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
(FEE REQUIRED)
For fiscal year ended December 31, 1997
OR
- ---
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the transition period from _______ to ____________________________________
Commission file number: 0-16751
CFW COMMUNICATIONS COMPANY
Virginia 54-1443350
(State or other jurisdiction of (I. R. S. employer
incorporation or organization) identification number)
P. O. Box 1990, Waynesboro, Virginia 22980
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 540-946-3500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of Class)
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. ( )
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 9, 1998; $305,256,109. (In determining this figure, the
registrant has assumed that all of its directors and executive officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purpose. The aggregate market value has been computed based upon the average of
the bid and asked prices as of March 9, 1998.)
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 March 9, 1998 13,008,934 shares
DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>
Information from the following documents has been incorporated by
reference in this report:
--- Annual Report to Shareholders for year ended December 31, 1997
PARTS I AND II
--- Proxy Statement for 1998 Annual Meeting of Shareholders - PARTS I
AND III
2
CFW COMMUNICATIONS COMPANY FORM 10-K
PART I
Item 1. BUSINESS
CFW Communications Company ("CFW" or the "Company") is a diversified
telecommunications provider offering a broad range of integrated
telecommunications products and services to business and residential customers
in Virginia and surrounding states, through its wireline, wireless and other
operating divisions. The Company's products and services include local
telephone, long distance, personal communications services (PCS), cellular,
paging, wireless and wireline cable television, directory assistance,
competitive access, local internet access, and alarm monitoring and
installation.
The Company's business strategy is to be a regional, integrated, full-service
provider of voice, data and video communications products and services to
customers within an expanding service area. The principal components of the
Company's strategy include; (I)offering a full range of communications products
and services; (ii) focusing on wireless communications and other higher growth
products and services; (iii) continuing its tradition of delivering high quality
service to its customers; and (iv) expanding its geographic presence throughout
Virginia and surrounding states.
The Company provides wireline services such as local exchange and telephone
service to approximately 30,000 customers in the cities of Waynesboro, Clifton
Forge and Covington, Virginia, and the surrounding counties, and maintains
approximately 36,000 access lines throughout its assigned territory. The Company
is a certified local exchange carrier in an eleven county area in Central and
Western Virginia and, with interconnection agreements in place with two
incumbent local telephone providers, the Company expects to commence providing
local telephone and long distance services to surrounding communities during
1998.
In addition to its local telephone operations, the Company, owns and operates
over 450 miles of fiber optic cable in Western and Central Virginia, using
state-of-the-art electronics, thus establishing a regional backbone for the
rapid deployment of broadband services beyond traditional franchise boundaries.
During 1997 CFW connected its fiber network to Carolina's FiberNet. This
continguous network serves eight states and represents 3,400 miles of fiber
cable. Having already constructed competitive access networks in Harrisonburg
and Charlottesville, Virginia, and with other markets planned within the region,
CFW is positioned to offer local telephone and long distance service. CFW also
leases capacity on this network to long distance carriers and provides private
network facilities and local internet access. Continued expansion and
enhancement of the network infrastructure is a key element in the strategic plan
to provide a regional platform for the deployment of new services such as
Personal Communications Services (PCS) and facilitates the Company's planned
offering of local telephone and long distance services to surrounding
communities.
The Company purchased the Alleghany County wireline cable system from Sammons
Communications Company, Inc. in mid year 1995 and now operates a traditional
coaxial cable system and services 7,200 customers in Alleghany County, Virginia.
During 1996, the Company completed the rebuild and expansion of this wireline
system to a state-of-the-art hybrid fiber coaxial (HFC) network with 750 MHZ of
capacity. This upgrade provides better signal quality, expands the number of
channels and includes additional premium channels. This new HFC network provides
the infrastructure for the Company to offer high speed modems for service such
as Internet and allows the Company to offer voice, data and video over a single
wireline network.
The Company also currently provides wireless communications products and
services such as cellular, personal communication services, paging and cable.
The Company owns approximately 84% of, and is the general partner in, a limited
partnership that provides cellular service in Virginia RSA6, a cellular
geographic area in Western Virginia covering a population of approximately
200,000 and 75 miles of interstate highway. The Company also is a limited
partner in the partnership providing cellular service in the Virginia RSA5, in
which it has a 22% interest. In April 1997, the Company sold its 30% limited
interest in the Roanoke MSA Cellular Partnership to GTE Wireless for
approximately $6.6 million. In addition, in 1997 the Company purchased from GTE
an 8.4% limited interest in Virginia RSA6 for approximately $1.1 million.
Additional information regarding this transaction is included in Note 2, Pages
20 and 21 of the Annual Report of CFW to its shareholders for the year ended
December 31, 1997, and is incorporated herein by reference.
The Company has a 21% common ownership interest in Virginia PCS Alliance, L.C.,
(VA Alliance) a provider of PCS serving 1.6 million populated area in central
and western Virginia. The Company also 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. Additional information regarding these
PCS investments is included in Note 2 Pages 20 and 21 of the Annual Report of
CFW to its Shareholders for the year ended December 31, 1997 and is incorporated
herein by reference.
The Company owns and operates wireless cable systems in the Charlottesville,
Shenandoah Valley and Richmond, Virginia markets. These systems currently
provide wireless cable service to approximately 13,000 customers. In 1997 the
Company commenced providing high-speed internet service in the Charlottesville
market which utilizes the wireless cable spectrum. The Company expects to launch
similar services in its remaining markets during 1998.
CFW COMMUNICATIONS COMPANY FORM 10-K
CFW also provides operator based information services for AT&T customers
requesting phone numbers in the mid-Atlantic states. During 1997 the Company
expanded its contract with AT&T to include directory assistance in the states of
New Jersey, Delaware and Pennsylvania. The Company also commenced providing
services to its PCS customers and GTE wireless customers in Virginia and
Pennsylvania. The Company currently handles more than 220,000 requests per
business day and provides employment for approximately 450 directory assistance
positions. The contract with AT&T commenced on December 1, 1994 and has an
initial term of five years. The Company has two calling centers dedicated to
these operations. These facilities can be leveraged to provide directory
assistance for other telecommunication companies, call completion and other
operator services.
The Company provides other communications services such as alarm installation
and monitoring, billing and collection services to long distance carriers within
the Company's local telephone exchange, and a regional telephone directory that
is used by both its customers and customers in neighboring local exchanges.
The percentage of total sales contributed by each class of service is as
follows:
1997 1996 1995
---- ---- ----
Wireline communications 58.4% 65.0% 67.8%
Wireless communications 19.9% 18.5% 17.7%
Directory assistance 17.9% 12.8% 10.9%
Other communications services 3.8% 3.7% 3.6%
Construction materials and equipment are furnished from dependable suppliers.
Delivery of materials and equipment is being made on normal schedules. Programs
have been initiated by the registrant to conserve fuel and energy. Regulations
published by the Federal Energy Office give high priority to telephone companies
in the allocation of fuel in the event of a shortage.
CFW Telephone Inc., a wholly-owned subsidiary, holds a Certificate of Public
Convenience and Necessity granted by the State Corporation Commission of
Virginia to provide telephone services in its certificated area. CFW Telephone,
Inc. also holds franchises
CFW COMMUNICATIONS COMPANY FORM 10-K
granted by the cities of Clifton Forge, Covington and Waynesboro which expire in
2021 and the town of Iron Gate which expires in 2024. These franchises grant CFW
Telephone, Inc. the right to place its poles and wires in the respective
jurisdictions.
CFW Network Inc., a wholly-owned subsidiary, operates a fiber optic network
which is unique to the area it serves. It holds a Certificate of Public
Convenience and Necessity to provide interexchange services anywhere within the
Commonwealth of Virginia and in 1996 was granted a Certificate of Public
Convenience and Necessity to provide local exchange telecommunications services
in all or parts of the following Virginia counties: Albemarle, Amherst, Augusta,
Bedford, Campbell, Frederick, Nelson, Roanoke, Rockbridge, Rockingham, and
Shenandoah, and in the following Virginia cities: Roanoke, Lynchburg, Salem,
Charlottesville, Harrisonburg, Bedford, Lexington, Staunton, Winchester, and
Buena Vista. The Company will compete with other local telephone companies.
CFW Cable of Virginia Inc., a wholly owned subsidiary, provides coaxial cable
service in primarily the same franchised area as CFW Telephone Inc. provides
local telephone service in the Clifton Forge and Covington area. Over-the-air
broadcasting, direct broadcast satellite service and other satellite based
services may compete with the Company's wireline cable system.
CFW Wireless Inc., a wholly-owned subsidiary, provides analog cellular and
digital PCS services in Virginia RSA6. CFW Wireless competes with another
cellular provider in Virginia RSA6 and also with PCS providers which offer
personal communication services (PCS). The Virginia PCS Alliance offers PCS, a
new 100% digital wireless technology, in eleven Virginia cities and their
surrounding communities. The West Virginia Alliance is expected to commence
proving PCS services in 1998 in five West Virginia cities and their surrounding
communities. PCS provides higher voice quality, longer battery life, text
messaging and more enhanced features than cellular. PCS will initially compete
with local telephone and cellular providers through fixed wireline replacement
and limited mobility services.
CFW Cable Inc., a wholly-owned subsidiary, has FCC licenses and lease
arrangements with FCC licensees to provide wireless cable service in the
Shenandoah Valley, Charlottesville, Richmond, Lynchburg, Winchester,
Virginia/Martinsburg, West Virginia markets. Conventional cable television
service and over-the-air-broadcasting, direct broadcast satellite service and
other satellite-based services also may compete with the Company's wireless
cable television operations.
In early 1996, Congress passed the Telecommunications Act of 1996, aimed at
increasing competition in telecommunications services such as local telephone,
cable and long distance. The Company has developed a strategic plan to
capitalize on these opportunities and, as previously stated, is now certified by
the
CFW COMMUNICATIONS COMPANY FORM 10-K
State Corporation Commission to provide local telephone services to an eleven
county region in the central and western portions of Virginia.
Seasonal effect on the business is not material. No extended payment terms are
made to customers. Orders for installation of services are being filled on a
current basis. No material part of the business is done with the Government.
Research and development is performed by the registrant's suppliers. For the
years ended December 31, 1997, 1996 and 1995, AT&T accounted for 34%, 24% and
24%, respectively, of the registrant's consolidated revenues. These revenues
primarily consisted of carrier access charges for long distance services,
billing and collection services and directory assistance.
The Company believes that it is in compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment. The Company does not anticipate any material effect on capital
expenditures for environmental control facilities at any time in the future in
order to maintain its compliance.
The Company employs 567 regular full-time and part-time persons.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers that the following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause the Company's actual consolidated results for 1998 and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company: continuation of economic growth and demand for wireless
and wireline communications services; continuation of 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;
anticipated competitive activity; 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 achieved in 1997 and 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.
CFW COMMUNICATIONS COMPANY FORM 10-K
EXECUTIVE OFFICERS OF THE COMPANY
Name Office Age
- ---- ------ ---
J. W. Brownlee Vice President - COO Wireline 57
W. C. Catlett Vice President - Strategy and
Business Development 38
D. E. Lowe President - West Virginia
Operations 56
D. R. Maccarelli Senior Vice President 45
M. B. Moneymaker Vice President - Finance 40
J. S. Quarforth President and Chief Executive Officer 43
C. A. Rosberg Senior Vice President 45
C. S. Smith Vice President - Administration,
Treasurer and Secretary 37
W. M. Zirkle Vice President and COO - Wireless 40
Information for Mr. Quarforth and Mr. Rosberg is included under the heading
"Election of Directors" in the Proxy Statement of the registrant for its
1997 Annual Meeting of Shareholders and is incorporated herein by reference.
Mr. Brownlee became Vice President and Chief Operating Officer - Wireline in
January 1997 after serving as Vice President - Telephone Operations since
January 1989. Previously he served as Outside Plant Engineering and Construction
Manager from October 1978 until January 1989.
Mr. Catlett became Vice President - Strategy and Business Development in January
1997 after serving as Director of Business Development since January 1994.
Previously, he served as Planning and Regulatory Manager from April 1992 until
January 1994 and Revenue Requirements Manager from May 1990 until April 1992.
Mr. Lowe became President of West Virginia operations in January 1998.
Previously, he was employed by Charles Ryan Associates, a public relations and
advertising firm, from January 1997 until December 1997. From August 1995 until
December 1996 he was self- employed as an independent consultant. During a
period of this time, he served as President of Glade Springs LLC, a recreational
resort and residential development company. From 1963 through August 1995, Mr.
