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Filed Pursuant to Rule 424(b)(3)
File No. 333-48644
PROSPECTUS
[CFW COMMUNICATIONS LOGO]
$280,000,000
Offer to Exchange All Outstanding
13% Senior Notes due 2010
For
13% Senior Exchange Notes due 2010
Interest payable February 15 and August 15
. The exchange offer will expire at 5:00 p.m. New York City time on December
11, 2000, unless otherwise extended.
. All outstanding notes that are validly tendered and not validly withdrawn
prior to the expiration of the exchange offer will be exchanged for an equal
principal amount of exchange notes that are registered under the Securities
Act of 1933.
. The exchange of outstanding notes for exchange notes will not be a taxable
event for U.S. federal income tax purposes.
. We do not intend to list the exchange notes on any national securities
exchange or NASDAQ.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 19 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER OR INVESTING IN THE
EXCHANGE NOTES ISSUED IN THE EXCHANGE OFFER. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 165.
We are not making this exchange offer in any state or jurisdiction where it is
not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE EXCHANGE NOTES TO BE DISTRIBUTED IN
THE EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 6, 2000.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................................ 5
RISK FACTORS.............................................................................. 19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS......................................... 30
USE OF PROCEEDS........................................................................... 31
CAPITALIZATION............................................................................ 32
THE EXCHANGE OFFER........................................................................ 35
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................................... 46
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
FW COMMUNICATIONS COMPANY............................................................ 59
SUPPLEMENTAL SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING
DATA OF CFW COMMUNICATIONS COMPANY .................................................. 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CFW COMMUNICATIONS..................................................... 63
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF RICHMOND-NORFOLK PCS.................. 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
RICHMOND-NORFOLK PCS................................................................. 82
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF R&B COMMUNICATIONS....... 85
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
R&B COMMUNICATIONS................................................................... 87
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE VIRGINIA ALLIANCE................. 90
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE VIRGINIA ALLIANCE................................................................ 91
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE WEST VIRGINIA ALLIANCE............ 94
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE WEST VIRGINIA ALLIANCE........................................................... 95
OUR BUSINESS.............................................................................. 98
OUR MANAGEMENT............................................................................ 120
PRINCIPAL SHAREHOLDERS.................................................................... 123
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 125
DESCRIPTION OF CERTAIN INDEBTEDNESS....................................................... 126
DESCRIPTION OF THE EXCHANGE NOTES......................................................... 128
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.................................. 160
PLAN OF DISTRIBUTION...................................................................... 164
LEGAL MATTERS............................................................................. 165
EXPERTS................................................................................... 165
WHERE YOU CAN FIND MORE INFORMATION....................................................... 165
ANNEX A TECHNICAL GLOSSARY.............................................................. A-1
INDEX TO FINANCIAL STATEMENTS............................................................. F-1
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THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT
THE COMPANY THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS UPON WRITTEN OR ORAL
REQUEST.
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission. You should rely only on the information or
representations provided in this prospectus. We have not authorized any person
to provide information other than that provided in this prospectus. We are not
making an offer of these securities in any jurisdiction where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus.
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Unless otherwise indicated:
. the 13% Senior Notes due 2010, which were issued on July 26, 2000, are
referred to in this prospectus as the outstanding notes;
. the 13% Senior Exchange Notes offered under this prospectus, are referred to
in this prospectus as the exchange notes; and
. the outstanding notes and the exchange notes are collectively referred to as
the notes.
Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes. The letter of transmittal states
that by so acknowledging 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 of 1933, or the Securities Act. 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 the outstanding notes were acquired by the broker-dealer as a result
of market-making activities or other trading activities. We have agreed that,
starting on the expiration date of the exchange offer and ending on the close of
business 180 days after the expiration date, we will make this prospectus
available to any broker-dealer for use in connection with any resale. See "PLAN
OF DISTRIBUTION."
This prospectus includes statistical data and forecasts concerning the
communications industry that we obtained from industry publications. These
publications generally indicate that they have obtained information from sources
that they believe are reliable, but that they do not guarantee the accuracy and
completeness of the information. Forecasts of developing industries, such as
ours, are not based upon sophisticated analyses of a substantial amount of
historical data as is the case for more mature industries. Often, interviews
with corporate leaders in developing industries, such as ours, form the basis
for much statistical data and forecasts. Thus, statistical data and forecasts
for developing industries, such as ours, are much less likely to be accurate. We
also have not sought the consent of any of these sources to refer to their data
in this prospectus.
All brand names, trademarks and service marks appearing in this prospectus
are the property of their respective holder.
CERTAIN DEFINITIONS
Except where otherwise indicated, the terms "CFW," "CFW Communications,"
the "Company," "our company," "us," "our" and "we" as used in this prospectus
refer to CFW Communications Company and its subsidiaries on a consolidated
basis, except where it is made clear that such term means only CFW
Communications Company, such as in "DESCRIPTION OF THE NOTES." The term "pops"
as used in this prospectus refers to the population of a market, derived from,
except where otherwise indicated, the Kagan's 1999 Cellular/PCS POPs Book, which
is published by Paul Kagan Associates, Inc., a leading independent media and
communications association. When we refer to Kagan's in this prospectus, we are
referring to Paul Kagan Associates, Inc. For an explanation of specific
technical terms that we have used in this prospectus, please read "ANNEX A -
TECHNICAL GLOSSARY."
The term "Transactions" as used in this prospectus refers to the following
transactions that are either in process or have recently been completed:
. the issuance and sale of $375 million of debt securities, consisting of:
$280,000,000 representing 280,000 units, each unit consisting of one 13%
Senior Note due 2010 and one warrant to purchase 1.8 shares of our common
stock, and $95,000,000 of 13 1/2% Subordinated Notes due 2011;
. the borrowings under the new senior credit facility;
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. the repayment of our existing senior indebtedness;
. the issuance and sale of our Series B, Series C and Series D Preferred Stock;
. our acquisition of the digital wireless operations of PrimeCo PCS, L.P. in
the Richmond-Petersburg and Norfolk-Virginia Beach, Virginia markets, which
we refer to in this prospectus as Richmond-Norfolk PCS;
. our merger with R&B Communications, Inc.;
. our acquisition of personal communications services, or PCS, licenses from
AT&T and disposition of wireless communications services, or WCS, licenses to
AT&T;
. our consolidation of the Virginia Alliance and the West Virginia Alliance, or
the Alliances, through which we conduct our PCS operations;
. the dispositions of our partnership interest in RSA 5 and the analog cellular
operations of our RSA 6 partnership; and
. the disposition of our directory assistance operations.
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus but does
not contain all of the information that is important to you. To understand all
of the terms of the exchange offer and the exchange notes and to attain a more
complete understanding of our business and financial condition, you should read
carefully this entire prospectus.
CFW Communications Company
Overview
We are a regional integrated communications provider offering a broad range
of wireless and wireline products and services to business and residential
customers in Virginia and West Virginia. We own our digital PCS licenses, fiber
optic network, switches and routers, which enable us to offer our customers end-
to-end connectivity in many of the regions we serve. Our facilities-based
approach allows us to control service quality and generate operating
efficiencies. As of June 30, 2000, after giving effect to the Transactions, we
had approximately 150,500 wireless subscribers and approximately 65,900
installed incumbent local exchange carrier access lines, which we refer to
throughout this prospectus as ILEC and competitive local exchange carrier access
lines, which we refer to throughout this prospectus as CLEC.
Our business encompasses both wireless and wireline communications
services:
. Wireless. Our wireless business consists primarily of digital PCS services,
which we offer in Virginia, West Virginia and Kentucky. We complement our
wireless voice services with wireless Internet and data services. Our PCS
network utilizes digital CDMA technology, which provides high bandwidth
capacity at comparatively low cost and can be upgraded to support enhanced
capabilities. We believe that the combination of our CDMA technology, our
bandwidth capacity and the LMDS and MMDS wireless spectrum that we own
positions us to capitalize on opportunities in the growing wireless data
market. As of June 30, 2000, after giving effect to the Transactions, we
owned licenses covering approximately 11.0 million pops and provided PCS
services to approximately 150,500 subscribers.
. Wireline. We provide ILEC and CLEC services in Virginia, West Virginia and
Tennessee. As an ILEC, we own and operate a 103-year-old local telephone
company. As of June 30, 2000, our ILEC had approximately 39,100 residential
and business access lines installed. As a CLEC, we serve nine markets in
three states and intend to continue our expansion into contiguous and other
nearby markets. Since commencing CLEC operations in mid-1998, we have grown
our number of installed business access lines to approximately 9,500, as of
June 30, 2000. In addition, we provide wireline Internet access through a
local presence in Virginia, West Virginia, Tennessee and North Carolina. We
offer high- speed data services, such as dedicated service and DSL, and
dial-up services in a growing number of markets within these four states.
As of June 30, 2000, our Internet customer base totaled approximately
56,300 dial-up subscribers and 900 DSL subscribers.
Our wireless and wireline businesses are supported by our fiber optic
network, which currently includes 602 route-miles and which we expect to include
approximately 1,500 route-miles by the end of 2000 after giving effect to the
Transactions. This network gives us the ability to originate, transport and
terminate much of our customers' communications traffic in many of our service
markets. We also use our network to back-haul communications traffic for our
retail services and to serve as a carrier's carrier, providing transport
services to third parties for long distance, Internet and private network
services. Our fiber optic network is connected to and marketed with adjacent
fiber optic networks in the mid-Atlantic region.
Competitive Strengths
. Regionally-Focused Provider. We have a regional market focus, which enables
us to have a stronger local presence and provide more personalized service
than national providers. We believe that our customer service has produced
a high level of customer satisfaction, which has differentiated us from our
competitors and generated strong customer retention rates.
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. Facilities-Based Operations and Robust Network. We operate our own fiber
optic network, switches and routers, which enable us to provide our
customers with end-to-end connectivity. Our facilities-based approach
allows us to control service quality, benefit from operating efficiencies
and economies of scale and generate leasing revenue.
. Broad Product Line Utilizing Multiple Technologies. Our multiple technology
platform assists us in meeting the diverse communications needs of our
customers. We believe that the range of technology reflected in our product
offerings gives us a significant competitive advantage in the fast-changing
communications industry.
. Experienced Management Team. Our management team led our transformation from
a 103-year-old regulated utility into a leading provider of integrated
communications services in our markets. Our 20 top executives and managers
average more than 17 years of experience in the communications industry. We
believe that our management's skill and experience gives us a competitive
advantage as we grow our business lines and expand into new contiguous and
other nearby markets.
. Stable and Diverse Sources of Revenue and EBITDA. Our ILEC, CLEC and fiber
optic network provide us with a stable source of revenues and EBITDA. For
1997, 1998 and 1999, after giving effect to the Transactions, these
operations generated revenues of $42.1 million, $46.5 million and $50.9
million, respectively, and EBITDA of $28.3 million, $30.0 million and $29.8
million, respectively. We also derive revenues from our wireless
operations, which have significantly increased after our acquisition of
Richmond-Norfolk PCS. Our stable and diverse sources of revenue and EBITDA
provide us with liquidity to support growth of our digital PCS operations
and our geographic expansion.
. Strong Equity Sponsorship from Welsh Carson Anderson & Stowe and Morgan
Stanley Dean Witter. Welsh, Carson, Anderson & Stowe VIII and IX, L.P.s,
private equity investment funds, and affiliates of Morgan Stanley Dean
Witter have invested in us $225.0 million and $25.0 million, respectively.
We believe that the ongoing sponsorship and guidance of these experienced
communications investors provides us with strategic advantages as we expand
our business and market presence.
Business Strategy
Our objective is to be the leading integrated communications provider in
our expanding region of operations. The key elements of our business strategy
are to:
. Increase Market Share by Establishing Service-Driven Customer Relationships
and a Local Presence. We intend to grow our business by leveraging our
local presence and continuing our focus on providing high levels of
customer satisfaction. We plan to accomplish this by establishing local
sales offices in our new markets and providing local representatives for
face-to-face sales and personalized client care. We intend to enhance our
local presence by continuing our support of the communities that we serve.
. Accelerate Growth by Offering Bundled Services. We intend to accelerate our
growth by leveraging our ability to offer a broad range of communications
services as a bundled package on a single bill. We believe that by cross-
selling multiple products and services, we are building new customer
relationships, creating a strong partnership with our customers and
increasing customer retention.
. Leverage Our Fiber Optic Network, Infrastructure and Technologies. Our
infrastructure, including our fiber optic network, switches and routers, is
a technologically-advanced communications facility that connects many of
our markets. We intend to offer our broad range of communications services
in many of our markets and deliver those services over infrastructure that
we control and maintain.
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. Accelerate Growth Through Acquisitions. We intend to expand our market reach
by pursuing strategic acquisitions of communications businesses that will
provide us access to contiguous and other nearby markets or additional
products or services. We seek acquisition targets that offer products and
services that we can integrate into our existing operations and networks.
Recent Developments
We are significantly expanding the geographic region that we serve and
focusing our growth efforts on our core communications services, primarily
digital PCS services, Internet access, including dedicated, high-speed DSL and
dial-up services, high-speed data transmission and local telephone services. In
connection with our expansion, we are receiving additional equity investments.
We are also divesting non-strategic assets. Transactions that are either in
process or have recently been completed include the:
. acquisition of Richmond-Norfolk PCS;
. merger with R&B Communications, an integrated communications provider in a
geographic market contiguous to ours, which will give us a controlling
interest in the Virginia Alliance and the West Virginia Alliance;
. equity investments from Welsh Carson and Morgan Stanley Dean Witter;
. acquisition of certain PCS licenses currently owned by AT&T that will add 2.5
million pops in certain markets in Pennsylvania;
. sales of our membership interest in RSA 5, our RSA 6 wireless analog
operations, our directory assistance operations and communications tower
sites; and
. arrangement of a new senior credit facility.
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We are a Virginia corporation with principal executive offices located at
401 Spring Lane, Suite 300, Waynesboro, Virginia 22980. Our telephone number is
(540) 946-3500, and our Web sites are http://www.cfw.com and
http://www.ntelos.com. The information on our Web sites is not incorporated by
reference into this prospectus.
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Summary of the Exchange Offer
We summarize the terms of the exchange offer below. This summary is not intended
to be complete. You should read the discussion under the heading "THE EXCHANGE
OFFER" beginning on page 35 for further information regarding the exchange offer
and resale of the exchange notes.
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The Exchange Offer: We are offering to exchange up to $280,000,000 in aggregate principal amount of
exchange notes, which have been registered under the Securities Act, for up to
$280,000,000 in aggregate principal amount of outstanding notes, which we
issued on July 26, 2000 in a private offering. The outstanding notes were
issued as part of a unit offering with each unit consisting of one outstanding
note with a principal amount of $1,000 and one warrant to purchase 1.8 shares
of our common stock. We are not offering to exchange your privately placed
warrants for registered warrants. In order for your outstanding notes to be
exchanged, you must properly tender them prior to the expiration of the
exchange offer. Except as set forth below under "--Conditions to the Exchange
Offer," all outstanding notes that are validly tendered and not validly
withdrawn will be exchanged. We will issue exchange notes as soon as
practicable after the expiration of the exchange offer. Outstanding notes may
be exchanged for exchange notes only in integral multiples of $1,000.
We believe that the exchange notes may be offered for resale, resold and
otherwise transferred by you without compliance with the registration or
prospectus delivery provisions of the Securities Act if:
. you are acquiring the exchange notes in the ordinary course of your
business;
. you are not participating, do not intend to participate, and have no
arrangements or understanding with any person to participate, in the
distribution of the exchange notes issued to you; and
. you are not an affiliate, under Rule 405 of the Securities Act, of ours.
Registration Rights Agreement: We sold the outstanding notes on July 26, 2000 to the placement agents of the
outstanding notes. Simultaneously with that sale, we signed a registration
rights agreement with the placement agents which requires us to conduct this
exchange offer. You have the right pursuant to the registration rights
agreement to exchange your outstanding notes for exchange notes with
substantially identical terms. This exchange offer is intended to satisfy the
registration rights. After the exchange offer is complete, you will no longer
be entitled to any exchange or registration rights with respect to outstanding
notes you do not tender for exchange. We are not registering the units,
warrants or our common stock as part of this exchange offer or in a separate
offering at this time.
Consequences of Failure to If you do not exchange your outstanding notes for exchange notes pursuant to
Exchange Your Outstanding Notes: the exchange offer, you will continue to be subject to the restrictions on
transfer provided in the outstanding notes and the indenture. In general, the
outstanding notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. We do not
intend to register any untendered outstanding notes under the Securities Act.
To the extent that outstanding notes are tendered and accepted in the exchange offer,
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the trading market for untendered outstanding notes and tendered but unaccepted
outstanding notes will be adversely affected.
Expiration Date: The exchange offer will expire at 5:00 p.m., New York City time, on December
11, 2000, or a later date and time to which we may extend it, in which case the
term "expiration date" will mean the latest date and time to which the exchange
offer is extended.
Withdrawal of Tenders: You may withdraw your tender of outstanding notes at any time prior to the
expiration date by delivering written notice of your withdrawal to the exchange
agent in accordance with the withdrawal procedures described in this
prospectus. We will return to you, without charge, promptly after the
expiration or termination of the exchange offer any outstanding notes that you
tendered but that were not exchanged.
Conditions to the Exchange Offer: We will not be required to accept outstanding notes for exchange if:
. the exchange offer would violate applicable law or SEC interpretations or
any legal action has been instituted or threatened that would impair our
ability to proceed with the exchange offer; or
. you do not tender your outstanding notes in compliance with the terms of the
exchange offer.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered. We reserve the right to terminate
the exchange offer if certain specified conditions have not been satisfied and
to waive any condition or otherwise amend the terms of the exchange offer in
any respect. Please read the section "THE EXCHANGE OFFER--Conditions to the
Exchange Offer" on page 38 for more information regarding the conditions to
the exchange offer.
Tendering Outstanding If your outstanding notes are held through The Depository Trust Company ("DTC")
Notes and Representations: and you wish to participate in the exchange offer, you may do so through one of
the following methods:
. Delivery of a Letter of Transmittal. You must complete and sign a letter of
transmittal in accordance with the instructions contained in the letter of
transmittal and forward the letter of transmittal by mail, facsimile
transmission or hand delivery, together with any other required documents, to
the exchange agent, either with the outstanding notes to be tendered or in
compliance with the specified procedures for guaranteed delivery of the
outstanding notes; or
. Automated Tender Offer Program of The Depository Trust Company. If you
tender under this program, you will agree to be bound by the letter of
transmittal that we are providing with this prospectus as though you had
signed the letter of transmittal.
Under both methods, by signing or agreeing to be bound by the letter of
transmittal, you will represent to us that, among other things:
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. any exchange notes that you receive are being acquired in the ordinary
course of your business;
. you have no arrangement or understanding with any person or entity to
participate in any distribution of the exchange notes;
. you are not engaged in and do not intend to engage in any distribution of
the exchange notes;
. if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes, you acquired those notes as a result
of market-making activities or other trading activities and you will deliver a
prospectus, as required by law, in connection with any resale of the exchange
notes; and
. you are not our "affiliate," as defined in Rule 405 of the Securities Act.
Please do not send your letter of transmittal or certificates representing your
outstanding notes to us. Those documents should only be sent to the exchange
agent. Questions regarding how to tender and requests for information should be
directed to the exchange agent.
Special Procedures for If you own a beneficial interest in outstanding notes that are registered in
Beneficial Owners: the name of a broker, dealer, commercial bank, trust company or other nominee,
and you wish to tender the outstanding notes in the exchange offer, you should
contact the registered holder promptly and instruct the registered holder to
tender on your behalf.
Consequences of Not Complying You are responsible for complying with all exchange offer procedures. You will
with Exchange Offer: only receive exchange notes in exchange for your outstanding notes if, prior to
the expiration date, you deliver to the exchange agent (1) the letter of
transmittal, properly completed Procedures: and duly executed; (2) any other
documents or signature guarantees required by the letter of transmittal; (3)
certificates for the outstanding notes or a book-entry confirmation of a
book-entry transfer of the outstanding notes into the exchange agent's account
at DTC.
Any outstanding notes you hold and do not tender, or which you tender but which
are not accepted for exchange, will remain outstanding and continue to accrue
interest, but will not retain any rights under the registration rights
agreement. You will not have any appraisal or dissenters' rights in connection
with the exchange offer. You should allow sufficient time to ensure that the
exchange agent receives all required documents before the expiration of the
exchange offer. Neither we nor the exchange agent has any duty to inform you of
defects or irregularities with respect to your tender of outstanding notes for
exchange.
Guaranteed Delivery Procedures: If you wish to tender your outstanding notes and cannot comply, prior to the
expiration date, with the applicable procedures for tendering outstanding notes
described above and under "THE EXCHANGE OFFER--Procedures for Tendering," you
must tender your outstanding notes according to the guaranteed delivery
procedures described in "THE EXCHANGE OFFER--Procedures for Tendering --
Guaranteed Delivery Procedures" beginning on page 42.
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U.S. Federal Income The exchange of outstanding notes for exchange notes in the exchange offer will
Tax Considerations: not be a taxable event for United States federal income tax purposes. Please
read "MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS" beginning on
page 160.
Use of Proceeds: We will not receive any cash proceeds from the issuance of exchange notes. The
net proceeds from the sale of the outstanding notes were used to fund part of
the cash portion of the purchase price of Richmond-Norfolk PCS.
The Exchange Agent: We have appointed The Bank of New York as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or the letter of transmittal and requests
for the notice of guaranteed delivery to the exchange agent as follows: The
Bank of New York, 101 Barclay Street, Floor 7E, New York, New York 10286;
Attention: Santino Ginocchietti, Reorganization Section-Corporate Trust, (212)
815-6331. Eligible institutions may make requests by facsimile at (212)
815-6339.
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Summary of the Terms of the Exchange Notes
This exchange offer relates to the exchange of up to $280,000,000 in aggregate principal amount of exchange notes for an equal
principal amount of outstanding notes. The outstanding notes were issued on July 26, 2000 as part of a unit offering, with
each unit consisting of one senior note in the principal amount of $1,000 and one warrant to purchase 1.8 shares of our
common stock. The exchange notes will evidence the same debt as the outstanding notes, which they are replacing, and both the
outstanding notes and the exchange notes are governed by the same indenture. The exchange notes will not have an attached
warrant and will trade separate and apart from the warrants.
Issuer: CFW Communications Company
Exchange Notes: $280,000,000 in aggregate principal amount of 13% Senior Notes due 2010. The form
and terms of the exchange notes are substantially identical to the form and terms
of the outstanding notes, except the exchange notes will be registered under the
Securities Act. Therefore, the exchange notes will not bear legends restricting
their transfer.
Final Maturity Date: August 15, 2010.
Interest: Interest will be payable in cash on February 15 and August 15 of each year,
beginning on February 15, 2001.
Interest Escrow Account: Approximately $69.1 million has been placed into an escrow account to pre-fund the
first four scheduled interest payments on the notes.
Separability: The holders of the outstanding notes and the warrants may separately transfer them
upon the earliest to occur of (1) the date that is 180 days following July 26,
2000, (2) the commencement of this exchange offer, (3) the date a shelf
registration statement with respect to the outstanding notes becomes effective,
(4) the commencement of an offer to purchase the outstanding notes upon a change
of control and (5) a date determined by Morgan Stanley & Co. Incorporated.
Optional Redemption: We may redeem any of the notes beginning on August 15, 2005. The initial
redemption price is 106.5% of their principal amount, plus accrued interest. The
redemption price will decline each year after 2005 and will be 100% of their
principal amount, plus accrued interest, beginning on August 15, 2008. In
addition, before August 15, 2003, we may redeem up to 35% of the aggregate
principal amount of the notes with the proceeds from sales of certain kinds of our
capital stock at 113.0% of their principal amount, plus accrued and unpaid
interest to the redemption date. We may make such redemption only if, after any
such redemption, at least 65% of the aggregate principal amount of notes
originally issued under the indenture remains outstanding.
Change of Control: Upon a change of control (as defined under "DESCRIPTION OF THE EXCHANGE NOTES" on
page 128), unless all notes have previously been called for redemption, we will
be required to make an offer to purchase the notes. The purchase price will
equal 101% of the principal amount of the notes on the date of purchase, plus
accrued interest.
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Rankings: The notes are senior unsecured obligations. The notes rank equally in right of
payment with our existing and future senior unsecured debt and will rank senior
to all of our future subordinated debt. The notes are subordinated in right of
payment to all of our existing and future senior secured debt, including our
direct borrowings under the new senior credit facility. The notes are also
effectively subordinated to all of the liabilities of our subsidiaries. As of June
30, 2000, after giving effect to the Transactions, our consolidated liabilities,
excluding the notes and the subordinated notes, were $331.9 million, substantially
all of which were liabilities of our subsidiaries.
As of June 30, 2000, after giving effect to the Transactions, we would have had
outstanding:
. $193.1 million of senior secured debt;
. $280.0 million of senior unsecured debt; and
. $95.0 million of subordinated unsecured debt.
Additionally, we would have had $175.0 million of borrowing availability under our
new senior credit facility, subject to certain conditions.
Certain Covenants: The terms of the notes will limit our ability and the ability of our restricted
subsidiaries to:
. incur additional debt;
. pay dividends on, redeem or repurchase our capital stock;
. make investments or certain other restricted payments;
. engage in sale-leaseback transactions;
. enter into transactions with affiliates;
. guarantee debts;
. sell assets;
. create liens; and
. engage in a merger, sale or consolidation.
These covenants are subject to important exceptions and qualifications, which
are described under the heading "DESCRIPTION OF EXCHANGE NOTES-- Covenants" on
page 143 of this prospectus.
Registration Rights: We are obligated to cause the notes to generally be freely transferable on or
prior to the date that is 180 days after July 26, 2000. If this requirement is not
met, then the annual interest rate on the notes will initially increase by .5%.
</TABLE>
13
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<TABLE>
<S> <C>
Absence of Public Market: There is no public market for the exchange notes. The exchange
notes will not be listed on any securities exchange or quotation
system. If an active public market does not develop, the market
price and liquidity of the exchange notes may be adversely
affected. Please prefer to the section in this prospectus entitled
"RISK FACTORS--The failure of a market to develop could affect your
ability to, and the price at which you may, resell your securities"
on page 21.
The units containing the outstanding notes currently trade in the
PORTAL Market. Following completion of the exchange offer, the
exchange notes will not be eligible for PORTAL Market trading.
Summary of Risk Factors
You should read the "RISK FACTORS" section of this prospectus beginning on page 19 as well as the
other cautionary statements contained in this prospectus before tendering your outstanding notes
for exchange notes or making an investment in the exchange notes.
</TABLE>
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<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
AND OPERATING DATA
The following tables set forth for the periods and as of the dates
indicated summary consolidated financial information for CFW Communications.
This historical consolidated financial information for the year ended December
31, 1999 is derived from our audited financial statements. The historical
consolidated financial information for the six months ended June 30, 2000 is
derived from our unaudited financial statements. Both our audited and unaudited
financial statements are included elsewhere in this prospectus and should be
read in conjunction with this summary. The pro forma financial information is
derived from the unaudited pro forma combined financial statements contained
elsewhere in this prospectus.
The pro forma adjustments reflected in the information presented below give
effect to:
. the issuance of 3.7 million shares of our common stock for all of the stock
of R&B Communications. This merger has been accounted for using the
purchase method of accounting;
. the acquisition of Richmond-Norfolk PCS for cash of $408.6 million, our 22%
limited partnership interest in RSA 5, the analog assets and operations of
RSA 6 and the assumption of $20.0 million of lease obligations. This
acquisition has been accounted for using the purchase method of accounting;
. the increase in our common ownership in the Virginia Alliance and West
Virginia Alliance of 70.3% and 34.3%, respectively, and the subsequent
consolidation (entities were previously accounted for on the equity method)
due to:
. the merger with R&B Communications, which owns common interests of the
Virginia Alliance and approximately 20.8% and 34.3% of the the West
Virginia Alliance, respectively;
. the Virginia Alliance's redemption of its Series A preferred
membership interests for $16.8 million; and
. the conversion by us and R&B of our respective Series B preferred
membership interests in the Virginia Alliance into common interests.
. The increase in our common ownership interests in the Alliances has
been accounted for as a step acquisition;
. the sale of the capital stock of CFW Information Services Inc., the
provider of our directory assistance services;
. the adjustment to rental expense, depreciation expense and the
amortization of deferred gain associated with the sale and leaseback of
certain communications tower sites;
. the like-kind exchange of certain wireless communications services,
which we refer to in this document as WCS, licenses for certain AT&T PCS
licenses, which has no effect on the pro forma balance sheet or statement
of operations;
. the sale of $375 million of debt securities in a private placement
and the closing of a new senior credit facility;
. the sale of our Series B, Series C and Series D preferred stock for
gross proceeds of $250.0 million;
. the repayment of substantially all of our existing indebtedness and
that of the Alliances; and
. the payment of fees and expenses related to the recent transactions
(as defined below).
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The term recent transactions refers to:
. the merger with R&B Communications;
. the issuance and sale of $375 million of debt securities in a
private placement;
. the borrowings under the new senior credit facility;
. the repayment of our existing senior indebtedness;
. the sale and issuance of our Series B, Series C and Series D
preferred stock;
. our acquisition of Richmond-Norfolk PCS;
. our acquisition of PCS licenses from AT&T and disposition of WCS
licenses to AT&T;
. our consolidation of the Virginia Alliance and the West Virginia
Alliance;
. the dispositions of our partnership interest in RSA 5 and the analog
cellular operations of our RSA 6 partnership; and
. the disposition of our directory assistance operations.
Our unaudited pro forma consolidated balance sheet as of June 30, 2000 has
been prepared as if the recent transactions had occurred on that date. The
unaudited pro forma consolidated statements of operations for the periods
presented give effect to the recent transactions as if they had occurred January
1, 1999. The adjustments, which are based upon available information and upon
certain assumptions that we believe are reasonable, are described in the
accompanying notes, contained elsewhere in this prospectus. The actual
allocation of these adjustments will be different and the difference may be
material.
16
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<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, 1999 June 30, 2000
------------------------------ ---------------------------------
Pro Forma Pro Forma
Historical As Adjusted Historical As Adjusted
------------- ------------- ------------------- -----------
(in thousands, except ratio data)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Selected Operating Data:
Revenues:
Wireline.................................... $44,110 $ 58,610 $ 28,572 $ 36,398
Wireless.................................... 21,692 74,785 11,698 43,434
Other....................................... 4,028 5,040 1,858 7,431
------- -------- -------------- -----------
Total Revenues............................ 69,830 138,435 42,128 87,263
Operating expenses............................ 57,159 206,805 34,844 117,081
------- -------- -------------- -----------
Operating income (loss)....................... 12,671 (68,370) 7,284 (29,818)
Interest expense.............................. (900) (73,275) (1,010) (36,548)
Net income (loss) from continuing operations.. $ 5,891 $(92,499) $ (301) $ (46,539)
Other Financial Data:
Capital expenditures (1)...................... $39,959 $102,450 $ 17,182 $ 51,888
EBITDA (2).................................... $27,945 $ (1,387) $ 14,035 $ 2,572
Ratio of earnings to fixed charges(3)......... 6.7x -- 4.4x --
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------
Pro Forma
Historical As Adjusted
---------------- -------------
(in thousands)
(unaudited)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 249 $ 33,223
Restricted cash............................... -- 67,994
Securities and investments.................... 35,101 58,309
Property, plant and equipment, net............ 129,605 441,153
Total assets.................................. 243,263 1,248,544
Total long-term debt.......................... 51,567 522,039
Redeemable and convertible preferred stock.... -- 237,465
Shareholders' equity.......................... 114,149 326,925
Operating Statistics:
Total PCS licensed POPs....................... 5,500,000 11,000,000
PCS subscribers............................... 62,500 150,500
Internet subscribers.......................... 57,300 59,600
CLEC access lines installed................... 12,400 17,300
ILEC access lines installed................... 39,100 51,400
</TABLE>
(1) Capital expenditures represent additions to: land and buildings; network
plant and equipment; furniture, fixtures and other equipment; and radio
spectrum licenses.
(2) EBITDA is defined as earnings before income taxes and minority interest,
interest expense, interest income, depreciation and amortization, gain
(loss) on sale of fixed assets, net equity income (loss) from investees and
asset impairment charges. We believe EBITDA is a meaningful indicator of
its performance. EBITDA is commonly used in the wireless communications
industry and by financial analysts and others who follow the industry to
measure operating performance. EBITDA should not be considered as an
alternative to operating income or cash flows from operating activities,
both of which are determined in accordance with generally accepted
accounting principles, or as a measure of liquidity. Because it is not
calculated under generally accepted accounting principles, our EBITDA may
not be comparable to similarly titled measures used by other companies.
17
<PAGE>
(3) The ratio of earnings to fixed charges is computed by dividing the sum of
income before taxes, income and losses from equity investees, minority
interests and fixed charges other than capitalized interest by fixed
charges. Fixed charges consists of interest charges, amortization of debt
expenses and discount related to indebtedness, whether expensed or
capitalized, and that portion of rental expenses we believe to be
representative of interest (estimated to be one-third of rental expense).
On a pro forma basis, giving effect to our recent transactions, as
described above, our earnings would have been insufficient to cover fixed
charges by approximately $131.5 million for the year ended December 31,
1999 and $65.2 million for the six months ended June 30, 2000.
18
<PAGE>
RISK FACTORS
Before tendering your outstanding notes for exchange notes or investing in
the exchange notes, you should carefully consider the following factors and
other information in this prospectus. The risks and uncertainties described
below are not the only ones we face. Additional risks not presently known to us
or that we currently deem immaterial may also impair our business operations.
Our business, financial condition, results of operations and our ability to make
payments on the notes could be materially adversely affected by any of the
following risks. This prospectus also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including the risks faced by us described below or elsewhere.
Risks Relating to an Investment in the Exchange Notes
Our significant interest expenses will limit our cash flow and could
adversely affect our operations and our ability to make full payment on your
exchange notes.
We will have a significant level of debt and interest expenses. As of June
30, 2000, after giving effect to the Transactions, we would have had
approximately $545.1 million of indebtedness. We also would have had the ability
to incur $175.0 million of additional debt under our new senior credit facility,
subject to certain conditions. For a description of our recent transactions, see
"OUR BUSINESS -- Recent Developments" on page 100. In addition, for the six
months ended June 30, 2000, after giving effect to the Transactions, our net
interest expense would have been approximately $36.5 million and our earnings
would have been insufficient to cover fixed charges by approximately $65.2
million. Further, the indenture governing the exchange notes allow us to incur
additional debt under certain circumstances. If we incur additional debt, the
related risks that we now face could increase.
Our substantial indebtedness poses important consequences to you, including
the risks that:
. we will use a substantial portion of our cash flow from operations, if any,
to pay principal and interest on our debt, thereby reducing the funds
available for working capital, capital expenditures, acquisitions and other
general corporate purposes;
. our indebtedness may limit our ability to obtain additional financing on
satisfactory terms, if at all;
. insufficient cash flow from operations may force us to sell assets,
restructure or refinance our debt, or seek additional equity capital, which
we may be unable to do at all or on satisfactory terms;
. our level of indebtedness may make us more vulnerable to economic or industry
downturns;
. indebtedness under the new senior credit facility bears interest at variable
rates, which could create higher debt service requirements if market
interest rates increase;
. our failure to comply with the financial and other covenants applicable to
our debt could result in an event of default, which, if not cured or
waived, would have a material adverse effect on us; and
. our debt service obligations increase our vulnerabilities to competitive
pressures, as many of our competitors will be less leveraged than we are.
These risks may directly impact our ability to service our debt obligations,
including the exchange notes.
19
<PAGE>
Because the exchange notes rank below our senior secured debt, you may not
receive full payment on your exchange notes.
Before paying principal and interest on the exchange notes, we must first
make payments on our existing and future senior secured debt, including all
outstanding amounts under our new senior credit facility. As of June 30, 2000,
after giving effect to the Transactions, we would have had approximately $193.1
million of senior secured indebtedness. We also would have had the ability to
incur $175.0 million of additional debt under our new senior credit facility,
subject to certain conditions.
Our obligations under the new senior credit facility are secured by
substantially all of our assets. If we are unable to repay amounts due on our
secured debt, the lenders could proceed against the collateral securing the debt
and we may not have enough assets left to pay you. In addition, the new senior
credit facility prohibits us from paying amounts due on the exchange notes, or
from purchasing, redeeming or otherwise acquiring the exchange notes, if a
default exists under our senior secured debt.
The exchange notes are not secured by any of our assets. If we become
insolvent or are liquidated, or if our debt under the new senior credit facility
is accelerated as a result of a cross-default provision in our outstanding debt
or otherwise, the lenders under such facility would be entitled to exercise the
remedies available to secured lenders under applicable law. Our bank lenders
have a claim on substantially all our assets. Accordingly, there may be no
assets remaining for you or any remaining assets may be insufficient to pay you
in full. See "DESCRIPTION OF CERTAIN INDEBTEDNESS" on page 126.
None of our subsidiaries is guaranteeing the exchange notes. All of our
direct and indirect subsidiaries will guarantee our obligations under our new
senior credit facility. In addition, the exchange notes are subordinated in
right of payment to all other debt and other liabilities, including trade
payables and guarantees, of our subsidiaries. As of June 30, 2000, after giving
effect to the Transactions, our consolidated liabilities, excluding the exchange
notes and the subordinated notes were $313.1 million, substantially all of which
were liabilities of our subsidiaries. Substantially all of our consolidated
assets are held by our subsidiaries. Any right we may have to receive assets of
our subsidiaries upon their liquidation or reorganization, and your resulting
rights to participate in those assets, would be effectively subordinated to the
claims of our subsidiaries' creditors.
The units were sold at a discount and some of the price that investors paid
for the units will be attributed to the warrants. Therefore, a holder's claim in
bankruptcy may be for less than the principal amount of notes that it holds.
We depend upon our subsidiaries for the cash flow necessary to service our
debt obligations, including the exchange notes.
The exchange notes are obligations exclusively of CFW Communications, which
is a holding company. We derive substantially all of our revenues from our
operating subsidiaries and do not have significant operations of our own. As a
result, we are dependent upon the ability of our subsidiaries to provide us with
cash, in the form of dividends, intercompany credits, loans or otherwise, to
meet our debt service obligations, including our obligations under the exchange
notes. These subsidiaries are separate and distinct legal entities and have no
obligations to pay any amounts due on the exchange notes or to make any funds
available. In addition, dividends, loans or other distributions to us from our
subsidiaries may be subject to contractual or other restrictions, will depend
upon the results of operations of such subsidiaries and may be subject to other
business considerations.
Your rights to be repaid would be adversely affected if a court determined
that we issued the exchange notes for inadequate consideration or with intent to
defraud our creditors.
Our ability to repay the exchange notes may be adversely affected if it is
determined in a bankruptcy, insolvency or similar proceeding that:
. we issued the exchange notes with intent to delay or defraud any creditor;
20
<PAGE>
. we contemplated insolvency with a design to prefer some creditors to the
exclusion of others; or
. we issued the exchange notes for less than reasonably equivalent value and
were insolvent at the time the notes were originally issued.
In such event, a court could, among other things, void all or a portion of
our obligations to you. In this case, you may not be repaid in full. A court may
also subordinate our obligations to you to our other debt to a greater extent
than would otherwise be the case. In this case, other creditors would be
entitled to be paid in full before any payment could be made on the exchange
notes. We cannot assure you that, after providing for all prior claims, there
would be sufficient assets to satisfy your claims.
The failure of a market to develop could affect your ability to, and the
price at which you may, resell your securities.
The exchange notes will be new issues of securities for which there is no
existing trading market. We cannot assure you as to the liquidity of markets
that may develop for the exchange notes, your ability to sell the exchange notes
or the price at which you would be able to sell the exchange notes. If such
markets were to develop, the exchange notes could trade at a discount from their
face value depending on many factors, including prevailing interest rates and
the markets for similar securities. In addition, any market-making by the
placement agents of the outstanding exchange notes may be limited during any
registered exchange offer or the pendency of any resale registration statement
and may be discontinued at any time without notice. We do not intend to apply
for listing of the exchange notes on any securities exchange. As a result, we
cannot assure you that an active trading market will ultimately develop for the
exchange notes. The liquidity of, and trading market for, the exchange notes
also may be adversely affected by changes in the market for high yield
securities and by changes in our financial performance or prospects or in the
prospects for companies in our industry generally.
If you do not exchange your outstanding notes for registered notes, your
notes will continue to have restrictions on transfer.
If you do not exchange your outstanding notes for exchange notes in the
exchange offer, or if your outstanding notes are tendered but not accepted, your
notes will continue to have restrictions on transfer. In general, you may offer
or sell any outstanding notes only if the notes are registered under the
Securities Act and applicable state laws, or resold under an exemption from
these laws. We do not intend to register the outstanding notes under the
Securities Act, other than in the limited circumstances described in the
registration rights agreement discussed in the section "DESCRIPTION OF THE
EXCHANGE NOTES -- Registration Rights" on page 129.
The issuance of the registered notes may adversely affect the market for
outstanding notes.
If outstanding notes are tendered for exchange, the trading market for
untendered and tendered but unaccepted outstanding notes could be adversely
affected. Please refer to the section in this prospectus entitled "THE EXCHANGE
OFFER -- Consequences of Failure to Exchange."
Risks Relating to Us and Our Business
Our historical operations results are not representative of future results.
Our operating results have historically been generated by our ILEC
operations, and we have had stable revenues and positive cash flow from
operations and EBITDA. In recent years, our cash flows and EBITDA have been
negatively impacted by our early stage businesses. This trend will be
exacerbated because we are acquiring additional early stage businesses in the
Transactions. During the second half of 2000, we expect to generate significant
operating losses and negative cash flow from operations.
21
<PAGE>
We may not be able to manage the rapid growth associated with our strategy
of growth through acquisitions, which would cause significant strain on our
management, financial and other resources.
As part of our growth strategy, we intend to expand our current business in
adjacent areas through acquisitions, including, for example, the merger and our
acquisition of Richmond-Norfolk PCS. These transactions impose substantial
integration risks on us. We may also engage in other acquisitions, including
local and regional Internet service providers, ILEC and CLEC operations, PCS
licenses and fiber optic networks. Our ability to engage in acquisitions will
depend on our ability to identify attractive acquisition candidates, and if
necessary, obtain financing on satisfactory terms. We will also face competition
for suitable acquisition candidates, which may increase our costs and limit the
number of suitable acquisition candidates. In addition, customers and employees
frequently terminate their relationships with acquired companies. Expansion of
our operations and the integration of future acquisitions will place a
significant strain on our management, financial and other resources and on our
systems.
We face risks that the systems we own and acquire will not perform as we
expect. In addition, we may incur unanticipated liabilities or contingencies
from acquired companies and we may have reduced earnings due to amortization,
increased interest costs and costs related to integration. Our ability to manage
future growth will depend upon our ability to:
. monitor operations;
. control costs;
. integrate acquired operations, including financial, computer, operating
and accounting systems;
. prevent the attrition of key employees and the loss of significant
customers of acquired businesses;
. maintain effective quality controls; and
. expand our internal management, technical and accounting systems.
A failure to implement and improve our systems, procedures and controls in
an efficient manner and at a pace consistent with the growth of our business
could have a material adverse effect on our business, prospects, operating
results and ability to service our debt.
We face competition in the communications industry generally from
competitors with substantially greater resources than us and from competing
technologies.
We operate in an increasingly competitive environment. As an integrated
communications provider, we face competition in our business from:
. competitive local exchange carrier operations (which we refer to in this
document as CLEC), including Adelphia, Fibernet and Comscape;
. Internet service providers, including AOL, EarthLink, PSI Net, and
BellSouth;
. wireless communications providers, including Sprint, AT&T/SunCom, GTE,
Verizon Wireless and Cellular One;
22
<PAGE>
. cable television companies, including Adelphia; and
. resellers of communications services and enhanced services providers.
In addition, we expect that, over time, wireless communications services
providers will compete more directly with wireline telephone services providers.
We generally compete on the basis of price and service quality.
Many communications services can be provided without incurring an
incremental charge for an additional unit of service. For example, there is
virtually no marginal cost for a carrier to transmit a call over its own
telephone network. As a result, once there are several facilities-based carriers
providing a service in a given market, price competition is likely and can be
severe. As a result, we have experienced price competition, which is expected to
continue. In each of our service areas, additional competitors could build
facilities. If additional competitors build facilities in our service areas,
this price competition may increase significantly.
Many of our competitors are, or are affiliated with, major communications
companies that have substantially greater financial, technical and marketing
resources than we have and greater name recognition and more established
relationships with a larger base of current and potential customers, and
accordingly, we may not be able to compete successfully. We expect that
increased competition will result in more competitive pricing. We have already
witnessed declining average revenue per subscriber due to two new entrants in
the Richmond Major Trading Area in 1999. Companies that have the resources to
sustain losses for some time have an advantage over those companies without
access to these resources. We cannot assure you that we will be able to achieve
or maintain adequate market share or revenue or compete effectively in any of
our markets.
Additionally, many of our competitors have national networks, which enables
them to offer long-distance telephone services to their subscribers without
imposing additional charges, or incurring any incremental cost. Therefore, some
of our competitors are able to offer pricing plans that include "free" long-
distance. We do not have a national network, and we must pay other carriers a
per-minute charge for carrying long-distance calls made by subscribers.
Accordingly, we will not be able to provide long-distance services without
imposing additional charges on subscribers or subsidizing their long-distance
calls and may face a disadvantage in attracting or retaining customers who
require long-distance services.
We also compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio,
domestic and global mobile satellite service and third generation, or 3G,
wireless technologies. These technologies may have advantages over the
technology we use and may ultimately be more attractive to customers. Each of
the factors and sources of competition discussed above could have a material
adverse affect on our business.
If we are unable to add a sufficient number of new PCS customers to support
our PCS business plans and to generate sufficient cash flow to service our debt,
we will have to depend significantly on our local telephone operations to
generate cash flow.
Our success will depend on our ability to expand our current customer base,
penetrate our target markets and otherwise capitalize on wireless opportunities.
We must increase our subscriber base without excessively reducing the prices we
charge to realize the anticipated cash flow, operating efficiencies and cost
benefits of our network. Additionally, our business strategy is to establish a
PCS presence in new markets and then supplement our PCS services with CLEC and
Internet services. This strategy is in the early stages of implementation and is
still unproven. We have historically relied significantly on revenues generated
by our local telephone operations to grow our business. If our PCS strategy is
unsuccessful, we will remain heavily dependent on our local telephone operations
to meet our cash flow needs.
23
<PAGE>
If we fail to raise the capital required to build-out and operate our
planned networks, we may experience a material adverse effect on our business.
We require significant additional capital to build-out and operate planned
networks and for general working capital needs. After giving effect to our
recent transactions, as more fully described in "OUR BUSINESS -- Recent
Developments" on page 100, we expect our capital expenditures for the last six
months of 2000 to be between $60 and $75 million and for the year 2001 to be
between $80 to $100 million. Our cash flows from operations will not be enough
to cover our anticipated capital expenditures. We may require additional and
unanticipated funds if we make acquisitions, if there are significant departures
from our current business plan, if we have unforeseen delays, cost overruns,
unanticipated expenses due to regulatory changes, or if we incur engineering
design changes or other technological risks. We will also require additional
capital to invest in any new wireless or wireline opportunities, including
capital for license acquisition costs. We may seek to obtain new capital through
subsequent public or private equity or debt financings. However, capital markets
have recently been volatile and uncertain. These markets may not improve, and we
may not be able to access these markets to raise additional capital on favorable
terms, or at all. If we fail to obtain required new financing, that failure
would have a material adverse effect on our business and our financial
condition. For example, if we are unable to access capital markets, we may have
to restrict our activities or sell our interests in one or more of our
subsidiaries or other ventures at a distressed sale price.
If we experience a high rate of PCS customer turnover, our costs could
increase and our revenues could decline.
Many PCS providers in the U.S. have experienced a high rate of customer
turnover, even when compared to analog cellular industry averages. The rate of
customer turnover may be the result of several factors, including limited
network coverage, reliability issues such as blocked or dropped calls, handset
problems, inability to roam onto third-party networks at competitive rates, or
at all, price competition and affordability, customer care concerns and other
competitive factors. We cannot assure you that our strategies to address
customer turnover will be successful. A high rate of customer turnover could
reduce revenues and increase marketing costs to attract the minimum number of
replacement customers required to sustain our business plan, which, in turn,
could have a material adverse effect on our business, prospects, operating
results and ability to service our debt.
Our results of operations may decline if the roaming rates we charge for
the use of our network by outside customers decrease or the roaming rates we pay
for our customers' usage of third party networks increase.
We earn revenues from customers of other wireless communications providers
who enter our service areas and use our network, commonly referred to as
roaming. Roaming rates per minute have declined over the last several years and
we expect that these declines will continue for the foreseeable future.
Similarly, because we do not have a national network, we must pay roaming
charges to other communications providers when our wireless customers use their
networks. We have entered into roaming agreements with other communications
providers that govern the roaming rates that we are permitted to charge and that
we are required to pay. If these roaming agreements are terminated, the roaming
rates we currently charge may further decrease and the roaming rates that we are
charged may increase and, accordingly, our revenues and cash flow may decline.
Our larger competitors may build networks in our markets, which may result
in decreased roaming revenues and severe price-based competition.
We compete with several wireless providers in each of our markets. Our current
roaming partners or other larger wireless providers might build their own
digital PCS networks in our service areas. Should this occur, use of our
networks for roaming would decrease and our roaming revenues would be adversely
affected. Once a digital PCS system is built out, there are only marginal costs
to carrying an additional call, so a larger number of competitors in our service
areas could introduce significantly higher levels of price competition and
reduce our revenues, as has occurred in many areas in the United States. Over
the last three years, the per-minute rate for wireless services has declined. We
expect this trend to continue into the foreseeable future. As per-minute rates
continue to decline, our revenues and cash flows may be adversely impacted.
24
<PAGE>
The loss of officers and skilled employees that we depend upon to operate
our business and implement our business plans could have a material adverse
effect on our business.
The loss of our key officers could hurt our ability to offer our products
and services. We believe that our future success will also depend in large part
on our continued ability to attract and retain highly qualified technical and
management personnel. We believe that there is and will continue to be intense
competition for qualified personnel in the PCS equipment and services industry
as the PCS market continues to develop. Additionally, we will rely on the
expertise of various R&B (upon completion of the merger) and Richmond-Norfolk
PCS officers and skilled employees to execute our business plans. We may not be
successful in retaining key personnel or in attracting and retaining other
highly qualified technical and management personnel.
Continued expansion of our network, services and subscribers could be
slowed if we cannot manage our growth.
We have rapidly expanded and developed our network and geographic areas of
operation. Our expansion and development has placed and will continue to place
significant demands on our management, operational and financial systems and
procedures and controls. We may not be able to manage our anticipated expansion
effectively, which would harm our business, results of operations, financial
condition and our ability to make payments on our debt.
Our further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies;
. regulatory and governmental developments;
. changes in the competitive climate in which we operate;
. successful implementation of customer billing, order processing and
network management systems;
. increasing number of customers and changes in their service
requirements;
. demand for greater data transmission capacity;
. availability of financing;
. technological developments;
. availability of rights-of-way, building access and antenna sites;
. availability of qualified consultants and contractors to assist in the
design and engineering of our network;
. our ability to hire and retain a sufficient number of qualified
employees;
. existence of strategic alliances or relationships; and
. emergence of future opportunities.
We will need to continue to improve our operational and financial systems
and our procedures and controls as we grow. We must also develop, train and
manage our existing and new employees.
25
<PAGE>
Failure to maintain billing and customer information systems effectively
may adversely affect our ability to bill and receive payments from customers.
We use sophisticated information and processing systems which are vital to
our growth and our ability to monitor costs, bill customers, process customer
orders and achieve operating efficiencies. Billing and information systems have
historically been produced by outside vendors. As we continue providing more
services, we will need more sophisticated billing and information systems. In
addition, we must successfully integrate the billing and information systems of
R&B, Richmond-Norfolk PCS, and other future acquisitions into our systems. Our
failure, or the failure of vendors, to adequately identify all of our
information and processing needs or to upgrade systems as necessary could have a
material adverse effect on our business. Also, call detail records may not be
accurately recorded and customer bills may not be generated promptly or
accurately, which could adversely affect our ability to promptly collect on
customer balances due to us.
We must secure unbundled network elements at reasonable rates or our CLEC
expansion may be delayed and our quality of service may decline.
In providing our CLEC services, we interconnect with and use incumbent
telephone companies' networks to access our customers. Therefore, we depend upon
the technology and capabilities of incumbent telephone companies. Our CLEC
operations depend significantly on the quality and availability of the incumbent
telephone companies' copper lines and the incumbent telephone companies'
maintenance of these lines. We must also maintain efficient procedures for
ordering, provisioning, maintaining and repairing lines from the incumbent
telephone companies. We may not be able to obtain the copper lines and services
we require from the incumbent telephone companies at satisfactory quality
levels, rates, terms and conditions. If we fail to do so, it could delay the
expansion of our CLEC networks and degrade the quality of our services to our
CLEC customers. If these events occur, we will experience a material adverse
effect on our CLEC business.
We also provide a digital subscriber line service, which we refer to in
this prospectus as DSL. To provide unbundled DSL-capable lines that connect each
end-user to our equipment, we rely on incumbent telephone companies. The
Telecommunications Act generally requires that charges for these unbundled
network elements be cost-based and nondiscriminatory. Charges for DSL-capable
lines and other unbundled network elements may vary based on rates proposed by
incumbent telephone companies and approved by state regulatory commissions.
Increases in these rates could result in a material adverse effect on our CLEC
business.
We cannot assure you that our anticipated merger with R&B Communications
will be completed in a timely manner or at all.
We have entered into an agreement and plan of merger dated June 16, 2000 to
merge with R&B Communications. Upon completion of the merger, we will gain a
controlling interest in the Virginia Alliance and the West Virginia Alliance,
through which we offer digital PCS services in Virginia, West Virginia and
Kentucky. Additionally, we expect to benefit from the synergies created by
adding geographic markets that are contiguous to markets we currently serve. The
completion of the merger is subject to approval by our shareholders and R&B
Communications' shareholders, the receipt of necessary regulatory approvals and
the satisfaction or waiver of customary closing conditions. Accordingly,
notwithstanding that a majority of R&B Communications' shareholders have signed
a voting agreement in favor of the merger, we cannot assure you that the merger
will be completed in a timely manner, or at all, or that we will ultimately
realize the expected benefits of the merger. See "OUR BUSINESS -- Recent
Developments -- R&B Communications."
26
<PAGE>
Successful expansion of our CLEC operations into new markets is dependent
on interconnection agreements, permits and rights-of-way.
The successful expansion of our CLEC operations will depend, in part, on
our ability to implement existing interconnection agreements and enter into and
implement new interconnection agreements as we expand into new markets.
Interconnection agreements are subject to negotiation and interpretation by the
parties to the agreements and are subject to state regulatory commission, FCC
and judicial oversight. We have successfully negotiated interconnection
agreements with the ILECs in the areas we serve. These interconnection
agreements have fixed terms, however, and several have expired or will expire in
the near future. These agreements must be renegotiated or re- arbitrated. We
cannot assure you that we will be able to renegotiate existing or enter into new
interconnection agreements in a timely manner on terms favorable to us. We must
also maintain existing and obtain new local permits, including rights to utilize
underground conduit and pole space and other rights-of-way. We cannot assure you
that we will be able to maintain our existing permits and rights or obtain and
maintain other permits and rights needed to implement our business plan on
acceptable terms. Cancellation or non-renewal of our interconnection agreements,
permits, rights-of-way or other arrangements could materially adversely affect
our business. In addition, the failure to enter into and maintain any required
arrangements for a new market may affect our ability to develop that market.
If we lose our collocation rights or our right to install equipment on
towers owned by other carriers or fail to obtain zoning approval for our cell
sites, we may have to rebuild our network.
We currently collocate our cell sites on facilities shared with one or more
wireless providers. As we expand our network, we intend to continue to collocate
our cell sites. If we are unable to secure future collocation agreements in
favorable locations or our current collocation agreements are terminated, we
would have to find new sites. Additionally, if our equipment had already been
installed we may have to rebuild that portion of our network. Some of the cell
sites are likely to require us to obtain zoning variances or local governmental
or third party approvals or permits. We may also have to make changes to our
radio frequency design as a result of difficulties in the site acquisition
process.
We may have difficulty in obtaining infrastructure equipment required in
order to meet our network expansion goals.
If we are unable to acquire the necessary equipment to expand our fiber
optic network in a timely manner, we may be unable to provide wireless
communications services comparable to those of our competitors or to meet our
expansion goals. The demand for the equipment that we need to construct our
fiber optic network is considerable and manufacturers of this equipment could
have substantial order backlogs. Accordingly, the lead time for the delivery of
this equipment may be long. Some of our competitors purchase large quantities of
communications equipment and may have more established relationships with the
manufacturers of this equipment. Consequently, they may receive priority in the
delivery of this equipment.
A substantial increase in fraudulent and/or unbilled use of our network
would adversely affect our business operations.
We incur costs associated with unauthorized use of our network. Fraud could
adversely affect our business by increasing interconnection costs, capacity
costs, administrative and capital costs, costs incurred for fraud prevention,
and payments to other carriers for unbillable fraudulent roaming. If the costs
associated with unauthorized use of our wireless network become substantial, we
may experience a material adverse effect on our business, prospects, operating
results and ability to service our debt.
The loss of our licenses could adversely affect our ability to provide
wireless and wireline services.
In the United States, cellular, personal communications services and
microwave licenses are valid for ten years from the effective date of the
license. Licensees may renew their licenses for additional ten-year periods by
filing a renewal application with the FCC. The renewal applications are subject
to FCC review and are put out for public comment to ensure that the licensees
meet their licensing requirements and comply with other applicable FCC mandates.
If we fail to file for renewal of these licenses or fail to meet any licensing
requirements, we could be denied a license renewal and, accordingly, our ability
to continue to provide service in that license area would be adversely affected.
27
<PAGE>
Because we rely heavily on a retail distribution channel, we are subject to
risks generally associated with retail operations that could adversely impact
our operations and financial condition.
Our sales strategy utilizes product and service distribution through retail
stores and kiosks. We currently own 31 related outlets and 8 kiosks. Also, as we
expand into new markets, we will continue to open new retail outlets.
Accordingly, we must successfully manage various risks associated with retail
operations, including inventory management, internal and external theft, the
ability to hire and retain qualified and knowledgeable employees, employee
turnover and training expenses, collective employee action, and identifying and
securing suitable locations. If we can't manage successfully any of these
factors successfully, it could have a material adverse impact on our business
strategy, operations and financial condition.
Risks Relating to the Communications Industry
Rapid and significant technological changes in the communications industry
may adversely affect us.
We face rapid and significant changes in technology, and we rely on third
parties for the development of and access to new technology. New technologies
may be protected by patents or other intellectual property laws and therefore
may not be available to us. We employ code division multiple access, known as
CDMA, which is a relatively new technology. CDMA may not provide the advantages
expected by us. If another technology becomes the preferred industry standard,
we may be at a competitive disadvantage and competitive pressures may require us
to change our digital technology which, in turn, may require us to incur
substantial costs. We may not be able to respond to such pressures and implement
new technology on a timely basis, or at an acceptable cost.
In particular, the wireless communications and Internet industries are
experiencing significant technological change, including:
. an increasing pace in digital upgrades of existing analog wireless
systems;
. evolving industry standards;
. the allocation of new radio frequency spectrum in which to license and
operate advanced wireless services;
. ongoing improvements in the capacity and quality of digital technology;
. shorter development cycles for new products and enhancements; and
. changes in end-user requirements and preferences.
We cannot predict the effect of technological changes on our business. We
believe our future success will depend, in part, on our ability to anticipate or
adapt to such changes and to offer, on a timely basis, services that meet
customer demands. We cannot assure you that we will obtain access to new
technology on a timely basis or on satisfactory terms. Our failure to obtain
access to this new technology could have a material adverse effect on our
business, prospects, operating results and ability to service our debt,
including the exchange notes.
We are subject to a complex and uncertain regulatory environment that may
require us to alter our business plans and increase our competition.
The U.S. communications industry is subject to federal, state and other
regulation that is continually evolving. As new communications laws and
regulations are issued, we may be required to modify our business plans or
operations. We cannot assure you that we can do so in a cost-effective manner.
Federal and state regulatory trends in favor of reduced regulation have had, and
are likely to have, both positive and negative effects on us and our ability to
compete. The regulatory environment governing ILEC operations has been and will
likely continue to be very liberal in its approach to promoting competition and
network access.
28
<PAGE>
Although no CLECs have entered our ILEC markets, it is possible that one or more
may enter our market to compete for our largest business customers. Federal or
state regulatory changes and any resulting increase in competition may have a
material adverse effect on our businesses. Further, we cannot assure you that
federal, state or local governments will not enact regulations or take other
actions that might have a material adverse effect on our business. These changes
could materially and adversely affect our business prospects, operating results
or our ability to service our debt, including the notes. See "OUR BUSINESS --
Regulation" on page 115.
The possible health effects of radio frequency emission may adversely
affect the demand for wireless telephone services.
Media reports have suggested that certain radio frequency emissions from
portable wireless telephones may be linked to various health concerns, including
cancer, and may interfere with heart pacemakers and other medical devices.
Concerns over radio frequency emissions and interference may have the effect of
discouraging the use of wireless telephones, which could have an adverse effect
upon our business. In recent years, the FCC has updated the guidelines and
methods it uses for evaluating radio frequency emissions from radio equipment,
including portable wireless telephones. In addition, interest groups have
requested that the FCC investigate claims that digital technologies pose health
concerns and cause interference with hearing aids and other medical devices.
The risks associated with using wireless telephones while driving may lead
to increased legislation or liability for accidents, which may have an adverse
impact on our operations.
There may be safety risks associated with the use of portable wireless
phones while driving. Concerns over these putative safety risks and the effect
of any legislation that may be adopted in response to these risks could limit
our ability to market and sell our wireless service. Furthermore, its possible
that government authorities will increase regulations of wireless telephones
resulting from these concerns or that wireless telephone companies may be liable
for costs or damages associated with these concerns. If new legislation limits
our ability to market and sell wireless service or results in decreased demand
for our services, or we are held liable for automobile accidents that occur
while a driver is using a wireless phone, our operations and financial condition
may be adversely impacted.
29
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference into this
prospectus contain various "forward-looking statements," as defined in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, as amended. These forward-looking statements are based on the beliefs
of our management, as well as assumptions made by, and information currently
available to, our management. We have based these forward-looking statements on
our current expectations and projections about future events and trends
affecting the financial condition of our business. These forward-looking
statements are subject to risks and uncertainties that may lead to results that
differ materially from those expressed in any forward-looking statement made by
us or on our behalf, including, among other things:
. changes in industry conditions created by federal and state legislation
and regulations;
. successful integration of acquisitions;
. the achievement of build-out, operational, capital, financing and
marketing plans relating to deployment of PCS services;
. retention of our existing customer base and service levels and our
ability to attract new customers;
. continuation of economic growth and demand for wireless and wireline
communications services;
. rapid changes in technology;
. the competitive nature of the wireless telephone and other
communications services industries;
. adverse changes in the roaming rates we charge and pay;
. the capital intensity of the wireless telephone business and our debt
structure;
. our substantial debt obligations and our ability to service those
obligations;
. the cash flow and financial performance of our subsidiaries;
. restrictive covenants and consequences of default contained in our
financing arrangements;
. completion of our anticipated merger with R&B Communications;
. our opportunities for growth through acquisitions and investments and
our ability to manage this growth;
. the level of demand for competitive local exchange services in smaller
markets;
. our ability to manage and monitor billing; and
. possible health effects of radio frequency transmission.
Words and phrases such as "expects," "estimates," "intends," "plans,"
"believes," "projection," "will continue" and "is anticipated" are intended to
identify forward-looking statements.
The results referred to in forward-looking statements may differ materially
from actual results because they involve estimates, assumptions and
uncertainties. We are not obligated to update or revise any forward-looking
statements or to advise of changes in the assumptions on which they are based,
whether as a result of new information, future events or otherwise. All forward-
looking statements should be viewed with caution.
30
<PAGE>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. In consideration for issuing the exchange notes, we will receive in
exchange a like principal amount of outstanding notes. The outstanding notes
surrendered in the exchange offer will be retired and canceled and cannot be
reissued. The net proceeds from the sale of the units, consisting of the
outstanding notes and warrants, and the subordinated notes, approximately $361
million after deducting the placement agents' fees and the estimated expenses of
the offering, were used to fund part of the cash portion of the purchase price
of Richmond-Norfolk PCS and to fund an escrow account to cover the first four
interest payments on the notes.
31
<PAGE>
Capitalization
The following information should be read in conjunction with the
consolidated financial statements and related notes thereto and other financial
information either contained elsewhere in this prospectus or incorporated herein
by reference. See "WHERE YOU CAN FIND MORE INFORMATION" on page 165.
The following table sets forth our capitalization as of June 30, 2000.
. an actual basis;
. on an as adjusted basis, to give effect to:
- the issuance and sale of the units and subordinated notes;
- borrowings under our new senior credit facility;
- the repayment of substantially all of our existing indebtedness and
that of the Alliances;
- the issuance and sale of our Series B convertible redeemable
preferred stock, Series C convertible redeemable preferred stock
and Series D redeemable preferred stock;
- the issuance of warrants to purchase 500,000 shares of our common
stock in connection with the issuance of our Series B Preferred
Stock;
- the issuance of 300,000 warrants to purchase our common stock in
connection with certain financings and the subordinated notes;
- the acquisition of Richmond-Norfolk PCS; and
- the dispositions of our partnership interest in RSA 5 and the
analog operations of RSA 6 in connection with our acquisition of
Richmond-Norfolk PCS.
. on a pro forma as adjusted basis, to give effect to the above events and:
- the merger with R&B Communications;
- the consolidation of the Virginia Alliance and the West Virginia
Alliance; and
- the sale of our directory assistance operations.
32
<PAGE>
You should read this table with the unaudited pro forma consolidated financial
information and the unaudited financial statements and the notes thereto
included in the back of this prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
----------------------
<S> <C> <C> <C>
As Pro Forma
Actual Adjusted As Adjusted
--------- ------------ -----------
(in thousands, except share data)
(unaudited)
Cash, restricted cash and advances:
Cash.................................................................. $ 249 $ 12,412 $ 33,223
Restricted cash....................................................... - 67,994(1) 67,994(1)
Advances to PCS Alliances............................................. - 162,543(2) -
--------- -------- ----------
Total cash, restricted cash and advances............................ 49 242,949 101,217
--------- -------- ----------
Long-term debt:
Existing lines of credit.............................................. 50,216 - -
Existing secured notes................................................ 1,351 1,351 20,413
Senior secured credit facility........................................ - 150,000(2) 150,000
Senior unsecured notes due 2010....................................... - 269,218(3) 269,218(3)
Subordinated notes due 2011........................................... - 82,801(4) 82,801(4)
Capital lease obligations............................................. - 22,648 22,648
--------- -------- ----------
Total long-term debt................................................ 51,567 526,018 545,080
--------- -------- ----------
Redeemable preferred stock:
Series D preferred shares, no shares issued and outstanding, actual;
77,200 shares issued and outstanding, as adjusted, and pro forma
as adjusted.......................................................... - 73,435 73,435
--------- -------- ----------
Convertible redeemable preferred stock:
Series B preferred shares, no shares issued and outstanding, actual;
112,500 shares issued and outstanding, as adjusted and pro forma
as adjusted.......................................................... - 106,670 106,670
Series C preferred shares, no shares issued and outstanding, actual;
60,300 shares issued and outstanding, as adjusted and pro forma
as adjusted.......................................................... - 57,360 57,360
--------- -------- ----------
Total convertible redeemable preferred stock.................... - 164,030 164,030
--------- -------- ----------
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized; no
shares issued and outstanding, actual................................ - - -
Warrants to purchase common stock; no warrants issued and
outstanding, actual; warrants to purchase 1,304,000 shares of
common stock issued and outstanding, as adjusted and pro forma
as adjusted(5)....................................................... - 22,874 22,874
Common stock, no par value, 20,000,000 shares authorized;
13,116,553 shares issued and outstanding actual; 13,116,553
shares issued and outstanding, as adjusted; 16,833,067 shares
issued and outstanding, pro forma as adjusted(6)..................... 44,747 44,747 185,452
Retained earnings..................................................... 49,270 82,656 88,953
Unrealized gain on securities' available for sale, net................ 20,132 20,132 29,646
--------- -------- ----------
Total shareholders' equity............................................ 114,149 334,439 490,955
--------- -------- ----------
Total capitalization................................................ $165,716 $933,892 $1,109,470
========= ======== ==========
</TABLE>
33
<PAGE>
(1) Approximate amount held in an escrow account used to fund the first four
interest payments on the senior notes offered hereby.
(2) Before we acquire a controlling interest in the Virginia Alliance and the
West Virginia Alliance, $162.5 million of the amount borrowed under our new
senior credit facility will be loaned to them, which they will use to repay
their indebtedness to the Rural Telephone Finance Cooperative. This amount
will be reflected as an advance to the Alliances.
(3) Net of the $3.9 million discount associated with the issue price and $6.9
million of the estimated fair value of the warrants attached.
(4) Net of the $12.2 million of the estimated fair value of the warrants
attached.
(5) In connection with the issuance of the Series B Preferred Stock, we have
issued to Welsh Carson and Morgan Stanley Dean Witter warrants to purchase
444,444.4 and 55,555.6 shares of our common stock, respectively, at an
exercise price of $50.00 per share. We have also issued warrants to
purchase 504,000 shares of our common stock in connection with the issuance
of the senior notes and 300,000 shares of common stock in connection with
the issuance of the subordinated notes, at exercise prices of $47.58 and
$.01 per share, respectively.
(6) In connection with seeking our shareholders' approval of the R&B
Communications merger, we intend to seek their approval to increase the
number of our authorized shares of common stock to 75 million shares.
34
<PAGE>
THE EXCHANGE OFFER
General
We are offering to exchange up to $280,000,000 in the aggregate principal
amount of exchange notes for the same aggregate principal amount of outstanding
notes. We are making the exchange offer for all of the outstanding notes. Your
participation in the exchange offer is voluntary and you should carefully
consider whether to accept this offer.
Purpose and Effect of the Exchange Offer
We issued and sold $280,000,000 in principal amount of the outstanding
notes on July 26, 2000 in a transaction exempt from the registration
requirements of the Securities Act. The notes issued and sold were part of units
consisting of one senior note and one warrant to purchase 1.8 shares of our
common stock. Upon consummation of this exchange offer, the notes and warrants
will become separately transferable. Because the transaction was exempt under
the Securities Act, you may re-offer, resell, or otherwise transfer the
outstanding notes only if registered under the Securities Act or if an
applicable exemption from the registration and prospectus delivery requirements
of the Securities Act is available.
In connection with the issuance of the outstanding notes, we entered into a
registration rights agreement. Under the registration rights agreement, we
agreed to:
. prepare and file a registration statement with the SEC for the
proposed purpose of exchanging the outstanding notes for notes which
have been registered under the Securities Act;
. use our best efforts to cause the registration statement to become
effective within 180 days following the original issuance of the
outstanding notes;
. keep the exchange offer open for at least 20 business days after its
commencement; and
. accept for exchange all outstanding notes validly tendered by and not
withdrawn in accordance with the terms of the exchange offer set forth
in the registration statement.
In addition, there are circumstances where we are required to use our best
efforts to file a shelf registration statement with respect to resales of the
notes. We have filed a copy of the registration rights agreement as an exhibit
to the registration statement that this prospectus forms a part of and that has
been filed with the SEC.
As soon as practicable after the registration statement is declared
effective, we will offer the holders of outstanding notes who are not prohibited
by any law or policy of the SEC from participating in this exchange offer the
opportunity to exchange their outstanding notes for exchange notes registered
under the Securities Act that are substantially identical to the outstanding
notes, except that the exchange notes will not contain terms with respect to
transfer restrictions, registration rights and additional interest.
Additional interest above the stated rate will accrue on the notes at a
rate of 0.5% per annum if the exchange offer is not consummated on or prior to
180 days after July 26, 2000. Any additional interest will accrue on the
outstanding notes until the exchange offer is consummated. Any additional
interest will be payable in cash semiannually, in arrears, on each interest
payment date, until the exchange offer is consummated.
35
<PAGE>
To exchange your outstanding notes for freely transferable exchange notes,
you will be required to make the following representations:
. any exchange notes that you receive will be acquired in the ordinary
course of your business;
. you have no arrangement or understanding with any person or entity to
participate in the distribution of the exchange notes;
. you are not our "affiliate," as defined in Rule 405 of the Securities
Act;
. you are not a broker-dealer, and you are not engaged in and do not
intend to engage in the distribution of the exchange notes; and
. if you are a broker-dealer that will receive exchange notes for your
own account and you acquired those notes as a result of market-making
activities or other trading activities, you will deliver a prospectus,
as required by law, in connection with any resale of the exchange
notes.
Resale of Exchange Notes
Based on the interpretations of the SEC staff in no-action letters issued
to third parties, we believe that exchange notes issued in the exchange offer
may be offered for resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery provisions of the
Securities Act, if:
. you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act;
. the exchange notes are acquired in the ordinary course of your business;
and
. you do not intend to participate in any distribution of the exchange notes.
Broker-dealers that acquired outstanding notes directly from us may not
rely on the interpretations of the SEC described above. Accordingly, in order to
sell their notes, broker-dealers that acquired outstanding notes directly from
us must comply with the registration and prospectus delivery requirements of the
Securities Act, including being named as a selling security holder in any resale
prospectus. If you are a broker-dealer that will receive exchange notes for your
own account in exchange for outstanding notes and you acquired those notes as a
result of market-making activities or other trading activities, you must deliver
a prospectus, as required by law, in connection with any resale of the exchange
notes. Only broker-dealers that acquired outstanding notes as a result of
market-making or other trading activities may participate in the exchange offer.
If you do not satisfy the above conditions, you
. cannot rely on the interpretations by the SEC staff; and
. must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale
transaction.
