United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from __________ to __________
Commission File Number 333-56365
MJD COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3725229
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
521 East Morehead Street, Suite 250
Charlotte, North Carolina 28202
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (704) 344-8150
Indicate by check mark whether the Registrant : (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___ No X
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As of October 31, 1998, the registrant had outstanding 1,810,147 shares of
common stock.
MJD COMMUNICATIONS, INC.
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. Page
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997......... 3
Condensed Consolidated Statements of Operations for the three months and
the nine months ended September 30, 1998 and 1997............................................ 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 ............................................................ 5
Notes to Condensed Consolidated Financial Statements ......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 17
Item 5. Other Information................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................................. 17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MJD Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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ASSETS September 30, December 31,
1998 1997
- - ---------------------------------------------------------------------------------------------------------------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 14,112,457 6,822,462
Accounts receivable and other 24,769,410 10,318,406
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Total current assets 38,881,867 17,140,868
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Property, plant and equipment, net 119,835,637 61,206,890
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Other assets:
Investments 33,452,502 11,423,521
Goodwill, net of accumulated amortization 158,616,023 50,432,932
Deferred charges and other assets 17,853,355 4,408,568
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Total other assets 209,921,880 66,265,021
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Total assets $ 368,639,384 144,612,779
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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Current Liabilities:
Accounts payable $ 7,496,451 4,999,714
Current portion of long-term debt, capital lease and other 2,310,713 5,721,039
Demand notes payable 814,500 879,000
Accrued interest payable 7,979,889 2,818,769
Other accrued liabilities 4,299,520 2,614,646
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Total current liabilities 22,901,073 17,033,168
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Long-term liabilities:
Long-term debt, net of current portion 94,935,747 126,502,779
Subordinated debt 200,000,000 109,246
Put warrant obligation 3,881,198 3,455,500
Deferred credits and other long-term liabilities 29,507,010 7,960,599
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Total long-term liabilities 328,323,955 138,028,124
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Minority interest 428,182 360,101
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Redeemable preferred stock -- 130,164
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Stockholders' equity (deficit):
Common stock 18,110 8,810
Additional paid-in capital 48,730,963 16,902,521
Retained deficit (31,762,899) (27,850,109)
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Total stockholders' equity (deficit) 16,986,174 (10,938,778)
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Total liabilities and stockholders' equity (deficit) $ 368,639,384 144,612,779
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See accompanying notes to condensed consolidated financial statements.
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MJD Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
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Operating revenues:
Switched services $ 19,800,341 10,526,236 49,285,853 27,067,834
Other 4,054,026 776,966 9,830,358 2,122,797
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Total operating revenues 23,854,367 11,303,202 59,116,211 29,190,631
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Operating expenses:
Plant operations 4,035,801 2,710,014 9,766,848 4,987,115
Corporate and customer service 5,545,852 1,664,093 14,308,121 6,196,565
Depreciation and amortization 6,112,487 2,089,061 13,412,396 6,098,899
Other 3,441,827 938,488 7,368,422 2,218,133
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Total operating expenses 19,135,967 7,401,656 44,855,787 19,500,712
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Income from operations 4,718,400 3,901,546 14,260,424 9,689,919
- - ---------------------------------------------------------------------------------------------------------
Other income (expense):
Net gain on sale of investments 270,791 - 660,484 -
Interest income 146,684 52,853 273,155 155,763
Dividend income 70,000 - 114,895 -
Interest expense (7,912,569) (2,356,011) (17,619,298) (6,354,394)
Other, net 103,339 (23,219) 301,542 323
- - ---------------------------------------------------------------------------------------------------------
Total other expense (7,321,755) (2,326,377) (16,269,222) (6,198,308)
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Earnings (loss) before
income taxes and
extraordinary item (2,603,355) 1,575,169 (2,008,798) 3,491,611
Income tax (expense) benefit 1,086,365 (812,685) 697,213 (1,651,787)
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Earnings (loss) before
extraordinary item (1,516,990) 762,484 (1,311,585) 1,839,824
Extraordinary item net of tax _ (3,611,624) (2,520,943) (3,611,624)
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Earnings (loss) before
minority interest (1,516,990) (2,849,140) (3,832,528) (1,771,800)
Minority interest in income
of subsidiaries (31,449) (2,649) (67,972) (25,103)
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Net earnings (loss) $ (1,548,439) (2,851,789) (3,900,500) (1,796,903)
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See accompanying notes to condensed consolidated financial statements.
