SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission File No. 0-16751
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CFW COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
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
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(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 5/13/98 13,008,934
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CFW COMMUNICATIONS COMPANY
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets,
March 31, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of
Income, Three Months Ended
March 31, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows, Three Months Ended
March 31, 1998 and 1997 6
Condensed Consolidated Statements of
Shareholders' Equity, Three Months Ended
March 31, 1998 and the Year Ended 1997 7
Notes to Condensed Consolidated Financial
Statements 8-9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-15
PART II. OTHER INFORMATION 16
SIGNATURES 17-18
2
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<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
<S> <C>
March 31,1998 December 31,
(Unaudited) 1997
--------------------- --------------------
ASSETS
Current Assets
Cash and cash equivalents $ 144,273 $ 1,224,347
Accounts receivable 10,760,985 12,931,115
Materials and Supplies 1,979,266 2,039,345
Prepaid expenses and other 349,613 349,617
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13,234,137 16,544,424
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Securities and Investments 17,571,053 16,873,601
--------------------- --------------------
Property and Equipment
In service 136,622,548 135,689,959
Under construction 3,375,124 2,013,191
--------------------- --------------------
139,997,672 137,703,150
Less accumulated depreciation 44,337,670 42,032,163
--------------------- --------------------
95,660,002 95,670,987
--------------------- --------------------
Other Assets
Cost in excess of net assets of 13,030,938 13,062,856
business acquired, less accumulated
amortization
Deferred charges 1,862,778 2,311,206
Radio spectrum licenses 5,153,487 3,984,455
--------------------- --------------------
20,047,203 19,358,517
--------------------- --------------------
$ 146,512,395 $ 148,447,529
===================== ====================
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
March 31, 1998 December 31,
(unaudited) 1997
------------------- -------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 4,803,684 $ 4,169,282
Customers' deposits 458,321 457,343
Advance billings 2,065,713 2,081,491
Accrued payroll 525,672 1,459,821
Accrued interest 383,586 815,622
Other accrued liabilities 2,702,728 2,651,719
Deferred revenue 1,467,800 1,329,877
Income taxes payable 325,909 124,545
------------------- -------------------
12,733,413 13,089,700
------------------- -------------------
Long-Term Debt 19,969,796 24,606,160
------------------- -------------------
Long-term Liabilities
Deferred income taxes 10,429,551 9,242,246
Retirement benefits other than 8,610,280 8,431,688
pensions
Other 1,993,609 1,471,543
------------------- -------------------
21,033,440 19,145,477
------------------- -------------------
Minority Interests 1,285,289 1,150,690
------------------- -------------------
Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 43,420,298 43,420,269
Retained earnings 48,070,159 47,035,233
------------------- -------------------
91,490,457 90,455,502
------------------- -------------------
$ 146,512,395 $ 148,447,529
=================== ===================
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
Operating Revenues
Wireline communications $ 9,211,446 $ 8,313,260
Wireless communications 3,159,444 2,708,918
Directory assistance 3,269,466 1,915,587
Other communications services 594,926 528,283
16,235,282 13,466,048
Operating Expenses
Maintenance and support 2,642,594 2,064,054
Depreciation and amortization 2,493,675 2,186,362
Customer operations 3,893,580 3,045,285
Corporate operations 1,658,555 1,684,006
10,688,404 8,979,707
Operating Income 5,546,878 4,486,341
Other Income (Expenses)
Other expenses, principally interest (189,538) (390,234)
Interest and dividend income 24,839 77,267
Equity loss from PCS investees (895,583) -
Equity income from other wireless investees 4,506 62,530
Loss on write-down of investment (270,067) -
4,221,035 4,235,904
Income Taxes 1,636,787 1,611,006
2,584,248 2,624,898
Minority Interests (134,598) (144,972)
Net Income $ 2,449,650 $ 2,479,926
- ------------------------------------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.19 $ 0.19
Net income per common share - diluted $ 0.19 $ 0.19
Average shares outstanding - basic 12,994,323 12,980,212
Average shares outstanding - diluted 13,096,162 13,061,732
- ------------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.10875 $ 0.103
