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<SEC-DOCUMENT>0001005477-99-001458.txt : 19990330
<SEC-HEADER>0001005477-99-001458.hdr.sgml : 19990330
ACCESSION NUMBER: 0001005477-99-001458
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990329
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MJD COMMUNICATIONS INC
CENTRAL INDEX KEY: 0001062613
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 133725229
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 333-56365
FILM NUMBER: 99576811
BUSINESS ADDRESS:
STREET 1: 521 EAST MOREHEAD ST
STREET 2: STE 250
CITY: CHARLOTTE
STATE: NC
ZIP: 28202
BUSINESS PHONE: 7043448150
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 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.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3725229
- ------------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
521 East Morehead Street, Suite 250
Charlotte, North Carolina 28202
------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (704) 344-8150.
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of March 24, 1999, the registrant had outstanding 1,810,146.80 shares
of common stock and no shares of the registrant's common stock were held by
non-affiliates.
<PAGE>
MJD COMMUNICATIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ITEM PAGE
NUMBER NUMBER
- ------ ------
- Index..............................................................2
PART I
1. Business...........................................................3
2. Properties........................................................10
3. Legal Proceedings.................................................11
4. Submission of Matters to a Vote of Security Holders...............12
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................13
6. Selected Financial Data...........................................14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .........................................16
7A. Quantitative and Qualitative Disclosures about Market Risk........23
8. Financial Statements and Supplementary Data.......................24
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................25
PART III
10. Directors and Executive Officers of the Registrant................26
11. Executive Compensation............................................28
12. Security Ownership and Beneficial Management .....................31
13. Certain Relationships and Related Transactions....................33
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8K...35
Independent Auditors Report and Schedule
- Signatures........................................................36
- Exhibit Index
<PAGE>
PART I
ITEM 1. BUSINESS
Company Overview
MJD Communications, Inc. ("MJD" or the "Company") is a provider of
telecommunications services to customers in rural communities offering a full
array of services which include local, intrastate and interstate access,
enhanced services, Internet services, cable television service and wireless
telephony. As of December 31, 1998, the Company believes that it was the
eighteenth largest telephone company in the United States, and the largest
telephone company in the United States that focuses primarily on acquiring and
operating rural telecommunications companies.
The Company believes that the rural telecommunications market is an
attractive investment opportunity due to the limited competition, stable
economic and demographic characteristics and a favorable regulatory environment;
in particular, pursuant to existing state and federal regulations, the Company
is able to charge rates which enable it to recover its operating and capital
costs, plus a reasonable (as determined by the relevant regulatory authority)
rate of return on its invested capital. The Company's rural local exchange
carriers ("RLECs") which serve this market are characterized by stable operating
results and strong cash flow margins. As of December 31, 1998, the Company had
successfully completed the acquisition of seventeen RLECs located in ten states
(Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota,
Washington, Oklahoma and Vermont) serving over 130,000 access lines. MJD's
strategy is to improve operating margins and reduce trailing acquisition
multiples by integrating many of the corporate and administrative functions of
the acquired companies and increasing revenues through innovative marketing
strategies for enhanced and ancillary services. The Company believes that the
attractive operating characteristics of rural markets and the Company's ability
to draw on its existing corporate resources create the opportunity to achieve
and maintain substantial operating efficiencies. During 1998, the Company
launched its competitive access exchange carrier ("CLEC") subsidiary, FairPoint
Communications Corp. ("FairPoint"), a wholly owned subsidiary. Through
FairPoint, the Company is extending its service offering to markets adjacent to
its RLECs. For the year ended December 31, 1998, FairPoint had entered fourteen
markets and has provisioned approximately 7,000 access lines which brought total
access lines under MJD ownership or management to approximately 137,000.
The Company was formed in 1991 to seek consolidation opportunities in the
RLEC market. The Company's senior management team has significant industry
experience and a demonstrated track record of acquiring and integrating RLECs.
As of December 31, 1998, senior management owned 24.6% of the common stock of
the Company on a fully diluted basis. The Company's primary equity investors are
investment partnerships affiliated with Kelso & Company ("Kelso") and Carousel
Capital Partners, L.P. ("Carousel" and collectively with Kelso, the "Equity
Investors"), each of which owned 37.7% of the common stock of the Company on a
fully diluted basis as of December 31, 1998. MJD benefits from the Equity
Investors' financial and management expertise and financial support. The Equity
Investors have invested a total of $47.8 million of equity capital in MJD
through December 31, 1998.
<PAGE>
Acquisition History
The following summarizes each RLEC the Company has acquired to date:
<TABLE>
<CAPTION>
Access Lines as
of Purchase
Location of December 31, Date Price
RLEC Acquired Operations 1998 Acquired (in millions)
- ------------------------------- --------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Sunflower Telephone Company, Kansas/Colorado 4,901 May 1993 $19.7
Inc.
Northland Telephone Company Maine/New 21,486 August 1994 $39.7
of Maine, Inc. Hampshire
STE/NE Acquisition Corp. d/b/a Vermont 5,675 August 1994 $12.0
Northland Telephone Company
of Vermont
Sidney Telephone Company Maine 1,417 January 1996 $ 3.0
Big Sandy Telecom, Inc. Colorado 934 June 1996 $ 3.1
Bluestem Telephone Company Kansas 1,008 August 1996 $ 3.9
Odin Telephone Exchange, Inc. Illinois 1,147 August 1996 $ 5.0
Kadoka Telephone Co. South Dakota 572 January 1997 $ 2.9
Columbine Telephone Company, Colorado 1,195 April 1997 $ 4.6
Inc.
Chautauqua & Erie Telephone New York 11,715 July 1997 $22.0
Corporation
C-R Communications, Inc. Illinois 936 October 1997 $ 4.0
Taconic Telephone Corp. New York 26,602 March 1998 $67.5
Ellensburg Telephone Company Washington 25,660 April 1998 $91.2
Chouteau Telephone Company Oklahoma 3,542 June 1998 $18.6
Utilities, Inc. Maine 22,859 November 1998 $46.8
Ravenswood Communications, Inc. Illinois 2,014 February 1999 $ 9.5
Columbus Grove Telephone Ohio 1,834 February 1999 $ 5.0
Company
Total: 133,497
</TABLE>
Industry Overview
The local exchange carrier ("LEC") industry is composed of a few large
companies such as the regional bell operating companies ("RBOCs") and a very
large number of relatively small independent companies ("RLECs"). These small,
independent telephone companies provide telephone service to more than five
million residences and businesses in secondary and rural marketplaces.
According to USTA data, there are over 1,250 independent telephone
companies with less than 25,000 access lines in the U.S., many of which could be
potential acquisition candidates for the Company. A majority of these small
telephone companies operate in sparsely populated rural areas where competition
from bypass companies including competitive access providers, cable television
operators or wireless telecommunications companies (such as cellular or PCS
providers) is limited due to the generally unfavorable economics of constructing
and operating such competitive systems. Most RLECs are privately held by
families or small groups of individuals. The Company believes that the owners of
these small
<PAGE>
companies are increasingly interested in selling such companies as the growing
technical, administrative and regulatory complexities of the local telephone
business challenge the capabilities of the existing management. In addition,
certain large telephone companies are selling many of their small rural
exchanges to focus their attention on their major metropolitan operations that
generate the bulk of their consolidated revenue and which are increasingly
threatened by competition. The Company believes that these companies cannot
continue to invest time and capital in rural operations that make up a
relatively insignificant portion of their consolidated operations. Given these
circumstances, the Company believes that it will continue to have numerous
opportunities to acquire RLECs and rural telephone operations currently owned by
the large telephone companies.
Rural Telephone Industry. RLECs typically exhibit stable economic and
demographic characteristics often associated with rural America. All of the
Company's telephone company subsidiaries qualify as "RLECs" under the
Telecommunications Act and are therefore entitled to benefit from a number of
cost recovery mechanisms associated with the "rural carrier" designation.
Because RLECs serve primarily rural areas and small towns, they tend to
have unique characteristics that differentiate them from larger local exchange
carriers ("LECs"). For instance, the per minute cost of operating both telephone
switches and interoffice facilities is higher in rural areas as RLECs typically
have fewer, more geographically dispersed customers and lower calling volumes.
Also, the distance from the telephone switch to the customer is typically longer
in rural areas, which results in increased distribution facilities costs. These
relatively high costs tend to discourage competitors from entering territories
served by RLECs. As a result, RLECs are not generally faced with the threat of
competition, as compared to the RBOCs which often serve densely populated areas
where significant economies of scale are achievable.
Revenue Components. An RLEC generates revenue from: (i) the provision of
basic local telephone service to customers within its service areas; (ii) the
provision of network access to inter-exchange carriers ("IXCs") for origination
and termination of interstate and intrastate long distance phone calls; (iii)
USSF payments; and (iv) the provision of ancillary services such as billing and
collection, long distance resale, enhanced services, wireless services, cable
television services, Internet services and customer premises equipment sales.
Capital Expenditures. Generally, RLECs' capital expenditures are (i)
capital expenditures for maintenance and (ii) expenditures for any expansions
required for growth within the RLEC's service area. Occasionally, RLECs are
required to make significant capital investments in a particular year to replace
a central switch, or to rebuild or upgrade elements or components of the RLEC's
outside plant.