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MJD Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- - --------------------------------------------------------------------------------
Nine months ended
September 30,
1998 1997
Cash flows from operating activities:
Net loss $ (3,900,500) (1,796,903)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 14,140,565 6,360,794
Other non cash expenses (income) (626,673) 310,191
Loss on early retirement of debt 2,896,599 1,128,677
Changes in assets and liabilities arising from operations, net of
acquisitions:
Accounts receivable 1,879,646 (1,018,729)
Accounts payable and accrued expenses 2,822,878 1,146,739
Minority interest 67,972 21,367
Income taxes recoverable (2,870,945) 442,263
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Total adjustments 18,310,042 8,391,302
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Net cash provided by operating activities 14,409,542 6,594,399
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Cash flows from investing activities:
Net capital additions (6,672,081) (5,149,691)
Acquisitions of telephone properties (171,701,416) (27,794,199)
Other, net 2,862,290 540,200
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Net cash used in investing activities (175,511,207) (32,403,690)
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Cash flows from financing activities:
Loan origination costs (16,196,941) (1,261,917)
Proceeds from issuance of long-term debt 451,000,000 62,785,000
Repayment of long-term debt (298,054,890) (15,743,697)
Net proceeds from the issuance of common stock 31,837,741 14,364,827
Dividends paid to stockholders (12,289) (279,394)
Repurchase of stock and warrants (141,564) (31,487,339)
Other, net (40,397) (32,274)
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Net cash provided by financing activities 168,391,660 28,345,206
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Net increase in cash and cash equivalents 7,289,995 2,535,915
Cash and cash equivalents, beginning of period 6,822,462 4,252,735
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Cash and cash equivalents, end of period $ 14,112,457 6,788,650
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See accompanying notes to condensed consolidated financial statements.
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MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) BASIS OF FINANCIAL REPORTING
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations
of the Securities and Exchange Commission; however, the Company believes
the disclosures which are made are adequate to make the information
presented not misleading.
The condensed consolidated balance sheet of MJD Communications, Inc. and
its Subsidiaries (the "Company") at December 31,1997, was derived from the
Company's audited balance sheet as of that date. The financial information
as of September 30, 1998, for the three months and nine months ended
September 30, 1998 and 1997 is unaudited; however, in the opinion of
management, such financial information includes all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
financial position, results of operations, and cash flows for the three
month and nine month periods have been included therein in accordance with
generally accepted accounting principles. The results of operations for the
interim periods are not necessarily indicative of the results of
operations, which might be expected for the entire year. The condensed
consolidated financial statements should be read in conjunction with the
Company's 1997 annual financial statements contained in its registration
statement which was declared effective on October 1, 1998.
(2) CREDIT FACILITY
On March 30, 1998, the Company entered into a $315 million senior secured
credit facility (the "New Credit Facility") which committed $75 million of
term debt (tranche C) amortized over nine years, $155 million of term debt
(tranche B) amortized over eight years and an $85 million reducing
revolving credit facility with a term of 6.5 years. Borrowings under the
New Credit Facility bear interest at a rate based, at the option of the
Company, on the participating banks' prime rate or Euro dollar rate, plus
an incremental rate of 3.0%, 2.75% and 2.5% for the Euro dollar margin and
2.0%,1.75% and 1.50% for the prime rate margins for the tranche C, tranche
B and revolver facility, respectively. The New Credit Facility is secured
by a perfected first priority pledge of the stock of all the subsidiaries
of the Company as well as the promissory notes evidencing intercompany
advances. The New Credit Facility is also guaranteed by the Company's four
intermediary holding companies, subject to contractual or regulatory
restrictions. The Company pays fees of one half of one percent per annum on
the aggregate unused portion of the revolver and tranche B commitment, in
addition to an annual agent's fee. Pursuant to the New Credit Facility, the
Company is required to enter into and has entered into, interest hedging
agreements that result in the fixing of the interest rate on no less than
50% of the principal amount of total outstanding debt, including any
subordinated debt.
Total proceeds from the New Credit Facility in the amount of $195 million
were utilized to repay all of the Company's outstanding long-term debt from
CoBank, ACB and Rural Telephone Finance Cooperative, pay related
transaction expenses and finance certain business acquisitions. On March
30, 1998, the Company recognized an extraordinary loss of approximately
$4.3 million ($2.5 million net of income taxes) resulting from a prepayment
penalty of approximately $1.4 million and the write-off of unamortized loan
origination costs of approximately $2.9 million related to the refinanced
debt.
The Company's ability to make additional borrowings under the New Credit
Facility is subject to compliance with certain financial ratios and other
conditions set forth in the New Credit Facility. These
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conditions limit the ability of the Company and certain of its subsidiaries
to, among other things, incur additional indebtedness, pay dividends or
make certain other restricted payments, consummate certain asset sales,
enter into certain transactions with affiliates, merge or consolidate with
another company or change the business conducted.
(3) ACQUISITIONS
On March 30, 1998, the Company acquired 100% of the outstanding common
stock of Taconic Telephone Corp. and subsidiaries for a purchase price of
$67.5 million. Acquisition costs were approximately $450,000. On April 30,
1998, the Company acquired 100% of the outstanding common stock of
Ellensburg Telephone Company for a purchase price of approximately $91.0
million. Acquisition costs were approximately $265,000. On June 1, 1998,
the Company acquired 100% of the outstanding common stock of Chouteau
Telephone Company for a purchase price of $18.6 million. Acquisition costs
were approximately $127,000.
These acquisitions have been accounted for as purchases and accordingly,
the acquired assets and liabilities have been recorded at their estimated
fair values at the dates of acquisition, and the results of operations have
been included in the accompanying consolidated financial statements since
the dates of acquisition. Not all purchase price allocations have been
finalized, however, due to the existence of certain pre-acquisition
contingencies. Consequently, adjustments to the preliminary allocations of
purchase price may emerge, as contingencies are resolved, but not more than
twelve months from the acquisition date. Goodwill recognized on these
acquisitions was approximately $102.6 million and will be amortized over an
estimated useful life of 40 years.
