local exchange carrier ("CLEC"). The ICD
will build its base of customers around the Company's 2,847 sheath mile
fiber optic network and its current established operations.
The Company's success will be affected by the challenges, expenses and delays
encountered in connection with the formation of any new business and the
competitive environment in which the Company intends to operate. In addition,
the Company has incurred a significant amount of indebtedness that may limit its
operational flexibility or otherwise affect its financial health. The Company's
performance will further be affected by its ability to raise more capital for
expansion of its business when needed and on attractive terms, to develop its
established and targeted markets, to generate a sufficient volume of traffic on
its network, to implement expanded interconnection and collocation with the
facilities of ILECs, to manage rapidly evolving communications technology, to
implement efficient information, billing and other back office systems, and to
attract, retain and motivate qualified personnel. The Company is also subject to
significant regulation at the federal, state and local levels. Delays in
receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
the Company. Although management believes that the Company will be able to
successfully mitigate these risks, there is no assurance that the Company will
be able to do so or that the Company will ever operate profitably.
The development of the Company's CLEC business and the acquisition, installation
and expansion of its fiber optic network in new markets will require significant
expenditures, and a substantial portion of those expenditures will be made
before realization of any revenue. As a result, together with the associated
high initial service costs of providing service in new markets, the Company
expects to have negative cash flow and operating losses from its expansion
operations until it establishes an adequate revenue base which may take several
years. The Company cannot be certain that it will establish an adequate revenue
base in each of its target markets or in its target markets as a whole.
4
<PAGE>
MADISON RIVER CAPITAL, LLC AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements, Continued
(Dollars in thousands, except share and operating data)
(Unaudited)
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and are in the form prescribed by
the Securities and Exchange Commission in instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should be read
in conjunction with the audited financial statements of the Company as of and
for the year ended December 31, 1999. Such financial statements are included in
the Company's registration statement on Form S-4 (Registration No. 333-36804)
filed with the Securities and Exchange Commission on May 11, 2000. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine month and three month periods ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
3. ACQUISITIONS
On March 30, 2000, a subsidiary of the Company, Coastal Communications, Inc.
("Coastal"), acquired 100% of the outstanding stock of Coastal Utilities, Inc.
and its wholly owned subsidiary, Coastal Long Distance Services, Inc. Coastal
paid approximately $130,000 in cash and issued Series A non-voting common stock
and Series B non-voting common stock of Coastal 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. Purchase
accounting was used to account for the acquisition.
To finance the acquisition, Coastal entered into two secured facilities totaling
$118,689 and an unsecured revolving line of credit for $10,000 with the Rural
Telephone Finance Cooperative ("RTFC"). The secured facilities, which were
completely drawn down, are composed of a $108,689 fifteen year term facility and
a $10,000, interest only, five year revolving line of credit. The unsecured
$10,000 revolving line of credit remains available to the Company as defined in
the credit agreement. The term facility bears interest at the base rate of
RTFC's stated variable rate plus 50 basis points. The lines of credit bear
interest at the RTFC base rate for a standard line of credit plus 50 basis
points for the secured line of credit and 100 basis points for the unsecured
line of credit. In April 2000, Coastal converted the $108,689 facility to a
fixed rate of 8.5% per annum through April 2005. The Company provided the
remaining required capital for the acquisition from its available cash.
4. TELEPHONE PLANT AND EQUIPMENT
Telephone plant and equipment at September 30, 2000 and December 31, 1999
consisted of the following:
September 30, December 31,
2000 1999
------------- -------------
Land, buildings and general equipment $ 50,249 $ 48,575
Central office equipment 81,963 48,345
Poles, wires, cables and conduit 200,976 80,409
Leasehold improvements 2,329 1,372
Software 7,328 6,829
Construction-in-process 66,480 121,353
------------ ------------
$ 409,325 $ 306,883
========== ==========
5
<PAGE>
MADISON RIVER CAPITAL, LLC AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements, Continued
(Dollars in thousands, except share and operating data)
(Unaudited)
5. LONG-TERM DEBT AND LINES OF CREDIT
On February 17, 2000, the Company completed a private debt offering of $200,000
13 1/4% senior notes (the "Private Placement Notes") which mature in 2010. The
net proceeds from the offering were approximately $189,711, reflecting a bond
discount of $2,738 and issuance costs of $7,551. The funds were used (i) 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, (ii) to
finance a portion of the Coastal Utilities acquisition and (iii) for general
corporate and working capital purposes.
