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, 1999
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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
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CFW COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
Virginia 54-1443350
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(State or other jurisdiction of (I. R. S. employer
incorporation or organization) identification number)
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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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
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(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
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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 28, 2000; $512,858,952. (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 28, 2000.)
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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, 2000 13,062,252 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, 1999 -
PARTS I AND II
--- Proxy Statement for 1999 Annual Meeting of Shareholders - PARTS I
AND III
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
PART I
Item 1. BUSINESS
CFW Communications Company (CFW or the Company) is an
integrated communications provider. The Company provides a
broad range of products and services to business and
residential customers in Virginia, West Virginia, Kentucky
and Tennessee. These communications products and services
include digital personal communications services (PCS),
dial-up Internet access, high-speed data services such as
Digital Subscriber Line (DSL) and dedicated service, local
telephone, competitive local telephone services (CLEC) to
businesses, long distance, analog cellular, paging,
wireless and wireline cable television, directory
assistance, competitive access, and alarm monitoring
services.
The Company's strategy is to be a regional, integrated
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 providing several services which utilize these
assets such as long distance directory assistance, long
distance services, 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 CLEC to businesses and DSL Internet service in
eight markets within Virginia and West Virginia. The
Company will further expand its operations base and its
service offerings in Virginia and West Virginia in 2000.
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
37,900 access lines in these service territories. The
Company is a certified local exchange carrier in Virginia,
West Virginia and Tennessee and, with interconnection
agreements in place with three incumbent local telephone
providers (Bell Atlantic, GTE and Sprint), the Company
commenced providing competitive local telephone services
to businesses in Charlottesville, Harrisonburg and
Staunton, Virginia in late 1998. In late 1999, the Company
expanded this service offering to Lexington, Lynchburg and
Winchester, Virginia and Huntington and Charleston, West
Virginia.
In addition to its local telephone operations, the Company
owns and operates over 500 miles of fiber optic cable in
western and central Virginia. This fiber is connected to
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. Additionally, ValleyNet's fiber
network is connected to Carolina FiberNet and, in 1998,
the ValleyNet network was expanded to connect to the AEP
Communications network. This contiguous network serves ten
states and represents 5,000 miles of fiber cable. CFW also
leases capacity on this network to long distance carriers
and provides private network facilities and local Internet
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<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
access. Continued expansion and enhancement of the network
infrastructure will facilitate the Company's ability to
further control its network operating costs in its CLEC,
Internet, and PCS businesses in an expanding region. In
March 2000, the company exchanged excess fiber capacity in
its fiber network in Virginia for an additional 261 miles
of fiber optic cable that extends its fiber network from
Roanoke, Virginia to Charleston, Beckley and Bluefield,
West Virginia. In addition, in the second quarter of 2000,
the Company anticipates completion of an additional 500
miles of fiber optic cable interconnecting the cities of
Lynchburg, Winchester, Danville and Martinsville,
Virginia.
The Company's Internet business services nearly 45,200
customers in 50 markets in Virginia, West Virginia,
Tennessee and North Carolina. This expansion has occurred
through acquisitions and internal growth. The Company had
two primary acquisitions in 1999. In August, the Company
acquired NetAccess, Inc. (Net Access) for approximately
$6.0 million. This acquisition added 13,500 subscribers in
18 markets. In October, the Company acquired substantially
all of the assets of Cornerstone Networks, Inc.
(Cornerstone) for $4.5 million and formed CFW Cornerstone,
Inc. (CFW Cornerstone). This acquisition added 9,000
subscribers in 4 markets. The Company acquired assets of
three other Internet Service Providers (ISP) for a total
of $1.9 million. These acquisitions increased the
Company's Internet customers by 6,600 subscribers. See
Note 6 to the Company's Consolidated Financial Statements
as found on page 27 of the Annual Report of CFW to its
Shareholders for the year ended December 31, 1999 which is
incorporated herein by reference.
The Company provides wireline cable services to 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 serving a 1.6 million populated area in central and
western Virginia which commenced providing service in late
1997. In addition to the interest in the VA Alliance, the
Company also 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
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CFW COMMUNICATIONS COMPANY FORM 10-K
Virginia and eastern Kentucky, southwestern Virginia and
eastern Ohio. WV Alliance commenced providing PCS services
in late 1998. Finally, the Company has controlling
interests in additional PCS licenses covering an
additional 1.8 million populated area. The total aggregate
population covered by all PCS licenses owned by the
Company is approximately 5.4 million. Additional
information regarding these PCS investments is included in
Note 3 to the Company's Consolidated Financial Statements
as found on page 25 of the Annual Report of CFW to its
Shareholders for the year ended December 31, 1999 which 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 11,100 customers. The
Company provides high-speed Internet service in the
Charlottesville market utilizing the wireless cable
spectrum.
CFW provides third-party operator-based directory
information services to customers of several
communications companies as well as to other business
customers. The Company currently handles more than 180,000
requests per average business day and provides employment
for approximately 400 directory assistance personnel. The
Company's largest directory assistance customer is AT&T
which accounts for 86% of total directory assistance
revenues, down from 94% in the prior year. A new
multi-year contract with AT&T commenced in January 2000.
During 1998, the Company invested in a national database
provider and, in late 1998, began offering national
directory assistance services. Prior to June 1999, the
Company had two operational calling centers dedicated to
these operations. During 1998 the Company purchased a
historically significant building in downtown Winchester,
Virginia which was renovated into a third calling center
and opened in June 1999. This additional center can
accommodate approximately 110 directory assistance
operator personnel. This facility provides additional
capacity and can be used to provide directory assistance
and call completion for other telecommunication companies.
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:
1999 1998 1997
---- ---- ----
Wireline communications 59.8% 56.4% 58.4%
Wireless communications 18.4% 19.8% 19.9%
Directory assistance 16.4% 19.4% 17.9%
Other communications services 5.4% 4.4% 3.8%
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.
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<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 competition 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
competitive local exchange services in eleven counties and
ten cities in Virginia. In 1999, this certification was
extended to include the entire Commonwealth of Virginia.
The Company competes with other local telephone companies.
With respect to its carrier services business, competition
may occur in the future in the event service providers
build network facilities. In addition to CLEC and carrier
services, CFW Network Inc. is also an Internet service
provider (ISP) in 28 markets in Virginia.
As mentioned above, the Company acquired Net Access and
acquired substantially all of the assets of Cornerstone,
both of which provide dial-up and dedicated Internet
access, and high-speed access (through DSL and ISDN
technologies). In addition to being an ISP, Net Access
also operates as a CLEC through its wholly-owned
subsidiary, NA Communications, Inc. NA Communications,
Inc. is certified in certain parts of Southern Virginia
and Tennessee.
Through its wholly-owned subsidiaries providing Internet
services, the Company is an ISP in 50 markets throughout
Virginia, West Virginia and parts of Tennessee and North
Carolina.
CFW Cable of Virginia Inc., a wholly-owned subsidiary,
provides cable television 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 compete with
the Company's wireline cable system.
CFW Wireless Inc. (CFW Wireless), 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. In 1998, the Company initiated filings with
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<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
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 and allows CFW Wireless to
provide CLEC services throughout the entire state.
Additionally, CFW Wireless obtained certification to
provide interexchange telecommunications resale services.
This certification allows the Company to provide long
distance services in West Virginia. Finally, CFW Wireless
is an ISP in West Virginia, servicing 6,000 subscribers.
The VA Alliance offers PCS, a 100% digital wireless
technology, throughout central and western Virginia. The
WV Alliance commenced providing PCS services in 1998 in
Charleston and Huntington, West Virginia and their
surrounding communities and, in the second quarter of
1999, expanded into the northern corridor, which includes
the cities of Clarksburg, Fairmont, and Morgantown, West
Virginia. 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 holds FCC
licenses and lease arrangements with FCC licensees to
provide wireless cable service in the Lynchburg and
Winchester, Virginia markets and the Martinsburg, West
Virginia market, in addition to the Shenandoah Valley,
Charlottesville, and Richmond, Virginia markets which the
company currently serves. Conventional cable television
service and over-the-air-broadcasting, direct broadcast
satellite service and other satellite-based services
compete with the Company's wireless cable television
operations. Acquisitions of MMDS spectrum by Sprint Corp.
and MCI WorldCom are expected to accelerate development of
digital equipment for high-speed digital data, and
possibly voice, applications. Such high-speed applications
are expected to add further competition.
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 23 through 25 in the Annual Report of CFW
Communications Company to its Shareholders for the year
ended December 31, 1999.
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 Virginia State
Corporation Commission to provide local telephone services
throughout Virginia. Additionally, the Company is
certified as a CLEC in West Virginia and Tennessee.
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, 1999, 1998 and
7
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
1997, AT&T accounted for 20%, 28% and 34%, 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 1,062 regular full-time and part-time
persons.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The Company desires to take advantage of the "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 2000; 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.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
Name Office Age
----------------------------- -------------------------------------------------------- --------
<S> <C> <C>
J. W. Brownlee Vice President- Virginia Operations 59
W. C. Catlett Vice President- Strategy and Business Development 40
D. E. Lowe President- West Virginia Operations 58
D. R. Maccarelli President- Virginia Operations 47
M. B. Moneymaker Vice President and Chief Financial Officer, Treasurer 42
and Secretary
D. M. Persing Senior Vice President 48
J. S. Quarforth Chairman of the Board and Chief Executive Officer 45
C. A. Rosberg President and Chief Operating Officer 47
</TABLE>
Information for Mr. Quarforth and Mr. Rosberg is included
under the heading "Election of Directors" in the Proxy
8
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
Statement of the registrant for its 1999 Annual Meeting of
Shareholders which is incorporated herein by reference.
Mr. Brownlee became Vice President- Virginia Operations in
1999 after serving as Vice President and Chief Operating
Officer - Wireline since January 1997. From January 1989
to December 1996, he served as Vice President - Telephone
Operations. Previously he served as Outside Plant
Engineering and Construction Manager from October 1978
until January 1989.
Mr. Catlett became Vice President - Strategy and Business
Development in January 1997 after serving as Director of
Business Development since January 1994. Previously, he
served as Planning and Regulatory Manager from April 1992
until January 1994 and Revenue Requirements Manager from
May 1990 until April 1992.
Mr. Lowe became President of West Virginia operations in
January 1998. Previously, he was employed by Charles Ryan
Associates, a public relations and advertising firm, from
January 1997 until December 1997. From August 1995 until
December 1996 he was self-employed as an independent
consultant. During a period of this time, he served as
President of Glade Springs LLC, a recreational resort and
residential development company. From 1963 through August
1995, Mr. Lowe was employed by Bell Atlantic, 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 President of Virginia Operations in
July 1999. From January 1994 to June 1999 he served as
Senior Vice President. From January 1993 to December 1993,
he served as Vice President - Network Services. From June
1974 to December 1992 he held numerous leadership
positions with Bell Atlantic. These positions encompassed
operations, engineering, regulatory and business
development.
Mr. Moneymaker became Vice President and Chief Financial
Officer, Treasurer and Secretary in January 1999. From
October 1995 to December 1998 he served as Vice President
of Finance. Previously, he was a Senior Manager for Ernst
and Young from October 1989 until October 1995.
Ms. Persing became Senior Vice President in January 1999.
From May 1998 to December 1998 she served as Vice
President- Human Resources. 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.
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<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. In 1998, the Company acquired a
33,000 square foot building located in Winchester,
Virginia. Approximately 17,500 square feet has been
renovated and is being used as our third directory
assistance call center. The remaining square footage,
which has not been renovated, is available for directory
assistance and other expansion needs.
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, 1999.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed in the NASDAQ
National Market. The number of registered shareholders
totaled 2,977 as of December 31, 1999, a decrease of 21
since December 31, 1998. The range of stock prices for the
two most recent fiscal years is included in a table under
the heading "Quarterly Review" on Page 38 of the Annual
Report of CFW Communications Company to its shareholders
for the year ended December 31, 1999 and is incorporated
herein by reference. The regular cash dividend paid for
each quarter of 1999 and 1998 was $0.11475 and $0.10875,
respectively, totaling $0.459 and $0.435 for the
respective years.
Item 6. SELECTED FINANCIAL DATA
The information included under the heading "Selected
Financial Data and Five Year Growth Comparison" on Page 39
of the Annual Report of CFW Communications Company to its
Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
10
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis" found on Pages
33 through 37 of the Annual Report of CFW Communications
Company to its Shareholders for the year ended December
31, 1999 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 26 and 27 of the
Annual Report of CFW to its Shareholders for the year
ended December 31, 1999 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, 1999 as follows:
Financial statements and Independent Auditor's Report
found on Pages 16 through 32.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the heading "Election of
Directors" in the definitive Proxy Statement of the
registrant for its 1999 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information included under the heading "Summary
Compensation Tables" in the definitive Proxy Statement of
the registrant for its 2000 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 2000 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 2000 Annual
Meeting of Shareholders is incorporated herein by
reference.
11
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CFW COMMUNICATIONS COMPANY FORM 10-K
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The following financial statements of CFW Communications Company
are incorporated by reference in Part II, Item 8 of this FORM
10-K:
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998, and 1997.
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
Independent Auditor's Report.
2. Schedules
Financial information of subsidiaries not consolidated and 50
percent or less owned entities.
(a) The following financial statements of Virginia PCS
Alliances, L.C. are incorporated as Exhibit 99 of this
FORM 10-K:
Balance Sheets at December 31, 1999 and 1998.
Statements of Operations for the years ended December
31, 1999 and 1998.
Statements of Cash Flows for the years ended December
31, 1999 and 1998.
Statements of Members' Equity (deficit) for the years
ended December 31, 1999 and 1998.
Notes to Financial Statements.
Independent Auditor's Report.
(b) The following financial statements of West Virginia PCS
Alliances, L.C. are incorporated as Exhibit 99 of this
FORM 10-K:
Balance Sheets at December 31, 1999 and 1998.
Statements of Operations for the years ended December
31, 1999 and 1998.
Statements of Cash Flows for the years ended December
31, 1999 and 1998.
Statements of Members' Equity (deficit) for the years
ended December 31, 1999 and 1998.
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CFW COMMUNICATIONS COMPANY FORM 10-K
Notes to Financial Statements.
Independent Auditor's Report.
3. Exhibits
(3.1) Articles of Incorporation are incorporated herein by
reference to Form 10-K, Exhibit 3, of CFW Communications
Company for the year ended December 31, 1995.
(3.1.1) Amendment to the Articles of Incorporation is
incorporated by reference to Form 10-K, Exhibit 3, of
CFW Communications Company for the year ended December
31, 1997.
(3.2) Amended and Restated Bylaws of CFW Communications
Company are filed herewith.
(4) Rights Agreement dated as of February 26, 2000 is
incorporated herein by reference to the Form 8-A,
Exhibit 4 dated February 29, 2000.
(10.1) 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.*
(10.2) Form of Letter Amending the 1997 Stock Compensation Plan
of CFW Communications Company is filed herewith.
(10.3) Amendment to the Executive Supplemental Retirement Plan
of CFW Communications Company is filed herewith.
(10.4) Form of Management Continuity Agreement of CFW
Communications Company is filed herewith.
(13) Annual Report of CFW Communications Company to its
shareholders for the year ended December 31, 1999 (See
Note 1).
(21) Subsidiaries of the registrant.
(23) Consent of McGladrey & Pullen, LLP.
(27) Financial Data Schedule for the year ended December 31,
1999.
(99) Financial Statements of Virginia PCS Alliances, L.C. and
for West Virginia PCS Alliances, L.C. for the year ended
December 31, 1999.
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.
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CFW COMMUNICATIONS COMPANY FORM 10-K
(b) Reports on Form 8-K.
There were no reports on Form 8-K for the three months ended
December 31, 1999.
14
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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, 2000
By s/ J. S. Quarforth
-------------------------
J. S. Quarforth, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Chairman and
s/ J. S. Quarforth Chief Executive Officer,
- --------------------------- and Director March 30, 2000
J. S. Quarforth
President,
s/ C. A. Rosberg Chief Operating Officer,
- --------------------------- and Director March 30, 2000
C. A. Rosberg
s/ P. H. Arnold Director March 30, 2000
- ---------------------------
P. H. Arnold
s/ W. W. Gibbs, V Director March 30, 2000
- ---------------------------
W. W. Gibbs, V
s/ J. B. Mitchell, Sr. Director March 30, 2000
- ---------------------------
J. B. Mitchell, Sr.
s/ C. W. McNeely, III Director March 30, 2000
- ---------------------------
C. W. McNeely, III
s/ J. N. Neff Director March 30, 2000
- ---------------------------
J. N. Neff
s/ R. S. Yeago, Jr. Director March 30, 2000
- ---------------------------
R. S. Yeago, Jr.
Vice President and
s/ M. B. Moneymaker Chief Financial Officer,
- ----------------------- Treasurer and Secretary March 30, 2000
M. B. Moneymaker
15
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
BY-LAWS
OF
CFW COMMUNICATIONS COMPANY
Amended and Restated as of December 13, 1999
ARTICLE 1
MEETINGS OF SHAREHOLDERS
1.1 Places of Meetings. All meetings of the shareholders shall be held
at such place, either within or without the State of Virginia, as from time to
time may be fixed by the Board of Directors.