In the first quarter of 1998, the Company entered into a letter of intent
to acquire Utilities, Inc. (excluding its subsidiaries, Seacoast Cellular
and Western Maine Cellular). The acquisition was consummated on November 6,
1998 for a total purchase price of approximately $52.3 million. The
acquisition will be accounted for using the purchase method. The Company
financed this acquisition primarily with long-term debt.
In the fourth quarter of 1998, the Company has entered into agreements to
acquire three other unrelated rural local exchange carriers ("RLECs"). The
acquisitions are not expected to close; however, until the first or second
quarter of 1999. The aggregate purchase price for the acquisitions is
expected to be approximately $24.1 million and will be financed through
existing debt facilities. Each of the acquisitions will be accounted for
using the purchase method of accounting.
The following unaudited pro forma information presents the combined results
of operations of the Company as though the acquisitions in 1998 and 1997,
occurred on January 1, 1997. The anticipated acquisitions of three
unrelated RLECs in the first or second quarter of 1999 have been omitted
from the following pro-forma information because they would not have a
significant effect on the pro-forma information. These results include
certain adjustments, including amortization of goodwill, increased interest
expense on debt related to the acquisitions and related income tax effects.
The pro forma financial information does not necessarily reflect the
results of operations that would have been achieved had the acquisitions
been consummated as of the assumed dates, nor are the results necessarily
indicative of the Company's future results of operations.
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PRO FORMA NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
(UNAUDITED)
Revenues ......................... $81,809,845 76,373,727
Net loss ......................... (5,466,178) (2,728,858)
(4) ISSUANCE OF LONG-TERM NOTES
On May 5, 1998, the Company issued $125.0 million of 9 1/2% senior
subordinated notes due 2008 (the "Fixed Rate Notes"), and $75.0 million of
floating rate callable securities due 2008 (the "Floating Rate Notes," and
collectively with the Fixed Rate Notes, the "Notes"). Proceeds were used to
reduce existing bank indebtedness under the New Credit Facility. The Notes
are general unsecured obligations of the Company, subordinated in right of
payment to all existing and future senior debt of the Company, and
effectively subordinated to all existing and future debt and other
liabilities (including trade payables and accrued liabilities) of the
Company's subsidiaries. Interest on the Notes is payable semi-annually.
Interest on the Fixed Rate Notes is fixed at 9 1/2% and interest on the
Floating Rate Notes is equal to a rate per annum of LIBOR plus 418.75 basis
points (10% at May 5, 1998).
(5) STOCK OPTION PLAN
In August 1998, the Board of Directors of the Company approved the MJD
Communications, Inc. Stock Incentive Plan (the "Plan"). The Plan provides
for grants of up to 256,220 nonqualified stock options to executives and
members of management, at the discretion of the compensation committee of
the Board of Directors. Options vest in 25% increments after the second,
third, fourth and fifth anniversaries of an individual grant. In the event
of a change in control, outstanding options will vest immediately.
In October 1998, the compensation committee of the Board of Directors
approved a grant of 233,200 options at an exercise price of $34.25 per
share. Pursuant to the terms of the grant, options become exercisable only
in the event that the Company is sold, or an initial public offering of the
Company's common stock or other change in control occur, as defined in the
grant agreements. The number of options that may ultimately become
exercisable also depends upon the extent to which the price per share
obtained from a sale of the Company exceeds a minimum hurdle price of
$85.63 per share. Options have a term of ten years from an effective grant
date of May 1998.
(6) SUBSEQUENT EVENTS
On July 1, 1998 the Company issued notice of its intent to exercise its
call right with respect to certain warrants held by unaffiliated parties.
These warrants are included in the Company's long term liabilities at a
value of approximately $3.9 million at September 30, 1998. The Company
expects to close the purchase of the warrants on or before July 1, 1999,
for a purchase price, which is currently being negotiated.
On October 5, 1998, the Board of Directors of the Company approved a ten
for one stock split to stockholders of record on September 1, 1998. The
stock split has been given retroactive effect in the
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accompanying condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION THAT
MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF THE
CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF MJD
COMMUNICATIONS, INC. AND ITS SUBSIDIARIES (COLLECTIVELY, THE "COMPANY"). THE
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM S-4 ON JUNE 9, 1998, AS AMENDED ON OCTOBER 1, 1998.
CERTAIN STATEMENTS INCLUDED IN THIS DOCUMENT ARE FORWARD-LOOKING, SUCH
AS STATEMENTS RELATING TO ESTIMATES OF OPERATING AND CAPITAL EXPENDITURE
REQUIREMENTS, FUTURE REVENUE AND OPERATING INCOME, AND CASH FLOW AND LIQUIDITY.