Due to the relatively high cost associated with serving rural telephone
properties, affordable universal telephone service could not be provided without
the support mechanisms historically made available to RLECs. The government has
preserved these support mechanisms in the Telecommunications Act with an
established system of cost recovery mechanisms that ensure a minimum rate of
return on capital investment in rural telephone assets. As a result, RLECs are
entitled to recover a minimum rate of return on all capital invested in
regulated telephone assets.
Services
The Company offers a broad portfolio of high-quality telecommunications
services for residential, business, government and carrier customers in each of
its markets. The Company believes it is able to efficiently and reliably provide
all of the telecommunications services required by its customers, thereby
enhancing the Company's ability to build upon its recognized market brand
identity within each of its markets. These services include dial tone for local,
intrastate and interstate access, and such other services as long distance,
Internet services, cable television services, entertainment and wireless
telephony.
<PAGE>
Generation of Revenue
The Company primarily generates revenue through: (i) the provision of
basic local telephone service to customers within its service areas; (ii) the
provision of network access to IXCs for origination and termination of
interstate and intrastate long distance phone calls; (iii) USSF payments; and
(iv) the provision of ancillary services such as billing and collection, long
distance resale, enhanced services, wireless services, cable television
services, Internet services and customer premises equipment sales.
The following chart summarizes each component of the Company's revenue
sources for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
% 1996 % 1997 % 1998
Revenue Source Revenue Revenue Revenue Description
- ------------------- ------- ------- ------- ----------------------------------------------
<S> <C> <C> <C> <C>
Basic Local Service 18.4% 16.0% 19.2% Enables the local customer to originate
and receive an unlimited number of calls
within a defined "exchange" area. The
customer is charged a flat monthly fee
which is regulated by state agencies.
Intrastate Access 32.0% 29.5% 26.3% Enables an IXC to utilize the Company's
local network to originate or terminate an
intrastate call. The access charge is paid
by the IXC to the Company and is
regulated by state regulatory agencies.
Interstate Access 31.0% 27.7% 27.7% Enables an IXC to utilize the Company's
local network to originate or terminate an
interstate call. The access charge is paid
by the IXC to the Company and is
regulated by the FCC.
USSF Revenue 10.4% 9.0% 5.2% The Company receives funds to subsidize
the cost of providing high cost local
telephone service in rural locations. The
funds are allocated and distributed to the
Company from pools of funds generated
by IXCs and LECs.
Other Services 8.2% 17.8% 21.6% The Company generates revenues from
billing and collection, local and long
distance resale, enhanced services,
wireless services, cable services, Internet
services and customer premises
equipment sales.
</TABLE>
Basic Local Service
Basic local service includes basic local lines, ISDN, Centrex, foreign
exchange, private lines and switched data services. The Company provides basic
local services to residential, business and government customers, generally for
a fixed monthly charge. The amount that the Company can charge for local service
is determined by rate proceedings involving the appropriate state regulatory
authorities.
<PAGE>
Network Access Charges
Network access charges relate to long distance or toll calls that
typically involve more than one company to complete the call. Since toll calls
are generally billed to the customer originating the call, a mechanism is
required to compensate each company providing services to complete the call. The
Company bills access charges to the other company involved in completing the
call for the use of the Company's facilities to access the customer, as
described below:
Intrastate Access Charges. The Company generates intrastate access revenue
when an intrastate long distance call (which involves an IXC) is originated by a
customer within the same state but in another local access and transport area
("LATA," i.e., the calling area controlled by a LEC). The IXC pays the Company
an intrastate access payment for either terminating or originating the call. The
Company records the details of the call through its carrier access billing
system ("CABS") and receives the access payment from the IXC. When a customer of
the Company originates the call, the Company typically provides billing and
collecting for the IXC through a billing and collection agreement. The access
charge for the Company's intrastate service is regulated and approved by the
state regulatory authority.
Interstate Access Charges. The Company generates interstate access revenue
when an interstate long distance call is originated by a customer calling from a
LATA in one state to a LATA in another state. The Company bills interstate
access charges in the same manner as it bills intrastate access charges;
however, the interstate access charge is regulated and approved by the FCC
instead of the state regulatory authority.
USSF Revenue
The USSF supplements the amount of local service revenue received by the
Company to ensure that basic local service rates for customers in high cost
rural areas are consistent with rates charged in lower cost urban and suburban
areas. The USSF is funded by monthly customer fees charged to IXCs and
administered by the USAC which then distributes funds to the Company on a
monthly basis based upon the Company's costs for providing local service.
Other Services
The Company seeks to leverage its local presence and network
infrastructure by offering services to customers such as long distance, enhanced
services, wireless services, cable services, Internet services, billing and
collection for IXCs and customer premises equipment sales.
Long Distance Resale. In 1997, the Company began offering long distance
services to its customers in select markets. The Company offers switched and
dedicated long distance services in its select markets through resale agreements
with national IXCs. In addition, in late 1997, the Company began offering
wholesale long distance services to other independent telephone companies. As of
December 31, 1998, the Company's RLECs provided long distance service to 27,996
customers or approximately 37.7% of the Company's total access lines in selected
markets, and provided wholesale long distance service to seven independent
companies.
Enhanced Services. The Company's digital switch platform allows it to
offer enhanced services such as call waiting, call forwarding, call return,
continuous redial, caller ID, voice mail, teleconferencing, video conferencing,
store-and-forward fax and follow-me numbers. As of December 31, 1998,
approximately 36% of the Company's customers subscribed to one or more enhanced
services.
Wireless Services. The Company owns interests in various RSA or MSA
properties. The Company resells cellular services in certain of its markets and
may expand this wireless reseller strategy to other markets.
Cable and Direct Broadcast Satellite ("DBS") Services. The Company
currently offers cable television services to customers in its New York,
Colorado and Oklahoma telephone markets. The Company continually evaluates
opportunities to expand these markets or add DBS resale to its existing markets
where appropriate.
<PAGE>
Internet Services. The Company offers dedicated and dial-up Internet
access services in certain of its service areas. The Company operates and
manages its own servers or is an agent for a third-party Internet service
provider. The Company currently provides Internet services to over 4,048
customers in select markets, representing an average penetration rate in such
markets of 7.8%.
Billing and Collection. Many IXCs provide long distance services to the
Company's RLEC customers and elect to use the Company's billing and collection
services. The Company charges IXCs a billing and collection fee for each call
record generated by the IXC's customer.
Customer Premises Equipment Sales. In its New York markets, the Company
sells and services equipment on its customers' premises. This equipment includes
private branch exchanges, key systems, telephone sets and accessories. In
addition, the Company offers inside wire maintenance plans to most of its
customers.
CLEC Services. The Company has extended its service offerings to markets
adjacent to its RLEC franchise areas. The Company is or plans to offer an array
of telecommunications services, such as local, long distance, data and wireless
to customers in rural and small urban markets (populations between 25,000 and
75,000) within approximately 200 miles of a Company owned RLEC. During 1998,
FairPoint entered and began offering telecommunications services in fourteen
markets and at December 31, 1998 had provisioned approximately 7,000 access
lines. The Company entered these markets on a resale basis and once reaching
meaningful market share will migrate its customers to its own facilities-based
services connected to the Company's RLEC network and switching facilities.
Following Fairpoint's initial success, the Company plans to continue providing
services to these existing markets and entering additional markets in 1999.
Sales and Marketing
The Company's marketing approach emphasizes locally-managed,
customer-oriented sales, marketing and service. The Company differentiates
itself from its competitors by providing superior product and customer support
services in its markets. As of December 31, 1998, the Company had 147 employees
engaged in sales, marketing and customer service (excluding CLEC (as defined)
and long distance employees).
Each of the Company's RLECs generally has a long history in the
communities it serves. It is the Company's policy to maintain and build upon its
RLECs' strong market identity as this is a significant competitive advantage. As
the Company markets new services and through its CLEC offers like services to
out of franchise rural communities, it will seek to capitalize on its market
identity to capture greater market recognition and market share.
The Company has two basic groups of customers: (i) local customers located
in the Company's LATAs who pay for local phone service and (ii) the IXCs which
pay the Company for access to customers located within the Company's LATAs. In
general, the vast majority of the Company's local customers are residential, as
opposed to business, which is typical for rural telephone companies. In
addition, no single customer within any of the Company's RLECs represents more
than one half of one percent of such RLEC's total revenue.
Competition
The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act") and other recent actions taken by the FCC and state
regulatory authorities promote competition in the provision of
telecommunications services; however, many of the competitive threats now
confronting the
<PAGE>
large telephone companies do not currently exist in the RLEC marketplace. Since
the enactment of the Communications Act of 1934 and its reaffirmation in the
Telecommunications Act, regulations promoting "universal service" have allowed
RLECs to maintain advanced technology while keeping prices affordable for rural
customers. In light of the high cost per access line of installing lines and
switches and providing telephone service in sparsely-populated rural areas, a
system of cost recovery mechanisms has been established to, among other things,
keep rural customer telephone charges at a "reasonable" level and yet allow
owners of rural telephone companies to earn a fair return on their investment.
These cost recovery mechanisms have resulted in robust RLEC telecommunications
networks. All of the Company's telephone operating subsidiaries currently
qualify as RLECs as defined under the Telecommunications Act.
