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 September 30, 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
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(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 10/13/98 13,013,848
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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,
September 30, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of
Income, Three and Nine Months Ended
September 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows, Nine Months Ended
September 30, 1998 and 1997 6
Condensed Consolidated Statements of
Shareholders' Equity, Nine Months Ended
September 30, 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 10-16
PART II. OTHER INFORMATION 17
SIGNATURES 18-19
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<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
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September 30,1998 December 31,
(Unaudited) 1997
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ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 3,503,236 $ 1,224,347
Accounts receivable 11,792,631 12,931,115
Materials and supplies 1,818,284 2,039,345
Prepaid expenses and other 703,747 349,617
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17,817,898 16,544,424
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Securities and Investments 14,802,878 16,873,601
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Property and Equipment
In service 141,069,707 135,689,959
Under construction 6,059,358 2,013,191
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147,129,065 137,703,150
Less accumulated depreciation 48,485,523 42,032,163
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98,643,542 95,670,987
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Other Assets
Cost in excess of net assets of business 12,814,246 13,062,856
acquired, less accumulated amortization
Deferred charges 1,773,167 2,311,206
Radio spectrum licenses 4,913,156 3,984,455
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19,500,569 19,358,517
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$ 150,764,887 $ 148,447,529
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
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September 30, 1998 December 31,
(unaudited) 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable $ 5,620,732 $ 4,169,282
Customers' deposits 432,721 457,343
Advance billings 2,249,233 2,081,491
Accrued payroll 1,170,511 1,459,821
Accrued interest 419,798 815,622
Other accrued liabilities 3,240,109 2,651,719
Deferred revenue 1,521,098 1,329,877
Income taxes payable - 124,545
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14,654,202 13,089,700
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Long-term Debt 17,856,397 24,606,160
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Long-term Liabilities
Deferred income taxes 12,919,967 9,242,246
Retirement benefits other than pensions 8,966,792 8,431,688
Other 1,447,986 1,471,543
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23,334,745 19,145,477
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Minority Interests 1,532,669 1,150,690
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Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 43,504,353 43,420,269
Retained earnings 49,882,521 47,035,233
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93,386,874 90,455,502
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$ 150,764,887 $ 148,447,529
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
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Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
Operating Revenues
<S> <C> <C> <C> <C>
Wireline communications $ 9,526,529 $ 8,580,522 $ 27,989,022 $ 25,314,414
Wireless communications 3,526,203 3,230,325 10,006,504 8,864,393
Directory assistance 3,379,243 2,857,631 9,917,092 7,317,606
Other communications services 723,684 488,101 2,029,595 1,629,132
17,155,659 15,156,579 49,942,213 43,125,545
Operating Expenses
Maintenance and support 2,754,780 2,453,825 7,989,006 7,020,330
Depreciation and amortization 2,655,921 2,255,507 7,636,712 6,673,076
Customer operations 4,198,668 3,739,863 12,068,200 10,191,962
Corporate operations 1,788,913 1,575,394 5,231,771 5,014,633
11,398,282 10,024,589 32,925,689 28,900,001
Operating Income 5,757,377 5,131,990 17,016,524 14,225,544
Other Income (Expenses)
Other expenses, principally interest (122,874) (368,629) (483,492) (950,850)
Interest and dividend income 22,202 96,218 78,987 225,488
Equity loss from PCS investees (1,547,594) (64,392) (3,789,224) (68,519)
Equity income from other wireless 59,236 25,375 101,244 76,791
investees
Loss on write-down of investment (353,028) - (623,095) -
Gain on sale of investment - - - 5,077,379
3,815,319 4,820,562 12,300,944 18,585,833
Income Taxes 1,462,437 1,752,521 4,728,539 6,954,880
2,352,882 3,068,041 7,572,405 11,630,953
Minority Interests (178,998) (174,390) (480,417) (351,978)
Net Income $ 2,173,884 $ 2,893,651 $ 7,091,988 $ 11,278,975
