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
For fiscal year ended December 31, 1998
-----------------
OR
___
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ____________________________________
Commission file number: 0-16751
CFW COMMUNICATIONS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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 February 22, 1999; $282,675,506. (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 February 22, 1999.)
<PAGE>
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 1, 1999 13,016,988 shares
------------------
DOCUMENTS INCORPORATED BY REFERENCE
Information from the following documents has been incorporated by
reference in this report:
--- Annual Report to Shareholders for year ended December 31, 1998
PARTS I AND II
--- Proxy Statement for 1999 Annual Meeting of Shareholders - PARTS I
AND III
2
<PAGE>
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 West Virginia, 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, competitive local telephone
service (CLEC) and internet access; (iii) continuing its
tradition of delivering high quality service to its
customers; and (iv) expanding its geographic presence
throughout central and western Virginia, West Virginia and
surrounding states.
The Company provides wireline services such as local
exchange and telephone service to customers in the cities
of Waynesboro, Clifton Forge and Covington, Virginia, and
the surrounding counties, and maintains approximately
36,700 access lines in these service territories. 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 three incumbent
local telephone providers, the Company commenced providing
competitive local telephone services to businesses in
Charlottesville, Harrisonburg and Staunton, Virginia in
late 1998 and, in 1999, plans to expand this service
offering throughout central and western Virginia and in
the Huntington and Charleston, WV communities.
In addition to its local telephone operations, the Company
owns and operates over 450 miles of fiber optic cable in
western and central Virginia. This fiber is connected and
is a part of a fiber network managed by ValleyNet, in
which the Company is a partner, using state-of-the-art
electronics, thus establishing a regional backbone for the
rapid deployment of broadband services beyond traditional
franchise boundaries. During 1997 ValleyNet connected its
fiber network to Carolina FiberNet. In 1998, the ValleyNet
network was expanded to connect to the AEP Communications
network. This contiguous network serves ten states and
represents 4,500 miles of fiber cable. CFW also leases
3
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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 will facilitate the Company's ability to
further control its network operating costs as it
introduces CLEC and internet services and increases its
PCS customer base throughout the region. Accordingly, the
Company plans to add 500 miles of fiber in 1999 through a
joint fiber build.
The Company's internet business services nearly 8,000
customers in most of its Virginia markets and in the
Huntington and Charleston markets of West Virginia. The
Company plans to expand this service to its' remaining
Virginia markets of Danville and Martinsville, VA and to
Morgantown, Fairmont and Clarksburg, WV in 1999.
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 HFC network provides the
infrastructure to support high-speed modems for service
such as Internet and provides the Company a platform to
support 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 22% limited partner in the Virginia RSA5
partnership providing cellular service in the region
immediately south of RSA6.
The Company has a 21% common ownership interest in
Virginia PCS Alliance, L.C. (VA Alliance), a provider of
PCS throughout 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 that commenced providing PCS services in
Charleston and Huntington in late 1998. Additional
information regarding these PCS investments is included in
Note 3 to the Company's Consolidated Financial Statements
as found on pages 22 and 23 of the Annual Report of CFW to
its Shareholders for the year ended December 31, 1998 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 12,000 customers. The
4
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
Company provides high-speed internet service in the
Charlottesville market which utilizes the wireless cable
spectrum. The Company expects to launch similar services
in its remaining wireless cable markets during 1999.
CFW provides operator based directory information services
for AT&T customers requesting phone numbers in the
mid-Atlantic states. The Company also provides directory
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 personnel. The contract with AT&T commenced on
December 1, 1994 and has an initial term of five years.
During 1998 the Company commenced providing national
directory assistance services to a new customer and also
invested in a national database provider. The Company has
two operational calling centers dedicated to these
operations. During 1998 the Company purchased a
historically significant building in downtown Winchester,
Virginia which is being renovated into a third calling
center. This additional center can accommodate
approximately 110 directory assistance operator personnel.
This facility provides additional capacity and can be used
to provide directory assistance for other
telecommunication companies, call completion and other
operator services. It is anticipated that this center will
be on-line in the second quarter of 1999.
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Wireline communications 56.4% 58.4% 65.0%
Wireless communications 19.8% 19.9% 18.5%
Directory assistance 19.4% 17.9% 12.8%
Other communications services 4.4% 3.8% 3.7%
</TABLE>
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.
5
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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 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. Historically, CFW Telephone Inc. has not
had significant competition from other providers over its
core services. However, due to the Telecommunications Act
of 1996 (discussed further below) and due to wireless
technological advances, the Company may be subject to
greater direct competitive forces in the future.
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
CLEC 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.
With respect to its carrier services business, competition
may occur in the future in the event other service
providers build network facilities.
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). In 1998, the
Company initiated filings with the state of West Virginia
to obtain certifications necessary to provide CLEC
services similar to those granted to CFW Network Inc. for
our Virginia CLEC offering. Approval of these certificates
in West Virginia was granted in January 1999.
Additionally, the Company obtained certification to
provide interexchange telecommunications resale services.
This certification allows the Company to roll out our long
distance services in West Virginia.
6
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
The Virginia PCS Alliance offers PCS, a new 100% digital
wireless technology, throughout central and western
Virginia. The West Virginia Alliance commenced providing
PCS services in 1998 in Charleston and Huntington, West
Virginia 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 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.
Financial information about industry segments required by
this item is incorporated herein by reference to Note 2 of
the Notes to Consolidated Financial Statements found on
pages 21 and 22 in the Annual Report of CFW Communications
Company to its Shareholders for the year ended December
31, 1998.
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 State
Corporation Commission to provide local telephone services
throughout the central and western portions of Virginia
and West Virginia.
Seasonal effect on the business is not material, however
directory assistance calling volume and roaming traffic is
typically higher in the summer months. 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, 1998, 1997 and
1996, AT&T accounted for 28%, 34% 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 748 regular full-time and part-time
persons.
7
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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 "safe harbor"
provisions of the Private Securities Litigation Reform Act
of 1995. 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 1999; the impact on capital requirements and
earnings from new business opportunities and expansion
into new markets and anticipated competitive activity not
being greater than anticipated; and the 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.
<TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
<CAPTION>
Name Office Age
----------------------------- -------------------------------------------------------- --------
<S> <C> <C>
J. W. Brownlee Vice President- Virginia Operations 58
W. C. Catlett Vice President- Strategy and Business Development 39
D. E. Lowe President- West Virginia Operations 57
D. R. Maccarelli Senior Vice President- Engineering and Carrier Services 46
M. B. Moneymaker Vice President and Chief Financial Officer, Treasurer 41
and Secretary
D. M. Persing Vice President- Human Resources 47
J. S. Quarforth President and Chief Executive Officer 44
C. A. Rosberg Senior Vice President and Chief Operating Officer 46
W. M. Zirkle President- Virginia Operations 41
</TABLE>
Information for Mr. Quarforth and Mr. Rosberg is included
under the heading "Election of Directors" in the Proxy
Statement of the registrant for its 1998 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.
8
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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, the last 2
1/2 years of which he served as President and Chief
Executive Officer for Bell Atlantic - West Virginia. He
held other executive level positions in operations,
advertising, corporate relations, external affairs, and
strategic planning during his 32-year telecommunications
career at Bell Atlantic.
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.
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. Persing became Vice President- Human Resources in May
1998. From December 1995 to March 1998, she was employed
by PrimeCo Personal Communications as Vice President of
Customer Care. From June 1974 to January 1994, she held
numerous leadership positions with AT&T. These positions
encompassed customer care, directory assistance, human
resources, network engineering, software development and
large project management. From August 1994 to November
1995, she served as operations manager for CFW's directory
assistance operation.
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.
9
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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. In 1998, the Company completed
construction of 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, in 1998 the Company completed construction of a
6,400 square foot retail store located in Waynesboro,
Virginia. All buildings are of masonry construction and
are in good condition. As discussed earlier, the Company
has acquired a historically significant, 33,000 square
foot building that was originally constructed in 1847.
This property is located in Winchester, Virginia.
Approximately 17,500 square feet is currently being
rehabilitated to accommodate a third directory assistance
center and an additional 500 square feet is being
rehabilitated as a retail store in the City's historic
pedestrian mall.
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, 1998.
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 2,998 as of December 31, 1998, an increase of 114
since December 31, 1997. The range of stock prices for the
two most recent fiscal years is included in a table under
the heading "Quarterly Review" on Page 35 of the Annual
Report of CFW Communications Company to its shareholders
for the year ended December 31, 1998 and is incorporated
herein by reference. The regular cash dividend paid for
each quarter of 1998 and 1997 was $0.10875 and $0.103,
respectively, totaling $0.435 and $0.412 for the
respective years.
10
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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 $12.5 million of the
Company's consolidated retained earnings were available
for the payment of dividends at December 31, 1998.
Item 6. SELECTED FINANCIAL DATA
The information included under the heading "Selected
Financial Data and Five Year Growth Comparison" on Page 35
of the Annual Report of CFW Communications Company to its
Shareholders for the year ended December 31, 1998 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
30 through 34 of the Annual Report of CFW Communications
Company to its Shareholders for the year ended December
31, 1998 is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into financial instruments
that subject the Company to material market risk.
Financial instruments in which the Company holds are
disclosed in Notes 4 and 5 to the Company's Consolidated
Financial Statements as found on pages 23 and 24 of the
Annual Report of CFW to its Shareholders for the year
ended December 31, 1998 and 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, 1998 as follows:
Financial statements and Independent Auditor's Report
found on Pages 14 through 29.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
11
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
Item 11. EXECUTIVE COMPENSATION
The information included under the heading "Summary
Compensation Tables" in the definitive Proxy Statement of
the registrant for its 1999 Annual Meeting of Shareholders
is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information included under the headings "Election of
Directors" and "Related Transactions" in the definitive
Proxy Statement of the registrant for its 1999 Annual
Meeting of Shareholders is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the headings "Election of
Directors" and "Related Transactions" in the definitive
Proxy Statement of the registrant for its 1999 Annual
Meeting of Shareholders is incorporated herein by
reference.
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, 1998 and 1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997, and 1996.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997, and 1996.
Notes to Consolidated Financial Statements.
Independent Auditor's Report.
2. Exhibits
( 3) 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 30, 1998.
12
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
(4.1) 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.
(4.2) Rights Agreement dated as of February 26, 1990 is
incorporated herein by reference to the Form 8-A,
Exhibit 1 dated March 5, 1990.
(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 1988
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, 1998
(See Note 1).
(21) Subsidiaries of the registrant.
(23) Consent of McGladrey and Pullen, LLP.
(27) Financial Data Schedule for the year ended December
31, 1998.
(99) Financial Statements of Virginia PCS Alliances, L.C.
for the year ended December 31, 1998.
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 Form 10-K.
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended
December 31, 1998.
(d) Financial information of subsidiaries not consolidated and 50 percent or
less owned entities.
The following financial statements of Virginia PCS Alliances, L.C. are
incorporated by reference in Part II, Item 8 of this FORM 10-K:
Balance Sheets at December 31, 1998 and 1997.
Statements of Operations for the years ended December 31, 1998 and 1997.
Statements of Cash Flows for the years ended December 31, 1998 and 1997.
Statements of Members' Equity (deficit) for the years ended December 31,
1998 and 1997.
Notes to Financial Statements.
Independent Auditor's Report.
14
<PAGE>
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 30, 1999
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:
<TABLE>
<CAPTION>
<S> <C>
s/ R. S. Yeago, Jr. Chairman of the Board,
- ---------------------------- and Director March 30, 1999
R. S. Yeago, Jr.
President and
s/ J. S. Quarforth Chief Executive Officer,
- ---------------------------- and Director March 30, 1999
J. S. Quarforth
Senior Vice President,
s/ C. A. Rosberg Chief Operating Officer,
- ----------------------------
C. A. Rosberg and Director March 30, 1999
s/ C. P. Barger Director March 30, 1999
- ----------------------------
C. P. Barger
s/ W. W. Gibbs, V Director March 30, 1999
- ----------------------------
W. W. Gibbs, V
s/ J. B. Mitchell, Sr. Director March 30, 1999
- ----------------------------
J. B. Mitchell, Sr.
s/ C. W. McNeely, III Director March 30, 1999
- ----------------------------
C. W. McNeely, III
s/ J. N. Neff Director March 30, 1999
- ----------------------------
J. N. Neff
Vice President and
s/ M. B. Moneymaker Chief Financial Officer,
- ---------------------------- Treasurer and Secretary March 30, 1999
M. B. Moneymaker
</TABLE>
15
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.
CFW
[logo]
Communications Company
[photograph]
P
e
o
p
l
More Ways To Bring More e Together.
1998 Annual Report
<PAGE>
bringing people
together in more ways
Telephone
The foundation of the Company's century-long communications services, CFW's
local and long distance telephone services are offered through a state of the
art digital switching system and extensive fiber optic network.
Wireless
CFW markets an array of wireless communications services including 100% digital
PCS, cellular and paging services. Its digital PCS network extends through
central and western Virginia and parts of West Virginia and is marketed under
the brand name Intelos.
Internet
CFW offers local connections to the internet, as well as e-mail and consulting
services. Dial-up services are complemented with high-speed data alternatives
that include wireless cable modems and DSL solutions.
Network
CFW's extensive fiber optic network provides for the economical transfer and
delivery of communications traffic from internet and long distance to wireless
services. It provides an alternative route for other carriers and is also used
by CFW to deliver CLEC service to businesses.
