SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999 Commission File No.
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0-16751
CFW COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ----
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 8/13/99 13,053,079
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CFW COMMUNICATIONS COMPANY
I N D E X
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Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, June 30, 1999 and December 31,
1998 3-4
Condensed Consolidated Statements of Income, Three and Six Months
Ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows, Six Months Ended
June 30, 1999 and 1998 6
Condensed Consolidated Statements of Shareholders' Equity for each of
the Calendar Quarters in the Six Months Ended June 30, 1999 and the
Year Ended December 31,1998 7
Notes to Condensed Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-16
PART II. OTHER INFORMATION 17
SIGNATURES 18-19
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2
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) December 31, 1998
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 440,884 $ 42,890
Accounts receivable, net of allowance of $0.7 million ($0.6 million
in 1998) 14,081,708 12,120,985
Receivable from affiliates 2,914,434 5,681,978
Materials and supplies 3,078,002 2,176,895
Prepaid expenses and other 607,642 448,775
Income tax receivable 543,115 691,221
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21,665,785 21,162,744
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SECURITIES AND INVESTMENTS 17,948,877 11,671,417
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PROPERTY AND EQUIPMENT
Land 2,243,827 1,957,874
Buildings and improvements 20,588,152 19,007,349
Network plant and equipment 101,000,885 93,247,587
Furniture, fixtures and other equipment 22,751,829 20,022,238
Radio spectrum licenses 15,469,995 15,468,649
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Total in service 162,054,688 149,703,697
Under construction 9,870,563 3,916,819
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171,925,251 153,620,516
Less accumulated depreciation 56,062,407 50,760,242
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115,862,844 102,860,274
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OTHER ASSETS
Cost in excess of net assets of business acquired, less accumulated
amortization of $1.6 million ($1.4 million in 1998) 13,147,053 12,705,900
Deferred charges 1,027,167 533,540
Radio spectrum licenses and license deposits 7,105,738 6,090,791
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21,279,958 19,330,231
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$ 176,757,464 $ 155,024,666
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, 1999 December 31,
(UNAUDITED) 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,159,728 $ 7,042,966
Customers' deposits 419,107 400,655
Advance billings 2,442,349 2,303,696
Accrued payroll 477,551 1,283,083
Accrued interest 484,079 623,412
Other accrued liabilities 3,475,634 2,490,386
Deferred revenue 1,761,903 1,221,849
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16,220,351 15,366,047
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LONG-TERM DEBT 32,426,982 19,774,262
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LONG-TERM LIABILITIES
Deferred income taxes 18,007,436 14,243,872
Retirement benefits other than pensions 9,711,357 9,317,424
Other 1,304,870 1,440,157
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29,023,663 25,001,453
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MINORITY INTERESTS 1,583,106 1,472,419
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COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, no par - -
Common stock, no par 43,679,395 43,527,636
Retained earnings 49,523,678 49,882,849
Accumulated other comprehensive income, unrealized gain
on securities available for sale, net 4,300,289 -
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97,503,362 93,410,485
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$ 176,757,464 $ 155,024,666
=============== ===============
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
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OPERATING REVENUES
Wireline communications $ 10,199,402 $ 9,251,047 $ 20,001,516 $ 18,462,493
Wireless communications 3,683,849 3,320,857 6,981,789 6,480,301
Directory assistance 2,993,126 3,268,383 5,866,634 6,537,849
Other communications services 1,012,895 710,985 2,056,960 1,305,911
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17,889,272 16,551,272 34,906,899 32,786,554
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OPERATING EXPENSES
Maintenance and support 3,543,780 2,591,632 6,746,099 5,234,226
Depreciation and amortization 2,968,335 2,487,116 5,779,127 4,980,791
Customer operations 4,990,636 3,975,952 9,557,882 7,869,532
Corporate operations 1,469,473 1,784,303 3,213,290 3,442,858
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12,972,224 10,839,003 25,296,398 21,527,407
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OPERATING INCOME 4,917,048 5,712,269 9,610,501 11,259,147
OTHER INCOME (EXPENSES)
Other expenses, principally interest (365,915) (171,080) (685,001) (360,618)
Interest and dividend income 94,939 31,946 201,563 56,785
Equity loss from PCS investees (2,938,107) (1,346,047) (5,269,281) (2,241,630)
Equity income from other wireless
investees 34,759 37,502 87,766 42,008
Loss on write-down of investment - - - (270,067)
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1,742,724 4,264,590 3,945,548 8,485,625
INCOME TAXES 318,073 1,629,315 1,092,156 3,266,102
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1,424,651 2,635,275 2,853,392 5,219,523
MINORITY INTERESTS (129,543) (166,821) (218,558) (301,419)
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NET INCOME $ 1,295,108 $ 2,468,454 $ 2,634,834 $ 4,918,104