On May 11, 2000, the Company filed a registration statement on Form S-4 with the
Securities and Exchange Commission in order to issue publicly registered notes
(the "Exchange Notes") in exchange for the Private Placement Notes. The
registration statement became effective on June 27, 2000. The terms of the
Exchange Notes are substantially identical to the terms of the Private Placement
Notes except that the transfer restrictions, registration rights and liquidated
damage provisions relating to the Private Placement Notes do not apply to the
Exchange Notes. The exchange offer expired on July 28, 2000. The entire $200,000
in Private Placement Notes was tendered and exchanged for Exchange Notes.
Long-term debt and lines of credit at September 30, 2000 and December 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Unsecured 13 1/4% senior notes payable, due March 1, 2010, with
interest payable semiannually on March 1 and September 1 $ 197,342 $ --
RTFC note payable due in escalating quarterly principal installments
through August 2013, interest payments due quarterly at a fixed rate of 7% 119,192 123,192
RTFC note payable due in quarterly principal installments of $250
through November 2002, increasing to $1,650 through May 2013 with final
payment of $1,384 in August 2013, interest payments
due quarterly at a fixed rate of 8.8% 72,934 73,684
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at a
fixed rate of 6.8% 13,833 14,351
RTFC note payable in escalating quarterly principal installments
through November 2012, interest payments due quarterly at a
fixed rate of 8.55% 7,016 7,278
RTFC note payable in escalating quarterly principal installments beginning
in December 2000 through September 2014 (initial quarterly installment
amount is $1,487), interest payments due quarterly at a fixed rate of 8.4% 138,389 138,389
RTFC note payable, paid in full in February 2000 -- 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 due quarterly at a fixed rate of 8.5% 108,689 --
RTFC secured line of credit, maturing March 2005, interest payments
are due quarterly at the base rate plus 50 basis points 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% 2,375 --
Other 392 939
--------- ---------
670,162 535,611
Less current portion 15,021 9,467
--------- ---------
$ 655,141 $ 526,144
========= =========
</TABLE>
At September 30, 2000, the Company had available, under the terms of the credit
agreements, undrawn credit facilities totaling $38.8 million with the RTFC.
6
<PAGE>
MADISON RIVER CAPITAL, LLC AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements, Continued
(Dollars in thousands, except share and operating data)
(Unaudited)
6. REDEEMABLE MINORITY INTEREST
Redeemable minority interest as of September 30, 2000 consists of the Series A
non-voting common stock and Series B non-voting common stock of Coastal issued
to the former shareholders of Coastal Utilities, Inc. as part of the Coastal
Utilities acquisition.
7. PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma condensed consolidated results of operations
of the Company for the nine months ended September 30, 2000 and 1999 give effect
on a pro forma basis to the following transactions:
o the acquisition and related financing of Gulf Coast Services in September
1999;
o the acquisition and related financing of Coastal Utilities in March 2000; and
o the issuance of the Private Placement Notes and the related increase
in interest and amortization expense.
The 2000 unaudited pro forma condensed consolidated results of operations give
effect to the issuance of the Private Placement Notes and the acquisition and
related financing of Coastal Utilities in March 2000 as if these transactions
had been consummated on January 1, 2000. The 1999 unaudited pro forma results of
operations give effect to the issuance of the Private Placement Notes, the
acquisition of Gulf Coast Services in September 1999 and the acquisition of
Coastal Utilities 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 the
Company 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. The unaudited pro forma results of
operations are based upon currently available information and upon certain
assumptions that the Company believes are reasonable.
The 2000 and 1999 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, 2000 or on January 1, 1999, respectively, nor does it
purport to be indicative of future consolidated operating results.
<TABLE>
<CAPTION>
Pro Forma Condensed Consolidated
Results of Operations
----------------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenues $ 127,887 $ 124,994
Operating expenses:
Cost of goods sold and direct costs and selling,
general and administrative expenses 88,944 93,476
Depreciation and amortization 36,546 33,366
---------- ----------
Operating income (loss) $ 2,397 $ (1,848)
========== ==========
Interest expense $ 48,783 $ 47,743
========== ==========
Other income, net $ 5,589 $ 15,181
========== ==========
Net loss $ (43,563) $ (34,828)
========== ==========
</TABLE>
7
<PAGE>
MADISON RIVER CAPITAL, LLC AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements, Continued
(Dollars in thousands, except share and operating data)
(Unaudited)
8. SEGMENT INFORMATION
The Company is a provider of integrated communications services and solutions.