1.2 Annual Meetings. The 1988 annual meeting of the shareholders shall
be held on a date to be determined by the initial Directors. Thereafter, each
annual meeting of the shareholders, for the election of Directors and
transaction of such other business as may come before the meeting, shall be held
in each year on the fourth Tuesday in April, at 10 a.m., if that day is not a
legal holiday, or such other date and time as designated by the Board of
Directors. If that day is a legal holiday, the annual meeting shall be held on
the next succeeding day not a legal holiday.
1.3 Special Meetings. A special meeting of the shareholders for any
purpose or purposes may be called at any time by the Chairman of the Board or by
a majority of the Board of Directors. At a special meeting no business shall be
transacted and no corporate action shall be taken other than that stated in the
notice of the meeting.
1.4 Notice of Meetings. Written or printed notice stating the place,
day and hour of every meeting of the shareholders and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
mailed not less than ten nor more than sixty days before the date of the meeting
to each shareholder of record entitled to vote at such meeting, at his address
which appears in the share transfer books of the Corporation. Such further
notice shall be given as may be required by law, but meetings may be held
without notice if all the shareholders entitled to vote at the meeting are
present in person or by proxy or if notice is waived in writing by those not
present, either before or after the meeting.
1.5 Quorum. Any number of shareholders together holding at least a
majority of the outstanding shares of capital stock entitled to vote with
respect to the business to be transacted, who shall be present in person or
represented by proxy at any meeting duly called, shall constitute a quorum for
the transaction of business. If less than a quorum shall be in attendance at the
time for which a meeting shall have been called, the meeting may be adjourned
from time to time by a majority of the shareholders present or represented by
proxy without notice other than by announcement at the meeting.
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CFW COMMUNICATIONS COMPANY FORM 10-K
1.6 Voting. At any meeting of the shareholders each shareholder of a
class entitled to vote on any matter coming before the meeting shall, as to such
matter, have one vote, in person or by proxy, for each share of capital stock of
such class standing in his name on the books of the Corporation on the date, not
more than seventy days prior to such meeting, fixed by the Board of Directors as
the record date for the purpose of determining shareholders entitled to vote.
Every proxy shall be in writing, dated and signed by the shareholder entitled to
vote or his duly authorized attorney-in-fact.
1.7 Conduct of Meetings. At each meeting of the stockholders, the
Chairman of the Board shall act as chairman and preside. In absence, the
Chairman of the Board may designate another officer of the Corporation who need
not be a Director, or a Director, to preside. The Secretary of the Corporation
or an Assistant Secretary, or in their absence, a person whom the chairman of
such meeting shall appoint, shall act as secretary of such meeting.
At any meeting of stockholders of the Corporation, only that business
that is properly brought before the meeting may be presented to and acted upon
by stockholders. To be properly brought before the meeting, business must be
brought (a) by or at the direction of the Board of Directors or (b) by a
stockholder who has given written notice of business he expects to bring before
the meeting to the Secretary of the Corporation not less than 60 days prior to
the meeting. If mailed, such notice shall be sent by certified mail, return
receipt requested, and shall be deemed to have been given when received by the
Secretary of the Corporation. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the meeting (a)
a brief description of the business to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation's stock
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. No business shall be conducted at a meeting of
stockholders except in accordance with the procedures set forth in this Section
1.7. The chairman of a meeting of stockholders shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 1.7, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
Any nomination for Director made by a stockholder must be made in
writing to the Secretary of the Corporation not less than 60 days prior to the
meeting of stockholders at which Directors are to be elected. If mailed, such
notice shall be sent by certified mail, return receipt requested, and shall be
deemed to have been given when received by the Secretary of the Corporation. A
stockholder's nomination for Director shall set forth (a) the name and business
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CFW COMMUNICATIONS COMPANY FORM 10-K
address of the stockholder's nominee, (b) the fact that the nominee has
consented to his name being placed in nomination, (c) the name and address, as
they appear on the Corporation's books, of the stockholder making the
nomination, (d) the class and number of shares of the Corporation's stock
beneficially owned by the stockholder, and (e) any material interest of the
stockholder in the proposed nomination.
Notwithstanding compliance with this Section 1.7, the chairman of a
meeting of stockholders may rule out of order any business brought before the
meeting that is not a proper matter for stockholder consideration. This Section
1.7 shall not limit the right of stockholders to speak at meetings of
stockholders on matters germane to the Corporation's business, subject to any
rules for the orderly conduct of the meeting imposed by the Chairman of the
meeting. The Corporation shall not have any obligation to communicate with
stockholders regarding any business or Director nomination submitted by a
stockholder in accordance with this Section 1.7 unless otherwise required by
law.
1.8 Inspectors. An appropriate number of inspectors for any meeting of
shareholders may be appointed by the Chairman of such meeting. Inspectors so
appointed will open and close the polls, will receive and take charge of proxies
and ballots, and will decide all questions as to the qualifications of voters,
validity of proxies and ballots, and the number of votes properly cast.
ARTICLE 2
DIRECTORS
2.1 General Powers. The property, affairs and business of the
Corporation shall be managed under the direction of the Board of Directors, and,
except as otherwise expressly provided by law, the Articles of Incorporation or
these By-laws, all of the powers of the Corporation shall be vested in such
Board.
2.2 Number and Classes of Directors. The number of Directors
constituting the Board of Directors shall be nine. The Board of Directors shall
be divided into three equal classes having staggered terms of office as
specified in the Articles of Incorporation.
2.3 Election and Removal of Directors; Quorum. Directors shall be
elected at the 1988 annual meeting of shareholders to fill each of the three
classes of Directors for the terms of office specified in the Articles of
Incorporation.
Commencing with the 1989 annual meeting of shareholders, Directors
shall be elected at each annual meeting to succeed those Directors whose terms
have expired and to fill any vacancies then existing. Each director who is
re-elected or elected to succeed a Director whose term has expired shall hold
office for the term of three years as specified in the Articles of Incorporation
and until his successor is elected.
Subject to the Articles of Incorporation, any Director may be removed
from office at a meeting called expressly for that purpose by the vote of
shareholders holding more than 66-2/3% of the shares entitled to vote at an
election of Directors.
Subject to the Articles of Incorporation, any vacancy occurring in the
Board of Directors may be filled by the affirmative vote of the majority of the
remaining Directors though less than a quorum of the Board, and the term of
office of any Director so elected shall expire at the annual meeting of
shareholders at which the term of the class to which they have been elected
expires.
A majority of the number of Directors elected and serving at the time
of any meeting shall constitute a quorum for the transaction of business. The
act of a majority of Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors. Less than a quorum may adjourn any
meeting.
2.4 Meetings of Directors. An annual meeting of the Board of Directors
shall be held as soon as practicable after the adjournment of the annual meeting
of shareholders at such place as the Board may designate. Other meetings of the
Board of Directors shall be held at places within or without the State of
Virginia and at times fixed by resolution of the Board, or upon call of the
Chairman of the Board or any four of the Directors. The Secretary or officer
performing the Secretary's duties shall give not less than twenty-four hours'
notice by letter, telegraph or telephone (or in person) of all meetings of the
Board of Directors, provided that notice need not be given of the annual meeting
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CFW COMMUNICATIONS COMPANY FORM 10-K
or of regular meetings held at times and places fixed by resolution of the
Board. Meetings may be held at any time without notice if all of the Directors
are present, or if those not present waive notice in writing either before or
after the meeting. The notice of meetings of the Board need not state the
purpose of the meeting.
2.5 Compensation. By resolution of the Board, Directors may be allowed
a fee and expenses for attendance at all meetings, but nothing herein shall
preclude Directors from serving the Corporation in other capacities and
receiving compensation for such other services.
2.6 Eligibility for Services as 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.
ARTICLE 3
COMMITTEES
3.1 Standing Committees.
(a) Number. There shall be four standing Committees of the Board of
Directors which shall be comprised only of Directors. The standing committees
are as follows: Executive, Audit, Governance, and Compensation Committee.
Upon recommendation by the Chairman of the Board as to the membership
of each Committee, the Board of Directors, will consider and by resolution adopt
by a majority of the number of Directors fixed by these By-laws, shall elect the
membership of each committee, who shall serve at the pleasure of the Board.
(b) Quorum and Manner of Acting. A majority of the members of any
Committee serving at the time of any meeting thereof shall constitute a quorum
for the transaction of business at such meeting. The action of a majority of
those members present at a Committee meeting at which a quorum is present shall
constitute the act of the Committee.
(c) Conduct of Meetings. Any action required or permitted to be taken
by any Committee may be taken without a meeting if all members of the Committee
consent in writing to the adoption of a resolution authorizing the action. The
resolution and written consents of the members shall be filed with the minutes
of the proceedings of the Committee.
(d) Meetings and Minutes. Subject to the foregoing, and unless the
Board shall otherwise decide, each Committee shall fix its rules of procedure,
determine its action and fix the time and place of its meetings. Special
meetings of a Committee may be held at anytime and any place upon the call of
the Chairman of the Board, the Chairman of the Committee, or any two members of
the Committee. Each Committee shall keep minutes of all meetings which shall be
at all times available to Directors. Action taken by a Committee shall be
reported promptly to the Board of Directors but not less frequently than
quarterly.
(e) Term of Office. Members of any Committee shall be elected as above
provided and shall hold office until their successors are elected by the Board
of Directors or until such Committee is dissolved by the Board of Directors.
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CFW COMMUNICATIONS COMPANY FORM 10-K
(f) Resignation and Removal. Any member of a Committee may resign at
any time by giving written notice of his intention to do so to the Chairman of
the Board or the Secretary of the Corporation, or may be removed, with or
without cause, at any time by such vote of the Board of Directors as would
suffice for his election.
(g) Vacancies. Any vacancy occurring in a Committee resulting from any
cause whatever may be filled by a majority of the number of Directors fixed by
these By-laws.
3.2 Executive Committee.
(a) How Constituted. The Executive Committee shall consist of not less
than three Directors, including the Chairman of the Board. Except for the
Chairman of the Board, all members of the Executive Committee shall be outside
directors. An outside director shall be a non-management director free of any
material business or professional relationship with the Corporation or its
management. The Chairman of the Board shall be Chairman of the Committee. If the
Chairman of the Committee will not be present at a meeting, he or she may
designate any member of the Committee to preside at the meeting.
(b) Primary Responsibilities. When the Board of Directors is not in
session, the Executive Committee shall have all power vested in the Board of
Directors by law, by the Articles of Incorporation, or by these By-laws,
provided that the Executive Committee shall not have power to (i) approve or
recommend to shareholders action that the Virginia Stock Corporation Act
requires to be approved by shareholders; (ii) fill vacancies on the Board or on
any of its committees; (iii) amend the Articles of Incorporation pursuant to
Section 13.1-706 of the Virginia Code; (iv) adopt, amend, or repeal the By-laws;
(v) approve a plan of merger not requiring shareholder approval; (vi) authorize
or approve a distribution, except according to a general formula or method
prescribed by the Board of Directors; or (vii) authorize or approve the issuance
or sale or contract for sale of shares, or determine the designation and
relative rights, preferences, and limitations of a class or series of shares,
except that the Board of Directors may authorize a committee, or a senior
executive officer of the Corporation, to do so within limits specifically
prescribed by the Board of Directors. The Executive Committee shall report at
the next regular or special meeting of the Board of Directors all action which
the Executive Committee may have taken on behalf of the Board since the last
regular or special meeting of the Board of Directors.
3.3 Audit Committee.
(a) How Constituted. The Audit Committee shall consist of not less than
two outside Directors, as defined in Section 3.2(a) above. The Chairman of the
Committee shall be appointed by the Board of Directors. If the Chairman of the
Committee will not be present at a meeting, he or she may designate any member
of the Committee to preside at the meeting. The Chairman of the Board, who shall
not be a member of the Committee, may attend Committee meetings upon the
invitation of the Chairman of the Committee.
(b) Primary Responsibilities. The primary responsibilities of the Audit
Committee shall consist of: recommending the selection of independent
accountants and auditors; reviewing the scope of the accountant's audit and
approval of any non-audit services to be performed by the independent
accountants; and reviewing annual audits and accounting practices.
3.4 Governance Committee.
(a) How Constituted. The Governance Committee shall consist of not less
than three outside Directors, as defined in Section 3.2(a) above, and the
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CFW COMMUNICATIONS COMPANY FORM 10-K
Chairman of the Board. The Chairman of the Committee shall be appointed from
among its outside Directors by the Board of Directors. If the Chairman of the
Committee will not be present at a meeting, he or she may designate any member
of the Committee to preside at the meeting.
(b) Primary Responsibilities. The primary responsibilities of the
Governance Committee shall include: reviewing the composition of the Board of
Directors to insure that there is a balance of appropriate skills and
characteristics reflected on the Board including age, diversity and experience;
developing criteria for Director searches and making recommendations to the
Board for the addition of any new Board members after proper search and
investigation; reviewing, in consultation with the Chairman of the Board, each
Director's continuation on the Board every three years prior to their standing
for re-election; monitoring procedures for corporate decision-making; evaluating
shareholder proposals; reviewing public policy issues which affect the image of
the Corporation within the Corporation's customer service areas; recommending
actions to increase the Board's effectiveness; and reviewing annually the format
used by the Corporation's management to report to the Board. The Chairman of the
Board shall consult with the Chairman of the Governance Committee when
developing agendas for meetings of the Board of Directors and on other issues as
appropriate.
3.5 Compensation Committee.
(a) How Constituted. The Compensation Committee shall consist of not
less than three outside Directors, as defined in Section 3.2(a) above. The
Chairman shall be appointed by the Board of Directors. If the Chairman of the
Committee will not be present at a meeting, he or she may designate any member
of the Committee to preside at the meeting. The Chairman of the Board, who shall
not be a member of the Committee, may attend Committee meetings upon the
invitation of the Chairman of the Committee.
(b) Primary Responsibilities. The primary responsibilities of the
Compensation Committee shall consist of: reviewing Board compensation policies
and evaluating the compensation of the CEO and senior management based on
criteria as set forth below; evaluating annually the performance of the CEO and
reviewing senior management performance evaluations, using such criteria as
performance of the business, accomplishments of long-term strategic objectives
and management development and any other criteria the Committee deems
appropriate; reviewing and reporting to the Board the recommended compensation
of all officers of the Corporation; reviewing total compensation and benefit
designs and practices for all Corporation employees; and reviewing stock option
programs.
3.6 Other Committees.
The Board of Directors, by resolution adopted by a majority of the
number of Directors fixed by these By-laws, may establish such other standing or
special committees of the Board as it may deem advisable, consisting of not less
than two Directors; and the members, terms and authority of such committees
shall be as set forth in the resolutions establishing the same.
The Chairman of the Board may establish such other special committees
of the Board of Directors as he deems advisable, and may appoint the members of
such committees. Any such committees shall have the authority to consider,
review, advise and recommend to the Chairman of the Board with respect to such
matters as may be referred to it by the Chairman of the Board, but shall have no
authority to act for the Corporation except with the prior approval of the Board
of Directors.
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CFW COMMUNICATIONS COMPANY FORM 10-K
ARTICLE 4
OFFICERS
4.1 Election of Officers; Terms. The officers of the Corporation shall
consist of the Chairman of the Board, the President, a Secretary and a Treasurer
and one or more Market Presidents, and one or more Executive Vice Presidents and
Senior Vice Presidents, as shall be determined by the Board of Directors. Other
officers may be appointed by the Chairman of the Board. All officers shall hold
office until the next annual meeting of the Board of Directors or until their
successors are elected. Any two officers may be combined in the same person as
the Board of Directors may determine, except the President and Secretary may not
be the same person.
4.2 Removal of Officers; Vacancies. Any officer of the Corporation may
be removed summarily with or without cause, at any time, by the Board of
Directors. Vacancies may be filled by the Board of Directors.
4.3 Duties of the Chairman. The Chairman of the Board shall be the
chief executive officer of the Corporation and shall be primarily responsible
for the implementation of policies of the Board of Directors. He shall have
authority over the general management and direction of the business and
operations of the Corporation and its divisions, if any, subject only to the
ultimate authority of the Board of Directors. He shall preside at all corporate
meetings, including meetings of the stockholders, the Board of Directors and the
Executive Committee. The Chairman shall have the power to sign share
certificates, deeds, mortgages, bonds, contracts or other instruments in
connection with the business of the Corporation, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these By-laws to some other officer or agent of the Corporation
or shall be required by law otherwise to be signed or executed. In addition, he
shall perform all duties incident to the office of the Chairman of the Board and
such other duties as from time to time may be assigned to him by the Board of
Directors.
4.4 Duties of the President. The President may, if so designated by the
Board of Directors, be the chief operating officer of the Corporation. He shall
participate in the general management and direction of the business and
operations of the Corporation and its divisions, if any, subject only to the
authority of the Chairman of the Board and the Board of Directors. He shall be a
Director and, in the absence of the Chairman of the Board, the President shall
preside at all meetings of the Corporation. The President shall have the same
power to sign for the Corporation as prescribed in these By-laws for the
Chairman of the Board. In addition, he shall perform all duties incident to the
office of the President and such other duties as from time to time may be
assigned to him by the Board of Directors or the Chairman of the Board.