Lowe was employed by Bell Atlantic. From February 1993 until August 1995 he
served as President and Chief Executive Officer for Bell Atlantic - West
Virginia. His 32 year telecommunications career at Bell Atlantic included
executive level positions in operations, advertising and corporate relations,
external affairs, and strategic planning.
<PAGE>
Mr. Maccarelli became Senior Vice President in January 1994 after serving as
Vice President - Network Services since January 1993. Previously, he served in
the following capacities for Bell Atlantic Corporation: as Director of Fast
Packet Services from April 1992 until December 1992; as Director of Business
Development from January 1992 until April 1992; and as Director of Network
Planning from December 1988 until January 1992.
CFW COMMUNICATIONS COMPANY FORM 10-K
Mr. Moneymaker became Vice President - Finance in October 1995. Previously he
was a Senior Manager for Ernst and Young from October 1989 until October 1995.
Ms. Smith became Vice President - Administration, Treasurer and Secretary in
May 1995 after serving as Vice President - Finance, Treasurer and Secretary
since January 1994. Previously, she served as Controller from May 1989 until
January 1994.
Mr. Zirkle became Vice President and Chief Operating Officer - Wireless in
February 1996 and became an executive officer of the Company effective April
1997. Previously he founded and was a principal, since 1990, in Essex
Communications Partners, Inc., a telecommunications management and consulting
firm serving the wireless industry.
Item 2. PROPERTIES
The Company owns its four exchange buildings and all equipment therein in the
cities of Clifton Forge, Covington and Waynesboro and the rural community of
Potts Creek. The Company also owns a plant service center building located
approximately one mile from the Waynesboro and Covington exchange buildings. The
Company owns its corporate headquarters building located in Waynesboro,
Virginia. Additionally, the Company owns two 15,700 square feet directory
service centers, one located in Clifton Forge, Virginia and the other located in
Waynesboro, Virginia. The Company owns a 14,400 square foot building located
adjacent to its directory service center in Waynesboro, Virginia for purposes of
housing its main PCS operations. The Company is currently constructing a 31,000
square foot building located adjacent to its main PCS operations building for
purposes of housing its integrated customer care facilities. In addition, the
Company is also constructing a 6,400 square foot retail store located in
Waynesboro, Virginia. All buildings are of masonry construction and are in good
condition.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ending December 31, 1997.
CFW COMMUNICATIONS COMPANY FORM 10-K
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed in the Nasdaq National Market. The
number of registered shareholders totaled 2,884 as of December 31, 1997, an
increase of one since December 31, 1996. The range of bid prices for the two
most recent fiscal years is included in a table under the heading "Quarterly
Review" on Page 31 of the Annual Report of CFW Communications Company to its
shareholders for the year ended December 31, 1997 and is incorporated herein by
reference. The regular cash dividend paid for each quarter of 1997 and 1996 was
$0.103 and $0.098, respectively, totaling $0.412 and $0.392.
The Company's 7.26% unsecured senior notes contain restrictive covenants
including restrictions relating to the payment of dividends. Pursuant to the
restrictions of the senior notes, approximately $9.0 million of the Company's
consolidated retained earnings were available for the payment of dividends at
December 31, 1997.
Item 6. SELECTED FINANCIAL DATA
The information included under the heading "Selected Financial Data and Five
Year Growth Comparison" on Page 31 of the Annual Report of CFW Communications
Company to its Shareholders for the year ended December 31, 1997 is incorporated
herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis" found on Pages 27 through 30 of the
Annual Report of CFW Communications Company to its Shareholders for the year
ended December 31, 1997 is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is incorporated herein by reference to the
Annual Report of CFW Communications Company to its Shareholders for the year
ended December 31, 1997 as follows:
Financial statements and Independent Auditor's Report found on Pages 14
through 26.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
CFW COMMUNICATIONS COMPANY FORM 10-K
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of Directors" in the
definitive Proxy Statement of the registrant for its 1998 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information included under the heading "Summary Compensation Tables" in the
definitive Proxy Statement of the registrant for its 1998 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the heading "Election of Directors" in the
definitive Proxy Statement of the registrant for its 1998 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the heading "Election of Directors" in the
definitive Proxy Statement of the registrant for its 1998 Annual Meeting of
Shareholders is incorporated herein by reference.
CFW COMMUNICATIONS COMPANY FORM 10-K
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements of CFW Communications Company
are incorporated by reference in Part II, Item 8 of this FORM
10-K:
Consolidated Balance Sheets at December 31, 1997, 1996, and 1995.
Consolidated Statements of Income for the years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996, and 1995.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
Independent Auditor's Report.
2. Exhibits
(3) Amendment to Bylaws dated December 1997 included herein.
Articles of Incorporation and Bylaws, including all other
amendments thereto, are incorporated by reference to Form
10-K, Exhibit 3, of CFW Communications Company dated March 11,
1996.
(4) Original Note Agreement dated as of January 1, 1993 for
$20,000,000 7.26% senior notes due January 1, 2008 is
incorporated herein by reference to Form 10-K, Exhibit 4, of
CFW Communications Company dated March 24, 1993.
(10) The previously filed 1997 Stock Compensation Plan,
Non-Employee Directors' Stock Option Plan and 1997 Employee
Stock Purchase Plan are hereby incorporated by reference to
the Company's Registration Statement on Forms S-8. (Regis.
Nos. 333-40753, 333-40751 and 333-45593, respectively). The
previously filed 1998 Stock Option plan is incorporated
herein by reference to the Company's Registration Statement on
Form S-4. (Regis. No. 33-20201) Annex IV.*
(13) Annual Report of CFW Communications Company to its
shareholders for the year ended December 31, 1997
(See Note 1).
CFW COMMUNICATIONS COMPANY FORM 10-K
(21) Subsidiaries of the registrant.
(23) Consent of McGladrey and Pullen, LLP.
(27) Financial Data Schedule for year ended December 31, 1997 and
Restated Financial Data Schedules (restated for the adoption
of Financial Accounting Standards Board Statement No. 128,
Earnings Per Share) for year ended December 31, 1996, and
quarters ended March 31, 1997 and 1996, June 30, 1997 and
1996, and September 30, 1997 and 1996.
Note 1. With the exception of the information incorporated in this Form
10-K by reference thereto, the Annual Report shall not be deemed "filed"
as part of this Form 10-K.
* Compensatory plan or arrangement required to be filed as an
exhibit to this report pursuant to item 14(C) Form 10-K.
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended
December 31, 1997.
CFW COMMUNICATIONS COMPANY FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 24, 1997
By
-----------------------------
J. S. Quarforth, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
- --------------------------- Chairman of the Board,
R. S. Yeago, Jr. and Director March 26, 1998
President and
- ---------------------------- Chief Executive Officer, March 26, 1998
J. S. Quarforth and Director
- ---------------------------- Senior Vice President,
C. A. Rosberg and Director March 26, 1998
- ----------------------------- Director March 26, 1998
C. P. Barger
- ----------------------------- Director March 26, 1998
W. W. Gibbs, V
- ------------------------------ Director March 26, 1998
J. B. Mitchell, Sr.
- ------------------------------ Director March 26, 1998
C. W. McNeely, III
- ------------------------------ Director March 26, 1998
J. N. Neff
- ------------------------------ Vice President-Administration,
C. S. Smith Treasurer and Secretary March 26, 1998
- ------------------------------ Vice President-Finance March 26, 1998
M. B. Moneymaker
CFW COMMUNICATIONS COMPANY FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 26, 1997
By s/ J. S. Quarforth
-----------------------------
J. S. Quarforth, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
s/ R. S. Yeago, Jr.
- --------------------------- Chairman of the Board,
R. S. Yeago, Jr. and Director March 26, 1998
s/ J. S. Quarforth President and
- ---------------------------- Chief Executive Officer, March 26, 1998
J. S. Quarforth and Director
s/ C. A. Rosberg
- ---------------------------- Senior Vice President,
C. A. Rosberg and Director March 26, 1998
s/ C. P. Barger
- ----------------------------- Director March 26, 1998
C. P. Barger
s/ W. W. Gibbs, V
- ----------------------------- Director March 26, 1998
W. W. Gibbs, V
s/ J. B. Mitchell, Sr.
- ------------------------------ Director March 26, 1998
J. B. Mitchell, Sr.
s/ C. W. McNeely, III
- ------------------------------ Director March 26, 1998
C. W. McNeely, III
s/ J. N. Neff
- ------------------------------ Director March 26, 1998
J. N. Neff
s/ C. S. Smith
- ------------------------------ Vice President-Administration,
C. S. Smith Treasurer and Secretary March 26, 1998
s/ M. B. Moneymaker
- ------------------------------ Vice President-Finance March 26, 1998
M. B. Moneymaker
14
Exhibit 3
Amendment to Bylaws as approved at the December 15, 1997 Board meeting of CFW
Communications Company:
Article II, Section 2.6 (Eligibility for Service as a Director) of the
Corporation's Bylaws is deleted in its entirety and the following is substituted
in its place:
2.6 Eligibility for Service as a Director. No person who shall have attained the
age of 70 years shall be eligible for election as a Director of the Corporation.
Notwithstanding the foregoing, any person who is serving as a Director of the
Company and who was serving as a Director of Clifton Forge-Waynesboro Telephone
Company on April 28, 1986 who had attained the age of 70 on such date shall be
eligible for election and to serve until reaching age 80, whereupon such person
shall retire, and any person who on such date had attained the age of 60 but was
under the age of 70 shall be eligible for election and to serve until reaching
age 75, whereupon such person shall retire.
Exhibit 13
Annual Report of CFW Communications Company to its Shareholders for the
year ended December 31, 1997.
<PAGE>
FINANCIAL HIGHLIGHTS
CFW Communications Company
<TABLE>
<CAPTION>
===============================================================================================================
Amount of Percent
1997 1996 Increase Increase
- ---------------------------------------------------------------------------------------------------------------
<S><C>
Operating Revenues $ 59,010,000 $ 49,948,300 $ 9,061,700 18.1%
Operating Expenses $ 39,597,800 $ 34,533,300 $ 5,064,500 14.7%
Operating Cash Flows(a) $ 28,608,400 $ 23,824,600 $ 4,783,800 20.1%
Operating Income $ 19,412,200 $ 15,415,000 $ 3,997,200 25.9%
Net Income(b) $ 12,220,900 $ 9,549,700 $ 2,671,200 28.0%
Net Income Per Share - Diluted(b) $ 0.94 $ 0.73 $ 0.21 28.8%
Cash Dividends Per Share $ 0.412 $ 0.392 $ 0.02 5.1%
Average No. Of Common
Shares Outstanding - Diluted 13,055,800 13,056,100 (300) -
Investment In Property
& Equipment $ 137,703,200 $ 127,196,100 $ 10,507,100 8.3%
===============================================================================================================
</TABLE>
(a) Operating Income before depreciation and amortization.
(b) Excluding gain on sale of investment and loss on write-down of investment,
1997 net income was $10,788,700 and 1997 net income per common share -
diluted was $0.83, an increase over the prior year of 13.0% and 13.7%,
respectively.
[3 BAR GRAPHS SHOWN HERE]
Operating
Net Cash Operating
Income Flow Revenue
(in millions)
1993 7.2 15.3 27.3
1994 7.6 17.3 32.2
1995 8.5 19.9 43.10
1996 9.5 23.8 49.9
1997 12.1 28.6 59.0
Table of Contents
Letter to Shareholders 2
Key Highlights 6
Integrated Full-Service Solutions 7
Consolidated Financial Statements 14
Independent Auditor's Report 26
Management's Discussion & Analysis 27
Board of Directors & Executive Officers 32
General Information Inside Back Cover
1
<PAGE>
LETTER
to the shareholders
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We entered 1997 with excitement and anticipation, looking forward to the
celebration of our company's 100th Year Anniversary. It's a heritage of which we
are extremely proud, and one on which we have built a solid foundation for the
future. Looking back, we not only celebrated a centennial of providing
high-quality services - but also started our quest for a second hundred years as
a regional, full-service telecommunications provider. In year 101, we are firmly
positioned to capitalize on the dynamic growth opportunities of the
communications industry and bring integrated state-of-the-art communications
solutions to an expanding service region.