Video
CFW delivers cable television services to viewers, including packages with local
or regional affiliates, pay-per-view and additional special services, cable
networks, and access to premium providers including HBO and Cinemax.
c Key Highlights 2
o Letter to Shareholders 3
n The Integrated Communications Provider Concept 6
t Consolidated Financial Statements 14
e Independent Auditor's Report 29
n Management's Discussion & Analysis 30
t Board of Directors & Executive Officers 36
s General Information Inside Back Cover
<PAGE>
financial highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Amount of Percent
(In thousands, except for per share amounts) 1998 1997 Inc. (Dec.) Inc. (Dec.)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $ 66,686 $ 59,010 $ 7,676 13.0%
Operating Expenses 44,060 39,598 4,462 11.3%
Operating Cash Flows (a) 33,130 28,608 4,522 15.8%
Operating Income 22,627 19,412 3,215 16.6%
Net Income (b) 8,508 12,221 (3,713) (30.4%)
Net Income Per Share - Diluted (b) 0.65 0.94 (0.29) (30.9%)
Cash Dividends Per Share 0.435 0.412 0.023 5.6%
Investment In Property
& Equipment $153,621 $137,703 $15,918 11.6%
Average Number of Common Shares
Outstanding - Diluted 13,094 13,056 38 0.3%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating Income before depreciation and amortization. See Management's
Discussion & Analysis for additional factors to consider in using this
measure.
(b) Excluding gain on sale of investment, loss on write-down of investment and
equity loss from PCS investees, net income was $13.1 million ($1.00 per
common share - diluted) and $11.3 million ($0.86 per common share -
diluted) for 1998 and 1997, respectively. This represents an increase of
$1.8 million or $0.14 per common share - diluted.
CFW Communications Company is the Integrated Communications Provider (ICP) of
choice for business and residential customers throughout central and western
Virginia and West Virginia. Offering a diversified range of integrated
telecommunications solutions and renowned customer service, CFW is a prime
source for serving any customer's communications requirements for
a voice, data and video. CFW finds more ways to bring more people
b together than any other communications company in the region.
o
u Serving as Virginia's premier telecommunications company for more than
t a century, CFW is the largest independent telephone company
headquartered in the Commonwealth and the 40th largest in the nation.
t Traded on the NASDAQ exchange (symbol: CFWC), the company has
h approximately 13 million shares outstanding and 3,000 shareholders.
e
c Operating Revenues Operating Cash Flows (a)
o (in millions of dollars) (in millions of dollars)
m [graph appears here] [graph appears here]
p 98 66.7 98 33.1
a 97 59.0 97 28.6
n 96 49.9 96 23.8
y 95 43.1 95 19.9
94 32.2 94 17.3
Net Income
(in millions of dollars)
[graph appears here]
98 8.5 (b)
97 12.2 (b)
96 9.6
95 8.5
94 7.6
<PAGE>
f
o
r
Key Highlights
t
h
e
y
e
a
r
RETAIL STORES - Opened 12 integrated communications retail stores in communities
across Virginia and West Virginia, resulting in wider distribution of our
products and services and greater convenience for our customers.
PREPAID WIRELESS - Introduced Intelos Express prepaid digital wireless phone
service, expanding our target of wireless consumers and creating significant
customer growth.
BUNDLED SERVICES - Launched internet and long distance services in Lynchburg and
Winchester, Virginia and Charleston and Huntington, West Virginia, providing the
first such integrated multi-service bundled packages with single billing in
the region.
NEW MARKETS - Launched three strategic services in Charleston and Huntington,
West Virginia making Intelos the first integrated communications provider to
offer digital PCS, internet and long distance services in the region.
CLEC SERVICE - Initiated competitive local exchange carrier service in
Charlottesville, Harrisonburg and Staunton, Virginia representing our first
entry into the CLEC business and supporting our integrated services strategy.
DSL SERVICE - Began offering digital subscriber line (DSL) service, a new
dedicated high-speed internet service, in Waynesboro, Virginia maximizing the
value of copper wire infrastructure for customers.
EXPANDED DIRECTORY ASSISTANCE - Announced plans to renovate the historic Taylor
Hotel in downtown Winchester as a third directory assistance center to meet
increasing traffic demands.
CUSTOMER CARE - Constructed and opened a 31,000 square foot integrated
customer contact center and training facility, supporting the Company's plan to
provide a single point of contact for wide ranging services.
BRAND - Introduced the CFW Intelos brand in core markets while continuing to
build the Intelos brand across the remaining market areas, more closely linking
the two strong brands in the minds of our customers.
CFW and its progressive Integrated Communications Provider (ICP) concept has
gained recognition in national magazines such as Wireless Review and Telephony.
The operating team leading the company into its 102nd year includes (top row l.
to r.) James Quarforth, President and CEO and Carl Rosberg, Senior Vice
President and COO. (bottom row l. to r.) David Lowe, President, West Virginia
Operations; David Maccarelli, Senior Vice President, Engineering and Carrier
Services and Walter Zirkle, President, Virginia Operations.
[photographs (5) appear here]
<PAGE>
Letter to Shareholders
Nationally the telecommunications industry is in a state of
unprecedented change -- mergers and acquisitions have become
commonplace, competition is emerging and new players are
rapidly entering the market. Companies are endeavoring to
become integrated communications providers and attempting to
bundle local, wireless, internet access and long distance
services.
Our long-term shareholders and the rural communities we [map
serve know that we have shared this vision of integrated appears
services for quite some time. And more importantly, we have here]
been executing a strategy to achieve it.
Today, we have the networks and infrastructure in place to offer
digi-tal PCS, internet access, local telephone and long distance
service in a rapidly expanding operating region. We also remain
focused on continuing our reputation as a quality service provider, R
having recently opened a new state of the art customer contact center. e
And, through nineteen integrated retail store and kiosk locations and g
an expanded business sales team, we offer a host of residential and i
business communications solutions. o
n
Financial Results a
l
Operating revenues were $66.7 million in 1998, an increase of 13% over
the previous year. Operating cash flows were $33.1 million, an O
increase of 16% over 1997. Operating income was $22.6 million, a 17% p
increase over last year. Net income for 1998 was $8.5 million, or e
$0.65 per share-diluted. r
a
These record results reflect strong contributions from our telephone, t
directory assistance, cellular and paging operations. Highlights from i
these core services include cellular and paging customer growth of 30% n
from the prior year, as our combined cellular and paging customers g
reached 38,400, and growth in telephone access minutes and lines of
10.5% and 3.3%, respectively, from the prior year as access lines A
topped 36,700. Partially offsetting these results were start-up costs r
associated with our introduction in the second half of 1998 of e
competitive local telephone services in Charlottesville, Harrisonburg a
and Staunton, Virginia; introduction of DSL service, an advanced new
high-speed internet product in Waynesboro, Virginia; and the launch of
internet and long distance services in Lynchburg and Winchester,
Virginia, and Charleston and Huntington, West Virginia.
In addition, we recognized $6.5 million, before-tax, of equity losses
reflecting our share of the operating losses associated with our
investments in PCS alliances and $1.0 million of loss, before-tax,
from the write-down of our investment in American Telecasting, Inc.
1998 ACCOMPLISHMENTS & STRATEGIC INITIATIVES
In 1998 we established Intelos as the leading digital PCS service
provider in central and western Virginia as we closed out the year
with a penetration rate of over one percent of the covered population
in this region. In late 1998, we also launched digital PCS services in
the Charleston and Huntington, West Virginia markets. And our PCS
expansion plans don't stop there, as we have also started construction
of a PCS network to serve the communities of Clarksburg, Fairmont and
Morgantown, West Virginia, and expect to commercially offer digital
PCS service in these new markets in the second quarter of 1999. With
national roaming agreements in place with carriers such as Sprint PCS,
our customers can look forward to the benefits of digital PCS, and,
through the use of a dual mode handset, analog cellular or digital
PCS, nationwide.
3
<PAGE>
I Complementing our PCS service in each of these markets has been our
n internet access service. In the fourth quarter of 1998 we followed our
t PCS offering in Lynchburg and Winchester, Virginia, and Charleston and
e Huntington, West Virginia, with internet access and long distance
l services. We now offer internet access in ten markets and nearly
o doubled our customer count from a year ago. Yet we are quick to
s realize that the internet customer of today is continually looking for
higher speed access to the internet. To address this demand, in
D November 1998 we introduced an advanced new data service called DSL in
i Waynesboro and have plans to deploy this exciting new technology in
g seven additional markets by the end of 1999. We will also be testing
i high-speed two-way wireless internet service in Charlottesville and
t the Shenandoah Valley with plans to introduce this attractive
a high-speed alternative by the end of 1999.
l
In 1998 we commenced offering competitive local telephone service, or
P CLEC, to businesses in the neighboring communities of Charlottesville,
C Harrisonburg and Staunton, Virginia - a significant accomplishment
S considering the complexity involved in interconnecting with the three
largest local telephone companies in Virginia. With these
C interconnections, and our back-office support in place, we plan to
o expand this service offering to businesses in these and other
v communities during 1999.
e
r While reselling local loops works for the business sector, we are
a looking to provide local service to residential customers by wireless
g local loop using the PCS spectrum. And with the Intelos PCS network in
e place, we have the ability to redefine the local calling area by
expanding our markets' current limited local calling areas. In early
A 1999 we will begin to trial this service in selected markets and
r anticipate a commercial launch later in the year.
e
a For our directory assistance operations, the year 1998 was a year for
integrating the rapid growth we experienced during 1997. Our directory
assistance workforce has done an outstanding job in learning three new
states introduced in 1997 and has also taken on the challenge of
providing national directory assistance services for a new national
directory assistance customer added during 1998. Our two existing call
centers are at near-capacity and, to position the Company for future
growth opportunities, we have commenced the renovation of a building in
Winchester, Virginia that will house our third call center. This new
center is expected to begin operations in May 1999, and when coupled
with the new national directory assistance database located in
Waynesboro, Virginia we will be prepared to aggressively pursue
additional directory assistance business.
[map All of the aforementioned services have stimulated additional
appears demand and usage of our 450 miles of fiber optic network. And
here] with continued growth expected from each of these service
offerings, coupled with our opening of new markets in Virginia
and West Virginia, through a joint fiber build we plan to acquire
500 additional miles of fiber to connect the balance of our
cities in Virginia during 1999 and plan to build or acquire
access to a fiber network in West Virginia in 2000.
A key enabler in our expansion has been the investment in back-office services
that allows us to provide integrated billing and outstanding customer care. We
recently opened a new integrated customer contact center located in Waynesboro,
Virginia that will enable us to rapidly move toward a single point of contact
for all services to simplify the service experience for
STRATEGIC SERVICES BY MARKET
- ----------------------------------------------------------------------------
1998 MARKET PCS INTERNET LONG DISTANCE LOCAL
- ----------------------------------------------------------------------------
Charlottesville, VA * * * *
Harrisonburg, VA * * * *
Staunton, VA * * * *
Waynesboro, VA * * * *
Charleston, WV * * *
Clifton Forge/Covington, VA * * *
Huntington, WV * * *
Lexington, VA * * *
Lynchburg, VA * * *
Winchester, VA * * *
Danville, VA *
Martinsville, VA *
New River Valley, VA *
Roanoke, VA *
4
[photograph appears here] i
n
President and CEO, James Quarforth and Chairman, Robert t
Yeago share a vision for CFW and a commitment to the e
extensive region it serves. Quality products and services, g
knowledgeable and helpful employees, and service to our r
communities will continue to define CFW as it moves forward a
as the region's leading integrated communications provider. t
i
o
n
our customers. We operate a total of nineteen retail stores and kiosks and
have expanded our business sales force throughout Virginia and West
Virginia. These locations offer a single source for voice and data
communications products and services, thereby providing as much convenience
and accessibility to our customers as possible. In 1999, CFW will bring
wireless data services to the Intelos PCS customer base allowing for
circuit switched data from a PC or facsimile machine connected through a
PCS phone. Later in 1999 and 2000, wireless data services will be enhanced
to afford direct connection to the internet and improved speeds of up to 64
kbps. We are also moving toward electronic commerce and production of a
single integrated bill to further enhance customer convenience.
OUTLOOK FOR 1999 AND BEYOND
As a mature company with strong cash flow, we have been able to make strategic
investment decisions that have allowed us to reposition the Company as a
regional ICP. Like most start-up PCS, competitive local exchange carriers (CLEC)
or internet access providers, we too are incurring up-front losses associated
with deploying these services. We believe this strategy will enable us to create
long-term shareholder growth. We also believe that as other telecommunications
companies transition into integrated communications providers, our story will be
better understood by the investment community and the market values of our
businesses will be more accurately reflected in our stock price.
In 1999 and beyond we plan to continue introducing our integrated communications
service offerings to communities throughout central and western Virginia and
West Virginia. These actions should accelerate our revenue growth in the years
ahead; however, the start-up costs will, in the short-term, depress operating
margins and earnings. We have the financial strength to absorb the impact from
this expansion and unlike most start-up PCS, CLEC or internet providers, we have
the financial ability to continue to support our history of paying dividends. We
are proud to report that in February, 1999 the Board approved the thirty-fourth
consecutive annual dividend increase, raising the annual dividend 5.52% to
$0.459 per share.
Thank you for your continued support.
/s/ James S. Quarforth /s/ Robert S. Yeago, Jr.
- -------------------------------- ------------------------------------
James S. Quarforth Robert S. Yeago, Jr.
President and Chief Executive Officer Chairman of the Board
5
<PAGE>
[photographs appear here]
More Ways
The ICP Concept
A world of communications possibilities for its customers--from a single
provider. That's CFW's vision. And in the dynamic and fast-paced world of
communications, it is quickly becoming a reality. CFW Communications represents
the most progressive Integrated Communications Provider (ICP) in its regional
service area. Couple the depth of its comprehensive array of communications
services with an award-winning commitment to outstanding customer care, and its
version of the ICP concept is created.
CFW has served as Virginia's premier communications company for more than 100
years, and its reputation for high-quality, value-added services, and
outstanding customer care has never been greater or more widespread. Its
integrated solutions encompass traditional telecom offerings as well as wireless
communications services, high-speed data delivery, cable television and business
and security systems. And, with a heritage richly centered in servicing the
needs of an ever increasing customer base, its ability to deliver integrated
communications products and services is overshadowed only by its desire to
differentiate its proposition with unprecedented customer care. In combination,
these elements provide its customers with the power to communicate whenever,
wherever, and however they choose. Being an Integrated Communications Provider
is a powerful premise that immediately differentiates CFW from other providers
in its field.
