SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000 Commission File No. 0-16751
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CFW COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1443350
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(State or other jurisdiction of (I R S employer
incorporation or organization) identification no.)
P. O. Box 1990, Waynesboro, Virginia 22980
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 540-946-3500
--------------------------
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 8/14/00 13,116,553
--------------------------
<PAGE>
CFW COMMUNICATIONS COMPANY
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, June 30, 2000 and
December 31, 1999 3-4
Condensed Consolidated Statements of Income, Three and
Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows Six
Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Shareholders'
Equity, Three and Six Months Ended June 30, 2000 and 1999 7
Notes to Condensed Consolidated Financial Statements 8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
PART II. OTHER INFORMATION 15
SIGNATURES 16-17
2
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, 2000
(Unaudited) December 31, 1999
--------------------- --------------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 248,754 $ 198,240
Accounts receivable, net of allowance of $1.6 million ($1.1 million
in 1999) 13,835,949 12,212,886
Receivable from affiliates 1,724,693 3,824,585
Materials and supplies 1,095,120 955,381
Prepaid expenses and other 976,718 572,339
Income tax receivable - 1,999,715
Assets of discontinued segment 9,764,328 8,023,326
--------------------- --------------------
27,645,562 27,786,472
--------------------- --------------------
Securities and Investments 35,100,542 39,109,476
--------------------- --------------------
Property and Equipment
Land and building 23,862,688 23,526,095
Network plant and equipment 114,712,693 100,938,828
Furniture, fixtures and other equipment 24,403,777 26,158,859
Radio spectrum licenses 15,476,485 15,478,079
--------------------- --------------------
Total in service 178,455,643 166,101,861
Under construction 12,530,597 9,124,046
--------------------- --------------------
190,986,240 175,225,907
Less accumulated depreciation 61,381,028 55,756,282
--------------------- --------------------
129,605,212 119,469,625
--------------------- --------------------
Other Assets
Cost in excess of net assets of business acquired, less accumulated
amortization of $3.3 million ($2.4 million in 1999) 31,039,878 23,411,894
Deferred charges 12,006,608 359,294
Radio spectrum licenses and license deposits 7,864,963 7,864,836
--------------------- --------------------
50,911,449 31,636,024
--------------------- --------------------
$ 243,262,765 $ 218,001,597
===================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
<CAPTION>
June 30, 2000 December 31,
(unaudited) 1999
------------------- --------------------
Liabilities and Shareholders' Equity
<S> <C> <C>
Current Liabilities
Accounts payable $ 20,317,262 $ 9,552,592
Customers' deposits 529,027 448,995
Advance billings 2,987,640 2,677,044
Accrued payroll 1,067,069 1,030,413
Accrued interest 96,152 280,151
Other accrued liabilities 3,423,737 1,617,206
Accrued income taxes payable 122,138 -
Deferred revenue 1,518,890 1,835,694
Liabilities of discontinued segment 3,275,045 2,293,799
------------------- --------------------
33,336,960 19,735,894
------------------- --------------------
Long-Term Debt 51,567,016 37,684,783
------------------- --------------------
Long-term Liabilities
Deferred income taxes 29,568,013 31,077,684
Retirement benefits 10,427,284 10,741,020
Other 2,795,177 797,175
------------------- --------------------
42,790,474 42,615,879
------------------- --------------------
Minority Interests 1,419,433 1,781,241
------------------- --------------------
Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 44,747,385 43,943,136
Retained earnings 49,269,554 50,385,117
Unrealized gain on securities available for sale, net 20,131,943 21,855,547
------------------- --------------------
114,148,882 116,183,800
------------------- --------------------
$ 243,262,765 $ 218,001,597
=================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Revenues
Wireline communications $ 14,697,395 $ 10,199,402 $ 28,572,506 $ 20,001,516
Wireless communications 5,818,465 5,422,466 11,697,822 10,471,538
Other communications services 1,001,967 1,012,895 1,857,857 2,056,960
--------------- -------------- -------------- --------------
21,517,827 16,634,763 42,128,185 32,530,014
--------------- -------------- -------------- --------------
Operating Expenses
Cost of sales 2,490,271 1,738,617 4,857,047 3,489,749
Maintenance and support 6,181,332 3,146,777 11,687,050 6,136,040
Depreciation and amortization 3,408,736 2,667,548 6,751,367 5,198,169
Customer operations 3,792,461 2,863,918 7,390,939 5,441,462
Corporate operations 2,057,649 1,486,327 4,158,220 3,067,124
--------------- -------------- -------------- --------------
17,930,449 11,903,187 34,844,623 23,332,544
--------------- -------------- -------------- --------------
Operating Income 3,587,378 4,731,576 7,283,562 9,197,470
Other Income (Expenses)
Other expenses, principally interest (550,112) (293,425) (1,009,975) (545,687)
Equity loss from PCS investees
VA PCS Alliance (1,315,066) (1,479,228) (2,838,564) (2,838,052)
WV PCS Alliance (1,672,892) (1,458,879) (3,816,908) (2,431,229)
Equity income from other wireless investees 56,629 34,759 98,629 87,766
--------------- -------------- -------------- --------------
105,937 1,534,803 (283,256) 3,470,268
Income Taxes 84,393 442,192 (87,314) 1,196,238
--------------- -------------- -------------- --------------
21,544 1,092,611 (195,942) 2,274,030
Minority Interests (31,970) (129,543) (105,092) (218,558)
--------------- -------------- -------------- --------------
Income (loss) from continuing operations (10,426) 963,068 (301,034) 2,055,472
Income from operation of discontinued segment, net of tax 347,687 332,040 686,705 579,362
--------------- -------------- -------------- --------------
Net Income $ 337,261 $ 1,295,108 $ 385,671 $ 2,634,834
--------------- -------------- -------------- --------------
Income (loss) from continuing operations per common share - $ - $ 0.07 $ (0.02) $ 0.16
basic
Income (loss) from continuing operations per common share - $ - $ 0.07 $ (0.02) $ 0.16
diluted
Net income per common share - basic $ 0.03 $ 0.10 $ 0.03 $ 0.20
Net income per common share - diluted $ 0.03 $ 0.10 $ 0.03 $ 0.20
Average shares outstanding - basic 13,100,688 13,040,176 13,083,819 13,031,007
Average shares outstanding - diluted 13,309,760 13,115,990 13,291,777 13,091,394
--------------- -------------- -------------- --------------
Cash dividends per share $ - $ 0.11475 $ 0.11475 $ 0.22950
--------------- -------------- -------------- --------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
--------------------------------------------
June 30, June 30,
2000 1999
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 385,671 $ 2,634,834
Deduct income from operations of discontinued segment (686,705) (579,361)
-------------------- ------------------
Income (loss) from continuing operations (301,034) 2,055,473
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 5,870,656 4,839,795
Amortization 880,711 358,374
Deferred taxes (412,320) 1,262,979
Retirement benefits (313,736) 439,663
Equity loss from PCS Alliances 6,655,470 5,269,281
