Exhibit 99.3.1
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF
CFW COMMUNICATIONS
You should read "Management's Discussion and Analysis of Financial Condition
and Results of Operations of CFW Communications" and our consolidated financial
statements and notes thereto included in this document for a further explanation
of the financial data summarized below.
We have set forth below selected historical consolidated financial data:
. as of, and for the years ended, December 31, 1995, 1996, 1997, 1998 and
1999, derived from our audited consolidated financial statements and
notes thereto, which have been audited by McGladrey & Pullen, LLP; and
. as of, and for the three-month periods ended, March 31, 1999 and 2000,
derived from our unaudited condensed consolidated financial statements
and notes thereto, which, in the opinion of our management, include all
adjustments necessary for a fair presentation of the financial position
and results of operations for these periods. Operating results for three-
month periods are not necessarily indicative of results that might be
expected for the entire fiscal year.
1
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(in thousands, except ratio data and operating activities)
(unaudited)
Statement of Operations:
Operating revenues:
Wireline
communications........ $ 29,196 $ 32,480 $ 34,495 $ 37,597 $ 44,110 $ 9,802 $ 13,875
Wireless
communications........ 8,427 10,894 13,434 17,624 21,692 5,049 5,880
Directory assistance... 4,706 6,400 10,533 12,949 12,104 2,874 3,332
Other communications
services.............. 1,836 2,103 2,267 2,942 4,028 1,044 856
-------- -------- -------- -------- -------- -------- --------
Total operating
revenues............. 44,165 51,877 60,729 71,112 81,934 18,769 23,943
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Cost of sales.......... 1,075 1,929 1,719 4,426 8,143 1,752 2,367
Maintenance and
support............... 8,392 9,528 9,660 10,837 16,609 3,296 5,877
Depreciation and
amortization.......... 6,438 8,410 9,196 10,504 12,623 2,811 3,706
Asset impairment
charge................ -- -- -- -- 3,951 -- --
Customer operations.... 9,275 11,156 14,283 16,223 19,870 4,567 5,361
Corporate operations... 5,563 5,439 6,459 6,496 7,216 1,650 2,359
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............. 30,743 36,462 41,317 48,486 68,412 14,076 19,670
-------- -------- -------- -------- -------- -------- --------
Operating income........ 13,422 15,415 19,412 22,626 13,522 4,693 4,273
Other income
(expenses):
Other expenses,
principally interest.. (1,269) (686) (855) (623) (905) (212) (482)
Equity loss from PCS
investees:
VA PCS Alliance........ -- -- (834) (5,075) (5,436) (1,359) (1,523)
WV PCS Alliance........ -- -- -- (1,391) (5,929) (972) (2,144)
Equity income from
other wireless
investees............. 840 450 74 198 179 53 42
Loss on write-down of
investment............ -- -- (2,808) (1,010) -- -- --
Gain on sale of tower
asset and
investments........... 927 -- 5,077 -- 8,318 -- --
-------- -------- -------- -------- -------- -------- --------
13,920 15,179 20,066 14,725 9,749 2,203 166
Income taxes............ 5,006 5,162 7,398 5,639 2,868 774 44
-------- -------- -------- -------- -------- -------- --------
Income before minority
interests.............. 8,914 10,017 12,668 9,086 6,881 1,429 122
Minority interests...... (420) (467) (447) (578) (388) (89) (74)
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 8,494 $ 9,550 $ 12,221 $ 8,508 $ 6,493 $ 1,340 $ 48
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data (at
period end):
Cash and cash
equivalents........... $ 5,265 $ 3,004 $ 1,224 $ 43 $ 199 $ 42 $ 311
Securities and
investments........... 29,472 20,597 16,874 10,981 39,109 16,449 36,949
Property, plant and
equipment, net........ 81,093 90,034 95,671 103,662 125,881 109,908 129,148
Total assets........... 143,251 142,400 147,743 154,334 218,002 167,438 220,609
Long-term debt......... 20,000 24,000 24,606 19,774 37,685 28,593 44,362
Shareholders' equity... 89,242 86,002 90,456 93,410 116,184 94,910 112,704
Other Financial Data:
EBITDA................. 19,859 23,825 28,608 33,130 30,096 7,504 7,979
Cash flow provided by
(used in):
Operating activities... 13,014 19,338 18,481 33,495 31,547 6,260 5,712
Investing activities... (9,093) (20,359) (13,953) (24,292) (42,843) (13,659) (11,157)
Financing activities... (7,215) (1,240) (6,307) (10,385) 11,452 7,398 5,558
Ratio of earnings to
fixed charges......... 6.9x 7.8x 7.7x 7.9x 7.0x 7.6x 4.6x
Operating Statistics (at
period end):
PCS subscribers........ -- -- -- 12,970 43,299 19,100 54,275
Internet subscribers... -- -- 4,114 7,450 45,212 10,518 54,100
CLEC access lines
installed............. -- -- -- 428 5,336 910 8,934
ILEC access lines
installed............. 32,893 34,106 35,576 36,746 37,924 37,103 38,254
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
CFW COMMUNICATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Consolidated Financial and Operating Data of CFW
Communications" and other financial statements and the notes thereto included
elsewhere in this document. Much of the discussion in this section involves
forward-looking statements. Our actual results may differ significantly from
the results suggested by these forward-looking statements for the reasons set
forth in this document.
We are significantly expanding the scope of the geographic markets that we
serve and focusing our growth efforts on our core communications services,
primarily digital PCS services, Internet access, including dedicated, high-
speed DSL and dial-up services, high-speed data transmission and local
telephone services. We are currently in the process of:
. acquiring the wireless licenses, assets and operations of Richmond-
Norfolk PCS;
. merging with R&B Communications, an integrated communications provider in
a geographic market contiguous to ours, which will give us a controlling
interest in the Virginia Alliance and the West Virginia Alliance;
. acquiring certain PCS licenses currently owned by AT&T that will add 2.5
million POPs in certain markets in Pennsylvania; and
. disposing of our wireless analog operations, directory assistance
operations and communications tower sites.
Historically, we have derived much of our revenues and EBITDA from our ILEC.
