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 March 31, 1999 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
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None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_x_No___
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class COMMON STOCK, NO PAR VALUE Outstanding 5/13/99 13,036,416
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CFW COMMUNICATIONS COMPANY
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets, March 31, 1999 and December
31, 1998 3-4
Condensed Consolidated Statements of Income, Three Months Ended March
31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows, Three Months Ended
March 31, 1999 and 1998 6
Condensed Consolidated Statements of Shareholders' Equity, Three
Months Ended March 31, 1999 and Each of the Calendar Quarters in the
Year Ended December 31,1998 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
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
March 31, 1999 December 31, 1998
(Unaudited)
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ASSETS
Current Assets
Cash and cash equivalents $ 42,152 $ 42,890
Accounts receivable, net of allowance of $0.7 million ($0.6 million 13,182,492 12,120,985
in 1998)
Receivable from affiliates 3,304,698 5,681,978
Materials and supplies 2,401,059 2,176,895
Prepaid expenses and other 565,615 448,775
Income tax receivable 520,989 691,221
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20,017,005 21,162,744
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Securities and Investments 16,448,568 11,671,417
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Property and Equipment
Land 1,957,874 1,957,874
Buildings and improvements 19,076,629 19,007,349
Network plant and equipment 95,444,426 93,247,587
Furniture, fixtures and other equipment 21,364,672 20,022,238
Radio spectrum licenses 15,468,649 15,468,649
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Total in service 153,312,250 149,703,697
Under construction 9,970,984 3,916,819
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163,283,234 153,620,516
Less accumulated depreciation 53,374,976 50,760,242
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109,908,258 102,860,274
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Other Assets
Cost in excess of net assets of business acquired, less accumulated 12,834,000 12,705,900
amortization of $1.5 million ($1.4 million in 1998)
Deferred charges 482,304 533,540
Radio spectrum licenses and license deposits 7,748,192 6,090,791
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21,064,496 19,330,231
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$ 167,438,327 $ 155,024,666
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See Notes to Condensed Consolidated Financial Statements.
3
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
March 31, 1999 December 31,
(unaudited) 1998
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Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 7,871,644 $ 7,042,966
Customers' deposits 412,048 400,655
Advance billings 2,354,804 2,303,696
Accrued payroll 330,922 1,283,083
Accrued interest 244,261 623,412
Other accrued liabilities 3,143,365 2,490,386
Deferred revenue 1,385,795 1,221,849
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15,742,839 15,366,047
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Long-Term Debt 28,593,414 19,774,262
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Long-term Liabilities
Deferred income taxes 15,816,092 14,243,872
Retirement benefits other than pensions 9,592,020 9,317,424
Other 1,330,167 1,440,157
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26,738,279 25,001,453
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Minority Interests 1,454,173 1,472,419
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Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 43,602,658 43,527,636
Retained earnings 49,726,670 49,882,849
Accumulated Other Comprehensive Income, unrealized gain 1,580,294 -
on securities available for sale, net
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94,909,622 93,410,485
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$ 167,438,327 $ 155,024,666
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See Notes to Condensed Consolidated Financial Statements.
4
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31, March 31,
1999 1998
Operating Revenues
Wireline communications $ 9,802,114 $ 9,211,446
Wireless communications 3,297,940 3,159,444
Directory assistance 2,873,508 3,269,466
Other communications services 1,044,065 594,926
17,017,627 16,235,282
Operating Expenses
Maintenance and support 3,202,319 2,642,594
Depreciation and amortization 2,810,792 2,493,675
Customer operations 4,567,246 3,893,580
Corporate operations 1,743,817 1,658,555
12,324,174 10,688,404
Operating Income 4,693,453 5,546,878
Other Income (Expenses)
Other expenses, principally interest (319,086) (189,538)
Interest and dividend income 106,624 24,839
Equity loss from PCS investees (2,331,174) (895,583)
Equity income from other wireless investees 53,007 4,506
Loss on write-down of investment - (270,067)
2,202,824 4,221,035
Income Taxes 774,083 1,636,787
1,428,741 2,584,248
Minority Interests (89,015) (134,598)
Net Income $ 1,339,726 $ 2,449,650
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Net income per common share - basic $ 0.10 $ 0.19
Net income per common share - diluted $ 0.10 $ 0.19
Average shares outstanding - basic 13,021,737 12,994,323
Average shares outstanding - diluted 13,087,864 13,096,162
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Cash dividends per share $ 0.11475 $ 0.10875
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See Notes to Condensed Consolidated Financial Statements.