Minority interests, net of distributions 74,338 37,187
Other (685,217) 349,708
Equity gains from other investees (494,745) (231,614)
Changes in assets and liabilities from operations:
Increase in accounts receivable (1,553,775) (1,920,376)
Increase in materials and supplies (139,739) (1,703,125)
Increase in other current assets (404,379) (112,600)
Changes in income taxes 2,121,853 148,106
Increase (decrease) in accounts payable (634,285) 459,106
Increase (decrease) in other accrued liabilities 517,793 (311,736)
Increase in other current liabilities 390,628 157,105
-------------------- ------------------
Net cash provided by continuing operations 11,572,219 11,097,326
Net cash provided by (used in) discontinued operations (73,051) (1,069,396)
-------------------- ------------------
Net cash provided by operating activities 11,499,168 10,027,930
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (17,182,335) (15,460,720)
Acquisition/disposition costs (394,747) -
Purchase of minority interest in RSA6 (7,400,000) -
Investments in PCS alliances (3,892,138) (3,892,138)
Repayments from PCS Alliances 2,099,892 2,767,544
Proceeds from sale of towers 3,200,000 -
Acquisition of Internet company and subscribers (1,356,373) (2,097,652)
Deposit on radio spectrum licenses, net (100,000) (76,500)
Purchase of radio spectrum licenses, net of minority interest - (856,450)
Maturities and distributions from other investments 391,799 175,506
-------------------- ------------------
Net cash used in investing activities (24,633,902) (19,440,410)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (1,501,234) (2,994,005)
Payments on senior notes (12,727,272) (3,636,364)
Additional borrowing on lines of credit, net 26,609,505 16,289,084
Net proceeds from exercise of stock options 804,249 151,759
-------------------- ------------------
Net cash provided by financing activities 13,185,248 9,810,474
-------------------- ------------------
Increase (decrease) in cash and cash equivalents 50,514 397,994
Cash and cash equivalents:
Beginning 198,240 42,590
-------------------- ------------------
Ending $ 248,754 $ 440,584
==================== ==================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
6
<PAGE>
<TABLE>
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity (unaudited)
<CAPTION>
Accumulated
Other Total
Retained Comprehensive Shareholders'
Common Stock Earnings Income Equity
Shares Amount
------------ ------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 13,016,988 $43,527,636 $ 49,882,849 $ - $ 93,410,485
Comprehensive income:
Net Income 1,339,726
Unrealized gain on securities available for
sale, net of $1.0 million of deferred tax
obligation 1,580,294
Comprehensive income 2,920,020
Cash dividends (1,495,905) (1,495,905)
Stock options exercised, net 19,428 75,022 75,022
------------ ------------- ---------------- ----------------- ----------------
Balance, March 31, 1999 13,036,416 43,602,658 49,726,670 1,580,294 94,909,622
Comprehensive income:
Net Income 1,295,108
Unrealized gain on securities available for
sale, net of $1.7 million of deferred tax
obligation 2,719,995
Comprehensive income 4,015,103
Cash dividends (1,498,100) (1,498,100)
Stock options exercised, net 5,663 76,737 76,737
------------ ------------- ---------------- ----------------- ----------------
Balance, June 30, 1999 13,042,079 $43,679,395 $ 49,523,678 $ 4,300,289 $ 97,503,362
============ ============= ================ ================= ================
Balance, December 31, 1999 13,060,386 $43,943,136 $ 50,385,117 $ 21,855,547 $116,183,800
Comprehensive income:
Net Income 48,410
Unrealized loss on securities available for
sale, net of $1.0 million deferred tax
benefit (2,409,118)
Comprehensive income (2,360,708)
Cash dividends (1,501,234) (1,501,234)
Stock options exercised, net 34,043 382,356 382,356
------------ ------------- ---------------- ----------------- ----------------
Balance, March 31, 2000 13,094,429 44,325,492 48,932,293 19,446,429 112,704,214
------------ ------------- ---------------- ----------------- ----------------
Comprehensive income:
Net Income 337,261
Unrealized gain on securities available for
sale, net of $1.0 million deferred tax
obligation 685,514
Comprehensive income 1,022,775
Stock options exercised, net 22,124 421,893 421,893
------------ ------------- ---------------- ----------------- ----------------
Balance, June 30, 2000 13,116,553 $44,747,385 $ 49,269,554 $ 20,131,943 $114,148,882
============ ============= ================ ================= ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1999, which is derived
from audited financial statements, contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of June 30, 2000 and December 31, 1999 and the
results of operations for the three and six months ended June 30, 2000
and 1999 and cash flows for the six months ended June 30, 2000 and 1999.
The results of operations for the three and six months ended June 30,
2000 and 1999 are not necessarily indicative of the results to be
expected for the full year.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform with
classifications adopted in 2000.
(2) The Company has five primary business segments which have separable
management focus and infrastructures and that offer different products
and services. These segments are described in more detail in Note 2 of
the Company's 1999 Annual Report to Shareholders. Summarized financial
information concerning the Company's reportable segments, as adjusted
for all periods for the effect of the Company's discontinued operations
(Note 10), is shown in the following table.
<TABLE>
<CAPTION>
Telephone Network & Internet Wireless Cable Other Total
(in thousands) CLEC
---------------------------------------------------------------------------------------------------------------------------------
As of and for the three months ended June 30, 2000
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $8,022 $2,342 $3,939 $5,220 $598 $1,397 $21,518
EBITDA 5,486 (208) 290 758 118 552 6,996
Depreciation &
Amortization 1,042 504 779 287 319 478 3,409
As of and for the three months ended June 30, 1999
Revenues $7,810 $1,220 $763 $4,709 $714 $1,419 $16,635
EBITDA 5,625 191 (345) 1,300 147 481 7,399
Depreciation &
amortization 921 284 147 235 636 445 2,668
As of and for the six months ended June 30, 2000
Revenues $15,991 $4,376 $7,412 $10,460 $1,238 $2,651 $42,128
EBITDA 10,979 (277) 392 1,814 257 870 14,035
Depreciation &
Amortization 2,067 950 1,507 606 662 959 6,751
Total segment
Assets 47,244 29,321 21,302 9,023 19,554 11,731 138,175
Corporate assets 95,324
Assets of discontinued operation 9,764
------------
Total Assets $243,263
============
As of and for the six months ended June 30, 1999
Revenues $15,511 $2,422 $1,266 $9,030 $1,442 $2,859 $32,530
EBITDA 11,024 503 (609) 2,341 286 851 14,396
Depreciation &
amortization 1,822 551 234 445 1,280 866 5,198
Total segment
assets 43,134 19,929 3,831 8,551 24,898 12,476 112,819
Corporate assets 55,136
Assets of discontinued operation 8,112
------------
Total Assets $176,067
============
</TABLE>
(3) The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, were increased by 337,260 and
75,815 shares, and by 385,672 and 60,717 for the three and six month
periods ended June 30, 2000 and 1999, respectively, to reflect the
assumed conversion of dilutive stock options. The Company currently has
637,930 options outstanding to acquire shares of common stock, of which
257,310 are currently exercisable.
