-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfekRMDzx0kSsbtLDqrqjK/TZLLYSTxhTSOox5a9SFc4MKcztxYy9dVT5JylUifG ZZqmmJiF87w0tT61r8EoZw== 0001047469-99-020654.txt : 19990517 0001047469-99-020654.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020654 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MJD COMMUNICATIONS INC CENTRAL INDEX KEY: 0001062613 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133725229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-56365 FILM NUMBER: 99624172 BUSINESS ADDRESS: STREET 1: 521 EAST MOREHEAD ST STREET 2: STE 250 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043448150 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-56365 ------------------------ MJD COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 13-3725229 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 521 EAST MOREHEAD STREET, SUITE 250 28202 CHARLOTTE, NORTH CAROLINA (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (704) 344-8150 ------------------------ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of May 12, 1999, the registrant had outstanding 1,810,147 shares of common stock. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MJD COMMUNICATIONS, INC. QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 31, 1999 INDEX
PAGE ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements........................................................................... Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............................................................................ 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998......................................................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998......................................................................................... 5 Notes to Condensed Consolidated Financial Statements......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 9 Item 3a. Quantitative and Qualitative Disclosures About Market Risk..................................... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................................. 16 Item 5. Other Information.............................................................................. 16 Item 6. Exhibits and Reports on Form 8-K............................................................... 17
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents........................................................... $ 12,240 13,241 Accounts receivable and other....................................................... 22,520 22,395 ----------- ------------ Total current assets.................................................................. 34,760 35,636 ----------- ------------ Property, plant, and equipment, net................................................... 143,942 142,321 ----------- ------------ Other assets: Investments......................................................................... 33,719 37,894 Goodwill, net of accumulated amortization........................................... 209,749 203,867 Deferred charges and other assets................................................... 21,603 21,173 ----------- ------------ Total other assets.................................................................... 265,071 262,934 ----------- ------------ Total assets.......................................................................... $ 443,773 440,891 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................... $ 9,365 10,153 Current portion of long-term debt, and other........................................ 4,530 4,383 Demand notes payable................................................................ 754 754 Accrued interest payable............................................................ 8,783 3,947 Other accrued liabilities........................................................... 5,025 6,842 ----------- ------------ Total current liabilities............................................................. 28,457 26,079 ----------- ------------ Long-term liabilities: Long-term debt, net of current portion.............................................. 363,641 364,610 Put warrant obligation.............................................................. 4,558 4,169 Deferred credits and other long-term liabilities.................................... 35,528 32,712 ----------- ------------ Total long-term liabilities........................................................... 403,727 401,491 ----------- ------------ Minority interest..................................................................... 494 435 ----------- ------------ Common stock subject to put option.................................................... 3,000 3,000 ----------- ------------ Stockholders' equity: Common stock........................................................................ 17 17 Additional paid-in capital.......................................................... 45,785 45,735 Retained deficit.................................................................... (37,707) (35,866) ----------- ------------ Total stockholders' equity............................................................ 8,095 9,886 ----------- ------------ Total liabilities and stockholders' equity............................................ $ 443,773 440,891 ----------- ------------ ----------- ------------
See accompanying notes to condensed consolidated financial statements 3 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 --------- --------- (DOLLARS IN THOUSANDS) Operating revenues: Switched services....................................................................... $ 25,155 11,653 Other................................................................................... 7,673 2,902 --------- --------- Total operating revenues.................................................................. 32,828 14,555 --------- --------- Operating expenses: Plant operations........................................................................ 4,645 2,409 Corporate and customer service.......................................................... 6,574 3,287 Depreciation and amortization........................................................... 7,182 2,632 Cost of services resold................................................................. 2,780 1,022 Other general and administrative........................................................ 5,275 1,166 --------- --------- Total operating expenses.................................................................. 26,456 10,516 --------- --------- Income from operations.................................................................... 6,372 4,039 --------- --------- Other income (expense): Net gain on sale of investments......................................................... 206 7 Interest income......................................................................... 165 37 Dividend income......................................................................... 405 29 Interest expense........................................................................ (9,334) (2,860) Other nonoperating, net................................................................. 140 (3) --------- --------- Total other expense....................................................................... (8,418) (2,790) --------- --------- Earnings (loss) before income taxes and extraordinary item................................ (2,046) 1,249 Income tax (expense) benefit.............................................................. 231 (615) --------- --------- Earnings (loss) before extraordinary item................................................. (1,815) 634 Extraordinary item net of tax............................................................. -- (2,521) --------- --------- Loss before minority interest............................................................. (1,815) (1,887) Minority interest in income of subsidiaries............................................... (26) (25) --------- --------- Net loss.................................................................................. $ (1,841) (1,912) --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements 4 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss................................................................................ $ (1,841) (1,912) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................................................... 7,669 2,711 Other non cash income................................................................... (222) (148) Loss on early retirement of debt........................................................ -- 2,897 Changes in assets and liabilities arising from operations, net of acquisitions: Accounts receivable................................................................... 1,250 (978) Accounts payable and accrued expenses................................................. (862) (2,231) Minority interest..................................................................... 26 25 Income taxes recoverable.............................................................. 3,651 (784) ---------- ---------- Total adjustments....................................................................... 11,512 1,492 ---------- ---------- Net cash provided (used) by operating activities........................................ 9,671 (420) ---------- ---------- Cash flows from investing activities: Net capital additions................................................................... (3,105) (655) Acquisitions of telephone properties.................................................... (13,035) (63,947) Other, net.............................................................................. 7,562 (763) ---------- ---------- Net cash used in investing activities................................................... (8,578) (65,365) ---------- ---------- Cash flows from financing activities: Loan origination costs.................................................................. -- (9,000) Proceeds from issuance of long-term debt................................................ -- 195,000 Repayment of long-term debt............................................................. (2,151) (86,865) Net proceeds from the issuance of common stock.......................................... -- 16,838 Repurchase of preferred stock and warrants.............................................. -- (130) Other, net.............................................................................. 57 (47,009) ---------- ---------- Net cash provided (used) by financing activities........................................ (2,094) 68,834 ---------- ---------- Net increase (decrease) in cash and cash equivalents...................................... (1,001) 3,049 Cash and cash equivalents, beginning of period............................................ 13,241 6,822 ---------- ---------- Cash and cash equivalents, end of period.................................................. $ 12,240 9,871 ---------- ---------- ---------- ----------
See accompanying notes to condensed consolidated financial statements 5 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF FINANCIAL REPORTING The unaudited interim financial statements include the consolidated statements of the Company. In the opinion of the management of the Company, its respective financial statements reflect all adjustments necessary for a fair presentation of results of operations, financial position, and cash flows. The results of operations for the interim periods are not necessarily indicative of the results of operations which might be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the Company's 1998 annual report on Form 10-K, which was filed on March 29, 1999. (2) ACQUISITIONS On February 1, 1999, the Company acquired 100% of the outstanding common stock of Ravenswood Communications, Inc. and its subsidiaries. On February 16, 1999 the Company acquired 98% of the outstanding common stock of Columbus Grove Telephone Company and its subsidiary. The aggregate purchase price for these acquisitions was $14.9 million, and acquisition costs were approximately $295,000. These acquisitions have been accounted for as purchases and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the dates of acquisition, and the results of operations have been included in the accompanying consolidated financial statements since the dates of acquisition. Not all purchase price allocations have been finalized, however, due to the existence of certain pre-acquisition contingencies. Consequently, adjustments to the preliminary allocations of purchase price may emerge as contingencies are resolved, provided that any such adjustments are expected to occur not more than twelve months from the relevant acquisition date. Goodwill recognized in connection with these acquisitions was approximately $6.7 million and will be amortized over an estimated useful life of 40 years. On April 30, 1999, the Company acquired 100% of the outstanding stock of Union Telephone Company of Hartford and subsidiaries, Armour Independent Telephone Co., Bridgewater-Canistota Independent Telephone Co. and WMW Cable TV Co. (collectively, "Union") for approximately $16.5 million. The acquisition will be accounted for using the purchase method of accounting. The Company has entered into a definitive agreement to acquire one other unrelated rural local exchange carrier ("RLEC"). The acquisition is expected to close in the third quarter of 1999. The purchase price is expected to be approximately $3.2 million and will be financed through cash flow from existing operations or the Company's senior secured credit facility. The acquisition will be accounted for using the purchase method of accounting. The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisitions in 1999 and 1998, including the pending acquisition, occurred on January 1, 1998. These combined results include certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have been 6 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACQUISITIONS (CONTINUED) achieved had the acquisitions been consummated as of the assumed dates, nor are the results necessarily indicative of the Company's future results of operations.