5
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
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March 31, March 31,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,339,726 $ 2,449,650
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,654,018 2,358,969
Amortization 156,774 134,706
Deferred taxes 603,652 1,187,305
Retirement benefits other than pensions 274,596 178,592
Other 55,420 116,964
Equity loss from wireless investees 2,278,167 891,077
Minority interests, net of distributions (18,246) 134,598
Distributions received from investments 1,636 642
Loss on write-down of investment - 270,067
Changes in assets and liabilities from operations:
(Increase) decrease in accounts receivable (1,061,507) 1,142,985
(Increase) decrease in materials and supplies (224,164) 60,079
(Increase) decrease in other current assets (116,840) 4
Decrease in income taxes 170,232 201,364
Increase in accounts payable 828,678 634,402
Decrease in other accrued liabilities (678,333) (1,315,176)
Increase (decrease) in other current liabilities 62,501 (14,800)
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Net cash provided by operating activities 6,326,310 8,431,428
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (9,633,002) (1,998,323)
Purchase of PCS licenses (54,441) (69,028)
Investments in PCS alliances (3,892,138) (2,059,072)
Repayments from PCS alliances 2,377,280 1,027,145
Acquisition of internet subscribers (305,447) -
Investment in internet service company (600,000) -
Deposit on radio spectrum licenses, net (1,601,615) (561,000)
Maturities and distributions from (contributions to) other investments (15,954) 199,835
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Net cash used in investing activities (13,725,317) (3,460,443)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (1,495,905) (1,414,724)
Payments on senior notes (3,636,364) (3,636,364)
Additional borrowing (payments) on lines of credit, net 12,455,516 (1,000,000)
Net proceeds from exercise of stock options 75,022 29
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Net cash provided by (used in) financing activities 7,398,269 (6,051,059)
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Net decrease in cash and cash equivalents (738) (1,080,074)
Cash and cash equivalents:
Beginning 42,890 1,224,347
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Ending $ 42,152 $ 144,273
==================== ==================
See Notes to Condensed Consolidated Financial Statements.
6
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity
Retained Accumulated Total
Common Stock Earnings Other Shareholders'
Comprehensive Equity
Income
Shares Amount
Balance, January 1, 1998 12,986,654 $ 43,420,269 $ 47,035,233 $ - $ 90,455,502
Comprehensive income:
Net Income 2,449,650
Comprehensive income 2,449,650
Cash dividends (1,414,724) (1,414,724)
Stock options exercised, net 22,280 29 29
Balance, March 31, 1998 13,008,934 43,420,298 48,070,159 - 91,490,457
Comprehensive income:
Net Income 2,468,454
Comprehensive income 2,468,454
Cash dividends (1,414,721) (1,414,721)
Stock options exercised, net 4,914 84,055 84,055
Balance, June 30, 1998 13,013,848 43,504,353 49,123,892 - 92,628,245
Comprehensive income:
Net Income 2,173,884
Comprehensive income 2,173,884
Cash dividends (1,415,255) (1,415,255)
Balance, September 30, 1998 13,013,848 43,504,353 49,882,521 - 93,386,874
Comprehensive income:
Net Income 1,415,652
Comprehensive income 1,415,652
Cash dividends (1,415,324) (1,415,324)
Stock options exercised, net 3,140 23,283 23,283
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 1,580,294
available for sale, net of $1.0
million deferred tax obligation
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
============== ============= - ============== ============== ================
See Notes to Condensed Consolidated Financial Statements.
7
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
(1) In the opinion of the Company, the accompanying condensed consolidated
financial statements which are unaudited, except for the condensed
consolidated balance sheet dated December 31, 1998, contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1999 and December
31, 1998 and the results of operations for the three months ended March
31, 1999 and 1998 and cash flows for the three months ended March 31,
1999 and 1998. The results of operations for the three months ended
March 31, 1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to confirm with
classifications adopted in 1999.
