SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 Commission File No. 0-16751
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CFW COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 8/13/98 13,013,848
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CFW COMMUNICATIONS COMPANY
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets,
June 30, 1998 and December 31, 1997 3-4
Condensed Consolidated Statements of
Income, Three and Six Months Ended
June 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows, Six Months Ended
June 30, 1998 and 1997 6
Condensed Consolidated Statements of
Shareholders' Equity, Six Months Ended
June 30, 1998 and the Year Ended 1997 7
Notes to Condensed Consolidated Financial
Statements 8-9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-15
PART II. OTHER INFORMATION 16
SIGNATURES 17-18
2
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
<S> <C>
=====================================================================================================================
June 30,1998 December 31,
(Unaudited) 1997
---------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,607,049 $ 1,224,347
Accounts receivable 13,055,316 12,931,115
Materials and supplies 1,964,427 2,039,345
Prepaid expenses and other 536,436 349,617
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17,163,228 16,544,424
---------------------------------------------------
Securities and Investments 15,860,681 16,873,601
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Property and Equipment
In service 137,944,628 135,689,959
Under construction 5,371,689 2,013,191
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143,316,317 137,703,150
Less accumulated depreciation 46,501,661 42,032,163
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96,814,656 95,670,987
---------------------------------------------------
Other Assets
Cost in excess of net assets of business 12,922,591 13,062,856
acquired, less accumulated amortization
Deferred charges 1,846,970 2,311,206
Radio spectrum licenses 4,783,066 3,984,455
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19,552,627 19,358,517
---------------------------------------------------
$ 149,391,192 $ 148,447,529
=====================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
=======================================================================================================================
June 30, 1998 December 31,
(unaudited) 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,669,178 $ 4,169,282
Customers' deposits 450,860 457,343
Advance billings 2,450,315 2,081,491
Accrued payroll 1,009,438 1,459,821
Accrued interest 727,543 815,622
Other accrued liabilities 2,942,750 2,651,719
Deferred revenue 1,907,748 1,329,877
Income taxes payable 372,500 124,545
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15,530,332 13,089,700
---------------------------------------------------
Long-term Debt 17,969,796 24,606,160
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Long-term Liabilities
Deferred income taxes 11,485,031 9,242,246
Retirement benefits other than pensions 8,788,820 8,431,688
Other 1,455,786 1,471,543
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21,729,637 19,145,477
---------------------------------------------------
Minority Interests 1,533,182 1,150,690
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Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 43,504,353 43,420,269
Retained earnings 49,123,892 47,035,233
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92,628,245 90,455,502
---------------------------------------------------
$ 149,391,192 $ 148,447,529
=======================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
=============================================================================================================================
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Operating Revenues
Wireline communications $ 9,251,047 $ 8,420,632 $ 18,462,493 $ 16,733,892
Wireless communications 3,320,857 2,925,150 6,480,301 5,634,068
Directory assistance 3,268,383 2,544,388 6,537,849 4,459,975
Other communications services 710,985 612,748 1,305,911 1,141,031
16,551,272 14,502,918 32,786,554 27,968,966
Operating Expenses
Maintenance and support 2,591,632 2,502,451 5,234,226 4,566,505
Depreciation and amortization 2,487,116 2,231,207 4,980,791 4,417,569
Customer operations 3,975,952 3,406,814 7,869,532 6,452,099
Corporate operations 1,784,303 1,755,233 3,442,858 3,439,239
10,839,003 9,895,705 21,527,407 18,875,412
Operating Income 5,712,269 4,607,213 11,259,147 9,093,554
Other Income (Expenses)
Other expenses, principally interest (171,080) (191,987) (360,618) (582,221)
Interest and dividend income 31,946 52,003 56,785 129,270
Equity loss from PCS investees (1,346,047) (4,127) (2,241,630) (4,127)
Equity income (loss) from other 37,502 (11,114) 42,008 51,416
wireless investees
Loss on write-down of investment - - (270,067) -
Gain on sale of investment - 5,077,379 - 5,077,379
4,264,590 9,529,367 8,485,625 13,765,271
Income Taxes 1,629,315 3,591,353 3,266,102 5,202,359
2,635,275 5,938,014 5,219,523 8,562,912
Minority Interests (166,821) (32,616) (301,419) (177,588)
Net Income $ 2,468,454 $ 5,905,398 $ 4,918,104 $ 8,385,324
=============================================================================================================================