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Net income per common share - basic $ 0.17 $ 0.22 $ 0.55 $ 0.87
Net income per common share - diluted $ 0.17 $ 0.22 $ 0.54 $ 0.86
Average shares outstanding - basic 13,013,848 12,982,748 13,005,791 12,981,759
Average shares outstanding - diluted 13,087,365 13,052,932 13,096,447 13,054,758
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Cash dividends per share $ 0.10875 $ 0.103 $ 0.32625 $ 0.309
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
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Nine Months Ended
September 30, September 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 7,091,988 $ 11,278,975
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 7,110,968 6,286,805
Amortization 525,744 483,168
Deferred taxes 3,677,721 1,012,720
Retirement benefits other than pensions 535,104 529,752
Other (293,991) 147,188
Equity from wireless investees 3,687,980 (8,272)
Minority interests, net of distributions 56,237 203,308
Distributions received from investments 148,855 99,704
Loss on write-down of investment 623,095 -
Gain on sale of investment - (5,077,378)
Changes in assets and liabilities from operations:
Decrease (increase) in accounts receivable 1,138,484 (3,479,352)
Decrease in materials and supplies 221,061 171,728
(Increase) decrease in other current assets (354,130) 270,997
Increase (decrease) in accounts payable 1,451,450 (351,765)
Decrease in other accrued liabilities (96,744) (493,104)
Increase in other current liabilities 143,120 1,351,999
Decrease in income taxes payable (124,545) -
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Net cash provided by operating activities 25,542,397 12,426,473
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (9,820,763) (10,835,599)
Purchases of radio spectrum licenses (417,455) (4,459,818)
Investments in PCS alliances (1,987,860) (971,362)
Investment in national directory assistance
database provider (1,000,000) -
Purchase of minority interests - (1,103,481)
Proceeds from the sale of investment - 6,594,399
Proceeds from sale of mortgage backed securities 934,146 414,337
Other (61,197) (32,582)
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Net cash used in investing activities (12,353,129) (10,394,106)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (4,244,700) (4,011,407)
Payments on senior notes (3,749,763) -
Payments on lines of credit, net (3,000,000) (50,000)
Net proceeds from exercise of stock options 84,084 825
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Net cash used in financing activities (10,910,379) (4,060,582)
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Increase (decrease) in cash and cash equivalents 2,278,889 (2,028,215)
Cash and cash equivalents:
Beginning 1,224,347 3,003,607
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Ending $ 3,503,236 $ 975,392
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Shareholders' Equity
<CAPTION>
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Common Stock Retained Accumulated Comprehensive
Earnings Other Income
Comprehensive
Income
Shares Amount
<S> <C> <C> <C> <C> <C>
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, Mar 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
Net Income - - 2,468,454 - 2,468,454
Cash dividends - - (1,414,721) - -
Stock options exercised, net 4,914 84,055 - - -
Balance, June 30, 1998 13,013,848 43,504,353 49,123,892 - 4,918,104
Net Income - - 2,173,884 - 2,173,884
Cash dividends - - (1,415,255) - -
Stock options exercised, net - - - - -
Balance, September 30, 1998 13,013,848 $ 43,504,353 $ 49,882,521 - $ 7,091,988
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
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 September 30, 1998 and
December 31, 1997 and the results of operations for the three and nine
months ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997. The results of operations for
the three and nine months ended September 30, 1998 and 1997 are not
necessarily indicative of the results to be expected for the full year.
Certain amounts on the 1997 financial statements have been reclassified,
with no effect on net income, to conform with classifications adopted in
1998.
(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 statements of shareholders' equity.
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.
Additionally, the Company recognized further impairment losses on its
investment in American Telecasting, Inc. of $0.3 million ($0.2 million
after-tax) during the first quarter 1998 and another $0.4 million ($0.2
million after-tax) during the third quarter 1998. Management viewed
these losses as permanent impairments and therefore, these losses were
realized in 1998 and, consequently, do not represent "other
comprehensive income" on the Condensed Consolidated Statements of
Shareholders' Equity. Subsequent to September 30, 1998, the value of the
investment in American Telecasting, Inc. has declined another $0.3
million ($0.2 million after-tax).