(2) The Company recognized a $0.3 million ($0.2 million after tax)
impairment loss on its investment in American Telecasting, Inc. (ATEL)
in the first quarter of 1998. At December 31, 1998, the carrying value
of the Company's investment in ATEL was $0.3 million based on the $0.195
trading price on December 31, 1998. In the first quarter of 1999, the
Company recorded an unrealized gain on this investment of $1.6 million,
net of $1.0 million deferred tax obligation, based on the $2.00 per
share trading price on March 31, 1999. On April 27, 1999 ATEL reported
that it had agreed to be acquired by Sprint Corporation, with each ATEL
shareholder to receive $6.50 per share in cash.
(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 66,127 and
101,846 shares for the three months ended March 31, 1999 and 1998,
respectively, to reflect the assumed conversion of dilutive stock
options. The Company currently has 509,437 options outstanding to
acquire shares of common stock, of which 261,881 are currently
exercisable.
(4) The Company has adopted "Statement of Position (SOP) 98-5 Start-Up
Costs." This standard requires the costs of start-up activities,
including organization costs, to be expensed as incurred. The standard
broadly defines start-up activities as those one-time activities related
to opening a new facility, introducing a new product or service,
conducting business in a new territory and the like. Adoption of this
standard did not have a material impact to the Company's results of
operations or the Company's financial position.
(5) The Company has a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications
services (PCS) serving a 1.6 million populated area in central and
western Virginia. The Company is managing such build-out pursuant to a
service agreement. PCS operations began throughout the Virginia region
in the fourth quarter of 1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million
populated area in West Virginia and parts of eastern Kentucky,
southwestern Virginia and eastern Ohio. The Company is managing this
build-out pursuant to a service agreement. The WV Alliance commenced
operations in the fourth quarter of 1998, offering services along the
Charleston and Huntington corridor and expanded to the northern corridor
of West Virginia, including the cities of Clarksburg, Fairmont and
Morgantown in the second quarter of 1999.
Combined summarized financial information for the VA Alliance and WV
Alliance ("Alliances"), both of which are accounted for under the equity
method, are as follows (dollar amounts in millions):
March 31, 1999 December 31, 1998
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Current assets $ 6.5 $ 4.1
Noncurrent assets 141.9 131.3
Current liabilities 19.3 22.7
Noncurrent liabilities 119.8 98.4
Redeemable preferred stock 14.6 14.3
8
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
For the Three Months Ended,
March 31, 1999 March 31, 1998
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Net sales $ 2.7 $ 0.3
Gross profit (loss) 0.6 (0.1)
Net loss applicable to common owners (8.7) (4.3)
Company's share of net loss (2.3) (0.9)
The Company has entered into guaranty agreements whereby the Company is
committed to provide guarantees of up to $50.5 million of the
Alliance's debt and redeemable preferred obligations. Such guarantees
become effective as obligations are incurred by the Alliances. At March
31, 1999, the Company has guaranteed $42.5 million of the Alliances'
obligations.
(1) Acquisitions and investments
In March 1999, the Company acquired 1,400 internet subscribers from
Charleston, WV based WVInter.net for a purchase price of $0.3 million.
In February 1999, the Company invested $0.6 million for a 10% common
ownership interests in NetAccess, Inc. (NetAccess), an internet service
provider serving East Tennessee and Southwestern Virginia, a 1.5 million
populated area. The Company has an option to purchase the remainder of
the outstanding stock of NetAccess on comparable terms, plus a
contingent payment in 2001, based on NetAccess achieving certain defined
year 2000 earnings levels. This option will expire on July 31, 1999, if
unexercised.
NetAccess has over 13,000 dial-up internet subscribers throughout the
region, provides digital subscriber line (DSL) service in 9 markets and
serves over 200 DSL customers and provides web hosting, internet design
services, private network connectivity via frame relay, ISDN, and wide
area ethernet services.
9
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Three Months Ended March 31, 1999 and 1998
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is a diversified
communications company providing a broad range of products and services to
business and residential customers primarily in Virginia and West Virginia.
These communications products and services include local telephone, long
distance, cellular, personal communications services (PCS), paging, wireless and
wireline cable television, directory assistance, competitive access, local
internet access, and alarm monitoring and installation.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment.