================================================================================================================
Net income per common share - basic $ 0.10 $ 0.19 $ 0.20 $ 0.38
Net income per common share - diluted $ 0.10 $ 0.19 $ 0.20 $ 0.38
Average shares outstanding - basic 13,040,176 13,008,988 13,031,007 13,001,696
Average shares outstanding - diluted 13,115,990 13,126,843 13,091,724 13,104,679
================================================================================================================
Cash dividends per share $ 0.11475 $ 0.10875 $ 0.22950 $ 0.21750
================================================================================================================
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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JUNE 30, JUNE 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,634,834 $ 4,918,104
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 5,420,753 4,710,630
Amortization 358,374 270,161
Deferred taxes 1,065,360 2,242,785
Retirement benefits other than pensions 393,933 357,132
Other 369,869 546,791
Equity loss from wireless investees 5,181,515 2,199,622
Minority interests, net of distributions 37,187 56,750
Distributions received from investments 50,031 48,576
Loss on write-down of investment - 270,067
Changes in assets and liabilities from operations:
Increase in accounts receivable (1,960,723) (124,201)
(Increase) decrease in materials and supplies (901,107) 74,918
Increase in other current assets (158,867) (186,819)
Decrease in income taxes 148,106 247,955
Increase in accounts payable 116,762 446,263
Increase (decrease) in other accrued liabilities 40,383 (247,431)
Increase in other current liabilities 157,105 362,341
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NET CASH PROVIDED BY OPERATING ACTIVITIES 12,953,515 16,193,644
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (18,192,425) (5,504,638)
Purchase of radio spectrum licenses, net of minority interest (856,450) (472,868)
Investments in PCS alliances (3,892,138) (2,192,467)
Repayments from PCS alliances 2,767,544 1,053,633
Acquisition of internet subscribers (1,497,652) -
Investment in internet service company (600,000) -
Deposit on radio spectrum licenses, net of minority interest (76,500) -
Maturities and distributions from (contributions to) other investments (18,374) 687,123
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NET CASH USED IN INVESTING ACTIVITIES (22,365,995) (6,429,217)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (2,994,005) (2,829,445)
Payments on senior notes (3,636,364) (3,636,364)
Additional borrowing (payments) on lines of credit, net 16,289,084 (3,000,000)
Net proceeds from exercise of stock options 151,759 84,084
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 9,810,474 (9,381,725)
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Net increase in cash and cash equivalents 397,994 382,702
Cash and cash equivalents:
BEGINNING 42,890 1,224,347
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ENDING $ 440,884 $ 1,607,049
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
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BALANCE, JANUARY 1, 1998 12,986,654 $ 43,420,269 $ 47,035,233 $ - $ 90,455,502
Comprehensive income:
Net Income 2,449,650
Comprehensive income 2,449,650
Cash dividends (1,414,724) (1,414,724)
Stock options exercised, net 22,280 29 29
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BALANCE, MARCH 31, 1998 13,008,934 43,420,298 48,070,159 - 91,490,457
Comprehensive income:
Net Income 2,468,454
Comprehensive income 2,468,454
Cash dividends (1,414,721) (1,414,721)
Stock options exercised, net 4,914 84,055 84,055
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BALANCE, JUNE 30, 1998 13,013,848 43,504,353 49,123,892 - 92,628,245
Comprehensive income:
Net Income 2,173,884
Comprehensive income 2,173,884
Cash dividends (1,415,255) (1,415,255)
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BALANCE, SEPTEMBER 30, 1998 13,013,848 43,504,353 49,882,521 - 93,386,874
Comprehensive income:
Net Income 1,415,652
Comprehensive income 1,415,652
Cash dividends (1,415,324) (1,415,324)
Stock options exercised, net 3,140 23,283 23,283
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BALANCE, DECEMBER 31, 1998 13,016,988 43,527,636 49,882,849 - 93,410,485
Comprehensive income:
Net Income 1,339,726
Unrealized gain on securities
available for sale, net of $1.0
million deferred tax obligation 1,580,294
Comprehensive income 2,920,020
Cash dividends (1,495,905) (1,495,905)
Stock options exercised, net 19,428 75,022 75,022
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BALANCE, MARCH 31, 1999 13,036,416 43,602,658 49,726,670 1,580,294 94,909,622
Comprehensive income:
Net Income 1,295,108
Unrealized gain on securities
available for sale, net of $1.7
million deferred tax obligation 2,719,995
Comprehensive income 4,015,103
Cash dividends (1,498,100) (1,498,100)
Stock options exercised, net 5,663 76,737 76,737
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BALANCE, JUNE 30, 1999 13,042,079 $ 43,679,395 $ 49,523,678 $ 4,300,289 $ 97,503,362
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
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CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1998, contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of June 30, 1999 and December
31, 1998 and the results of operations for the three and six months
ended June 30, 1999 and 1998 and cash flows for the six months ended
June 30, 1999 and 1998. The results of operations for the three and six
months ended June 30, 1999 and 1998 are not necessarily indicative of
the results to be expected for the full year.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to confirm with
classifications adopted in 1999.
