<PAGE>
Exhibit 99.4.1
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.
As described in Note 14 to the Consolidated Financial Statements, on June 1,
2000 the Company retroactively revised its reporting of certain revenues and
related costs of its wireless operations.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
February 17, 2000, except for notes 14 and 15,
as to which the date is June 16, 2000
1
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<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
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<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>
See Notes to Consolidated Financial Statements.
3
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Operating Revenues
Wireline communications............... $44,110,124 $37,596,778 $34,495,331
Wireless communications (Note 14)..... 21,691,671 17,623,857 13,432,974
Directory assistance.................. 12,104,096 12,949,714 10,533,459
Other communications services......... 4,028,445 2,941,880 2,267,156
----------- ----------- -----------
81,934,336 71,112,229 60,728,920
----------- ----------- -----------
Operating Expenses
Cost of sales (Note 14)............... 8,142,551 4,426,125 1,718,962
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
----------- ----------- -----------
68,412,230 48,485,767 41,316,712
----------- ----------- -----------
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.
4
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
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.
5
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 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.
6
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
7
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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.
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.
8
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies (Continued)
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 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.
9
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Disclosures About Segments of an Enterprise and Related Information
(Continued)
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.
Directory assistance revenues are reported net of database access charges
of $3.9 million, $5.0 million and $4.1 million for the three years ended
December 31, 1999 because management believes this presentation more
appropriately reflect the revenues for services provided by this segment.
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
unallocated 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
and Directory Wireless
Telephone CLEC Internet Wireless Assistance Cable Other Total
--------- ------- -------- -------- ---------- -------- ------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Revenues................ $31,261 $5,635 $5,611 $18,924 $12,104 $2,768 $5,632 $ 81,935
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 $14,657 $12,950 $2,966 $4,551 $ 71,112
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 $10,321 $10,533 $3,112 $3,938 $ 60,729
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>
10
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Disclosures About Segments of an Enterprise and Related Information
(Continued)
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 and all
other intercompany transactions are cost based. Segment depreciation and
amortization contains an allocation of depreciation and amortization from
corporate assets. Corporate depreciation and amortization not allocated to the
segments is indicated in the "Other" column in the proceeding table.
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.
11
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Investments in Wireless Affiliates (Continued)
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
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- -------
(in thousands)
<S> <C> <C> <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 in-
terest................. 15,192 14,345 -- --
<CAPTION>
VA Alliance WV Alliance
--------------------------- ------------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- -------- ------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
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.
12
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities and Investments
Investments consist of the following as of December 31:
<TABLE>
<CAPTION>
Carrying Values
------------------------
Type of Ownership 1999 1998
---------------------------- ----------- -----------
<S> <C> <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>
13
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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 DSL and 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 DSL and ISDN technology. This acquisition increased the
Company's Internet customers by approximately 9,000 subscribers on the date of
acquisition.
14
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Acquisitions (Continued)
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):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Operating Revenues............................................. $79,774 $69,812
Net Income..................................................... 5,308 6,449
Net Income per common share--diluted........................... $ 0.40 $ 0.49
</TABLE>
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 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.
15
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
Total income tax expense was different than an amount computed by applying the
graduated statutory federal income tax rates to income before taxes. The
reasons for the differences are as follows for the years ended December 31:
<TABLE>
<CAPTION>
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:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
16
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes (Continued)
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.
17
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Other Postretirement
Plan 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>
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.
18
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Pension Plans and Other Postretirement Benefits (Continued)
The following table provides the components of net periodic benefit cost for
the plans:
<TABLE>
<CAPTION>
Other Post Employment
Defined Benefit Pension 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>
Other Post
Defined Benefit Employment
Pension Plan 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.
19
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. A maximum of
25,000 shares of common stock may be issued upon the exercise of options
granted under the Director's Plan. Stock options must be granted under the
Plans at not less than 100% of fair market value at the date of grant and have
a maximum life of ten years from the date of grant. Options and other awards
under the Plans may be exercised in compliance with such requirements as
determined by a committee of the Board of Directors.
A summary of the status of the Stock Option Plans at December 31, 1999, 1998
and 1997 and changes during the years ended on those dates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average 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
Options Outstanding Exercisable
----------------------------- -----------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Range of Exercise Prices Shares Life Price Shares 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.
20
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Stock Plans (Continued)
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.
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>
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.