We do not intend to seek our own no-action letter, and we cannot assure you that
the SEC staff would make a similar determination with respect to the exchange
notes as it has in prior no-action letters issued to other parties. In November
1998, the SEC proposed various changes to the regulatory structure for offerings
registered under the Securities Act. The SEC has stated that, if these proposals
are adopted, the SEC staff will repeal the interpretations set forth in prior
no-action letters. We cannot predict whether these proposals will be adopted or,
if they are adopted, when and in what form they will be adopted or what impact
any new interpretations would have on this exchange offer.
36
<PAGE>
If an exemption from registration is not available, any noteholder
intending to resell exchange notes must be covered by an effective registration
statement under the Securities Act containing the selling noteholder's
information required by Item 507 of Regulation S-K under the Securities Act.
This prospectus may be used for an offer to resell, resale or other retransfer
of exchange notes only as specifically described in this prospectus. Please read
the section captioned "PLAN OF DISTRIBUTION" on page 164 for more details
regarding the transfer of exchange notes.
Terms of the Exchange Offer
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes properly tendered and not withdrawn prior to the expiration date. We will
issue exchange notes in principal amount equal to the principal amount of
outstanding notes surrendered. Outstanding notes may be tendered for exchange
notes only in integral multiples of $1,000.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $280,000,000 aggregate principal amount
of the outstanding notes are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of outstanding notes. There
will be no fixed record date for determining registered holders of outstanding
notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions of the
registration rights agreement, the applicable requirements of the Securities Act
and the Securities and Exchange Act of 1934, and the rules, regulations and
interpretations of the SEC. Outstanding notes that are not tendered for exchange
will remain outstanding and continue to accrue interest, but will not be
entitled to the rights and benefits the holders have under the registration
rights agreement.
We will be deemed to have accepted for exchange properly tendered
outstanding notes when we have given oral or written notice of the acceptance to
the exchange agent and complied with the applicable provisions of the
registration rights agreement. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the exchange notes from us.
If you tender outstanding notes in the exchange offer, you will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than applicable
taxes described below, in connection with the exchange offer. It is important
that you read the "-- Fees and Expenses" section for more details regarding fees
and expenses incurred in the exchange offer.
We will return any outstanding notes that we do not accept for exchange for
any reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
37
<PAGE>
Neither we nor our board of directors nor the exchange agent makes any
recommendation to holders of the outstanding notes as to whether to tender or
refrain from tendering all or any portion of their outstanding notes in the
exchange offer. In addition, no one has been authorized to make any
recommendation to holders of the outstanding notes. After reading this
prospectus and the letter of transmittal and consulting with your advisers, if
any, based on your financial position and requirements, you must make your own
decision whether to participate in the exchange offer, and, if so, the aggregate
amount of outstanding notes to tender.
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time on December
11, 2000, unless, in our sole discretion, we extend it.
Extensions, Delays in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or various times, to extend the
period of time during which the exchange offer is open. We may delay acceptance
of any outstanding notes by giving oral or written notice of the extension to
their holders. During any extensions, all outstanding notes previously tendered
will remain subject to the exchange offer, and we may accept them for exchange.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
If any of the conditions described below under "-- Conditions to the
Exchange Offer" have not been satisfied, we reserve the right, in our sole
discretion:
. to delay accepting for exchange any outstanding notes;
. to extend the exchange offer; or
. to terminate the exchange offer
by giving oral or written notice of the delay, extension or termination to the
exchange agent. We also reserve the right to amend the terms of the exchange
offer.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of outstanding notes. If we amend the exchange offer in a manner that we
determine to constitute a material change, we will promptly file a post-
effective amendment to the registration statement and disclose the amendment by
means of a prospectus supplement when the post-effective amendment has been
declared effective by the SEC. The prospectus supplement will be distributed to
the registered holders of the outstanding notes. Depending upon the significance
of the amendment and the manner of disclosure to the registered holders, we will
extend the exchange offer if the exchange offer would otherwise expire during
any period of delay.
Conditions to the Exchange Offer
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange, if in our reasonable judgment:
38
<PAGE>
. the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the SEC;
. any action or proceeding has been instituted or threatened in any
court or by or before any governmental agency with respect to the
exchange offer that, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer; or
. you do not tender your notes in compliance with the terms of the
exchange offer.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us the representations
described under "-- Purpose and Effect of the Exchange Offer" and "-- Procedures
for Tendering" and "PLAN OF DISTRIBUTION."
We expressly reserve the right to amend or terminate the exchange offer and
to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions to the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, non-acceptance or termination to the registered holders of the
outstanding notes as promptly as practicable.
These conditions are for our sole benefit and we may assert them in whole
or in part at any time or at various times in our sole discretion. If we fail at
any time to exercise any of these rights, this failure will not mean that we
have waived our rights. Each right will be deemed an ongoing right that we may
assert at any time or at various times. If any waiver or amendment constitutes a
material change to the exchange offer, we will promptly disclose the waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the outstanding notes. In this case, we will extend the
exchange offer to the extent required by the Exchange Act to provide holders of
outstanding notes the opportunity to effectively consider the additional
information and to factor this information into their investment decision.
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any outstanding
notes, if at the time any stop order has been threatened or is in effect with
respect to (i) the registration statement of which this prospectus constitutes a
part or (ii) the qualification of the indenture relating to the notes under the
Trust Indenture Act of 1939.
We currently expect that each of the conditions will be satisfied and that
no waiver will be necessary.
Procedures for Tendering
How to Tender Generally
Only a holder of outstanding notes may tender the outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
. complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal;
. have the signature on the letter of transmittal guaranteed, if the
letter of transmittal so requires; and
. mail, send by facsimile or otherwise deliver the letter of transmittal
to the exchange agent prior to the expiration date; or
. comply with the automated tender offer program procedures of DTC, as
described below.
39
<PAGE>
. In addition, either:
. the exchange agent must receive, prior to the expiration date, a
timely confirmation of book-entry transfer of the outstanding notes
into the exchange agent's account at DTC according to the procedure
for book-entry transfer described below or a properly transmitted
agent's message; or
. the holder must comply with the guaranteed delivery procedures, as
described below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided under "SUMMARY OF THE EXCHANGE OFFER -- The Exchange Agent" on
page 11 prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and us in accordance with the
terms and subject to the conditions described in this prospectus and in the
letter of transmittal.
The method of delivery of the letter of transmittal and all other required
documents to the exchange agent is at your election and risk. Rather than mail
these items, we recommend that you use an overnight or hand delivery service. In
all cases, you should allow sufficient time to assure delivery to the exchange
agent before the expiration date. Do not send the letter of transmittal to us.
You may request your brokers, dealers, commercial banks, trust companies or
other nominees to effect the above transactions for you.
How to Tender if You Are a Beneficial Owner
If you beneficially own outstanding notes that are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and you
wish to tender those notes, you should contact the registered holder promptly
and instruct it to tender on your behalf.
Your Representation to Us
By signing or agreeing to be bound by the letter of transmittal, you
represent to us that, among other things:
. any exchange notes that you receive are being acquired in the ordinary
course of your business;
. you have no arrangement or understanding with any person or entity to
participate in any distribution of the exchange notes;
. you are not a broker-dealer, and you are not engaged in and do not intend
to engage in any distribution of the exchange notes;
. if you are a broker-dealer that will receive exchange notes for your own
account in exchange for outstanding notes and you acquired those notes as a
result of market-making activities or other trading activities, you will
deliver a prospectus, as required by law, in connection with any resale of
the exchange notes; and
. you are not our "affiliate," as defined in Rule 405 of the Securities Act.
Signatures and Signature Guarantees
You must have signatures on a letter of transmittal or any notice of withdrawal,
as described below, guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States, or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act, that is a member of one of the recognized
signature guarantee programs identified in the letter of transmittal, unless the
outstanding notes are tendered:
40
<PAGE>
. by a registered holder who has not completed the box entitled "SPECIAL
ISSUANCE INSTRUCTIONS" or "SPECIAL DELIVERY INSTRUCTIONS" on the
letter of transmittal; or
. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondence in
the United States, or an eligible guarantor institution.
If the letter of transmittal or any notes or note powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless waived by us, the parties listed
above should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
Tendering Through DTC's Automated Tender Offer Program
Any financial institution that is a participant in DTC's system may be able
to use DTC's automated tender offer program to tender. Participants in the
program may be able to transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the outstanding notes
to the exchange agent in accordance with its procedures for transfer. DTC will
then send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, to the
effect that:
. DTC has received an express acknowledgment from a participant in its
automated tender offer program that it is tendering outstanding notes
that are the subject of the book-entry confirmation;
. the participant has received and agrees to be bound by the terms of
the letter of transmittal or, in the case of an agent's message
relating to guaranteed delivery, that the participant has received and
agrees to be bound by the applicable notice of guaranteed delivery;
and
. the agreement may be enforced against the participant.
Determinations Under the Exchange Offer
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered outstanding notes and
withdrawal of tendered outstanding notes. Our determination will be final and
binding on all parties. We reserve the absolute right to reject any outstanding
notes not properly tendered or any outstanding notes our acceptance of which
would, in the opinion of our counsel, be unlawful. We also reserve the right to
waive any defect, irregularities or conditions of tender as to particular
outstanding notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, all defects or irregularities
in connection with tenders of outstanding notes must be cured within the time as
we will determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of outstanding notes, neither we, the
exchange agent nor any other person is obligated to do so, and no such parties
will incur any liability for failure to give the notification. Tenders of
outstanding notes will not be deemed made until the defects or irregularities
have been cured or waived. Any outstanding notes received by the exchange agent
that are not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
41
<PAGE>
When We Will Issue Exchange Notes
In all cases, we will issue exchange notes for outstanding notes that we have
accepted for exchange only after the exchange agent timely receives:
. outstanding notes or a timely book-entry confirmation of the
outstanding notes into the exchange agent's account at DTC;
. a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message;
and
. the exchange offer has expired.
Return of Outstanding Notes Not Accepted or Excepted
If we do not accept any tendered outstanding notes for exchange for any
reason described in the terms and conditions of the exchange offer or if
outstanding notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or non-exchanged outstanding notes will be
returned without expense to their tendering holder. In the case of outstanding
notes tendered by book-entry transfer into the exchange agent's account at DTC
according to the procedures described below, the non-exchanged outstanding notes
will be credited to an account maintained with DTC. These actions will occur as
promptly as practicable after the expiration or termination of the exchange
offer.
Book-Entry Transfer
The exchange agent will establish an account with respect to the
outstanding notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution participating in DTC's system
may make book-entry delivery of outstanding notes by causing DTC to transfer the
outstanding notes into the exchange agent's account at DTC in accordance with
DTC's procedures for transfer.
Guaranteed Delivery Procedures
If you wish to tender your outstanding notes but you cannot deliver the
letter of transmittal or any other required documents to the exchange agent or
comply with the applicable procedures under DTC's automated tender offer program
prior to the expiration date, you may still tender if:
. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor
institution;
. prior to the expiration date, the exchange agent receives from a
member firm as described above, either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail
or hand delivery or a properly transmitted agent's message and notice
of guaranteed delivery:
. setting forth your name and address, the registered number(s) of
your outstanding notes and the principal amount of outstanding
notes tendered;
. stating that the tender is being made thereby;
. guaranteeing that, within three New York Stock Exchange trading
days after the expiration date, the letter of transmittal or
facsimile thereof, together with the outstanding notes or a
book-entry confirmation, and any other documents required by the
letter of transmittal will be deposited by the eligible guarantor
institution with the exchange agent; and
42
<PAGE>
. the exchange agent receives the properly completed and executed
letter of transmittal or facsimile thereof, as well as a
book-entry confirmation, and all other documents required by the
letter of transmittal, within three New York Stock Exchange
trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent you if you wish to tender your outstanding notes according to the
guaranteed delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to the expiration date.
For a withdrawal to be effective:
. the exchange agent must receive a written notice of withdrawal at one
of the addressees listed below under "-- The Exchange Agent," or
. you must comply with the appropriate procedures of DTC's automated
tender offer program system.
. Any notice of withdrawal must:
. specify the name of the person who tendered the outstanding notes to
be withdrawn; and
. identify the outstanding notes to be withdrawn, including the
principal amount of the outstanding notes.
If outstanding notes have been tendered under the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn outstanding notes
and must otherwise comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination will be final and
binding on all parties. We will deem any outstanding notes so withdrawn not to
have been validly tendered for exchange for purposes of the exchange offer.
Any outstanding notes that have been tendered for exchange but that are not
exchanged for any reason will be credited to an account maintained with DTC for
the outstanding notes. This crediting will take place as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer. You
may retender properly withdrawn outstanding notes by following one of the
procedures described under "-- Procedures for Tendering" above at any time on or
prior to the expiration date.
Exchange Agent
The Bank of New York has been appointed as the exchange agent for the
exchange offer. Questions and requests for assistance or additional copies of
this prospectus or the letter of transmittal should be directed to the exchange
agent addressed as follows:
43
<PAGE>
By Registered Mail or Certified Mail By Overnight Courier
The Bank of New York The Bank of New York
101 Barclay Street, Floor 7E 101 Barclay Street, Floor 7E
New York, NY 10286 New York, NY 10286
Attention: Santino Ginocchietti Attention: Santino Ginocchietti
Reorganization Section, Corporate Trust Reorganization Section, Corporate Trust
By Telephone By Facsimile
(212) 815-6331 (212) 815-6339
Fees and Expenses
We will bear the expenses of the exchange offer. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or other soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the expenses to be incurred in connection with the exchange
offer. They include:
. SEC registration fees;
. fees and expenses of the exchange agent and trustee;
. accounting and legal fees and printing costs; and
. any related fees and expenses.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
. certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
. tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal;
. a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer; or
. satisfactory evidence of payment of any transfer taxes payable by a
noteholder is not submitted with the letter of transmittal.
In such circumstances, the amount of the transfer taxes will be billed
directly to that tendering holder.
44
<PAGE>
Consequences of Failure to Exchange
If you do not exchange your outstanding notes for exchange notes in the
exchange offer, you will remain subject to the existing restrictions on transfer
of the outstanding notes, and the market for secondary resales is likely to be
minimal. In general, you may not offer or sell the outstanding notes unless they
are registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register the outstanding notes under the Securities Act. Unless they are broker-
dealers selling under certain circumstances, holders of outstanding notes will
no longer have any rights under the Registration Rights Agreement although the
outstanding notes will remain outstanding and will continue to accrue interest.
Broker-dealers that are not eligible to participate in the exchange offer may
have additional rights under the registration rights agreement to facilitate the
sale of their outstanding notes.
Accounting Treatment
We will record the exchange notes in our accounting records at the same
carrying value as the outstanding notes, which is the aggregate principal amount
of the outstanding notes, as reflected in our accounting records on the date of
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes in connection with the exchange offer. Participation in the exchange
offer is voluntary, and you should carefully consider whether to accept. You are
urged to consult your financial and tax advisors in making your own decision on
what action to take.
Further Note Acquisition
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We are not required and have no present plans to acquire any
outstanding notes that are not tendered in the exchange offer or to file a
registration statement to permit resales of any untendered outstanding notes.
45
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma consolidated financial information has
been derived by the application of pro forma adjustments to CFW's historical
consolidated financial statements included elsewhere in this prospectus. The pro
forma adjustments give effect to:
. the issuance of 3.7 million shares of our common stock for all of the stock
of R&B Communications. This merger has been accounted for using the
purchase method of accounting.
. the acquisition of Richmond-Norfolk PCS for cash of $408.6 million, our 22%
limited partnership interest in RSA 5, the analog assets and operations of
RSA 6 and the assumption of $20.0 million of lease obligations. This
acquisition has been accounted for using the purchase method of accounting;
. the increase in our common ownership in the Virginia Alliance and West
Virginia Alliance of 70.3% and 34.3%, respectively, and the subsequent
consolidation (entities were previously accounted for on the equity method)
due to:
.. the merger with R&B Communications, which owns approximately 20.8% and
34.3% of the common interests of the Virginia Alliance and the West
Virginia Alliance, respectively;
.. the Virginia Alliance's redemption of its Series A preferred
membership interests for $16.7 million; and
.. the conversion by us and R&B of our respective Series B preferred
membership interests in the Virginia Alliance into common interests.
. The increase in our common ownership interests in the Alliances has been
accounted for as a step acquisition;
. the sale of the capital stock of CFW Information Services Inc., the
provider of our directory assistance services;
. the adjustment to rental expense, depreciation expense and the amortization
of deferred gain associated with the sale and leaseback of various
communications tower sites;
. the like-kind exchange of various wireless communications services, which
we refer to in this document as WCS, licenses for various AT&T PCS
licenses, which has no effect on the pro forma balance sheet or statement
of operations;
. the sale of $375 million of debt securities in a private placement and the
closing of a new senior credit facility;
. the sale of our Series B, Series C and Series D preferred stock for gross
proceeds of $250.0 million, assuming that shareholder approval has been
granted to convert the Series D to Series C;
. the repayment of substantially all of our existing indebtedness and that of
the Alliances; and
. the payment of fees and expenses related to the recent transactions (as
defined below).
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<PAGE>
The term recent transactions refers to:
. the merger with R&B Communications;
. the issuance and sale of $375 million of debt securities in a private
placement;
. the borrowings under the new senior credit facility;
. the repayment of our existing senior indebtedness;
. the sale and issuance of our Series B, Series C and Series D preferred
stock;
. our acquisition of Richmond-Norfolk PCS;
. our acquisition of PCS licenses from AT&T and disposition of WCS
licenses to AT&T ;
. our consolidation of the Virginia Alliance and the West Virginia
Alliance;
. our dispositions of partnership interest in RSA 5 and the analog
cellular operations of our RSA 6 partnership; and
. our disposition of our directory assistance operations.
Our unaudited pro forma consolidated balance sheet as of June 30, 2000 has
been prepared as if the recent transactions had occurred on that date. The
unaudited pro forma consolidated statements of operations for the periods
presented give effect to the recent transactions as if they had occurred January
1, 1999. The adjustments, which are based upon available information and upon
various assumptions that we believe are reasonable, are described in the
accompanying notes. The actual allocation of these adjustments will be different
and the difference may be material.
The unaudited pro forma consolidated financial statements should not be
considered indicative of actual results that would have been achieved had the
recent transactions been consummated on the date or for the periods indicated
and do not purport to indicate balance sheet data or results of operations as of
any future date or for any future period.
The unaudited pro forma consolidated financial information should be read
in conjunction with the historical financial statements and the notes thereto
included elsewhere in this prospectus with respect to R&B and as incorporated by
reference with respect to CFW, Richmond-Norfolk PCS and the Alliances. The CFW
historical column presented in the accompanying December 31, 1999 unaudited pro
forma consolidated statement of operations has been restated to reflect
directory assistance as a discontinued operation as that business segment was
disposed of in July 2000 and was presented as a discontinued operation in CFW's
Form 10-Q for the period ended June 30, 2000.
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<PAGE>
CFW COMMUNICATIONS COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
as of June 30, 2000
(in thousands)
<TABLE>
<CAPTION>
Acquisitions
------------------------------------------------
Richmond- West
Norfolk Virginia Virginia
CFW PCS R&B Alliance Alliance Pro Forma Pro Forma
Historical Historical Historical Historical Historical Adjustments(a) As Adjusted
---------- ---------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......... $ 249 $ 188 $ 8,937 $ 65 10,053 $ 13,731 $ 33,223
Accounts receivable, net.......... 13,836 4,507 3,578 2,154 2,235 (1,243) 25,067
Other receivables................. 1,725 671 2,681 792 271 3,564 9,704
Inventories, materials and
supplies......................... 1,095 792 356 5,427 1,512 -- 9,182
Prepaid expenses and other........ 977 1,104 48 173 141 -- 2,443
Assets of discontinued segment.... 9,764 -- -- -- - (9,764) --
-------- -------- ------- -------- ----------- -------- -----------
Total current assets............. 27,646 7,262 15,600 8,611 14,212 6,288 79,619
-------- -------- ------- -------- ----------- -------- -----------
Restricted cash..................... -- -- -- -- - 67,994 67,994
Securities and investments.......... 35,101 -- 17,983 -- - 5,225 58,309
Subordinated capital certificates... -- -- -- 4,529 2,554 (7,083) --
Property and equipment, net......... 129,605 140,420 25,640 101,746 46,534 (2,792) 441,153
Other assets
Cost in excess of net assets of
business acquired................. 31,040 -- -- -- - 525,457 556,497
Other.............................. 19,871 596 2,413 1,024 3,405 17,663 44,972
-------- -------- ------- -------- ---------- -------- -----------
Total other assets............... 50,911 596 2,413 1,024 3,405 543,120 601,469
-------- -------- ------- -------- ---------- -------- -----------
Total assets..................... $243,263 $148,278 $61,636 $115,910 66,705 $612,752 $1,248,544
======== ======== ======= ======== ========== ======== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
Current liabilities
Accounts payable.................. $ 20,318 $ 5,122 $ 833 $ 3,860 6,494 $ (11) $ 36,616
Current portion of long-term
debt and capital lease
obligations...................... -- 3,874 394 -- - -- 4,268
Current portion of recognized
losses in PCS ventures........... -- -- 3,322 -- - (3,322) --
Liabilities of discontinued
business......................... 3,275 -- -- -- - (3,275) --
Other accrued liabilities......... 9,745 2,748 1,284 (699) 3,873 730 17,681
-------- -------- ------- -------- --------- -------- -----------
Total current liabilities....... 33,338 11,744 5,833 3,161 10,367 (5,878) 58,565
-------- -------- ------- -------- --------- -------- -----------
Long-term debt...................... 51,567 -- 7,289 129,654 51,136 282,393 522,039
Capital lease obligations........... -- 18,773 -- -- - -- 18,773
Long-term liabilities
Deferred income taxes.............. 29,568 -- 8,069 -- - 5,835 43,472
Retirement benefits................ 10,427 -- -- -- - -- 10,427
Long-term portion of recognized
losses in PCS ventures............ -- -- 6,007 -- - (6,007) --
Other.............................. 2,795 3,182 2,008 9,572 13,040 -- 30,597
-------- -------- ------- -------- -------- -------- -----------
Total long-term liabilities....... 42,790 3,182 16,084 9,572 13,040 (172) 84,496
-------- -------- ------- -------- -------- -------- -----------
Minority interests.................. 1,419 -- -- -- - (1,138) 281
Series A preferred redeemable
membership interests............... -- -- -- 15,632 - (15,632) --
Series B redeemable preferred
stock.............................. -- -- -- -- - 106,670 106,670
Series C redeemable preferred
stock.............................. -- -- -- -- - 130,795 130,795
Shareholders' equity (deficit)/
members' equity (deficit).......... 114,149 114,579 32,430 (42,109) (7,838) 115,714 326,925
-------- -------- ------- -------- -------- -------- -----------
Total liabilities and
shareholders' equity............. $243,263 $148,278 $61,636 $115,910 66,705 $612,752 $1,248,544
======== ======== ======= ======== ======== ======== ===========
</TABLE>
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<PAGE>
CFW COMMUNICATIONS COMPANY
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
The pro forma financial data have been derived by the application of pro
forma adjustments to our historical financial statements as of the date noted.
(a) Pro forma adjustments to the Pro Forma Consolidated Balance Sheet are
summarized in the following table (in thousands) and are described in the notes
that follow.
<TABLE>
<CAPTION>
Acquisition Disposition
Transaction Repayment Merger Alliance of Richmond of
Fees and of Existing with Step Norfolk Directory
Financing(1) Expenses(2) Debt(3) R&B(4) Acquisition(5) PCS(6) Assistance(7)
------------ -------------- -------------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents........... $703,114 $(40,075) $(212,759) $ (1,300) $(16,748) $(438,305) $19,804
Accounts receivable,
net................... -- -- -- -- -- (1,243) --
Other receivables...... -- 3,423 141 -- -- -- --
Inventories,
materials and
supplies.............. -- -- -- -- -- -- --
Restricted cash........ 67,994 -- -- -- -- -- --
Assets of
discontinued
business.............. (9,764)
Securities and
investments........... -- -- -- (959) 4,166 (478) 2,496
Subordinated capital
certificates.......... -- -- (7,083) -- -- -- --
Property and
equipment, net........ -- -- -- -- -- (2,792) --
Cost in excess of
net assets of
business acquired..... -- 4,500 -- 110,825 37,568 372,564 --
Debt issuance costs.... -- 18,025 (362) -- -- -- --
Accounts payable....... -- -- -- -- -- (11) --
Current portion of
recognized losses
in PCS ventures....... -- -- -- -- (3,322) -- --
Liabilities of
discontinued
business.............. -- -- -- -- -- -- (3,275)
Other accrued
liabilities........... -- -- (216) 1,250 -- (304) --
Long-term debt......... 502,019 -- (219,626) -- -- -- --
Deferred income taxes -- -- -- -- -- 5,835 --
Retirement benefits -- -- -- -- -- -- --
Long-term portion of
recognized losses
in PCS ventures....... -- -- -- -- (6,007) -- --
Minority interests..... -- -- -- (959) -- (179) --
Redeemable Series A
preferred
membership
interests............. -- -- -- -- (15,632) -- --
Series B redeemable
preferred stock....... 110,608 (3,938) -- -- -- -- --
Series C redeemable
preferred stock....... 135,607 (4,812) -- -- -- -- --
Shareholders' equity
(deficit)/members'
interests/(deficit)... 22,874 (5,377) (221) 108,275 49,947 (75,595) 15,811
</TABLE>
Total Net
Adjustment
-----------
Cash and cash
equivalents........... $ 13,731
Accounts receivable,
net................... (1,243)
Other receivables...... 3,564
Inventories,
materials and
supplies.............. --
Restricted cash........ 67,994
Assets of
discontinued
business.............. (9,764)
Securities and
investments........... 5,225
Subordinated capital
certificates.......... (7,083)
Property and
equipment, net........ (2,792)
Cost in excess of
net assets of
business acquired..... 525,457
Debt issuance costs.... 17,663
Accounts payable....... (11)
Current portion of
recognized losses
in PCS ventures....... (3,322)
Liabilities of
discontinued
business.............. (3,275)
Other accrued
liabilities........... 730
Long-term debt......... 282,393
Deferred income taxes 5,835
Retirement benefits --
Long-term portion of
recognized losses
in PCS ventures....... (6,007)
Minority interests..... (1,138)
Redeemable Series A
preferred
membership
interests............. (15,632)
Series B redeemable
preferred stock....... 106,670
Series C redeemable
preferred stock....... 130,795
Shareholders' equity
(deficit)/members'
interests/(deficit)... 115,714
49
<PAGE>
(1) The adjustments relate to our sale of senior and subordinated notes
and the sale of our preferred stock as follows (in thousands):
New senior secured term loan B.... $100,000
New senior secured term loan C.... 50,000
Senior notes due 2010(i).......... 276,108
Subordinated notes due 2011(ii)... 95,000
New preferred stock(iii).......... 250,000
--------
Total financing................... $771,108
========
(i) $68.0 million of proceeds will be placed in escrow and will be used to
pay the first four interest payments on the senior notes. The issuance
of $276.1 million principal amount of senior notes, net of $3.9
million debt discount and warrants to purchase 504,000 shares of
common stock for $276.1 million in cash will be allocated as $269.2
million debt and $6.9 million common equity.
(ii) The issuance of $95.0 million principal amount of subordinated notes
and warrants to purchase 300,000 shares of common stock for $95.0
million in cash will be allocated as $82.8 million debt and $12.2
million common equity.
(iii) The issuance of $250.0 million of our preferred stock and warrants to
purchase 500,000 shares of common stock for $250.0 million cash will
be allocated as $246.2 million preferred equity and $3.8 million
common equity.
(2) The portion of estimated cash expenses attributable to our new senior
credit facility and the senior and subordinated notes totals $18.0 million
and will be recorded as deferred financing costs and will be amortized over
the expected life of the debt to be issued. Such estimated debt issuance
costs include estimated fees and expenses payable to banks, placement
agents, outside professionals and related advisors. Additionally, $4.5
million of estimated transaction expenses have been recorded as goodwill
related to the merger with R&B and the acquisition of Richmond-Norfolk PCS.
The remaining $17.6 million of estimated cash expenses represent $8.8
million of costs associated with the sale of our preferred stock, $5.6
million ($3.4 million, net of $2.2 million tax) of costs associated with a
bridge commitment fee, $2.4 million ($1.5 million, net of $.9 million tax)
of costs associated with one-time transaction expenses and $.8 million ($.5
million, net of $.3 million tax) of costs associated with the debt
prepayment premium.
(3) The adjustments include the repayment of existing indebtedness and related
accrued interest and the write-off of capitalized debt issuance costs of
the combined companies as follows (in thousands):
CFW................................ $ 50,216
Virginia Alliance.................. 118,274
West Virginia Alliance............. 51,136
--------
Debt to be refinanced.............. 219,626
Subordinated capital certificates.. (7,083)
Accrued interest................... 216
--------
Total use of cash.................. $212,759
========
The related unamortized deferred loan costs of $362,000 ($221,000, net of
$141,000 tax) related to the existing indebtedness of the combined
companies will be written off as an extraordinary charge upon the repayment
of existing indebtedness.
50
<PAGE>
(4) Represents the merger with R&B Communications for 3,716,400 of our common
shares at $37.86 per share (the average of our closing common stock price
for the two days before announcement and two days after announcement). The
actual number of shares to be issued in the merger is based on the exchange
ratio of 60.27 of our shares to one share of R&B Communications. The
adjustment to common equity and the excess of the estimated purchase price
over the estimated fair value of the net identifiable assets acquired is as
follows (in thousands):
Fair value of CFW common stock issued.. $140,705
Less: R&B, net assets.................. 32,430
--------
Net adjustment to common equity..... 108,275
Transaction expenses................... 1,300
Covenant not to compete................ 1,250
--------
Net adjustment to goodwill........ $110,825
========
We have preliminarily referred to the excess of the estimated purchase
price over the estimated fair value of the net identifiable assets acquired
as goodwill. The final allocation of the excess purchase price over net
identifiable assets, to be determined by an independent appraiser after
closing, will include, if applicable, recognition of adjustments of the
tangible assets and liabilities to their fair values, the fair value of
identifiable intangible assets, including FCC licenses, intellectual
property and residual goodwill. We have assumed an average amortization
period of 20 years for goodwill for illustrative purposes.
The adjustment also eliminates the $959,000 investment held by us in
various R&B PCS licenses.
(5) Represents the purchase accounting adjustments necessary to reflect the
consolidation of the Virginia and West Virginia Alliances. A controlling
interest in the Alliances will be obtained through (i) the merger with R&B
Communications, (ii) the contribution of additional common equity capital
to the Virginia Alliance and the related redemption of Series A preferred
membership interests, and (iii) the conversion of our and R&B
Communication's Series B preferred membership interests into common
membership interests. Following these transactions, we will own
approximately 91.1% and 78.9% of the Virginia Alliance and the West
Virginia Alliance, respectively. The adjustment to the excess of the
estimated purchase price over the estimated fair value of the net
identifiable assets acquired is as follows (in thousands):
Cash paid for redemption of Series A preferred stock....... $ 16,748
Less: Carrying value of Series A preferred stock........... (15,632)
Elimination of negative investment balance................. (13,495)
Elimination of historical net equity deficit of Alliances.. 49,947
--------
Net adjustment to goodwill.............................. $ 7,568
========
We have preliminarily referred to the excess of the estimated purchase price
over the estimated fair value of the net identifiable assets acquired as
goodwill. The final allocation of the excess purchase price over net
identifiable assets, to be determined by an independent appraiser after closing
of the merger, will include, if applicable, recognition of adjustments of the
tangible assets and liabilities to their fair values, the fair value of
identifiable intangible assets, including FCC licenses, intellectual property
and residual goodwill. We have assumed an average amortization period of 20
years for goodwill for illustrative purposes.
51
<PAGE>
(6) Represents the purchase of Richmond-Norfolk PCS for (i) $408.6 million in
cash, (ii) the assumption of $20.0 million of lease obligations, (iii) the
disposition of our 22% interest in RSA 5 and (iv) the disposition of the
analog assets and operations of RSA 6. Before completion of our recent
transactions, we purchased the 15.9% of the RSA 6 membership interest that
we did not previously own for $10.8 million. The adjustment to the excess
of the estimated purchase price over the estimated fair value of the net
identifiable assets acquired and common equity is as follows (in
thousands):
Cash paid to PrimeCo.............................. $ 408,643
Fair value of RSA 6 analog assets and operations.. 75,000
Fair value of 22% of RSA 5........................ 3,500
---------
Total purchase consideration................. 487,143
Less:
Historical net equity of Richmond-Norfolk PCS..... (114,579)
---------
Net adjustment to goodwill........................ $ 372,564
=========
Fair value of RSA 6 analog assets and operations.. $ 75,000
Fair value of 22% of RSA 5........................ 3,500
Less: Book value of RSA 6 and RSA 5............... (14,810)
---------
Pre-tax gain on disposition of RSA 6 and RSA 5.... 63,690
Cash taxes on gain................................ (18,871)
Deferred tax liability............................ (5,835)
Historical net equity of Richmond-Norfolk PCS..... (114,579)
---------
Net adjustment to common equity ............ $ (75,595)
=========
We have preliminarily referred to the excess of the estimated purchase
price over the estimated fair value of the net identifiable assets acquired
as goodwill. The final allocation of the excess purchase price over net
identifiable assets, to be determined by an independent appraiser after
closing of the merger, will include, if applicable, recognition of
adjustments of the tangible assets and liabilities to their fair values,
the fair value of identifiable intangible assets, including FCC licenses,
intellectual property and residual goodwill. We have assumed an average
amortization period of 20 years for goodwill for illustrative purposes.
The net adjustment to cash includes the sum of (i) $408.6 million estimate of
cash paid to PrimeCo, (ii) $10.8 million paid to acquire the minority interest
in RSA 6, and (iii) $18.9 million of cash taxes paid on the gains from
disposition of RSA 6 and RSA 5. The remaining adjustments include the
elimination of the historical assets and liabilities of RSA 6 and the equity
interest in RSA 5.
52
<PAGE>
(7) Includes the disposition of the directory assistance operations to telegate
AG for $35.5 million, consisting of $32.0 million in cash and common stock
of telegate AG with a fair market value of $3.5 million. Substantially all
of the assets and liabilities of the business, with the exception of
various land and buildings, were sold in the transaction. The net
adjustment to common equity for the gain on the related disposition is as
follows (in thousands):
Cash proceeds.......................... $ 32,000
Fair value of stock consideration...... 3,500
--------
Total consideration............... 35,500
Cash taxes on gain..................... (12,196)
Net book value of assets sold.......... (7,493)
--------
Net adjustment to common equity... $ 15,811
========
The net adjustment to cash includes the cash proceeds of $32.0 million, less
$12.2 million of cash taxes paid on the gain on disposition of the directory
assistance operations. The remaining adjustments include the elimination of
the historical assets and liabilities of the directory assistance operations
and the receipt of $3.5 million in stock consideration.
53
<PAGE>
CFW COMMUNICATIONS COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Year Ended December 31, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Acquisitions
---------------------------------------------------
Richmond- West
Norfolk Virginia Virginia Pro Forma
CFW PCS R&B Alliance Alliance Pro Forma As
Historical Historical Historical Historical Historical Adjustments Adjusted
----------- ----------- ------------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Wireless communications............. $ 21,692 $ 50,456 $ 1,257 $ 13,377 $ 2,989 $(14,986)(a) $ 74,785
Wireline communications............. 44,110 -- 14,500 -- -- -- 58,610
Other communications services....... 4,028 -- 1,012 -- -- -- 5,040
-------- -------- ------- -------- -------- ----------- ---------
69,830 50,456 16,769 13,377 2,989 (14,986) 138,435
-------- -------- ------- -------- -------- ----------- ---------
Operating expenses:
Cost of sales....................... 8,142 15,137 -- 5,864 3,065 (5,660)(a) 26,548
Maintenance and support............. 15,212 10,498 4,917 6,638 4,130 (1,099)(a) 40,296
Depreciation and amortization....... 11,323 13,866 2,808 7,770 2,068 25,197(b) 63,032
Asset impairment charge............. 3,951 -- -- -- -- -- 3,951
Customer operations................. 11,685 25,705 2,031 8,685 4,094 -- 52,200
Corporate operations................ 6,846 7,315 2,356 2,517 1,744 20,778
-------- -------- ------- -------- -------- ---------
57,159 72,521 12,112 31,474 15,101 18,438 206,805
-------- -------- ------- -------- -------- ----------- ---------
Operating income (loss).............. 12,671 (22,065) 4,657 (18,097) (12,112) (33,424) (68,370)
Other income (expenses):
Interest expense, net............... (900) (1,462) (348) (8,042) (1,175) (61,348)(c) (73,275)
Net equity income (loss) from PCS
and other wireless investees....... (11,187) -- (9,652) -- -- 21,358(d) 519
Gain/(loss) on sale of assets....... 8,318 (806) 252 -- -- -- 7,764
Other income (expense).............. -- (171) -- -- -- 2,291(e) 2,120
-------- -------- ------- -------- -------- ----------- ---------
(3,769) (2,439) (9,748) (8,042) (1,175) (37,699) (62,872)
-------- -------- ------- -------- -------- ----------- ---------
Income (loss) from continuing
operations before income taxes
and minority interest............... 8,902 (24,504) (5,091) (26,139) (13,287) (71,123) (131,242)
Income taxes (benefit)............... 2,622 -- (917) -- -- (40,448)(f) (38,743)
-------- -------- ------- -------- -------- ----------- ---------
Income (loss) from continuing
operations before minority
interests........................... 6,280 (24,504) (4,174) (26,139) (13,287) (30,675) (92,499)
Minority interests................... (389) -- -- -- -- 389(a) --
-------- -------- ------- -------- -------- ----------- ---------
Net income (loss) from continuing
operations.......................... $ 5,891 $(24,504) $(4,174) $(26,139) $(13,287) $(30,286) $ (92,499)
======== ======== ======= ======== ======== =========== =========
Dividend requirements on preferred
stock............................... $18,598(g) $ 18,598
=========== =========
Loss from continuing
operations applicable to common
shares.............................. $(111,097)
=========
Net loss from continuing operations
per common share--basic............. $(6.64)
=========
Average shares outstanding--basic.... 16,742
Other Data:
EBITDA(h)........................... 27,945 (8,199) 7,465 (10,327) (10,044) (8,227) (1,387)
Depreciation and amortization....... 11,323 13,866 2,808 7,770 2,068 25,197 63,032
Interest expense paid or payable
in cash............................. 900 1,462 685 8,304 1,176 56,398 68,925
Cash flows provided (used in):
Operating activities................ 31,547 (6,955) 7,680 (22,926) (12,478) (64,876) (68,008)
Investing activities................ (42,843) (12,455) (5,804) (23,202) (26,306) -- (110,610)
Financing activities................ 11,452 19,832 (568) 46,132 38,781 -- 115,629
Pro forma deficiency of earnings to
fixed charges....................... (131,761)
</TABLE>
54
<PAGE>
CFW COMMUNICATIONS COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Six Months Ended June 30, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Acquisitions
----------------------------------------------------
Richmond- West
Norfolk Virginia Virginia Pro Forma
CFW PCS R&B Alliance Alliance Pro Forma As
Historical Historical Historical Historical Historical Adjustments Adjusted
----------- ----------- ------------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues:
Wireless communications............. $ 10,471 $ 20,203 $ 740 $ 5,575 $ 407 $(7,022)(a) $ 30,374
Wireline communications............. 20,002 -- 7,194 -- -- -- 27,196
Other communications services....... 2,057 4,428 399 608 192 -- 7,684
-------- -------- ------- -------- ------- ----------- --------
32,530 24,631 8,333 6,183 599 (7,022) 65,254
-------- -------- ------- -------- ------- ----------- --------
Operating expenses:
Cost of sales....................... 3,490 7,703 -- 2,851 699 (2,586)(a) 12,157
Maintenance and support............. 6,136 5,197 1,699 3,357 1,860 (995)(a) 17,254
Depreciation and amortization....... 5,198 6,785 1,359 4,853 692 12,769 (b) 31,656
Customer operations................. 5,442 13,205 1,274 3,854 1,575 -- 25,350
Corporate operations................ 3,067 4,410 1,207 1,184 1,006 -- 10,874
-------- -------- ------- -------- ------- ----------- --------
23,333 37,300 5,539 16,099 5,832 9,188 97,291
-------- -------- ------- -------- ------- ----------- --------
Operating income (loss).............. 9,197 (12,669) 2,794 (9,916) (5,233) (16,210) (32,037)
Other income (expenses):
Interest expense, net............... (546) (750) (410) (3,730) (216) (30,908)(c) (36,560)
Net equity income (loss) from PCS
and other wireless investees........ (5,181) -- (4,560) -- -- 9,982 (d) 241
Gain/(loss) on sale of assets....... -- (197) -- -- -- -- (197)
Other income (expense).............. -- -- -- -- -- 1,145(e) 1,145
-------- -------- ------- -------- ------- ----------- --------
(5,727) (947) (4,970) (3,730) (216) (19,781) (35,371)
-------- -------- ------- -------- ------- ----------- --------
Income (loss) from continuing
operations before income taxes and
minority interest................... 3,470 (13,616) (2,176) (13,646) (5,449) (35,991) (67,408)
Income taxes (benefit)............... 1,196 -- 32 -- -- (20,952)(f) (19,724)
-------- -------- ------- -------- ------- ----------- --------
Income (loss) from continuing
operations before minority
interests........................... 2,274 (13,616) (2,208) (13,646) (5,449) (15,039) (47,684)
Minority interests................... (218) -- -- -- -- 218 (a) --
-------- -------- ------- -------- ------- ----------- --------
Income (loss ) from continuing
operations.......................... $ 2,056 (13,616) $(2,208) $(13,646) $(5,449) $(14,821) $(47,684)
-------- -------- ------- -------- ------- ----------- --------
Dividend requirements on preferred
stock............................... $ 9,145 (g) $ 9,145
=========== ========
Loss from continuing
operations applicable to common
shares.............................. $(56,829)
========
Net loss from continuing operations
per common share-basic.............. $(3.40)
========
Average shares outstanding-basic..... 16,731
Other Data:
EBITDA(h)........................... 14,395 (5,884) 4,153 (5,063) (4,541) (3,441) (381)
Depreciation and amortization....... 5,198 6,785 1,359 4,853 692 12,769 31,656
Interest expense paid or payable
in cash........................... 546 750 544 3,730 476 28,430 34,476
Cash flows provided (used in):
Operating activities............... 10,028 (5,597) 3,623 (13,525) (5,505) (31,997) (42,973)
Investing activities............... (19,440) (7,017) (3,421) (11,774) (8,307) -- (49,959)
Financing activities............... 9,810 12,774 (417) 25,301 13,813 -- 61,281
Pro forma deficiency of earnings
to fixed charges.................. (67,649)
</TABLE>
55
<PAGE>
CFW COMMUNICATIONS COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the Six Months Ended June 30, 2000
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Acquisitions
-----------------------------------------------
Richmond- West
Norfolk Virginia Virginia
CFW PCS R&B Alliance Alliance Pro Forma
Historical Historical Historical Historical Historical Adjustments
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Wireless communications................ $11,698 $23,454 $ 830 $ 9,628 $ 5,145 $(7,321)(a)
Wireline communications................ 28,572 -- 7,826 -- -- --
Other communications services.......... 1,858 3,537 468 799 769 --
------- ------- ------- -------- ------- -----------
42,128 26,991 9,124 10,427 5,914 (7,321)
------- ------- ------- -------- ------- -----------
Operating expenses:
Cost of sales.......................... 4,857 7,427 -- 4,465 4,273 (3,088)(a)
Maintenance and support................ 11,687 5,144 2,457 4,054 3,015 (1,240)(a)
Depreciation and amortization.......... 6,751 6,925 1,663 3,855 1,164 12,032(b)
Customer operations.................... 7,391 12,559 1,525 4,770 3,505 --
Corporate operations................... 4,158 3,292 1,790 1,623 1,027 --
------- ------- ------- -------- ------- -----------
34,844 35,347 7,435 18,767 12,984 7,704
------- ------- ------- -------- ------- -----------
Operating income (loss)................. 7,284 (8,356) 1,689 (8,340) (7,070) (15,025)
Other income (expenses):
Interest expense, net.................. (1,010) (688) (66) (5,308) (1,485) (27,991)(c)
Net equity income (loss) from PCS and
other wireless investees.............. (6,557) -- (5,779) -- -- 12,587 (d)
Gain/(loss) on sale of assets.......... -- (43) -- -- -- --
Other income (expense)................. -- -- -- -- -- 1,146 (e)
------- ------- ------- -------- ------- -----------
(7,567) (731) (5,845) (5,308) (1,485) (14,258)
------- ------- ------- -------- ------- -----------
Loss before income taxes and
minority interest...................... (283) (9,087) (4,156) (13,648) (8,555) (29,283)
Income tax benefit...................... (87) -- (1,610) -- -- (16,776)(f)
------- ------- ------- -------- ------- -----------
Loss from continuing
operations before minority
interests.............................. (196) (9,087) (2,546) (13,648) (8,555) (12,507)
Minority interests...................... (105) -- -- -- -- 105 (a)
------- ------- ------- -------- ------- -----------
Net loss from continuing operations..... $ (301) $(9,087) $(2,546) $(13,648) $(8,555) $(12,402)
======= ======= ======= ======== ======= ===========
Dividend requirements on preferred
stock................................. $9,772(g)
========
Loss from continuing
operations applicable to common
shares................................
Net loss from continuing operations
per common share-basic ...............
Average shares outstanding-basic.......
Other Data:
EBITDA(h)............................. 14,035 (1,431) 3,352 (4,485) (5,906) (2,993)
Depreciation and amortization......... 6,751 6,925 1,663 3,855 1,164 12,032
Interest expense paid or payable in
cash................................. 1,010 688 228 5,308 1,824 25,405
Cash flows provided (used in):
Operating activities................. 11,499 (6,525) 2,926 (8,923) (6,565) (28,524)
Investing activities................. (24,634) (11,928) (1,763) 10,666 12,622 --
Financing activities................. 13,185 18,219 (444) (1,741) 3,987 --
Pro forma deficiency of earnings to
fixed charges.......................
</TABLE>
Pro Forma As
Adjusted
------------
Operating revenues:
Wireless communications............... $ 43,434
Wireline communications............... 36,398
Other communications services......... 7,431
--------
87,263
--------
Operating expenses:
Cost of sales......................... 17,934
Maintenance and support............... 25,117
Depreciation and amortization......... 32,390
Customer operations................... 29,750
Corporate operations.................. 11,890
--------
117,081
--------
Operating income (loss)................ (29,818)
Other income (expenses):
Interest expense, net................. (36,548)
Net equity income (loss) from PCS and
other wireless investees............. 251
Gain/(loss) on sale of assets......... (43)
Other income (expense)................ 1,146
--------
(35,194)
--------
Loss before income taxes and
minority interest..................... (65,012)
Income tax benefit..................... (18,473)
--------
Loss from continuing
operations before minority
interests............................. (46,539)
Minority interests..................... --
--------
Net loss from continuing operations.... $(46,539)
========
Dividend requirements on preferred
stock................................. $ 9,772
========
Loss from continuing
operations applicable to common
shares................................ $(56,310)
========
Net loss from continuing operations
per common share-basic ............... $(3.35)
=======
Average shares outstanding-basic....... 16,784
Other Data:
EBITDA(h)............................. 2,572
Depreciation and amortization......... 32,390
Interest expense paid or payable in
cash................................. 34,463
Cash flows provided (used in):
Operating activities................. (35,396)
Investing activities................. (15,753)
Financing activities................. 33,206
Pro forma deficiency of earnings to
fixed charges....................... (65,264)
56
<PAGE>
CFW COMMUNICATIONS COMPANY
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma adjustments to the Statement of Operations exclude $5.6
million ($3.4 million, net of $2.2 million tax) related to a bridge commitment
fee, $362,000 ($221,000, net of $141,000 tax) write-off of deferred loan costs
associated with existing indebtedness, $63.5 million ($38.8 million, net of
$24.7 million tax) gain on disposition of RSA 5 and the analog assets and
operations of RSA 6, $28.0 million ($15.8 million, net of $12.2 million tax)
gain on disposition of the directory assistance operations, $2.4 million ($1.5
million, net of $.9 million tax) of costs associated with one-time transaction
expenses and $.8 million ($.5 million, net of $.3 million tax) of costs
associated with the debt prepayment premium. Such amounts represent non-
recurring items that we anticipate will be recorded in our Consolidated
Statement of Operations primarily during the third and fourth quarters of 2000.
(a) The pro forma adjustments to revenue, cost of goods sold, operating
expenses and minority interest and income from discontinued operations
represent (i) the elimination of operating results associated with the
disposition of the analog assets and operations of RSA 6 and the
disposition of the directory assistance operations, (ii) the elimination of
various intercompany revenues and expenses between combining companies, and
(iii) incremental rent expense associated with the sale of various tower
assets that occurred in the first quarter of 2000 and the subsequent
leaseback of such tower assets.
(b) The pro forma adjustment to depreciation and amortization expense reflects
(i) the elimination of historical depreciation expense associated with the
sale of various tower assets that occurred in the first quarter of 2000,
the disposition of RSA 6 and (ii) the application of purchase accounting to
R&B Communications, Richmond-Norfolk PCS and the Alliances.
<TABLE>
<CAPTION>
Year Ended Six Months Ended Six Months Ended
December 31, 1999 June 30, 2000 June 30, 1999
------------------ ----------------- -----------------
<S> <C> <C> <C>
(in thousands)
Historical depreciation elimination:
Tower asset sales.................. $ (759) $ (928) $ (196)
RSA 6.............................. (316) (177) (172)
------- ------- -------
(1,075) (1,105) (368)
------- ------- -------
Purchase accounting (1):
R&B Communications................. 5,541 2,771 2,771
Richmond-Norfolk PCS............... 18,628 9,314 9,314
Transaction expenses............... 225 113 113
Alliances.......................... 1,878 939 939
------- ------- -------
26,272 13,137 13,137
------- ------- -------
Total depreciation and
amortization expense adjustment.... $25,197 $12,032 $12,769
======= ======= =======
</TABLE>
(1) The merger with R&B Communications, the acquisition of Richmond-Norfolk PCS
and the consolidation of the Alliances will be accounted for as purchases.
Under purchase accounting, the total purchase cost will be allocated to the
assets acquired and liabilities assumed, based on valuations and other
studies, as of the date of acquisition. The actual allocation of purchase
cost and the resulting effect on income from operations may differ
significantly from the estimated pro forma amounts included in this
document. For pro forma purposes, the preliminary goodwill balance is being
amortized over 20 years.
57
<PAGE>
(c) The pro forma adjustment to interest expense reflects our new senior credit
facility, senior notes, subordinated notes, retained indebtedness,
amortization of debt discount for issuance of warrants and amortization of
related debt issuance costs less the historical interest expense on debt
repaid.
A .125% increase or decrease in the assumed interest rate applicable to our
new senior credit facility, senior notes and subordinated notes would change
the pro forma interest expense and income before taxes by $657,000 for the
year ended December 31, 1999 and $328,000 for the six months ended June 30,
2000 and 1999.
(d) Represents the elimination of the equity losses related to the Alliances,
previously recorded by us and R&B. After the transactions are complete, we
will control the Alliances. The Alliances' income statements will therefore
be consolidated with us. See note (5) to unaudited pro forma balance sheet
for further explanation.
(e) Includes (1) rental income earned on the assets excluded from the
disposition of the directory assistance operations, and (2) amortization of
the deferred gain from the sale and leaseback of various tower assets.
(f) Includes the tax effect of the pro forma adjustments and the consolidation
of the Alliances and Richmond-Norfolk PCS at the applicable effective tax
rate.
(g) Represents the 8 1/2% per annum dividend on the Series B preferred stock and
the 5 1/2% per annum dividend on the Series C preferred stock, which both
accrete semi-annually, plus the dividend accretion of the discount related
to the 500,000 warrants and transaction expenses related to the sale of our
preferred stock. This calculation assumes shareholder approval. In the
absence of shareholder approval, our Series D preferred stock will remain
outstanding, which would result in total preferred dividends of $30.8
million for the year ended December 31, 1999, and $16.8 million and $14.9
million for the six months ended June 30, 2000 and 1999, respectively.
(h) EBITDA is defined, for any period, as earnings before income taxes and
minority interest, interest expense, interest income, depreciation and
amortization, gain (loss) on sale of fixed assets, net equity income (loss)
from investees and asset impairment charges. EBITDA is presented because it
is a widely accepted financial indicator of a company's ability to service
and/or incur debt. EBITDA should not be considered as an alternative to net
income as a measure of our operating results or to cash flow as a measure of
liquidity. Because EBITDA is not calculated identically by all companies,
our EBITDA calculation may not be strictly comparable to other similarly
titled measures used by other companies.
Pro forma EBITDA is calculated as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended Six Months Ended
December 31, 1999 June 30, 2000 June 30,1999
------------------ ----------------- -----------------
<S> <C> <C> <C>
(in thousands)
Pro forma net loss before income taxes and minority $(131,242) $(65,012) $(67,408)
interest.
Adjustments:
Other income...................................... (2,120) (1,146) (1,146)
(Gain) loss on sale of fixed assets............... (7,764) 43 197
Net equity income from other wireless investees... (519) (251) (241)
Interest expense, net............................. 73,275 36,548 36,560
Asset impairment charge........................... 3,951 -- --
Depreciation and amortization..................... 63,032 32,390 31,656
--------- -------- --------
Pro forma EBITDA..................................... $ (1,387) $ 2,572 $ (381)
========= ======== ========
</TABLE>
58
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF
CFW COMMUNICATIONS COMPANY
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CFW Communications" and our consolidated
financial statements and notes thereto included in this document for a further
explanation of the financial and operational data summarized below.
We have set forth below selected historical consolidated financial data as
of and for the years ended, December 31, 1995, 1996, 1997, 1998 and 1999,
derived from our audited consolidated financial statements and notes thereto,
which have been audited by McGladrey & Pullen, LLP.
59
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
===============================================
1995 1996 1997 1998 1999
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Operating revenues:
Wireline communications............... $ 29,196 $ 32,480 $ 34,495 $ 37,597 $ 44,110
Wireless communications............... 8,427 10,894 13,434 17,624 21,692
Directory assistance.................. 4,706 6,400 10,533 12,949 12,104
Other communications services......... 1,836 2,103 2,267 2,942 4,028
-------- -------- -------- -------- --------
Total operating revenues............ 44,165 51,877 60,729 71,112 81,934
-------- -------- -------- -------- --------
Operating expenses:
Cost of sales......................... 1,075 1,929 1,719 4,426 8,143
Maintenance and support............... 8,392 9,528 9,660 10,837 16,609
Depreciation and amortization......... 6,438 8,410 9,196 10,504 12,623
Asset impairment charge............... -- -- -- -- 3,951
Customer operations................... 9,275 11,156 14,283 16,223 19,870
Corporate operations.................. 5,563 5,439 6,459 6,496 7,216
-------- -------- -------- -------- --------
Total operating expenses............ 30,743 36,462 41,317 48,486 68,412
-------- -------- -------- -------- --------
Operating income....................... 13,422 15,415 19,412 22,626 13,522
Other income (expenses):
Other expenses, principally interest.. (1,269) (686) (855) (623) (905)
Equity loss from PCS investees:.
VA PCS Alliance..................... -- -- (834) (5,075) (5,436)
WV PCS Alliance..................... -- -- -- (1,391) (5,929)
Equity income from other wireless
investees........................... 840 450 74 198 179
Loss on write-down of investment....... -- -- (2,808) (1,010) --
Gain on sale of tower asset and
investments........................... 927 -- 5,077 -- 8,318
-------- -------- -------- -------- --------
13,920 15,179 20,066 14,725 9,749
Income taxes........................... 5,006 5,162 7,398 5,639 2,868
-------- -------- -------- -------- --------
Income before minority interests....... 8,914 10,017 12,668 9,086 6,881
Minority interests..................... (420) (467) (447) (578) (388)
-------- -------- -------- -------- --------
Net income............................. $ 8,494 $ 9,550 $ 12,221 $ 8,508 $ 6,493
======== ======== ======== ======== ========
Earnings per share diluted. 0.66 0.73 0.94 0.65 0.50
======== ======== ======== ======== ========
Cash dividends per share............... 0.379 0.392 0.412 0.435 0.459
======== ======== ======== ======== ========
Balance Sheet Data (at period end):
Cash and cash equivalents............ $ 5,265 $ 3,004 $ 1,224 $ 43 $ 199
Securities and investments........... 29,472 20,597 16,874 10,981 39,109
Property, plant and equipment, net... 76,711 85,896 90,161 98,463 119,470
Total assets......................... 143,251 142,400 147,743 154,334 218,002
Long-term debt....................... 20,000 24,000 24,606 19,774 37,685
Shareholders' equity................. 89,242 86,002 90,456 93,410 116,184
Other Financial Data:
EBITDA............................... 19,859 23,825 28,608 33,130 30,096
Cash flow provided by (used in):
Operating activities................ 13,014 19,338 18,481 33,495 31,547
Investing activities................ (9,093) (20,359) (13,953) (24,292) (42,843)
Financing activities................ (7,215) (1,240) (6,307) (10,385) 11,452
Ratio of earnings to fixed charges.. 6.9x 7.8x 7.7x 7.9x 7.0x
</TABLE>
60
<PAGE>
SUPPLEMENTAL SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA OF CFW COMMUNICATIONS COMPANY
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CFW Communications" and our consolidated
financial statements and notes thereto incorporated by reference into this joint
proxy/prospectus for a further explanation of the financial and operational data
summarized below.
We have set forth below supplemental selected historical consolidated
financial data as of and for the years ended December 31, 1995, 1996, 1997, 1998
and 1999 and as of and for the six-month periods ended, June 30, 1999 and 2000.
Information presented for all periods has been restated to reflect directory
assistance as a discontinued operation as that business segment was disposed of
in July 2000 and was presented as a discontinued operation in the Company's Form
10-Q for the period ended June 30, 2000.
The six month periods ended June 30, 1999 and 2000 are derived from our
unaudited condensed consolidated financial statements and notes thereto, which,
in the opinion of our management, include all adjustments necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for six-month periods do not necessarily indicate
results that might be expected for the entire fiscal year.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
=============================================== =================
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(in thousands, except ratio and operating data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Operating revenues:
Wireline communications............................ $29,196 $32,480 $34,495 $37,597 $44,110 $20,002 $28,572
Wireless communications............................ 8,427 10,894 13,434 17,624 21,692 10,471 11,698
Other communications services...................... 1,836 2,103 2,267 2,942 4,028 2,057 1,858
------- ------- ------- ------- ------- ------- -------
Total operating revenues........................... 39,459 45,477 50,196 58,163 69,830 32,530 42,128
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Cost of sales...................................... 1,075 1,929 1,719 4,426 8,142 3,490 4,857
Maintenance and support............................ 7,209 8,775 8,784 9,762 15,212 6,136 11,687
Depreciation and amortization...................... 5,913 7,740 8,280 9,472 11,323 5,198 6,751
Asset impairment charge............................ -- -- -- -- 3,951 -- --
Customer operations................................ 5,843 7,537 7,668 8,625 11,685 5,442 7,391
Corporate operations............................... 5,690 5,106 5,876 5,903 6,846 3,067 4,158
------- ------- ------- ------- ------- ------- -------
Total operating expenses........................... 25,730 31,087 32,327 38,188 57,159 23,333 34,844
------- ------- ------- ------- ------- ------- -------
Operating income................................... 13,729 14,390 17,869 19,975 12,671 9,197 7,284
Other income (expenses):
Other expenses, principally
interest.......................................... (369) (651) (817) (676) (900) (546) (1,010)
Equity loss from PCS investees:
VA PCS Alliance................................... -- -- (834) (5,075) (5,437) (2,838) (2,839)
WV PCS Alliance................................... -- -- -- (1,391) (5,929) (2,431) (3,817)
Equity income from other
wireless investees................................ 840 450 74 198 179 88 99
Loss on write-down of
investment........................................ -- -- (2,808) (1,010) -- -- --
Gain on sale of tower
asset and investments............................. 927 -- 5,077 -- 8,318 -- --
------- ------- ------- ------- ------- ------- -------
15,127 14,189 18,561 12,021 8,902 3,470 (283)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Income taxes......................... 5,476 4,777 6,813 4,587 2,622 1,196 (87)
------- ------- ------- ------- ------- ------- -------
Income before minority interests....... 9,651 9,412 11,748 7,434 6,280 2,274 (196)
Minority interests..................... (420) (467) (447) (578) (389) (218) (105)
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations............................ 9,231 8,945 11,301 6,856 5,891 2,056 (301)
Income (loss) from discontinued
operations............................ (737) 605 920 1,652 602 579 687
------- ------- ------- ------- ------- ------- -------
Net income............................. $ 8,494 $ 9,550 $12,221 $ 8,508 $ 6,493 $ 2,635 $ 386
======= ======= ======= ======= ======= ======= =======
Income from continuing operations
per share............................. $0.71 $0.69 $0.87 $0.52 $0.45 $0.16 $(0.02)
Other Financial Data:
Ratio of earnings to fixed
charges.............................. 7.5x 7.3x 7.2x 7.0x 6.7x 6.6x 4.4x
Operating Statistics (at period end):
PCS subscribers...................... -- -- -- 12,970 43,299 24,166 62,544
Internet subscribers................. -- -- 4,114 7,450 45,212 16,652 57,292
CLEC access lines installed.......... -- -- -- 428 5,823 2,327 12,353
ILEC access lines installed.......... 32,893 34,106 35,576 36,746 37,924 37,325 39,112
</TABLE>
Six Months
Ended June 30,
===================
1999 2000
-------- --------
Balance Sheet Data (at period end):
Cash and cash equivalents............ $ 441 $ 249
Securities and investments........... 17,949 35,101
Property, plant and equipment, net... 115,863 129,605
Total assets......................... 176,757 243,263
Long-term debt....................... 32,427 51,567
Shareholders' equity................. 97,503 114,149
Other Financial Data:
EBITDA................................ 14,395 14,035
Cash flow provided by (used in):
Operating activities................ 10,028 11,499
Investing activities................ (19,440) (24,634)
Financing activities................ 9,810 13,185
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
CFW COMMUNICATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial and Operating Data of CFW
Communications" and other financial statements and the notes thereto included
elsewhere in this document. Much of the discussion in this section involves
forward-looking statements. Our actual results may differ significantly from the
results suggested by these forward-looking statements for the reasons set forth
in this document.
We are significantly expanding the scope of the geographic markets that we
serve and focusing our growth efforts on our core communications services,
primarily digital PCS services, Internet access, including dedicated, high-speed
DSL and dial-up services, high-speed data transmission and local telephone
services. Transactions that are either in process or have recently been
completed include:
. acquiring the wireless licenses, assets and operations of Richmond-
Norfolk PCS;
. merging with R&B Communications, an integrated communications provider
in a geographic market contiguous to ours, which will give us a
controlling interest in the Virginia Alliance and the West Virginia
Alliance;
. acquiring various PCS licenses currently owned by AT&T that will add
2.5 million pops in various markets in Pennsylvania; and
. disposing of our wireless analog operations, directory assistance
operations and communications tower sites.
Historically, we have derived much of our revenues and EBITDA from our
ILEC. Additionally, for 1999, our network operations and wireless operations
generated positive EBITDA and our Internet operations were EBITDA positive for
the fourth quarter of 1999 and the first quarter of 2000. For the year ended
December 31, 1999 and the six months ended June 30, 2000, our EBITDA was $30.1
million and $14.0 million, respectively. After giving effect to the
Transactions, our EBITDA would have been negative $1.4 million and positive $2.6
million, respectively. As a result of our increasing focus on and growth in
digital PCS, Internet access and CLEC services, we expect an increasing portion
of our operating revenues and EBITDA to be generated by businesses other than
our ILEC operations. These newer businesses have generated lower or negative
EBITDA and operating margins due to start-up costs associated with expansion
into new markets and introduction of new service offerings. As we expand our
markets, start-up and acquire new businesses and introduce new products, we
expect to continue to generate lower or negative EBITDA and operating margins.
The Transactions will have a significant ongoing impact on our results of
operations and our liquidity. Richmond-Norfolk PCS and the Alliances each have
generated operating losses and negative cash flows from operations since
inception. Although R&B Communications has generated operating income and
positive cash flows from operations, the Transactions as a whole will
substantially decrease our operating income and cash flows from operations over
the near term. During the second half of 2000, we expect to generate negative
EBITDA and significant operating losses as a result of depreciation,
amortization and transaction costs. The Transactions will also substantially
increase our interest expense and our discretionary capital expenditures.
Upon completion of the Transactions, we expect to recognize between $10
million and $12 million in financing related, non-recurring charges. These
charges include bridge financing commitment fees, cash payments and the value of
warrants issued for bridge financing commitments and prepayment premiums
associated with refinancing the indebtedness of the Alliances.
In connection with the Transactions, we expect to record goodwill and PCS
license values in the range of $520 million to $540 million, in the aggregate,
which will be amortized over 20 years and 40 years, respectively.
63
<PAGE>
Upon completion of an appraisal to support the purchase price allocations, these
amounts will be reallocated to the appropriate tangible and intangible asset
categories and amortized over their respective lives. Additionally, debt
associated with the Transactions and debt to support capital expansion plans and
operating and interest costs over the next 18 months will result in total debt
of between approximately $600 million and $650 million. These higher debt
levels, coupled with an anticipated increase in our blended interest rate, will
result in interest costs of between approximately $74 million and $80 million on
an annualized basis. In addition to the Transactions, we are disposing of our
directory assistance business and our RSA 6 analog cellular business. We expect
after-tax gains from sales of these businesses to be approximately $57 million
in 2000. Operating results and financial condition which give effect to the
Transactions are included elsewhere in this document.
Price reductions have occurred in most segments of the communications
industry and we expect this to continue. As noted above, this trend affects our
ability to maintain EBITDA margins experienced historically. Often, these
pricing pressures result in rate plans with more minutes and lower per minute
rates.
We have also included in this document selected financial information and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for Richmond-Norfolk PCS and R&B Communications. We have included
the same information for the Virginia Alliance and the West Virginia Alliance,
both of which will be consolidated in our financial statements after our merger
with R&B Communications. Historically, the Alliances were accounted for under
the equity method of accounting. Percentage calculations presented in each
entity's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" have been calculated based upon actual, not rounded,
results.
Overview
We are a regional integrated communications provider offering a broad range
of wireless and wireline products and services to business and residential
customers in Virginia and West Virginia. We own our own digital PCS licenses,
fiber optic network, switches and routers, which enable us to offer our
customers end-to-end connectivity in many of the regions we serve. Our
facilities-based approach allows us to control service quality and generate
operating efficiencies. As of June 30, 2000, after giving effect to the
Transactions, we had approximately 150,500 wireless subscribers and
approximately 68,700 installed ILEC and CLEC access lines.
Revenues
Our revenues are generated from the following categories:
. wireless communications, including cellular, paging, voice mail and
wireless cable, which consists primarily of video services;
. wireline communications, including telephone revenues, fiber optic
network usage for our carrier's carrier services, Internet, CLEC,
long- distance and wireline cable revenues generated from cable
television;
. directory assistance revenues from providing directory listings for
customers seeking telephone numbers in the mid-Atlantic states; and
. other communications services revenues, including revenues from our
sale and lease of communications equipment and security alarm
monitoring and installation and rental of property and equipment,
primarily to the Alliances.
Operating Expenses
Our operating expenses are generally grouped in the following categories:
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<PAGE>
. cost of sales, which represents our cost of purchasing PCS handsets.
We sell these to our customers at a price below our cost.
Previously, we offset this discount against our revenues. Prior
periods have been conformed to the current presentation.
. maintenance and support expenses, including costs related to
specific property and equipment, and charges for using other
carriers' networks, tower rental expenses, and repair and
maintenance expenses, as well as indirect costs such as engineering
and general administration of property and equipment;
. depreciation and amortization, including amortization of goodwill
from acquired assets and capital outlays to support continued
business expansion;
. asset impairment charges, if applicable;
. customer operations expenses, including marketing, product
management, product advertising, sales, publication of a regional
telephone directory, customer services and directory services; and
. corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information management,
human resources and other general and administrative expenses.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest income
and expense, dividend income, equity income from our 22% limited partnership
interest in RSA 5, equity income or loss from the Virginia Alliance and West
Virginia Alliance, gain on sale of investments and assets and loss on write-
down of investments. Our income statements refer to RSA 5 as the "other wireless
investees" and to the Alliances as the "PCS investees."
Income Taxes
Our income tax liability and effective tax rate increases or decreases
based upon changes in a number of factors, including our pre-tax income or loss,
losses sustained by the Alliances, net operating losses and related
carryforwards, alternative minimum tax credit carryforwards, gain or loss on the
sale of assets and investments, write-down of assets and investments, non-
deductible amortization, tax and employment credits, and charitable
contributions and other tax deductible amounts.
Results of Operations
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Overview
EBITDA decreased $.4 million, or 5%, from $7.4 million to $7.0 million and
$.4 million, or 3%, from $14.4 million to $14.0 million, for the respective
three and six month periods ended June 30, 2000 over 1999. Operating income
decreased $1.1 million, or 24%, from $4.7 million to $3.6 million, and $1.9
million, or 21%, from $9.2 million to $7.3 million for the respective three and
six month periods ended June 30, 2000 and 1999.
These results reflect customer growth from our wireless, CLEC and Internet
businesses, with customers from these services totaling 101,900 as of June 30,
2000, a 55,500, or 120%, customer increase from June 30, 1999. This growth came
from internal growth and expansion throughout our markets in PCS, Internet and
CLEC and from Internet acquisitions. EBITDA decreased due to CLEC start-up
losses, which were significant in our new West Virginia markets. Operating
income decreased from the prior year comparable quarter and six month period due
to the noted decrease in EBITDA coupled with the higher levels of depreciation
and goodwill amortization generated from Internet acquisitions and from capital
investments in our growth businesses and underlying supporting infrastructure.
65
<PAGE>
Net income for the three and six months ended June 30, 2000 was $.3 million
and $.4 million, respectively. This included a $3.0 million loss ($1.9 million
loss after-tax) and $6.7 million loss ($4.1 million loss after tax) for the
three and six month periods, respectively, relating to our equity share of
losses from our investments in the Alliances, which provide PCS service
throughout our Virginia and West Virginia marketplace.
Net income for the three and six months ended June 30, 1999 was $1.3
million and $2.6 million, respectively. This included a $2.9 million loss ($1.8
million loss after-tax) and $5.3 million loss ($3.3 million loss after tax) for
the three and six month periods, respectively, relating to our equity share of
losses from our investments in the Alliances, which provide PCS service
throughout our Virginia and West Virginia marketplace.
Operating Revenues
Operating revenues increased $4.9 million, or 29%, from $16.6 million for
the three months ended June 30, 1999 to $21.5 million for the three months ended
June 30, 2000. Operating revenues increased $9.6 million, or 30%, from $32.5
million for the six months ended June 30, 1999 to $42.1 million for the six
months ended June 30, 2000.
Wireless Communications Revenues. Wireless communications revenues
increased $.4 million, or 7%, and $1.2 million, or 12%, for the respective three
and six month periods ended June 30, 2000 as compared to June 30, 1999. Wireless
communications revenues were $5.8 million and $11.7 million for the three and
six months ended June 30, 2000, as compared to $5.4 million and $10.5 million
for the three and six months ended June 30, 1999.
. Digital and Analog Cellular, Paging and Voicemail Revenue. Revenues
for digital and analog cellular, paging, and voicemail increased
$.5 million, or 11%, from $4.7 million for the three months ended
June 30, 1999 to $5.2 million for the three months ended June 30,
2000 and increased $1.5 million, or 16%, from $9.0 million for the
six months ended June 30, 1999 to $10.5 million for the six months
ended June 30, 2000. The increase was primarily attributable to
customer growth. The company had 46,900 combined digital, analog
cellular and paging customers as of June 30, 2000, which represented
a 13% increase in the number of wireless customers from June 1999.
Access, airtime and toll revenues increased $.5 million, or 87%, and
$1.1 million, or 105% for the respective three and six month periods
ended June 30, 2000 over 1999. This was partially offset by both the
related direct cost of sales and a $.2 million increase in handset
subsidies due to reduced prices for the six months ended June 30,
2000 over 1999.
. Wireless Cable Revenues. Wireless cable revenues decreased $.1
million, or 16%, from $.7 million for the three months ended June
30, 1999 to $.6 million for the three months ended June 30, 2000 and
decreased $.2 million, or 14%, from $1.4 million for the six months
ended June 30, 1999 to $1.2 million for the six months ended June
30, 2000.
Wireline Communications Revenues. Wireline communications revenues
increased $4.5 million, or 44%, and $8.6 million, or 43%, for the three and six
month periods ended June 30, 2000 as compared to June 30, 1999, respectively.
Wireline communications revenues were $14.7 million and $28.6 million for the
three and six months ended June 30, 2000 and were $10.2 million and $20.0
million for the three and six months ended June 30, 1999.
. Telephone Revenues. Telephone revenues, which include local service,
access and toll services, directory advertising and calling feature
revenues, increased $.2 million, or 3%, from $7.8 million for the
three months ended June 30, 1999 to $8.0 million for the three
months ended June 30, 2000 and increased $.5 million, or 3%, from
$15.5 million for the six months ended June 30, 1999 to $16.0
million for the six months ended June 30, 2000. The increase was
due to an increase in access minutes of 17%, toll minutes of 10%,
and access lines of 5%.
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<PAGE>
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber
optic network usage for carrier's carrier services and CLEC
operations increased $1.1 million, or 92%, from $1.2 million for the
three months ended June 30, 1999 to $2.3 million for the three
months ended June 30, 2000 and increased $2.0 million, or 81%, from
$2.4 million for the six months ended June 30, 1999 to $4.4 million
for the six months ended June 30, 2000. Approximately $1.1 million
and $2.0 million of these increases for the three and six month
related periods was due to the growth in CLEC customers and
revenues. As of June 30, 2000, CLEC customers totaled 12,400, an
increase of 10,000 customers from June 30, 1999.