This is the new age in communications, and people require reliable,
comprehensive solutions for keeping in touch. Whether at home or at the office
- -- CFW is proving it has more ways to bring more people together.
[photographs appear here] v
a
Intelos digital PCS is at the forefront of wireless l
communications, delivering privacy, clarity, and a toll free u
calling area that can include the state, the region or the e
country.
6
<PAGE>
MORE ICP WAYS
CFW's philosophy of "more ways to bring more people together" is especially
applicable in today's busy and fast-paced environment. Revolutionary leaps
forward in technology and general availability of services have given modern age
communications a personalized dimension. In the new age, every family and
business can have a unique communications solution. The line between traditional
residential and business services is becoming more obscure, the result of
improved communications tools and the need to stay in touch with people rather
than places. This revolution sets the stage for an ICP that can deliver
comprehensive, integrated communications services that are reliable, easily
obtainable, and meet the often overlapping needs of both residential and
business customers.
f CFW's family of integrated communications services is among the
l broadest in the industry. From within its own network infrastructure,
e CFW can provide customized solutions that exactly meet the needs of
x most residential or business customers in their region. And, while
i traditional telephone services continue to be available in core
b markets, CFW has expanded its offering to include digital PCS, local
i internet access, DSL, voicemail, directory assistance, long distance,
l paging, cellular, cable television, business telephone systems and
i security and alarm services. Many of these services cross the
t boundaries of traditional communications. Digital PCS, for example,
y may be coupled with text messaging services, like stock quotes or
headline news, to create a personal communications device that is as
unique to the customer as a fingerprint.
Full Service
[PHOTO]
CFW residential customers, such as the David Bull family,
enjoy the quality and convenience of multiple communications
services. One of the first to enjoy high speed internet
access using DSL technology, the Bull's also have local
telephone, long distance and wireless services. (Waynesboro,
Virginia)
7
<PAGE>
Integrated Communications
CFW's ICP concept is further played out in nineteen company-owned r
retail stores and kiosks. These integrated communications shopping e
centers maintain a visible and striking presence in its markets while l
offering customers an opportunity to evaluate and sample the latest in i
communications technology. Professionally trained sales and service a
representatives are available to provide consulting services, answer b
questions and demonstrate CFW's complete family of communications l
services. More importantly, they can personally discuss with each e
customer how these services can be integrated together to make
individual communications more effective. CFW's commitment to personal
service is exemplified in its retail facilities, where they still do
business by meeting customers person-to-person and creating long-term
relationships.
These retail facilities are complemented with business sales professionals that
bring communications expertise directly to their business customers. By
analyzing and assessing customer needs, CFW is able to craft solutions that
maximize customer specific objectives for voice, data and video. Additionally,
their representatives provide a single interface for business partners,
establishing continuity and mutual respect. CFW realizes that business customers
have many choices for communications services. At CFW, the difference is in its
people, its personalized service, and the added value of the ICP concept.
But face-to-face is not the only way to reach CFW. Their new customer contact
center in Waynesboro, Virginia was built on a century old foundation of deep
rooted customer care philosophies. From this state of the art customer care and
employee training center, CFW's service representatives receive and respond to
customer
[photograph appears here]
Designed to reflect the comforts of home, CFW's integrated
retail stores offer customers a relaxed environment in which
to evaluate and sample the latest in communications
technology. Strong colors and distinctive architectural
designs further establish brand recognition throughout the
region.
8
<PAGE>
inquiries by phone, fax, or e-mail. Universal service representatives
are trained on a variety of communications services and provide a single point
of contact for its customers.
You might also see CFW employees in their local communities. They could be at
soccer practice in Roanoke, Virginia, the Regatta in Charleston, West Virginia
or working as volunteers in any local school system. Their employees are well
entrenched in serving the communities where they work and live, and CFW is proud
to be making a positive influence in local communities across their region.
Whenever and wherever a communications need exists, you can depend on CFW to be
there. Through integrated services, personalized customer care, integrated
billing, and retail and business representatives, CFW works to create the
seamless ICP relationship that its customers will trust now and in the future.
STRATEGY FOR ICP DEVELOPMENT
During the past year, CFW moved decisively in a direction that transformed the
Company into a true regionally based ICP servicing central and western Virginia
and West Virginia. By utilizing a robust digital PCS network and growing fiber
capacity, CFW has been able to extend multiple-service offerings throughout a
much larger regional footprint. In addition, the Company began offering local
business dial tone to a broader service area, while also continuing to enhance
traditional communications services with new technologies that enhance the value
of its ICP concept. For example, CFW introduced DSL service that allows for
simultaneous voice and data transmission over traditional copper lines. That
means local telephone service customers can maximize their communications
services by enjoying direct high-speed internet connections while taking voice
calls at home or work without adding a second line.
By first deploying the Intelos digital PCS network in new markets, and then
entering as a high-quality provider of competitively priced prepaid and postpaid
wireless services, the Company has made it possible for customers to achieve
innovative, feature-rich wireless communications while positioning for
additional services. The digital PCS
[photograph appears here]
CFW's four strategic services meet the wide variety of voice
and data needs of home and business customers. Key services,
which may be offered as stand alone or as value-added
bundles, include digital PCS, internet access and local and
long distance telephone services.
Strategic Services
9
<PAGE>
Convenience
[photograph appears here]
George Davis, an independent stockbroker, is one of seven
representatives of Ficon Insurance Agency who utilizes
digital PCS from Intelos. "The long distance savings is just
incredible - we never use our office phones to make calls
outside of the area anymore." George takes his phone
everywhere he goes and describes it as the "most convenient"
wireless service in the region. (Charleston, West Virginia)
G relationship becomes the foundation upon which to build a broader Y
e integrated services strategy. Internet, local and long distance O
o telephone services follow PCS into expanded regional markets. U
g These services are offered either as stand-alone communications '
r services or as part of integrated multi-service bundles designed V
a to maximize value for customers. Bundling is an important element E
p in the ICP strategy, encouraging customers to seek a single
h source provider for all of their communications needs, while G
i rewarding them in both savings and convenience. As an added O
c benefit, services in the multi-service pack ages are presented on T
a single bill and supported by universal customer care
representatives. M
A
I
L
In a communications era of extraordinary evolution, CFW continually searches for
opportunities to expand the value of both new and traditional services. Couple
this with extraordinary customer care, personalized service, and integrated
back-office support, and the ICP concept becomes a powerful proposition.
A YEAR OF NETWORK GROWTH
During 1998, CFW dramatically expanded the reach of its information services and
fiber network. In information services, the Company's directory assistance group
gained access to a national directory assistance database, positioning
10
<PAGE>
E it to capture significant portions of calling volumes from other
x communications carriers. This important enhancement makes it easier
p for callers to receive directory assistance even if they do not know
a the area code. In light of the proliferation of area codes across the
n United States in recent years, the ability to find a number based on
s the name and state of the person called is a prime benefit. And these
i services are delivered with the same commitment to outstanding
o customer service that has been its hallmark for many years.
n
While much of CFW's directory assistance business is contracted
by large carriers, such as AT&T, during 1998 the Company
experienced a growing volume of directory assistance calls from
wireless customers, adding a new dimension to this already
robust business. The Company's two directory assistance
centers operated at near-capacity during the year, making a
third center an appealing option.
In anticipation of continued demand and expansion of its directory
assistance services, CFW began the renovation of the former Taylor
Hotel in downtown Winchester, Virginia to serve as its third directory
assistance center. This new call center, which will open in the second
quarter of 1999, will accommodate up to 250 employees. Part of the
ground floor level of the hotel will also serve as a highly visible
retail store for the Company's products and services. In total, the
project represents CFW's steadfast commitment to the region and to the
directory assistance business.
In 1998, CFW significantly expanded its fiber network capabilities
through direct connections to the CFN Fiber Network and AEP
Communications Fiber Network, resulting in the ability to sell seamless
[PHOTO]
Well trained, directory assistance operators answer an
average of 220,000 calls every business day. Our commitment
to accuracy, quality and superior customer care has resulted
in continued growth and expansion for CFW directory
assistance services.
Network
11
<PAGE>
F voice and data transmission over 10,000 miles of fiber from
i Pennsylvania to Florida. In addition, CFW continues to partner with
b other telecommunications companies to grow its fiber network and other
e facilities for economical wide-area-delivery of services.
r
This ability to deliver services to customers by a variety of means
O provides added flexibility. As CFW expands its service offerings out
p from the core wireless service, its extensive fiber capacity allows it
t to economically link together widespread markets.
i
c A STRATEGY FOR THE FUTURE
N For a company so well grounded in the traditions of its past, CFW is
e moving with confidence as an ICP into a strong future. CFW will
t continue to carry other service providers' long distance and
w communications traffic, further increasing its return on investment in
o facilities. In addition, Intelos will lease portions of its digital
r PCS network, which will improve return and encourage other carriers to
k utilize Intelos' network infrastructure. Intelos will aggressively
pursue the buildout of the digital PCS network that forms the
foundation for its strategy of ICP service expansion.
With this foundation intact, the Company's four strategic services--digital PCS,
internet, local and long distance telephone services--will continue to be
extended into new and existing PCS markets. Intelos will install the necessary
hardware and software to accommodate wireless data services in the first half of
1999 and by early 2000, its digital PCS service will allow direct connections to
the internet with improved speeds of up to 64 kbps.
CFW's regional footprint will continue to expand, as it plans to open the
northern
[map appears here]
CFW and its partners, through interconnection agreements,
offer a continuous fiber network encompassing 16 states and
more than 10,000 miles. This extensive infrastructure makes
for an attractive alternate traffic route for carriers, while
also serving as a backbone for ICP service development in
Virginia and West Virginia.
12
<PAGE>
[photograph appears here]
Our vision of the integrated communications provider concept
is nearly realized. By combining the strengths of our rich
heritage, our employees, and our services, we are confident
of a bright future that finds more ways to bring more people
together.
L
e
a
d
e
The Future r
s
h
i
p
corridor markets of West Virginia--including Clarksburg, Fairmont and
Morgantown--in 1999. A new West Virginia operations center and switch facility
will be located in downtown Charleston, further enhancing its position as a
regional integrated communications provider.
Certainly, it is foremost that CFW continually look for ways to add value to its
relationships with its customers. This CFW will do through ever-enhanced
services from a single source, expanded 24-hours by 7-days a week customer care,
and a continuation of its corporate policy of involvement in the communities it
serves.
There is a link between this company and its communities that spans a century.
It will be CFW's strength as it moves forward, and will always be an integral
part of its culture. It is also a time of great excitement and opportunity in
communications, and CFW is positioned to prevail today, and to drive powerfully
into the future. By developing the resources and systems needed to serve its
customers over time, and by remaining true to its history and heritage as the
premier provider of reliable communications, CFW will continue to find more ways
to bring more people together.