In addition, the Company has leveraged its existing switching platform and fiber
optic network by introducing new services such as long distance directory
assistance, long distance services to local telephone customers and surrounding
communities, cable television, local internet access, and various enhanced
services such as Call Waiting and Caller Identification. These activities
continue to contribute to growth in the Company's operating revenues. In
addition to these activities, the Company has commenced offering, in selected
markets within Virginia, a competitive local telephone service, a high-speed
wireless cable and digital subscriber line (DSL) internet service and a wireless
local telephone service. Further, the Company will be expanding its operations
base and its service offerings in Virginia and West Virginia throughout 1999 and
2000.
As a result of the Company's increasing focus on and growth in wireless
communications and other competitive communications related businesses, a larger
percentage of the Company's operating revenues and operating cash flows
(operating cash flow is defined as operating income before depreciation and
amortization) are being generated by businesses other than the mature telephone
operations. Accordingly, management believes operating cash flow is a meaningful
indicator of the Company's performance. Operating cash flows is commonly used in
the wireless communications industry and by financial analysts and others who
follow the industry to measure operating performance. Operating cash flows
should not be construed as an alternative to operating income or cash flows from
operating activities (both as determined in accordance with generally accepted
accounting principles) or as a measure of liquidity.
Through the Virginia PCS Alliance, L.C. ("VA Alliance") and West Virginia PCS
Alliance, L.C. ("WV Alliance"), and other PCS joint ventures, the Company has
acquired radio spectrum licenses for personal communications services ("PCS")
for markets with an aggregate population of five million people. These licenses
have enabled the Company, as managing member of both Alliances, to deploy PCS
services in central and western Virginia and central West Virginia and will
enable the Company to provide services in additional markets in Virginia, West
Virginia and parts of Maryland, Ohio, Pennsylvania, Kentucky and Tennessee. The
VA Alliance completed its first full year of operation in 1998 and the WV
Alliance commenced offering PCS services in the Charleston and Huntington, WV
corridor in the fourth quarter of 1998. The WV Alliance commenced offering PCS
services in the Clarksburg, Fairmont and Morgantown corridor in the second
quarter of 1999. Throughout 1999, management expects continued growth in
revenue, operating cash flows and operating income from its current consolidated
operations. However, the Company is experiencing lower operating margins due to
start-up costs of newer businesses associated with expansion into new markets
and introduction of new service offerings through the region. This is expected
to continue. The Company's recognition of its share of losses associated with
its investments in the PCS Alliances is expected to be significant in 1999 as
the Company recognizes a full year of operating losses from both the Virginia
and West Virginia Alliances. These losses from equity investments are expected
to exceed net income growth from consolidated operations and will likely result
in consolidated net income levels below amounts reported in recent years. These
losses from equity investments are also expected to continue into future years
until build-out is completed and a sufficient customer base is established.
The Company wishes to caution readers that these forward-looking statements and
any other forward-looking statements made by the Company are based on a number
of assumptions, estimates and projections including but not limited to,
continuation of economic growth and demand for wireless and wireline
communications services; continuation of current level of services for certain
material customers; reform initiatives being considered by the FCC being
relatively revenue neutral; significant competition in the Company's telephone
service area not emerging in 1999; the impact on capital requirements and
earnings from new business opportunities, expansions into new markets and
anticipated competitive activity not being greater than anticipated; and the
achievement of build-out, operational, capital, financing and marketing plans
relating to deployment of PCS services. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
10
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
risks and uncertainties, and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof and the Company undertakes no obligation to
revise or update such statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had net income of $1.3 million, or $0.10 per share, for the first
quarter 1999. This represents a 45% decrease from net income of $2.4 million, or
$.19 per share for the first quarter 1998. Net income for the first quarter of
1999 included a $2.3 million loss ($1.4 million loss after-tax), up from $0.9
million ($0.6 million loss after-tax) in the first quarter of 1998, relating to
the Company's share of losses from our PCS investments which provides Personal
Communications Services (PCS) throughout the Company's Virginia and West
Virginia marketplace. Partially offsetting this was the writedown taken on our
investment in American Telecasting, Inc. of $0.3 million ($0.2 million
after-tax) during the first quarter of 1998 with no similar charge in the first
quarter of 1999. Excluding these items, net income for the first quarter 1999
would have been $2.8 million as compared to $3.2 million for the first quarter
1998.