PRO FORMA THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ------------- ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) Revenues....................................................... $ 34,267 31,052 Net loss....................................................... (1,653) (3,857)
(3) STOCK OPTION PLAN In February 1999, the compensation committee of the Board of Directors of Fairpoint Communications Corp. ("Fairpoint"), approved the grant of options covering 855,500 shares of common stock of FairPoint under the FairPoint Communications Corp. Stock Incentive Plan at an exercise price of $0.50 per share, which is the estimated fair market value of Fairpoint's common stock. The options have a term of ten years. (4) REPORTABLE SEGMENTS The Company has two reportable segments: incumbent local exchange carrier (ILEC) operations and competitive local exchange carrier (CLEC) operations. The ILEC operations provide local, long distance and other telecommunications services to customers in rural communities in which competition currently does not exist for local telecommunications services. The CLEC operations provide local and long distance telecommunications services to customers in markets outside of the Company's ILEC markets. The Company utilizes the following information for purposes of making decisions about allocating resources to a segment and assessing a segment's performance:
ILEC CLEC OPERATIONS OPERATIONS TOTAL ------------ ----------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS) Three months ended March 31, 1999: Revenue from external customers......................... $ 30,689 2,138 32,827 Intersegment revenues................................... -- 235 235 EBITDA.................................................. 17,107 (2,663) 14,444
7 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) REPORTABLE SEGMENTS (CONTINUED) A reconciliation of reportable segment amounts to the Company's consolidated balances for the three months ended March 31, 1999 is as follows:
(DOLLARS IN THOUSANDS) EBITDA to net loss: EBITDA........................................................................... $ 14,444 Other components of EBITDA Depreciation and amortization.................................................. (7,182) Interest expense............................................................... (9,334) Income tax expense 231 --------- Net loss..................................................................... $ (1,841) --------- ---------
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION THAT MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF MJD COMMUNICATIONS, INC. AND ITS SUBSIDIARIES (COLLECTIVELY, THE "COMPANY"). THE DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999. CERTAIN STATEMENTS INCLUDED IN THIS DOCUMENT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ESTIMATES OF OPERATING AND CAPITAL EXPENDITURE REQUIREMENTS, FUTURE REVENUE AND OPERATING INCOME, AND CASH FLOW AND LIQUIDITY. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON THE COMPANY'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS IN THE FUTURE TO DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, UNCERTAINTIES RELATING TO ECONOMIC AND BUSINESS CONDITIONS, GOVERNMENTAL AND REGULATORY POLICIES, AND THE COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY OPERATES. THESE AND OTHER RISKS ARE DETAILED BELOW AS WELL AS IN OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. OVERVIEW MJD Communications, Inc. ("MJD") focuses primarily on acquiring and operating rural local exchange carriers ("RLECs"), the rural segment of the telecommunications industry. During the first quarter ending March 31, 1999, MJD acquired two RLECs, Ravenswood Communications, Inc. and The Columbus Grove Telephone Company (collectively the "1999 Acquisitions"), which in the aggregate serve approximately 3,900 access lines. Including the 1999 Acquisitions, the Company owned and operated 19 RLECs which served approximately 135,000 access lines located in eleven states at March 31, 1999. MJD has initiated a competitive local exchange carrier ("CLEC") strategy through its wholly-owned subsidiary FairPoint Communications Corp. ("FairPoint"). FairPoint began offering telecommunications services in April 1998. At March 31, 1999, FairPoint was providing telecommunications services in twenty-four markets and had provisioned approximately 11,000 access lines. With the inclusion of FairPoint, total access lines under management by the Company was approximately 146,000 at March 31, 1999. REVENUES: The Company's switched revenues are derived primarily from: (i) the provision of basic local telephone service revenues; and (ii) the provision of network access to inter-exchange carriers ("IXCs") for origination and termination of interstate and intrastate long distance telephone calls. Other revenues include ancillary service revenues such as billing and collection, long distance resale, enhanced services, and other such ancillary services and FairPoint's revenues. OPERATING EXPENSES: The Company's operating expenses are categorized as plant operations, corporate and customer service, depreciation and amortization, cost of services resold and other general and administrative expenses. Access line growth, the Company's acquisition activity and general business inflationary adjustments influence year to year changes in such expenses. OTHER (INCOME) EXPENSES: The Company's other income includes interest income, dividends, gain or loss on sale of assets and other miscellaneous, non-operating income. The Company's other expenses consist primarily of interest expense on the Company's debt and other non-operating expenses. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998 OPERATING REVENUE. Net revenue increased $18.3 million, or 125.5%, to $32.8 million from $14.6 million for the three months ended March 31, 1999 and 1998, respectively. The 1999 Acquisitions and the 9 acquisitions completed by the Company in 1998 (the "1998 Acquisitions") accounted for $17.0 million, or 117.0%, of the revenue increase. For the RLECs owned and operated for a comparable period in 1999 and 1998, net revenues were unchanged at $14.5 million. FairPoint reported first quarter 1999 revenues of $1.3 million, or 8.7% of the increase in revenues reported for the three months ended March 31, 1999. As FairPoint began reporting revenues in April 1998, FairPoint has no comparable information to report for the three months ended March 31, 1998. Basic local service revenue increased $3.9 million to $6.1 million from $2.2 million for the three months ended March 31, 1999 and 1998, respectively. This revenue increase is primarily attributable to an increase in access lines from the 1999 Acquisitions and the 1998 Acquisitions. The 1999 Acquisitions and the 1998 Acquisitions acquired after the first quarter 1998 accounted for 82,556 access lines, or 61% of total access lines, operated by the Company at March 31, 1999. For RLECs owned and operated by the Company for the comparable periods ending March 31, 1999 and 1998, these RLECs achieved internal growth of 3,320 access lines. The 1999 Acquisitions and 1998 Acquisitions contributed $3.7 million of the increase in basic local service revenue for the three months ended March 31, 1999. For the RLECs owned and operated for a comparable period, basic local service revenues increased by $0.2 million to $2.4 million from $2.2 million for the three months ended March 31, 1999 and 1998, respectively. Universal Service Support Fund ("USSF") revenue increased $0.4 million to $1.5 million from $1.1 million for the three months ended March 31, 1999 and 1998, respectively. The 1999 Acquisitions and 1998 Acquisitions reported $0.3 million in USSF revenue for the three months ended March 31, 1999. For the RLECs owned and operated for a comparable period, USSF revenues increased by $0.1 million to $1.2 million from $1.1 million for the three months ended March 31, 1999 and 1998, respectively. Network access revenues or interstate and intrastate revenues increased $9.2 million to $17.5 million from $8.3 million for the three months ended March 31, 1999 and 1998, respectively. This revenue increase is attributable to the increase in minutes of use contributed by the 1999 Acquisitions and 1998 Acquisitions. Network access revenues contributed by the 1999 Acquisitions and 1998 Acquisitions in the three months ended March 31, 1999 was $9.5 million. For the RLECs owned and operated for a comparable period, network access revenues decreased by $0.3 million to $8.0 million from $8.3 million for the three months ended March 31, 1999 and 1998, respectively. Other revenues increased $4.8 million to $7.7 million from $2.9 million for the three months ended March 31, 1999 and 1998, respectively. Revenue contribution from the 1999 Acquisitions and the 1998 Acquisitions provided $3.5 million of the increase in other revenue for the three months ended March 31, 1999. For the RLECs owned and operated for a comparable period by the Company, other revenues remained at $2.9 million for the three months ended March 31, 1999 and 1998. FairPoint had revenue of $1.3 million for the three months ended March 31, 1999. As Fairpoint began reporting revenue in April, 1998, Fairpoint has no comparable revenue information to report for the three months ended March 31, 1998. OPERATING EXPENSES. Operating expenses, which include plant operations, corporate and customer service, depreciation and amortization, cost of services resold and other general and administrative expenses, increased $15.9 million to $26.5 million from $10.5 million for the three months ended March 31, 1999 and 1998, respectively. The increase was primarily attributed to the operating expenses associated with the 1999 Acquisitions and the 1998 Acquisitions, which in the aggregate accounted for $11.7 million of the increase. For RLECs owned and operated for a comparable period, operating expenses increased approximately $0.5 million, or 5.3%, to $11.0 million for the three months ended March 31, 1999 from $10.4 million for the three months ended March 31, 1998. The change was primarily attributable to an increase in corporate and customer service expenses and in cost of services resold at the Company's long distance subsidiary, ST Long Distance. FairPoint's operating expenses were $3.7 million, or 34.9%, of the Company's operating expense increase, for the three months ended March 31, 1999. As FairPoint began 10 reporting expenses in April 1998, FairPoint has no comparable expense information to report for the three months ended March 31, 1998. INCOME FROM OPERATIONS. As a result of the factors described above, income from operations increased $2.3 million, or 57.8%, to $6.4 million from $4.0 million for the three months ended March 31, 1999 and 1998, respectively. As a percentage of revenues, income from operations was 19.4% as compared to 27.8% for the three months ended March 31, 1999 and 1998, respectively. This income from operations margin decline for the three months ended March 31, 1999 is attributed to the expenses associated with FairPoint and an increase in corporate and customer services expenses. For RLECs owned and operated for a comparable period, the income from operations decreased $0.6 million to $3.5 million in 1999 from $4.1 million in 1998 and the income from operations margin decreased to 10.7% from 28.1%. The decrease was attributable to an increase in corporate and customer services expenses and depreciation. OTHER INCOME (EXPENSE). Net other expense increased $5.6 million to $8.4 million from $2.8 million for the three months ended March 31, 1999 and 1998, respectively. The increase was primarily attributable to an increase in interest expense associated with the additional debt incurred to complete the 1998 Acquisitions. LIQUIDITY AND CAPITAL RESOURCES Implementation of the Company's acquisition strategy has required a significant portion of the Company's capital resources. The Company historically has used the proceeds of institutional and bank debt, private equity offerings, and the Company's available cash flow, to fund the Company's acquisition strategy. The Company maintains a senior secured credit facility (the "Credit Facility"). Within the Credit Facility there is an $85 million reducing revolving term facility with a remaining term of five and one-half