(3) 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. In order to reflect the assumed conversion of dilutive stock
options, the weighted average number of common shares outstanding, which
was used to compute diluted net income per share, were increased by
73,517 and 70,184 shares for the three months ended September 30, 1998
and 1997, respectively, and by 90,656 and 72,999 shares for the nine
months ended September 30, 1998 and 1997, respectively. The Company
currently has 473,379 options outstanding to acquire shares of common
stock, of which 228,287 are currently exercisable.
(4) The Accounting Standards Executive Committee issued "Statement of
Position (SOP) 98-5 Start-Up Costs" in June 1998. This standard requires
the costs of start-up activities, including organization costs, to be
expensed as incurred. The standard broadly defines start-up activities
as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new
territory and the like. The standard is effective for fiscal years
beginning after December 15, 1999 and requires that previously deferred
start-up costs be written-off through a cumulative effect change to
earnings when the standard is initially adopted. Adoption of this
standard is not expected to have a material impact to the Company's
results of operations or the Company's financial position.
(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
8
<PAGE>
build-out and operate a system to provide PCS to a 2.0 million populated
area. The Company is managing this build-out pursuant to a service
agreement. The WV Alliance commenced operations in September 1998,
offering services along the Charleston and Huntington corridor.
Combined summarized financial information for the VA Alliance and WV
Alliance ("Alliances"), both of which are accounted for under the equity
method, are as follows (dollar amounts in millions):
September 30, 1998 December 31, 1997
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Current assets $ 7.1 $ 5.8
Noncurrent assets 134.3 101.6
Current liabilities 31.4 37.5
Noncurrent liabilities 88.0 33.6
Redeemable preferred stock 12.8 12.8
For the Nine Months Ended
September 30, 1998
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Net sales $ 1.8
Gross profit/(loss) 0.0
Net loss applicable to common owners (17.2)
Company's share of net loss (3.8)
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
September 30, 1998, the Company has guaranteed $31.1 million of the
Alliances' obligations.
9
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Three and Nine Months Ended September 30, 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, sales and service of
phone systems and alarm installation and monitoring.
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, competitive local exchange
services 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 are
being generated by businesses other than the mature telephone operations.
Operating cash flows is defined as operating income before depreciation and
amortization. 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 PCS in markets with an aggregate population
of five million people. These licenses have enabled the Company, as managing
partner of both Alliances, to deploy PCS in parts of central Virginia and will
enable further deployment 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 WV Alliance commenced
construction of the PCS network in West Virginia in early 1998 and began
providing PCS in the Charleston and Huntington corridor in September 1998 and
expects to commence PCS in the Clarksburg, Fairmont and Morgantown corridor by
the year's end.
In 1998, management expects continued proportionate growth in revenue and
operating cash flows from its current consolidated operations. The Company
recognized losses of approximately $1.5 million and $3.8 million for the three
and nine months ended September 30, 1998 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 become more significant
through the remainder of 1998 and 1999 due to significant expansion within the
Virginia markets and recognition of our share of losses from the WV Alliance
which commenced operations in September 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. Losses from equity investments are expected to
continue into future years until build-out is complete and a sufficient customer
base has been 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. These include, but are 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
10
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
earnings from new business opportunities and expansion into new markets; price
erosion from competitive activity not being greater than anticipated; and
achievement of build-out, operational, capital, financial and marketing plans
relating to deployment of PCS. 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's net income for the third quarter of 1998 was $2.2 million, or
$0.17 per share, as compared to net income of $2.9 million, or $0.22 per share,
for the third quarter of 1997. Net income for the nine month periods ending
September 30, 1998 and 1997 was $7.1 million and $11.3 million, respectively.