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON THE COMPANY'S CURRENT EXPECTATIONS
AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS IN THE FUTURE TO DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED
IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY. THESE
RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, UNCERTAINTIES RELATING
TO ECONOMIC AND BUSINESS CONDITIONS, GOVERNMENTAL AND REGULATORY POLICIES, AND
THE COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY OPERATES. THESE AND OTHER RISKS
ARE DETAILED BELOW AS WELL AS IN OTHER DOCUMENTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
MJD Communications, Inc. was founded in 1991 to participate in the
consolidation opportunities that exist in the highly fragmented, independent,
largely family-owned and operated, rural segment of the telecommunications
industry. As of September 30, 1998, the Company owned and operated fourteen
rural local exchange carriers ("RLECs") with 105,794 access lines in rural
locations in ten states.
The operations of the RLECs owned by the Company for more than twelve
months have been characterized by stable growth and cash flow. The primary
reason for the growth in the Company's cash flow has been the acquisition of
additional RLECs. In addition, the RLECs owned by the Company have realized
access line growth and increases in minutes of use ("MOU"). Although new access
line growth is correlated with general economic activity, economic downturns
typically have not significantly impacted the Company's established base of
access lines or MOU.
REVENUES: The Company generates revenue primarily through: (i) the
provision of basic local telephone service to customers within its service areas
(including federal and state Universal Service Support Fund ("USSF") revenues,
which accounted for approximately 13.1% of 1997 revenue); (ii) the provision of
network access to inter-exchange carriers ("IXCs") for origination and
termination of interstate and intrastate long distance telephone calls; and
(iii) the provision of ancillary services such as billing and collection, long
distance resale, enhanced services, wireless services, cable services, Internet
services and customer premises equipment sales. The revenues listed in clauses
(i) and (ii) above are classified by the Company as "Switched Revenue." The
revenues listed in clause (iii) above are classified by the Company as "Other
Revenue."
The Company's historically stable revenues for operations owned by the
Company for more than twelve months are the result of the basic utility of
telecommunications services, the highly regulated nature of the
telecommunications industry and underlying cost recovery settlement and support
mechanisms. The Company's subscribers are predominantly residential. Basic local
service allows the user to place unlimited calls within a defined local calling
area. USSF revenues are a subsidy paid to the Company to support the high cost
of its operations in rural markets. Access revenues are generated by providing
IXCs access to the Company's local network and its customers. Other service
revenue is generated from the ancillary services described above.
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OPERATING EXPENSES: The Company's operating expenses are categorized as
plant operations, corporate and customer service, other expenses and
depreciation and amortization. Year to year changes in such expenses are
typically influenced by access line growth and general business inflationary
adjustments. Plant operations expenses consist of expenses incurred by the
Company in connection with the operation of its central offices and outside
plant facilities and related operations. Corporate and customer service expenses
consist of expenses generated by the Company's general management, accounting,
engineering, marketing and customer service functional groups. Other expenses
consist of miscellaneous expenses such as operating taxes.
OTHER (INCOME) EXPENSES: The Company's other income includes interest
income, dividends, gain or loss on sale of assets and other miscellaneous,
non-operating income. The Company's other expenses consist primarily of interest
on the Company's debt and other non-operating expenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
OPERATING REVENUE. Net revenue increased $12.6 million to $23.9 million for
the three months ended September 30, 1998 from $11.3 million for the three
months ended September 30, 1997. RLECs acquired after the second quarter 1997
contributed $11.3 million to the quarter to quarter increase in revenues. For
RLECs owned and operated for a comparable period, operating revenue improved
approximately $1.3 million or 12.9% to $11.4 million from $10.1 million in 1997.
Basic local service revenue increased $3.1 million to $5.2 million for the
three months ended September 30, 1998 from $2.1 million for the three months
ended September 30, 1997. This revenue increase is primarily attributable to an
increase in access lines. The inclusion of access lines from the RLECs acquired
by the Company after the second quarter 1997 provided an increase of 55,280
access lines and internal growth in RLECs owned and operated by the Company
prior to the third quarter 1997 provided an increase of 2,723 access lines.
Revenue contribution from the RLECs acquired after the second quarter
1997 provided approximately $2.9 million of the increase in basic local service
revenue for the three months ended September 30, 1998. For the RLECs owned and
operated for a comparable period, basic local service revenues increased by $0.2
million to $1.9 million for the three months ended September 30, 1998 from $1.7
million for the three months ended September 30, 1997.
USSF revenues were approximately $1.3 million and $1.1 million in each of
the three month periods ended September 30, 1998 and September 30, 1997,
respectively.
Interstate and intrastate revenues increased $6.0 million to $13.3 million
for the three months ended September 30, 1998 from $7.3 million for the three
months ended September 30, 1997. This revenue increase is attributable to an
increase in access lines and MOUs and an increase in interstate and intrastate
settlement revenues administered by the National Exchange Carriers Association
("NECA") or a respective state's settlement administrator. Revenue contribution
from the RLECs acquired by the Company after the second quarter 1997 provided
approximately $5.6 million of the increase in interstate and intrastate revenues
for the three months ended September 30, 1998. For the RLECs owned and operated
for a comparable period, interstate and intrastate revenues increased by $0.4
million to $7.1 million for the three months ended September 30, 1998 from $6.7
million for the three months ended September 30, 1997.