In markets where the Company implements its CLEC strategy, the Company
will compete with incumbent local exchange carriers ("ILEC") and possibly other
CLECs.
The Company will be subject to competition for suitable acquisition
candidates from other competitors engaged in the acquisition of RLECs. There are
over 1,250 small independent companies that are potential acquisition
candidates. However, a continuing trend toward business combinations and
alliances in the telecommunications industry may increase competition for such
acquisition candidates.
Network Facilities
As of December 31, 1998, (i) the Company's RLEC franchise areas included
92 exchanges serving approximately 130,000 access lines that were located across
approximately 12,146 square miles and (ii) the Company maintained over 12,200
miles of copper plant and 991 miles of fiber optic plant that interconnect the
Company's remote central offices with IXCs serving the Company's subscribers.
The Company's central office host and remote sites have advanced digital
switches manufactured by Nortel or Siemens and current generic software which
allows the Company to provide advanced calling features, products and services
to its rural subscribers. The outside plant consists of transport and
distribution delivery networks connecting the Company's host central office with
remote central offices and ultimately to the Company's customers. Fiber optic
technology is being deployed throughout the Company's network and is the primary
transport technology between the Company's host and remote central offices and
interconnection points with the RBOCs, GTE, long distance carriers or other
RLECs. Where topography and geography permit, cable is generally buried,
reducing the risk of service interruption from adverse weather.
The Company's fiber optic transport systems are primarily synchronous
optical networks ("SONET"). This type of network allows the Company to build and
design more durable networks, while utilizing the less durable asynchronous
optical systems for limited local or specialized applications. The Company's
fiber optic transport system is capable of supporting increasing customer demand
for high bandwidth transport services and applications.
The Company has integrated numerous elements of its network to offer a
variety of services and applications that meet increasingly sophisticated rural
communications customers. These network elements include SS7 signaling networks,
voice messaging platforms, switch based large Meet-Me Conference Bridges,
switched 56Kb/sec digital data and ISDN lines, and numerous customer located key
and PBX systems. As the telecommunications industry is subject to rapid and
significant changes in technology, customer demand and competitive pressures,
the Company consistently endeavors to introduce additional elements of
functionality to its network, including Frame Relay and ATM switches, Local
Number Portability, Advanced Intelligent Network (AIN) services, and Voice over
I/P (Internet) opportunities.
The Company has been segmenting its rural copper plant network into
Carrier Serving Areas ("CSA's"), effectively multiplying embedded copper plant
capacity and enabling unencumbered service deployment throughout the Company's
service areas. The Company's strategy is to push the intelligence and
unencumbered capabilities of host digital central office switch and transport
closer to its increasingly sophisticated rural communications customers by
deploying remote switches throughout the Company's service areas.
The Company plans to prudently invest capital to maintain, replace and
upgrade its entire telecommunications infrastructure. The Company continually
reviews expenditures to ensure they are economically justifiable and result from
an integrated network planning process.
<PAGE>
Employees
As of December 31, 1998, the Company employed a total of 706 full-time
employees, of whom 83 were represented by unions. The Company has collective
bargaining agreements with (i) Local 23-26 of the International Brotherhood of
Electrical Workers (AFL-CIO) 107 covering 7 employees employed by its Northland
Telephone Company of Vermont subsidiary; (ii) Local 1115 of the Communications
Workers of America, covering 15 employees employed by its Chautauqua & Erie
Telephone Corp. subsidiary in New York; and (iii) Local 166 of the International
Brotherhood Electrical Workers (AFL-CIO), covering 61 employees employed by its
Taconic Telephone Corp. subsidiary in New York. The contracts expire in February
1999, January 2000 and March 2000, respectively.
<PAGE>
ITEM 2. PROPERTIES
The Company owns most of its administrative and maintenance facilities,
rolling stock, central office and remote switching platforms and outside plant.
Administrative and maintenance facilities are generally located in or near
community centers. Central offices are often within the administrative building
and outlying customer service centers. Auxiliary battery or other non-utility
power sources are at each central office to provide uninterrupted service in the
event of an electrical power failure. Transport and distribution network
facilities (outside plant) include fiber optic backbone and copper wire
distribution facilities which connect customers to remote switch locations or to
the central office and to points of presence or interconnection with the IXCs.
These facilities are located on land pursuant to permits, easements or other
agreements. Rolling stock includes service vehicles, construction equipment and
other required maintenance equipment.
<PAGE>
ITEM 3. 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 STE),
Siesta Telecom, Inc. ("Siesta"), which is a company controlled by Mr. 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 Plaintiffs' prepaid
telephone card distribution business. Plaintiffs have alleged, among other
things, that Mr. May, Siesta and ST Long Distance have engaged in fraud,
misappropriation of trade secrets, unfair competition, deceptive trade practices
and trade slander; and that Mr. May, Siesta and ST Long Distance have breached
various contractual obligations to the Plaintiffs and received certain
overpayments from the Plaintiffs. Plaintiffs seek approximately $1 million in
damages relating to such alleged overpayments, as well as injunctive relief
relating to certain other matters. Despite the fact that LWC was unprofitable in
the year ended December 31, 1997 and without any substantiation by any third
party, on the basis of a three-month period in 1997 in which LWC claims it was
profitable, the Plaintiffs have also alleged that ST Long Distance is
responsible for lost profits of between $12 million and (assuming LWC's profits
were to grow at a rate of 20% annually) $38 million, which LWC would have
generated in the 10-year period after the cessation of the LWC/ST Long Distance
business relationship. The Company intends to vigorously contest all of the
Plaintiffs' allegations, and believes that it has no liability to the
Plaintiffs. In particular, the Company believes the Plaintiffs' claim for lost
profits are entirely speculative, frivolous and without merit. 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.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted during the fourth quarter of the
fiscal year to a vote of the security holders of MJD:
1. Consent by and among the Stockholders of MJD Communications, Inc.
dated November 23, 1998 to an increase in the authorized capital stock of
MJD by amendment to the Certificate of Incorporation. The amendment was
unanimously approved by the Stockholders.
2. Waiver and Consent by and among the Stockholders of MJD
Communications, Inc. dated October 27, 1998 regarding the dissolution of
MJD Partners, L.P. ("Partners"), the distribution of the assets of
Partners and the waiver of certain restrictions under the Stockholders'
Agreement dated July 31, 1997. The Waiver and Consent was unanimously
approved by the Stockholders of MJD.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(All share numbers and purchase price amounts have
been adjusted to give effect to the stock split which
occurred in November 1998.)
There is no established public market for the common equity of the
Company. Substantially all of the Company's equity securities are owned by
Carousel Capital Partners, L.P. ("Carousel"), Kelso Investment Associates V,
L.P. ("KIAV"), Kelso Equity Partners V, L.P. ("KEPV," and together with KIAV,
"Kelso") and the Company's executive officers and directors.
There are 2,086,816 shares of common stock that are subject to outstanding
options or warrants to purchase, or securities convertible into, common equity
of MJD.
There are no shares of common stock that could be sold pursuant to Rule
144 under the Securities Act or that MJD has agreed to register under the
Securities Act for sale by the security holders.
There are no shares that are being, or have been publicly proposed to be,
publicly offered by MJD (unless such common equity is being offered pursuant to
an employee benefit plan or dividend reinvestment plan), the offering of which
could have a material effect on the market price of MJD's common equity.
The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly held debt as well as
restrictive covenants in the Company's bank lending arrangement. The Company
currently has no intention of paying cash dividends on its equity securities for
the foreseeable future.
In March 1998, the Company sold 491,598.6 shares of Class A Voting Common
Stock to Kelso, Carousel and the Company's officers and directors for a purchase
price of $34.25 per share. The proceeds from the sale of these securities were
used by the Company to finance its acquisition of Taconic Telephone Corp. (See
Item 13, "Certain Relationships and Related Transactions--Purchase of Common
Stock by Management.")
In April 1998, the Company sold 437,944 shares of Class A Voting Common
Stock to Kelso and Carousel for a purchase price of $34.25 per share. The
proceeds from the sale of these securities were used by the Company to finance
its acquisition of Ellensburg Telephone Company.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands)
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1998, are derived from the
consolidated financial statements of MJD Communications, Inc. and its
subsidiaries, which in the case of the consolidated financial statements for the
years ended December 31, 1995, 1996, 1997 and 1998 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. The consolidated
financial statement data for the year ended December 31, 1994 are derived from
consolidated financial statements of the Company which were audited by other
independent certified public accountants. Dollar amounts are presented in
thousands.