Additionally, for 1999, our network operations and wireless operations
generated positive EBITDA and our Internet operations were EBITDA positive for
the fourth quarter of 1999 and the first quarter of 2000. For the year ended
December 31, 1999 and the three months ended March 31, 2000, our EBITDA was
$30.1 million and $8.0 million, respectively. After giving effect to the
Transactions, our EBITDA would have been $.2 million and negative $.6 million,
respectively. As a result of our increasing focus on and growth in digital
PCS, Internet access and CLEC services, we expect an increasing portion of our
operating revenues and EBITDA to be generated by businesses other than our
ILEC operations. These newer businesses have generated lower or negative
EBITDA and operating margins due to start-up costs associated with expansion
into new markets and introduction of new service offerings. As we expand our
markets, start-up and acquire new businesses and introduce new products, we
expect to continue to generate lower or negative EBITDA and operating margins.
The Transactions will have a significant ongoing impact on our results of
operations and our liquidity. Richmond-Norfolk PCS and the Alliances each have
generated operating losses and negative cash flows from operations since
inception. Although R&B Communications has generated operating income and
positive cash flows from operations, the Transactions as a whole will
substantially decrease our operating income and cash flows from operations
over the near term. During the second half of 2000, we expect to generate
negative EBITDA and significant operating losses as a result of depreciation,
amortization and transaction costs. The Transactions will also substantially
increase our interest expense and our discretionary capital expenditures.
Upon completion of the Transactions, we expect to recognize between $10
million and $12 million in financing related, non-recurring charges. These
charges include bridge financing commitment fees, cash payments and the value
of warrants issued for bridge financing commitments and prepayment premiums
associated with refinancing the indebtedness of the Alliances.
In connection with the Transactions, we expect to record goodwill and PCS
license values in the range of $520 million to $540 million, in the aggregate,
which will be amortized over 20 years and 40 years, respectively. Upon
completion of an appraisal to support the purchase price allocations, these
amounts will be reallocated to
1
the appropriate tangible and intangible asset categories and amortized over
their respective lives. Additionally, debt associated with the Transactions
and debt to support capital expansion plans and operating and interest costs
over the next 18 months will result in total debt of between approximately
$600 million and $650 million. These higher debt levels, coupled with an
anticipated increase in our blended interest rate, will result in interest
costs of between approximately $74 million and $80 million on an annualized
basis. In addition to the Transactions, we are disposing of our directory
assistance business and our RSA 6 analog cellular business. We expect after-
tax gains from sales of these businesses to be approximately $57 million in
2000. Operating results and financial condition which give effect to the
Transactions are included elsewhere in this document.
Price reductions have occurred in most segments of the communications
industry and we expect this to continue. As noted above, this trend affects
our ability to maintain EBITDA margins experienced historically. Often, these
pricing pressures result in rate plans with more minutes and lower per minute
rates.
We have also included in this document selected financial information and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for Richmond-Norfolk PCS and R&B Communications. We have included
the same information for the Virginia Alliance and the West Virginia Alliance,
both of which will be consolidated in our financial statements after our
merger with R&B Communications. Historically, the Alliances were accounted for
under the equity method of accounting. Percentage calculations presented in
each entity's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" have been calculated based upon actual, not rounded,
results.
Overview
We are a leading regional integrated communications provider offering a
broad range of wireless and wireline products and services to business and
residential customers in Virginia and West Virginia. We own our own digital
PCS licenses, fiber optic network, switches and routers, which enable us to
offer our customers end-to-end connectivity in many of the regions we serve.
Our facilities-based approach allows us to control service quality and
generate operating efficiencies. As of March 31, 2000, after giving effect to
the Transactions, we had approximately 140,700 wireless subscribers and
approximately 63,800 installed ILEC and CLEC access lines.
Revenues
Our revenues are generated from the following categories:
. wireless communications, including cellular, paging, voice mail and
wireless cable, which consists primarily of video services;
. wireline communications, including telephone revenues, fiber optic
network usage for our carrier's carrier services, Internet, CLEC, long
distance and wireline cable revenues generated from cable television;
. directory assistance revenues from providing directory listings for
customers seeking telephone numbers in the mid-Atlantic states; and
. other communications services revenues, including revenues from our sale
and lease of communications equipment and security alarm monitoring and
installation and rental of property and equipment, primarily to the
Alliances.
Operating Expenses
Our operating expenses are generally grouped in the following categories:
. cost of sales, which represents our cost of purchasing PCS handsets. We
sell these to our customers at a price below our cost. Previously, we
offset this discount against our revenues. Prior periods have been
conformed to the current presentation.
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. maintenance and support expenses, including costs related to specific
property and equipment, and charges for using other carriers' networks,
tower rental expenses, and repair and maintenance expenses, as well as
indirect costs such as engineering and general administration of property
and equipment;
. depreciation and amortization, including amortization of goodwill from
acquired assets and capital outlays to support continued business
expansion;
. asset impairment charges, if applicable;
. customer operations expenses, including marketing, product management,
product advertising, sales, publication of a regional telephone
directory, customer services and directory services; and
. corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information management, human
resources and other general and administrative expenses.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest income
and expense, dividend income, equity income from our 22% limited partnership
interest in RSA 5, equity income or loss from the Virginia Alliance and West
Virginia Alliance, gain on sale of investments and assets and loss on write-
down of investments. Our income statements refer to RSA 5 as the "other
wireless investees" and to the Alliances as the "PCS investees."
Income Taxes
Our income tax liability and effective tax rate increases or decreases based
upon changes in a number of factors, including our pre-tax income or loss,
losses sustained by the Alliances, net operating losses and related
carryforwards, alternative minimum tax credit carryforwards, gain or loss on
the sale of assets and investments, write-down of assets and investments, non-
deductible amortization, tax and employment credits, and charitable
contributions and other tax deductible amounts.
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Overview
EBITDA increased $.5 million, or 7%, from $7.5 million for the three months
ended March 31, 1999 to $8.0 million for the three months ended March 31,
2000. Operating income decreased $.4 million, or 9%, from $4.7 million for the
three months ended March 31, 1999 to $4.3 million for the three months ended
March 31, 2000.
These results reflect customer growth from our CLEC, Internet and RSA 6
analog and digital operations, with customers from these services totaling
93,900 as of March 31, 2000, a 55,900, or 147%, customer increase from March
31, 1999. This growth came from internal growth and expansion throughout our
markets in PCS, Internet and CLEC and from Internet acquisitions. EBITDA
increased due to improved cash flow from Internet and directory assistance
partially offset by CLEC start-up losses, which were significant in our new
West Virginia markets. Operating income decreased from the prior year's
comparable quarter due to higher levels of depreciation and amortization
generated from Internet acquisitions and from capital investments in our
growth businesses and underlying supporting infrastructure.