Other services revenue increased $3.3 million to $4.1 million for the three
months ended September 30,
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1998 from $0.8 million for the three months ended September 30, 1997. Other
services revenues consist of directory advertising, billing and collection for
inter-exchange carriers ("IXCs") and other related telephone services. Revenue
contribution from RLECs acquired by the Company after the second quarter 1997
provided $2.4 million of the increase in other services revenues for the three
months ended September 30, 1998. For RLEC's owned and operated for a comparable
period, other services revenues increased by $0.8 million to $1.3 million for
the three months ended September 30, 1998 from $0.5 million for the three months
ended September 30, 1997.
OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, other operating expenses, and depreciation and
amortization increased $11.7 million to $19.1 million for the three months ended
September 30, 1998 from $7.4 million for the three months ended September 30,
1997. The increase was primarily due to the inclusion of operating expenses from
the RLECs acquired by the Company after the second quarter 1997 which
contributed approximately $9.2 million for the three months ended September 30,
1998. For RLECs owned and operated for a comparable period, operating expenses
increased approximately $2.5 million or 38.4% to $9.0 million in 1998 from $6.5
million in 1997. The operating expense increase was due to an increase in
corporate and customer service expense driven by the Company's substantial
increase in access lines from its acquisitions completed during the first three
quarters of 1998. The Company has grown the number of its access lines by
approximately 100% since December 31, 1997, as a result of its acquisition of
over 54,000 access lines. To support its expanded operations, the Company
increased corporate staff in areas such as accounting, finance and human
resources. Additionally, expense increases were attributable to operating
expenses of the Company's new competitive local exchange carrier ("CLEC")
subsidiary and to an increase in depreciation .
INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $0.9 million or 20.9% to $4.7 million for the three
months ended September 30, 1998 from $3.8 million for the three months ended
September 30, 1997. The increase was primarily due to income from operations for
RLECs acquired after the second quarter 1997, which provided approximately $2.1
million of this increase for the three months ended September 30, 1998. For
RLECs owned and operated for a comparable period, income from operations
decreased $1.2 million to $2.4 million in 1998 from $3.6 million in 1997 and the
income from operations margin was 9.9% in 1998 compared to 31.7% in 1997. The
decrease in income from operations and its margin as a percent of revenues was
related to the increase in operating expenses, as described above.
OTHER INCOME (EXPENSE). Other expense increased $5.0 million to $7.3
million for the three months ended September 30, 1998 from $2.3 million for the
three months ended September 30, 1997. The increase was primarily due to an
increase in interest expense caused by the additional debt borrowed to complete
acquisitions during 1997 and 1998 and to effect the Company's recapitalization
in July 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
OPERATING REVENUE. Net revenue increased $29.9 million or 102.5% to $59.1
million for the nine months ended September 30, 1998 from $29.2 million for the
nine months ended September 30, 1997. Revenue contribution from the RLECs
acquired by the Company after the fiscal year ending December 31, 1996 ("FYE
1996") provided approximately $26.5 million of this increase. For RLECs owned
and operated for a comparable period, operating revenue improved approximately
$3.5 million or 12.8% to $30.9 million from $27.4 million in 1997.
Basic local service revenue increased $6.7 million to $12.0 million for the
nine months ended September 30, 1998 from $5.3 million for the same period in
1997. This revenue increase is primarily attributable to an
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increase in access lines. The Company's access lines increased by 58,003 from
47,791 access lines at September 30, 1997 to 105,794 access lines at September
30, 1998. The inclusion of access lines from the RLECs acquired by the Company
after January 1, 1997 provided an increase of 55,280 access lines and internal
growth by RLECs owned and operated by the Company. provided an increase of 2,723
access lines. Revenue contribution from the RLECs acquired after FYE 1996
provided approximately $6.4 million of the increase in basic local service
revenue for the nine months ended September 30, 1998. For the RLECs owned and
operated for a comparable period, basic local service revenues increased by $0.4
million to $5.1 million for the nine months ended September 30, 1998 from $4.7
million for the nine months ended September 30, 1997.
USSF revenues were approximately $3.7 million and $3.2 million in the nine
month periods ended September 30, 1998 and September 30, 1997, respectively.
Interstate and intrastate revenues increased $15.0 million to $33.6 million
for the nine months ended September 30, 1998 from $18.6 million for the nine
months ended September 30, 1997. This revenue increase is attributable to an
increase in access lines and MOUs and an increase in interstate and intrastate
settlement revenues administered by NECA or a respective state's settlement
administrator. Revenue contribution from the RLECs acquired by the Company after
FYE 1996 provided approximately $13.7 million of the increase in interstate and
intrastate revenues for the nine months ended September 30, 1998. For the RLECs
owned and operated for a comparable period, interstate and intrastate revenues
increased by $1.3 million to $19.1 million for the nine months ended September
30, 1998 from $17.8 million for the nine months ended September 30, 1997.
Other services revenues increased $7.7 million to $9.8 million for the nine
months ended September 30, 1998 from $2.1 million for the nine months ended
September 30, 1997. Other services revenues consist of directory advertising,
billing and collection for IXCs and other related telephone services. Revenue
contribution from RLECs acquired by the Company after FYE 1996 provided $6.0
million of the increase in other services revenues for the nine months ended
September 30, 1998. For RLEC's owned and operated for a comparable period by the
Company, other services revenues increased by $1.7 million to $3.5 million for
the nine months ended September 30, 1998 from $1.8 million for the nine months
ended September 30, 1997.