<TABLE>
<CAPTION>
Actual
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues:
Switched services...................... $ 12,656 $ 22,763 $ 27,973 $ 39,257 $ 72,124
Other.................................. 1,369 1,986 2,383 8,506 19,883
--------- -------- ---------- ---------- ----------
Total operating revenues.................. 14,025 24,749 30,356 47,763 92,007
--------- -------- ---------- ---------- ----------
Operating expenses:
Plant operations....................... 1,886 3,746 4,181 6,857 14,293
Corporate and customer service......... 3,991 6,433 7,577 11,581 22,275
Depreciation and amortization.......... 3,099 5,757 6,644 8,777 20,089
Cost of services resold................ -- -- 97 4,791 6,163
Other.................................. 1,081 1,407 1,658 3,318 12,625
--------- -------- ---------- ---------- ----------
Total operating expenses.................. 10,057 17,343 20,157 35,324 75,445
--------- -------- ---------- ---------- ----------
Income from operations.................... 3,968 7,406 10,198 12,439 16,562
--------- -------- ---------- ---------- ----------
Other income (expense):
Net income (loss) on sale of
investments and other assets........ 1,030 (30) (3) (19) 651
Interest income........................ 143 225 180 212 442
Dividend income........................ 553 664 667 1,182 1,119
Interest expense....................... (3,772) (7,267) (9,605) (9,293) (27,170)
Other nonoperating, net................ 29 33 (15) 140 885
--------- -------- ---------- ---------- ----------
Total other income (expense).............. (2,017) (6,375) (8,776) (7,778) (24,073)
--------- -------- ---------- ---------- ----------
Earnings (loss) before income taxes and
extraordinary item..................... 1,951 1,031 1,423 4,661 (7,511)
Income tax (expense) benefit.............. (940) (547) (1,462) (1,876) 2,112
--------- -------- ---------- ---------- ----------
Earnings (loss) before extraordinary item
and minority interest.................. 1,011 484 (39) 2,785 (5,399)
Extraordinary item........................ -- -- -- (3,611) (2,521)
--------- -------- ---------- ---------- ----------
Earnings (loss) before minority interest.. 1,011 484 (39) (826) (7,920)
Minority interest income of subsidiaries.. (14) (6) (33) (62) (80)
--------- -------- ---------- ---------- ----------
Net earnings (loss)....................... $ 997 $ 478 $ (72) $ (888) (8,000)
========= ======== ========== ========== ==========
Balance Sheet Data:
Cash and cash equivalents................. $ 5,016 $ 3,672 $ 4,253 $ 6,822 $ 13,241
Working capital........................... 1,406 1,026 596 108 9,557
Property, plant and equipment net......... 37,616 37,048 41,615 61,207 142,321
Total assets.............................. 82,281 79,218 97,020 144,613 440,891
Long-term debt............................ 66,991 64,180 73,958 131,912 368,112
Redeemable preferred stock................ 6,618 6,701 10,689 130 --
Total stockholders' equity (deficit)...... (333) 103 (2,142) (10,939) 9,886
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Actual
-------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Adjusted EBITDA(1)........................ $ 8,808 $ 14,050 $ 17,639 $ 22,669 $ 39,668
Capital expenditures...................... 1,768 4,439 8,439 8,262 12,433
Ratio of earnings to fixed charges(2)..... 1.5x 1.1x 1.1x 1.5x --
Summary Cash Flow Data:
Net cash provided by operating activities. $ 5,504 $ 6,039 $ 9,772 $ 9,839 $ 14,867
Net cash provided by (used in) investing
activities............................. (50,846) (4,481) (19,790) (38,967) (225,522)
Net cash provided by financing activities. 49,937 (2,903) 10,599 31,697 217,074
Operating Data:
Access lines in service................... 28,205 28,737 34,017 48,731 129,649
</TABLE>
- ----------
(1) Adjusted EBITDA represents net earnings (loss) plus interest expense,
income taxes, depreciation and amortization, and extraordinary items.
Adjusted EBITDA is presented because management believes it provides
useful information regarding the Company's ability to incur and/or service
debt. Management expects that investors may use this data to analyze and
compare other telecommunications companies with the Company in terms of
operating performance, leverage and liquidity. Adjusted EBITDA is not a
measurement of financial performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated
net earnings (loss) as a measure of performance, or for cash flow as a
measure of liquidity. The definition of EBITDA in the Indenture is
designed to determine EBITDA for the purposes of contractually limiting
the amount of debt which the Company may incur. Adjusted EBITDA presented
herein differs from the definition of EBITDA in the Indenture, which
excludes from the calculation of EBITDA (i) net income of Unrestricted
Subsidiaries (as defined in the Indenture) unless such net income is
actually dividended to the Company or a Restricted Subsidiary and (ii) net
income of any Restricted Subsidiary to the extent there is any restriction
on the ability of such Restricted Subsidiary to pay dividends to the
Company (except that the Company's equity in the net income of any such
Restricted Subsidiary is included to the extent of dividends actually
received by the Company from such Restricted Subsidiary). The definition
of EBITDA in the Indenture is a component of the term "Pro Forma EBITDA"
in the Indenture, which is used in a financial covenant calculation
therein. Pro Forma EBITDA, as defined in the Indenture, differs from
Adjusted EBITDA primarily because it is calculated after giving effect to
cost savings the Company believes will be achieved during the applicable
period. Adjusted EBITDA as calculated by the Company is not necessarily
comparable to similarly captioned amounts of other companies.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest
and extraordinary items, plus fixed charges. Fixed charges include
interest expense on all indebtedness, capitalized interest and rental
expense on operating leases representing that portion of rental expense
deemed to be attributable to interest. The Company had a deficiency of
$7,511 to cover fixed charges in 1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
General. MJD was founded in 1991 to participate in the consolidation
opportunities that exist in the highly fragmented, independent, largely
privately held and operated, rural segment of the telecommunications industry.
The Company is actively acquiring and operating rural local telephone carriers
("RLEC"). For the year ended December 31, 1998, the Company owned and operated
17 RLECs located in ten states. As of December 31, 1998, the Company believes
that it was the eighteenth largest telephone company in the United States, with
approximately 130,000 access lines, and the largest telephone company in the
United States that focuses primarily on acquiring and operating rural
telecommunications service companies. Also, during 1998 the Company launched its
competitive access exchange carrier ("CLEC"), FairPoint Communications Corp
("FairPoint"), a wholly owned subsidiary. By year end 1998, FairPoint was
providing telecommunications services in fourteen markets and provisioned
approximately 7,000 access lines. With the inclusion of FairPoint, total access
lines under management by the Company was 137,000 at December 31, 1998.
For the year ended December 31, 1998, the Company had revenue and adjusted
EBITDA of approximately $92.0 million and approximately $39.7 million,
respectively. The Company provided net cash of approximately $14.9 million from
operating activities, used net cash of approximately $225.5 million in investing
activities and provided net cash of approximately $217.1 million from financing
activities for the year ended December 31, 1998.
The Company's operations have been characterized by stable growth and cash
flow that typifies the stable economic and demographic characteristics of its
rural service areas. The primary reason for the growth in the Company's cash
flow has been the acquisition of additional RLECs. During 1998, the Company
acquired four RLECs that significantly contributed to the Company's growth for
the year ended December 31, 1998. As a result of these four acquisitions, the
Company acquired approximately 78,700 access lines and various cable television,
Internet and wireless assets. See Note 2 to Consolidated Financial Statements
for additional information.
Total Minutes of Use Growth Under MJD Ownership
The following chart illustrates Minutes of Use ("MOU") growth experienced
by the Company:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sunflower-Kansas ... 50,895,394 51,274,642 52,393,074 60,791,553 69,506,448
Sunflower-Colorado . 5,122,171 4,998,707 5,338,954 5,474,730 5,511,144
Northland-Maine .... 91,695,162* 227,850,913 245,268,456 291,489,937 349,727,547
Northland-Vermont .. 23,123,900* 55,819,538 63,293,970 68,263,915 79,443,225
Sidney ............. 21,169,908 23,411,177 24,808,248
Big Sandy .......... 8,018,156* 17,149,198 18,502,564
Bluestem ........... 2,657,899* 7,308,376 12,709,165
Odin ............... 6,775,410* 17,128,665 17,568,669
Kadoka ............. 6,686,692 6,476,420
Columbine .......... 13,165,980* 20,348,139
Chautauqua & Erie .. 76,854,224* 161,719,750
C-R ................ 4,443,983* 18,881,863
Taconic ............ 307,410,445*
Ellensburg ......... 252,951,181*
Chouteau ........... 32,206,913*
Utilities .......... 46,998,323*
Total .......... 170,836,627 339,943,800 404,915,827 592,168,430 1,424,770,044
=========== =========== =========== =========== =============
</TABLE>
* Period includes less than 12 months.
<PAGE>
Access Line Growth Under MJD Ownership
The following chart illustrates access lines at the individual RLECs for the
fiscal year indicated:
1994 1995 1996 1997 1998
-------- -------- -------- -------- -------
Sunflower--Kansas ..... 4,097 4,140 4,232 4,343 4,553
Sunflower--Colorado ... 302 305 326 332 348
Northland of Maine .... 18,629 18,978 19,728 20,493 21,486
Northland of Vermont .. 5,177 5,314 5,409 5,510 5,675
Sidney ................ 1,295 1,359 1,417
Big Sandy ............. 865 893 934
Bluestem .............. 1,018 992 1,008
Odin .................. 1,144 1,164 1,147
Kadoka ................ 580 572
Columbine ............. 1,085 1,195
C&E ................... 11,070 11,715
C-R ................... 910 936
Taconic ............... 26,602
Ellensburg ............ 25,660
Chouteau .............. 3,542
Utilities ............. 22,859
Total ............. 28,205 28,737 34,017 48,731 129,649
====== ====== ====== ====== =======
Note: Data is as of December 31 of the relevant year.
