VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL STATEMENTS
December 31, 1998
Contents
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INDEPENDENT AUDITOR'S REPORT 1
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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 - 12
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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, 1998 and 1997, 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, 1998 and 1997, 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 12, 1999
1
VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS (Note 2)
1998 1997
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Current Assets
Cash and cash equivalents $ 59,814 $ 159,082
Accounts receivable, net of allowance of $194,958 in 1998 944,845 98,872
Inventories 2,271,572 858,770
Prepaid expenses 371,924 243,792
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Total current assets 3,648,155 1,360,516
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Subordinated Capital Certificates 3,838,366 1,073,064
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Property and Equipment
Land and building 1,220,533 174,151
Network plant and equipment 63,311,713 23,342,861
Furniture, fixtures, and other equipment 4,057,770 4,297,564
Radio spectrum licenses 32,714,384 22,658,469
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Total in service 101,304,400 50,473,045
Under construction 2,565,479 29,251,056
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103,869,879 79,724,101
Less accumulated depreciation 7,257,206 736,763
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96,612,673 78,987,338
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Other Assets
Radio spectrum licenses - 10,040,657
Other 216,705 698,218
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216,705 10,738,875
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$ 104,315,899 $ 92,159,793
==================================
See Notes to Financial Statements.
2
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
1998 1997
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Current Liabilities
Accounts payable $ 2,392,739 $ 6,512,713
Due to affiliates (Note 6) 2,260,982 660,383
Dividends payable (Note 3) 229,138 229,142
Customer deposits 56,187 2,700
Advance billings 71,518 26,906
Accrued construction costs 6,044,812 26,759,907
Accrued interest 726,992 594,586
Accrued payroll 150,515 2,045
Accrued taxes 35,878 -
Other accrued liabilities 22,129 13,484
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Total current liabilities 11,990,890 34,801,866
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Long-Term Debt (Note 2) 90,301,358 34,722,382
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Redeemable Series A Preferred Membership Interests (Note 3) 14,345,128 13,542,076
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Commitments (Note 5)
Members' Equity (Deficit) (Note 4)
Series B preferred membership interests 10,860,376 8,320,000
Common membership interests (23,181,853) 773,469
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(12,321,477) 9,093,469
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$ 104,315,899 $ 92,159,793
==================================
3
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
1998 1997
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Operating revenues:
Subscriber revenue $ 1,738,543 $ 72,519
Wholesale revenue 2,175,733 2,400
Equipment sales 730,356 43,552
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4,644,632 118,471
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Operating expenses:
Cost of goods sold 3,009,537 315,017
Maintenance and support 5,166,427 756,992
Depreciation and amortization 7,040,676 685,826
Customer operations 5,729,097 1,444,291
Corporate operations 2,111,408 234,154
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23,057,145 3,436,280
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Loss before interest and preferred dividends (18,412,513) (3,317,809)
Interest expense:
Senior credit facility 4,131,445 163,067
Redeemable preferred interest 1,870,988 471,119
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Net loss $ (24,414,946)$ (3,951,995)
===================================
See Notes to Financial Statements.
4
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1998 and 1997
Series B
Preferred Common
Membership Membership
Interests Interests Total
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Balance as of December 31, 1996 $ 7,820,000 $ 3,601,950 $ 11,421,950
Capital contributions - 1,638,050 1,638,050
Issuance costs - (14,536) (14,536)
Conversion of Common Membership Interests
to Series B Preferred Membership Interests 500,000 (500,000) -
Net loss (3,951,995) (3,951,995)
------------------------------------------------
Balance as of December 31, 1997 8,320,000 773,469 9,093,469
Capital contributions 2,540,376 459,624 3,000,000
Net loss - (24,414,946) (24,414,946)
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Balance as of December 31, 1998 $ 10,860,376 $ (23,181,853)$ (12,321,477)
================================================
See Notes to Financial Statements.
5
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
1998 1997
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Cash Flows From Operating Activities
Net loss $ (24,414,946)$ (3,951,995)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 6,527,202 634,568
Amortization 513,474 51,258
Changes in assets and liabilities:
(Increase) in:
Accounts receivable (845,973) (98,872)
Inventories (1,412,802) (858,770)
Prepaid expenses (128,132) (243,792)
Increase (decrease) in:
Accounts payable, trade (4,119,974) 1,811,698
Advance billings and customer deposits 98,099 29,606
Accrued interest 132,406 163,067
Accrued dividends on Series A Preferred Membership Interests 771,087 415,398
Other accrued liabilities 192,993 (51,634)
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Net cash used in operating activities (22,686,566) (2,099,468)
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Cash Flows From Investing Activities
Purchase of property and equipment (34,826,975) (23,531,184)
Purchase of radio spectrum licenses - (1,927,154)
Increase in deferred charges - (473,575)
---------------------------------
Net cash used in investing activities (34,826,975) (25,931,913)
---------------------------------
Cash Flows From Financing Activities
Capital contributions, net 3,000,000 1,623,514
Advances from affiliates 1,600,599 127,080
Borrowings on revolving credit agreements, net 273,024 1,881,695
Proceeds from long-term borrowings 52,540,650 20,609,405
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Net cash provided by financing activities 57,414,273 24,241,694
---------------------------------
Net decrease in cash (99,268) (3,789,687)
Cash:
Beginning 159,082 3,948,769
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Ending $ 59,814 $ 159,082
=================================
(Continued)
6
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (Continued )
Years Ended December 31, 1998 and 1997
1998 1997
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Supplemental Schedule of Noncash Investing
and Financing Activities
Noncash increases in radio spectrum licenses consisting primarily of
accrued interest $ - $ 431,519
=================================
Noncash increases in property and equipment consisting primarily of of
accrued construction costs, accounts payable, accrued
dividends, and capitalization of other intangible costs $ 6,044,812 $ 26,808,718
=================================
Subordinated capital certificates acquired by long-term
borrowings $ 2,765,302 $ 1,073,064
=================================
Conversion of Common Membership Interests to Series B Preferred
Membership Interests $ - $ 500,000
=================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 4,419,430 $ 517,490
=================================
Cash payments for redeemable preferred interest $ 1,099,896 $ 870,754
=================================
See Notes to Financial Statements.