Dedication
13
<PAGE>
Consolidated Balance Sheets
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 42,890 $ 1,224,347
Accounts receivable, net of allowance of $0.6 million ($0.3 million in 1997) 12,120,985 12,204,284
Receivable from affiliates 5,681,978 726,831
Materials and supplies 2,176,895 2,039,345
Prepaid expenses and other 448,775 349,617
Income taxes receivable 691,221 -
- --------------------------------------------------------------------------------------------------------------
21,162,744 16,544,424
--------------------------
SECURITIES AND INVESTMENTS 11,671,417 16,873,601
- --------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 1,957,874 1,702,312
Buildings and improvements 19,007,349 14,710,539
Network plant and equipment 93,247,587 87,718,927
Furniture, fixtures, and other equipment 20,022,238 16,187,202
Radio spectrum licenses 15,468,649 15,370,979
--------------------------
Total in service 149,703,697 135,689,959
Under construction 3,916,819 2,013,191
- --------------------------------------------------------------------------------------------------------------
153,620,516 137,703,150
Less accumulated depreciation 50,760,242 42,032,163
- --------------------------------------------------------------------------------------------------------------
102,860,274 95,670,987
--------------------------
OTHER ASSETS
Cost in excess of net assets of business acquired,
less accumulated amortization of $1.4 million ($1.0 million in 1997) 12,705,900 13,062,856
Deferred charges 533,540 1,120,829
Radio spectrum licenses 6,090,791 5,174,832
- --------------------------------------------------------------------------------------------------------------
19,330,231 19,358,517
--------------------------
$155,024,666 $148,447,529
- --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,042,966 $ 4,169,282
Customers' deposits 400,655 457,343
Advance billings 2,303,696 2,081,491
Accrued payroll 1,283,083 1,459,821
Accrued interest 623,412 815,622
Other accrued liabilities 2,490,386 2,651,719
Deferred revenue 1,221,849 1,329,877
Income taxes payable - 124,545
- --------------------------------------------------------------------------------------------------------------
15,366,047 13,089,700
------------------------------
LONG-TERM DEBT 19,774,262 24,606,160
- --------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Deferred income taxes 14,243,872 9,242,246
Retirement benefits other than pensions 9,317,424 8,431,688
Other 1,440,157 1,471,543
- --------------------------------------------------------------------------------------------------------------
25,001,453 19,145,477
------------------------------
MINORITY INTERESTS 1,472,419 1,150,690
- --------------------------------------------------------------------------------------------------------------
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 43,527,636 43,420,269
20,000,000 shares; issued 13,016,988 shares
(12,986,654 in 1997)
Retained earnings 49,882,849 47,035,233
- --------------------------------------------------------------------------------------------------------------
93,410,485 90,455,502
------------------------------
$155,024,666 $148,447,529
- --------------------------------------------------------------------------------------------------------------
15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
CFW Communications Company and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Wireline communications $37,596,778 $34,495,331 $32,479,810
Wireless communications 13,197,732 11,714,012 9,205,028
Directory assistance 12,949,714 10,533,459 6,399,865
Other communications services 2,941,880 2,267,156 1,863,584
- ----------------------------------------------------------------------------------------------------------
66,686,104 59,009,958 49,948,287
--------------------------------------
OPERATING EXPENSES
Maintenance and support 10,837,093 9,659,569 9,528,425
Depreciation and amortization 10,503,338 9,196,237 8,409,662
Customer operations 16,223,183 14,282,592 11,156,489
Corporate operations 6,496,028 6,459,352 5,438,732
- ----------------------------------------------------------------------------------------------------------
44,059,642 39,597,750 34,533,308
--------------------------------------
OPERATING INCOME 22,626,462 19,412,208 15,414,979
OTHER INCOME (EXPENSES)
Other expenses, principally interest (729,926) (1,140,020) (1,273,045)
Interest and dividend income 106,835 284,660 587,393
Equity loss from PCS investees (6,467,031) (834,075) -
Equity income from other wireless investees 197,906 74,115 449,893
Loss on write-down of investment (1,009,661) (2,808,145) -
Gain on sale of investment - 5,077,379 -
- ----------------------------------------------------------------------------------------------------------
14,724,585 20,066,122 15,179,220
INCOME TAXES 5,638,940 7,398,495 5,162,497
- ----------------------------------------------------------------------------------------------------------
9,085,645 12,667,627 10,016,723
MINORITY INTERESTS (578,005) (446,695) (467,017)
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 8,507,640 $12,220,932 $ 9,549,706
- ----------------------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.65 $ 0.94 $ 0.74
Net income per common share - diluted $ 0.65 $ 0.94 $ 0.73
Average shares outstanding - basic 13,007,880 12,982,289 12,977,920
Average shares outstanding - diluted 13,093,561 13,055,814 13,056,081
- ----------------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.435 $ 0.412 $ 0.392
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
16
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,507,640 $12,220,932 $ 9,549,706
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 9,730,746 8,559,656 7,916,152
Amortization 772,592 636,581 493,510
Deferred taxes 5,001,626 105,664 1,612,833
Retirement benefits other than pensions 885,736 707,581 574,150
Other (37,534) (10,426) 42,812
Equity (gain) loss from wireless investees 6,269,125 759,960 (449,893)
Minority interests, net of distributions (4,013) (41,306) 22,231
Distributions received from investments 218,705 99,704 155,141
Gain on sale of investment - (5,077,379) -
Loss on write-down of investment 1,009,661 2,808,145 -
Changes in assets and liabilities from operations:
Increase (decrease) in accounts receivable 83,299 (3,489,136) (823,032)
Increase in materials and supplies (137,550) (19,509) (38,999)
Increase (decrease) in income taxes (815,766) 741,612 (613,711)
Increase in other current assets (99,158) (238,786) (123,789)
Increase (decrease) in accounts payable 2,873,684 823,237 (328,265)
Increase (decrease) in other accrued liabilities (530,281) (144,075) 777,693
Increase in other current liabilities 165,517 192,460 571,092
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,894,029 18,634,915 19,337,631
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (16,736,272) (14,196,629) (15,874,951)
Purchase of PCS licenses (666,885) (4,459,818) (1,355,347)
Investments in PCS alliances (2,253,995) (1,492,709) (4,351,235)
Net advances to PCS alliances (4,955,147) - -
Purchase of investment (1,004,681) - -
Sale of mortgage-backed securities 971,288 540,961 990,125
Maturities and distributions from other investments (45,239) 10,282 232,377
Purchase of cellular minority interests - (1,103,481) -
Proceeds from the sale of investment - 6,594,399 -
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,690,931) (14,106,995) (20,359,031)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (5,660,024) (5,349,009) (5,087,255)
Payments on senior notes and notes payable (3,741,764) - -
Payments on lines of credit, net (1,090,134) (1,000,000) 4,000,000
Stock redeemed - - (175,313)
Net proceeds from exercise of stock options 107,367 41,829 22,589
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (10,384,555) (6,307,180) (1,239,979)
- ----------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,181,457) (1,779,260) (2,261,379)
Cash and cash equivalents:
Beginning 1,224,347 3,003,607 5,264,986
- ----------------------------------------------------------------------------------------------------------
Ending $ 42,890 $1,224,347 $ 3,003,607
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
17
</TABLE>
<PAGE>
Consolidated Statements of Shareholders' Equity
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Accumulated Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 12,983,318 $ 43,531,164 $ 35,700,859 $10,009,680 $ 89,241,703
Comprehensive Income:
Net income 9,549,706
Unrealized loss on securities available
for sale, net of $4.8 million
of deferred tax benefit (7,549,504)
Comprehensive income 2,000,202
Cash dividends (5,087,255) (5,087,255)
Stock options exercised, net 6,894 22,589 22,589
Stock redeemed (10,000) (175,313) (175,313)
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 12,980,212 43,378,440 40,163,310 2,460,176 86,001,926
Comprehensive Income:
Net income 12,220,932
Unrealized loss on securities available
for sale, net of $1.6 million
of deferred tax benefit (2,460,176)
Comprehensive income 9,760,756
Cash dividends (5,349,009) (5,349,009)
Stock options exercised, net 6,442 41,829 41,829
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,986,654 43,420,269 47,035,233 - 90,455,502
Comprehensive Income:
Net income 8,507,640
Comprehensive income 8,507,640
Cash dividends (5,660,024) (5,660,024)
Stock options exercised, net 30,334 107,367 107,367
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 13,016,988 $ 43,527,636 $ 49,882,849 $ - $ 93,410,485
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
18
</TABLE>
<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, personal
communications services ("PCS"), cellular, 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.
REVENUE RECOGNITION: The Company's revenue recognition policy is to recognize
revenues when services are rendered or when products are delivered, installed
and functional, as applicable. Certain services of the Company require payment
in advance of service performance. In such cases, the Company records a service
liability at the time of billing and subsequently recognizes revenue over the
service period.
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. 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. Information
regarding these and all other investments is reviewed continuously for evidence
of impairment in value. No impairment was deemed to have occurred at December
31, 1998.
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. Buildings are depreciated over a 50 year life.
Network plant and equipment are depreciated over various lives from 3 to 50
years, with an average life of approximately 13 years for the category.
Furniture, fixtures and other equipment are depreciated over various lives from
5 to 24 years. Radio spectrum licenses, which are for areas where the licenses
are being used in operations, are amortized over a life of 30 years. The Company
has other radio spectrum licenses that are included in other assets until such
licenses are placed in service. Depreciation provisions were approximately 6.8%,
6.6% and 6.8% of average depreciable assets for the years 1998, 1997 and 1996,
respectively.
19
<PAGE>
MATERIALS AND SUPPLIES: The Company's materials and supplies inventory consists
primarily of items held for resale such as cellular and PCS phones, pagers,
cable converter boxes, wireline business phones and accessories, and items used
as installation and maintenance supplies. The Company values its inventory at
the lower of average cost or market. The market value is determined by reviewing
current replacement cost, marketability, and obsolescence. The balance for
resale items at December 31, 1998 was $1.4 million ($0.8 million in 1997) and
the installation and maintenance items $0.8 million ($1.2 million in 1997).
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. The Company periodically evaluates the recoverability of
intangibles resulting from business acquisitions and assesses whether impairment
has occurred. This assessment is derived based on current and future levels of
income and cash flow as well as other factors, such as business trends, future
prospects and market and economic conditions.
PENSION BENEFITS: At December 31, 1998, the Company adopted the provisions of
Financial Accounting Standards Board (FASB) Statement No. 132, Employers'
Disclosures about Pensions and Other Post-retirement Benefits. This standard
revises the disclosure about pension and other post-retirement benefit plans.
Accordingly, the disclosures in these financial statements have been modified to
comply with this new standard. 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 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 COMMON 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.
The weighted average number of common shares outstanding (diluted), which
was used to compute diluted net income per share, was derived by adding weighted
average outstanding shares ("Average shares outstanding - basic") to assumed
conversion of dilutive stock options (85,681, 73,525 and 78,161 shares for 1998,
1997 and 1996, respectively). The Company has 31,850, 52,450 and 54,450 stock
options outstanding in 1998, 1997 and 1996, 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 values 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, 3 and 4. The fair value of off
balance sheet guarantees, as described in Note 3, is not determinable due to the
nature of the transaction.
DISCLOSURES REGARDING OPERATING SEGMENTS AND RELATED INFORMATION: At December
31, 1998, the Company adopted the additional disclosure provisions of FASB
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. 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
20
<PAGE>
was 28% in 1998, 34% in 1997, and 24% in 1996. The primary segments receiving
revenue from this customer are telephone and directory assistance (Note 2).
COMPREHENSIVE INCOME: The Company adopted the additional disclosure provisions
of 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.
START-UP COSTS: The Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities, in June
1998. This statement requires the costs of start-up activities, including
organization costs, to be expensed as incurred. The statement broadly defines
start-up activities as those one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory and the like. The statement is effective beginning in 1999, and
requires that previously deferred start-up costs be written-off through a
cumulative effect charge to earnings when the statement is initially adopted.
Adoption of this statement is not expected to have a material impact to the
Company's results of operations or the Company's financial position.
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 1998.
Note 2. Disclosures About Segments of an
Enterprise and Related Information
The Company has five primary business segments which have separable management
focus and infrastructures and that offer different products and services. These
segments are as follows:
Telephone: The Company has a 100 year old local telephone business subject to
the regulations of the State Corporation Commission of Virginia. This business
is the incumbent local exchange carrier (ILEC) for several areas in western
Virginia. Principal products offered by this business are local service which
includes advanced calling features, network access, long distance toll and
directory advertising.
Network: The Company directly or indirectly owns 450 miles of fiber optic
network and provides transport services for long distance, internet and private
network services. This network is connected and marketed with Carolina's
FiberNet throughout the Southeast. Additionally, the network business offers
internet and, in 1998, began marketing long distance and competitive local
exchange service in certain Virginia markets.
Wireless: The Company's wireless business carries cellular and digital phones
and services, paging and voicemail and is marketed in the retail,
business-to-business and wholesale channels within the Company's cellular
territories.
Directory Assistance: The Company's directory assistance business provides third
party directory assistance for customers of several communications companies and
handles approximately 220,000 requests per average business day. Revenues from
its largest customer, AT&T, accounted for 94%, 97% and 100% of the segment's
total revenues for 1998, 1997, and 1996, respectively.
Wireless Cable: The cable business offers a wireless video cable service and has
launched a wireless cable high-speed internet service in Charlottesville,
Virginia.
Wireless revenues are reported net of cost of sales, primarily for
handsets, of $4.4 million, $1.7 million and $1.9 million for the three years
ended December 31, 1998. Directory assistance revenues are reported net of
database access charges of $5.0 million, $4.1 million and $2.3 million for the
three years ended December 31,1998. Wireless cable revenues are reported net of
programming and equipment costs of $1.7 million, $1.5 million and $1.1 million
for the three years ended December 31, 1998.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). The Company
evaluates the performance of its operating segments principally on operating
revenues and earnings before income taxes, depreciation and amortization
(EBITDA). Corporate functions are allocated at cost to the operating segments
and all other intercompany transactions are cost based. Segment depreciation and
amortization contains an allocation of deprecia tion and amortization from
corporate assets. Corporate depreciation and amortization not allocated to the
segments are indicated in the "Other" column in the table following.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes certain
unallocated corporate related items, and results from the Company's alarm,
communication services and wireline cable businesses which are not considered
separate reportable segments.
21
<PAGE>
<TABLE>
<CAPTION>
Directory Wireless
(in thousands) Telephone Network Wireless Assistance Cable Other Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Revenues $30,548 $ 5,440 $10,231 $12,950 $2,966 $4,551 $ 66,686
EBITDA 21,715 1,605 4,896 3,018 365 1,531 33,130
Depreciation &
Amortization 3,343 1,637 637 1,032 2,724 1,130 10,503
Total Segment
Assets 42,521 14,081 7,581 10,942 26,018 14,542 115,685
Corporate Assets 39,340
--------
Total Assets $155,025
- ----------------------------------------------------------------------------------------------------------
1997
Revenues $28,828 $3,997 $8,602 $10,533 $3,112 $3,938 $ 59,010
EBITDA 19,708 1,887 4,318 1,627 285 783 28,608
Depreciation &
Amortization 3,169 1,071 602 916 2,567 871 9,196
Total Segment
Assets 40,523 12,822 6,877 12,593 29,048 14,664 116,527
Corporate Assets 31,921
--------
Total Assets $148,448
- ----------------------------------------------------------------------------------------------------------
1996
Revenues $27,388 $3,592 $6,819 $6,400 $2,385 $3,364 $49,948
EBITDA 17,982 2,453 2,875 925 (488) 78 23,825
Depreciation &
Amortization 3,887 785 448 670 1,907 713 8,410
Total Segment
Assets 38,942 13,252 7,439 9,711 28,952 15,937 114,233
Corporate Assets 28,167
--------
Total Assets $142,400
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Note 3. Investments in Wireless Affiliates
At December 31, 1998, the Company had invested $0.9 million ($0.8 million at
December 31, 1997) for a 21% common ownership interest in Virginia PCS Alliance,
L.C. ("VA Alliance"), a provider of PCS serving a 1.6 million populated area in
central and western Virginia. The Company is managing network expansion and
ongoing operations pursuant to a service agreement. PCS operations began
throughout the Virginia region in the fourth quarter of 1997.
At December 31, 1998, the Company had invested approximately $6.0 million
($4.2 million at December 31, 1997) for 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% 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 committed to provide $9.8 million of additional capital to
the VA Alliance in three equal annual installments beginning in January 1999.
Such additional capital commitments would be reduced by proceeds, if any, from
future equity offerings by the VA Alliance.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million
populated area in West Virginia and eastern Kentucky, southwestern Virginia and
eastern Ohio. The Company is managing network expansion and ongoing operations
pursuant to a service agreement. PCS operations began in Charleston and
Huntington, West Virginia in the fourth quarter of 1998.
In August 1997, the Company contributed PCS licenses valued at $4.5 million
and approximately $1.0 million in cash in exchange for such ownership in the WV
Alliance. The Company has committed to provide $2.5 million of additional
capital to the WV Alliance in four equal annual installments beginning in
January 1999. Such additional capital commitments would be reduced by proceeds,
if any, from future equity offerings by the WV Alliance.