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
--------------------------------------------
March 31, March 31,
1998 1997
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,449,650 $ 2,479,926
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,358,969 2,062,418
Amortization 134,706 123,944
Deferred taxes 1,187,305 407,471
Retirement benefits other than pensions 178,592 163,808
Other 47,936 153,883
Equity from wireless investees 891,077 (62,530)
Minority interests, net of distributions 134,598 86,749
Distributions received from investments 642 70,239
Loss on write-down of investment 270,067 -
Changes in assets and liabilities from operations:
(Increase) decrease in accounts receivable 2,170,130 (563,334)
(Increase) decrease in materials and supplies 60,079 (15,925)
Decrease in other current assets 4 592,068
Increase (decrease) in accounts payable 634,402 (831,540)
Decrease in other accrued liabilities (1,315,176) (763,881)
Increase (decrease) in other current liabilities (14,800) 972,347
Increase in income taxes payable 201,364 -
-------------------- -------------------
Net cash provided by operating activities 9,389,545 4,875,643
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,998,323) (2,793,889)
(Deposit) refund on radio spectrum licenses, net (561,000) 1,344,377
Investments in PCS alliances (1,956,602) -
Other 97,365 112,943
-------------------- -------------------
Net cash used in investing activities (4,418,560) (1,336,569)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (1,414,724) (1,336,962)
Payments on senior notes (3,636,364) -
Payments on lines of credit, net (1,000,000) (2,350,000)
Net proceeds from exercise of stock options 29 -
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Net cash used in financing activities (6,051,059) (3,686,962)
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Decrease in cash and cash equivalents (1,080,074) (147,888)
Cash and cash equivalents:
Beginning 1,224,347 3,003,607
-------------------- -------------------
Ending $ 144,273 $ 2,855,719
==================== ===================
See Notes to Condensed Consolidated Financial Statements.
6
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity
<CAPTION>
Common Stock
Shares Amount Retained Accumulated Comprehensive
Earnings Other Income
Comprehensive
Income
Balance, December 31, 1996 12,980,212 $ 43,378,440 $ 40,163,310 $ 2,460,176
Net Income - - 2,479,926 - 2,479,926
Unrealized loss on securities - - - (3,262,248) (3,262,248)
available for sale, net of $2.1
million deferred tax benefit
Cash dividends - - (1,336,962) - -
Balance, March 31, 1997 12,980,212 43,378,440 41,306,274 (802,072) (782,322)
Net Income - - 5,905,398 - 5,905,398
Unrealized loss on securities - - - (1,159,604) (1,159,604)
available for sale, net of $0.7
million deferred tax benefit
Cash dividends - - (1,337,217) - -
Balance, June 30, 1997 12,980,212 43,378,440 45,874,455 (1,961,676) 3,963,472
Net Income - - 2,893,651 - 2,893,651
Unrealized gain on securities - - - 539,251 539,251
available for sale, net of $0.3
million deferred tax obligation
Cash dividends - - (1,337,228) - -
Stock options exercised, net 62 825 - - -
Balance, September 30, 1997 12,980,274 43,379,265 47,430,878 (1,422,425) 7,396,374
Net Income - - 941,957 - 941,957
Reclassification to realized loss, - - - 1,422,425 1,422,425
included in net income
Cash dividends - - (1,337,602) - -
Stock options exercised, net 6,380 41,004 - - -
Balance, December 31, 1997 12,986,654 43,420,269 47,035,233 - $ 9,760,756
==================
Net Income - - 2,449,650 - $ 2,449,650
Cash dividends - - (1,414,724) - -
Stock options exercised, net 22,280 29 - -
Balance, March 31, 1998 13,008,934 $ 43,420,298 $ 48,070,159 $ - $ 2,449,650
========== =============== ================= =============== ==================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
7
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CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1997, contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1998 and December
31, 1997 and the results of operations for the three months ended March
31, 1998 and 1997 and cash flows for the three months ended March 31,
1998 and 1997. The results of operations for the three months ended
March 31, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
(2) The Company adopted the additional disclosure provisions of Financial
Accounting Standards Board (FASB) Statement No. 130, reporting
comprehensive income, in the first quarter of 1998. This pronouncement
results in the Company presenting in a financial statement all items
required to be recognized under accounting standards as components of
comprehensive income. The Company has elected to present this
information in the consolidated statement of shareholders' equity.