The Company's equity share of PCS losses were $1.5 million and $3.8 million
(before tax), respectively, for the three and nine months ended September 30,
1998. Additionally, further decline in the market price of American Telecasting,
Inc. prompted additional write-downs in the Company's investment of
approximately $0.3 million ($0.2 million after-tax) in the first quarter 1998
and $0.4 million ($0.2 million after-tax) in the third quarter 1998. The second
quarter of 1997 included a $5.1 million ($3.1 million after tax or $0.24 per
share) gain on the sale of its investment in the Roanoke Cellular partnership.
Excluding these items, net income increased $0.4 million (13%) and $1.6 million
(20%) for the three and nine month periods ending September 30, 1998 versus
September 30, 1997. These increases are primarily the result of increased net
income in the telephone, cellular, and directory assistance businesses partially
offset by start-up costs associated with our commencement of competitive local
telephone services (CLEC), internet and long distance (LD)services in several
geographic markets. The third quarter is at a lower percentage growth rate than
the nine month comparison due to the aforementioned start-up costs.
Operating revenues were $17.2 million and $49.9 million for the three and nine
months ended September 30, 1998. This represents a $2.0 million (13%) and $6.8
million (16%) increase over operating revenues for the three and nine months
ended September 30, 1997. Operating cash flows for the three and nine months
ended September 30, 1998 were $8.4 million and $24.7 million, respectively, a
$1.0 million (14%) and $3.8 million (18%) increase over the three and nine
months ended September 30, 1997. Operating income for the three and nine months
ended September 30, 1998 was $5.8 million and $17.0 million, respectively, a
$0.6 million (12%) and a $2.8 million (20%) increase over the comparable periods
from the prior year. 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 subsequent operating efficiencies, growth in telephone access
lines, increases in minutes of use and calling features. As mentioned above,
this is partially offset by the start-up costs associated with expansion of
services into new markets.
OPERATING REVENUES
The total operating revenue increase of $2.0 million and $6.8 million for the
three and nine month periods ended September 30, 1998 over September 30, 1997
was fueled primarily by revenue increases in the directory assistance business
of $0.5 million and $2.6 million for these three and nine month periods. This is
attributable to a 13% and 31% increase in call volume over these three and nine
month periods in the current year versus the prior year due primarily to
significant 1997 contract expansions. Telephone, network and cellular operating
revenues increased $0.6 million, $0.3 million and $0.4 million, respectively for
11
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
the three months ended September 30, 1998 versus the comparable prior year
period and increased $1.6 million, $1.1 million and $1.2 million, respectively
for the nine months ended September 30, 1998 versus the comparable prior year
period. Access minutes and lines grew 12% and 4%, respectively and cellular and
paging customers grew 30% over the first nine months of 1997. Additionally,
increased network traffic, internet customer growth and revenues from the
commencement of CLEC and LD services accounted for the network revenue growth.
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 (11%) and $2.7 million (11%) for the three and nine months ended
September 30, 1998 versus the comparable 1997 periods. Telephone revenues, which
include local service, access and toll services, directory advertising and
calling feature revenues were $22.8 million for the first nine months of 1998
($7.8 million for the third quarter 1998). This represents an increase of 8%
over the first nine months of 1997 (9% increase over the third quarter 1997).
Network revenues increased $0.3 million and $1.1 million for the three and nine
month period ended September 30, 1998 versus the comparable prior year periods.
The increase for first nine months of 1998 versus 1997 is due to increases in
carrier access revenue of $0.3 million generated by increased traffic, internet
revenue of $0.4 million due to internet customer growth of 88% and $0.4 million
due to the commencement of competitive local exchange and long distance for the
first nine months of 1998 versus 1997.
WIRELESS COMMUNICATIONS
Revenues from the Company's wireless communications, which include cellular,
paging, wireless cable and other miscellaneous revenues, increased $0.3 million
(9%) and $1.1 million (13%) for the three and nine months ended September 30,
1998 versus 1997. Cellular revenues, including access, air time, roaming
charges, paging and voicemail increased by $0.4 million or 16% and $1.2 million
or 19% for the three and nine month periods ended September 30, 1998,
respectively, over the comparable period in the prior year reflecting year over
year customer growth of 30%.