Net income per common share - basic $ 0.19 $ 0.45 $ 0.38 $ 0.65
Net income per common share - diluted $ 0.19 $ 0.45 $ 0.38 $ 0.64
Average shares outstanding - basic 13,008,988 12,982,288 13,001,696 12,981,256
Average shares outstanding - diluted 13,126,843 13,044,837 13,104,679 13,053,824
=============================================================================================================================
Cash dividends per share $ 0.10875 $ 0.103 $ 0.21750 $ 0.206
=============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
==========================================================================================================================
Six Months Ended
June 30, June 30,
1998 1997
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,918,104 $ 8,385,324
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 4,710,630 4,169,502
Amortization 270,161 248,067
Deferred taxes 2,242,785 674,093
Retirement benefits other than pensions 357,132 354,208
Other 546,791 473,697
Equity from wireless investees 2,199,622 (47,289)
Minority interests, net of distributions 56,750 28,918
Distributions received from investments 48,576 68,649
Loss on write-down of investment 270,067 -
Gain on sale of investment - (5,077,379)
Changes in assets and liabilities from operations:
Increase in accounts receivable (124,201) (2,571,279)
Decrease in materials and supplies 74,918 139,611
Increase in other current assets (186,819) (55,129)
Increase (decrease) in accounts payable 1,499,896 (655,354)
Decrease in other accrued liabilities (247,431) (825,616)
Increase in other current liabilities 362,341 293,765
Increase in income taxes payable 247,955 2,536,589
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Net cash provided by operating activities 17,247,277 8,140,377
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,504,638) (6,192,361)
Purchases of radio spectrum licenses (472,868) (5,031,818)
Investments in PCS alliances (1,986,090) -
Purchase of minority interests - (1,103,481)
Proceeds from the sale of investment - 6,594,399
Other 480,746 128,378
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Net cash used in investing activities (7,482,850) (5,604,883)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (2,829,445) (2,674,179)
Payments on senior notes (3,636,364) -
Payments on lines of credit, net (3,000,000) (2,300,000)
Net proceeds from exercise of stock options 84,084 -
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Net cash used in financing activities (9,381,725) (4,974,179)
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Increase (decrease) in cash and cash equivalents 382,702 (2,438,685)
Cash and cash equivalents:
Beginning 1,224,347 3,003,607
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Ending $ 1,607,049 $ 564,922
==========================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Shareholders' Equity
<CAPTION>
====================================================================================================================================
Common Stock Retained Accumulated Comprehensive
Earnings Other Income
Comprehensive
Income
Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 12,980,212 $ 43,378,440 $ 40,163,310 $ 2,460,176
Net Income - - 2,479,926 - $ 2,479,926
Unrealized loss on securities - - - (3,262,248) (3,262,248)
available for sale, net of $2.1
million deferred tax benefit
Cash dividends - - (1,336,962) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, Mar 31, 1997 12,980,212 43,378,440 41,306,274 (802,072) (782,322)
Net Income - - 5,905,398 - 5,905,398
Unrealized loss on securities - - - (1,159,604) (1,159,604)
available for sale, net of $0.7
million deferred tax benefit
Cash dividends - - (1,337,217) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 12,980,212 43,378,440 45,874,455 (1,961,676) 3,963,472
Net Income - - 2,893,651 - 2,893,651
Unrealized gain on securities - - - 539,251 539,251
available for sale, net of $0.3
million deferred tax obligation
Cash dividends - - (1,337,228) - -
Stock options exercised, net 62 825 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 12,980,274 43,379,265 47,430,878 (1,422,425) 7,396,374
Net Income - - 941,957 - 941,957
Reclassification to realized loss, - - - 1,422,425 1,422,425
included in net income
Cash dividends - - (1,337,602) - -
Stock options exercised, net 6,380 41,004 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,986,654 43,420,269 47,035,233 - $ 9,760,756
====================
Net Income - - 2,449,650 - $ 2,449,650
Cash dividends - - (1,414,724) - -
Stock options exercised, net 22,280 29 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 13,008,934 43,420,298 48,070,159 - 2,449,650
Net Income - - 2,468,454 - 2,468,454
Cash dividends - - (1,414,721) - -
Stock options exercised, net 4,914 84,055 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 13,013,848 $ 43,504,353 $ 49,123,892 $ - $ 4,918,104
====================================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1997, contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of June 30, 1998 and December
31, 1997 and the results of operations for the three and six months
ended June 30, 1998 and 1997 and cash flows for the six months ended
June 30, 1998 and 1997. The results of operations for the three and six
months ended June 30, 1998 and 1997 are not necessarily indicative of
the results to be expected for the full year.