8
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
(4) As of June 30, 2000, the Company had a 21% common ownership interest in
Virginia PCS Alliance, L.C. (VA Alliance), a provider of personal
communications services (PCS) serving a 1.7 million populated area in
central and western Virginia. The Company is managing such build-out
pursuant to a service agreement. PCS operations began throughout the
Virginia region in the fourth quarter of 1997.
As of June 30, 2000, the Company had a 45% common ownership interest in
the West Virginia PCS Alliance, L.C. (WV Alliance), a PCS provider
serving a 2.0 million populated area in West Virginia and parts of
eastern Kentucky, southwestern Virginia and eastern Ohio. The Company is
managing this build-out pursuant to a service agreement. The WV Alliance
commenced operations in the fourth quarter of 1998, offering services
along the Charleston and Huntington corridor and expanded to the
northern corridor of West Virginia, including the cities of Clarksburg,
Fairmont and Morgantown in the second quarter of 1999.
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for under the equity method,
are as follows:
<TABLE>
<CAPTION>
VA Alliance WV Alliance
(in thousands) June 30, 2000 December 31, 1999 June 30, 2000 December 31, 1999
-------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Current assets $ 21,060 $ 9,241 $ 14,212 $ 2,367
Noncurrent assets 94,849 111,601 52,493 51,130
Current liabilities 3,161 7,633 10,367 3,076
Long-term debt 129,653 131,478 64,176 51,125
Redeemable preferred interest 12,892 15,192 - -
<CAPTION>
VA Alliance WV Alliance
For the Three Months Ended, For the Three Months Ended,
--------------------------- ---------------------------
(in thousands) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
Net sales $ 5,726 $ 3,007 $ 3,635 $ 376
Gross profit (loss) 3,243 1,830 1,349 (82)
Net loss applicable to common owners (6,323) (7,112) (3,749) (3,269)
Company's share of net loss (1,315) (1,479) (1,672) (1,458)
VA Alliance WV Alliance
For the Six Months Ended, For the Six Months Ended,
------------------------- -------------------------
(in thousands) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
Net sales $ 10,206 $ 5,424 $ 6,260 $ 632
Gross profit (loss) 5,407 2,414 1,640 (100)
Net loss applicable to common owners (13,648) (13,645) (8,554) (5,448)
Company's share of net loss (2,838) (2,838) (3,816) (2,431)
</TABLE>
As of June 30, 2000, the Company had entered into guaranty agreements
whereby the Company is committed to provide guarantees of up to $71.0
million of the Alliance's debt and redeemable preferred obligations.
Such guarantees become effective as obligations are incurred by the
Alliances. Subsequent to June 30, 2000, the Company refinanced the
Alliance debt (Note 7)
(5) In February 2000, the Company acquired 4,400 Internet subscribers from
Twin County Internet Access ("TCIA") for a purchase price of $1.0
million. TCIA is located in Galax, VA and serves parts of Southwestern
Virginia and Northern North Carolina. In May 2000, the Company acquired
2,195 Internet subscribers from Heart of Virginia Communications, Inc.
("HOVAC") for a purchase price of $0.3 million. HOVAC is located in
Farmville, VA.
In March 2000, the Company sold 10 towers for $3.2 million and the
Alliances sold a total of 123 towers for $38.5 million to Crown Castle
International Corp ("Crown"). In April 2000, the Alliances sold a total
of 18 towers for $5.7 million to Crown. In connection with these
transactions, the Company has certain future leaseback and other
commitments. Accordingly, gains on the sales have been deferred for book
purposes and will be amortized over the life of the leaseback agreement.
9
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
The effective tax rate for the Company changed significantly, from 29.3%
for the six months ended June 30, 1999 to 47.7% for the six months ended
June 30, 2000. The effective tax rate for the results from continuing
operations was a tax obligation of 37% for the six months ended June 30,
1999 as compared to a tax benefit of 22% for the six months ended June
30, 2000. The increases in the effective tax rates are a result of an
increase in non-deductible goodwill from the Internet acquisitions which
occurred over the last 18 months and other non-deductible goodwill,
applied against a lower pretax income (thus having a greater percentage
effect). Also, the presence of prior year tax credits and the favorable
treatment of a significant charitable contribution made in the prior
year caused the prior year rate to be below statutory rates. In addition
to the increased effective tax rate, the Company is anticipating that
its current tax provision will be significantly greater than prior
periods as a result of the recognition of the entire tower gain for tax
purposes, as well as the gains on sale of the directory assistance and
cellular analog businesses (Note 7 and 10). The current year effective
tax rate will be reduced from the rates noted above as a result of the
gains from these transactions due to the fact that non-deductible
goodwill will make up a smaller percent of a significantly increased
taxable income.
(6) In prior periods, the Company reported wireless revenues net of cost of
sales, primarily handsets. On June 1, 2000, the Company retroactively
revised its reporting to no longer net the cost of sales for handsets
and to present these amounts as a separate component of operating
expenses. Operating revenues for wireless communications were increased
by an identical amount. This revision was made because, in the opinion
of management, it more appropriately reflects the revenues and costs of
its wireless operations in accordance with industry practice.
(7) On July 26, 2000, the Company closed on the acquisition of PrimeCo
Personal Communications, L.P. PCS licenses, assets and operations in the
Richmond and Hampton Roads areas of Virginia ("PrimeCo VA") for cash of
$408.6 million, the assumption of approximately $20.0 million of lease
obligations and the transfer of a limited partnership interest and the
assets, licenses and operations of our analog wireless operation, with a
combined value of approximately $78.5 million.
The Company obtained financing through issuance of unsecured Senior
Notes for $280 million, Subordinated Notes for $95 million, a Senior
Secured Credit Facility of up to $325 million and various preferred
stock offerings of $250 million. These financing transactions closed
concurrent with or just prior to the PrimeCo VA acquisition. The Company
used the proceeds of the financing vehicles to fund the PrimeCo VA
acquisition, to repay substantially all of its existing indebtedness and
that of the Alliances, and for future expansion.
The Senior Notes were issued at 98.61% of par value and contain a 13.0%
coupon rate (13.25% yield). They mature in August 2010. Approximately
$69.1 million was placed in escrow to pre-fund the first four interest
payments. The Senior Notes are redeemable early at a redemption price of
up to 106.5%, reducing to 100% by August 2008 and contain various
financial covenants. Additionally, these notes were issued with warrants
to purchase an aggregate of 504,000 shares of the Company's common stock
at a price of $47.58 per share. The warrants are exercisable one year
from July 2000 and expire August 2010. The Senior Notes will be recorded
net of the $3.9 million discount associated with the issue price, $6.9
million of the estimated fair value of the warrants attached and other
associated closing costs.
The Subordinated Notes were issued at par and contain a 13.5% coupon
rate. They mature in February 2011. These notes are subordinate to all
senior indebtedness, including the senior notes. These notes contain
early redemption features similar to the senior notes. The notes were
issued with warrants to purchase an aggregate of 300,000 shares of the
Company's common stock at a price of $0.01 per share. These warrants are
also exercisable one year from July 2000 and expire February 2011. The
Subordinated Notes will be recorded net of the $12.2 million estimated
fair value of the warrants attached and other associated closing costs.