The Company's operations are classified into two reportable business segments,
the LTD and the ICD. Though both segments provide telecommunication services,
each segment is managed by distinct management teams, and their financial and
operating results are evaluated separately by the chief operating decision
maker. The reporting segments follow the same accounting principles and policies
used for the Company's consolidated financial statements. The following
summarizes the revenues and net operating income for each segment for the three
and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues
LTD $ 44,581 $ 15,846 $ 117,474 $ 48,981
ICD 1,272 178 2,216 262
-------- -------- --------- --------
45,853 16,024 119,690 49,243
Less intersegment revenues (317) (98) (899) (113)
-------- -------- --------- --------
Total reported revenues $ 45,536 $ 15,926 $ 118,791 $ 49,130
======== ======== ========= ========
Net operating income
LTD $ 6,339 $ 1,224 $ 17,158 $ 6,470
ICD (7,241) (2,093) (15,757) (3,368)
-------- -------- --------- --------
Total reported operating
income (loss) $ (902) $ (869) $ 1,401 $ 3,102
======== ======== ========= ========
</TABLE>
As of September 30, 2000, total assets by segment, net of intersegment
investments and other intersegment balances, were as follows:
Total assets
LTD $ 811,542
ICD 144,583
-------
Total assets $ 956,125
=======
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q constitute "forward-looking statements"
that involve risks and uncertainties. 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:
o the uncertainties and potential delays associated with our planned
expansion into competitive local service;
o the passage of legislation or court decisions adversely affecting the
telecommunications industry;
o our ability to repay our outstanding indebtedness;
o our ability to raise additional capital on acceptable terms and
on a timely basis;
o competition in the telecommunications industry; and
o the advent of new technology.
Except as required by law, we are not obligated to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
occurring after the filing of this Form 10-Q or to reflect the occurrence of
unanticipated events.
Included in our discussion and analysis of the operating results of the Company
are comparisons of EBITDA. EBITDA consists of operating income (loss) before
depreciation and amortization and is presented because we believe it is
frequently used by investors and other interested parties in the evaluation of a
company's ability to meet its future debt service, capital expenditure and
working capital requirements. However, other companies in our industry may
present EBITDA differently than we do. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to cash flows from operating activities as a
measure of liquidity or as an alternative to net earnings as an indicator of our
operating performance or any other measures of performance derived in accordance
with generally accepted accounting principles.
References in this Form 10-Q to "we," "us" and "our" mean Madison River Capital,
LLC and its subsidiaries.
Overview
We are an established 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. At September 30, 2000, we had approximately
202,800 voice and data lines in service.
The Company is organized into two operating divisions, the Local
Telecommunications Division ("LTD") and the Integrated Communications Division
("ICD"). The LTD is responsible for the integration, operation and development
of the Company's established markets which consist of four incumbent local
exchange carriers ("ILECs") acquired since January 1998. The ILECs are located
in North Carolina, Illinois, Alabama and Georgia. The ICD is responsible for
developing and expanding the Company's target markets and transport business as
a competitive local exchange carrier ("CLEC"). The ICD will build its base of
customers around the Company's 2,847 sheath miles of fiber optic network and its
current established operations. We are currently certified in nine states as a
competitive local exchange carrier ("CLEC") and in eleven states as a long
distance provider (see table below).
9
<PAGE>
States Certified as a
States Certified Long Distance
as a CLEC Provider
----------------- -----------------
North Carolina North Carolina
South Carolina South Carolina
Florida Georgia
Alabama Florida
Mississippi Alabama
Louisiana Mississippi
Texas Louisiana
Tennessee Texas
Illinois Tennessee
Illinois
Kentucky
The majority of our 2,847 sheath mile fiber optic network comprises a
long-haul network in the southeast United States that 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. During the
third quarter, we entered into peering agreements with MCI/Worldcom in both
Atlanta and Dallas. In the second quarter, we opened our new, state-of-the-art
network support center in Plano, Texas. The center continuously monitors our
advanced fiber optic platform, ATM backbone transport platform, Internet and
enterprise data network elements and product and service delivery components all
the way to the customer site.