DIRECTORY ASSISTANCE
Directory assistance revenue grew $0.5 million (18%) and $2.6 million (36%) for
the three and nine months ended September 30, 1998 versus the comparable periods
of the prior year. Call volumes for the first nine months of 1998 were up 31%
over the prior year due to contract expansions and new business generated
throughout 1997, the most significant portion of which occurred in the first
half of 1997.
OPERATING EXPENSES
Operating expenses increased $1.4 million (14%) and $4.0 million (14%) for the
three and nine month periods ended September 30, 1998 as compared to the same
periods in 1997. Of this increase, $1.4 million represented a nine month period
to period increase in the operating expenses of directory assistance. This is a
23% increase over the same period in the prior year and is a result of
additional operating expenses necessary to support the revenue growth.
Additionally, network expenses for the first nine months of 1998 increased $1.4
million (107%) over the prior year comparable period. This is due to a 46%
increase in access costs and other material and support related costs primarily
associated with and in support of the internet growth. Further, customer
operations costs increased 94% in support of the growth in internet, CLEC and
LD. As a percent of the related revenue, the Company's total operating expenses
actually decreased by less than 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 non-capital
investment in systems and customer care operations infrastructure to support our
continued revenue and customer growth and future expansion plans. In addition,
start-up costs associated with deploying new services in existing markets and
expansion into new markets is expected to continue.
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 $0.3 million (12%) and $1.0 million (14%) for the three and nine
months ended September 30, 1998 versus the comparable periods 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 $0.4 million (18%) and $1.0
million (14%) for the three and nine months ended September 30, 1998 versus the
comparable periods in 1997. This is due to a period to period increase in the
property and equipment asset base which increased 5% from $134 million as of
September 30, 1997 to $141 million as of September 30, 1998. Additionally,
investments in computer software and hardware with shorter depreciable lives has
driven depreciation as a percent of the related assets up from an annualized
rate of 6.6% to 7.2%. 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 and systems related
investments necessary to allow for the bundling of certain services and the
integration of customer care and other key functions.
CUSTOMER OPERATIONS EXPENSE
Customer operations expense, which includes marketing and sales, product
management, product advertising, publication of a regional telephone directory,
customer services and directory assistance services increased $0.5 million (12%)
and $1.9 million (18%) for the three and nine month periods ended September 30,
1998 versus the same periods of the prior year. Directory assistance increased
$0.1 million (7%) and $1.1 million (25%) over these three and nine month periods
to support the revenue growth. As mentioned above, customer care costs relating
to the high growth businesses and the Company's commitment to further enhance
customer care operations accounts for the 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
increased $0.2 million for the three and nine months ended September 30, 1998
versus the comparable three and nine month periods in the prior year. This is
due to increased corporate infrastructure requirements in support of the
Company's growth.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA Alliance, which commenced operations
in the fourth quarter of 1997 and WV Alliance, which commenced operations in
late September 1998, was $1.5 million and $3.8 million for the three and nine
months ended September 30, 1998. The Company has a 21% common ownership interest
in the VA Alliance and a 45% common ownership interest in the WV Alliance.
INCOME TAXES
Income taxes decreased $0.3 million and $2.2 million for the three and nine
months ended September 30, 1998 as compared to the same periods in 1997 due to
the taxes relating to the 1997 gain on the sale of the Roanoke MSA Cellular
partnership. The effective tax rate increased slightly, from 38% to 40% for the
first nine months of 1998 versus 1997 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 nine months ended September 30, 1998, net cash provided by operating
activities was $25.5 million. The principal changes in operating assets and
liabilities was a $1.5 million increase in accounts payable which is due to the
timing of payments. Accounts receivable decreased by $1.1 million due to a
slight improvement in the collection cycle for certain major accounts.