22
<PAGE>
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:
(in thousands) 1998 1997
- ----------------------------------------------------------
Current assets $ 4,136 $ 5,756
Noncurrent assets 131,312 101,560
Current liabilities 22,723 37,549
Noncurrent liabilities 98,380 33,571
Redeemable preferred interest 14,345 12,812
(in thousands) 1998 1997
- ----------------------------------------------------------
Net sales $ 4,756 $ 119
Gross profit (loss) 1,528 (197)
Net loss applicable
to common owners (27,518) (3,952)
Company's share of net loss (6,467) (834)
The Company has entered guarantee agreements whereby the Company is
committed to provide guarantees of up to $50.5 million of the Alliances' debt
and redeemable preferred obligations. Such guarantees become effective as
obligations are incurred by the Alliances. At December 31, 1998, the Company has
guaranteed $34.6 million of the Alliances' obligations.
In its managing member 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"). The Company charged the Alliances $1.9
million in 1998 and $0.5 million in 1997 for these corporate services.
In connection with providing corporate services, the Company processes and
pays the Alliances' capital and general operating expenses and is subsequently
reimbursed. The outstanding advances at December 31,1998 totalled $5.6 million
($0.7 million at December 31,1997).
Retained earnings of the Company at December 31, 1998, include accumulated
losses of $4.5 million related to these Alliances.
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
approximately $16,000 and $374,000 in 1997 and 1996, respectively. In addition,
in April 1997, the Company purchased from GTE an 8.4% interest in the Virginia
RSA 6 Cellular Partnership for approximately $1.1million. At December 31, 1998,
the Company had an 84% ownership interest in the Virginia RSA 6 Cellular
Partnership.
Note 4. Securities and Investments
Investments consist of the following as of December 31:
<TABLE>
<CAPTION>
Carrying Values
Type of Ownership 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Available for Sale
American Telecasting, Inc. Equity Securities $ 275,362 $ 1,285,022
Mortgage-backed securities Debt Securities - 971,288
- -----------------------------------------------------------------------------------------------------------
275,362 2,256,310
-------------------------
Equity Method
Virginia PCS Alliance, L.C. Equity and Convertible
Preferred Interests 1,404,879 4,504,770
West Virginia PCS Alliance, L.C. Equity Interest 4,661,583 5,774,728
Virginia Telecommunications General Partnership
Partnership Interest 325,684 380,394
Virginia Independent Limited Partnership
Telephone Alliance Interest 489,628 445,050
Other Partnership Interests 518,605 527,733
- -----------------------------------------------------------------------------------------------------------
7,400,379 11,632,675
-------------------------
Cost Method
Illuminet Holdings, Inc. Equity and Convertible
Debt Securities 1,778,787 1,771,765
Multimedia Medical Systems, Inc. Equity Securities 1,052,650 1,052,650
Listing Services Solutions, Inc. Equity Securities 1,004,681 -
Other Equity Securities 159,558 160,201
- -----------------------------------------------------------------------------------------------------------
3,995,676 2,984,616
-------------------------
$11,671,417 $16,873,601
- -----------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
The Company recognized a $1.0 million and $2.8 million impairment loss for
the years ended December 31, 1998 and 1997, respectively, on its investment in
American Telecasting, Inc. (ATEL) which resulted in a carrying value in the
investment of $0.3 million at December 31, 1998.
Changes in the unrealized gain (loss) on available for sale securities
during the years ended December 31, 1998 and 1997, reported as a separate
component of shareholders' equity and making up the entire amount of accu
mulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain, beginning balance $ - $4,026,475
Unrealized holding gains (losses) during the year - (4,026,475)
- -----------------------------------------------------------------------------------------------------------
Unrealized gain, ending balance $ - $ -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Note 5. Long-Term Debt and Lines of Credit
Long-term debt and lines of credit consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.26% Unsecured senior notes due in annual
installments from 1999 to 2007 $16,363,636 $20,000,000
6.25% Notes payable secured by certain PCS
radio spectrum licenses due from 1999 to 2006 1,500,760 1,606,160
Borrowings under lines of credit 1,909,866 3,000,000
- ----------------------------------------------------------------------------------------------------------
$19,774,262 $24,606,160
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The unsecured senior note agreement contains various restrictive convenants
including restrictions relating to additional debt issuance, fixed charges, net
worth and payment of dividends. Approximately $12.5 million of retained earnings
were available for the payment of dividends at December 31, 1998.
The Company paid $3.6 million of principal on the unsecured senior notes in
January 1999 with proceeds from borrowings under the Company's lines of credit.
The Company has classified this payment amount and borrowings under its notes
payable and lines of credit as long-term, since 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, 1998. The blended interest rates on
the borrowings under lines of credit as of December 31, 1998, 1997 and 1996 was
5.2%, 5.9% and 5.9%, respectively.
Interest expense was $716,000, $888,000, and $1,325,000 for 1998, 1997, and
1996, respectively. Maturities of long-term debt for each of the next five years
are 1999 - $0, 2000 - $7,592,000; 2001 - $1,982,000; and 2002 -$1,993,000; and
2003 - $2,004,000.
Note 6. Shareholder Rights Plan
In 1990, the Company adopted a ten-year shareholder rights plan that provides a
right to common shareholders to acquire a unit of preferred stock of the Company
at a purchase price of $130. The right is exercisable only upon the occurrence
of certain events. If a third party acquires 20% or more of the Company's common
stock, without prior approval of the Board of Directors, other shareholders are
entitled to receive, upon exercise of the right and payment of the purchase
price, common stock or preferred stock at the option of the Company having a
value equal to twice the amount of the purchase price.
24
<PAGE>
Note 7. Income Taxes
The components of income tax expense are as follows for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal tax expense $ 690,507 $6,165,040 $3,159,133
State tax expense (benefit) (53,193) 1,127,791 390,531
- -----------------------------------------------------------------------------------------------------------
637,314 7,292,831 3,549,664
Deferred tax expense
Federal tax expense 4,500,178 95,070 1,482,070
State tax expense 501,448 10,594 165,145
Investment tax credits amortized - - (34,382)
- -----------------------------------------------------------------------------------------------------------
5,001,626 105,664 1,612,833
- -----------------------------------------------------------------------------------------------------------
$5,638,940 $7,398,495 $5,162,497
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at statutory rate $4,851,302 $6,766,799 $5,049,271
Investment tax credits amortization - - (34,382)
State income taxes, net of federal income tax benefit 560,204 751,334 366,746
Other - net 227,434 (119,638) (219,138)
- ----------------------------------------------------------------------------------------------------------
$5,638,940 $7,398,495 $5,162,497
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Net deferred income tax assets and liabilities consist of the following
components at December 31:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Retirement benefits other than pension $ 3,334,042 $ 3,106,609
Net operating loss of acquired company 1,074,000 1,074,000
Net operating loss 542,143 -
Alternative minimum tax credit carryforwards 568,405 -
Accrued expenses 268,577 -
Other 447,183 339,672
- -----------------------------------------------------------------------------------------------------------
6,234,350 4,520,281
- -----------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Investments, net 5,722,200 33,454
Property and equipment 14,756,022 13,689,777
Other - 39,296
- -----------------------------------------------------------------------------------------------------------
20,478,222 13,762,527
- -----------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $14,243,872 $ 9,242,246
- -----------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Note 8. Pension Plans and Other Postretirement Benefits
The Company sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for its employees. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and fair value
of assets over the two-year period ending December 31, 1998, and a statement of
the funded status as of December 31 of each year:
<TABLE>
<CAPTION>
Defined Benefit Pension Plan Other Postretirement Benefit Plan
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligations, beginning $16,655,591 $15,646,558 $ 7,134,616 $ 6,622,727
Service cost 617,099 486,925 202,347 177,187
Interest cost 1,212,044 1,175,197 525,784 503,626
Amendment - (249,319) - -
Actuarial (gain) loss 1,767,159 479,493 671,957 (11,549)
Benefits paid (878,231) (883,263) (117,632) (157,375)
- -------------------------------------------------------------------------------------------------------------
Benefit obligations, ending $19,373,662 $16,655,591 $ 8,417,072 $ 7,134,616
- -------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning $17,791,099 $16,279,589 $ - $ -
Actual return on plan assets 2,206,080 2,394,773 - -
Employer contribution - - 117,632 157,375
Benefits paid (878,231) (883,263) (117,632) (157,375)
- -------------------------------------------------------------------------------------------------------------
Fair value plan assets, ending $19,118,948 $17,791,099 $ - $ -
- -------------------------------------------------------------------------------------------------------------
Funded status:
Funded status, beginning $ (254,714) $ 1,135,508 $(8,417,072) $(7,134,616)
Unrecognized net actuarial gain (861,171) (2,178,484) (170,039) (851,378)
Unrecognized prior service cost 533,334 565,873 - -
Unrecognized transition obligations 47,341 63,122 - -
- -------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (535,210) $ (413,981) $(8,587,111) $(7,985,994)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's matching contributions to the defined contribution plan were
$406,000, $337,000, and $246,000 for the years ended December 31, 1998, 1997,
and 1996.
The accumulated benefit obligation of the Company's nonqualified pension
plan was approximately $730,000, $446,000 and $249,000 at December 31, 1998,
1997, and 1996, respectively, and has been classified with retirement benefits
other than pensions. All of the Company's plans for postretirement benefits
other than pensions and the nonqualified pension plan have no plan assets.
The following table provides the components of net periodic benefit cost
for the plans:
<TABLE>
<CAPTION>
Defined Benefit Pension Plan Other Postretirement Benefit Plan
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 617,099 $ 486,925 $ 445,527 $202,347 $177,187 $207,319
Interest cost 1,212,044 1,175,197 1,043,933 525,784 503,626 476,194
Expected return on plan assets (1,729,609) (1,579,686) (1,444,994) - - -
Amortization of transition obligations 15,781 15,781 15,781 - - -
Amortization of prior service cost 32,539 45,005 12,529 - - -
Recognized net actuarial gain (26,625) (15,352) (13,304) (9,382) (12,656) -
- --------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 121,229 $ 127,870 $ 59,472 $718,749 $668,157 $683,513
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The prior-service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10% of the greater of the benefit obligation and the market-related
value of assets are amortized over the average remaining service period of
active participants.
26
<PAGE>
The Company has multiple nonpension postretirement benefit plans. The health
care plan is contributory, with participants' contributions adjusted annually;
the life insurance plans are also contributory. Eligibility for the life
insurance plan has been restricted to active pension participants age 50-64 as
of January 5, 1994. The accounting for the plans anticipates that the Company
will maintain a consistent level of cost sharing for the benefits with the
retirees.
The assumptions used in the measurements of the Company's benefit
obligations are shown in the following table:
<TABLE>
<CAPTION>
Defined Benefit Pension Plan Other Postretirement Benefit Plan
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assumptions as of December 31
Discount rate 7.00% 7.50% 7.75% 7.00% 7.50% 7.75%
Expected return on plan assets 10.00% 10.00% 9.50% - - -
Rate of compensation increase 4.75% 4.75% 4.75% - - -
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for the 1998. The rate was
assumed to decrease gradually each year to a rate of 5.75% for 2001 and remain
at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of a 1% change on the
total of service and interest cost components of net periodic postretirement
health care benefit cost would be $137,000 for a 1% increase and $108,000 for a
1% decrease. Additionally, the effect of a 1% change on the health care
component of the accumulated postretirement benefit obligations would be
$1,324,000 for a 1% increase and $1,062,000 for a 1% decrease.
Note 9. 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 Director's Stock Option Plan (Director's 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 Director's 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 the Stock Option Plans at December 31, 1998, 1997
and 1996 and changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 409,210 $17.10 325,022 $15.90 244,606 $14.99
- ------------------------------------------------------------------------------------------------------------
Granted 115,740 23.02 109,373 20.68 99,800 17.68
Exercised (45,971) 10.25 (8,915) 10.33 (12,084) 9.79
Forfeited (10,300) 21.62 (16,270) 20.90 (7,300) 20.12
- ------------------------------------------------------------------------------------------------------------
Outstanding at end of year 468,679 $19.13 409,210 $17.10 325,022 $15.90
Exercisable at end of year 225,631 $17.12 212,545 $14.89 177,348 $13.43
Weighted average fair value per option of
options granted during the year $6.91 $6.15 $4.85
- ------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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> <C> <C> <C> <C>
$ 6.50 - 10.00 45,500 1 year $ 8.81 45,500 $ 8.81
$12.75 - 18.25 140,066 6 years $16.75 84,016 $16.26
$18.38 - 25.75 283,113 8 years $21.91 96,115 $21.82
</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 $0.4 million ($0.03 per share) in 1998 and
$0.2 million ($0.02 per share) for 1997 and 1996. 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 1.7% to 2.0% for 1998, 1.9% to 2.3% for 1997, and 2.0% for 1996; risk-free
interest rates of 5.0% to 5.7% for 1998, 5.9% to 6.3% for 1997 and 6.4% for
1996; expected lives of 6 years for 1998 and 1997 and 8 years for 1996; and
price volatility of 26.0% to 26.3% for 1998, 23.1% to 24.6% for 1997 and 15.8%
for 1996.
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.
Note 10. Supplementary Disclosures Of Cash Flow Information
The following information is presented as supplementary disclosures for the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash payments for:
Interest, net of capitalized interest of $785,854
in 1998, $762,643 in 1997, and $322,516 in 1996 $ 925,609 $1,067,098 $1,174,778
- -----------------------------------------------------------------------------------------------------------
Income taxes $1,453,080 $6,551,222 $4,166,400
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In 1997 the Company contributed two PCS radio spectrum licenses valued at
$4.5 million to the WV Alliance in exchange for equity ownership (Note 3). In
1997, the Company acquired through the FCC auction certain PCS radio spectrum
licenses for approximately $1.6 million of notes payable.
Note 11. 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 $2,011,000, $1,352,000,
$977,000, in 1998, 1997, and 1996, respectively. The total amount committed
under these lease agreements is: $1,000,000 in 1999, $518,000 in 2000, $410,000
in 2001, $331,000 in 2002, $278,000 in 2003 and $3,407,000 for the years
thereafter.