4.5 Duties of the Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit all monies and securities of the Corporation in
such banks and depositories as shall be designated by the Board of Directors. He
shall be responsible (i) for maintaining adequate financial accounts and records
in accordance with generally accepted accounting practices; (ii) for the
preparation of appropriate operating budgets and financial statements; (iii) for
the preparation and filing of all tax returns required by law; and (iv) for the
performance of all duties incident to the office of Treasurer and such other
duties as from time to time may be assigned to him by the President. The
Treasurer may sign and execute in the name of the Corporation share
certificates, deeds, mortgages, bonds, contracts or other instruments, except in
cases where the signing and the execution thereof shall be expressly delegated
by the Board of Directors or by these By-laws to some other officer or agent of
the Corporation or shall be required by law or otherwise to be signed or
executed.
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CFW COMMUNICATIONS COMPANY FORM 10-K
4.6 Duties of the Secretary. The Secretary shall act as secretary of
all meetings of the Board of Directors and shareholders of the Corporation. When
requested, he shall also act as secretary of the meetings of the committees of
the Board. He shall keep and preserve the minutes of all such meetings in
permanent books. He shall see that all notices required to be given by the
Corporation are duly given and served; shall have custody of the seal of the
Corporation and shall affix the seal or cause it to be affixed to all share
certificates of the Corporation and to all documents the execution of which on
behalf of the Corporation under its corporate seal is duly authorized in
accordance with law or the provisions of these By-laws; shall have custody of
all deeds, leases, contracts and other important corporate documents; shall have
charge of the books, records and papers of the Corporation relating to its
organization and management as a Corporation; shall see that all reports,
statements and other documents required by law (except tax returns) are properly
filed; and shall in general perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the President.
4.7 Powers and Duties of Other Officers. The powers and duties of all
other officers of the Corporation shall be those usually pertaining to their
respective offices, subject to the direction and control of the Board of
Directors and as otherwise provided in these Bylaws, or as prescribed by the
Chairman of the Board.
ARTICLE 5
CAPITAL STOCK
5.1 Certificates. The shares of capital stock of the Corporation shall
be evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
shares of the Corporation may be appointed by the Board of Directors and may be
required to countersign certificates representing shares of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a share certificate shall for any reason cease to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as though such person had not ceased to be
an officer of the Corporation.
5.2 Lost, Destroyed and Mutilated Certificates. Holders of the shares
of the Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of the certificate therefor, and the Board of
Directors may in its discretion cause one or more new certificates for the same
number of shares in the aggregate to be issued to such shareholder upon the
surrender of the mutilated certificate or upon satisfactory proof of such loss
or destruction, and the deposit of a bond in such form and amount and with such
surety as the Board of Directors may require.
5.3 Transfer of Shares. The shares of the Corporation shall be
transferable or assignable only on the books of the Corporation by the holder in
person or by attorney on surrender of the certificate for such shares duly
endorsed and, if sought to be transferred by attorney, accompanied by a written
power of attorney to have the same transferred on the books of the Corporation.
The Corporation will recognize, however, the exclusive right of the person
registered on its books as the owner of shares to receive dividends and to vote
as such owner.
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CFW COMMUNICATIONS COMPANY FORM 10-K
5.4 Fixing Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purpose, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notices of the meeting are mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
ARTICLE 6
MISCELLANEOUS PROVISIONS
6.1 Seal. The seal of the Corporation shall consist of two concentric
circles, between which shall be inscribed the name of the Company and in the
center shall be inserted "Seal."
6.2 Fiscal Year. The fiscal year of the Corporation shall end on the
last day of December of each year as may be fixed by the Board of Directors.
6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders
for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
6.4 Amendment of By-laws. Unless proscribed by the Articles of
Incorporation, these By-laws may be amended or altered at any meeting of the
Board of Directors by affirmative vote of a majority of the number of Directors
fixed by these By-laws. The shareholders entitled to vote in respect of the
election of Directors, however, shall have the power to rescind, amend, alter or
repeal any By-laws and to enact By-laws which, if expressly so provided, may not
be amended, altered or repealed by the Board of Directors.
6.5 Voting of Shares Held. Unless otherwise provided by resolution of
the Board of Directors or of the Executive Committee, if any, the President may
from time to time appoint an attorney or attorneys or agent or agents of the
Corporation, in the name and on behalf of the Corporation, to cast the vote
which the Corporation may be entitled to cast as a shareholder or otherwise in
any other corporation, any of whose securities may be held by the Corporation,
at meetings of the holders of the shares or other securities of such other
corporation, or to consent in writing to any action by any such other
corporation; and the President shall instruct the person or persons so appointed
as to the manner of casting such votes or giving such consent and may execute or
cause to be executed on behalf of the Corporation, and under its corporate seal
or otherwise, such written proxies, consents, waivers or other instruments as
may be necessary or proper in the premises. In lieu of such appointment the
President may himself attend any meetings of the holders of shares or other
securities of any such other corporation and there vote or exercise any or all
power of the Corporation as the holder of such shares or other securities of
such other corporation.
9
Exhibit 10.2
form of letter Amending the 1997 stock compensation plan
________ __ , 1999
[Optionee]
[Address]
Option Agreement Amendment
Dear ______________:
CFW Communications Company (the Company) recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control of the Company exists. The possibility of a change in control and the
uncertainty it may cause among management employees, may distract management
personnel to the detriment of the Company and its stockholders.
The Company's Board of Directors has determined that appropriate
steps should be taken to encourage the continued dedication of the company's
senior management, including yourself, to their assigned duties without
distraction in the face of a possible change in control of the company.
Accordingly, effective January 1, 2000, this letter amends the
option agreement or agreements by and between the Company and you dated prior to
the date hereof (the Agreement) to provide that the option will become fully
exercisable on (i) the date the Company enters into an Agreement, the
consummation of which would result in a "Change in Control"; or (ii) the date
any person (including the Company) publicly announces an intention to take or to
consider taking actions which if consummated would constitute a "Change in
Control". Notwithstanding the preceding sentence, no acceleration of the
option's exercisability shall occur if the Company determines that the
acceleration will have an adverse effect on the availability of pooling of
interest accounting. The remaining terms of your Agreement are not affected by
this letter and they remain unchanged.
For purposes of the Agreement, a "Change in Control" will result
from any of the following events:
(a) any "person," as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any Company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the owner
or "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of Company securities representing more than 30% of the
combined voting power of the then outstanding securities;
(b) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Company's board of directors (the
Board), and any new director (other than a director designated by a person who
has entered into an agreement with the Company to effect a transaction described
in clause (a), (c) or (d) hereof) whose election by the Board or nomination for
election by the Company's stockholders was approved by a vote of a majority of
the directors then still in office who either (l) were directors at the
beginning of such period or (2) were so elected or nominated with such approval,
cease for any reason to constitute at least a majority of the Board;
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other Company and such merger or
consolidation is consummated, other than (l) a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation or
(2) a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as hereinabove defined)
acquires more than 30% of the combined voting power of the Company's then
outstanding securities; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets and such liquidation
or sale of assets is consummated.
If you have any questions in this regard, please call
______________ at _______________.
Sincerely,
James S. Quarforth
President
Exhibit 10.3
AMENDMENT TO THE EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
FIRST: Article I of the Plan is amended by adding the following
definition as Section 1.04:
Change in Control means:
(i) any "person," as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than the Company, any
trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any company
owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their
ownership of stock of the Company), is or becomes the
owner or "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of
Company securities representing more than 30% of the
combined voting power of the then outstanding securities;
(ii) during any period of two consecutive years (not
including any period prior to the execution of this
Agreement), individuals who at the beginning of such
period constitute the Company's board of directors (the
"Board"), and any new director (other than a director
designated by a person who has entered into an agreement
with the Company to effect a transaction described in
clause (i), (iii) or (iv) of this Section) whose election
by the Board or nomination for election by the Company's
stockholders was approved by a vote of a majority of the
directors then still in office who either (l) were
directors at the beginning of such period or (2) were so
elected or nominated with such approval, cease for any
reason to constitute at least a majority of the Board;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other Company and
such merger or consolidation is consummated, other than
(l) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such
merger or consolidation or (2) a merger or consolidation
effected to implement a recapitalization of the Company
(or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 30% of the
combined voting power of the Company's then outstanding
securities; or
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for
the sale or disposition by the Company of all or
substantially all of the Company's assets and such
liquidation or sale of assets is consummated.
SECOND: Article I is further amended by renumbering Sections 1.04
and 1.05 as Sections 1.05 and 1.06, respectively.
THIRD: Article I is further amended by adding the following
definition as Section 1.07:
Control Change Date means the date on which a Change in
Control occurs. If a Change in Control occurs on account
of a series of events, the "Control Change Date" shall be
the date on which the last of such events occurs.
FOURTH: Article I is further amended by renumbering Sections 1.06
through 1.16 as Sections 1.08 through 1.18, respectively.
FIFTH: Article I is further amended by adding the following
sentence to Section 1.18 (formerly Section 1.16):
Years of Service also includes any period in which a
Participant is entitled to receive severance pay under the
CFW Communications Company Severance Pay Plan or under an
agreement between the Company and the Participant.
SIXTH: Article II is amended by adding the following language at
the end of the second sentence thereof:
;provided, however, that the Board may not declare that a
Participant is no longer a Participant during the period
beginning three months before a Control Change Date or
after a Control Change Date.
SEVENTH: Article III is amended by adding the following Section
3.06:
Excise Taxes. Any amount payable under this Plan shall be
reduced if such payment or any amount or benefit provided
under any plan, program, arrangement or agreement with the
Company is subject to excise tax under Code section 4999
or any successor provision. In that event, such payments
or benefits shall be reduced to the maximum amount that
may be provided to or on behalf of the Participant without
liability for such excise tax. Any reduction required by
the preceding sentence shall first come from any cash
severance benefit payable to the Participant, next from
cash payable under this Plan, next from cash payable under
other plans, programs, arrangements or agreements and
finally from noncash benefits.
2
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
EIGHTH: Article IV is amended by adding the following language as
the fourth sentence:
Notwithstanding the foregoing, the Company may establish a
grantor trust in anticipation of its obligations to
Participants and Beneficiaries but the assets of any such
trust shall remain subject to the claims of the Company's
creditors.
NINTH: Section 5.02(b) is amended to read as follows:
Effective January 1, 2000, a Participant who terminates
his employment with the Company prior to Retirement but
(i) after completing seven (7) Years of Service or (ii)
after a Control Change Date, shall be entitled to benefits
under the Plan as of the date he would have been eligible
to Retire and determined under Plan section 3.01(a)(1),
based on his Years of Service as of his termination of
employment (which shall include any Years of Service
creditable under the second sentence of Section 1.18);
provided, however, that no benefits shall be payable if
(1) the Participant terminates his employment voluntarily
(other than a voluntary termination (a) after completing
seven (7) Years of Service or (b) with Good Reason after a
Change in Control)or (2) the Company discharges the
Participant with Cause as determined by the Board.
TENTH: Section 5.01(c) is amended by adding the following
language at the end thereof:
For purposes of subsection (b), Good Reason means that
(1) Participant's total compensation (the sum of base
salary and target annual incentive payment, based on
objectives comparable to those applicable to similarly
situated Company executives) is reduced,
(2) Participant's job duties and responsibilities are
diminished,
(3) Participant is required to relocate to a facility
more than fifty miles from Waynesboro, Virginia,
(4) Participant does not receive any previously
deferred compensation when the payment of such deferral is
due,
(5) Participant is not provided benefits (e.g.,
health insurance) that are comparable in all material
respects to those provided to Participant on the Control
Change Date,
(6) Participant is directed by the Board or an
officer of the Company or an Affiliate (or the Company's
successor or an affiliate thereof) to engage in conduct
that is unethical, illegal or contrary to the Company's
(or its successor's) good business practices or
3
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
(7) Participant is directed by the Board or an
officer of the Company or an Affiliate (or the Company's
successor or an affiliate thereof) to refrain from acting
and the failure to act is unethical, illegal or contrary
to the Company's (or its successor's) good business
practices.
ELEVENTH: Section 7.01 is amended by adding the following
language at the end of the first sentence:
;provided, however, that without a Participant's consent,
the Board may not terminate, amend or modify the Plan
within three months before a Control Change Date or after
a Control Change Date.
TWELFTH: Exhibit I to the Plan is amended by deleting the
reference "1-14" and the corresponding Applicable Percentage and
by substituting the following in their stead:
Participant's
Years of Service Applicable Percentage
---------------- ---------------------
1 29.5
2 30.5
3 32.0
4 33.5
5 35.0
6 36.5
7 38.0
8 39.5
9 41.0
10 42.5
11 44.0
12 45.5
13 47.0
14 48.5
4
CFW COMMUNICATIONS COMPANY FORM 10-K
Exhibit 10.4
Form of Management Continuity Agreement
THIS AGREEMENT, dated _________ ___, 1999, is between __________________
("Executive") and CFW COMMUNICATIONS COMPANY, a VIRGINIA corporation (the
"Company"), and provides as follows.
RECITALS
The Company considers it essential to the best interests of its
shareholders to foster the continuing employment of its key management
personnel.
The Company recognizes that the possibility of a Change in Control
exists and that such possibility, and the uncertainty and questions that it may
raise among management may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders.
Executive will continue to serve the Company in reliance upon the
undertakings of the Company contained herein.
In consideration of the premises and the mutual covenants herein
contained, the Company and Executive agree as follows:
1. Term. The Term of this Agreement is the period beginning on January
1, 2000 and ending on December 31, 2001. The Term of this Agreement shall be
extended for an additional twelve months unless the Company, at least four
months before the expiration of the Term of this Agreement, provides written
notice to Executive that the Term of this Agreement will not be extended. The
preceding sentence shall first be effective to extend the Term of this Agreement
until December 31, 2002 unless written notice to the contrary is provided to
Executive by the Company before September 1, 2000.
2. Entitlement. Subject to Executive's compliance with paragraph 7,
Executive will be entitled to receive the benefits described in this Agreement
if there is a Change in Control during the Term of this Agreement and either of
the following applies:
(a) Executive's employment is terminated without Cause prior to
the fifth anniversary of the Control Change Date (even if such
termination occurs after the Term of this Agreement);
(b) Executive resigns with Good Reason prior to the fifth
anniversary of the Control Change Date (even if such resignation
occurs after the Term of this Agreement);
For purposes of this Agreement, the date of a termination of Executive's
employment as described in subparagraphs (a) or (b) above is Executive's
"Termination Date."
3. Severance Pay. If Executive's Termination Date occurs within
twenty-four months after the Control Change Date, Executive will receive a
severance benefit equal to two years' Compensation. If Executive's Termination
Date occurs more than twenty-four months after the Control Change Date, but
before the expiration of sixty months after the Control Change Date, Executive
will receive a severance benefit equal to one year's Compensation.
Notwithstanding the preceding sentences, in lieu of the severance pay described
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
in the preceding sentences of this paragraph 3, Executive shall receive a
severance benefit equal to the severance benefit available to employees of the
Company (or its successor and any of its affiliates) who are similarly situated
to the Executive on the Executive's Termination Date if the value of such
benefit is greater than the value of the benefit described in this paragraph.
Executive's severance benefit, less applicable withholding taxes, shall be paid
in equal monthly installments in accordance with the Company's regular payroll
policies and the period in which such amount is payable is referred to an
Executive's "Severance Period."
4. Benefit Reduction. The severance pay payable under paragraph 3 to
Executive during any month shall be reduced by the amount of any cash
compensation paid to Executive by another employer or business for services
rendered by Executive after Executive's Termination Date; provided, however that
this paragraph 4 shall not apply with respect to cash compensation paid to
Executive for services of a similar nature that Executive rendered to such other
employer or business prior to Executive's Termination Date.
5. Welfare Benefits. If Executive satisfies the requirements of
paragraph 2, Executive and Executive's dependents will be entitled to continued
participation in the "employee welfare benefit plans" (as defined in Section
3(1) of the Employee Retirement Income Security Act of 1974) in which Executive
participated on his Termination Date during the Severance Period. In lieu of
such continued coverage, Executive will be reimbursed, on a net after-tax basis,
for the cost of individual insurance coverage for Executive and Executive's
dependents under a policy or policies that provide benefits not less favorable
than the benefits provided under such employee welfare benefit plans. The
coverage provided under this paragraph shall be secondary to any coverage
provided to Executive and Executive's dependents by another employer of
Executive.
6. Other Benefits. Executive will receive all of the benefits that
Executive is entitled to receive under the terms of the benefit plans, programs
and arrangements in which Executive currently participates, including, by way of
example and not of limitation, any pension, "401(k)" plan, "401(k)" restoration
plan, supplemental pension plan or retiree welfare benefit plan, regardless of
whether the requirements of paragraph 2 are satisfied.
7. Confidentiality and Non-Competition. Executive agrees to comply with
his Confidentiality and Non-Competition Agreement with the Company and that if
Executive breaches such agreement, the Company shall, in addition to other
available remedies, be entitled to injunctive relief and shall not be required
to provide any benefit to Executive pursuant to this Agreement.