(3) The Company recognized a $2.8 million ($1.7 million after tax)
impairment loss on its investment in American Telecasting, Inc. in the
fourth quarter of 1997. Accordingly, the unrealized loss of $2.3 million
before-tax ($1.4 million after tax) was reclasssified to realized loss.
(4) At December 31, 1997, the Company adopted the provisions of FASB
Statement No. 128, Earnings Per Share, which provides for the dual
presentation of basic net income per share and diluted net income per
share. The weighted average number of common shares outstanding, which
was used to compute diluted net income per share, were increased by
101,846 and 81,520 shares for the three months ended March 31, 1998 and
1997, respectively, to reflect the assumed conversion of dilutive stock
options. The Company currently has 476,179 options outstanding to
acquire shares of common stock, of which 219,506 are currently
exercisable.
(5) The Company has a 21% common ownership interest in Virginia PCS
Alliance, L.C. (VA Alliance), a provider of personal communications
services (PCS) serving a 1.6 million populated area in central and
western Virginia. The Company is managing such build-out pursuant to a
service agreement. PCS operations began throughout the Virginia region
in the fourth quarter of 1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. (WV Alliance), an owner of PCS radio spectrum licenses
for most of West Virginia and parts of eastern Kentucky, southwestern
Virginia and eastern Ohio. These licenses enable the WV Alliance to
build-out and operate a system to provide PCS services to a 2.0 million
populated area. The Company is managing this build-out pursuant to a
service agreement. The WV Alliance expects to commence operations by
June 1998.
Combined summarized financial information for the VA Alliance and WV
Alliance (Alliances), both of which are accounted for by the equity
method, are as follows:
March 31, 1998 December 31,1997
-------------- ----------------
Current assets $ 5,940,000 $ 5,756,000
Noncurrent assets 105,898,000 101,560,000
Current liabilities 20,509,000 37,549,000
Noncurrent liabilities 56,416,000 33,571,000
Redeemable preferred stock 12,819,000 12,812,000
8
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CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
March 31, 1998
Net sales $ 325,000
Gross profit/(loss) (121,000)
Net loss applicable to common owners (4,289,000)
Company's share of net loss (896,000)
The Company has entered into guaranty agreements whereby the Company is
committed to provide guarantees of up to $36.2 million of the VA
Alliance's debt and redeemable preferred obligations and up to $15.1
million of the WV Alliance's debt obligations, with such guarantees
becoming effective as obligations are incurred by the Alliances. At
March 31, 1998, the Company has guaranteed $20.0 million of the
Alliances' obligations.
9
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Three Months Ended March 31, 1998 and 1997
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is a diversified
communications company providing a broad range of products and services to
business and residential customers. These communications products and services
include local telephone, long distance, cellular, personal communications
services (PCS), paging, wireless and wireline cable television, directory
assistance, competitive access, local internet access, and alarm monitoring and
installation.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment.
In addition, the Company has leveraged its existing switching platform and fiber
optic network by introducing new services such as long distance, directory
assistance, cable television, local internet access, and various enhanced
services such as call waiting and caller identification. These activities have
contributed to considerable growth in the Company's operating revenues.
As a result of the Company's increasing focus on and growth in wireless
communications and other competitive communications related businesses, a larger
percentage of the Company=s operating revenues and operating cash flows
(operating cash flows is defined as operating income before depreciation and
amortization) are being generated by businesses other than the mature telephone
operations. Accordingly, management believes operating cash flow is a meaningful
indicator of the Company's performance. Operating cash flow is commonly used in
the wireless communications industry and by financial analysts and others who
follow the industry to measure operating performance. Operating cash flows
should not be construed as an alternative to operating income or cash flows from
operations (both as determined in accordance with generally accepted accounting
principles) or as a measure of liquidity.