The Company's investing activities for the nine months ended September 30, 1998
included $9.8 million for the purchase of property and equipment, $2.2 million
of which represents software and hardware related equipment, $2.2 million for
land, building, furniture and fixtures and leasehold improvements primarily
related to retail stores and $4.0 million which represents an increase in
property and equipment under construction. Primary contributions to the increase
in property and equipment under construction were construction in progress of
the customer care facility ($1.7 million), information systems projects ($0.5
million) and other telecommunications electronics ($0.5 million). Also, the
Company invested an additional $2.0 million in the VA Alliance and invested $1.0
in a national data base provider. Additionally, a Company led consortium
invested $0.6 million in Local Multipoint Distribution Services (LMDS) spectrum
licenses with a net cash outlay from the Company of $0.3 million. Finally, the
Company liquidated $0.9 million of mortgage backed securities to satisfy cash
needs.
Net cash used for financing activities for the nine months ended September 30,
1998 aggregated $10.9 million which primarily represents payment of dividends on
outstanding capital stock of $4.2 million, payment on senior notes of $3.7
million and the reduction of lines of credit of $3.0 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 investments in the
VA Alliance and the WV Alliance during 1998 (Note 4). 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.
The Company's plan was devised around several key components: (1) system
inventory, (2) third party confirmation, (3) internal systems review, (4)
compliance implementation, (5) testing and (6) contingency planning. Regarding
the first component, the Company completed a comprehensive inventory of all it's
systems (hardware and software) in July 1998. At the same time, formal
communication, through a confirmation process, was initiated 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. The Company has received
responses from approximately two-thirds of the confirmations sent and continues
to follow-up on non-responses and instances where potential issues were noted.
Regarding the third component, the Company has completed a comprehensive review
of it's computer systems to identify the internal systems that could be impacted
by the year 2000 issue. Based on findings from this review, the Company has
14
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
developed an implementation plan to resolve potential issues and is in the early
to middle stages of implementing such a plan. Both the second and third
components were further broken down by category of system (network systems,
information technology systems and other supporting systems). Significant focal
areas are the Company's network/switching related equipment and the corporate
billing, customer provisioning and accounting systems. The final components are
testing and contingency planning. Testing, where feasible, will span both the
internal systems and systems interface with third parties. Contingency planning
is necessary in the event that conversion efforts, customer compliance or any
other conditions arise that prevent planned critical application upgrades. The
entire year 2000 project has a targeted completion date of June 1, 1999.
Completion of this project includes planned testing of each major exposure area
to ensure compliance. Although no significant plan changes are anticipated,
implementation of any contingency plan, should it be necessary, may effect the
project's completion date and cost.
Based on it's findings and assessment to date, the Company is or 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
estimates are not expected to be material to the Company's business operations
or financial condition. The Company will continue to review and update this
estimate over the duration of the project.
As mentioned above, the Company expects its year 2000 program to be completed by
June 1, 1999. It should be noted that the Company plans to devote all resources
required to resolve any significant year 2000 issues. However, if the planned
modifications and upgrades are not made, or are not completed on a timely basis,
and continguency plans were to falter, the year 2000 issue could have a material
impact on the operations of the Company. Also, there can be no assurance that
the systems of other companies on which the Company's systems rely 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
material impact on the operations of the Company could include, but not be
limited to, interruption of telecommunications services, interruption, error or
failure of the Company's customer care services, including customer billing, and
failures of the Company's other information systems and other date-sensitive
equipment. Such failures could result in substantial customer claims as well as
lost revenue due to service interruption, significant delays in the billing
process and increased expense associated with stabilizing operations following
such failures.
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
Not applicable
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
No reports on Form 8-K have been filed during the quarter
ended 9/30/98.
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
November 13, 1998 s/J. S. Quarforth
-------------------------------------
J. S. Quarforth, President
and Chief Executive Officer
November 13, 1998 s/M. B. Moneymaker
-------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer and
Secretary
17
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