The 1998 acquisitions represented 78,700 access lines or 60.6% of the
total access lines at December 31, 1998. For the RLECs acquired prior to 1998,
access lines were 50,986, an increase of 4.6% compared to prior year, 1997.
Revenues: The Company generates revenue primarily through: (i) the
provision of basic local telephone service to customers within its service areas
(including federal USSF revenues, which accounted for approximately 5.2 % for
the year ended December 31, 1998); (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, customer
premises equipment sales and FairPoint. The revenues listed in clauses (i) and
(ii) above are classified by the Company as "Switched Services." The revenues
listed in clause (iii) above are classified by the Company as "Other revenue."
% of Revenue
----------------------------------------------
Revenue Source 1996 1997 1998
- -------------- ------------- ------------ ------------
Basic Local Service .................... 18.4% 16.0% 19.2%
Interstate and Intrastate Access ....... 63.0% 57.2% 54.0%
USSF ................................... 10.4% 9.0% 5.2%
Other Services ......................... 8.2% 17.8% 21.6%
The Company's historically stable revenues 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. Universal Service Support Fund ("USSF") revenues are a support payment
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 revenue is generated from the ancillary
services described above.
The Company's RLECs have two basic groups of customers: (i) local
customers located in the RLEC's LATA(s) who pay for local telephone service and
(ii) the IXCs which pay the RLEC, directly or via National Exchange Carrier
Association ("NECA") for access to customers located within the RLEC's LATA(s).
The RLECs provide access service to numerous IXCs and also bill and collect long
distance charges from customers on behalf of the IXCs. The amount of access
charge revenue associated with a particular IXC varies depending upon the RLEC's
local customers' long distance calling patterns and choice of long distance
carrier.
<PAGE>
Operating Expenses: The Company's operating expenses are categorized as
plant operations, corporate and customer service, depreciation and amortization,
cost of services resold and other general and administrative expenses. Year to
year changes in such expenses are influenced by access line growth and general
business inflationary adjustments. Plant operations expenses consist of
operating 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. Cost of services resold are the expenses incurred to
provide long distance resale by the Company's long distance subsidiary, ST Long
Distance ("STLD") and local and long distance resale by FairPoint. Other general
and administrative expenses are expenses such as property taxes, operating
expenses at STLD and FairPoint and other miscellaneous expenses.
Other (Income) Expenses: The Company's other income includes interest
income, dividends, gain or loss on sale of assets and other miscellaneous,
non-operating income. The Company's other expenses consist primarily of interest
on the Company's debt and other non-operating expenses.
Results of Operations
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Operating Revenue. Net revenue increased $44.2 million or 92.6% to $92.0
million in the year ended December 31, 1998 from $47.8 million in the year ended
December 31, 1997. The acquisition in 1998 of Taconic Telephone Corp.,
Ellensburg Telephone Company, Chouteau Telephone Company, and Utilities, Inc.
(collectively, the "1998 Acquisitions") as well as the full year results for the
RLECs acquired by the Company in 1997 (collectively, the "1997 Acquisitions"),
provided for 87.6 % of the increase. The Company's CLEC, FairPoint, reported
first year revenues of $1.1 million or 2.5% of the increase in revenues reported
in 1998. For the RLECs owned and operated for a comparable period in 1998 and
1997, net revenue improved approximately $1.0 million or 2.3% to $43.9 million
in 1998 from $42.9 million in 1997.
Basic local service revenue increased $10.1 million to $17.7 million for
the year ended December 31, 1998 from $7.6 million for the year ended December
31, 1997. This revenue increase is primarily attributable to an increase in
access lines. The Company's access lines increased to 129,649 access lines from
48,731 access lines at December 31,1998 and 1997, respectively. The inclusion of
access lines from the RLECs acquired by the Company during 1998 provided an
increase of approximately 78,700 access lines and internal growth by RLECs owned
and operated by the Company at December 31, 1997 provided an increase of
approximately 2,300 access lines. Revenue contribution from the RLECs acquired
in 1998 and 1997 provided $9.6 million of the increase in basic local service
revenue for the year ended December 31, 1998. For the RLECs owned and operated
for a comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.9 million for the year ended December 31, 1997 from $6.5
million for the year ended December 31, 1997.
USSF revenue increased $0.4 million to $4.7 million for the year ended
December 31, 1998 from $4.3 million for the year ended December 31, 1997. For
the RLECs owned and operated for a comparable period by the Company, USSF
revenues decreased by $0.3 million to $3.7 million dollars for the year ended
December 31, 1998 from $4.0 million for the year ended December 31, 1997.
Interstate and intrastate revenues increased $22.4 million to $49.7
million for the year ended December 31, 1998 from $27.3 million for the year
ended December 31, 1997. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenue administered by NECA or a respective state's settlement methodologies.
Revenue contribution from the RLECs acquired in 1998 and 1997 provided $17.2
million and $4.3 million, respectively, of the increase in interstate and
intrastate revenue for the year ended December 31, 1998. For the RLECs owned and
operated for a comparable period by the Company, interstate and intrastate
revenues increased by $0.9 million to $26.0 million for the year ended December
31, 1998 from $25.1 million for the year ended December 31, 1997.
Other revenues increased $11.4 million to $19.9 million for the year ended
December 31, 1998 from $8.5 million for the year ended December 31, 1997.
Revenue contribution from the RLECs acquired by the Company during 1998 and 199
provided $6.8 million and $2.4 million, respectively, of the increase in other
revenue for the year ended December 31, 1998. FairPoint reported first year
revenue of $1.1 million. For the RLECs owned and operated for a comparable
period by the Company, other revenues increased by $1.0 million to $8.4 million
for the year ended December 31, 1998 from $7.4 million for the year ended
December 31, 1997.
<PAGE>
Operating Expenses. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses increased $40.1 million or
113.6% to $75.4 million in the year ended December 31, 1998 from $35.3 million
during the year ended December 31, 1997. The increase was primarily attributable
to the operating expenses incurred by the 1998 Acquisitions and the 1997
Acquisitions, which contributed an aggregate of $31.6 million of the increase.
Expenses associated with the start up and operation of FairPoint were $5.8
million or 14.5% of the expense increase in 1998. For RLECs owned and operated
for a comparable period in 1998 and 1997, operating expense increased
approximately $2.6 million or 8.3% to $34.0 million in 1998 from $31.4 million
in 1997. This increase can be attributed to a $3.0 million increase in corporate
and customer service expenses associated with the dramatic growth experienced by
the Company in 1998.
Income from Operations. As a result of the factors described above, income
from operations increased $4.1 million or 33.1% to $16.6 million in the year
ended December 31, 1998 from $12.4 million in the year ended December 31, 1997.
As a percentage of revenues, the income from operations was 18.0% in 1998 as
compared to 26.0% in 1997. The income from operations decline in 1998 is
primarily attributed to the expenses associated with the launch of FairPoint.
For RLECs owned and operated for comparable periods in 1998 and 1997, the income
from operations decreased $1.8 million to $9.7 million in 1998 from $11.5
million in 1997 and the income from operations margin decreased to 22.4% from
26.9%. The decrease was attributed to an increase in corporate and customer
services expenses.
Other Income (Expense). Net other expense increased $16.3 million or
209.5% to $24.1 million in the year ended December 31, 1998 from $7.8 million
during the year ended December 31, 1997. The increase was due to primarily
interest expense associated with the additional debt incurred to complete the
1998 Acquisitions. The increase in other expenses was partially offset by a net
gain from sale of assets of $0.7 million and an increase of $0.2 million in
dividend and interest income from the Company's investments.
Extraordinary Item. For the year ended December 31, 1998, the Company
recognized an extraordinary loss of $2.5 million (net of taxes) related to the
early retirement of debt.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Operating Revenue. Net revenue increased $17.4 million or 57.3% to $47.8
million in the year ended December 31, 1997 from $30.4 million in the year ended
December 31, 1996. Revenue from the acquisitions in 1997 of Kadoka Telephone
Co., Columbine Telephone Company, Chautauqua & Erie Telephone Corp. ("C&E") and
C-R Communications, Inc. (collectively, the "1997 Acquisitions") as well as the
full year results for the RLECs acquired by the Company in 1996 (collectively,
the "1996 Acquisitions"), provided for 46.4% of the increase. The company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 23.0% of the increase in total revenues reported in 1997. For RLECs owned and
operated for a comparable period in 1997 and 1996, net revenue increased
approximately $5.3 million or 19.2% to $32.9 million in 1997 from $27.6 million
in 1996.
Basic local service revenue increased $2.0 million to $7.6 million for the
year ended December 31, 1997 from $5.6 million for the year ended December 31,
1996. This revenue increase is primarily attributable to an increase in access
lines. The Company's access lines increased 14,714 to 48,731 access lines from
34,017 access lines for the years ended December 31, 1997 and 1996,
respectively. The inclusion of access lines from the RLECs acquired by the
Company during 1997 provided an increase of 13,645 access lines and internal
growth by RLECs owned and operated by the Company at December 31, 1997 provided
an increase of 1,069 access lines. Revenue contribution from the RLECs acquired
in 1997 and 1996 provided $1.6 million of the increase in basic local service
revenue for the year ended December 31, 1997. For the RLECs owned and operated
for a comparable period by the Company, basic local service revenue increased by
$0.4 million to $6.5 million for the year ended December 31, 1997 from $5.6
million for the year ended December 31, 1996.