A highlight of 1997 was our launch of Personal Communications Services, a
fully-digital wireless phone service marketed under the Intelos brand. In
conjunction with this service, we opened our first integrated retail stores
throughout central and western Virginia. With Personal Communications by
Intelos, our serviced communities have the latest in digital wireless
communications and we have the flagship product, distribution channels, and
network facilities from which to expand and implement a full-service
communications strategy. In 1997, we also introduced high-speed wireless
internet access and long distance telephone services. Additionally, we laid the
foundation for continued growth in telephone services, including an aggressive
strategy for expanded local telephone and long distance services for surrounding
communities. These accomplishments, and many others, have enhanced our portfolio
of services and represent significant long-term growth opportunities for CFW.
Financial Growth
Operating revenues were $59.0 million in 1997, an increase of 18% over the
previous year. Operating cash flows were $28.6 million, an increase of 20% over
1996. Operating income was $19.4 million, a 26% increase over last year. These
record results reflect strong customer growth in our cellular, paging, and
wireless cable operations, solid contributions from our telephone operations,
and doubling of our directory assistance calling volume.
Net income for 1997 was $12.2 million, or $.94 per share - diluted,
including a $5.1 million ($3.1 million after tax, or $0.24 per share) gain on
the sale of our investment
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INTELOS 1997
COVERAGE AREA
[MAP]
INTELOS
COVERAGE
PCS PRIMEC
COVERAGE AGEA
INTELOS CUSTOMERS
ENJOY A ROBUST
DIGITAL NETWORK.
ACROSS THE STATE AND
ACROSS THE NATION.
2
<PAGE>
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in the Roanoke MSA Cellular Partnership and a $2.8 million ($1.7 million after
tax, or $0.13 per share) loss on the write-down of our investment in American
Telecasting, Inc. Exclusive of these investment transactions, earnings for 1997
were $10.8 million, or $0.83 per share, a 13% increase over net income of $9.5
million, or $0.73 per share - diluted for 1996. These earnings results reflect
the aforementioned growth from our consolidated operations, partially offset by
$0.8 million of equity losses reflecting our share of the operating losses
associated with our investments in Personal Communications Services (PCS)
alliances that commenced operations in Virginia in the fourth quarter of 1997.
Strategic Accomplishments
The Company's accomplishments in 1997 clearly demonstrate our ability to plan
for and implement key strategic objectives. While many PCS providers were just
getting started, we diligently went about raising capital, building a
substantial contiguous digital network, and becoming the first in our region,
and one of the first in the nation, to offer PCS throughout rural markets.
As managing partner and the largest owner in the Virginia PCS Alliance,
L.C. and West Virginia PCS Alliance, L.C., we have designed and are deploying a
robust digital PCS network to serve an area populated by nearly five million
people covering central and western Virginia and most of West Virginia. In
Virginia, we now offer Personal Communications by Intelos in eleven cities and
their surrounding communities. By the end of 1998, our PCS network will have
expanded to include the major West Virginia markets of Charleston, Huntington,
Clarksburg, Fairmont, Morgantown, and their surrounding communities. And with
national roaming agreements in place, our customers can now look forward to the
benefits of digital PCS services in over 600 cities nationwide.
In 1997, we experienced continued growth in telephone access lines and
associated features. Additionally, services such as voicemail and paging
exhibited solid subscriber growth, up 25% and 31%, respectively, from the
previous year. We also introduced long distance services to our local telephone
service area, adding nearly 4,000 customers in the fourth quarter, and are now
expanding these services to surrounding communities. Also, in early 1998, we
will begin
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BEGINNING WITH PCS.
CFW HAS AN OPPORTUNITY
TO DEPLOY ITS INTEGRATED
SOLUTIONS STRATEGY
ACROSS VIRGINIA AND
WEST VIRGINIA
3
<PAGE>
offering competitive local telephone services to selected cities within the
region, including Charlottesville and Staunton, Virginia.
Since first introducing internet services in late 1995, we continue to
experience strong growth, ending the year with more than 4,500 business and
residential customers. To complement this service, we began offering high-speed
wireless internet access in Charlottesville and the surrounding communities
during the second half of 1997. This service is efficiently transmitted through
the Company's wireless cable television system and provides internet customers
with a state-of-the-art performance alternative. Our plan is to expand the
high-speed internet service into our remaining wireless cable markets during
1998.
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Using an experimental license from the FCC in 1997, we participated with a
consortium of manufacturers to test the transmission of two-way digital
telephone and internet access services over wireless cable spectrum. The test
was successful and we await further FCC rulemaking in 1998 which would permit
commercial use of our wireless cable spectrum for two-way transmissions.
As previously mentioned, 1997 was an exceptional growth year for our
directory assistance services. We entered the year handling approximately
100,000 calls per average business day. Today, we are handling more than 220,000
calls per average business day. We are pleased to have been recognized by AT&T
as one of their premier directory assistance service providers. We are also
pleased to have commenced providing directory assistance services to GTE
Mobilnet customers in two states and to our own Intelos customers in Virginia.
Integrated, Full-Service Communications Provider
In October 1997, we opened our first integrated communications retail store in
Charlottesville, Virginia. The store showcases Personal Communications by
Intelos and features a wide variety of communications services including long
distance, paging, cable television, internet access, security alarm and business
telephone services. Indeed, we now service this market with a complete package
of voice, data and video solutions. This reflects a totally integrated and
full-service philosophy that many local telephone, cable, and long distance
providers are still striving to achieve.
We are replicating our integrated, full-service strategy throughout central
and western Virginia and West Virginia. In 1997, we opened six integrated
communications retail stores. Each store showcases Personal Communications by
Intelos and offers a variety of advanced communications services. Our strategic
plan calls for
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DIRECTORY ASSISTANCE
Calls from anywhere
in the United States
IN 1997.
DIRECTORY ASSISTANCE
CONTRIBUTED MORE
THAN $10 MILLION
TO REVENUES, AND
ASSISTED WITH MORE
THAN 50 MILLION
CUSTOMER INQUIRIES.
4
<PAGE>
additional retail storefronts to open in 1998, providing a broader service area
for residents and businesses of Virginia and West Virginia, and leading the way
for our integrated, full-service communications concept.
In today's competitive environment, it is critical to provide quality
customer care and innovative product packaging. In 1998, we will open our new
integrated customer care center that will allow customers to address their
diverse communications needs with just one call. Our unmatched portfolio of
services will also enable us to introduce unique service bundles aimed at
increasing customer loyalty, revenues, and multiple-service customers.
Our Future
These are truly dynamic times for CFW. As we move forward into the future, we
are well positioned to capitalize on the growth opportunities within our
expanded region. Our challenge is to continue to sharpen our focus on the core
principles and values that have enabled us to distinguish ourselves within the
industry and to differentiate ourselves from an ever increasing number of
competitors. Today, you can be confident that CFW is a company with the
infrastructure for robust growth. Our comprehensive family of integrated,
high-quality service offerings are in place; so is our commitment to our
customers, our shareholders, our employees, and our communities.
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CFW ended 1997, our centennial year, with more than 35,000 telephone access
lines and strong growth in internet, long distance, and network services. Our
wireless services, introduced to a five-county region in the early nineties,
have built a base of nearly 30,000 cellular and paging customers. Looking ahead,
we foresee the opportunity for unprecedented customer growth in wireless
services, as we and our alliances introduce PCS services to communities across
Virginia and West Virginia.
It is our belief that now, more than at any other time in our history, we
are strategically prepared to face the challenges that lie ahead, and capitalize
on the opportunities that are presented to us. We look forward to an exciting
1998, and the continued growth of our services into an expanded geographic
region. Thank you for your continued support.
/s/ Robert S. Yeago, Jr. /s/ James S. Quarforth
- --------------------------- ---------------------------
Robert S. Yeago, Jr. James S. Quarforth
Chairman of the Board President and Chief Executive Officer
5
<PAGE>
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KEY
HIGHLIGHTS
for the year
Intelos
Personal Communications Services (PCS), branded Intelos, is a fully-digital
wireless service that combines the functionality of a home or business phone
with the mobility of wireless. PCS provides superior voice quality, clarity, and
privacy, plus incorporates standard features such as Caller ID, Call Waiting,
Three Way Conferencing, Alphanumeric text messaging, an extended local calling
area, and first incoming minute free. Some handsets, like the one shown, can
switch between digital PCS and cellular services.
o Commenced offering Personal Communications Services in eleven cities and their
surrounding communities in central and western Virginia - becoming the first in
our region, and one of the first in the nation, to offer this state-of-the-art
digital service to rural communities. Further growth opportunities lie ahead as
we launch service in West Virginia in 1998.
o Recognized for our quality service, we doubled directory assistance calling
volume as we began providing services to AT&T customers seeking numbers in the
Mid-Atlantic region. We also began providing similar services to GTE wireless
customers in Virginia and Pennsylvania.
o Commenced offering long distance services in our local service area,
attracting nearly 4,000 residential customers in the fourth quarter of 1997 and
laying the groundwork to offer such service to nearby communities in 1998.
o Launched high-speed wireless internet service in Charlottesville and
surrounding areas-meeting customer demands for speed. Customers enjoy download
performance that is significantly faster than traditional services.
o Opened integrated communications retail stores in Charlottesville, Lynchburg,
and Roanoke. The stores showcase Personal Communications by Intelos and
offer a wide array of communications services.
o Played a key role in the deployment of a local area school computer
network, a two-year project which began as The Educational Challenge
issued by the CFW Communicatons Foundation. Today, students and
educators enjoy a robust network connecting them to the world.
INTELOS 1997
COVERAGE AREA
2
REGIONAL SERVICE AREA
3
DIRECTORY ASSISTANCE
4
KEY
HIGHLIGHTS
<<<<<<<<<<<<<<<<<<<<<<<<<ABOVE LINES OF TEXT IS WHAT WAS IN FILE>>>>>>>>>>>>>>
6
<PAGE>
INTEGRATED
full-service solutions
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Total Communications
Our strategy to become the region's premier provider of integrated
communications solutions is driven by a strong desire to service the needs of
our customers. Our traditional voice solutions, network facilities, wireless
alternatives, cable television, and internet connectivity, combined with the
recent addition of Personal Communications by Intelos, positions us to deliver a
comprehensive range of services that span video, voice, and data in all of its
forms.
Setting the Standard
Through innovation, a bold vision for the delivery of integrated solutions, and
the most comprehensive family of services available, CFW is fast defining the
standard for all communications service providers. CFW customers can select the
exact set of communications services they desire, and few companies can match
our combination of depth, breadth, or community presence. We also set the
standard for support, consistently recognized as one of the top-rated service
providers in our region. Soon we will offer our customers a single telephone
number to support our entire line of services, and the ability to consolidate
all of their CFW services on a single bill.
Single Source
CFW's total integration concept is supported by an expanded retail outlet
strategy. In these conveniently located "soft-tech" centers, customers can
comfortably experience state-of-the-art communications services in a relaxed
environment. The outlets showcase Personal Communications by Intelos, and
reinforce our extensive ability to serve both business and residential
customers.
Seamlessly integrated, full-service solutions from a regional provider with a
track record for excellent service, value, and dependability. For important
connections, the choice is CFW.
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THE COMPANY'S
INTERGRATED FULL-SERVICE SOLUTIONS
STRATEGY IS EXEMPLIFIED BY
CONVENIENT AND COMFORTABLE RETAIL OUTLETS.
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<PAGE>
RESIDENTIAL
total solutions
CFW MEETS RESIDENTIAL
COMMUNICATIONS NEEDS
WITH INTEGRATED
SOLUTIONS RANGING
FROM TELEPHONES
TO ENTERTAINMENT.
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TEXT READS AS FOLLOWS
At work, communications tools may be a necessity. At home, however,
telecommunications may be more a matter of convenience. And residential
customers want more than just dial tone from a communications provider.
Residential applications require flexibility, dependability, a wide selection of
services, and a provider that's committed to superior customer care. CFW
provides a single source solution for residential customers, allowing the
creation of customized, home-based communications systems that are tailor made
for value.
THE RESIDENTIAL PROPOSITION
At CFW, our concept of integrated, full-service solutions for residential
customers is all encompassing. The transient information age has increased the
communications complexity of most families, and CFW has successfully expanded
our services to meet the needs of these dynamic and rapidly changing lifestyles.