(2) The Company has five primary business segments which have separable
management focus and infrastructures and that offer different products
and services. These segments are described in more detail in the Note 2
of the Company's 1998 Annual Report. Summarized financial information
concerning the Company's reportable segments is shown in the following
table.
<TABLE>
<CAPTION>
TELEPHONE NETWORK WIRELESS DIRECTORY CABLE OTHER TOTAL
(IN THOUSANDS) ASSISTANCE
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FOR THE SIX MONTHS ENDED JUNE 30, 1999
Revenues $15,511 $3,687 $5,540 $5,867 $1,442 $2,860 $34,907
EBITDA 11,024 (106) 2,341 680 286 1,165 15,390
Depreciation &
Amortization 1,822 785 447 581 1,280 864 5,779
Total Segment
Assets 43,134 23,760 8,551 14,105 24,898 13,164 127,612
Corporate Assets 49,145
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TOTAL ASSETS $176,757
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FOR THE SIX MONTHS ENDED JUNE 30, 1998
Revenues $15,072 $2,591 $4,979 $6,538 $1,501 $2,106 $32,787
EBITDA 10,712 947 2,467 1,535 166 413 16,240
Depreciation &
Amortization 1,644 542 281 514 1,348 652 4,981
Total Segment
Assets 40,651 13,180 6,748 12,356 26,949 15,970 115,854
Corporate Assets 33,537
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TOTAL ASSETS $149,391
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FOR THE THREE MONTHS ENDED JUNE 30, 1999
Revenues $7,809 $1,983 $2,970 $2,993 $713 $1,421 $17,889
EBITDA 5,626 (154) 1,300 355 146 612 7,885
Depreciation &
Amortization 921 432 234 301 637 443 2,968
- --------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1998
Revenues $7,503 $1,352 $2,606 $3,268 $715 $1,107 $16,551
EBITDA 5,396 524 1,296 682 39 262 8,199
Depreciation &
Amortization 817 273 100 254 674 369 2,487
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</TABLE>
(3) The Company recognized a $0.3 million ($0.2 million after tax)
impairment loss on its investment in American Telecasting, Inc. (ATEL)
in the first quarter of 1998. At December 31, 1998, the carrying value
of the Company's investment in ATEL was $0.3 million based on the $0.195
trading price on December 31, 1998. On April 27, 1999, ATEL reported
that it had agreed to be acquired by Sprint Corporation, with each ATEL
shareholder to receive $6.50 per share in cash. This agreement was
approved by the shareholders of ATEL in June 1999 and is subject to FCC
approval. The Company holds approximately 1.2 million shares of ATEL
stock as of June 30, 1999. Through the second quarter of 1999, the
Company has recorded an unrealized gain on this investment of $4.3
million, net of $2.7 million deferred tax obligation, based on the $5.97
per share trading price on June 30, 1999.
8
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CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
(4) The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, were increased by 75,815 and
117,855 shares for the three months ended June 30, 1999 and 1998,
respectively, and by 60,717 and 102,983 shares for the six months ended
June 30, 1999 and 1998, respectively, to reflect the assumed conversion
of dilutive stock options. The Company currently has 583,386 options
outstanding to acquire shares of common stock, of which 262,213 are
currently exercisable.
(5) The Company has a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications
services (PCS) serving a 1.6 million populated area in central and
western Virginia. The Company is managing such build-out pursuant to a
service agreement. PCS operations began throughout the Virginia region
in the fourth quarter of 1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million
populated area in West Virginia and parts of eastern Kentucky,
southwestern Virginia and eastern Ohio. The Company is managing this
build-out pursuant to a service agreement. The WV Alliance commenced
operations in the fourth quarter of 1998, offering services along the
Charleston and Huntington corridor and expanded to the northern corridor
of West Virginia, including the cities of Clarksburg, Fairmont and
Morgantown, in the second quarter of 1999.