Since our inception, our principal activities have been the acquisition,
integration, operation and improvement of the four ILECs 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 continuing to develop our existing
markets and expanding, initially, from those established markets into 14
markets, including:
o Mid-Atlantic: the Research Triangle (Raleigh, Durham and Chapel Hill,
North Carolina) and the Triad (Greensboro and Winston-Salem, North
Carolina).
o Midwest: Peoria, Bloomington-Normal, Decatur and Springfield, Illinois.
o Gulf Coast: Mobile and Montgomery, Alabama; Biloxi, Mississippi;
Pensacola, Florida; New Orleans, Louisiana; Atlanta, Georgia; and Houston
and Dallas, Texas.
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 approximately $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 approximately
$232.0 million which we refer to as the "Gallatin River" acquisition. We
acquired Gulf Coast Services, a telecommunications provider located in the
southeastern United States, in September 1999 for approximately $312.6 million.
In March 2000, our subsidiary, Coastal Communications, Inc., acquired all of the
outstanding capital stock of Coastal Utilities, Inc. (hereafter referred to as
the "Coastal Communications acquisition") for approximately $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.
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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 established markets.
For the nine months ended September 30, 2000, 98.1% of our operating revenues
came from our LTD division. 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 in the near term. Then, as we develop our CLEC
business, we expect significant growth and a growing percentage of our revenues
to come from sales of communication services to medium and large businesses and
residential multi-dwelling units in our expansion markets as well as the sale of
fiber transport services. 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. We expect the fiber transport 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 the ILECs, which are the foundation of our business,
experienced fairly consistent results and are anticipated to continue doing so.
However, as we make investments to develop our new markets, our operating
expenses have become less consistent. We are making significant expenditures in
our expansion markets to build our fiber network and develop a marketing and
sales infrastructure. We currently expect that our expenses will increase at a
faster pace than revenues as we develop our business in our expansion markets.
We expect that our primary operating expenses will consist of cost of goods sold
and direct costs and selling, general and administrative expenses in addition to
depreciation and amortization.
Cost of goods sold and direct costs
Our cost of goods sold and direct costs include:
o plant specific costs and expenses, such as network and general support
expense, central office switching and transmission expense, information
origination/termination expense and cable and wire facilities expense;
o plant nonspecific costs, such as testing, provisioning, network,
administrative, power and engineering;
o 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;
o the cost of leasing transport from ILECs or other providers where our
fiber transport capacity is not available;
o the cost of collocating in ILEC central offices; and
o the cost of purchasing and installing electronics on our fiber network.
We have already entered into interconnection agreements with Bell South, GTE,
Ameritech and Southwestern Bell. 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.
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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:
o selling and marketing expenses;
o expenses associated with customer care;
o billing and other operating support systems; and
o 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.
Results of Operations
In September 1999, we acquired Gulf Coast Services, and, in March 2000, we
completed the Coastal Communications acquisition. As a result of these
acquisitions, we believe that our historical financial statements for the nine
month period and three month period ended September 30, 2000 are not directly
comparable with our historical financial statements for the same periods of
1999, respectively. The operating results for the nine months ended September
30, 2000 include nine months of operations for Gulf Coast Services and
approximately six months of operations for Coastal Communications whereas the
nine months ended September 30, 1999 do not include any operations for either
acquisition. The operating results for the three months ended September 30, 2000
include three months of operations for Gulf Coast Services and three months of
operations for Coastal Communications whereas the three months ended September
30, 1999 do not include any operations for either acquisition.
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Nine Months Ended September 30, 2000 compared to Nine Months Ended
September 30, 1999
Total revenues increased $69.7 million to $118.8 million for the nine months
ended September 30, 2000 from $49.1 million for the same period of 1999. The
increase is attributable principally to a full nine months of operations of Gulf
Coast Services and approximately six months of operations of Coastal
Communications being included in 2000. Revenues of Gulf Coast Services accounted
for $43.1 million, or 61.9%, of the net increase. Revenues of Coastal
Communications accounted for $19.6 million, or 28.1%, 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, were approximately 85.3% and 88.6%
for the nine months ended September 30, 2000 and 1999, respectively.