Residential telephone service has long been at the heart of CFW service
offerings, but our long reaching solutions go well beyond the phone jack. Today,
we can couple telephone services with competitive long distance, directory
assistance, voicemail, paging, local internet connectivity, alarm and monitoring
services, cable television, and cellular. And, with the added appeal of the
feature-rich Personal Communications by Intelos, our residential proposition is
stronger than ever. CFW, with a full complement of services, is prepared to meet
all of the communications needs of our expanding residential service region.
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CFW IS MORE THAN
A QUALITY PROVIDER
OF COMMUNICATIONS
SERVICES. WE'RE
AN INTEGRATED PART
OF THE COMMUNITIES
WE SERVE.
Supporting Services
Though CFW can offer far more services than most other providers, our
residential proposition would be incomplete without one essential element -
customer care. Our company was built on a foundation of customer-centric
philosophies that have made customer service a differentiating factor for more
than 100 years. Today, we support our residential customers with business
offices and retail outlets that offer personalized, face-to-face customer care.
We still take payments over the counter, the way our predecessors did, and we
take great pride in being known as a service company. Customers can also contact
us by mail, fax, and e-mail, or reach a friendly, professional customer service
representative by dialing a toll-free or local number. Our sterling ability to
provide superior customer service gives credibility to the total communications
concept. When customers choose us, we focus on providing the high-quality
support that they so rightly deserve.
Community Involvement
CFW employees don't just service residential areas, we live in these same
communities. Our employees coach in youth leagues, are active in church and
civic organizations, schools, and other volunteer groups. The CFW Communications
Foundation assists local charities, and we have been recognized by the
Commonwealth of Virginia for outstanding support of Emergency Medical Services.
Perhaps our greatest accomplishment is in local school systems, where more than
1,000 computers go online with a network infrastructure supplied by the Company
and put into operation with many hours of employee volunteer labor. Even our
long distance program, termed "Speak Out For Education", returns a portion of
long distance operating revenues back to area schools.
When residential customers choose CFW, they know they're working with a trusted
resource that is committed to unparalleled service, dependability, and value.
CFW delivers and supports the communications requirements of any household.
Clearly, the right choice and the right services.
9
<PAGE>
CFW'S ABILITY TO
CRAFT CUSTOM BUSINESS
SOLUTIONS HAS EARNED
US A REPUTATION FOR
LASTING SERVICE
AND SUPPORT.
Businesses have unique communications requirements and expectations. Mobile
communications, internet connectivity, on-premises telephone systems, wiring,
paging, and a host of additional services must be seamlessly combined to ensure
that a business is up and running, and continuously connected for maximum
effectiveness. CFW meets the total communications needs of businesses, large or
small, with a comprehensive family of services, and a formula for mutually
beneficial success.
More Than Communications
CFW provides far more for business customers than the ability to communicate.
Rather, we transform telecommunications into a vital strategic advantage. We
work closely with our business partners to determine the precise combination of
services that will enable them to derive the maximum benefit. That's when the
power of our total solutions concept becomes most evident. CFW has the resources
to draw upon the breadth of our technical capabilities and counsel our business
customers on the services that will help them operate at their peak potential.
Over time, as technology evolves and new services become available, we are there
with suggestions on how to integrate these opportunities, thus improving
communications capabilities and strengthening their competitive position. CFW is
a trusted ally - and valuable consultant - continually updating business
customers with the latest in reliable, state-of-the-art communications services.
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BUSINESS
total solutions
10
<PAGE>
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>>>>>>>>>>>>>>>>>>>
THE BUSINESS PROPOSITION
CFW has the breadth of services required to meet the communications needs of any
business, from large industrial manufacturers and health care facilities to the
smallest, most enterprising start-up. We can provide local dial tone, special
services such as ISDN, T1, Caller ID, and others, long distance, Centrex,
on-premises business telephone systems, alarm and monitoring services, and cable
television. We can also provide fully integrated voicemail and paging solutions,
high-speed wireless or traditional internet connectivity, and a variety of
cellular services. Businesses also benefit from Personal Communications by
Intelos, the first wireless alternative that is secure, clear, and incorporates
features such as Caller ID, Three Way Calling, and a state-wide local calling
area. Best of all, businesses can select the exact set of services they require,
from a single provider that is renowned for reliability, dependability, and
customer service.
ATTENTION TO DETAIL
Our ability to customize a communications package for any business serves as a
great differentiator, but it is our attention to detail that makes us special.
CFW business-to-business sales representatives are well-trained professionals
that play an active and personal role in the servicing of business clients. They
are supported by an organization of technical, engineering, and administrative
resources that assist in delivering the highest levels of quality and service.
Business customers depend on CFW for all kinds of telecommunications systems.
Being an integrated, total solutions provider and a trusted business partner is
a responsibility we take seriously.
COMPANIES LIKE
J.S. MATHERS, INC.
TRUST CFW TO MEET THE
DYNAMIC COMMUNICATIONS
NEEDS OF THEIR BUSINESS.
11
<PAGE>
NETWORK
total solutions
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CFW makes efficient use of our capital infrastructure, while adding positively
to the Company's profitability. Network services are a good example of how CFW
maximizes its regional presence, while contributing to the strategic growth and
expansion of the total services concept.
Fiber Network
In 1997, ValleyNet connected its fiber optic network, which encompasses 450
miles of CFW-owned fiber, to Carolina's FiberNet. The contiguous network serves
eight states and represents 3,400 miles of fiber cable. The extensive network
provides an attractive, alternative traffic route for long distance carriers,
private network facilities and local internet access. In addition to wholesale
opportunities, it is an important component in the efficient deployment of other
CFW services such as local telephone, internet, and Personal Communications
Services.
What City, Please
CFW directory assistance service professionals handle more than 220,000 requests
per business day, a direct result of our capabilities and commitment to service
excellence. We began the year with AT&T customers from across the country
calling for telephone numbers within a four-state region. AT&T soon recognized
CFW's superior, high-quality performance and routed us additional callers
seeking telephone numbers in three more states. CFW directory assistance
professionals also handle GTE Mobilnet customers in Virginia and Pennsylvania
and CFW and Intelos customers that request directory listings. Today, after
creating more than 150 local jobs in 1997, CFW directory assistance operators
routinely project our philosophy of world-class customer care over a million
times a week.
Continued growth in network services will enable and enhance other CFW services,
while demonstrating the same professionalism, dedication, and high-quality
customer care that is synonymous with our heritage. Another clear indication of
why CFW is the total communications provider of choice.
12
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FUTURE
innovative solutions
The telecommunications landscape is changing, literally, at the speed of light.
CFW will be at the forefront of these changes, expanding our regional footprint
and extending the value and quality of our fully-integrated solutions to
business and residential customers throughout Virginia and West Virginia. And
while we will move confidently and strategically towards the natural extension
of our service areas, we shall never lose sight of the customer perspective and
the commitment to the quality and values that enabled our previous success.
BRIGHT FUTURE
Our successful launch of Personal Communications by Intelos is enhanced only by
an even more promising future. We are proud to be first to market in many of our
service areas with our robust network, creating an opportunity to establish a
solid service provider identity and creating wholesale opportunities for future
growth. Our comprehensive family of services will also provide for attractive
multiple-service bundles that can target specific market segments within any of
our served regions. CFW is an approved Competitive Local Exchange Carrier (CLEC)
in eleven Virginia counties, opening powerful, full-integrated solution
opportunities that include local telephone, long distance, PCS, cable, and
internet services. By bundling services, CFW will attract new customers while
providing differentiation and increased customer satisfaction. And, as we
implement our vision for integrated communications services, we will simplify
the support process by moving to a one-number customer care system. To that end,
we have started construction on a customer care facility that will house the
resources and sophisticated computer-telephony network that is required to
replicate our value-added service philosophies across an expanded regional
footprint. Continued investments in customer care, integrated billing, and the
delivery of state-of-the-art services result in a bright future for CFW, and
world-class telecommunications services for all of our customers.
POSITIONING FOR GROWTH
THROUGH TECHNOLOGICAL
INNOVATION, VALUE-ADDED
SERVICES, AND DEDICATED
EMPLOYEES.
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<PAGE>
CONSOLIDATED BALANCE SHEETS
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
==================================================================================================================
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,224,347 $ 3,003,607 $ 5,264,986
Accounts receivable 12,931,115 9,441,979 8,677,086
Materials and supplies 2,039,345 2,019,836 1,980,837
Prepaid expenses and other 349,617 471,339 347,550
Income taxes receivable - 617,067 3,356
- ------------------------------------------------------------------------------------------------------------------
16,544,424 15,553,828 16,273,815
- ------------------------------------------------------------------------------------------------------------------
SECURITIES AND INVESTMENTS 16,873,601 20,597,270 29,471,626
- ------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
In service 135,689,959 124,388,071 107,420,864
Under construction 2,013,191 2,807,983 4,385,440
- ------------------------------------------------------------------------------------------------------------------
137,703,150 127,196,054 111,806,304
Less accumulated depreciation 42,032,163 37,162,040 30,713,237
- ------------------------------------------------------------------------------------------------------------------
95,670,987 90,034,014 81,093,067
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Cost in excess of net assets of business acquired,
less accumulated amortization 13,062,856 12,660,497 13,268,224
Deferred charges 2,311,206 2,198,923 3,144,581
Radio spectrum licenses 3,984,455 1,355,347 -
- ------------------------------------------------------------------------------------------------------------------
19,358,517 16,214,767 16,412,805
- ------------------------------------------------------------------------------------------------------------------
$148,447,529 $142,399,879 $143,251,313
==================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S><C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,169,282 $ 3,346,045 $ 3,674,310
Customers' deposits 457,343 469,566 477,393
Advance billings 2,081,491 1,876,808 1,506,777
Accrued payroll 1,459,821 1,007,883 833,232
Accrued interest 815,622 726,000 726,000
Other accrued liabilities 2,651,719 2,987,816 2,384,774
Deferred revenue 1,329,877 1,181,481 972,593
Income taxes payable 124,545 - -
- ------------------------------------------------------------------------------------------------------------------
13,089,700 11,595,599 10,575,079
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 24,606,160 24,000,000 20,000,000
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Deferred income taxes 9,242,246 10,702,885 13,866,047
Retirement benefits other than pensions 8,431,688 7,724,107 7,149,957
Other 1,471,543 1,478,467 1,543,863
- ------------------------------------------------------------------------------------------------------------------
19,145,477 19,905,459 22,559,867
- ------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 1,150,690 896,895 874,664
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, no par value per share, authorized - - -
1,000,000 shares; none issued
Common stock, no par value per share, authorized 43,420,269 43,378,440 43,531,164
20,000,000 shares; issued 12,986,654 shares
(12,980,212 in 1996 and 12,983,318 in 1995)
Retained earnings 47,035,233 40,163,310 35,700,859
Unrealized gain on securities available for sale, net - 2,460,176 10,009,680
- ------------------------------------------------------------------------------------------------------------------
90,455,502 86,001,926 89,241,703
- ------------------------------------------------------------------------------------------------------------------
$148,447,529 $142,399,879 $143,251,313
==================================================================================================================
</TABLE>
15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
==================================================================================================================
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S><C>
OPERATING REVENUES
Wireline communications $34,495,331 $32,479,810 $29,196,134
Wireless communications 11,714,012 9,205,028 7,618,528
Directory assistance 10,533,459 6,399,865 4,705,959
Other communications services 2,267,156 1,863,584 1,568,395
- ------------------------------------------------------------------------------------------------------------------
59,009,958 49,948,287 43,089,016
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Maintenance and support 9,659,569 9,528,425 8,391,967
Depreciation and amortization 9,196,237 8,409,662 6,437,849
Customer operations 14,282,592 11,156,489 9,274,890
Corporate operations 6,459,352 5,438,732 5,562,721
- ------------------------------------------------------------------------------------------------------------------
39,597,750 34,533,308 29,667,427
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 19,412,208 15,414,979 13,421,589
OTHER INCOME (EXPENSES)
Other expenses, principally interest (1,140,020) (1,273,045) (1,871,953)
Interest and dividend income 284,660 587,393 603,521
Equity loss from PCS investee (834,075) - -
Equity income from other wireless investees 74,115 449,893 839,948
Gain on sale of investment 5,077,379 - 926,699
Loss on write-down of investment (2,808,145) - -
- ------------------------------------------------------------------------------------------------------------------