. Internet Revenues. Revenues from Internet services increased $3.2
million from $.8 million for the three months ended June 30, 1999 to
$4.0 million for the three months ended June 30, 2000 and increased
$6.1 million from $1.3 million for the six months ended June 30,
1999 to $7.4 million for the six months ended June 30, 2000. This
revenue growth was attributable to acquisitions, internal customer
growth and improved unit revenues. This growth in Internet services
comprised the largest single component of wireline revenue growth in
the three months ended June 30, 2000, as Internet and DSL customers
grew to 57,300 as of June 30, 2000, an increase of 40,600 customers
from June 30, 1999. Internet customer growth from acquisitions
accounted for 35,700 of this total, and 9,600 was from internal
growth.
. Wireline Cable Revenues. Wireline cable revenues remained unchanged
at $.4 million and $.8 million for the three and six months ended
June 30, 2000 and 1999, respectively. This revenue stream is not
growing due to a decrease in the level of marketing and sales and
other resources deployed to support the operation.
Other Communications Services Revenues. Other communications services
revenues remained unchanged at $1.0 million for the three months ended June 30,
1999 and 2000. Other communications services revenues decreased $.2 million from
$2.1 million for the six months ended June 30, 1999 to $1.9 million for the six
months ended June 30, 2000. Revenues from phone systems sales and services
decreased $.2 million due to a shift in marketing and sales efforts from this
business. Our revenues from rentals, primarily for company owned assets, which
are being used by the Alliances, remained unchanged.
Operating Expenses
Total Operating Expenses. Total operating expenses increased $6.0 million,
or 51%, from $11.9 million for the three months ended June 30, 1999 to $17.9
million for the three months ended June 30, 2000. Operating expenses increased
$11.5 million, or 49%, from $23.3 million for the six months ended June 30. 1999
to $34.8 million for the six months ended June 30, 2000. This increase was
primarily attributable to a $4.4 million and an $8.4 million increase in the
operating expenses of the wireline businesses for these three and six month
periods, respectively, and a $1.0 million and a $1.8 million increase in the
operating expenses of our wireless business for these same periods,
respectively. Within the wireline business, Internet and network comprised $2.5
million and $1.5 million, respectively, of the increase for the three months
ended June 30, 1999 as compared to June 30, 2000, and $5.1 million and $2.7
million, respectively, for the six month periods then ended. Approximately $2.0
million of the three month increase and $3.8 million of the six month increase
came from operations acquired after the second quarter of 1999. The remaining
increase in Internet operating expenses is from acquisitions which occurred
during the first six months of 1999 and internal expansion within existing
markets and into new markets. The fiber optic network operating expense
increased as a result of the expenses associated with increased fiber build-out
and start-up costs associated with launching or preparing to launch CLEC
operations in new Virginia and West Virginia markets.
Cost of Sales. Cost of sales increased $.8 million, or 43%, from $1.7
million for the three months ended June 30, 1999 to $2.5 million for the three
months ended June 30, 2000 and increased $1.4 million, or 39%, from $3.5 million
for the six months ended June 30, 1999 to $4.9 million for the six months ended
June 30, 2000. Roaming and access accounted for $.6 million and $1.1 million of
the increase for the three and six month periods, respectively.
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Maintenance and Support Expense. Maintenance and support expense increased
$3.0 million, or 96%, from $3.2 million for the three months ended June 30, 1999
to $6.2 million for the three months ended June 30, 2000 and increased $5.6
million, or 90%, from $6.1 million for the six months ended June 30, 1999 to
$11.7 million for the six months ended June 30, 2000. This increase was
primarily attributable to a $1.7 million and a $3.2 million increase for the
three and six month comparable periods from Internet acquisitions occurring
after June 30, 1999. Additionally, network and CLEC maintenance and support
expenses increased $.9 million and $1.6 million for the three and six month
comparable periods resulting from CLEC rollout and engineering and operations
support growth. Wireless maintenance and support is up $.3 million for the six
month period ended June 30, 2000 versus 1999 due to the rent of tower sites sold
in March 2000. Other increases in maintenance and support expenses were
consistent with customer and revenue growth.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $.7 million, or 28%, from $2.7 million for the three months
ended June 30, 1999 to $3.4 million for the three months ended June 30, 2000 and
increased $1.6 million, or 30%, from $5.2 million for the six months ended June
30, 1999 to $6.8 million for the six months ended June 30, 2000. This increase
was due to an increase in property and equipment of approximately 16%, from $162
million as of June 30, 1999 to $188 million as of June 30, 2000. In addition,
goodwill increased $17.9 million from $13.1 million as of June 30, 1999 to $31.0
million as of June 30, 2000 due to Internet acquisitions, which increased
goodwill amortization by $.9 million over these same six month periods.
Depreciation and amortization as a percent of the related assets increased from
3.0% for the six months ended June 30, 1999 to 3.1% for the six months ended
June 30, 2000. This increase is due to a shift in the composition of the asset
base to network plant and equipment and a higher amount of goodwill from
Internet acquisitions, both of which carry shorter lives.
Customer Operations Expense. Customer operations expense increased $.9
million, or 32%, from $2.9 million for the three months ended June 30, 1999 to
$3.8 million for the three months ended June 30, 2000 and increased $1.9
million, or 36%, from $5.5 million for the six months ended June 30, 1999 to
$7.4 million for the six months ended June 30, 2000. Primary areas of
fluctuations were in the Internet and network and CLEC operations. Internet
operations increased $.6 million and $1.2 million for the three and six months
ended June 30, 2000 over 1999, primarily from acquisitions during 1999. Network
and CLEC operations increased $.5 million and $.9 million for the three and six
months ended June 30, 2000 over 1999. The growth in this area relates primarily
to marketing and sales activities and customer care costs primarily associated
with adding new customers.
Corporate Operations Expenses. Corporate operations expense increased $.6
million, or 38%, from $1.5 million for the three months ended June 30, 1999 to
$2.1 million for the three months ended June 30, 2000 and increased $1.1
million, or 36%, from $3.1 million for the six months ended June 30, 1999 to
$4.2 million for the six months ended June 30, 2000. Of this increase, $.3
million and $.6 million for the three and six months ended June 30, 2000 over
1999, respectively, related to acquired Internet operations and the remaining
increases represent growth in the corporate infrastructure associated with the
significant customer growth and our geographic expansion.
Other Income (Expenses)
Total other income (expenses) increased $.3 million, or 9%, from $3.2
million for the three months ended June 30, 1999 to $3.5 million for the three
months ended June 30, 2000. Other income (expenses) increased $1.9 million, or
32%, from $5.7 million for the six months ended June 30, 1999 to $7.6 million
for the six months ended June 30, 2000.
Other expenses, principally interest, increased $.3 million and $.5
million for the three and six months ended June 30, 2000 versus the comparable
prior year periods. These increases were due to additional borrowings under our
lines of credit, with total debt increasing by $19.2 million, from $32.4 million
as of June 30, 1999 to $51.6 million as of June 30, 2000. As a result of the
acquisition and related financing transactions, we expect our interest expense
to significantly increase in the future.
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Our share of losses from the Virginia Alliance decreased $.2 million, or
11%, from $1.5 million for the three months ended June 30, 1999 to $1.3 million
for the three months ended June 30, 2000 and remained unchanged at $2.8 million
for the six months ended June 30, 1999 and 2000. Our share of losses from the
West Virginia Alliance, which commenced operations in the latter part of the
third quarter of 1998 and expanded significantly in the second quarter of 1999,
increased $.2 million, or 15%, from $1.5 million for the three months ended June
30, 1999 to $1.7 million for the three months ended June 30, 2000 and increased
$1.4 million, or 57%, from $2.4 million for the six months ended June 30, 1999
to $3.8 million for the six months ended June 30, 2000.
Combined customer growth for the Alliances during the three and six months
ended June 30, 2000 totaled 8,300 and 19,200 customers, respectively, as total
customers exceeded 62,500 as of June 30, 2000. This compares to combined
customer growth in the three and six months ended June 30, 1999 of 5,100 and
11,300 customers, respectively. Net sales and gross profit increased 172% and
205%, respectively, for the six months ended June 30, 2000 (Note 4 to the
Unaudited Interim Condensed Financial Statements). During this same timeframe,
the Alliances experienced higher handset trade-in activity associated with the
introduction of next generation, dual mode and data capable handset models.
This, coupled with the increase in new customers and the related phone sales
volume, resulted in higher phone subsidies of $4.5 million as compared to $1.6
million for the six months ended June 30, 2000 and 1999, respectively.
In July 2000, upon our exercise of an option to invest $11.4 million in
exchange for additional common ownership interest in the VA Alliance and our
conversion of its Series B preferred ownership interest in the VA Alliance to
common interest, our ownership percentage of the VA Alliance increased from 21%
to 65%. Based on this, the VA Alliance will be consolidated into our financial
statements in future periods. Our ownership interests in the VA and WV Alliance
will increase to 91% and 79%, respectively, upon completion of the R&B merger
(Note 9 to the Unaudited Interim Condensed Financial Statements), which is
expected to be completed by the fourth quarter of 2000. After this transaction
is completed, both Alliances will be consolidated into our financial statements.
Equity income from RSA 5 was not material for the three and six months
ended June 30, 1999 and 2000. In July 2000, our 22% limited interest in RSA5 was
sold to Verizon (previously PrimeCo) as part of consideration for the Richmond-
Norfolk PCS acquisition.
Income Taxes
Income taxes decreased $.3 million, or 81%, from $.4 million for the three
months ended June 30, 1999 to $.1 million for the three months ended June 30,
2000 and decreased $1.3 million, from $1.2 million for the six months ended June
30, 1999 to a tax benefit of $.1 million for the six months ended June 30, 2000.
These decreases were due to the change in the pre-tax income for the comparable
periods. Additionally, the effective rate changed from a 37% tax obligation for
the six months ended June 30, 1999 to a 22% tax benefit for the six months ended
June 30, 2000. The effective tax rate change is due to the continuing operations
results turning from a profit to a loss with non- deductible goodwill from 1999
Internet acquisitions being added back to the pretax loss and thus, resulting in
a tax benefit significantly below the statutory rate.
1999 Compared to 1998
Overview
EBITDA decreased $3.0 million, or 9%, from $33.1 million in 1998 to $30.1
million in 1999. Operating income decreased $9.1 million, or 40%, from $22.6
million in 1998 to $13.5 million in 1999.
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The total number of customers from our higher growth segments increased
more than four times. The combined digital PCS customers within our RSA 6
service area, Internet customers, and CLEC customers increased from 12,200 to
64,500 for the years ending 1998 and 1999, respectively. EBITDA decreased from
the prior year due to start-up costs associated with expansion into new markets
and new service offerings. In addition to such costs relating to internal
growth, increased depreciation and amortization from acquisition activity
further lowered operating income in 1999. Also, we recognized a $4.0 million
asset impairment charge in 1999. Finally, 1999 directory assistance call volume
declines coupled with start-up costs associated with the roll-out of national
directory products resulted in a decline in operating cash flow and operating
income from directory assistance of $1.5 million and $1.8 million, respectively,
from that of the prior year.
Net income for 1999 was $6.5 million, which included non-recurring items
totaling $8.3 million, $5.2 million after tax, of gains from the sale of our
investment in American Telecasting, Inc, or ATEL, and a tower sale and a $4.0
million, $1.5 million after tax, asset impairment charge. This charge related to
a $1.3 million write-off of our prior billing software and a $2.7 million charge
related to various wireless analog cable equipment.
Net income for 1998 was $8.5 million, including a non-recurring charge of
$1.0 million, $.6 million after tax, loss on the write-down of our investment in
ATEL and equity losses from the Alliances of $6.5 million, $4.0 million after
tax.
Operating Revenues
Operating revenues increased $10.8 million, or 15%, from $71.1 million in
1998 to $81.9 million in 1999. The increase was the result of strong customer
growth in our strategic business segments.
Wireless Communications Revenues. Wireless communications revenues
increased $4.1 million, or 23%, from $17.6 million in 1998 to $21.7 million in
1999.
. Digital and Analog Cellular, Paging and Voicemail Revenues. Revenues
for digital and analog cellular, paging and voicemail increased $4.2 million, or
29%, from $14.7 million in 1998 to $18.9 million in 1999. These increases
resulted primarily from digital and analog cellular access, toll, and roaming
associated with 24% customer growth over 1998 and an increase in outside roaming
minutes from other carriers' customers of 33% over 1998. ARPU increased 4%, from
$28.49 in 1998 to $29.55 in 1999 due to a growing percentage of digital PCS
subscribers as compared to analog subscribers.
. Wireless Cable Revenues. Wireless cable revenues decreased $.2
million, or 7%, from $3.0 million in 1998 to $2.8 million in 1999. The decline
in revenue was due to the limitation of both marketing efforts and installations
to multiple-dwelling units in an effort to contain costs and capital associated
with analog cable video services in this business segment.
Wireline Communications Revenues. Wireline communications revenues
increased $6.5 million, or 17%, from $37.6 million in 1998 to $44.1 million in
1999.
. Telephone Revenues. Telephone revenues increased $.8 million, or 3%,
from $30.5 million in 1998 to $31.3 million in 1999. These increases were
primarily due to access line growth of 3% and revenue growth from advanced
calling features of 7% in 1999. These increases were partially offset by slight
decreases in toll and access rates.
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber
optic network usage and CLEC operations increased $1.6 million, or 40%, from
$4.0 million in 1998 to $5.6 million in 1999. This increase was the result of
increased network usage and the roll-out of CLEC operations in four markets in
the second half of 1998 and four additional markets in late 1999.
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. Internet Revenues. Revenues from Internet services increased $4.2
million, or 300%, from $1.4 million in 1998 to $5.6 million in 1999. This growth
in Internet revenues comprised the largest single component of wireline revenue
growth in 1999 as we added a total of 37,700 subscribers during 1999, with total
subscribers exceeding 45,200 by year-end. This was achieved from customer growth
within our existing markets and growth through acquisitions. Internet pricing
has remained relatively constant during 1999 and 1998.
. Wireline Cable Revenues. Wireline cable revenues have remained
relatively constant from 1998 to 1999, due to a decrease in the level of
resources deployed to support these operations.
Directory Assistance Revenues. Directory assistance revenues decreased
$.9 million, or 7%, from $13.0 million in 1998 to $12.1 million in 1999. Call
volumes declined 18% from 65.4 million calls in 1998 to 53.6 million calls in
1999. This was attributable to the impact of "call around plans" offered by
large competitors compared to traditional directory assistance traffic being
handled at our call centers without sufficient new business to off set the
continued base business decline. Although volume declined 18% in 1999, the
revenue decline was only 7%, due to the fact that an increasing percentage of
the total call volume is from national directory assistance offerings that
include higher service levels and higher unit prices.
Other Communications Services Revenues. Other communications services
revenues increased $1.1 million, or 38%, from $2.9 million in 1998 to $4.0
million in 1999. This increase was due primarily to an increase in rental
charges to the Alliances for additional assets used by the Alliances but owned
by us.
Operating Expenses
Total operating expenses increased $19.9 million, or 41%, from $48.5
million in 1998 to $68.4 million in 1999. Excluding the asset impairment charges
discussed below, total operating expenses increased $16.0 million, or 33%, from
$48.5 million in 1998 to $64.5 million in 1999. Of this increase, $9.5 million
is from the wireline businesses, $8.4 million of which is from fiber optic
network usage, CLEC and Internet services and $1.1 million is from other
wireline related expenses. The $8.4 million increase is comprised primarily of
$2.4 million from Virginia Internet acquisitions, $2.1 million primarily from
Internet acquisition expenses related to our expansion into West Virginia, $2.5
million from CLEC rollout and expansion and $1.4 million from other related
expenses. Operating expenses increased in wireless communications, directory
assistance and other communications services by $4.5 million, $.9 million, and
$1.0 million, respectively. Increases in wireless communications operating
expenses included variable expenses, such as handset cost of sales, sales
commissions, customer care, network access, and selling and advertising
expenses. These expenses were consistent with revenue growth. Wireless
communications access, selling and advertising expenses, as well as retail store
and customer care costs, increased $1.3 million. The directory assistance
increase was driven by transition related costs as this business transitioned to
a structure to support significant growth in national directory assistance
offerings. Lastly, other communications services operating costs and
depreciation and amortization increased $1.0 million. These increases pertained
to the increases in corporate assets owned by us and the related operating costs
which were used by the Alliances, as discussed in the operating revenues section
above, and increases in corporate infrastructure costs.
Cost of Sales. Cost of sales increased $3.7 million, or 84%, from $4.4
million in 1998 to $8.1 million in 1999. Of this increase, $2.2 million relates
to increased costs associated with network access, airtime and toll fees from
our wireless operations. Additionally, equipment cost of goods sold increased
$1.5 million from equipment subsidies which increased from $125.16 per unit in
1998 to $165.78 per unit in 1999. The increase in the per unit charge reflects a
higher percentage of digital versus analog sales.
Maintenance and Support Expenses. Maintenance and support expenses
increased $5.8 million, or 54%, from $10.8 million in 1998 to $16.6 million in
1999. Of this total increase, $1.6 million relates to fiber optic network and
CLEC services and $2.3 million relates to Internet services. These increases
represent network and other plant related expense increases due to the
geographic expansion and new costs from the acquired Internet businesses. The
remaining $1.9 million was spread among all the other business segments.
Increases in these segments were due to customer growth and start-up related
costs.
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Depreciation and Amortization Expense. Depreciation and amortization
expense increased $2.1 million, or 20%, from $10.5 million in 1998 to $12.6
million in 1999. Of this increase, $1.0 million related to Internet services,
$.5 million of which represents amortization of goodwill from acquired assets
and $.5 million represents additional equipment and improvements to the related
network plant and equipment. Other communications services depreciation
increased $.5 million and telephone depreciation increased $.4 million. Other
communications services depreciation increased primarily due to an increase in
corporate facilities and back-office software upgrades. In addition,
depreciation increased due to digital switching upgrades.
Asset Impairment Charge. In addition to normal depreciation and
amortization expense, we recognized a $4.0 million asset impairment charge,
including a $2.7 million write-down of various wireless analog cable assets and
a $1.3 million write-off of software assets from an abandoned billing system due
to a conversion to a single billing platform.
Customer Operations Expense. Customer operations expense increased $3.7
million, or 23%, from $16.2 million in 1998 to $19.9 million in 1999. Retail
store costs and customer care costs increased $1.1 million and $1.0 million,
respectively, in 1999. This increase represents the geographic expansion of our
retail presence with the opening of five stores in each of 1999 and 1998 and
increase in the customer care costs to cover the significant new customer
additions and the related larger overall customer base. In addition, directory
assistance customer operations increased $.6 million, or 8%, despite a lower
call volume. This is due to start-up and training costs associated with the
shift to the national directory assistance products. In addition to the start-up
costs, these product offerings have a higher level of service and related costs.
Corporate Operations Expense. Corporate operations expense increased $.7
million, or 11%, from $6.5 million in 1998 to $7.2 million in 1999. This was due
to acquired Internet businesses and other corporate infrastructure increases
necessary to support our overall growth.
Other Income (Expenses)
Total other income (expenses), which was a net expense for 1998 and 1999,
decreased $4.1 million, or 52%, from $7.9 million in 1998 to $3.8 million in
1999.
Other expenses, principally interest, increased $.3 million, from $.6
million in 1998 to $.9 million in 1999. The increase in interest expense is due
to additional borrowings under our lines of credit of $17.0 million.
Equity income from RSA 5, our analog cellular limited partnership interest,
remained unchanged in 1999 compared to 1998. Equity loss from the Alliances
increased $4.9 million, or 75%, from $6.5 million in 1998 to $11.4 million in
1999. Including the Virginia Alliance wholesale PCS subscribers from our RSA 6
service area, the Alliances' subscribers increased 30,400, or 236%, from 12,900
at December 31, 1998 to 43,300 at December 31, 1999. Further information
concerning the Alliances is contained in "Management's Discussions and Analysis
of Financial Condition and Results of Operation" for each respective Alliance.
After completion of our merger with R&B Communications, the Alliances will be
accounted for on a consolidated basis.
We recognized a $1.0 million impairment loss on our investment in ATEL at
December 31, 1998. We concluded at that time that the decline in value was other
than temporary given recent trading prices in the common stock and ATEL's
financial condition and continued financial losses. However, in 1999, ATEL was
purchased by Sprint Corp. and the investment was sold for a gain over the
carrying value after write-downs of $7.6 million. Additionally, we sold our
tower in Richmond, Virginia for a gain of $.7 million.
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Income Taxes
Income taxes decreased $2.7 million, or 48%, from $5.6 million in 1998 to
$2.9 million in 1999. There were two primary factors causing this change: (1) a
decrease in the pre-tax income of $4.8 million and (2) a change in the effective
tax rate from 40% in 1998 to 31% in 1999. The change in the effective tax rate
was due to charitable contributions deductible for tax purposes at appreciated
market values which were $1.5 million greater than the cost basis. In addition
to this, we received tax credits totaling $.5 million for rehabilitation of a
historic building in Winchester, Virginia, the location of our new directory
assistance call center, and employment credits for exceeding various new hire
levels in our directory assistance business.
1998 Compared to 1997
Overview
EBITDA increased $4.5 million, or 16%, from $28.6 million in 1997 to $33.1
million in 1998. Operating income increased $3.2 million, or 17%, from $19.4
million in 1997 to $22.6 million in 1998.
Strong customer growth in our PCS and analog cellular and paging operations
of 30% and 33%, respectively, fueled the growth in our wireless operations.
Operating results from our wireline operations reflect continued strong
contributions from our telephone operations, led by 3% growth in access lines,
11% growth in access minutes and continued growth in calling features, an over
80% increase in Internet customers and effective cost control. Results from our
directory assistance operations reflect the annualized revenue stream from 1997
contract expansions and operating efficiencies. Start-up costs associated with
expansion into new markets and new service offerings reduced the year-to- year
increases.
Net income for 1998 was $8.5 million, which included a $1.0 million, $.6
million after tax, loss on the write-down of our investment in ATEL and equity
losses from the Alliances of $6.5 million, $4.0 million after tax.
Net income for 1997 was $12.2 million, which included a $5.1 million gain,
$3.1 million after tax, on the sale of our investment in the Roanoke MSA
Cellular Partnership, a $2.8 million, $1.7 million after tax, loss on write-down
of our investment in ATEL and a $.8 million loss, $.5 million after tax, from
our equity share of losses from the Alliances.
Operating Revenues
Operating revenues increased $10.4 million, or 17%, from $60.7 million in
1997 to $71.1 million in 1998. This increase was primarily due to a $4.2 million
increase in wireless communication revenues, a $3.1 million increase in wireline
communications revenues, a $2.4 million increase in directory assistance and
revenues and a $.7 million increase in other communications services revenues.
Wireless Communications Revenues. Wireless communications revenues in 1998
totaled $17.6 million, an increase of $4.2 million, or 31%, over 1997.
. Digital and Analog Cellular, Paging and Voicemail Revenues. Revenues
for digital and analog cellular, paging and voicemail increased $4.3
million, or 42%, from $10.3 million in 1997 to $14.6 million in
1998. These increases resulted primarily from digital and analog
cellular access, toll, and roaming associated with 30% customer
growth over 1997 and increased outside roaming traffic.
. Wireless Cable Revenues. Wireless cable revenues decreased $.1
million, or 3b%, from $3.1 million in 1997 to $3.0 million in 1998.
The decline in revenue was due to limiting both marketing efforts
and installations to multiple-dwelling units in an effort to contain
costs and capital in this line of business.
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Wireline Communications Revenues. Wireline communications revenues
increased $3.1 million, or 9%, from $34.5 million in 1997 to $37.6 million in
1998.
. Telephone Revenues. Telephone revenues increased $1.7 million, or
6%, from $28.8 million in 1997 to $30.5 million in 1998. These
increases were primarily due to access line growth of 3% in 1998 and
revenue growth from custom calling features of 19% in 1998.
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber
optic network usage and CLEC operations increased $.8 million, or
25%, from $3.2 million in 1997 to $4.0 million in 1998. This
increase was due to expanded services that included competitive
local telephone service and long distance.
. Internet Revenues. Revenues from our wireline Internet services
increased $.6 million, or 75%, from $.8 million in 1997 to $1.4
million in 1998. This growth is attributable to the over 80%
increase in our Internet customer base as we added a total of 3,400
subscribers in 1998, with total subscribers of 7,500 by year-end,
the introduction of our new DSL data service product and our overall
emphasis to grow our Internet operations.
. Wireline Cable Revenues. Wireline cable revenues have remained
relatively constant from 1997 through 1998, due to a decrease in the
level of resources deployed to support these operations.
Directory Assistance Revenues. Directory assistance revenues increased $2.4
million, or 23%, from $10.5 million in 1997 to $12.9 million in 1998. During the
first half of 1997, we commenced directory assistance services to AT&T customers
seeking telephone numbers in New Jersey and Delaware. During August through
October 1997, we expanded this service to encompass Pennsylvania. After
considering these expansions, which only had a partial year impact in 1997,
total call volume increased 10.4 million in 1998.
Other Communications Services Revenues. Other communications services
revenues increased $.7 million, or 30%, from $2.3 million in 1997 to $3.0
million in 1998, due primarily to services provided and assets leased to the
Alliances.
Operating Expenses
Total operating expenses increased $7.2 million, or 17%, from $41.3 million
in 1997 to $48.5 million in 1998. Growth in cellular and digital PCS subscribers
contributed $3.8 million in operating expenses in 1998 from 1997. The
introduction of competitive local telephone services and long distance and the
resulting start-up related costs, coupled with the growth of our Internet
services and the related commitment towards our Internet infrastructure,
accounted for $1.8 million of the 1998 increase. Additionally, costs associated
with increased directory assistance calling volume accounted for $1.1 million of
the 1998 increase due to the annualized revenue from 1997 contract expansions
and commencement of national directory assistance services. Finally, other
communications services expenses increased $.5 million in 1998.
Cost of Sales. Cost of sales increased $2.7 million, or 159%, from $1.7
million in 1997 to $4.4 million in 1998. Of this increase, $1.5 million was for
roaming revenues. Roaming settlements between us and outside carriers was not
billed in 1997. Equipment cost of sales increased $.8 million, in line with
customer growth.
Maintenance and Support Expense. Maintenance and support expense increased
$1.1 million, or 11%, from $9.7 million in 1997 to $10.8 million in 1998. This
increase resulted primarily from increased costs associated with subscriber
additions and service enhancements for the underlying fiber optic network and
support systems.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $1.3 million, or 14%, from $9.2 million in 1997 to $10.5
million in 1998. This increase was a result of capital outlays to support
continued business expansion primarily in our wireless operations and directory
assistance.
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Customer Operations Expense. Customer operations expense increased $1.9
million, or 13%, from $14.3 million in 1997 to $16.2 million in 1998.
Approximately $1.1 million of these 1998 increases related to the addition of
personnel to our directory assistance business throughout 1997 to handle the
calling volume from new contracts. Since these additional personnel were
employed for less than a full year in 1997, as compared to a full year in 1998,
the relative personnel expense was higher in 1998. Additionally, we experienced
an increase in customer service and sales and marketing related costs of $.8
million in order to support our wireless communications growth and CLEC and
Internet expansion.
Corporate Operations Expenses. Corporate operations expenses remained
relatively constant in 1998.
Other Income (Expenses)
Total other income (expenses) decreased $8.6 million from income of $.7
million in 1997 to an expense of $7.9 million in 1998.
Other expenses, principally interest, decreased $.3 million, or 33%, from
$.9 million in 1997 to $.6 million in 1998. The reduction in interest expense
was primarily a result of the liquidation of mortgaged-backed securities used to
satisfy cash flow needs in lieu of additional debt, and lower interest rates on
line of credit debt facilities offset by an increase in investing activity. We
capitalized interest on property under construction and the investments in the
Alliances of $.8 million in each of 1997 and 1998.
Interest and dividend income was down $.2 million, or 67%, from $.3 million
in 1997 to $.1 million in 1998, due to the liquidation of mortgage- backed
securities to support the continued growth in customer base and business
expansion. Equity income from RSA 5, our analog cellular partnership interest,
increased $.1 million, or 100%, to $.2 million in 1998. Additional information
concerning the Alliances is contained in "Management's Discussed and Analysis of
Financial Condition and Results of Operations" for each respective Alliance.
Equity loss from the Alliances totaled $6.5 million for 1998 compared to
$.8 million in 1997. At the end of 1998, we had a 21% common ownership interest
in the Virginia Alliance, which commenced operations in the fourth quarter of
1997, and a 45% common ownership in the West Virginia Alliance, which commenced
operations in late 1998. The increase in equity loss from the Alliances was due
to the full year of Virginia Alliance operations and the commencement of the
West Virginia Alliance operations late in 1998.
We recognized a $5.1 million gain on the sale of our 30% limited ownership
interest in the Roanoke MSA Cellular Partnership to GTE Wireless in April 1997.
We recognized a $1.0 and $2.8 million impairment loss on our investment in
ATEL at December 31, 1998 and 1997, respectively. We concluded that the decline
in value was other than temporary given recent trading prices in the common
stock and ATEL's financial condition and continued financial losses.
Income Taxes
Income taxes decreased $1.8 million, or 24%, from $7.4 million in 1997 to
$5.6 million in 1998. This decrease was attributable to a number of factors, the
most significant of which was the recognition of approximately $6.5 million in
losses sustained by the Alliances compared to only $.8 in 1997. These losses
generated an increased tax benefit to us of approximately $2.2 million.
Additionally, we recognized a one-time increase to tax expense of $2.0 million
related to a gain on an investment sale in 1997. The 1998 tax reductions were
offset by approximately $1.2 million of income taxes recognized by the $3.2
million increase in taxable income from operations. The 1997 increase was due to
an increase in taxable income from operations, $2.0 million of taxes from the
gain on the sale of the Roanoke MSA Cellular Partnership, offset partially by a
$1.1 million tax benefit from the write-down of our investment in ATEL. The
effective rate was 38% in 1997 and 40% in 1998, respectively.
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Discontinued Operations
In May 2000, we announced that we had entered into a definitive agreement
to sell our directory assistance operations. We sold our directory assistance
operations in July 2000. All periods presented on the income statement have been
restated to reflect the accounting for the directory assistance segment as
discontinued operations. Non-incremental corporate overhead of $.2 million for
the three month periods ended June 30, 2000 and 1999, and $.4 million and $.3
million for the six month periods ended June 30, 2000 and 1999, respectively,
which was previously allocated to this business segment, have been recognized as
charges to other operating expenses cash flows.
Liquidity and Capital Resources
We have funded our working capital requirements and capital expenditures
from net cash provided from operating activities and borrowings under credit
facilities. After closing on the Richmond-Norfolk PCS operations and the related
financing, we had $175 million in unused borrowings available under our senior
credit facility.
Operating Cash Flows
In the six months ended June 30, 2000, net cash provided by operating
activities was $11.5 million. Principal changes in operating assets and
liabilities were as follows: accounts receivable increased $1.6 million
resulting from the timing of our receipt of significant customer billings,
increased billings and an overall increase of our receivables aging; income
taxes changed from a $2.0 million receivable position at December 31, 1999 to a
$.1 million payable position at June 30, 2000 primarily as a result of our share
of taxable income associated with the Alliances sale of tower assets; and
accounts payable decreased $.6 million from December 31, 1999 due to the timing
of payments.
Investing Cash Flows
Our cash flows used in investing activities for the six months ended June
30, 2000 aggregated $24.6 million. During the six months ended June 30, 2000,
our investing activities included: $17.2 million for the purchase of property
and equipment, $9.5 million of which represents significant telephone, network
and Internet circuit and network related electronic equipment; $1.3 million
relates to significant building and landscape projects; and $1.6 million relates
to billing software.
The remainder is primarily network equipment additions. In connection with
the Transactions, we recorded $11.6 million of debt financing fees and other
professional service costs. Of this amount, $11.2 million was accrued as of June
30, 2000, as noted above, and will be recognized as a cash outlay for investment
and financing activities in the consolidated statement of cash flows in the
period such amounts are paid. Also in connection with the Transactions, we
purchased minority ownership interest in RSA6 for $7.4 million, bringing its
ownership interest in RSA6 to 95% and, subsequent to June 30, 2000 but prior to
the Transactions, purchased the remainder of the minority interest in RSA6. We
also invested an additional $3.9 million in the Alliances and received repayment
for $2.1 million of advances. Also, we received $3.2 million from the sale of 10
towers. Finally, we acquired customers and various assets of two Internet
companies for $1.4 million.
During 1999, our investing activities included:
. the investment of $36.7 million in property and equipment, including
$9.5 million of which was for CLEC and fiber backbone capital
expenditures, $5.2 million was for our new billing system and other
software upgrades, $4.8 million for telephone plant upgrade and
additions, $2.6 million for the purchase and renovation of the
Winchester, Virginia property, $2.4 million for Internet related
expenditures, and $12.2 million for various other expenditures.
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<PAGE>
. $1.9 million in net repayments from the Alliances;
. $5.3 million investment in the Alliances and PCS licenses;
. $12.4 million in Internet acquisitions; and
. $9.7 million in proceeds from the sales of our Richmond tower asset and
ATEL investment.
Financing Cash Flows
Net cash used for financing activities for the six months ended June 30,
2000 aggregated $13.2 million which represents payment of dividends on
outstanding capital stock of $1.5 million, a redemption payment on the senior
notes of $12.7 million (see Note 5 to the Audited Consolidated Financial
Statements), additional borrowing under lines of credit totaling $26.6 million
and proceeds from the exercise of stock options totaling $.8 million.
Under restrictions related to the new debt financing (Note 7 to the
Unaudited Interim Condensed Consolidated Financial Statements), we have
discontinued payment of dividends to common shareholders effective for the
quarter ending June 30, 2000. This will allow us to retain future earnings, if
any, to fund the development and growth of our businesses and to service our
debt obligations.
During 1999, net cash provided by financing activities aggregated $11.5
million, which included an aggregate of $17.0 million of long-term debt
borrowings, offset by $6.0 million used to pay dividends.
Forward-Looking Analysis
After the completion of the Transactions, our liquidity needs will be
influenced by numerous factors including:
. significantly reduced or negative EBITDA that we expect to continue
until at least into 2001, as a result of acquiring capital intensive
businesses in their early stages, entering new markets and disposing
of businesses that generate positive EBITDA;
. increased capital expenditures to support planned PCS network growth
and expansion, much of which is discretionary in nature, and to
support planned customer growth;
. our own continuing capital expenditures due to our ongoing strategy of
offering our services in new markets, adding new products and
services, and enhancing organic growth;
. significant capital expenditures to become an integrated communications
provider in many of our existing, newly acquired and other potential
markets by offering a broader range of products and services;
. capital expenditures for the Richmond and Hampton Roads markets
(Richmond-Norfolk PCS acquisition) and R&B Communications;
. significantly increased interest expense.
After the completion of the Transactions, our liquidity sources will
include:
. cash flow from operations, if any;
. approximately $69.1 million held in the escrow account to fund the
first four interest payments on the senior notes;
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<PAGE>
. $175.0 million available under our new credit facility subject to
various conditions;
. public and private debt and equity markets;
. disposition of additional non-core businesses and assets, such as
additional cell towers received from Richmond-Norfolk PCS and
wireline cable operations, and investments; and
. interest on the escrow account.
We expect capital expenditures for the last six months of 2000 to be
between $50 and $70 million and for the year 2001 to be between $80 million to
$100 million. We expect these capital expenditures to be used to:
. support continued expansion of CLEC and Internet access services;
. add another building to support employee additions commensurate with
the growth in digital PCS, Internet and CLEC customers; and
. support the expansion of Richmond-Norfolk PCS' and R&B Communications'
core businesses.
Richmond-Norfolk PCS and the Alliances have substantially satisfied their
FCC build-out requirements. Consequently, the expenditures above are generally
discretionary, permitting us to maintain significant flexibility in our business
plans and capital expenditures. Since these are generally discretionary
expenditures, we cannot assure you when, if ever, these proposed uses will be
initiated or completed.
Based on our assumptions about the future of our operating results, our
capital expenditure needs, many of which are discretionary, and the availability
of borrowings under our new credit facility and our other sources of liquidity,
we believe that we will have sufficient capital resources until we begin
generating significant positive EBITDA. However, if any of our assumptions prove
incorrect or if we make additional acquisitions, we may not have sufficient
capital resources. If so, we may have to delay or abandon some of our
anticipated capital expenditures and our ability to make interest and principal
payments on the notes will be significantly impaired.
Inflation
We believe that inflation has not had, and will not have, a material
adverse effect on our results of operations or financial condition.
Year 2000 Update
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations including, among other things,
computer systems, voice and data networks, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We addressed this issue with a plan centered around several key components:
. system inventory;
. third party confirmation;
. internal systems review;
. compliance implementation;
. testing; and
. contingency planning.
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Our year 2000 project was completed in the third quarter of 1999. The total
year 2000 project costs were not material to our business operations or
financial condition. We believe that our core systems are year 2000 compliant
and we have not experienced significant problems relating to the year 2000
issue. However, in the event that unforeseen circumstances arise, we believe
that our contingency plans will prevent significant year 2000 issues from having
a material impact on the financial or operational results in future periods.
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<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
RICHMOND-NORFOLK PCS
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Richmond-Norfolk PCS" and such entity's
financial statements and notes thereto included in this document for a further
explanation of the financial data summarized below.
We have set forth below selected historical financial data of Richmond-
Norfolk PCS:
. as of December 31, 1998 and 1999, and for the three years in the period
ended December 31, 1999, derived from the audited financial statements and
notes thereto of Richmond-Norfolk PCS, which have been audited by
PricewaterhouseCoopers LLP; and
. as of June 30, 1999 and 2000, and for the six-month periods then ended,
derived from the unaudited financial statements and notes thereto of
Richmond-Norfolk PCS, which, in the opinion of its management, include all
adjustments necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for six-month
periods are not necessarily indicative of results that might be expected
for the entire fiscal year.
We have also included the balance sheet data of Richmond-Norfolk PCS as of
December 31, 1997, which is unaudited.
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<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
============================================ =====================
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(in thousands, except operating data) (unaudited)
<S> <C>
Statement of Operations:
Operating revenues:
Service revenues........... $ 6,963 $ 24,808 $ 41,015 $ 20,203 $ 23,454
Product sales.............. 3,728 5,546 7,671 3,662 2,465
Other...................... 481 916 1,770 766 1,072
-------- -------- -------- -------- --------
Total operating revenues... 11,172 31,270 50,456 24,631 26,991
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of service............ 167 489 941 420 877
Cost of products sold...... 4,018 5,714 7,217 3,568 2,443
Operating expenses......... 32,418 41,355 50,497 26,527 25,102
Depreciation and
amortization.............. 8,333 11,125 13,866 6,785 6,925
-------- -------- -------- -------- --------
Total operating costs and
expenses.................. 44,936 58,683 72,521 37,300 35,347
-------- -------- -------- -------- --------
Loss from operations....... (33,764) (27,413) (22,065) (12,669) (8,356)
Other income expenses):
Interest expense........... (1,951) (1,678) (1,462) (750) (688)
Gain (loss) on disposal of
assets.................... (174) 44 (806) (197) (43)
Other loss................. -- -- (171) -- --
-------- -------- -------- -------- --------
Net loss.................. $(35,889) $(29,047) $(24,504) $(13,616) $ (9,087)
======== ======== ======== ======== ========
Balance Sheet Data
(at period end):
Cash and cash equivalents. $ 79 $ -- $ 422 $ 132 $ 188
Total assets.............. 127,192 145,281 143,214 144,290 148,278
Long-term debt............ 25,571 25,539 23,034 24,331 21,955
PrimeCo equity investment. 89,032 94,904 104,097 105,170 114,579
Operating Data (at period
end):
PCS subscribers........... 23,732 56,840 78,854 73,644 87,955
</TABLE>
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RICHMOND MAJOR TRADING AREA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS OF RICHMOND-NORFOLK PCS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial and Operating Data" and other financial
statements and the notes thereto included elsewhere in this document. Much of
the discussion in this section involves forward-looking statements. Actual
results may differ significantly from the results suggested by these forward-
looking statements.
Overview
PrimeCo Personal Communications, L.P. ("PrimeCo") was formed in 1995 as a
limited partnership between Bell Atlantic Corporation, NYNEX, Air Touch
Communications and US West for the purpose of acquiring licenses issued by the
Federal Communications Commission ("FCC"), pursuant to Subpart E of Part 24 of
the FCC rules ("PCS License") and to design, build, own, and operate broadband
personal communication services ("PCS Business") in certain Major Trading Areas
("MTA") in Virginia, Texas, Florida, Louisiana, Alabama, Illinois and Wisconsin.
An MTA is an urban market within the United States, as defined by the FCC to
determine geographic coverage areas for Personal Communication System ("PCS")
networks. The Richmond, Virginia Major Trading Area (The Richmond MTA or market)
covers most of central and eastern Virginia, including the Richmond and Hampton
Roads metropolitan areas and the Outer Banks of North Carolina.
Effective April 3, 2000, and in order to comply with certain Federal
Communications Commission ("FCC") regulations regarding overlap properties,
three markets (operating in the Houston, Chicago and Richmond MTA's) were
contributed to by PrimeCo to PrimeCo PCS, a separate legal entity jointly
controlled by Bell Atlantic Corporation and Vodaphone Airtouch.
The Richmond market's strategy is to be the premier local wireless provider
in the areas it serves and to grow a profitable customer base. The Richmond
market has implemented this strategy through the deployment of leading edge
technology (Code Division Multiple Access-- CDMA), maintaining high network
performance standards and creating simplified and competitively-priced products
and services. Rate plans include features at no additional charge, such as
Caller ID, voice mail, first incoming minute free and nationwide long distance.
The Richmond market has become a market leader in prepay calling services with
its MyMinutes service options.
The following discussion of the financial condition and results of the
operations of the Richmond MTA for the six months ended June 30, 2000 and 1999
should be read in conjunction with the financial statements of the company, the
notes thereto and information included elsewhere in this document. References to
quarterly periods refer to the company's six-month periods ended June 30.
This discussion contains forward-looking statements that involve risks and
uncertainties. The actual results could differ materially from the results
anticipated in these forward-looking statements as a result of factors
including, but not limited to, those under "Risk Factors" and "Forward-Looking
Statements".
Revenues
Our revenues are generated from the following categories:
. service revenues, including monthly access fees for bundled minutes,
excess airtime, prepay activation fees, roaming revenue, long
distance revenue, and revenue from features such as call forwarding
and directory assistance;
. product sales, including revenue from the sale of handsets and
related accessories; and
. other revenue, including monthly rent and fees received from other
carriers who collocate on Richmond MTA owned towers, revenue
received from non-Richmond MTA customers roaming on the Richmond
MTA network.
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Operating Costs and Expenses
Our direct operating costs and expenses are generally incurred from the
following categories:
. cost of service, including expenses related to long distance,
roaming usage, and directory assistance usage by subscribers;
. cost of products sold, including the retail price of handsets sold,
which are generally sold below cost and the difference between cost
and the retail price of handsets (subsidy) is recognized as an
operating expense, and the cost of accessories;
. operating expenses, including all costs related to network
operations, customer acquisition, customer care, finance, human
resource, legal, information technology, and executive management,
including corporate overhead allocations; and
. depreciation expense recognized on network fixed assets, leasehold
improvements on stores and kiosks, company owned switch buildings,
information technology assets, and furniture and fixtures. The PCS
license and microwave clearing costs are amortized on a
straight-line basis over a 40-year life.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest expense,
less any capitalized portion, gain (loss) on the disposal of assets, and other
income (loss).
Results of Operations
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net loss decreased $2.2 million, or 39%, from a loss of $5.7 million for
the three months ended June 30, 1999 to a loss of $3.5 million for the three
months ended June 30, 2000. Net loss decreased $4.5 million, or 33%, from $13.6
million for the six months ended June 30 1999 to $9.1 million for the six months
ended June 30, 2000.
These operating results reflect an increase in the ending customer base of
19% from 73,644 as of June 30, 1999 to 87,955 as of June 30, 2000.
Operating Revenues
Operating revenues increased $1.0 million, or 8%, from $12.7 million for
the three months ended June 30, 1999 to $13.7 million for the three months ended
June 30, 2000. Operating revenues increased $2.4 million, or 10%, from $24.6
million for the six months ended June 30, 1999 to $27.0 million for the six
months ended June 30, 2000.
Service Revenue. Service revenues increased $1.2 million, or 11%, and $3.3
million, or 16%, for the respective three and six month periods ended June 30,
2000 as compared to June 30, 1999. Service revenues were $12.0 million and $23.5
million for the three and six months ended June 30, 2000, as compared to $10.8
million and $20.2 million for the three and six months ended June 30, 1999. The
increase was primarily due to subscriber growth. The MTA had 87,955 subscribers
as of June 30, 2000, which represented an increase of 14,311, or 19%, compared
to June 30, 1999. The increase in subscribers was offset in part by a decrease
in average revenues per unit, or ARPU, of $4.13, or 8.2%, from $50.16 for the
six months ended June 30, 1999 to $46.03 for the six months ended June 30, 2000.
ARPU declined $4.53, or 9%, from $50.48 for the three months ended June 30, 1999
to $45.95 for the three months ended June 30, 2000. The decrease in ARPU is
primarily the result of pricing pressures caused by new PCS operators who
entered the market in June 1999. We expect some price declines to continue, but
intend to continue to increase revenues by adding additional subscribers and
increasing the service and minutes of use we provide.
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<PAGE>
Product Sales. Product sales decreased $.4 million, or 28%, from $1.5
million to $1.1 million, and $1.2 million, or 33%, from $3.7 million to $2.5
million for the respective three and six month periods ended June 30, 2000 as
compared to 1999. This decrease was primarily due to lower retail handset prices
during the three and six months ended June 30, 2000 compared to the three and
six months ended June 30, 1999.
Other Revenue. Other revenue increased $.2 million, or 59%, and $.3
million, or 40%, for the respective three and six month periods ended June 30,
2000 as compared to 1999. Other revenue was $.6 million and $1.1 million for the
three and six months ended June 30, 2000 compared to $.4 million and $.8 million
for the three and six months ended June 30, 1999. This growth was due to
additional collocation rent and fees we received from other carriers. After the
transaction, CFW may dispose of the towers that generate these revenues.
Operating Costs and Expenses
Operating costs and expenses decreased $1.2 million, or 7%, from $18
million to $16.8 million, and $2.0 million, or 5%, from $37.3 million to $35.3
million for the respective three and six months ended June 30, 2000 compared to
1999.
Cost of Service. Cost of service increased $.3 million, or 129%, from $0.2
million to $0.5 million, and $.5 million, or 109%, from $.4 million to $.9
million for the respective three and six months ended June 30, 2000 compared to
1999. This increase was the result of higher long distance and roaming usage
from the growth in the subscriber base. Additionally, long distance use per
subscriber increased as approximately 65% of current subscribers have price
plans that include free long distance. Free long distance was not available in
the second quarter of 1999. Competitors, such as Sprint, that have a national
long distance network have a substantial cost advantage in providing free long
distance services. Additionally, roaming use per subscriber has increased in
2000 as a result of a decrease in our minimum roaming rate to $.15 per minute in
December 1999. Prior to the decrease, our minimum roaming rate was $.39 per
minute.
Cost of Products Sold. Cost of products sold decreased $.5 million, or 32%,
from $1.5 million to $1.0 million, and $1.1 million, or 32%, from $3.5 million
to $2.4 million for the respective three and six months ended June 30, 2000 as
compared to 1999. This decrease was the result of a 30% decrease in retail
handset prices for the six months ended June 30, 2000 compared to June 30, 1999.
Operating Expenses. Operating expenses decreased $1.4 million, or 11%, from
$12.8 million to $11.4 million, and $1.4 million, or 5 %, from $26.5 million to
$25.1 million for the respective three and six months ended June 30, 2000 as
compared to June 30, 1999. Decreases in corporate overhead, payroll, general and
administrative, and promotion expenses contributed to the decrease in total
operating expenses.
Depreciation and Amortization. Depreciation and amortization increased $0.4
million, or 11%, and $.1 million, or 2%, for the respective three and six months
ended June 30, 2000 as compared to June 30, 1999. Depreciation and amortization
was $3.8 million and $6.9 million for the three and six months ended June 30,
2000. Depreciation and amortization was $3.4 million and $6.8 million for the
three and six months ended June 30, 1999. The increase is due to additional
capital spending in the third and fourth quarters of 1999 and the first six
months of 2000.
Other Income (Expenses)
Interest expenses decreased $.1 million, or 13%, from $.4 million to $.3
million, and $.1 million, or 8%, from $.8 million to $.7 million for the
respective three and six months ended June 30, 2000 as compared to June 30,
1999. Loss on the disposal of assets increased $.039 million from $.028 million
to $.067 million for the three months ended June 30, 2000. Loss on the disposal
of assets decreased $.2 million, or 78%, from $.2 million to $.043 million for
the six months ended June 30, 2000 compared to June 30, 1999.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF
R&B COMMUNICATIONS
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of R&B Communications" and such entity's
financial statements and notes thereto included in this document for a further
explanation of the financial data summarized below.
We have set forth below selected historical consolidated financial data of
R&B Communications:
. as of, and for the years ended, December 31, 1995, 1996, 1997, 1998 and
1999, derived from the consolidated financial statements and notes thereto
of R&B Communications, which have been audited by Phibbs, Burkholder,
Geisert & Huffman, LLP with respect to the years ended 1995 through 1998
and McGladrey & Pullen, LLP with respect to the year ended 1999; and
. as of, and for the six-month periods ended, June 30, 1999 and 2000,
derived from the unaudited condensed consolidated financial statements and
notes thereto of R&B Communications, which, in the opinion of its
management, include all adjustments necessary for a fair presentation of
the financial position and results of operations for these periods.
Operating results for six-month periods are not necessarily indicative of
results that might be expected for the entire fiscal year.
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<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
================================================================== ===============
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
(in thousands, except ratio data and operating activities) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Operating revenues:
Wireline communications......... $ 8,863 $ 8,657 $ 9,734 $11,703 $14,500 $ 7,193 $ 7,826
Wireless communications......... 495 653 968 1,219 1,257 740 830
Other communications
services....................... 1,056 884 922 954 1,012 399 468
------- ------- ------- ------- ------- ------- -------
Total operating revenues........ 10,414 10,194 11,624 13,876 16,769 8,332 9,124
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Maintenance and support......... 1,717 2,009 2,312 3,398 4,917 1,699 2,457
Depreciation and
amortization.................... 1,237 1,426 2,104 2,340 2,808 1,358 1,663
Customer operations............. 934 1,046 1,290 1,928 2,031 1,274 1,525
Corporate operations............ 1,397 1,444 1,700 1,862 2,356 1,207 1,790
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 5,285 5,925 7,406 9,528 12,112 5,538 7,435
------- ------- ------- ------- ------- ------- -------
Operating income................. 5,129 4,269 4,218 4,348 4,657 2,794 1,689
Other income (expenses):
Interest and dividend
income.......................... 543 542 311 261 337 134 162
Other expenses,
principally interest........... (805) (747) (557) (410) (685) (544) (228)
Equity loss from PCS
investees:
VA PCS Alliance................ -- -- (822) (5,078) (5,427) (2,854) (2,839)
WV PCS Alliance................ -- -- -- (1,064) (4,565) (1,859) (3,093)
Equity income from other
investees...................... 1,135 586 634 315 340 153 154
Gain (loss) on sale
of assets and
investments.................... 1,708 (284) 5,080 31 252 -- --
------- ------- ------- ------- ------- ------- -------
7,710 4,366 8,864 (1,597) (5,091) (2,176) (4,155)
Income taxes (benefit)........... 2,681 1,582 3,052 (759) (917) 32 (1,610)
------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ 5,029 $ 2,784 $ 5,812 $ (838) $(4,174) $(2,208) $(2,545)
======= ======= ======= ======= ======= ======= =======
Balance Sheet Data (at
period end):
Cash and cash equivalents....... $ 8,442 $ 6,001 $ 7,021 $ 6,910 $ 8,218 $ 6,695 $ 8,937
Securities and Investments...... 9,146 6,249 6,495 8,441 18,812 8,427 17,983
Property, Plant and
Equipment...................... 14,760 18,462 20,116 22,465 25,015 21,921 25,640
Total assets.................... 39,026 42,196 46,897 48,125 63,912 45,516 61,636
Long-term debt.................. 9,852 8,529 8,276 7,908 7,520 8,056 7,288
Shareholders' equity............ 23,645 26,190 31,669 31,258 35,562 29,395 32,430
Operating Data (at period end):
Internet subscribers............ -- 363 686 1,209 2,078 1,445 2,332
ILEC access lines............... 8,796 9,265 9,919 10,512 12,233 10,898 12,323
CLEC access lines............... -- -- -- 1,260 3,840 2,557 4,952
</TABLE>
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R&B COMMUNICATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS OF R&B COMMUNICATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial and Operating Data" and other financial
statements and the notes thereto included elsewhere in this document. Much of
the discussion in this section involves forward-looking statements. Actual
results may differ significantly from the results suggested by these forward-
looking statements
Overview
R&B is an integrated communications provider offering a broad range of
products and services to business and residential customers in the Roanoke and
New River Valleys of Virginia. These communications products and services
include local and long distance telephone, dial-up and high-speed Internet
access, competitive local exchange access, paging and wireless cable television.
Historically, R&B has derived much of its revenues from its ILEC. R&B
introduced Internet services in late 1996 and CLEC services in the second
quarter of 1998. As a result of its increasing focus on and growth in CLEC
services and Internet services, an increasing portion of its operating revenues
and EBITDA will be generated by businesses other than its mature local telephone
operations. These newer businesses have generated lower operating margins due to
start-up costs associated with expansion into new markets and introduction of
new service offerings throughout the region it serves. As it expands its markets
and introduces new products, R&B expects to continue to have lower operating
margins for these businesses.
R&B's wireless PCS service offerings consist of significant investments in
the Virginia Alliance and the West Virginia Alliance. The Virginia Alliance and
the West Virginia Alliance commenced operation in September 1997 and September
1998, respectively. R&B has recognized significant equity losses from these
investments.
On June 16, 2000, R&B's board of directors approved an agreement and plan
of merger with CFW Communications.
Results of Operations
Three and Six Months Ended June 30, 2000 Compared to Three and Six Months Ended
June 30, 1999
Overview
Net loss decreased $.5 million, or 25%, from $1.8 to $1.3 million, and
increased $.3 million, or 15%, from $2.2 million to $2.5 million for the
respective three and six month periods ended June 30, 2000, as compared to 1999.
EBITDA decreased $.6 million, or 30%, from $2.1 to $1.5 million, and $.8
million, or 19%, from $4.2 million to $3.4 million for the respective three and
six month periods ended June 30, 2000, as compared to 1999. Operating income
decreased $.8 million, or 56%, from $1.4 million to $.6 million, and $1.1
million, or 40%, from $2.8 million to $1.7 million for the respective three and
six month periods ended June 30, 2000 and 1999. R&B Communications' share of the
net loss from the Alliances increased $.1 million, or 7%, from $2.6 million,
$1.6 million after-tax, to $2.7 million, $1.7 million after-tax, and increased
$1.2 million, or 26%, from $4.8 million, $3.0 million after-tax, to $6.0
million, $3.7 million after-tax, for the three and six month periods ended June
30, 2000, as compared to 1999.
These results reflect customer growth from wireless, CLEC and Internet
services and R&B Communications' share of the Alliances' losses. The decreases
in operating income and EBITDA results were due to higher levels of depreciation
and amortization generated by capital investments in growth businesses and the
underlying supporting infrastructure.
87
<PAGE>
Operating Revenues
Total operating revenues increased $.2 million, or 4%, from $4.4 million to
$4.6 million for the three months ended June 30, 1999 and 2000, respectively.
Total operating revenues increased $.8 million, or 9%, from $8.3 million for the
six months ended June 30, 1999 to $9.1 million for the six months ended June 30,
2000. The increase was due primarily to a $.3 million and $.8 million increase
in network and CLEC-based revenues during the respective three and six month
periods. CLEC customers totaled 4,952 as of June 30, 2000, which represented an
increase of 2,395 customers from June 30, 1999. Internet customers grew to 2,300
as of June 30, 2000, an increase of 900 customers from June 30, 1999.
Wireline Communications Revenues. Wireline communications revenues
increased $.1 million, or 3%, and $.6 million, or 9%, for the three and six
month periods ended June 30, 2000, as compared to June 30, 1999. Wireline
communications revenues were $3.8 million and $7.8 million for the three and six
months ended June 30, 2000, and were $3.7 million and $7.2 million for the three
and six months ended June 30, 1999. Network revenues and revenues from fiber
optic network usage, CLEC and long distance accounted for most of this increase.
CLEC revenues increased $.6 million, or 74% from $.8 million for the six months
ended June 30, 1999 to $1.4 million for the six months ended June 30, 2000,
reflecting the growth in access lines noted above.
Wireless Communications Revenues. Wireless communications revenues remained
relatively stable, increasing $.1 million, or 20%, and $.1 million, or 12%, for
the respective three and six month periods ended June 30, 2000, as compared to
June 30, 1999. Wireless communications revenues were $.5 million and $.8 million
for the three and six months ended June 30, 2000, as compared to $.4 million and
$.7 million for the three and six month periods ended June 30, 1999.
Other Communications Revenues. Other communications services revenues
remained unchanged at $.3 million for the three months ended June 30, 1999 and
2000. Other communications revenues increased $.1 million, or 17%, from $.4
million for the six months ended June 30, 1999 to $.5 million for the six months
ended June 30, 2000. This increase was principally the result of ancillary sales
and services related to the growing wireline and wireless services.
Operating Expenses
Total operating expenses increased $.9 million, or 33%, from $3.0 million
to $3.9 million for the three months ended June 30, 1999 and 2000, respectively.
Total operating expenses increased $1.9 million, or 34%, from $5.5 million for
the six months ended June 30, 1999 to $7.4 million for the six months ended June
30, 2000. This increase was primarily in the wireline businesses. Within this
business, CLEC and network operations comprised $.3 and $.7 million of the total
respective increase. The CLEC and network operating expense increased as a
result of the expenses associated with managing the increased fiber network and
from strong growth of the CLEC markets.
Maintenance and Support Expense. Maintenance and support expense increased
$.2 million, or 24%, from $1.0 million for the three months ended June 30, 1999
to $1.2 million for the three months ended June 30, 2000, and increased $.7
million, or 45%, from $1.7 million for the six months ended June 30, 1999 to
$2.4 million for the six months ended June 30, 2000. This increase was due
primarily to CLEC rollout and engineering and operations support growth.
Depreciation and Amortization. Depreciation and amortization expense
increased $.1 million, or 23%, from $.7 million to $.8 million for the three
months ended June 30, 1999 and 2000, respectively, and $.4 million, or 22%, from
$1.3 million for the six months ended June 30, 1999 to $1.7 million for the six
months ended June 30, 2000. This increase was due to an increase of
approximately 15% in the plant-in- service asset base from $38.0 million as of
June 30, 1999 to $43.7 million as of June 30, 2000. Depreciation and
amortization as a percent of the related assets increased from 3.4% for the six
months ended June 30, 1999 to 3.7% for the six months ended June 30, 2000. This
increase was due to a shift in the composition of the asset base from
traditional telephone plant to more network plant and equipment.
88
<PAGE>
Customer Operations Expense. Customer operations expense increased $.1
million, or 16%, from $.7 million to $.8 million for the three months ended June
30, 1999 and 2000, respectively, and $.2 million, or 20%, from $1.3 million for
the six months ended June 30, 1999 to $1.5 million for the six months ended June
30, 2000. This increase related primarily to marketing and sales activities and
customer care growth, which was consistent with the related revenue growth.
Corporate Operations Expense. Corporate operations expense increased $.5
million, or 75%, from $.6 million for the three months ended June 30, 1999 to
$1.1 million for the three months ended June 30, 2000. Corporate operations
expense increased $.6 million, or 48%, from $1.2 million for the six months
ended June 30, 1999 to $1.8 million for the six months ended June 30, 2000. This
increase was a result of growth in the corporate infrastructure commensurate
with the significant growth in operations and merger related expenses, including
corporate bonuses, legal and financial valuation expenses.
Other Income (Expenses)
Other income (expenses) was driven primarily by the effect of losses from
the Alliances. R&B Communications' share of losses from the Virginia Alliance
decreased $.2 million, or 11%, from $1.5 million for the three months ended June
30, 1999 to $1.3 million for the three months ended June 30, 2000, and remained
unchanged at $2.8 million for the six months ended June 30, 1999 and 2000. Its
share of losses from the West Virginia Alliance, which commenced operations in
the latter part of the third quarter of 1998, and expanded significantly in the
second quarter of 1999, increased $.3 million, or 30%, for the three months
ended June 30, 2000, as compared to 1999, and $1.2 million, or 66%, for the six
months ended June 30, 2000, as compared to 1999. R&B's share of losses from the
West Virginia Alliance were $1.5 million and $3.2 million for the three and six
month periods ended June 30, 2000, and were $1.1 million and $1.9 million for
the three and six month periods ended June 30, 1999. Further information
concerning the Alliances is contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for each respective Alliance.
Income Taxes
Income tax changed $1.1 million from an expense of $.3 million for the
three months ended June 30, 1999 to a benefit of $.8 million for the three
months ended June 30, 2000. Income tax changed $1.6 million from an expense of
less than $.1 million for the six months ended June 30, 1999 to a benefit of
$1.6 million for the six months ended June 30, 2000. The primary factors causing
this change were an increase in the pre-tax loss of $.6 million for the three
months ended June 30, 2000 and $1.9 million for the six months ended June 30,
2000, as compared to 1999, as well as an additional tax expense from tax
adjustments in the second quarter of 1999.
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<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
THE VIRGINIA ALLIANCE
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Virginia Alliance" and such entity's
financial statements and notes thereto included in this document for a further
explanation of the financial data summarized below.
We have set forth below selected historical financial data of the Virginia
Alliance:
. as of, and for the years ended, December 31, 1997, 1998 and 1999, derived
from the audited financial statements and notes thereto of the Virginia
Alliance, which have been audited by McGladrey & Pullen, LLP; and
. as of, and for the six-month periods ended, June 30, 1999 and 2000,
derived from the unaudited financial statements and notes thereto, of he
Virginia Alliance, which, in the opinion of its management, include all
adjustments necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for six-month
periods are not necessarily indicative of results that might be expected
for the entire fiscal year.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
================================== ===================
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Operating revenues:
Subscriber revenues........... $ 72 $ 1,739 $ 7,957 $ 3,756 $ 5,793
Wholesale revenues............ 2 2,176 3,904 1,821 3,836
Equipment revenues............ 44 730 1,516 606 798
------- -------- -------- -------- --------
Total operating revenues.... 118 4,645 13,377 6,183 10,427
------- -------- -------- -------- --------
Operating expenses:
Cost of sales................. 315 3,010 5,864 2,851 4,465
Maintenance and support....... 757 5,167 6,638 3,357 4,054
Depreciation and
amortization................ 686 7,041 7,770 4,695 3,855
Customer operations........... 1,444 5,729 8,685 3,853 4,770
Corporate operations.......... 234 2,111 2,517 1,343 1,623
------- -------- -------- -------- --------
Total operating expenses.... 3,436 23,058 31,474 16,099 18,767
------- -------- -------- -------- --------
Operating loss................. (3,318) (18,413) (18,097) (9,916) (8,340)
Interest income (expense):
Interest income................ -- -- 262 -- --
Interest expense............... (163) (4,131) (6,390) (219) (329)
Senior credit facility......... -- -- -- (2,559) (4,005)
Series A redeemable preferred
interest..................... (471) (1,871) (1,914) (952) (974)
------- -------- -------- -------- --------
Net loss.................... $(3,952) $(24,415) $(26,139) $(13,646) $(13,648)
======= ======== ======== ======== ========
Balance Sheet Data (end of period):
Cash and cash equivalents.. $ 159 $ 60 $ 64 $ 62 $ 65
Total assets............... 92,160 104,316 120,842 116,603 115,910
Long-term debt............. 34,722 90,301 131,478 100,379 129,654
Series A redeemable
preferred stock.......... 13,542 14,345 15,192 12,860 15,632
Members' equity (deficit).. 9,093 (12,321) (33,461) (20,967) (42,109)
</TABLE>
90
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE VIRGINIA ALLIANCE
Overview
The Virginia PCS Alliance, L.C. was organized in 1994 to offer personal
communications services in central and western Virginia. Operations commenced in
September 1997, prior to which the Virginia Alliance was in the development
stage. Its major activities through September 1997 were limited to acquiring PCS
radio spectrum licenses, designing and constructing a personal communications
system and obtaining equity capital. The Virginia Alliance owns PCS radio
spectrum licenses for markets covering 1.7 million POPs. The Virginia Alliance
has generated significant operating losses since it began operations and
anticipates continued operating losses at least through 2000.
Revenues
The Virginia Alliance's revenues are generated from:
. subscriber revenues, including monthly access, usage, long distance
and service fees billed to users of our digital wireless network;
. wholesale revenues derived from providing access to our PCS network
to other communication services providers; and
. sales revenues derived from direct sales of handsets and
accessories.
Operating Expenses
The Virginia Alliance's operating expenses include:
. cost of sales, including equipment costs, usage-based access
charges, long distance, roaming charges, and other direct costs;
. maintenance and support expenses, including PCS network operations
and construction, switching, engineering, and related general and
administrative costs;
. depreciation and amortization of property and equipment, PCS
spectrum licenses and other deferred costs; and
. customer operations expenses, including taxes other than income,
executive, planning, information management, accounting and finance,
human resources, external relations, legal, purchasing, and general
and administrative costs.
Other Income (Expenses)
The Virginia Alliance's other income (expenses) are generated (incurred)
from interest income and expenses.
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<PAGE>
Results of Operations
Three and Six Months Ended June 30, 2000 compared to Three and Six Months Ended
June 30, 1999
Overview
Net loss decreased $.8 million or 11% from $7.1 million for the three
months ended June 30, 1999 to $6.3 million for the three months ended June 30,
2000. Net loss was unchanged at 13.6 million for the six months ended June 30,
1999 and the six months ended June 30, 2000. EBITDA increased $.7 million or 26%
from a negative $2.6 million for the three months ended June 30, 1999 to a
negative $1.9 million for the three months ended June 30, 2000. EBITDA increased
$.7 million or 14% from negative $5.2 million for the six months ended June 30,
1999 to negative $4.5 million for the six months ended June 30, 2000. Operating
loss decreased $1.4 million or 28% from $5.1 million for the three months ended
June 30, 1999 to $3.7 million for the three months ended June 30, 2000.
Operating loss decreased $1.6 million or 16% from $9.9 million for the six
months ended June 30, 1999 to $8.3 million for the six months ended June 30,
2000.
These results reflect an increase in subscribers of 19,972, from 21,064 as
of June 30, 1999 to 41,036 as of June 30, 2000. This growth came from internal
growth and expansion in the Virginia Alliance's markets. Start up losses and
customer acquisition costs associated with the addition of new subscribers
slowed improvement in operating cash flows. Network operations and support cost
increased as a result of significant network expansion.
Operating Revenues
Operating revenue increased $2.2 million or 66% from $3.4 million for the
three months ended June 30, 1999 to $5.6 million for the three months ended June
30, 2000. Operating revenue increased $4.2 million or 69% from $6.2 million for
the six months ended June 30, 1999 to $10.4 million for the six months ended
June 30, 2000.
Subscriber Revenues. Subscriber revenues increased $1.0 million or 47% from
$2.2 million for the three months ended June 30, 1999 to $3.2 million for the
three months ended June 30, 2000. This increase was primarily due to subscriber
growth. ARPU decreased $6.93 or 14% from $50.78 for the three months ended June
30, 1999 to $43.85 for the three months ended June 30, 2000. Subscriber revenue
increased $2.0 million or 54% from $3.8 million for the six months ended June
30, 1999 to $5.8 million for the six months ended June 30, 2000. ARPU decreased
$11.52 or 21% from $54.61 for the six months ended June 30, 1999 to $43.09 for
the six months ended June 30, 2000. The decline in ARPU was primarily the result
of pricing pressures caused by increased competition, changes in rate plans and
growth in prepay calling plans.
Wholesale Revenues. Wholesale revenue increased $1.1 million or 110%, from
$1.0 million for the three months ended June 30, 1999 to $2.1 million for the
three months ended June 20, 2000. Wholesale revenue increased $2.0 million or
111% from $1.8 million for the six months ended June 30, 1999 to $3.8 million
for the six months ended June 30, 2000. This increase was primarily due to
wholesale minutes associated with new wholesale agreements entered into in the
third quarter of 1999. Wholesale agreements with other PCS service providers
increased revenues because the Virginia Alliance became the preferred provider
of roaming services for Sprint and Horizon within the majority of the Alliance's
service area.
Equipment Revenues. Equipment revenue increased $.1 million or 53% from $.2
million for the three months ended June 30, 2000 to $.3 million for the three
months ended June 30, 2000. Equipment revenue increased $.2 million or 32% from
$.6 million for the six months ended June 30, 1999 to $.8 million for the six
months ended June 30, 2000. This increase was due to an increase in gross
subscriber additions and management initiatives to increase accessory sales.
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<PAGE>
Operating Expenses
Operating expenses increased $.8 million or 10% from $8.5 million for the
three months ended June 30, 1999 to $9.3 million for the three months ended June
30, 2000. Operating expenses increased $2.7 million or 17% from $16.1 million
for the six months ended June 30, 1999 to $18.8 million for the six months ended
June 30, 2000. Handset and other equipment costs together with additional
customer support expenses related to subscriber growth represented this
increase. Network expansion and enhancement also contributed to the period to
period changes.
Cost of Sales. Cost of sales increased $1.1 million or 100% from $1.1
million for the three months ended June 30, 1999 to $2.2 million for the three
months ended June 30, 2000. Cost of sales increased $1.6 million or 57% from
$2.9 million for the six months ended June 30, 1999 to $4.5 million for the six
months ended June 30, 1999. Handset and accessory costs related to subscriber
growth increased $.8 million for the 3 month period and $1.1 million for the six
months ended June 30, 2000. Variable operation costs including usage based
access, long distance and directory assistance increased $.2 million and $.3
million in the three and six month periods, respectively. Roaming charges paid
to other carriers increased $.1 million in the three months ending June 30, 2000
and $.2 million in the six months ending June 30, 2000.
Maintenance and Support Expense. Maintenance and support expense increased
$.1 million or 3% from $2.0 million for the three months ended June 30, 1999 to
$2.1 million for the three months ended June 30, 2000. Maintenance and support
expense increased $.7 million or 21% from $3.4 million for the six months ended
June 30, 1999 to $4.1 million for the six months ended June 30, 2000. This
increase was primarily due to increases in access, rents and maintenance costs
associated with the addition of 50 cell sites during the period June 30, 1999 to
June 30, 2000, and other network enhancements, which included the addition of
switching equipment upgrades and central base station controllers.
Depreciation and Amortization. Depreciation and amortization decreased $.7
million or 30% from $2.5 million for the three months ended June 30, 1999 to
$1.8 for the three months ended June 30, 2000. Depreciation and amortization
decreased $.8 million or 18% from $4.7 million for the six months ended June 30,
1999 to $3.9 million for the six months ended June 30, 2000. This decrease is
primarily due to the sale of 59 towers with a combined book value of $8.8
million in March and April 2000. The gain on the tower sale was deferred and is
being recognized, for book purposes, over a ten-year period.
Customer Operations Expense. Customer operations expense increased $.3
million or 11 % from $2.1 million for the three months ended June 30, 1999 to
$2.4 million for the three months ended June 30, 2000. Customer operations
expense increased $.9 million or 24% from $3.9 million for the six months ended
June 30, 1999 to $4.8 million for the six months ended June 30, 2000.
Advertising and marketing expenses increased $.1 million and $.4 million for the
three and six month periods, respectively. Selling expenses including
commissions, retail store operations and warehousing grew $.1 million and $.2
million for the three and six month periods, respectively. The increase in
expense reflects the addition of five retail stores. Customer service and
billing costs increased $.1 million for the three months ended June 30, 2000 and
$.3 million for the six months ended June 30, 2000 to support the increase in
subscribers.
Corporate Operations Expense. Corporate operations expense increased $.1
million or 21% from $.7 million for the three months ended June 30, 1999 to $.8
million for the three months ended June 30, 2000. Corporate operations expense
increased $.3 million or 21% from $1.3 million for the six months ended June 30,
1999 to $1.6 million for the six months ended June 30, 2000. The increases were
primarily related to executive, accounting, and general and administrative costs
to support the business expansion.
93
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
THE WEST VIRGINIA ALLIANCE
You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the West Virginia Alliance" and such
entity's financial statements and notes thereto included in this document for a
further explanation of the financial data summarized below.
We have set forth below selected historical financial data of the West
Virginia Alliance:
. as of, and for the years ended, December 31, 1998 and 1999, derived from
the audited financial statements and notes thereto of the West Virginia
Alliance, which have been audited by McGladrey & Pullen, LLP; and
. as of, and for the six-month periods ended, June 30, 1999 and 2000,
derived from the unaudited financial statements and notes thereto, of the
West Virginia Alliance, which, in the opinion of its management, include
all adjustments necessary for a fair presentation of the financial position
and results of operations for these periods. Operating results for six-
month periods are not necessarily indicative of results that might be
expected for the entire fiscal year.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
------------------------- ---------------------------
1998 1999 1999 2000
------- -------- ------- -------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Statement of Operations:
Operating revenues:
Subscriber revenue................. $ 46 $ 2,308 $ 407 $ 4,372
Wholesale revenue.................. -- -- -- 772
Equipment revenue.................. 66 681 192 769
------- -------- ------- -------
Total operating revenues........... 112 2,989 599 5,913
------- -------- ------- -------
Operating expenses:
Cost of sales...................... 219 3,065 699 4,273
Maintenance and support............ 610 4,130 1,860 3,015
Depreciation and
amortization....................... 259 2,068 692 1,164
Customer operations................ 1,309 4,094 1,575 3,505
Corporate operations............... 818 1,744 1,006 1,026
------- -------- ------- -------
Total operating expenses........... 3,215 15,101 5,832 12,983
------- -------- ------- -------
Operating loss...................... (3,103) (12,112) (5,233) (7,070)
Interest income (expense):
Interest income..................... -- -- 260 339
Interest expense.................... -- (1,175) -- --
Senior credit facility.............. -- -- (476) (1,824)
------- -------- ------- -------
Net loss........................... $(3,103) $(13,287) $(5,449) $(8,555)
======= ======== ======= =======
Balance Sheet Data (end of period):
Cash and cash equivalents........... $ 10 $ 8 $ 11 $10,053
Total assets........................ 31,132 53,497 35,936 66,705
Long-term debt...................... 9,237 51,125 24,739 51,136
Members' equity (deficit)........... 11,162 (704) 7,134 (7,838)
</TABLE>
94
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE WEST VIRGINIA ALLIANCE
Overview
The West Virginia PCS Alliance, L.C. was organized in 1997. The West
Virginia Alliance was formed to fund, establish and operate a business to
design, construct, own, operate and maintain a personal communications system to
provide personal communications services in West Virginia. Operations commenced
during September 1998, prior to which the Alliance was in the development stage.