Net income for the three months ended March 31, 2000 was $.05 million, which
included a $3.7 million loss, $1.9 million loss after-tax, relating to our
equity share of losses from our investments in the Alliances, which provide
PCS service throughout our Virginia and West Virginia marketplace.
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Net income for the three months ended March 31, 1999 was $1.3 million, which
included a $2.3 million loss, $1.4 million loss after-tax, relating to our
share of losses from our investments in the Alliances.
Operating Revenues
Operating revenues increased $4.6 million, or 27%, from $17.0 million for
the three months ended March 31, 1999 to $21.6 million for the three months
ended March 31, 2000.
Wireless Communications Revenues. Wireless communications revenues increased
$.9 million, or 18%, from $5.0 million for the three months ended March 31,
1999 to $5.9 million for the three months ended March 31, 2000.
. Digital and Analog Cellular, Paging and Voicemail Revenue. Revenues for
digital and analog cellular, paging, and voicemail increased $.9 million,
or 21%, from $4.4 million for the three months ended March 31, 1999 to
$5.2 million for the three months ended March 31, 2000. The increase was
primarily attributable to customer growth. We had 46,600 combined
digital, analog cellular and paging customers as of March 31, 2000, which
represented a 14% growth in the number of wireless customers from the
comparable quarter of 1999. Average revenue per subscriber, or ARPU,
calculated on the total of access, airtime and toll revenues, increased
slightly from $29.07 for the three months ended March 31, 1999 to $29.56
for the period ended March 31, 2000, due to a growing percentage of
digital PCS subscribers as compared to analog subscribers. Our ARPU is
approximately 25% below Virginia Alliance ARPUs because we have analog
subscribers, which have lower ARPUs. Access, airtime and roaming revenues
increased $.7 million consistent with customer growth. Miscellaneous
revenue, including directory assistance charges, handset insurance
revenue and late fees, increased $.2 million.
. Wireless Cable Revenues. Wireless cable revenues have remained constant
for the three months ended March 31, 2000, as compared to the three
months ended March 31, 1999 due to the refocusing of our marketing
efforts on higher growth PCS, CLEC and Internet businesses.
Wireline Communications Revenues. Wireline communications revenues increased
$4.1 million, or 42%, from $9.8 million for the three months ended March 31,
1999 to $13.9 million for the three months ended March 31, 2000.
. Telephone Revenues. Telephone revenues, which include local service,
access and toll services, directory advertising and advanced calling
feature revenues increased $.3 million, or 3% from $7.7 million for the
three months ended March 31, 1999 to $8.0 million for the three months
ended March 31, 2000. The increase was due to an increase in access
minutes of 13% and in access lines of 3%.
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber optic
network usage for carrier's carrier services and CLEC operations increased
$.8 million, or 69%, from $1.2 million for the three months ended March 31,
1999 to $2.0 million for the three months ended March 31, 2000. This
increase was primarily due to a $.9 million increase in CLEC revenues offset
by a $.1 million decrease in long-haul revenues as a result of price
decreases. Our CLEC operations recognized reciprocal compensation of
approximately $.6 million in 1999 and had a net receivable for reciprocal
compensation as of March 31, 2000 of $.3 million. As of March 31, 2000, CLEC
installed access lines totaled 8,900, an increase of 8,000 lines from March
31, 1999.
. Internet Revenues. Revenues from Internet services increased $3.0
million, or 592%, from $.5 million for the three months ended March 31,
1999 to $3.5 million for the three months ended March 31, 2000. This
revenue growth was attributable to acquisitions and internal customer
growth. This growth in Internet services comprised the largest single
component of wireline revenue growth in the three months ended March 31,
2000 as Internet and DSL customers grew to 54,400 as of March 31, 2000,
an increase of 43,900 customers from March 31, 1999. Internet customer
growth from acquisitions accounted for 33,500 of this total, and 10,400
was from internal growth.
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. Wireline Cable Revenues. Wireline cable revenues remained constant for
the three months ended March 31, 2000, as compared to the three months
ended March 31, 1999 due to a decrease in the level of resources deployed
to support these operations.
Directory Assistance Revenues. Directory assistance revenues increased $.4
million, or 14%, from $2.9 million for the three months ended March 31, 1999
to $3.3 million for the three months ended March 31, 2000. Total call volumes
decreased over the same period by 20% due to the impact of competitors'
national directory assistance plans. Total revenues increased despite this
call volume decline due to a greater mix of higher priced national directory
assistance calls. Additionally, we entered into a new contract with AT&T in
early 2000 which included higher pricing for the traditional directory
assistance services. We have agreed to sell our directory assistance business
to telegate AG pursuant to a stock purchase agreement dated May 17, 2000. Upon
completion of this sale, we will cease generating directory assistance
revenues.
Other Communications Services Revenues. Other communications services
revenues decreased $.2 million, or 18%, from $1.1 million for the three months
ended March 31, 1999 to $.9 million for the three months ended March 31, 2000.
Revenues from phone systems sales and services decreased $.2 million due to a
shift in marketing and sales efforts to our core businesses. Our revenues from
rentals, primarily for company owned assets, which are being used by the
Alliances, remained unchanged.
Operating Expenses
Total operating expenses increased $5.6 million, or 40%, from $14.1 million
for the three months ended March 31, 1999 to $19.7 million for the three month
period ended March 31, 2000. This increase was attributable to a $4.9 million
increase in the operating expenses of the wireline businesses. Wireless
businesses, directory assistance and other communication services increased by
a total of $.7 million. Within the wireline business, Internet and network
comprised $3.2 million and $1.4 million, respectively, of the total increase.
Approximately $2.9 million of the Internet increase came from operations
acquired after the first quarter of 1999. Additionally, the fiber optic
network and CLEC operating expenses increased as a result of operating
expenses associated with increased fiber build-out and start-up costs, such as
higher network access charges, repair and maintenance costs, and engineering
and operations support, associated with launching or preparing to launch CLEC
operations in new Virginia and West Virginia markets.
Cost of Sales. Cost of sales increased $.6 million, or 35%, from $1.8
million for the three months ended March 31, 1999 to $2.4 million for the
three months ended March 31, 2000. The access related costs increased $.5
million due to the significant increase in the related subscriber base. The
remaining $.1 million increased due to the increase in equipment cost of
sales.