years. This facility is available for general corporate purposes, capital expenditures and acquisitions. At March 31, 1999, there was no outstanding balance under this revolving term facility. Borrowings under the Credit Facility are guaranteed by the Company's four mid-tier subsidiary companies and secured by certain subsidiaries' pledge of stock. Pursuant to the Credit Facility, the Company is required to comply with certain financial covenants. For the three months ended March 31, 1999, the Company was in compliance with such covenants. On May 5, 1998, the Company consummated a public offering of debt consisting of $125 million in aggregate principal amount of 9 1/2% Senior Subordinated Notes and $75 million in aggregate principal amount of Floating Rate Callable Securities, each due in 2008 (collectively the "Notes"). The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company, and effectively subordinated to all existing and future debt and other liabilities of the Company's subsidiaries. Interest on the Notes is payable semi-annually. Besides debt service, the Company's primary liquidity requirements are expected to be for general corporate purposes, capital expenditures and to finance the Company's pending or future acquisition activities. The Company believes that proceeds from the Credit Facility and the sale of non-core assets during 1999 are sufficient to fund the pending acquisition. The Company has historically generated sufficient cash flow from operations to meet all of its capital expenditure requirements. During the first quarter of 1999 and 1998, the Company spent approximately $3.1 million and $0.7 million respectively, on capital expenditures. The Company expects capital expenditures in 1999 for all existing operations to be approximately $25.0 million, which is expected to be funded through existing operations. The Company's entry into additional markets as a CLEC is expected to result in the Company incurring initial operating losses in its CLEC business. The Company invested approximately $5.0 million in Fairpoint in 1998 and expects to invest approximately $15.0 million in 1999, in order to enable FairPoint to expand into ten additional markets and increase its total number of CLEC markets served to 24. In 11 addition, FairPoint plans to build telecommunications facilities to migrate its customers to the Company's existing networks, which will require substantial capital expenditures in 1999 and 2000. The Credit Facility limits the funding of such losses and capital expenditures to (i) $5.0 million per year so long as the senior debt leverage ratio (as calculated under the Credit Facility) exceeds 4.0x and (ii) $15.0 million per year whenever such leverage ratio is under 4.0x. The terms of the Notes also impose certain restrictions on the Company's ability to fund FairPoint's expansion. If FairPoint's business plan proves to be successful, the Company believes Fairpoint will be able to raise separate capital for its future capital requirements. Net cash provided by operating activities was $9.7 million for the three months ended March 31, 1999 and net cash used by operating activities was $0.4 million for the three months ended March 31, 1998. Net cash used in investing activities was $8.6 million and $65.4 million for the three months ended March 31, 1999 and 1998, respectively. These cash flows primarily reflect expenditures relating to acquisitions of RLECs of $13.0 million and $63.9 million for the three months ended March 31, 1999 and 1998, respectively, and capital expenditures of $3.1 million and $0.7 million for the three months ended March 31, 1999 and 1998, respectively. Net cash used by financing activities was $2.1 million for the three months ended March 31, 1999 and net cash provided by financing activities was $68.8 million for the three months ended March 31, 1998. These cash flows for the three months ended March 31, 1999 primarily represent the repayment of long-term debt. The cash flows for the three months ended March 31, 1998 primarily represent borrowings, in the amount of $195.0 million and proceeds from the issuance of common stock of $16.8 million. A majority of the proceeds for the three months ended March 31, 1998 were utilized to repay long-term debt of $86.9 million and to complete the 1998 Acquisitions. Adjusted EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance or as a substitute for cash flow as a measure of liquidity. Adjusted EBITDA presented herein differs from the definition of EBITDA in the indenture relating to the Notes. The definition of EBITDA in such indenture is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which the Company may incur. Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly captioned amounts of other companies. Adjusted EBITDA is presented because management believes it provides useful information regarding the Company's ability to incur and/or service debt. Increases or decreases in Adjusted EBITDA may indicate improvements or decreases, respectively, in the Company's free cash flows available to incur and/or service debt and cover fixed charges. Management expects that, because Adjusted EBITDA is commonly used in the telecommunications industry as a measure of performance, investors may use this data to analyze and compare other telecommunications companies with the Company in terms of operating performance, leverage and liquidity. Adjusted EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, and extraordinary items. Adjusted EBITDA increased 115.0% to $14.4 million for the three months ended March 31, 1999 from $6.7 million for the three months ended March 31, 1998. Adjusted EBITDA reported by the RLECs was $17.1 million and by FairPoint was $(2.7) million for the three months ended March 31, 1999. The Company may secure additional funding through the sale of public or private debt and/or equity securities or enter into another bank credit facility to fund future acquisitions and operations. If the Company's growth occurs more rapidly than is currently anticipated or if its operating results are below expectations, there can be no assurance that the Company will be successful in raising sufficient additional capital on terms that it will consider acceptable, or that the Company's operations will produce positive cash flow in sufficient amounts to meet its debt obligations. The Company's failure to raise and generate sufficient funds may require it to delay or abandon some of its planned future growth or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the telecommunications industry. 