Its major activities through September 1998 were limited to acquiring PCS radio
spectrum licenses, designing and constructing a personal communications system
and obtaining equity capital. The West Virginia Alliance completed its first
full year of operations in 1999. The West Virginia Alliance owns PCS radio
spectrum licenses for markets covering 2.2 million POPs. The West Virginia
Alliance has generated significant operating losses since it began operations
and anticipates continued losses at least through 2000.
Revenues
The West Virginia alliance's revenues are generated from:
. subscriber revenues, including monthly access, usage, long distance
and service fees billed to users of our digital wireless network;
. wholesale revenues derived from providing access to our PCS network
to other communication services providers; and
. sales revenues derived from direct sales of handsets and accessories.
Operating Expenses
The West Virginia Alliance's operating expenses include:
. cost of sales, including equipment costs, usage-based access charges,
long distance, roaming charges, and other direct costs;
. maintenance and support expenses, including PCS network operations
and construction, switching, engineering, and related general and
administrative costs;
. depreciation and amortization of property and equipment, PCS spectrum
licenses and other deferred costs; and
. customer operations expenses, including taxes other than income,
executive, planning, information management, accounting and finance,
human resources, external relations, legal, purchasing, and general
and administrative costs.
Other Income (Expenses)
The West Virginia Alliance's other income (expenses) are generated
(incurred) from interest income and expenses.
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<PAGE>
Results of Operations
Overview
Net loss increased $.5 million or 15% from $3.3 million for the three
months ended June 30, 1999 to $3.8 million for the three months ended June 30,
2000. Net loss increased $3.1 million or 57% from $5.5 million for the six
months ended June 30, 1999 to $8.6 million for the six months ended June 30,
2000. EBITDA decreased $.01 million or .5% from a negative $2.6 million for the
three months ended June 30, 1999 to a negative $2.7 million for the three months
ended June 30, 2000. EBITDA decreased $1.4 million or 30% from negative $4.5
million for the six months ended June 30, 1999 to negative $5.9 million for the
six months ended June 30, 2000. Operating loss was unchanged at $3.1 million for
the three months ended June 30, 1999 and the three months ended June 30, 2000.
Operating loss increased $1.8 million or 35% from $5.2 million for the six
months ended June 30, 1999 to $7.0 million for the six months ended June 30,
2000.
These results reflect an increase in subscribers of 18,062, from 3,102 as
of June 30, 1999 to 21,164 as of June 30, 2000. This growth came from internal
growth and expansion in the West Virginia Alliance's markets. Start up losses
and customer acquisition costs associated with the addition of new subscribers
slowed improvement in operating cash flows. Network operations and support cost
increased as a result of significant network expansion.
Operating Revenues
Operating revenue increased $3.1 million from $.4 million for the three
months ended June 30, 1999 to $3.5 million for the three months ended June 30,
2000. Operating revenue increased $5.3 million from $.6 million for the six
months ended June 30, 1999 to $5.9 million for the six months ended June 30,
2000.
Subscriber Revenues. Subscriber revenues increased $2.5 million from $.2
million for the three months ended June 30, 1999 to $2.7 million for the three
months ended June 30, 2000. This increase was primarily due to subscriber
growth. ARPU increased $12.52, or 36%, from $34.49 for the three months ended
June 30, 1999 to $47.01 for the three months ended June 30, 2000. Subscriber
revenue increased $4.0 million from $.4 million for the six months ended June
30, 1999 to $4.4 million for the six months ended June 30, 2000. ARPU increased
$10.90 or 32% from $34.05 for the six months ended June 30, 1999 to $44.95 for
the six months ended June 30, 2000. The increase in ARPU was primarily due to
the fact that the service was introduced and late 1998 and the Company continued
to offer introductory promotional pricing during the first six months of 1999.
Additionally, the growth in out of package minutes, long distance, customer
roaming and other revenues contributed to this increase.
Wholesale Revenues. Wholesale revenue increased $.5 million, from no
revenues during the three months ended June 30, 1999 to $.5 million for the
three months ended June 30, 2000. Wholesale revenue increased $ .8 million from
no revenues during the six months ended June 30, 1999 to $.8 million for the six
months ended June 30, 2000. This increase was primarily due to wholesale minutes
associated with new wholesale agreements entered into in the third quarter of
1999. Wholesale agreements with other PCS service providers increased revenues
because the West Virginia Alliance became the preferred provider of roaming
services for Sprint and Horizon.
Equipment Revenues. Equipment revenue increased $.2 million from $.1
million for the three months ended June 30, 1999 to $.3 million for the three
months ended June 30, 2000. Equipment revenue increased $.6 million from $.2
million for the six months ended June 30, 1999 to $.8 million for the six months
ended June 30, 2000. This increase was due to an increase in gross subscriber
additions.
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<PAGE>
Operating Expenses
Operating expenses increased $3.2 million or 92% from $3.4 million for the
three months ended June 30, 1999 to $6.6 million for the three months ended June
30, 2000. Operating expenses increased $7.2 million or 123% from $5.8 million
for the six months ended June 30, 1999 to $13.0 million for the six months ended
June 30, 2000. Handset and other equipment costs together with additional
customer support expenses related to subscriber growth represented the increase.
Network expansion and enhancement also contributed to the period to period
change.
Cost of Sales. Cost of sales increased $1.7 million from $.4 million for
the three months ended June 30, 1999 to $2.1 million for the three months ended
June 30, 2000. Cost of sales increased $3.6 million from $.7 million for the six
months ended June 30, 1999 to $4.3 million for the six months ended June 30,
2000. Handset and accessory costs related to subscriber growth represented $1.2
million and $2.6 million of the increase for the three and six month periods,
respectively. Variable operation costs including usage based access, long
distance and directory assistance increased $.3 million for the three months
ended June 30, 2000 and $.6 million for the six months ended June 30, 2000.
Roaming charges paid to other carriers increased $.2 million for the three
months and $.4 million for the six months ended June 30, 2000.
Maintenance and Support Expense. Maintenance and support expense increased
$.5 million or 50% from $1.1 million for the three months ended June 30, 1999 to
$1.6 million for the three months ended June 30, 2000. Maintenance and support
expense increased $1.1 million or 62% from $1.9 million for the six months ended
June 30, 1999 to $3.0 million for the six months ended June 30, 2000. This
increase was primarily due to increases in access, rents and maintenance costs
associated with the addition of 46 cell sites during the period June 30, 1999 to
June 30, 2000 and other network enhancements, which included the addition of a
central base station controller.
Depreciation and Amortization. Depreciation and amortization increased $.04
million or 9% from $.42 million for the three months ended June 30, 1999 to $.46
million for the three months ended June 30, 2000. Depreciation and amortization
increased $.5 million or 68% from $.7 million for the six months ended June 30,
1999 to $1.2 million for the six months ended June 30, 2000. Significant
expansion in network construction, which included cell site additions in the
central West Virginia markets of Charleston and Huntington and commencement of
operations in the northern corridor of West Virginia in May 1999 represented an
increase in depreciation expense of $.7 million for the six months ended June
30, 2000 as compared to the same period in 1999. The increase in depreciation
expense was partially offset by the sale of 82 towers with a combined book value
of $11.8 million in March and April 2000. The gain on the tower sales was
deferred and is being amortized, for book purposes, over a ten-year period.
Customer Operations Expense. Customer operations expense increased $.9
million or 107 % from $.9 million for the three months ended June 30, 1999 to
$1.8 million for the three months ended June 30, 2000. Customer operations
expense increased $1.9 million or 123% from $1.6 million for the six months
ended June 30, 1999 to $3.5 million for the six months ended June 30, 2000.
Advertising and marketing expenses increased $.3 million and $.5 million for the
three and six month periods, respectively. Selling expenses including
commissions, retail store operations and warehousing grew $.4 million in the
three months ended June 30, 2000 and $.7 million in the six months ended June
30, 2000 over comparable periods in 1999. The increase in expenses reflects the
addition of four retail stores in the northern corridor. Customer service and
billing costs increased $.2 million for the three months ended June 30, 2000 and
$.7 million for the six months ended June 30, 2000 versus the three and six
month periods in 1999. These increases were necessary to support the significant
increase in subscribers.
Corporate Operations Expense. Corporate operations expense remained
unchanged at $.6 million for the three months ended June 30, 1999 and the three
months ended June 30, 2000. Corporate operations expense was unchanged at $1
million for the six months ended June 30, 1999 and the six months ended June 30,
2000.
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OUR BUSINESS
Overview
We are a regional integrated communications provider offering a broad range
of wireless and wireline products and services to business and residential
customers in Virginia and West Virginia. We own our own digital PCS licenses,
fiber optic network, switches and routers, which enable us to offer our
customers end-to-end connectivity in many of the regions we serve. Our
facilities-based approach allows us to control service quality and generate
operating efficiencies.
Our business encompasses both wireless and wireline communications
services:
. Wireless. Our wireless business consists primarily of digital PCS
services, which we offer in Virginia, West Virginia and Kentucky. We
complement our wireless voice services with wireless Internet and data
services. We began offering digital PCS services in late 1997 and have
provided analog cellular service since 1991. Our PCS network utilizes
digital CDMA technology, which provides high bandwidth capacity at
comparatively low cost and can be upgraded to support enhanced
capabilities. We believe that the combination of our CDMA technology,
our bandwidth capacity and the LMDS and MMDS wireless spectrum that we
own positions us to capitalize on opportunities in the growing
wireless data market. As of June 30, 2000, after giving effect to our
recent transactions, which are described below under "Recent
Developments," we owned licenses covering approximately 11 million
pops and provided PCS services to approximately 150,500 subscribers.
. Wireline. We provide ILEC and CLEC services in Virginia, West
Virginia and Tennessee. As an ILEC, we own and operate a 103-year-old
local telephone company. As of June 30, 2000, our ILEC had
approximately 39,100 residential and business access lines installed.
As a CLEC, we serve nine markets in three states and intend to
continue our expansion into contiguous and other nearby markets. Since
commencing CLEC operations in mid-1998, we have grown our number of
installed business access lines to approximately 9,500, as of June 30,
2000. In addition, we provide wireline Internet access through a local
presence in Virginia, West Virginia, Tennessee and North Carolina. We
offer high-speed data services, such as dedicated service and DSL, and
dial-up services in a growing number of markets within these three
states. As of June 30, 2000, our Internet customer base totaled
approximately 56,300 dial-up subscribers and 900 DSL subscribers.
Our wireless and wireline businesses are supported by our fiber optic
network, which currently includes 602 route-miles and which we expect to include
approximately 1,500 route-miles by the end of 2000. This network gives us the
ability to originate, transport and terminate much of our customers'
communications traffic in many of our service markets. We also use our network
to back-haul communications traffic for our retail services and to serve as a
carrier's carrier, providing transport services to third parties for long
distance, Internet and private network services. Our fiber optic network is
connected to and marketed with adjacent fiber optic networks in the mid-Atlantic
region.
Competitive Strengths
Regionally-Focused Provider. We have a regional market focus, which enables
us to have a stronger local presence and provide more personalized service than
national providers. We enhance our presence in the markets that we serve with
local retail stores and kiosks, through which we market our products and
services. We own this distribution network, which enables us to better control
service quality and customer care. We also strengthen our local presence through
our support of the communities that we serve. We and our employees participate
in local charities, community organizations and chambers of commerce. We believe
that our regional focus and local presence have generated strong brand
awareness. We also believe that our customer service has produced a high level
of customer satisfaction, which has differentiated us from our competitors and
generated strong customer retention rates.
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Facilities-Based Operations and Robust Network. We operate our own fiber
optic network, switches and routers, which enable us to provide our customers
with end-to-end connectivity. We conduct our CLEC operations by routing
communications traffic to our switches and transporting that traffic primarily
over our network. This facilities-based approach allows us to better control
service quality, benefit from operating efficiencies and economies of scale and
generate leasing revenue. Our technologically-advanced facilities also enable us
to generate revenue as a carriers' carrier. Our network includes SONET rings,
which enable communications traffic to bypass network breaks. We also own
substantial PCS bandwidth capacity in our markets, ranging from 10 MHz to 40
MHz, as well as complementary LMDS and MMDS wireless spectrum.
Broad Product Line Utilizing Multiple Technologies. Our multiple technology
platform assists us in meeting the diverse communications needs of our
customers. As an integrated communications provider, we offer wireless and
wireline services, including voice, Internet and data services. We deliver our
services through multiple technologies. For example, we can provide mobile
wireless services through PCS, using CDMA technology, or fixed wireless services
through our LMDS or MMDS wireless spectrum, and we provide Internet access and
data services through dial-up, DSL or wireless technology. We have also invested
in new technologies, such as SDSL, to anticipate market demands. We believe that
the range of technology reflected in our product offerings gives us a
significant competitive advantage in the fast-changing communications industry.
Experienced Management Team. Our management team led our transformation
from a 103 year-old regulated utility into a leading provider of integrated
communications services in our markets. Our 20 top executives and managers
average more than 17 years of experience in the communications industry, with
expertise in network engineering and operations, wireless technologies, customer
care, sales and marketing, project development, regulatory affairs and business
development and financial management. Members of our management team have held
managerial positions at other communications companies, such as AT&T, Bell
Atlantic, GTE, PrimeCo, Shenandoah Telecommunications and Sprint. Our management
team has particularly strong experience in the wireless communications industry.
We have offered analog cellular services since 1991 and digital PCS services
since 1997. We believe that our management's skill and experience gives us a
competitive advantage as we grow our business lines and expand into new
contiguous and other nearby markets.
Stable and Diverse Sources of Revenue and EBITDA. Our ILEC, CLEC and fiber
optic network provide us with a stable source of revenues and EBITDA. For 1997,
1998 and 1999, after giving effect to the Transactions, these operations
generated revenues of $42.1 million, $46.5 million and $50.9 million,
respectively, and EBITDA of $28.3 million, $30.0 million and $29.8 million,
respectively. We also derive revenues from our wireless operations, which will
significantly increase after our acquisition of Richmond-Norfolk PCS. Our
Internet-related operations are a fast-growing component of both our wireless
and wireline operations. Our stable and diverse sources of revenue and EBITDA
provide us with liquidity to support growth of our digital PCS operations and
our geographic expansion.
Strong Equity Sponsorship from Welsh Carson Anderson & Stowe and Morgan
Stanley Dean Witter. Welsh, Carson, Anderson & Stowe VIII and IX, L.P.s, private
equity investment funds, have invested a total of $225 million and affiliates of
Morgan Stanley Dean Witter have invested $25 million in newly issued preferred
equity in the Company.
Business Strategy
Our objective is to be the leading integrated communications provider in
our expanding region of operations. The key elements of our business strategy
are to:
Increase Market Share by Establishing Service-Driven Customer Relationships
and a Local Presence. We intend to grow our business by leveraging our local
presence and continuing our focus on providing high levels of customer
satisfaction. We plan to accomplish this by establishing local sales offices in
our new markets and providing local representatives for face-to-face sales and
personalized client care. We intend to enhance our local presence by continuing
our support of the communities that we serve, including corporate and employee
participation in community programs, and expanding this support to our target
markets. We also plan to pursue an aggressive branding campaign. We will
reinforce our customer relationships by continuing to provide integrated,
personalized customer care in each of our markets. We intend to do this through
our retail locations, which also serve as customer care centers, and our 24
hours-a-day, 365 days-a-year call center.
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Accelerate Growth by Offering Bundled Services. We intend to accelerate our
growth by leveraging our ability to offer a broad range of communications
services in a bundled package and on a single bill. When entering new markets,
we generally plan to establish a strong brand presence through our PCS services
and then leverage that presence to market our CLEC, Internet access and data
transmission products. In our new markets, we intend to build our own
facilities, connect the new market to our existing infrastructure and then
leverage our advantage as an integrated communications provider by marketing our
broad range of communications services. We also plan to broaden our service
offerings by offering CLEC services to residential customers. We believe that by
cross-selling multiple products and services, we are building new customer
relationships, strengthening the partnership with existing customers and
increasing customer retention.
Leverage Our Fiber Optic Network, Infrastructure and Technologies. Our
infrastructure, including our fiber optic network, switches and routers, is a
technologically-advanced communications facility that connects many of our
markets. We intend to offer our broad range of communications services in many
of our markets and deliver those services over infrastructure that we control
and maintain. We plan to continue expanding our network. We also intend to
continue using our network to serve as a carrier's carrier, offering switching
and transport services to other communications carriers. As Internet and data
transmission markets grow, we plan to utilize our network infrastructure to
deliver high-speed broadband data applications to our customers. We also intend
to use our PCS bandwidth capacity, which ranges from 10 MHz to 40MHz in our
markets, and our LMDS and MMDS wireless spectrum to capitalize on opportunities
in the growing market for wireless Internet access and data transmission.
Accelerate Growth Through Acquisitions. We intend to expand our market
reach by pursuing strategic acquisitions of communications businesses that will
provide us access to contiguous and other nearby markets or additional products
or services. We plan to continue pursuing suitable Internet service providers
that would give us local dial-up presences in additional markets, as well as
wireline service providers that would expand the geographic reach of our CLEC
services. We may also acquire additional wireless licenses through future FCC
auctions or acquisitions from third parties. We seek acquisition targets that
offer products and services that we can integrate into our existing operations
and networks.
Recent Developments
We are significantly expanding the geographic region that we serve and
focusing our growth efforts on our core communications services, primarily
digital PCS services, Internet access, including dedicated, high-speed DSL and
dial-up services, high-speed data transmission and local telephone services. In
connection with our expansion, we are receiving additional equity investments.
We are also divesting non-strategic assets. Transactions that are either in
process or have recently been completed include the:
. acquisition of Richmond-Norfolk PCS;
. merger with R&B Communications, an integrated communications provider
in a geographic market contiguous to ours, which will give us a
controlling interest in the Virginia Alliance and the West Virginia
Alliance;
. equity investments from Welsh Carson and Morgan Stanley Dean Witter;
. acquisition of certain PCS licenses currently owned by AT&T that will
add 2.5 million pops in certain markets in Pennsylvania;
. sales of our membership interest in RSA 5, our RSA 6 wireless analog
operations, our directory assistance operations and communications
tower sites; and
. arrangement of a new senior credit facility.
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Richmond-Norfolk PCS
A key component of our business strategy is to significantly expand our
digital PCS business. As part of that expansion, we have acquired certain
wireless operations of PrimeCo PCS, L.P. Pursuant to an asset exchange agreement
dated May 17, 2000, we acquired Richmond-Norfolk PCS from PrimeCo. In exchange,
we paid PrimeCo $408.6 million in cash, transferred to PrimeCo the assets and
license comprising the analog cellular operations of the RSA 6 partnership and
our partnership interest in RSA 5, and assumed approximately $20.0 million of
indebtedness in the form of leveraged lease obligations.
Richmond-Norfolk PCS was the first digital PCS provider in the Richmond and
Norfolk basic trading areas, introducing its services in November 1996. The
Richmond and Norfolk basic trading areas, cover approximately 3.0 million pops.
Richmond-Norfolk PCS adds to our PCS footprint a large service territory in
strategically located, contiguous markets. These markets, both of which are
densely populated and relatively affluent, offer us an attractive opportunity to
significantly expand our PCS operations.
Richmond-Norfolk PCS offers communications products and services that it
markets through a multi-channel distribution network comprised of company-
operated retail outlets, third party agents and dealers, and direct sales
representatives who target business accounts. The Richmond-Norfolk PCS network
utilizes the same technologically-advanced digital CDMA technology that we use
in our PCS services.
R&B Communications
Pursuant to an agreement and plan of merger dated June 16, 2000, we have
agreed to merge with R&B Communications by issuing an aggregate of 3.7 million
shares of our common stock, valued at approximately $141 million on that date,
for all of the issued and outstanding shares of R&B Communications common stock.
In connection with the merger, we have agreed to increase the size of our board
of directors to include two members designated by R&B Communications, including
R&B Communications' CEO, J. Allen Layman, who will become our Chairman of the
Board and President. The merger is expected to qualify as a tax-free
reorganization and will be accounted for as a purchase. The merger is subject to
the approval of our shareholders and the shareholders of R&B Communications,
regulatory approvals and other customary closing conditions. We expect this
transaction to close in the fourth quarter of 2000.
R&B Communications is an integrated communications provider offering a
broad range of products and services, including ILEC, CLEC, Internet access,
data transmission facilities and paging and long distance telephone services. We
and R&B Communications have pursued joint initiatives in the Virginia and West
Virginia communications markets for a number of years, including ValleyNet, a
fiber optic consortium, the Virginia Alliance and the West Virginia Alliance,
through which both of us conduct PCS operations, and acquisitions of several
digital PCS and LMDS wireless spectrum licenses. R&B Communications operates as
an ILEC in Botetourt County, Virginia and offers its CLEC services in Roanoke,
Virginia. Our merger with R&B Communications will give us 91.1% and 78.9%
interests in the Virginia Alliance and the West Virginia Alliance, respectively.
The merger will also add approximately 125 miles to our fiber optic network.
As of June 30, 2000, R&B Communications served approximately 2,300 Internet
subscribers and had approximately 5,000 CLEC and 12,300 ILEC access lines
installed. Total operating revenues were $3.9 million in the first quarter of
1999, $4.5 million in the first quarter of 2000, $13.9 million in 1998 and $16.8
million in 1999. EBITDA was $2.0 million in the first quarter of 1999, $1.9
million in the first quarter of 2000, $6.7 million in the year ended 1998 and
$7.5 million in the year ended 1999.
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Additional Equity Investment
Welsh Carson and Morgan Stanley Dean Witter have invested $225.0 million
and $25.0 million, respectively, in us. Pursuant to a stock purchase agreement,
dated as of July 11, 2000, Welsh Carson purchased $100.0 million of our Series B
preferred stock, and Morgan Stanley Dean Witter purchased $12.5 million of that
same Series B preferred stock. In connection with the issuance of the Series B
preferred stock, we issued to Welsh Carson and Morgan Stanley Dean Witter
warrants to purchase 444,444.4 and 55,555.6 shares of our common stock,
respectively, at an exercise price of $50.00 per share.
Pursuant to stock purchase agreements dated as of July 26, 2000, and August
14, 2000, respectively, Welsh Carson purchased $55.0 million of our Series C
preferred stock, and $70 million of our Series D preferred stock, and Morgan
Stanley Dean Witter purchased $5.3 million of that same Series C preferred stock
and $7.2 million of that same Series D preferred stock. The Series B and Series
C preferred stock is convertible into our common stock at any time, and the
Series D preferred stock is convertible into Series C preferred stock upon
approval of our shareholders.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on page 125 for more
information about our transactions with Welsh Carson and Morgan Stanley Dean
Witter.
PCS License Acquisitions
Pursuant to an exchange agreement with AT&T Corp. and certain affiliates,
dated as of June 26, 2000, AT&T has agreed to transfer to us digital PCS
spectrum owned by AT&T. In exchange, we agreed to transfer to AT&T certain
wireless communications services, or WCS, licenses that we own. Under the terms
of the agreement, AT&T agreed to assign to us PCS license spectrum ranging from
10MHz to 15MHz in certain markets in Pennsylvania in exchange for our assignment
to AT&T of our WCS licenses in Richmond, Virginia and Columbus, Ohio. The
proposed acquisition of the AT&T PCS licenses would add 2.5 million pops to our
PCS license footprint in strategically located, contiguous geographic markets.
These pops are not currently built out.
Divestitures
We have divested certain of our non-strategic assets and operations,
including our wireless analog and directory assistance operations and our
communications tower sites. In connection with our acquisition of Richmond-
Norfolk PCS, we transferred to PrimeCo the assets and license comprising the
analog cellular operations of RSA 6, a partnership in which we owned a 100%
interest, and our limited partnership interest in RSA 5, a partnership in which
we owned a 22.0% interest.
We have sold our directory assistance operations. Pursuant to a stock
purchase agreement dated May 17, 2000, with telegate AG, a public company in
Germany, we sold to telegate AG the capital stock of CFW Information Services
Inc. through which we conducted our directory assistance operations. In
exchange, we received $32.0 million in cash and $3.5 million of stock in
telegate AG.
In March 2000, we sold to Crown Castle International Corp., for
approximately $46.4 million, 145 communications tower sites that were owned by
either us, the Virginia Alliance or the West Virginia Alliance. In April 2000,
we sold to Crown Castle an additional six tower sites for approximately $1.1
million. In June 2000, we sold to Crown Castle an additional three tower sites
for approximately $.6 million.
Finance Plan
To fund the $408.6 million cash portion of the purchase price of Richmond-
Norfolk PCS, we sold $280.0 million of the outstanding notes, $95.0 million of
subordinated notes, $137.5 million of Series C and Series D Preferred Stock and
closed on a $325.0 million senior credit facility. We also refinanced
substantially all of the Alliances' and our indebtedness with proceeds from our
new senior credit facility and part of the proceeds from the $112.5 million sale
of our Series B Preferred Stock. The following table sets forth our uses of the
net proceeds from this offering, the proceeds from our new senior credit
facility and the proceeds from the sale of our Series B, Series C and Series D
Preferred Stock (dollars in thousands):
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<TABLE>
<CAPTION>
Sources of Funds Use of Funds
---------------- ------------
<S> <C> <C> <C>
Outstanding Notes...................... 276,108 Repay existing indebtednesses (3)....... $209,300
Subordinated Notes..................... 95,000 Acquisition of Richmond-Norfolk PCS (4). 408,600
New senior credit facility (1)......... 150,000 Escrow account (5)...................... 69,121
Sale of Series B Preferred Stock (2)... 112,500 Transaction costs....................... 40,500
Sale of Series C Preferred Stock (2)... 60,300 Cash.................................... 43,587
--------
Sale of Series D Preferred Stock (2)... 77,200
--------
$771,108 $771,108
======== ========
</TABLE>
(1) We will have an additional $175.0 million of borrowing availability under
our new senior credit facility, subject to certain conditions. The new
senior credit facility is described under "DESCRIPTION OF CERTAIN
INDEBTEDNESS" on page 126.
(2) The terms of the Series B, Series C and Series D Preferred Stock are
described under "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" on page
125.
(3) Of this amount, $149.4 million was used by the Virginia Alliance and the
West Virginia Alliance to repay their indebtedness to the Rural Telephone
Finance Cooperative.
(4) The aggregate purchase price for Richmond-Norfolk PCS was comprised of (i)
approximately $408.6 million in cash, (ii) the transfer of the assets and
license comprising the analog operations of RSA 6 and our limited
partnership interest in RSA 5, and (iii) our assumption of $20.0 million of
indebtedness in the form of leveraged least obligations.
(5) Approximate amount held in an escrow account to pre-fund the first four
interest payments on the notes.
Market Opportunity
We operate in the wireless and the wireline communications markets,
including the digital PCS, local telephone, Internet access and data
transmission markets. We believe that the rapid expansion of the digital
wireless market and our use of advanced CDMA technology position us to
significantly expand our wireless operations. The opening of local markets to
competition, accelerated growth rates in local traffic related to increases in
Internet access, and the desire for "one-stop shopping" by small and medium-
sized businesses and consumers, present us with the opportunity to significantly
expand our business.
Wireless
We believe that our wireless communications offerings, primarily our PCS
services, present us with significant growth opportunities and are a key
component of our integrated suite of communications products. Since the
introduction of commercial analog cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers for cellular, PCS and enhanced specialized mobile radio, or ESMR,
has increased from an estimated 340,200 at the end of 1985 to more than 86.0
million at December 31, 1999, according to the Cellular Telecommunications
Industry Association, or CTIA. According to the CTIA, for the five years ended
December 31, 1999, the U.S. wireless communications industry, including analog
cellular, PCS and ESMR, was characterized by the following trends:
. total service revenues increased at a compound annual
rate of 20%, reaching $40.0 billion at the end of 1999;
. the number of wireless subscribers at the end of each
year increased at a compound annual rate of 26%, reaching 86.0 million
at the end of 1999;
. annual subscriber growth decreased from 40% in 1995 to 24% in 1999;
and
. average monthly revenues per subscriber decreased from $51.00 at the
end of 1995 to $41.24 at the end of 1999, an average annual decline
of $2.44.
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Kagan's estimates that the number of wireless users will increase to 151.3
million and 201.9 million by 2002 and 2005, respectively. This projected growth
is driven largely by a substantial projected increase in PCS users, who are
forecast to account for approximately 35% and 43% of total wireless users in
2002 and 2005, respectively, representing a significant increase over the
approximately 18% of total wireless customers using PCS at the end of 1999.
Kagan's projects that total wireless industry penetration, defined as the number
of wireless subscribers nationwide divided by total United States population,
will grow from an estimated 31% in 1999 to 69% in 2005.
Wireline
Overall Market Size and Growth. According to International Data
Corporation, or IDC, the overall market of regulated, switched and unswitched
data and voice traffic is estimated to have generated a total of $212.8 billion
in revenues in 1998 and is expected to grow to $252.2 billion by 2002. The
number of switched network access lines is expected to grow from 187.5 million
lines in 1998 to 232.6 million lines by 2002 and CLEC market share by revenue is
expected to grow from 2.6% in 1998 to 5.6% by 2002. Because it is not a mature
market, estimates of data and Internet services revenue are not as well
established as those relating to traditional voice traffic communications. We
believe, however, that a significant market opportunity exists for providers of
data and Internet services.
Growing Market Demand for High-Speed Digital Communications Bandwidth.
High-speed connectivity has become important to businesses and consumers due to
the dramatic increase in Internet usage and electronic business. According to
IDC, the number of Internet users in the U.S. is estimated to have reached
approximately 107.4 million in 1999 and is forecasted to grow to approximately
200.0 million by 2003. The popularity of the Internet with consumers has driven
the rapid proliferation of the Internet as a commercial medium, as businesses
establish Web sites and corporate intranets and extranets to expand their client
reach and improve their communications efficiency. To remain competitive, small
and medium-sized businesses will increasingly need high-speed Internet
connections to maintain complex Web sites, access critical business information
and communicate with employees, clients and business partners more efficiently.
High-speed digital connections are also becoming increasingly important to
businesses and consumers as more information and applications that require high
bandwidth become available on the Internet. As businesses continue to increase
their use of the Internet, intranets and extranets, we expect the market for
business Internet access to continue to grow rapidly, causing the demand for
high-speed digital communications services to grow rapidly as well. According to
IDC, total DSL line revenue in the U.S. is expected to increase from $400.0
million in 1999 to $7.9 billion in 2004. Insight Research estimates that by
2003, there will be 9.2 million DSL lines, up from approximately 300,000 DSL
lines in 1999.
Expansion of Competitive Local Communications Industry. Until recently, the
competitive local communications industry has generally been limited to
providing interstate dedicated access, interstate switched access and private
line services, accounting for only approximately one-fourth of the total local
services market. The Telecommunications Act of 1996 opened local services
markets to full competition by preempting state and local laws to the extent
that they prevent competitive entry with respect to the provision of any
communications service and imposed a variety of new duties on established
telephone companies in order to promote competition in local exchange and access
services. The pro-competitive aspects of the Telecommunications Act have created
significant opportunities for us to grow our business, as well as created
incentives for new competitors to enter the marketplace.
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Our Wireless Markets
The following table sets forth information as of June 30, 2000, after
giving effect to the Transactions, regarding estimated market pops, as provided
by Kagan's, our number of subscribers and our market penetration rate in the
digital PCS markets in which we operate and the markets in which we have
licenses but do not yet operate:
Our Our Market
Market Name POPs Subscribers Penetration
-------------------------------------- ---------- ----------- ------------
Operating Markets
Virginia
Charlottesville.................... 215,300 4,872 2.3%
Danville/Martinsville.............. 258,700 2,327 0.9%
Harrisonburg/Staunton/Waynesboro... 252,500 16,466 6.5%
Lynchburg.......................... 158,400 5,725 3.6%
Norfolk/Virginia Beach............. 1,763,400 55,411 3.1%
Richmond-Petersburg................ 1,210,400 32,544 2.7%
Roanoke............................ 639,600 10,094 1.6%
Winchester......................... 158,100 1,645 1.0%
West Virginia
Charleston......................... 487,000 9,741 2.0%
Huntington, WV and Ashland, KY..... 369,100 7,697 2.1%
Morgantown/Clarksburg/Fairmont..... 357,300 3,927 1.1%
---------- ------- ---
Total Operating Market........... 5,869,800 150,499 2.6%
Licensed Markets
Virginia
Brunswick-Mecklenburg.............. 45,300
Fredericksburg..................... 136,300
West Virginia
Beckley............................ 168,200
Bluefield.......................... 177,300
Logan.............................. 41,000
Parkersburg, WV and Marietta, OH... 181,800
Wheeling........................... 212,400
Williamson, WV and Pineville, KY... 186,200
Ohio
Portsmouth......................... 95,700
Pennsylvania
Altoona............................ 223,900
Harrisburg......................... 687,400
Johnstown.......................... 235,900
Lancaster.......................... 457,000
Reading............................ 356,000
State College...................... 133,900
Williamsport....................... 160,600
York-Hanover....................... 463,300
Tennessee
Kingsport.......................... 686,200
Maryland
Cumberland......................... 160,100
Hagerstown......................... 354,600
----------
Total Licensed Markets........... 5,163,088
---------- --------
Total Wireless Markets........... 11,032,900 150,499
========== =======
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Products and Services
Wireless
Digital PCS. Our digital PCS packages provide the following affordable and
reliable services:
. Digital Features. The features of our basic PCS service include voice
mail, caller ID, call waiting, three-way calling and call forwarding.
For an additional fee, we also provide wireless Internet access.
. Nationwide Service. Our nationwide roaming agreements and dual-mode
handsets allow our customers to roam on wireless networks of other wireless
providers. We have a nationwide roaming agreement with Sprint that allows
our PCS customers to make and receive calls when roaming on the Sprint
digital CDMA network. The Sprint network currently offers digital service
in more than 4,000 cities, including the 50 largest U.S. metropolitan
areas.
. Advanced Handsets. We offer dual and tri-mode handsets employing CDMA
technology, which allow customers to make and receive calls on both CDMA
PCS and analog frequency bands. These handsets allow roaming on digital or
analog networks where our digital PCS service is not available. These
handsets are equipped with preprogrammed features such as speed dial and
last number redial.
. Extended Battery Life. The CDMA handsets that we offer provide extended
battery life. These handsets generally offer four days of standby and two
and one-half hours of talk time battery life. Handsets operating on a
digital system are capable of saving battery life while turned on but not
in use, improving efficiency and extending the handset's use.
. Enhanced Voice Quality. Our CDMA technology offers enhanced voice quality
and clarity, powerful error correction, less susceptibility to call fading
and enhanced interference rejection, as compared to analog cellular
systems, all of which result in fewer dropped calls.
. Privacy and Security. Our PCS services provide secure voice transmissions
encoded into a digital format, designed to prevent eavesdropping and
unauthorized cloning of subscriber identification numbers.
. Customer Care. We offer customer care 24 hours-a-day, 365 days-a-year.
Customers can call our toll-free customer care number from anywhere on our
PCS network. Our PCS handsets can be preprogrammed with a speed dial
feature that allows customers to easily reach customer care at any time.
Our local retail stores also serve as customer care centers, where
customers can receive personalized customer service.
. Simple Rate Plans. We offer simple, affordable pricing plans. Customers
can select from rate plans that include local, state or regional one-rate
calling areas. Our business and residential PCS customers can also bundle
nationwide toll-free calling and Internet access at a discount with their
basic PCS services.
. Prepay Plans. In addition to our traditional PCS packages, we also offer a
prepay alternative. With our prepay plans, we have no contract with the
customer, no credit check is conducted and we do not bill the customer. The
customer prepays for talk time and purchases additional time by credit
card, through our customer care network, or by purchasing prepaid calling
cards from a variety of convenient locations.
Wholesale Wireless Services. We also provide digital PCS services on a
wholesale basis to other PCS service providers. We have a ten-year agreement
with Horizon Personal Communications, Inc., a Sprint affiliate, to provide
wholesale PCS services to Horizon in Charlottesville, Danville, Lynchburg,
Martinsville, Roanoke, Staunton and Waynesboro, Virginia; Beckley, Bluefield,
Clarksburg, Elkins, Fairmont, Huntington and Morgantown, West Virginia; and
Ashland, Kentucky. Horizon uses our network to provide retail service to its
customers in these 15 markets. Our sales of wholesale PCS services complement
our retail sales to leverage our network infrastructure. Our wholesale agreement
provides us with a long-term source of revenues and enhances our roaming
relationship with Sprint. In addition, Sprint customers can roam on our network
under a preferred roaming agreement.
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Other Wireless Services. We own and operate wireless cable systems in the
Charlottesville, Shenandoah Valley and Richmond, Virginia markets. These systems
currently provide wireless cable service to approximately 11,000 customers. We
offer our subscribers up to 25 basic cable channels, including ESPN, CNN, TBS
and MTV, and one to three premium channels, including HBO, the Disney Channel
and Showtime. We also provide our customers with paging services that cover most
of Virginia, Maryland and the District of Columbia. As of June 30, 2000, after
giving effect to the Transactions, we had approximately 19,800 paging customers.
We offer numeric, alphanumeric, tone-only and tone and voice paging services, as
well as wide-area paging.
New Products and Services. We recently began offering our PCS customers
mobile Internet access, which they can utilize by connecting their wireless
handsets to a laptop or other handheld device. Our wireless Internet access
enables PCS customers to send and receive e-mail or other information any time
they are on a CDMA network. Our CDMA technology also supports direct Internet
access from a handset. We are currently developing this product and expect it to
become widely marketed with the availability of data-capable handsets.
Wireline
Our wireline communications services include ILEC and CLEC services, Internet
access, including high-speed DSL and dial-up, and data transmission services. We
also own and operate a fiber optic cable network, switches and routers through
which we deliver many of our services.
ILEC and CLEC. We currently provide ILEC and CLEC services in Virginia,
West Virginia and Tennessee. As an ILEC, we own and operate a 103-year-old
telephone company in western Virginia that serves business and residential
customers. As a CLEC, we serve business customers in nine markets with
interconnection agreements with Bell Atlantic, GTE and Sprint.
We offer our ILEC and CLEC customers voice services that include the following:
. Custom Calling Features. We offer a broad range of custom calling
features, including call waiting, continuous redialing, caller ID and
voice mail.
. Centrex Services. We offer our business customers Centrex services,
which replace a customer's private branch exchange, or PBX, system. In
lieu of a PBX system, our Centrex services provide the switching
function, along with multiple access lines.
. Long Distance Services. We provide long distance within the local access
transport area served by our ILEC. We offer domestic and international
long distance services to our ILEC and CLEC customers through resale
arrangements with interexchange carriers such as AT&T and MCI WorldCom.
Internet. We provide Internet access services in Virginia, West Virginia,
Tennessee and North Carolina. We offer our Internet customers value-added
services that include the following:
. Local Dial-Up Internet Access. We offer dial-up Internet access through
52 local Internet points of presence. We offer multiple e-mail accounts,
free software and personal disk space.
. Dedicated Internet Access. We provide dedicated high-speed Internet
connectivity, including frame relay, ATM and leased line services.
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. High-Speed DSL Access. We offer DSL Internet access. DSL technology
enables a customer to receive high-speed Internet access through its
copper telephone line.
. Web Hosting. We host over 3,000 domains on both UNIX and Windows NT
servers. In addition to Web hosting, we offer Web site design and
development through NetAccess. Domain services, collocation agreements
and Internet marketing services are also available.
Fiber Optic Network. We own and operate a fiber optic cable network that is
currently 602 route-miles. After giving effect to the Transactions and the
capacity we are currently adding, we expect our network to include approximately
1,500 route-miles by the end of 2000. Our fiber optic network provides a
backbone for the delivery of our ILEC, CLEC, Internet access and digital PCS
services to business and residential customers. Our network enables us to
originate, transport and terminate communications traffic within our service
territory, facilitating our ability to control quality and contain network
operating costs. A portion of our network is a part of a fiber network managed
by ValleyNet, a partnership of us and four other communications companies that
have interconnected their networks to create a 872 route-mile, nonswitched,
fiber optic network from Carlisle, Pennsylvania, through the Interstate 81
corridor in Virginia, to Johnson City, Tennessee. The ValleyNet network is
connected to and marketed with other adjacent fiber networks, including
Carolinas FiberNet and the AEP Communications network, creating an approximately
4,500 route-mile connected fiber optic network that serves ten states.
We also use our network to serve as a carrier's carrier, leasing capacity
on our network to other communications carriers for the provision of long
distance services, private network facilities and Internet access. In addition,
we are a minority owner of a newly formed fiber optic cable joint venture,
America's Fiber Network, LLC, which controls an approximately 7,000-mile network
extending from New York to Chicago to Johnson City, Tennessee. We are also a
regional partner in the nationwide signaling system network operated by
Illuminet Holdings, Inc. As a regional partner, we lease capacity to Illuminet
on our mated pair of signal transfer points. Our pair of signal transfer points
is currently one of 12 pairs comprising the Illuminet network.
New Products and Services. We are researching alternative voice technology
that will allow voice over IP. In addition, our CLEC operations are researching
integrated access devices that will allow multiple voice lines to be served by a
single pair of copper wires, or loop, while a DSL Internet connection is
maintained on that same loop. In addition, we are one of two communications
companies participating in line-sharing trials with Sprint. Line-sharing will
make it cost effective to provide DSL service to a residential market by
enabling a data carrier to lease the high frequency portion of an ILEC's access
line to deliver DSL services. We are also reviewing several types of DSL
technology that will allow us to expand our DSL offering. These include ADSL,
RADSL and SDSL, each of which allows for greater transmission speed.
Sales and Marketing
We use several sales channels to distribute our products and services.
These channels include our own retail stores and kiosks, a direct sales force
and third-party indirect sales agents. We seek to have a strong retail presence
in the markets that we serve, and therefore focus our sales efforts on our
retail locations. Each of our retail locations is staffed with locally-based
sales and customer service representatives. We use our retail locations to
provide face-to-face personalized product sales and client care. We also have
account representatives assigned to the small to medium-sized business market
segment and other account representatives assigned to the large business market
segment. We compensate our sales representatives with a base salary and
commissions based on sales volumes. We conduct a training program for all of our
sales representatives that emphasizes the development of customer relationships.
Our marketing strategy focuses on our position as an integrated
communications provider. Our strategy is comprised of the following key
elements, which apply to each of our products and services across all of our
markets:
. provide value-added products and services through bundled packages;
. provide exceptional customer service; and
. serve as a strong corporate citizen and integral part of the community.
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We seek to use these elements to position us as a customer's first choice for
complete communications solutions.
We strengthen our local presence through corporate and employee support of
the communities in our markets. We participate in local charities, community
organizations and chambers of commerce. We use our local presence to pursue an
aggressive branding campaign, primarily by advertising through radio and
newspapers and, to a lesser extent, television. Our target demographics are
individuals in the 25 to 45 year-old range and small to medium-sized businesses.
Customer Service
We believe that we have gained a differentiating advantage by providing
high levels of customer service and advanced technologies. Each of our retail
locations is staffed with customer representatives who provide personalized
client care. We operate an advanced Customer Contact and Technology Center in
Waynesboro, Virginia, which provides customer care for each of our products and
services, and an additional customer care center in Charleston, West Virginia.
These customer care centers are staffed with teleservice representatives who
provide customer service and recommend new products and services. Our Waynesboro
customer care center operates 24 hours-a-day, 365 days-a-year. We further
support our customer-centric strategy with regional customer care centers and
our sophisticated back-office systems, which facilitate real-time customer
assistance. We believe that our emphasis on customer services increases our
customer retention rates.
Network Infrastructure and Technology
Wireless
Wireless digital signal transmission is accomplished through one of three
protocols: CDMA, TDMA or GSM, none of which are compatible. We deliver our PCS
services through CDMA technology. Our CDMA network includes a wireless switch
with three centralized base station controllers, or CBSCs, supporting more than
360 base transceiver stations, or BTSs. We intend to add a second switch in
Charleston, West Virginia in the third quarter of 2000 and deploy two additional
CBSCs by the end of 2000. We collocate a 3Com inter-working unit with each
switch to enable wireless data access. We use various configurations of Motorola
BTS equipment to provide cost-efficient radio frequency coverage. We enhance PCS
backhaul facilities through the use of Tellabs digital cross-connect systems, or
DCS, equipment located at strategic BTS locations. The DCSs consolidate the T-1
facilities from multiple BTSs for efficient backhaul to the wireless switch.
CDMA allows a larger number of calls within one allocated frequency and
reuses the full frequency in each cell. We believe that CDMA technology provides
important performance benefits that include the following:
. Superior Voice Quality. CDMA systems offer more powerful error
correction, less susceptibility to fading and less interference than
analog systems. Using enhanced voice coding techniques, CDMA systems
achieve voice service similar in quality to typical wireline telephone
service. CDMA voice coding technology also filters out distracting
background noise more effectively than existing wireline, analog
cellular and other digital PCS systems.
. Increased Capacity. CDMA technology allows a greater number of calls
within one allocated frequency and reuses the entire frequency spectrum
in each cell. CDMA systems are expected to provide capacity gains over
the current analog, TDMA and GSM systems. A new voice coding standard,
referred to as enhanced variable rate coding, or EVRC, allows CDMA
networks to support additional capacity while maintaining the high level
of voice quality associated with digital networks. We intend to utilize
the EVRC technology throughout our PCS network to increase capacity.
Additional capacity improvements are expected for CDMA networks over the
next two years as next generation standards are approved and implemented
that will facilitate high-speed data and additional increases in voice
traffic capacity.
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. Soft Hand-Off. CDMA systems transfer calls throughout the network using
a technique referred to as a "soft hand-off," which connects a mobile
customer's call with a new cell site while maintaining a connection with
the cell site currently in use. CDMA networks monitor the quality of the
transmission received by both cell sites simultaneously to select a
better transmission path and to ensure that the network does not
disconnect the call in one cell until it is clearly established in a new
one. As a result, fewer calls are dropped compared to analog, TDMA and
GSM networks, all of which use a "hard hand-off" and disconnect the call
from the current cell site as it connects with a new one.
. Enhanced Privacy And Security. CDMA technology combines a constantly
changing coding scheme with a low power signal to enhance security and
privacy. Vendors are currently developing additional encryption
capabilities that will further enhance overall network security.
. Simplified Frequency Planning. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless
network to reduce interference and enhance capacity. Analog cellular
service providers spend considerable money and time on frequency
planning. Because TDMA and GSM-based systems have frequency reuse
constraints similar to present analog systems, frequency planning for
TDMA and GSM-based systems is expected to be as expensive as that of
current analog systems. With CDMA technology, however, the same subset
of allocated frequencies can be re-used in every cell, reducing the need
for costly frequency re-use patterning and constant frequency plan
management.
. Long Battery Life. Due to their greater efficiency in power consumption,
CDMA handsets can provide up to four days of standby time and two and
one-half hours of talk time availability. This generally exceeds the
battery life of handsets using alternative digital or analog
technologies.
Wireline
Our network infrastructure and supporting services form a communications
backbone through which we deliver ILEC, CLEC, Internet access and digital PCS
services. Owning and operating our own network facilities enhances our ability
to control the quality of our products and services and generate operating
efficiencies and economies of scale. One of our operating strategies has been to
deploy new technology to increase operating efficiencies and to provide a
platform for the delivery of new services to our customers. We believe that we
have been among the leaders in the communications industry in infrastructure
development. We began providing digital and private line service to our
customers in 1986. We have installed fiber optic cable between our main switches
and our remote switching units. Our digital fiber network provides faster call
completion, improved transmission quality, lower costs and the ability to offer
a broader range of communications services and products.
Our wireline network includes a Lucent 5ESS digital switch, which provides
end-office and tandem functions for both our ILEC and CLEC businesses in
Virginia. We have ten remote switching modules deployed throughout our ILEC
territory and three more supporting our CLEC markets. Another Lucent 5ESS
digital switch, located in Charleston, supports our CLEC business in West
Virginia. We act as a regional node on Illuminet's nationwide SS7 network using
an Alcatel signal transfer point.
Our network consists of Nortel and Lucent SONET transport equipment,
Alcatel digital cross-connect systems, NEC multiplexers, and fiber-optic cable
manufactured by Lucent and Corning Cable Systems. The fiber cable is comprised
of both single-mode and non-zero dispersion shifted fiber. The latter is
suitable for supporting dense wave division multiplexing transport architecture,
which is scheduled for deployment by the end of 2000.
We use Lucent Any Media and Advanced Fiber Corporation UMC1000 digital loop
carriers throughout our ILEC and CLEC access network. Pairgain high-bit-rate DSL
transport equipment is used to provide T-1 speeds where conditioned facilities
are not readily available. We provide our voicemail services on a Glenayre
platform. Our network operations center, currently under construction, will
monitor our wireline, wireless and data networks on a continuous basis using a
Harris network management system.
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Our dial-up Internet access equipment is manufactured by Cisco, Nortel and
Lucent. We use Cisco routers to connect to the Internet. Our e-mail,
authentication and other services reside on Sun Microsystems servers. We provide
dedicated ISDN connections to the Internet using the Lucent Max 1800. We provide
DSL service at a standard speed of 768 kilobits per second over Paradyne
multiple virtual line equipment.
Information Systems
We have made a significant commitment to back office systems and
automation, investing in software and mid-range hardware to prepare for the
growth of our business. We have consolidated our lines of business under single
vendor solutions using products from IBM and other vendors such as JD Edwards,
Cisco and Lucent. These single solutions are built on scalable and world class
technologies to leverage our investment in people and technology.
Enterprise Systems
At the core of our information technology infrastructure is our IBM
Integrated Customer Management System billing system. This system has allowed us
to consolidate wireline, wireless, Internet, cable, paging and other services
within one service order process and thereby become more customer responsive by
reducing input errors and increasing speed and efficiency. This same system
allows us to perform customer care, plant, trouble management and billing
functions within one interface.
We currently use a third party provisioning system called Rapid Order,
which allows us to automatically provision our wireline and wireless switching
equipment at the time of each service order. Rapid Order is also used to audit
our internal systems for revenue assurance opportunities. In addition, we are
implementing a product from Lucent called BILLDATS to electronically manage the
flow of call detail records to our billing system, as well as data repositories
and third-party wholesale relationships.
We have made a significant investment in IBM's AS/400 family of application
and data servers, which allows us to process a sizable amount of data generated
by our wireless and wireline operations. The AS/400 platform also supports our
JD Edwards enterprise resource planning system, which makes it easier for us to
manage the data across these highly utilized systems. We believe that our
centralization to one billing system, as well as the significant utilization of
the AS/400 mid-range platform, position us well for significant growth.
Corporate LAN/WAN Networks
We have made significant progress in consolidating all of our corporate
systems onto one operating system for ease of use by our employees. We are
continuing our comprehensive upgrade to Cisco devices that allow for additional
local area network, or LAN, and wide area network, or WAN, management. We intend
to use our internal infrastructure to enhance the real-time monitoring and
recording of our network operations center, while gaining staff productivity
from speed and efficiencies on the LAN. Upgrades are also underway to use more
of our commercial network facilities to reduce costs paid to third-party
communications providers.
Competition
Overview
Many communications services can be provided without incurring an
incremental charge for an additional unit of service. For example, there is
virtually no marginal cost for a carrier to transmit a call over its own
network. As a result, once there are several facilities-based carriers providing
a service in a given market, price competition is likely and can be severe. As a
result, we have experienced price competition, which is expected to continue. In
each of our service areas, additional competitors could build facilities. If
additional competitors build facilities in our service areas, this price
competition may increase significantly.
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Wireless
We compete in our territory, and will compete in the Richmond-Norfolk PCS
territory, with both wireless analog and wireless digital communications service
providers. Several wireless carriers compete in portions of our market areas,
including Alltel Mobile, AT&T/SunCom, Horizon Personal Communications, Nextel,
Sprint PCS, Verizon Wireless, and affiliates of some of these companies. Many of
these competitors have financial resources and customer bases greater than ours.
Some wireless providers are able to offer free services, including, among
others, free long distance, free incoming calls and free wireless Internet
access. Many of them also have more established infrastructures, marketing
programs and brand names. In addition, some of our competitors offer coverage in
areas not serviced by our PCS network, or, because of their calling volumes or
their affiliations with, or ownership of, wireless providers, offer roaming
rates lower than ours.
We believe that a growing number of PCS operators will likely compete with
us in providing some or all of the services available through our network and
may provide services that we do not. Additionally, we expect that existing
analog cellular providers, some of which have been operational for a number of
years and have significantly greater financial and technical resources and
customer bases than us, will continue to upgrade their systems to provide
digital wireless communication services competitive with ours. Our ability to
compete effectively with these providers will depend on multiple factors,
including the continued success of our technology in providing superior call
quality and clarity, our ability to competitively price our products and offer
options that suit our customer's calling needs within each market, our increased
brand recognition and our continued expansion and improvement of our network and
customer care system. Our ability to compete effectively will also depend on our
ability to leverage our position as a provider of integrated communications
services.
We also face competition from resellers, which provide wireless service to
customers but do not hold FCC licenses or own facilities. Instead, the reseller
buys blocks of wireless telephone numbers and capacity from a licensed carrier
and resells service, often at lower rates, through its own distribution network
to the public. As a result, a reseller is both a customer of a wireless
licensee's services and also a competitor of that and other licensees. The FCC
requires all analog cellular and PCS wireless licensees to permit resale of
carrier service to a reseller.
We compete with wireless providers that have greater resources than ours
that may build their own digital PCS networks in areas in which we operate. Once
a digital PCS system is built out, there is no incremental cost to carrying an
additional call, so a larger number of competitors in our service areas could
introduce significantly higher levels of price competition and reduce our
revenues, as has occurred in many areas in the United States. Over the last
three years, the per-minute rate for wireless services has declined. We expect
this trend to continue into the foreseeable future. As per-minute rates continue
to decline, our revenues and cash flows may be adversely impacted.
In addition, we will compete with paging, dispatch and conventional mobile
telephone companies in our digital PCS markets. Potential users of PCS systems
may find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display, as well as tone-only service, may be adequate for
potential customers who do not need to speak to the caller.
We also expect to face increased competition from entities providing
similar services using other communications technologies, including paging and
digital two-way paging, ESMR, domestic and global satellite-based
communications, 3G, and wireless cable systems. While some of these technologies
and services are currently operational, others are being developed or may be
developed in the future.
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Wireline
ILEC and CLEC Services. Several factors have resulted in increased
competition in the local telephone market over the past 15 years, including:
. growing customer demand for alternative products and services;
. technological advances in the transmission of voice, data and video;
. development of fiber optics and digital electronic technology;
. a decline in the level of access charges paid by interexchange
carriers to local telephone companies to access their local networks;
and
. legislation and regulations, including the Telecommunications Act of
1996, designed to promote competition.
As the ILEC for Waynesboro, Clifton Forge and Covington, Virginia and the
surrounding counties, we are subject to competition from CLECs. Although no
CLECs have entered our incumbent markets to compete with us, it is possible that
one or more may enter our markets to compete for our largest business customers.
The regulatory environment governing ILEC operations has been and will likely
continue to be very liberal in its approach to promoting competition and network
access. Cable operators are also entering local exchange markets in selected
locations. Other sources of potential competition include wireless service
providers.
Our CLEC operations compete primarily with local incumbent telephone
companies and, to a lesser extent, other CLECs. Currently, we face competition
in our CLEC markets from several other CLECs, including Adelphia, Fibernet, and
Comscope. We also face, and will continue to face, competition from other
current and potential future market entrants, including other CLECs, cable
television companies, electric utilities, microwave carriers, wireless
communications providers, Internet service providers, and private networks built
by large end-users.
Internet. We currently offer our Internet and data services in small,
underserved markets. The Internet industry is characterized by the absence of
significant barriers to entry and the rapid growth in Internet usage among
customers. As a result, we expect that our competition will increase from market
entrants offering high-speed data services, including DSL, cable and wireless
access. We believe this will likely occur as large diversified communications
and media companies acquire ISPs and as ISPs consolidate into larger, more
competitive companies. Our competition includes:
. access and content providers, such as America Online, the Microsoft
Network and Prodigy;
. local, regional and national Internet service providers, such as
PSINet and EarthLink;
. the Internet services of regional, national and international
communications companies, such as AT&T, BellSouth and MCI WorldCom;
. regional Bell operating companies, such as Bell Atlantic; and
. online services offered by incumbent cable providers.
Many of our competitors have financial resources, corporate backing,
customer bases, marketing programs and brand names that are greater than ours.
Additionally, competitors may charge less than we do for Internet services,
causing us to reduce, or preventing us from raising, our fees.
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Properties
We are headquartered in Waynesboro, VA and own offices and facilities in a
number of locations within our operating markets. We believe that our current
facilities are adequate to meet our needs in our existing markets for the
foreseeable future. The table below provides the location, description and
approximate square footage of our material properties.
<TABLE>
<CAPTION>
Approximate Square
Location Property Description Footage
------------------- ------------------------------- ------------------
<S> <C> <C>
Clifton Forge, VA Exchange Building and Equipment 4,100
Directory Service Center(1) 15,700
Covington, VA Exchange Building and Equipment 18,000
Plant Service Center 11,900
Potts Creek, VA Exchange Building and Equipment 500
Waynesboro, VA Corporate Headquarters 26,000
PCS Operations Building 14,400
Customer Care Center 31,000
Retail Store 6,400
Directory Service Center(1) 15,700
Exchange Building and Equipment 36,200
Plant Service Center 8,750
Winchester, VA Directory Service Center(1)(2) 17,500
</TABLE>
(1) Each of these facilities is being leased to telegate AG in connection with
the sale of our directory service operations.
(2) This directory assistance call center is housed in an approximately 33,000
square foot building. Of that 33,000 square feet, approximately 15,500
square feet is unrenovated and available for directory assistance or other
expansion needs.
Employees
As of June 30, 2000, we employed 1,058 full-time and 50 part-time persons.
Of these employees, 135 are included in one of three collective bargaining units
that cover each of our ILEC, cable and security operations. We have collective
bargaining agreements with each of the collective bargaining units. The
agreement with the ILEC unit expires June 30, 2002, and the agreements with each
of the cable and security units expire March 31, 2003. We believe that we have
good relations with our employees.
Legal Proceedings
We are involved in routine litigation in the ordinary course of our
business. We do not believe that any pending or threatened litigation of which
we are aware would have a material adverse effect on our financial condition or
results of operations.
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Regulation
Overview
Our communications services are subject to varying degrees of federal,
state and local regulation. Under the Communications Act of 1934, as amended by
the Telecommunications Act of 1996, or the Telecommunications Act, the FCC has
jurisdiction over the regulation of interstate and international common carrier
services and over the allocation, licensing, and regulation of radio services.
At the federal level, the Federal Aviation Administration also regulates antenna
structures used by us and the Department of Justice shares jurisdiction with the
FCC over the competitive aspects of communications mergers and acquisitions. Our
common carrier services are also regulated to different degrees by state public
service commissions, and local zoning and public works authorities have
jurisdiction over public rights-of-way and antenna structures that can affect
the coverage and speed of roll-out of our services. In recent years, the
regulation of the communications industry has been in a state of transition as
the United States Congress and various state legislatures have passed laws
seeking to foster greater competition in communications markets. The FCC and
state regulatory commissions have adopted many new rules to implement this
legislation and encourage competition.
At present, many of the services we offer are unregulated or subject only
to minimal regulation. Our Internet services are not considered to be common
carrier services, although regulatory treatment of Internet services is evolving
and such services may become subject, at least in part, to some form of common
carrier regulation. Our wireless services, including analog cellular and digital
PCS, are considered commercial mobile radio services and subject to common
carrier regulation. At this time, however, the FCC has declined to impose any
rate regulation on such services and the states are preempted from engaging in
entry or rate regulation, although the states may regulate the other terms and
conditions of such offerings and may petition the FCC for the right to extend
their regulations under certain circumstances.
Changes in rules or regulatory policy by the FCC and state regulatory
commissions can have a significant impact on the pricing and competitive aspects
of our services and we could become subject to more pervasive regulations, or
have new aspects of our operations regulated, at any time. The following summary
of regulatory developments and legislation does not purport to describe all
present and proposed federal, state and local regulations and legislation
affecting the communications industry. Certain of these and other existing
federal and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which this industry operates. Neither the outcome of
these proceedings, nor their impact upon the communications industry or our
services can be predicted at this time.
Federal Common Carrier Regulation
Interstate common carriers are subject to obligations under the
Telecommunications Act, including, among other things, requirements to:
. provide service upon reasonable request;
. avoid unjust or unreasonable discriminations among customers;
. obtain prior approval for entry into and exit from certain
activities;
. file and maintain tariffs describing their rates, terms and
conditions for certain services; and
. interconnect with other carriers, including obligations to unbundle
service offerings in certain circumstances, and provide reciprocal
compensation.
In addition, common carriers are subject to technical, funding, and other
requirements under the Telecommunications Act relating to, among other things,
providing operator services and pay-per-call services; assisting law enforcement
agencies with electronic surveillance and 911 response; and enhancing access to,
and the utility of, communications services by individuals with disabilities.
Common carriers must also pay into funding pools for, among other things,
universal service, numbering plan administration, and, telecommunications relay
services for individuals with hearing and speech disabilities. These regulatory
obligations impose direct and indirect costs on us and can limit our ability to
take advantage rapidly of market opportunities.
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Federal Regulation of the Wireless Communications Industry
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless communications systems in the United
States. CMRS providers are considered "common carriers" and are subject to the
obligations of such carriers, except where specifically exempted by the FCC. For
example, the FCC has concluded that CMRS providers are entitled to enter into
reciprocal compensation arrangements with local exchange carriers, but has
declined at this time to classify CMRS providers themselves as local exchange
carriers subject to the obligations of the Telecommunications Act. These
regulations could change at some point in the future and impose additional
operating costs or restrictions on us.
Besides the general common carrier regulations, the Telecommunications Act
also imposes obligations specifically on radio licensees. Radio licensees, for
example, must generally obtain prior approval for the assignment of radio
licenses and for the transfer of control of a radio licensee. There are also
restrictions on non-U.S. ownership of classes of radio licenses and prohibitions
on radio license ownership by certain entities found guilty of certain criminal
offenses. Radio licenses are also granted only for limited terms, are subject to
modification through rulemaking proceedings, and do not confer property rights
on the licensee. Radio licenses may be revoked for violations of the
Telecommunications Act or the FCC rules, radio licensees are subject to the
FCC's enforcement authority to levy fines and other punishments, and certain
licenses subject to federal financing may be canceled for nonpayment. While we
believe we are in compliance with the Telecommunications Act and the FCC rules,
any violations may adversely affect our assets and financial status.
The FCC has also enacted CMRS regulations, and has enacted service-
specific PCS and cellular regulations, that apply to our operations. The CMRS
regulations, among other things, mandate compliance with enhanced 911 location
determination requirements for mobile carriers, limit the amount of spectrum in
which a carrier may have interests in any area, and require carriers to offer
certain roaming capabilities as well as to offer their services for resale.
Shortly, CMRS carriers will also have to make network changes to implement local
number portability, which allows end users to retain their telephone number when
switching service providers.
The service-specific PCS and cellular regulations govern the licensing,
technical and operational requirements for such services. These regulations,
among other things, limit radiated power, license area boundaries, and
transmission characteristics. Such regulations also require the use of approved
equipment and compliance with the National Environmental Policy Act, which,
among other things, regulates the exposure of humans to radio frequency
emissions for health and safety reasons. The service-specific rules also provide
build-out benchmarks and set a 10-year license term, subject to renewal. Digital
PCS and analog cellular carriers failing to meet build-out requirements are
subject to license cancellation or retraction of their licensed area. Such
carriers do receive a renewal expectancy, which creates a presumption that
renewal is in the public interest, if they comply with the Act and FCC rules and
provide "substantial service" to the public during their license terms. While we
believe we are in material compliance with these requirements and will satisfy
all material build-out requirements, which should enable us to renew our
licenses, the loss of any licenses would have a material adverse affect on our
operations.
We also hold certain digital PCS and other radio licenses under the FCC's rules
for designated entities, which enabled us to take advantage of bidding credits
and federal financing because we met certain financial limits. These rules,
however, restrict us from entering into certain transactions and seeking certain
investments that may cause a change in our status. The FCC's designated entities
rules provide for, among other things, a number of disclosure and trafficking
restrictions to ensure that benefits received by designated entities are not
assigned to non-qualifying entities. Licenses set aside for designated entities
cannot be assigned, and control of a designated entity holding such licenses
cannot be transferred for at least five years from the date of license grant
except to other designated entities. If a designated entity licensee seeks to
undergo a transfer of control or to assign its licenses, it may be required to
pay back all, or a portion, of its bidding credits and government financing
benefits and to pay off all debt owed to the federal government.
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Federal Regulation of ILEC, CLEC and Interexchange Services
The Telecommunications Act requires ILECs to provide access to their
networks to competing carriers. Among other things, the Telecommunications Act
requires ILECs to:
. provide physical collocation, which allows CLECs and other
interconnectors to install and maintain their own network equipment
in ILEC central offices, or virtual collocation if requested or if
physical collocation is demonstrated to be technically infeasible;
. unbundle components of their local service networks so that other
providers of local service can compete for a wider range of local
services;
. establish "wholesale" rates for their services to promote resale by
CLECs and other competitors;
. allow interconnection for the provision of local services at any
technically feasible point; and
. disclose certain technical information.
In addition, all local exchange carriers, including CLECs, must:
. establish number portability, which will allow a customer to retain
its existing phone number if it switches its local exchange carrier;
. permit resale of telecommunications services;
. establish dialing parity, which ensures that customers will not
detect a quality difference in dialing telephone numbers or accessing
operators, directory assistance, or emergency services;
. provide communications carriers nondiscriminatory access to telephone
poles, ducts, conduits and rights-of-way; and
. compensate carriers for terminating local traffic that originated on
their networks.
Interconnection Agreements. In order to obtain access to an ILEC's network,
a competitive carrier is required to negotiate an interconnection agreement with
the ILEC covering the network elements it desires to use. In the event the
parties cannot agree, the matter is submitted to the state public service
commission for binding arbitration. Expired agreements continue in effect as
interim agreements until replaced by new agreements that may be applied
retroactively. The Telecommunications Act's general interconnection requirements
apply to interexchange carriers and to all other providers of communications
services, although the terms and conditions for interconnection provided by
these carriers are not regulated as strictly as interconnection provided by the
ILECs. This may provide us with the ability to reduce our access costs by
interconnecting directly with non-ILECs, but may also cause us to incur
additional administrative and regulatory expenses in replying to interconnection
requests from other carriers.
Access Charges. The FCC has fundamentally restructured the "access charges"
that ILECs charge to interexchange carriers and end user customers to connect to
the ILEC's network to permit increased pricing flexibility to ILECs subject to
the FCC's price cap rules as competition becomes established in their markets.
In August 1999, the FCC adopted an order providing additional pricing
flexibility to ILECs subject to price cap regulation in their provision of
interstate access services, particularly special access and dedicated transport.
Some of the actions taken by the FCC would immediately eliminate rate scrutiny
for "new services" and permit the establishment of additional geographic zones
within a market that would have separate rates. Additional and more substantial
pricing flexibility will be given to ILECs as specified levels of competition in
a market are reached through the collocation of competitive carriers and their
use of competitive transport. This flexibility will include, among other items,
customer specific pricing, volume and term discounts for some services and
streamlined tariffing.
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As part of the same August order, the FCC initiated another proceeding to
consider increased pricing flexibility proposals for ILECs access charges. This
proceeding also will consider the reasonableness of CLEC access rates and seeks
comment on whether the FCC should adopt rules to regulate CLEC access charges.
In addition, the FCC's rulemaking is examining whether any statutory or
regulatory constraints prevent an interexchange carrier from declining to accept
a CLEC's access services, and if so under what circumstances. The outcome of
this rulemaking is not possible to predict.
In late May, the FCC adopted an access reform proposal sponsored by AT&T
and several regional bell operating companies. That plan, which applies to all
price cap-regulated ILECs, will substantially lower ILEC switched access
charges, restructure charges imposed on end users, and establish additional,
explicit funding for universal service.
Tariffing of Interstate Services. We must file federal tariffs for the
interstate access services offered by our ILEC affiliates. CLECs may, but are
not required to, file interstate access tariffs. Interexchange carriers, in
contrast, generally are not permitted to file new tariffs for domestic
interstate services and must withdraw existing domestic interstate tariffs by
January 31, 2001. International services must still be tariffed. Instead,
interexchange carriers must post their rates for domestic interexchange services
on their web sites. Because tariffs had the force of law and strictly limited
carriers' liability, detariffing may increase administrative costs for
interexchange carriers and expose them to greater liability.
Review of Universal Service Requirements. The FCC and the states are
required to establish a "universal service" program to ensure that affordable,
quality landline communications services are available across the United States.
We are required to contribute to the federal universal service program as well
as existing state programs. The FCC has determined that our "contribution" to
the federal universal service program is a variable percentage of interstate
"end-user communications revenues." Although many states are likely to adopt a
similar assessment methodology, the states are free to calculate communications
service provider contributions in any manner they choose as long as the process
is not inconsistent with the FCC's rules. At the present time it is not possible
to predict the extent of our total federal and state universal service
assessments or our ability to recover from the universal service fund for
service provided to high cost areas.
State Regulation of ILEC, CLEC and Interexchange Services. Most states have
some form of certification requirement which requires telecommunication
providers to obtain authority from state regulatory commissions prior to
offering common carrier services. State regulatory commissions 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 Telecommunications Act, public service
commissions 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. State regulatory commissions may also formulate rules regarding fees
imposed on providers of communications services within their respective states
to support state universal service programs.
The Telecommunications Act preempts state statutes and regulations that
restrict the provision of CLEC services. As a result, we are free to provide the
full range of intrastate local and long distance services in all states which we
currently operate, and in any states into which we may wish to expand. While
this action greatly increases our potential customer base, it also increases the
amount of competition to which we may be subject.
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We are subject to regulation in Virginia by the State Corporation
Commission, or SCC. Our tariffs are approved by and on file with the SCC for
ILEC services in our certificated service territory in and around Waynesboro,
Virginia and Clifton Forge, Virginia. We are also certified as an ILEC in West
Virginia and Tennessee. We provide CLEC services to businesses in
Charlottesville, Harrisonburg, Lexington, Lynchburg, Staunton and Winchester,
Virginia and Huntington and Charleston, West Virginia and our rates for such
CLEC service may fluctuate based on market conditions.
Internet and DSL
On November 9, 1999, the FCC released a decision that concluded that
advanced services, such as DSL, sold by ILECs to ISPs on a wholesale basis and
bundled by the ISP with its other services are not subject to the
Telecommunications Act's discounted resale obligations. This decision will allow
ILECs to provide ISPs with special rate packages for DSL without having to
provide a further discount to CLECs. Our Internet subsidiaries may obtain such
special pricing.
In addition, on November 18, 1999, the FCC ordered ILECs to share their
telephone lines with providers of high speed Internet access and other data
services. This action permits CLECs to obtain access to the high-frequency
portion of the local loop from the ILECs over which the ILECs provide voice
services. As a result, a CLEC will be able to provide DSL-based services over
the same telephone lines simultaneously used by the ILEC for its voice services,
and will no longer need to purchase a separate local loop from the ILEC in order
to provide DSL services. This ruling may make it easier for CLECs, including
ourselves and our competitors to provide DSL services.
Calls placed by end-users to Internet service providers are subject to
reciprocal compensation payments under most existing interconnection agreements.
On February 26, 1999, the FCC decided that these calls are primarily interstate
traffic for jurisdictional purposes and that the Telecommunications Act does not
require reciprocal compensation to be paid on them. The decision asserts that
because no federal rules governing inter-carrier compensation for this traffic
currently exist, the determination of whether it is subject to reciprocal
compensation may be made by state regulatory commissions. The FCC's decision
states that state commission decisions mandating the payment of reciprocal
compensation for Internet service providers' traffic may conform with federal
law. The FCC has, however, initiated proceedings to address the issue on a
prospective basis. The United States Court of Appeals for the District of
Columbia Circuit on March 24, 2000 vacated and remanded the FCC's February 26,
1999 decision and required the FCC to explain the rationale for its decision.
Another significant issue facing Internet service providers is whether they
will be given access to broadband systems operated by cable television
companies. ISPs generally believe that mandatory access is appropriate and would
allow them to provide competitive high-speed broadband service to more
customers. Although the issue continues to be debated and legislation has been
introduced to Congress to mandate access to broadband cable networks, the FCC
has thus far declined to take action on the matter. The ultimate outcome of this
issue could have a significant impact on the success of ISPs.
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OUR MANAGEMENT
Directors and Executive Officers
Our executive officers are elected annually by the board of directors and
serve until their successors are duly elected and qualified. Pursuant to the
terms of the securities purchase agreements and certificates of designation
relating to the issuance and sale of our Series B Preferred Stock, Welsh Carson
has designated Anthony J. de Nicola as its board representative.