USSF revenues increased $1.1 million to $4.3 million for the year ended
December 31, 1997 from $3.2 million for the year ended December 31, 1996. For
the RLECs owned and operated for a comparable period by the Company, USSF
revenues increased by $0.4 million to $3.6 million dollars for the year ended
December 31, 1997 from $3.2 million for the year ended December 31, 1996.
Interstate and intrastate revenues increased $8.2 million to $27.3 million
for the year ended December 31, 1997 from $19.1 million for the year ended
December 31, 1996. This revenue increase is attributable to an increase in
access lines and MOUs and an increase in interstate and intrastate settlement
revenue administered by NECA or a respective state's settlement methodologies.
Revenue contribution from the RLECs acquired in 1997 and 1996 provided $1.5
million and $2.8 million, respectively, of the increase in interstate and
intrastate revenues for the year ended December 31, 1997. For the RLECs owned
and operated for a comparable period by the Company, interstate and intrastate
revenues increased by $3.9 million to $23.1 million for the year ended December
31, 1997 from $19.1 million for the year ended December 31, 1996.
<PAGE>
Other revenues increased $6.1 million to $8.5 million for the year ended
December 31, 1997 from $2.4 million for the year ended December 31, 1996.
Revenue contribution from the RLECs acquired by the Company during 1997 and 1996
provided $0.1 million and $1.2 million, respectively, of the increase in other
services revenues for the year ended December 31, 1997. The Company's long
distance resale subsidiary, STLD, reported first year revenues of $4.0 million
or 65.6% of the increase in total revenues reported in 1997. For the RLECs owned
and operated for a comparable period by the Company, other revenues increased by
$0.6 million to $3.1 million for the year ended December 31, 1997 from $2.5
million for the year ended December 31, 1996.
Operating Expenses. Operating expenses, which include plant operations,
corporate and customer service, depreciation and amortization, cost of services
resold and other general and administrative expenses increased $15.2 million or
75.2% to $35.3 million in the year ended December 31, 1997 from $20.1 million
during the year ended December 31, 1996. The increase was primarily attributable
to the operating expenses incurred by the acquisitions of businesses in 1997 and
1996, which contributed an aggregate of $6.3 million to the increase. Expenses
allocated with the start up and operations of STLD were $5.4 million or 35.5% of
the total expense increase in 1997. For RLECs owned and operated for a
comparable period in 1997 and 1996, operating expense increased approximately
$3.6 million or 19.4% to $22.2 million in 1997 from $18.6 million in 1996. Most
of this increase can be attributed to a $1.2 million increase in corporate and
customer service, a $0.9 million change in other expense related to a change in
regulatory treatment for a reciprocal use agreement with Bell Atlantic
Corporation, and and an increase in toll costs related to new ISP activity.
Income from Operations. As a result of the factors described above, income
from operations increased $2.2 million or 22.0% to $12.4 million in the year
ended December 31, 1997 from $10.2 million in the year ended December 31, 1996.
As a percentage of revenues, income from operations margin was 26.0% in 1997 as
compared to 33.6% in 1996. For RLECs owned and operated for comparable periods
in 1997 and 1996, the income from operations increased $1.8 million or 20.2% to
$10.7 million in 1997 from $8.9 million in 1996 and the income from operations
margin increased to 32.5% from 32.4%.
Other Income (Expense). Net other expense decreased $1.0 million or 11.4%
to $7.8 million in the year ended December 31, 1997 from $8.8 million during the
year ended December 31, 1996. The improvement was because there was a decrease
in interest expense of approximately $0.3 million and an increase of $0.5
million in dividend and interest income from the company's investments.
Extraordinary Item. For the year ended December 31, 1997, the Company
recognized an extraordinary loss of $3.6 million (net of taxes) related to the
early retirement of debt.
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 "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 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 Credit Facility.
See Note 5 to Consolidated Financial Statements for additional information.
On May 5, 1998, the Company consummated its debt offering consisting of
$125.0 million in aggregate principal amount of 9 1/2% Senior Subordinated Notes
due 2008 (the "Fixed Rate Notes"), and $75.0 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 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
<PAGE>
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 pursuant to a Registration Statement on Form S-4 filed with the Securities
and Exchange Commission (File # 333-56365, declared effective October 1, 1998 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. The Company is currently in
compliance with all covenants under the Credit Facility. See Note 5 to
Consolidated Financial Statements for additional information.
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 by the Equity Investors through
December 31, 1998.
In addition to debt service, the Company's principal liquidity
requirements are generally expected to be for general corporate purposes,
capital expenditures and to finance the Company's pending acquisition
activities. The Company believes that the proceeds from the Credit Facility, the
Notes and the sale of non-core assets during 1999 provide sufficient resources
to fund the pending acquisitions that will close in the first half of 1999. The
Company's annual capital expenditures for existing operations have historically
been significant. Because existing regulations allow the Company to recover its
operating 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 1998 and 1997 and 1996, the Company spent approximately $12.4
million, $8.3 million and $8.4 million, respectively, on capital expenditures.
The Company's entry into additional markets as a CLEC is expected to
result in the Company's incurring initial operating losses. The Company invested
approximately $5.0 million in 1998 and it expects to invest approximately $15.0
million in 1999, to expand into ten additional markets bringing its total
markets to 24 by the end of 1999. In addition, FairPoint plans to build
facilities to migrate its customers to the Company's existing networks, which
will require substantial capital expenditures in 1999 and 2000. The Credit
Facility limits the funding of such losses and capital expenditures to (i) $5.0
million per year so long as the senior debt leverage ratio exceeds 4.0x and (ii)
$15.0 million per year whenever such leverage ratio is under 4.0x. The terms of
the Notes also impose certain restrictions on the Company's ability to fund
FairPoint's expansion. If FairPoint's plan proves to be successful, the Company
believes it will be able to raise separate financing for FairPoint's future
capital requirements as permitted under the Credit Facility and the Indenture
for the Notes.
Net cash provided by operating activities was $14.9 million and $9.8
million for the years ended December 31, 1998 and 1997, respectively. Net cash
used in investing activities was $225.5 million and $39.0 million for the year
ended December 31, 1998 and 1997, respectively. These cash flows primarily
reflect expenditures relating to acquisitions of RLECs of $217.1 million and
$30.8 million for the years ended December 31, 1998 and 1997, respectively and
capital expenditures of $12.4 and $8.3 for the years ended December 31, 1998 and
1997, respectively. Net cash provided by financing activities was $217.1 and
$31.7 million for the years ended December 31, 1998 and 1997, respectively.
These cash flows primarily represent borrowings, the proceeds of which were
$510.6 in 1998 and $71.1 in 1997, and from the proceeds of the issuance of
common stock of $31.8 million and $15.9 million in 1998 and 1997, respectively.
A majority of the 1998 proceeds were used to repay long-term debt of $307.8 and
to complete the 1998 acquisitions. 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. See Note 9 to Consolidated
Financial Statements for additional information.
Net cash provided by operating activities was $9.8 million for each of the
years ended December 31, 1997 and 1996. Net cash used in investing activities
was $39.0 million and $19.8 million for the years ended December 31, 1997 and
1996, respectively. These cash flows primarily reflect expenditures relating to
acquisitions of telephone properties of $30.8 million and $11.3 million for the
years ended December 31, 1997 and 1996, respectively, and capital expenditures
of $8.3 million and $8.4 million for the years ended December 31, 1997 and 1996,
respectively. Net cash provided by financing activities was $31.7 million and
$10.6 million for the years ended December 31, 1997 and 1996, respectively.
These cash flows primarily represent borrowings, the proceeds of which were
$71.1 million and proceeds from the issuance of common stock of $15.9 million in
1997. 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. On July 31, 1997, a recapitalization (the
"Recapitalization") of the Company was completed. For additional information,
see Note 9 to the Consolidated Financial Statements.
<PAGE>
Adjusted EBITDA is not a measure of performance under generally accepted
accounting principles and should not be construed as a substitute for
consolidated net earnings (loss) as a measure of performance, or as a substitute
for cash flow as a measure of liquidity. Adjusted EBITDA presented herein
differs from the definition of EBITDA in the indenture applicable to the
covenants for the Notes. The definition of EBITDA in such indenture is designed
to determine EBITDA for the purposes of contractually limiting the amount of
debt which the Company may incur. Adjusted EBITDA as calculated by the Company
is not necessarily comparable to similarly captioned amounts of other companies.
Adjusted EBITDA is presented because management believes it provides
useful information regarding the Company's ability to incur and/or service debt.
Increases or decreases in Adjusted EBITDA may indicate improvements or
decreases, respectively, in the Company's free cash flows available to incur
and/or service debt and cover fixed charges. Management expects that, because
Adjusted EBITDA is commonly used in the telecommunications industry as a measure
of performance, investors may use this data to analyze and compare other
telecommunications companies with the Company in terms of operating performance,
leverage and liquidity.
Adjusted EBITDA increased 75.0% to $39.7 million for the twelve months
ended December 31, 1998 from $22.7 million in the year ended December 31, 1997.