The Company has commitments for capital expenditures of approximately $6
million as of December 31, 1998, all of which are expected to be incurred in
fiscal 1999.
28
<PAGE>
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, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
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. Those 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, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 12, 1999
29
<PAGE>
Management's Discussion and Analysis
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 primarily in Virginia and West
Virginia. These communications products and services include local telephone,
long distance, cellular, personal communications service (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 including Call Waiting and Caller Identification. These activities
continue to contribute to growth in the Company's operating revenues. In
addition to these activities, the Company has commenced offering, in selected
markets within Virginia, a competitive local telephone service, high-speed
wireless cable and digital subscriber line (DSL) internet services and a
wireless local telephone service. Further, the Company will be expanding its
operations base and its service offerings in Virginia and West Virginia in 1999.
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 service ("PCS")
for markets with an aggregate population of five million people. These licenses
have enabled the Company, as managing member of both Alliances, to deploy PCS in
central and western Virginia and central West Virginia and will enable the
Company to provide services in additional markets in Virginia, West Virginia and
parts of Maryland, Ohio, Pennsylvania, Kentucky and Tennessee. The VA Alliance
completed its first full year of operation in 1998 and the WV Alliance commenced
offering PCS in Charleston and Huntington, West Virginia in the fourth quarter
of 1998. The Company plans to commence providing PCS in the Clarksburg, Fairmont
and Morgantown, West Virginia corridor in the first half of 1999. In 1999,
management expects continued growth in revenue, operating cash flows and
operating income from its current consolidated operations. However, the Company
expects lower operating margins due to start-up costs of newer businesses
associated with expansion into new markets and introduction of new service
offerings through the region. The Company's recognition of its share of losses
associated with its investments in the PCS Alliances is expected to be
significant in 1999 as the Company recognizes a full year of operating losses
from both the Virginia and West Virginia Alliances. 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 also
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 1999; the impact on capital requirements and
earnings from new business opportunities and expansion into new markets and
anticipated competitive activity not being greater than anticipated; and the
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.
30
<PAGE>
RESULTS OF OPERATIONS
SUMMARY- Operating revenues were $66.7 million in 1998, an increase
of 13% over 1997. Operating cash flows were $33.1 million, an increase of 16%
over 1997. Operating income was $22.6 million in 1998, an increase of 17% over
1997. Strong customer growth in our cellular and paging operations of 28% and
33%, respectively, fueled the growth in our wireless operations. Operating
results from our wireline operations reflect continued strong contributions from
our telephone operations, led by 3% growth in access lines, 11% growth in access
minutes and continued growth in calling features, over 80% increase in internet
customers and effective cost control. Results from our directory assistance
operations reflect the annualized revenue stream from 1997 contract expansions
and operating efficiencies. Start-up costs associated with expansion into new
markets and new service offerings reduced the year to year percentage increases.
Net income for 1998 was $8.5 million, or $0.65 per share-diluted, which
includes a $1.0 million ($0.6 million after tax, or $0.05 per share) loss on the
write-down of our investment in American Telecasting, Inc. (ATEL) (see Note 4 to
the financial statements) and equity losses from PCS investees of $6.5 million
($4.0 million after tax, or $0.30 per share). Exclusive of these transactions,
earnings for 1998 were $13.1 million, or $1.00 per share. These earnings results
reflect the continued growth from our consolidated operations, particularly
directory assistance and cellular.
Net income for 1997 was $12.2 million, or $0.94 per share-diluted, including
a $5.1 million gain ($3.1 million after tax, or $0.24 per share) on the sale of
our investment in the Roanoke MSA Cellular Partnership (see Note 3 to the
financial statements, hereinafter referred to as "Note 3"), a $2.8 million ($1.7
million after tax, or $0.13 per share) loss on write-down of our investment in
ATEL and a $0.8 million loss ($0.5 million after tax, or $0.04 per share) from
the Company's equity share of losses from PCS investees. Exclusive of these
transactions, earnings for 1997 were $11.3 million, or $0.86 per share. These
earnings reflect the growth from our consolidated telephone, cellular and
directory assistance operations.
OPERATING REVENUES - Total operating revenues were $66.7 million, an
increase of $7.7 million, or 13% over 1997 ($9.1 million, or 18%, increase in
1997 over 1996). The increases were primarily attributable to wireline services,
cellular, and directory assistance. Wireline revenue in 1998 totaled $37.6
million, an increase of $3.1 million, or 9% over 1997 ($5.1 million, or 16%,
over 1996). Wireless revenue in 1998 totaled $13.2 million, an increase of $1.5
million, or 13% over 1997 ($4.0 million, or 43%, over 1996). Directory
assistance revenue in 1998 totaled $12.9 million, an increase of $2.4 million,
or 23% over 1997 ($6.5 million, or 102%, over 1996).
Wireline communications revenues include telephone revenues, fiber optic
network usage, internet access, competitive local telephone, long distance and
wireline cable revenues. Telephone revenues, which include local service, access
and toll service, directory advertising and calling feature revenues were $30.5
million, an increase of $1.7 million, or 6% over 1997 ($1.4 million, or 5%
increase in 1997 over 1996). These increases were primarily due to growth in
access lines of 3% and 4% in 1998 and 1997, respectively, and revenue growth
from custom calling features of 19% and 28%, respectively. Revenues from fiber
optic network usage, which includes internet services, were $5.4 million, an
increase of $1.4 million, or 36%, over 1997 ($0.4 million, or 11% increase in
1997 over 1996) due to expanded network usage and growth of over 80% in our
internet customer base. Expanded services in 1998 included competitive local
telephone service and long distance which generated $0.8 million in revenue for
1998. Wireline cable revenues have remained relatively constant from 1996
through 1998, with only a $0.1 million increase during this two-year period.
Wireless communications include cellular, paging, voicemail and wireless
cable. Revenues for cellular, paging and voicemail totaled $10.2 million, an
increase of $1.6 million, or 19%, over 1997 ($1.8 million, or 26%, in 1997 over
1996). Increases result primarily from cellular access, toll, and roaming
associated with 28% customer growth over 1997 (33% in 1997 over 1996) and
increased outside roaming traffic. Wireless cable revenues of $3.0 million
decreased 5% from 1997 but increased 24% compared to 1996. The decline in 1998
revenue is due to limiting marketing efforts and installations to
multiple-dwelling units in an effort to contain costs and capital in this
business section. This revenue stream pertains primarily to video services. The
Company realized less than $0.1 million of revenues from the high-speed wireless
internet, introduced in one geographic market in 1998.
Directory assistance revenues, which includes net revenues from providing
directory listings for customers seeking telephone numbers in the mid-Atlantic
states, were $12.9 million, an increase of $2.4 million, or 23% over 1997 ($4.1
million, or 65% increase, in 1997 over 1996). 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. These
expansions, which only had a partial year impact in the prior year, produced an
additional 12.6 million of call volume in 1998 over 1997.
Other communications revenues, which include revenues from the Company's
sale and lease of communications equipment and security alarm monitoring and
installation, and rental for property and equipment primarily to the PCS
Alliances were $2.9 million, an increase of $0.7 million, or 30% over 1997 ($0.4
million, or 22% in 1997 over 1996) due primarily to services provided to the
Alliances.
31
<PAGE>
OPERATING EXPENSES - Total operating expenses were $44.0 million, an
increase of $4.5 million, or 11% over 1997 ($5.1 million, or 15%, increase in
1997 over 1996). The introduction of competitive local telephone services and
long distance and the resulting start-up related costs, coupled with the growth
of internet and the related commitment towards that infrastructure, accounted
for $2.0 million of the 1998 increase. Additionally, costs associated with
increased directory assistance calling volume accounted for $1.1 million of the
1998 increase due to the annualized revenue from 1997 contract expansions and
commencement of national directory assistance services. Finally, growth in
cellular customers contributed an additional $1.1 million in operating expenses
in 1998 over 1997. The increase in 1997 over 1996 was primarily attributable to
directory assistance contract expansions ($3.9 million) and growth in cellular
and wireless cable customers ($1.5 million). These increases in 1998 over 1997
trailed total revenue growth resulting in a 2% margin improvement indicating a
leveraging of fixed costs and a continued focus on cost containment and
operating efficiencies.
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 $1.2 million or
12%, over 1997. This increase was primarily a result of increased costs
associated with customer growth and service enhancements for the underlying
network and support systems. Maintenance and support expenses for 1997 increased
$0.1 million, or 1%, over 1996 which was a result of the Company controlling
expenses by acquiring access and other network pricing decreases coupled with
more efficient utilization of our facilities and equipment infrastructure.
Depreciation and amortization expenses in 1998 increased $1.3 million, or
14% over 1997 and $0.8 million, or 9% in 1997 over 1996. The increase in 1998
and 1997 was a result of capital outlays to support continued business expansion
primarily in our wireless operations and directory assistance.
Customer operations expenses, which included marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services and directory services, increased $1.9 million, or 14% over
1997 and $3.1 million, or 28%, in 1997 over 1996. Approximately $1.0 million of
these 1998 increases relate to the directory assistance business that added
personnel throughout 1997 to handle the calling volume from new contracts. The
fact that personnel hired to support this expansion were in place for a partial
year in 1997 but the full year of 1998 caused year over year expense growth.
Additionally, the Company has invested resources in customer service related
functions and sales and marketing related costs in order to support our growth
businesses and expansion plans, a significant portion ($0.9 million) of which
relates to competitive telephone service, long distance, internet and
communications systems sales and support. The 1997 increase over 1996 was
primarily attributable to the directory assistance expansion during 1997.
Corporate operations expenses, which include taxes other than income,
executive, accounting, legal, purchasing, information management, human
resources and other general and administrative expenses, remained constant in
1998 and increased $1.0 million, or 19% in 1997 over 1996. 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 from wireless investees,
equity loss from PCS investees, gain on sale of investment and loss on
write-down of investment, decreased $8.6 million from 1997 but increased $0.9
million in 1997 over 1996.
Other expenses, principally interest, decreased $0.4 million, or 36% from
1997 and $0.1 million, or 10% in 1997 from 1996. The reduction in interest
expense in 1998 and 1997 is primarily a result of the liquidation of
mortgaged-backed securities used to satisfy cash flow needs in lieu of
additional debt, and lower interest rates on line of credit debt facilities
offset by an increase in investing activity (see Statement of Cash Flows). The
Company capitalized interest on property under construction and the investments
in PCS alliances of $0.8 million in 1998 and in 1997. As a result of the VA
Alliance commencing operations during the fourth quarter of 1997 and the
commencement of operations of the WV Alliance in mid-year 1998, the Company
expects the capitalization of interest costs to be reduced during 1999.
Interest and dividend income was down $0.2 million, or 62% from 1997 and
$0.3 million, or 52% in 1997 from 1996, due to the liquidation of
mortgage-backed securities to support the continued growth in customer base and
business expansion.
Equity income from other wireless investees, which includes equity earnings
from the Company's cellular partnership interests increased $0.1 million, or
167% over 1997 and decreased $0.4 million, or 84% in 1997 from 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 3).
Equity loss from PCS investees totaled $6.5 million for 1998. The Company
has a 21% common ownership interest in the VA Alliance, a provider of PCS
serving a 1.6 million populated area in central and western Virginia, that
commenced operations in the fourth quarter of 1997. The Company also has a 45%
common ownership interest in the WV Alliance, an owner of PCS radio spectrum
licenses for most of West Virginia and parts of eastern Kentucky, southwestern
Virginia and eastern Ohio. The WV Alliance commenced operations in late 1998.
Accordingly, management believes that the Company's share of losses to be
recognized in 1999 will increase over 1998 loss levels due to the full year of
operations for the WV Alliance.
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 3).
32
<PAGE>
The Company recognized a $1.0 and $2.8 million impairment loss on its
investment in American Telecasting, Inc. (ATEL) at December 31, 1998 and 1997,
respectively. The Company concluded that the decline in value was other than
temporary given recent trading prices in the common stock and ATEL's financial
condition and continued financial losses.
INCOME TAXES - Income taxes decreased $1.8 million, or 24% from 1997 and
increased $2.2 million, or 43%, in 1997 from 1996. The 1998 decrease was
attributable to a number of factors, the most significant of which was the
recognition of approximately $6.5 million in losses sustained by our PCS
investees compared to only $0.8 in 1997. These losses generated an increased tax
benefit to the Company of approximately $2.2 million. Additionally, the Company
recognized a one-time increase to tax expense of $2.0 million related to a gain
on an investment sale in 1997 (discussed further below). The 1998 tax reductions
were offset by approximately $1.2 million of income taxes recognized by the $3.2
million increase in taxable income from operations. 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 tax benefit from the write-down of the Company's investment in
ATEL. The effective rate was 40%, 38%, and 35% in 1998, 1997 and 1996,
respectively.
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 $22.1 million in unused
aggregate borrowings available under its existing credit facilities.
During 1998, net cash provided by operating activities was $33.9 million.
Principle changes in operating assets and liabilities included a $0.9 million
increase in current assets, excluding cash and receivable from affiliates, and a
$2.3 million increase in current liabilities. Current assets increased in 1998
primarily due to the income tax receivable versus an income tax liability in
1997 and current liabilities increased $2.3 million due to timing of payments
offset by other accrued liabilities reduction of $0.5 million. The Company's
investing activities included the investment of $16.7 million in property and
equipment, $5.0 million in net advances to PCS Alliances, $2.3 million
investment in PCS Alliances, $1.0 million investment in Listing Services
Solutions, Inc., $0.7 investment in PCS licenses, and proceeds of $1.0 from the
liquidation of mortgaged-backed securities. Net cash used in financing
aggregated $10.4 million, which includes $5.7 million used to pay dividends and
an aggregate of $4.8 million of payments on long-term debt.