Maintenance and Support Expense. Maintenance and support expense increased
$2.6 million, or 79%, from $3.3 million for the three months ended March 31,
1999 to $5.9 million for the three months ended March 31, 2000. This increase
was primarily attributable to a $1.8 million increase in expenses from
Internet acquisitions, most of which occurred in the second half of 1999.
Additionally, the increase was due to a $.7 million increase resulting from
CLEC rollout and engineering and operations support growth. Tower leasing
costs are expected to increase in future periods as a result of selling towers
owned by us and the Alliances in March and April 2000. In addition, upon
completion of the Transactions, we expect our tower rental expenses to further
increase after the planned disposition of towers obtained in the Transactions.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $.9 million, or 32%, from $2.8 million for the three months ended
March 31, 1999 to $3.7 million for the three months ended March 31, 2000. This
increase was due to an increase in our property and equipment of approximately
19%, from $153 million as of March 31, 1999 to $182 million as of March 31,
2000. In addition, goodwill from Internet acquisitions increased by $12.5
million, from $14.3 million as of March 31, 1999 to $26.8 million as of March
31, 2000. Depreciation and amortization as a percent of the related assets
increased from 1.7% for three months ended March 31, 1999 to 1.8% for the
three months ended March 31, 2000. This increase was due to a
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shift in the composition of the asset base to network plant and equipment
which carry shorter average lives and due to the goodwill from Internet
acquisitions occurring in 1999 and 2000, which are amortized over 10 years. As
a result of our recent sale of 151 cell towers, we expect a decrease in our
depreciation expenses. As a result of the Transactions, we expect our
amortization of goodwill to increase significantly in the future.
Customer Operations Expense. Customer operations expense increased $.8
million, or 17%, from $4.6 million for the three months ended March 31, 1999
to $5.4 million for the three months ended March 31, 2000. Internet operations
increased $.7 million, which included $.3 million from acquisitions, and the
network and CLEC operations increased $.4 million. The growth in this area
relates primarily to marketing and sales activities and customer care
operations growth associated with the related revenue growth. These increases
were partially offset by a decrease in directory assistance customer
operations expense of $.2 million. This decreased due to the lower call volume
and the absence of start-up costs incurred in the three months ended March 31,
1999 associated with the national database services and the Winchester,
Virginia call center which was opened in the second quarter of 1999.
Corporate Operations Expense. Corporate operations expense increased $.7
million, or 41%, from $1.7 million for the three months ended March 31, 1999
to $2.4 million for the three months ended March 31, 2000. Of this increase,
$.3 million related to acquired Internet operations and the remaining $.4
million represented growth in the corporate infrastructure associated with the
significant customer growth and our geographic expansion.
Other Income (Expenses)
Total other income (expenses), which was a net expense in the three month
periods ended March 31, 1999 and 2000, increased $1.6 million, or 65%, from $2.5
million for the three months ended March 31, 1999 to $4.1 million for the three
months ended March 31, 2000.
Other expenses, principally interest, increased $.3 million, or 150%, from
$.2 million for the three months ended March 31, 1999 to $.5 million for the
three months ended March 31, 2000. The increase in interest expense is due to
additional borrowings under our lines of credit of $15.8 million. As a result
of the Transactions, we expect our interest expense to significantly increase
in the future.
Our share of losses from the Virginia Alliance increased $.1 million, or 7%,
from $1.4 million for the three months ended March 31, 1999 to $1.5 million
for the three months ended March 31, 2000. Our share of losses from the West
Virginia Alliance, which commenced operations in the latter part of the third
quarter of 1998 and expanded significantly in the second quarter of 1999,
increased $1.1 million, or 110%, from $1.0 million for the three months ended
March 31, 1999 to $2.1 million for the three months ended March 31, 2000.
Combined customer growth for the Alliances during the three months ended
March 31, 2000 totaled 11,000 customers. This compares to combined customer
growth in the three months ended March 31, 1999 of 6,200 customers. Equity
income from RSA 5 was not material for the three months ended March 31, 1999
and 2000. Further information concerning the Alliances is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for each respective Alliance. After completion of our merger with
R&B Communications, the Alliances will be accounted for on a consolidated
basis.
Income Taxes
Income taxes decreased $.7 million, or 88%, from $.8 million for the three
months ended March 31, 1999 to $.04 million for the three months ended March
31, 2000. This increase was due to the difference in the pre-tax income for
the comparable periods. Additionally, the effective rate changed from 37% for
the three months ended March 31, 1999 to 48% for the three months ended March
31, 2000. The higher effective tax rate results from non-deductible goodwill
from 1999 Internet acquisitions being added back to income for income tax
purposes.
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1999 Compared to 1998
Overview
EBITDA decreased $3.0 million, or 9%, from $33.1 million in 1998 to $30.1
million in 1999. Operating income decreased $9.1 million, or 40%, from $22.6
million in 1998 to $13.5 million in 1999.
The total number of customers from our higher growth segments increased more
than four times. The combined digital PCS customers within our RSA 6 service
area, Internet customers, and CLEC customers increased from 12,200 to 64,500
for the years ending 1998 and 1999, respectively. EBITDA decreased from the
prior year due to start-up costs associated with expansion into new markets
and new service offerings. In addition to such costs relating to internal
growth, increased depreciation and amortization from acquisition activity
further lowered operating income in 1999. Also, we recognized a $4.0 million
asset impairment charge in 1999. Finally, 1999 directory assistance call
volume declines coupled with start-up costs associated with the roll-out of
national directory products resulted in a decline in operating cash flow and
operating income from directory assistance of $1.5 million and $1.8 million,
respectively, from that of the prior year.
Net income for 1999 was $6.5 million, which included non-recurring items
totaling $8.3 million, $5.2 million after tax, of gains from the sale of our
investment in American Telecasting, Inc, or ATEL, and a tower sale and a $4.0
million, $1.5 million after tax, asset impairment charge. This charge related
to a $1.3 million write-off of our prior billing software and a $2.7 million
charge related to certain wireless analog cable equipment.
Net income for 1998 was $8.5 million, including a non-recurring charge of
$1.0 million, $.6 million after tax, loss on the write-down of our investment
in ATEL and equity losses from the Alliances of $6.5 million, $4.0 million
after tax.
Operating Revenues
Operating revenues increased $10.8 million, or 15%, from $71.1 million in
1998 to $81.9 million in 1999. The increase was the result of strong customer
growth in our strategic business segments.
Wireless Communications Revenues. Wireless communications revenues increased
$4.1 million, or 23%, from $17.6 million in 1998 to $21.7 million in 1999.