Note 14. Wireless Revenues and Cost of Sales
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 so as 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.
21
<PAGE>
CFW COMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Subsequent Events
On June 16, 2000, the Company's Board of Directors approved an agreement and
plan of merger with R&B Communications Inc. 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 has a 21% common ownership interest, along with convertible preferred
ownership interest, in the VA Alliance and a 34% common ownership interest in
the WV Alliance. The Company has a 21% common ownership interest, along with
convertible preferred ownership interest in the VA Alliance, and a 45% common
ownership interest in the WV Alliance (See Note 3). As a result of the merger
with R&B and other planned increases in common ownership through redemption
and conversion of preferred interests, consolidation of the VA Alliance and
the WV Alliance will be required concurrent with the closing of the merger.
On May 17, 2000, the Board of Directors approved the acquisition of PrimeCo
Personal Communications, L.P., Richmond Major Trading Area (Richmond-Norfolk
PCS) for cash of $407.3 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. This acquisition is subject to
regulatory approval and will be accounted for using the purchase method of
accounting.
The Company plans to obtain financing through issuance of unsecured Senior
Notes for $375 million, a Senior Secured Credit Facility of up to $325 million
and various preferred stock offerings of $225 million. The Company plans to
use the proceeds of the financing vehicles to fund the acquisition of
Richmond-Norfolk PCS, to repay its existing indebtedness and that of the
Alliances, and for future expansion.
Pursuant to a stock purchase agreement, dated May 17, 2000 with telegate AG, a
public company in Germany, the Company will sell the capital stock of CFW
Information Services, Inc., through which directory assistance operations are
conducted. In exchange, the Company will receive $32.0 million in cash and
$3.5 million in stock of telegate. This disposition is subject to regulatory
approval.
22
<PAGE>
Note 16. Unaudited Quarterly Financial Data
Summarized quarterly financial data for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------
(In thousands, except per share March 31 June 30 September 30 December 31
amounts) -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999
Operating revenues (a) $18,769 $19,628 $21,389 $22,149
Operating income (b) 4,693 4,917 1,737 2,175
Gain on sale of investments and
tower asset -- -- 8,318 --
Equity loss from PCS investees (2,331) (2,938) (2,702) (3,395)
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)
-----------------------------------------------------------------------------
1998
Operating revenues(a) $17,258 $17,500 $18,263 $18,091
Operating income 5,547 5,712 5,758 5,609
Loss on write-down of investment (270) -- (353) (387)
Equity loss from PCS investees (896) (1,346) (1,547) (2,678)
Net income 2,450 2,468 2,174 1,416
Net income per share - basic 0.189 0.190 0.167 0.108
Net income per share - dilutive 0.187 0.188 0.166 0.109
-----------------------------------------------------------------------------
</TABLE>
(a) Operating revenues have been increased as follows as compared to the
amounts reported in the Quarterly Reports to Shareholders and on Forms 10-
Q as a result of revising its reporting so as to no longer report wireless
revenues net of cost of sales (See Note 14).
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1999 1,751 1,739 2,023 2,630
1998 1,023 949 1,107 1,347
</TABLE>
(b) An asset impairment charge of $2.7 million relating to the Company's
wireless analog cable equipment was charged to operating income in the
third quarter of 1999. Additionally, concurrent with the completion of the
conversion to a single billing platform, the Company charged a $1.2
million write-off of software associated with its prior wireless billing
system against operating income during the fourth quarter of 1999.