20,066,122 15,179,220 13,919,804
INCOME TAXES 7,398,495 5,162,497 5,005,941
- ------------------------------------------------------------------------------------------------------------------
12,667,627 10,016,723 8,913,863
MINORITY INTERESTS (446,695) (467,017) (420,250)
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $12,220,932 $ 9,549,706 $ 8,493,613
==================================================================================================================
Net income per common share - basic $ 0.94 $ 0.74 $ 0.66
Net income per common share - diluted $ 0.94 $ 0.73 $ 0.66
Average shares outstanding - basic 12,982,289 12,977,920 12,864,755
Average shares outstanding - diluted 13,055,814 13,056,081 12,933,926
- ------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.412 $ 0.392 $ 0.379
==================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
==================================================================================================================================
Years Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $12,220,932 $ 9,549,706 $ 8,493,613
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 8,559,656 7,916,152 6,155,979
Amortization 636,581 493,510 281,870
Deferred taxes 105,664 1,612,833 1,031,266
Retirement benefits other than pensions 707,581 574,150 636,051
Other (10,426) 42,812 (318,381)
Equity from wireless investees 759,960 (449,893) (839,948)
Minority interests, net of distributions (41,306) 22,231 50,954
Distributions received from investments 99,704 155,141 40,013
Gain on sale of investment (5,077,379) - (926,699)
Loss on write-down of investment 2,808,145 - -
Changes in assets and liabilities from operations:
Increase in accounts receivable (3,489,136) (823,032) (3,145,144)
Increase in materials and supplies (19,509) (38,999) (344,113)
(Increase) decrease in income taxes 741,612 (613,711) 778,496
(Increase) decrease in other current assets (238,786) (123,789) 312,883
Increase (decrease) in accounts payable 823,237 (328,265) (826,489)
Increase (decrease) in other accrued liabilities (144,075) 777,693 964,516
Increase in other current liabilities 192,460 571,092 669,216
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,634,915 19,337,631 13,014,083
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (14,196,629) (15,874,951) (11,595,802)
Purchase of PCS licenses (4,459,818) (1,355,347) -
Investments in PCS alliances (1,492,709) (4,351,235) (558,223)
Maturities and distributions from securities and other investments 551,243 1,222,502 3,061,055
Purchase of cellular minority interests (1,103,481) - -
Proceeds from sale of investment 6,594,399 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,106,995) (20,359,031) (9,092,970)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (5,349,009) (5,087,255) (4,852,005)
Proceeds from (payments on) borrowings (1,000,000) 4,000,000 (114,163)
Stock redeemed - (175,313) (2,561,500)
Net proceeds from exercise of stock options 41,829 22,589 312,655
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,307,180) (1,239,979) (7,215,013)
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,779,260) (2,261,379) (3,293,900)
Cash and cash equivalents:
Beginning 3,003,607 5,264,986 8,558,886
- ----------------------------------------------------------------------------------------------------------------------------------
Ending $ 1,224,347 $ 3,003,607 $ 5,264,986
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
==================================================================================================================================
Unrealized Gain
Common Stock Retained on Securities
Shares Amount Earnings Available for Sale, Net
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Balance, December 31, 1994 12,676,548 $ 37,280,009 $ 32,059,251 $ 6,238,013
Net income - - 8,493,613 -
Unrealized gain on securities
available for sale, net - - - 3,771,667
Cash dividends - - (4,852,005) -
Stock options exercised, net 29,509 312,655 - -
Business acquisition 404,761 8,500,000 - -
Stock redeemed (127,500) (2,561,500) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 12,983,318 43,531,164 35,700,859 10,009,680
Net income - - 9,549,706 -
Unrealized loss on securities
available for sale, net - - - (7,549,504)
Cash dividends - - (5,087,255) -
Stock options exercised, net 6,894 22,589 - -
Stock redeemed (10,000) (175,313) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 12,980,212 43,378,440 40,163,310 2,460,176
Net income - - 12,220,932 -
Unrealized loss on securities
available for sale, net - - - (2,460,176)
Cash dividends - - (5,349,009) -
Stock options exercised, net 6,442 41,829 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,986,654 $43,420,269 $47,035,233 $ -
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CFW Communications Company and Subsidiaries
Note 1. Significant Accounting Policies
CFW Communications Company is a diversified regional communications company that
provides a broad range of products and services to businesses, telecommunication
carriers and residential customers in Virginia and surrounding states. The
Company's services include local telephone, long distance, cellular, personal
communications services, paging, wireline and wireless cable television,
directory assistance, competitive access, local internet access and alarm
monitoring and installation. Significant accounting policies follow:
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries and those partnerships
where the Company, as managing partner, exercises control. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments with a purchased maturity of three
months or less to be cash equivalents. The Company places its temporary cash
investments with high credit quality financial institutions. At times such
investments may be in excess of the FDIC insurance limit.
SECURITIES AND INVESTMENTS: The Company has investments in debt and equity
securities and partnerships. Information regarding these investments is reviewed
continuously for evidence of impairment in value (see Note 3). No further
impairment was deemed to have occurred at December 31, 1997.
Management determines the appropriate classification of securities at the
date of purchase and continually thereafter. The classification of those
securities and the related accounting policies are as follows:
AVAILABLE FOR SALE SECURITIES: Securities classified as available for sale
primarily are traded on a national exchange and are those securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors including changes in market conditions, liquidity
needs and other similar factors. Securities available for sale are stated at
fair value and unrealized holding gains and losses, net of the related deferred
tax effect, are reported as a separate component of shareholders' equity.
Realized gains and losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
EQUITY METHOD INVESTMENTS: These investments consist of partnership and
corporate investments where the Company's ownership is 20% or more, except where
such investments meet the requirements for consolidation. Under the equity
method, the Company's share in earnings or losses of these companies is included
in earnings.
INVESTMENTS CARRIED AT COST: These are investments in which the Company does not
have significant ownership and for which there is no ready market.
Interest on debt securities is recognized in income as accrued, and
dividends on marketable equity securities recognized in income when declared.
Realized gains or losses are determined on the basis of specific securities sold
and are included in earnings.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Accumulated
depreciation is charged with the cost of property retired, plus removal cost,
less salvage. Depreciation is determined under the remaining life method and
straight line composite rates. Depreciation provisions were approximately 6.6%,
6.4% and 6.5% of average depreciable assets for the years 1997, 1996 and 1995,
respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED: Cost in excess of net assets acquired
resulting from acquisitions is being amortized over 30 years using the
straight-line method.
PENSION BENEFITS: The Company sponsors a non-contributory defined benefit
pension plan covering all employees who meet eligibility requirements. Pension
benefits vest after five years of service and are based on years of service and
average final compensation subject to certain reductions if the employee retires
before reaching age 62. The Company's funding policy has been to contribute up
to the maximum amount allowable by applicable regulations. Contributions are
intended to provide not only for benefits based on service to date, but also for
those expected to be earned in the future.
The Company also sponsors a contributory defined contribution plan under
Internal Revenue Code Section 401(k) for substantially all employees. The
Company contributes 60% of each participant's annual contribution for
contributions up to 6% of each participant's annual compensation. The employee
elects the type of investment fund from the equity, bond and annuity
alternatives offered by the plan.
RETIREMENT BENEFITS OTHER THAN PENSIONS: The Company provides certain health
care benefits for all retired employees that meet eligibility requirements. The
Company's share of the estimated costs of benefits that
19
<PAGE>
will be paid after retirement is generally being accrued by charges to expense
over the eligible employees' service periods to the dates they are fully
eligible for benefits.
INCOME TAXES: Deferred income taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
NET INCOME PER SHARE: At December 31, 1997, the Company adopted the provisions
of Financial Accounting Standards Board (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. Basic net income per share was computed by
dividing net income by the weighted average number of common shares outstanding
during the year. Diluted net income per share was computed under the treasury
stock method assuming the conversion, as of the beginning of the year, of all
dilutive stock options. Net income per share for all prior periods presented has
been restated to conform with FASB Statement No. 128.
The weighted average number of common shares outstanding, which was used to
compute diluted net income per share, were increased by 73,525, 78,161 and
69,171 shares for 1997, 1996 and 1995, respectively, to reflect the assumed
conversion of dilutive stock options. The Company has 52,450, 54,450 and 57,200
stock options outstanding in 1997, 1996 and 1995, respectively, which could
potentially dilute net income per share in future periods, but which were not
included in diluted net income per share for the periods presented since the
results were antidilutive. There were no adjustments to net income in the
computation of diluted net income per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments
recorded on the balance sheet, except securities and investments, are not
significantly different from the carrying amounts. Information as to securities
and investments is included elsewhere in Notes 1, 2 and 3. The fair value of off
balance sheet guarantees, as described in Note 2, is not determinable due to the
nature of the transaction.
DISCLOSURES REGARDING OPERATING SEGMENTS AND RELATED INFORMATION: The Company
will adopt the additional disclosure provisions of FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information, in 1998.
The Company has one customer that accounts for greater than 10% of its revenue,
primarily consisting of carrier access charges for long distance services,
billing and collecting services and directory assistance. The percent of
operating revenue from this customer was 34% in 1997, 24% in 1996 and 24% in
1995.
COMPREHENSIVE INCOME: The Company will adopt the additional disclosure
provisions of FASB Statement No. 130, Reporting Comprehensive Income, in 1998.
This pronouncement will result in the Company presenting in a financial
statement all items required to be recognized under accounting standards as
components of comprehensive income.
FINANCIAL STATEMENT CLASSIFICATIONS: Certain amounts on the prior year financial
statements have been reclassified, with no effect on net income, to conform with
classification adopted in 1997.
Note 2. Investments in Wireless Affiliates
In April 1997, the Company sold its 30% limited interest in the Roanoke MSA
Cellular Partnership to GTE Wireless (GTE) for approximately $6.6 million and
recognized a gain on the sale of approximately $5.1 million. The Company
recognized equity income from the Roanoke MSA Cellular Partnership of $16,334,
$374,432, and $768,986 in 1997, 1996 and 1995, respectively. In addition, in
April 1997, the Company purchased from GTE an 8.4% limited interest in the
Virginia RSA 6 Cellular Partnership for approximately $1.1 million. At December
31, 1997, the Company had an 84% ownership interest in the Virginia RSA 6
Cellular Partnership.
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 services agreement. PCS operations began
throughout the Virginia region in the fourth quarter of 1997.
In September 1996, the Company invested approximately $4.0 million for a
convertible preferred ownership interest in the VA Alliance which is convertible
after four years into additional common ownership interest. If converted, the
Company would have a 43% common ownership interest in the VA Alliance. In
December 1996, the VA Alliance also issued $12.9 million of redeemable preferred
ownership interest that can be redeemed by the investor after December 31, 2001.
In the event the investor elects to redeem such preferred equity after such
date, the Company may elect to fund $11.4 million of such obligation in exchange
for additional common ownership in the VA Alliance. In the event this redemption
and funding occurs, and the Company converts its convertible preferred ownership
interest, the Company would have a 65% common ownership interest in the VA
Alliance.
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. In August 1997, the Company contributed PCS licenses and
approximately $1.0 million in cash in exchange for such ownership in the WV
Alliance. The contributed PCS licenses were previously acquired through the FCC
PCS license auctions and also purchased from GTE for approximately $8.5 million
of which the Company's share was approximately $4.25 million.
The contributed 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
20
<PAGE>
this build-out pursuant to a services agreement. The WV Alliance expects to
commence operations by midyear 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:
1997 1996
- -----------------------------------------------------------------
Current assets $ 5,756,000 $ 3,416,000
Noncurrent assets 101,560,000 37,239,000
Current liabilities 37,549,000 5,263,000
Noncurrent liabilities 33,571,000 11,154,000
Redeemable preferred interest 12,812,000 12,821,000
1997
- -----------------------------------------------------------------
Net sales $ 119,000
Gross profit (loss) (197,000)
Net loss applicable to
common owners (3,952,000)
Company's share of net loss (834,200)
The Company has entered into guarantee 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, with such guarantees becoming effective as
obligations are incurred by the VA Alliance. At December 31, 1997, the Company
has guaranteed $16.9 million of the VA Alliance's obligations. The Company
expects to provide guarantees not to exceed $16.0 million, for a portion of the
debt obligations to be incurred by the WV Alliance.
The Company also has committed to contribute $12.1 million of additional
capital to the VA Alliance payable $2.0 million, $3.4 million, $3.4 million and
$3.3 million in January of 1998, 1999, 2000 and 2001, respectively. Such
additional capital commitments will be reduced by proceeds, if any, from future
equity offerings by the VA Alliance. The Company expects to provide additional
capital to the WV Alliance not to exceed $3.0 million, in the aggregate, payable
in four annual installments commencing in 1999.