Combined summarized financial information for the VA Alliance and WV
Alliance ("Alliances"), both of which are accounted for under the equity
method, are as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
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Current assets $ 9.4 $ 4.1
Noncurrent assets 142.1 131.3
Current liabilities 25.5 22.7
Noncurrent liabilities 125.1 98.4
Redeemable preferred stock 14.8 14.3
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended, For the Six Months Ended,
--------------------------- -------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
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<S> <C>
Net sales $ 3.4 $ 0.6 $ 6.1 $ 0.9
Gross profit (loss) 1.7 (0.1) 2.3 (0.2)
Net loss applicable to common owners (10.4) (6.2) (19.1) (10.5)
Company's share of net loss (2.9) (1.3) (5.3) (2.2)
</TABLE>
The Company has entered into guaranty agreements whereby the Company is
committed to provide guarantees of up to $63.5 million of the Alliance's
debt and redeemable preferred obligations. Such guarantees become
effective as obligations are incurred by the Alliances. At June 30,
1999, the Company has guaranteed $50.6 million of the Alliances'
obligations.
(6) Acquisitions and investments
In July 1999, the Company completed it's purchase of common ownership
interest in NetAccess, Inc. (NetAccess), an internet service provider
serving a 1.5 million populated area in East Tennessee and Southwestern
Virginia, for $6.0 million. The Company made an investment in NetAccess
of $0.6 million in February 1999 and in July 1999, exercised it's option
to purchase the remainder of the outstanding stock of NetAccess for $5.4
million , plus a contingent payment in 2001, based on NetAccess
achieving certain defined year 2000 earnings levels. NetAccess has over
13,500 dial-up internet subscribers throughout the region, provides
digital subscriber line (DSL) service to over 200 DSL customers and
provides web hosting, internet design services, private network
connectivity via frame relay, ISDN, and wide area ethernet services.
In May 1999, the Company acquired 4,500 internet subscribers from
Charleston, WV based NewWave Communications for $1.2 million. Similarly,
in March 1999, the Company acquired 1,400 internet subscribers from
Charleston, WV based WVInter.net for a purchase price of $0.3 million.
9
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CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
(7) Income taxes
The Company anticipates an effective tax rate for fiscal year 1999 of
29% versus the effective rate for 1998 of 40%. Rehabilitation tax
credits and job employment credits account for 7% of the 11% decrease.
The remaining 4% relates to favorable tax treatment of a charitable
contribution of an appreciated asset. Other reconciling items from the
statutory rate of 38% are consistent with those of the prior year.
10
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Three Months Ended June 30, 1999 and 1998
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 services (PCS), paging, wireless and
wireline cable television, directory assistance, competitive access, local
internet access, and alarm monitoring and installation.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment
and geographic expansion. In addition, the Company has leveraged its existing
switching platform and fiber optic network by introducing new services such as
long distance directory assistance, long distance services to local telephone
customers and surrounding communities, cable television, local internet access,
and various enhanced services such as Call Waiting and Caller Identification.
These activities continue to contribute to growth in the Company's operating
revenues. In addition to these activities, the Company has commenced offering,
in selected markets within Virginia, a competitive local telephone service, a
high-speed wireless cable and digital subscriber line (DSL) internet service and
a wireless local telephone service. Further, the Company will be expanding its
operations base and its service offerings in Virginia and West Virginia
throughout 1999 and 2000. Finally, directory assistance call volume continues to
decline which significantly impacts the Company's operating results as further
discussed in the results of operations section below.
As a result of the Company's increasing focus on and growth in wireless
communications and other competitive communications related businesses, a
significant portion of the Company's operating revenues and operating cash flows
(operating cash flow is defined as operating income before depreciation and
amortization) are being generated by businesses other than the mature telephone
operations. Accordingly, management believes operating cash flow is a meaningful
indicator of the Company's performance. Operating cash flows is commonly used in
the wireless communications industry and by financial analysts and others who
follow the industry to measure operating performance. Operating cash flows
should not be construed as an alternative to operating income or cash flows from
operating activities (both as determined in accordance with generally accepted
accounting principles) or as a measure of liquidity.