8. Excise Taxes. Executive agrees that the amounts payable and the
benefits to be provided under this Agreement shall be reduced if such amounts or
benefits or any amount or benefit provided under any plan, program, arrangement
or agreement with the Company is subject to excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended, or any successor provision. In that
event, such payments or benefits shall be reduced to the maximum amount that may
be provided to or on behalf of Executive without liability for such excise tax.
Any reduction required by the preceding sentence shall first come from cash
payable under this Agreement, next from cash payable under other plans,
programs, arrangements or agreements and finally from noncash benefits.
9. Definitions. For purposes of this Agreement, the following
definitions will apply:
a. Cause. the term "Cause" means that (i) Executive has been
convicted of a felony that involves the misappropriation of
Company assets or that materially injures the business reputation
of the Company or (ii) the Company's Board of Directors has
2
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
determined in good faith that there has been a willful and
continuing failure on the part of Executive to perform a material
duty or responsibility and that such failure has not been
corrected within ninety days after written notice to Executive.
b. Change in Control. A "Change in Control" shall be deemed to
have occurred if:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan
of the Company, or any company owned, directly or indirectly,
by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is
or becomes the owner or "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly,
of Company securities representing more than 30% of the
combined voting power of the then outstanding securities;
(ii) during any period of two consecutive years (not
including any period prior to the execution of this
Agreement), individuals who at the beginning of such period
constitute the Company's board of directors (the "Board"),
and any new director (other than a director designated by a
person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii) or (iv)
of this Section) whose election by the Board or nomination
for election by the Company's stockholders was approved by a
vote of a majority of the directors then still in office who
either (l) were directors at the beginning of such period or
(2) were so elected or nominated with such approval, cease
for any reason to constitute at least a majority of the
Board;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other Company and such
merger or consolidation is consummated, other than (l) a
merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (2) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no "person" (as hereinabove defined)
acquires more than 30% of the combined voting power of the
Company's then outstanding securities; or
3
<PAGE>
CFW COMMUNICATIONS COMPANY FORM 10-K
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially
all of the Company's assets and such liquidation or sale of
assets is consummated.
c. Compensation. "Compensation" means the sum of (i) Executive's
annual salary as in effect on Executive's Termination Date and
(ii) Executive's target annual incentive payments for the year
that includes Executive's Termination Date.
d. Control Change Date. "Control Change Date" means the date on
which a Change in Control occurs. If a Change in Control occurs
on account of a series of events, the "Control Change Date" shall
be the date on which the last of such events occurs.
e. Good Reason. The "Good Reason" means that (i) Executive's
total compensation (the sum of base salary and target annual
incentive payment, based on objectives comparable to those
applicable to similarly situated Company executives) is reduced,
(ii) Executive's job duties and responsibilities are diminished,
(iii) Executive is required to relocate to a facility more than
fifty miles from Waynesboro, Virginia, (iv) Executive does not
receive any previously deferred compensation when the payment of
such deferral is due, (v) Executive is not provided benefits
(e.g., health insurance) that are comparable in all material
respects to those provided to Executive on the Control Change
Date, (vi) Executive is directed by the Board of Directors or an
officer of the Company or an affiliate (or the Company's
successor or an affiliate thereof) to engage in conduct that is
unethical, illegal or contrary to the Company's (or its
successor's) good business practices or (vii) Executive is
directed by the Board of Directors or an officer of the Company
or an affiliate (or the Company's successor or an affiliate
thereof) to refrain from acting and the failure to act is
unethical, illegal or contrary to the Company's (or its
successor's) good business practices.
10. Governing Law. This Agreement will be governed by the laws of the
Commonwealth of Virginia except to the extent to the extent that they would
Trequire the application of the laws of another State.
IN WITNESS WHEREOF, Executive has signed this Agreement and the Company
has caused this Agreement to be signed by its duly authorized officer.
----------------------------------
[Executive's Name]
CFW COMMUNICATIONS COMPANY
By________________________________
Title:______________________________
Exhibit 13
Annual Report of CFW Communications Company to its Shareholders for the
year ended December 31, 1999.
<PAGE>
Financials
Contents
Consolidated Statements of Income 17
- --------------------------------------------------------------------------------
Consolidated Balance Sheets 18
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 20
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity 21
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 22
- --------------------------------------------------------------------------------
Independent Auditor's Report 32
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 33
- --------------------------------------------------------------------------------
Quarterly Review 38
- --------------------------------------------------------------------------------
Selected Financial Data and Five Year Growth Comparison 39
- --------------------------------------------------------------------------------
Board of Directors and Executive Officers 40
- --------------------------------------------------------------------------------
<PAGE>
Consolidated Statements of Income
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Wireline communications $ 44,110,124 $ 37,596,778 $ 34,495,331
Wireless communications 13,549,120 13,197,732 11,714,012
Directory assistance 12,104,096 12,949,714 10,533,459
Other communications services 4,028,445 2,941,880 2,267,156
- ------------------------------------------------------------------------------------------
73,791,785 66,686,104 59,009,958
- ------------------------------------------------------------------------------------------
Operating Expenses
Maintenance and support 16,608,994 10,837,093 9,659,569
Depreciation and amortization 12,623,212 10,503,338 9,196,237
Asset impairment charge 3,950,894 - -
Customer operations 19,870,214 16,223,183 14,282,592
Corporate operations 7,216,365 6,496,028 6,459,352
- ------------------------------------------------------------------------------------------
60,269,679 44,059,642 39,597,750
- ------------------------------------------------------------------------------------------
Operating Income 13,522,106 22,626,462 19,412,208
Other Income (Expenses)
Other expenses, principally interest (904,699) (623,091) (855,360)
Equity loss from PCS investees
VA PCS Alliance (5,436,446) (5,075,624) (834,075)
WV PCS Alliance (5,928,605) (1,391,407) -
Equity income from other wireless investees 179,128 197,906 74,115
Loss on write-down of investment - (1,009,661) (2,808,145)
Gain on sale of tower asset and investments 8,317,511 - 5,077,379
- ------------------------------------------------------------------------------------------
9,748,995 14,724,585 20,066,122
Income Taxes 2,867,704 5,638,940 7,398,495
- ------------------------------------------------------------------------------------------
6,881,291 9,085,645 12,667,627
Minority Interests (388,633) (578,005) (446,695)
- ------------------------------------------------------------------------------------------
Net Income $ 6,492,658 $ 8,507,640 $ 12,220,932
- ------------------------------------------------------------------------------------------
Net income per common share - basic $ 0.50 $ 0.65 $ 0.94
Net income per common share - diluted $ 0.50 $ 0.65 $ 0.94
Average shares outstanding - basic 13,041,868 13,007,880 12,982,289
Average shares outstanding - diluted 13,112,952 13,093,561 13,055,814
- ------------------------------------------------------------------------------------------
Cash dividends per share $ 0.459 $ 0.435 $ 0.412
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE>
Consolidated Balance Sheets
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 198,540 $ 42,890
Accounts receivable, net of allowance of $1.1 million ($0.6 million in 1998) 13,822,010 12,120,985
Receivable from affiliates 3,824,585 5,681,978
Materials and supplies 955,381 1,374,877
Prepaid expenses and other 572,339 448,775
Income taxes receivable 2,002,572 691,221
- -----------------------------------------------------------------------------------------------------------
21,375,427 20,360,726
----------------------------
Securities and Investments 39,109,476 10,980,988
- -----------------------------------------------------------------------------------------------------------
Property and Equipment
Land and building 23,526,095 20,965,223
Network plant and equipment 108,449,567 93,247,587
Furniture, fixtures, and other equipment 28,170,261 20,022,238
Radio spectrum licenses 15,478,079 15,468,649
----------------------------
Total in service 175,624,002 149,703,697
Under construction 9,535,642 4,718,837
- -----------------------------------------------------------------------------------------------------------
185,159,644 154,422,534
Less accumulated depreciation 59,278,974 50,760,242
- -----------------------------------------------------------------------------------------------------------
125,880,670 103,662,292
----------------------------
Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization of $2.4 million ($1.4 million in 1998) 23,411,894 12,705,900
Deferred charges 359,294 533,540
Radio spectrum licenses 7,864,836 6,090,791
- -----------------------------------------------------------------------------------------------------------
31,636,024 19,330,231
----------------------------
$218,001,597 $154,334,237
- -----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 9,809,268 $ 7,042,966
Customers' deposits 448,995 400,655
Advance billings 2,677,044 2,303,696
Accrued payroll 1,156,120 1,283,083
Accrued interest 280,151 623,412
Other accrued liabilities 2,888,530 1,955,176
Deferred revenue 1,835,694 1,221,849
- ---------------------------------------------------------------------------------------------------------------
19,095,802 14,830,837
----------------------------
Long-term Debt 37,684,783 19,774,262
- ---------------------------------------------------------------------------------------------------------------
Long-term Liabilities
Deferred income taxes 31,604,744 14,243,872
Retirement benefits 10,854,052 9,852,634
Other 797,175 749,728
- ---------------------------------------------------------------------------------------------------------------
43,255,971 24,846,234
----------------------------
Minority Interests 1,781,241 1,472,419
- ---------------------------------------------------------------------------------------------------------------
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 20,000,000 shares;
issued 13,060,386 shares (13,016,988 in 1998) 43,943,136 43,527,636
Retained earnings 50,385,117 49,882,849
Unrealized gain on securities available for sale, net 21,855,547 -
- ---------------------------------------------------------------------------------------------------------------
116,183,800 93,410,485
----------------------------
$218,001,597 $154,334,237
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Consolidated Statements of Cash Flows
CFW Communications Company and Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,492,658 $ 8,507,640 $ 12,220,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,458,860 9,730,746 8,559,656
Amortization 1,164,352 772,592 636,581
Asset impairment charge 3,950,894 - -
Deferred taxes 3,683,184 5,001,626 105,664
Retirement benefits other than pensions 1,001,418 1,006,965 835,451
Other 25,527 (37,534) (10,426)
Equity loss from wireless investees 11,185,923 6,269,125 759,960
Minority interests, net of distributions (55,738) (4,013) (41,306)
Distributions received from investments 132,090 218,705 99,704
Gain on sale of tower asset and investments (8,317,511) - (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 (1,239,062) 83,299 (3,489,136)
(Increase) decrease in materials and supplies 419,496 (536,949) (173,459)
Increase in other current assets (123,564) (99,158) (238,786)
(Increase) decrease in income taxes (1,311,351) (815,766) 741,612
Increase in accounts payable 2,194,811 2,873,684 823,237
Increase (decrease) in other accrued liabilities 463,130 (651,510) (271,945)
Increase in other current liabilities 421,688 165,517 192,460
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,546,805 33,494,630 18,480,965
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (36,726,308) (16,336,873) (14,042,679)
Purchase of PCS licenses, net of minority interest (1,409,602) (666,885) (4,459,818)
Investments in PCS Alliances (3,892,138) (2,253,995) (1,492,709)
(Advances to) repayments from PCS Alliances 1,857,393 (4,955,147) -
Acquisitions of Internet company and subscribers (12,354,928) - -
Investment in national database provider - (1,004,681) -
Sale of mortgage-backed securities - 971,288 540,961
Proceeds from the sale of tower asset and investments 9,732,457 - 6,594,399
Purchase of cellular minority interests - - (1,103,481)
Maturities and distributions from (contributions to) other investments (49,800) (45,239) 10,282
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (42,842,926) (24,291,532) (13,953,045)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (5,990,390) (5,660,024) (5,349,009)
Payments on senior notes (3,636,364) (3,741,764) -
Additional borrowings (payments) under other debt facilities, net 20,663,025 (1,090,134) (1,000,000)
Net proceeds from exercise of stock options 415,500 107,367 41,829
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 11,451,771 (10,384,555) (6,307,180)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 155,650 (1,181,457) (1,779,260)
Cash and cash equivalents:
Beginning 42,890 1,224,347 3,003,607
- ---------------------------------------------------------------------------------------------------------------------
Ending $ 198,540 $ 42,890 $ 1,224,347
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
20
<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> <C>
Balance, January 1, 199 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 effect (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
Comprehensive income:
Net Income 6,492,658
Unrealized gain on securities available
for sale, net of $14.0 million
of deferred tax effect 21,855,547
Comprehensive income 28,348,205
Cash dividends (5,990,390) (5,990,390)
Stock options exercised, net 43,398 415,500 415,500
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 13,060,386 $43,943,136 $50,385,117 $21,855,547 $116,183,800
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
21
<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 personal communications services ("PCS"), local
telephone, long distance, 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 are
primarily 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, 1999.
Interest on debt securities is recognized in income as accrued, and
dividends on marketable equity securities are 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 7.0%,
6.8% and 6.6% of average depreciable assets for the years 1999, 1998 and 1997,
respectively.
22
<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,
wireline business phones and accessories. The Company values its inventory at
the lower of cost (specific identification) or market. The market value is
determined by reviewing current replacement cost, marketability, and
obsolescence.
COST IN EXCESS OF NET ASSETS ACQUIRED: Cost in excess of net assets acquired
resulting from acquisitions is being amortized over various lives from 10 to 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: 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 employee's 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") plus assumed
conversion of dilutive stock options (71,084, 85,681, and 73,525 shares for
1999, 1998 and 1997, respectively). The Company had 27,500, 31,850, and 52,450
stock options outstanding in 1999, 1998 and 1997, 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, based on cash flows relative to similar instruments. 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.
MAJOR CUSTOMER: The Company has one customer that accounts for greater than 10%
of its revenue, primarily consisting of carrier access charges for long distance
services, billing and collecting services and directory assistance. The percent
of operating revenue from this customer was 20% in 1999, 28% in 1998, and 34% in
1997. The primary segments receiving revenue from this customer were telephone
and directory assistance.
FINANCIAL STATEMENT CLASSIFICATIONS: Certain amounts in the prior year financial
statements have been reclassified, with no effect on net income, to conform with
classifications adopted in 1999.
Note 2. Disclosures About Segments of an Enterprise and Related
Information
The Company has six 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. Principle products offered by this business are local service, which
includes advanced calling features, network access, long distance toll and
directory advertising.
Network: In addition to the ILEC services, the Company directly or indirectly
owns 500 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 in parts of a mid-Atlantic eight state region.
Additionally, the network
23
<PAGE>
business, which began offering Competitive Local Exchange (CLEC) service in
1998, is certified in Virginia, West Virginia and Tennessee and provided CLEC
service in four markets throughout 1999 and commenced offering CLEC services in
four additional markets late in 1999.
Internet: The Company provides Internet access services through a local presence
in 48 markets in Virginia, West Virginia, Tennessee and North Carolina. Through
internal growth and acquisition, the Company has six times more Internet
customers at the end of 1999 versus the prior year end. The Company offers
high-speed data services, such as dedicated service and DSL(Digital Subscriber
Line) in an increasing number of these markets within this region.
Wireless: The Company's wireless business carries cellular and digital phones
and services, paging and voicemail and is marketed in the retail and
business-to-business channels primarily within the Company's cellular territory.
Directory Assistance: The Company's directory assistance business provides third
party directory assistance for customers of several communications companies and
handled an average of more than 180,000 requests per day in 1999. Revenues from
its largest customer, AT&T, accounted for 86%, 94% and 97% of the segments total
revenues for 1999, 1998, and 1997, respectively.
Wireless Cable: The cable business offers wireless video cable service and
offers wireless cable high-speed Internet service in Charlottesville, Virginia.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes certain unallo- cated
corporate related items, as well as results from the Company's alarm,
communication services and wireline cable businesses, which are not considered
separate reportable segments.
<TABLE>
<CAPTION>
Network Directory Wireless
(in thousands) Telephone and CLEC Internet Wireless Assistance Cable Other Total
- -----------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 31,261 $ 5,635 $ 5,611 $ 10,781 $ 12,104 $ 2,768 $ 5,632 $ 73,792
EBITDA 21,697 1,010 (808) 4,116 1,528 422 2,131 30,096
Depreciation &
Amortization 3,753 1,311 1,237 967 1,300 2,153 1,902 12,623
Asset impairment
charge (Note 7) 2,713 1,238 3,951
Total Segment
Assets 45,309 24,763 16,778 9,156 14,261 20,376 12,863 143,506
Corporate Assets 74,496
----------
Total Assets $218,002
- -----------------------------------------------------------------------------------------------------------
1998
Revenues $ 30,548 $ 4,024 $ 1,416 $ 10,231 $ 12,950 $ 2,966 $ 4,551 $ 66,686
EBITDA 21,715 1,943 (338) 4,896 3,018 365 1,531 33,130
Depreciation &
Amortization 3,343 1,378 259 637 1,032 2,724 1,130 10,503
Total Segment
Assets 42,521 13,033 1,048 7,581 10,942 26,018 14,542 115,685
Corporate Assets 38,649
----------
Total Assets $154,334
- -----------------------------------------------------------------------------------------------------------
1997
Revenues $ 28,828 $ 3,165 $ 832 $ 8,602 $ 10,533 $ 3,112 $ 3,938 $ 59,010
EBITDA 19,708 2,036 (149) 4,318 1,627 285 783 28,608
Depreciation &
Amortization 3,169 926 145 602 916 2,567 871 9,196
Total Segment
Assets 40,523 12,170 652 6,877 12,593 29,048 14,664 116,527
Corporate Assets 31,216
----------
Total Assets $147,743
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Wireless revenues are reported net of cost of sales, primarily for
handsets, of $8.1 million, $4.4 million and $1.7 million for the three years
ended December 31, 1999. Directory assistance revenues are reported net of data-
base access charges of $3.9 million, $5.0 million and $4.1 million for the three
years ended December 31, 1999. Wireless cable revenues are reported net of
programming and equipment costs of $1.8 million, $1.7 million and $1.5 million
for the three years ended December 31, 1999.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (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
24
<PAGE>
and all other intercompany transactions are cost based. Segment depreciation and
amortization contains an allocation of depreciation and amortization from corpo-
rate assets. Corporate depreciation and amortization not allocated to the
segments is indicated in the "Other" column in the table on page 24.