Adjusted EBITDA reported by the RLECs was $44.8 million, by STLD was $(0.5)
million and by FairPoint was $(4.6) million for the year ended December 31,
1998. Adjusted EBITDA increased 28.5% from $17.6 million in the year ended
December 31, 1996 to $22.7 million in the year ended December 31, 1997. Adjusted
EBITDA reported by the RLECs was $24.1 million and by STLD was $(1.4) million
for the year ended December 31, 1997. Adjusted EBITDA reported by the RLECs was
$17.6 million for the year ended December 31, 1996.
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.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
anticipates adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's consolidated
financial statements.
Inflation
The Company does not believe inflation has a significant effect on its
operations.
Year 2000
The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (i) identify each critical system element that requires date code
remediation, (ii) establish a plan to remediate such systems, (iii) implement
all required remediations and (iv) selectively test the remediated systems.
Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned systems; (i) switching and transmission
hardware and software used by the Company to route and deliver telephone calls;
(ii) network support systems, including customer services systems and (iii)
billing and collection systems used by the Company to invoice and process most
of its customer payments. In addition, the Company (i) receives critical
services from providers of utilities and other services to facilities that house
employees and switching, transmission and other equipment and (ii) is dependent
upon outside vendors for, among other things, the provision of critical network
components. The Company is also critically reliant upon the systems of other
telecommunication carriers with which the Company's systems interconnect
<PAGE>
for the routing and delivery of telephone calls. The Company has also identified
potential Year 2000 related liability with respect to the telephone equipment
manufactured by unaffiliated parties that the Company has sold or leased to its
customers. The identification, planning and remediation phases of the Plan are
materially complete as they relate to Company-owned systems.
Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors and other telecommunications
carriers:
o The Company generally plans to remediate Company-owned switching,
transmission, billing and collection and other critical systems
through the revision or replacement of current system components.
Necessary changes to Company-owned systems are in process and are
expected to be completed by mid-year 1999. The selective testing and
verification of such changes are expected to be completed during
1999. Due to the large number of system components requiring
remediation, the Company does not intend to test every remediated
system but will rely upon the results of selective testing to
determine the effectiveness of remediation efforts.
o With respect to critical services provided by utilities and other
third parties, the Company is in the process of contacting all such
suppliers and plans to have contacted all such suppliers before the
end of first quarter 1999. Thus far, a majority of those suppliers
contacted have responded that their systems and service delivery
mechanisms are Year 2000 compliant or can be made so through
currently available modifications. The Company plans to continue
monitoring all third-party remediation efforts and to make
contingency plans for the delivery of such services as necessary.
o The Year 2000 compliance status of other telecommunications carriers
with which the Company's switching systems interconnect is not yet
known. The Company is making inquiries with these carriers to
determine their compliance status and expects to obtain the results
of compliance tests during second quarter 1999, although there can
be no assurance that carriers will supply this information.
While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the most reasonably likely worst
case scenario of the failure by the Company, its suppliers or other
telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company (i) to provide
telecommunications services to the Company's customers, (ii) to route and
deliver telephone calls originating from or terminating with other
telecommunications carriers, (iii) to timely and accurately process service
requests and (iv) to timely and accurately bill its customers. In addition to
lost earnings, these failures could also result in loss of customers due to
service interruptions and billing errors, substantial claims by customers and
increased expenses associated with Year 2000 litigation, stabilization of
operations and executing mitigation and contingency plans.
Contingency planning to maintain and restore services in the event of
natural disasters, power failures and systems-related problems is a routine part
of the Company's operations. The Company believes that such contingency plans
will assist the Company in responding to the failure by outside service
providers to successfully address Year 2000 issues. In addition, the Company is
currently identifying and considering various Year 2000-specific contingency
plans, including identification of alternate vendors and service providers and
manual alternatives to system operations. These Year 2000-specific contingency
plans are expected to be materially completed during the first quarter of 1999,
but their review and development will continue into 1999.
Although the total costs to implement the Plan cannot be precisely
estimated, the Company anticipates spending approximately of $1.0 million. The
costs incurred to date and estimated remaining costs are for outside
consultants, software and hardware applications. These costs will be expensed as
incurred, unless new systems are purchased that should be capitalized in
accordance with generally accepted accounting principles. The Company does not
separately track the internal costs incurred for the Year 2000 project, and such
cost are principally the related payroll costs for its information systems
group. Some of the costs represent ongoing investment in systems upgrades, the
timing of which is being accelerated in order to facilitate Year 2000
compliance. In some instances, such upgrades will position the Company to
provide more and better-quality
<PAGE>
services to its customers than they currently receive. The Company expects to
fund these costs with cash provided by operations. Cost estimates and statements
of the Company's plans discussed above are forward-looking statements that are
derived using numerous assumptions of future events, many of which are outside
the Company's control, including the availability and future cost of trained
personnel and various other resources, third party modification plans, the
absence of systems requiring remediation that have not yet been discovered, and
other factors.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow exposures
from changes in interest rates on long-term debt as approximately 82% of the
Company's debt is at fixed rates or effectively at fixed rates through the use
of interest rate swaps. At December 31, 1998, the fair value of the Company's
long-term debt is estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities. At December 31, 1998, the Company had
long-term debt with a carrying value of approximately $368.1 million and
estimated fair value of approximately $370.0 million. The market risk is
estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 91.6 basis points in interest
rates (ten percent of the rates currently offered to the Company). An increase
in interest rates would result in approximately a $0.7 million decrease in fair
value of the Company's long-term debt.
During 1998, the Company entered into interest rate swaps to manage its exposure
to fluctuations in interest rates of its variable rate debt. The fair value of
these swaps was approximately $(1.7) million at December 31, 1998. The negative
fair value indicates an estimated amount the Company would have to pay to cancel
the contracts or transfer them to other parties. Pertaining to its Credit
Facility, the Company used an interest rate swap agreement with a notational
amount of $25 million to effectively convert a portion of its variable interest
rate exposure to a fixed rate of 9.91%. The swap agreement expires on September
29, 2000. As to its Floating Rate Notes, the Company used two interest rate swap
agreements, with notational amounts of $50 million and $25 million,
respectively, to effectively convert its variable interest rate exposure to a
fixed rate of 10.01% and 9.95%, respectively. Both swap agreements expire on
November 1, 2001.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
MJD Communications, Inc.:
We have audited the accompanying consolidated balance sheets of MJD
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MJD Communications,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
February 19, 1999
Lincoln, Nebraska
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
-------- -------
(Dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,241 6,822
Accounts receivable, net of allowance for doubtful accounts of
$369 in 1998 and $49 in 1997 19,112 8,313
Prepaid and other assets 3,283 1,249
Income taxes recoverable -- 757
-------- -------
Total current assets 35,636 17,141
-------- -------
Property, plant, and equipment, net 142,321 61,207
-------- -------
Other assets:
Investments 37,894 11,424
Goodwill, net of accumulated amortization 203,867 50,433
Debt issue costs, net of accumulated amortization 16,121 2,981
Covenants not to compete, net of accumulated amortization 2,938 988
Other 2,114 439
-------- -------
Total other assets 262,934 66,265
-------- -------
Total assets $440,891 144,613
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity (Deficit) 1998 1997
--------- --------
(Dollars in thousands
except share data)
<S> <C> <C>
Current liabilties:
Accounts payable $ 10,153 5,055
Current portion of long-term debt 3,502 5,409
Demand notes payable 754 879
Current portion of obligation for covenants not to compete 881 256
Accrued interest payable 3,947 2,819
Accrued property taxes 1,847 1,171
Other accrued liabilities 4,407 1,444
Income taxes payable 588 --
--------- --------
Total current liabilities 26,079 17,033
--------- --------
Long-term liabilities:
Long-term debt, net of current portion 364,610 126,503
Put warrant obligation 4,169 3,456
Unamortized investment tax credits 632 199
Obligation for covenants not to compete, net of current portion 2,162 756
Deferred income taxes 26,729 6,983
Other liabilities 3,189 132
--------- --------
Total long-term liabilities 401,491 138,029
--------- --------
Minority interest 435 360
--------- --------
Redeemable preferred stock -- 130
--------- --------
Common stock subject to put option, 87,600 shares in 1998 3,000 --
--------- --------
Stockholders' equity (deficit):
Common stock:
Class A voting, par value $.01 per share, authorized 3,000,000