Through the Virginia PCS Alliance, L.C. ("VA Alliance") and West Virginia PCS
Alliance, L.C. ("WV Alliance"), and other PCS joint ventures, the Company has
acquired radio spectrum licenses for personal communications services ("PCS")
for markets with an aggregate population of five million people. These licenses
have enabled the Company, as managing member of both Alliances, to deploy PCS
services 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 services in the Charleston and Huntington, WV
corridor in the fourth quarter of 1998. The WV Alliance commenced offering PCS
services in the Clarksburg, Fairmont and Morgantown corridor in the second
quarter of 1999. Throughout 1999, management expects continued growth in revenue
from its current consolidated operations. However, the Company is experiencing
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. This is expected to continue. 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, expansions 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
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
herein are as of the date hereof and the Company undertakes no obligation to
revise or update such statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had net income of $1.3 million, or $0.10 per share, for the second
quarter 1999, a decrease of 48% from net income of $2.5 million, or $0.19 per
share for the second quarter 1998. Net income for the second quarter of 1999
included a $2.9 million loss ($1.8 million loss after-tax), up from $1.3 million
($0.8 million loss after-tax) in the second quarter of 1998, relating to the
Company's share of losses from our PCS investments which provides Personal
Communications Services (PCS) throughout the Company's Virginia and West
Virginia marketplace. Net income for six months ended June 30, 1999 and 1998 was
$2.6 million and $4.9 million, respectively. The Company's share of PCS losses
for the six months ended June 30, 1999 and 1998 were $5.3 million ($3.3 million
loss after-tax) and $2.2 million ($1.4 million loss after-tax), respectively.
Excluding these losses and the writedown taken on our investment in American
Telecasting, Inc. of $0.3 million ($0.2 million after-tax) during the first
quarter of 1998, net income for the second quarter of 1999 and 1998 was $3.1
million and $3.3 million, respectively. Additionally, net income excluding these
items for the six months ended June 30, 1999 and 1998 was $5.9 million and $6.5
million, respectively.
Operating revenues were $17.9 million for the three months ended June 30, 1999
which is a 8% increase over operating revenues of $16.6 million for the three
months ended June 30, 1998 and a $0.9 million increase over the first quarter
1999. Operating revenues for the six months ended June 30, 1999 and 1998 were
$34.9 million and $32.8 million, respectively. Operating cash flows for the
three and six months ended June 30, 1999 were $7.9 million, a 4% decrease over
second quarter 1998 operating cash flows of $8.2 million and $15.4 million, a 5%
decrease over the six months ended 1998 of $16.2 million. Operating income for
the three months ended June 30, 1999 was $4.9 million, a 14% decrease from
second quarter 1998 operating income of $5.7 million. Operating income for the
six months ended June 30, 1999 was $9.6 million versus $11.3 million for the
corresponding prior year period.
These results reflect customer growth with our wireless products of 22%,
customer growth of 153% with our internet products through acquisitions and
internal growth in existing and new geographic markets, and the addition of
approximately 2,300 new CLEC customers. Profit margins were significantly
11
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
impacted by a decline in year over year directory assistance call volume, by the
start-up costs associated with new products and new market introductions, and by
increased phone subsidies due to an increase in the wireless customer growth
rate.
OPERATING REVENUES
The total operating revenue increase of $1.3 million and $2.1 million for the
three and six months ended June 30, 1999 versus 1998 were driven primarily by an
increase in the network business (supported from both CLEC and internet customer
growth noted above), by wireless customer growth and by revenues from other
communication services for asset and service fees charged to related parties.
The network growth was primarily due to a $0.6 million increase in CLEC revenue
and $0.5 million increase in internet revenue for the six months ended June 30,
1999 versus 1998. Cellular's total subscriber revenues grew $1.2 million for the
six months ended June 30, 1999 versus the comparable prior year period primarily
from access and airtime. This was offset to a large extent by the related phone
subsidy increases of $0.8 million for the same periods. In relation to gross
sales, phone subsidies in the current year exceeded those of the prior year due
to a higher percentage of cellular sales coming from the higher subsidies on
digital PCS phones versus analog cellular phones. Through the second quarter
1999, directory assistance operating revenues declined $0.7 million or 10% due
to an 18% reduction in call volume partially offset by higher prices associated
with the national directory service product.