Operating revenues were $17.0 million for the three months ended March 31, 1999
which is a 5% increase over operating revenues of $16.2 million for the three
months ended March 31, 1998. Operating cash flows for the three months ended
March 31, 1999 were $7.5 million, a 7% decrease over first quarter 1998
operating cash flows of $8.0 million. Operating income for the three months
ended March 31, 1999 was $4.7 million, a 15% decrease from first quarter 1998
operating income of $5.5 million.
These results reflect customer growth with our wireless and internet products of
31% and 106%, respectively, and the addition of approximately 900 new CLEC
customers. Profit margins were significantly impacted by a decline in year over
year directory assistance call volume, by the start-up costs associated with new
products and new market introductions, and by increased phone subsidies due to
an increase in the wireless customer growth rate.
OPERATING REVENUES
The total operating revenue increase of $0.8 million was fueled primarily by a
$0.4 million increase in the network business and $0.2 million increase in
wireless. The network growth was primarily due to a $0.3 million increase in
CLEC revenue and $0.2 million increase in interenet revenue. Cellular's
equipment sales grew $0.2 million and the combination of access, airtime and
roaming grew $0.6 million. This was partially offset by the related equipment,
access and airtime costs of sales growth. Directory assistance operating
revenues declined $0.4 million or 12% due to a 14% reduction in call volume.
WIRELINE COMMUNICATIONS
Revenues from the Company's wireline operations, which include telephone
revenues, fiber optic network usage and wireline cable revenues, increased $0.6
million or 6% for the three months ended March 31, 1999 versus the comparable
1998 period. As mentioned above, network revenues, which include revenues from
carrier access, CLEC, long distance, and internet, increased $0.4 million and
telephone revenues, which include local service, access and toll services,
directory advertising and calling feature revenues were up $0.1 million or 2%
for the first quarter 1999 over 1998.
WIRELESS COMMUNICATIONS
Wireless communications is comprised of cellular, digital PCS, paging, and
voicemail (collectively referred to as wireless herein), other miscellaneous
wireless revenues and wireless cable. Revenues from these operations increased
$0.1 million or 4% for the three months ended March 31, 1999 versus 1998.
Wireless revenues, including access, air time, roaming charges, paging, and
voicemail increased $0.2 million or 8% for this three month period over the
comparable period in the prior year. Excluding the effect of the additional
phone subsidies from a higher customer growth rate, this revenue stream was up
$0.4 million.
11
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
DIRECTORY ASSISTANCE
Directory assistance revenue declined 12% for the three months ended March 31,
1999 versus the three months ended March 31, 1998. The 14% call volume decline
was attributable to the impact of call around plans versus traditional directory
assistance traffic being handled at our two call centers without sufficient new
business to offset the continued base business decline. There was, however, a
partial offset from new national directory assistance call volume, a service
introduced in late 1998 and further expanded in March 1999.
OTHER COMMUNICATIONS SERVICES
Other communications services revenue are derived from building and equipment
rentals charged to affiliates, sales, installation and maintenance of phone
systems and sales, installation and service of alarm monitoring systems. This
revenue stream increased $0.4 million for the first quarter 1999 versus the
first quarter of 1998. The Company received rentals primarily for company owned
assets which are being used by the PCS Alliances. These revenues increased $0.3
million in the first quarter 1999 versus the first quarter 1998.
OPERATING EXPENSES
Operating expenses increased $1.6 million or 15% for the three month period
ended March 31, 1999 as compared to the same period in 1998. Of this increase,
$0.6 million represented a period to period increase in the operating expenses
of the Virginia network business and $0.3 million pertains to the West Virginia
network start-up. This is a result of the operating expenses associated with
increased fiber builds and those start-up costs associated with launching or
preparing to launch internet, CLEC, and long distance in new Virginia and West
Virginia geographic markets. Additionally, cellular operating expenses increased
$0.4 million which represents costs associated with the significant customer
growth. Finally, directory assistance operating expenses increased $0.2 million
despite lower call volumes due to training and development costs incurred in
taking on a new national database contract and start-up costs associated with
the new call center being opened in Winchester in the second quarter of 1999.