The preferred stock offering contained Series B convertible, redeemable
preferred stock of $112.5 million, Series C convertible, redeemable
preferred stock of $60.3 million, and Series D redeemable preferred
stock of $77.2 million. The Series B preferred stock converts to common
stock at $41 per share, contains warrants to purchase an aggregate of
500,000 shares of the Company's common stock at a price of $50 per share
and pays an 8.5% per annum dividend. The Series C preferred stock
converts to common stock at $43 per share and pays an 8.5% per annum
dividend. The Series C conversion price goes to $45 per share and the
dividend rate goes to 5.5% upon shareholder approval. The Series D pays
an 18% per annum dividend. However, upon shareholder approval as
required within the terms of the Series D preferred stock, the Series D
is converible to Series C with a conversion price of $45 per share and a
dividend rate of 5.5%.
In July 2000, the Company borrowed $150 million of the $325 million
senior secured term loans. The loans contain a tranche A term loan of
$50 million, tranche B term loan of $100 million, tranche C term loan of
$75 million and a revolving credit facility of $100 million. These loans
10
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
begin maturing in four years with final maturities occurring in seven to
eight years. The loans bear interest at rates 3% to 4% above the
Eurodollar rate or 2.5% to 3% above the federal funds rates. The loans
contain certain financial covenants and restrictions as to their use.
Concurrent with closing the PrimeCo VA acquisition and above financing,
$149.4 million of the amount borrowed under the senior term loans was
loaned to the Alliances, which they used to repay their indebtedness to
the Rural Telephone Finance Cooperative ("RTFC"). Additionally, of the
total proceeds obtained from all financing sources, the Company paid
$408.6 million to PrimeCo as part of the acquisition consideration, paid
$43.0 million of their outstanding borrowings under previously existing
lines of credit, placed $69.1 million in escrow to be used to fund the
first four interest payments on the senior notes, acquired additional
common ownership interest in the VA Alliance for $11.4 million, and will
pay approximately $40 million in transaction fees and expenses relating
to all of the transactions discussed herein. Of the total transaction
fees and expenses, approximately $10 to $12 million will be recognized
in financing related, non-recurring charges.
(8) Concurrent with the closing of the PrimeCo VA acquisition and the
aforementioned debt and equity financing, the VA Alliance redeemed its
series A preferred membership interest for $16.8 million. This payment
included consideration for redemption of $12.9 million in principle,
$2.8 million in accrued interest and $1.1 million in early redemption
fees. The Company then exercised its right to fund $11.4 million of this
redemption in exchange for additional common ownership interest in the
VA Alliance. The Company also elected to convert its convertible
preferred ownership interest in the VA Alliance into common ownership
interest. These redemptions and conversions increased the Company's
common ownership interest in the VA Alliance from 21% to 65%.
Accordingly, beginning in the third quarter of 2000, the Company will
consolidate the operations of the VA Alliance.
(9) On June 16, 2000, the Company's Board of Directors approved an agreement
and plan of merger with R&B Communications, Inc. ("R&B"). Under the
terms of that agreement, the Company will issue approximately 3.7
million shares of its common stock in exchange for 100% of R&B's
outstanding common stock. This transaction is subject to regulatory and
shareholder approval and will be accounted for using the purchase method
of accounting.
R&B is an Integrated Communications Provider (ICP) supplying local and
long distance telephone service, and dial-up and high-speed Internet
service to business and residential customers in Roanoke, Virginia and
the surrounding area, as well as in the New River Valley of Virginia.
R&B has a 26 % ownership interest in the VA Alliance and a 34% common
ownership interest in the WV Alliance. Upon completion of the merger
with R&B, R&B's contribution of additional common equity capital to the
VA Alliance and their conversion of Series B preferred membership
interests, the Company will own 91% and 79% of the VA Alliance and WV
Alliance, respectively. Accordingly, the WV Alliance will also be
consolidated pursuant to the merger.
(10) Effective July 11, 2000, pursuant to a stock purchase agreement dated
May 17, 2000 with telegate AG, a Federal Republic of Germany
corporation, the Company sold the capital stock of CFW Information
Services, Inc., through which directory assistance operations are
conducted. In exchange, the Company received $32.0 million in cash and
$3.5 million in stock from telegate AG. As such, the directory
assistance operation was treated as a discontinued operation in these
financial statements. Accordingly, the overhead costs which were
allocated to this business segment which were not specifically
identified and incremental to the directory assistance operations were
reclassified as corporate expenses and included as "other" in the Note
2. These costs totaled $.4 million and $.3 million for the six months
ended June 30, 2000 and 1999, respectively, and $.2 million and $.1
million for the three months ended June 30, 2000 and 1999, respectively.
Components of amounts pertaining to the discontinued operations are
reflected in the financial statements and are presented in the following
table:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands; unaudited) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------- ------------------ --------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Operating revenues $ 3,431 $ 2,993 $ 6,763 $ 5,867
Operating income 555 185 1,132 413
Income tax expense 223 (121) 439 (101)
Income from operations of discontinued $ 348 $ 332 $ 687 $ 579
segment
--------------------------------------------- ----- ------------ ------ -------------- ----- ------------ ------ ------------
11
<PAGE>
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
<CAPTION>
(In thousands; unaudited) June 30, 2000 December 31, 1999
--------------------------------------------- ------------------ ---------------------
Net assets of discontinued operations:
Current assets $ 3,179 $ 1,612
Property and equipment, net 10,781 12,655
Other assets 43 -
------------ --------------
Assets of discontinued segment $ 14,003 $ 14,267
------------ --------------
Current liabilities 1,476 1,654
Deferred taxes 793 527
Retirement benefits 1,006 113
------------ --------------
Liabilities of discontinued operations $ 3,275 $ 2,294
------------ --------------
</TABLE>
12
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Overview
CFW Communications Company (the "Company") is a leading regional
integrated communications provider offering a broad range of wireless and
wireline products and services to business and residential customers in
Virginia, West Virginia, Kentucky, Tennessee and North Carolina. We own our own
digital PCS licenses, fiber optic network, switches and routers, which enables
us to offer our customers end-to-end connectivity in the regions that we serve.
This facilities-based approach allows us to control product quality and generate
operating efficiencies. As of June 30, 2000, the Company, combined with the VA
Alliance and WV Alliance, had approximately 62,500 digital PCS subscribers and
approximately 51,500 combined ILEC (Incumbent local exchange carrier) and CLEC
(Competitive local exchange carrier) access lines installed. PrimeCo VA
operations had approximately 88,000 subscribers.
Historically, we have derived much of our revenues from our ILEC. As a
result of our increasing focus on and growth in digital PCS, Internet access and
CLEC services, a significant portion of our operating revenues and EBITDA
(earnings before interest, taxes, depreciation and amortization) are being
generated by businesses other than our ILEC. These newer businesses have
generated lower operating margins due to start-up costs associated with
expansion into new markets and introduction of new service offerings throughout
the region. As we expand our markets through start-up activities and
acquisitions of new businesses and introduce new products, we expect these lower
operating margins to continue.