WIRELINE COMMUNICATIONS
Revenues from the Company's wireline operations, which include telephone
revenues, fiber optic network usage and wireline cable revenues, increased $0.9
million or 10% for the three months ended June 30, 1999 versus the comparable
1998 period and $1.5 million or 8% for the six months ended June 30, 1999 versus
1998. As mentioned above, network revenues, which include revenues from carrier
access, CLEC, long distance, and internet, increased $0.6 million for the second
quarter 1999 versus 1998 and $1.1 million for the six months ended June 30, 1999
versus 1998. Again, this is due to significant customer growth in internet and
CLEC through expansion to new VA and WV geographic markets and through the
internet acquisitions (see Note 6). Telephone revenues, which include local
service, access and toll services, directory advertising and calling feature
revenues were up $0.3 million or 4% for the second quarter 1999 over 1998 and
$0.4 million or 3% for the six month periods ended June 30, 1999 and 1998.
12
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
WIRELESS COMMUNICATIONS
Wireless communications is comprised of cellular, digital PCS, paging, and
voicemail (collectively referred to as wireless herein), other miscellaneous
wireless revenues and wireless cable. Revenues from these operations increased
$0.4 million or 11% for the three months ended June 30, 1999 versus 1998 and
$0.5 million or 8% for the six months ended June 30, 1999 versus the comparable
1998 period. Revenues from wireless, including access, air time, roaming
charges, paging, and voicemail represented all of the wireless communications
increase. Excluding the effect of the additional phone subsidies from a higher
customer growth rate and the change in the product sales mix to a higher
percentage of digital PCS phones, this revenue stream was up $0.8 million and
$1.3 million for the three and six months ended June 30, 1999, respectively.
DIRECTORY ASSISTANCE
Directory assistance revenue declined 8% and 10% for the three and six months
ended June 30, 1999, respectively, over that of the prior year. Over the three
and six months ended June 30, 1999, call volume declined 22% and 18%,
respectively. This was attributable to the impact of call around plans versus
traditional directory assistance traffic being handled at our two call centers
without sufficient new business to offset the continued base business decline.
The new national directory business, a service introduced in late 1998 and
further expanded in March 1999 and again in late June 1999, partially offset the
reduction in the traditional directory assistance traffic.
OTHER COMMUNICATIONS SERVICES
Other communications services revenue are derived from building and equipment
rentals charged to affiliates, sales, installation and maintenance of phone
systems and sales, installation and service of alarm monitoring systems. This
revenue stream increased $0.3 million for the second quarter 1999 versus the
second quarter of 1998 and $0.8 million for the comparable six month periods in
1999 and 1998. The Company receives rentals primarily for company owned assets
which are being used by the PCS Alliances. These revenues increased $0.5 million
in the six months ended June 30, 1999 versus 1998, primarily due to CFW owned
retail store additions and the addition of the WV headquarters facility.
OPERATING EXPENSES
Operating expenses increased $2.1 million or 20% for the three month period
ended June 30, 1999 as compared to the same period in 1998 and increased $3.8
million or 18% for the six months ended June 30, 1999 versus the 1998 comparable
period. Of these increases, approximately 65% represent a period to period
increase in the operating expenses of the network business, approximately 45% of
which relate to the WV network start-up. The other significant contributor to
the growth in network operating expenses is access and related costs of bringing
on new internet and CLEC customers. To the extent that these networking
functions can be migrated onto Company owned facilities, these costs are being
reduced with further reductions expected in the second half of 1999 and in 2000.
Another contributor to the network operating expense growth are the costs
associated with increased fiber builds and other start-up costs associated with
launching or preparing to launch internet, CLEC, and long distance in new
Virginia and West Virginia geographic markets. In addition to the network
operating expense growth, cellular operating expenses increased $0.5 million and
$0.9 million for the three and six months ended June 30, 1999, respectively,
which accounts for approximately 22% of the total operating expense growth. More
than 60% of these increases are customer operations related expenses incurred in
support of the significant customer growth. Finally, directory assistance
operating expenses increased $0.2 million for the six months ending June 30,
1999 versus 1998, despite lower call volumes, due to training and development
costs incurred in taking on a new national database contract and start-up costs
associated with the new call center being opened in Winchester in the second
quarter of 1999 and the commencement of new national directory contracts.
MAINTENANCE AND SUPPORT EXPENSE
Maintenance and support expense, which includes property and equipment
maintenance, general engineering and general administration of plant operations,
increased $1.0 million or 37% and $1.5 million or 29% for the three and six
months ended June 30, 1999 versus the comparable periods of the prior year. Of
the total increase, approximately 80% is the result of network maintenance and
13
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
support expense growth. This is due primarily to increased access and other
related costs in support of the revenue growth coupled with start-up costs
incurred relative to launching CLEC and internet services in new geographic
markets and expanding our internet service offerings.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $0.5 million or 19% and $0.8
million or 16% for the three and six months ended June 30, 1999 versus the
comparable period in 1998. This is due to a period to period increase in the
property and equipment asset base of approximately 17%, from $138 million as of
June 30, 1998 to $162 million as of June 30, 1999. Depreciation as a percent of
assets decreased nominally, from 3.4% to 3.3% for the respective periods. The
property and equipment increase was primarily due to digital switching hardware
and other network infrastructure assets and, to a lesser extent, additions
supporting back office functions.