. Digital and Analog Cellular, Paging and Voicemail Revenues. Revenues for
digital and analog cellular, paging and voicemail increased $4.2 million,
or 29%, from $14.7 million in 1998 to $18.9 million in 1999. These
increases resulted primarily from digital and analog cellular access,
toll, and roaming associated with 24% customer growth over 1998 and an
increase in outside roaming minutes from other carriers' customers of 33%
over 1998. ARPU increased 4%, from $28.49 in 1998 to $29.55 in 1999 due
to a growing percentage of digital PCS subscribers as compared to analog
subscribers.
. Wireless Cable Revenues. Wireless cable revenues decreased $.2 million,
or 7%, from $3.0 million in 1998 to $2.8 million in 1999. The decline in
revenue was due to the limitation of both marketing efforts and
installations to multiple-dwelling units in an effort to contain costs
and capital associated with analog cable video services in this business
segment.
Wireline Communications Revenues. Wireline communications revenues increased
$6.5 million, or 17%, from $37.6 million in 1998 to $44.1 million in 1999.
. Telephone Revenues. Telephone revenues increased $.8 million, or 3%, from
$30.5 million in 1998 to $31.3 million in 1999. These increases were
primarily due to access line growth of 3% and revenue growth from
advanced calling features of 7% in 1999. These increases were partially
offset by slight decreases in toll and access rates.
7
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber optic
network usage and CLEC operations increased $1.6 million, or 40%, from
$4.0 million in 1998 to $5.6 million in 1999. This increase was the
result of increased network usage and the roll-out of CLEC operations in
four markets in the second half of 1998 and four additional markets in
late 1999.
. Internet Revenues. Revenues from Internet services increased $4.2
million, or 300%, from $1.4 million in 1998 to $5.6 million in 1999. This
growth in Internet revenues comprised the largest single component of
.wireline revenue growth in 1999 as we added a total of 37,700
subscribers during 1999, with total subscribers exceeding 45,200 by year-
end. This was achieved from customer growth within our existing markets
and growth through acquisitions. Internet pricing has remained relatively
constant during 1999 and 1998.
. Wireline Cable Revenues. Wireline cable revenues have remained relatively
constant from 1998 to 1999, due to a decrease in the level of resources
deployed to support these operations.
Directory Assistance Revenues. Directory assistance revenues decreased $.9
million, or 7%, from $13.0 million in 1998 to $12.1 million in 1999. Call
volumes declined 18% from 65.4 million calls in 1998 to 53.6 million calls in
1999. This was attributable to the impact of "call around plans" offered by
large competitors compared to traditional directory assistance traffic being
handled at our call centers without sufficient new business to off set the
continued base business decline. Although volume declined 18% in 1999, the
revenue decline was only 7%, due to the fact that an increasing percentage of
the total call volume is from national directory assistance offerings that
include higher service levels and higher unit prices.
Other Communications Services Revenues. Other communications services
revenues increased $1.1 million, or 38%, from $2.9 million in 1998 to $4.0
million in 1999. This increase was due primarily to an increase in rental
charges to the Alliances for additional assets used by the Alliances but owned
by us.
Operating Expenses
Total operating expenses increased $19.9 million, or 41%, from $48.5 million
in 1998 to $68.4 million in 1999. Excluding the asset impairment charges
discussed below, total operating expenses increased $16.0 million, or 33%,
from $48.5 million in 1998 to $64.5 million in 1999. Of this increase, $9.5
million is from the wireline businesses, $8.4 million of which is from fiber
optic network usage, CLEC and Internet services and $1.1 million is from other
wireline related expenses. The $8.4 million increase is comprised primarily of
$2.4 million from Virginia Internet acquisitions, $2.1 million primarily from
Internet acquisition expenses related to our expansion into West Virginia,
$2.5 million from CLEC rollout and expansion and $1.4 million from other
related expenses. Operating expenses increased in wireless communications,
directory assistance and other communications services by $4.5 million, $.9
million, and $1.0 million, respectively. Increases in wireless communications
operating expenses included variable expenses, such as handset cost of sales,
sales commissions, customer care, network access, and selling and advertising
expenses. These expenses were consistent with revenue growth. Wireless
communications access, selling and advertising expenses, as well as retail
store and customer care costs, increased $1.3 million. The directory
assistance increase was driven by transition related costs as this business
transitioned to a structure to support significant growth in national
directory assistance offerings. Lastly, other communications services
operating costs and depreciation and amortization increased $1.0 million.
These increases pertained to the increases in corporate assets owned by us and
the related operating costs which were used by the Alliances, as discussed in
the operating revenues section above, and increases in corporate
infrastructure costs.
Cost of Sales. Cost of sales increased $3.7 million, or 84%, from $4.4
million in 1998 to $8.1 million in 1999. Of this increase, $2.2 million
relates to increased costs associated with network access, airtime and toll
fees from our wireless operations. Additionally, equipment cost of goods sold
increased $1.5 million from equipment subsidies which increased from $125.16
per unit in 1998 to $165.78 per unit in 1999. The increase in the per unit
charge reflects a higher percentage of digital versus analog sales.
8
Maintenance and Support Expenses. Maintenance and support expenses increased
$5.8 million, or 54%, from $10.8 million in 1998 to $16.6 million in 1999. Of
this total increase, $1.6 million relates to fiber optic network and CLEC
services and $2.3 million relates to Internet services. These increases
represent network and other plant related expense increases due to the
geographic expansion and new costs from the acquired Internet businesses. The
remaining $1.9 million was spread among all the other business segments.
Increases in these segments were due to customer growth and start-up related
costs.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $2.1 million, or 20%, from $10.5 million in 1998 to $12.6 million in
1999. Of this increase, $1.0 million related to Internet services, $.5 million
of which represents amortization of goodwill from acquired assets and $.5
million represents additional equipment and improvements to the related
network plant and equipment. Other communications services depreciation
increased $.5 million and telephone depreciation increased $.4 million. Other
communications services depreciation increased primarily due to an increase in
corporate facilities and back-office software upgrades. In addition,
depreciation increased due to digital switching upgrades.
Asset Impairment Charge. In addition to normal depreciation and amortization
expense, we recognized a $4.0 million asset impairment charge, including a
$2.7 million write-down of certain wireless analog cable assets and a $1.3
million write-off of software assets from an abandoned billing system due to a
conversion to a single billing platform.