Note 3. Investments in
Wireless Affiliates
At December 31, 1999, the Company had invested $1.1 million ($0.9 million at
December 31, 1998) for 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 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, 1999, the Company had invested approximately $9.1 million
($6.0 million at December 31, 1998) for convertible preferred ownership interest
in the VA Alliance which is convertible in 2001 into additional common ownership
interest. If converted, the Company would have a 46% 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 $14.3 million additional capital to
the VA Alliance in installments of $6.5 million in 2000, $6.5 million in 2001
and $1.3 million in 2002. 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 and expanded to
Morgantown and the northern corridor of West Virginia in the second quarter of
1999.
The Company has committed to provide additional capital to the WV Alliance
of $1.9 million in three equal annual installments beginning in January 2000.
Such additional capital commitments would be reduced by proceeds, if any, from
future equity offerings by the WV Alliance.
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for by the equity method, are as
follows:
<TABLE>
<CAPTION>
VA Alliance WV Alliance
(in thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets $ 9,241 $ 3,648 $ 2,367 $ 488
Noncurrent assets 111,601 100,668 51,130 30,644
Current liabilities 7,633 11,991 3,076 10,732
Noncurrent liabilities 131,478 90,301 51,125 9,237
Redeemable preferred interest 15,192 14,345 - -
VA Alliance WV Alliance
(in thousands) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Net sales $ 12,677 $ 3,200 $ 119 $ 3,087 $ 114 $ -
Gross profit (loss) 6,059 1,635 (197) (77) (107) -
Net loss applicable to
common owners (26,139) (24,415) (3,952) (13,287) (3,103) -
Company's share of net loss (5,436) (5,076) (834) (5,929) (1,391) -
</TABLE>
The Company has entered into guarantee agreements whereby the Company is
committed to provide guarantees of up to $71.0 million of the Alliances' debt
and redeemable preferred obligations. Such guarantees become effective as
obligations are incurred by the Alliances. At December 31, 1999, the Company has
guaranteed $67.5 million of the Alliance's 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
$3.3 million in 1999, $1.9 million in 1998 and $0.5 million in 1997 for these
corporate services. Retained earnings of the Company at December 31, 1999
include accumulated losses of $11.6 million related to these Alliances.
25
<PAGE>
<TABLE>
<CAPTION>
Note 4. Securities and Investments
Investments consist of the following as of December 31:
Carrying Values
Type of Ownership 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available for Sale
American Telecasting, Inc. Equity Securities $ - $ 275,362
Illuminet Holdings, Inc. Equity Securities 37,612,740 1,778,787
- ----------------------------------------------------------------------------------------------------------------------------
37,612,740 2,054,149
---------------------------
Equity Method
Virginia PCS Alliance, L.C. Equity and Convertible
Preferred Interests (773,449) 1,404,879
West Virginia PCS Alliance, L.C. Equity Interest (633,003) 4,661,583
Virginia Telecommunications Partnership General Partnership Interest 296,973 325,684
Virginia Independent Telephone Alliance Limited Partnership Interest 527,595 489,628
Other Partnership Interests 564,696 518,605
- ----------------------------------------------------------------------------------------------------------------------------
(17,188) 7,400,379
---------------------------
Cost Method
Multimedia Medical Systems, Inc. Equity Securities 362,221 362,221
Listing Services Solutions, Inc. Equity Securities 1,004,681 1,004,681
Other Equity Securities 147,022 159,558
- ----------------------------------------------------------------------------------------------------------------------------
1,513,924 1,526,460
---------------------------
$39,109,476 $10,980,988
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In October 1999, Illuminet Holdings, Inc. completed an initial public
offering ("IPO") and commenced being traded on the NASDAQ exchange under the
symbol ILUM. The Company holds 683,000 shares of ILUM at a cost of $1.8 million
with a market value of $37.6 million on December 31, 1999 ($55.00 per share).
Concurrent with ILUM's NASDAQ listing, the Company reclassified the investment
from the cost method category to the available for sale category. Prior to this
date, the investment was accounted for under the cost method. Pursuant to the
terms of the IPO, the Company is restricted from selling shares of ILUM until
April 2000.
The Company sold its investment in American Telecasting, Inc. ("ATEL") in
September 1999, for $6.50 per share, recognizing a $7.6 million gain. At
December 31, 1998, the Company owned 1.2 million shares of ATEL which had a
carrying value of $0.20 per share, net of total impairment losses of $3.8
million recorded in 1998 and 1997.
Changes in the unrealized gain (loss) on available for sale securities
during the years ended December 31, 1999 and 1998, reported as a separate
component of shareholders' equity are as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain, beginning balance $ - $ -
Unrealized holding gains during the year 35,868,877 -
- --------------------------------------------------------------------------------------------------------------------------
Unrealized gain, ending balance 35,868,877 -
Deferred tax effect related to net unrealized holding gains (14,013,330) -
- --------------------------------------------------------------------------------------------------------------------------
Unrealized gain included in shareholders' equity $21,855,547 $ -
- --------------------------------------------------------------------------------------------------------------------------
</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>
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.26% Unsecured senior notes due in annual
installments from 2000 to 2007 $12,727,272 $16,363,636
6.25% Notes payable secured by certain PCS
radio spectrum licenses due from 2000 to 2006 1,427,180 1,500,760
Borrowings under lines of credit 23,530,331 1,909,866
- --------------------------------------------------------------------------------------------------------------------------
$37,684,783 $19,774,262
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Using proceeds from borrowings under the Company's lines of credit, the Company
paid $3.2 million of principal on the unsecured senior notes in January 2000
and, in February 2000, paid $9.5 million to the senior note holders in full
redemption of the senior notes. In connection with this redemption, the Company
increased its committed lines of credit from $45 million to $60 million. The
Company has classified 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 existing lines of credit that have a maturity of beyond one
year. The blended interest rates on the borrowings under lines of credit as of
December 31, 1999, 1998 and 1997 were 6.2%, 5.2% and 5.9%, respectively.
Interest expense was $1.1 million, $0.7 million and $0.9 million for 1999,
1998 and 1997, respectively. Maturities of long-term debt for each of the next
five years are 2000 - $34.8 million; 2001 - $1.7 million; 2002 - $0.2 million;
2003 - $0.2 million; and 2004 - $0.2 million.
Note 6. Acquisitions
In August 1999, the Company acquired, for cash, all of the outstanding stock of
NetAccess, Inc. ("NAXS"), an Internet Service Provider ("ISP"), for an initial
payment of approximately $6.0 million. In addition, a contingent purchase
payment will be made based on achievement of future performance levels during
calendar year 2000. At this time, the contingent payment can not be reasonably
estimated. The contingent payment, if applicable, will be made during the first
quarter of 2001. NAXS, now a wholly-owned operating subsidiary of the Company,
is engaged in the business of providing dial-up and dedicated Internet access,
high-speed access through DS Land ISDN technology. This acquisition increased
the Company's core Internet customers by approximately 13,500 subscribers on the
date of acquisition. NAXS also operates a Competitive Local Exchange Carrier
("CLEC") telephone company through its wholly-owned subsidiary, NA
Communications, Inc. The excess of the total acquisition cost over the fair
value of the net assets acquired of approximately $6.0 million is being
amortized over 10 years by the straight-line method. This acquisition has been
accounted for as a purchase and results of operations since the date of
acquisition are included in the 1999 consolidated financial statements.
In October 1999, CFW Cornerstone, Inc. ("CFW Cornerstone"), a wholly-owned
subsidiary of the Company, acquired substantially all of the assets of
Cornerstone Networks, Inc. ("Cstone"), an ISP, for an initial payment of
approximately $4.5 million in cash. In addition, contingent purchase payments
will be made based on achievement of future performance levels during calendar
year 2000. At this time the contingent payment cannot be reasonably estimated.
All contingent payments, if applicable, will be made during the first quarter of
2001. CFW Cornerstone provides dial-up and dedicated Internet access, high-
speed access through DSLand ISDN technology. This acquisition increased the
Company's Internet customers by approximately 9,000 subscribers on the date of
acquisition.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations are included in the financial
statements as of the date of acquisition, and the assets and liabilities were
recorded based upon their fair values at the date of acquisition. The excess of
the total acquisition cost over the fair value of the net tangible assets and
other identifiable intangible assets acquired of approximately $3.8 million is
being amortized over 10 years by the straight-line method. The acquisition also
included various non-compete agreements, which are being amortized over the life
of each respective agreement.
The following table represents the Company's unaudited proforma results for
1999 and 1998 assuming the acquisitions occurred on January 1, 1998 (in
thousand, except for per share data):
Year Ended December 31, 1999 1998
- ------------------------------------------------------
Operating Revenues $79,774 $69,812
Net Income 5,308 6,449
Net Income
per common share - diluted $ 0.40 $ 0.49
These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which would have actually occurred had the acquisitions been made on or before
January 1, 1998, nor are they an indication of future performance.
In addition, the Company has acquired the assets of several other ISP's for
a total of $1.9 million. The transactions were accounted for under the purchase
method of accounting and, accordingly, the assets and liabilities were recorded
based on upon their fair values at the date of acquisition. The total
acquisition cost over the fair value of the net identifiable tangible and
intangible assets acquired of $1.0 million is being amortized over 10 years by
the straight-line method. These acquisitions increased the Company's core
customer base by approximately 6,600 subscribers.
Note 7. Asset Impairment and dispositions
As a result of the Company's conversion to a single billing platform capable of
billing wireline and wireless services, the Company recognized a $1.2 million
($0.8 million after-tax) write-off of software associated with the prior billing
system during the fourth quarter of 1999.
In September 1999, the Company recognized an asset impairment charge of
$2.7 million ($1.7 million after-tax) relating to certain wireless analog cable
equipment. The Company provides wireless analog cable services over MMDS
spectrum. Acquisitions of MMDS spectrum by Sprint Corp. and MCI WorldCom are
expected to accelerate development of digital equipment for high-speed digital
data, and possibly voice, applications. As a result of these actions, an
analysis of cash flows in each market and an assessment of the alternative uses
for this spectrum, the Company determined that the carrying value of certain
27
<PAGE>
wireless analog cable equipment was impaired and recognized the asset
write-down. The wireless analog cable equipment, which was deemed to be impaired
in value, was written-down to its estimated net realizable value of $0.2 million
based on the Company's assessment of fair value of similarly used equipment.
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
ATEL, which resulted in a carrying value in the investment of $0.3 million at
December 31, 1998. In 1999, the Company received cash proceeds of $7.9 million
and recognized a gain of $7.6 million due to the purchase of American
Telecasting, Inc. by Sprint Corp.
In July 1999, the Company sold its Richmond tower for $1.6 million,
recognizing a gain of $0.7 million.
Note 8. Income Taxes
The components of income tax expense are as follows for the years ended December
31:
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax expense:
Federal tax expense (benefit) $ (809,101) $ 690,507 $ 6,165,040
State tax expense (benefit) (6,379) (53,193) 1,127,791
- --------------------------------------------------------------------------------
(815,480) 637,314 7,292,831
Deferred tax expense:
Federal deferred tax expense 3,306,693 4,500,178 95,070
State deferred tax expense 376,491 501,448 10,594
- --------------------------------------------------------------------------------
3,683,184 5,001,626 105,664
- --------------------------------------------------------------------------------
$ 2,867,704 $ 5,638,940 $ 7,398,495
- --------------------------------------------------------------------------------
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>
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at statutory rate $ 3,182,523 $ 4,851,302 $ 6,766,799
Tax credits, net of basis adjustment (492,687) - -
Excess charitable contribution benefit (734,657) - -
State income taxes, net of federal income tax benefit 244,274 295,848 751,334
Nondeductible amortization 215,560 132,940 132,940
Other, net 452,691 358,850 (252,578)
- ------------------------------------------------------------------------------------------------
$ 2,867,704 $ 5,638,940 $ 7,398,495
- ------------------------------------------------------------------------------------------------
</TABLE>
Net deferred income tax assets and liabilities consist of the following
components at December 31:
1999 1998
- --------------------------------------------------------------------------------
Deferred income tax assets:
Retirement benefits other than pension $ 3,497,202 $ 3,334,042
Net operating loss of acquired companies 1,277,704 1,074,000
Net operating loss 3,393,237 1,051,538
Alternative minimum tax credit carryforwards 627,367 627,367
Accrued expenses 848,368 268,577
Federal and state tax credits 672,411 -
Other 1,274,461 447,183
- --------------------------------------------------------------------------------
11,590,750 6,802,707
Deferred income tax liabilities:
PCS investments, net 12,981,599 6,041,723
Property and equipment 16,007,662 15,004,856
Unrealized gain on securities available for sale 14,013,330 -
Other 192,903 -
- --------------------------------------------------------------------------------
43,195,494 21,046,579
- --------------------------------------------------------------------------------
Net deferred income tax liabilities $31,604,744 $14,243,872
- --------------------------------------------------------------------------------
28
<PAGE>
In connection with the acquisition of NAXS (Note 6), the Company recorded
approximately $0.3 million of deferred tax assets at the date of acquisition.
The Company had alternative minimum tax ("AMT") credit carryforwards of $0.6
million, which have been reflected as a reduction of deferred taxes. AMT credits
may generally be carried forward indefinitely and used in future years to the
extent the Company's regular tax liability exceeds the AMT liability for such
future years. For tax purposes, the Company had available net operating loss
("NOL") carryforwards for regular income tax purposes of approximately $2.8
million at December 31, 1998. This loss has been carried back to 1996 and the
related benefit has been recorded in current income taxes receivable. The
Company is anticipating that the 1999 NOL will be approximately $8.4 million,
which will expire in 2019. The Company also had federal and state investment tax
credit carryforwards for tax purposes of approximately $0.7 million, which
expire during 2019.
Note 9. Shareholder Rights Plan
In February 2000, the Company adopted a new 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 $162. The new rights plan replaces
the Company's prior plan which was adopted in 1990 and expired in February 2000.
The right is exercisable only upon the occurrence of certain events. If a third
party acquires 15% 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.
Note 10. 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, 1999, and a statement of
the funded status as of December 31 of each year:
<TABLE>
<CAPTION>
Defined Benefit Pension Plan Other Postretirement Benefit Plan
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligations, beginning $ 19,373,662 $ 16,655,591 $ 8,417,072 $ 7,134,616
Service cost 783,742 617,099 211,526 202,347
Interest cost 1,323,014 1,212,044 578,690 525,784
Amendment 131,532 - - -
Actuarial (gain) loss (1,363,569) 1,767,159 (745,891) 671,957
Benefits paid (1,105,135) (878,231) (259,875) (117,632)
- ---------------------------------------------------------------------------------------------------------
Benefit obligations, ending $ 19,143,246 $ 19,373,662 $ 8,201,522 $ 8,417,072
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning $ 19,118,948 $ 17,791,099 $ - $ -
Actual return on plan assets 2,744,040 2,206,080 - -
Employer contribution - - 259,875 117,632
Benefits paid (1,105,135) (878,231) (259,875) (117,632)
- ---------------------------------------------------------------------------------------------------------
Fair value plan assets, ending $ 20,757,853 $ 19,118,948 $ - $ -
- ---------------------------------------------------------------------------------------------------------
Funded status:
Funded status, beginning $ 1,614,607 $ (254,714) $ (8,201,522) $ (8,417,072)
Unrecognized net actuarial gain (3,088,692) (861,171) (915,930) (170,039)
Unrecognized prior service cost 632,327 533,334 - -
Unrecognized transition obligations 31,560 47,341 - -
- ---------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (810,198) $ (535,210) $ (9,117,452) $ (8,587,111)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The Company's matching contributions to the defined contribution plan were
$0.5 million, $0.4 million, and $0.3 million for the years ended December 31,
1999, 1998, and 1997, respectively.
The accumulated benefit obligation of the Company's nonqualified pension
plan was approximately $0.9 million, $0.7 million and $0.4 million at December
31, 1999, 1998 and 1997, respectively, and has been classified with retirement
benefits other than pensions. All of the Company's plans for post retirement
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 Other Post Employment Benefit Plan
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 783,742 $ 617,099 $ 486,925 $211,526 $ 202,347 $ 177,187
Interest cost 1,323,014 1,212,044 1,175,197 578,690 525,784 503,626
Expected return on plan assets (1,864,548) (1,729,609) (1,579,686) - - -
Amortization of transition obligations 15,781 15,781 15,781 - - -
Amortization of prior service cost 32,539 32,539 45,005 - - -
Recognized net actuarial gain - (26,625) (15,352) - (9,382) (12,656)
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 290,528 $ 121,229 $ 127,870 $790,216 $ 718,749 $ 668,157
- -----------------------------------------------------------------------------------------------------------------------------
</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.