Set forth below are the names, ages and positions of our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age Position
--------------------------- --- --------------------------------------------------
<S> <C> <C>
James S. Quarforth......... 46 Chairman of the Board and Chief Executive Officer
Carl A. Rosberg............ 47 President, Chief Operating Officer and Director
David R. Maccarelli........ 48 Senior Vice President--Operations and Engineering
Michael B. Moneymaker...... 42 Senior Vice President and Chief Financial Officer,
Treasurer and Secretary
Don Marie Persing.......... 48 Senior Vice President
Warren C. Catlett.......... 40 Senior Vice President--Corporate Development
Phyllis H. Arnold.......... 51 Director
William W. Gibbs, V........ 59 Director
C. Wilson McNeely, III..... 57 Director
John B. Mitchell, Sr....... 59 Director
John N. Neff............... 48 Director
Anthony J. de Nicola....... 36 Director
</TABLE>
Our board of directors is comprised of three classes. The members of each class
are elected annually to serve staggered three-year terms as follows:
. Class I directors include Messrs. McNeely and Rosberg, who have been
elected to serve until 2001;
. Class II directors include Messrs. Mitchell and Quarforth, who have
been elected to serve until 2002 and includes Mr. de Nicola, who will
stand for election at the next annual shareholders meeting; and
. Class III directors include Ms. Arnold and Messrs. Neff and Gibbs,
who have been elected to serve until 2003.
James S. Quarforth became Chairman of the Board and Chief Executive Officer
on May 1, 1999. Mr. Quarforth has served as a director of CFW Communications
since 1987. Previously, he was President and Chief Executive Officer since 1990.
He has also served as a director of Virginia Financial Corporation, Illuminet
Holdings, Inc. and, until September 23, 1999, served as a director of American
Telecasting, Inc.
Carl A. Rosberg became President and Chief Operating Officer on May 1,
1999. Mr. Rosberg has served as a director of CFW Communications since 1992.
Previously, he was Senior Vice President until May 1, 1999. He also served as a
director of American Telecasting, Inc. until September 23, 1999.
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David R. Maccarelli became Senior Vice President -- Operations and
Engineering in May 2000. From July 1999 to April 2000 he served as President of
Virginia operations. From January 1994 to June 1999 he served as Senior Vice
President. From January 1993 to December 1993, he served as Vice President --
Network Services. From June 1974 to December 1992, prior to joining CFW
Communications, he held numerous leadership positions with Bell Atlantic. These
positions encompassed operations, engineering, regulatory and business
development.
Michael B. Moneymaker became Senior Vice President and Chief Financial
Officer, Treasurer and Secretary in April 2000. From January 1999 to March 2000,
he was Vice President and Chief Financial Officer, Treasurer and Secretary. From
October 1995 to December 1998 he served as Vice President of Finance.
Previously, he was a Senior Manager for Ernst and Young from October 1989 until
October 1995.
Don Marie Persing became Senior Vice President in July 1999. From May 1998
to June 1999 she served as Vice President--Human Resources. Prior to joining us,
from December 1995 to April 1998, she was employed by PrimeCo Personal
Communications as Vice President of Customer Care. From August 1994 to November
1995, she served as operations manager for CFW's directory assistance operation.
From June 1974 to January 1994, she held numerous leadership positions with AT&T
and C&P Telephone. These positions encompassed customer care, directory
assistance, human resources, network engineering, software development and large
project management.
Warren C. Catlett became Senior Vice President--Strategy and Business
Development in April 2000. From January 1997 to March 2000, he was Vice
President--Strategy and Business Development. Prior to that, he had served as
director of Business Development since January 1994. Previously, he served as
Planning and Regulatory Manager from April 1992 until January 1994 and Revenue
Requirements Manager from May 1990 until April 1992. Previously, he was
responsible for a variety of tariff, settlements, and regulatory matters at the
National Exchange Carrier Association.
Phyllis H. Arnold has been a director of CFW Communications since 1999. She
is the Senior Executive Vice President and Chief Operating Officer of One Valley
Bancorp, Inc. She has served on the board of directors of One Valley Bancorp
since 1993. Mrs. Arnold has been the President and Chief Operating Officer of
One Valley Bank, N.A. since 1991.
William W. Gibbs, V has been a director of CFW Communications since 1977.
He has been President of Comprehensive Computer Consultants, Inc. since 1994.
C. Wilson McNeely, III has been a director of CFW Communications since
1995. He has been Chairman of the Board of Eagle Corporation, a manufacturer of
concrete products and distributor of fuel oils, since 1997. Prior to 1997 he was
President of Eagle Corporation.
John B. Mitchell, Sr. has been a director of CFW Communications since 1989.
He has been President and Chairman of the Board of Hammond--Mitchell, Inc., a
construction contractor since 1968.
John N. Neff has been a director of CFW Communications since 1995. He has
been President and Chief Executive Officer of Nielsen Builders, Inc. since 1988.
Anthony J. de Nicola was appointed a director of CFW Communications in July
2000. He has served as a managing member or general partner of the respective
sole general partners of Welsh, Carson, Anderson & Stowe VIII and IX, L.P.s and
other associated investment partnerships since 1994. Previously he worked for
William Blair & Co. for four years in the merchant banking area. He is a
director of Centennial Communications, BTI Telecom Corp., Valor
Telecommunications, LLC, Alliance Data Systems, Inc. and several private
companies.
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We expect that, following our merger with R&B Communications, J. Allen
Layman, who is currently Chief Executive Officer of R&B Communications, will
become President and Chairman of our Board of Directors. We also expect that
John B. Williamson, III will become one of our directors. Mr. Williamson is
currently on the board of R&B Communications and is President and Chief
Executive Officer of RGC Resources, Inc.
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PRINCIPAL SHAREHOLDERS
The following table presents information, as of September 25, 2000,
regarding the beneficial ownership of our common stock by:
. each person known to us to be a beneficial owner of five percent or more
of our common stock;
. each director;
. each executive officer named under "OUR MANAGEMENT -- Directors and
Executive Officers" on page 120; and
. all directors and executive officers as a group.
Under Securities Exchange Commission rules, beneficial ownership of our
common stock includes any shares as to which a person, directly or indirectly,
has or shares voting power or investment power and also any shares as to which a
person has the right to acquire such voting or investment power within 60 days
through the exercise of an option, warrant, right of conversion of a security or
otherwise. Unless otherwise indicated in the footnotes to this table, each of
the beneficial owners named in the table has sole voting and investment power
with respect to their shares of our common stock. Unless otherwise noted, the
address for each of our directors and executive officers is c/o CFW
Communications Company, 401 Spring Lane, Suite 300, Waynesboro, Virginia 22980.
As of September 25, 2000, we had 13,129,653 shares of common stock outstanding.
For purposes of calculating the percentage of total voting power below, we have
included in the number of outstanding shares of common stock 4,146,228(1) shares
of common stock that may be acquired upon the conversion of our Series B and
Series C preferred stock, which votes with our common stock on an as-converted
basis.
(1) This amount does not give effect to shareholder approval of the proposal to
modify the Series B, Series C and Series D preferred stock.
<TABLE>
<CAPTION>
Number of Shares Percentage
Beneficially of Total
Name and Address of Beneficial Owner Owned (1) Voting Power
-------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Welsh, Carson, Anderson & Stowe(2)(3)......................... 4,463,049 14.9%
James S. Quarforth(4)......................................... 143,086 *
Carl A. Rosberg(5)............................................ 85,698 *
David R. Maccarelli(6)........................................ 41,016 *
Michael B. Moneymaker(7)...................................... 26,827 *
Don Marie Persing(8).......................................... 7,532 *
Phyllis H. Arnold(9).......................................... 2,302 *
Warren C. Catlett(10)......................................... 16,273 *
William W. Gibbs, V(11)....................................... 161,581 *
C. Wilson McNeely, III(12).................................... 19,008 *
John B. Mitchell, Sr(13)...................................... 6,511 *
John N Neff(14)............................................... 5,055 *
Anthony J. de Nicola(15)...................................... 6,764 *
All directors and executive officers as a group (12 persons).. 521,653 3.0%
</TABLE>
* Less than one percent.
(1) Includes shares held by spouses, children, trusts, and companies in which
the director or officer owns a controlling interest.
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<PAGE>
(2) Gives effect to the agreement of Welsh Carson not to vote more than 14.9%
of the votes entitled to be cast. Absent this agreement, and assuming
shareholder approval of the proposal to modify various terms of the
outstanding series of preferred stock, Welsh Carson would have the power
to vote 24.5% of the votes entitled to be cast. Of these shares, Welsh,
Carson, Anderson & Stowe VIII, L.P. and Welsh, Carson, Anderson & Stowe
IX, L.P. each own 2,001,466 shares beneficially and of record. 300,000 of
the shares are owned beneficially and of record by WCAS Capital Partners
III, L.P. and 160,118 of the shares are owned beneficially and of record
by individuals who are members of the limited liability company that
serves as the sole general partners of Welsh, Carson, Anderson & Stowe
VIII and IX, L.P.s, including Mr. de Nicola and individuals employed by
its investment advisor. Each of Welsh, Carson, Anderson & Stowe VIII L.P.
and Welsh, Carson, Anderson & Stowe IX, L.P. disclaim beneficial
ownership of all shares except to the extent owned of record by them. The
address for Welsh, Carson, Anderson & Stowe VIII, L.P. and Welsh, Carson,
Anderson & Stowe IX, L.P. is 320 Park Avenue, Suite 2500, New York, New
York 10022. Morgan Stanley Dean Witter may have the right, by grant of a
proxy from Welsh Carson, to cast votes in excess of 14.9% of the
outstanding votes that Welsh Carson otherwise would be entitled to vote.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Equity Investment"
on page 125.
(3) Assumes shareholder approval of the proposal to modify various terms of
each outstanding series of preferred stock and includes approximately
2,439,024 shares issuable upon conversion of 100,000 shares of Series B
preferred stock, approximately 1,279,581 shares issuable upon conversion
of 55,022 shares of Series C preferred stock, approximately 444,444
shares issuable upon the exercise of warrants to purchase common stock at
an initial exercise price of $50.00 per share, and 300,000 shares
issuable upon the exercise of warrants to purchase common stock at an
initial exercise price of $.01 per share. Welsh Carson has also purchased
69,978 shares of our Series D preferred stock. Upon shareholder approval,
the Series D preferred stock will convert into 69,978 shares of Series C
preferred stock, which are convertible into approximately 1,555,067
shares of common stock.
(4) Includes 89,700 shares which Mr. Quarforth has the right to acquire
through the exercise of stock options.
(5) Includes 55,450 shares which Mr. Rosberg has the right to acquire through
the exercise of stock options.
(6) Includes 37,516 shares which Mr. Maccarelli has the right to acquire
through the exercise of stock options.
(7) Includes 17,400 shares which Mr. Moneymaker has the right to acquire
through the exercise of stock options.
(8) Includes 4,500 shares which Ms. Persing has the right to acquire through
the exercise of stock options.
(9) Includes 1,302 shares which Ms. Arnold has the right to acquire through
the exercise of stock options.
(10) Includes 14,535 shares which Mr. Catlett has the right to acquire through
the exercise of stock options.
(11) Includes 1,022shares which Mr. Gibbs has the right to acquire through the
exercise of stock options.
(12) Includes 1,322 shares which Mr. McNeely has the right to acquire through
exercise of stock options.
(13) Includes 1,592 shares which Mr. Mitchell has the right to acquire through
the exercise of stock options.
(14) Includes 4,055 shares which Mr. Neff has the right to acquire through the
exercise of stock options.
(15) Excludes 4,456,285 shares owned beneficially and of record by Welsh,
Carson, Anderson & Stowe VIII, L.P., Welsh, Carson, Anderson & Stowe IX,
L.P., WCAS Capital Partners III, L.P. and other individuals who are
affiliated with Welsh Carson. Mr. de Nicola disclaims beneficial
ownership of such shares. See footnote (2) above. Includes 778 shares
issuable upon the exercise of warrants to purchase common stock at an
initial exercise price of $50.00 per share.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Investment
Welsh Carson has purchased 100,000 shares of Series B preferred stock for
$100.0 million, and Morgan Stanley Dean Witter has purchased 12,500 shares of
the Series B preferred stock for $12.5 million. The Series B preferred stock is
entitled to receive dividends at an annual rate of 8.5% of the stated value and
is convertible into shares of our common stock at any time at the option of the
holders at a conversion rate equal to the stated value divided by $41.00. In
connection with the issuance of the Series B preferred stock, we issued to Welsh
Carson and Morgan Stanley Dean Witter warrants to purchase 500,000 shares of our
common stock at an exercise price of $50.00 per share.
Welsh Carson has also purchased 55,022 shares of Series C preferred stock
for $55.0 million and 69,978 shares of Series D preferred stock for $70.0
million. Morgan Stanley Dean Witter has purchased 5,278 shares of that same
Series C preferred stock for $5.3 million and 7,222 shares of that same Series D
preferred stock for $7.2 million. The Series C preferred stock is entitled to
receive dividends at an annual rate of 8.5% of the stated value and is
convertible into shares of common stock at any time at the option of the holders
at a conversion rate equal to the stated value divided by $43.00. The Series D
preferred stock is entitled to receive dividends at an annual rate of 18.0% of
the stated value and is automatically converted into shares of Series C
preferred stock upon our shareholders' approval of such conversion. Upon such
approval, the dividend rate on the Series C preferred stock will decrease to
5.5%, and the conversion price will increase to $45.00.
The holders of the Series B preferred stock are entitled to elect in the
aggregate two of our directors. Welsh Carson has agreed with CFW that it will
elect one director until such time as Federal Communications Commission
regulations would permit Welsh Carson to control the election of more than 14.9%
of the directors. As long as the Series B preferred stock is outstanding, CFW
will have no more than 11 directors on the board, unless Welsh Carson otherwise
agrees. The holders of the Series B and Series C preferred stock are entitled
to vote with the holders of our common stock on an as-converted basis. Until
our shareholders approve full voting rights, Welsh Carson will exercise voting
rights only with respect to shares representing less than 20% of the votes
entitled to be cast by all holders of voting securities at the time of any such
vote, and will vote any remaining shares in the same proportion as our other
shareholders. The Series D preferred stock is non-voting. Notwithstanding
shareholder approval of full voting rights, Welsh Carson has agreed with CFW not
to vote more than 14.9% of the votes entitled to be cast by all holders of
voting securities, until such time as Federal Communications Commission
regulations would permit full voting rights. Welsh Carson may grant to Morgan
Stanley, the other holder of the Series B and Series C preferred stock, a proxy
to cast Welsh Carson's votes in excess of 14.9%. Shares for which a proxy has
not been granted will be voted in the same proportion as our other shareholders.
In connection with these equity investments, we have paid to Welsh Carson
all reasonable out-of-pocket expenses of Welsh Carson.
Subordinated Notes
WCAS Capital Partners III, L.P., an affiliate of Welsh Carson, has
purchased at par $95.0 million aggregate principal amount of 13.5% subordinated
notes. WCAS Capital will not be permitted to transfer any of the subordinated
notes to a third party for a period of one year from the closing date of the
issuance of such subordinated notes without the prior consent of Morgan Stanley
& Co. Incorporated.
Affiliated Transactions
During 2000, CFW awarded a construction project to Nielsen Builders, Inc.
This project related to the renovations of a new customer care center. It is
anticipated that the renovations will cost approximately $1.3 million. In 1999,
CFW awarded a construction project for a new $3.7 million corporate facility to
Nielsen Builders through a competitive bidding process. Construction of the new
facility commenced in 2000. In 1998, CFW paid $2.7 million to Nielsen Builders
for the construction of our Waynesboro customer care center and certain
additional construction activities, which were completed in 1998. The
construction project for the customer care center had been awarded to Nielsen
Builders in 1997 through a competitive bidding process. Mr. John Neff, currently
a member of our board of directors, serves as President and Chief Executive
Officer of Nielsen Builders.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Credit Facility
On July 26, 2000 we entered into an agreement for a $325 million senior,
secured credit facility provided by a syndicate of lenders headed by Morgan
Stanley Senior Funding, Inc., as administrative agent. This facility is in the
form of a $100 million revolving credit facility and $225 million in term loans
and term loan commitments, divided into a $50 million Term Loan A, a $100
million Term Loan B and a $75 million Term Loan C. The following is a summary of
certain provisions of our new senior secured credit facility. This summary is
not complete.
Term Loan B was used to finance, in part, the acquisition of Richmond-
Norfolk PCS. For a description of this transaction, see "OUR BUSINESS -- Recent
Developments -- Richmond-Norfolk PCS" on page 101. Borrowings under Term Loan A
are available until July 26, 2001 under the credit agreement. These borrowings
and borrowings under the revolving credit facility were used to refinance our
existing senior debt and debt of the Alliances to the RTFC. We also intend to
use these borrowings for working capital and general corporate purposes of ours
and the Alliances, up to a limit of $250 million in total provided by us to the
Alliances.
The revolving credit facility is repayable in a single payment on the
seventh anniversary of closing. Amounts outstanding under Term Loan A at the end
of one year are repayable beginning the fourth year after closing in increasing
quarterly installments, with a final maturity on the seventh anniversary of
closing. Term Loan B is repayable beginning in the third year after closing in
quarterly installments equal to approximately 1% per year of principal during
each year through the seventh year, with the entire balance of Term Loan B
repayable between the seventh and eighth anniversaries of closing. Term Loan C
is repayable in a single payment on the eighth anniversary of closing.
We may prepay any portion of the senior credit facilities at any time
without penalty, except that we must compensate the lenders for any breakage or
other reasonable funding costs. We must repay any outstanding loans out of cash
we receive from the following events:
. subject to exceptions for amounts reinvested in our businesses, 100%
of proceeds of (1) asset sales and (2) "Extraordinary Events," such
as income tax refunds, pension reversions, receipt of certain
insurance proceeds, etc.;
. 100% of proceeds of the issuance of additional debt or equity after
the closing; and
. 50% of excess annual cash flow.
We may choose to have interest accrue on loans outstanding under the senior
credit facilities at rates based on the adjusted prime rate or the fully reserve
adjusted London interbank offered rate, or LIBOR, plus an applicable margin. The
applicable margin will be (1) in respect of the revolving credit facility and
the Term Loan A, (x) for the first six months after the closing date of the
credit facility, 3.25% per annum over the LIBOR rate and 2.25% over adjusted
prime and (y) thereafter, the applicable percentage per annum may vary depending
on our leverage ratio, (2) in respect of the Term Loan B, 4.00% per annum over
the LIBOR rate and 3.00% per annum over adjusted prime and (3) in respect of the
Term Loan C, 2.75% per annum over the LIBOR rate and 1.75% per annum over
adjusted prime. At any time when there is a default under the senior credit
facility, the lenders have the right to increase all interest rates by 2% per
annum.
In addition, we must pay (1) an agency fee, (2) commitment fees and (3)
letter of credit fees. The agency fee, payable to the administrative agent, is
$85,000 a year. The commitment fee is payable periodically on the unused portion
of the $100 million revolving credit commitment and during the first year after
the closing date on any unused portion of the Term Loan A at a rate equal to
between .50% and .75% per annum depending on the amounts drawn under the
revolving credit facility and the Term Loan A. Letter of credit fees are payable
on the face amount of letters of credit we ask be issued for our account, at a
rate equal to the margin over LIBOR that is applicable at the time to revolving
credit loans that bear interest based on LIBOR paid proportionately to all
lenders, plus an additional .25% for the account of the issuing bank.
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Our obligations under the senior credit facility are secured by
substantially all of our assets, including real property. We have pledged to the
collateral agent for the lenders' benefit, our equity interests in any
subsidiaries, including the Alliances. Our subsidiaries (other than the
Alliances) have guaranteed our obligations under the senior credit facility and
have also pledged their assets to secure their guarantees. The Alliances have
separately guaranteed our obligations to the lenders, to the extent of the
amount we have invested or will invest (by loans or in the form of equity) in
them from proceeds of the senior credit facility.
During the term of the senior credit facility, we will also be bound by
certain financial covenants, as follows:
(1) until December 31, 2002, a maximum ratio of senior debt to total
capital, a maximum ratio of total debt to total capital, minimum aggregate
service revenues, minimum number of subscribers, and minimum EBITDA and (2)
after December 31, 2002, a maximum total debt to EBITDA, a maximum senior
secured debt to EBITDA, a minimum interest coverage ratio and a minimum debt
service coverage ratio.
In addition, we are required to make financial statements and other reports
available to the lenders on a regular basis and there are limits on our ability
to incur additional debt, to grant liens on our property, to declare dividends
or make other distributions to our shareholders, or to repurchase our own stock
or prepay other debt, to make capital expenditures or loans to or investments in
others, to merge, consolidate, sell and buy assets or acquire other businesses,
to engage in transactions with our affiliates (other than subsidiary guarantors)
or to amend our certificate of incorporation.
The senior credit facility provides for customary events of default,
including non-payment, breaches of covenants, making misleading or inaccurate
representations and warranties, cross-default to certain other debt, certain
events of bankruptcy and insolvency, ERISA violations, and change in control.
In September 2000, we entered into two five-year interest rate swap
agreements to modify the interest characteristics on $162.5 million of debt
under the $325 million senior credit facility from a variable rate to a fixed
rate basis. These agreements involve our paying an amount based on a fixed
interest rate of 6.8% and receiving an amount based on one-month London
Interbank Offered Rates (LIBOR) variable interest rate (6.6% at September 30,
2000), calculated on a $162.5 million notional amount. The senior credit
facility provides for payment of a LIBOR based variable interest rate plus an
interest rate ranging from 2.75% to 4.0%, depending on the respective loan
traunche. At September 30, 2000, we had $100 million of Term Loan B and $50
million of Term Loan C outstanding; the interest rate swap provided for a fixed
rate totaling 10.8% and 9.5% for the Term Loan B and Term Loan C, respectively.
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DESCRIPTION OF THE EXCHANGE NOTES
The outstanding notes were, and the exchange notes will be issued under an
Indenture, dated as of July 26, 2000, between CFW Communications Company, as
issuer, and The Bank of New York, as Trustee. A copy of the Indenture is being
filed as an Exhibit to this registration statement. The following summary of
certain provisions of the Indenture is not complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture.
As used in this "DESCRIPTION OF THE NOTES," the term "Company" means CFW
Communications Company and excludes any of its subsidiaries and the term
"exchange notes" means the exchange notes, unless otherwise indicated. Whenever
particular defined terms of the Indenture not otherwise defined herein are
referred to, such defined terms are incorporated herein by reference. For
definitions of certain capitalized terms used in the following summary, see "--
Certain Definitions" beginning on page 131.
The following description of the terms of the Indenture governing the
exchange notes is a summary. This summary does not restate the Indenture and
excludes certain definitions and complex legal terminology contained in the
Indenture. While we believe this summary contains all of the information about
the Indenture that is important to your decision to tender your notes or to
purchase the notes, it does not include all of the provisions of the Indenture
that you may feel are important. It is the Indenture, and not this summary, that
defines your rights as a noteholder. If you would like to read the Indenture in
its entirety, you may obtain a copy from us by contacting the Company or from
the SEC at the address set forth under "WHERE YOU CAN FIND MORE INFORMATION."
General
The notes will be unsecured (except to the extent described under "--
Security" on page 130) unsubordinated obligations of the Company, and will
mature on August 15, 2010. Each note will bear interest at the rate shown on the
front cover of this prospectus from the Closing Date or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the February 1 or
August 1 immediately preceding the Interest Payment Date) on February 15 and
August 15 of each year, commencing February 15, 2001.
If by the date that is six months after July 26, 2000, the Company has not
consummated a registered exchange offer for the notes or caused a shelf
registration statement with respect to resales of the notes to be declared
effective, the annual interest rate on the notes will increase by .5% until the
consummation of a registered exchange offer or the effectiveness of a shelf
registration statement. See "-- Registration Rights" on page 129.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 101 Barclay Street, Floor 21-W,
New York, New York 10286); provided that, at the option of the Company, payment
of interest may be made by check mailed to the Holders at their addresses as
they appear in the Security Register.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "-- Book-Entry; Delivery and Form" on page 158. No service charge will be
made for any registration of transfer or exchange of notes, but the Company may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
Subject to the covenants described under "--Covenants" on page 143 and
applicable law, the Company may issue additional notes under the Indenture. The
notes offered hereby and any additional notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
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Optional Redemption
General
The notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after August 15, 2005 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the redemption
date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the redemption date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing August
15, of the years set forth below:
Redemption
Year Price
---- -----
2005 106.500%
2006 104.333
2007 102.167
2008 and thereafter 100.000%
In addition, at any time prior to August 15, 2003, the Company may redeem
up to 35% of the principal amount of the notes with the Net Cash Proceeds of one
or more sales of Capital Stock of the Company (other than Disqualified Stock),
at any time or from time to time in part, at a redemption price (expressed as a
percentage of principal amount) of 113.0%, plus accrued and unpaid interest to
the Redemption Date (subject to the rights of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest due
on an Interest Payment Date); provided that at least 65% of the aggregate
principal amount of notes originally issued remains outstanding after each such
redemption and that notice of any such redemption is mailed within 60 days after
each such sale of Capital Stock.
Selection
In the case of any partial redemption, selection of the notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed or, if the notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no note of $1,000 in principal amount or
less shall be redeemed in part. If any note is to be redeemed in part only, the
notice of redemption relating to such note shall state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original note.
Sinking Fund
There will be no sinking fund payments for the notes.
Registration Rights
The Company has agreed with the Placement Agents, for the benefit of the
Holders, that the Company will use its best efforts, at its cost, to file and
cause to become effective a registration statement with respect to a registered
offer (the "exchange offer") to exchange the outstanding notes for an issue of
unsubordinated notes of the Company (the "exchange notes") with terms identical
to the outstanding notes (except that the exchange notes will not bear legends
restricting the transfer thereof). Upon such registration statement being
declared effective, the Company shall offer the exchange notes in return for
surrender of the outstanding notes. Such offer shall remain open for not less
than 20 business days after the date notice of the exchange offer is mailed to
Holders. For each outstanding note surrendered to the Company under the exchange
offer, the Holder will receive an exchange note of equal principal amount.
Interest on each exchange note shall accrue from the last Interest Payment Date
on which interest was paid on the outstanding notes so surrendered or, if no
interest has been paid on such notes, from the Closing Date. In the event that
applicable interpretations of the staff of the Securities and Exchange
Commission do not permit the Company to effect the exchange offer, or under
certain other circumstances, the Company shall, at its cost, use its best
efforts to
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cause to become effective a shelf registration statement (the "Shelf
Registration Statement") with respect to resales of the outstanding notes and to
keep such Shelf Registration Statement effective until the expiration of the
time period referred to in Rule 144(k) under the Securities Act after the
Closing Date, or such shorter period that will terminate when all notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. The Company shall, in the event of such a shelf
registration, provide to each Holder copies of the prospectus, notify each
Holder when the Shelf Registration Statement for the outstanding notes has
become effective and take certain other actions as are required to permit
resales of the outstanding notes. A Holder that sells its outstanding notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to such a Holder (including certain indemnification obligations).
In the event that the exchange offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after July 26, 2000, the annual interest rate borne by the notes will
be increased by .5% until the exchange offer is consummated or the Shelf
Registration Statement is declared effective.
If the Company effects the exchange offer, the Company will be entitled to
close the exchange offer 20 business days after the commencement thereof,
provided that it has accepted all notes theretofore validly surrendered in
accordance with the terms of the exchange offer. If you do not exchange your
outstanding notes for exchange notes in the exchange offer, or if your
outstanding notes are tendered but not accepted, your notes will continue to
have restrictions on transfer. In general, you may offer or sell any outstanding
notes only if the notes are registered under the Securities Act and applicable
state laws, or resold under an exemption from these laws. We do not intend to
register the outstanding notes under the Securities Act, other than in the
limited circumstances described in this Section.
This summary of certain provisions of the Registration Rights Agreement is
not complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the Registration Rights Agreement, which is filed as
an exhibit to the Registration Statement.
Security
The Indenture required that on the Closing Date, the Company must purchase
and pledge to the Trustee for the benefit of the Holders of the notes the
Collateral in such amount as will be sufficient upon receipt of scheduled
interest and principal payments of such securities, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Company, to provide for payment in full of the first four scheduled interest
payments due on the notes. The Company used approximately $69.6 million to
acquire the Collateral. The Collateral is pledged by the Company to the Trustee
for the benefit of the Holders of the notes pursuant to the Escrow Agreement and
will be held by the Trustee in the Collateral Account. Pursuant to the Escrow
Agreement, immediately prior to an Interest Payment Date on the notes, the
Company may either deposit with the Trustee from funds otherwise available to
the Company cash sufficient to pay the interest scheduled to be paid on such
date or the Company may direct the Trustee to release from the Collateral
Account proceeds sufficient to pay interest then due on the notes. In the event
that the Company exercises the former option, the Company may thereafter direct
the Trustee to release to the Company proceeds or Collateral from the Collateral
Account in like amount. A failure by the Company to pay interest on the notes
(including by instructing the Trustee to do so from proceeds of the Collateral
sufficient therefor) in a timely manner through the first four scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period.
The notes are secured in part by a first priority security interest in the
Escrow Agreement and in the Collateral Account and, accordingly, the Collateral
and the Collateral Account will also secure repayment of the principal amount of
the notes to the extent of such security. Under the Escrow Agreement, once the
Company makes the first four scheduled interest payments on the notes, all of
the remaining Collateral and any other amounts in the Collateral Account, if
any, will be released from the Collateral Account and thereafter the notes will
be unsecured.
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Ranking
The Indebtedness evidenced by the notes ranks equally in right of payment
with all existing and future senior unsecured indebtedness of the Company and
senior in right of payment to all existing and future subordinated indebtedness
of the Company. After giving pro forma effect to the Transactions, as of June
30, 2000, the Company and its subsidiaries would have had approximately $331.9
million of indebtedness outstanding (other than the senior notes and
subordinated notes). See "CAPITALIZATION" on page 32. After giving pro forma
effect to the Transactions, as of June 30, 2000, the Company and its
subsidiaries would have had approximately $193.1 million of secured indebtedness
outstanding (other than the notes), as well as $175.0 million of borrowing
availability under the Credit Facility. The Credit Facility is secured by
substantially all of the assets of the Company and its subsidiaries. The notes
will be effectively subordinated to the indebtedness under the Credit Facility
to the extent of such security interests. The subordinated notes will be
expressly subordinated to all senior Indebtedness of the Company, including the
senior notes. Holders of senior Indebtedness, including the senior notes, will
have customary blockage rights.
The Company conducts a substantial portion of its operations through
subsidiaries and, therefore, the Company largely depends upon the cash flow of
its subsidiaries to meet its obligations, including its obligations under the
notes. The Company's subsidiaries will not be guarantors of the notes and are
separate entities, with no obligation to make payments on the notes or to make
funds available therefor. Generally, with respect to the assets and earnings of
such subsidiaries, priority will be given to claims of the subsidiaries'
creditors, including trade creditors, secured creditors, creditors holding
indebtedness and guarantees issued by the subsidiaries, and claims of equity
holders, if any, of the subsidiaries over the claims of the Company's creditors,
including holders of the notes. The notes, therefore, will be effectively
subordinated to all existing and future liabilities (including trade payables)
of the Company's subsidiaries. After giving pro forma effect to the
Transactions, as of June 30, 2000, the Company's subsidiaries would have had
approximately $331.9 million of indebtedness (other than the senior notes and
subordinated notes) and other liabilities outstanding. See "RISK FACTORS --
Because the exchange notes rank below our senior secured debt, you may not
receive full payment on your notes" on page 20.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (1) existing at the
time such Person becomes a Restricted Subsidiary or (2) assumed in connection
with an Asset Acquisition by a Restricted Subsidiary; provided that Indebtedness
of such Person which is redeemed, defeased, retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be
Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(1) the net income of any Person that is not a Restricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period;
(2) the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or
all or substantially all of the property and assets of such Person are
acquired by the Company or any of its Restricted Subsidiaries;
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(3) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of such net income is not at the time
permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to
Asset Sales;
(5) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant
described below, any amount paid or accrued as dividends on Preferred
Stock of the Company owned by Persons other than the Company and any
of its Restricted Subsidiaries; and
(6) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (1) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany payables and receivables) and (2) all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, other than licenses, all as set forth on the
most recent quarterly or annual consolidated balance sheet of the Company and
its Restricted Subsidiaries, prepared in conformity with GAAP and filed with the
SEC or provided to the Trustee.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (1) an Investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment or (2) an
acquisition by the Company or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person; provided that the property and assets acquired are related,
ancillary or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (1) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (2) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) after the Closing
Date in one transaction or a series of related transactions by the Company or
any of its Restricted Subsidiaries to any Person other than the Company or any
of its Restricted Subsidiaries of (1) all or any of the Capital Stock of any
Restricted Subsidiary, (2) all or substantially all of the property and assets
of an operating unit or business of the Company or any of its Restricted
Subsidiaries or (3) any other property and assets (other than the Capital Stock
or other Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
assets of the Company; provided that "Asset Sale" shall not include (a) sales or
other dispositions of inventory, receivables and other current assets, (b)
sales, transfers or other dispositions of assets constituting a Restricted
Payment permitted to be made under the "Limitation on Restricted Payments"
covenant, (c) sales or other dispositions
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of assets for consideration at least equal to the fair market value of the
assets sold or disposed of, to the extent that the consideration received would
satisfy clause (B) of the "Limitation on Asset Sales" covenant or (d) sales or
other dispositions of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of
business.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (2) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Cash Equivalents" means (1) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) in each case maturing within
one year after the date of acquisition, (2) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500.0 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Ratings Group or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within one year after the date of acquisition and (3) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (1) and (2) above.
"Change of Control" means such time as (1) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than the
Permitted Holders, becomes the ultimate "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act) of more 35% of the total voting power of the
Voting Stock of the Company on a fully diluted basis and such total voting power
is more than WCAS's total voting power of the Voting Stock of the Company on a
fully diluted basis; or (2) individuals who on the Closing Date constitute the
Board of Directors (together with any new directors whose election by the Board
of Directors or whose nomination by the Board of Directors for election by the
Company's stockholders was approved by a vote of at least a majority of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the notes were originally issued
under the Indenture.
"Collateral" has the meaning ascribed thereto in the Escrow Agreement.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income: (1) Consolidated Interest
Expense, (2) income taxes (other than income taxes (either positive or negative)
attributable to extraordinary and non-recurring gains or losses or sales of
assets), (3) depreciation expense, (4) amortization expense, (5) for purposes of
determining the Company's ability to Incur Indebtedness, non- recurring
severance and transaction costs incurred in connection with any acquisition
(including any Transaction) by the Company or its Restricted Subsidiaries and
(6) all other non-cash items reducing Adjusted Consolidated Net Income (other
than items that will require cash payments and for which an accrual or reserve
is, or is required by GAAP to be, made), less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis for
the Company and its Restricted Subsidiaries in conformity with GAAP; provided
that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) or increased (to the extent not otherwise increased in
accordance with GAAP) by an amount equal to (A) the amount of
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the Adjusted Consolidated Net Income (whether positive or negative) attributable
to such Restricted Subsidiary multiplied by (B) the percentage ownership
interest in the income of such Restricted Subsidiary not owned on the last day
of such period by the Company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries, including, without limitation, amortization of original
issue discount on any Indebtedness and the interest portion of any deferred
payment obligation, calculated in accordance with the effective interest method
of accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing; and the net
costs associated with Interest Rate Agreements) and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by the Company and its Restricted
Subsidiaries during such period; excluding, however, (1) any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income
pursuant to clause (3) of the definition thereof (but only in the same
proportion as the net income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to clause (3) of the
definition thereof) and (2) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the notes, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Credit Facility" means the Credit Facility among the Company, Morgan
Stanley Senior Funding, Inc. and certain other financial institutions party
thereto, as such agreement, may be, in one or more agreements with one or more
lending groups, amended, renewed, extended, substituted, refinanced,
restructured, replaced, supplemented or otherwise modified, in whole or in part,
from time to time (including, without limitation, any successive renewals,
extensions, substitutions, refinancings, restructurings, replacements,
supplements or other modifications of the foregoing, including those that
increase the amount available thereunder in accordance with the terms of the
Indenture).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (1) required to be redeemed prior to
the Stated Maturity of the notes, (2) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the notes or (3) convertible into or exchangeable for Capital Stock referred
to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the notes; provided that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
prior to the Stated Maturity of the notes shall not constitute Disqualified
Stock if the "asset sale" or "change of control" provisions applicable to such
Capital Stock are no more favorable to the holders of such Capital Stock than
the provisions contained in "Limitation on Asset Sales" and "Repurchase of Notes
upon a Change of Control" covenants described below and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provision prior to the Company's repurchase of such notes
as are required to be repurchased pursuant to the "Limitation on Asset Sales"
and "Repurchase of Notes upon a Change of Control" covenants described below.
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"Collateral Account" means an account established with the Escrow Agent
pursuant to the terms of the Escrow Agreement for the deposit of the Collateral
to be purchased by the Company with a portion of the net proceeds from the sale
of the notes.
"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 by
the Board of Directors, whose determination shall be conclusive if evidenced by
a Board Resolution; provided that with respect to any transaction or series of
related transactions having a value in excess of $10 million, such determination
is made by disinterested members of the Board of Directors.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those 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 approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (1) the amortization of any expenses incurred in
connection with the Transactions and (2) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (2) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by notes, debentures,
notes or other similar instruments;
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(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing obligations (other than
obligations described in (1) or (2) above or (5), (6) or (7) below) entered
into in the ordinary course of business of such Person to the extent such
letters of credit are not drawn upon or, if drawn upon, to the extent such
drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months (or one year in the case of earnouts for which the maximum
non-contingent obligation does not exceed $25.0 million) after the date of
placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables;
(5) all Capitalized Lease Obligations;
(6) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to
the extent such Indebtedness is Guaranteed by such Person; and
(8) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum net liability
upon the occurrence of the contingency giving rise to the obligation, provided
(A) that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP, (B) that money
borrowed and set aside at the time of the Incurrence of any Indebtedness in
order to prefund the payment of the interest on such Indebtedness shall not be
deemed to be "Indebtedness" so long as such money is held to secure the payment
of such interest and (C) that Indebtedness shall not include any liability for
federal, state, local or other taxes.
"Indebtedness to EBITDA Ratio" means, on any Transaction Date, the ratio of
(1) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Transaction Date to
(2) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which financial statements of the Company
have been filed with the SEC or provided to the Trustee (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making
the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro
forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any
Asset Disposition) that occur from the beginning of the Four Quarter Period
through the Transaction Date (the "Reference Period"), as if they had
occurred and such proceeds had been applied on the first day of such
Reference Period; and (C) pro forma effect shall be given to Asset
Dispositions and Asset Acquisitions (including giving pro forma effect to
the application of proceeds of any Asset Disposition) that have been made
by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset acquisitions
were Asset Dispositions or Asset Acquisitions that occurred on the first
day of such Reference Period; provided that to the extent that clause (B)
or (C) of this sentence requires that pro forma effect be given to an Asset
Acquisition or Asset Disposition, such pro forma calculation shall be based
upon the four full fiscal quarters immediately preceding the Transaction
Date of the Person, or division or line of business of the Person, that is
acquired or disposed of for which financial information is available.
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"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" by the Company or any Restricted Subsidiary in any Person
means any direct or indirect advance, loan or other extension of credit
(including, without limitation, by way of Guarantee or similar arrangement; but
excluding Permitted Advances and advances to customers in the ordinary course of
business that are, in conformity with GAAP, recorded as accounts receivable on
the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, notes, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the retention
of the Capital Stock (or any other Investment) by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Subsidiary, including without limitation, by reason of any transaction permitted
by clause (iii) of the "Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries" covenant. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, the amount of or a reduction in an Investment shall be equal to
the fair market value thereof at the time such Investment is made or reduced.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"MSDW" means Morgan Stanley Dean Witter & Co. and its affiliates.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or Cash Equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or Cash Equivalents and proceeds from the conversion of other property
received when converted to cash or Cash Equivalents, net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of counsel
and investment bankers) related to such Asset Sale, (ii) provisions for all
taxes (whether or not such taxes will actually be paid or are payable) as a
result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding at
the time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
as a reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or Cash
Equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or Cash Equivalents and proceeds from the
conversion of other property received when converted to cash or Cash
Equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
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"Offer to Purchase" means an offer to purchase notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating:
(1) the covenant pursuant to which the offer is being made and that
all notes validly tendered will be accepted for payment on a pro rata
basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days after the date
such notice is mailed) (the "Payment Date");
(3) that any note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless the Company defaults in the payment of the purchase
price, any note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;
(5) that Holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(6) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such notes purchased; and
(7) that Holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered; provided that each note purchased and each new note
issued shall be in a principal amount of $1,000 or integral multiples
thereof.
On the Payment Date, the Company shall (1) accept for payment on a pro rata
basis notes or portions thereof tendered pursuant to an Offer to Purchase; (2)
deposit with the Paying Agent money sufficient to pay the purchase price of all
notes or portions thereof so accepted; and (3) deliver, or cause to be
delivered, to the Trustee all notes or portions thereof so accepted together
with an Officers' Certificate specifying the notes or portions thereof accepted
for payment by the Company. The Paying Agent shall promptly mail to the Holders
of notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new note equal in
principal amount to any unpurchased portion of the note surrendered; provided
that each note purchased and each new note issued shall be in a principal amount
of $1,000 or integral multiples thereof. The Company will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with 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 the event that the Company is required to repurchase notes
pursuant to an Offer to Purchase.
"Permitted Advances" means advances by the Company to the West Virginia PCS
Alliance on and after the Closing Date in an aggregate amount not to exceed
$104.0 million at any one time outstanding.
"Permitted Holders" means WCAS and MSDW.
"Permitted Investment" means:
(1) an Investment in the Company or a Restricted Subsidiary or a
Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey
all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided that such person's primary business is related,
ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment;
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(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(4) stock, obligations or securities received in satisfaction of
judgments;
(5) an Investment in an Unrestricted Subsidiary consisting solely of
an Investment in another Unrestricted Subsidiary;
(6) Interest Rate Agreements and Currency Agreements designed solely
to protect the Company or its Restricted Subsidiaries against fluctuations
in interest rates or foreign currency exchange rates;
(7) loans or advances to or guarantees of third-party loans or
advances to employees of the Company or any Restricted Subsidiary in the
normal course of business in an aggregate amount not to exceed $5.0 million
in the aggregate at any one time outstanding;
(8) Strategic Telecommunications Investments made after the Closing
Date in an aggregate amount not to exceed $11.25 million in the aggregate
at any one time outstanding prior to the closing of the Company's
acquisition of R&B Communications, Inc. (the "R&B Acquisition") and $15.0
million thereafter in the aggregate at any one time outstanding;
(9) Notwithstanding (8) above, Strategic Telecommunications
Investments, to the extent that the payment for such Strategic
Telecommunications Investments consists of (i) Common Stock of the Company
or (ii) proceeds of a sale of Common Stock of the Company received by the
Company within 60 days of the making of such Investment;
(10) Investments, the payment for which consists of (i) Qualified
Capital Stock of the Company or (ii) the proceeds of a sale of Qualified
Capital Stock of the Company received by the Company within 60 days of the
making of such Investment, in an aggregate amount not to exceed $37.5
million at any one time outstanding prior to the closing of the R&B
Acquisition and thereafter $50.0 million in the aggregate at any one time
outstanding; and
(11) Investments outstanding on the Closing Date or to be made as part
of the Transactions, including without limitation, $7.5 million of
investments in the RTFC to facilitate borrowings under the Credit Facility.
"Permitted Liens" means:
(1) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(2) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
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(4) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal notes, government contracts, performance and
return-of-money notes and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(5) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole;
(6) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that (a) such
Lien is created solely for the purpose of securing Indebtedness Incurred,
in accordance with the "Limitation on Indebtedness" covenant described
below, to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such
Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the
commencement of full operation of such property (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and
(c) any such Lien shall not extend to or cover any property or assets other
than such item of property or assets and any improvements on such item;
(7) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries, taken as a whole;
(8) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;
(9) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(10) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(11) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do
not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets acquired;
(12) Liens in favor of the Company or any Restricted Subsidiary;
(13) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary that do not give rise to
an Event of Default;
(14) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(15) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(16) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures
options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in
interest rates, currencies or the price of commodities;
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(17) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date;
(18) Liens on shares of Capital Stock of any Unrestricted Subsidiary
to secure Indebtedness of such Unrestricted Subsidiary; and
(19) Liens on receivables.
"Preferred Share Documents" means (1) the Securities Purchase Agreement
dated as of July 11, 2000 among the Company, WCAS, and the other purchasers
listed on the signature pages thereof (the "Purchasers"), with respect to the
Series B Preferred Stock, (2) the Securities Purchase Agreement among the
Company and the Purchasers, with respect to the Series C and Series D Preferred
Stock, (3) the Shareholders Agreement among the Company and the Purchasers
entered into at the closing of the sale of the Series B Preferred Stock, and (4)
the Warrant Agreement among the Company and the Purchasers entered into at the
closing of the sale of the Series B Preferred Stock.
"Qualified Capital Stock" means any Capital Stock of a Person that is not
Disqualified Capital Stock.
"Related Business" means any business related to, ancillary to, or
complementary to, the ownership, development, operation or acquisition of
communications systems or the provision of communications services, in each case
as determined in good faith by the Board of Directors.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary, including, without limitation, the Virginia PCS
Alliance and the West Virginia PCS Alliance (after such Alliances become
Subsidiaries of the Company) so long as the Company has not designated either
Alliance as an Unrestricted Subsidiary in the manner provided for herein.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw- Hill
Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (1) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (2) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (1) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (2) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Telecommunications Investment" means the acquisition by the
Company or any of its Restricted Subsidiaries of 50.0% or less of the Common
Stock in a Related Business (1) over which the Company or its Restricted
Subsidiaries exerts operational or managerial influence or (2) which provides
services directly to the Company or its Restricted Subsidiaries; in each case,
as determined in good faith by the Board of Directors (when such Investment is
or exceeds $1.0 million) or as certified by an officer of the Company (when such
Investment is below $1.0 million).
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
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"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within 180 days of the date of acquisition thereof issued
by a bank or trust company which is organized under the laws of the United
States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $100 million (or the
foreign currency equivalent thereof) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank or trust company meeting the qualifications described in
clause (2) above;
(4) commercial paper, maturing not more than 90 days after the date
of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P; and
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Transactions" means:
(1) the issuance of the senior notes and the subordinated notes by
the Company;
(2) the repayment of indebtedness by the Company of the Alliances to
the RTFC;
(3) the sale and issuance by the Company to the Permitted Holders of
an aggregate amount of $250.0 million of its Preferred Shares;
(4) the acquisition by the Company of certain licences and assets
held by PrimeCo PCS, L.P.;
(5) the borrowings by the Company under the Credit Facility; and
(6) the dispositions of assets of Virginia RSA 6 and RSA 5 in
connection with the Richmond-Norfolk Acquisition.
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"Unrestricted Subsidiary" means (1) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (2) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (1) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (2) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (1) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (2) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"WCAS" means Welsh, Carson, Anderson & Stowe VIII, L.P. and Welsh, Carson,
Anderson & Stowe IX, L.P. and their respective affiliates.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
Covenants
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving pro forma effect to the Incurrence of such Indebtedness and the
receipt and application of the proceeds therefrom, the Indebtedness to EBITDA
Ratio would be positive but (1) less than 7.0:1.0, if prior to August 15, 2004
and (2) less than 6.0:1.0, if on or after August 15, 2004.
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Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following:
(1) Indebtedness of the Company outstanding at any time in an
aggregate principal amount (together with refinancings thereof) not to
exceed $325.0 million, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below;
(2) Indebtedness owed (A) to the Company or (B) to any Restricted
Subsidiary; provided that any event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer
of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of
such Indebtedness not permitted by this clause (2);
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided
that Indebtedness the proceeds of which are used to refinance or refund the
notes or Indebtedness that is pari passu with, or subordinated in right of
payment to, the notes shall only be permitted under this clause (3) if
(A) in case the notes are refinanced in part or the Indebtedness
to be refinanced is pari passu with the notes, such new Indebtedness,
by its terms or by the terms of any agreement or instrument pursuant
to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining
notes;
(B) in case the Indebtedness to be refinanced is subordinated in
right of payment to the notes, such new Indebtedness, by its terms or
by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the notes at least to the extent
that the Indebtedness to be refinanced is subordinated to the notes;
and
(C) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature prior to the
Stated Maturity of the Indebtedness to be refinanced or refunded, and
the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or
refunded;
and provided further that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to
this clause (3);
(4) Indebtedness
(A) in respect of performance, surety or appeal notes provided
in the ordinary course of business;
(B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect the
Company or its Restricted Subsidiaries against fluctuations in foreign
currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable
thereunder; and
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(C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety notes or performance notes
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection
with such disposition;
(5) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase notes tendered in an Offer to
Purchase made as a result of a Change in Control or (B) deposited to
defease the notes as described below under "Defeasance";
(6) Guarantees of the notes and subordinated notes and Guarantees of
Indebtedness of the Company by any Restricted Subsidiary provided the
Guarantee of such Indebtedness is permitted by and made in accordance with
the "Limitation on Issuance of Guarantees by Restricted Subsidiaries"
covenant described below;
(7) Acquired Indebtedness; provided that the Indebtedness to EBITDA
Ratio, after giving effect to such Incurrence on a pro forma basis, is no
greater than such ratio prior to giving pro forma effect to such
Incurrence;
(8) The Incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness to finance the cost (including the cost of
design, development, improvement, acquisition, construction, installation,
transportation or integration) to acquire equipment, inventory or network
assets, in an aggregate principal amount not to exceed $10.0 million in any
year; provided that amounts not so Incurred in any year may be accumulated
and Incurred by the Company or any of its Restricted Subsidiaries in any
subsequent fiscal year; and provided further that the aggregate amount of
Indebtedness that may be outstanding under this clause (8) at any one time
shall not exceed $75.0 million;
(9) Indebtedness of the Company not to exceed, at any one time
outstanding, two times the sum of:
(A) the Net Cash Proceeds received by the Company, other than
from MSDW and WCAS up to an aggregate amount of $112.5 million, from
the issuance and sale of its Capital Stock (other than Disqualified
Stock) or options, warrants or other rights to acquire such Capital
Stock to a Person that is not a Subsidiary of the Company, to the
extent such Net Cash Proceeds have not been used pursuant to clause
(C)(2) of the first paragraph or clause (3) or (4) of the second
paragraph of the "Limitation on Restricted Payments" covenant to make
a Restricted Payment, and
(B) 80% of the fair market value of property (other than cash or
cash equivalents) received by the Company after the Closing Date
(other than with respect to the R&B Acquisition) from the sale of its
Capital Stock (other than Disqualified Stock) or options, warrants or
other rights to acquire such Capital Stock to a person that is not a
Subsidiary of the Company, to the extent such sale of Capital Stock
has not been used pursuant to clause (3) or (4) of the second
paragraph of the "Limitation on Restricted Payments" covenant to make
a Restricted Payment;
provided that such Indebtedness Incurred pursuant to this clause (9) does not
mature prior to the Stated Maturity of the notes and has an Average Life longer
than the notes; or
(10) Indebtedness of the Company (in addition to Indebtedness
permitted under clauses (1) through (9) above) in an aggregate principal
amount outstanding at any time (together with refinancings thereof) not to
exceed $15.0 million at any time prior to closing of the R&B Acquisition
and $25.0 million thereafter, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales"
covenant described below.
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(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred
under the Credit Facility on or prior to the Closing Date shall be treated as
Incurred pursuant to clause (1) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) of the preceding
sentence), the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
(d) Notwithstanding anything herein to the contrary, if the Company or any
Restricted Subsidiary issues any security convertible into Indebtedness, the
documents governing such security shall provide that unless the Incurrence of
such Indebtedness would be permitted under this "Limitation on Indebtedness"
covenant, such security may not be converted into Indebtedness.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (1) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (2) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
holder) of 5% or more of the Capital Stock of the Company, (3) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
notes or (4) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (1) through (4)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) the Company could not Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant or
(C) the aggregate amount of all Restricted Payments (the amount, if
other than in cash, to be determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of
(1) the amount of (x) Consolidated EBITDA of the Company after June 30,
2003 through the end of the latest full fiscal quarter for which
consolidated financial statements of the Company are available preceding
the date of such Restricted Payment, treated as a single accounting
period, less (y) 2.0 times the aggregate Consolidated Interest Expense of
the Company after June 30, 2003 through the end of the latest full fiscal
quarter for which consolidated financial statements of the Company are
available preceding the date of such Restricted Payment treated as a
single accounting period, plus
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(2) the aggregate Net Cash Proceeds and fair market value of
property other than cash (to the extent not used to make a Permitted
Investment), received by the Company after the Closing Date from the
issuance and sale permitted by the Indenture of its Capital Stock (other
than Disqualified Stock) to a Person who is not a Subsidiary of the
Company, including an issuance or sale permitted by the Indenture of
Indebtedness of the Company for cash subsequent to the Closing Date upon
the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who
is not a Subsidiary of the Company of any options, warrants or other
rights to acquire Capital Stock of the Company (in each case, exclusive
of any Disqualified Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the notes) plus
(3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or
any Restricted Subsidiary or from the Net Cash 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 Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary
in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (3) of the second paragraph of part (a) of the "Limitation on
Indebtedness" covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock
of the Company or an Unrestricted Subsidiary (or options, warrants or other
rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of Capital Stock
(other than Disqualified Stock) of the Company (or options, warrants or
other rights to acquire such Capital Stock);
(4) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to
the notes in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock);
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company;
(6) Investments acquired in exchange for, or out of the proceeds of a
substantially concurrent offering of, Capital Stock (other than
Disqualified Stock) of the Company;
(7) any purchase or redemption of Disqualified Stock of the Company
or any of its Restricted Subsidiaries made by or in exchange for, or out of
the proceeds of the substantially concurrent sale of, Disqualified Stock of
the Company;
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(8) upon the occurrence of a Change of Control and within 60 days
after the completion of the offer to repurchase the notes pursuant to the
provisions of the "Repurchase of Notes upon a Change of Control" covenant
(including the purchase of any notes tendered), any purchase or redemption
of subordinated obligations required pursuant to the terms thereof as a
result of such Change of Control at a purchase or redemption price not to
exceed the outstanding principal amount thereof, plus any accrued or unpaid
interest; provided, however, that at the time of such purchase or
redemption no Default shall have occurred and be continuing;
(9) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such options or Capital Stock represents a portion of the
exercise price thereof;
(10) payments not to exceed $250,000 in the aggregate solely to enable
the Company to make payments to holders of its Capital Stock in lieu of the
issuance of fractional shares of its Capital Stock; and
(11) the repurchase of $95.0 million of subordinated notes with the
proceeds of the issuance of additional senior Indebtedness having a Stated
Maturity no earlier than the Stated Maturity of the notes, including
without limitation, notes under the Indenture; provided that pro forma for
such transaction, the Company could Incur $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant.
provided that, except in the case of clauses (1) and (3), no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (2) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (3) or (4) thereof and an Investment acquired as a capital contribution
or in exchange for Capital Stock referred to in clause (4) thereof), and the Net
Cash Proceeds from any issuance of Capital Stock referred to in clauses (3) and
(4), shall be included in calculating whether the conditions of clause (C) of
the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the notes, or Indebtedness that
is pari passu with the notes, then the Net Cash Proceeds of such issuance shall
be included in clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not used for
such redemption, repurchase or other acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect to
such Investment (up to the amount of the Investment on the date made).
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (2) pay any Indebtedness owed to the
Company or any other Restricted Subsidiary, (3) make loans or advances to the
Company or any other Restricted Subsidiary or (4) transfer any of its property
or assets to the Company or any other Restricted Subsidiary.
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The foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing on the Closing Date in the Credit Facility, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced;
(2) existing under or by reason of applicable law;
(3) existing with respect to any Person or the property or assets of
such Person acquired by the Company or any Restricted Subsidiary, existing
at the time of such acquisition and not incurred in contemplation thereof,
which encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(4) in the case of clause (4) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or
any Restricted Subsidiary not otherwise prohibited by the Indenture or (C)
arising or agreed to in the ordinary course of business, not relating to
any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any
Restricted Subsidiary in any manner material to the Company and its
Restricted Subsidiaries, taken as a whole; or
(5) with respect to a Restricted Subsidiary and imposed pursuant to
an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of,
such Restricted Subsidiary.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except:
(1) to the Company or a Wholly Owned Restricted Subsidiary;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law;
(3) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale; or
(4) the sale of Common Stock of Restricted Subsidiaries (other than
Disqualified Stock), if the proceeds of such issuance and sale are applied
in accordance with paragraphs 1(A) and 1(B) of the "Limitation on Asset
Sales" covenant.
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Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the notes ("Guaranteed
Indebtedness"), unless (1) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the notes by such Restricted Subsidiary
and (2) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary (x) that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) of the Indebtedness Incurred under the Credit Facility. If the
Guaranteed Indebtedness is (A) pari passu with the notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (1) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (2) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which the Company or a
Restricted Subsidiary delivers to the Trustee a written opinion of a
nationally recognized investment banking firm or a nationally recognized
firm having expertise in the specific area which is the subject of such
determination stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view;
(2) any transaction solely between the Company and any of its Wholly
Owned Restricted Subsidiaries or solely between Wholly Owned Restricted
Subsidiaries;
(3) the payment of reasonable and customary regular fees to directors
of the Company who are not employees of the Company;
(4) any payments or other transactions pursuant to any tax- sharing
agreement between the Company and any other Person with which the Company
files a consolidated tax return or with which the Company is part of a
consolidated group for tax purposes;
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(5) any sale of shares of Capital Stock (other than Disqualified
Stock) of the Company (or options, warrants or other rights to acquire such
Capital Stock);
(6) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant;
(7) any purchase of Capital Stock of Restricted Subsidiaries approved
by a majority of the disinterested members of the Board of Directors;
provided, however, that such purchases shall not be made from (i) WCAS,
(ii) management of the Company or (iii) family members of management of the
Company; or
(8) payments by the Company or any of its Restricted Subsidiaries to
WCAS pursuant to the terms of the Preferred Share Documents, as they exist
on the Closing Date, between the Company and WCAS relating to the issuance,
sale and purchase of the Preferred Shares.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on Transactions
with Shareholders and Affiliates" covenant and not covered by clauses (2)
through (8) of this paragraph, (a) the aggregate amount of which exceeds $1.0
million in value, must be approved or determined to be fair in the manner
provided for in clause (1)(A) or (B) above and (b) the aggregate amount of which
exceeds $10.0 million in value, must be determined to be fair in the manner
provided for in clause (1)(B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(1) Liens existing on the Closing Date;
(2) Liens granted after the Closing Date on any assets or Capital Stock of
the Company or its Restricted Subsidiaries created in favor of the Holders;
(3) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary;
(4) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (3) of the second
paragraph of the "Limitation on Indebtedness" covenant; provided that such Liens
do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced;
(5) Liens on any property or assets of a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted under the "Limitation on
Indebtedness" covenant;
(6) Permitted Liens; or
(7) Liens securing obligations under the Credit Facility.
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Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (1) the lease is for a period, including renewal rights, of not in excess of
three years; (2) the lease secures or relates to industrial revenue or pollution
control notes; (3) the transaction is solely between the Company and any Wholly
Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (4) the Company or such Restricted Subsidiary, within 12 months
after the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance with
clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales"
covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (1) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (2) at least 75.0% of the consideration received
consists of cash or Temporary Cash Investments or the assumption of Indebtedness
of the Company or any Restricted Subsidiary (other than Indebtedness to the
Company or any Restricted Subsidiary), provided that the Company or such
Restricted Subsidiary is irrevocably and unconditionally released from all
liability under such Indebtedness.
In the event and to the extent that the Net Cash Proceeds received by the
Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the SEC or provided to the Trustee), then the Company shall or shall cause
the relevant Restricted Subsidiary to:
(1) within twelve months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets
(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or any
Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant
described above or Indebtedness of any other Restricted Subsidiary, in each
case owing to a Person other than the Company or any of its Restricted
Subsidiaries or
(B) invest an equal amount, or the amount not so applied pursuant to
clause (A) (or enter into a definitive agreement committing so to invest
within 12 months after the date of such agreement), in property or assets
(other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, the Company and its Restricted
Subsidiaries existing on the date of such investment and
(2) apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied pursuant to
clause (1)) as provided in the following paragraph of this "Limitation on Asset
Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to
be committed to be applied) during such 12-month period as set forth in clause
(1) of the preceding sentence and not applied as so required by the end of such
period shall constitute "Excess Proceeds."
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If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10.0 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders (and if required by the terms
of any Indebtedness that is pari passu with the notes ("Pari Passu
Indebtedness"), from the holders of such Pari Passu Indebtedness) on a pro rata
basis an aggregate principal amount of notes (and Pari Passu Indebtedness) equal
to the Excess Proceeds on such date, at a purchase price equal to 100% of the
principal amount thereof, plus, in each case, accrued interest (if any) to the
Payment Date.
Notwithstanding anything herein to the contrary, the Company shall not, and
shall not permit its Restricted Subsidiaries to engage in any Asset Sale with
respect to licenses or plant, property and equipment used primarily by the
Company or its Restricted Subsidiaries to provide PCS and having a fair market
value in the aggregate in excess of $200.0 million.
Repurchase of Notes upon a Change of Control
The Company must commence, within 30 days after the occurrence of a Change
of Control, and consummate an Offer to Purchase for all notes then outstanding,
at a purchase price equal to 101% of the principal amount thereof, plus accrued
interest (if any) to the Payment Date.
We cannot assure you that the Company will have sufficient funds available
at the time of any Change of Control to make any debt payment (including
repurchases of notes) required by the foregoing covenant (as well as may be
contained in other securities of the Company which might be outstanding at the
time). The above covenant requiring the Company to repurchase the notes will,
unless consents are obtained, require the Company to repay all indebtedness then
outstanding which by its terms would prohibit such note repurchase, either prior
to or concurrently with such note repurchase.
Events of Default
The following events are defined as "Events of Default" in the Indenture:
(1) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(2) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first four scheduled
interest payments on the notes in a timely manner will constitute an Event
of Default with no grace or cure period;
(3) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or "Repurchase of Notes upon a Change of Control" covenant;
(4) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the notes
(other than a default specified in clause (a), (b) or (c) above) and such
default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the notes;
(5) there occurs with respect to any issue or issues of Indebtedness
of the Company or any Significant Subsidiary having an outstanding
principal amount of $10.0 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder
thereof to declare such Indebtedness to be due and payable prior to its
Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment
default;
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(6) any final judgment or order (not covered by insurance) for the
payment of money in excess of $10.0 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged,
and there shall be any period of 30 consecutive days following entry of the
final judgment or order that causes the aggregate amount for all such final
judgments or orders outstanding and not paid or discharged against all such
Persons to exceed $10.0 million during which a stay of enforcement of such
final judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect;
(7) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any Significant Subsidiary
in an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of
the property and assets of the Company or any Significant Subsidiary or (C)
the winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall remain
unstayed and in effect for a period of 30 consecutive days;
(8) the Company or any Significant Subsidiary (A) commences a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary
or for all or substantially all of the property and assets of the Company or
any Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or
(9) the Escrow Agreement shall cease to be in full force and effect or
enforceable in accordance with its terms, other than in accordance with its
terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (1) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
notes that have become due solely by such declaration of acceleration, have been
cured or waived and (2) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
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The Holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of notes. A Holder
may not pursue any remedy with respect to the Indenture or the notes unless: (1)
the Holder gives the Trustee written notice of a continuing Event of Default;
(2) the Holders of at least 25% in aggregate principal amount of outstanding
notes make a written request to the Trustee to pursue the remedy; (3) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (4) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a note to receive payment of the
principal of, premium, if any, or interest on, such note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company also is obligated to notify the Trustee of any default or defaults in
the performance of any covenants or agreements under the Indenture.
SEC Reports and Reports to Holders
The Indenture requires the Company, whether or not the Company is then
required to file reports with the SEC, to file with the SEC all such reports and
other information as it would be required to file with the SEC by Sections 13(a)
or 15(d) under the Exchange Act if it were subject to the Exchange Act. The
Company also is required to supply the Trustee and each Holder or to supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information within 15 days after the date it
would have been required to file such reports or other information with the SEC
had it been subject to such Sections. In addition, the Company is also required
to comply with the other provisions of Section 314(a) of the Trust Indenture Act
of 1939.
Consolidation, Merger and Sale of Assets
The Company will not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless:
(1) the Company shall be the continuing Person, or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of
the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of the obligations of the Company on all of the notes and
under the Indenture;
(2) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing;
(3) immediately after giving effect to such transaction on a pro
forma basis the Company, or any Person becoming the successor obligor of
the notes, as the case may be, could Incur at least $1.00 of Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant;
provided that this clause (3) shall not apply to a consolidation, merger or
sale of all (but not less than all) of the assets of the Company if all
Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would have been permitted
(and all such Liens and Indebtedness, other than Liens and Indebtedness of
the Company and its Restricted Subsidiaries outstanding immediately prior
to the transaction, shall be deemed to have been Incurred) for all purposes
of the Indenture; and
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(4) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clause (3)) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with;
provided, however, that clauses (3) and (4) above do not apply if, in the good
faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company and any
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
Defeasance
Defeasance and Discharge
The Indenture provides that the Company will be deemed to have paid and
will be discharged from any and all obligations in respect of the notes on the
123rd day after the deposit referred to below, and the provisions of the
Indenture will no longer be in effect with respect to the notes (except for,
among other matters, certain obligations to register the transfer or exchange of
the notes, to replace stolen, lost or mutilated notes, to maintain paying
agencies and to hold monies for payment in trust) if, among other things:
(A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the notes,
(B) the Company has delivered to the Trustee (1) either (x) an Opinion
of Counsel to the effect that Holders will not recognize income, gain or
loss for federal income tax purposes as a result of the Company's exercise
of its option under this "Defeasance" provision and will be subject to
federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon
(and accompanied by a copy of) a ruling of the Internal Revenue Service to
the same effect unless there has been a change in applicable federal income
tax law after the Closing Date such that a ruling is no longer required or
(y) a ruling directed to the Trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel and (2)
an Opinion of Counsel to the effect that the creation of the defeasance
trust does not violate the Investment Company Act of 1940 and after the
passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code
or Section 15 of the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and
(D) if at such time the notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to
the effect that the notes will not be delisted as a result of such deposit,
defeasance and discharge.
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Defeasance of Certain Covenants and Certain Events of Default
The Indenture further provides that the provisions of the Indenture
will no longer be in effect with respect to clauses (3) and (4) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Covenants," clause (c) under "Events of Default" with respect to
such clauses (3) and (4) under "Consolidation, Merger and Sale of Assets,"
clause (d) under "Events of Default" with respect to such other covenants and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the notes, the satisfaction of
the provisions described in clauses (B)(2), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default
In the event the Company exercises its option to omit compliance with
certain covenants and provisions of the Indenture with respect to the notes as
described in the immediately preceding paragraph and the notes are declared due
and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on the notes at the time
of their Stated Maturity but may not be sufficient to pay amounts due on the
notes at the time of the acceleration resulting from such Event of Default.
However, the Company will remain liable for such payments.
Modification and Waiver
The Indenture may be amended, without the consent of any Holder, to: (1)
cure any ambiguity, defect or inconsistency in the Indenture; provided that such
amendments do not adversely affect the interests of the Holders in any material
respect; (2) comply with the provisions described under "--Consolidation,
Merger and Sale of Assets"; (3) comply with any requirements of the SEC in
connection with the qualification of the Indenture under the Trust Indenture
Act; (4) evidence and provide for the acceptance of appointment by a successor
Trustee; or (5) make any change that, in the good faith opinion of the Board of
Directors, does not materially and adversely affect the rights of any Holder.
Modifications and amendments of the Indenture may be made by the Company and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding notes; provided, however, that no such
modification or amendment may, without the consent of each Holder affected
thereby, (1) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (2) reduce the principal amount of, or premium, if
any, or interest on, any Note, (3) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (4) impair the right
to institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Note, (5) other than as provided under "--Events of Default" in connection
with a rescission, waive a default in the payment of principal of, premium, if
any, or interest on the notes or (6) reduce the percentage or aggregate
principal amount of outstanding notes the consent of whose Holders is necessary
for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults.
No Personal Liability of Incorporators, Stockholders, Officers, Directors, or
Employees
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture, or in any of the notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the notes, waives and releases all such liability.
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Concerning the Trustee
The Indenture provides that, except during the continuance of a
Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Indenture. If an Event of Default
has occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise of the rights and powers vested in it under the Indenture
as a prudent person would exercise under the circumstances in the conduct of
such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
Book-Entry; Delivery and Form
The certificates representing the exchange notes will be issued in
fully registered form without interest coupons. The exchange notes will be
represented by one or more permanent global notes in definitive, fully
registered form without interest coupons (each a "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of a
nominee of, DTC.
The Global Notes
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC, also called "participants", or persons who
hold interests through participants. Ownership of beneficial interests in a
Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Owners of beneficial interests in
the Global Notes may hold their interests in a Global Note directly through DTC
if they are participants in such system, or indirectly through organizations
which are participants in such system.
Owners of beneficial interests in the Global Notes will not be entitled to
have notes registered in their names, and will not receive or be entitled to
receive physical delivery of definitive certificates representing individual
notes except in certain limited circumstances set forth in the Indenture. The
laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of such securities in definitive form. Accordingly, the
ability to transfer interests in the securities represented by a Global Note to
such persons may be limited. In addition, because DTC can act only on behalf of
its respective participants, who in turn act on behalf of persons who hold
interests through such participants, the ability of a person having an interest
in the securities represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC, or its nominee, is the registered owner or holder of any of
the Global Notes, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the securities represented by such Global Notes for
all purposes under the Indenture. No beneficial owner of an interest in the
Global Notes will be able to transfer that interest except in accordance with
DTC's applicable procedures, in addition to those provided for under the
Indenture.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
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CFW expects that DTC will take any action permitted to be taken by a holder
of notes (including the presentation of notes for exchange) only at the
direction of one or more participants to whose account the DTC interests in a
Global Note is credited and only in respect of such portion of the aggregate
principal amount of 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 will exchange the applicable Global Note for Certificated Notes.
Payments
Payments of any amounts owing in respect of the Global Notes will be made
through one or more paying agents to DTC. None of CFW, the trustee, the transfer
agent or any paying agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
CFW expects that DTC or its nominee, upon receipt of any payments made in
respect of the Global Notes, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Note as shown on the records of DTC. CFW also expects that
payments by participants to owners of beneficial interests in the Global Notes
held through such participants will be governed by standing instructions and
customary practice, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
Information Concerning DTC
CFW understands that: DTC is a limited purpose trust company organized
under the laws of the State of New York, a "banking organization" within the
meaning of New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"Clearing Agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies and certain other organizations that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly, also called "indirect participants".
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither CFW nor the Trustee
will have any responsibility for the performance by DTC or its respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by CFW within 90
days, CFW will issue Certificated Notes in exchange for the Global Notes.
Holders of an interest in a Global Note may receive Certificated Notes in
accordance with the DTC's rules and procedures in addition to those provided for
under the Indenture.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following represents the opinion of Hunton & Williams, counsel to the
Company, with respect to certain material United States federal income tax
consequences of the ownership and disposition of the notes. This summary deals
only with notes held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended to the date hereof (the "Code"). In
addition, except as discussed below under the heading "Non-U.S. Holders," this
summary addresses consequences only to beneficial owners ("Holders") that for
United States federal income tax purposes are (i) citizens or residents of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust subject
to primary supervision by a court in the United States and control by one or
more United States fiduciaries. Thus, the following does not address any tax
consequences that apply specifically to nonresident aliens or foreign entities,
except as discussed below under the heading "Non-U.S. Holders." Moreover, it
does not discuss all of the tax consequences that may be relevant to a Holder in
light of his particular circumstances or to Holders subject to special rules,
such as certain financial institutions, insurance companies, dealers in
securities, and persons who engage in a straddle or a hedge relating to a note.
The following also assumes that a Holder will not make an election to treat all
interest on a note as original issue discount pursuant to pertinent Treasury
Regulations. This summary is based on existing law, which is subject to change
at any time, possibly with retroactive effect.
Exchange Offer
For United States federal income tax purposes, the exchange will be
disregarded and each exchange note will be treated as a continuation of the
corresponding outstanding note. Accordingly, Holders will not recognize gain or
loss upon the exchange of their outstanding notes for exchange notes.
Interest on the Notes
Interest on a note generally will be taxable to a Holder as ordinary
interest income at the time it accrues or is received in accordance with the
Holder's method of accounting for federal income tax purposes. In addition,
special rules governing the treatment of original issue discount will apply to
the notes, as described below, and consequently Holders of notes will be taxed
on additional income as such discount accrues.
Original Issue Discount
The outstanding notes were issued, and the exchange notes (as a
continuation of the outstanding notes) will be treated as issued, with original
issue discount ("OID") within the meaning of Section 1273 of the Code because a
portion of the $986.10 total issue price per unit of the outstanding notes and
warrants must be allocated to warrants, causing the issue price of an
outstanding note to be less than its principal amount by more than a minimal
amount. The Company has determined that, for each $1,000 principal amount of the
outstanding notes, $24.61 of the total issue price is allocable to warrants, and
$961.49 of the total issue price is allocable to the outstanding notes. That
allocation will be binding on each Holder, unless the Holder explicitly
discloses that his allocation of issue price between an outstanding note and
warrant is different from that allocation. Unless otherwise provided by the
Internal Revenue Service, such disclosure must be made on a statement attached
to the Holder's timely filed federal income tax return for the taxable year in
which the Holder acquired the outstanding note.
The amount of OID on a note is the excess of the "stated redemption price
at maturity" over the "issue price" of the note. The stated redemption price at
maturity of a note is the total of all payments provided by the note excluding
payments of qualified stated interest. The semiannual interest payments on the
notes are qualified stated interest payments. Thus, the stated redemption price
at maturity is the stated principal amount, and the amount of OID is $38.51 per
$1,000 of principal amount. Holders of the notes (including Holders who are cash
basis taxpayers) will include OID in income currently as interest as it accrues
over the life of the notes under a formula based upon the semiannual compounding
of interest at a rate that provides for a constant yield to maturity, which
(based on the allocation of issue price to the outstanding notes) is 13.713%.
Under this formula, Holders of the notes generally will have to include in gross
income greater amounts of OID in each successive accrual period. As further
described below, accrued OID generally must be included in income by subsequent
as well as original Holders of the notes.