12 NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company anticipates adopting this accounting pronouncement in 2000; however, management believes it will not have a significant impact on the Company's consolidated financial statements. YEAR 2000 The year 2000 issue concerns the inability of computer systems and certain other equipment to properly recognize and process data that uses two digits rather than four to designate particular years. The Company has initiated a Year 2000 Project Plan ("the Plan") to assess whether its systems that process date sensitive information will perform satisfactorily leading up to and beyond January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000, any year 2000-related problem with critical systems, the failure of which could have a material adverse effect on the Company's operations. The Plan includes steps to (i) identify each critical system element that requires date code remediation, (ii) establish a plan to remediate such systems, (iii) implement all required remediations and (iv) selectively test the remediated systems. Thus far, the identification phase has identified year 2000 issues in the following critical Company-owned systems; (i) switching and transmission hardware and software used by the Company to route and deliver telephone calls; (ii) network support systems, including customer services systems and (iii) billing and collection systems used by the Company to invoice and process most of its customer payments. In addition, the Company (i) receives critical services from providers of utilities and other services to facilities that house employees and switching, transmission and other equipment and (ii) is dependent upon outside vendors for, among other things, the provision of critical network components. The Company is also critically reliant upon the systems of other telecommunication carriers with which the Company's systems interconnect for the routing and delivery of telephone calls. The Company has also identified potential Year 2000 related liability with respect to the telephone equipment manufactured by unaffiliated parties that the Company has sold or leased to its customers. The identification, planning and remediation phases of the Plan are materially complete as they relate to Company-owned systems Based on work completed under the Plan to date, the Company currently intends to take the following additional steps under its Plan with respect to Company-owned systems, third-party vendors and other telecommunications carriers: - The Company generally plans to remediate Company-owned switching, transmission, billing and collection and other critical systems through the revision or replacement of current system components. Necessary changes to Company-owned systems are in process and are expected to be completed by mid-year 1999. The selective testing and verification of such changes are expected to be completed during 1999. Due to the large number of system components requiring remediation, the Company does not intend to test every remediated system but will rely upon the results of selective testing to determine the effectiveness of remediation efforts. - With respect to critical services provided by utilities and other third parties, the Company is in the process of contacting all such suppliers and plans to have contacted all such suppliers before the end of first quarter 1999. Thus far, a majority of those suppliers contacted have responded that their systems and service delivery mechanisms are Year 2000 compliant or can be made so through currently available modifications. The Company plans to continue monitoring all third-party remediation efforts and to make contingency plans for the delivery of such services as necessary. 13 - The Year 2000 compliance status of other telecommunications carriers with which the Company's switching systems interconnect is not yet known. The Company is making inquiries with these carriers to determine their compliance status and expects to obtain the results of compliance tests during second quarter 1999, although there can be no assurance that carriers will supply this information. While the Company currently believes that it will be able to remediate and selectively test Company-owned systems in time to minimize any detrimental effect on its operations, there can be no assurance that such steps will be successful. Failure by the Company to timely and effectively remediate its systems, or the failure of critical vendors and suppliers and other telecommunications carriers to remediate affected systems, could have a material adverse impact on the Company's business, financial condition, results of operations and prospects. Because the impact of Year 2000 issues on the Company is materially dependent on the mitigation efforts of parties outside the Company's control, the Company cannot assess with certainty the magnitude of any such potential adverse impact. However, based upon risk assessment work conducted thus far, the Company believes that the most reasonably likely worst case scenario of the failure by the Company, its suppliers or other telecommunications carriers with which the Company interconnects to resolve Year 2000 issues would be an inability by the Company (i) to provide telecommunications services to the Company's customers, (ii) to route and deliver telephone calls originating from or terminating with other telecommunications carriers, (iii) to timely and accurately process service requests and (iv) to timely and accurately bill its customers. In addition to lost earnings, these failures could also result in a loss of customers due to service interruptions and billing errors, substantial claims by customers and increased expenses associated with Year 2000 litigation, stabilization of