We have recently significantly expanded the scope of the geographic
markets that we serve and focused our growth efforts on our core communications
services, primarily digital PCS services, Internet access, including dedicated,
high-speed DSL and dial-up services, high-speed data transmission and local
telephone services. Through July 2000, we have completed the following:
o acquisition of the wireless licenses, assets and operations of PrimeCo
Personal Communications, L.P. (`PrimeCo") in the Richmond and Hampton
Roads, Virginia markets ("PrimeCo VA");
o issuance and sale of $375 million of debt securities in a private
placement;
o closing on $325 million in new senior credit facility, with $150
million borrowed on the date of the PrimeCo VA closing;
o payment of existing senior indebtedness and refinanced the VA & WV
Alliance debt obligations;
o issuance and sale of Series B, Series C and Series D Preferred Stock;
o acquisition of certain PCS licenses currently owned by AT&T that will
add 2.5 million POPs in certain markets in Maryland and Pennsylvania;
o redemption of the series A preferred membership interest in the VA
Alliance and conversion of series B preferred membership interest into
common interest;
o dispositions of RSA 5 and the analog assets and operations of RSA 6 in
connection with the transaction with PrimeCo;
o disposition of our directory assistance operations; and
o execution of a merger agreement with R&B Communications, an integrated
communications provider in a geographic market contiguous to ours.
This agreement is subject to shareholder and regulatory approval and
is expected to close by the fourth quarter of 2000.
Collectively these events are referred to as the "Transactions" elsewhere in
this document.
Due to the disposition of the directory assistance operation in July 2000, the
Company has accounted for the directory assistance operation as a discontinued
operation and, therefore, the directory assistance operating results are
separated in the financial statements from the results of continuing operations
and are separately discussed after the income taxes section below.
As a result of the Transactions (Note 8 and 10), third and fourth quarter
results will differ significantly from the second quarter and year to date June
30, 2000 results discussed herein. The Company will report significant losses
from operations due to consolidation of the Alliance results, significant
goodwill amortization and the significant increases in interest related costs.
The discussion and analysis herein should be read in conjunction with the
financial statements and the notes thereto included herein. Much of the
discussion in this section involves forward-looking statements. Our actual
results may differ significantly from the results suggested by these
forward-looking statements. 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, changes in industry conditions created by federal
and state legislation and regulations; successful integration of acquisitions;
the achievement of build-out, operational, capital, financing and marketing
plans relating to deployment of PCS services; retention of our existing customer
base and service levels and our ability to attract new customers; continuation
of economic growth and demand for wireless and wireline communications services;
rapid changes in technology; the competitive nature of the wireless telephone
and other communications services industries; the effects of inflation and price
changes not being greater than anticipated, adverse changes in the roaming rates
13
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
we charge and pay; the capital intensity of the wireless telephone business and
our debt structure; our substantial debt obligations and our ability to service
those obligations; the cash flow and financial performance of our subsidiaries;
restrictive covenants and consequences of default contained in our financing
arrangements; completion of our anticipated merger with R&B Communications; our
opportunities for growth through acquisitions and investments and our ability to
manage this growth; the level of demand for competitive local exchange services
in smaller markets; our ability to manage and monitor billing; and possible
health effects of radio frequency transmission. 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
Revenues
Our revenues are generated from the following categories:
o wireless communications, including cellular, paging, voice mail and
wireless cable, which consists primarily of video services;
o wireline communications, including telephone revenues, fiber optic
network usage, or carrier's carrier services, Internet, CLEC, long
distance and cable television revenues; and
o other communications services revenues, including revenues from our
sale and lease of communications equipment and security alarm
monitoring and installation and rental of property and equipment
primarily to the Alliances.
Operating Expenses
Our operating expenses are generally incurred from the following
categories:
o maintenance and support expenses, including costs related to specific
property and equipment, as well as indirect costs such as engineering
and general administration of property and equipment;
o depreciation and amortization, including amortization of goodwill from
acquired assets and capital outlays to support continued business
expansion;
o asset impairment charges, if applicable;
o customer operations expenses, including marketing, product management,
product advertising, sales, publication of a regional telephone
directory, customer services and directory services;
o corporate operations expenses, including taxes other than income,
executive, accounting, legal, purchasing, information management,
human resources and other general and administrative expenses; and
o cost of goods sold, which represents our cost of purchasing PCS
phones. We sell these to our customers at a price below our cost.
Previously, we have netted this discount against our revenues. We have
reclassified prior periods to conform them to our new policy of
separately reporting cost of goods sold.
Other Income (Expenses)
Our other income (expenses) are generated (incurred) from interest
income and expense, dividend income, equity income or loss from RSA 5, equity
income or loss from the Virginia Alliance and West Virginia Alliance, gain on
sale of investments and assets and loss on write-down of investments. Our income
statements refer to RSA 5 as the "other wireless investees" and to the Alliances
as the "PCS investees."
Income Taxes
Our income tax liability and effective tax rate increases or decreases
based upon changes in a number of factors, including our pre-tax income or loss,
losses sustained by the Alliances, net operating losses and related
carryforwards, alternative minimum tax credit carryforwards, gain or loss on the
sale of assets and investments, write-down of assets and investments,
non-deductible amortization, tax and employment credits, and charitable
contributions and other tax deductible amounts.
14
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Results of Operations
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Overview
Revenue increased $4.9 million, or 29%, from $16.6 million to $21.5
million, and $9.6 million, or 30%, from $32.5 million to $42.1 million for the
respective three and six month periods ended June 30, 2000 as compared to 1999.
EBITDA decreased $.4 million, or 5%, from $7.4 million to $7.0 million and $.4
million, or 3%, from $14.4 million to $14.0 million, for the respective three
and six month periods ended June 30, 2000 over 1999. Operating income decreased
$1.1 million, or 24%, from $4.7 million to $3.6 million, and $1.9 million, or
21%, from $9.2 million to $7.3 million for the respective three and six month
periods ended June 30, 2000 and 1999.
These results reflect customer growth from our wireless, CLEC and
Internet businesses, with customers from these services totaling 101,900 as of
June 30, 2000, a 55,500, or 120%, customer increase from June 30, 1999. This
growth came from internal growth and expansion throughout our markets in PCS,
Internet and CLEC and from Internet acquisitions. EBITDA decreased due to CLEC
start-up losses, which were significant in our new West Virginia markets.
Operating income decreased from the prior year comparable quarter and six month
period due to the noted decrease in EBITDA coupled with the higher levels of
depreciation and goodwill amortization generated from Internet acquisitions and
from capital investments in our growth businesses and underlying supporting
infrastructure.
Net income for the three and six months ended June 30, 2000 was $.3
million and $.4 million, respectively. This included a $3.0 million loss ($1.9
million loss after-tax) and $6.7 million loss ($4.1 million loss after tax) for
the three and six month periods, respectively, relating to our equity share of
losses from our investments in the Alliances, which provide PCS service
throughout our Virginia and West Virginia marketplace.
Net income for the three and six months ended June 30, 1999 was $1.3
million and $2.6 million, respectively. This included a $2.9 million loss ($1.8
million loss after-tax) and $5.3 million loss ($3.3 million loss after tax) for
the three and six month periods, respectively, relating to our equity share of
losses from our investments in the Alliances, which provide PCS service
throughout our Virginia and West Virginia marketplace.