Through the Virginia PCS Alliance, L.C. ("VA Alliance") and West Virginia PCS
Alliance, L.C. ("WV Alliance"), and other PCS joint ventures, the Company has
acquired radio spectrum licenses for personal communications services ("PCS")
for markets with an aggregate population of five million people. These licenses
will enable the Company, as managing partner of both Alliances, to deploy PCS
services in central and western Virginia, West Virginia and parts of Maryland,
Ohio, Pennsylvania, Kentucky and Tennessee. In the fourth quarter of 1997 the VA
Alliance commenced providing PCS to a 1.6 million populated area in central and
western Virginia. The Company has commenced construction of the WV Alliance's
PCS network and expects to commence providing PCS services in the Charleston and
Huntington corridor by mid-1998 and the Clarksburg, Fairmont and Morgantown
corridor in the second half of 1998.
In 1998, management expects continued proportionate growth in revenue and
operating cash flows from its current consolidated operations. However, the
recent trend of lower operating margins due to start-up costs associated with
deploying new services in existing markets and expansion into new markets is
expected to continue. In the first quarter of 1998, the Company recognized a
loss of approximately $0.9 million ($0.7 million for the fourth quarter of 1997)
for its share of losses from PCS partnerships. The Company's recognition of its
share of losses associated with its investments in PCS partnerships is expected
to be significant in 1998 as the Company recognizes a full year of its share of
operating losses from the Virginia PCS Alliance and begins recognizing its share
10
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CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
of operating losses from the West Virginia PCS Alliance, which is expected to
commence operations in 1998. These losses from equity investments are expected
to exceed net income growth from consolidated operations and will likely result
in consolidated net income levels below amounts reported in recent years. These
losses from equity investments are expected to continue into future years until
build-out is completed and a sufficient customer base is established.
The Company wishes to caution readers that these forward-looking statements and
any other forward-looking statements made by the Company are based on a number
of assumptions, estimates and projections including, but not limited to,
continuation of economic growth and demand for wireless and wireline
communications services; continuation at the current level of services for
certain material customers; reform initiatives being considered by the FCC being
relatively revenue neutral; significant competition in the Company's telephone
service area not emerging in 1998; the impact on capital requirements and
earnings from new business opportunities and expansion into new markets; greater
than anticipated competitive activity requiring reduced pricing; and achievement
of build-out, operational, capital, financing and marketing plans relating to
deployment of PCS services. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof and the Company undertakes no obligation to
revise or update such statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had net income of $2.4 million, or $0.19 per share, for the first
quarter 1998. This represents a 1% decrease over net income of $2.5 million, or
$.19 per share for the first quarter 1997. Net income for the first quarter of
1998 included a $0.9 million loss ($0.5 million loss after-tax) relating to the
Company's share of losses from our PCS investment that successfully commenced
providing Personal Communications Services (PCS) throughout the Company's
Virginia marketplace. In addition, further decline in the market price of
American Telecasting, Inc. prompted an additional write-down in the Company's
investment of approximately $0.3 million ($0.2 million after-tax).
Excluding these items, net income for the first quarter 1998 would have been
$3.1 million, an increase of 27% from first quarter 1997.
Operating revenues were $16.2 million for the three months ended March 31, 1998
which is a 21% increase over operating revenues of $13.5 million for the three
months ended March 31, 1997. Operating cash flows for the three months ended
March 31, 1998 were $8.0 million, a 20% increase over first quarter 1997
operating cash flows of $6.7 million. Operating income for the three months
ended March 31, 1998 was $5.5 million, a 24% increase over first quarter 1997
operating income of $4.5 million.
These results reflect continued strong contributions from CFW's managed cellular
operations, significant increases in both revenue and cash flow contributions
from directory assistance due to contract expansions during 1997, and growth in
telephone access lines, minutes of use and calling features.
11
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
OPERATING REVENUES
The total operating revenue increase of $2.8 million was fueled primarily by a
$1.4 million increase in the directory assistance business. This is attributable
to a doubling of call volume within the Company's existing call centers since
January 1, 1997 as a result of two contract expansions with AT&T during 1997 and
commencement of services for GTE wireless and Intelos wireless customers.