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 Post Employment Benefit Plan
Assumptions as of December 31, 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 7.00% 7.50% 7.50% 7.00% 7.50%
Expected return on plan assets 10.00% 10.00% 10.00% - - -
Rate of compensation increase 4.75% 4.75% 4.75% - - -
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually each year to a rate of 6.00% for 2006 and to 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 $0.1 million for a 1% increase and $0.1
million for a 1% decrease. Additionally, the effect of a 1% change on the health
care component of the accumulated postretirement benefit obligations would be
$1.2 million for a 1% increase and $1.0 million for a 1% decrease.
30
<PAGE>
Note 11. Stock Plans
The Company's 1997 Stock Compensation Plan ("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. Amaximum 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, 1999,
1998 and 1997 and changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
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 468,679 $19.13 409,210 $17.10 325,022 $15.90
Granted 170,407 22.58 115,740 23.02 109,373 20.68
Exercised (62,015) 14.22 (45,971) 10.25 (8,915) 10.33
Forfeited (54,170) 21.54 (10,300) 21.62 (16,270) 20.90
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 522,901 $20.59 468,679 $19.13 409,210 $17.10
- -----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 230,291 $18.90 225,631 $17.12 212,545 $14.89
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per option
of options granted during the year $6.53 $6.91 $6.15
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted- Weighted-
Range of Number of Remaining Average Number of Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.00 - 12.75 38,600 1 year $11.33 38,600 $11.33
$16.25 - 19.38 117,856 6 years $17.75 84,296 $17.81
$20.88 - 25.75 366,445 8 years $22.48 107,395 $22.48
</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 $0.8 million ($0.06 per share) in 1999, $0.4
million ($0.03 per share) in 1998 and $0.2 million ($0.02 per share) in 1997.
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 2.0% to 2.1% for 1999, 1.7% to 2.0% for 1998, and 1.9% to 2.3% for 1997;
risk-free interest rates of 4.8% to 6.4% for 1999, 5.0% to 5.7% for 1998, and
5.9% to 6.3% for 1997; expected lives of 6 years for 1999, 1998 and 1997; and
price volatility of 25.8% to 26.3% for 1999, 26.0% to 26.3% for 1998, and 23.1%
to 24.6% for 1997.
The Company also has a plan whereby employees can use up to 10% of their
gross wages to purchase the Company's common stock at a price 10% less than the
market price on the purchase date.
31
<PAGE>
Note 12. Supplementary Disclosures Of Cash Flow Information
The following information is presented as supplementary disclosures for the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash payments for:
Interest, net of capitalized interest of $637,431 in 1999,
$785,854 in 1998, and $762,643 in 1997 $2,335,839 $ 925,609 $1,067,098
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes $ 495,871 $1,453,080 $6,551,222
- ----------------------------------------------------------------------------------------------------------------------------
</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 13. 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 three to thirty years. These leases
are associated with the operation of a cellular business in Virginia Rural
Service Area 6 in which the Company is the general partner. The leases for
channel rights relate to the Company's wireless cable operations and have
initial terms of three to ten years. The equipment leases have an initial term
of three years. Rental expense for operating leases was $1.7 million, $2.0
million and $1.4 million in 1999, 1998, and 1997, respectively. The total amount
committed under these lease agreements is: $1.6 million in 2000, $0.9 million in
2001, $0.9 million in 2002, $0.7 million in 2003, $0.7 million in 2004 and $4.3
million for the years thereafter.
The Company has commitments for capital expenditures of approximately $5
million as of December 31, 1999, all of which are expected to be incurred in
fiscal 2000.
- --------------------------------------------------------------------------------
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/S/McGladrey & Pullen, LLP
Richmond, Virginia
February 17, 2000
32
<PAGE>
Management's Discussion and Analysis
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is an integrated
communications provider. The Company provides a broad range of products and
services to business and residential customers in Virginia, West Virginia,
Kentucky and Tennessee. These communications products and services include
digital PCS, dial-up Internet access, high-speed data services such as Digital
Subscriber Line ("DSL") and dedicated service, local telephone, long distance,
cellular, personal communications services ("PCS"), paging, wireless and
wireline cable television, directory assistance, competitive access, and alarm
monitoring and installation.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment.
In addition, the Company has leveraged its existing switching platform and fiber
optic network by introducing new services such as long distance directory
assistance, long distance services to local telephone customers and surrounding
communities, cable television, local Internet access, and various enhanced
services such as Call Waiting and Caller Identification. These activities
continue to contribute to growth in the Company's operating revenues. In
addition to these activities, the Company has commenced offering, in selected
markets within Virginia, a competitive local telephone service and digital
subscriber line ("DSL") Internet service. The Company will further expand its
operations base and its service offerings in Virginia and West Virginia in 2000.
As a result of the Company's increasing focus on and growth in digital PCS,
Internet access and competitive local telephone ("CLEC") services, 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
and asset impairment charges) are being generated by businesses other than the
mature telephone operations. Throughout 2000, 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 throughout the region. This is expected to continue.
As mentioned above, the Company references operating cash flows as one
measure of operating performance. Management believes operating cash flow is a
meaningful indicator of the Company's performance. Operating cash flows are
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 of which are 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 5.4 million people. These
licenses have enabled the Company, as managing member of both Alliances, to
deploy PCS services in central and western Virginia, central West Virginia and
eastern Kentucky 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. Due to start-up costs
resulting from the Alliances' market expansion, customer acquisition costs and
handset subsidies taken on the sale of the Alliances' digital products, the
Alliances are generating significant operating losses which are expected to
continue in 2000. 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.
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
33
<PAGE>
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 2000; 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 cau-
tioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that any significant
deviations from these assumptions could cause actual results to differ
materially from those in the above and other forward- looking statements.
Forward-looking statements included herein are as of the date hereof and the
Company undertakes no obligation to revise or update such statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Summary - Operating revenues were $73.8 million in 1999, an increase of 11% over
1998. Operating cash flows were $30.1 million, a decrease of $3.0 million or 9%
under 1998. Operating income was $13.5 million in 1999, a decrease of $9.1
million or 40% from 1998. The combination of digital PCS customers within our
RSA6 service area, Internet customers, and CLEC customers grew in total
approximately 442%. This growth was partially offset by higher phone subsidies
from the digital PCS customer growth (which are netted in operating revenues)
and the directory assistance volume declines. Operating cash flows and operating
income were down from the prior year due to start-up costs and capital
investments associated with expansion into new markets and new service
offerings. In addition to such costs relating to internal growth, increased
depreciation and amortization of acquisition activity further lowered operating
income in 1999. Finally, 1999 directory assistance call volume declines coupled
with start-up costs associated with the roll out of national directory products
resulted in a decline in operating cash flow and operating income from directory
assistance of $1.5 million and $1.8 million, respectively, from that of the
prior year.
Net income for 1999 was $6.5 million, or $0.50 per share-diluted, including
$8.3 million ($5.2 million after tax, or $0.39 per share) of gains from the sale
of our investment in American Telecasting, Inc ("ATEL") and the sale of the
Richmond tower (see Notes 4 and 7), and equity losses from PCS investees of
$11.4 million ($7.0 million after tax, or $0.54 per share). Exclusive of these
transactions and the asset impairment charge of $4.0 million ($2.5 million
after-tax, or $0.19 per share), earnings for 1999 were $10.8 million, or $0.83
per share. As noted above, these earnings results reflect the significant
start-up and up-front costs associated with the Company's customer, product and
geographic expansions. Net income for 1998 was $8.5 million, or $0.65 per
share-diluted, including a $1.0 million ($0.6 million after tax, or $0.05 per
share) loss on the write-down of our investment in 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 in the Company's traditional business segments and
geographic markets, particularly directory assistance and cellular.
Operating Revenues - Total operating revenues were $73.8 million, an
increase of $7.1 million, or 11%, over 1998 ($7.7 million, or 13%, increase in
1998 over 1997). The 1999 increases were primarily attributable to wireline
services. Wireline revenue in 1999 totaled $44.1 million, an increase of $6.5
million, or 17%, over 1998 ($3.1 million, or 9%, increase in 1998 over 1997).
Other communication services increased $1.1 million in 1999 to $4.0 million
($0.7 million, or 30%, increase in 1998 over 1997). This is due primarily to an
increase in rental charged to PCS affiliates due to a related increase in their
usage of assets owned by the Company. Directory assistance revenues totaled
$12.1 million, a decrease of $0.8 million, or 7%, from 1998 (1998 increased $2.4
million, or 23%, over 1997), and wireless revenues were up $0.4 million, or 3%,
over 1998 ($1.5 million, or 13%, over 1997). Wireline communications revenues
include telephone revenues, fiber optic network usage, Internet access, com-
petitive 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 $31.3 million, an increase of $0.7
million, or 2%, over 1998 ($1.7 million, or 6%, increase in 1998 over 1997).
These increases were primarily due to growth in access lines of 3% in both 1999
and 1998 and revenue growth from custom calling features of 7% and 19%,
respectively. These increases were partially offset by slight decreases in toll
and access rates. Revenues from fiber optic network usage and CLEC were $5.6
million, an increase of $1.6 million, or 40%, over 1998 ($0.8 million, or 22%,
increase in 1998 over 1997) due to increased network usage and the roll out of
CLEC in four markets in the second half of 1998 and four additional markets in
late 1999. The largest single component of wireline revenue growth in 1999 was
the growth in Internet revenues. The Company added a total of 37,700 subscribers
during 1999, with total subscribers exceeding 45,200 by year-end. This was
achieved from customer growth within our existing markets and growth through
acquisitions. Revenues from
34
<PAGE>
Internet services were $5.6 million, an increase of $4.2 million, or 296% over
1998 ($0.6 million, or 71%, increase in 1998 over 1997).
Wireline cable revenues have remained relatively constant from 1997 through
1999. Wireless communications include cellular, paging, voicemail and wireless
cable. Revenues for cellular, paging and voicemail totaled $10.8 million, an
increase of $0.6 million, or 5%, over 1998 ($1.6 million, or 19%, increase in
1998 over 1997). These increases resulted primarily from cellular access, toll,
and roaming associated with 24% customer growth over 1998 (28% in 1998 over
1997) and an increase in outside roaming minutes of 33% over 1998. This was
partially offset by the higher equipment subsidies ($2.8 million in 1999 versus
$1.9 million in 1998 and $1.0 million in 1997) due to a significant growth in
digital PCS customers within the VA RSA6 service area (13,000, 4,400, and 491
digital PCS customers at December 31, 1999, 1998 and 1997, respectively).
Wireless cable revenues of $2.8 million decreased $0.2 million, or 7%, from 1998
(5% decrease in 1998 from 1997). The decline in revenue is due to limiting
marketing efforts and installations to multiple-dwelling units in an effort to
contain costs and capital associated with analog cable video services in this
business segment.
Directory assistance revenues, which includes net revenues from providing
directory listings for customers seeking telephone numbers in the mid-Atlantic
states, decreased $0.9 million, or 7%, in 1999 from 1998, but increased $2.4
million, or 23%, in 1998 over 1997. Call volumes declined 18% from 65.4 million
calls in 1998 to 53.6 million calls in 1999. This was attributable to the impact
of call around plans offered by large competitors versus traditional directory
assistance traffic being handled at our call centers without sufficient new
business to off-set the continued base business decline. Although volume
declined 18% in 1999, the revenue decline was only 7%. The new national
directory assistance offerings are closing the rate of call volume decline from
the original contract business and are more rapidly closing the rate of revenue
decline as these products involve a higher level of service and price. Growth in
1998 was from contract expansions to the base business which occurred throughout
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, increased $1.1 million, or 37%, over 1998 ($0.7 million, or 30%, in
1998 over 1997) due primarily to an increase in rental charges to the PCS
Alliances for additional assets used by the PCS Alliances but owned by the
Company.
Operating Expenses - Total operating expenses were $60.3 million, an increase of
$16.2 million, or 37%, over 1998 ($4.5 million, or 11%, increase in 1998 over
1997). Excluding the asset impairment charges (Note 7), total operating expenses
were $56.3 million, an increase of $12.3 million, or 28%, over 1998. Of this
increase, $9.5 million is from the wireline businesses, $8.4 million of which is
from Network, CLEC and Internet. Of the $8.4 million increase, $2.4 million is
directly from Virginia Internet acquisitions, $2.1 million is from Internet
expansion in West Virginia (primarily acquisition related) and $2.5 million is
from CLEC rollout and expansion. Operating expenses increased in wireless
communications, directory assistance and other communications services by $0.8
million (7%), $0.9 million (8%), and $1.0 million (34%), respectively. Increases
in wireless communications operating expenses were primarily variable in nature.
Costs such as access, selling and advertising expenses, as well as retail store
and customer care costs, increased $1.3 million. The directory assistance
increase was driven by transition related costs as this business transitioned to
a structure which will support significant growth in national directory
assistance offerings. Lastly, other communications services depreciation
increased $0.5 million and other communications services operating costs
increased the remaining $0.5 million. These increases pertained to the
increases in corporate assets owned by the Company and the related operating
costs which were used by the PCS Alliances, as discussed in the operating
revenues section above, and increases in corporate infrastructure costs.
Maintenance and support expenses, which include costs related to specific
property and equipment, as well as indirect costs such as engineering and
general administration of property and equipment, increased $5.8 million, or
53%, over 1998. Of this total increase, $1.6 million relates to network and CLEC
and $2.3 million relates to Internet. These increases represent network and
other plant related expense increases due to the geographic expansion and new
costs from acquired the Internet businesses. The remaining $1.9 million of
increase was evenly spread among all the other business segments. Increases in
these segments were due to customer growth and start-up related costs.
Maintenance and support expenses grew $1.2 million, or 12%, in 1998 over 1997
due to the first phase of geographic expansion and service enhancements for
the underlying network and support systems. Depreciation and amortization
expenses in 1999 increased $2.1 million, or 20.2%, over 1998. Of this increase,
$1.0 million related to Internet, $0.5 million of which represents amortization
of goodwill from acquired assets and the balance represents additional equipment
and improvements to the related network plant and equipment. The other primary
contributors to this increase are the
35
<PAGE>
other communications services depreciation increase of $0.5 million (discussed
on page 35) and the increase in telephone depreciation of $0.4 million.
Telephone depreciation increased primarily due to digital switching upgrades.
In addition to normal depreciation and amortization expenses, the Company
recognized a $4.0 million asset impairment charge for write-downs of certain
wireless analog cable assets ($2.7 million) and a write-off of software assets
($1.3 million) from an abandoned billing system due to a conversion to a single
billing platform (Note 7).
Customer operations expenses, which included marketing, product
management, product advertising, sales, publication of a regional telephone
directory, customer services and directory services, increased $3.6 million, or
22%, in 1999 over 1998 ($1.9 million, or 14%, in 1998 over 1997). Retail store
costs and customer care costs increased $1.1 million and $1.0 million,
respectively, in 1999 over 1998. This increase represents the geographic
expansion of our retail presence with the opening of five stores in 1999 and
1998 and increase in the customer care costs to cover the significant new
customer additions and the related larger overall customer base. In addition to
this, directory assistance customer operations increased $0.6 million, or 8%,
despite a lower call volume. This is due to start-up and training costs
associated with the shift to the national directory assistance products. In
addition to the start-up costs, these product offerings are at a higher level of
service and related costs. Customer operations expenses increased $1.9 million
in 1998 over 1997 which related to directory assistance growth in 1998 and, to a
lesser extent, sales and marketing related cost increases.
Corporate operations expenses, which include taxes other than income,
executive, accounting, legal, purchasing, information management, human
resources and other general and administrative expenses, increased $0.7 million,
or 11%, in 1999 over 1998. This was due to the corporate operations expenses of
the acquired Internet businesses and other corporate infrastructure increases
necessary to support the overall growth of the Company. Corporate operations
expenses remained constant in 1998 versus 1997.
Other Income (Expenses) - Other income (expenses), which includes the
categories of other, principally interest, equity income from wireless
investees, equity loss from PCS investees, gain on sale of tower assets and the
ATEL investment and loss on write-down of investment, decreased $4.1 million
from 1998 and decreased $8.6 million in 1998 from 1997.
Other expenses, principally interest, increased $0.3 million in 1999 from
1998 and decreased $0.2 million in 1998 from 1997. The increase in interest
expense is due to additional borrowings of $17.0 million (see Statement of Cash
Flows). The decrease in 1998 from 1997 was due to the liquidation of
mortgaged-backed services 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).
Equity income from other wireless investees, which includes equity earnings
from the Company's cellular limited partnership interests remained unchanged in
1999 versus 1998 and increased $0.1 million in 1998 over 1997. Equity loss from
PCS investees totaled $11.4 million in 1999, a $4.9 million increase over the
1998 loss of $6.5 million ($0.8 million in 1997). As mentioned earlier, driving
this growth in losses is the significant customer growth and the related
equipment subsidy and customer acquisition costs associated with this. Including
the wholesale digital PCS subscribers in the Company's VA RSA6 service area,
digital PCS subscribers increased 236% to 43,300 at December 31, 1999, an
increase of 30,400 over the prior year end.