Operating Revenues
Operating revenues increased $4.9 million, or 29%, from $16.6 million
for the three months ended June 30, 1999 to $21.5 million for the three months
ended June 30, 2000. Operating revenues increased $9.6 million, or 30%, from
$32.5 million for the six months ended June 30, 1999 to $42.1 million for the
six months ended June 30, 2000.
Wireless Communications Revenues. Wireless communications revenues
increased $.4 million, or 7%, and $1.2 million, or 12%, for the respective three
and six month periods ended June 30, 2000 as compared to June 30, 1999. Wireless
communications revenues were $5.8 million and $11.7 million for the three and
six months ended June 30, 2000, as compared to $5.4 million and $10.5 million
for the three and six months ended June 30, 1999.
o Digital and Analog Cellular, Paging and Voicemail Revenue. Revenues
for digital and analog cellular, paging, and voicemail increased $.5
million, or 11%, from $4.7 million for the three months ended June 30,
1999 to $5.2 million for the three months ended June 30, 2000 and
increased $1.5 million, or 16%, from $9.0 million for the six months
ended June 30, 1999 to $10.5 million for the six months ended June 30,
2000. The increase was primarily attributable to customer growth. The
Company had 46,900 combined digital, analog cellular and paging
customers as of June 30, 2000, which represented a 13% increase in the
number of wireless customers from June 1999. Access, airtime and toll
revenues increased $.5 million, or 87%, and $1.1 million, or 105% for
the respective three and six month periods ended June 30, 2000 over
1999. This was partially offset by both the related direct cost of
sales and a $.2 million increase in handset subsidies due to reduced
prices for the six months ended June 30, 2000 over 1999.
o Wireless Cable Revenues. Wireless cable revenues decreased $.1
million, or 16%, from $.7 million for the three months ended June 30,
1999 to $.6 million for the three months ended June 30, 2000 and
decreased $.2 million, or 14%, from $1.4 million for the six months
ended June 30, 1999 to $1.2 million for the six months ended June 30,
2000.
15
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Wireline Communications Revenues. Wireline communications revenues
increased $4.5 million, or 44%, and $8.6 million, or 43%, for the three and six
month periods ended June 30, 2000 as compared to June 30, 1999, respectively.
Wireline communications revenues were $14.7 million and $28.6 million for the
three and six months ended June 30, 2000 and were $10.2 million and $20.0
million for the three and six months ended June 30, 1999.
o Telephone Revenues. Telephone revenues, which include local service,
access and toll services, directory advertising and calling feature
revenues, increased $.2 million, or 3%, from $7.8 million for the
three months ended June 30, 1999 to $8.0 million for the three months
ended June 30, 2000 and increased $.5 million, or 3%, from $15.5
million for the six months ended June 30, 1999 to $16.0 million for
the six months ended June 30, 2000. The increase was due to an
increase in access minutes of 17%, toll minutes of 10%, and access
lines of 5%.
o Fiber Optic Network Usage and CLEC Revenues. Revenues from fiber optic
network usage for carrier's carrier services and CLEC operations
increased $1.1 million, or 92%, from $1.2 million for the three months
ended June 30, 1999 to $2.3 million for the three months ended June
30, 2000 and increased $2.0 million, or 81%, from $2.4 million for the
six months ended June 30, 1999 to $4.4 million for the six months
ended June 30, 2000. Approximately $1.1 million and $2.0 million of
these increases for the three and six month related periods was due to
the growth in CLEC customers and revenues. As of June 30, 2000, CLEC
customers totaled 12,400, an increase of 10,000 customers from June
30, 1999.
o Internet Revenues. Revenues from Internet services increased $3.2
million from $.8 million for the three months ended June 30, 1999 to
$4.0 million for the three months ended June 30, 2000 and increased
$6.1 million from $1.3 million for the six months ended June 30, 1999
to $7.4 million for the six months ended June 30, 2000. This revenue
growth was attributable to acquisitions, internal customer growth and
improved unit revenues. This growth in Internet services comprised the
largest single component of wireline revenue growth in the three
months ended June 30, 2000, as Internet and DSL customers grew to
57,300 as of June 30, 2000, an increase of 40,600 customers from June
30, 1999. Internet customer growth from acquisitions accounted for
35,700 of this total, and 9,600 was from internal growth.
o Wireline Cable Revenues. Wireline cable revenues remained unchanged at
$.4 million and $.8 million for the three and six months ended June
30, 2000 and 1999, respectively. This revenue stream is not growing
due to a decrease in the level of marketing and sales and other
resources deployed to support the operation.
Other Communications Services Revenues. Other communications services
revenues remained unchanged at $1.0 million for the three months ended June 30,
1999 and 2000. Other communications services revenues decreased $.2 million from
$2.1 million for the six months ended June 30, 1999 to $1.9 million for the six
months ended June 30, 2000. Revenues from phone systems sales and services
decreased $.2 million due to a shift in marketing and sales efforts from this
business. Our revenues from rentals, primarily for company owned assets, which
are being used by the Alliances, remained unchanged.
Operating Expenses
Total Operating Expenses. Total operating expenses increased $6.0
million, or 51%, from $11.9 million for the three months ended June 30, 1999 to
$17.9 million for the three months ended June 30, 2000. Operating expenses
increased $11.5 million, or 49%, from $23.3 million for the six months ended
June 30. 1999 to $34.8 million for the six months ended June 30, 2000. This
increase was primarily attributable to a $4.4 million and an $8.4 million
increase in the operating expenses of the wireline businesses for these three
and six month periods, respectively, and a $1.0 million and a $1.8 million
increase in the operating expenses of our wireless business for these same
periods, respectively. Within the wireline business, Internet and network
comprised $2.5 million and $1.5 million, respectively, of the increase for the
three months ended June 30, 1999 as compared to June 30, 2000, and $5.1 million
and $2.7 million, respectively, for the six month periods then ended.
Approximately $2.0 million of the three month increase and $3.8 million of the
six month increase came from operations acquired after the second quarter of
1999. The remaining increase in Internet operating expenses is from acquisitions
which occurred during the first six months of 1999 and internal expansion within
existing markets and into new markets. The fiber optic network operating expense
increased as a result of the expenses associated with increased fiber build-out
and start-up costs associated with launching or preparing to launch CLEC
operations in new Virginia and West Virginia markets.
16
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Cost of Goods Sold. Cost of goods sold increased $.8 million, or 43%,
from $1.7 million for the three months ended June 30, 1999 to $2.5 million for
the three months ended June 30, 2000 and increased $1.4 million, or 39%, from
$3.5 million for the six months ended June 30, 1999 to $4.9 million for the six
months ended June 30, 2000. Roaming and access accounted for $.6 million and
$1.1 million of the increase for the three and six month periods, respectively.