Telephone, network and cellular operating revenues increased $0.6 million, $0.3
million and $0.4 million, respectively. Access minutes and lines grew 10% and
4%, respectively and cellular and paging customers grew nearly 30% over the
first quarter 1997.
WIRELINE COMMUNICATIONS
Revenues from the Company's wireline operations, which include telephone
revenues, fiber optic network usage and wireline cable revenues, increased $0.9
million or 11% for the three months ended March 31, 1998 versus the comparable
1997 period. Telephone revenues, which include local service, access and toll
services, directory advertising and calling feature revenues were $7.6 million
for the first quarter 1998, an increase of 8% over first quarter 1997.
Network revenues increased $0.3 million due to increases in carrier access
revenue of $0.2 million due to increased traffic and internet revenue of $0.1
million due to internet customer growth of 83%.
WIRELESS COMMUNICATIONS
Revenues from the Company's wireless communications, which include cellular,
paging, wireless cable, and other miscellaneous revenues, increased $0.5 million
or 17% for the three months ended March 31, 1998 versus 1997. Cellular revenues,
including access, air time, roaming charges, paging and voicemail increased by
$0.4 million or 20% for this three month period over the comparable period in
the prior year. Wireless cable revenue increased $0.1 million.
DIRECTORY ASSISTANCE
Directory assistance revenue grew $1.4 million or 71% for the three months ended
March 31, 1998 versus the three months ended March 31, 1997. Call volume during
this period was up five million calls or 57% due to contract expansions and new
business generated throughout 1997.
OPERATING EXPENSES
Operating expenses increased $1.7 million or 19% for the three month period
ended March 31, 1998 as compared to the same period in 1997. Of this increase,
$0.7 million represented a period to period increase in the operating expenses
of directory assistance. This is a 37% increase over the same period in the
prior year and is a result of additional operating expenses necessary to fund
the revenue growth. As a percent of the related revenue, operating expenses
decreased 1% over the same period in the prior year. This is due to improved
operational efficiencies, particularly in the Company's directory assistance
operations which experienced significant growth during 1997. Offsetting these
efficiencies were increases in repair and maintenance and internet access costs,
as well as an increase in the Company's investment in systems and customer care
operations infrastructure.
12
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
MAINTENANCE AND SUPPORT EXPENSE
Maintenance and support expense, which includes property and equipment
maintenance, general engineering and general administration of plant operations,
increased $0.6 million or 28% for the three months ended March 31, 1998 versus
the comparable period of the prior year. This increase is primarily the result
of increased access and other related costs in support of the revenue growth.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $0.3 million or 14% for the
three months ended March 31, 1998 versus the comparable period in 1997. This is
due to a period to period increase in the property and equipment asset base of
approximately 9%, from $126 million as of March 31, 1997 to $137 million as of
March 31, 1998. Additionally, investments in computer software and hardware with
shorter depreciable lives has driven depreciation as a percent of the related
assets up from 1.7% to 1.8%. The property and equipment increase was a result of
capital growth to support continued business expansion primarily in the
Company's wireless operations and directory assistance.
CUSTOMER OPERATIONS EXPENSE
Customer operations expense, which includes marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services, and directory assistance services increased $0.8 million or
28% for the three month period ended March 31, 1998 versus the same period of
the prior year. Directory assistance increased $0.6 million or 45% to support
the revenue growth. As mentioned above, the Company's commitment to further
enhance customer care operations accounts for a majority of the remaining
increase.
CORPORATE OPERATIONS EXPENSE
Corporate operations expense, which includes taxes other than income, executive,
planning, accounting, external relations, legal, purchasing, information
management, human resources and other general and administrative expenses
changed by less than $0.1 million for the three month period ended March 31,
1998 versus the three month period ended March 31, 1997.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA PCS Alliance, which commenced
operations in the fourth quarter of 1997, was $0.9 million for the first quarter
of 1998. The Company has a 21% common ownership interest in the VA Alliance. The
Company also has a 45% common ownership interest in the WV Alliance which is
expected to commence operations by mid-year 1998.