23
<PAGE>
CFW COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......................... $ 311,294 $ 198,540
Accounts receivable, net of allowance of $1.3
million ($1.1 million in 1999).................... 14,091,119 13,822,010
Receivable from affiliates......................... 5,840,873 3,824,585
Materials and supplies............................. 959,837 955,381
Prepaid expenses and other......................... 882,282 572,339
Income tax receivable.............................. -- 2,002,572
------------ ------------
22,085,405 21,375,427
------------ ------------
Securities and Investments........................... 36,948,610 39,109,476
------------ ------------
Property and Equipment
Land and building.................................. 23,821,944 23,526,095
Network plant and equipment........................ 112,987,324 108,449,567
Furniture, fixtures and other equipment............ 29,861,999 28,170,261
Radio spectrum licenses............................ 15,478,079 15,478,079
------------ ------------
Total in service................................. 182,149,346 175,624,002
Under construction................................. 8,910,487 9,535,642
------------ ------------
191,059,833 185,159,644
Less accumulated depreciation...................... 61,912,222 59,278,974
------------ ------------
129,147,611 125,880,670
------------ ------------
Other Assets
Cost in excess of net assets of business acquired,
less accumulated amortization of $2.9 million
($2.4 million in 1999)............................ 23,955,931 23,411,894
Deferred charges................................... 606,233 359,294
Radio spectrum licenses and license deposits....... 7,864,963 7,864,836
------------ ------------
32,427,127 31,636,024
------------ ------------
$220,608,753 $218,001,597
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
24
<PAGE>
CFW COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable................................... $ 8,600,580 $ 9,809,268
Customers' deposits................................ 502,691 448,995
Advance billings................................... 2,827,413 2,677,044
Accrued payroll.................................... 890,051 1,156,120
Accrued interest................................... 68,565 280,151
Other accrued liabilities.......................... 4,073,400 2,888,530
Accrued income taxes payable....................... 1,308,389 --
Deferred revenue................................... 1,624,197 1,835,694
------------ ------------
19,895,286 19,095,802
------------ ------------
Long-Term Debt....................................... 44,361,556 37,684,783
------------ ------------
Long-Term Liabilities
Deferred income taxes.............................. 27,684,291 31,604,744
Retirement benefits................................ 11,155,246 10,854,052
Other.............................................. 2,961,360 797,175
------------ ------------
41,800,897 43,255,971
------------ ------------
Minority Interests................................... 1,846,800 1,781,241
------------ ------------
Commitments
Shareholders' Equity
Preferred stock, no par............................ -- --
Common stock, no par............................... 44,325,492 43,943,136
Retained earnings.................................. 48,932,293 50,385,117
Unrealized gain on securities available for sale,
net............................................... 19,446,429 21,855,547
------------ ------------
112,704,214 116,183,800
------------ ------------
$220,608,753 $218,001,597
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
25
<PAGE>
CFW COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Operating Revenues
Wireline communications............................. $13,875,111 $ 9,802,114
Wireless communications............................. 5,879,357 5,049,072
Directory assistance................................ 3,332,289 2,873,508
Other communications services....................... 855,890 1,044,065
----------- -----------
23,942,647 18,768,759
----------- -----------
Operating Expenses
Cost of sales....................................... 2,366,776 1,751,132
Maintenance and support............................. 5,877,059 3,296,103
Depreciation and amortization....................... 3,705,681 2,810,792
Customer operations................................. 5,361,216 4,567,246
Corporate operations................................ 2,358,927 1,650,033
----------- -----------
19,669,659 14,075,306
----------- -----------
Operating Income...................................... 4,272,988 4,693,453
Other Income (Expenses)
Other expenses, principally interest................ (481,810) (212,462)
Equity loss from PCS investees
VA PCS Alliance................................... (1,523,498) (1,358,824)
WV PCS Alliance................................... (2,144,016) (972,350)
Equity income from other wireless investees......... 42,000 53,007
----------- -----------
165,664 2,202,824
Income Taxes.......................................... 44,132 774,083
----------- -----------
121,532 1,428,741
Minority Interests.................................... (73,122) (89,015)
----------- -----------
Net Income............................................ $ 48,410 $ 1,339,726
=========== ===========
Net income per common share--basic.................... $ 0.004 $ 0.103
Net income per common share--diluted.................. $ 0.004 $ 0.102
Average shares outstanding--basic..................... 13,066,950 13,021,737
Average shares outstanding--diluted................... 13,295,947 13,087,864
Cash dividends per share.............................. $ 0.11475 $ 0.11475
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
26
<PAGE>
CFW COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities
Net income....................................... $ 48,410 $ 1,339,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 3,244,512 2,654,018
Amortization................................... 461,169 156,774
Deferred taxes................................. (2,386,662) 603,652
Retirement benefits............................ 301,194 314,610
Equity loss from PCS Alliances................. 3,667,514 2,331,174
Minority interests, net of distributions....... 65,559 (18,246)
Other.......................................... (798,122) (62,461)
Changes in assets and liabilities from
operations:
Increase in accounts receivable................ (199,821) (1,061,507)
Increase in materials and supplies............. (4,456) (224,164)
Increase in other current assets............... (309,943) (116,840)
Changes in income taxes........................ 3,310,961 170,232
Increase (decrease) in accounts payable........ (1,458,643) 828,678
Decrease in other accrued liabilities.......... (434,180) (718,347)
Increase in other current liabilities.......... 204,065 62,501
------------ ------------
Net cash provided by operating activities.......... 5,711,557 6,259,800
------------ ------------
Cash Flows From Investing Activities
Purchases of property and equipment.............. (7,687,545) (9,633,002)
Purchase of PCS licenses......................... -- (54,441)
Investments in PCS alliances..................... (3,892,138) (3,892,138)
Repayments from (advances to) PCS Alliances...... (2,016,288) 2,377,280
Proceeds from sale of towers..................... 3,200,000 --
Acquisition of Internet company and subscribers.. (747,314) (905,447)
Deposit on radio spectrum licenses, net.......... (100,000) (1,601,615)
Maturities and distributions from other
investments..................................... 86,587 50,556
------------ ------------
Net cash used in investing activities.............. (11,156,698) (13,658,807)
------------ ------------
Cash Flows From Financing Activities
Cash dividends................................... (1,501,234) (1,495,905)
Payments on senior notes......................... (12,727,272) (3,636,364)
Additional borrowing on lines of credit, net..... 19,404,045 12,455,516
Net proceeds from exercise of stock options...... 382,356 75,022
------------ ------------
Net cash provided by financing activities.......... 5,557,895 7,398,269
------------ ------------
Increase (decrease) in cash and cash equivalents... 112,754 (738)
Cash and Cash Equivalents:
Beginning........................................ 198,540 42,890
------------ ------------
Ending........................................... $ 311,294 $ 42,152
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
27
<PAGE>
CFW COMMUNICATIONS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1999................... 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
Comprehensive income:
Net Income............ 4,377,425
Reversal of unrealized
gain on securities
sold, net of $2.6
million of deferred
tax obligation....... (4,300,289)
Comprehensive income.. 77,136
Cash dividends.......... (1,498,024) (1,498,024)
Stock options exercised,
net.................... 11,000 210,875 210,875
---------- ----------- ----------- ----------- ------------
Balance, September 30,
1999................... 13,053,079 43,890,270 52,403,079 -- 96,293,349
Comprehensive income:
Net Income............ (519,601)
Unrealized gain on
securities available
for sale, net of
$14.0 million of
deferred tax
obligation........... 21,855,547
Comprehensive income.. 21,335,946
Cash dividends.......... (1,498,361) (1,498,361)
Stock options exercised,
net.................... 7,307 52,866 52,866
---------- ----------- ----------- ----------- ------------
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
========== =========== =========== =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
28
<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, contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 2000 and December
31, 1999 and the results of operations for the three months ended March
31, 2000 and 1999 and cash flows for the three months ended March 31, 2000
and 1999. The results of operations for the three months ended March 31,
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 six 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 is shown in the
following table.
<TABLE>
<CAPTION>
Network & Directory
Telephone CLEC Internet Wireless Assistance Cable Other Total
--------- --------- -------- -------- ---------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of and for the three
months ended March 31,
2000
Revenues................ $ 7,969 $ 2,034 $ 3,473 $5,240 $ 3,332 $ 640 $ 1,255 $ 23,943
EBITDA.................. 5,493 (69) 101 1,056 760 139 498 7,978
Depreciation &
amortization........... 1,025 446 728 319 363 343 482 3,706
Total segment assets.... 46,276 26,912 18,864 8,711 13,720 19,861 12,477 146,821
Corporate assets........ 73,788
--------
Total Assets............ $220,609
========
As of and for the three
months ended March 31,
1999
Revenues................ $ 7,701 $ 1,202 $ 502 $4,321 $ 2,874 $ 728 $ 1,441 $ 18,769
EBITDA.................. 5,399 313 (264) 1,041 325 139 551 7,504
Depreciation &
amortization........... 901 267 87 210 280 644 422 2,811
Total segment assets.... 42,953 15,646 2,329 8,290 13,848 25,426 13,786 122,278
Corporate assets........ 45,160
--------
Total Assets............ $167,438
========
</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 228,996 and 66,127 shares
for the three months ended March 31, 2000 and 1999, respectively, to
reflect the assumed conversion of dilutive stock options. The Company
currently has 651,030 options outstanding to acquire shares of common
stock, of which 279,076 are currently exercisable.