Customer Operations Expense. Customer operations expense increased $3.7
million, or 23%, from $16.2 million in 1998 to $19.9 million in 1999. Retail
store costs and customer care costs increased $1.1 million and $1.0 million,
respectively, in 1999. This increase represents the geographic expansion of
our retail presence with the opening of five stores in each of 1999 and 1998
and increase in the customer care costs to cover the significant new customer
additions and the related larger overall customer base. In addition, directory
assistance customer operations increased $.6 million, or 8%, despite a lower
call volume. This is due to start-up and training costs associated with the
shift to the national directory assistance products. In addition to the start-
up costs, these product offerings have a higher level of service and related
costs.
Corporate Operations Expense. Corporate operations expense increased $.7
million, or 11%, from $6.5 million in 1998 to $7.2 million in 1999. This was
due to acquired Internet businesses and other corporate infrastructure
increases necessary to support our overall growth.
Other Income (Expenses)
Total other income (expenses), which was a net expense for 1998 and 1999,
decreased $4.1 million, or 52%, from $7.9 million in 1998 to $3.8 million in
1999.
Other expenses, principally interest, increased $.3 million, from $.6
million in 1998 to $.9 million in 1999. The increase in interest expense is
due to additional borrowings under our lines of credit of $17.0 million.
Equity income from RSA 5, our analog cellular limited partnership interest,
remained unchanged in 1999 compared to 1998. Equity loss from the Alliances
increased $4.9 million, or 75%, from $6.5 million in 1998 to $11.4 million in
1999. Including the Virginia Alliance wholesale PCS subscribers from our RSA 6
service area, the Alliances' subscribers increased 30,400, or 236%, from
12,900 at December 31, 1998 to 43,300 at December 31, 1999. Further
information concerning the Alliances is contained in "Management's Discussions
and Analysis of Financial Condition and Results of Operation" for each
respective Alliance. After completion of our merger with R&B Communications,
the Alliances will be accounted for on a consolidated basis.
We recognized a $1.0 million impairment loss on our investment in ATEL at
December 31, 1998. We concluded at that time that the decline in value was
other than temporary given recent trading prices in the
9
common stock and ATEL's financial condition and continued financial losses.
However, in 1999, ATEL was purchased by Sprint Corp. and the investment was
sold for a gain over the carrying value after write-downs of $7.6 million.
Additionally, we sold our tower in Richmond, Virginia for a gain of $.7
million.
Income Taxes
Income taxes decreased $2.7 million, or 48%, from $5.6 million in 1998 to
$2.9 million in 1999. There were two primary factors causing this change: (1)
a decrease in the pre-tax income of $4.8 million and (2) a change in the
effective tax rate from 40% in 1998 to 31% in 1999. The change in the
effective tax rate was due to charitable contributions deductible for tax
purposes at appreciated market values which were $1.5 million greater than the
cost basis. In addition to this, we received tax credits totaling $.5 million
for rehabilitation of a historic building in Winchester, Virginia, the
location of our new directory assistance call center, and employment credits
for exceeding certain new hire levels in our directory assistance business.
1998 Compared to 1997
Overview
EBITDA increased $4.5 million, or 16%, from $28.6 million in 1997 to $33.1
million in 1998. Operating income increased $3.2 million, or 17%, from $19.4
million in 1997 to $22.6 million in 1998.
Strong customer growth in our PCS and analog cellular and paging operations
of 30% and 33%, respectively, fueled the growth in our wireless operations.
Operating results from our wireline operations reflect continued strong
contributions from our telephone operations, led by 3% growth in access lines,
11% growth in access minutes and continued growth in calling features, an over
80% increase in Internet customers and effective cost control. Results from
our directory assistance operations reflect the annualized revenue stream from
1997 contract expansions and operating efficiencies. Start-up costs associated
with expansion into new markets and new service offerings reduced the year-to-
year increases.
Net income for 1998 was $8.5 million, which included a $1.0 million, $.6
million after tax, loss on the write-down of our investment in ATEL and equity
losses from the Alliances of $6.5 million, $4.0 million after tax.
Net income for 1997 was $12.2 million, which included a $5.1 million gain,
$3.1 million after tax, on the sale of our investment in the Roanoke MSA
Cellular Partnership, a $2.8 million, $1.7 million after tax, loss on write-
down of our investment in ATEL and a $.8 million loss, $.5 million after tax,
from our equity share of losses from the Alliances.
Operating Revenues
Operating revenues increased $10.4 million, or 17%, from $60.7 million in
1997 to $71.1 million in 1998. This increase was primarily due to a $4.2
million increase in wireless communication revenues, a $3.1 million increase
in wireline communications revenues, a $2.4 million increase in directory
assistance and revenues and a $.7 million increase in other communications
services revenues.
Wireless Communications Revenues. Wireless communications revenues in 1998
totaled $17.6 million, an increase of $4.2 million, or 31%, over 1997.
. Digital and Analog Cellular, Paging and Voicemail Revenues. Revenues for
digital and analog cellular, paging and voicemail increased $4.3 million,
or 42%, from $10.3 million in 1997 to $14.6 million in 1998. These
increases resulted primarily from digital and analog cellular access,
toll, and roaming associated with 30% customer growth over 1997 and
increased outside roaming traffic.
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. Wireless Cable Revenues. Wireless cable revenues decreased $.1 million,
or 3%, from $3.1 million in 1997 to $3.0 million in 1998. The decline in
revenue was due to limiting both marketing efforts and installations to
multiple-dwelling units in an effort to contain costs and capital in this
line of business.
Wireline Communications Revenues. Wireline communications revenues increased
$3.1 million, or 9%, from $34.5 million in 1997 to $37.6 million in 1998.
. Telephone Revenues. Telephone revenues increased $1.7 million, or 6%,
from $28.8 million in 1997 to $30.5 million in 1998. These increases were
primarily due to access line growth of 3% in 1998 and revenue growth from
custom calling features of 19% in 1998.
. Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber optic
network usage and CLEC operations increased $.8 million, or 25%, from
$3.2 million in 1997 to $4.0 million in 1998. This increase was due to
expanded services that included competitive local telephone service and
long distance.
. Internet Revenues. Revenues from our wireline Internet services increased
$.6 million, or 75%, from $.8 million in 1997 to $1.4 million in 1998.
This growth is attributable to the over 80% increase in our Internet
customer base as we added a total of 3,400 subscribers in 1998, with
total subscribers of 7,500 by year-end, the introduction of our new DSL
data service product and our overall emphasis to grow our Internet
operations.