CUSTOMER OPERATIONS EXPENSE
Customer operations expense, which includes marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services, and directory assistance services increased $1.0 million or
26% and $1.7 million or 21% for the three and six month periods ended June 30,
1999 versus the same periods of the prior year. Cellular and network accounted
for $1.1 million of the six month increase and directory assistance accounted
for $0.4 million of the six month increase. These increases are due largely to
growth of support functions, primarily customer care, needed to support customer
and revenue growth. As mentioned above, directory assistance incurred start-up
costs associated with the new national database services and the new Winchester,
VA call center.
CORPORATE OPERATIONS EXPENSE
Corporate operations expense, which includes taxes other than income, executive,
planning, accounting, external relations, legal, purchasing, information
management, human resources and other general and administrative expenses
decreased $0.3 million for the three month period ended June 30, 1999 versus the
three month period ended June 30, 1998. This decrease is reflective of favorable
claims experience with respect to medical insurance costs and a reduction in
earnings performance based incentive compensation.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA & WV PCS Alliance was $2.9 million and
$5.3 million for the three and six months ended June 30, 1999, respectively,
versus 1998 losses for the comparable periods of $1.3 million and $2.2 million,
respectively.
The Company has a 21% common ownership interest in the VA Alliance. The
Company's share of losses from the VA Alliance was $1.5 million and $2.9 million
for the three and six months ended June 30, 1999, respectively. This compares to
losses of $1.2 million and $2.1 million for the comparable periods of the prior
year. The Company expects the VA Alliance losses to level off and begin
decreasing in 2000 as it reaches critical mass in customers and revenues
necessary to support the capital and operational investments. The VA Alliance
ended the second quarter of 1999 with 21,100 customers, an 18,000 customer
increase over the prior year second quarter.
The Company has a 45% common ownership interest in the WV Alliance which
commenced operations in the latter part of the third quarter of 1998. The
Company experienced losses from the WV Alliance in the three and six months
ended June 30, 1999 of $1.4 million and $2.4 million, respectively. This
compares to losses of $0.1 million and $0.1 million for the comparable periods
of the prior year. Loss from the WV Alliance are expected to increase as it
builds the customer base, recognizes start up related losses from the operation
of the northern corridor of West Virginia which commenced providing services in
the second quarter of 1999, and continues its network build-out throughout its
license area. The WV Alliance ended the second quarter of 1999 with 3,100
customers, a 2,300 customer increase since the end of 1998.
14
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
INCOME TAXES
Income taxes decreased $1.3 million and $2.2 million for the three and six
months ended June 30, 1999 as compared to the same periods in 1998. This is due
to the lower pre-tax income for the first six months of 1999 versus 1998 and due
to the rehabilitation tax credits and job employment credits of $0.3 million
which were recognized in the first six months of 1999. The effective tax rate
for the first six months of 1999 excluding the tax credits would approximate the
tax rate for 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 30, 1999, net cash provided by operating activities
was $13.0 million. Principal changes in operating assets and liabilities were as
follows: Accounts receivable increased $1.9 million due to the timing of
receipts from a significant customer and the overall sales growth. Materials and
supplies increased $0.9 million which relates the increases in digital handset
inventories necessary to support the sales growth.
The Company's investing activities for the six months ended June 30, 1999
included $18.2 million for the purchase of property and equipment, $6.1 million
of which related to significant capital additions relating to network, internet,
and switching equipment and network fiber builds, $3.2 million which represents
the Winchester directory assistance center building and related assets, $2.7 for
computer hardware and software, $2.3 million which relates to major CLEC
co-location equipment and other related equipment, and $0.7 million related to
furniture and fixtures. These investments were necessary for service expansion
and enhancements. The Company also invested an additional $3.9 million in the
Alliances and received repayments from the Alliances against affiliate advances
totaling $2.8 million. Additionally, the Company purchased internet subscribers
and made an investment in an internet company totaling $2.1 million (see Note
6), acquired PCS radio spectrum licenses for $0.9 million and has funds on
deposit with the FCC of $0.1 million to enable the Company to participate in the
Local Multipoint Distribution Service (LMDS) re-auction.