Certain amounts on the 1997 financial statements have been reclassified,
with no effect on net income, to conform with classifications adopted in
1998.
(2) The Company adopted the additional disclosure provisions of Financial
Accounting Standards Board (FASB) Statement No. 130, reporting
comprehensive income, in the first quarter of 1998. This pronouncement
results in the Company presenting in a financial statement all items
required to be recognized under accounting standards as components of
comprehensive income. The Company has elected to present this
information in the consolidated statements of shareholders' equity.
The Company recognized a $2.8 million ($1.7 million after tax)
impairment loss on its investment in American Telecasting, Inc. in the
fourth quarter of 1997. Accordingly, the unrealized loss of $2.3 million
before-tax ($1.4 million after tax) was reclasssified to realized loss.
(3) At December 31, 1997, the Company adopted the provisions of FASB
Statement No. 128, Earnings Per Share, which provides for the dual
presentation of basic net income per share and diluted net income per
share. In order to reflect the assumed conversion of dilutive stock
options, the weighted average number of common shares outstanding, which
was used to compute diluted net income per share, were increased by
117,855 and 62,549 shares for the three months ended June 30, 1998 and
1997, respectively, and by 102,983 and 72,569 shares for the six months
ended June 30, 1998 and 1997, respectively. The Company currently has
476,179 options outstanding to acquire shares of common stock, of which
226,105 are currently exercisable.
(4) The Company has a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications
services (PCS) serving a 1.6 million populated area in central and
western Virginia. The Company is managing such build-out pursuant to a
service agreement. PCS operations began throughout the Virginia region
in the fourth quarter of 1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), an owner of PCS radio spectrum licenses
for most of West Virginia and parts of eastern Kentucky, southwestern
Virginia and eastern Ohio. These licenses enable the WV Alliance to
build-out and operate a system to provide PCS services to a 2.0 million
populated area. The Company is managing this build-out pursuant to a
service agreement. The WV Alliance expects to commence operations in the
third quarter of 1998.
8
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
Combined summarized financial information for the VA Alliance and WV
Alliance ("Alliances"), both of which are accounted for under the equity
method, are as follows ($'s in millions):
June 30, 1998 December 31, 1997
------------- -----------------
Current assets $ 3.8 $ 5.8
Noncurrent assets 114.1 101.6
Current liabilities 17.2 37.5
Noncurrent liabilities 72.1 33.6
Redeemable preferred stock 12.8 12.8
June 30, 1998
-------------
Net sales $ 0.9
Gross profit/(loss) (0.2)
Net loss applicable to common owners (10.5)
Company's share of net loss (2.2)
The Company has entered into guaranty agreements whereby the Company is
committed to provide guarantees of up to $36.2 million of the VA
Alliance's debt and redeemable preferred obligations and up to $15.1
million of the WV Alliance's debt obligations, with such guarantees
becoming effective as obligations are incurred by the Alliances. At June
30, 1998, the Company has guaranteed $24.0 million of the Alliances'
obligations.