OPERATING EXPENSES. Operating expenses, which include plant operations,
corporate and customer service, other operating expenses, and depreciation and
amortization increased $25.4 million to $44.9 million for the nine months ended
September 30, 1998 from $19.5 million for the nine months ended September 30,
1997. The increase was primarily due to the inclusion of operating expenses from
the RLECs acquired by the Company after FYE 1996 which contributed approximately
$20.2 million for the nine months ended September 30, 1998. For RLECs owned and
operated for a comparable period, operating expenses increased approximately
$5.2 million or 28.3% to $23.5 million in 1998 from $18.3 million in 1997. The
operating expense increase was primarily due to an increase in corporate and
customer service expense driven by the Company's acquisition and financing
activities during the first three quarters of 1998. The Company has grown the
number of its access lines by approximately 100% since December 31, 1997, as a
result of its acquisition of over 54,000 access lines. To support its expanded
operations, the Company increased corporate staff in areas such as accounting,
finance, MIS, and human resources. Additionally, operating expense increases
were attributable to operating expenses of the Company's new competitive local
exchange carrier ("CLEC") subsidiary and to an increase in depreciation and
amortization expense
INCOME FROM OPERATIONS. As a result of the factors described above, income
from operations increased $4.6 million or 47.2% to $14.3 million for the nine
months ended September 30, 1998 from $9.7 million for the nine months ended
September 30, 1997. The increase was primarily due to the income from operations
for RLECs acquired after FYE 1996 provided approximately $6.3 million of this
increase for the nine months ended September 30, 1998. The income from
operations margin was 24.1% in the nine months ended
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September 30, 1998 as compared to 33.2% in the nine months ended September 30,
1997. For RLECs owned and operated for a comparable period income from
operations decreased $1.7 million to $7.4 million in 1998 from $9.1 million in
1997 and the income from operations margin was 24.0% in the nine months ended
September 30, 1998 compared to 31.2% in the nine months ended September 30,
1997. The decrease in income from operations and its margin as a percent of
revenues was related to the increase in operating expenses, as described above.
OTHER INCOME (EXPENSE). Other expense increased $10.0 million or 162.1% to
$16.2 million for the nine months ended September 30, 1998 from $6.2 million for
the nine months ended September 30, 1997. The increase was primarily due to an
increase in interest expense caused by the additional debt borrowed to complete
acquisitions during 1997, to effect the Company's recapitalization in July 1997
and to complete acquisitions in the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Implementation of the Company's acquisition strategy has required a
significant portion of the Company's capital resources. The Company historically
has used the proceeds of bank debt and private equity offerings, supplemented by
the Company's available cash flow, to fund the implementation of the Company's
acquisition strategy.
On March 30, 1998, the Company closed a $315.0 million senior secured
credit facility (the "New Credit Facility") which included (i) $75.0 million of
term debt (Tranche C) amortized over nine years, (ii) $155.0 million of term
debt (Tranche B) amortized over eight years and (iii) an $85.0 million reducing
revolving credit facility (the "Revolver") with a term of six and one-half
years. All obligations of the Company under the New Credit Facility are
guaranteed by four of the intermediary subsidiaries of the Company; ST
Enterprises, LTD., MJD Holdings Corp., MJD Services Corp. and MJD Ventures, Inc.
The ability of such subsidiaries to guarantee the obligations of the Company
under certain circumstances may be restricted. The Company is obligated to
comply with certain financial ratios and tests, including the following (which
ratios became less restrictive as a result of the Company achieving a ratio of
senior debt to annualized EBITDA ratio of less than 4.0 to 1.0): (i) maintain a
ratio of annualized EBITDA to interest expense of 1.5 to 1.0; (ii) maintain a
ratio of debt to annualized EBITDA of not more than 6.5 to 1.0; and (iii)
maintain a ratio of senior debt to annualized EBITDA of not more than 4.0 to
1.0. The Company is currently in compliance with all covenants under the New
Credit Facility.
On May 5, 1998, the Company consummated its debt offering consisting of
$125 million in aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2008 (the "Fixed Rate Notes"), and $75 million in aggregate
principal amount of Floating Rate Callable Securities due 2008 (the "Floating
Rate Notes") (together with the Fixed Rate Notes, "the Notes").
Proceeds were used to reduce the tranche A and tranche B debt outstanding under
the New Credit Facility. The Notes are general unsecured obligations of the
Company, subordinated in right of payment to all existing and future senior debt
(as defined in the Indenture relating to the Notes) of the Company, and
effectively subordinated to all existing and future debt and other liabilities
(including trade payables and accrued liabilities) of the Company's
subsidiaries. Interest on the Notes is payable semi-annually. Interest on the
Fixed Rate Notes is fixed at 9 1/2% and interest on the Floating Rate
Notes is equal to a rate per annum at LIBOR (as defined in the
Indenture) plus 418.75 basis points. On November 2, 1998, the Company
consummated an exchange offer by exchanging its 9 1/2% Senior Subordinated Notes
due 2008, Series B (the "Fixed Rate Exchange Notes") and Floating Rate Callable
Securities due 2008, Series B (the " Floating Rate Exchange Notes") which have
been registered under the Securities Act of 1933, as amended, for like principal
amounts of the Fixed Rate Notes and the Floating Rate Notes,
respectively.