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In general, the amount of OID that a Holder of a note must include in
income for a taxable year is the sum of the "daily portions" of OID on the note
for all days during the taxable year that such Holder owns the note. Such daily
portions are determined by allocating to each day in the accrual period a
ratable portion of the OID allocable to that accrual period. An accrual period
generally is each successive period that ends on February 15 or August 15. In
the case of an initial Holder of an outstanding note, the amount of OID on a
note allocable to each accrual period is determined by multiplying the "adjusted
issue price" of the note by its yield to maturity (based on compounding at the
close of each accrual period). The adjusted issue price of a note at the
beginning of any accrual period will be the sum of its issue price and the
amount of OID allocable to all prior accrual periods, reduced by the amount of
any payments (other than payments of qualified stated interest) made with
respect to the note in all prior accrual periods. A subsequent Holder also will
be required to include in gross income daily portions of OID with respect to the
note. However, if a subsequent Holder acquires the note for an amount greater
than the note's adjusted issue price (i.e., at an acquisition premium), the
subsequent Holder's daily portions of OID with respect to the note will be
reduced by an allocable portion of the amount by which the price paid by such
Holder (up to the stated principal amount) exceeds the note's adjusted issue
price.
The Company is to provide annual information statements to certain
noncorporate Holders and to the Internal Revenue Service stating the amount of
OID determined to have accrued on the notes. A Holder that acquires a note at an
acquisition premium must independently determine the amount of OID includable in
income with respect to the note.
Sale or Retirement of Notes
Upon the sale, retirement (including redemption) or other taxable
disposition of all or part of a note, a Holder will recognize gain or loss equal
to the difference between the amount realized on the sale, retirement or other
disposition and the Holder's adjusted tax basis in the note or part thereof. Any
recognized gain or loss will be capital gain or loss, except to the extent of
any accrued market discount (see "Market Discount" below). For these purposes,
the amount realized does not include any amount received for accrued interest on
a note, which will be taxable as interest income. A Holder's adjusted tax basis
in a note acquired by purchase will equal the cost of the note to the Holder,
increased by the amount of any accrued OID and market discount included in
taxable income by the Holder with respect to the note and reduced by any
amortized Section 171 premium (see "Amortizable Premium" below) and any prior
payments (other than payments of qualified stated interest) on the note to the
Holder. The redemption of only part of a note will require the allocation of the
entire note's adjusted tax basis and adjusted issue price between the redeemed
part and the part retained by the Holder in order to determine gain or loss and
future accruals of OID.
Market Discount
A purchaser of a note at a discount from the adjusted issue price of the
note acquires the note with "market discount." However, market discount with
respect to a note will be considered to be zero if the market discount is
minimal, i.e., less than the product of (A) 0.25% of the adjusted issue price of
the note multiplied by (B) the weighted average maturity of the note after the
date of purchase. The purchaser of a note with more than a minimal amount of
market discount generally will be required to treat any gain on the sale,
(retirement, including redemption) or other disposition of all or part of the
note as ordinary income to the extent of accrued (but not previously taxable)
market discount. Market discount generally will accrue ratably during the period
from the date of purchase to the maturity date of the note, unless the Holder
irrevocably elects to accrue such market discount on the basis of a constant
interest rate.
A Holder who has acquired a note at a market discount generally will be
required to defer any interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the note, to the extent such
deductions exceed interest and OID income on the note. Any such deferred
interest expense generally will be allowable as a deduction not later than the
year in which the related market discount is recognized. As an alternative to
the inclusion of market discount in income upon disposition of a note, a Holder
may make an election to include market discount in income as it accrues on all
market discount instruments acquired by the Holder during or after the taxable
year for which the election is made. In that case, the preceding deferral rule
for interest expense will not apply.
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Amortizable Premium
A purchaser of a note at a premium over the stated principal amount of the
note (plus accrued interest) generally may elect to amortize the premium
("Section 171 premium") from the purchase date to the maturity date, under a
constant yield method that reflects semiannual compounding. Amortized Section
171 premium generally will be treated as an offset to interest income on a note
and not as a separate deduction. An election to amortize Section 171 premium
generally may not be revoked and applies to all taxable bonds owned by the
Holder during or after the Holder's taxable year for which the election is made.
Under certain circumstances, the amortization of Section 171 premium
must be deferred if a note is acquired at a premium when the note subsequently
may be redeemed at the Company's option for a redemption price exceeding the
stated principal amount. If the Company's exercise of the redemption option
would maximize the Holder's yield on the note, only the excess (if any) of the
Section 171 premium over the redemption premium may be amortized before the
optional redemption date, and that excess would be amortizable as if the
redemption date were the maturity date of the note. The preceding principles
would apply for each successive optional redemption price and date for which
redemption of the note at the optional redemption price would maximize the
Holder's yield on the note. Once the note ceased to be redeemable at a price
that would maximize the Holder's yield, the remaining amount of Section 171
premium would be amortizable over the remaining term of the note to its maturity
date.
Section 171 premium does not include any acquisition premium attributable
to the portion of a purchase price for a note that exceeds the adjusted issue
price but not the stated principal amount of the note. As described above under
"Original Issue Discount," such an acquisition premium reduces the amount of OID
includable in the income of the Holder.
Non-U.S. Holders
A Non-U.S. Holder is a beneficial owner of a note who is treated as a
foreign person for United States federal income tax purposes.
This paragraph deals only with Non-U.S. Holders that own or dispose of a
note in connection with the conduct of a trade or business in the United States.
Such a Non-U.S. Holder generally will be subject to the same United States
federal income tax consequences as United States persons, except as may
otherwise be provided by an applicable tax treaty. In addition, such a Non-U.S.
Holder must provide a properly completed IRS Form W-ECI to the Company or other
payor of payments on any note held by the Non-U.S. Holder, in order to claim an
exemption from United States federal withholding tax on payments on the note.
The following paragraphs deal with Non-U.S. Holders that do not own or
dispose of a note in connection with the conduct of a trade or business in the
United States.
Payments of principal or interest, including OID, on a note to a Non-U.S.
Holder will not be subject to United States federal income or withholding tax if
. the Non-U.S. Holder is not a bank that receives payments on the note
through an extension of credit pursuant to an agreement entered into in
the ordinary course of its business;
. the Non-U.S. Holder does not actually or constructively own at least 10% of
the total combined voting power of all classes of the Company's voting
stock;
. the Non-U.S. Holder is not a "controlled foreign corporation" that is
related to the Company through stock ownership; and
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. the Non-U.S. Holder certifies to the payor that it is a Non-U.S. Holder and
provides its name and address to the payor (or a securities clearing
organization, bank, or other financial institution that holds securities
for customers in the ordinary course of its business and holds the note on
behalf of the Non-U.S. Holder certifies to the payor that it has received
the required certificate from the Non-U.S. Holder and furnishes a copy of
the certificate to the payor).
Payments of interest, including OID, to a Non-U.S. Holder that fails to satisfy
any of the preceding conditions generally will be subject to United States
federal withholding tax of 30% (or 31% if the last condition is not satisfied),
unless an applicable tax treaty provides an exemption from or reduction in
withholding tax and the Non-U.S. Holder provides appropriate documentation to
claim entitlement to the treaty benefit.
Gain realized on the sale, retirement (including redemption), or other
disposition of a note held by a Non-U.S. Holder will not be subject to United
States federal income tax, unless the Non-U.S. Holder is an individual who is
present in the United States for at least 183 days in the year in which the
disposition occurs (and certain other conditions are met) or the Non-U.S. Holder
is subject to certain provisions of the Code that apply to United States
expatriates. Payments of proceeds of the sale or other disposition of a note to
or through the office of a broker may be subject to United States information
reporting and, in the case of a United States office, backup withholding tax
unless the broker has appropriate documentation establishing that, among other
things, the beneficial owner is a Non-U.S. Holder.
A note held by an individual who is not a citizen or resident of the United
States generally will not be subject to United States federal estate tax. If,
however, the individual actually or constructively owns at least 10% of the
voting power of all classes of the Company's voting stock or if interest on the
note is effectively connected with the conduct of a trade or business in the
United States, the note may be subject to United States federal estate tax
absent an exemption under an applicable tax treaty.
Backup Withholding
A Holder may be subject to "backup withholding" under certain
circumstances. Backup withholding applies to a Holder if the Holder, among other
things, (i) fails to furnish his social security number or other taxpayer
identification number ("TIN") to the payor responsible for backup withholding
(for example, the Holder's securities broker), (ii) furnishes such payor an
incorrect TIN, (iii) fails to provide such payor with a certified statement,
signed under penalties of perjury, that the TIN provided to the payor is correct
and that the Holder is not subject to backup withholding, or (iv) fails to
report properly interest and dividends on his tax return. Backup withholding,
however, does not apply to payments made to certain exempt recipients, such as
corporations and tax-exempt organizations. The backup withholding rate is 31% of
"reportable payments," which generally will include interest payments and
principal payments on the notes.
The preceding federal income tax discussion may not be applicable to a
Holder, depending upon a Holder's particular situation, and therefore each
Holder should consult his tax advisor about the tax consequences of the
ownership and disposition of notes, including the tax consequences under state,
local, foreign and other tax laws and the possible effects of changes in federal
or other tax law.
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PLAN OF DISTRIBUTION
Except as described below, a broker-dealer may not participate in the
exchange offer in connection with a distribution of the exchange notes. Each
broker-dealer that receives exchange notes for its own account under the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. Based on SEC staff interpretations, a
broker-dealer could use this prospectus, as it may be amended or supplemented
from time to time, in connection with resales of exchange notes received in the
exchange offer where the beneficial interests in outstanding notes for which
they were exchanged were acquired as a result of market-making activities or
other trading activities. We have agreed that for a period not to exceed 180
days to make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any resale.
The information described above concerning SEC staff interpretations is not
intended to constitute legal advice, and broker-dealers should consult their own
legal advisors with respect to these matters.
We will not receive any proceeds from the exchange offer or any sale of
exchange notes by broker-dealers. Exchange notes received by broker-dealers for
their own account under 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 those
methods of resale, at market prices prevailing at the time of resale, at the
time of resale, at prices related to those prevailing market prices or
negotiated prices. Any 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 broker-dealer and/or the purchasers of any
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account under the exchange offer and any broker or dealer that
participates in a distribution of the exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
resale of exchange notes and any commissions or concessions received by any of
those persons may be deemed to be underwriting compensation under the Securities
Act. Any broker or dealer registered under the Exchange Act who holds
outstanding notes that were acquired for its own account as a result of market-
making activities or other trading activities, other than outstanding notes
acquired directly from us, may exchange those outstanding notes under the
exchange offer; however, that broker or dealer may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the exchange notes received by the broker or
dealer in the exchange offer. This prospectus delivery requirement may be
satisfied by the delivery by that broker or dealer of this prospectus. 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.
We have agreed to pay the expenses of registration of the exchange notes
and will indemnify the holders of the exchange notes, including any broker-
dealers, against certain liabilities, including liabilities under the Securities
Act.
Prior to the exchange offer, there has been no public market for the
outstanding notes. We do not intend to apply for listing of the exchange notes
on any securities exchange. There can be no assurance that an active market for
the exchange notes will develop. To the extent that a market for the exchange
notes develops, the market value of the exchange notes will depend on market
conditions (including yields on alternative investments and general economic
conditions), our financial condition and other conditions. Those conditions
might cause the exchange notes, to the extent that they are actively traded, to
trade at a significant discount from face value. We have not entered into any
arrangement or understanding with any person to distribute the exchange notes to
be received in the exchange offer.
We have not agreed to compensate broker-dealers who effect the exchange of
outstanding notes on behalf of holders.
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LEGAL MATTERS
Certain legal matters in connection with the exchange notes, including the
validity of the exchange notes, will be passed upon for us by Hunton & Williams,
Atlanta, Georgia.
EXPERTS
The consolidated financial statements of CFW as of December 31, 1999 and
1998 and for each of the three years in the period ended December 31, 1999
included in this prospectus have been audited by McGladrey & Pullen, LLP,
independent auditors, as stated in their reports appearing herein.
The financial statements of the Virginia PCS Alliance and the West Virginia
PCS Alliance as of December 31, 1999 and 1998 and for each of three years in the
period ended December 31, 1999 included in this prospectus have been audited by
McGladrey & Pullen, LLP, independent auditors, as stated in their reports
appearing herein.
Phibbs, Burkholder, Geisert & Huffman, independent auditors, have audited
R&B's consolidated financial statements at December 31, 1998, and for each of
the two years in the period then ended, as set forth in their report. McGladrey
& Pullen, LLP, independent auditors, have audited R&B's consolidated financial
statements at December 31, 1999, and for the year then ended, as set forth in
their report. R&B has included its financial statements in this prospectus in
reliance on Phibbs, Burkholder, Geisert & Huffman's and McGladrey & Pullen,
LLP's respective reports, given on their authority as experts in accounting and
auditing.
The financial statements of PrimeCo Personal Communications, L.P. Richmond
Major Trading Area as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-4 that we
have filed with the Securities and Exchange Commission. This prospectus does not
contain all of the information set forth in the registration statement. For
further information about us and the exchange notes, you should refer to the
registration statement. This prospectus summarizes material provisions of
agreements and other documents. Since these summaries may not contain all of the
information that you may find important, you should review the full text of
these documents, which can be found as either exhibits to the Registration
Statement or exhibits to other filings we have made. This prospectus
incorporates important business and financial information about the company that
is not included in or delivered with this document.
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Securities and Exchange
Commission filings are available to the public over the internet at the
Securities and Exchange Commission's web site at http://www.sec.gov. You may
also read and copy any documents that are filed at the Securities and Exchange
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.;
7 World Trade Center, Suite 1300, New York, New York; and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information on the public
reference rooms. You may also obtain filed documents from commercial document
retrieval services (some of which also provide on-line delivery). You may also
inspect such reports, proxy statements and other information concerning CFW at
the offices of The Nasdaq National Market, 9801 Washingtonian Boulevard,
Gaithersburg, Maryland, 20878.
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Securities and Exchange Commission
will automatically update and supersede this information.
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CFW incorporates by reference the documents listed below. Some of these
filings have been amended by later filings, which also are listed. CFW may be
required by the Securities and Exchange Commission to file other documents under
Section 13(a), 13(c), 24 or 15(d) of the Securities Exchange Act of 1934 prior
to the completion of the exchange offer. These other documents will be deemed
incorporated by reference in this prospectus and to be a part of it from the
date they are filed with the Securities and Exchange Commission. Any statements
contained in this prospectus concerning the provisions of any document filed
with the Securities and Exchange Commission are not necessarily complete, and,
in each instance, you should refer to the document in its entirety for complete
information.
You should rely only on the information incorporated by reference or
provided in this prospectus, dated November 6, 2000, 2000. You should not assume
that the information in this prospectus is accurate as of any date other than
that date.
CFW also incorporates by reference additional documents that may be filed
with the Securities and Exchange Commission between the date of this prospectus
and the completion of the exchange offer. The following documents are hereby
incorporated by reference to this prospectus.
<TABLE>
<CAPTION>
CFW Securities and Exchange
Commission Filings (File No. 0-1675) Period/As of Date
------------------------------------ -----------------
<S> <C>
Definitive Proxy Statement March 20, 2000
Annual Report on Form 10-K Fiscal year ended December 31, 1999
Quarterly Report on Form 10-Q Quarter ended March 31, 2000
Quarterly Report on Form 10-Q Quarter ended June 30, 2000
Registration Statement on Form 8-A12B February 29, 2000
Registration Statement on Form 8-A/A August 10, 2000
Current Report on Form 8-K February 29, 2000
Current Report on Form 8-K May 25, 2000
Current Report on Form 8-K July 10, 2000 (as amended on August 4, 2000)
Current Report on Form 8-K July 24, 2000 (as amended on August 14, 2000)
Current Report on Form 8-K August 4, 2000
Current Report on Form 8-K/A August 4, 2000
Current Report on Form 8-K/A August 14, 2000
Current Report on Form 8-K October 10, 2000
</TABLE>
Documents incorporated by reference are available from CFW without charge
by first class mail or equally prompt means within one business day of receipt
of your request, excluding exhibits unless the exhibit has been specifically
incorporated by reference into the information that this prospectus
incorporates. If you want to receive a copy of any document incorporated by
reference, please request in writing or by telephone from CFW at the following
addresses:
CFW Communications Company
401 Spring Lane, Suite 300
P. O. Box 1990
Waynesboro, Virginia 22980
Attn: Michael B. Moneymaker
(540)946-3500
166
<PAGE>
_________________________________
ANNEX A
TECHNICAL GLOSSARY
__________________________________
A-1
<PAGE>
TECHNICAL GLOSSARY
"3G" third generation wireless technology, a
recent wireless technology.
"ADSL" Asymmetric Digital Subscriber Line is a
high speed transmission technology using
existing twisted pair copper lines that
permits simultaneous POTS, or plain old
telephone service, and high-speed data
communication.
"ARPU" average revenue per subscriber.
"ATM" Asynchronous Transfer Mode is a highly
scalable protocol that packs digital
information into 53-byte cells, which
are switched throughout LAN or WAN over
virtual circuits supporting real-time
voice, video and data.
"BTS" Base Transceiver Station provides the
standard radio transceiver functions for
the air interface.
"CBSCs" Centralized Base Station Controllers
provide centralized control of the BTS's
along with switching, transcoding and
traffic concentration functions.
"CDMA" Code Division Multiple Access is a
method of spread-spectrum transmission
for cellular or digital wireless
personal communication networks that
allows a large number of wireless phone
users simultaneously to access a single
radio frequency band without
interference.
"CLEC" Competitive Local Exchange Carrier is a
company that provides competitive local
telephone service.
"CMRS" Commercial Mobile Radio Services is a
term coined by the FCC in 1994 to
describe publicly available, for-profit,
radio-based telecommunications services
that interconnect with the public
switched telephone network for the
purpose of sending or receiving
communications.
"DCS" Digital Cross-Connect System is a system
which consolidates the T-1 facilities
from multiple BTSs for efficient
backhaul to the wireless switch.
"Dense Wave Division Multiplexing" a transport architecture for sharing a
single transmission among two or more
users by allocating each user an
exclusive band within the channel.
"EBITDA" earnings before income taxes and
minority interest, interest expense,
interest income, depreciation and
amortization, gain (loss) on sale of
fixed assets, net equity income (loss)
from investees and asset impairment
charges.
"ESMR" Enhanced Specialized Mobile Radio is a
private, mobile, business radiophone
service whose base stations can
communicate with each
A-2
<PAGE>
other via the public telephone network.
"EVRC" Enhanced Variable Rate Coding is a
system that allows CDMA networks to
support additional capacity while
maintaining the voice quality associated
with digital networks.
"Frame Relay" a method of achieving high-speed,
packet-switched data transmission within
digital networks at transmission speeds
between 56 Kbps and 1.544 Mbps.
"GSM" Global System for Mobile Communications
began as the European standard for
digital cellular phones under the name
Groupe Speciale Mobile, but the name was
changed to reflect that the standard has
been adopted by several countries
outside of Europe.
"ILEC" Incumbent Local Exchange Carrier refers
to the primary local telephone company,
as distinguished from new competitive
carriers established after deregulation.
"Interexchange Carriers or IXCs" carriers authorized by the FCC to
provide interstate long-distance
communication services between LATAs or
a carrier authorized by a state public
utility commission to provide long-
distance communications services but no
local exchange services within the state
borders.
"Internet" the global network of data networks
enabling computers of all kinds to
communicate and share resources
throughout the world.
"ISDN" Integrated Services Digital Network is a
telecommunications service that uses
digital transmission and switching
technology to provide voice and data
communications on a bearer channel while
sending signaling on a data channel.
"ISP" Internet Service Provider is a vendor
that provides direct access to the
Internet.
"LMDS" Local Multipoint Distribution Service
uses a portion of the radio frequency
spectrum to deliver voice, video or
data.
"LATA" Local Access and Transport Area is one
of the 161 local telephone exchange
areas established as a result of the
AT&T divestiture and which serve to
distinguish local phone service from
long-distance service.
"LAN" Local Area Network is a private data
communications network linking a variety
of data devices, such as computer
terminals, personal computers and mini-
computers, all housed in a defined
building, plant or geographic area.
"Local Exchange Access" switched connections provided to
customers in a defined serving area or
exchange.
"Local Exchange Carrier" a company that provides intra-LATA
telecommunications services.
A-3
<PAGE>
"MMDS" Multichannel Multipoint Distribution
Service uses a portion of the radio
frequency spectrum to deliver voice,
video or data.
"PCS" Personal Communication Services is a
term coined by the FCC to describe an
intelligent, digital, two-way, wireless
telecommunications system.
"POP" Population of a market.
"RADSL" Rate Adaptive Digital Subscriber Line is
a transmission technology that supports
both asymmetric and symmetric
applications on a single twisted pair
telephone line allowing adaptive data
rates up to 7 Mbps.
"Remote Switching Modules" a system that performs switching
functions from a remote location under
the control of a host switching system
located in a central office. The system
switches calls among the lines directly
connected to it.
"SDSL" Symmetric Digital Subscriber Line is a
line that provides a bandwidth, bi-
directional transmission over one copper
wire pair for T1 or E1 services.
"Switched Access" a service offered by telephone companies
that provides switched connections
between local telephone subscribers and
long distance companies.
"TDMA" Time Division Multiple Access is a
method of digital transmission for
wireless transmission telecommunications
systems that allows a large number of
users simultaneously to access a single
radio frequency band without
interference.
"Voice Over IP" Voice Over Internet Protocol allows
voice transmission over the Internet.
"WAN" Wide Area Network is a network which
spans a large geographic area.
"xDSL" x Digital Subscriber Lines refers to all
digital subscriber line based services.
Digital subscriber line is the non-
loaded, local loop copper connection
between the national service provider
and a customer's premises.
A-4
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CFW Communications Company
<TABLE>
<S> <C>
Audited Consolidated Financial Statements
Independent Report of McGladrey & Pullen, LLP......................................................... F-3
Balance Sheets at December 31, 1999 and 1998.......................................................... F-4
Statements of Income for the years ended December 31, 1999, 1998 and 1997............................. F-6
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997......................... F-7
Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997............... F-8
Notes to Financial Statements......................................................................... F-9
Unaudited Interim Condensed Consolidated Financial Statements
Balance Sheets at June 30, 2000 and December 31, 1999................................................. F-26
Statements of Income for the three and six months ended June 30, 2000 and 1999........................ F-28
Statements of Cash Flows for the six months ended June 30, 2000 and 1999.............................. F-29
Statements of Shareholders' Equity for each of the calendar quarters in the period ending June
30, 2000 and each of the calendar quarters in the year ended December 31, 1999................... F-30
Notes to Financial Statements......................................................................... F-31
PrimeCo Personal Communications, L.P., Richmond Major Trading Area
Audited Financial Statements
Independent Report of PricewaterhouseCoopers LLP...................................................... F-34
Balance Sheets at December 31, 1999 and 1998.......................................................... F-35
Statements of Operations for the years ended December 31, 1999, 1998 and 1997......................... F-36
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997......................... F-37
Notes to Financial Statements......................................................................... F-38
Unaudited Interim Financial Statements
Balance Sheets at June 30, 2000 and December 31, 1999................................................. F-45
Statements of Operations for the six months ended June 30, 2000 and 1999.............................. F-46
Statements of Cash Flows for the six months ended June 30, 2000 and 1999.............................. F-47
Notes to Financial Statements......................................................................... F-48
R&B Communications, Inc.
Audited Consolidated Financial Statements
Independent Report of McGladrey & Pullen, LLP......................................................... F-49
Independent Report of Phibbs, Burkholder, Geisert & Huffman, LLP...................................... F-50
Balance Sheets at December 31, 1999 and 1998.......................................................... F-51
Statements of Operations for the years ended December 31, 1999, 1998 and 1997......................... F-53
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997......................... F-54
Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997............... F-55
Notes to Financial Statements......................................................................... F-56
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Unaudited Interim Condensed Consolidated Financial Statements
Balance Sheets at June 30, 2000 and December 31, 1999................................................ F-64
Statements of Operations for the three and six months ended June 30, 2000 and 1999................... F-66
Statements of Cash Flows for the six months ended June 30, 2000 and 1999............................. F-67
Statements of Shareholders' Equity for the three months ended June 30, 2000 and 1999................. F-68
Notes to Financial Statements........................................................................ F-69
Virginia PCS Alliance, L.C.
Audited Financial Statements
Independent Report of McGladrey & Pullen, LLP........................................................ F-71
Balance Sheets at December 31, 1999 and 1998......................................................... F-72
Statements of Operations for the years ended December 31, 1999, 1998 and 1997........................ F-73
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........................ F-74
Statements of Members' Equity (deficit) for the years ended December 31, 1999, 1998 and 1997......... F-76
Notes to Financial Statements........................................................................ F-77
Unaudited Interim Condensed Financial Statements
Balance Sheets at June 30, 2000 and December 31, 1999................................................ F-83
Statements of Operations for the three and six months ended June 30, 2000 and 1999................... F-84
Statements of Cash Flows for the six months ended June 30, 2000 and 1999............................. F-85
Statements of Members' Equity (deficit) for each of the calendar quarters in the six months
ended June 30, 2000 and the year ended December 31, 1999........................................ F-86
Notes to Financial Statements........................................................................ F-87
West Virginia PCS Alliance, L.C.
Audited Financial Statements
Independent Report of McGladrey & Pullen, LLP........................................................ F-88
Balance Sheets at December 31, 1999 and 1998......................................................... F-89
Statements of Operations for the years ended December 31, 1999, 1998, and for the period from
July 1, 1997 (date of inception) through December 31, 1997...................................... F-90
Statements of Cash Flows for the years ended December 31, 1999, 1998, and for the period from
July 1, 1997 (date of inception) through December 31, 1997...................................... F-91
Statements of Members' Equity (deficit) for the years ended December 31, 1999, 1998, and for
the period from July 1, 1997 (date of inception) through December 31, 1997...................... F-93
Notes to Financial Statements........................................................................ F-94
Unaudited Interim Condensed Financial Statements
Balance Sheets at June 30, 2000 and December 31, 1999................................................ F-98
Statements of Operations for the three and six months ended June 30, 2000 and 1999................... F-99
Statements of Cash Flows for the six months ended June 30, 2000 and 1999............................. F-100
Statements of Members' Equity (deficit) for each of the calendar quarters in the six months
ended June 30, 2000 and the year ended December 31, 1999........................................ F-101
Notes to Financial Statements........................................................................ F-102
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CFW Communications Company
Waynesboro, Virginia
We have audited the accompanying consolidated balance sheets of CFW
Communications Company and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
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 generally accepted auditing
standards. 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 disclosure 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CFW
Communications Company and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
As described in Note 14 to the Consolidated Financial Statements, on June 1,
2000 the Company retroactively revised its reporting of certain revenues and
related costs of its wireless operations.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 17, 2000, except for notes 14 and 15,
as to which the date is June 16, 2000
F-3
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 198,540 $ 42,890
Accounts receivable, net of allowance of $1.1
million ($0.6 million in 1998).................... 13,822,010 12,120,985
Receivable from affiliates......................... 3,824,585 5,681,978
Materials and supplies............................. 955,381 1,374,877
Prepaid expenses and other......................... 572,339 448,775
Income taxes receivable............................ 2,002,572 691,221
------------ ------------
21,375,427 20,360,726
------------ ------------
Securities and Investments........................... 39,109,476 10,980,988
------------ ------------
Property and Equipment
Land and building.................................. 23,526,095 20,965,223
Network plant and equipment........................ 108,449,567 93,247,587
Furniture, fixtures, and other equipment........... 28,170,261 20,022,238
Radio spectrum licenses............................ 15,478,079 15,468,649
------------ ------------
Total in service................................. 175,624,002 149,703,697
Under construction................................. 9,535,642 4,718,837
------------ ------------
185,159,644 154,422,534
Less accumulated depreciation...................... 59,278,974 50,760,242
------------ ------------
125,880,670 103,662,292
------------ ------------
Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization of $2.4 million
($1.4 million in 1998)............................ 23,411,894 12,705,900
Deferred charges................................... 359,294 533,540
Radio spectrum licenses............................ 7,864,836 6,090,791
------------ ------------
31,636,024 19,330,231
------------ ------------
$218,001,597 $154,334,237
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................................... $ 9,809,268 $ 7,042,966
Customers' deposits................................ 448,995 400,655
Advance billings................................... 2,677,044 2,303,696
Accrued payroll.................................... 1,156,120 1,283,083
Accrued interest................................... 280,151 623,412
Other accrued liabilities.......................... 2,888,530 1,955,176
Deferred revenue................................... 1,835,694 1,221,849
------------ ------------
19,095,802 14,830,837
------------ ------------
Long-Term Debt....................................... 37,684,783 19,774,262
------------ ------------
Long-Term Liabilities
Deferred income taxes.............................. 31,604,744 14,243,872
Retirement benefits................................ 10,854,052 9,852,634
Other.............................................. 797,175 749,728
------------ ------------
43,255,971 24,846,234
------------ ------------
Minority Interests................................... 1,781,241 1,472,419
------------ ------------
Commitments
Shareholders' Equity
Preferred stock, no par value per share, authorized
1,000,000 shares; none issued..................... -- --
Common stock, no par value per share, authorized
20,000,000 shares; issued 13,060,386 shares
(13,016,988 in 1998).............................. 43,943,136 43,527,636
Retained earnings.................................. 50,385,117 49,882,849
Unrealized gain on securities available for sale,
net............................................... 21,855,547 --
------------ ------------
116,183,800 93,410,485
------------ ------------
$218,001,597 $154,334,237
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues
Wireline communications............... $44,110,124 $37,596,778 $34,495,331
Wireless communications (Note 14)..... 21,691,671 17,623,857 13,432,974
Directory assistance.................. 12,104,096 12,949,714 10,533,459
Other communications services......... 4,028,445 2,941,880 2,267,156
----------- ----------- -----------
81,934,336 71,112,229 60,728,920
----------- ----------- -----------
Operating Expenses
Cost of sales (Note 14)............... 8,142,551 4,426,125 1,718,962
Maintenance and support............... 16,608,994 10,837,093 9,659,569
Depreciation and amortization......... 12,623,212 10,503,338 9,196,237
Asset impairment charge............... 3,950,894 -- --
Customer operations................... 19,870,214 16,223,183 14,282,592
Corporate operations.................. 7,216,365 6,496,028 6,459,352
----------- ----------- -----------
68,412,230 48,485,767 41,316,712
----------- ----------- -----------
Operating Income........................ 13,522,106 22,626,462 19,412,208
Other Income (Expenses)
Other expenses, principally interest.. (904,699) (623,091) (855,360)
Equity loss from PCS investees
VA PCS Alliance..................... (5,436,446) (5,075,624) (834,075)
WV PCS Alliance..................... (5,928,605) (1,391,407) --
Equity income from other wireless
investees............................ 179,128 197,906 74,115
Loss on write-down of investment...... -- (1,009,661) (2,808,145)
Gain on sale of tower asset and
investments.......................... 8,317,511 -- 5,077,379
----------- ----------- -----------
9,748,995 14,724,585 20,066,122
Income Taxes............................ 2,867,704 5,638,940 7,398,495
----------- ----------- -----------
6,881,291 9,085,645 12,667,627
Minority Interests...................... (388,633) (578,005) (446,695)
----------- ----------- -----------
Net Income.............................. $ 6,492,658 $ 8,507,640 $12,220,932
=========== =========== ===========
Net income per common share--basic...... $ 0.50 $ 0.65 $ 0.94
Net income per common share--diluted.... $ 0.50 $ 0.65 $ 0.94
Average shares outstanding--basic....... 13,041,868 13,007,880 12,982,289
Average shares outstanding--diluted..... 13,112,952 13,093,561 13,055,814
Cash dividends per share................ $ 0.459 $ 0.435 $ 0.412
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income.......................... $ 6,492,658 $ 8,507,640 $ 12,220,932
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation........................ 11,458,860 9,730,746 8,559,656
Amortization........................ 1,164,352 772,592 636,581
Asset impairment charge............. 3,950,894 -- --
Deferred taxes...................... 3,683,184 5,001,626 105,664
Retirement benefits other than
pensions........................... 1,001,418 1,006,965 835,451
Other............................... 25,527 (37,534) (10,426)
Equity loss from wireless
investees.......................... 11,185,923 6,269,125 759,960
Minority interests, net of
distributions...................... (55,738) (4,013) (41,306)
Distributions received from
investments........................ 132,090 218,705 99,704
Gain on sale of tower asset and
investments........................ (8,317,511) -- (5,077,379)
Loss on write-down of investment.... -- 1,009,661 2,808,145
Changes in assets and liabilities
from operations:
(Increase) decrease in accounts
receivable........................ (1,239,062) 83,299 (3,489,136)
(Increase) decrease in materials
and supplies...................... 419,496 (536,949) (173,459)
Increase in other current assets... (123,564) (99,158) (238,786)
(Increase) decrease in income
taxes............................. (1,311,351) (815,766) 741,612
Increase in accounts payable....... 2,194,811 2,873,684 823,237
Increase (decrease) in other
accrued liabilities............... 463,130 (651,510) (271,945)
Increase in other current
liabilities....................... 421,688 165,517 192,460
------------ ------------ ------------
Net cash provided by operating
activities....................... 31,546,805 33,494,630 18,480,965
------------ ------------ ------------
Cash Flows From Investing Activities
Purchases of property and
equipment.......................... (36,726,308) (16,336,873) (14,042,679)
Purchase of PCS licenses, net of
minority interest.................. (1,409,602) (666,885) (4,459,818)
Investments in PCS Alliances........ (3,892,138) (2,253,995) (1,492,709)
(Advances to) repayments from PCS
Alliances.......................... 1,857,393 (4,955,147) --
Acquisitions of Internet company and
subscribers........................ (12,354,928) -- --
Investment in national database
provider........................... -- (1,004,681) --
Sale of mortgage-backed securities.. -- 971,288 540,961
Proceeds from the sale of tower
asset and investments.............. 9,732,457 -- 6,594,399
Purchase of cellular minority
interests.......................... -- -- (1,103,481)
Maturities and distributions from
(contributions to) other
investments........................ (49,800) (45,239) 10,282
------------ ------------ ------------
Net cash used in investing
activities....................... (42,842,926) (24,291,532) (13,953,045)
------------ ------------ ------------
Cash Flows From Financing Activities
Cash dividends...................... (5,990,390) (5,660,024) (5,349,009)
Payments on senior notes............ (3,636,364) (3,741,764) --
Additional borrowings (payments)
under other debt facilities, net... 20,663,025 (1,090,134) (1,000,000)
Net proceeds from exercise of stock
options............................ 415,500 107,367 41,829
------------ ------------ ------------
Net cash provided by (used in)
financing activities............. 11,451,771 (10,384,555) (6,307,180)
------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents................. 155,650 (1,181,457) (1,779,260)
Cash and Cash Equivalents:
Beginning........................... 42,890 1,224,347 3,003,607
------------ ------------ ------------
Ending.............................. $ 198,540 $ 42,890 $ 1,224,347
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 12,980,212 $43,378,440 $40,163,310 $ 2,460,176 $ 86,001,926
Comprehensive income:
Net Income............ 12,220,932
Unrealized loss on
securities available
for sale, net of $1.6
million of deferred
tax effect........... (2,460,176)
Comprehensive income.. 9,760,756
Cash dividends........ (5,349,009) (5,349,009)
Stock options
exercised, net....... 6,442 41,829 41,829
---------- ----------- ----------- ----------- ------------
Balance, December 31,
1997................... 12,986,654 43,420,269 47,035,233 -- 90,455,502
Comprehensive income:
Net Income............ 8,507,640
Comprehensive income.. 8,507,640
Cash dividends........ (5,660,024) (5,660,024)
Stock options
exercised, net....... 30,334 107,367 107,367
---------- ----------- ----------- ----------- ------------
Balance, December 31,
1998................... 13,016,988 43,527,636 49,882,849 -- 93,410,485
Comprehensive income:
Net Income............ 6,492,658
Unrealized gain on
securities available
for sale, net of
$14.0 million of
deferred tax effect.. 21,855,547
Comprehensive income.. 28,348,205
Cash dividends........ (5,990,390) (5,990,390)
Stock options
exercised, net....... 43,398 415,500 415,500
---------- ----------- ----------- ----------- ------------
Balance, December 31,
1999................... 13,060,386 $43,943,136 $50,385,117 $21,855,547 $116,183,800
========== =========== =========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
CFW Communications Company is a diversified regional communications company
that provides a broad range of products and services to businesses,
telecommunication carriers and residential customers in Virginia and
surrounding states. The Company's services include personal communications
services ("PCS"), local telephone, long distance, cellular, paging, wireline
and wireless cable television, directory assistance, competitive access, local
Internet access and alarm monitoring and installation. Significant accounting
policies follow:
Accounting 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.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries and those
partnerships where the Company, as managing partner, exercises control. All
significant intercompany accounts and transactions have been eliminated.
Revenue recognition: The Company's revenue recognition policy is to
recognize revenues when services are rendered or when products are
delivered, installed and functional, as applicable. Certain services of the
Company require payment in advance of service performance. In such cases,
the Company records a service liability at the time of billing and
subsequently recognizes revenue over the service period.
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents. The Company places
its temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of the FDIC
insurance limit.
Securities and investments: The Company has investments in debt and equity
securities and partnerships. Management determines the appropriate
classification of securities at the date of purchase and continually
thereafter. The classification of those securities and the related
accounting policies are as follows:
Available for sale securities: Securities classified as available for sale
are primarily traded on a national exchange and are those securities that
the Company intends to hold for an indefinite period of time but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors including changes in
market conditions, liquidity needs and other similar factors. Securities
available for sale are stated at fair value and unrealized holding gains
and losses, net of the related deferred tax effect, are reported as a
separate component of shareholders' equity. Realized gains and losses,
determined on the basis of the cost of specific securities sold, are
included in earnings.
Equity method investments: These investments consist of partnership and
corporate investments where the Company's ownership is 20% or more, except
where such investments meet the requirements for consolidation. Under the
equity method, the Company's share in earnings or losses of these companies
is included in earnings.
Investments carried at cost: These are investments in which the Company
does not have significant ownership and for which there is no ready market.
Information regarding these and all other investments is reviewed
continuously for evidence of impairment in value. No impairment was deemed
to have occurred at December 31, 1999.
Interest on debt securities is recognized in income as accrued, and
dividends on marketable equity securities are recognized in income when
declared. Realized gains or losses are determined on the basis of specific
securities sold and are included in earnings.
F-9
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Property and equipment: Property and equipment is stated at cost.
Accumulated depreciation is charged with the cost of property retired, plus
removal cost, less salvage. Depreciation is determined under the remaining
life method and straight-line composite rates. Buildings are depreciated
over a 50-year life. Network plant and equipment are depreciated over
various lives from 3 to 50 years, with an average life of approximately 13
years for the category. Furniture, fixtures and other equipment are
depreciated over various lives from 5 to 24 years. Radio spectrum licenses,
which are for areas where the licenses are being used in operations, are
amortized over a life of 30 years. The Company has other radio spectrum
licenses that are included in other assets until such licenses are placed
in service. Depreciation provisions were approximately 7.0%, 6.8% and 6.6%
of average depreciable assets for the years 1999, 1998 and 1997,
respectively.
Materials and supplies: The Company's materials and supplies inventory
consists primarily of items held for resale such as cellular and PCS
phones, pagers, wireline business phones and accessories. The Company
values its inventory at the lower of cost (specific identification) or
market. The market value is determined by reviewing current replacement
cost, marketability, and obsolescence.
Cost in excess of net assets acquired: Cost in excess of net assets
acquired resulting from acquisitions is being amortized over various lives
from 10 to 30 years using the straight-line method. The Company
periodically evaluates the recoverability of intangibles resulting from
business acquisitions and assesses whether impairment has occurred. This
assessment is derived based on current and future levels of income and cash
flow as well as other factors, such as business trends, future prospects
and market and economic conditions.
Pension benefits: The Company sponsors a non-contributory defined benefit
pension plan covering all employees who meet eligibility requirements.
Pension benefits vest after five years of service and are based on years of
service and average final compensation subject to certain reductions if the
employee retires before reaching age 62. The Company's funding policy has
been to contribute up to the maximum amount allowable by applicable
regulations. Contributions are intended to provide not only for benefits
based on service to date, but also for those expected to be earned in the
future.
The Company also sponsors a contributory defined contribution plan under
Internal Revenue Code Section 401(k) for substantially all employees. The
Company contributes 60% of each participant's annual contribution for
contributions up to 6% of each participant's annual compensation. The
employee elects the type of investment fund from the equity, bond and
annuity alternatives offered by the plan.
Retirement benefits other than pensions: The Company provides certain
health care benefits for all retired employees that meet eligibility
requirements. The Company's share of the estimated costs of benefits that
will be paid after retirement is generally being accrued by charges to
expense over the eligible employee's service periods to the dates they are
fully eligible for benefits.
Income taxes: Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Net income per common share: Basic net income per share was computed by
dividing net income by the weighted average number of common shares
outstanding during the year. Diluted net income per share was computed
under the treasury stock method assuming the conversion, as of the
beginning of the year, of all dilutive stock options.
F-10
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
The weighted average number of common shares outstanding (diluted), which
was used to compute diluted net income per share, was derived by adding
weighted average outstanding shares ("Average shares outstanding--basic")
plus assumed conversion of dilutive stock options (71,084, 85,681, and
73,525 shares for 1999, 1998 and 1997, respectively). The Company had
27,500, 31,850, and 52,450 stock options outstanding in 1999, 1998 and
1997, respectively, which could potentially dilute net income per share in
future periods, but which were not included in diluted net income per share
for the periods presented since the results were antidilutive. There were
no adjustments to net income in the computation of diluted net income per
share.
Fair value of financial instruments: The fair values of financial
instruments recorded on the balance sheet, except securities and
investments, are not significantly different from the carrying amounts,
based on cash flows relative to similar instruments. Information as to
securities and investments is included elsewhere in Notes 1, 3 and 4. The
fair value of off-balance sheet guarantees, as described in Note 3, is not
determinable due to the nature of the transaction.
Major customer: The Company has one customer that accounts for greater than
10% of its revenue, primarily consisting of carrier access charges for long
distance services, billing and collecting services and directory
assistance. The percent of operating revenue from this customer was 20% in
1999, 28% in 1998, and 34% in 1997. The primary segments receiving revenue
from this customer were telephone and directory assistance.
Financial statement classifications: Certain amounts in the prior year
financial statements have been reclassified, with no effect on net income,
to conform with classifications adopted in 1999.
Note 2. Disclosures About Segments of an Enterprise and Related Information
The Company has six primary business segments which have separable management
focus and infrastructures and that offer different products and services.
These segments are as follows:
Telephone: The Company has a 100-year-old local telephone business subject
to the regulations of the State Corporation Commission of Virginia. This
business is the incumbent local exchange carrier (ILEC) for several areas
in western Virginia. Principle products offered by this business are local
service, which includes advanced calling features, network access, long
distance toll and directory advertising.
Network: In addition to the ILEC services, the Company directly or
indirectly owns 500 miles of fiber optic network and provides transport
services for long distance, Internet and private network services. This
network is connected and marketed with Carolina's FiberNet in parts of a
mid-Atlantic eight state region. Additionally, the network business, which
began offering Competitive Local Exchange (CLEC) service in 1998, is
certified in Virginia, West Virginia and Tennessee and provided CLEC
service in four markets throughout 1999 and commenced offering CLEC
services in four additional markets late in 1999.
Internet: The Company provides Internet access services through a local
presence in 48 markets in Virginia, West Virginia, Tennessee and North
Carolina. Through internal growth and acquisition, the Company has six
times more Internet customers at the end of 1999 versus the prior year end.
The Company offers high-speed data services, such as dedicated service and
DSL(Digital Subscriber Line) in an increasing number of these markets
within this region.
Wireless: The Company's wireless business carries cellular and digital
phones and services, paging and voicemail and is marketed in the retail and
business-to-business channels primarily within the Company's cellular
territory.
F-11
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Disclosures About Segments of an Enterprise and Related Information
(Continued)
Directory Assistance: The Company's directory assistance business provides
third party directory assistance for customers of several communications
companies and handled an average of more than 180,000 requests per day in
1999. Revenues from its largest customer, AT&T, accounted for 86%, 94% and
97% of the segments total revenues for 1999, 1998, and 1997, respectively.
Directory assistance revenues are reported net of database access charges
of $3.9 million, $5.0 million and $4.1 million for the three years ended
December 31, 1999 because management believes this presentation more
appropriately reflect the revenues for services provided by this segment.
Wireless Cable: The cable business offers wireless video cable service and
offers wireless cable high-speed Internet service in Charlottesville,
Virginia.
Summarized financial information concerning the Company's reportable segments
is shown in the following table. The "Other" column includes certain
unallocated corporate related items, as well as results from the Company's
alarm, communication services and wireline cable businesses, which are not
considered separate reportable segments.
<TABLE>
<CAPTION>
Network
and Directory Wireless
Telephone CLEC Internet Wireless Assistance Cable Other Total
--------- ------- -------- -------- ---------- -------- ------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues................ $31,261 $5,635 $5,611 $18,924 $12,104 $2,768 $5,632 $ 81,935
EBITDA.................. 21,697 1,010 (808) 4,116 1,528 422 2,131 30,096
Depreciation &
Amortization........... 3,753 1,311 1,237 967 1,300 2,153 1,902 12,623
Asset impairment charge
(Note 7)............... 2,713 1,238 3,951
Total Segment Assets.... 45,309 24,763 16,778 9,156 14,261 20,376 12,863 143,506
Corporate Assets........ 74,496
--------
Total Assets.......... $218,002
========
1998
Revenues................ $30,548 $4,024 $1,416 $14,657 $12,950 $2,966 $4,551 $ 71,112
EBITDA.................. 21,715 1,943 (338) 4,896 3,018 365 1,531 33,130
Depreciation &
Amortization........... 3,343 1,378 259 637 1,032 2,724 1,130 10,503
Total Segment Assets.... 42,521 13,033 1,048 7,581 10,942 26,018 14,542 115,685
Corporate Assets........ 38,649
--------
Total Assets.......... $154,334
========
1997
Revenues................ $28,828 $3,165 $ 832 $10,321 $10,533 $3,112 $3,938 $ 60,729
EBITDA.................. 19,708 2,036 (149) 4,318 1,627 285 783 28,608
Depreciation &
Amortization........... 3,169 926 145 602 916 2,567 871 9,196
Total Segment Assets.... 40,523 12,170 652 6,877 12,593 29,048 14,664 116,527
Corporate Assets........ 31,216
--------
Total Assets.......... $147,743
========
</TABLE>
F-12
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Disclosures About Segments of an Enterprise and Related Information
(Continued)
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (Note 1). The Company evaluates the
performance of its operating segments principally on operating revenues and
earnings before income taxes, depreciation and amortization (EBITDA).
Corporate functions are allocated at cost to the operating segments and all
other intercompany transactions are cost based. Segment depreciation and
amortization contains an allocation of depreciation and amortization from
corporate assets. Corporate depreciation and amortization not allocated to the
segments is indicated in the "Other" column in the proceeding table.
Note 3. Investments in Wireless Affiliates
At December 31, 1999, the Company had invested $1.1 million ($0.9 million at
December 31, 1998) for a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications services
("PCS") serving a 1.6 million populated area in central and western Virginia.
The Company is managing network expansion and ongoing operations pursuant to a
service agreement. PCS operations began throughout the Virginia region in the
fourth quarter of 1997.
At December 31, 1999, the Company had invested approximately $9.1 million
($6.0 million at December 31, 1998) for convertible preferred ownership
interest in the VA Alliance which is convertible in 2001 into additional
common ownership interest. If converted, the Company would have a 46%
ownership interest in the VA Alliance. In December 1996, the VA Alliance also
issued $12.9 million of redeemable preferred ownership interest that can be
redeemed by the investor after December 31, 2001. In the event the investor
elects to redeem such preferred equity after such date, the Company may elect
to fund $11.4 million of such obligation in exchange for additional common
ownership in the VA Alliance. In the event this redemption and funding occurs,
and the Company converts its convertible preferred ownership interest, the
Company would have a 65% common ownership interest in the VA Alliance.
The Company has committed to provide $14.3 million additional capital to the
VA Alliance in installments of $6.5 million in 2000, $6.5 million in 2001 and
$1.3 million in 2002. Such additional capital commitments would be reduced by
proceeds, if any, from future equity offerings by the VA Alliance.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million
populated area in West Virginia and eastern Kentucky, southwestern Virginia
and eastern Ohio. The Company is managing network expansion and ongoing
operations pursuant to a service agreement. PCS operations began in Charleston
and Huntington, West Virginia, in the fourth quarter of 1998 and expanded to
Morgantown and the northern corridor of West Virginia in the second quarter of
1999.
The Company has committed to provide additional capital to the WV Alliance of
$1.9 million in three equal annual installments beginning in January 2000.
Such additional capital commitments would be reduced by proceeds, if any, from
future equity offerings by the WV Alliance.
F-13
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investments in Wireless Affiliates (Continued)
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for by the equity method, are as
follows:
<TABLE>
<CAPTION>
VA Alliance WV Alliance
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 9,241 $ 3,648 $ 2,367 $ 488
Noncurrent assets....... 111,601 100,668 51,130 30,644
Current liabilities..... 7,633 11,991 3,076 10,732
Noncurrent liabilities.. 131,478 90,301 51,125 9,237
Redeemable preferred in-
terest................. 15,192 14,345 -- --
<CAPTION>
VA Alliance WV Alliance
--------------------------- ------------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- -------- ------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 12,677 $ 3,200 $ 119 $ 3,087 $ 114 $ --
Gross profit (loss)..... 6,059 1,635 (197) (77) (107) --
Net loss applicable to
common owners.......... (26,139) (24,415) (3,952) (13,287) (3,103) --
Company's share of net
loss................... (5,436) (5,076) (834) (5,929) (1,391) --
</TABLE>
The Company has entered into guarantee agreements whereby the Company is
committed to provide guarantees of up to $71.0 million of the Alliances' debt
and redeemable preferred obligations. Such guarantees become effective as
obligations are incurred by the Alliances. At December 31, 1999, the Company
has guaranteed $67.5 million of the Alliance's obligations.
In its managing member role, the Company provides certain corporate services
for the Alliances, including executive, finance, accounting, information
management, human resources, and other general and administrative services
(collectively, "corporate services"). The Company charged the Alliances $3.3
million in 1999, $1.9 million in 1998 and $0.5 million in 1997 for these
corporate services. Retained earnings of the Company at December 31, 1999
include accumulated losses of $11.6 million related to these Alliances.
F-14
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities and Investments
Investments consist of the following as of December 31:
<TABLE>
<CAPTION>
Carrying Values
------------------------
Type of Ownership 1999 1998
---------------------------- ----------- -----------
<S> <C> <C> <C>
Available for Sale
American Telecasting,
Inc................... Equity Securities $ -- $ 275,362
Illuminet Holdings,
Inc................... Equity Securities 37,612,740 1,778,787
----------- -----------
37,612,740 2,054,149
----------- -----------
Equity Method
Virginia PCS Alliance,
L.C................... Equity and Convertible
Preferred Interests (773,449) 1,404,879
West Virginia PCS
Alliance, L.C......... Equity Interest (633,003) 4,661,583
Virginia
Telecommunications
Partnership........... General Partnership Interest 296,973 325,684
Virginia Independent
Telephone Alliance.... Limited Partnership Interest 527,595 489,628
Other.................. Partnership Interests 564,696 518,605
----------- -----------
(17,188) 7,400,379
----------- -----------
Cost Method
Multimedia Medical
Systems, Inc.......... Equity Securities 362,221 362,221
Listing Services
Solutions, Inc........ Equity Securities 1,004,681 1,004,681
Other.................. Equity Securities 147,022 159,558
----------- -----------
1,513,924 1,526,460
----------- -----------
$39,109,476 $10,980,988
=========== ===========
</TABLE>
In October 1999, Illuminet Holdings, Inc. completed an initial public offering
("IPO") and commenced being traded on the NASDAQ exchange under the symbol
ILUM. The Company holds 683,000 shares of ILUM at a cost of $1.8 million with
a market value of $37.6 million on December 31, 1999 ($55.00 per share).
Concurrent with ILUM's NASDAQ listing, the Company reclassified the investment
from the cost method category to the available for sale category. Prior to
this date, the investment was accounted for under the cost method. Pursuant to
the terms of the IPO, the Company is restricted from selling shares of ILUM
until April 2000.
The Company sold its investment in American Telecasting, Inc. ("ATEL") in
September 1999, for $6.50 per share, recognizing a $7.6 million gain. At
December 31, 1998, the Company owned 1.2 million shares of ATEL which had a
carrying value of $0.20 per share, net of total impairment losses of $3.8
million recorded in 1998 and 1997.
Changes in the unrealized gain (loss) on available for sale securities during
the years ended December 31, 1999 and 1998, reported as a separate component
of shareholders' equity are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Unrealized gain, beginning balance................... $ -- $ --
Unrealized holding gains during the year............. 35,868,877 --
------------ ----------
Unrealized gain, ending balance...................... 35,868,877 --
Deferred tax effect related to net unrealized holding
gains............................................... (14,013,330) --
------------ ----------
Unrealized gain included in shareholders' equity..... $ 21,855,547 $ --
============ ==========
</TABLE>
F-15
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Long-Term Debt and Lines of Credit
Long-term debt and lines of credit consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
7.26% Unsecured senior notes due in annual
installments from 2000 to 2007....................... $12,727,272 $16,363,636
6.25% Notes payable secured by certain PCS radio
spectrum licenses due from 2000 to 2006.............. 1,427,180 1,500,760
Borrowings under lines of credit...................... 23,530,331 1,909,866
----------- -----------
$37,684,783 $19,774,262
=========== ===========
</TABLE>
Using proceeds from borrowings under the Company's lines of credit, the
Company paid $3.2 million of principal on the unsecured senior notes in
January 2000 and, in February 2000, paid $9.5 million to the senior note
holders in full redemption of the senior notes. In connection with this
redemption, the Company increased its committed lines of credit from $45
million to $60 million. The Company has classified borrowings under its notes
payable and lines of credit as long-term, since the Company has the ability
and the intent to refinance these borrowings with existing lines of credit
that have a maturity of beyond one year. The blended interest rates on the
borrowings under lines of credit as of December 31, 1999, 1998 and 1997 were
6.2%, 5.2% and 5.9%, respectively.
Interest expense was $1.1 million, $0.7 million and $0.9 million for 1999,
1998 and 1997, respectively. Maturities of long-term debt for each of the next
five years are 2000--$34.8 million; 2001--$1.7 million; 2002--$0.2 million;
2003--$0.2 million; and 2004--$0.2 million.
Note 6. Acquisitions
In August 1999, the Company acquired, for cash, all of the outstanding stock
of NetAccess, Inc. ("NAXS"), an Internet Service Provider ("ISP"), for an
initial payment of approximately $6.0 million. In addition, a contingent
purchase payment will be made based on achievement of future performance
levels during calendar year 2000. At this time, the contingent payment can not
be reasonably estimated. The contingent payment, if applicable, will be made
during the first quarter of 2001. NAXS, now a wholly-owned operating
subsidiary of the Company, is engaged in the business of providing dial-up and
dedicated Internet access, high-speed access through DSL and ISDN technology.
This acquisition increased the Company's core Internet customers by
approximately 13,500 subscribers on the date of acquisition. NAXS also
operates a Competitive Local Exchange Carrier ("CLEC") telephone company
through its wholly-owned subsidiary, NA Communications, Inc. The excess of the
total acquisition cost over the fair value of the net assets acquired of
approximately $6.0 million is being amortized over 10 years by the straight-
line method. This acquisition has been accounted for as a purchase and results
of operations since the date of acquisition are included in the 1999
consolidated financial statements.
In October 1999, CFW Cornerstone, Inc. ("CFW Cornerstone"), a wholly-owned
subsidiary of the Company, acquired substantially all of the assets of
Cornerstone Networks, Inc. ("Cstone"), an ISP, for an initial payment of
approximately $4.5 million in cash. In addition, contingent purchase payments
will be made based on achievement of future performance levels during calendar
year 2000. At this time the contingent payment cannot be reasonably estimated.
All contingent payments, if applicable, will be made during the first quarter
of 2001. CFW Cornerstone provides dial-up and dedicated Internet access, high-
speed access through DSL and ISDN technology. This acquisition increased the
Company's Internet customers by approximately 9,000 subscribers on the date of
acquisition.
F-16
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Acquisitions (Continued)
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations are included in the financial
statements as of the date of acquisition, and the assets and liabilities were
recorded based upon their fair values at the date of acquisition. The excess
of the total acquisition cost over the fair value of the net tangible assets
and other identifiable intangible assets acquired of approximately $3.8
million is being amortized over 10 years by the straight-line method. The
acquisition also included various non-compete agreements, which are being
amortized over the life of each respective agreement.
The following table represents the Company's unaudited proforma results for
1999 and 1998 assuming the acquisitions occurred on January 1, 1998 (in
thousand, except for per share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Operating Revenues............................................. $79,774 $69,812
Net Income..................................................... 5,308 6,449
Net Income per common share--diluted........................... $ 0.40 $ 0.49
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually occurred had the acquisitions been made on or before
January 1, 1998, nor are they an indication of future performance.
In addition, the Company has acquired the assets of several other ISP's for a
total of $1.9 million. The transactions were accounted for under the purchase
method of accounting and, accordingly, the assets and liabilities were
recorded based on upon their fair values at the date of acquisition. The total
acquisition cost over the fair value of the net identifiable tangible and
intangible assets acquired of $1.0 million is being amortized over 10 years by
the straight-line method. These acquisitions increased the Company's core
customer base by approximately 6,600 subscribers.
Note 7. Asset Impairment and dispositions
As a result of the Company's conversion to a single billing platform capable
of billing wireline and wireless services, the Company recognized a $1.2
million ($0.8 million after-tax) write-off of software associated with the
prior billing system during the fourth quarter of 1999.
In September 1999, the Company recognized an asset impairment charge of $2.7
million ($1.7 million after-tax) relating to certain wireless analog cable
equipment. The Company provides wireless analog cable services over MMDS
spectrum. Acquisitions of MMDS spectrum by Sprint Corp. and MCI WorldCom are
expected to accelerate development of digital equipment for high-speed digital
data, and possibly voice, applications. As a result of these actions, an
analysis of cash flows in each market and an assessment of the alternative
uses for this spectrum, the Company determined that the carrying value of
certain wireless analog cable equipment was impaired and recognized the asset
write-down. The wireless analog cable equipment, which was deemed to be
impaired in value, was written-down to its estimated net realizable value of
$0.2 million based on the Company's assessment of fair value of similarly used
equipment.
The Company recognized a $1.0 million and $2.8 million impairment loss for the
years ended December 31, 1998 and 1997, respectively, on its investment in
ATEL, which resulted in a carrying value in the investment of $0.3 million at
December 31, 1998. In 1999, the Company received cash proceeds of $7.9 million
and recognized a gain of $7.6 million due to the purchase of American
Telecasting, Inc. by Sprint Corp.
In July 1999, the Company sold its Richmond tower for $1.6 million,
recognizing a gain of $0.7 million.
F-17
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense:
Federal tax expense (benefit)............. $ (809,101) $ 690,507 $6,165,040
State tax expense (benefit)............... (6,379) (53,193) 1,127,791
---------- ---------- ----------
(815,480) 637,314 7,292,831
Deferred tax expense:
Federal deferred tax expense.............. 3,306,693 4,500,178 95,070
State deferred tax expense................ 376,491 501,448 10,594
---------- ---------- ----------
3,683,184 5,001,626 105,664
---------- ---------- ----------
$2,867,704 $5,638,940 $7,398,495
========== ========== ==========
</TABLE>
Total income tax expense was different than an amount computed by applying the
graduated statutory federal income tax rates to income before taxes. The
reasons for the differences are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed tax at statutory rate............. $3,182,523 $4,851,302 $6,766,799
Tax credits, net of basis adjustment....... (492,687) -- --
Excess charitable contribution benefit..... (734,657) -- --
State income taxes, net of federal income
tax benefit............................... 244,274 295,848 751,334
Nondeductible amortization................. 215,560 132,940 132,940
Other, net................................. 452,691 358,850 (252,578)
---------- ---------- ----------
$2,867,704 $5,638,940 $7,398,495
========== ========== ==========
</TABLE>
Net deferred income tax assets and liabilities consist of the following
components at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Retirement benefits other than pension................ $ 3,497,202 $ 3,334,042
Net operating loss of acquired companies.............. 1,277,704 1,074,000
Net operating loss.................................... 3,393,237 1,051,538
Alternative minimum tax credit carryforwards.......... 627,367 627,367
Accrued expenses...................................... 848,368 268,577
Federal and state tax credits......................... 672,411 --
Other................................................. 1,274,461 447,183
----------- -----------
11,590,750 6,802,707
Deferred income tax liabilities:
PCS investments, net.................................. 12,981,599 6,041,723
Property and equipment................................ 16,007,662 15,004,856
Unrealized gain on securities available for sale...... 14,013,330 --
Other................................................. 192,903 --
----------- -----------
43,195,494 21,046,579
----------- -----------
Net deferred income tax liabilities................... $31,604,744 $14,243,872
=========== ===========
</TABLE>
F-18
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes (Continued)
In connection with the acquisition of NAXS (Note 6), the Company recorded
approximately $0.3 million of deferred tax assets at the date of acquisition.
The Company had alternative minimum tax ("AMT") credit carryforwards of $0.6
million, which have been reflected as a reduction of deferred taxes. AMT
credits may generally be carried forward indefinitely and used in future years
to the extent the Company's regular tax liability exceeds the AMT liability
for such future years. For tax purposes, the Company had available net
operating loss ("NOL") carryforwards for regular income tax purposes of
approximately $2.8 million at December 31, 1998. This loss has been carried
back to 1996 and the related benefit has been recorded in current income taxes
receivable. The Company is anticipating that the 1999 NOL will be
approximately $8.4 million, which will expire in 2019. The Company also had
federal and state investment tax credit carryforwards for tax purposes of
approximately $0.7 million, which expire during 2019.
Note 9. Shareholder Rights Plan
In February 2000, the Company adopted a new ten-year shareholder rights plan
that provides a right to common shareholders to acquire a unit of preferred
stock of the Company at a purchase price of $162. The new rights plan replaces
the Company's prior plan which was adopted in 1990 and expired in February
2000. The right is exercisable only upon the occurrence of certain events. If
a third party acquires 15% or more of the Company's common stock, without
prior approval of the Board of Directors, other shareholders are entitled to
receive, upon exercise of the right and payment of the purchase price, common
stock or preferred stock at the option of the Company having a value equal to
twice the amount of the purchase price.
F-19
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Pension Plans and Other Postretirement Benefits
The Company sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of assets over the two-year period ending December 31, 1999, and a
statement of the funded status as of December 31 of each year:
<TABLE>
<CAPTION>
Defined Benefit Pension Other Postretirement
Plan Benefit Plan
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Change in benefit
obligations:
Benefit obligations,
beginning............... $19,373,662 $16,655,591 $ 8,417,072 $ 7,134,616
Service cost............. 783,742 617,099 211,526 202,347
Interest cost............ 1,323,014 1,212,044 578,690 525,784
Amendment................ 131,532 -- -- --
Actuarial (gain) loss.... (1,363,569) 1,767,159 (745,891) 671,957
Benefits paid............ (1,105,135) (878,231) (259,875) (117,632)
----------- ----------- ----------- -----------
Benefit obligations,
ending................ $19,143,246 $19,373,662 $ 8,201,522 $ 8,417,072
=========== =========== =========== ===========
Change in plan assets:
Fair value of plan
assets, beginning....... $19,118,948 $17,791,099 $ -- $ --
Actual return on plan
assets.................. 2,744,040 2,206,080 -- --
Employer contribution.... -- -- 259,875 117,632
Benefits paid............ (1,105,135) (878,231) (259,875) (117,632)
----------- ----------- ----------- -----------
Fair value plan assets,
ending................ $20,757,853 $19,118,948 $ -- $ --
=========== =========== =========== ===========
Funded status:
Funded status,
beginning............... $ 1,614,607 $ (254,714) $(8,201,522) $(8,417,072)
Unrecognized net
actuarial gain.......... (3,088,692) (861,171) (915,930) (170,039)
Unrecognized prior
service cost............ 632,327 533,334 -- --
Unrecognized transition
obligations............. 31,560 47,341 -- --
----------- ----------- ----------- -----------
Accrued benefit cost... $ (810,198) $ (535,210) $(9,117,452) $(8,587,111)
=========== =========== =========== ===========
</TABLE>
The Company's matching contributions to the defined contribution plan were
$0.5 million, $0.4 million, and $0.3 million for the years ended December 31,
1999, 1998, and 1997, respectively.
The accumulated benefit obligation of the Company's nonqualified pension plan
was approximately $0.9 million, $0.7 million and $0.4 million at December 31,
1999, 1998 and 1997, respectively, and has been classified with retirement
benefits other than pensions. All of the Company's plans for post retirement
benefits other than pensions and the nonqualified pension plan have no plan
assets.
F-20
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Pension Plans and Other Postretirement Benefits (Continued)
The following table provides the components of net periodic benefit cost for
the plans:
<TABLE>
<CAPTION>
Other Post Employment
Defined Benefit Pension Benefit Plan
------------------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 783,742 $ 617,099 $ 486,925 $211,526 $202,347 $177,187
Interest cost........... 1,323,014 1,212,044 1,175,197 578,690 525,784 503,626
Expected return on plan
assets................. (1,864,548) (1,729,609) (1,579,686) -- -- --
Amortization of
transition
obligations............ 15,781 15,781 15,781 -- -- --
Amortization of prior
service cost........... 32,539 32,539 45,005 -- -- --
Recognized net actuarial
gain................... -- (26,625) (15,352) -- (9,382) (12,656)
----------- ----------- ----------- -------- -------- --------
Net periodic benefit
cost................. $ 290,528 $ 121,229 $ 127,870 $790,216 $718,749 $668,157
=========== =========== =========== ======== ======== ========
</TABLE>
The prior-service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
The Company has multiple nonpension postretirement benefit plans. The health
care plan is contributory, with participants' contributions adjusted annually;
the life insurance plans are also contributory. Eligibility for the life
insurance plan has been restricted to active pension participants age 50-64 as
of January 5, 1994. The accounting for the plans anticipates that the Company
will maintain a consistent level of cost sharing for the benefits with the
retirees.
The assumptions used in the measurements of the Company's benefit obligations
are shown in the following table:
<TABLE>
<CAPTION>
Other Post
Defined Benefit Employment
Pension Plan Benefit Plan
------------------- ----------------
Assumptions as of December 31,
-------------------------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate............................ 7.50% 7.00% 7.50% 7.50% 7.00% 7.50%
Expected return on plan assets........... 10.00% 10.00% 10.00% -- -- --
Rate of compensation increase............ 4.75% 4.75% 4.75% -- -- --
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually each year to a rate of 6.00% for 2006 and to
remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The effect of a 1% change on the total of
service and interest cost components of net periodic postretirement health
care benefit cost would be $0.1 million for a 1% increase and $0.1 million for
a 1% decrease. Additionally, the effect of a 1% change on the health care
component of the accumulated postretirement benefit obligations would be $1.2
million for a 1% increase and $1.0 million for a 1% decrease.
F-21
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Stock Plans
The Company's 1997 Stock Compensation Plan ("Option Plan") provides for the
grant of stock options, stock appreciation rights ("SARS"), stock awards and
performance shares to officers and certain key management employees. A maximum
of 950,000 shares of common stock may be issued under the Option Plan by means
of the exercise of options or SARS, the grant of stock awards and/or the
settlement of performance shares. The Company's Non-Employee Director's Stock
Option Plan ("Director's Plan") provides a non-employee director the
opportunity to receive stock options in lieu of a retainer fee. A maximum of
25,000 shares of common stock may be issued upon the exercise of options
granted under the Director's Plan. Stock options must be granted under the
Plans at not less than 100% of fair market value at the date of grant and have
a maximum life of ten years from the date of grant. Options and other awards
under the Plans may be exercised in compliance with such requirements as
determined by a committee of the Board of Directors.
A summary of the status of the Stock Option Plans at December 31, 1999, 1998
and 1997 and changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 468,679 $19.13 409,210 $17.10 325,022 $15.90
Granted................. 170,407 22.58 115,740 23.02 109,373 20.68
Exercised............... (62,015) 14.22 (45,971) 10.25 (8,915) 10.33
Forfeited............... (54,170) 21.54 (10,300) 21.62 (16,270) 20.90
------- ------ ------- ------ ------- ------
Outstanding at end of
year................... 522,901 $20.59 468,679 $19.13 409,210 $17.10
------- ------ ------- ------ ------- ------
Exercisable at end of
year................... 230,291 $18.90 225,631 $17.12 212,545 $14.89
------- ------ ------- ------ ------- ------
Weighted average fair
value per option of
options granted during
the year............... $ 6.53 $ 6.91 $ 6.15
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$10.00--12.75.................. 38,600 1 year $11.33 38,600 $11.33
$16.25--19.38.................. 117,856 6 years $17.75 84,296 $17.81
$20.88--25.75.................. 366,445 8 years $22.48 107,395 $22.48
</TABLE>
Grants of options under the Plans are accounted for following Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations.
Accordingly, no compensation cost has been recorded. The Company has elected
to apply the disclosure-only provisions of FASB Statement No. 123. However,
had compensation cost been recorded based on the fair value of awards at the
grant date, the pro forma impact on the Company's net income and net income
per common share--diluted would have been $0.8 million ($0.06 per share) in
1999, $0.4 million ($0.03 per share) in 1998 and $0.2 million ($0.02 per
share) in 1997. The pro forma effects of applying FASB Statement No. 123 are
not indicative of future amounts since, among other reasons, the requirements
of the Statement have been applied only to options granted after December 31,
1994.
F-22
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Stock Plans (Continued)
The fair value of each grant is estimated at the grant date using the Black-
Scholes option-pricing model with the following assumptions: dividend rate of
2.0% to 2.1% for 1999, 1.7% to 2.0% for 1998, and 1.9% to 2.3% for 1997; risk-
free interest rates of 4.8% to 6.4% for 1999, 5.0% to 5.7% for 1998, and 5.9%
to 6.3% for 1997; expected lives of 6 years for 1999, 1998 and 1997; and price
volatility of 25.8% to 26.3% for 1999, 26.0% to 26.3% for 1998, and 23.1% to
24.6% for 1997.
The Company also has a plan whereby employees can use up to 10% of their gross
wages to purchase the Company's common stock at a price 10% less than the
market price on the purchase date.
Note 12. Supplementary Disclosures Of Cash Flow Information
The following information is presented as supplementary disclosures for the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash payments for:
Interest, net of capitalized interest of
$637,431 in 1999, $785,854 in 1998, and
$762,643 in 1997........................... $2,335,839 $ 925,609 $1,067,098
========== ========== ==========
Income taxes................................ $ 495,871 $1,453,080 $6,551,222
========== ========== ==========
</TABLE>
In 1997, the Company contributed two PCS radio spectrum licenses valued at
$4.5 million to the WV Alliance in exchange for equity ownership (Note 3). In
1997, the Company acquired through the FCC auction certain PCS radio spectrum
licenses for approximately $1.6 million of notes payable.
Note 13. Lease Commitments
The Company has several operating leases for administrative office space,
retail space, tower space, channel rights, and equipment. The leases for
retail and tower space have initial lease periods of three to thirty years.
These leases are associated with the operation of a cellular business in
Virginia Rural Service Area 6 in which the Company is the general partner. The
leases for channel rights relate to the Company's wireless cable operations
and have initial terms of three to ten years. The equipment leases have an
initial term of three years. Rental expense for operating leases was $1.7
million, $2.0 million and $1.4 million in 1999, 1998, and 1997, respectively.
The total amount committed under these lease agreements is: $1.6 million in
2000, $0.9 million in 2001, $0.9 million in 2002, $0.7 million in 2003, $0.7
million in 2004 and $4.3 million for the years thereafter.
The Company has commitments for capital expenditures of approximately $5
million as of December 31, 1999, all of which are expected to be incurred in
fiscal 2000.
Note 14. Wireless Revenues and Cost of Sales
In prior periods, the Company reported wireless revenues net of cost of sales,
primarily handsets. On June 1, 2000, the Company retroactively revised its
reporting so as to no longer net the cost of sales for handsets and to present
these amounts as a separate component of operating expenses. Operating
revenues for wireless communications were increased by an identical amount.
This revision was made because, in the opinion of management, it more
appropriately reflects the revenues and costs of its wireless operations in
accordance with industry practice.
F-23
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Subsequent Events
On June 16, 2000, the Company's Board of Directors approved an agreement and
plan of merger with R&B Communications Inc. Under the terms of that agreement,
the Company will issue approximately 3.7 million shares of its common stock in
exchange for 100% of R&B's outstanding common stock. This transaction is
subject to regulatory and shareholder approval and will be accounted for using
the purchase method of accounting.
R&B has a 21% common ownership interest, along with convertible preferred
ownership interest, in the VA Alliance and a 34% common ownership interest in
the WV Alliance. The Company has a 21% common ownership interest, along with
convertible preferred ownership interest in the VA Alliance, and a 45% common
ownership interest in the WV Alliance (See Note 3). As a result of the merger
with R&B and other planned increases in common ownership through redemption
and conversion of preferred interests, consolidation of the VA Alliance and
the WV Alliance will be required concurrent with the closing of the merger.
On May 17, 2000, the Board of Directors approved the acquisition of PrimeCo
Personal Communications, L.P., Richmond Major Trading Area (Richmond-Norfolk
PCS) for cash of $408.6 million, the assumption of approximately $20.0 million
of lease obligations and the transfer of a limited partnership interest and
the assets, licenses and operations of our analog wireless operation, with a
combined value of approximately $78.5 million. This acquisition is subject to
regulatory approval and will be accounted for using the purchase method of
accounting.