In its managing partner role, the Company provides certain corporate
services for the Alliances, including executive, finance, accounting,
information management, human resources, and other general and administrative
services (collectively, "corporate services"). In 1997 the Company charged the
Alliances $0.5 million for these corporate services.
Retained earnings of the Company at December 31, 1997, includes accumulated
losses of $ 0.5 million related to these Alliances.
Note 3. Securities and Investments
Investments consist of the following as of December 31:
<TABLE>
<CAPTION>
Carrying Values
Type of Ownership 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Available for Sale
American Telecasting, Inc. Equity Securities $ 1,285,022 $ 8,119,644 $20,475,624
Mortgage-backed securities Debt Securities 971,288 1,512,249 2,502,374
- ----------------------------------------------------------------------------------------------------------------------------------
2,256,310 9,631,893 22,977,998
----------------------------------------------
Equity Method
Virginia PCS Alliance, L.C. Equity and Convertible
Preferred Interests 4,504,770 5,074,818 723,583
West Virginia PCS Alliance, L.C. Equity Interest 5,774,728 - -
Roanoke Cellular Limited Limited Partnership
Partnership Interest - 1,500,687 1,280,987
Virginia Telecommunications General Partnership
Partnership Interest 380,394 416,926 307,174
Virginia Independent Limited Partnership
Telephone Alliance Interest 445,050 425,352 377,463
Other Partnership Interests 527,733 569,032 489,021
- ----------------------------------------------------------------------------------------------------------------------------------
11,632,675 7,986,815 3,178,228
---------------------------------------------
Cost Method
Illuminet Holdings, Inc. Equity and Convertible
Debt Securities 1,771,765 1,764,839 1,706,700
Multimedia Medical Systems, Inc. Equity Securities 1,052,650 1,052,650 1,000,000
Applied Video Technology Equity Securities - - 446,219
Other Equity Securities 160,201 161,073 162,481
- ----------------------------------------------------------------------------------------------------------------------------------
2,984,616 2,978,562 3,315,400
---------------------------------------------
$16,873,601 $20,597,270 $29,471,626
==================================================================================================================================
</TABLE>
Expected maturities on mortgage-backed securities will differ from
contractual maturities because the issuers of these securities have the right to
call or prepay their obligations without any penalties.
21
<PAGE>
At December 31, 1997, the Company recognized a $2.8 million impairment loss
on its investment in American Telecasting, Inc. (ATEL) which resulted in a
current cost basis in the investment of $1.3 million. The Company concluded that
the decline in value was other than temporary given recent trading prices in the
common stock, ATEL's financial condition and continued financial losses, coupled
with delays in rulemaking by the FCC which is necessary to permit ATEL to
provide two-way telephony and internet services over its wireless cable
spectrum.
Changes in the unrealized gain (loss) on available for sale securities
during the years ended December 31, 1997, 1996 and 1995, reported as a separate
component of shareholders' equity are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Unrealized gain, beginning balance $ 4,026,475 $ 16,382,455 $10,209,515
Unrealized holding gains (losses) during the year (4,026,475) (12,355,980) 6,172,940
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain, ending balance - 4,026,475 16,382,455
Deferred tax effect related to net unrealized holding gains - (1,566,299) (6,372,775)
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain included in shareholders' equity $ - $ 2,460,176 $10,009,680
==================================================================================================================================
</TABLE>
Note 4. Long-Term Debt and Lines of Credit
Long-term debt and lines of credit consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
7.26% Unsecured senior notes due in annual
installments from 1998 to 2008 $20,000,000 $20,000,000 $20,000,000
6.25% Notes payable secured by certain PCS
radio spectrum licenses due from 1999 to 2006 1,606,160 - -
Borrowings under lines of credit 3,000,000 4,000,000 -
- ----------------------------------------------------------------------------------------------------------------------------------
$24,606,160 $24,000,000 $20,000,000
==================================================================================================================================
</TABLE>
The unsecured senior note agreement contains various restrictive convenants
including restrictions relating to additional debt issuances, fixed charges, net
worth and payment of dividends. Approximately $9.0 million of retained earnings
were available for the payment of dividends at December 31, 1997.
The Company paid $3.6 million of principal on the unsecured senior notes in
January 1998 with proceeds from the borrowings under the Company's lines of
credit. The Company has classified this payment amount and borrowings under
lines of credit as long-term as the Company has the ability and the intent to
refinance these borrowings with an existing line of credit that has a maturity
of beyond one year. The Company has available lines of credit aggregating $24.0
million at December 31, 1997. The blended interest rate on the borrowings under
lines of credit as of December 31, 1997 and 1996, was 5.9%.
Interest expense was $888,000, $1,325,000 and $1,134,000 for 1997, 1996 and
1995, respectively. Maturities of long-term debt for each of the next five years
are 1998 - $0; 1999 - $8,533,000; 2000 - $1,983,000; 2001 - $1,994,000; and 2002
- -$2,005,000.
Note 5. Income Taxes
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Current tax expense:
Federal tax expense $6,165,040 $3,159,133 $3,651,126
State tax expense 1,127,791 390,531 323,549
- ----------------------------------------------------------------------------------------------------------------------------------
7,292,831 3,549,664 3,974,675
Deferred tax expense 105,664 1,647,215 1,151,009
Deferred investment tax credits amortized - (34,382) (119,743)
- ----------------------------------------------------------------------------------------------------------------------------------
$7,398,495 $5,162,497 $5,005,941
==================================================================================================================================
</TABLE>
22
<PAGE>
Total income tax expense was different than an amount computed by applying
the graduated statutory federal income tax rates to income before taxes. The
reasons for the differences are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Computed tax at statutory rate $6,766,799 $5,049,271 $4,624,844
Investment tax credits amortization - (34,382) (119,743)
State income taxes, net of federal income tax benefit 744,265 257,750 368,099
Other - net (112,569) (110,142) 132,741
- ----------------------------------------------------------------------------------------------------------------------------------
$7,398,495 $5,162,497 $5,005,941
==================================================================================================================================
</TABLE>
Net deferred income tax assets and liabilities consist of the following
components at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Deferred income tax assets:
Retirement benefits other than pension $ 3,106,609 $ 2,897,931 $ 2,626,922
Net operating loss of acquired company 1,074,000 1,074,000 1,074,000
Other 339,672 110,711 82,886
- ----------------------------------------------------------------------------------------------------------------------------------
4,520,281 4,082,642 3,783,808
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Investments, net 33,454 883,342 1,174,238
Property and equipment 13,689,777 12,231,842 10,100,735
Unrealized gain on securities available for sale - 1,566,299 6,372,775
Other 39,296 104,044 2,107
- ----------------------------------------------------------------------------------------------------------------------------------
13,762,527 14,785,527 17,649,855
- ----------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 9,242,246 $10,702,885 $13,866,047
==================================================================================================================================
</TABLE>
Note 6. Pension Plans
Net pension cost for the Company's pension plans consisted of the following
components for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Service cost-benefits earned $ 486,925 $ 445,527 $ 341,474
Interest cost on projected benefit obligations 1,175,197 1,043,933 970,892
Actual return on plan assets (2,394,773) (1,432,109) (2,140,429)
Net amortization and deferral 860,521 2,121 783,605
- ----------------------------------------------------------------------------------------------------------------------------------
Defined benefit plan expense (credit) 127,870 59,472 (44,458)
Defined contribution plan expense 336,926 245,883 194,250
- ----------------------------------------------------------------------------------------------------------------------------------
$ 464,796 $ 305,355 $ 149,792
==================================================================================================================================
</TABLE>
Assumptions used by the Company in the determination of pension plan
information consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Discount rate 7.50% 7.75% 7.50%
Rate of increase in compensation levels 4.75% 4.75% 5.00%
Expected long-term rate of return on plan assets 10.00% 9.50% 9.50%
</TABLE>
23
<PAGE>
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the accompanying balance sheets as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Actuarial present value of benefit obligations:
Vested benefits $13,225,345 $12,129,936 $10,122,138
==============================================
Accumulated benefits $13,445,262 $12,497,226 $10,466,270
==============================================
Projected benefits $16,655,591 $15,646,558 $14,348,088
Plan assets at fair value, primarily equity securities
and group annuity contracts 17,791,099 16,279,589 15,639,445
- ----------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligations 1,135,508 633,031 1,291,357
Items not yet recognized:
Net gain (2,178,484) (1,858,242) (1,803,414)
Prior service cost 565,873 860,197 190,734
Transition obligations 63,122 78,903 94,684
- ----------------------------------------------------------------------------------------------------------------------------------
Liability included in balance sheets $ (413,981) $ (286,111) $ (226,639)
==================================================================================================================================
</TABLE>
Note 7. Retirement Benefits Other Than Pensions.
The Company sponsors two defined benefit plans for retirees that cover both
salaried and nonsalaried employees. The individual plans provide medical
benefits for all retirees and group life benefits for employees retiring prior
to January 1994. The health care plan requires no contributions, except for
personnel electing early retirement prior to age 62, provided they have 20 years
of service. The group life plan premium is contributory on a retiree/company
shared basis. Both plans anticipate that benefits offered under the plans will
be adjusted periodically in accordance with changes adopted for the active
employee plans. Neither plan is currently being funded.
The following table sets forth the plans' combined status reconciled with
the obligation recognized in the accompanying balance sheets as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Accumulated postretirement benefit obligations:
Retirees $2,677,064 $1,945,327 $1,852,859
Fully eligible active plan participants 951,478 1,685,990 1,589,434
Other active plan participants 3,506,074 2,991,410 3,028,227
- ----------------------------------------------------------------------------------------------------------------------------------
7,134,616 6,622,727 6,470,520
Unrecognized net gain 851,378 852,485 430,542
- ----------------------------------------------------------------------------------------------------------------------------------
7,985,994 7,475,212 6,901,062
Other benefits 445,694 248,895 248,895
- ----------------------------------------------------------------------------------------------------------------------------------
Liability included in balance sheets $8,431,688 $7,724,107 $7,149,957
==================================================================================================================================
</TABLE>
Provision for retirement benefits other than pensions included the
following components for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Service cost - benefits attributed to service during the year $177,187 $207,319 $206,737
Interest cost on accumulated postretirement benefit obligations 503,626 476,194 464,122
Amortization of unrecognized net gain (12,656) - (2,420)
- ----------------------------------------------------------------------------------------------------------------------------------
$668,157 $683,513 $668,439
==================================================================================================================================
</TABLE>
The discount rates used to compute the accumulated postretirement benefit
obligations were 7.50%, 7.75% and 7.50% at December 31, 1997, 1996 and 1995,
respectively. For measurement purposes, an 8% annual rate of increase in the per
capita cost of covered benefits was assumed for 1997, with such annual rate of
increase gradually declining to 5.75% in 2001 and remaining at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. Increasing the assumed health care cost trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligations by approximately $1.1 million and the aggregate of the
service and interest cost components of the provision for retirement benefits
other than pensions for the year then ended by approximately $0.1 million.
24
<PAGE>
Note 8. Stock Plans
The Company's 1997 Stock Compensation Plan (Option Plan), which replaces the
Company's 1988 Stock Option Plan, provides for the grant of stock options, stock
appreciation rights (SARS), stock awards and performance shares to officers and
certain key management employees. A maximum of 950,000 shares of common stock
may be issued under the Option Plan by means of the exercise of options or SARS,
the grant of stock awards and/or the settlement of performance shares. The
Company's Non-Employee Directors' Stock Option Plan (Directors' Plan) provides a
non-employee director the opportunity to receive stock options in lieu of a
retainer fee. A maximum of 25,000 shares of common stock may be issued upon the
exercise of options granted under the Directors' Plan. Stock options must be
granted under the Plans at not less than 100% of fair market value at the date
of grant and have a maximum life of ten years from the date of grant. Options
and other awards under the Plans may be exercised in compliance with such
requirements as determined by a committee of the Board of Directors.