INCOME TAXES
Income taxes increased less than $0.1 million for the three months ended March
31, 1998 as compared to the same periods in 1997. The effective tax rate
increased slightly, from 38% for the first quarter 1997 to 39% for the first
quarter 1998 due to an increase in certain state minimum tax provisions.
13
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 1998, net cash provided by operating
activities was $9.4 million. Principal changes in operating assets and
liabilities included a $2.2 million decrease in accounts receivable which is due
to a $1.0 million decrease in short term advances to the PCS Alliances in the
first quarter 1998 compared to the prior year end. Also, the telephone operation
and directory assistance receivables decreased $2.1 million in the three months
ended March 31, 1998 due to timing of collections between the periods. This is
offset by increases in network receivables of $0.5 million for annual billings
and other receivables' increases reflecting the related revenue growth. Other
accrued liabilities decreased $1.3 million of which $0.9 million related to the
timing of payroll payments between the periods. Also, accrued interest decreased
by $0.4 million due to timing and lower debt balances. Accounts payable
increased for the first quarter 1998 versus the first quarter 1997 by $0.6
million due to the timing of payments at the respective quarter ends.
The Company's investing activities for the three months ended March 31, 1998
included $2.0 million for the purchase of property and equipment, $0.8 million
of which represents software and hardware related equipment and $1.4 million
which represents an increase in property and equipment under construction.
Primary contributions to the increase in property and equipment under
construction were the renovations to certain retail stores ($0.2 million),
ground breaking of the customer care facility ($0.1 million), an investment in
billing systems ($0.5 million), central office equipment ($0.2 million), and
internet and competitive local exchange facilities ($0.2 million). The Company
invested an additional $2.0 million in the VA Alliance and placed funds on
deposit with the FCC totaling $1.1 million, of which the Company's net cash
outlay was $0.6 million, to enable a Company led consortium to participate in
the Local Multipoint Distribution Services (LMDS) spectrum auction.
Net cash used for financing activities for the three months ended March 31, 1998
aggregated $6.1 million which primarily represents payment of dividends on
outstanding capital stock of $1.4 million, payment on senior notes of $3.6
million and the reduction of lines of credit of $1.0 million.
Funds required for dividends, capital expenditures, interest and debt principal
payments, and partnership contributions are expected to be provided from
internal sources and borrowings drawn against available credit facilities. The
Company has entered into certain guarantee agreements relating to its investment
in the VA Alliance and expects to enter into similar debt guarantee agreements
with the WV Alliance during 1998 (Note 5). Management anticipates that funds
required for additional capital contributions to the VA Alliance and WV Alliance
will be provided from increased cash flow resulting from lower estimated tax
payments due to the Company recognizing its proportionate share of the tax
losses generated by the VA Alliance and WV Alliance, both limited liability
companies, cash flows from operations and borrowings under existing lines of
credit.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
14
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
The Company is in the process of conducting a comprehensive review of its
computer systems to identify the internal systems that could be impacted by the
year 2000 issue and is developing an implementation plan to resolve the issue.
The review also entails formal communications with all of the Company's
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties failure to
resolve their own year 2000 issues.
Based on our findings and assessment to date, the Company will be performing
certain planned telephone switching software upgrades and computer software and
system upgrades, which are being performed primarily to better meet the business
and growth needs of the Company. The total year 2000 project cost is not
expected to be material to the Company's business operations or financial
condition. The Company expects its year 2000 program to be completed on a timely
basis. However, if such modifications and upgrades are not made, or are not
completed on a timely basis, the year 2000 issue could have a material impact on
the operations of the Company. There can also be no assurance that the systems
of other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems or costs of upgrades.
The costs of the program and estimated completion date are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
compliance by third parties which interact with the Company's systems, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
15
<PAGE>
CFW COMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K - None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFW COMMUNICATIONS COMPANY
May 14, 1998 s/J. S. Quarforth
-------------------------------------
J. S. Quarforth, President
and Chief Executive Officer
May 14, 1998 s/C. S. Smith
-------------------------------------
C. S. Smith, Vice President and Chief
Accounting Officer, Treasurer and
Secretary
May 14, 1998 s/M. B. Moneymaker
-------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer
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