9
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Three and Six Months Ended June 30, 1998 and 1997
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is a diversified
communications company providing a broad range of products and services to
business and residential customers. These communications products and services
include local telephone, long distance, cellular, personal communications
services (PCS), paging, wireless and wireline cable television, directory
assistance, competitive access, local internet access, sales and service of
phone systems and alarm installation and monitoring.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment.
In addition, the Company has leveraged its existing switching platform and fiber
optic network by introducing new services such as long distance, directory
assistance, cable television, local internet access and various enhanced
services such as call waiting and caller identification. These activities have
contributed to considerable growth in the Company's operating revenues.
As a result of the Company's increasing focus on and growth in wireless
communications and other competitive communications related businesses, a larger
percentage of the Company's operating revenues and operating cash flows are
being generated by businesses other than the mature telephone operations.
Operating cash flows is defined as operating income before depreciation and
amortization. Management believes operating cash flow is a meaningful indicator
of the Company's performance. Operating cash flow is commonly used in the
wireless communications industry and by financial analysts and others who follow
the industry to measure operating performance. Operating cash flows should not
be construed as an alternative to operating income or cash flows from operations
(both as determined in accordance with generally accepted accounting principles)
or as a measure of liquidity.
Through the Virginia PCS Alliance, L.C. ("VA Alliance") and West Virginia PCS
Alliance, L.C. ("WV Alliance") and other PCS joint ventures, the Company has
acquired radio spectrum licenses for PCS in markets with an aggregate population
of five million people. These licenses have enabled the Company, as managing
partner of both Alliances, to deploy PCS services in parts of central Virginia
and will enable further deployment in central and western Virginia, West
Virginia and parts of Maryland, Ohio, Pennsylvania, Kentucky and Tennessee. In
the fourth quarter of 1997, the VA Alliance commenced providing PCS to a 1.6
million populated area in central and western Virginia. The WV Alliance has
commenced construction of the PCS network in West Virginia and expects to
commence providing PCS services in the Charleston and Huntington corridor by the
end of September 1998 and the Clarksburg, Fairmont and Morgantown corridor by
the year's end.
In 1998, management expects continued proportionate growth in revenue and
operating cash flows from its current consolidated operations. The Company
recognized losses of approximately $1.3 million and $2.2 million for the three
and six months ended June 30, 1998 for its share of losses from PCS
partnerships. The Company's recognition of its share of losses associated with
its investments in PCS partnerships is expected to be significant in 1998 as the
10
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Company recognizes a full year of its share of operating losses from the VA
Alliance and begins recognizing its share of operating losses from the WV
Alliance. These losses from equity investments are expected to exceed net income
growth from consolidated operations and will likely result in consolidated net
income levels below amounts reported in recent years. Losses from equity
investments are expected to continue into future years until build-out is
complete and a sufficient customer base has been established.
The Company wishes to caution readers that these forward-looking statements and
any other forward-looking statements made by the Company are based on a number
of assumptions, estimates and projections. These include, but are not limited
to, continuation of economic growth and demand for wireless and wireline
communications services; continuation at the current level of services for
certain material customers; reform initiatives being considered by the FCC being
relatively revenue neutral; significant competition in the Company's telephone
service area not emerging in 1998; the impact on capital requirements and
earnings from new business opportunities and expansion into new markets; price
erosion from competitive activity not being greater than anticipated; and
achievement of build-out, operational, capital, financial and marketing plans
relating to deployment of PCS services. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof and the Company undertakes no obligation to
revise or update such statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's net income for the second quarter of 1998 was $2.5 million, or
$0.19 per share, as compared to net income of $5.9 million, or $0.45 per share,
for the second quarter of 1997. The second quarter of 1997 included a $5.1
million ($3.1 million after tax or $0.24 per share) gain on the sale of its
investment in the Roanoke Cellular partnership. Exclusive of this gain, net
income decreased $0.3 million or 11% between these two periods. Net income for
the six month periods ending June 30, 1998 and 1997 was $4.9 million and $8.4
million, respectively. Excluding the gain on sale of investment mentioned above,
net income for these six month periods was down $0.3 million or 7%.