The Company had firm cash commitments relating to purchases of property and
equipment of approximately $6 million as of December 31, 1998. Capital
expenditures for 1999, including these commitments, are expected to increase
significantly over 1998 levels to support expansion of competitive local
telephone and internal access services, build-out of 500 miles of fiber optic
cable, and the addition of a third directory assistance calling center. 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 WV Alliance (Note 3) and expects to increase its
guarantee levels and equity contributions in the Alliances to support continued
PCS network build-out and expansion. Management anticipates that funds required
for additional capital contributions to the VA Alliance and WV Alliance (Note 3)
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 has addressed this issue with a plan which is centered around
several key components: (1) system inventory, (2) third party confirmation, (3)
internal systems review, (4) compliance implementation, (5) testing and (6)
contingency planning. Regarding the first component, the Company completed a
comprehensive inventory of all its systems (hardware and software) in July 1998.
At the same time, formal communication, through a confirmation process, was
initiated with all of the Company's significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to resolve their own year 2000 issues. The Company
has received responses from approximately two-thirds of the confirmations sent
and continues to follow-up on non-responses and instances where potential issues
were noted. Regarding the third component, the Company has completed a
comprehensive review of its computer systems to identify the internal systems
that could be impacted by the year 2000 issue. Based on findings from this
review, the Company has developed an implementation plan to resolve potential
issues and is in the early to middle stages of implementing such a plan. Both
the second and third components were further broken down by category of system
(network
33
<PAGE>
systems, information technology systems and other supporting systems).
Significant focal areas are the Company's network/ switching related equipment
and the corporate billing, customer provisioning and accounting systems. The
final components are testing and contingency planning. Testing, where feasible,
spans both the internal systems and systems interface with third parties.
Contingency planning is necessary in the event that conversion efforts, customer
compliance or any other conditions arise that prevent planned critical
application upgrades. The entire year 2000 project has a targeted completion
date of June 1, 1999. Completion of this project includes planned testing of
each major exposure area to ensure compliance. Although no significant plan
changes are anticipated, implementation of any contingency plan, should it be
necessary, may affect the project's completion date and cost.
Based on it's findings and assessment to date, the Company is or will be
performing certain planned telephone switching software upgrades and computer
software and system upgrades, which are being performed primarily to better meet
the business and growth needs of the Company. The total year 2000 project cost
estimates are not expected to be material to the Company's business operations
or financial condition. The Company will continue to review and update this
estimate over the duration of the project.
As mentioned above, the Company expects its year 2000 program to be
completed by June 1, 1999. It should be noted that the Company plans to devote
the resources required to resolve any significant year 2000 issues. However, if
the planned modifications and upgrades are not made, or are not completed on a
timely basis, and contingency plans were to falter, the year 2000 issue could
have a material impact on the operations of the Company. Also, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be timely converted or that any such failure to convert by another
company would not have an adverse effect on the Company's systems or costs of
upgrades. The material impact on the operations of the Company could include,
but not be limited to, interruption of telecommunications services,
interruption, error or failure of the Company's customer care services,
including customer billing, and failures of the Company's other information
systems and other date-sensitive equipment. Such failures could result in
substantial customer claims as well as lost revenue due to service interruption,
significant delays in the billing process and increased expense associated with
stabilizing operations following such failures.
The costs of the program and estimated completion date are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
compliance by third parties which interact with the Company's systems, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
34
<PAGE>
Quarterly Review
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Operating revenues $ 16,235 $ 16,551 $ 17,156 $ 16,744
Operating cash flows (a) 8,041 8,199 8,413 8,477
Operating income 5,547 5,712 5,757 5,610
Loss on write-down of investment (270) - (353) (387)
Equity loss from PCS investees (896) (1,346) (1,547) (2,678)
Net income 2,450 2,468 2,174 1,416
Net income per share - basic 0.189 0.190 0.167 0.108
Net income per share - diluted 0.187 0.188 0.166 0.109
- ----------------------------------------------------------------------------------------------------------
Stock price range $27.00-20.75 $27.50-22.75 $24.25-20.00 $23.38-19.50
- ----------------------------------------------------------------------------------------------------------
Quarterly dividend $ 0.10875 $ 0.10875 $ 0.10875 $ 0.10875
- ----------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------------
Operating revenues $ 13,466 $ 14,503 $ 15,157 $ 15,884
Operating cash flows (a) 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 investees - - (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
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating income before depreciation and amortization. See Management's
Discussion and Analysis for additional factors to consider in using this
measure.
- - Fourth quarter 1997 includes equity loss from investment in PCS Alliances
(Note 3), which commenced operations during the fourth quarter, of $0.8
million ($0.5 million after-tax or $0.04 per share). These losses totaled
$6.5 million ($4.0 million after-tax or $0.30 per share) for the year ended
December 31, 1998 (Note 3).
- - Fourth quarter 1997 includes a loss on write-down of the investment in
American Telecasting, Inc. (Note 4) of $2.8 million ($1.7 million after-tax
or $0.13 per share). Further write-downs of this investment totalled $1.0
million ($0.6 million after-tax or $0.05 per share) for the year ended
December 31, 1998.
- - Second quarter 1997 includes gain on the sale of investment in the Roanoke
MSA Cellular Partnership (Note 3) of $5.1 million ($3.1 million after-tax or
$0.24 per share).
Selected Financial Data and Five Year Growth Comparison
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 66,686 $ 59,010 $ 49,948 $ 43,089 $ 32,198
Operating expenses 44,060 39,598 34,533 29,667 19,949
Income taxes 5,639 7,399 5,163 5,006 3,550
Gain on sale of investments - 5,077 - 927 -
Loss on write-down of investment (1,010) (2,808) - - -
Net income 8,508 12,221 9,550 8,494 7,563
Earnings per share - diluted 0.65 0.94 0.73 0.66 0.63
Cash dividends per share 0.435 0.412 0.392 0.379 0.368
Total assets 155,025 148,448 142,400 143,251 123,964
Long-term debt 19,774 24,606 24,000 20,000 20,067
Retirement benefits
other than pensions 9,317 8,432 7,724 7,150 6,514
Investment in property
and equipment $153,621 $137,703 $127,196 $111,806 $103,086
Average number of common
shares outstanding - diluted 13,093,561 13,055,814 13,056,081 12,933,926 12,016,163
Number of employees 743 567 454 492 232
Number of shareholders 2,998 2,884 2,883 2,889 2,638
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Board of Directors
<TABLE>
<CAPTION>
<S> <C> <C>
C. Phillip Barger John B. Mitchell, Sr. Carl A. Rosberg
Retired Chairman President & Chairman Senior Vice President and
E. W. Barger & Company Hammond-Mitchell, Inc. Chief Operating Officer
T/A Barger Insurance Network CFW Communications
John N. Neff
William Wayt Gibbs, V President and Robert S. Yeago, Jr.
President Chief Executive Officer Chairman of the Board
Comprehensive Computer Consultants Nielsen Builders, Inc. CFW Communications
C. Wilson McNeely, III James S. Quarforth
Chairman President and
Eagle Corporation Chief Executive Officer
CFW Communications
Executive Officers
J. William Brownlee David R. Maccarelli James S. Quarforth
Vice President - Senior Vice President - President and
Virginia Operations Engineering and Carrier Services Chief Executive Officer
Warren C. Catlett Michael B. Moneymaker Carl A. Rosberg
Vice President - Strategy and Vice President and Senior Vice President and
Business Development Chief Financial Officer, Chief Operating Officer
Treasurer and Secretary
David E. Lowe Robert S. Yeago, Jr.
President - Don Marie Persing Chairman of the Board
West Virginia Operations Vice President -
Human Resources Walter M. Zirkle, III
President -
Virginia Operations
</TABLE>
36
<PAGE>
Annual Meeting
The Board of Directors extends to the shareholders a cordial invitation to
attend the Annual Meeting of Shareholders, at the Holiday Inn next to Route 275
and I-81, north of Staunton, Virginia, on Tuesday, April 27, 1999, at 10:00am.
Corporate Office
401 Spring Lane
Suite 300
PO Box 1990
Waynesboro, Virginia 22980
540-946-3500
Web Page
http://www.cfw.com or www.intelos.com
Stock Updates
For updates on CFW stock prices call 800-946-8227, or dial locally 946-5144. CFW
is publically traded on The NASDAQ Stock Market under the symbol CFWC.
Shareholder Services
For shareholder services, including information on the Company's Dividend
Reinvestment and Stock Purchase Plan, please call 1-888-221-4239.
All trademarks are the property of their respective owners.
<PAGE>
CFW COMMUNICATIONS COMPANY
POST OFFICE BOX 1990
WAYNESBORO, VIRGINIA 22980
540-946-3500
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 12, 1999, 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.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 42890
<SECURITIES> 0
<RECEIVABLES> 12120985
<ALLOWANCES> 591,596
<INVENTORY> 5681978
<CURRENT-ASSETS> 2176895
<PP&E> 21162744
<DEPRECIATION> 153620516
<TOTAL-ASSETS> 50760242
<CURRENT-LIABILITIES> 155024666
<BONDS> 15366047
19774262
0
<COMMON> 0
<OTHER-SE> 43527636
<TOTAL-LIABILITY-AND-EQUITY> 49882849
<SALES> 155024666
<TOTAL-REVENUES> 0
<CGS> 66686104
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 715938
<INCOME-PRETAX> 14724585
<INCOME-TAX> 5638940
<INCOME-CONTINUING> 8507640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8507640
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
</TABLE>
VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL STATEMENTS
December 31, 1998
<PAGE>
Contents
- ----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- ----------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2 - 3
Statements of operations 4
Statements of members' equity (deficit) 5
Statements of cash flows 6 - 7
Notes to financial statements 8 - 12
- ----------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Management Committee
Virginia PCS Alliance, L.C.
Waynesboro, Virginia
We have audited the accompanying balance sheets of Virginia PCS Alliance, L.C.
as of December 31, 1998 and 1997, and the related statements of operations,
members' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Alliance'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. Those 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 disclosures 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 financial statements referred to above present fairly, in
all material respects, the financial position of Virginia PCS Alliance, L.C. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 12, 1999
1
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS (Note 2)
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 59,814 $ 159,082
Accounts receivable, net of allowance of $194,958 in 1998 944,845 98,872
Inventories 2,271,572 858,770
Prepaid expenses 371,924 243,792
----------------------------------
Total current assets 3,648,155 1,360,516
----------------------------------
Subordinated Capital Certificates 3,838,366 1,073,064
----------------------------------
Property and Equipment
Land and building 1,220,533 174,151
Network plant and equipment 63,311,713 23,342,861
Furniture, fixtures, and other equipment 4,057,770 4,297,564
Radio spectrum licenses 32,714,384 22,658,469
----------------------------------
Total in service 101,304,400 50,473,045
Under construction 2,565,479 29,251,056
----------------------------------
103,869,879 79,724,101
Less accumulated depreciation 7,257,206 736,763
----------------------------------
96,612,673 78,987,338
----------------------------------
Other Assets
Radio spectrum licenses - 10,040,657
Other 216,705 698,218
----------------------------------
216,705 10,738,875
----------------------------------
$ 104,315,899 $ 92,159,793
==================================
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 2,392,739 $ 6,512,713
Due to affiliates (Note 6) 2,260,982 660,383
Dividends payable (Note 3) 229,138 229,142
Customer deposits 56,187 2,700
Advance billings 71,518 26,906
Accrued construction costs 6,044,812 26,759,907
Accrued interest 726,992 594,586
Accrued payroll 150,515 2,045
Accrued taxes 35,878 -
Other accrued liabilities 22,129 13,484
----------------------------------
Total current liabilities 11,990,890 34,801,866
----------------------------------
Long-Term Debt (Note 2) 90,301,358 34,722,382
----------------------------------
Redeemable Series A Preferred Membership Interests (Note 3) 14,345,128 13,542,076
----------------------------------
Commitments (Note 5)
Members' Equity (Deficit) (Note 4)
Series B preferred membership interests 10,860,376 8,320,000
Common membership interests (23,181,853) 773,469
----------------------------------
(12,321,477) 9,093,469
----------------------------------
$ 104,315,899 $ 92,159,793
==================================
</TABLE>
3
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues:
Subscriber revenue $ 1,738,543 $ 72,519
Wholesale revenue 2,175,733 2,400
Equipment sales 730,356 43,552
-----------------------------------
4,644,632 118,471
-----------------------------------
Operating expenses:
Cost of goods sold 3,009,537 315,017
Maintenance and support 5,166,427 756,992
Depreciation and amortization 7,040,676 685,826
Customer operations 5,729,097 1,444,291
Corporate operations 2,111,408 234,154
-----------------------------------
23,057,145 3,436,280
-----------------------------------
Loss before interest and preferred dividends (18,412,513) (3,317,809)
Interest expense:
Senior credit facility 4,131,445 163,067
Redeemable preferred interest 1,870,988 471,119
-----------------------------------
Net loss $ (24,414,946)$ (3,951,995)
===================================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Series B
Preferred Common
Membership Membership
Interests Interests Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 7,820,000 $ 3,601,950 $ 11,421,950
Capital contributions - 1,638,050 1,638,050
Issuance costs - (14,536) (14,536)
Conversion of Common Membership Interests
to Series B Preferred Membership Interests 500,000 (500,000) -
Net loss (3,951,995) (3,951,995)
------------------------------------------------
Balance as of December 31, 1997 8,320,000 773,469 9,093,469
Capital contributions 2,540,376 459,624 3,000,000
Net loss - (24,414,946) (24,414,946)
------------------------------------------------
Balance as of December 31, 1998 $ 10,860,376 $ (23,181,853)$ (12,321,477)
================================================
See Notes to Financial Statements.