MAINTENANCE AND SUPPORT EXPENSE
Maintenance and support expense, which includes property and equipment
maintenance, general engineering and general administration of plant operations,
increased $0.6 million or 21% for the three months ended March 31, 1999 versus
the comparable period of the prior year. This increase is primarily the result
of increased access and other related costs in support of the revenue growth
coupled with start-up costs incurred relative to launching our CLEC and long
distance services in new geographic markets and expanding our internet service
offerings.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $0.3 million or 13% for the
three months ended March 31, 1999 versus the comparable period in 1998. This is
due to a period to period increase in the property and equipment asset base of
approximately 12%, from $137 million as of March 31, 1998 to $153 million as of
March 31, 1999. Depreciation as a percent of assets remains unchanged at 1.8%.
The property and equipment increase was primarily for back office software and
digital switching hardware and software.
CUSTOMER OPERATIONS EXPENSE
Customer operations expense, which includes marketing, product management,
product advertising, sales, publication of a regional telephone directory,
customer services, and directory assistance services increased $0.7 million or
17% for the three month period ended March 31, 1999 versus the same period of
the prior year. Cellular and directory assistance each accounted for $0.2
million and the remaining increase was spread fairly evenly between telephone,
Virginia network and West Virginia network. These increases are due largely to
growth of support functions, primarily customer care, needed to support customer
and revenue growth. As mentioned above, directory assistance incurred start-up
costs associated with the new national database services and the new Winchester,
VA call center.
12
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
CORPORATE OPERATIONS EXPENSE
Corporate operations expense, which includes taxes other than income, executive,
planning, accounting, external relations, legal, purchasing, information
management, human resources and other general and administrative expenses
increased $0.1 million for the three month period ended March 31, 1999 versus
the three month period ended March 31, 1998 which represents normal growth.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA PCS Alliance was $1.4 million for the
first quarter of 1999. The Company has a 21% common ownership interest in the VA
Alliance. The Company's share of losses from the WV PCS Alliance, which
commenced operations in the latter part of the third quarter of 1998, was $1.0
million for the first quarter of 1999. The Company has a 45% common ownership
interest in the WV Alliance. The Company anticipates increased losses from the
WV Alliance as it commences providing PCS services in the northern portion of
West Virginia and continues its network build-out throughout its license area.
INCOME TAXES
Income taxes decreased $0.9 million for the three months ended March 31, 1999 as
compared to the same periods in 1998. This is due primarily to the $0.5 million
increase in tax benefit on the increase in equity losses from the Alliances and
the $0.3 million tax reduction from lower operating income in the first quarter
of 1999 versus 1998. The effective tax rate decreased from 40% for the first
quarter 1998 to 37% for the first quarter of 1999. This decrease is primarily
based on restoration and employment tax credits and a lower anticipated rate for
deferred tax reversals.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 1999, net cash provided by operating
activities was $6.3 million. Principal changes in operating assets and
liabilities were as follows: Accounts receivable increased $1.0 million due to
the timing of receipts from a significant customer. Accounts payable increased
as of March 31, 1999 by $0.8 million due to the timing of payments at the
respective quarter ends. Other accrued liabilities decreased by $0.7 primarily
due to the timing of annual bonus compensation and semi-annual interest
payments.
The Company's investing activities for the three months ended March 31, 1999
included $9.6 million for the purchase of property and equipment, $4.9 million
of which represents software and hardware related circuit and switching
equipment and the related building up-fits for telephone, network and directory
assistance. Internet equipment required for digital subscriber line services and
to expand the internet geographic market into West Virginia accounted for
another $0.9 million. Computer equipment and furniture and fixture additions
accounted for $1.4 million of this total increase. These investments were
necessary for service expansion and enhancements. The Company also invested an
additional $3.9 million in the Alliances and placed funds on deposit with the
FCC totaling $1.6 million to enable the Company to participate in the Personal
Communication Services (PCS) radio spectrum license re-auction. Repayments from
the Alliances increased cash flows by $2.4 million. Finally, the company
invested $0.6 million in NetAccess, Inc. and acquired internet subscribers from
WVInter.net for $0.3 million (See Note 6).