The Company's equity share of PCS losses were $2.2 million or $0.17 per share
($1.4 after tax or $0.11 per share) for the six months ended June 30, 1998.
Additionally, further decline in the market price of American Telecasting, Inc.
prompted an additional write-down in the Company's investment of approximately
$0.3 million ($0.2 million after-tax) in the first quarter of 1998. Therefore,
excluding these nonoperating items and the Company's equity share of PCS losses,
net income increased $0.6 million (20%) and $1.2 million (24%) for the three and
six month periods ending June 30, 1998 versus June 30, 1997. These increases
were primarily a result of increased net income in the telephone and directory
assistance businesses.
Operating revenues were $16.6 million and $32.8 million for the three and six
months ended June 30, 1998. This represents a $2.0 million (14%) and $4.8
million (17%) increase over operating revenues for the three and six months
ended June 30, 1997. Operating cash flows for the three and six months ended
June 30, 1998 were $8.2 million and $16.2 million, respectively, a $1.4 million
(20%) and $2.7 million (20%) increase over the three and six months ended June
30, 1997. Operating income for the three and six months ended June 30, 1998 was
$5.7 million and $11.3 million, respectively, a $1.1 million (24%) and a $2.2
million (24%) increase over the comparable periods from the prior year.
11
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
These results reflect continued strong contributions from CFW's managed cellular
operations, significant increases in both revenue and cash flow contributions
from directory assistance due to contract expansions during 1997 and growth in
telephone access lines, minutes of use and calling features.
OPERATING REVENUES
The total operating revenue increase of $2.0 million and $4.8 million for the
three and six month periods ended June 30, 1998 over June 30, 1997 was fueled
primarily by revenue increases in the directory assistance business of $0.7
million and $2.1 million for these three and six month periods. This is
attributable to a 27% and 40% increase in call volume over these three and six
month periods in the current year versus the prior year due primarily to
significant contract expansions. Telephone, network and cellular operating
revenues increased $0.4 million, $0.4 million and $0.5 million, respectively for
the three months ended June 30, 1998 versus the comparable prior year period and
increased $1.0 million, $0.7 million and $0.9 million, respectively for the six
months ended June 30, 1998 versus the comparable prior year period. Access
minutes and lines grew 11% and 4%, respectively and cellular and paging
customers grew 28% over the first half of 1997. Additionally, increased network
traffic, internet customer growth and revenues from the commencement of
competitive local exchange and long distance services accounted for the network
revenue growth.
WIRELINE COMMUNICATIONS
Revenues from the Company's wireline operations, which include telephone
revenues, fiber optic network usage and wireline cable revenues, increased $0.8
million (10%) and $1.7 million (10%) for the three and six months ended June 30,
1998 versus the comparable 1997 periods. Telephone revenues, which include local
service, access and toll services, directory advertising and calling feature
revenues were $15.1 million for the first half of 1998 ($7.5 million for the
second quarter 1998). This represents an increase of 7% over the first half of
1997 (6% increase over the second quarter 1997).
Network revenues increased $0.4 million and $0.7 million for the three and six
month period ended June 30, 1998 versus the comparable prior year periods. This
is due to increases for the first half of 1998 versus 1997 in carrier access
revenue of $0.2 million generated by increased traffic, internet revenue of $0.2
million due to internet customer growth of 81% and $0.3 million due to the
commencement of competitive local exchange and long distance.