Maintenance and Support Expenses. Maintenance and support expenses
increased $3.0 million, or 96%, from $3.2 million for the three months ended
June 30, 1999 to $6.2 million for the three months ended June 30, 2000 and
increased $5.6 million, or 90%, from $6.1 million for the six months ended June
30, 1999 to $11.7 million for the six months ended June 30, 2000. This increase
was primarily attributable to a $1.7 million and a $3.2 million increase for the
three and six month comparable periods from Internet acquisitions occurring
after June 30, 1999. Additionally, network and CLEC maintenance and support
expenses increased $.9 million and $1.6 million for the three and six month
comparable periods resulting from CLEC rollout and engineering and operations
support growth. Wireless maintenance and support is up $.3 million for the six
month period ended June 30, 2000 versus 1999 due to the rent of tower sites sold
in March 2000. Other increases in maintenance and support expenses were
consistent with customer and revenue growth.
Depreciation and Amortization Expenses. Depreciation and amortization
expense increased $.7 million, or 28%, from $2.7 million for the three months
ended June 30, 1999 to $3.4 million for the three months ended June 30, 2000 and
increased $1.6 million, or 30%, from $5.2 million for the six months ended June
30, 1999 to $6.8 million for the six months ended June 30, 2000. This increase
was due to an increase in property and equipment of approximately 16%, from $162
million as of June 30, 1999 to $188 million as of June 30, 2000. In addition,
goodwill increased $17.9 million from $13.1 million as of June 30, 1999 to $31.0
million as of June 30, 2000 due to Internet acquisitions, which increased
goodwill amortization by $.9 million over these same six month periods.
Depreciation and amortization as a percent of the related assets increased from
3.0% for the six months ended June 30, 1999 to 3.1% for the six months ended
June 30, 2000. This increase is due to a shift in the composition of the asset
base to network plant and equipment and a higher amount of goodwill from
Internet acquisitions, both of which carry shorter lives.
Customer Operations Expenses. Customer operations expense increased $.9
million, or 32%, from $2.9 million for the three months ended June 30, 1999 to
$3.8 million for the three months ended June 30, 2000 and increased $1.9
million, or 36%, from $5.5 million for the six months ended June 30, 1999 to
$7.4 million for the six months ended June 30, 2000. Primary areas of
fluctuations were in the Internet and network and CLEC operations. Internet
operations increased $.6 million and $1.2 million for the three and six months
ended June 30, 2000 over 1999, primarily from acquisitions during 1999. Network
and CLEC operations increased $.5 million and $.9 million for the three and six
months ended June 30, 2000 over 1999. The growth in this area relates primarily
to marketing and sales activities and customer care costs primarily associated
with adding new customers.
Corporate Operations Expenses. Corporate operations expense increased
$.6 million, or 38%, from $1.5 million for the three months ended June 30, 1999
to $2.1 million for the three months ended June 30, 2000 and increased $1.1
million, or 36%, from $3.1 million for the six months ended June 30, 1999 to
$4.2 million for the six months ended June 30, 2000. Of this increase, $.3
million and $.6 million for the three and six months ended June 30, 2000 over
1999, respectively, related to acquired Internet operations and the remaining
increases represent growth in the corporate infrastructure associated with the
significant customer growth and the Company's geographic expansion.
Other Income (Expenses)
Total other income (expenses) increased $.3 million, or 9%, from $3.2
million for the three months ended June 30, 1999 to $3.5 million for the three
months ended June 30, 2000. Other income (expenses) increased $1.9 million, or
32%, from $5.7 million for the six months ended June 30, 1999 to $7.6 million
for the six months ended June 30, 2000.
Other expenses, principally interest, increased $.3 million and $.5
million for the three and six months ended June 30, 2000 versus the comparable
prior year periods. These increases were due to additional borrowings under our
lines of credit, with total debt increasing by $19.2 million, from $32.4 million
as of June 30, 1999 to $51.6 million as of June 30, 2000. As a result of the
acquisition and related financing transactions (Note 7), we expect our interest
expenses to significantly increase in the future.
Our share of losses from the Virginia Alliance decreased $.2 million,
or 11%, from $1.5 million for the three months ended June 30, 1999 to $1.3
million for the three months ended June 30, 2000 and remained unchanged at $2.8
million for the six months ended June 30, 1999 and 2000. Our share of losses
from the West Virginia Alliance, which commenced operations in the latter part
of the third quarter of 1998 and expanded significantly in the second quarter of
1999, increased $.2 million, or 15%, from $1.5 million for the three months
ended June 30, 1999 to $1.7 million for the three months ended June 30, 2000 and
increased $1.4 million, or 57%, from $2.4 million for the six months ended June
30, 1999 to $3.8 million for the six months ended June 30, 2000.
17
<PAGE>
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Combined customer growth for the Alliances during the three and six
months ended June 30, 2000 totaled 8,300 and 19,200 customers, respectively, as
total customers exceeded 62,500 as of June 30, 2000. This compares to combined
customer growth in the three and six months ended June 30, 1999 of 5,100 and
11,300 customers, respectively. Net sales and gross profit increased 172% and
205%, respectively, for the six months ended June 30, 2000 (Note 4). During this
same timeframe, the Alliances experienced higher handset trade-in activity
associated with the introduction of next generation, dual mode and data capable
handset models. This, coupled with the increase in new customers and the related
phone sales volume, resulted in higher phone subsidies of $4.5 million as
compared to $1.6 million for the six months ended June 30, 2000 and 1999,
respectively.
In July 2000, upon the Company's exercise of an option to invest $11.4
million in exchange for additional common ownership interest in the VA Alliance
and the Company's conversion of its series B preferred ownership interest in the
VA Alliance to common interest, the Company's ownership percentage of the VA
Alliance increased from 21% to 65%. Based on this, the VA Alliance will be
consolidated into the Company's financial statements in future periods. The
Company's ownership interests in the VA and WV Alliance will increase to 91% and
79%, respectively, upon completion of the R&B merger (Note 9), which is expected
to be completed by the fourth quarter of 2000. After this transaction is
completed, both Alliances will be consolidated into our financial statements.
Equity income from RSA 5 was not material for the three and six months
ended June 30, 1999 and 2000. In July 2000, the Company's 22% limited interest
in RSA5 was sold to Verizon (previously PrimeCo) as part of consideration for
the PrimeCo VA acquisition.
Income Taxes
Income taxes decreased $.3 million, or 81%, from $.4 million for the
three months ended June 30, 1999 to $.1 million for the three months ended June
30, 2000 and decreased $1.3 million, from $1.2 million for the six months ended
June 30, 1999 to a tax benefit of $.1 million for the six months ended June 30,
2000. These decreases were due to the change in the pre-tax income for the
comparable periods. Additionally, the effective rate changed from a 37% tax
obligation for the six months ended June 30, 1999 to a 22% tax benefit for the
six months ended June 30, 2000. The effective tax rate change is due to the
continuing operations results turning from a profit to a loss with
non-deductible goodwill from 1999 Internet acquisitions being added back to the
pretax loss and thus, resulting in a tax benefit significantly below the
statutory rate.
Discontinued Operations
In May 2000, the Company announced that it had entered into a
definitive agreement to sell its directory assistance operations. The Company
sold its directory assistance operations in July 2000. All periods presented on
the income statement have been restated to reflect the accounting for the
directory assistance segment as discontinued operations. Non-incremental
corporate overhead of $.2 million for the three month periods ended June 30,
2000 and 1999, and $.4 million and $.3 million for the six month periods ended
June 30, 2000 and 1999, respectively, which was previously allocated to this
business segment, have been recognized as charges to other operating expenses
cash flows in the following segment presentation.