A summary of the status of these plans at December 31, 1997, 1996 and 1995
and changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Outstanding at beginning of year 325,022 $15.90 244,606 $ 14.99 241,615 $ 14.09
Granted 109,373 20.68 99,800 17.68 44,250 19.21
Exercised (8,915) 10.33 (12,084) 9.79 (29,500) 10.68
Forfeited (16,270) 20.90 (7,300) 20.12 (11,750) 22.52
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 409,210 $17.10 325,022 $15.90 244,606 $14.99
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 212,545 $14.89 177,348 $13.43 161,815 $12.02
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per option of
options granted during the year $6.15 $4.85 $5.69
==================================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Number Remaining Average Number Average
Range of of Contractual Exercise of Exercise
Exercise Prices Shares Life Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
$ 6.50 - 10.00 74,781 2 years $ 7.95 74,781 $ 7.95
$12.75 - 18.25 152,056 7 years $ 16.63 73,756 $ 15.62
$19.37 - 25.75 182,373 8 years $ 21.24 64,008 $ 22.14
</TABLE>
Grants of options under the Plans are accounted for following Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. Accordingly,
no compensation cost has been recorded. The Company has elected to apply the
disclosure-only provisions of FASB Statement No. 123. However, had compensation
cost been recorded based on the fair value of awards at the grant date, the pro
forma impact on the Company's net income and net income per common share-diluted
would have been less than $0.2 million and $0.02 per share for 1997, 1996 and
1995. The pro forma effects of applying FASB Statement No. 123 are not
indicative of future amounts since, among other reasons, the requirements of the
Statement have been applied only to options granted after December 31, 1994.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions: dividend rate
of 1.9% to 2.3% for 1997, 2.0% for 1996, and 1.9% for 1995; risk-free interest
rates of 5.9% to 6.3% for 1997 and 6.4% for 1996 and 1995; expected lives of 6
years for 1997 and 8 years for 1996 and 1995; and price volatility of 23.1% to
24.6% for 1997 and 15.8% for 1996 and 1995.
The Company also has a plan whereby its common stock can be purchased by
employees at a price 10% less than the market price on the issue date.
25
<PAGE>
Note 9. Supplementary Disclosures Of Cash Flow Information
The following information is presented as supplementary disclosures for the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Cash payments for:
Interest, net of capitalized interest of $762,643
in 1997, $322,516 in 1996, and $404,147 in 1995 $1,067,098 $1,174,778 $1,079,601
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes $6,551,222 $4,166,400 $3,196,178
==================================================================================================================================
</TABLE>
In 1997, the Company contributed PCS radio spectrum licenses valued at
$4.25 million to the West Virginia PCS Alliance, L.C. in exchange for equity
ownership (Note 2). In 1997, the Company acquired through the FCC auction
certain PCS radio spectrum licenses for approximately $1.6 million of notes
payable. In 1995, the Company acquired a cable television company for
approximately $8.5 million of common stock. The excess of the total acquisition
cost over the fair value of the net assets acquired was $7.7 million.
Note 10. Lease Commitments
The Company has several operating leases for administrative office space, retail
space, tower space, channel rights, and equipment. The leases for retail and
tower space have initial lease periods of ten to thirty years. These leases are
associated with the operation of a cellular business in Virginia Rural Service
Area 6 in which the Company is the general partner. The leases for channel
rights relate to the Company's wireless cable operations and have initial terms
of three to ten years. The equipment leases have an initial term of three years.
Rental expense for operating leases was $1,352,000, $977,000, $809,000, in 1997,
1996, and 1995, respectively. The total amount committed under these lease
agreements is $917,000 in 1998, $893,000 in 1999, $854,000 in 2000, $701,000 in
2001, $621,000 in 2002 and $6,353,000 for the years thereafter.
================================================================================
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CFW Communications Company
Waynesboro, Virginia
We have audited the accompanying consolidated balance sheets of CFW
Communications Company and subsidiaries as of December 31, 1997, 1996, and 1995,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 CFW
Communications Company and subsidiaries as of December 31, 1997, 1996, and 1995,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
---------------------------------------
McGladrey & Pullen, LLP
Richmond, Virginia
February 13, 1998
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is a diversified regional
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, long distance services to local telephone customers and surrounding
communities, cable television, local internet access, and various enhanced
services such as Call Waiting and Caller Identification. These activities
continue to contribute to 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 flows is a
meaningful indicator of the Company's performance. Operating cash flows 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 operating activities (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 the 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 PCS
network in the WV Alliance and expects to commence providing PCS services in the
Charleston and Huntington corridor by mid-1998 and the Clarksburg, Fairmont and
Morgantown areas 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 1997, the Company recognized a loss of approximately
$0.8 million for its share of losses from PCS partnerships which were
operational for only a portion of the fourth quarter. The Company's recognition
of its share of losses associated with its investments in PCS partnerships is
expected to be at least as significant in 1998, on an annualized basis, as the
Company recognizes a full year of operating losses from the VA Alliance and
begins recognizing its share of operating losses from the WV 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 of 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;
anticipated competitive activity; 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
SUMMARY - Operating revenues were $59.0 million in 1997, an increase of 18% over
1996. Operating cash flows were $28.6 million, an increase of 20% over 1996.
Operating income was $19.4 million, a 26% increase over last year. Strong
customer growth in our cellular, paging, and wireless cable operations of 33%,
31%, and 15%, respectively, fueled
27
<PAGE>
the growth in our wireless operations. Operating results from our wireline
operations reflect continued strong contributions from our telephone operations,
led by 4.3% growth in access lines, growth in minutes and calling features,
doubling of internet customers and effective cost control. Doubling of our
directory assistance calling volume with the commencement of services in New
Jersey, Delaware and Pennsylvania resulted in strong revenue, operating cash
flows and earnings growth from our directory assistance operations.
Net income for 1997 was $12.2 million, or $0.94 per share - diluted,
including a $5.1 million ($3.1 million after tax, or $0.24 per share) gain on
the sale of our investment in the Roanoke MSA Cellular Partnership (Note 2) and
a $2.8 million ($1.7 million after tax, or $0.13 per share) loss on write-down
of our investment in American Telecasting, Inc. (ATEL) (Note 3). Exclusive of
these transactions, earnings for 1997 were $10.8 million, or $0.83 per share, a
13% increase over net income of $9.5 million, or $0.73 per share for 1996. These
current earnings results reflect the aforementioned growth from our consolidated
operations, partially offset by our share of the expected operating losses from
our investments in a PCS partnership of $0.8 million ($0.5 million after tax)
that commenced operations in the fourth quarter of 1997.
The Company reported net income for 1996 of $9.5 million, or $0.73 per
share - diluted, a 12% increase over net income for 1995 of $8.5 million, or
$0.66 per share. Growth from telephone and managed cellular operations, coupled
with 1996 earnings from directory assistance operations, which incurred
significant start-up losses in 1995, accounted for the majority of the increase.
Results for 1995 included a gain of $0.9 million ($0.6 million after-tax, or
$0.045 per share) from the sale of an investment. Excluding this gain, net
income for 1996 rose $1.6 million, or 21%, over 1995.
Operating cash flows were $23.8 million in 1996, a 20% increase over
operating cash flow results of $19.9 million in 1995. This reflects increases
from telephone operations of $1.9 million, primarily from increases in access
and toll minutes, and $0.3 million from managed cellular operations, primarily
from customer growth of 46% in 1996 and 40% in 1995, coupled with a $1.2 million
contribution in 1996 from directory assistance operations which reported a cash
flow loss of $0.9 million in 1995, its first year of operations.
OPERATING REVENUES - Total operating revenues were $59.0 million, an increase of
$9.1 million, or 18%, over 1996 ($6.9 million, or 16%, over 1995). The increases
were primarily attributable to doubling of the Company's directory assistance
call volume through the expansion of our contract with AT&T to include directory
assistance in the states of New Jersey, Delaware and Pennsylvania, growth in
toll and access minutes of use, access lines and calling features, growth in
cellular, paging and wireless cable customers of 33%, 31% and 15% (46%, 29% and
38% growth in 1996 over 1995), respectively, and doubling of internet customers.
Wireline communications revenues include telephone revenues, fiber optic
network usage and wireline cable revenues. Telephone revenues, which include
local service, access and toll service, directory advertising and calling
feature revenues were $28.8 million, an increase of $1.4 million, or 5%, over
1996. Telephone revenues increased 7%, or $1.8 million, for 1996 over 1995.
These increases were primarily due to growth in access lines of 4.3% and 3.3%,
in 1997 and 1996, respectively, and revenue growth from custom calling features
of 28% and 15%, respectively. Revenues from fiber optic network usage, which
includes internet services, were $4.0 million, an increase of 11%, or $0.4
million, over 1996 (25%, or $0.7 million increase in 1996 over 1995) due to
expanded network services and growth of over 112% in our internet customer base.
Wireline cable revenues were $1.7 million in 1997 compared to $1.5 million in
1996.
Wireless communications revenues include cellular and paging revenues of
$8.6 million, an increase of $1.8 million, or 26%, over 1996 ($1.1 million, or
20%, over 1995), from access, toll, and roaming; and wireless cable revenues of
$3.1 million, an increase of 30% over 1996 (24% increase over 1995), from
customer basic and premium revenues and the introduction of wireless internet
services in late 1997 in our Charlottesville, Virginia, market. The increases
reflect a 33% and 31% (46% and 27% growth in 1996 over 1995) growth in cellular
and paging customers, respectively. The cable increase reflects a lower customer
growth rate of 15% in 1997 due to 1996 being the initial service year in
Richmond, Virginia, and high growth in the Shenandoah Valley market in 1996 due
to introducing an expanded channel line (38% growth in 1996 over 1995).
Directory assistance revenues, which includes net revenues from providing
directory listings for customers seeking telephone numbers in the mid-Atlantic
states, increased $4.1 million, or 65%, over 1996 ($1.7 million, or 36%, over
1995). During the first half of 1997, the Company commenced directory assistance
services to AT&T customers seeking telephone numbers in New Jersey and Delaware.
During August through October 1997, the Company expanded this service to
encompass Pennsylvania. In 1997, the Company also commenced providing services
to our PCS customers and GTE wireless customers in Virginia and Pennsylvania.
Although directory assistance had not reached its annualized run rate in new
traffic territories, year over year call volume is up 23.9 million, or 78%.
These new territories are expected to generate, on an annualized basis, over
120% growth in calling volume.
Other communications revenues, which include revenues from the Company's
sale and lease of communications equipment and security alarm monitoring and
installation, increased $0.4 million, or 22%, over 1996 and $0.3 million, or
19%, over 1995.
OPERATING EXPENSES - Total operating expenses were $39.6 million, an increase of
$5.1 million, or 15%, over 1996 ($4.9 million, or 16%, increase in 1996 over
1995). Directory assistance costs, primarily associated with contract expansion,
accounted for $3.9 million of the 1997 increase.
28
<PAGE>
Growth in cellular and wireless cable customers contributed an additional $1.5
million in operating expenses 1997 over 1996. The increase in 1996 over 1995 was
primarily attributable to growth in cellular and wireless cable customers and
wireless cable expanded operations. In addition, 1996 was the first full year of
wireline cable operations.
Maintenance and support expenses, which include costs related to specific
property and equipment, as well as indirect costs such as general engineering
and general administration of property and equipment, increased $0.1 million, or
1%, over 1996. The Company controlled expenses by acquiring access and other
network pricing decreases, coupled with more efficient utilization of our
facilities and equipment infrastructure. Maintenance and support expenses
increased $1.1 million, or 14%, over 1995 primarily as a result of increased
costs to support the growth in customers and services.
Depreciation and amortization expenses increased $0.8 million, or 9%, over
1996 and $2.0 million, or 31%, over 1995. The increase in 1997 was a result of
capital growth to support continued business expansion primarily in our wireless
operations and directory assistance. The increase of $2.0 million in 1996 was a
result of license amortization and depreciation related to the commencement of
wireless cable services in our Richmond, Virginia, market. In addition, the
Company recognized an additional $0.7 million in 1996 relating to the disposal
of certain regulated telephone plant and equipment.
Customer operations expenses, which included marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services and directory assistance services, increased $3.1 million, or
28%, over 1996 and $1.9 million, or 20%, over 1995. Approximately 92% of these
increases relate to the directory assistance business and reflect continued
training and additional staff related to the expansion of states handled for the
new directory assistance markets served. Additionally, the Company has invested
resources in customer service related functions in order to support our growth
businesses. The 1996 increase was primarily attributable to sales commissions
related to strong customer growth in our wireless operations.