WIRELESS COMMUNICATIONS
Revenues from the Company's wireless communications, which include cellular,
paging, wireless cable and other miscellaneous revenues, increased $0.4 million
(14%) and $0.8 million (15%) for the three and six months ended June 30, 1998
versus 1997. Cellular revenues, including access, air time, roaming charges,
paging and voicemail increased by $0.5 million or 21% and $0.9 million or 21%
for the three and six month periods ended June 30, 1998, respectively, over the
comparable period in the prior year reflecting year over year customer growth of
28%.
12
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
DIRECTORY ASSISTANCE
Directory assistance revenue grew $0.7 million (29%) and $2.1 million (47%) for
the three and six months ended June 30, 1998 versus the comparable periods of
the prior year. Call volumes for the first half of 1998 were up 40% over the
prior year due to contract expansions and new business generated throughout
1997.
OPERATING EXPENSES
Operating expenses increased $0.9 million (10%) and $2.7 million (14%) for the
three and six month periods ended June 30, 1998 as compared to the same periods
in 1997. Of this increase, $1.1 million represented a six month period to period
increase in the operating expenses of directory assistance. This is a 28%
increase over the same period in the prior year and is a result of additional
operating expenses necessary to support the revenue growth. As a percent of the
related revenue, the Company's total operating expenses decreased 3% over the
same period in the prior year. This is due to improved operational efficiencies,
particularly in the Company's directory assistance operations which experienced
significant growth during 1997. Offsetting these efficiencies were increases in
repair and maintenance and internet access costs, as well as an increase in the
Company's non-capital investment in systems and customer care operations
infrastructure to support our continued revenue and customer growth and future
expansion plans. In addition, start-up costs associated with deploying new
services in existing markets and expansion into new markets is expected to
continue.
MAINTENANCE AND SUPPORT EXPENSE
Maintenance and support expense, which includes property and equipment
maintenance, general engineering and general administration of plant operations,
increased $0.1 million (4%) and $0.7 million (15%) for the three and six months
ended June 30, 1998 versus the comparable periods of the prior year. This
increase is primarily the result of increased access and other related costs in
support of the revenue growth.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $0.3 million (11%) and $0.6
million (13%) for the three and six months ended June 30, 1998 versus the
comparable periods in 1997. This is due to a period to period increase in the
property and equipment asset base which increased 7% from $129 million as of
June 30, 1997 to $138 million as of June 30, 1998. Additionally, investments in
computer software and hardware with shorter depreciable lives has driven
depreciation as a percent of the related assets up from an annualized rate of
6.8% to 7.2%. The property and equipment increase was a result of capital growth
to support continued business expansion primarily in the Company's wireless
operations and directory assistance and systems related investments necessary to
allow for the bundling of certain services and the integration of customer care
and other key functions.
CUSTOMER OPERATIONS EXPENSE
Customer operations expense, which includes marketing and sales, product
management, product advertising, publication of a regional telephone directory,
customer services and directory assistance services increased $0.6 million (17%)
and $1.4 million (22%) for the three and six month periods ended June 30, 1998
versus the same periods of the prior year. Directory assistance increased $0.4
million (28%) and $1.0 million (36%) over these three and six month periods to
support the revenue growth. As mentioned above, the Company's commitment to
further enhance customer care operations accounts for the majority of the
remaining increase.
13
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
CORPORATE OPERATIONS EXPENSE
Corporate operations expense, which includes taxes other than income, executive,
planning, accounting, external relations, legal, purchasing, information
management, human resources and other general and administrative expenses
increased less than $0.1 million for the three and six months ended June 30,
1998 versus the comparable three and six month periods in the prior year.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA Alliance, which commenced operations
in the fourth quarter of 1997, was $1.3 million and $2.2 million for the three
and six months ended June 30, 1998. The Company has a 21% common ownership
interest in the VA Alliance. The Company also has a 45% common ownership
interest in the WV Alliance which is expected to commence operations in the
third quarter of 1998.