. Wireline Cable Revenues. Wireline cable revenues have remained relatively
constant from 1997 through 1998, due to a decrease in the level of
resources deployed to support these operations.
Directory Assistance Revenues. Directory assistance revenues increased $2.4
million, or 23%, from $10.5 million in 1997 to $12.9 million in 1998. During
the first half of 1997, we commenced directory assistance services to AT&T
customers seeking telephone numbers in New Jersey and Delaware. During August
through October 1997, we expanded this service to encompass Pennsylvania.
After considering these expansions, which only had a partial year impact in
1997, total call volume increased 10.4 million in 1998.
Other Communications Services Revenues. Other communications services
revenues increased $.7 million, or 30%, from $2.3 million in 1997 to $3.0
million in 1998, due primarily to services provided and assets leased to the
Alliances.
Operating Expenses
Total operating expenses increased $7.2 million, or 17%, from $41.3 million
in 1997 to $48.5 million in 1998. Growth in cellular and digital PCS
subscribers contributed $3.8 million in operating expenses in 1998 from 1997.
The introduction of competitive local telephone services and long distance and
the resulting start-up related costs, coupled with the growth of our Internet
services and the related commitment towards our Internet infrastructure,
accounted for $1.8 million of the 1998 increase. Additionally, costs
associated with increased directory assistance calling volume accounted for
$1.1 million of the 1998 increase due to the annualized revenue from 1997
contract expansions and commencement of national directory assistance
services. Finally, other communications services expenses increased $.5
million in 1998.
Cost of Sales. Cost of sales increased $2.7 million, or 159%, from $1.7
million in 1997 to $4.4 million in 1998. Of this increase, $1.5 million was
for roaming revenues. Roaming settlements between us and outside carriers was
not billed in 1997. Equipment cost of sales increased $.8 million, in line
with customer growth.
Maintenance and Support Expense. Maintenance and support expense increased
$1.1 million, or 11%, from $9.7 million in 1997 to $10.8 million in 1998. This
increase resulted primarily from increased costs associated with subscriber
additions and service enhancements for the underlying fiber optic network and
support systems.
11
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $1.3 million, or 14%, from $9.2 million in 1997 to $10.5 million in
1998. This increase was a result of capital outlays to support continued
business expansion primarily in our wireless operations and directory
assistance.
Customer Operations Expense. Customer operations expense increased $1.9
million, or 13%, from $14.3 million in 1997 to $16.2 million in 1998.
Approximately $1.1 million of these 1998 increases related to the addition of
personnel to our directory assistance business throughout 1997 to handle the
calling volume from new contracts. Since these additional personnel were
employed for less than a full year in 1997, as compared to a full year in
1998, the relative personnel expense was higher in 1998. Additionally, we
experienced an increase in customer service and sales and marketing related
costs of $.8 million in order to support our wireless communications growth
and CLEC and Internet expansion.
Corporate Operations Expenses. Corporate operations expenses remained
relatively constant in 1998.
Other Income (Expenses)
Total other income (expenses) decreased $8.6 million from income of $.7
million in 1997 to an expense of $7.9 million in 1998.
Other expenses, principally interest, decreased $.3 million, or 33%, from
$.9 million in 1997 to $.6 million in 1998. The reduction in interest expense
was primarily a result of the liquidation of mortgaged-backed securities used
to satisfy cash flow needs in lieu of additional debt, and lower interest
rates on line of credit debt facilities offset by an increase in investing
activity. We capitalized interest on property under construction and the
investments in the Alliances of $.8 million in each of 1997 and 1998.
Interest and dividend income was down $.2 million, or 67%, from $.3 million
in 1997 to $.1 million in 1998, due to the liquidation of mortgage-backed
securities to support the continued growth in customer base and business
expansion. Equity income from RSA 5, our analog cellular partnership interest,
increased $.1 million, or 100%, to $.2 million in 1998. Additional information
concerning the Alliances is contained in "Management's Discussed and Analysis
of Financial Condition and Results of Operations" for each respective
Alliance.
Equity loss from the Alliances totaled $6.5 million for 1998 compared to $.8
million in 1997. At the end of 1998, we had a 21% common ownership interest in
the Virginia Alliance, which commenced operations in the fourth quarter of
1997, and a 45% common ownership in the West Virginia Alliance, which
commenced operations in late 1998. The increase in equity loss from the
Alliances was due to the full year of Virginia Alliance operations and the
commencement of the West Virginia Alliance operations late in 1998.
We recognized a $5.1 million gain on the sale of our 30% limited ownership
interest in the Roanoke MSA Cellular Partnership to GTE Wireless in April
1997.
We recognized a $1.0 and $2.8 million impairment loss on our investment in
ATEL at December 31, 1998 and 1997, respectively. We concluded that the
decline in value was other than temporary given recent trading prices in the
common stock and ATEL's financial condition and continued financial losses.
Income Taxes
Income taxes decreased $1.8 million, or 24%, from $7.4 million in 1997 to
$5.6 million in 1998. This decrease was attributable to a number of factors,
the most significant of which was the recognition of approximately $6.5
million in losses sustained by the Alliances compared to only $.8 in 1997.
These losses generated an increased tax benefit to us of approximately $2.2
million. Additionally, we recognized a one-time increase to tax expense of
$2.0 million related to a gain on an investment sale in 1997. The 1998 tax
reductions were offset by approximately $1.2 million of income taxes
recognized by the $3.2 million increase in taxable
12
income from operations. The 1997 increase was due to an increase in taxable
income from operations, $2.0 million of taxes from the gain on the sale of the
Roanoke MSA Cellular Partnership, offset partially by a $1.1 million tax
benefit from the write-down of our investment in ATEL. The effective rate was
38% in 1997 and 40% in 1998, respectively.
Liquidity and Capital Resources
We have funded our working capital requirements and capital expenditures
from net cash provided from operating activities and borrowings under credit
facilities. At March 31, 2000, we had $15.6 million in unused aggregate
borrowings available under our existing credit facilities.
Operating Cash Flows
During the three months ended March 31, 2000, net cash provided by operating
activities was $5.7 million. Principal changes in operating assets and
liabilities included a change in income taxes from a receivable position in as
of March 31, 1999 to a payable position of $3.3 million in the three months
ended March 31, 2000, and accounts payable decreased to $1.5 million. The
income tax change was a result of our share of taxable income associated with
the sale of tower assets by the Alliances.