operations and executing mitigation and contingency plans. Contingency planning to maintain and restore services in the event of natural disasters, power failures and systems-related problems is a routine part of the Company's operations. The Company believes that such contingency plans will assist the Company in responding to the failure by outside service providers to successfully address Year 2000 issues. In addition, the Company is currently identifying and considering various Year 2000-specific contingency plans, including identification of alternate vendors and service providers and manual alternatives to system operations. These Year 2000-specific contingency plans are expected to be materially completed during the first quarter of 1999, but their review and development will continue throughout 1999. Although the total costs to implement the Plan cannot be precisely estimated, the Company anticipates spending approximately of $1.0 million. The costs incurred to date and estimated remaining costs are for outside consultants, software and hardware applications. These costs will be expensed as incurred, unless new systems are purchased that should be capitalized in accordance with generally accepted accounting principles. The Company does not separately track the internal costs incurred for the Year 2000 project, and such cost are principally the related payroll costs for its information systems group. Some of the costs represent ongoing investment in systems upgrades, the timing of which is being accelerated in order to facilitate Year 2000 compliance. In some instances, such upgrades will position the Company to provide more and better-quality services to its customers than they currently receive. The Company expects to fund these costs with cash provided by operations. Cost estimates and statements of the Company's plans discussed above are forward-looking statements that are derived using numerous assumptions of future events, many of which are outside the Company's control, including the availability and future cost of trained personnel and various other resources, third party modification plans, the absence of systems requiring remediation that have not yet been discovered, and other factors. 14 ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt as approximately 82% of the Company's debt is at fixed rates or effectively at fixed rates through the use of interest rate swaps. At March 31, 1999, the fair value of the Company's long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At March 31, 1999, the Company had long-term debt with a carrying value of approximately $367.2 million and estimated fair value of approximately $369.8 million. The market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 91.9 basis points in interest rates (ten percent of the rates currently offered to the Company). An increase in interest rates would result in approximately a $0.7 million decrease in fair value of the Company's long-term debt. The Company has entered into interest rate swaps to manage its exposure to fluctuations in interest rates of its variable rate debt. The fair value of these swaps was approximately $(0.2) million at March 31, 1999. The negative fair value indicates an estimated amount the Company would have to pay to cancel the contracts or transfer them to other parties. Pertaining to the Credit Facility, the Company used an interest rate swap agreement with a notional amount of $25 million to effectively convert a portion of its variable interest rate exposure to a fixed rate of 9.91%. The swap agreement expires on September 29, 2000. As to its Floating Rate Notes, the Company used two interest rate swap agreements, with notational amounts of $50 million and $25 million, respectively, to effectively convert its variable interest rate exposure to a fixed rate of 10.01% and 9.95%, respectively. Both swap agreements expire on November 1, 2001. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation and regulatory proceedings incidental to the conduct of its business, but the Company is not a party to any lawsuit or proceeding which, in the opinion of the Company, is likely to have a material adverse effect on the Company. On April 6, 1998, Latin World Communications, Inc. ("LWC") and Debra A. Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May ("May"), who is a former officer of ST Long Distance (a subsidiary of the Company), Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May, and ST Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota County, Florida. From March 1997 through early 1998, ST Long Distance provided long distance services to Plaintiffs in connection with the Plaintiffs' prepaid telephone card distribution business. On June 26, 1998, Plaintiffs filed an Amended Complaint. Plaintiffs assert claims against May, Siesta and ST Long Distance for breach of contract, fraud, misappropriation of trade secrets, overpayments to May, interference with business relationships, deceptive trade practices and trade slander. Plaintiffs seek approximately $1 million in damages plus an unspecified amount of punitive damages related to these claims as well as injunctive relief relating to certain other matters. The Company timely answered the Plaintiffs' Complaint and Amended Complaint, denied Plaintiffs' claims, asserted counterclaims against Plaintiffs, asserted cross-claims against May, and filed a Third Party Complaint against David Dwiggins ("Dwiggins"), a business partner of May. The Company intends to vigorously contest all of the Plaintiffs' claims, believes that it has no liability to the Plaintiffs and will actively pursue its claims against Plaintiffs, May and Dwiggins. While the outcome of such litigation cannot be predicted, the Company does not believe that such litigation, even if determined adversely to the Company, would have a material adverse effect on its financial condition or results of operations. ITEM 5. OTHER INFORMATION RECENT AND PENDING ACQUISITIONS The Company has recently completed the following RLEC acquisition: On April 30, 1999, the Company acquired Union. Union is headquartered in Hartford, South Dakota, approximately 12 miles west of Sioux Falls. Union operates approximately 3,300 access lines in eastern South Dakota. The Company purchased the stock of Union for approximately $16.5 million. In the year ended December 31, 1998, Union had revenues of $3.1 million. The Company has entered into an agreement to acquire one other unrelated rural local exchange carrier. The acquisition is expected to close in the second quarter of 1999. The purchase price is expected to be approximately $3.2 million and will be financed through existing operations. Each of the above-referenced acquisitions will be accounted for using the purchase method of accounting. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement, dated March 6, 1997 among the Company, MJD Partners, L.P. Carousel Capital Partners, L.P., Kelso Investment Associates V, L.P. and Kelso Equity Partners, V, L.P., as amended* 2.2 Stock Purchase Agreement dated as of March 28, 1996 among MJD Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen Investments, Inc., and Odin Telephone Exchange, Inc.* 2.3 Agreement and Plan of Merger dated as of March 27, 1998 by and among MJD Ventures, Inc., Utilities Acquisition Corp. and Utilities, Inc.* 2.4 Agreement and Plan of Merger, dated as of August 6, 1996 among MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and Erie Telephone Corporation* 2.5 Stock Purchase Agreement, dated as of September 24, 1996 among MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and Virginia L. Conlee* 2.6 Stock Purchase Agreement, dated as of June 24, 1997 among MJD Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter, C-R Communications, Inc., C-R Telephone Company and certain stockholders* 2.7 Agreement and Plan of Merger, dated as of September 2, 1997 among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic Telephone Corp.* 2.8 Agreement and Plan of Merger, dated December 31, 1997 among MJD Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg Telephone Company* 2.9 Agreement and Plan of Merger, dated as of March 12, 1998 among MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau Telephone Company and certain shareholders of Chouteau Telephone Company* 2.10 Stock Purchase Agreement, dated as of October 16, 1998 among MJD Service Corp., Carla J. Brownlee and Ravenswood Communications, Inc.* 3.1 Amended and Restated Certificate of Incorporation of the Company* 3.2 Amended and Restated By-Laws of the Company* 4.1 Indenture, dated as of May 5, 1998, between the Company and United States Trust Company of New York, as trustee, relating to the Company's $125,000,000 9 1/2% Senior Subordinated Notes due 2008 and $75,000,000 Floating Rate Callable Securities due 2008* 4.2 Form of Initial Fixed Rate Security* 4.3 Form of Initial Floating Rate Security* 4.4 Form of Exchange Fixed Rate Security* 4.5 Form of Exchange Floating Rate Security* 4.6 Form of Purchase Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein* 4.7 Registration Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein*
17
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.1 Credit Agreement dated as of March 30, 1998 among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company* 10.2 Form of B Term Note* 10.3 Form of C Term Note--Floating Rate* 10.4 Form of C Term Note--Fixed Rate* 10.5 Form of RF Note* 10.6 Form of AF Note* 10.7 Subsidiary Guarantee, dated as of March 30, 1998, by MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. for the benefit of Bankers Trust Company* 10.8 Pledge Agreement, dated as of March 30, 1998 among MJD Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., as pledgors, and Bankers Trust Company, as collateral agent and pledgee* 10.9 Capital Contribution Agreement, dated as of March 27, 1998 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners, L.P., MJD Communications, Inc. and Bankers Trust Company* 10.10 Stockholder's Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners V, L.P., the Company and MJD Partners, L.P.* 10.11 Registration Rights Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P., the Company and MJD Partners, L.P.* 10.12 Financial Advisory Agreements, dated as of July 31, 1997 among the Company, MJD Holdings Corp. and affiliates of each of Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P. and Carousel Capital Partners, L.P.* 10.13 Share Exchange Agreement, dated as of July 31, 1997 between the Company and MJD Partners, L.P.* 10.14 Contribution Agreement, dated as of July 31, 1997 between Meyer Haberman, Jack H. Thomas, Eugene B. Johnson and Bugger Associates, Inc. and MJD Partners, L.P.* 10.15 Contribution Agreement, dated as of July 31, 1997 between MJD Partners, L.P. and the Company* 10.16 Amended and Restated Class A Voting Common Stock Purchase Warrants of the Company* 10.17 Consulting Agreement, dated as of July 31, 1997 between MJD Partners, Inc. and Bugger Associates, Inc.* 10.18 Severance Agreement, dated as of July 31, 1997 between ST Enterprises, LTD and John P. Duda* 10.19 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Eugene B. Johnson* 10.20 Severance Agreement, dated as of July 31, 1997 between the Company and Walter E. Leach, Jr.*
18
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.21 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Jack H. Thomas* 10.22 Amendment to Credit Agreement dated as of July 30, 1998, among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company* 10.23 Form of Purchase Agreement and Subordination Agreement between Bankers Trust Company and the Company* 21 Subsidiaries of the Company* 27 Financial Data Schedule
- ------------------------ * Previously filed. (b) Reports on Form 8-K The Company did not file any current reports on Form 8-K during the quarter ended March 31, 1999 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MJD COMMUNICATIONS, INC. BY: /S/ WALTER E. LEACH, JR. ----------------------------------------- Walter E. Leach, Jr. SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY 20 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 12,240 0 19,125 353 0 34,760 320,912 176,970 443,773 28,457 200,000 0 0 18 8,077 443,773 32,828 32,828 2,780 26,456 0 0 9,334 (2,046) (231) (1,815) 0 0 0 (1,841) 0 0
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