The Company plans to obtain financing through issuance of unsecured Senior
Notes for $280 million, Subordinated Notes for $95 million, a Senior Secured
Credit Facility of up to $325 million and various preferred stock offerings of
$250 million. The Company plans to use the proceeds of the financing vehicles to
fund the acquisition of Richmond-Norfolk PCS, to repay its existing indebtedness
and that of the Alliances, and for future expansion.
Pursuant to a stock purchase agreement, dated May 17, 2000 with telegate AG, a
public company in Germany, the Company will sell the capital stock of CFW
Information Services, Inc., through which directory assistance operations are
conducted. In exchange, the Company will receive $32.0 million in cash and
$3.5 million in stock of telegate. This disposition is subject to regulatory
approval.
F-24
<PAGE>
Note 16. Unaudited Quarterly Financial Data
Summarized quarterly financial data for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
(In thousands, except per share March 31 June 30 September 30 December 31
amounts) -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Operating revenues (a) $18,769 $19,628 $21,389 $22,149
Operating income (b) 4,693 4,917 1,737 2,175
Gain on sale of investments and
tower asset -- -- 8,318 --
Equity loss from PCS investees (2,331) (2,938) (2,702) (3,395)
Net income (loss) 1,340 1,295 4,378 (520)
Net income (loss) per share -
basic 0.103 0.099 0.335 (0.040)
Net income (loss) per share -
dilutive 0.102 0.099 0.334 (0.040)
-----------------------------------------------------------------------------
1998
Operating revenues(a) $17,258 $17,500 $18,263 $18,091
Operating income 5,547 5,712 5,758 5,609
Loss on write-down of investment (270) -- (353) (387)
Equity loss from PCS investees (896) (1,346) (1,547) (2,678)
Net income 2,450 2,468 2,174 1,416
Net income per share - basic 0.189 0.190 0.167 0.108
Net income per share - dilutive 0.187 0.188 0.166 0.109
-----------------------------------------------------------------------------
</TABLE>
(a) Operating revenues have been increased as follows as compared to the
amounts reported in the Quarterly Reports to Shareholders and on Forms 10-
Q as a result of revising its reporting so as to no longer report wireless
revenues net of cost of sales (See Note 14).
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999 1,751 1,739 2,023 2,630
1998 1,023 949 1,107 1,347
</TABLE>
(b) An asset impairment charge of $2.7 million relating to the Company's
wireless analog cable equipment was charged to operating income in the
third quarter of 1999. Additionally, concurrent with the completion of the
conversion to a single billing platform, the Company charged a $1.2
million write-off of software associated with its prior wireless billing
system against operating income during the fourth quarter of 1999.
F-25
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 2000
(Unaudited) December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 248,754 $ 198,240
Accounts receivable, net of allowance of $1.6 million ($1.1 million
in 1999) 13,835,949 12,212,886
Receivable from affiliates 1,724,693 3,824,585
Materials and supplies 1,095,120 955,381
Prepaid expenses and other 976,718 572,339
Income tax receivable - 1,999,715
Assets of discontinued segment 9,764,328 8,023,326
------------- ----------------
27,645,562 27,786,472
------------- ----------------
Securities and Investments 35,100,542 39,109,476
------------- ----------------
Property and Equipment
Land and building 23,862,688 23,526,095
Network plant and equipment 114,712,693 100,938,828
Furniture, fixtures and other equipment 24,403,777 26,158,859
Radio spectrum licenses 15,476,485 15,478,079
------------- ----------------
Total in service 178,455,643 166,101,861
Under construction 12,530,597 9,124,046
------------- ----------------
190,986,240 175,225,907
Less accumulated depreciation 61,381,028 55,756,282
------------- ----------------
129,605,212 119,469,625
------------- ----------------
Other Assets
Cost in excess of net assets of business acquired, less accumulated
amortization of $3.3 million ($2.4 million in 1999) 31,039,878 23,411,894
Deferred charges 12,006,608 359,294
Radio spectrum licenses and license deposits 7,864,963 7,864,836
------------- ----------------
50,911,449 31,636,024
------------- ----------------
$ 243,262,765 $ 218,001,597
============= ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-26
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(unaudited) 1999
---------------- -----------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 20,317,262 $ 9,552,592
Customers' deposits 529,027 448,995
Advance billings 2,987,640 2,677,044
Accrued payroll 1,067,069 1,030,413
Accrued interest 96,152 280,151
Other accrued liabilities 3,423,737 1,617,206
Accrued income taxes payable 122,138 -
Deferred revenue 1,518,890 1,835,694
Liabilities of discontinued segment 3,275,045 2,293,799
---------------- ---------------
33,336,960 19,735,894
---------------- ---------------
Long-Term Debt 51,567,016 37,684,783
---------------- ---------------
Long-term Liabilities
Deferred income taxes 29,568,013 31,077,684
Retirement benefits 10,427,284 10,741,020
Other 2,795,177 797,175
---------------- ---------------
42,790,474 42,615,879
---------------- ---------------
Minority Interests 1,419,433 1,781,241
---------------- ---------------
Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 44,747,385 43,943,136
Retained earnings 49,269,554 50,385,117
Unrealized gain on securities available for sale, net 20,131,943 21,855,547
---------------- ---------------
114,148,882 116,183,800
---------------- ---------------
$ 243,262,765 $ 218,001,597
================ ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-27
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues
Wireline communications $ 14,697,395 $10,199,402 $28,572,506 $20,001,516
Wireless communications 5,818,465 5,422,466 11,697,822 10,471,538
Other communications services 1,001,967 1,012,895 1,857,857 2,056,960
------------ ----------- ----------- -----------
21,517,827 16,634,763 42,128,185 32,530,014
------------ ----------- ----------- -----------
Operating Expenses
Cost of sales 2,490,271 1,738,617 4,857,047 3,489,749
Maintenance and support 6,181,332 3,146,777 11,687,050 6,136,040
Depreciation and amortization 3,408,736 2,667,548 6,751,367 5,198,169
Customer operations 3,792,461 2,863,918 7,390,939 5,441,462
Corporate operations 2,057,649 1,486,327 4,158,220 3,067,124
------------ ----------- ----------- -----------
17,930,449 11,903,187 34,844,623 23,332,544
------------ ----------- ----------- -----------
Operating Income 3,587,378 4,731,576 7,283,562 9,197,470
Other Income (Expenses)
Other expenses, principally interest (550,112) (293,425) (1,009,975) (545,687)
Equity loss from PCS investees
VA PCS Alliance (1,315,066) (1,479,228) (2,838,564) (2,838,052)
WV PCS Alliance (1,672,892) (1,458,879) (3,816,908) (2,431,229)
Equity income from other wireless investees 56,629 34,759 98,629 87,766
------------ ----------- ----------- -----------
105,937 1,534,803 (283,256) 3,470,268
Income Taxes 84,393 442,192 (87,314) 1,196,238
------------ ----------- ----------- -----------
21,544 1,092,611 (195,942) 2,274,030
Minority Interests (31,970) (129,543) (105,092) (218,558)
------------ ----------- ----------- -----------
Income (loss) from continuing operations (10,426) 963,068 (301,034) 2,055,472
Income from operation of discontinued segment, net of tax 347,687 332,040 686,705 579,362
------------ ----------- ----------- -----------
Net Income $ 337,261 $ 1,295,108 $ 385,671 $ 2,634,834
------------ ----------- ----------- -----------
Income (loss) from continuing operations per common share - $ - $ 0.07 $ (0.02) $ 0.16
basic
Income (loss) from continuing operations per common share - $ - $ 0.07 $ (0.02) $ 0.16
diluted
Net income per common share - basic $ 0.03 $ 0.10 $ 0.03 $ 0.20
Net income per common share - diluted $ 0.03 $ 0.10 $ 0.03 $ 0.20
Average shares outstanding - basic 13,100,688 13,040,176 13,083,819 13,031,007
Average shares outstanding - diluted 13,309,760 13,115,990 13,291,777 13,091,394
------------- ----------- ----------- -----------
Cash dividends per share $ - $ 0.11475 $ 0.11475 $ 0.22950
------------- ----------- ----------- -----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-28
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------
June 30, June 30,
2000 2000
------------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 385,671 $ 2,634,834
Deduct income from operations of discontinued segment (686,705) (579,361)
-------------- --------------
Income (loss) from continuing operations (301,034) 2,055,473
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 5,870,656 4,839,795
Amortization 880,711 358,374
Deferred taxes (412,320) 1,262,979
Retirement benefits (313,736) 439,663
Equity loss from PCS Alliances 6,655,470 5,269,281
Minority interests, net of distributions 74,338 37,187
Other (685,217) 349,708
Equity gains from other investees (494,745) (231,614)
Changes in assets and liabilities from operations:
Increase in accounts receivable (1,553,775) (1,920,376)
Increase in materials and supplies (139,739) (1,703,125)
Increase in other current assets (404,379) (112,600)
Changes in income taxes 2,121,853 148,106
Increase (decrease) in accounts payable (634,285) 459,106
Increase (decrease) in other accrued liabilities 517,793 (311,736)
Increase in other current liabilities 390,628 157,105
-------------- --------------
Net cash provided by continuing operations 11,572,219 11,097,326
Net cash provided by (used in) discontinued operations (73,051) (1,069,396)
-------------- --------------
Net cash provided by operating activities 11,499,168 10,027,930
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (17,182,335) (15,460,720)
Acquisition/disposition costs (394,747) -
Purchase of minority interest in RSA6 (7,400,000) -
Investments in PCS alliances (3,892,138) (3,892,138)
Repayments from PCS Alliances 2,099,892 2,767,544
Proceeds from sale of towers 3,200,000 -
Acquisition of Internet company and subscribers (1,356,373) (2,097,652)
Deposit on radio spectrum licenses, net (100,000) (76,500)
Purchase of radio spectrum licenses, net of minority interest - (856,450)
Maturities and distributions from other investments 391,799 175,506
-------------- --------------
Net cash used in investing activities (24,633,902) (19,440,410)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (1,501,234) (2,994,005)
Payments on senior notes (12,727,272) (3,636,364)
Additional borrowing on lines of credit, net 26,609,505 16,289,084
Net proceeds from exercise of stock options 804,249 151,759
-------------- --------------
Net cash provided by financing activities 13,185,248 9,810,474
-------------- --------------
Increase (decrease) in cash and cash equivalents 50,514 397,994
Cash and cash equivalents:
Beginning 198,240 42,590
-------------- --------------
Ending $ 248,754 $ 440,584
============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-29
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
---------- ------------ ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 13,016,988 $43,527,636 $ 49,882,849 $ - $ 93,410,485
Comprehensive income:
Net Income 1,339,726
Unrealized gain on securities available for
sale, net of $1.0 million of deferred tax
obligation 1,580,294
Comprehensive income 2,920,020
Cash dividends (1,495,905) (1,495,905)
Stock options exercised, net 19,428 75,022 75,022
---------- ----------- ------------ ------------ ---------------
Balance, March 31, 1999 13,036,416 43,602,658 49,726,670 1,580,294 94,909,622
Comprehensive income:
Net Income 1,295,108
Unrealized gain on securities available for
sale, net of $1.7 million of deferred tax
obligation 2,719,995
Comprehensive income 4,015,103
Cash dividends (1,498,100) (1,498,100)
Stock options exercised, net 5,663 76,737 76,737
---------- ----------- ------------- -------------- --------------
Balance, June 30, 1999 13,042,079 $43,679,395 $49,523,678 $ 4,300,289 $ 97,503,362
========== =========== ============= ============== ==============
Balance, December 31, 1999 13,060,386 $43,943,136 $50,385,117 $ 21,855,547 $ 116,183,800
Comprehensive income:
Net Income 48,410
Unrealized loss on securities available for
sale, net of $1.0 million deferred tax
benefit (2,409,118)
Comprehensive income (2,360,708)
Cash dividends (1,501,234) (1,501,234)
Stock options exercised, net 34,043 382,356 382,356
---------- ----------- ----------- -------------- --------------
Balance, March 31, 2000 13,094,429 44,325,492 48,932,293 19,446,429 112,704,214
---------- ----------- ------------ -------------- --------------
Comprehensive income:
Net Income 337,261
Unrealized gain on securities available for
sale, net of $1.0 million deferred tax
obligation 685,514
Comprehensive income 1,022,775
Stock options exercised, net 22,124 421,893 421,893
---------- ----------- ------------ -------------- --------------
Balance, June 30, 2000 13,116,553 $44,747,385 $ 49,269,554 $ 20,131,943 $ 114,148,882
========== =========== ============ ============== ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-30
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1999, which is derived from
audited financial statements, contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2000 and December 31, 1999 and the results of
operations for the three and six months ended June 30, 2000 and 1999 and
cash flows for the six months ended June 30, 2000 and 1999. The results of
operations for the three and six months ended June 30, 2000 and 1999 are
not necessarily indicative of the results to be expected for the full year.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform with classifications
adopted in 2000.
(2) The Company has five primary business segments which have separable
management focus and infrastructures and that offer different products and
services. These segments are described in more detail in Note 2 of the
Company's 1999 Annual Report to Shareholders. Summarized financial
information concerning the Company's reportable segments, as adjusted for
all periods for the effect of the Company's discontinued operations (Note
10), is shown in the following table.
<TABLE>
<CAPTION>
Telephone Network & Internet Wireless Cable Other Total
CLEC
(in thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of and for the three months ended June 30, 2000
Revenues $ 8,022 $ 2,342 $ 3,939 $ 5,220 $ 598 $ 1,397 $ 21,518
EBITDA 5,486 (208) 290 758 118 552 6,996
Depreciation &
Amortization 1,042 504 779 287 319 478 3,409
As of and for the three months ended June 30, 1999
Revenues $ 7,810 $ 1,220 $ 763 $ 4,709 $ 714 $ 1,419 $ 16,635
EBITDA 5,625 191 (345) 1,300 147 481 7,399
Depreciation &
amortization 921 284 147 235 636 445 2,668
As of and for the six months ended June 30, 2000
Revenues $15,991 $ 4,376 $ 7,412 $ 10,460 $ 1,238 $ 2,651 $ 42,128
EBITDA 10,979 (277) 392 1,814 257 870 14,035
Depreciation &
Amortization 2,067 950 1,507 606 662 959 6,751
Total segment
Assets 47,244 29,321 21,302 9,023 19,554 11,731 138,175
Corporate assets 95,324
Assets of discontinued operation 9,764
---------
Total Assets $ 243,263
=========
As of and for the six months ended June 30, 1999
Revenues $15,511 $ 2,422 $ 1,266 $ 9,030 $ 1,442 $ 2,859 $ 32,530
EBITDA 11,024 503 (609) 2,341 286 851 14,396
Depreciation &
amortization 1,822 551 234 445 1,280 866 5,198
Total segment
assets 43,134 19,929 3,831 8,551 24,898 12,476 112,819
Corporate assets 55,136
Assets of discontinued operation 8,112
---------
Total Assets $ 176,067
=========
</TABLE>
(3) The weighted average number of common shares outstanding, which was used to
compute diluted net income per share in accordance with FASB Statement No.
128, Earnings Per Share, were increased by 337,260 and 75,815 shares, and
by 385,672 and 60,717 for the three and six month periods ended June 30,
2000 and 1999, respectively, to reflect the assumed conversion of dilutive
stock options. The Company currently has 637,930 options outstanding to
acquire shares of common stock, of which 257,310 are currently exercisable.
(4) As of June 30, 2000, the Company had a 21% common ownership interest in
Virginia PCS Alliance, L.C. (VA Alliance), a provider of personal
communications services (PCS) serving a 1.7 million populated area in
central and western Virginia. The Company is managing such build-out
pursuant to a service agreement. PCS operations began throughout the
Virginia region in the fourth quarter of 1997.
As of June 30, 2000, the Company had a 45% common ownership interest in the
West Virginia PCS Alliance, L.C. (WV Alliance), a PCS provider serving a
2.0 million populated area in West Virginia and parts of
F-31
<PAGE>
eastern Kentucky, southwestern Virginia and eastern Ohio. The Company is
managing this build-out pursuant to a service agreement. The WV Alliance
commenced operations in the fourth quarter of 1998, offering services along
the Charleston and Huntington corridor and expanded to the northern
corridor of West Virginia, including the cities of Clarksburg, Fairmont and
Morgantown in the second quarter of 1999.
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for under the equity method, are
as follows:
<TABLE>
<CAPTION>
VA Alliance WV Alliance
(in thousands) June 30, 2000 December 31, 1999 June 30, 2000 December 31, 1999
-------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Current assets $ 21,060 $ 9,241 $ 14,212 $ 2,367
Noncurrent assets 94,849 111,601 52,493 51,130
Current liabilities 3,161 7,633 10,367 3,076
Long-term debt 129,653 131,478 64,176 51,125
Redeemable preferred interest 12,892 15,192 - -
VA Alliance WV Alliance
For the Three Months Ended, For the Three Months Ended,
--------------------------------- ---------------------------------
(in thousands) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- -------------- ---------------- --------------
Net sales $ 5,726 $ 3,007 $ 3,635 $ 376
Gross profit (loss) 3,243 1,830 1,349 (82)
Net loss applicable to common owners (6,323) (7,112) (3,749) (3,269)
Company's share of net loss (1,315) (1,479) (1,672) (1,458)
VA Alliance WV Alliance
For the Six Months Ended, For the Six Months Ended,
-------------------------------- --------------------------------
(in thousands) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- ------------- ---------------- --------------
Net sales $ 10,206 $ 5,424 $ 6,260 $ 632
Gross profit (loss) 5,407 2,414 1,640 (100)
Net loss applicable to common owners (13,648) (13,645) (8,554) (5,448)
Company's share of net loss (2,838) (2,838) (3,816) (2,431)
</TABLE>
As of June 30, 2000, the Company had entered into guaranty agreements
whereby the Company is committed to provide guarantees of up to $71.0
million of the Alliance's debt and redeemable preferred obligations. Such
guarantees become effective as obligations are incurred by the Alliances.
Subsequent to June 30, 2000, the Company refinanced the Alliance debt (Note
7).
(5) In February 2000, the Company acquired 4,400 Internet subscribers from Twin
County Internet Access ("TCIA") for a purchase price of $1.0 million. TCIA
is located in Galax, VA and serves parts of Southwestern Virginia and
Northern North Carolina. In May 2000, the Company acquired 2,195 Internet
subscribers from Heart of Virginia Communications, Inc. ("HOVAC") for a
purchase price of $0.3 million. HOVAC is located in Farmville, VA.
In March 2000, the Company sold 10 towers for $3.2 million and the
Alliances sold a total of 123 towers for $38.5 million to Crown Castle
International Corp ("Crown"). In April 2000, the Alliances sold a total of
18 towers for $5.7 million to Crown. In connection with these transactions,
the Company has certain future leaseback and other commitments.
Accordingly, gains on the sales have been deferred for book purposes and
will be amortized over the life of the leaseback agreement.
The effective tax rate for the Company changed significantly, from 29.3%
for the six months ended June 30, 1999 to 47.7% for the six months ended
June 30, 2000. The effective tax rate for the results from continuing
operations was a tax obligation of 37% for the six months ended June 30,
1999 as compared to a tax benefit of 22% for the six months ended June 30,
2000. The increases in the effective tax rates are a result of an increase
in non-deductible goodwill from the Internet acquisitions which occurred
over the last 18 months and other non-deductible goodwill, applied against
a lower pretax income (thus having a greater percentage effect). Also, the
presence of prior year tax credits and the favorable treatment of a
significant charitable contribution made in the prior year caused the prior
year rate to be below statutory rates. In addition to the increased
effective tax rate, the Company is anticipating that its current tax
provision will be significantly greater than prior periods as a result of
the recognition of the entire tower gain for tax purposes, as well as the
gains on sale of the directory assistance and cellular analog businesses
(Note 7 and 10). The current year effective tax rate will be reduced from
the rates noted above as a result of the gains from these transactions due
to the fact that non-deductible goodwill will make up a smaller percent of
a significantly increased taxable income.
(6) In prior periods, the Company reported wireless revenues net of cost of
sales, primarily handsets. On June 1, 2000, the Company retroactively
revised its reporting to no longer net the cost of sales for handsets and
to present these amounts as a separate component of operating expenses.
Operating revenues for wireless communications were increased by an
identical amount. This revision was made because, in the opinion of
management, it more appropriately reflects the revenues and costs of its
wireless operations in accordance with industry practice.
(7) On July 26, 2000, the Company closed on the acquisition of PrimeCo Personal
Communications, L.P. PCS licenses, assets and operations in the Richmond
and Hampton Roads areas of Virginia ("PrimeCo VA") for cash of $408.6
million, the assumption of approximately $20.0 million of lease obligations
and the transfer of a limited partnership interest and the assets, licenses
and operations of our analog wireless operation, with a combined value of
approximately $78.5 million.
The Company obtained financing through issuance of unsecured Senior Notes
for $280 million, Subordinated Notes for $95 million, a Senior Secured
Credit Facility of up to $325 million and various preferred stock offerings
of $250 million. These financing transactions closed concurrent with or
just prior to the PrimeCo VA acquisition. The Company used the proceeds of
the financing vehicles to fund the PrimeCo VA acquisition, to repay
substantially all of its existing indebtedness and that of the Alliances,
and for future expansion.
The Senior Notes were issued at 98.61% of par value and contain a 13.0%
coupon rate (13.25% yield). They mature in August 2010. Approximately $69.1
million was placed in escrow to pre-fund the first four interest payments.
The Senior Notes are redeemable early at a redemption price of up to
106.5%, reducing to 100% by August 2008 and contain various financial
covenants. Additionally, these notes were issued with warrants to purchase
an aggregate of 504,000 shares of the Company's common stock at a price of
$47.58 per share. The warrants are exercisable one year from July 2000 and
expire August 2010. The Senior Notes will be recorded net of the $3.9
million discount associated with the issue price, $6.9 million of the
estimated fair value of the warrants attached and other associated closing
costs.
The Subordinated Notes were issued at par and contain a 13.5% coupon rate.
They mature in February 2011. These notes are subordinate to all senior
indebtedness, including the senior notes. These notes contain early
redemption features similar to the senior notes. The notes were issued with
warrants to purchase an aggregate of 300,000 shares of the Company's common
stock at a price of $0.01 per share. These warrants are
F-32
<PAGE>
also exercisable one year from July 2000 and expire February 2011. The
Subordinated Notes will be recorded net of the $12.2 million estimated fair
value of the warrants attached and other associated closing costs.
The preferred stock offering contained Series B convertible, redeemable
preferred stock of $112.5 million, Series C convertible, redeemable
preferred stock of $60.3 million, and Series D redeemable preferred stock
of $77.2 million. The Series B preferred stock converts to common stock at
$41 per share, contains warrants to purchase an aggregate of 500,000 shares
of the Company's common stock at a price of $50 per share and pays an 8.5%
per annum dividend. The Series C preferred stock converts to common stock
at $43 per share and pays an 8.5% per annum dividend. The Series C
conversion price goes to $45 per share and the dividend rate goes to 5.5%
upon shareholder approval. The Series D pays an 18% per annum dividend.
However, upon shareholder approval as required within the terms of the
Series D preferred stock, the Series D is converible to Series C with a
conversion price of $45 per share and a dividend rate of 5.5%.
In July 2000, the Company borrowed $150 million of the $325 million senior
secured term loans. The loans contain a tranche A term loan of $50 million,
tranche B term loan of $100 million, tranche C term loan of $75 million and
a revolving credit facility of $100 million. These loans begin maturing in
four years with final maturities occurring in seven to eight years. The
loans bear interest at rates 3% to 4% above the Eurodollar rate or 2.5% to
3% above the federal funds rates. The loans contain certain financial
covenants and restrictions as to their use.
Concurrent with closing the PrimeCo VA acquisition and above financing,
$149.4 million of the amount borrowed under the senior term loans was
loaned to the Alliances, which they used to repay their indebtedness to the
Rural Telephone Finance Cooperative ("RTFC"). Additionally, of the total
proceeds obtained from all financing sources, the Company paid $408.6
million to PrimeCo as part of the acquisition consideration, paid $43.0
million of their outstanding borrowings under previously existing lines of
credit, placed $69.1 million in escrow to be used to fund the first four
interest payments on the senior notes, acquired additional common ownership
interest in the VA Alliance for $11.4 million, and will pay approximately
$40 million in transaction fees and expenses relating to all of the
transactions discussed herein. Of the total transaction fees and expenses,
approximately $10 to $12 million will be recognized in financing related,
non-recurring charges.
(8) Concurrent with the closing of the PrimeCo VA acquisition and the
aforementioned debt and equity financing, the VA Alliance redeemed its
series A preferred membership interest for $16.8 million. This payment
included consideration for redemption of $12.9 million in principle, $2.8
million in accrued interest and $1.1 million in early redemption fees. The
Company then exercised its right to fund $11.4 million of this redemption
in exchange for additional common ownership interest in the VA Alliance.
The Company also elected to convert its convertible preferred ownership
interest in the VA Alliance into common ownership interest. These
redemptions and conversions increased the Company's common ownership
interest in the VA Alliance from 21% to 65%. Accordingly, beginning in the
third quarter of 2000, the Company will consolidate the operations of the
VA Alliance.
(9) On June 16, 2000, the Company's Board of Directors approved an agreement
and plan of merger with R&B Communications, Inc. ("R&B"). Under the terms
of that agreement, the Company will issue approximately 3.7 million shares
of its common stock in exchange for 100% of R&B's outstanding common stock.
This transaction is subject to regulatory and shareholder approval and will
be accounted for using the purchase method of accounting.
R&B is an Integrated Communications Provider (ICP) supplying local and long
distance telephone service, and dial-up and high-speed Internet service to
business and residential customers in Roanoke, Virginia and the surrounding
area, as well as in the New River Valley of Virginia.
R&B has a 26 % ownership interest in the VA Alliance and a 34% common
ownership interest in the WV Alliance. Upon completion of the merger with
R&B, R&B's contribution of additional common equity capital to the VA
Alliance and their conversion of Series B preferred membership interests,
the Company will own 91% and 79% of the VA Alliance and WV Alliance,
respectively. Accordingly, the WV Alliance will also be consolidated
pursuant to the merger.
(10) Effective July 11, 2000, pursuant to a stock purchase agreement dated May
17, 2000 with telegate AG, a Federal Republic of Germany corporation, the
Company sold the capital stock of CFW Information Services, Inc., through
which directory assistance operations are conducted. In exchange, the
Company received $32.0 million in cash and $3.5 million in stock from
telegate AG. As such, the directory assistance operation was treated as a
discontinued operation in these financial statements. Accordingly, the
overhead costs which were allocated to this business segment which were not
specifically identified and incremental to the directory assistance
operations were reclassified as corporate expenses and included as "other"
in the Note 2. These costs totaled $.4 million and $.3 million for the six
months ended June 30, 2000 and 1999, respectively, and $.2 million and $.1
million for the three months ended June 30, 2000 and 1999, respectively.
Components of amounts pertaining to the discontinued operations are
reflected in the financial statements and are presented in the following
table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands; unaudited) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $ 3,431 $ 2,993 $ 6,763 $ 5,867
Operating income 555 185 1,132 413
Income tax expense 223 (121) 439 (101)
Income from operations of discontinued $ 348 $ 332 $ 687 $ 579
</TABLE>
(In thousands; unaudited) June 30, 2000 December 31, 1999
--------------------------------------------- ------------- -----------------
Net assets of discontinued operations:
Current assets $ 3,179 $ 1,612
Property and equipment, net 10,781 12,655
Other assets 43 -
------- -------
Assets of discontinued segment $14,003 $14,267
------- -------
Current liabilities 1,476 1,654
Deferred taxes 793 527
Retirement benefits 1,006 113
------- -------
Liabilities of discontinued operations $ 3,275 $ 2,294
------- -------
F-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of PrimeCo Personal Communications, L.P.:
In our opinion, the accompanying balance sheets and the related statements of
operations and of cash flows present fairly, in all material respects, the
financial position of the Richmond Major Trading Area of PrimeCo Personal
Communications, L.P. ("PrimeCo") at December 31, 1999 and 1998, and the
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. These financial statements are the
responsibility of PrimeCo's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 14, 2000
F-34
<PAGE>
RICHMOND MAJOR TRADING AREA
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 422 $ --
Accounts receivable, trade, net of allowance for doubtful
accounts of $1,165 and $547, respectively................. 4,433 2,958
Accounts receivable, other................................. 258 2,092
Inventory, finished goods.................................. 1,461 1,278
Prepaid assets............................................. 541 586
Other...................................................... 50 23
-------- --------
Total current assets..................................... 7,165 6,937
PCS Licenses, net of accumulated amortization of $1,833 and
$1,254, respectively........................................ 21,318 21,897
Microwave relocation, net of accumulated amortization of $718
and $484, respectively...................................... 8,050 8,327
Property, plant and equipment, net........................... 101,107 103,799
Construction in progress..................................... 4,985 3,827
Other........................................................ 589 494
-------- --------
Total assets............................................. $143,214 $145,281
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Current installments of capital leases..................... $ 3,742 $ 3,495
Accounts payable and accrued expenses...................... 9,857 8,569
Note payable to vendor..................................... -- 10,396
Accrued compensation....................................... 438 911
Taxes, other than income................................... 2,046 1,467
-------- --------
Total current liabilities................................ 16,083 24,838
Capital lease obligations, noncurrent........................ 20,255 23,303
Other noncurrent liabilities................................. 2,779 2,236
Commitments and contingent liabilities
PrimeCo equity investment.................................... 104,097 94,904
-------- --------
Total liabilities and equity............................. $143,214 $145,281
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
RICHMOND MAJOR TRADING AREA
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues and sales:
Service revenues.............................. $ 41,015 $ 24,808 $ 6,963
Product sales................................. 7,671 5,546 3,728
Other......................................... 1,770 916 481
-------- -------- --------
Net revenue................................. 50,456 31,270 11,172
-------- -------- --------
Direct operating costs and expenses:
Cost of service............................... 941 489 167
Cost of products sold......................... 7,217 5,714 4,018
Operating expenses............................ 50,497 41,355 32,418
Depreciation and amortization................. 13,866 11,125 8,333
-------- -------- --------
Total....................................... 72,521 58,683 44,936
-------- -------- --------
Loss from operations........................ (22,065) (27,413) (33,764)
Interest expense, less capitalized interest of
$172, $565 and $0, respectively................ (1,462) (1,678) (1,951)
Gain (loss) on disposal of assets............... (806) 44 (174)
Other income (loss)............................. (171) -- --
-------- -------- --------
Net loss........................................ $(24,504) $(29,047) $(35,889)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
RICHMOND MAJOR TRADING AREA
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(24,504) $(29,047) $(35,889)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 13,866 11,125 8,333
Bad debt expense............................. 1,281 511 347
(Gain) loss on disposal of assets............ 806 (44) 174
Changes in assets and liabilities:
Accounts receivable, trade................. (2,756) (1,740) (1,717)
Inventory, finished goods.................. (183) (671) (372)
Prepaid assets............................. 45 (72) (128)
Other assets............................... 1,712 (1,790) (740)
Accounts payable and accrued expenses...... 1,462 1,774 (38)
Accrued compensation....................... (473) 233 190
Taxes, other than income................... 579 738 704
Other noncurrent liabilities............... 1,210 2,107 957
-------- -------- --------
Net cash used in operating activities.... (6,955) (16,876) (28,179)
-------- -------- --------
Cash flows from investing activities:
Payments for microwave relocation.............. (119) (279) (1,794)
Recoveries of microwave relocation costs....... 263 197 --
Additions to property, plant and equipment..... (12,599) (14,776) (32,305)
-------- -------- --------
Net cash used in investing activities...... (12,455) (14,858) (34,099)
-------- -------- --------
Cash flows from financing activities:
Increase in intercompany payable to PrimeCo.... 33,696 34,919 64,846
Reductions of capital leases................... (3,468) (3,264) (2,967)
Proceeds from capital leases................... -- -- 400
Payment of note payable to vendor.............. (10,396) -- --
-------- -------- --------
Net cash provided by financing activities.. 19,832 31,655 62,279
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 422 (79) 1
Cash and cash equivalents, beginning of period... -- 79 78
-------- -------- --------
Cash and cash equivalents, end of period......... $ 422 $ -- $ 79
======== ======== ========
</TABLE>
Supplemental disclosure in Note 10.
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS
1. Organization and Activities:
PrimeCo Personal Communications, L.P. ("PrimeCo" or the "Partnership") was
formed on May 8, 1995 as a Delaware limited partnership for the purpose of
acquiring licenses issued by the Federal Communications Commission ("FCC")
pursuant to Subpart E of Part 24 of the FCC rules ("PCS License") and to
design, build, own and operate broadband personal communications services
("PCS Business") in certain Major Trading Areas ("MTA"). An MTA is an urban
market within the United States, as defined by the FCC to determine geographic
coverage areas for Personal Communication System ("PCS") networks.
PCSCO Partnership (a wholly owned affiliate of Bell Atlantic Corporation) and
PCS Nucleus, L.P. (a wholly owned subsidiary of Air Touch Communications,
Inc.), collectively the "Partners", each hold a 20% general and 30% limited
interest in PrimeCo.
The Richmond Major Trading Area (the "Richmond MTA") of PrimeCo operates the
FCC license awarded to PrimeCo for the Richmond, Virginia market. The balance
sheets and the related statements of operations and cash flows of the Richmond
MTA (the "financial statements") represent the assets, liabilities and
operations of the Richmond MTA on a separate reporting basis. The financial
statements are maintained by PrimeCo on a separate reporting basis. As a
result, no allocations other than those discussed in footnote 6, "Related
Party Transactions", were made.
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies:
Cash and Cash Equivalents
Cash equivalents consist primarily of highly liquid investments with minimal
interest rate risk and original maturities of 90 days or less at date of
acquisition.
Inventory
Inventory consists of handsets and related accessories. Inventories purchased
for resale are carried at the lower of cost (determined using weighted
average) or market. Market is determined using replacement cost in accordance
with industry standards.
Revenue Recognition
The Richmond MTA records service revenues for the amount of communications
services rendered, primarily measured by billable minutes of traffic in
addition to a monthly charge for access and features, after deducting a
reserve for fraudulent unauthorized use or subscriber fraud.
Equipment sales consist of revenues from the sales of digital phones and
related accessories. Such sales are not considered a primary part of the
Richmond MTA's personal communications business. Upon shipment of products to
unaffiliated customers, the Richmond MTA recognizes sales and related costs
and expenses. The Richmond MTA has established programs which, under specified
conditions, enable customers to return products.
Customer accounts are monitored through an aging process that addresses the
customer credit class and number of days the balance is outstanding. A reserve
for uncollectible accounts is recorded based on historical accounts receivable
agings and write-offs and is further evaluated as a percentage of recorded
revenues. When a customer account is determined uncollectible, it is written-
off.
F-38
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies (Continued):
Licenses and Microwave Relocation
PCS Licenses include costs incurred to acquire the Richmond MTA FCC license on
frequency block B in the 1850-1990 MHz radio frequency bands.
The PCS licenses are issued conditionally for ten years. Historically, the FCC
has granted license renewals providing the licensees have complied with
applicable rules, policies and the Communications Act of 1934, as amended. The
Partnership believes it has complied with and intends to continue to comply
with these rules and policies.
Microwave relocation includes costs incurred to relocate incumbent microwave
links affecting the Richmond MTA's licensed frequencies.
The Richmond MTA amortizes the cost of the PCS Licenses and microwave
relocation costs on a straight-line basis over a 40 year life.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. These costs include cell
site acquisition, site development, network and switch hardware, capitalized
interest, and engineering and overhead. Depreciation is recorded on a
straight-line basis over the following estimated useful lives: buildings, 20
years, plant and other equipment, 3 to 15 years. Leasehold improvements are
depreciated over the shorter of the remaining term of the lease or the
estimated useful life of the improvement. When depreciable assets are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gains or losses on disposition
are recognized in income. Repair and maintenance costs are charged to expense
when incurred; significant renewals and improvements are capitalized.
Long-Term Assets
The carrying values of all long-term assets are reviewed for impairment
whenever events or changes in circumstances (such as significant declines in
sales, earnings, or cash flows or material adverse changes in the business
climate) indicate they may not be recoverable.
Software Development Costs
Specific expenditures directly related to development projects for internal-
use software are capitalized and amortized over their estimated useful life.
Costs incurred in the preliminary project stage of development (prior to
technological feasibility) are expensed as incurred.
Initial operating systems software is capitalized and amortized over the life
of the related hardware. Initial network application software is capitalized
and amortized over three years.
Capitalized computer software of approximately $17.0 million and $16.8 million
at December 31, 1999 and 1998, respectively, is recorded in property, plant
and equipment. The Richmond MTA amortized computer software costs of
approximately $2.1 million, $2.4 million and $1.3 million for the periods
ended December 31, 1999, 1998 and 1997, respectively.
Foreign Currency
The Partnership has entered into forward exchange contracts to hedge foreign
currency transactions. The Partnership's forward exchange contracts do not
subject the Partnership to risk from exchange rate movements because gains and
losses on such contracts offset losses and gains, respectively, on the
Japanese yen denominated portion of its capital lease obligations. The
Richmond MTA had approximately $12.7 million and $12.0 million of foreign
exchange contracts outstanding relating to foreign currency denominated
capital lease obligations at December 31, 1999 and 1998, respectively. The
forward exchange contracts generally require the Partnership to exchange U.S.
dollars for foreign currencies at maturity, at rates agreed to at inception of
the contracts.
F-39
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies (Continued):
Credit risk associated with concentrations can arise when changes in economic,
industry or geographic factors affect groups of counterparties with similar
characteristics, whose aggregate credit exposure is significant to the
Partnership's total credit exposure. The current volatility in the Asian
markets creates an unfavorable environment for the counterparties to the
exchange contracts to fulfill their obligations to deliver the contracted
currencies. Accordingly, the Partnership could be at risk for any currency
related fluctuations if the counterparties do not contractually comply. Should
the counterparties not comply, the ultimate impact, if any, will be a function
of the difference in cost of acquiring yen at the time of delivery versus the
contractually agreed upon price.
The aggregate hedge payable (receivable) and capital lease receivable
(payable) as of December 31, 1999 and 1998 is ($804,000) and $434,000,
respectively. The associated gain and (loss) on the hedging activities, which
has been netted in the statements of operations against capital lease (gains)
and losses for the periods ended December 31, 1999, 1998 and 1997 is $1.2
million, $1.5 million and ($1.2) million, respectively.
Advertising Costs
Advertising costs included in operating expenses are expensed as incurred.
Advertising expenses totalled approximately $13.9 million, $12.7 million and
$8.8 million in 1999, 1998 and 1997, respectively. These costs include handset
subsidy expenses of $7.1 million, $7.9 million and $6.5 million, in 1999, 1998
and 1997, respectively.
Income Taxes
The Richmond MTA is not a separate legal taxable entity for federal, state or
local income tax purposes and therefore, a provision for income taxes has not
been presented in these financial statements. The operations of the Richmond
MTA are included in the consolidated results of operations of PrimeCo and
therefore will be included in the income tax returns of the Partners of
PrimeCo.
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 on the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Recently Issued Accounting Pronouncements
Comprehensive Income
Effective December 31, 1998, the Richmond MTA adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. It
requires all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. There were no items of comprehensive income for the years ended
December 31, 1999, 1998, and 1997.
Segment of an enterprise and related information
The Richmond MTA has one reportable industry segment that constructs and
operates a wireless network for the provision of wireless services to
customers in the Richmond-Norfolk PCS license area.
F-40
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
Accounting for Derivative Instruments
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133) which, as amended, is effective for fiscal years
beginning after June 15, 2000, was issued. Earlier application for certain
provisions of this standard is permitted. SFAS 133 establishes accounting and
reporting standards for derivative instruments. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
financial statements and measure those instruments at fair value, and it
defines the accounting for changes in the fair value of the derivatives
depending on the intended use of the derivative. Management is evaluating SFAS
133 and does not believe that adoption of the Statement will have a material
impact on its results of operations, financial position, or cash flows.
3. Property, Plant and Equipment:
Property, plant and equipment consists of the following at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in
thousands)
<S> <C> <C>
Land, buildings and leasehold improvements.................. $ 2,640 $ 2,130
Network equipment........................................... 128,753 119,023
Data processing............................................. 1,174 1,336
Furniture and fixtures...................................... 670 558
-------- --------
133,237 123,047
Accumulated depreciation and amortization................... (32,130) (19,248)
-------- --------
Total....................................................... $101,107 $103,799
======== ========
</TABLE>
Network equipment with a cost of approximately $32.2 million at December 31,
1999 and 1998 is subject to capital lease obligations. Accumulated
amortization of capitalized leases at December 31, 1999 and 1998 was $10.1
million and $7.0 million, respectively.
F-41
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
4. Leases:
Capital Leases
During 1997 and 1996, the Richmond MTA entered into a series of sale/leaseback
transactions for a portion of its network equipment. The sale/leasebacks were
accounted for as financings, wherein the property remains on the books and a
capital lease obligation is recorded for the proceeds received. The underlying
amounts due under these leases have been guaranteed by the partners of
PrimeCo. There was no gain or loss associated with the transactions. Future
minimum payments applicable to the Richmond MTA under these obligations, a
portion of which are payable in Japanese yen, less imputed interest, are as
follows:
<TABLE>
<CAPTION>
(Dollars
in
thousands)
<S> <C>
Years:
2000............................................................... $ 4,465
2001............................................................... 4,465
2002............................................................... 4,695
2003............................................................... 5,874
2004............................................................... 9,194
Thereafter......................................................... 101
-------
Total minimum lease payments......................................... 28,794
Less: Imputed interest............................................... (4,797)
-------
Present value of minimum lease payments.............................. 23,997
Less: current installments........................................... (3,742)
-------
Long-term capital lease obligations at December 31, 1999............. $20,255
=======
</TABLE>
Operating Leases
The Richmond MTA also has various operating leases, primarily related to
rentals for towers, sites, stores and offices. At December 31, 1999, the
aggregate minimum rental commitments under noncancelable operating leases for
the periods shown are as follows:
<TABLE>
<CAPTION>
(Dollars
in
thousands)
<S> <C>
Years:
2000............................................................... $ 2,956
2001............................................................... 2,956
2002............................................................... 2,989
2003............................................................... 2,982
2004............................................................... 2,966
Thereafter......................................................... 5,890
-------
Total................................................................ $20,739
=======
</TABLE>
Rental expense was approximately $3.4 million, $3.2 million and $2.3 million
in 1999, 1998 and 1997, respectively.
F-42
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
5. Commitments and Contingencies:
Litigation
PrimeCo is involved in various claims and legal proceedings of a nature
considered normal to its business. Management believes that these will not
have a material effect on the Richmond MTA's operating results or financial
position.
Vendor Agreements
PrimeCo has an agreement with its equipment supplier with regards to equipment
costs, payment terms and available credits. This equipment supplier is the
primary provider for the Richmond MTA's network equipment. Vendor credits were
made available to the Richmond MTA based upon the volume of equipment
purchased in accordance with the agreements. The assets purchased under this
agreement are passed to the Richmond MTA through intercompany accounts.
Microwave Relocation Costs
The FCC requires PCS License holders to compensate incumbents for relocating
to new frequencies. The Richmond MTA has incurred approximately $8.8 million
in microwave relocation costs as of December 31, 1999 and 1998.
PrimeCo is legally entitled to partial recoveries of these amounts in the
future as other PCS providers establish service requiring clearance of the
same microwave links; however, the aggregate recovery cannot be reasonably
estimated. Amounts received with respect to these recoveries are recorded as a
reduction to the related asset account.
Recoverability of Assets and Network Expansion
The realization of the Partnership's assets is dependent upon continued
financial support from its partners and successful implementation of its
business strategy. The Richmond MTA will continue to incur significant
expenditures in connection with expanding and improving its coverage areas.
The Partners of PrimeCo have committed funding for 2000 capital and operating
expenditures. In addition, they have provided letters of support to PrimeCo
which ensure, up to the respective partners proportionate share of ownership,
that the financial support necessary to meet all cash flow requirements will
be provided to PrimeCo for the twelve-month period ending January 1, 2001.
On September 21, 1999, the Partners of PrimeCo entered into an agreement that
contemplates, among other things, the combination of certain assets, including
the assets of PrimeCo. At this time, management is unable to predict the
precise effect of this agreement on PrimeCo or the Richmond MTA.
6. Related Party Transactions
Overhead is allocated according to a formula based on gross subscriber
additions or network infrastructure buildout in the Richmond MTA, and other
usage factors. These operating expenses include the direct costs incurred by
PrimeCo and an allocation of PrimeCo overhead, and amounted to approximately
$17.3 million, $13.1 million, and $11.4 million for 1999, 1998, and 1997,
respectively. Management believes the method of allocation is reasonable.
F-43
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS, Continued
7. Employee Benefits:
Effective September 1, 1995, PrimeCo established a defined contribution profit
sharing employee savings plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan") for all employees of the Partnership. PrimeCo
received a favorable determination letter confirming the 401(k) Plan's
qualification from the Internal Revenue Service during 1996.
Employees may elect to contribute up to 16% of their annual compensation. The
Partnership will match employee contributions up to 4% of compensation and, at
its discretion, may elect to make additional contributions under the profit
sharing provisions of the 401(k) Plan. Total expenses related to the 401(k)
Plan for the periods ended December 31, 1999, 1998 and 1997 amounted to
approximately $152,000, $110,000 and $171,000, respectively.
8. Short Term Borrowing and Credit Facilities:
On December 18, 1998, PrimeCo entered into a short term note payable with one
of its primary vendors. The Richmond MTA's allocated principal portion
approximating $10.4 million, based on asset purchases under the note, was
outstanding at December 31, 1998, with a 6% interest rate. The note was paid
in full in January 1999.
9. Fair Value of Financial Instruments:
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable to vendor, accounts payable, and microwave
relocation and capital lease obligations. Because of their short maturity,
cash and cash equivalents, accounts receivable, notes payable to vendor and
accounts payable approximate their fair value.
Amounts payable related to foreign currency forward contracts, which are used
to hedge foreign commitments, are recorded at fair value based on currency
exchange rates in effect at the balance sheet date. Capital lease and
microwave relocation obligations approximate fair value based on interest
rates for similar transactions.
10. Supplemental Data to Statements of Cash Flows:
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1999 1998 1997
------ ------- ------
(Dollars in
thousands)
<S> <C> <C> <C>
Interest paid was as follows:
Interest paid.......................................... $1,143 $ 1,456 $1,372
====== ======= ======
Noncash investing activities were as follows:
Additions to property, plant and equipment............. $ -- $10,184 $4,510
====== ======= ======
Reductions and credits to property, plant and
equipment............................................. $ 779 $ -- $6,212
====== ======= ======
Note payable to vendor in exchange for equipment....... $ -- $10,396 $ --
====== ======= ======
Additions to microwave relocation obligations.......... $ 221 $ 150 $ 780
====== ======= ======
Additions to PCS License............................... $ -- $ -- $ 107
====== ======= ======
</TABLE>
F-44
<PAGE>
RICHMOND MAJOR TRADING AREA
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31,
(Unaudited) 1999
------------- -------------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 188 $ 422
Accounts receivable, net of allowance for doubtful accounts of 4,823 4,433
$1,193 and $1,165, respectively
Accounts receivable, other 355 258
Inventory, finished goods 792 1,461
Prepaid assets 860 541
Other 244 50
--------- ---------
Total current assets 7,262 7,165
--------- ---------
PCS Licenses, net of accumulated amortization of $2,122 and $1,833, 21,029 21,318
respectively
Microwave relocation, net of accumulated amortization of $827 and $718, 7,926 8,050
respectively
Property, plant and equipment, net 106,956 101,107
Construction in progress 4,509 4,985
Other 596 589
--------- ---------
Total assets $148,278 $143,214
========= =========
LIABILITIES AND EQUITY
Current Liabilities:
Current installments of capital leases $ 3,874 $ 3,742
Accounts payable and accrued expenses 5,122 9,857
Accrued compensation 441 438
Taxes, other than income 2,307 2,046
--------- ---------
Total current liabilities 11,744 16,083
--------- ---------
Capital lease obligations, noncurrent 18,773 20,255
Other noncurrent liabilities 3,182 2,779
PrimeCo equity investment 114,579 104,097
--------- ---------
Total liabilities and equity $148,278 $143,214
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE>
RICHMOND MAJOR TRADING AREA
STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues and sales:
Service revenues $ 12,001 $ 10,795 $ 23,454 $ 20,203
Product sales 1,080 1,491 2,465 3,662
Other 580 364 1,072 766
------ ------ ------ ------
Net revenue 13,661 12,650 26,991 24,631
Direct operating costs and expenses:
Cost of service 538 235 877 420
Cost of products sold 989 1,458 2,443 3,568
Operating expenses 11,422 12,838 25,102 26,527
Depreciation and amortization 3,814 3,437 6,925 6,785
------ ------ ------ ------
Total 16,763 17,968 35,347 37,300
------ ------ ------ ------
Loss from operations (3,102) (5,318) (8,356) (12,669)
Interest expense, less capitalized interest of $28 and (329) (378) (688) (750)
$24 for the three months ended June 30, 2000 and
1999 respectively ($46 and $106 for the six months
ended June 30, 2000 and 1999, respectively)
Loss on disposal of assets (67) (28) (43) (197)
------ ------ ------ ------
Net Loss $ (3,498) $ (5,724) $ (9,087) $ (13,616)
====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE>
RICHMOND MAJOR TRADING AREA
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
---------------- ---------------
June 30, June 30,
2000 1999
---------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (9,087) $(13,616)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,925 6,785
Bad debt expense 424 480
Loss on disposal of assets 43 197
Changes in assets and liabilities from operations:
Accounts receivable, trade (814) (1,625)
Inventory 669 492
Prepaid assets (319) (268)
Other assets (298) 1,608
Accounts payable and accrued expenses (4,735) (238)
Accrued compensation 3 (464)
Taxes, other than income 261 941
Other noncurrent liabilities 403 111
-------- --------
Net cash used in operating activities (6,525) (5,597)
-------- --------
Cash Flows From Investing Activities:
Payments for microwave relocation - -
Recoveries of microwave relocation costs 12 -
Additions to property, plant and equipment (11,940) (7,017)
-------- --------
Net cash used in investing activities (11,928) (7,017)
-------- --------
Cash Flows From Financing Activities:
Increase in intercompany payable 19,569 24,382
Reductions of capital leases (1,350) (1,212)
Payment of note payable to vendor - (10,396)
-------- --------
Net cash provided by financing activities 18,219 12,774
-------- --------
Increase (decrease) in cash and cash equivalents (234) 160
Cash and cash equivalents, beginning of period 422 -
-------- --------
Cash and cash equivalents, end of period $ 188 $ 160
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
RICHMOND MAJOR TRADING AREA
NOTES TO FINANCIAL STATEMENTS
(1) Business and Significant Accounting Policies:
The accompanying unaudited financial statements, in the opinion of the
PrimeCo Personal Communications, L.P. ("PrimeCo") management, contain all
material, normal and recurring adjustments necessary to present accurately the
financial condition of the Richmond Major Trading Area ("Richmond MTA") and the
results of its operations for the periods indicated. The results of operations
for the interim periods reported are not necessarily indicative of the results
to be experienced for the entire year.
These unaudited financial statements should be used in conjunction with
the financial statements and notes thereto for the year ended December
31, 1999. Significant accounting policies followed by the Richmond MTA
were disclosed in the notes to the Richmond MTA's financial statements
for the year ended December 31, 1999. The year-end balance sheet data
included within was derived from the audited financial statements, but
does not include all of the disclosures required by generally accepted
accounting principles.
Business
The Richmond MTA of PrimeCo design, builds, and operates broadband
personal communications services ("PCS") under the PCS license awarded to
PrimeCo in the Richmond, Virginia Market.
Litigation
PrimeCo is involved in various claims and legal proceedings of a nature
considered normal to its business. Management believes that these will not have
a material effect on the Richmond MTA's operating results or financial position.
(2) Ownership:
Effective April 3, 2000, in order to comply with Federal Communications
Commission ("FCC") regulations regarding overlap properties, the operations of
the Richmond MTA were contributed by PrimeCo to PrimeCo PCS, LP., a separate
legal entity jointly controlled by Bell Atlantic Corporation and Vodafone
AirTouch.
(3) Subsequent Events:
On July 26, 2000, PrimeCo closed on the disposition to CFW
Communications Company of PrimeCo Personal Communications, L.P. PCS licenses,
assets and operations in the Richmond MTA for cash of $408.6 million, the
assumption of approximately $20.0 million of lease obligations and the transfer
of a limited partnership interest and the assets, licenses and operations of
analog wireless operations, with a combined value of approximately $78.5
million.
F-48
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
R&B Communications, Inc.
Daleville, Virginia
We have audited the accompanying consolidated balance sheet of R&B
Communications, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, 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 generally accepted auditing
standards. 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 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of R&B
Communications, Inc. and subsidiaries as of December 31, 1999, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
April 26, 2000, except for Note 9,
as to which the date is June 16, 2000
F-49
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
R&B Communications, Inc.
Daleville, Virginia
We have audited the accompanying consolidated balance sheet of R&B
Communications, Inc., and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of R&B
Communications, Inc., and its subsidiaries, as of December 31, 1998, and the
results of their operations and their cash flows for the years ended December
31, 1998 and 1997 in conformity with generally accepted accounting principles.
/s/ Phibbs Burkholder Geisert & Huffman
Harrisonburg, Virginia
February 19, 1999
F-50
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................ $ 8,218,177 $ 6,909,613
Accounts receivable.................................. 3,834,561 2,576,244
Materials and supplies............................... 354,878 323,518
Prepaid expenses and other........................... 230,094 9,712
Income taxes receivable.............................. 2,680,774 2,598,952
----------- -----------
15,318,484 12,418,039
----------- -----------
Securities and Investments............................. 18,811,889 8,441,698
----------- -----------
Property and Equipment
Land and building.................................... 4,497,672 4,397,674
Network plant and equipment.......................... 21,231,445 19,600,655
Furniture, fixtures, and other equipment............. 14,954,217 11,541,085
Radio spectrum licenses.............................. 926,376 926,376
----------- -----------
Total in service.................................... 41,609,710 36,465,790
Less accumulated depreciation and amortization......... 16,594,851 13,999,963
----------- -----------
25,014,859 22,465,827
----------- -----------
Other Assets
Cash surrender value of life insurance............... 3,749,035 3,965,660
Radio spectrum licenses.............................. 958,546 742,786
Other deferred charges............................... 59,548 91,220
----------- -----------
4,767,129 4,799,666
----------- -----------
$63,912,361 $48,125,230
=========== ===========
</TABLE>
F-51
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................. $ 385,627 $ 365,626
Recognized losses in excess of investment in PCS
ventures............................................ 3,100,000 163,066
Accounts payable..................................... 1,493,424 1,065,070
Customers' deposits.................................. 26,483 28,602
Advance billings..................................... 702,649 633,254
Accrued payroll...................................... 118,023 90,880
Accrued interest..................................... 15,610 18,518
Other accrued liabilities............................ 707,328 674,808
Dividends payable.................................... 221,022 199,501
----------- -----------
6,770,166 3,239,325
----------- -----------
Long-Term Debt, net of current maturities.............. 7,520,082 7,907,901
----------- -----------
Long-Term Liabilities
Deferred income taxes................................ 10,100,000 4,105,674
Recognized losses in excess of investment in PCS
ventures............................................ 2,078,690 --
Deferred compensation................................ 1,772,000 1,472,000
Unamortized investment tax credits................... 109,463 142,428
----------- -----------
14,060,153 5,720,102
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Common stock, $10 par value per share, authorized
100,000 shares; issued 61,669 shares (61,671 in
1998)............................................... 616,690 616,710
Retained earnings.................................... 24,845,542 29,241,142
Unrealized gain on securities available for sale,
net................................................. 10,099,728 1,400,050
----------- -----------
35,561,960 31,257,902
----------- -----------
$63,912,361 $48,125,230
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-52
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Operating Revenues
Wireline communications............... $14,499,701 $11,703,381 $9,734,331
Wireless communications............... 1,257,571 1,218,802 968,404
Other communications services......... 1,012,076 954,092 921,592
----------- ----------- ----------
16,769,348 13,876,275 11,624,327
----------- ----------- ----------
Operating Expenses
Maintenance and support............... 4,917,215 3,398,213 2,311,849
Depreciation and amortization......... 2,808,093 2,340,046 2,104,554
Customer operations................... 2,030,715 1,927,899 1,290,468
Corporate operations.................. 2,356,231 1,862,416 1,699,749
----------- ----------- ----------
12,112,254 9,528,574 7,406,620
----------- ----------- ----------
Operating Income........................ 4,657,094 4,347,701 4,217,707
Other Income (Expenses)
Interest and dividend income.......... 336,526 260,868 311,410
Other expenses, principally interest.. (685,171) (410,153) (557,105)
Equity loss from PCS investees
VA PCS Alliance...................... (5,427,347) (5,077,821) (821,936)
WV PCS Alliance...................... (4,564,475) (1,063,948) --
Equity income from other investees.... 339,727 315,247 634,164
Gain on sale of assets and
investments.......................... 252,483 30,677 5,079,593
----------- ----------- ----------
(5,091,163) (1,597,429) 8,863,833
Income Taxes (Benefit).................. (917,265) (758,938) 3,051,905
----------- ----------- ----------
Net Income (Loss)....................... $(4,173,898) $ (838,491) $5,811,928
=========== =========== ==========
Net income (loss) per common share--
basic and diluted...................... $ (67.68) $ (13.48) $ 92.53
Average shares outstanding--basic and
diluted................................ 61,670 62,211 62,813
Cash dividends per share................ $ 3.60 $ 3.25 $ 3.00
</TABLE>
See Notes to Consolidated Financial Statements.
F-53
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss)....................... $(4,173,898) $ (838,491) $5,811,928
Adjustments to reconcile net income
(loss) to net
cash provided by operating activities:
Depreciation.......................... 2,747,121 2,279,074 2,043,582
Amortization.......................... 60,972 60,972 60,972
Deferred taxes........................ 628,000 1,589,232 184,770
Retirement benefits other than
pensions............................. 300,000 267,000 178,000
Other................................. (241,819) (136,765) 64,043
Equity loss from wireless investees... 9,652,095 5,826,522 187,772
Gain on sale of investments........... (252,483) (30,677) (5,079,593)
Changes in assets and liabilities from
operations:
(Increase) decrease in accounts
receivable........................... (1,258,317) (870,920) 283,632
(Increase) in materials and supplies.. (31,360) (6,370) (51,783)
Increase (decrease) in other current
assets............................... (220,382) 163,249 (452,398)
(Increase) decrease in income taxes
receivable........................... (81,822) (2,348,152) 328,500
Increase (decrease) in accounts
payable.............................. 428,354 109,650 (1,622,447)
Increase in other accrued
liabilities.......................... 124,031 -- --
----------- ---------- ----------
Net cash provided by operating
activities........................... 7,680,492 6,064,324 1,936,978
----------- ---------- ----------
Cash Flows From Investing Activities
Purchases of property and equipment..... (5,325,453) (3,776,869) (3,707,173)
Purchase of investment securities....... (281,818) (347,152) (85,982)
Purchases of licenses................... (215,760) -- --
Contributions to equity investments..... (1,837,881) (978,764) (89,500)
Net (premium) proceeds on life insurance
policies............................... 458,444 (144,593) (63,687)
Proceeds from the sale of investment in
partnership............................ -- -- 2,355,956
Proceeds from the sale of equipment..... -- 4,103 22,013
Proceeds from sale of investment
securities............................. 989,925 313,464 11,430
Distributions from equity investments... 408,634 383,642 343,529
----------- ---------- ----------
Net cash used in investing
activities........................... (5,803,909) (4,546,169) (1,213,414)
----------- ---------- ----------
Cash Flows From Financing Activities
Cash dividends.......................... (199,501) (187,080) (172,243)
Proceeds of short-term debt............. -- -- 748,000
Proceeds of long-term debt.............. -- -- 850,500
Redemption of common stock.............. (700) (345,450) (54,380)
Payments of long-term debt.............. (367,818) (1,097,195) (1,075,344)
----------- ---------- ----------
Net cash provided by (used in)
financing activities................. (568,019) (1,629,725) 296,533
----------- ---------- ----------
Increase (decrease) in cash and cash
equivalents.......................... 1,308,564 (111,570) 1,020,097
Cash and Cash Equivalents:
Beginning............................... 6,909,613 7,021,183 6,001,086
----------- ---------- ----------
Ending.................................. $ 8,218,177 $6,909,613 $7,021,183
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-54
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 62,901 $629,010 $25,041,884 $ 519,285 $26,190,179
Comprehensive income:
Net Income............ 5,811,928
Unrealized losses on
securities available
for sale, net of
$61,726 deferred tax
effect............... (100,866)
Reclassification of
realized losses on
securities available
for sale, net of
$5,735 deferred tax
effect...............
Comprehensive income.. 9,389 5,720,451
Redemption of 243 shares
of common stock........ (243) (2,430) (51,950) (54,380)
Dividends............... (187,148) (187,148)
------ -------- ----------- ----------- -----------
Balance, December 31,
1997................... 62,658 626,580 30,614,714 427,808 31,669,102
Comprehensive income:
Net Loss.............. (838,491)
Unrealized gains on
securities available
for sale, net of
$606,524 of deferred
tax effect........... 991,274
Reclassification of
realized gains on
securities available
for sale, net of
$11,645 deferred tax
effect............... (19,032)
Comprehensive income.. 133,751
Redemption of 987 shares
of common stock........ (987) (9,870) (335,580) (345,450)
Dividends............... (199,501) (199,501)
------ -------- ----------- ----------- -----------
Balance, December 31,
1998................... 61,671 616,710 29,241,142 1,400,050 31,257,902
Comprehensive income:
Net Loss.............. (4,173,898)
Unrealized gains on
securities available
for sale, net of
$5,425,408 of
deferred tax effect.. 8,860,114
Reclassification of
realized gains on
securities available
for sale, net of
$92,047 deferred tax
effect............... (160,436)
Comprehensive income.. 4,525,780
Redemption of 2 shares
of common stock...... (2) (20) (680) (700)
Dividends............... (221,022) (221,022)
------ -------- ----------- ----------- -----------
Balance, December 31,
1999................... 61,669 $616,690 $24,845,542 $10,099,728 $35,561,960
====== ======== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-55
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
R&B Communications, Inc. and its subsidiaries provide a broad range of
products and services to businesses, telecommunication carriers and
residential customers in the Roanoke Valley area of Virginia. R&B's services
include personal communications services ("PCS"), local telephone, long
distance, paging, voice-mail, wireless cable television, directory assistance,
competitive access, and local Internet access. Significant accounting policies
follow:
Accounting 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.
Principles of consolidation: The consolidated financial statements include
the accounts of R&B and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue recognition: R&B's revenue recognition policy is to recognize
revenues when services are rendered or when products are delivered,
installed and functional, as applicable. Certain services of R&B require
payment in advance of service performance. In such cases, R&B records a
service liability at the time of billing and subsequently recognizes
revenue over the service period.
Cash and cash equivalents: For purposes of reporting cash flows, R&B
considers all highly liquid debt instruments with a purchased maturity of
three months or less to be cash equivalents. R&B places its temporary cash
investments with high credit quality financial institutions. At times, such
investments may be in excess of the FDIC insurance limit.
Securities and investments: R&B has investments in debt and equity
securities and partnerships. Management determines the appropriate
classification of securities at the date of purchase and continually
thereafter. The classification of those securities and the related
accounting policies are as follows:
Available-for-sale securities: Securities classified as available for sale
are traded primarily on a national exchange and consist of securities that
R&B intends to hold for an indefinite period of time but not necessarily to
maturity. Decisions to sell a security classified as available for sale are
based on various factors including changes in market conditions, liquidity
needs and other similar factors. Securities available for sale are stated
at fair value and unrealized holding gains and losses, net of the related
deferred tax effect, are reported as a separate component of shareholders'
equity. Realized gains and losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
Equity method investments: Equity method investments consist of partnership
investments. Under this method, R&B's share in earnings or losses of these
companies is included in earnings. Where R&B has guaranteed obligations of
a partnership, or committed to make capital investments in excess of
carrying value, negative capital balances are reported as liabilities.
Investments carried at cost: Cost method investments are those in which R&B
does not have significant ownership and for which there is no ready market.
Patronage equity received in connection with the acquisition of long-term
debt is included in this category.
Property and equipment: Property and equipment is stated at cost.
Accumulated depreciation is charged with the cost of property retired, plus
removal cost, less salvage. Depreciation is determined under the remaining
life method and straight-line composite rates. Buildings are depreciated
over lives from 35 to 50 years. Network plant and equipment are depreciated
over various lives from 5 to 50 years. Furniture, fixtures and other
equipment are depreciated over various lives from 5 to 25 years. Channel
acquisition costs
F-56
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Significant Accounting Policies (continued)
are amortized over a life of 30 years. Depreciation provisions were
approximately 7.2%, 6.8% and 6.5% of average depreciable assets for the
years 1999, 1998 and 1997, respectively.
Materials and supplies: R&B's materials and supplies inventory consists
both of items held for resale such as PCS and wireline phones, pagers, and
accessories, and materials for the maintenance and expansion of plant
operations. R&B values its inventory at the lower of average cost or
market. The market value is determined by reviewing current replacement
cost, marketability, and obsolescence.
Retirement plans: R&B sponsors a contributory defined contribution plan
under Internal Revenue Code Section 401(k) for all full-time employees with
at least one year of service. R&B contributes 50% of each participant's
annual contribution for contributions up to 4% of each participant's annual
compensation, and contributes 100% of each participant's annual
contribution for the next 2%. The employee elects the type of investment
fund from the equity and bond alternatives offered by the plan.
R&B also sponsors a qualified profit-sharing plan to provide retirement
benefits for employees. The plan provides for a choice of a lump sum
distribution or periodic payments upon normal retirement at age 65,
permanent disability or death. The plan provides for voluntary
contributions and covers substantially all full-time employees. The
employer's contribution to the plan is determined annually by R&B board of
directors.
Income taxes: Deferred income taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Net income (loss) per common share: Basic net income per share was computed
by dividing net income by the weighted average number of common shares
outstanding during the year. R&B has no potential common stock outstanding,
such as stock options, warrants or convertible debt; therefore, basic and
diluted net income per share are the same.
Fair value of financial instruments: The fair values of financial
instruments recorded on the balance sheet, except securities and
investments, are not significantly different from the carrying amounts,
based on cash flows relative to similar instruments. Information as to
securities and investments is included elsewhere in Notes 1, 3 and 4. The
fair value of off-balance sheet guarantees, as described in Note 3, is not
determinable due to the nature of the transaction.
Note 2. Disclosures About Segments of an Enterprise and Related Information
R&B has five primary business segments which have separable management focus
and infrastructures and that offer different products and services. These
segments are as follows:
Telephone: R&B has a 99-year-old local telephone business subject to the
regulations of the State Corporation Commission of Virginia. This business
is an incumbent local exchange carrier (ILEC) in Botetourt County,
Virginia. Principle products offered by this business are local service,
which includes advanced calling features, long distance toll and directory
advertising.
Network: In addition to the ILEC services, R&B directly or indirectly owns
a fiber optic network and provides transport services for long distance,
Internet and private network services. Additionally, the network business
began offering Competitive Local Exchange (CLEC) service in 1998, currently
providing services to customers in the Roanoke Valley of Virginia.
F-57
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Disclosures About Segments of an Enterprise and Related Information
(continued)
Internet: R&B provides local Internet access services through a local
presence in the Roanoke Valley and surrounding areas of western Virginia.
Wireless: R&B's wireless business provides paging and voicemail and is
marketed in the retail and business-to-business channels primarily within
R&B's Internet service territory.
Wireless Cable: The cable business offers wireless video cable service and
offers wireless cable high-speed Internet service to residential and
commercial subscribers in the Roanoke Valley.
Summarized financial information concerning R&B's reportable segments is shown
in the following table. The "Other" column includes certain unallocated
corporate related items, as well as results from R&B's maintenance contract,
directory advertising and retail businesses, which are not considered separate
reportable segments.
<TABLE>
<CAPTION>
Network Wireless Corporate
Telephone and CLEC Internet Wireless Cable and other Total
--------- -------- -------- -------- -------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues.............. $ 8,945 $ 5,511 $593 $ 811 $ 714 $ 195 $16,769
EBITDA................ 4,536 2,581 77 335 (32) (32) 7,465
Depreciation &
Amortization......... 1,581 561 77 85 453 51 2,808
Total Segment Assets.. 36,893 10,071 406 573 2,706 13,263 63,912
1998
Revenues.............. $ 8,102 $ 3,776 $311 $ 873 $ 607 $ 207 $13,876
EBITDA................ 4,026 2,294 (49) 524 (129) 21 6,687
Depreciation &
Amortization......... 1,365 403 57 59 422 34 2,340
Total Segment Assets.. 26,403 7,520 370 1,554 3,983 8,295 48,125
1997
Revenues.............. $ 7,398 $ 2,626 $133 $ 907 $ 332 $ 228 $11,624
EBITDA................ 4,145 2,207 27 380 (366) (71) 6,322
Depreciation &
Amortization......... 1,371 324 27 47 316 19 2,104
Total Segment Assets.. 22,718 5,370 282 944 3,696 13,887 46,897
</TABLE>
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (Note 1). R&B evaluates the
performance of its operating segments principally on operating revenues,
operating income and EBITDA, which R&B defines as operating income plus
depreciation and amortization. Corporate functions are allocated at cost to
the operating segments. Segment expenses contain an allocation of shared
expenses for general administration.
Note 3. Investments in Wireless Affiliates
At December 31, 1999, R&B had invested approximately $1,054,914 ( $895,593 at
December 31, 1998) for a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications services
("PCS") serving a 1.6 million populated area in central and western Virginia.
PCS operations began throughout the Virginia region in the fourth quarter of
1997.
At December 31, 1999, R&B had invested approximately $5,976,262 ( $4,841,098
at December 31, 1998) for convertible preferred ownership interest in the VA
Alliance which is convertible beginning in 2000 into additional common
ownership interest. If converted, R&B would have a 37% ownership interest in
the VA Alliance. In December 1996, the VA Alliance also issued $12.9 million
of redeemable preferred ownership
F-58
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Investments in Wireless Affiliates (continued)
interest that can be redeemed by the investor after December 31, 2001. In the
event the investor elects to redeem such preferred equity after such date, R&B
may elect to fund $1.5 million of such obligation in exchange for additional
common ownership in the VA Alliance. In the event this redemption and funding
occurs, and R&B converts its convertible preferred ownership interest, R&B
would have a 26% common ownership interest in the VA Alliance.
R&B has committed to provide approximately $5.7 million additional capital to
the VA Alliance in installments of approximately $2.6 million in 2000 and
2001, and $.5 million in 2002. Such additional capital commitments would be
reduced by proceeds, if any, from future equity offerings by the VA Alliance.
R&B has a 34% common ownership interest in the West Virginia PCS Alliance,
L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million populated area
in West Virginia and eastern Kentucky, southwestern Virginia and eastern Ohio.
PCS operations began in Charleston and Huntington, West Virginia, in the
fourth quarter of 1998 and expanded to Morgantown and the northern corridor of
West Virginia in the second quarter of 1999.
R&B has committed to provide additional capital to the WV Alliance of
approximately $1.5 million in three equal annual installments beginning in
January 2000. Such additional capital commitments would be reduced by
proceeds, if any, from future equity offerings by the WV Alliance.
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for by the equity method, are as
follows:
<TABLE>
<CAPTION>
VA Alliance WV Alliance
----------------- ---------------
1999 1998 1999 1998
-------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Current assets............................ $ 9,241 $ 3,648 $ 2,367 $ 488
Noncurrent assets......................... 111,601 100,668 51,130 30,644
Current liabilities....................... 7,633 11,991 3,076 10,732
Noncurrent liabilities.................... 131,478 90,301 51,125 9,237
Redeemable preferred interest............. 15,192 14,345 -- --
</TABLE>
<TABLE>
<CAPTION>
VA Alliance WV Alliance
--------------------------- -----------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- -------- ------- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 12,677 $ 3,200 $ 119 $ 3,087 $ 114 $--
Gross profit (loss)..... 6,059 1,635 (197) (77) (107) --
Net loss applicable to
common owners.......... (26,139) (24,415) (3,952) (13,287) (3,103) --
Company's share of net
loss................... (5,427) (5,078) (834) (4,564) (1,064) --
</TABLE>
R&B has entered into guarantee agreements whereby R&B is committed to provide
guarantees of up to $34.3 million of the Alliances' debt and redeemable
preferred obligations. Such guarantees become effective as obligations are
incurred by the Alliances. At December 31, 1999, R&B has guaranteed $29.3
million of the Alliance's obligations.
F-59
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Securities and Investments
Investments consist of the following as of December 31:
<TABLE>
<CAPTION>
Carrying Values
-----------------------
Type of Ownership 1999 1998
---------------------- ----------- ----------
<S> <C> <C> <C>
Available for Sale
MCI WorldCom, Inc............ Equity Securities $ 3,333,227 $3,004,747
Illuminet Holdings, Inc...... Equity Securities 13,538,360 447,285
ITC DeltaCom, Inc............ Equity Securities 325,119 160,000
CFW Communications, Inc...... Equity Securities 225,875 151,938
Other........................ Equity Securities 565,882 702,117
----------- ----------
17,988,463 4,466,087
----------- ----------
Equity Method
Virginia PCS Alliance, L.C... Equity and Convertible
Preferred Interests (4,295,928) (163,066)
West Virginia PCS Alliance,
L.C......................... Equity Interest (882,762) 3,194,496
Virginia Telecommunications
Partnership................. Partnership Interest 297,348 323,483
Other........................ Partnership Interests 124,407 111,000
----------- ----------
(4,756,935) 3,465,913
----------- ----------
Cost Method
Rural Telephone Bank......... Equity Securities 328,558 328,558
Other........................ Equity Securities 73,113 18,074
----------- ----------
401,671 346,632
----------- ----------
13,633,199 8,278,632
Amounts reported separately
as liabilities.............. 5,178,690 163,066
----------- ----------
$18,811,889 $8,441,698
=========== ==========
</TABLE>
In October 1999, Illuminet Holdings, Inc. ("ILUM") completed an initial public
offering ("IPO") and commenced being traded on the NASDAQ exchange under the
symbol ILUM. R&B holds 246,152 shares of ILUM at a cost of $447,285 with a
market value of $13,538,360 on December 31, 1999 ($55.00 per share).