During 1999, net cash provided by operating activities was $31.5 million.
Principle changes in operating assets and liabilities included a $1.2 million
increase in accounts receivable, a $1.3 million increase in income tax
receivable, a $.4 million decrease in materials and supplies, a $2.2 million
increase in accounts payable and a $.9 million increase in other current and
accrued liabilities. The $1.2 million increase in accounts receivable was due
to the timing of receipt from a significant customer and the overall sales
growth. The $1.3 million increase in income tax receivable was due to
quarterly estimated tax payments in the first half of 1999 based on interim
results that, when projected, did not reflect the level of PCS losses from
expansion and growth in Virginia and West Virginia. Materials and supplies
decreased due to the strong retail sales at the end of 1999, which brought
down our handset inventories below the prior year end levels. The $2.2 million
increase in accounts payable related to higher overall purchasing volumes and
timing of some significant capital equipment deliveries. The $.9 million
increase in other accrued and current liabilities resulted from $.5 million in
timing of certain directory assistance current payables and $.4 million in
increased advance billings to customers, primarily due to the addition of the
acquired Internet operations.
Investing Cash Flows
During the three months ended March 31, 2000, our investing activities
included:
. $7.7 million for the purchase of property and equipment, $4.1 million of
which represents telephone, network and Internet circuit and network-
related electronic equipment, $.5 million relates to building and
landscape and $.4 million relates to billing software;
. a $3.9 million investment in the Alliances;
. a $2.0 million advance to the Alliances;
. $3.2 million in proceeds from the sale of ten communications towers; and
. $.7 million for the acquisition of customers and certain assets of Twin
County Internet Access, an Internet company in Galax, Virginia and
serving southwestern Virginia and northern North Carolina.
During 1999, our investing activities included:
. the investment of $36.7 million in property and equipment, including $9.5
million of which was for CLEC and fiber backbone capital expenditures,
$5.2 million was for our new billing system and other software upgrades,
$4.8 million for telephone plant upgrade and additions, $2.6 million for
the purchase
13
and renovation of the Winchester, Virginia property, $2.4 million for
Internet related expenditures, and $12.2 million for various other
expenditures.
. $1.9 million in net repayments from the Alliances;
. $5.3 million investment in the Alliances and PCS licenses;
. $12.4 million in Internet acquisitions; and
. $9.7 million in proceeds from the sales of our Richmond tower asset and
ATEL investment.
Financing Cash Flows
During the three months ended March 31, 2000, net cash provided by financing
activities consisted of $19.4 million of additional borrowing and $.4 million
in proceeds from the exercise of stock options offset by $1.5 million in
dividend payments and $12.7 million for the redemption of our senior notes.
During 1999, net cash provided by financing activities aggregated $11.5
million, which included an aggregate of $17.0 million of long-term debt
borrowings, offset by $6.0 million used to pay dividends.
We had firm cash commitments relating to purchases of property and equipment
of approximately $4.0 million to $6.0 million as of March 31, 2000.
Forward-Looking Analysis
After the completion of the Transactions, our liquidity needs will be
influenced by numerous factors including:
. significantly reduced or negative EBITDA that we expect to continue until
at least into 2001, as a result of acquiring capital intensive businesses
in their early stages and entering new markets;
. increased capital expenditures to support planned PCS network growth and
expansion, much of which is discretionary in nature, and to support
planned customer growth;
. our own continuing capital expenditures due to our ongoing strategy of
offering our services in new markets, adding new products and services,
and enhancing organic growth;
. significant capital expenditures to become an integrated communications
provider in many of our existing, newly acquired and other potential
markets by offering a broader range of products and services;
. capital expenditures for Richmond-Norfolk PCS and R&B Communications;
. continued investment in the Alliances;
. future acquisitions;
. significantly increased interest expense; and
. an escrow account shortfall of approximately $66 million in the event
that we must redeem at 101% of their aggregate principal amount the debt
securities that we expect to sell in a private transaction to fund a portion
of the cash purchase price of Richmond-Norfolk PCS.
After the completion of the Transactions, our liquidity sources will
include:
. cash flow from operations, if any;
. approximately $91 million held in an escrow account to fund the first
four interest payments on our debt securities;
. $175.0 million available under our new credit facility subject to certain
conditions;
. public and private debt and equity markets;
14
. disposition of additional non-core businesses and assets, such as
additional cell towers received from Richmond-Norfolk PCS and wireline
cable operations, and investments; and
. interest on the escrow account.
Assuming the completion of the Transactions, we expect capital expenditures
for the last nine months of 2000 and for the year 2001 to be between $80
million to $100 million for each period. We expect these capital expenditures
to be used to:
. support continued expansion of CLEC and Internet access services;
. add another building to support employee additions commensurate with the
growth in digital PCS, Internet and CLEC customers; and
. support the expansion of Richmond-Norfolk PCS' and R&B Communications'
core businesses.
Richmond-Norfolk PCS and the Alliances have substantially satisfied their
FCC build-out requirements. Consequently, the expenditures above are generally
discretionary, permitting us to maintain significant flexibility
in our business plans and capital expenditures. Since these are generally
discretionary expenditures, we cannot assure you when, if ever, these proposed
uses will be initiated or completed.
Based on our assumptions about the future of our operating results, our
capital expenditure needs, many of which are discretionary, and the
availability of borrowings under our new credit facility and our other sources
of liquidity, we believe that we will have sufficient capital resources until
we begin generating significant positive EBITDA. However, if any of our
assumptions prove incorrect or if we make additional acquisitions, we may not
have sufficient capital resources. If so, we may have to delay or abandon some
of our anticipated capital expenditures and our ability to make interest and
principal payments on our debt securities will be significantly impaired.
Inflation
We believe that inflation has not had, and will not have, a material adverse
effect on our results of operations or financial condition.
Year 2000 Update
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures
or miscalculations causing disruptions of operations including, among other
things, computer systems, voice and data networks, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
We addressed this issue with a plan centered around several key components:
. system inventory;
. third party confirmation;
. internal systems review;
. compliance implementation;
. testing; and
. contingency planning.
Our year 2000 project was completed in the third quarter of 1999. The total
year 2000 project costs were not material to our business operations or
financial condition. We believe that our core systems are year 2000 compliant
and we have not experienced significant problems relating to the year 2000
issue. However, in the event that unforeseen circumstances arise, we believe
that our contingency plans will prevent significant year 2000 issues from
having a material impact on the financial or operational results in future
periods.
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