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Certain funds managed by Kelso & Company and certain funds managed by
Carousel Capital Corp. (collectively the "Equity Investors")invested an
additional $16.3 million on March 30, 1998 to finance the acquisition of Taconic
Telephone Corp. and an additional $15.0 million on April 30, 1998 to finance the
acquisition of Ellensburg Telephone Company, resulting in a total of $47.8
million of equity capital invested in MJD through September 30, 1998.
In addition to debt service, the Company's principal liquidity requirements
are expected to be for general corporate purposes, capital expenditures and to
consumate the Company's pending acquisitions. The Company believes that the
proceeds from the New Credit Facility and the Notes provide sufficient resources
to fund the pending acquisitions. The Company's annual capital expenditures for
existing operations have historically been significant. Because existing
regulations allow the Company to recover its operating and capital costs, plus a
reasonable return on its invested capital in regulated telephone assets, capital
expenditures constitute an attractive use of the Company's cash flow. The
Company has historically generated sufficient cash flow from operations to meet
all of its capital expenditure requirements for existing operations. In 1996 and
1997, the Company spent approximately $8.4 million and $8.2 million on capital
expenditures, respectively. The Company expects capital expenditures in 1998 for
all existing operations and the completed acquisitions to be approximately $15.0
million.
Management evaluates potential acquisitions on an ongoing basis and has
had, and continues to have, preliminary discussions concerning the purchase of
additional RLECs and other telecommunications properties. The Company may
require additional financing for future acquisitions, if any, and there can be
no assurance that it will be able to obtain such financing on favorable terms,
if at all.
The Company's plan to enter additional markets as a CLEC is expected to
result in the Company's incurring initial operating losses followed by
significant capital expenditures. The Company currently estimates that it will
invest approximately $5.0 million and $15.0 million in 1998 and 1999,
respectively, related to the planned rollout of nine CLEC markets in 1998 and
fifteen CLEC markets in 1999. In addition, the Company anticipates building
facilities to migrate CLEC customers to the Company's existing networks, which
will require substantially more capital expenditures in 1999 and 2000. The New
Credit Facility limits the funding of such losses and capital expenditures to
(i) $5.0 million per year so long as the senior debt leverage ratio exceeds 4.0x
and (ii) $15.0 million per year whenever such leverage ratio is under 4.0x. The
terms of the Notes also impose certain restrictions on the Company's ability to
fund its CLEC expansion. If the CLEC plan proves to be successful, the Company
believes it will be able to raise separate financing for future CLEC capital
requirements as permitted under the New Credit Facility and the Indenture for
the Notes.
Net cash provided by operating activities was $14.4 million and $6.6
million for the nine months ended September 30, 1998 and 1997, respectively. Net
cash used in investing activities was $175.5 million and $32.4 million for the
nine months ended September 30, 1998 and 1997, respectively. These cash flows
primarily reflect expenditures relating to acquisitions of RLECs of $171.7
million and $27.8 million for the nine months ended September 30, 1998 and 1997,
respectively, and capital expenditures of $6.7 million and $5.1 million for the
nine months ended September 30, 1998 and 1997, respectively.
Net cash provided by financing activities was $168.4 million and $28.3
million for the nine months ended September 30, 1998 and 1997, respectively.
These cash flows primarily represent borrowings, the proceeds of which were
$71.1 million in 1997 and $451.0 million in the first nine months of 1998 and
proceeds from the issuance of common stock of $15.9 million in 1997 and $31.8
million in the first nine months of 1998. A majority of the 1997 proceeds were
utilized to repay long-term debt of $22.1 million and repurchase preferred stock
and warrants for an aggregate amount of $31.5 million. A majority of the 1998
proceeds were utilized to repay long-term debt of $298.1 million and to purchase
RLECs. On July 31, 1997, a recapitalization (the
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"Recapitalization") of the Company was completed. The Company (i) issued 437,940
shares of the Company's Class A voting common stock for proceeds of $15.0
million in the aggregate to the Equity Investors and (ii) issued 4,400 shares to
members of management for proceeds of $150,705. Proceeds from the
Recapitalization and related borrowings of $39.2 million from CoBank, ACB were
utilized to (i) retire certain subordinated notes issued by ST Enterprises,
LTD., a wholly-owned subsidiary of the Company; (ii) repurchase all of the
outstanding shares of preferred stock of the Company not owned by management;
and (iii) repurchase certain common stock purchase warrants that were owned by
Fleet Equity Partners and its affiliates. In October 1997, the Company issued an
additional 43,790 shares of common stock to Kelso and Carousel for an aggregate
amount of approximately $1.5 million. The proceeds of this stock issuance were
utilized to finance the acquisition of C-R Communications, Inc.