INCOME TAXES
Income taxes decreased $2.0 million and $1.9 million for the three and six
months ended June 30, 1998 as compared to the same periods in 1997 due to the
taxes relating to the 1997 gain on the sale of the Roanoke MSA Cellular
partnership. The effective tax rate increased slightly, from 38% to 40% for the
first half of 1998 versus 1997 due to an increase in certain state minimum tax
provisions.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 30, 1998, net cash provided by operating activities
was $17.2 million. The principal changes in operating assets and liabilities was
a $1.5 million increase in accounts payable which is due to the timing of
payments. Other current liabilities increased $0.4 million due to increases in
advance billings in the cellular operations.
The Company's investing activities for the six months ended June 30, 1998
included $5.5 million for the purchase of property and equipment, $0.9 million
of which represents software and hardware related equipment and $3.3 million
which represents an increase in property and equipment under construction.
Primary contributions to the increase in property and equipment under
construction were the renovations to certain retail stores ($0.5 million),
construction in progress of the customer care facility ($1.0 million) and an
investment in billing systems ($0.5 million). The Company invested an additional
$2.0 million in the VA Alliance. A Company led consortium invested $0.6 million
in Local Multipoint Distribution Services (LMDS) spectrum licenses with a net
cash outlay from the Company of $0.3 million.
Net cash used for financing activities for the six months ended June 30, 1998
aggregated $9.4 million which primarily represents payment of dividends on
outstanding capital stock of $2.8 million, payment on senior notes of $3.6
million and the reduction of lines of credit of $3.0 million.
14
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Funds required for dividends, capital expenditures, interest and debt principal
payments and partnership contributions are expected to be provided from internal
sources and borrowings drawn against available credit facilities. The Company
has entered into certain guarantee agreements relating to its investments in the
VA Alliance and the WV Alliance during 1998 (Note 4). Management anticipates
that funds required for additional capital contributions to the VA Alliance and
WV Alliance will be provided from increased cash flow resulting from lower
estimated tax payments due to the Company recognizing its proportionate share of
the tax losses generated by the VA Alliance and WV Alliance, both limited
liability companies, cash flows from operations and borrowings under existing
lines of credit.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is in the process of conducting a comprehensive review of its
computer systems to identify the internal systems that could be impacted by the
year 2000 issue and is developing an implementation plan to resolve the issue.
The review also entails formal communications with all of the Company's
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties failure to
resolve their own year 2000 issues.
Based on our findings and assessment to date, the Company will be performing
certain planned telephone switching software upgrades and computer software and
system upgrades, which are being performed primarily to better meet the business
and growth needs of the Company. The total year 2000 project cost is not
expected to be material to the Company's business operations or financial
condition. The Company expects its year 2000 program to be completed on a timely
basis. However, if such modifications and upgrades are not made, or are not
completed on a timely basis, the year 2000 issue could have a material impact on
the operations of the Company. There can also be no assurance that the systems
of other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems or costs of upgrades.
The costs of the program and estimated completion date are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
compliance by third parties which interact with the Company's systems, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
15
<PAGE>
CFW COMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
At the regular Annual Meeting of the Shareholders held April
21, 1998, directors C.P. Barger, C.W. McNeely, III, and C.A.
Rosberg, being the same as the nominees in the proxy
solicitation, were elected.
The following votes were cast for each of the following
nominees for Director or were withheld with respect to such
nominees:
================================================================================
VOTES FOR VS. TOTAL SHARES
NOMINEE FOR AGAINST OUTSTANDING
- --------------------------------------------------------------------------------
C.P. Barger 9,923,032 124,551 76.3%
- --------------------------------------------------------------------------------
C.W. McNeely, III 9,991,714 55,869 76.8%
- --------------------------------------------------------------------------------
C.A. Rosberg 9,982,819 64,764 76.7%
- --------------------------------------------------------------------------------
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
ended 6/30/98.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFW COMMUNICATIONS COMPANY
August 14, 1998 s/J. S. Quarforth
--------------------------------------
J. S. Quarforth, President
and Chief Executive Officer
August 14, 1998 s/M. B. Moneymaker
--------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer and
Secretary
17
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