Corporate operations expenses, which include taxes other than income,
executive, accounting, legal, purchasing, information management, human
resources and other general and administrative expenses, increased $1.0 million,
or 19%, over 1996 and decreased $0.1 million from 1995. The increase in 1997
relates primarily to internal infrastructure growth necessary to support the
overall growth of the Company.
OTHER INCOME (EXPENSES) - Other income (expenses) which includes interest
expense, dividend and interest income, equity income (loss) from wireless
investees, gain on sale of investment and loss on write-down of investment,
increased $0.9 million over 1996.
Other expenses, principally interest, decreased $0.1 million, or 10%, from
1996 and $0.6 million, or 32%, from 1995. The reduction in interest expense in
1997 is primarily a result of additional interest expense from increased
borrowings, offset by capitalization of interest costs. The Company capitalized
interest on property under construction and investments in PCS alliances of $0.8
million in 1997 and $0.3 million in 1996, respectively. As a result of the VA
Alliance commencing operations during the fourth quarter of 1997 and the
anticipated commencement of operations of the WV Alliance in midyear 1998, the
Company expects the capitalization of interest costs to be reduced during 1998.
The $0.6 million reduction from 1996 under 1995 was primarily a result of costs
recognized in 1995 from an adverse ruling in litigation involving wireless cable
operations, which the Company assumed with its 1994 acquisition of American
Quality Cable.
Interest and dividend income was down $0.3 million, or 52%, under 1996 due
to the Company's utilization of cash to support the strong growth in customer
base and business expansion.
Equity loss from PCS investees totaled $0.8 million for 1997, as the VA
Alliance commenced operations in the fourth quarter. 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 expects to commence operations by
midyear 1998.
Equity income from other wireless investees, which includes equity earnings
from the Company's cellular partnership interests decreased $0.4 million, or
84%, in 1997 and $0.4 million, or 46%, in 1996. The decrease in 1997 is
principally due to the sale of the Company's 30% limited interest in the Roanoke
MSA cellular partnership to GTE in April 1997 (Note 2). The $0.4 million
decrease in 1996 over 1995 was due to higher operating costs.
The Company recognized a $5.1 million gain on the sale of its 30% limited
ownership interest in the Roanoke MSA Cellular Partnership to GTE Wireless in
April 1997 (Note 2).
The Company recognized a $2.8 million impairment loss on its investment in
ATEL at December 31, 1997. The Company concluded that the decline in value was
other than temporary given recent trading prices in the common stock, ATEL's
financial condition and continued financial losses, coupled with delays in
rulemaking by the FCC which is necessary to permit ATEL to provide two-way
telephony and internet services over its wireless cable spectrum.
INCOME TAXES - Income taxes increased $2.2 million, or 43%, over 1997 and $0.2
million, or 3%, over 1996. The 1997 increase was due to an increase in taxable
income from operations, $2.0 million of taxes from the gain on the sale of the
Roanoke MSA Cellular Partnership, offset partially by a $1.1 million deferred
tax benefit from the write-down of the Company's investment in ATEL. The 1996
increase was due to an increase in taxable income from operations offset by
adjustments to tax deductible amounts. The effective rate was 38% and 35% in
1997 and 1996, respectively.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its working capital requirements and capital expenditures
from net cash provided from operating activities and borrowings under committed
credit facilities. The Company has $21.0 million in unused aggregate borrowings
available under its existing credit facilities.
During 1997, net cash provided by operating activities was $18.6 million.
Principle changes in operating assets and liabilities included a $2.8 million
increase in current assets, excluding cash, and a $1.5 million increase in
current liabilities. The increase in operating assets resulted primarily from an
increase in accounts receivable associated with directory assistance, directory
listings, and access billings. Operating liabilities increased primarily as a
result of advanced billings for cellular and wireless cable operations. The
Company's investing activities included the investment of $14.2 million in
property and equipment, $2.6 million investment in PCS and cellular (Note 2) and
$4.5 million for PCS licenses, of which licenses valued at $4.3 million were
subsequently contributed to the WV Alliance (Note 2), offset by proceeds of $6.6
million from the sale of our Roanoke MSA Cellular Partnership interest (Note 2)
and distributions and liquidations of various investments. Net cash used in
financing aggregated $6.3 million, including $5.3 million used to pay dividends.
The Company had firm cash commitments relating to purchases of property and
equipment of approximately $3.2 million as of December 31, 1997. Capital
expenditures for 1998, including these commitments, are expected to approximate
1997 levels in order for the Company to continue its growth trend in wireless
communications and other services. 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 2). Management anticipates that funds required for additional capital
contributions to the VA Alliance and WV Alliance (Note 2) 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 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 timely, the year 2000 issue could have a material impact on the
operations of the Company. There can 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.
30
<PAGE>
QUARTERLY REVIEW
<TABLE>
<CAPTION>
=================================================================================================================================
(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S><C>
1997
Operating revenues $ 13,466 $ 14,503 $ 15,157 $ 15,884
Operating cash flows 6,673 6,838 7,387 7,710
Operating income 4,486 4,607 5,132 5,187
Gain on sale of investment - 5,077 - -
Loss on write-down of investment - - - (2,808)
Equity loss from PCS investee - - (60) (774)
Net income 2,480 5,905 2,894 942
Net income per share - basic 0.191 0.453 0.223 0.074
Net income per share - diluted 0.190 0.452 0.222 0.072
- ---------------------------------------------------------------------------------------------------------------------------------
Stock price range $22.25-18.25 $19.50-16.62 $22.50-17.50 $24.75-18.50
Quarterly dividend $ 0.103 $ 0.103 $ 0.103 $ 0.103
- ---------------------------------------------------------------------------------------------------------------------------------
1996
Operating revenues $ 12,061 $ 12,305 $ 12,537 $ 13,045
Operating cash flows 5,535 5,932 6,058 6,299
Operating income 3,722 4,034 4,047 3,612
Net income 2,306 2,332 2,292 2,620
Net income per share - basic 0.178 0.180 0.176 0.202
Net income per share - diluted 0.177 0.179 0.175 0.201
- ---------------------------------------------------------------------------------------------------------------------------------
Stock price range $18.50-17.25 $24.00-17.75 $24.00-19.25 $23.25-21.25
Quarterly dividend $ 0.098 $ 0.098 $ 0.098 $ 0.098
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - Fourth quarter 1997 includes equity loss from investment in PCS partnership
(Note 2), which commenced operations during the fourth quarter, of $0.8
million ($0.5 million after-tax or $0.04 per share).
- - Fourth quarter 1997 includes a loss on write-down of the investment in
American Telecasting, Inc. (Note 3) of $2.8 million ($1.7 million after-tax
or $0.13 per share).
- - Second quarter 1997 includes gain on the sale of investment in the Roanoke MSA
Cellular Partnership (Note 2) of $5.1 million ($3.1 million after-tax or $0.24
per share).
- - Fourth quarter 1996 includes additional depreciation expense of $0.7 million
($0.4 million after-tax or $0.3 per share) relating to disposal of certain
regulated plant and equipment. Fourth quarter 1996 also includes a reduction
to income tax of $0.4 million or $0.03 per share as a result of a refinement
to estimated income taxes for the year.
SELECTED FINANCIAL DATA AND FIVE YEAR GROWTH COMPARISON
<TABLE>
<CAPTION>
==================================================================================================================================
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S><C>
Operating revenues $ 59,010,000 $ 49,948,300 $ 43,089,000 $ 32,197,700 $ 27,349,600
Operating expenses 39,597,800 34,533,300 29,667,400 19,949,300 16,208,000
Income taxes 7,398,500 5,162,500 5,005,900 3,550,400 3,766,700
Gain on sale in investment 5,077,400 - 926,699 - -
Loss on write-down of investment (2,808,100) - - - -
Net income 12,220,900 9,549,700 8,493,600 7,562,800 7,176,400
Net income per share - diluted 0.94 0.73 0.66 0.63 0.62
Cash dividends per share 0.412 0.392 0.379 0.368 0.355
Total assets 148,447,500 142,399,900 143,251,300 123,964,300 98,975,900
Long-term debt 24,606,200 24,000,000 20,000,000 20,066,900 20,114,200
Retirement benefits
other than pensions 8,431,700 7,724,100 7,150,000 6,513,900 6,356,900
Investment in property
and equipment $137,703,200 $127,196,100 $111,806,300 $103,086,300 $ 71,456,200
Average number of common
shares outstanding - diluted 13,055,814 13,056,081 12,933,926 12,016,163 11,600,019
Number of employees 567 454 492 232 166
Number of shareholders 2,884 2,883 2,889 2,638 1,853
==================================================================================================================================
</TABLE>
31
<PAGE>
BOARD OF DIRECTORS
C. Phillip Barger John B. Mitchell Carl A. Rosberg
Chairman President Senior Vice President
E. W. Barger & Company Hammond-Mitchell, Inc. CFW Communications
T/A Barger Insurance Network
John N. Neff Robert S. Yeago, Jr.
William Wayt Gibbs, V President and Chairman of the Board
President Chief Executive Officer CFW Communications
Comprehensive Computer Nielsen Builders, Inc.
Consultants
James S. Quarforth
C. Wilson McNeely, III President and
President Chief Executive Officer
Eagle Corporation CFW Communications
EXECUTIVE OFFICERS
J. William Brownlee David R. Maccarelli Christina S. Smith
Vice President and Senior Vice President Vice President
Chief Operating Officer - Administration
Wireline Michael B. Moneymaker Treasurer and Secretary
Vice President Finance
Warren C. Catlett Robert S. Yeago, Jr.
Vice President Strategy and James S. Quarforth Chairman of the Board
Business Development President and
Chief Executive Officer Walter M. Zirkle, III
David E. Lowe Vice President and
President - Carl A. Rosberg Chief Operating Officer -
West Virginia Operations Senior Vice President Wireless
IN MEMORIAM-1912-1997
[PHOTO APPEARS HERE]
DENNIS B. DRAPER served CFW in a variety of capacities for over 50 years,
beginning with his employment in 1941 as a plant supervisor. He was elected
Corporate Secretary in 1944 and elected to the Board of Directors in 1947, a
position he held until 1992.
He was promoted to Vice President and General Plant Manager in 1949 to
oversee the maintenance and expansion of all the Company's plant operations. In
June 1963, he was elected President and took on the additional responsibility of
Chairman of the Board in 1969.
Relinquishing the position of President in 1978, he continued as Chairman
of the Board and Chief Executive Officer. In 1982, he retired from active
employment after 41 years of service, but continued as a member of the Board
until 1992, serving as its Chairman through 1990.
Mr. Draper served as President of the Virginia Independent Telephone
Association in 1956 and had served as a member of the Board of the United States
Telephone Association. He was also active in local Chambers of Commerce and
civic organizations.
IN RECOGNITION
[PHOTO APPEARS HERE]
Our appreciation is extended to MEREDITH E. YEAGO for his many years of
dedicated service to CFW. He retired from the Board of Directors in January
1998.
Mr. Yeago came to the Company in 1950 as an accountant after graduating
from the University of Virginia School of Commerce. He was elected Treasurer in
1953 and elected to the additional position of Corporate Secretary in 1966. He
was elected as a member of the Board of Directors in 1969.
In 1978, he was promoted to Vice President and Treasurer, a position held
until his retirement from active employment in July 1989 after 39 years of
service. He continued as a member of the Board of Directors until this year.
During his telephone career, Mr. Yeago served as President of the Virginia
Independent Telephone Association in 1969 and served on Boards of local civic
and charitable organizations.
32
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
The Company has as its wholly-owned subsidiaries, CFW Telephone Inc., CFW
Network Inc., CFW Wireless Inc., CFW Cable Inc., CFW Cable of Virginia Inc., CFW
Communications Services Inc., CFW Licenses Inc., CFW Information Services Inc.
and CFW PCS Inc., which are incorporated in Virginia and are included in the
consolidated financial statements of the Company. CFW Wireless Inc. is the
managing partner of Virginia RSA6 Cellular Limited Partnership and Virginia RSA6
Resale Limited Partnership, in each of which it owns an 84% interest. These
partnerships are also included in the consolidated financial statements of the
Company.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated February 13, 1998, incorporated by reference in this annual report
of CFW Communications Company on Form 10-K, into the Company's previously filed
Form S-8 Registration Statements File Nos. 2-65364, 33-31361, 33-45650 and
33-55745, 333-40751, 333-40753 and 333-45593 and Form S-3 Registration Statement
No. 333-17945.
Richmond, Virginia
March 18, 1998
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