Operations commenced in the fourth quarter of 1997 for the VA Alliance and
thus, 1997 losses reflect only a partial year. 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. 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, WV PCS Alliance losses in 1999 grew by $4.5 million over 1998
losses. Management believes that the Company's share of losses to be recognized
in 2000 will continue to be significant due to continued rapid customer growth
resulting in customer acquisition costs and high equipment subsidies before the
base is sufficient to cover the operating cost structure and customer
acquisition costs.
The Company recognized a $1.0 and $2.8 million impairment loss on its
investment in ATEL at December 31, 1998 and 1997, respectively. The Company
concluded at that time 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. However, in 1999, ATEL was purchased by Sprint
Corp. and the investment was sold for a gain over the carrying value after
write-downs of $7.6 million (Note 7). Additionally, the Company sold its tower
in Richmond, VA, for a gain of $0.7 million (Note 7).
36
<PAGE>
Income Taxes - Income taxes decreased $2.8 million, or 49%, in 1999 from
1998 (1.8 million, or 24%, in 1998 from 1997). There were two primary factors
causing this change: (1) a decrease in the pre-tax income of $4.8 million ($5.5
million in 1998 from 1997) and (2) a change in the effective tax rate to 31% in
1999 from 40% in 1998 (38% in 1997). The change in the effective tax rate was
due to charitable contributions deductible for tax purposes at appreciated
market values which were $1.5 million greater than the cost basis. In addition
to this, the Company received tax credits totaling $0.5 million for
rehabilitation of a historic building in Winchester, VA (the location of the
Company's new directory assistance call center) and employment credits for
exceeding certain new hire levels in our directory assistance business.
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 $23.8 million in unused aggregate borrowings
available under its existing credit facilities.
During 1999, net cash provided by operating activities was $31.5 million.
Principle changes in operating assets and liabilities included a $1.2 million
increase in accounts receivable, a $1.3 million increase in income tax
receivable, a $0.4 million decrease in materials and supplies, a $2.2 million
increase in accounts payable and a $0.9 million increase in other current and
accrued liabilities. The $1.2 million increase in accounts receivable was due to
the timing of receipt from a significant customer and the overall sales growth.
The $1.3 million increase in income tax receivable was due to quarterly
estimated tax payments in the first half of 1999 based on interim results
that, when projected, did not reflect the level of PCS losses from expansion and
growth in Virginia and West Virginia. Materials and supplies decreased due to
the strong retail sales at the end of 1999 which brought down the Company's
handset inventories below the prior year end levels. The $2.2 million increase
in accounts payable relates to higher overall purchasing volumes and timing of
some significant capital equipment deliveries. The $0.9 million increase in
other accrued and current liabilities relates to (1) $0.5 million in timing of
certain directory assistance current payables and (2) increased advance billings
to customers, primarily due to the addition of the acquired Internet operations.
The Company's investing activities included: (1) the investment of $36.7 million
in property and equipment, (2) $1.9 million in net repayments from PCS
Alliances, (3) $5.3 million investment in PCS Alliances and PCS licenses, (4)
$12.4 million in Internet acquisitions and (5) $9.7 million in proceeds from the
sale of the Company's Richmond tower asset (Note 7) and from the sale of the
ATEL investment (Note 4). Net cash used in financing aggregated $11.5 million,
including $6.0 million used to pay dividends and an aggregate of $17.0 million
of borrowing on long-term debt.
The Company had firm cash commitments relating to purchases of property and
equipment of approximately $5 million as of December 31,1999. Capital
expenditures for 2000, including these commitments, are expected to remain at
1999 levels to support continued expansion of competitive local telephone and
Internet access services, to participate in joint fiber build projects and to
add another building to support employee additions commensurate with the
growth in digital PCS, Internet and CLEC customers. 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
cash flows from operations and borrowings under committed 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 addressed this issue with a plan 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. The Company's year 2000 project was completed in the third quarter of
1999.
The total year 2000 project costs were not material to the Company's
business operations or financial condition. Management believes that the
Company's core systems are year 2000 compliant and the Company has not
experienced significant problems relating to the year 2000 issue. However, in
the event that unforeseen circumstances arise, management believes that its
contingency plans will prevent significant year 2000 issues from having a
material impact on the financial or operational results in future periods.
37
<PAGE>
<TABLE>
<CAPTION>
Quarterly Review
(In thousands,except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
- --------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Operating revenues $ 17,018 $ 17,889 $ 19,366 $ 19,519
Operating cash flows (a) 7,504 7,885 7,686 7,021
Operating income 4,693 4,917 1,737 2,175
Gain on sale of tower asset and investments - - 8,318 -
Equity loss from PCS investees
VA PCS Alliance (1,359) (1,479) (1,298) (1,301)
WV PCS Alliance (972) (1,459) (1,404) (2,094)
Net income (loss) 1,340 1,295 4,378 (520)
Net income (loss) per share - basic 0.103 0.099 0.335 (0.040)
Net income (loss) per share - dilutive 0.102 0.099 0.334 (0.040)
- --------------------------------------------------------------------------------------------------------
Stock price range $22.63-20.19 $25.50-20.63 $24.00-20.13 $34.63-21.63
Quarterly dividend $0.11475 $0.11475 $0.11475 $0.11475
- --------------------------------------------------------------------------------------------------------
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 5,758 5,609
Loss on write-down of investment (270) - (353) (387)
Equity loss from PCS investees
VA PCS Alliance (876) (1,244) (1,244) (1,712)
WV PCS Alliance (20) (102) (303) (966)
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 - dilutive 0.187 0.188 0.166 0.109
- --------------------------------------------------------------------------------------------------------
Stock price range $27.00-20.75 $27.50-22.25 $24.25-20.00 $23.38-19.50
Quarterly dividend $0.10875 $0.10875 $0.10875 $0.10875
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Operating income before depreciation and amortization and asset
impairment charges. See Management's Discussion and Analysis for
additional factors to consider in using this measure.
- - Losses were recognized in the first, third and fourth quarters of 1998
totaling $1.0 million ($0.6 million after-tax or $0.05 per share) on
write-down of the investment in American Telecasting, Inc. In the third
quarter of 1999, this investment was sold for a gain of $7.6 million
($4.7 million after-tax or $0.36 per share)(Note 7).
- - Third quarter 1999 includes a gain on sale of the Richmond, VA, tower
of $0.7 million ($0.4 million after-tax or $0.03 per share).
- - An asset impairment charge was recognized in the third quarter of 1999
of $2.7 million relating to the Company's wireless analog cable
equipment. Additionally, concurrent with the completion of the
conversion to a single billing platform, the Company recognized a $1.2
million write-off of software associated with its prior wireless
billing system (Note 7).
238
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data and Five Year Growth Comparison
($'s in thousands,except per share amounts) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 73,792 $ 66,686 $ 59,010 $ 49,948 $ 43,089
Operating expenses 60,270 44,060 39,598 34,533 29,667
Income taxes 2,868 5,639 7,398 5,163 5,006
Asset impairment charge 3,951 - - - -
Gain on sale of investments 8,318 - 5,077 - 927
Loss on write-down of investment - (1,010) (2,808) - -
Net income 6,493 8,508 12,221 9,550 8,494
Earnings per share - diluted 0.50 0.65 0.94 0.73 0.66
Cash dividends per share 0.459 0.435 0.412 0.392 0.379
Total assets 218,002 154,334 147,743 142,400 143,251
Long-term debt 37,685 19,774 24,606 24,000 20,000
Retirement benefits 10,854 9,853 8,845 8,010 7,351
Investment in property
and equipment $ 185,160 $ 154,423 $ 137,703 $ 127,196 $ 111,806
Average number of common
shares outstanding - diluted 13,112,952 13,093,561 13,055,814 13,056,081 12,933,926
Number of employees 981 743 567 454 492
Number of shareholders 2,977 2,998 2,884 2,883 2,889
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Board of Directors Executive Officers
Phyllis Huff Arnold J.William Brownlee
President and CEO Vice President -
One Valley Bank, N.A. Virginia Operations
William Wayt Gibbs,V Warren C.Catlett
President Vice President - Strategy
Comprehensive Computer and Business Development
Consultants, Inc.
David E.Lowe
C.Wilson McNeely,III President -
Chairman West Virginia Operations
Eagle Corporation
David R.Maccarelli
John B.Mitchell President -
President & Chairman Virginia Operations
Hammond-Mitchell, Inc.
Michael B.Moneymaker
John N.Neff Vice President and
President and Chief Financial Officer,
Chief Executive Officer Treasurer and Secretary
Nielsen Builders, Inc.
Donna M.Persing
James S.Quarforth Senior Vice President
Chairman and
Chief Executive Officer James S.Quarforth
CFW Communications Chairman of the Board
Company Chief Executive Officer
Carl A.Rosberg Carl A.Rosberg
President and President and
Chief Operating Officer Chief Operating Officer
CFW Communications
Company
Robert S.Yeago,Jr.
Retired Chairman
CFW Communications Company
[PHOTO OF C. PHILLIP BARGER APPEARS HERE]
C.Phillip Barger
Our appreciation is extended to C. Phillip Barger for his 37
years of service as a member of the Board of Directors. He retired from the
Board in April of 1999. Mr. Barger provided leadership and insight as CFW
transitioned from a local telephone company into an integrated communications
provider. As CFW moves into a new millennium we can do so with confidence
because of the foundation put into place by people like Mr. Barger.
[PHOTO OF PHYLLIS HUFF ARNOLD APPEARS HERE]
Phyllis Huff Arnold
Appointed to the Board of Directors in 1999 was Ms. Phyllis
Huff Arnold of One Valley Bancorp, Inc. Ms. Arnold is the Senior Executive Vice
President and Chief Operating Officer of One Valley Bancorp, Inc., which is
headquartered in Charleston, West Virginia. The Appointment to the Board of
Directors was effective May 1, 1999. She has served on the One Valley Bancorp's
Board of Directors since 1993. Ms. Arnold joined One Valley in 1972 and has held
numerous leadership positions including having been promoted to President and
CEO of One Valley Bank, NA in 1991. Ms. Arnold left One Valley in 1979 to serve
as the West Virginia Commissioner of Banking until rejoining One Valley in 1983.
40
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
The Company has as its wholly-owned subsidiaries, CFW Telephone Inc.,
CFW Network Inc., CFW Wireless Inc., CFW Cable Inc., CFW Cable of
Virginia Inc., CFW Communications Services Inc., Net Access, Inc., CFW
Cornerstone, 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
in which it owns an 84% interest. This partnership is 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 17, 2000, 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.
We also consent to the inclusion in this annual report on form 10-K,
exhibit 99, of our reports dated February 17, 2000 on the financial statements
of Virginia PCS Alliance, L.C. and West Virginia PCS Alliance, L.C.
/s/ McGladrey & Pullen LLP
Richmond, Virginia
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 198540
<SECURITIES> 0
<RECEIVABLES> 13822010
<ALLOWANCES> 1091627
<INVENTORY> 955381
<CURRENT-ASSETS> 21375427
<PP&E> 185159644
<DEPRECIATION> 59278974
<TOTAL-ASSETS> 218001597
<CURRENT-LIABILITIES> 19095802
<BONDS> 37684783
0
0
<COMMON> 43943136
<OTHER-SE> 50385117
<TOTAL-LIABILITY-AND-EQUITY> 218001597
<SALES> 0
<TOTAL-REVENUES> 73791785
<CGS> 0
<TOTAL-COSTS> 60269679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1110148
<INCOME-PRETAX> 9748995
<INCOME-TAX> 2867704
<INCOME-CONTINUING> 6492658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6492658
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
</TABLE>
Exhibit 99
Financial Statements of Virginia PCS Alliance, L.C. and
West Virginia PCS Alliance, L.C. for the year ended
December 31, 1999.
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL report
December 31, 1999
<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 - 13
- ----------------------------------------------------------------------------
<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, 1999 and 1998, 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, 1999 and 1998, 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 17, 2000
1
<PAGE>
<TABLE>
VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1999 and 1998
<CAPTION>
ASSETS (Note 2) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 64,052 $ 59,814
Accounts receivable, net of allowance
of $561,861 ($194,958 in 1998) 1,790,159 570,893
Account receivable, other 867,376 373,952
Inventories 5,996,148 2,271,572
Prepaid expenses 522,798 371,924
--------------------------------------
Total current assets 9,240,533 3,648,155
--------------------------------------
Subordinated Capital Certificates 4,522,811 3,838,366
--------------------------------------
Property and Equipment
Land and building 1,864,318 1,220,533
Network plant and equipment 73,920,705 63,311,713
Furniture, fixtures and other equipment 5,913,845 4,057,770
Radio spectrum licenses 32,714,384 32,714,384
--------------------------------------
Total in service 114,413,252 101,304,400
Under construction 6,991,159 2,565,479
--------------------------------------
121,404,411 103,869,879
Less accumulated depreciation 14,989,390 7,257,206
--------------------------------------
106,415,021 96,612,673
--------------------------------------
Other Assets 663,374 216,705
--------------------------------------
$ 120,841,739 $ 104,315,899
======================================
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT) 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 3,737,845 $ 8,437,551
Due to affiliates (Note 6) 2,900,955 2,260,982
Dividends payable (Note 3) 229,138 229,138
Customer deposits 152,758 56,187
Advance billings 80,702 71,518
Accrued interest 355,970 726,992
Accrued payroll 98,680 150,515
Accrued taxes 39,676 35,878
Other accrued liabilities 37,075 22,129
--------------------------------------
Total current liabilities 7,632,799 11,990,890
--------------------------------------
Long-Term Debt (Note 2) 131,478,017 90,301,358
--------------------------------------
Redeemable Series A Preferred Membership Interests (Note 3) 15,191,674 14,345,128
--------------------------------------
Commitments (Note 5)
Members' Equity (Deficit) (Note 4)
Series B preferred membership interests 15,094,337 10,860,376
Common membership interests (48,555,088) (23,181,853)
--------------------------------------
(33,460,751) (12,321,477)
--------------------------------------
$ 120,841,739 $ 104,315,899
======================================
</TABLE>
3
<PAGE>
<TABLE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues:
Subscriber revenue $ 7,957,059 $ 1,738,543
Wholesale revenue 3,903,356 2,175,733
Equipment sales 1,516,240 730,356
------------------------------------------
13,376,655 4,644,632
------------------------------------------
Operating expenses:
Cost of goods sold 5,863,735 3,009,537
Maintenance and support 6,638,337 5,166,427
Depreciation and amortization 7,769,480 7,040,676
Customer operations 8,684,604 5,729,097
Corporate operations 2,517,056 2,111,408
------------------------------------------
31,473,212 23,057,145
------------------------------------------
Loss before interest and preferred dividends (18,096,557) (18,412,513)
Interest income (expense):
Interest income 262,094
Senior credit facility (6,390,325) (4,131,445)
Redeemable preferred interest (1,914,486) (1,870,988)
------------------------------------------
Net loss $ (26,139,274) $ (24,414,946)
==========================================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
<TABLE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999 and 1998
<CAPTION>
Series B
Preferred Common
Membership Membership
Interests Interests Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1998 $ 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)
Capital contributions 4,233,961 766,039 5,000,000
Net loss - (26,139,274) (26,139,274)
------------------------------------------------------
Balance as of December 31, 1999 $ 15,094,337 $ (48,555,088) $ (33,460,751)
======================================================
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
<TABLE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (26,139,274) (24,414,946)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 6,914,324 6,527,202
Amortization 855,156 513,474
Changes in assets and liabilities:
(Increase) in:
Accounts receivable (1,712,690) (845,973)
Inventories (3,724,576) (1,412,802)
Prepaid expenses (150,874) (128,132)
Increase (decrease) in:
Accounts payable, trade 515,676 (4,119,974)
Advance billings and customer deposits 105,755 98,099
Accrued interest (371,022) 132,406
Accrued dividends on Series A Preferred
Membership Interests 814,587 771,087
Other accrued liabilities (33,091) 192,993
-------------------------------------
Net cash used in operating activities (22,926,029) (22,686,566)
-------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (22,749,914) (34,826,975)
Increase in patronage capital certificates (466,833) -
Decrease in deferred charges 14,827 -
-------------------------------------
Net cash used in investing activities (23,201,920) (34,826,975)
-------------------------------------
Cash Flows From Financing Activities
Capital contributions, net 5,000,000 3,000,000
Advances from affiliates 639,973 1,600,599
Borrowings on revolving credit agreements, net 27,487,693 273,024
Proceeds from long-term borrowings 13,004,521 52,540,650
-------------------------------------
Net cash provided by financing activities 46,132,187 57,414,273
-------------------------------------
Net decrease in cash and cash equivalents 4,238 (99,268)
Cash and cash equivalents
Beginning 59,814 159,082
-------------------------------------
Ending $ 64,052 59,814
=====================================
</TABLE>
(Continued)
6
<PAGE>
<TABLE>
VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities
Noncash increases in property and equipment consisting
primarily of accrued construction costs, accounts payable,
accrued dividends, and capitalization of other intangible
costs $ 829,430 $ 6,044,812
======================================
Subordinated capital certificates acquired by long-term
borrowings $ 684,445 $ 2,765,302
======================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 7,064,868 $ 4,419,430
======================================
Cash payments for redeemable preferred interest $ 1,099,899 $ 1,099,896
======================================
</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 value 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 1998 financial
statements have been reclassified, with no effect on net loss or members'
equity (deficit) to conform with classifications adopted in 1999.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
1999 1998
--------------------------------------
Vendor Supported Loan $ 75,000,000 $ 71,139,502
Supplemental Loan 15,456,231 5,627,763
Line of Credit 29,642,412 2,154,719
U. S. Department of the Treasury, FCC 11,154,374 11,154,374
Other 225,000 225,000
--------------------------------------
$ 131,478,017 $ 90,301,358
======================================
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").