Total operating expenses increased $71.4 million from $46.0 million, or 93.7% of
total revenues in the first nine months of 1999, to $117.4 million, or 98.8% of
total revenues in the first nine months of 2000. The increase is attributable to
the inclusion of nine months of operations of Gulf Coast Services, approximately
six months of operations for Coastal Communications and the expansion of the
CLEC and transport business. The increases were partially offset by lower
expenses in existing operations from improved efficiencies. The inclusion of
Gulf Coast Services' operating expenses accounted for $42.0 million, or 58.8%,
the inclusion of Coastal Communications operating expenses accounted for $15.8
million, or 22.1%, and the expansion of the CLEC and fiber transport business
accounted for $13.9 million, or 19.5%, of the net increase in operating
expenses, respectively. Cost of goods sold and direct costs, as a percentage of
total revenues, increased from 27.0% in the first nine months of 1999 to 36.3%
in the first nine months of 2000, and selling, general and administrative
expenses, as a percentage of total revenues, decreased from 39.4% in the first
nine months of 1999 to 33.9% in the first nine months of 2000. Depreciation and
amortization expense, as a percentage of total revenues, increased from 27.4% in
the first nine months of 1999 to 28.7% in the first nine months of 2000.
Net operating income decreased $1.7 million from $3.1 million, or 6.3% of total
revenues in the first nine months of 1999, to $1.4 million, or 1.2% of total
revenues in the first nine months of 2000. The decrease in net operating income
margin was directly attributable to the increase in operating expenses from the
expansion of the CLEC and transport business.
Interest expense increased $33.6 million from $11.5 million, or 23.3% of total
revenues in the first nine months of 1999, to $45.0 million, or 37.9% of total
revenues in the first nine months of 2000. The increase in interest expense is
attributable to the issuance of the senior notes in February, as well as the
financing for the Gulf Coast Services acquisition and the Coastal Communications
acquisition.
Net loss increased $33.6 million from $7.0 million, or 14.3% of total revenues
in the first nine months of 1999, to $40.6 million, or 34.2% of total revenues
in the first nine months of 2000, as a result of the factors discussed above.
EBITDA increased $18.9 million from $16.5 million, or 33.7% of total revenues in
the first nine months of 1999, to $35.4 million, or 29.8% of total revenues in
the first nine months of 2000. The increase in EBITDA is primarily attributable
to the two acquisitions.
Three Months Ended September 30, 2000 compared to Three Months Ended
September 30, 1999
Total revenues increased $29.6 million to $45.5 million for the three months
ended September 30, 2000 from $15.9 million for the same period of 1999. The
increase is attributable principally to a full three months of operations of
Gulf Coast Services and Coastal Communications in 2000. The increase resulting
from revenues of Gulf Coast Services accounted for $15.6 million, or 52.5%, of
the net increase. The increase resulting from revenues of Coastal Communications
accounted for $9.7 million, or 32.9%, 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 86.0% and 86.4% for the three months ended
September 30, 2000 and 1999, respectively.
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Total operating expenses increased $29.6 million from $16.8 million, or 105.5%
of total revenues in the three month period ended September 30, 1999, to $46.4
million, or 102.0% of total revenues in the three month period ended September
30, 2000. The increase is attributable to the inclusion of three months of
operations of Gulf Coast Services and Coastal Communications in the third
quarter of 2000 and the expansion of the CLEC and fiber transport business. The
inclusion of Gulf Coast Services' operating expenses accounted for $15.1
million, or 51.1%, the inclusion of Coastal Communications' operating expenses
accounted for $8.7 million, or 29.3%, and the expansion of the CLEC and fiber
transport business accounted for $5.9 million, or 20.1%, of the net increase in
operating expenses, respectively. Cost of goods sold and direct costs, as a
percentage of total revenues, increased from 33.9% in the three month period
ended September 30, 1999 to 40.5% in the three month period ended September 30,
2000, and selling, general and administrative expenses, as a percentage of total
revenues, decreased from 44.9% in the three month period ended September 30,
1999 to 32.5% in the three month period ended September 30, 2000. Depreciation
and amortization expense, as a percentage of total revenues, increased from
26.7% in the three month period ended September 30, 1999 to 29.0% in the three
month period ended September 30, 2000.
Net operating loss was unchanged at $0.9 million for each three month period.
Improved operating results and the inclusion of the operations of Gulf Coast
Services and Coastal Communications were offset by losses from the expansion of
the CLEC and fiber transport business. As a percentage of total revenues, net
operating loss was 2.0% in the three month period ended September 30, 2000 and
5.5% in the three month period ended September 30, 1999.