The Company may secure additional funding through the sale of public or
private debt and equity securities or enter into another bank credit facility to
fund future acquisitions. If the Company's growth occurs more rapidly than is
currently anticipated or if its operating results are below expectations, there
can be no assurance that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable, or that the
Company's operations will produce positive cash flow in sufficient amounts to
meet its debt obligations. The Company's failure to raise and generate
sufficient funds may require it to delay or abandon some of its planned future
growth or expenditures, which could have a material adverse effect on the
Company's growth and its ability to compete in the telecommunications industry.
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NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information regarding their operating segments in annual
financial statements and requires that those enterprises report selected
information regarding their operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
regarding products and services, geographic areas, and major customers. SFAS 131
is effective for fiscal years beginning after December 15, 1997. The Company
believes that adopting this accounting pronouncement in 1998 will not have a
significant effect on the level of disclosures in its consolidated financial
statements.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and other Post-Retirement
Benefits" ("SFAS 132"), which is effective for fiscal years beginning after
December 15, 1997. SFAS 132 revises disclosure requirements for pension and
other post-retirement benefits plans. The Company believes that adopting this
accounting pronouncement in 1998 will not have a significant effect on the level
of disclosures in its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
anticipates adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's consolidated
financial statements.
YEAR 2000
The year 2000 issue involves the risk that computer systems using two-digit date
fields will fail to recognize properly the year 2000, resulting in computer
failures for businesses, government agencies, service providers, vendors and
customers. The Company has assessed its systems and believes them to be year
2000 compliant. In addition, the Company has received assurance from its major
software vendors that the products used by the Company are or will be compliant
by early 1999. If the systems of other companies on whose services the Company
depends or with whom the Company's systems interface are not year 2000
compliant, it could have a material adverse effect on the Company. The Company
has budgeted $100,000 to review the year 2000 issue during 1998 and will
continue its year 2000 issue assessment and, if it comes to the attention of
management that any of its systems, or the systems of those on whom the Company
relies, are not year 2000 compliant, the Company expects to develop an action
plan and devote the resources to address such problem. There can be no assurance
that devoting further resources of the Company to the year 2000 issue, if the
need should arise, would not have a material adverse effect on the Company.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company currently and from time to time is involved in litigation and
regulatory proceedings incidental to the conduct of its business, but the
Company is not a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.
On April 6, 1998, Latin World Communications, Inc. ("LWC") and Debra A.
Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May
("May"), who is a former officer of ST Long Distance (a subsidiary of the
Company), Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May,
and ST Long Distance in the Circuit Court for the Twelfth Judicial Circuit,
Sarasota County, Florida. From March 1997 through early 1998, ST Long Distance
provided long distance services to Plaintiffs in connection with the Plaintiffs'
prepaid telephone card distribution business. On June 26, 1998, Plaintiffs filed
an Amended Complaint. Plaintiffs assert claims against May, Siesta and ST Long
Distance for breach of contract, fraud, misappropriation of trade secrets,
overpayments to May, interference with business relationships, deceptive trade
practices and trade slander. Plaintiffs seek approximately $1 million in damages
plus an unspecified amount of damages related to these claims as well as
injunctive relief relating to certain other matters. The Company timely answered
the Plaintiffs' Complaint and Amended Complaint, denied Plaintiffs' claims,
asserted counterclaims against Plaintiffs, asserted cross-claims against May,
and filed a Third Party Complaint against David Dwiggins ("Dwiggins"), a
business partner of May. The Company intends to vigorously contest all of the
Plaintiffs' claims, believes that it has no liability to the Plaintiffs and will
actively pursue its claims against Plaintiffs, May and Dwiggins. While the
outcome of such litigation cannot be predicted, the Company does not believe
that such litigation, even if determined adversely to the Company, would have a
material adverse effect on its financial condition or results of operations.
Item 5. Other Information
RECENT AND PENDING ACQUISITIONS
The Company has recently completed the following RLEC acquisition:
UTILITIES, INC. On November 6, 1998, the Company acquired Utilities, Inc.
("Utilities"). Utilities is headquartered in Standish, Maine, approximately 15
miles west of Portland. Utilities operates approximately 22,200 access lines in
central and southern Maine, most of which are located in exchanges adjacent to
exchanges operated by subsidiaries of the Company. The Company purchased the
stock of Utilities for approximately $52.3 million and assumed approximately $12
million of debt of Utilities. In the year ended December 31, 1997, Utilities had
revenues of $16.2 million (which excludes the revenues of certain cellular
businesses of Utilities that were not acquired by the Company).
In the fourth quarter of 1998, the Company has entered into agreements to
acquire three other unrelated RLECs. The acquisitions are not expected to close,
however, until the first or second quarter of 1999. The aggregate purchase price
for the acquisitions is expected to be approximately $21.7 million and will be
financed through existing debt facilities. Each of the acquisitions will be
accounted for using the purchase method of accounting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Purchase Agreement and Subordination Agreement between Bankers
Trust Company and the Company.
27.1 Financial Data Schedule.
(b) Reports on Form 8K
The Company did not file any current reports on Form 8-K during
the quarter ended September 30, 1998
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MJD Communications, Inc.
Date: November 13, 1998 By: /s/ Walter E. Leach, Jr.
---------------------------
Walter E. Leach, Jr.
Senior Vice President, Chief
Financial Officer and Secretary
(Duly Authorized Officer and
Principal Financial Officer)