The Alliance has a $146.0 million Senior Secured Credit Facility with the Rural
Telephone Financing Cooperative ("RTFC" or "Lender"). This credit facility was
entered into in 1999 and replaced the Alliance's previous $89 million senior
secured credit facility. The available facilities consist of a 7-year term loan
("Vendor Supported Loan") in the amount of $75.0 million, a 7-year term loan
("Supplemental Loan") in the amount of $36.0 million, and a 7-year revolving
line of credit loan ("Line of Credit") in the amount of $35.0 million.
The Vendor Supported Loan is to finance up to $71.25 million of Motorola
("Vendor") 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 $34.2 million of nongovernment-funded
PCS license costs, microwave relocation expenses, non-Motorola related capital
expenditures and working capital, and to purchase up to $1.8 million of RTFC
SCCs.
9
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Long-Term Debt (Continued)
The RTFC SCC's 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 quarterly
installments, plus accrued interest, with 10% of the principal due in year five,
15% due per year in years six and seven, and the final 60% is due at the
maturity date, October 15, 2006.
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, 1999 and
1998 was 7.45% and 6.60%, 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. The line of credit is to be repaid on
October 15, 2006. 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, 1999 and 1998 was 8.10% and 7.20%, respectively.
Interest costs in 1999 were approximately $6.7 million of which $6.4 was
expensed and $0.3 million was capitalized. Interest costs in 1998 were
approximately $4.5 million of which $4.1 million was expensed and $0.4 million
was capitalized.
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 $68.3 million in
the aggregate. As additional credit support for the Vendor Supported Loan and
the supplemental loan, Motorola has entered into a guaranty agreement with the
RTFC for up to $77.7 million of the Alliance's outstanding indebtedness.
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.
10
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Long-Term Debt (Continued)
Long-term debt maturities of amounts of Vendor Supported and Supplemental loans
outstanding at December 31, 1999 are as follows:
2000 through 2002 $ -
2003 4,522,812
2004 11,307,029
Thereafter 115,648,176
-------------------
Total $ 131,478,017
===================
The RTFC allocates a large percentage of its annual margins to its patrons. A
majority portion of the allocation is returned to the borrowers in cash. The
remainder is issued to borrowers in the form of patronage capital certificates,
which are retired in cash on an RTFC board approved cycle. In 1999, the Alliance
received a cash distribution for 1998 patronage capital in the amount of
$123,993. A $419,260 receivable for the 1999 cash distribution was recorded and
is reflected in Other receivables on the Alliance's balance sheet . The net
present value of the total patronage capital certificates was $466,833 at
December 31, 1999 and is reflected in Other assets on the Alliance's balance
sheet. The Alliance records Patronage Capital as a reduction in interest
expense.
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, 1999 and 1998, accrued current dividends were
approximately $229,000 for each date and accrued "true up" dividends were
approximately $2,316,000 and $1,501,000, 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.
11
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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), 115,471.6 units issued on January 6, 1998 at $22.00 per unit (stated
value), and 192,452.7 units issued on January 4, 1999 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 a
440,363.8 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.
Equity Subscriptions: The members entered into equity subscription agreements
that obligates them to contribute $30 million in the aggregate of which $8
million had been contributed as of December 31, 1999. The remaining
additional equity contributions are scheduled to be contributed over three
years $10 million in 2000; $10 million in 2001 and $2 million in 2002. Such
contributions shall be for the purchase, at fair market value, of Common
Membership or Series B Preferred Membership units.
In January 2000, 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, 1999 and 1998 was approximately $1,571,000 and $1,169,000,
respectively. The total amount committed under these lease agreements is
$1,353,576 in 2000, $1,320,316 in 2001, $1,159,081 in 2002, $853,706 in 2003,
$569,760 in 2004 and $2,040,167 for the years thereafter.
Equipment: The Alliance had outstanding purchase commitments of approximately
$2.2 million at December 31, 1999.
12
<PAGE>
VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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,
customer care and other general and administrative services to the Alliance in
the amount of $4,751,731 in 1999 and $3,015,260 in 1998. Of the total 1999
charges, $4,253,119 ($2,684,701 in 1998) was expensed and $498,612 ($330,559 in
1998) was capitalized. CFW Communications Company also provided certain
corporate services for the Alliance in the amount of $2,094,421 in 1999 and
$1,310,486 in 1998. All corporate services were expensed in 1999 and 1998.
Corporate services include executive, finance, accounting, 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. Interest on outstanding advances
was $240,627 in 1999.
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 $1,454,228 in 1999 and $1,639,595 in
1998.
13
<PAGE>
9
WEST VIRGINIA PCS ALLIANCE, L.C.
FINANCIAL REPORT
December 31, 1999
<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 - 11
- ----------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Management Committee
West Virginia PCS Alliance, L.C.
Waynesboro, Virginia
We have audited the accompanying balance sheets of West Virginia PCS Alliance,
L.C. as of December 31, 1999 and 1998, 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 West Virginia PCS Alliance,
L.C. as of December 31, 1999 and 1998, 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 17, 2000
1
<PAGE>
<TABLE>
WEST VIRGINIA PCS ALLIANCE, L.C.
BALANCE SHEETS
December 31, 1999 and 1998
<CAPTION>
ASSETS (Note 2) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 8,120 $ 10,254
Accounts receivable, net of allowance
of $99,915 ($1,768 in 1998) 832,763 32,453
Other receivables 175,376 141,449
Inventories 1,281,241 229,150
Prepaid expenses 69,049 74,145
--------------------------------------
Total current assets 2,366,549 487,451
--------------------------------------
Subordinated Capital Certificates 2,506,255 411,869
--------------------------------------
Property and Equipment
Land and building 942,988 42,668
Network plant and equipment 33,898,373 8,911,322
Furniture, fixtures and other equipment 1,330,005 789,631
Radio spectrum licenses 6,132,100 6,132,100
--------------------------------------
Total in service 42,303,466 15,875,721
Under construction 5,436,007 11,634,333
--------------------------------------
47,739,473 27,510,054
Less accumulated depreciation 2,317,215 257,819
--------------------------------------
45,422,258 27,252,235
--------------------------------------
Other Assets
Radio spectrum licenses 2,844,772 2,756,946
Other 356,894 223,441
--------------------------------------
3,201,666 2,980,387
--------------------------------------
$ 53,496,728 $ 31,131,942
======================================
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
<TABLE>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 1,819,567 $ 7,147,589
Due to affiliates (Note 5) 1,059,198 3,492,424
Accrued payroll 59,797 56,337
Advance billings 27,550 9,371
Accrued interest 5,434 4,526
Other accrued liabilities 104,530 22,280
--------------------------------------
Total current liabilities 3,076,076 10,732,527
Long-Term Debt (Note 2) 51,125,102 9,237,389
Commitments (Note 4)
Members' Equity (Deficit) (Note 3) (704,450) 11,162,026
--------------------------------------
$ 53,496,728 $ 31,131,942
======================================
</TABLE>
3
<PAGE>
<TABLE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues:
Subscriber revenue $ 2,307,517 $ 46,293
Equipment sales 681,398 65,388
------------------------------------------
2,988,915 111,681
------------------------------------------
Operating expenses:
Cost of goods sold 3,065,469 218,943
Maintenance and support 4,129,714 610,106
Depreciation and amortization 2,067,618 258,959
Customer operations 4,094,039 1,308,767
Corporate operations 1,743,683 817,984
------------------------------------------
15,100,523 3,214,759
------------------------------------------
Loss before interest expense (12,111,608) (3,103,078)
Interest expense 1,175,868
------------------------------------------
Net loss $ (13,287,476) $ (3,103,078)
==========================================
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
Years Ended December 31, 1999 and 1998
Common
Membership
Interests
- ------------------------------------------------------------------------------
Balance as of December 31, 1997 $ 14,290,224
Issuance costs (25,120)
Net loss (3,103,078)
------------------
Balance as of December 31, 1998 11,162,026
Capital contributions 1,421,000
Net loss (13,287,476)
------------------
Balance as of December 31, 1999 $ (704,450)
==================
See Notes to Financial Statements.
5
<PAGE>
<TABLE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (13,287,476) $ (3,103,078)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,059,396 254,849
Amortization 8,222 4,110
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (834,237) (173,902)
Inventories (1,052,091) (229,150)
Prepaid expenses 5,096 (74,145)
Increase in:
Accounts payable 518,754 682,086
Advance billings 18,180 9,371
Accrued interest 908 4,526
Other accrued liabilities 85,710 2,489
--------------------------------------
Net cash used in operating activities (12,477,538) (2,622,844)
--------------------------------------
Cash Flows From Investing Activities
Purchase of property and equipment (26,076,196) (13,997,039)
Increase in radio spectrum licenses (87,826) (3,994)
Increase in deferred charges (95) (10,803)
Increase in patronage capital certificates (141,580) -
--------------------------------------
Net cash used in investing activities (26,305,697) (14,011,836)
--------------------------------------
Cash Flows From Financing Activities
Increase in equity issuance costs - (2,232)
Capital contributions 1,421,000 -
Advances from affiliates (2,433,226) 3,426,045
Borrowings on revolving credit agreements, net - 1,000,000
Proceeds from long-term borrowings, net 39,793,327 7,825,520
--------------------------------------
Net cash provided by financing activities 38,781,101 12,249,333
--------------------------------------
Net decrease in cash and cash equivalents (2,134) (4,385,347)
Cash and cash equivalents
Beginning 10,254 4,395,601
--------------------------------------
Ending $ 8,120 $ 10,254
======================================
</TABLE>
(Continued)
6
<PAGE>
<TABLE>
WEST VIRGINIA PCS ALLIANCE, L.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Schedule of Noncash Investing and
Financing Activities
Noncash increases in property and equipment consisting
primarily of accrued construction costs and reallocation
of prior year other intangible costs $ 618,726 $ 6,661,939
======================================
Subordinated capital certificates acquired by long-term
borrowings $ 2,094,386 $ 411,869
======================================
Supplemental Disclosure of Cash Flow Information
Cash payments for interest $ 1,781,822 $ 178,627
======================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
The West Virginia PCS Alliance, L.C. ("Alliance") was organized in 1997 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 West Virginia. Operations commenced during
September 1998, prior to which the Alliance was in the development stage. Its
major activities through September 1998 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. 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>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies (Continued)
Fair value of financial instruments: The fair value 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 1998 financial
statements have been reclassified, with no effect on net loss or members'
equity to conform with classifications adopted in 1999.
Note 2. Long-Term Debt
Long-term debt consists of the following as of December 31:
1999 1998
--------------------------------------
Vendor Supported Loan $ 50,125,102 $ 8,237,389
Line of Credit 1,000,000 1,000,000
--------------------------------------
$ 51,125,102 $ 9,237,389
======================================
In July 1998, the Alliance entered into a $70.5 million Senior Secured Credit
Facility with the Rural Telephone Financing Cooperative ("RTFC" or "Lender") and
Motorola, Inc. ("Motorola"). The available facilities consist of a 7-year senior
secured term loan ("Vendor Supported Loan") in the amount of $52.5 million, a
7-year senior secured term loan ("Supplemental Loan") in the amount of $17.0
million, and a 5-year senior secured revolving line of credit loan ("Line of
Credit") in the amount of $1.0 million.
The Vendor Supported Loan is to finance up to $49.9 million of Motorola supplied
PCS equipment and engineering services, nonvendor related capital expenditures
and microwave relocation expenses, and to purchase up to $2.6 million of RTFC
subordinated capital certificates ("SCCs"). The Supplemental Loan is to finance
up to $16.2 million of non-Motorola related capital expenditures and working
capital, and to purchase up to $0.8 million of RTFC SCCs. The Line of Credit is
to supplement the Alliance's general short-term cash requirements.
The RTFC SCC's 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.
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 Loan at December 31, 1999 was 7.45%. In
September 1998, the Alliance converted $5.0 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.
9
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Long-Term Debt (Continued)
Under the Line of Credit agreement, the Alliance will pay interest quarterly
with all principal and interest payments due five years from the date of the
Line of Credit agreement. 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, 1999 was 8.1%.
All of the Alliance's present and future assets and revenues 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. These
guarantees will not exceed the lesser of (i) $32.8 million plus interest and
fees due thereon or (ii) 30% of the outstanding indebtedness under the Vendor
Supported Loan plus outstanding borrowings on the Supplemental Loan and Line of
Credit, inclusive of principal, interest and fees due thereon. As additional
credit support for the Vendor Supported Loan, Motorola has entered into a
guaranty agreement with the RTFC, whereby it is committed to guarantee up to the
lesser of (i) $36.8 million or (ii) 70% of the Alliance's outstanding
indebtedness under the Vendor Supported Loan. Pursuant to this agreement,
Motorola is entitled to a guaranty fee of 2%, 3%, and 4% of the outstanding
indebtedness under the Vendor Supported Loan which it guarantees in years 5, 6,
and 7, respectively. There is no fee in years 1 through 4.
The loan agreements contain various restrictive covenants including negative
covenants related to additional indebtedness, redemption of membership interests
and payment of management fees. The agreements also contain financial covenants
related to cash flows, population coverage, number of subscribers, debt service
coverage and leverage.
There are no long-term debt maturities for 2000-2001. Maturities for 2002, 2003,
2004 and 2005 are $2,506,255, $7,265,638, $7,518,765 and $33,834,444,
respectively. Interest costs were approximately $1,783,000 in 1999,
approximately $607,000 of which was capitalized.
The RTFC allocates a large percentage of its annual margins to its patrons. A
majority portion of the allocation is returned to the borrowers in cash. The
remainder is issued to borrowers in the form of patronage capital certificates,
which are retired in cash on an RTFC board approved cycle. In 1999, the Alliance
recorded a receivable in the amount of $42,932 for the 1999 cash distribution
that is reflected in other receivables on the balance sheet. The net present
value of the total patronage capital certificates was $141,579 at December 31,
1999 and is reflected in other assets on the balance sheet.
Note 3. Capital Structure
The Alliance's authorized capitalization consists of one class of membership
interest, which consists of 1,242,002 units issued for a total of $14,316,036
before $50,932 of related issuance costs. This issuance is defined as the
initial "Capital Contribution." Additional future cash contributions may be
required from the members on the same terms and conditions of their initial
Capital Contribution. If any member fails to make the additional contributions,
their existing capital account balance may be redeemed at 25% of the then
outstanding balance and amounts forfeited would be allocated among the remaining
common members.
10
<PAGE>
WEST VIRGINIA PCS ALLIANCE, L.C.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Capital Structure (Continued)
Pursuant to the terms of the aforementioned debt facility, the members entered
into equity subscriptions agreements that obligate them to contribute additional
equity of $5.68 million, in the aggregate. Such additional equity contributions
are to be made in four annual installments of $1.42 million ending in 2002 for
the purchase, at fair market value, of Common Membership units.
In January 2000, the members contributed $1.42 million to the Alliance,
purchasing 78,944.44 Common Membership units.
Note 4. Commitments
Leases: The Alliance leases property for cell site locations and retail stores.
Leases for cell site locations vary in term from five to ten years. Leases for
retail store locations vary in term from one 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 was approximately
$769,000 for the year ended December 31, 1999. The total amount committed under
these agreements is $727,989 in 2000, $682,133 in 2001, $657,140 in 2002,
$557,183 in 2003, $308,602 in 2004 and $326,765 for the years thereafter.
Equipment: The Alliance has entered into a purchase contract to acquire up to
$35.0 million of equipment over a period ending July 10, 2002. As of December
31, 1999, the Alliance had purchased $20.2 million pursuant to the terms of such
contract. Total outstanding purchase commitments were approximatley $2.6 million
at December 31, 1999.
Note 5. 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, customer care and other
services to the Alliance in the amount of $1,273,715 in 1999 and $933,585 in
1998. All 1999 charges were expensed. Of the total 1998 charges, $380,746 was
expensed and $552,839 was capitalized during the construction and start up
period. CFW Communications Company also provided certain corporate services for
the Alliance in the amount of $1,168,009 in 1999 and $553,225 in 1998. All of
the 1999 charges were expensed. Of the total 1998 charges, $436,014 was expensed
and $117,211 was capitalized during the construction and start up period.
Corporate services include executive, finance, accounting, 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. The net advances are included in due to
affiliates in the accompanying balance sheet. 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. Interest
on outstanding advances totaled 193,990 in 1999.
Switch access and switching equipment and services totaling $972,759 in 1999 and
$1,115,043 in 1998 were provided at cost by the Virginia PCS Alliance LC (an
entity related by common ownership and management). All of the 1999 charges were
expensed. Of the total 1998 charges, $375,941 was expensed and $739,102 was
capitalized.
11