Interest expense increased $12.5 million from $3.9 million, or 24.4% of total
revenues in the three month period ended September 30, 1999, to $16.4 million,
or 36.1% of total revenues in the three month period ended September 30, 2000.
The increase in interest expense is attributable to the issuance of the senior
notes in February, as well as the financing for the Gulf Coast Services
acquisition and the Coastal Communications acquisition.
Net loss increased $12.5 million from $3.6 million, or 22.4% of total revenues
in the three month period ended September 30, 1999, to $16.1 million, or 35.3%
of total revenues in the three month period ended September 30, 2000, as a
result of the factors discussed above. EBITDA increased $8.9 million from $3.4
million, or 21.2% of total revenues in the three month period ended September
30, 1999, to $12.3 million, or 27.0% of total revenues in the three month period
ended September 30, 2000. The increase in EBITDA is primarily attributable to
the two acquisitions.
Liquidity and Capital Resources
We are a holding company with no business operations of our own. Our only
significant assets are the capital stock/member interests of our subsidiaries.
Accordingly, our only sources of cash to pay our obligations are cash on hand
and distributions from our subsidiaries from their net earnings and cash flow.
Even if our subsidiaries determine to pay a dividend on, or make a distribution
in respect of, their capital stock/member interests, we cannot assure you that
our subsidiaries will generate sufficient cash flow to pay such a dividend or
distribute such funds or that they will be permitted to pay such dividend or
distribution under the terms of their credit facilities.
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 $17.3 million at September
30, 2000 and $63.2 million at December 31, 1999.
Operating Activities. For the nine months ended September 30, 2000 and 1999, we
generated cash from operating activities of $1.2 million and $6.8 million,
respectively. The change was primarily attributable to the increase in the net
loss, which was offset by the net change in accrued expenses in the first nine
months of 2000 when compared to the same period of 1999.
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Investing Activities. For the nine months ended September 30, 2000, we used cash
in investing activities of $172.5 million and for the nine months ended
September 30, 1999, we used cash in investing activities of $351.5 million.
Investing activities in the first nine months of 2000 were primarily
attributable to the acquisition of Coastal Communications, net of cash acquired,
for $117.0 million. In addition, purchases of telephone plant and equipment in
the first nine months of 2000 were $58.2 million. Investing activities in the
first nine months of 1999 were primarily attributable to the acquisition of Gulf
Coast Services, net of cash acquired, for $310.5 million, purchase of stock in
RTFC of $31.6 million related to the financing of the Gulf Coast Services
acquisition and purchases of telephone plant and equipment of $14.5 million.
Financing Activities. For the nine months ended September 30, 2000, net cash
provided by financing activities was $140.8 million and for the nine months
ended September 30, 1999, net cash provided by financing activities was $443.3
million. Net cash provided by financing activities in the first nine months of
2000 consisted of $318.3 million in 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
$183.9 million, which included the repayment of the $177.8 million term loan
from RTFC. For the nine months ended September 30, 1999, net cash provided by
financing activities included loan proceeds of $316.2 million from the RTFC used
in the Gulf Coast Services acquisition and capital contributions from member of
$127.1 million.
Long-Term Debt and Revolving Credit Facilities
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 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's stated variable rate 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
September 30, 2000, $20.8 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 the $123.2 million term facility into a
fixed rate of 7.0% per annum through November 2004, and we converted the $73.7
million term facility into a fixed rate of 8.8% per annum through April 2003. At
September 30, 2000, $119.2 million and $72.9 million, respectively, were
outstanding under these term facilities.
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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 senior notes offering. The remaining 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 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 September 30, 2000, $138.4 million was outstanding under this term facility.
Our first principal installment of $1.5 million is due in December 2000.
On February 17, 2000, we privately placed $200.0 million of senior notes. The
proceeds from the offering were approximately $189.7 million, net of bond
discount of $2.7 million and issuance costs of $7.6 million. 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. At September
30, 2000, the senior notes had a carrying value of $197.3 million.
To finance the Coastal Communications acquisition, on March 30, 2000, we entered
into secured facilities for $118.7 million and a $10.0 million unsecured
revolving line of credit with the RTFC. The secured facilities, which were
completely drawn down, are composed of a $108.7 million, fifteen year term
facility and a $10.0 million, interest only, five year facility. The term
facility bears interest at the base rate of RTFC's stated variable rate 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 the $108.7 million term facility into a fixed rate of 8.5% per
annum through April 2005. The lines of credit bear interest at the RTFC base
rate for a standard line of credit plus 50 basis points for the secured line of
credit and 100 basis points for the unsecured line of credit. At September 30,
2000, $108.7 million and $10.0 million, respectively, were outstanding under the
facilities. Our first principal installment of $1.1 million is due in July 2001.