R&B sold an investment in American Telecasting, Inc. ("ATEL") in September and
October 1999, recognizing a $247,000 gain.
Changes in the unrealized gain (loss) on available for sale securities during
the years ended December 31, 1999 and 1998, reported as a separate component
of shareholders' equity are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Unrealized gain beginning, balance.................. $ 2,256,689 $ 689,568
Unrealized holding gains during the year............ 14,033,039 1,567,121
----------- ----------
Unrealized gain, ending balance..................... 16,289,728 2,256,689
Deferred tax effect related to net unrealized
holding gains...................................... 6,190,000 856,639
----------- ----------
Unrealized gain included in shareholders' equity.... $10,099,728 $1,400,050
=========== ==========
</TABLE>
F-60
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Long-Term Debt
Long-term debt and lines of credit consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
5.00% note due in quarterly installments of principal
and interest of $28,353 through 2011................... $ 987,048 $1,049,167
5.00% note due in quarterly installments of principal
and interest of $53,501 through 2015................... 2,299,684 2,395,766
5.50% note due in monthly installments of principal and
interest of $23,650 through 2008....................... 610,961 669,869
5.50% note due in monthly installments of principal and
interest of $42,403 through 2008....................... 1,087,497 1,196,475
6.05% note due in monthly installments of principal and
interest of $188 through 2026.......................... 2,725,381 2,761,661
5.00% note due in quarterly installments of principal
and interest of $3,595 through 2021.................... 188,897 193,633
2.00% note due in quarterly installments of principal
and interest of $212 through 2007...................... 6,241 6,956
---------- ----------
7,905,709 8,273,527
Less: Current maturities................................ 385,627 365,626
---------- ----------
$7,520,082 $7,907,901
========== ==========
</TABLE>
The above items are secured by substantially all Company assets. As of
December 31, 1999, R&B has drawn down $2,893,924 on a $5,352,059 commitment
from the Rural Telephone Bank (RTB). The amount outstanding on these
borrowings was $2,725,381 and $2,761,661 as of December 31, 1999 and 1998,
respectively. R&B has 35 years to use the approved amount, and is required to
purchase stock in the RTB equal to 5% of the loan. This stock is recorded in
investments.
The Rural Utility Service restricts the payment of dividends by Roanoke and
Botetourt Telephone Company, Inc. to 60% of its total net earnings since
December 31, 1976. Total dividend distributions through December 31, 1999 were
$2,207,829 less than the amount allowed by this limitation.
Interest expense was $1.1 million, $0.7 million and $0.9 million for 1999,
1998 and 1997, respectively. Maturities of long-term debt for each of the next
five years are 2000--$385,627; 2001--$406,731; 2002--$428,994; 2003--$452,485;
and 2004--$477,269.
Note 6. Income Taxes
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal tax expense (benefit)........... $ (949,388) $(2,100,995) $2,565,331
State tax expense (benefit)............. (595,877) (247,175) 301,804
----------- ----------- ----------
(1,545,265) (2,348,170) 2,867,135
Deferred tax expense
Federal deferred tax expense............ 558,424 1,417,779 160,920
State deferred tax expense.............. 69,576 171,453 23,850
----------- ----------- ----------
628,000 1,589,232 184,770
----------- ----------- ----------
$ (917,265) $ (758,938) $3,051,905
=========== =========== ==========
</TABLE>
F-61
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Income Taxes (continued)
Total income tax expense was different than an amount computed by applying the
graduated statutory federal income tax rates to income before taxes. The
reasons for the differences are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ----------
<S> <C> <C> <C>
Computed tax at statutory rate............ $(1,730,995) $(543,125) $3,013,703
Tax credits, net of basis adjustment...... (32,965) (38,855) (41,802)
State income taxes (benefit), net of
federal income tax effect................ (590,128) (65,175) 221,899
Adjustment to prior year estimates........ 393,877 -- --
Nondeductible life insurance.............. 76,554 -- --
IRS audit adjustment...................... 942,162 -- --
Other, net................................ 24,230 (111,783) (141,895)
----------- --------- ----------
$ (917,265) $(758,938) $3,051,905
=========== ========= ==========
</TABLE>
Net deferred income tax assets and liabilities consist of the following
components at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred income tax assets
Retirement benefits other than pension................. $ 673,360 $ 559,360
Compensated absences................................... 55,852 44,085
Net operating loss..................................... 3,012,823 --
Other.................................................. 242,270 205,217
----------- ----------
3,984,305 808,662
Deferred income tax liabilities:
PCS investments, net................................... 5,320,981 1,660,437
Property and equipment................................. 2,573,324 2,397,260
Unrealized gain on securities available for sale....... 6,190,000 856,639
----------- ----------
14,084,305 4,914,336
----------- ----------
Net deferred income tax liabilities...................... $10,100,000 $4,105,674
=========== ==========
</TABLE>
R&B has a net operating loss of approximately $8 million, which expires in
2019.
Note 7. Supplementary Disclosures of Cash Flow Information
The following information is presented as supplementary disclosures for the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- -------- ----------
<S> <C> <C> <C>
Cash payments (refunds) for:
Interest, net of capitalized interest of
$60,502 in 1999, $34,006 in 1998, and $62,406
in 1997...................................... $ 828,985 $532,431 $ 549,950
=========== ======== ==========
Income taxes, net............................. $(1,463,443) $ -- $2,535,476
=========== ======== ==========
</TABLE>
In 1997, R&B sold its share of a cellular telephone partnership. As a portion
of the total proceeds, R&B received approximately $4.3 million in non-cash
assets.
F-62
<PAGE>
R&B COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Retirement Plans and Other Postretirement Benefits
Company matching contributions to the defined contribution plan totaled
$92,280, $72,356 and $64,245 in 1999, 1998 and 1997, respectively. Profit-
sharing contributions totaled $125,000, $100,000 and $100,000 in 1999, 1998
and 1997, respectively. These amounts are reflected in operating expenses in
the statement of operations.
R&B has adopted salary continuation plan agreements with certain of its
employees. The amount of the deferred compensation is based on 25-50% of one's
average salary in the last five years of employment. The compensation is
payable monthly over a 10-year period. The estimated costs of benefits that
will be paid after retirement is being accrued by charges to expense over the
eligible employee's service periods to the dates they are fully eligible for
benefits. Such charges were $300,000, $267,000, and $178,000 in 1999, 1998 and
1997, respectively.
Note 9. Subsequent Event (Merger with CFW Communications Company)
On June 16, 2000, R&B's board of directors approved an agreement and plan of
merger with CFW Communications Company. Under the terms of that agreement,
shareholders of R&B will receive 60.27 shares of CFW Communications Company.
common stock for each outstanding share. The transaction is subject to
regulatory and shareholder approvals. Holders of a majority of R&B's shares
have agreed to vote in favor of the transaction.
F-63
<PAGE>
R&B COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31, 1999
------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents..................... $ 8,937,398 $ 8,218,177
Accounts receivable........................... 3,577,723 3,834,561
Materials and supplies........................ 356,099 354,878
Prepaid expenses and other.................... 48,477 230,094
Income tax receivable......................... 2,680,774 2,680,774
------------ -----------
15,600,471 15,318,484
------------ -----------
Securities and Investments...................... 17,983,196 18,811,889
------------ -----------
Property and Equipment
Land and building............................. 4,484,422 4,497,672
Network plant and equipment................... 23,197,649 21,231,445
Furniture, fixtures and other equipment....... 15,053,944 14,954,217
Radio spectrum licenses....................... 926,376 926,376
------------ -----------
Total in service............................ 43,662,391 41,609,710
Under construction............................ 176,287 --
------------ -----------
43,838,678 41,609,710
Less accumulated depreciation................. 18,199,006 16,594,851
------------ -----------
25,639,672 25,014,859
------------ -----------
Other Assets
Cash surrender value of life insurance........ 1,441,412 3,749,035
Radio spectrum licenses and license deposits.. 958,546 958,546
Other deferred charges........................ 12,569 59,548
------------ -----------
2,412,527 4,767,129
------------ -----------
$ 61,635,866 $63,912,361
============ ===========
</TABLE>
F-64
<PAGE>
R&B COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31, 1999
------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt.......... $ 394,064 $ 385,627
Recognized losses in excess of investment in
PCS ventures................................. 3,321,702 3,100,000
Accounts payable.............................. 832,562 1,493,424
Customers' deposits........................... 25,133 26,483
Advance billings.............................. 563,664 702,649
Accrued payroll............................... 135,559 118,023
Accrued interest.............................. -- 15,610
Other accrued liabilities..................... 559,472 707,328
Dividend payable.............................. -- 221,022
------------ -----------
5,832,156 6,770,166
------------ -----------
Long-Term Debt, net of current maturities....... 7,288,481 7,520,082
Long-Term Liabilities
Deferred income taxes......................... 8,069,409 10,100,000
Recognized losses in excess of investment in
PCS ventures................................. 6,007,263 2,078,690
Deferred compensation......................... 1,922,000 1,772,000
Unamortized investment tax credits............ 86,339 109,463
------------ -----------
16,085,011 14,060,153
------------ -----------
Shareholders' Equity
Common stock, no par.......................... 616,690 616,690
Retained earnings............................. 22,299,372 24,845,542
Unrealized gain on securities available for
sale, net.................................... 9,514,156 10,099,728
------------ -----------
32,430,218 35,561,960
------------ -----------
$ 61,635,866 $63,912,361
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-65
<PAGE>
R&B COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenues
Wireline
communications......... $ 3,836,472 $ 3,739,158 $ 7,826,099 $ 7,193,794
Wireless
communications......... 474,876 395,280 829,913 739,908
Other communications
services............... 268,897 271,818 467,921 398,750
----------- ----------- ----------- -----------
4,580,245 4,406,256 9,123,933 8,332,452
----------- ----------- ----------- -----------
Operating Expenses
Maintenance and
support................ 1,248,600 1,005,464 2,456,572 1,698,723
Depreciation and
amortization........... 846,461 688,480 1,663,532 1,358,578
Customer operations..... 748,756 647,694 1,525,086 1,273,524
Corporate operations.... 1,100,779 630,581 1,789,717 1,207,587
----------- ----------- ----------- -----------
3,944,596 2,972,219 7,434,907 5,538,412
----------- ----------- ----------- -----------
Operating Income.......... 635,649 1,434,037 1,689,026 2,794,040
Other Income (Expenses)
Interest and dividend
income................. 93,928 73,970 161,657 134,034
Other expenses,
principally interest... (119,892) (432,697) (228,152) (544,215)
Equity loss from PCS
investees
VA PCS Alliance........ (1,315,066) (1,479,228) (2,838,564) (2,853,768)
WV PCS Alliance........ (1,445,833) (1,112,150) (3,093,413) (1,859,356)
Equity income from other
investees.............. 62,897 76,539 153,410 153,000
----------- ----------- ----------- -----------
(2,088,317) (1,439,529) (4,156,036) (2,176,265)
Income Tax Benefit........ 768,286 (328,785) 1,609,866 (31,452)
----------- ----------- ----------- -----------
Net Loss.................. $(1,320,031) $(1,768,314) $(2,546,170) $(2,207,717)
=========== =========== =========== ===========
Net loss per common
share--basic and
diluted.................. (21.405) (28.674) (41.228) (35.799)
Average shares
outstanding--basic and
diluted.................. 61,669 61,671 61,669 61,671
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-66
<PAGE>
R&B COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss........................................... $(2,546,170) $(2,207,717)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 1,663,532 1,358,578
Deferred tax benefit............................. (1,609,886) (888,236)
Share of equity loss from equity method
investees....................................... 5,778,567 4,560,124
Changes in assets and liabilities from operations:
(Increase) decrease in accounts receivable....... 256,838 (1,320,678)
(Increase) decrease in materials and supplies.... (1,221) 69,938
Decrease in income tax receivable................ -- 2,080,095
(Increase) decrease in other assets.............. 181,617 (43,305)
Decrease in accounts payable..................... (660,862) (384,356)
Increase in other accrued liabilities............ 2,720 427,417
Decrease in advance billings..................... (138,985) (28,792)
----------- -----------
Net cash provided by operating activities........ 2,926,150 3,623,068
----------- -----------
Cash Flows From Investing Activities
Purchases of property, equipment and other assets.. (2,241,366) (1,625,294)
Investments in PCS alliances....................... (1,781,702) (1,781,702)
Investment in securities........................... (47,298) --
Increase (decrease) in cash surrender value of
officer's life insurance.......................... 2,307,623 (13,660)
----------- -----------
Net cash used in investing activities............ (1,762,743) (3,420,656)
----------- -----------
Cash Flows From Financing Activities
Cash dividends..................................... (221,022) (199,501)
Payments on long-term debt......................... (223,164) (217,436)
Redemption of common stock......................... -- (20)
----------- -----------
Net cash used in financing activities............ (444,186) (416,957)
----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... 719,221 (214,545)
Cash and Cash Equivalents:
Beginning.......................................... 8,218,177 6,909,613
----------- -----------
Ending............................................. $ 8,937,398 $ 6,695,068
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-67
<PAGE>
R&B COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
--------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1998................... 61,671 $616,710 $29,241,142 $ 1,400,050 $31,257,902
Comprehensive income:
Net loss.............. (439,403)
Unrealized gain on
securities available
for sale, net of
$323,963 deferred tax
effect............... 528,572
Comprehensive income.. 89,169
------ -------- ----------- ----------- -----------
Balance, March 31,
1999................... 61,671 616,710 28,801,739 1,928,622 31,347,071
Comprehensive income:
Net loss.............. (1,768,314)
Unrealized gain on
securities available
for sale, net of
$140,699 deferred tax
effect............... 229,561
Comprehensive income.. (1,538,753)
------ -------- ----------- ----------- -----------
Balance, June 30, 1999.. 61,671 $616,710 $27,033,425 $ 2,158,183 $29,808,318
====== ======== =========== =========== ===========
Balance, December 31,
1999................... 61,669 616,690 24,845,542 10,099,728 35,561,960
Comprehensive income:
Net loss.............. (1,226,139)
Unrealized loss on
securities available
for sale, net of
$533,056 deferred tax
effect............... (731,151)
Comprehensive income.. (1,957,290)
------ -------- ----------- ----------- -----------
Balance, March 31,
2000................... 61,669 616,690 23,619,403 9,368,577 33,604,670
Comprehensive income:
Net loss.............. (1,320,031)
Unrealized gain on
securities available
for sale, net of
$89,227 deferred tax
effect............... 145,579
Comprehensive income.. (1,174,452)
------ -------- ----------- ----------- -----------
Balance, June 30, 2000.. 61,669 $616,690 $22,299,372 $ 9,514,156 $32,430,218
====== ======== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-68
<PAGE>
R&B COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of R&B, the accompanying condensed consolidated financial
statements which are unaudited, except for the condensed consolidated
balance sheet dated December 31, 1999, which is derived from audited
financial statements, contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of June 30, 2000 and December 31, 1999 and the results of operations for
the six months ended June 30, 2000 and 1999 and cash flows for the six
months ended June 30, 2000 and 1999. The results of operations for the six
months ended June 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the full year.
(2) R&B has five primary business segments which have separable management
focus and infrastructures and that offer different products and services.
These segments are described in more detail in Note 2 of R&B's 1999
Financial Statements. Summarized financial information concerning R&B's
reportable segments is shown in the following table. The "Corporate and
Other" column includes various unallocated corporate items which are not
considered separate reportable segments.
<TABLE>
<CAPTION>
Network
and Wireless Corporate
Telephone CLEC Internet Wireless Cable and other Total
--------- ------- -------- -------- -------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
For the three months
ended June 30, 2000
Revenues.............. $ 2,050 $ 1,769 $ 203 $336 $ 178 $ 44 $ 4,580
EBITDA................ 527 751 (93) 180 16 47 1,428
Depreciation &
Amortization......... 442 224 20 25 122 13 846
For the three months
ended June 30, 1999
Revenues.............. $ 2,338 $ 1,468 $ 156 $227 $ 180 $ 37 $ 4,406
EBITDA................ 1,295 747 (18) 86 (31) 44 2,123
Depreciation &
Amortization......... 367 185 20 18 85 13 688
As of and for the six
months ended June 30,
2000
Revenues.............. $ 4,243 $ 3,484 $ 383 $557 $ 355 $ 102 $ 9,124
EBITDA................ 1,465 1,641 (111) 268 19 71 3,353
Depreciation &
Amortization......... 868 437 40 51 242 26 1,664
Total Segment Assets.. 37,282 12,855 794 789 2,306 7,610 61,636
As of and for the six
months ended June 30,
1999
Revenues.............. $ 4,490 $ 2,723 $ 285 $392 $ 359 $ 83 $ 8,332
EBITDA................ 2,526 1,385 5 171 9 57 4,153
Depreciation &
Amortization......... 728 295 37 37 236 26 1,359
Total Segment Assets.. 25,373 10,072 426 607 2,678 7,427 46,583
</TABLE>
(3) Basic net loss per share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. R&B has no
potential common stock outstanding, such as stock options, warrants or
convertible debt; furthermore, a net loss was incurred for the periods
presented. Therefore, basic and diluted net income per share are the same.
(4) R&B has a 21% common ownership interest in Virginia PCS Alliance, L.C.
("VA Alliance"), a provider of personal communications services (PCS)
serving a 1.6 million populated area in central and western Virginia. PCS
operations began throughout the Virginia region in the fourth quarter of
1997.
F-69
<PAGE>
R&B COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
R&B has a 34% common ownership interest in the West Virginia PCS Alliance,
L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million populated
area in West Virginia and parts of eastern Kentucky, southwestern Virginia
and eastern Ohio.
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for under the equity method, are
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
VA Alliance WV Alliance
---------------------- ----------------------
June 30, December 31, June 30, December 31,
2000 1999 2000 1999
-------- ------------ -------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Current assets............... $ 21,060 $ 9,241 $14,212 $ 2,367
Noncurrent assets............ 94,849 111,601 52,493 51,130
Current liabilities.......... 3,161 7,633 10,367 3,076
Long-term liabilities........ 129,653 131,478 64,176 51,125
Redeemable preferred inter-
est......................... 12,892 15,192 -- --
<CAPTION>
VA Alliance WV Alliance
For the For the
Three Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Net sales.................... $ 5,726 $ 3,007 $ 3,635 $ 376
Gross profit (loss).......... 3,243 1,830 1,349 (82)
Net loss applicable to common
owners...................... (6,323) (7,112) (3,749) (3,269)
Company's share of net loss.. (1,315) (1,479) (1,446) (1,112)
<CAPTION>
VA Alliance WV Alliance
Six Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Net sales.................... $ 10,206 $ 5,424 $ 6,260 $ 632
Gross profits (loss)......... 5,407 2,414 1,640 (100)
Net loss applicable to common
owners...................... (13,648) (13,645) (8,554) (5,448)
Company's share of net loss.. (2,839) (2,854) (3,093) (1,859)
</TABLE>
R&B has entered into guaranty agreements whereby R&B is committed to
provide guarantees of up to $30.8 million of the Alliance's debt and
redeemable preferred obligations. Such guarantees become effective as
obligations are incurred by the Alliances. At June 30, 2000, R&B has
guaranteed $28.6 million of the Alliances' obligations.
(5) The provision for income taxes differs from the amount of income tax
determined by applying the applicable Federal statutory rate to earnings
before income taxes as a result of state income taxes, non-deductible
expenses and additional expense resulting from a tax exam completed during
the second quarter of 1999.
(6) On June 16, 2000, R&B's board of directors approved an agreement and plan
of merger with CFW Communications, Inc. Under the terms of that agreement,
shareholders of R&B will receive 60.27 shares of CFW Communications
Company common stock for each outstanding share of R&B common stock. The
transaction is subject to regulatory and shareholder approvals and will be
accounted for using the purchase method of accounting. Holders of a
majority of R&B's shares have agreed to vote in favor of the transaction.
F-70
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Management Committee
Virginia PCS Alliance, L.C.
Waynesboro, Virginia
We have audited the accompanying balance sheets of Virginia PCS Alliance, L.C.
as of December 31, 1999 and 1998, and the related statements of operations,
members' equity (deficit) and cash flows for each of the years in the three-
year period ended December 31, 1999. These financial statements are the
responsibility of the Alliance's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Virginia PCS Alliance, L.C.
as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
Richmond, Virginia
February 17, 2000
F-71
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS (Note 2)
Current Assets
Cash and cash equivalents........................ $ 64,052 $ 59,814
Accounts receivable, net of allowance of $561,861
($194,958 in 1998).............................. 1,790,159 570,893
Account receivable, other........................ 867,376 373,952
Inventories...................................... 5,996,148 2,271,572
Prepaid expenses................................. 522,798 371,924
------------ ------------
Total current assets........................... 9,240,533 3,648,155
------------ ------------
Subordinated Capital Certificates.................. 4,522,811 3,838,366
------------ ------------
Property and Equipment
Land and building................................ 1,864,318 1,220,533
Network plant and equipment...................... 73,920,705 63,311,713
Furniture, fixtures and other equipment.......... 5,913,845 4,057,770
Radio spectrum licenses.......................... 32,714,384 32,714,384
------------ ------------
Total in service............................... 114,413,252 101,304,400
Under construction............................... 6,991,159 2,565,479
------------ ------------
121,404,411 103,869,879
Less accumulated depreciation.................... 14,989,390 7,257,206
------------ ------------
106,415,021 96,612,673
------------ ------------
Other Assets....................................... 663,374 216,705
------------ ------------
$120,841,739 $104,315,899
============ ============
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable................................. $ 3,737,845 $ 8,437,551
Due to affiliates (Note 6)....................... 2,900,955 2,260,982
Dividends payable (Note 3)....................... 229,138 229,138
Customer deposits................................ 152,758 56,187
Advance billings................................. 80,702 71,518
Accrued interest................................. 355,970 726,992
Accrued payroll.................................. 98,680 150,515
Accrued taxes.................................... 39,676 35,878
Other accrued liabilities........................ 37,075 22,129
------------ ------------
Total current liabilities...................... 7,632,799 11,990,890
------------ ------------
Long-Term Debt (Note 2)............................ 131,478,017 90,301,358
------------ ------------
Redeemable Series A Preferred Membership Interests
(Note 3).......................................... 15,191,674 14,345,128
------------ ------------
Commitments (Note 5)
Members' Equity (Deficit) (Note 4)
Series B preferred membership interests.......... 15,094,337 10,860,376
Common membership interests...................... (48,555,088) (23,181,853)
------------ ------------
(33,460,751) (12,321,477)
------------ ------------
$120,841,739 $104,315,899
============ ============
</TABLE>
See Notes to Financial Statements.
F-72
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Operating revenues:
Subscriber revenue.................. $ 7,957,059 $ 1,738,543 $ 72,519
Wholesale revenue................... 3,903,356 2,175,733 2,400
Equipment sales..................... 1,516,240 730,356 43,552
------------ ------------ -----------
13,376,655 4,644,632 118,471
------------ ------------ -----------
Operating expenses:
Cost of sales....................... 5,863,735 3,009,537 315,017
Maintenance and support............. 6,638,337 5,166,427 756,992
Depreciation and amortization....... 7,769,480 7,040,676 685,826
Customer operations................. 8,684,604 5,729,097 1,444,291
Corporate operations................ 2,517,056 2,111,408 234,154
------------ ------------ -----------
31,473,212 23,057,145 3,436,280
------------ ------------ -----------
Loss before interest and preferred
dividends........................ (18,096,557) (18,412,513) (3,317,809)
Interest income (expense):
Interest income..................... 262,094 -- --
Senior credit facility.............. (6,390,325) (4,131,445) (163,067)
Redeemable preferred interest....... (1,914,486) (1,870,988) (471,119)
------------ ------------ -----------
Net loss.............................. $(26,139,274) $(24,414,946) $(3,951,995)
============ ============ ===========
</TABLE>
See Notes to Financial Statements.
F-73
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................ $(26,139,274) $(24,414,946) $ (3,951,995)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation...................... 6,914,324 6,527,202 634,568
Amortization...................... 855,156 513,474 51,258
Changes in assets and liabilities:
(Increase) in:
Accounts receivable............. (1,712,690) (845,973) (98,872)
Inventories..................... (3,724,576) (1,412,802) (858,770)
Prepaid expenses................ (150,874) (128,132) (243,792)
Increase (decrease) in:
Accounts payable, trade......... 515,676 (4,119,974) 1,811,698
Advance billings and customer
deposits....................... 105,755 98,099 29,606
Accrued interest................ (371,022) 132,406 163,067
Accrued dividends on Series A
Preferred Membership
Interests...................... 814,587 771,087 415,398
Other accrued liabilities....... (33,091) 192,993 (51,634)
------------ ------------ ------------
Net cash used in operating
activities................... (22,926,029) (22,686,566) (2,099,468)
------------ ------------ ------------
Cash Flows From Investing Activities
Purchase of property and
equipment........................ (22,749,914) (34,826,975) (23,531,184)
Increase in patronage capital
certificates..................... (466,833) -- --
Purchase of radio specturm
licenses......................... -- -- (1,927,154)
Decrease in deferred charges...... 14,827 -- (473,575)
------------ ------------ ------------
Net cash used in investing
activities................... (23,201,920) (34,826,975) (25,931,913)
------------ ------------ ------------
Cash Flows From Financing Activities
Capital contributions, net........ 5,000,000 3,000,000 1,623,514
Advances from affiliates.......... 639,973 1,600,599 127,080
Borrowings on revolving credit
agreements, net.................. 27,487,693 273,024 1,881,695
Proceeds from long-term
borrowings....................... 13,004,521 52,540,650 20,609,405
------------ ------------ ------------
Net cash provided by financing
activities................... 46,132,187 57,414,273 24,241,694
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents.... 4,238 (99,268) (3,789,687)
Cash and Cash Equivalents
Beginning......................... 59,814 159,082 3,948,769
------------ ------------ ------------
Ending............................ $ 64,052 $ 59,814 $ 159,082
============ ============ ============
</TABLE>
See Notes to Financial Statements.
F-74
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing
and Financial Activities
Noncash increase in radio spectrum licenses
consisting primarily of accrued
dividends................................. $ -- $ -- $ 431,519
========== ========== ===========
Supplemental Schedule of Noncash Investing
and Financing Activities
Noncash increases in property and equipment
consisting primarily of accrued
construction costs, accounts payable,
accrued dividends, and capitalization of
other intangible costs.................... $ 829,430 $6,044,812 $26,808,718
========== ========== ===========
Subordinated capital certificates acquired
by long-term borrowings................... $ 684,445 $2,765,302 $ 1,073,064
========== ========== ===========
Supplemental Disclosure of Cash Flow
Information
Cash payments for interest................. $7,064,868 $4,419,430 $ 517,490
========== ========== ===========
Cash payments for redeemable preferred
interest.................................. $1,099,899 $1,099,896 $ 870,754
========== ========== ===========
</TABLE>
See Notes to Financial Statements.
F-75
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Series B
Preferred Common
Membership Membership
Interests Interests Total
----------- ------------ ------------
<S> <C> <C> <C>
Balance as of January 1, 1997.......... $ 7,820,000 $ 3,601,950 $ 11,421,950
Capital contributions................ -- 1,638,050 1,638,050
Issuance costs....................... -- (14,536) (14,536)
Conversion of Common Membership
Interest............................ 500,000 (500,000) --
Net loss............................. -- (3,951,995) (3,951,995)
----------- ------------ ------------
Balance as of December 31, 1997........ 8,320,000 773,469 9,093,469
Capital contributions................ 2,540,376 459,624 3,000,000
Net loss............................. -- (24,414,946) (24,414,946)
----------- ------------ ------------
Balance as of December 31, 1998........ 10,860,376 (23,181,853) (12,321,477)
Capital contributions................ 4,233,961 766,039 5,000,000
Net loss............................. -- (26,139,274) (26,139,274)
----------- ------------ ------------
Balance as of December 31, 1999........ $15,094,337 $(48,555,088) $(33,460,751)
=========== ============ ============
</TABLE>
See Notes to Financial Statements.
F-76
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The Virginia PCS Alliance, L.C. ("Alliance") was organized in 1994 pursuant to
the provisions of the Virginia Limited Liability Company Act. The Alliance was
formed to fund, establish and operate a business to design, construct, own,
operate and maintain a personal communications system to provide personal
communications services ("PCS") in central and western Virginia. Operations
commenced during September 1997, prior to which the Alliance was in the
development stage. Its major activities through September 1997 were limited to
acquiring PCS radio spectrum licenses, designing and constructing a personal
communications system and obtaining equity capital.
CFW Wireless Inc., a wholly-owned subsidiary of CFW Communications Company, is
responsible for managing and operating the Alliance pursuant to the terms and
conditions of the service agreement and within the framework of the approved
operating and capital business plan.
The following is a summary of the Alliance's significant accounting policies:
Accounting 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.
Cash and cash equivalents: The Alliance considers all highly liquid cash
investments with a purchased maturity of three months or less to be cash
equivalents. At times such investments may be in excess of federally-
insured amounts.
Inventories: Inventories include PCS telephone equipment held for sale and
are stated at the lower of average cost or market.
Property and equipment: Property and equipment is stated at cost and
depreciated using the straight-line method over their estimated useful
lives. Buildings are depreciated over a 50-year life. Network plant and
equipment are depreciated over various lives ranging from 5 to 17 years,
with an average life of approximately 10 years for the category. Furniture,
fixtures and other equipment are depreciated over various lives ranging
from 3 to 24 years. Radio spectrum licenses, which are for areas where the
licenses are being used in operations, are amortized over a life of 40
years. The Alliance includes radio spectrum licenses in other assets until
such licenses are placed in service. Assets under construction represent
costs incurred for the construction of cell sites, including allocated
overhead costs.
Revenue recognition: The Alliance earns revenue by providing access to and
usage of its personal communications network. Local service and airtime
revenues are recognized as services are provided. Wholesale revenues are
earned by providing switch access and other switching services, including
roamer management, to other wireless carriers. Wholesale prices are based
on actual annual fixed and variable costs. Other revenues for equipment
sales are recognized at the point of sale. Handset equipment is sold at
prices below cost. Prices are based on the service contract period. The
Alliance recognizes the entire cost of the handsets at the point of sale,
rather than deferring such costs over the service contract period.
F-77
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Fair value of financial instruments: The fair value of financial
instruments recorded on the balance sheets are not significantly different
than the carrying amounts.
Income taxes: The Alliance is treated as a partnership for income tax
purposes. The Internal Revenue Code and applicable state statutes provide
that income and expenses of a partnership are not separately taxable, but
rather accrue directly to the members as provided by agreement.
Accordingly, no provision for federal or state income taxes has been made
in the financial statements.
Financial statement classifications: Certain amounts on the 1998 and 1997
financial statements have been reclassified, with no effect on net loss or
members' equity (deficit) to conform with classifications adopted in 1999.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Vendor Supported Loan................................. $ 75,000,000 $71,139,502
Supplemental Loan..................................... 15,456,231 5,627,763
Line of Credit........................................ 29,642,412 2,154,719
U. S. Department of the Treasury, FCC................. 11,154,374 11,154,374
Other................................................. 225,000 225,000
------------ -----------
$131,478,017 $90,301,358
============ ===========
</TABLE>
In September 1996, the Alliance entered into two 7.00% installment notes with
the Federal Communications Commission ("FCC") related to licenses awarded in
the PCS radio spectrum Block "C" auction. Interest only is payable quarterly
through September 30, 2002. Commencing December 31, 2002, principal and
interest is payable in equal quarterly installments of $805,341 through June
30, 2006. The entire unpaid principal amount, together with accrued and unpaid
interest, is due September 17, 2006 ("Maturity Date").
The Alliance has a $146.0 million Senior Secured Credit Facility with the
Rural Telephone Financing Cooperative ("RTFC" or "Lender"). This credit
facility was entered into in 1999 and replaced the Alliance's previous $89
million senior secured credit facility. The available facilities consist of a
7-year term loan ("Vendor Supported Loan") in the amount of $75.0 million, a
7-year term loan ("Supplemental Loan") in the amount of $36.0 million, and a
7-year revolving line of credit loan ("Line of Credit") in the amount of $35.0
million.
The Vendor Supported Loan is to finance up to $71.25 million of Motorola
("Vendor") supplied PCS equipment and engineering services, nonvendor related
capital expenditures, microwave relocation expenses and working capital, and
to purchase up to $3.75 million of RTFC subordinated capital certificates
("SCCs"). The Supplemental Loan is to finance up to $34.2 million of
nongovernment-funded PCS license costs, microwave relocation expenses, non-
Motorola related capital expenditures and working capital, and to purchase up
to $1.8 million of RTFC SCCs.
F-78
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 2. Long-Term Debt (Continued)
The RTFC SCC's are nonmarketable securities and are stated at historical cost.
As the RTFC loans are repaid, the SCCs will be refunded through a cash payment
to maintain a 5% SCCs-to-outstanding loan balance ratio.
Interest only is payable through four years for the Vendor Supported and
Supplemental Loans. After this time, principal is payable in quarterly
installments, plus accrued interest, with 10% of the principal due in year
five, 15% due per year in years six and seven, and the final 60% is due at the
maturity date, October 15, 2006.
As borrowings occur, the Alliance can choose between several fixed and
variable rate interest options. The variable interest rate in effect on the
nonfixed portions of the Vendor Supported and Supplemental Loans at December
31, 1999 and 1998 was 7.45% and 6.60%, respectively. In January 1998, the
Alliance converted $15.0 million of the Vendor Supported Loan to a fixed rate
of 7.25%. This rate is in effect until January 2003, at which time the loan
will revert to the variable rate. In September 1998, the Alliance converted
$27.0 million of the Vendor Supported Loan to a fixed rate of 6.55%. This rate
is in effect until September 2001, at which time the loan will revert to the
variable rate.
The credit facility includes a line of credit to supplement the Alliances
general short-term cash requirements. The line of credit is to be repaid on
October 15, 2006. The interest rate on the Line of Credit is the RTFC's
standard monthly quoted line of credit rate plus 0.5%. The interest rate in
effect on the Line of Credit at December 31, 1999, 1998, and 1997 was 8.10%,
7.20% and 7.75%, respectively.
Interest costs in 1999 were approximately $6.7 million of which $6.4 was
expensed and $0.3 million was capitalized. Interest costs in 1998 were
approximately $4.5 million of which $4.1 million was expensed and $0.4 million
was capitalized. Interest costs in 1997 were approximately $1.1 million, of
which $0.2 million was expensed and $0.9 million was capitalized.
All of the Alliance's present and future assets are pledged as security for
the RTFC loans. In addition, each member of the Alliance has entered into an
irrevocable unsecured pro rata guaranty with the RTFC for up to $68.3 million
in the aggregate. As additional credit support for the Vendor Supported Loan
and the supplemental loan, Motorola has entered into a guaranty agreement with
the RTFC for up to $77.7 million of the Alliance's outstanding indebtedness.
The loan agreements contain various restrictive covenants, including negative
covenants, related to additional indebtedness, payment of dividends,
redemption of membership interests and payment of management fees. The
agreements also contain financial covenants related to cash flows, population
coverage and number of subscribers.
F-79
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 2. Long-Term Debt (Continued)
Long-term debt maturities of amounts of Vendor Supported and Supplemental
loans outstanding at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 through 2002.................................................. $ --
2003............................................................... 4,522,812
2004............................................................... 11,307,029
Thereafter......................................................... 115,648,176
------------
Total............................................................ $131,478,017
============
</TABLE>
The RTFC allocates a large percentage of its annual margins to its patrons. A
majority portion of the allocation is returned to the borrowers in cash. The
remainder is issued to borrowers in the form of patronage capital
certificates, which are retired in cash on an RTFC board approved cycle. In
1999, the Alliance received a cash distribution for 1998 patronage capital in
the amount of $123,993. A $419,260 receivable for the 1999 cash distribution
was recorded and is reflected in Other receivables on the Alliance's balance
sheet. The net present value of the total patronage capital certificates was
$466,833 at December 31, 1999 and is reflected in Other assets on the
Alliance's balance sheet. The Alliance records Patronage Capital as a
reduction in interest expense.
Note 3. Series A Preferred Membership Interests
The Series A Preferred Membership Interests consists of 1,294,000 units issued
on December 30, 1996 at $10.00 per unit (stated value). Total proceeds were
$12,940,000 before issuance costs. These units are entitled to cumulative, but
not compounded, cash distributions at 8.5% per annum. This amount is payable
quarterly for five years from the date contributed, at which time a "true up"
amount is payable for the difference between an amount computed based on a 14%
compounded annualized rate of return and the cumulative amount described above
at 8.5%. At December 31, 1999, 1998 and 1997, accrued current dividends were
approximately $229,000 for each date and accrued "true up" dividends were
approximately $2,316,000, $1,501,000 and $730,000, respectively. Accrued "true
up" dividends are included on the balance sheet with "Redeemable Series A
Preferred Membership Interests."
At any time after the fifth anniversary of the capital contribution date, each
Series A Preferred Member may put all, but not less than all, of its Preferred
Series A Membership Interest to the Alliance in exchange for cash equivalent
to the stated value, plus any accrued distributions. If such put takes place,
additional Common Membership Interests may be acquired at $10.00 per unit for
88.1% of the put amount by CFW Communications Company and for 11.9% of the put
amount by R&B Communications, Inc., both Common Members.
For any Series A Preferred Membership Interests not put to the Alliance as of
the fifth anniversary date as well as any "true up" amounts due, the annual
cash distribution rate will be changed to the lesser of 7% or LIBOR plus 1
1/2%, payable quarterly. After ten years from the Series A capital
contribution date, the Alliance may redeem at any time any or all of the
Series A Preferred Membership Interests still outstanding at the Stated Value
plus any accrued distributions.
F-80
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 4. Members' Equity (Deficit)
Members' equity (deficit) consists of the following classes of membership
interests:
Series B Preferred Membership Interests: This consists of 782,000 units
issued on September 30, 1996 at $10.00 per unit (stated value), 50,000
units converted from Common Units on August 27, 1997 at $10.00 per unit
(stated value), 115,471.6 units issued on January 6, 1998 at $22.00 per
unit (stated value), and 192,452.7 units issued on January 4, 1999 at
$22.00 per unit (stated value). Dividends are payable beginning after the
tenth year from the capital contribution date at 8% per annum, payable
quarterly and are cumulative, but not compounded. After the fourth year
from the capital contribution date, the Series B units are convertible into
Common Membership Interests on a unit-for-unit basis.
Common Membership Interests: Common membership interests consist of a
440,363.8 Common Units. Additional future cash contributions may be
required from the Common Members on the same terms and conditions of their
initial Capital Contribution. If any Common Member fails to make the
additional contributions, their existing capital account balance may be
redeemed at 25% and amounts forfeited would be allocated among the
remaining Common Members.
Equity Subscriptions: The members entered into equity subscription
agreements that obligate them to contribute $30 million in the aggregate of
which $8 million had been contributed as of December 31, 1999. The
remaining additional equity contributions are scheduled to be contributed
over three years: $10 million in 2000; $10 million in 2001 and $2 million
in 2002. Such contributions shall be for the purchase, at fair market
value, of Common Membership or Series B Preferred Membership units.
In January 2000, the members contributed $5.0 million to the Alliance,
purchasing 34,820 Common Units for $0.8 million and 192,452.7 Series B
Preferred Membership Units for approximately $4.2 million.
Note 5. Commitments
Leases: The Alliance leases property for cell site locations and retail
stores. Leases for cell site locations vary in term from five to twenty
years. Leases for retail store locations vary in term from three to five
years. Certain cell site location leases have been prepaid and are being
amortized on a straight-line basis over the total lease term. Total annual
lease expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $1,571,000, $1,169,000 and $212,000, respectively. The total
amount committed under these lease agreements is $1,353,576 in 2000,
$1,320,316 in 2001, $1,159,081 in 2002, $853,706 in 2003, $569,760 in 2004
and $2,040,167 for the years thereafter.
Equipment: The Alliance had outstanding purchase commitments of
approximately $2.2 million at December 31, 1999.
F-81
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 6. Related Party Transactions
All transactions of the Alliance are administered by the managing partner. CFW
Wireless, a subsidiary of CFW Communications Company, provided engineering,
construction, sales management, billing, customer care and other general and
administrative services to the Alliance in accordance with the service
contract, which totalled $4,751,731 in 1999, $3,015,260 in 1998 and $1,757,204
in 1997. Of the total 1999 charges, $4,253,119 ($2,684,701 in 1998 and
$815,899 in 1997) was expensed and $498,612 ($330,559 in 1998 and $941,305 in
1997) was capitalized. CFW Communications Company also provided certain
corporate services for the Alliance in the amount of $2,094,421 in 1999,
$1,310,486 in 1998 and $336,650 in 1997. All corporate services were expensed
in 1999 and 1998, and of the total 1997 charges, $161,281 was expensed and
$175,369 was capitalized during the construction and startup period. Corporate
services include executive, finance, accounting, human resources, information
management and marketing services. Such services are charged to the Alliance
at cost. In addition, the managing partner advances funds to the Alliance to
cover expenditures incurred. These advances are included in due to affiliates
in the accompanying balance sheets. Interest on outstanding advances was
$240,627 in 1999.
Switch access and switching services are provided at cost to the West Virginia
PCS Alliance L.C. and the Virginia RSA6 Cellular Limited Partnership, both
affiliated through common ownership and management. Such services have been
recorded as wholesale revenue and totaled $1,454,228 in 1999, $1,639,595 in
1998 and $47,400 in 1997.
F-82
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
CONDENSED BALANCE SHEETS
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- -------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 65,028 $ 64,052
Accounts receivable, net of allowance for doubtful accounts 2,153,668 1,790,159
of $900 and $600, respectively
Accounts receivable, other 792,123 867,376
Inventories 5,427,262 5,996,148
Prepaid expenses 173,295 522,798
------------- -------------
Total current assets 8,611,376 9,240,533
Subordinated Capital Certificates 4,529,491 4,522,811
Property and Equipment
Land and building 2,123,442 1,864,318
Network plant and equipment 67,590,491 73,920,705
Furniture, fixtures and other equipment 6,168,771 5,913,845
Radio spectrum licenses 32,714,384 32,714,384
------------- -------------
Total in service 108,597,088 114,413,252
Under construction 11,130,779 6,991,159
------------- -------------
119,727,867 121,404,411
Less accumulated depreciation 17,983,166 14,989,390
------------- -------------
101,744,701 106,415,021
Other Assets 1,023,999 663,374
------------- -------------
$ 115,909,567 $ 120,841,739
============= =============
LIABILITIES AND MEMBER'S EQUITY(DEFICIT)
Current Liabilities
Accounts payable $ 3,859,963 $ 3,737,845
Due to affiliates (2,009,533) 2,900,955
Dividends payable 229,146 229,138
Customer deposits 526,503 152,758
Advance billings 101,502 80,702
Accrued interest 163,561 355,970
Accrued payroll 119,136 98,680
Accrued taxes 122,376 39,676
Other accrued liabilities 48,347 37,075
------------- -------------
Total current liabilities 3,161,001 7,632,799
Long-Term Liabilities
Long-term debt 129,653,834 131,478,017
Other long term liabilities 9,571,713
------------- -------------
139,225,547 131,478,017
Redeemable Series A Preferred Membership Interests 15,632,020 15,191,674
Members' Equity (Deficit)
Series B preferred membership interests 19,328,298 15,094,337
Common membership interests (61,437,299) (48,555,088)
------------- -------------
(42,109,001) (33,460,751)
------------- -------------
$ 115,909,567 $ 120,841,739
============= =============
</TABLE>
See Notes to Financial Statements
F-83
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ending June 30, For the six months ending June 30,
2000 1999 2000 1999
--------------- ----------------- ------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Subscriber revenue $ 3,165,886 $ 2,155,275 $ 5,792,706 $ 3,756,045
Wholesale revenue 2,096,356 996,675 3,835,861 1,820,888
Equipment revenue 376,506 246,352 798,726 606,004
------------ ------------ ------------ ------------
5,638,748 3,398,302 10,427,293 6,182,937
Operating expenses:
Cost of sales 2,255,300 1,125,308 4,464,852 2,851,259
Maintenance and support 2,073,568 2,015,804 4,054,184 3,356,498
Depreciation and amortization 1,779,650 2,527,430 3,855,039 4,695,048
Customer operations 2,377,528 2,134,793 4,770,010 3,853,446
Corporate operations 848,578 701,220 1,623,248 1,342,819
------------ ------------ ------------ ------------
9,334,624 8,504,555 18,767,333 16,099,070
------------ ------------ ------------ ------------
Operating loss (3,695,876) (5,106,253) (8,340,040) (9,916,133)
Interest expense
Interest expense (110,381) (194,537) (329,248) (219,113)
Senior credit facility (2,028,161) (1,334,367) (4,004,639) (2,558,902)
Redeemable preferred interest (488,621) (477,205) (974,324) (951,653)
------------ ------------ ------------ ------------
(2,627,163) (2,006,109) (5,308,211) (3,729,668)
------------ ------------ ------------ ------------
Net loss $ (6,323,039) $ (7,112,362) $(13,648,251) $(13,645,801)
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
F-84
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
CONDENSED STATEMENTS OF CASH FLOWS Six
Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (13,648,251) $ (13,645,801)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,001,521 4,676,400
Amortization 23,860 18,649
Amortization of gain on tower sale (170,342)
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (288,256) (2,014,115)
Inventories 568,886 (2,412,486)
Prepaid expenses 349,503 (266,185)
Increase (decrease) in:
Accounts payable, trade (501,068) (217,338)
Advance billings and customer deposits 394,545 26,270
Accrued interest (192,409) (198,225)
Accrued dividends on Series A Preferred 424,373 401,704
Other accrued liabilities 114,429 106,233
------------ ------------
Net cash used in operating activities (8,923,209) (13,524,894)
------------ ------------
Cash Flows From Investing Activities
Purchase of property and equipment (7,555,364) (11,944,100)
Proceeds of sale of towers 18,843,125 --
Increase in patronage capital certificates (379,502) --
Decrease (Increase) in deferred charges (242,725) 170,000
------------ ------------
Net cash provided by (used in) investing activities 10,665,534 (11,774,100)
------------ ------------
Cash Flows From Financing Activities
Capital contributions, net 5,000,002 5,000,000
Advances from (payments to) affiliates (4,910,488) (575,892)
Borrowings (Repayments) on revolving credit agreements, net (1,957,772) 12,024,644
Proceeds from long-term borrowings 126,909 8,852,294
------------ ------------
Net cash provided by (used in) financing activities (1,741,349) 25,301,046
------------ ------------
Net increase in cash and cash equivalents 976 2,052
Cash and Cash Equivalents:
Beginning 64,052 59,814
------------- -------------
Ending $ 65,028 $ 61,866
============= =============
</TABLE>
See Notes to Financial Statements
F-85
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
CONDENSED STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(Unaudited)
Series B
Preferred Common
Membership Membership
Interests Interests Total
------------ ------------- -------------
Balance as of January 1, 1999 $ 10,860,376 $ (23,181,853) $ (12,321,477)
Capital contributions 4,233,961 766,039 5,000,000
Net loss - (6,533,439) (6,533,439)
------------ ------------- -------------
Balance as of March 31, 1999 15,094,337 (28,949,253) (13,854,916)
Net loss - (7,112,357) (7,112,357)
------------ ------------- -------------
Balance as of June 30, 1999 15,094,337 (36,061,610) (20,967,273)
Net loss - (6,244,336) (6,244,336)
------------ ------------- -------------
Balance as of September 30, 1999 15,094,337 (42,305,946) (27,211,609)
Net loss - (6,249,142) (6,249,142)
------------ ------------- -------------
Balance as of December 31, 1999 15,094,337 (48,555,088) (33,460,751)
Capital contributions 4,233,961 766,039 5,000,000
Net loss - (7,325,211) (7,325,211)
------------ ------------- -------------
Balance as of March 31, 2000 19,328,298 (55,114,260) (35,785,962)
Net loss - (6,323,039) (6,323,039)
------------ ------------- -------------
Balance as of June 30, 2000 $ 19,328,298 $ (61,437,299) $ (42,109,001)
============ ============= =============
See Notes to Financial Statements
F-86
<PAGE>
VIRGINIA PCS ALLIANCE L.C.
--------------------------
Notes to Financial Statements
-----------------------------
(1) In the opinion of the managing member of the Alliance, the accompanying
financial statements which are unaudited, except for the balance sheet
dated December 31, 1999, contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of June 30, 2000 and December 31, 1999 and the results of
operations for the three and six months ended June 30, 2000 and 1999 and
cash flows for the six months ended June 30, 2000 and 1999. The results
of operations for the three and six months ended June 30, 2000 and 1999
are not necessarily indicative of the results to be expected for the
full year.
(2) In March 2000, the Alliance sold 56 towers for $17.9 million to Crown
Castle International Corp (Crown). In April 2000, the Alliances sold a
total of 3 towers for $1.0 million to Crown. In connection with these
transactions, the Alliance has certain future leaseback and other
commitments. Accordingly, these gains have been deferred for book
purposes and will be amortized over the life of the leaseback agreement.
(3) In January 2000, the members contributed $5.0 million to the Alliance,
purchasing 34,820 Common Units for $0.8 million and 192,452.7 Series B
Preferred Membership Units for approximately $4.2 million.
(4) In July 2000, the Alliance redeemed its series A preferred membership
interest for $16.8 million. This payment included consideration for
redemption of $12.9 million in principle, $2.8 million in accrued
interest and $1.1 million in early redemption fees. CFW Communications
Company and R&B Communications exercised their right to fund $12.9
million of this redemption in exchange for additional common ownership
interest in the Alliance. CFW and R&B also elected to convert their
Series B convertible preferred ownership interest in the Alliance into
common ownership interest. These redemptions and conversions increased
the common ownership interest of CFW Communications Company from 21% to
65% and R&B Communications from 21% to 26%.
In July, the Alliance borrowed $114.9 million from CFW Communications
Company (CFW) to payoff its indebtedness to the Rural Telephone Finance
Cooperative (RTFC). The payoff included a prepayment fee of $.5 million.
The Alliance's debt obligation to CFW bears interest at a rate equal to
CFW's borrowing rate under its Senior Credit Facility (10.6% in July
2000) and matures in 2008.
F-87
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Management Committee
West Virginia PCS Alliance, L.C.
Waynesboro, Virginia
We have audited the accompanying balance sheets of West Virginia PCS Alliance,
L.C. as of December 31, 1999 and 1998, and the related statements of
operations, members' equity (deficit) and cash flows for each of the years in
the two-year period ended December 31, 1999 and for the period from July 1,
1997 (date of inception) through December 31, 1997. These financial statements
are the responsibility of the Alliance's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 the 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 financial position of West Virginia PCS Alliance,
L.C. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the years in the two-year period ended December 31,
1999 and for the period from July 1, 1997 (date of inception) through December
31, 1997, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen LLP
Richmond, Virginia
February 17, 2000
F-88
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS (Note 2)
Current Assets
Cash and cash equivalents............................ $ 8,120 $ 10,254
Accounts receivable, net of allowance of $99,915
($1,768 in 1998).................................... 832,763 32,453
Other receivables.................................... 175,376 141,449
Inventories.......................................... 1,281,241 229,150
Prepaid expenses..................................... 69,049 74,145
----------- -----------
Total current assets............................... 2,366,549 487,451
----------- -----------
Subordinated Capital Certificates...................... 2,506,255 411,869
----------- -----------
Property and Equipment
Land and building.................................... 942,988 42,668
Network plant and equipment.......................... 33,898,373 8,911,322
Furniture, fixtures and other equipment.............. 1,330,005 789,631
Radio spectrum licenses.............................. 6,132,100 6,132,100
----------- -----------
Total in service................................... 42,303,466 15,875,721
Under construction................................... 5,436,007 11,634,333
----------- -----------
47,739,473 27,510,054
Less accumulated depreciation........................ 2,317,215 257,819
----------- -----------
45,422,258 27,252,235
----------- -----------
Other Assets
Radio spectrum licenses.............................. 2,844,772 2,756,946
Other................................................ 356,894 223,441
----------- -----------
3,201,666 2,980,387
----------- -----------
$53,496,728 $31,131,942
=========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable..................................... $ 1,819,567 $ 7,147,589
Due to affiliates (Note 5)........................... 1,059,198 3,492,424
Accrued payroll...................................... 59,797 56,337
Advance billings..................................... 27,550 9,371
Accrued interest..................................... 5,434 4,526
Other accrued liabilities............................ 104,530 22,280
----------- -----------
Total current liabilities.......................... 3,076,076 10,732,527
----------- -----------
Long-Term Debt (Note 2)................................ 51,125,102 9,237,389
Commitments (Note 4)
Members' Equity (Deficit) (Note 3)..................... (704,450) 11,162,026
----------- -----------
$53,496,728 $31,131,942
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-89
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and for the period fromJuly 1, 1997 (date
of inception) through December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Operating revenues:
Subscriber revenue...................... $ 2,307,517 $ 46,293 $ --
Equipment sales......................... 681,398 65,388 --
------------ ----------- ---------
2,988,915 111,681 --
------------ ----------- ---------
Operating expenses:
Cost of sales........................... 3,065,469 218,943 --
Maintenance and support................. 4,129,714 610,106 --
Depreciation and amortization........... 2,067,618 258,959 --
Customer operations..................... 4,094,039 1,308,767 --
Corporate operations.................... 1,743,683 817,984 --
------------ ----------- ---------
15,100,523 3,214,759 --
------------ ----------- ---------
Loss before interest expense.......... (12,111,608) (3,103,078) --
Interest expense.......................... 1,175,868 -- --
------------ ----------- ---------
Net loss.................................. $(13,287,476) $(3,103,078) $ --
============ =========== =========
</TABLE>
See Notes to Financial Statements.
F-90
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and for the period from July 1, 1997 (date
of inception) through December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................. $(13,287,476) $ (3,103,078) $ --
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation....................... 2,059,396 254,849 --
Amortization....................... 8,222 4,110 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable.............. (834,237) (173,902) --
Inventories...................... (1,052,091) (229,150) --
Prepaid expenses................. 5,096 (74,145) --
Increase in:
Accounts payable................. 518,754 682,086 --
Advance billings................. 18,180 9,371 --
Accrued interest................. 908 4,526 --
Other accrued liabilities........ 85,710 2,489 --
------------ ------------ -----------
Net cash used in operating
activities.................... (12,477,538) (2,622,844) --
------------ ------------ -----------
Cash Flows From Investing Activities
Purchase of property and
equipment......................... (26,076,196) (13,997,039) (729,160)
Increase in radio spectrum
licenses.......................... (87,826) (3,994) (8,851,607)
Increase in deferred charges....... (95) (10,803) (380,235)
Increase in patronage capital
certificates...................... (141,580) -- --
------------ ------------ -----------
Net cash used in investing
activities.................... (26,305,697) (14,011,836) (9,961,002)
------------ ------------ -----------
Cash Flows From Financing Activities
Increase in equity issuance costs.. -- (2,232) (25,812)
Capital contributions.............. 1,421,000 -- 14,316,036
Advances from affiliates........... (2,433,226) 3,426,045 66,379
Borrowings on revolving credit
agreements, net................... -- 1,000,000 --
Proceeds from long-term borrowings,
net............................... 39,793,327 7,825,520 --
------------ ------------ -----------
Net cash provided by financing
activities.................... 38,781,101 12,249,333 14,356,603
------------ ------------ -----------
Net increase (decrease) in cash
and cash equivalents.......... (2,134) (4,385,347) 4,395,601
Cash and Cash Equivalents
Beginning............................ 10,254 4,395,601 --
------------ ------------ -----------
Ending............................... $ 8,120 $ 10,254 $ 4,395,601
============ ============ ===========
</TABLE>
See Notes to Financial Statements.
F-91
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and for the period from July 1, 1997 (date
of inception) through December 31, 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities
Noncash increases in property and equipment
consisting primarily of accrued construction
costs and reallocation of prior year other
intangible costs............................. $ 618,726 $6,661,939 $799,469
========== ========== ========
Subordinated capital certificates acquired by
long-term borrowings......................... $2,094,386 $ 411,869 $ --
========== ========== ========
Supplemental Disclosure of Cash Flow Information
Cash payments for interest.................... $1,781,822 $ 178,627 $ --
========== ========== ========
</TABLE>
See Notes to Financial Statements.
F-92
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999, 1998 and for the period from July 1, 1997 (date
of inception) through December 31, 1997
<TABLE>
<CAPTION>
Common
Membership
Interests
------------
<S> <C>
Initial Capital Contribution..................................... $ 14,316,036
Issuance costs................................................. (25,812)
Net income..................................................... --
------------
Balance as of December 31, 1997.................................. 14,290,224
Issuance costs................................................. (25,120)
Net loss....................................................... (3,103,078)
------------
Balance as of December 31, 1998.................................. 11,162,026
Capital contributions.......................................... 1,421,000
Net loss....................................................... (13,287,476)
------------
Balance as of December 31, 1999.................................. $ (704,450)
============
</TABLE>
See Notes to Financial Statements.
F-93
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The West Virginia PCS Alliance, L.C. ("Alliance") was organized in 1997
pursuant to the provisions of the Virginia Limited Liability Company Act. The
Alliance was formed to fund, establish and operate a business to design,
construct, own, operate and maintain a personal communications system to
provide personal communications services ("PCS") in West Virginia. Operations
commenced during September 1998, prior to which the Alliance was in the
development stage. Its major activities through September 1998 were limited to
acquiring PCS radio spectrum licenses, designing and constructing a personal
communications system and obtaining equity capital.
CFW Wireless Inc., a wholly-owned subsidiary of CFW Communications Company, is
responsible for managing and operating the Alliance pursuant to the terms and
conditions of the service agreement and within the framework of the approved
operating and capital business plan.
The following is a summary of the Alliance's significant accounting policies:
Accounting 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.
Cash and cash equivalents: The Alliance considers all highly liquid cash
investments with a purchased maturity of three months or less to be cash
equivalents. At times such investments may be in excess of federally-
insured amounts.
Inventories: Inventories include PCS telephone equipment held for sale and
are stated at the lower of average cost or market.
Property and equipment: Property and equipment is stated at cost and
depreciated using the straight-line method over their estimated useful
lives. Buildings are depreciated over a 50-year life. Network plant and
equipment are depreciated over various lives ranging from 5 to 17 years,
with an average life of approximately 10 years for the category. Furniture,
fixtures and other equipment are depreciated over various lives ranging
from 3 to 24 years. Radio spectrum licenses, which are for areas where the
licenses are being used in operations, are amortized over a life of 40
years. The Alliance includes radio spectrum licenses in other assets until
such licenses are placed in service. Assets under construction represent
costs incurred for the construction of cell sites, including allocated
overhead costs.
Revenue recognition: The Alliance earns revenue by providing access to and
usage of its personal communications network. Local service and airtime
revenues are recognized as services are provided. Other revenues for
equipment sales are recognized at the point of sale. Handset equipment is
sold at prices below cost. Prices are based on the service contract period.
The Alliance recognizes the entire cost of the handsets at the point of
sale, rather than deferring such costs over the service contract period.
F-94
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
Fair value of financial instruments: The fair value of financial
instruments recorded on the balance sheets are not significantly different
than the carrying amounts.
Income taxes: The Alliance is treated as a partnership for income tax
purposes. The Internal Revenue Code and applicable state statutes provide
that income and expenses of a partnership are not separately taxable, but
rather accrue directly to the members as provided by agreement.
Accordingly, no provision for federal or state income taxes has been made
in the financial statements.
Financial statement classifications: Certain amounts on the 1998 and 1997
financial statements have been reclassified, with no effect on net loss or
members' equity to conform with classifications adopted in 1999.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Vendor Supported Loan.................................... $50,125,102 $8,237,389
Line of Credit........................................... 1,000,000 1,000,000
----------- ----------
$51,125,102 $9,237,389
=========== ==========
</TABLE>
In July 1998, the Alliance entered into a $70.5 million Senior Secured Credit
Facility with the Rural Telephone Financing Cooperative ("RTFC" or "Lender")
and Motorola, Inc. ("Motorola"). The available facilities consist of a 7-year
senior secured term loan ("Vendor Supported Loan") in the amount of $52.5
million, a 7-year senior secured term loan ("Supplemental Loan") in the amount
of $17.0 million, and a 5-year senior secured revolving line of credit loan
("Line of Credit") in the amount of $1.0 million.
The Vendor Supported Loan is to finance up to $49.9 million of Motorola
supplied PCS equipment and engineering services, nonvendor related capital
expenditures and microwave relocation expenses, and to purchase up to $2.6
million of RTFC subordinated capital certificates ("SCCs"). The Supplemental
Loan is to finance up to $16.2 million of non-Motorola related capital
expenditures and working capital, and to purchase up to $0.8 million of RTFC
SCCs. The Line of Credit is to supplement the Alliance's general short-term
cash requirements.
The RTFC SCC's are nonmarketable securities and are stated at historical cost.
As the RTFC loans are repaid, the SCCs will be refunded through a cash payment
to maintain a 5% SCCs-to-outstanding loan balance ratio.
As borrowings occur, the Alliance can choose between several fixed and
variable rate interest options. The variable interest rate in effect on the
nonfixed portions of the Vendor Supported Loan at December 31, 1999 was 7.45%.
In September 1998, the Alliance converted $5.0 million of the Vendor Supported
Loan to a fixed rate of 6.55%. This rate is in effect until September 2001, at
which time the loan will revert to the variable rate.
F-95
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 2. Long-Term Debt (Continued)
Under the Line of Credit agreement, the Alliance will pay interest quarterly
with all principal and interest payments due five years from the date of the
Line of Credit agreement. The interest rate on the Line of Credit is the
RTFC's standard monthly quoted line of credit rate plus 0.5%. The interest
rate in effect on the Line of Credit at December 31, 1999 was 8.1%.
All of the Alliance's present and future assets and revenues are pledged as
security for the RTFC loans. In addition, each member of the Alliance has
entered into an irrevocable unsecured pro rata guaranty with the RTFC. These
guarantees will not exceed the lesser of (i) $32.8 million plus interest and
fees due thereon or (ii) 30% of the outstanding indebtedness under the Vendor
Supported Loan plus outstanding borrowings on the Supplemental Loan and Line
of Credit, inclusive of principal, interest and fees due thereon. As
additional credit support for the Vendor Supported Loan, Motorola has entered
into a guaranty agreement with the RTFC, whereby it is committed to guarantee
up to the lesser of (i) $36.8 million or (ii) 70% of the Alliance's
outstanding indebtedness under the Vendor Supported Loan. Pursuant to this
agreement, Motorola is entitled to a guaranty fee of 2%, 3%, and 4% of the
outstanding indebtedness under the Vendor Supported Loan which it guarantees
in years 5, 6, and 7, respectively. There is no fee in years 1 through 4.
The loan agreements contain various restrictive covenants including negative
covenants related to additional indebtedness, redemption of membership
interests and payment of management fees. The agreements also contain
financial covenants related to cash flows, population coverage, number of
subscribers, debt service coverage and leverage.
There are no long-term debt maturities for 2000-2001. Maturities for 2002,
2003, 2004 and 2005 are $2,506,255, $7,265,638, $7,518,765 and $33,834,444,
respectively. Interest costs were approximately $1,783,000 in 1999,
approximately $607,000 of which was capitalized.
The RTFC allocates a large percentage of its annual margins to its patrons. A
majority portion of the allocation is returned to the borrowers in cash. The
remainder is issued to borrowers in the form of patronage capital
certificates, which are retired in cash on an RTFC board approved cycle. In
1999, the Alliance recorded a receivable in the amount of $42,932 for the 1999
cash distribution that is reflected in other receivables on the balance sheet.
The net present value of the total patronage capital certificates was $141,579
at December 31, 1999 and is reflected in other assets on the balance sheet.
Note 3. Capital Structure
The Alliance's authorized capitalization consists of one class of membership
interest, which consists of 1,242,002 units issued for a total of $14,316,036
before $50,932 of related issuance costs. This issuance is defined as the
initial "Capital Contribution." Additional future cash contributions may be
required from the members on the same terms and conditions of their initial
Capital Contribution. If any member fails to make the additional
contributions, their existing capital account balance may be redeemed at 25%
of the then outstanding balance and amounts forfeited would be allocated among
the remaining common members.
F-96
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
Note 3. Capital Structure (Continued)
Pursuant to the terms of the aforementioned debt facility, the members entered
into equity subscriptions agreements that obligate them to contribute
additional equity of $5.68 million, in the aggregate. Such additional equity
contributions are to be made in four annual installments of $1.42 million
ending in 2002 for the purchase, at fair market value, of Common Membership
units.
In January 2000, the members contributed $1.42 million to the Alliance,
purchasing 78,944.44 Common Membership units.
Note 4. Commitments
Leases: The Alliance leases property for cell site locations and retail
stores. Leases for cell site locations vary in term from five to ten years.
Leases for retail store locations vary in term from one to five years. Certain
cell site location leases have been prepaid and are being amortized on a
straight-line basis over the total lease term. Total annual lease expense was
approximately $769,000 for the year ended December 31, 1999. The total amount
committed under these agreements is $727,989 in 2000, $682,133 in 2001,
$657,140 in 2002, $557,183 in 2003, $308,602 in 2004 and $326,765 for the
years thereafter.
Equipment: The Alliance has entered into a purchase contract to acquire up to
$35.0 million of equipment over a period ending July 10, 2002. As of December
31, 1999, the Alliance had purchased $20.2 million pursuant to the terms of
such contract. Total outstanding purchase commitments were approximately $2.6
million at December 31, 1999.
Note 5. Related Party Transactions
All transactions of the Alliance are administered by the managing partner. CFW
Wireless, a subsidiary of CFW Communications Company provided engineering,
construction, customer care and other services to the Alliance in accordance
with the service contract, which totalled $1,273,715 in 1999, $933,585 in 1998
and $179,836 in 1997. All 1999 charges were expensed. Of the total 1998
charges, $380,746 was expensed and $552,839 was capitalized during the
construction and start up period. CFW Communications Company also provided
certain corporate services for the Alliance in the amount of $1,168,009 in
1999, $553,225 in 1998 and $69,541 in 1997. All of the 1999 charges were
expensed. Of the total 1998 charges, $436,014 was expensed and $117,211 was
capitalized during the construction and start up period. All of the 1997
charges were capitalized. Corporate services include executive, finance,
accounting, human resources, information management and marketing services.
Such services are charged to the Alliance at cost. In addition, the managing
partner advances funds to the Alliance to cover expenditures incurred. The net
advances are included in due to affiliates in the accompanying balance sheet.
In addition, the managing partner advances funds to the Alliance to cover
expenditures incurred. These advances are included in due to affiliates in the
accompanying balance sheets. Interest on outstanding advances totaled $193,990
in 1999.
Switch access and switching equipment and services totaling $972,759 in 1999
and $1,115,043 in 1998 were provided at cost by the Virginia PCS Alliance LC
(an entity related by common ownership and management). All of the 1999
charges were expensed. Of the total 1998 charges, $375,941 was expensed and
$739,102 was capitalized.
F-97
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
CONDENSED BALANCE SHEETS
June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------- -----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 10,053,155 $ 8,120
Accounts receivable, net of allowance of $400 ($100 in 1999) 2,235,346 832,763
Other receivables 270,556 175,376
Inventories 1,512,073 1,281,241
Prepaid expenses 140,884 69,049
------------ ------------
Total current assets 14,212,014 2,366,549
Subordinated Capital Certificates 2,554,143 2,506,255
------------ ------------
Property and Equipment
Land and building 948,060 942,988
Network plant and equipment 29,292,819 33,898,373
Furniture, fixtures and other equipment 1,964,399 1,330,005
Radio spectrum licenses 6,132,100 6,132,100
------------ ------------
Total in service 38,337,378 42,303,466
Under construction 11,442,244 5,436,007
------------ ------------
49,779,622 47,739,473
Less accumulated depreciation 3,244,889 2,317,215
------------ ------------
46,534,733 45,422,258
------------ ------------
Other Assets
Radio spectrum licenses 2,870,928 2,844,772
Other 533,612 356,894
------------ ------------
3,404,540 3,201,666
------------ ------------
$ 66,705,430 $ 53,496,728
============ ============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities
Accounts payable $ 6,494,430 $ 1,819,567
Due to affiliates 3,662,112 1,059,198
Accrued payroll 79,563 59,797
Advance billings 36,946 27,550
Accrued interest - 5,434
Other accrued liabilities 94,074 104,530
------------ ------------
Total current liabilities 10,367,125 3,076,076
Long-Term Liabilities
Long-term debt 51,136,389 51,125,102
Other long term liabilities 13,040,008 -
------------ ------------
64,176,397 51,125,102
Members' Deficit
Common membership interests (7,838,092) (704,450)
------------ ------------
$ 66,705,430 $ 53,496,728
============ ============
</TABLE>
See Notes to Financial Statements
F-98
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ending June 30, For the six months ending June 30,
--------------------------------------- -----------------------------------------
2000 1999 2000 1999
----------------- ------------------ -------------------- -------------------
<S> <C> <C> <C> <C>
Operating revenues:
Subscriber revenue $ 2,701,954 $ 250,421 $ 4,372,627 $ 406,942
Wholesale revenue 451,769 - 771,572 -
Equipment sales 301,311 102,261 768,909 192,012
------------ ------------ ------------ ------------
3,455,034 352,682 5,913,108 598,954
------------ ------------ ------------ ------------
Operating expenses:
Cost of sales 2,105,789 434,726 4,272,807 699,429
Maintenance and support 1,609,367 1,074,938 3,014,662 1,859,659
Depreciation and amortization 462,323 423,549 1,163,880 691,679
Customer operations 1,823,253 882,656 3,505,069 1,574,985
Corporate operations 567,191 598,571 1,026,470 1,006,053
------------ ------------ ------------ ------------
6,567,923 3,414,440 12,982,888 5,831,805
------------ ------------ ------------ ------------
Operating Loss (3,112,889) (3,061,758) (7,069,780) (5,232,851)
Interest income (expense)
Interest income 291,826 105,950 339,255 259,503
Senior credit facility (928,305) (313,905) (1,824,116) (475,640)
------------ ------------ ------------ ------------
(636,479) (207,955) (1,484,861) (216,137)
------------ ------------ ------------ ------------
Net Loss $ (3,749,368) $ (3,269,713) $ (8,554,641) $ (5,448,988)
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
F-99
<PAGE>
<TABLE>
<CAPTION>
WEST VIRGINIA PCS ALLIANCE, L.C.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
2000 1999
--------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (8,554,641) $ (5,448,988)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,377,891 687,568
Amortization 4,110 4,111
Amortization of gain on tower sale (218,120)
Changes in assets and liabilities
(Increase) in:
Accounts receivable (1,497,763) (311,989)
Inventories (230,832) (216,069)
Prepaid expenses (71,835) (55,892)
Increase (decrease) in:
Accounts payable 2,613,233 (216,595)
Advance billings and customer deposits 9,396 (3,700)
Accrued interest (5,434) (6,003)
Other accrued liabilities 9,310 62,519
------------ ------------
Net cash used in operating activities (6,564,685) (5,505,038)
------------ ------------
Cash Flows From Investing Activities
Purchase of property and equipment (12,252,890) (8,292,309)
Proceeds from sale of towers 25,212,960 -
Increase in deferred charges/credits (144,944) (14,868)
Increase in patronage capital certificates (192,718) -
------------ ------------
Net cash provided by (used in) investing activities 12,622,408 (8,307,177)
------------ ------------
Cash Flows From Financing Activities
Capital contributions, net 1,420,999 1,421,000
Advances from (Repayments to) affiliates 2,602,914 (2,284,423)
Borrowings on revolving credit agreements, net (1,000,000) -
Proceeds from long-term borrowings 963,399 14,676,119
------------ ------------
Net cash provided by financing activities 3,987,312 13,812,696
------------ ------------
Net increase in cash and cash equivalents 10,045,035 481
Cash and Cash Equivalents
Beginning 8,120 10,254
------------ ------------
Ending $ 10,053,155 $ 10,735
============ ============
</TABLE>
See Notes to Financial Statements
F-100
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(Unaudited)
Common
Membership
Interests
------------
Balance as of January 1, 1999 $ 11,162,026
Capital contributions 1,421,000
Net loss (2,179,278)
------------
Balance as of March 31, 1999 10,403,748
Net loss (3,269,708)
------------
Balance as of June 30, 1999 7,134,040
Net loss (3,146,097)
------------
Balance as of September 30, 1999 3,987,943
Net loss (4,692,393)
------------
Balance as of December 31, 1999 (704,450)
Capital contributions 1,421,000
Net loss (4,805,274)
------------
Balance as of March 31, 2000 (4,088,724)
Net loss (3,749,368)
------------
Balance as of June 30, 2000 $ (7,838,092)
============
See Notes to Financial Statements
F-101
<PAGE>
WEST VIRGINIA PCS ALLIANCE L.C.
-------------------------------
Notes to Financial Statements
-----------------------------
(1) In the opinion of the managing member of the Alliance, the accompanying
financial statements which are unaudited, except for the balance sheet
dated December 31, 1999, contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of June 30, 2000 and December 31, 1999 and the results of operations for
the three months ended June 30, 2000 and 1999 and cash flows for the six
months ended June 30, 2000 and 1999. The results of operations for the six
months ended June 30, 2000 and 1999 are not necessarily indicative of the
results to be expected for the full year.
(2) In March 2000, the Alliance sold 67 towers for $20.6 million to Crown
Castle International Corp (Crown). In April 2000, the Alliance sold a total
of 15 towers for $3.3 million to Crown. In connection with these
transactions, the Alliance has certain future leaseback and other
commitments. Accordingly, these gains have been deferred for book purposes
and will be amortized over the life of the leaseback agreement.
(3) In January 2000, the members contributed $1.42 million to the Alliance,
purchasing 78,944.44 Common Membership units.
(4) In July 2000, the Alliance borrowed $49.1 million from CFW Communications
Company to payoff its indebtedness to the Rural Telephone Finance
Cooperative (RTFC). The payoff included a prepayment fee of $.3 million.
The Alliance's debt obligation to CFW bears interest at a rate equal to
CFW's borrowing rate under its Senior Credit Facility (10.6% in July 2000)
and matures in 2008.
F-102