Madison River Communications, which laid off about 140 workers at the end of 2001, is scrambling to find $35 million to make a payment to the former owners of Coastal Communications, which the company acquired in May 2000.

Part of the acquisition agreement with Coastal Communications, a data and voice service providers for businesses with an extensive fiber network across the Southeast to Dallas, included two “put options” that were offered to its three founders.

One comes due in 2005 for an undisclosed amount, and the other, due this year, for $35 million according to an analyst who follows the company, has already been called. That means the option holders want their money. Trouble is, Madison River only has $21.6 million of cash on hand, according to figures released by the company.

Ironically, Madison River’s 2001 revenue increase of $16.4 million — up to $184.3 million compared to $167.1 million in 2000 – comes from its first full year of reporting revenues from Coastal Communications. Company officials declined to comment on their quest for an investor other than to say they are deep into discussions.

“The concern is that if they are forced to pay that in cash then the company’s liquidity situation would not look as clean as it does now,” says Pat Dyson, director of RBC Capital Markets in New York, who follows Madison River. “The ideal situation would be for them to secure equity financing to pay off the $35 million.”

Less emphasis on the CLEC business?

Madison River, which also discussed the layoffs during a conference call, may have slimmed down just enough to be attractive to private investors during this ugly time for telecoms. The company employed as many as 1,000 people in all divisions in 2000 and had some 240 or so employees at its North Carolina headquarters.

Although Madison River has declined to provide guidance for 2002, it is trying to draw investor attention to the recent decline in EBITDA for its integrated communications division (ICD) that is responsible for 17,400 voice and DSL connections.

“It almost looks like they’re getting out of the CLEC business all together,” Dyson says.

In December 2001, the ICD’s adjusted earnings before interest, taxation, depreciation and amortization (EBITDA) loss totaled $872,000 and decreased to about $470,000 during the month of January, compared to a loss of $23.1 million for all of 2001. “We’d like to break even here during the second quarter,” CEO Steve Vanderwoude said in the conference call to discuss earnings . The ICD generated 2001 revenues of $15.5 million.

Company officials anticipate that Madison River’s capital expenditure rate will continue shrinking through 2002. The company spent $54 million last year, and company officials say that amount will decrease this year to $20 million, mainly because it has completed the build out of is network.

Plans call for the ICD to continue to add new connections, although much slower than in the past, and Madison River will concentrate these efforts in the Research Triangle Park area and in New Orleans. The company also plans to maintain its presence in Illinois but it is no longer directing sales efforts in that market, according to its annual report.

“Our success in the ICD primarily came from expense cuts,” Vanderwoude says. “This is a result of going from a growth and sales focused business plan to the self-funded plan that requires fewer sales people — and other personnel.”

Local telecommunications division grows

Meanwhile, Madison River’s local telecom division continues to sign up customers. As of Dec. 31 the local telecom division (LTD) had about 206,000 voice and DSL connections, an increase of 5,460 over 2000. Of those connections 135,700 are residential lines, 59,100 are business lines and 11,100 are DSL connections. The LTD also has 80,200 long-distance customers and 30,000 dial-up Internet subscribers.

The LTD accounted for $168.8 million of Madison River’s 2001 revenues and finished the year with EBTIDA of $85.6 million. And as long as the company maintains its focus on rural customers – the only market segment BellSouth isn’t holding in a death grip – it seems to be in a good position to experience gradual growth, says RBC’s Dyson.

“Growth will not be huge but I think it is important right now that they are bringing their cash burn rate down,” Dyson says.