In addition to the $130.0 million in cash paid in the Coastal Communications
acquisition, we also issued to the former shareholders of Coastal Utilities
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.
At September 30, 2000, we had available, as defined in the credit agreements,
$38.8 million of undrawn credit facilities with the RTFC.
Capital Requirements
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:
o electronics for our fiber optic network;
o digital ATM switches; and
o transmission equipment collocated in ILEC central offices.
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Our expenditures will also include:
o real estate expenses in connection with our network facilities and
operations;
o the development and integration of operations support systems and other
automated back office systems;
o the upgrade and maintenance of our current network infrastructure;
o sales and marketing;
o corporate overhead; and
o personnel development.
We currently estimate that cash required to fund capital expenditures through
the end of 2000 will be approximately $17 million. For the nine months ended
September 30, 2000, cash used to fund capital expenditures was approximately $48
million. In 2001, we anticipate making capital expenditures of approximately $64
million. We currently project that 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
markets through 2001. 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:
o the extent to which we consummate any significant additional acquisitions;
o the success of our expansion initiatives;
o the demand for our services in our existing markets;
o our ability to acquire, develop and integrate the necessary OSS and other
back office systems; and
o regulatory, technological and competitive developments.
We may be unable to access the cash flow of our subsidiaries since certain of
our subsidiaries are parties to credit or other borrowing agreements that
restrict the payment of dividends, and those subsidiaries are likely to continue
to be subject to such restrictions and prohibitions for the foreseeable future.
In addition, future agreements governing the terms of our subsidiaries'
indebtedness may restrict our subsidiaries' ability to pay dividends to us.
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.
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 SFAS No. 138 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, as amended, will have a
material impact on our consolidated financial statements.
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ITEM 3 - 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 September 30, 2000, we have fixed rate secured debt with the RTFC
of $460.1 million at a blended rate of 8.08%. 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
senior notes have a stated fixed rate of 13.25%. Accordingly, we are subject to
only minimal interest rate risk on our long-term debt while our fixed rates are
in place.
As part of the Coastal Communications acquisition, we acquired a marketable
equity security investment with a fair value, as of September 30, 2000, of $11.3
million, for which we are subject to market risk.
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Part II
Item 1. 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 Services, who had elected to
retire in 1996 and 1997 and receive cash distributions for their interests in an
employee stock ownership plan (ESOP) filed a class action lawsuit in Alabama
state court alleging breach of fiduciary duty, suppression and misrepresentation
against, among others, Gulf Coast Services and its subsidiary. Defendants
removed the case to federal court, where it proceeded under the caption 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
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 Services to the
plaintiffs, and a preliminary injunction to stop Gulf Coast Services from making
any further distributions from the ESOP. The plaintiffs also sought 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 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 Services 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 Services stock depending on when they left
Gulf Coast and Services 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. On July 21, 2000, a fairness
hearing was held at which the court certified the plaintiffs class and gave
final approval to the settlement.
All of the plaintiffs' claims were paid on the defendants' behalf from an escrow
account established in connection with the sale of Gulf Coast Services by the
sellers of the Gulf Coast Services stock. The Company did not incur any expenses
or other costs related to the settlement of this case.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------------------------------------------------
<S> <C>
3.1 Certificate of Formation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-4 (File
No. 333-36804) filed with the Securities and Exchange
Commission on May 11, 2000 (the "May Form S-4"))
3.2 Limited Liability Company Agreement of the Registrant
(incorporated by reference to Exhibit 3.2 to the May
Form S-4)
10.1 Interconnection Agreement-Texas, dated July 27, 2000,
between Southwestern Bell Telephone Company and
Madison River Communications LLC
27.1 Madison River Capital, LLC Financial Data Schedule
as of and for the nine months ended September 30,
2000 and September 30, 1999
</TABLE>
(b) Reports on Form 8-K
NONE
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MADISON RIVER CAPITAL, LLC
Date: November 13, 2000 /s/ PAUL H. SUNU
----------------------------------
Name: Paul H. Sunu
Title: Managing Director, Chief
Financial Officer and Secretary
20