Net cash used for financing activities for the three months ended March 31, 1999
aggregated $7.4 million which primarily represents payment of dividends on
outstanding capital stock of $1.5 million, payment on senior notes of $3.6
million and the additional borrowing under lines of credit of $12.4 million.
Funds required for dividends, capital expenditures, interest and debt principal
payments, and partnership contributions are expected to be provided from
internal sources and borrowings drawn against available credit facilities. The
Company has entered into certain guarantee agreements relating to its investment
in the Alliances (Note 5). Management anticipates that funds required for
additional capital contributions to the Alliances will be provided from
increased cash flow resulting from lower estimated tax payments due to the
Company recognizing its proportionate share of the tax losses generated by the
Alliances, both limited liability companies, cash flows from operations and
borrowings under existing lines of credit.
13
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has addressed this issue with a plan which is centered around
several key components: (1) system inventory, (2) third party confirmation, (3)
internal systems review, (4) compliance implementation, (5) testing and (6)
contingency planning. Regarding the first component, the Company completed a
comprehensive inventory of all its systems (hardware and software) in July 1998.
At the same time, formal communication, through a confirmation process, was
initiated with all of the Company's significant suppliers and large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties failure to resolve their own year 2000 issues. The Company
has received responses from approximately three-quarters of the confirmations
sent and continues to follow-up on non-responses and instances where potential
issues were noted. Regarding the third component, the Company has completed a
comprehensive review of its computer systems to identify the internal systems
that could be impacted by the year 2000 issue. Based on findings from this
review, the Company has developed an implementation plan to resolve potential
issues and is in the early to middle stages of implementing such a plan. Both
the second and third components were further broken down by category of system
(network systems, information technology systems and other supporting systems).
Significant focal areas are the Company's network/switching related equipment
and the corporate billing, customer provisioning and accounting systems. The
final components are testing and contingency planning. Testing, where feasible,
will span both the internal systems and systems interface with third parties.
Contingency planning is necessary in the event that conversion efforts, customer
compliance or any other conditions arise that prevent planned critical
application upgrades. The entire year 2000 project has a targeted completion
date prior to the end of the third quarter of 1999. Completion of this project
includes planned testing of each major exposure area to ensure compliance. The
primary area of concern regarding year 2000 compliance is the finalization of
the billing system conversion. While the Company does not anticipate a problem
completing this project prior to the end of the third quarter of 1999, the
planned completion date for the billing system conversion is two to three months
later than originally anticipated. No other significant plan changes are
anticipated. However, should the implementation of any contingency plan be
necessary, the project's completion date and cost could be effected.
Based on it's findings and assessment to date, the Company is or will be
performing certain planned telephone switching software upgrades and computer
software and system upgrades, which are being performed primarily to better meet
the business and growth needs of the Company. The total year 2000 project cost
estimates are not expected to be material to the Company's business operations
or financial condition. The Company will continue to review and update this
estimate over the duration of the project.
As mentioned above, the Company expects its year 2000 program to be completed
prior to the end of the third quarter of 1999. It should be noted that the
Company plans to devote all resources required to resolve any significant year
2000 issues. However, if the planned modifications and upgrades are not made, or
are not completed on a timely basis, and contingency plans were to falter, the
year 2000 issue could have a material impact on the operations of the Company.
Also, there can be no assurance that the systems of other companies on which the
Company's systems rely will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems or costs of upgrades. The material impact on the operations of the
Company could include, but not be limited to, interruption of telecommunications
services, interruption, error or failure of the Company's customer care
services, including customer billing, and failures of the Company's other
information systems and other date-sensitive equipment. Such failures could
result in substantial customer claims as well as lost revenue due to service
interruption, significant delays in the billing process and increased expense
associated with stabilizing operations following such failures.
The costs of the program and estimated completion date are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
compliance by third parties which interact with the Company's systems, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
14
CFW COMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes In Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K - No reports on
Form 8-K have been filed during the
quarter ended March 31, 1999
15
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
May 14, 1999 s/J. S. Quarforth
-----------------------------------------------------
J. S. Quarforth, Chairman and Chief Executive Officer
May 14, 1999 s/M. B. Moneymaker
-----------------------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer, and Secretary
16