Net cash provided by financing activities for the six months ended June 30, 1999
aggregated $9.8 million which primarily represents payment of dividends on
outstanding capital stock of $3.0 million, payment on senior notes of $3.6
million and the additional borrowing under lines of credit of $16.3 million.
Funds required for dividends, capital expenditures, interest and debt principal
payments, and partnership contributions are expected to be provided from
internal sources and borrowings drawn against available credit facilities. The
Company has entered into certain guarantee agreements relating to its investment
in the Alliances (Note 5). Management anticipates that funds required for
additional capital contributions to the Alliances 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
Alliances, 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 95% 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 late stage of implementing such a plan. Both the second and
third components were further broken down by category of system (network
systems, information technology systems and other supporting systems).
Significant focal areas are the Company's network/switching related equipment
and the corporate billing, customer provisioning and accounting systems. The
15
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
final components are testing and contingency planning. Testing, where feasible,
will span both the internal systems and systems interface with third parties.
Contingency planning is necessary in the event that conversion efforts, customer
compliance or any other conditions arise that prevent planned critical
application upgrades. The entire year 2000 project has a targeted completion
date of September 30, 1999. Completion of this project includes planned testing
of each major exposure area to ensure compliance. The most significant
uncompleted portion of this project relates to the finalization of the billing
system conversion. This conversion is being done primarily to integrate the
Company's separate billing systems, create consolidated service billing and
enhance the technical service systems. The Company does not anticipate a problem
completing this project prior to September 30, 1999. No significant plan changes
are anticipated. However, should the implementation of any contingency plan be
necessary, the project's completion date and cost could be effected.
Based on it's findings and assessment to date, the Company has performed certain
planned telephone switching software upgrades and computer software and system
upgrades, which were 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 through
project completion.
As mentioned above, the Company expects its year 2000 program to be completed by
the end of the third quarter of 1999. It should be noted that the Company plans
to devote all resources required to resolve any significant year 2000 issues.
However, if the planned modifications and upgrades are not made, or are not
completed on a timely basis, and 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.
16
<PAGE>
CFW COMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
At the regular Annual Meeting of the Shareholders held April 27, 1999,
directors J.S. Quarforth and J.B. Mitchell, being the same as the
nominees in the proxy solicitation, were elected.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
VOTES FOR VS. TOTAL SHARES
NOMINEE FOR AGAINST OUTSTANDING
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
J.S. Quarforth 10,605,596 200,286 81.5%
- -------------------------------------------------------------------------------------------------------------------------
J.B. Mitchell 10,597,344 208,538 81.4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following continued in their capacity as directors: W.W. Gibbs,
C.W. McNeely, J.N. Neff, C.A. Rosberg, and R.S. Yeago. C.P. Barger's term
expired April 27, 1999 and P.H. Arnold was appointed to the board of directors
effective May 1, 1999 with a term expiring in 2000.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K - No reports on
Form 8-K have been filed during the
quarter ended June 30, 1999
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFW COMMUNICATIONS COMPANY
August 16, 1999
-------------------------------------------------------
J. S. Quarforth, Chairman and Chief Executive Officer
August 16, 1999
-------------------------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer, and Secretary
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFW COMMUNICATIONS COMPANY
August 16, 1999 s/ J. S. Quarforth
---------------------------------------------------------
J. S. Quarforth, Chairman and Chief Executive Officer
August 16, 1999 s/ M. B. Moneymaker
---------------------------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer, and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 440,884
<SECURITIES> 0
<RECEIVABLES> 16,996,142
<ALLOWANCES> 0
<INVENTORY> 3,078,002
<CURRENT-ASSETS> 21,665,785
<PP&E> 171,925,251
<DEPRECIATION> 56,062,407
<TOTAL-ASSETS> 176,757,464
<CURRENT-LIABILITIES> 16,220,351
<BONDS> 32,426,982
0
0
<COMMON> 43,679,395
<OTHER-SE> 49,523,678
<TOTAL-LIABILITY-AND-EQUITY> 176,757,464
<SALES> 0
<TOTAL-REVENUES> 34,906,899
<CGS> 0
<TOTAL-COSTS> 25,296,398
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667,470
<INCOME-PRETAX> 3,945,548
<INCOME-TAX> 1,092,156
<INCOME-CONTINUING> 2,853,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,634,834
<EPS-BASIC> 0.202
<EPS-DILUTED> 0.201
</TABLE>
