Exhibit 99
Financial Statements of Virginia PCS Alliance, L.C. and
West Virginia PCS Alliance, L.C. for the year ended
December 31, 1999.
VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL report
December 31, 1999
Contents
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- ----------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2 - 3
Statements of operations 4
Statements of members' equity (deficit) 5
Statements of cash flows 6 - 7
Notes to financial statements 8 - 13
- ----------------------------------------------------------------------------
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 the years then ended. 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 the years then ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen LLP
Richmond, Virginia
February 17, 2000
1
VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS (Note 2) 1999 1998
- ----------------------------------------------------------------------------------------------
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
======================================
See Notes to Financial Statements.
2
LIABILITIES AND MEMBERS' EQUITY (DEFICIT) 1999 1998
- ----------------------------------------------------------------------------------------------------
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
======================================
3
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
1999 1998
- --------------------------------------------------------------------------------------------------------
Operating revenues:
Subscriber revenue $ 7,957,059 $ 1,738,543
Wholesale revenue 3,903,356 2,175,733
Equipment sales 1,516,240 730,356
------------------------------------------
13,376,655 4,644,632
------------------------------------------
Operating expenses:
Cost of goods sold 5,863,735 3,009,537
Maintenance and support 6,638,337 5,166,427
Depreciation and amortization 7,769,480 7,040,676
Customer operations 8,684,604 5,729,097
Corporate operations 2,517,056 2,111,408
------------------------------------------
31,473,212 23,057,145
------------------------------------------
Loss before interest and preferred dividends (18,096,557) (18,412,513)
Interest income (expense):
Interest income 262,094
Senior credit facility (6,390,325) (4,131,445)
Redeemable preferred interest (1,914,486) (1,870,988)
------------------------------------------
Net loss $ (26,139,274) $ (24,414,946)
==========================================
See Notes to Financial Statements.
4
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999 and 1998
Series B
Preferred Common
Membership Membership
Interests Interests Total
- -------------------------------------------------------------------------------------------
Balance as of January 1, 1998 $ 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)
======================================================
See Notes to Financial Statements.
5
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (26,139,274) (24,414,946)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 6,914,324 6,527,202
Amortization 855,156 513,474
Changes in assets and liabilities:
(Increase) in:
Accounts receivable (1,712,690) (845,973)
Inventories (3,724,576) (1,412,802)
Prepaid expenses (150,874) (128,132)
Increase (decrease) in:
Accounts payable, trade 515,676 (4,119,974)
Advance billings and customer deposits 105,755 98,099
Accrued interest (371,022) 132,406
Accrued dividends on Series A Preferred
Membership Interests 814,587 771,087
Other accrued liabilities (33,091) 192,993
-------------------------------------
Net cash used in operating activities (22,926,029) (22,686,566)
-------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (22,749,914) (34,826,975)
Increase in patronage capital certificates (466,833) -
Decrease in deferred charges 14,827 -
-------------------------------------
Net cash used in investing activities (23,201,920) (34,826,975)
-------------------------------------
Cash Flows From Financing Activities
Capital contributions, net 5,000,000 3,000,000
Advances from affiliates 639,973 1,600,599
Borrowings on revolving credit agreements, net 27,487,693 273,024
Proceeds from long-term borrowings 13,004,521 52,540,650
-------------------------------------
Net cash provided by financing activities 46,132,187 57,414,273
-------------------------------------
Net decrease in cash and cash equivalents 4,238 (99,268)
Cash and cash equivalents
Beginning 59,814 159,082
-------------------------------------
Ending $ 64,052 59,814
=====================================
(Continued)
6
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
1999 1998
- ------------------------------------------------------------------------------------------------------------------
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
======================================
Subordinated capital certificates acquired by long-term
borrowings $ 684,445 $ 2,765,302
======================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 7,064,868 $ 4,419,430
======================================
Cash payments for redeemable preferred interest $ 1,099,899 $ 1,099,896
======================================
See Notes to Financial Statements.
7
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.
8
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 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:
1999 1998
--------------------------------------
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
======================================
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.
9
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 and 1998 was 8.10% and 7.20%, 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.
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.
10
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:
2000 through 2002 $ -
2003 4,522,812
2004 11,307,029
Thereafter 115,648,176
-------------------
Total $ 131,478,017
===================
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 and 1998, accrued current dividends were
approximately $229,000 for each date and accrued "true up" dividends were
approximately $2,316,000 and $1,501,000, 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.
11
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 obligates 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 and 1998 was approximately $1,571,000 and $1,169,000,
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.
12
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, in accordance
with the service contract, engineering, construction, sales management, billing,
customer care and other general and administrative services to the Alliance in
the amount of $4,751,731 in 1999 and $3,015,260 in 1998. Of the total 1999
charges, $4,253,119 ($2,684,701 in 1998) was expensed and $498,612 ($330,559 in
1998) was capitalized. CFW Communications Company also provided certain
corporate services for the Alliance in the amount of $2,094,421 in 1999 and
$1,310,486 in 1998. All corporate services were expensed in 1999 and 1998.
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 and $1,639,595 in
1998.
13
9
WEST VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL REPORT
December 31, 1999
Contents
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- ----------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2 - 3
Statements of operations 4
Statements of members' equity (deficit) 5
Statements of cash flows 6 - 7
Notes to financial statements 8 - 11
- ----------------------------------------------------------------------------
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 the years then ended. 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 West Virginia PCS Alliance,
L.C. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ McGladrey & Pullen LLP
Richmond, Virginia
February 17, 2000
1
WEST VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS (Note 2) 1999 1998
- --------------------------------------------------------------------------------------------
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
======================================
See Notes to Financial Statements.
2
LIABILITIES AND MEMBERS' EQUITY (DEFICIT) 1999 1998
- ---------------------------------------------------------------------------------------
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
======================================
3
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Operating revenues:
Subscriber revenue $ 2,307,517 $ 46,293
Equipment sales 681,398 65,388
------------------------------------------
2,988,915 111,681
------------------------------------------
Operating expenses:
Cost of goods sold 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)
==========================================
See Notes to Financial Statements.
4
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999 and 1998
Common
Membership
Interests
- ------------------------------------------------------------------------------
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)
==================
See Notes to Financial Statements.
5
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
1999 1998
- --------------------------------------------------------------------------------------------------
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)
Increase in radio spectrum licenses (87,826) (3,994)
Increase in deferred charges (95) (10,803)
Increase in patronage capital certificates (141,580) -
--------------------------------------
Net cash used in investing activities (26,305,697) (14,011,836)
--------------------------------------
Cash Flows From Financing Activities
Increase in equity issuance costs - (2,232)
Capital contributions 1,421,000 -
Advances from affiliates (2,433,226) 3,426,045
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
--------------------------------------
Net decrease in cash and cash equivalents (2,134) (4,385,347)
Cash and cash equivalents
Beginning 10,254 4,395,601
--------------------------------------
Ending $ 8,120 $ 10,254
======================================
(Continued)
6
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
1999 1998
- ------------------------------------------------------------------------------------------------------------------
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
======================================
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
======================================
See Notes to Financial Statements.
7
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.
8
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 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:
1999 1998
--------------------------------------
Vendor Supported Loan $ 50,125,102 $ 8,237,389
Line of Credit 1,000,000 1,000,000
--------------------------------------
$ 51,125,102 $ 9,237,389
======================================
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.
9
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.
10
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 approximatley $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, in accordance
with the service contract, engineering, construction, customer care and other
services to the Alliance in the amount of $1,273,715 in 1999 and $933,585 in
1998. 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 and $553,225 in 1998. 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.
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.
11