7
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
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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
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Note 1. Significant Accounting Policies (Continued)
Fair value of financial instruments: The fair values 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 1997 financial
statements have been reclassified, with no effect on net loss or members'
equity (deficit) to conform with classifications adopted in 1998.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
1998 1997
-----------------------------------
Vendor Supported Loan $ 71,139,502 $ 21,461,313
Supplemental Loan 5,627,763
Line of Credit 2,154,719 1,881,695
U. S. Department of the Treasury, FCC 11,154,374 11,154,374
Other 225,000 225,000
-----------------------------------
$ 90,301,358 $ 34,722,382
===================================
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").
In July 1997, the Alliance entered into an $89.0 million Senior Secured Credit
Facility with the Rural Telephone Financing Cooperative ("RTFC" or "Lender") and
Motorola, Inc. ("Vendor"). The available facilities consist of a 10-year term
loan ("Vendor Supported Loan") in the amount of $75.0 million, a 10-year term
loan ("Supplemental Loan") in the amount of $10.0 million, and a 5-year
revolving line of credit loan ("Line of Credit") in the amount of $4.0 million.
The Vendor Supported Loan is to finance up to $71.25 million of Motorola
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 $9.5 million of nongovernment-funded PCS
license costs, microwave relocation expenses, non-Motorola related capital
expenditures and working capital, and to purchase up to $0.5 million of RTFC
SCCs.
9
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
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Note 2. Long-Term Debt (Continued)
The RTFC SCCs 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 equal quarterly
installments, plus accrued interest, with 10% of the principal due in year five,
15% due per year in years six and seven, and 20% due per year in years eight
through ten.
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, 1998 and
1997 was 6.60% and 7.15%, 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. Under this agreement, the Alliance is
required to reduce its outstanding balance to zero each year for a period of at
least five consecutive business days. 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, 1998 and 1997 was 7.20% and
7.75%, respectively.
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 $36.5 million in
the aggregate. As additional credit support for the Vendor Supported Loan,
Motorola has entered into a guaranty agreement with the RTFC for up to $52.5
million of the Alliance's outstanding indebtedness under the Vendor Supported
Loan.
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.
There are no long-term debt maturities for 1999 and 2000. Maturities for 2001,
2002 and 2003 are $3,838,363, $10,206,048, and $14,089,138, respectively.
Interest costs in 1998 were approximately $4.5 million of which $4.1 million was
expensed and $0.4 million was capitalized. Interest costs in 1997 were
approximately $1.1 million of which $0.2 million was expensed and $0.9 million
was capitalized.
10
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
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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, 1998 and 1997, accrued current dividends were
approximately $229,000 for each date and accrued "true up" dividends were
approximately $1,501,000 and $730,000, respectively. Accrued "true up" dividends
are included on the balance sheet with "Redeemable Series A Preferred Membership
Interests."
At any time after the fifth anniversary of the capital contribution date, each
Series A Preferred Member may put all, but not less than all, of its Preferred
Series A Membership Interest to the Alliance in exchange for cash equivalent to
the stated value, plus any accrued distributions. If such put takes place,
additional Common Membership Interests may be acquired at $10.00 per unit for
88.1% of the put amount by CFW Communications Company and for 11.9% of the put
amount by R&B Communications, Inc., both Common Members.
For any Series A Preferred Membership Interests not put to the Alliance as of
the fifth anniversary date as well as any "true up" amounts due, the annual cash
distribution rate will be changed to the lesser of 7% or LIBOR plus 1-1/2%,
payable quarterly. After ten years from the Series A capital contribution date,
the Alliance may redeem at any time, any or all of the Series A Preferred
Membership Interests still outstanding, at the Stated Value plus any accrued
distributions.
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), and 115,471.6 units issued on January 6, 1998 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
approximately 406,000 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.
11
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
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Note 4. Members' Equity (Deficit) (Continued)
Equity Subscriptions: The members entered into equity subscription agreements
that obligates them to contribute additional equity of $15.0 million in the
aggregate. The remaining additional equity contributions are scheduled to be
contributed equally over three years beginning in January 1999. Such
contributions shall be for the purchase, at fair market value, of Common
Membership or Series B Preferred Membership units.
In January 1999, 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, 1998 and 1997 was approximately $1,169,000 and $212,000,
respectively. The total amount committed under these lease agreements is
$945,437 in 1999, $938,935 in 2000, $902,654 in 2001, $685,788 in 2002, $329,139
in 2003 and $1,960,106 for the years thereafter.
Equipment: The Alliance had outstanding purchase commitments of approximately
$6.0 million at December 31, 1998.
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,
and other general and administrative services to the Alliance in the amount of
$2,012,684 in 1998 and $1,757,204 in 1997. Of the total 1998 charges, $1,682,125
($815,899 in 1997) was expensed and $330,559 ($941,305 in 1997) was capitalized.
CFW Communications Company also provided certain corporate services for the
Alliance in the amount of $2,313,062 in 1998 and $336,650 in 1997. In 1998, all
corporate services were expensed. Of the total 1997 charges, $161,281 was
expensed and $175,369 was capitalized during the construction and startup
period. Corporate services include executive, finance, accounting, customer
care, 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.
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 $1,639,595 in 1998 and $47,400 in
1997.
12