(4) The Company has a 21% common ownership interest in Virginia PCS Alliance,
L.C. (VA Alliance), a provider of personal communications services (PCS)
serving a 1.6 million populated area in central and western Virginia. The
Company is managing such build-out pursuant to a service agreement. PCS
operations began throughout the Virginia region in the fourth quarter of
1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. (WV Alliance), a provider of PCS serving a 2.0 million
populated area in West Virginia and parts of eastern Kentucky, southwestern
Virginia and eastern Ohio. The Company is managing this build-out pursuant
to a service agreement. The WV Alliance commenced operations in the fourth
quarter of 1998, offering services along the Charleston and Huntington
corridor and expanded to the northern corridor of West Virginia, including
the cities of Clarksburg, Fairmont and Morgantown in the second quarter of
1999.
29
<PAGE>
CFW COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information for the VA Alliance and WV Alliance
("Alliances"), both of which are accounted for under the equity method, are
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
VA Alliance WV Alliance
----------------------- ----------------------
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Current assets................. $ 11,623 $ 9,241 $17,494 $ 2,367
Noncurrent assets.............. 104,749 111,601 48,764 51,130
Current liabilities............ 11,265 7,633 7,952 3,076
Long-term liabilities.......... 125,482 131,478 62,394 51,125
Redeemable preferred interest.. 15,410 15,192 -- --
<CAPTION>
VA Alliance WV Alliance
For the Three For the Three
Months Ended, Months Ended,
----------------------- ----------------------
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Net sales...................... $ 4,480 $ 2,417 $ 2,626 $ 257
Gross profit (loss)............ 2,164 584 291 (18)
Net loss applicable to common
owners........................ (7,325) (6,533) (4,805) (2,179)
Company's share of net loss.... (1,523) (1,359) (2,144) (972)
</TABLE>
The Company has 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. At March 31, 2000, the
Company has guaranteed $57.2 million of the Alliances' obligations.
(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 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, these gains have been deferred for book purposes and will be
amortized over the life of the leaseback agreement.
(6) The provision for income taxes differs from the amount of income tax
determined by applying the applicable Federal statutory rate to earnings
before income taxes, as a result of the following:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Tax provision at Federal statutory rate................... 34.00% 34.00%
State income taxes, net of Federal tax benefit............ 3.96% 3.96%
Non deductible goodwill................................... 9.68% 2.30%
Tax credits, net of basis adjustment...................... -- (3.64%)
----- -----
Anticipated effective tax rate............................ 47.64% 36.62%
===== =====
</TABLE>
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. However, the effective tax rate will not change as a
result of this transaction.
30
<PAGE>
CFW COMMUNICATIONS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(7) 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 so as 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.
(8) On June 16, 2000, the Company's Board of Directors approved an agreement
and plan of merger with R&B Communications Inc. 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 has a 21% common ownership interest, along with convertible preferred
ownership interest, in the VA Alliance and a 34% common ownership interest
in the WV Alliance. The Company has a 21% common ownership interest, along
with convertible preferred ownership interest in the VA Alliance, and a
45% common ownership interest in the WV Alliance (See Note 3). As a result
of the merger with R&B and other planned increases in common ownership
through redemption and conversion of preferred interests, consolidation of
the VA Alliance and the WV Alliance will be required concurrent with the
closing of the merger.
On May 17, 2000, the Board of Directors approved the acquisition of
PrimeCo Personal Communications, L.P., Richmond Major Trading Area
(Richmond-Norfolk PCS) for cash of $407.3 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. This acquisition is subject to regulatory approval and will
be accounted for using the purchase method of accounting.
The Company plans to obtain financing through issuance of unsecured Senior
Notes for $375 million, a Senior Secured Credit Facility of up to $325
million and various preferred stock offerings of $225 million. The Company
plans to use the proceeds of the financing vehicles to fund the
acquisition of Richmond-Norfolk PCS, to repay its existing indebtedness
and that of the Alliances, and for future expansion.
Pursuant to a stock purchase agreement, dated May 17, 2000 with telegate
AG, a public company in Germany, the Company will sell the capital stock
of CFW Information Services, Inc., through which directory assistance
operations are conducted. In exchange, the Company will receive $32.0
million in cash and $3.5 million in stock of telegate. This disposition is
subject to regulatory approval.
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