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 credit facilities. After closing on the PrimeCo VA operations (Note 7) and
the related financing, the Company had $175 million in unused borrowings
available under its senior credit facility.
Operating Cash Flows
In the six months ended June 30, 2000, net cash provided by operating
activities was $11.5 million. Principal changes in operating assets and
liabilities were as follows: accounts receivable increased $1.6 million
resulting from the timing of our receipt of significant customer billings,
increased billings and an overall increase of our receivables aging; income
taxes changed from a $2.0 million receivable position at December 31, 1999 to a
$.1 million payable position at June 30, 2000 primarily as a result of the
Company's share of taxable income associated with the Alliances sale of tower
assets (Note 5); and accounts payable decreased $.6 million from December 31,
1999 due to the timing of payments.
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CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
The Company's cash flows used in investing activities for the six months
ended June 30, 2000 aggregated $24.6 million and included $17.2 million for the
purchase of property and equipment, $9.5 million of which represents significant
telephone, network and Internet circuit and network related electronic
equipment, $1.3 million relates to significant building and landscape projects
and $1.6 million relates to billing software. The remainder is primarily network
equipment additions. In connection with the Transactions, the Company recorded
$11.6 million of debt financing fees and other professional service costs. Of
this amount, $11.2 million was accrued as of June 30, 2000, as noted above, and
will be recognized as a cash outlay for investment and financing activities in
the consolidated statement of cash flows in the period such amounts are paid.
Also in connection with the Transactions, the Company purchased minority
ownership interest in RSA6 for $7.4 million, bringing its ownership interest in
RSA6 to 95% and, subsequent to June 30, 2000 but prior to the Transactions,
purchased the remainder of the minority interest in RSA6. The Company also
invested an additional $3.9 million in the Alliances and received repayment for
$2.1 million of advances. Also, the Company received $3.2 million from the sale
of 10 towers (Note 5). Finally, the Company acquired customers and certain
assets of two Internet companies (Note 5) for $1.4 million.
Net cash used for financing activities for the six months ended June
30, 2000 aggregated $13.2 million which represents payment of dividends on
outstanding capital stock of $1.5 million, a redemption payment on the senior
notes of $12.7 million (see Note 5 in the 1999 Annual Report to Shareholders),
additional borrowing under lines of credit totaling $26.6 million and proceeds
from the exercise of stock options totaling $.8 million.
Under restrictions related to the new debt financing (Note 7), we have
discontinued payment of dividends to common shareholders effective for the
quarter ending June 30, 2000. This will allow the Company to retain future
earnings, if any, to fund the development and growth of its businesses and to
service its debt obligations.
After the completion of the Transactions, our liquidity needs will be
influenced by numerous factors including:
o significantly reduced or negative EBITDA that we expect to continue
until at least into 2001, as a result of acquiring capital intensive
businesses in their early stages, entering new markets and disposing
of businesses that generate positive EBITDA;
o increased capital expenditures to support planned PCS network growth
and expansion, much of which is discretionary in nature, and to
support planned customer growth;
o our own continuing capital expenditures due to our ongoing strategy of
offering our services in new markets, adding new products and
services, and enhancing organic growth;
o significant capital expenditures to become an integrated
communications provider in many of our existing, newly acquired and
other potential markets by offering a broader range of products and
services;
o capital expenditures for the Richmond and Hampton Roads markets
(PrimeCo VA acquisition) and R&B Communications; o continued
investment in the Alliances; o future acquisitions; and o
significantly increased interest expense.
After the completion of the Transactions, our liquidity sources will
include:
o cash flow from operations, if any;
o approximately $69.1 million held in the escrow account to fund the
first four interest payments on the senior notes;
o $175.0 million available under our new credit facility subject to
certain conditions;
o public and private debt and equity markets;
o disposition of additional non-core businesses and assets, such as
additional cell towers received from Richmond-Norfolk PCS and wireline
cable operations, and investments; and
o interest on the escrow account.
We expect capital expenditures for the last six months of 2000 to be
between $50 and $70 million and for the year 2001 to be between $80 million to
$100 million. We expect these capital expenditures to be used to:
o support continued expansion of CLEC and Internet access services;
o add another building to support employee additions commensurate with
the growth in digital PCS, Internet and CLEC customers; and
o support the expansion of Richmond-Norfolk PCS' and R&B Communications'
core businesses.
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CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
Richmond-Norfolk PCS and the Alliances have substantially satisfied their
FCC build-out requirements. Consequently, the expenditures above are generally
discretionary, permitting us to maintain significant flexibility in our business
plans and capital expenditures. Since these are generally discretionary
expenditures, we cannot assure you when, if ever, these proposed uses will be
initiated or completed.
Based on our assumptions about the future of our operating results, our
capital expenditure needs, many of which are discretionary, and the availability
of borrowings under our new credit facility and our other sources of liquidity,
we believe that we will have sufficient capital resources until we begin
generating significant positive EBITDA. However, if any of our assumptions prove
incorrect or if we make additional acquisitions, we may not have sufficient
capital resources. If so, we may have to delay or abandon some of our
anticipated capital expenditures and our ability to make interest and principal
payments on the notes will be significantly impaired.
20
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CFW COMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of Legal Proceeding, see the Form 10-Q filed by the
Company for the quarter ended March 31, 2000.
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
At the regular Annual Meeting of the Shareholders held April 25, 2000,
Class III Directors P.H. Arnold, J.N. Neff, and W.W. Gibbs, being the
same as the nominees in the proxy solicitation, were elected.
The following votes were cast for each of the following nominees for
Director or were withheld with respect to such nominees:
<TABLE>
<CAPTION>
VOTES FOR VS. TOTAL SHARES
NOMINEE FOR AGAINST OUTSTANDING
------------------------------- ---------------------------- ---------------------------- -------------------------------
<S> <C> <C> <C>
P.H. Arnold 10,481,705 73,505 99.3%
W.W. Gibbs 10,509,396 45,814 99.6%
J.N. Neff 9,635,583 919,628 91.3%
</TABLE>
The following continued in their capacity as directors: C.W. McNeely,
C.A. Rosberg, J.B. Mitchell, and J.S. Quarforth. C.P. Barger's term
expired April 27, 1999 and R.S. Yeago term expired on April 25, 2000,
coincident with his planned retirement as a Director.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K - Form 8-K dated March 25, 2000, pertaining to
the letter agreement with R&B Communications, Inc. for the planned
merger, the asset exchange agreement with PrimeCo and the related
financing plans.
21
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFW COMMUNICATIONS COMPANY
August 14, 2000 /s/J. S. Quarforth
-----------------------------------
J. S. Quarforth, Chairman and Chief Executive Officer
August 14, 2000 /s/M. B. Moneymaker
-----------------------------------
M. B. Moneymaker, Senior Vice President and
Chief Financial Officer, Treasurer, and Secretary