</TABLE>
5
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (24,414,946)$ (3,951,995)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 6,527,202 634,568
Amortization 513,474 51,258
Changes in assets and liabilities:
(Increase) in:
Accounts receivable (845,973) (98,872)
Inventories (1,412,802) (858,770)
Prepaid expenses (128,132) (243,792)
Increase (decrease) in:
Accounts payable, trade (4,119,974) 1,811,698
Advance billings and customer deposits 98,099 29,606
Accrued interest 132,406 163,067
Accrued dividends on Series A Preferred Membership Interests 771,087 415,398
Other accrued liabilities 192,993 (51,634)
---------------------------------
Net cash used in operating activities (22,686,566) (2,099,468)
---------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (34,826,975) (23,531,184)
Purchase of radio spectrum licenses - (1,927,154)
Increase in deferred charges - (473,575)
---------------------------------
Net cash used in investing activities (34,826,975) (25,931,913)
---------------------------------
Cash Flows From Financing Activities
Capital contributions, net 3,000,000 1,623,514
Advances from affiliates 1,600,599 127,080
Borrowings on revolving credit agreements, net 273,024 1,881,695
Proceeds from long-term borrowings 52,540,650 20,609,405
---------------------------------
Net cash provided by financing activities 57,414,273 24,241,694
---------------------------------
Net decrease in cash (99,268) (3,789,687)
Cash:
Beginning 159,082 3,948,769
---------------------------------
Ending $ 59,814 $ 159,082
=================================
(Continued)
</TABLE>
6
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (Continued )
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities
Noncash increases in radio spectrum licenses consisting primarily of
accrued interest $ - $ 431,519
=================================
Noncash increases in property and equipment consisting primarily of of
accrued construction costs, accounts payable, accrued
dividends, and capitalization of other intangible costs $ 6,044,812 $ 26,808,718
=================================
Subordinated capital certificates acquired by long-term
borrowings $ 2,765,302 $ 1,073,064
=================================
Conversion of Common Membership Interests to Series B Preferred
Membership Interests $ - $ 500,000
=================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 4,419,430 $ 517,490
=================================
Cash payments for redeemable preferred interest $ 1,099,896 $ 870,754
=================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
The Virginia PCS Alliance, L.C. ("Alliance") was organized in 1994 pursuant to
the provisions of the Virginia Limited Liability Company Act. The Alliance was
formed to fund, establish and operate a business to design, construct, own,
operate and maintain a personal communications system to provide personal
communications services ("PCS") in central and western Virginia. Operations
commenced during September 1997, prior to which the Alliance was in the
development stage. Its major activities through September 1997 were limited to
acquiring PCS radio spectrum licenses, designing and constructing a personal
communications system and obtaining equity capital.
CFW Wireless Inc., a wholly-owned subsidiary of CFW Communications Company, is
responsible for managing and operating the Alliance pursuant to the terms and
conditions of the service agreement and within the framework of the approved
operating and capital business plan.
The following is a summary of the Alliance's significant accounting policies:
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.
Cash and cash equivalents: The Alliance considers all highly liquid cash
investments with a purchased maturity of three months or less to be cash
equivalents. At times such investments may be in excess of federally-insured
amounts.
Inventories: Inventories include PCS telephone equipment held for sale and
are stated at the lower of average cost or market.
Property and equipment: Property and equipment is stated at cost and
depreciated using the straight-line method over their estimated useful lives.
Buildings are depreciated over a 50 year life. Network plant and equipment
are depreciated over various lives ranging from 5 to 17 years, with an
average life of approximately 10 years for the category. Furniture, fixtures
and other equipment are depreciated over various lives ranging from 3 to 24
years. Radio spectrum licenses, which are for areas where the licenses are
being used in operations, are amortized over a life of 40 years. The Alliance
includes radio spectrum licenses in other assets until such licenses are
placed in service. Assets under construction represent costs incurred for the
construction of cell sites, including allocated overhead costs.
Revenue recognition: The Alliance earns revenue by providing access to and
usage of its personal communications network. Local service and airtime
revenues are recognized as services are provided. Wholesale revenues are
earned by providing switch access and other switching services, including
roamer management, to other wireless carriers. Wholesale prices are based on
actual annual fixed and variable costs. Other revenues for equipment sales
are recognized at the point of sale. Handset equipment is sold at prices
below cost. Prices are based on the service contract period. The Alliance
recognizes the entire cost of the handsets at the point of sale, rather than
deferring such costs over the service contract period.
8
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies (Continued)
Fair value of financial instruments: The fair values of financial instruments
recorded on the balance sheets are not significantly different than the
carrying amounts.
Income taxes: The Alliance is treated as a partnership for income tax
purposes. The Internal Revenue Code and applicable state statutes provide
that income and expenses of a partnership are not separately taxable, but
rather accrue directly to the members as provided by agreement. Accordingly,
no provision for federal or state income taxes has been made in the financial
statements.
Financial statement classifications: Certain amounts on the 1997 financial
statements have been reclassified, with no effect on net loss or members'
equity (deficit) to conform with classifications adopted in 1998.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
1998 1997
-----------------------------------
Vendor Supported Loan $ 71,139,502 $ 21,461,313
Supplemental Loan 5,627,763
Line of Credit 2,154,719 1,881,695
U. S. Department of the Treasury, FCC 11,154,374 11,154,374
Other 225,000 225,000
-----------------------------------
$ 90,301,358 $ 34,722,382
===================================
In September 1996, the Alliance entered into two 7.00% installment notes with
the Federal Communications Commission ("FCC") related to licenses awarded in the
PCS radio spectrum Block "C" auction. Interest only is payable quarterly through
September 30, 2002. Commencing December 31, 2002, principal and interest is
payable in equal quarterly installments of $805,341 through June 30, 2006. The
entire unpaid principal amount, together with accrued and unpaid interest, is
due September 17, 2006 ("Maturity Date").
In July 1997, the Alliance entered into an $89.0 million Senior Secured Credit
Facility with the Rural Telephone Financing Cooperative ("RTFC" or "Lender") and
Motorola, Inc. ("Vendor"). The available facilities consist of a 10-year term
loan ("Vendor Supported Loan") in the amount of $75.0 million, a 10-year term
loan ("Supplemental Loan") in the amount of $10.0 million, and a 5-year
revolving line of credit loan ("Line of Credit") in the amount of $4.0 million.
The Vendor Supported Loan is to finance up to $71.25 million of Motorola
supplied PCS equipment and engineering services, nonvendor related capital
expenditures, microwave relocation expenses and working capital, and to purchase
up to $3.75 million of RTFC subordinated capital certificates ("SCCs"). The
Supplemental Loan is to finance up to $9.5 million of nongovernment-funded PCS
license costs, microwave relocation expenses, non-Motorola related capital
expenditures and working capital, and to purchase up to $0.5 million of RTFC
SCCs.
9
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Long-Term Debt (Continued)
The RTFC SCCs are nonmarketable securities and are stated at historical cost. As
the RTFC loans are repaid, the SCCs will be refunded through a cash payment to
maintain a 5% SCCs-to-outstanding loan balance ratio.
Interest only is payable through four years for the Vendor Supported and
Supplemental Loans. After this time, principal is payable in equal quarterly
installments, plus accrued interest, with 10% of the principal due in year five,
15% due per year in years six and seven, and 20% due per year in years eight
through ten.
As borrowings occur, the Alliance can choose between several fixed and variable
rate interest options. The variable interest rate in effect on the nonfixed
portions of the Vendor Supported and Supplemental Loans at December 31, 1998 and
1997 was 6.60% and 7.15%, respectively. In January 1998, the Alliance converted
$15.0 million of the Vendor Supported Loan to a fixed rate of 7.25%. This rate
is in effect until January 2003, at which time the loan will revert to the
variable rate. In September 1998, the Alliance converted $27.0 million of the
Vendor Supported Loan to a fixed rate of 6.55%. This rate is in effect until
September 2001, at which time the loan will revert to the variable rate.
The credit facility includes a line of credit to supplement the Alliances
general short-term cash requirements. Under this agreement, the Alliance is
required to reduce its outstanding balance to zero each year for a period of at
least five consecutive business days. The interest rate on the Line of Credit is
the RTFC's standard monthly quoted line of credit rate plus 0.5%. The interest
rate in effect on the Line of Credit at December 31, 1998 and 1997 was 7.20% and
7.75%, respectively.
All of the Alliance's present and future assets are pledged as security for the
RTFC loans. In addition, each member of the Alliance has entered into an
irrevocable unsecured pro rata guaranty with the RTFC for up to $36.5 million in
the aggregate. As additional credit support for the Vendor Supported Loan,
Motorola has entered into a guaranty agreement with the RTFC for up to $52.5
million of the Alliance's outstanding indebtedness under the Vendor Supported
Loan.
The loan agreements contain various restrictive covenants, including negative
covenants, related to additional indebtedness, payment of dividends, redemption
of membership interests and payment of management fees. The agreements also
contain financial covenants related to cash flows, population coverage and
number of subscribers.
There are no long-term debt maturities for 1999 and 2000. Maturities for 2001,
2002 and 2003 are $3,838,363, $10,206,048, and $14,089,138, respectively.
Interest costs in 1998 were approximately $4.5 million of which $4.1 million was
expensed and $0.4 million was capitalized. Interest costs in 1997 were
approximately $1.1 million of which $0.2 million was expensed and $0.9 million
was capitalized.
10
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Series A Preferred Membership Interests
The Series A Preferred Membership Interests consists of 1,294,000 units issued
on December 30, 1996 at $10.00 per unit (stated value). Total proceeds were
$12,940,000 before issuance costs. These units are entitled to cumulative, but
not compounded, cash distributions at 8.5% per annum. This amount is payable
quarterly for five years from the date contributed, at which time a "true up"
amount is payable for the difference between an amount computed based on a 14%
compounded annualized rate of return and the cumulative amount described above
at 8.5%. At December 31, 1998 and 1997, accrued current dividends were
approximately $229,000 for each date and accrued "true up" dividends were
approximately $1,501,000 and $730,000, respectively. Accrued "true up" dividends
are included on the balance sheet with "Redeemable Series A Preferred Membership
Interests."
At any time after the fifth anniversary of the capital contribution date, each
Series A Preferred Member may put all, but not less than all, of its Preferred
Series A Membership Interest to the Alliance in exchange for cash equivalent to
the stated value, plus any accrued distributions. If such put takes place,
additional Common Membership Interests may be acquired at $10.00 per unit for
88.1% of the put amount by CFW Communications Company and for 11.9% of the put
amount by R&B Communications, Inc., both Common Members.
For any Series A Preferred Membership Interests not put to the Alliance as of
the fifth anniversary date as well as any "true up" amounts due, the annual cash
distribution rate will be changed to the lesser of 7% or LIBOR plus 1-1/2%,
payable quarterly. After ten years from the Series A capital contribution date,
the Alliance may redeem at any time, any or all of the Series A Preferred
Membership Interests still outstanding, at the Stated Value plus any accrued
distributions.
Note 4. Members' Equity (Deficit)
Members' equity (deficit) consists of the following classes of membership
interests:
Series B Preferred Membership Interests: This consists of 782,000 units
issued on September 30, 1996 at $10.00 per unit (stated value), 50,000 units
converted from Common Units on August 27, 1997 at $10.00 per unit (stated
value), and 115,471.6 units issued on January 6, 1998 at $22.00 per unit
(stated value). Dividends are payable beginning after the tenth year from the
capital contribution date at 8% per annum, payable quarterly and are
cumulative, but not compounded. After the fourth year from the capital
contribution date, the Series B units are convertible into Common Membership
Interests on a unit-for-unit basis.
Common Membership Interests: Common membership interests consist of
approximately 406,000 Common Units. Additional future cash contributions may
be required from the Common Members on the same terms and conditions of their
initial Capital Contribution. If any Common Member fails to make the
additional contributions, their existing capital account balance may be
redeemed at 25% and amounts forfeited would be allocated among the remaining
Common Members.
11
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Members' Equity (Deficit) (Continued)
Equity Subscriptions: The members entered into equity subscription agreements
that obligates them to contribute additional equity of $15.0 million in the
aggregate. The remaining additional equity contributions are scheduled to be
contributed equally over three years beginning in January 1999. Such
contributions shall be for the purchase, at fair market value, of Common
Membership or Series B Preferred Membership units.
In January 1999, the members contributed $5.0 million to the Alliance,
purchasing 34,820 Common Units for $0.8 million and 192,452.7 Series B Preferred
Membership Units for approximately $4.2 million.
Note 5. Commitments
Leases: The Alliance leases property for cell site locations and retail stores.
Leases for cell site locations vary in term from five to twenty years. Leases
for retail store locations vary in term from three to five years. Certain cell
site location leases have been prepaid and are being amortized on a straight-
line basis over the total lease term. Total annual lease expense for the years
ended December 31, 1998 and 1997 was approximately $1,169,000 and $212,000,
respectively. The total amount committed under these lease agreements is
$945,437 in 1999, $938,935 in 2000, $902,654 in 2001, $685,788 in 2002, $329,139
in 2003 and $1,960,106 for the years thereafter.
Equipment: The Alliance had outstanding purchase commitments of approximately
$6.0 million at December 31, 1998.
Note 6. Related Party Transactions
All transactions of the Alliance are administered by the managing partner. CFW
Wireless, a subsidiary of CFW Communications Company provided, in accordance
with the service contract, engineering, construction, sales management, billing,
and other general and administrative services to the Alliance in the amount of
$2,012,684 in 1998 and $1,757,204 in 1997. Of the total 1998 charges, $1,682,125
($815,899 in 1997) was expensed and $330,559 ($941,305 in 1997) was capitalized.
CFW Communications Company also provided certain corporate services for the
Alliance in the amount of $2,313,062 in 1998 and $336,650 in 1997. In 1998, all
corporate services were expensed. Of the total 1997 charges, $161,281 was
expensed and $175,369 was capitalized during the construction and startup
period. Corporate services include executive, finance, accounting, customer
care, human resources, information management and marketing services. Such
services are charged to the Alliance at cost. In addition, the managing partner
advances funds to the Alliance to cover expenditures incurred. These advances
are included in due to affiliates in the accompanying balance sheets.
Switch access and switching services are provided at cost to the West Virginia
PCS Alliance L.C. and the Virginia RSA6 Cellular Limited Partnership, both
affiliated through common ownership and management. Such services have been
recorded as wholesale revenue and totaled $1,639,595 in 1998 and $47,400 in
1997.
12