shares, issued and outstanding 1,722,547 and 880,600 shares
in 1998 and 1997, respectively 17 9
Additional paid-in capital 45,735 16,906
Accumulated deficit (35,866) (27,854)
--------- --------
Total stockholders' equity (deficit) 9,886 (10,939)
--------- --------
Total liabilities and stockholders' equity $ 440,891 144,613
========= ========
</TABLE>
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Operating revenues:
Switched services $ 72,124 39,257 27,973
Other 19,883 8,506 2,383
-------- ------- -------
Total operating revenues 92,007 47,763 30,356
-------- ------- -------
Operating expenses:
Plant operations 14,293 6,857 4,181
Corporate and customer service 22,275 11,581 7,577
Depreciation and amortization 20,089 8,777 6,644
Cost of services resold 6,163 4,791 97
Other general and administrative 12,625 3,318 1,658
-------- ------- -------
Total operating expenses 75,445 35,324 20,157
-------- ------- -------
Income from operations 16,562 12,439 10,199
-------- ------- -------
Other income (expense):
Net gain (loss) on sale of investments and other assets 651 (19) (3)
Interest income 442 212 180
Dividend income 1,119 1,182 667
Interest expense (27,170) (9,293) (9,605)
Other nonoperating, net 885 140 (15)
-------- ------- -------
Total other expense (24,073) (7,778) (8,776)
-------- ------- -------
Earnings (loss) before income taxes
and extraordinary item (7,511) 4,661 1,423
Income tax (expense) benefit 2,112 (1,876) (1,462)
-------- ------- -------
Earnings (loss) before extraordinary item (5,399) 2,785 (39)
Extraordinary item - loss on early retirement of debt, net of
income tax benefit of $1,755 in 1998 and $2,296 in 1997 (2,521) (3,611) --
-------- ------- -------
Loss before minority interest (7,920) (826) (39)
Minority interest in income of subsidiaries (80) (62) (33)
-------- ------- -------
Net loss $ (8,000) (888) (72)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Total
Class A Additional Retained stockholders'
common paid-in earnings equity
stock capital (deficit) (deficit)
----- ------- -------- --------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 4 146 (47) 103
Net loss -- -- (72) (72)
Accretion of redeemable preferred stock -- (146) (2,027) (2,173)
----- ------- ------- -------
Balance, December 31, 1996 4 -- (2,146) (2,142)
Net loss -- -- (888) (888)
Issuance of 487,580 shares of common stock 5 15,870 -- 15,875
Conversion of redeemable preferred stock -- 112 -- 112
Capital contribution -- 924 -- 924
Repurchase of redeemable preferred stock -- -- (24,541) (24,541)
Redeemable preferred stock dividends -- -- (279) (279)
----- ------- ------- -------
Balance, December 31, 1997 9 16,906 (27,854) (10,939)
Net loss -- -- (8,000) (8,000)
Preferred stock dividends -- -- (12) (12)
Issuance of 929,540 shares of common stock 9 31,828 -- 31,837
Reclassification of 87,600 shares of common stock
subject to put option (1) (2,999) -- (3,000)
----- ------- ------- -------
Balance, December 31, 1998 $ 17 45,735 (35,866) 9,886
===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,000) (888) (72)
--------- ------- -------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 21,534 9,093 6,914
Provision for uncollectible revenue 303 -- 5
Deferred income taxes (1,653) 207 429
Income from equity method investments (931) -- --
Deferred patronage dividends (265) (585) (304)
Minority interest in income of subsidiaries 80 62 33
Increase (decrease) in put warrant obligation 714 (295) 2,072
Net (gain) loss on sale of investments and other assets (630) 17 3
Loss on early retirement of debt 2,897 1,864 --
Amortization of investment tax credits (131) (31) (16)
Changes in assets and liabilities arising from
operations, net of acquisitions:
Accounts receivable 6,075 (1,563) (465)
Prepaid and other assets 253 (106) (19)
Accounts payable (1,398) 1,664 773
Accrued interest payable 1,128 720 105
Accrued liabilities 689 636 338
Income taxes recoverable/payable (5,798) (956) (24)
--------- ------- -------
Total adjustments 22,867 10,727 9,844
--------- ------- -------
Net cash provided by operating activities 14,867 9,839 9,772
--------- ------- -------
Cash flows from investing activities:
Acquisitions of telephone properties, net of cash acquired (217,080) (30,845) (11,262)
Acquisition of property, plant, and equipment (12,433) (8,262) (8,439)
Proceeds from sale of property, plant, and equipment 107 121 70
Organizational costs (158) -- --
Distributions from investments 118 63 9
Payment on covenant not to compete (219) (94) (19)
Acquisition of investments (8) (241) (149)
Proceeds from sale of investments 4,088 403 --
Payments received on direct financing leases -- 249 --
Increase (decrease) in other assets/liabilities, net 63 (361) --
--------- ------- -------
Net cash used in investing activities $(225,522) (38,967) (19,790)
--------- ------- -------
</TABLE>
6 (Continued)
<PAGE>
MJD COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 510,583 71,134 12,824
Repayment of long-term debt (307,763) (22,104) (3,673)
Net proceeds from issuance of preferred stock -- -- 1,816
Repurchase of preferred stock and warrants (175) (31,487) --
Dividends paid to preferred stockholders (12) (279) --
Net proceeds from the issuance of common stock 31,837 15,875 --
Loan origination costs (17,345) (1,949) (326)
Payment of early retirement benefits -- (25) (21)
Dividends paid to minority stockholders (6) (4) (4)
Release of restricted funds -- 561 --
Repayment of capital lease obligation (45) (25) (17)
--------- ------- -------
Net cash provided by financing activities 217,074 31,697 10,599
--------- ------- -------
Net increase in cash and cash equivalents 6,419 2,569 581
Cash and cash equivalents, beginning of year 6,822 4,253 3,672
--------- ------- -------
Cash and cash equivalents, end of year $ 13,241 6,822 4,253
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) Organization and Summary of Significant Accounting Policies
Organization
MJD Communications, Inc. (MJD) provides management services to its
wholly-owned subsidiaries: S T Enterprises, Ltd. (STE); MJD Ventures, Inc.
(Ventures); MJD Services Corp. (Services); MJD Holdings Corp. (Holdings),
FairPoint Communications Corp. (FairPoint) and MJD Capital Corp. STE,
Ventures, Services, and Holdings also provide management services to their
wholly-owned subsidiaries.
Collectively, the wholly-owned subsidiaries of STE, Ventures, Services,
and Holdings primarily provide telephone local exchange services in
various states. Operations also include resale of long distance services,
internet services, cable services, equipment sales, and installation and
repair services. MJD Capital Corp. leases equipment to other subsidiaries
of MJD. FairPoint is a competitive local exchange carrier (CLEC) reselling
local and long distance services in various states.
STE's wholly-owned subsidiaries include Sunflower Telephone Company
(Sunflower); Northland Telephone Company of Maine, Inc. and Northland
Telephone Company of Vermont, Inc. (The Northland Companies); S T
Communications, Inc.; S T Paging, Inc.; and S T Long Distance, Inc. (S T
Long Distance), Venture's wholly-owned subsidiaries include Sidney
Telephone Company (Sidney), C-R Communications, Inc. (C-R), Taconic
Telephone Corp. (Taconic), Ellensburg Telephone Company (Ellensburg),
Chouteau Telephone Company (Chouteau), Utilities, Inc. (Utilities) and
Telephone Services Company (TSC). Services' wholly-owned subsidiaries
include Bluestem Telephone Company (Bluestem); Big Sandy Telecom, Inc.
(Big Sandy); Columbine Telecom Company (Columbine); and Odin Telephone
Exchange, Inc. (Odin). Holdings' wholly-owned subsidiaries include Kadoka
Telephone Co. (Kadoka) and Chautauqua & Erie Telephone Corporation (C&E).
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of MJD
Communications, Inc. and its subsidiaries (the Company). All intercompany
transactions and accounts have been eliminated in consolidation.
The consolidated financial statements have been prepared using generally
accepted accounting principles applicable to regulated entities. The
Company's telephone subsidiaries follow the accounting for regulated
enterprises prescribed by Statement of Financial Accounting Standards
(SFAS) No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION.
This accounting recognizes the economic effects of rate regulation by
recording costs and a return on investment, as such amounts are recovered
through rates authorized by regulatory authorities. Accordingly, SFAS No.
71 requires the Company's telephone subsidiaries to depreciate telephone
plant over useful lives that would otherwise be determined by management.
SFAS No. 71 also requires deferral of certain costs and obligations based
upon approvals received from regulators to permit recovery of such amounts
in future years. The Company's telephone subsidiaries periodically review
the applicability of SFAS No. 71 based on the developments in their
current regulatory and competitive environments.
8 (Continued)
<PAGE>
MJD COMMUNICATIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Revenue Recognition From Telephone Operations
Revenues from telephone services are recognized from primarily three
sources: access, pooling, and miscellaneous. Local access charges are
billed to local end users under tariffs approved by each state's Public
Utilities Commission. Access revenues are derived on the intrastate
jurisdiction by billing access charges to interexchange carriers and to
regional bell operating companies. These charges are billed based on toll
or access tariffs approved by the local state's Public Utilities
Commission. Access charges for the interstate jurisdiction are billed in
accordance with tariffs filed by the National Exchange Carrier Association
(NECA) or by the individual company and approved by the Federal
Communications Commission.
Revenues are determined on a bill and keep basis or a pooling basis. If on
a bill and keep basis, the Company bills the charges to either the access
provider or the end user and keeps the revenue. If the Company
participates in a pooling environment (interstate or intrastate), the toll
or access billed are contributed to a revenue pool. The revenue is then
distributed to individual companies based on their company-specific
revenue requirement. This distribution is based on individual state Public
Utilities Commission's (intrastate) or Federal Communications Commission's
(interstate) approved separation rules and rates of return. Distribution
from these pools can change relative to changes made to expenses, plant
investment, or rate of return. Some companies participate in federal and
certain state universal service programs that are pooling in nature but
are regulated by rules separate from those described above. These rules
vary by state.
Miscellaneous revenues are derived by billing to either end users, access
providers, or other parties, services such as directory advertising,
billing and collecting services, rent, etc. These services are typically
billed under contract or under tariff supervision.
The costs of services resol