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 September 30, 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
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(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 11/15/99 13,053,079
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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, September
30, 1999 and December 31, 1998 3-4
Condensed Consolidated Statements of Income, Three
and Nine Months Ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Shareholders'
Equity for each of the Calendar Quarters in the
Nine Months Ended September 30, 1999 and the Year
Ended December 31,1998 7
Notes to Condensed Consolidated Financial Statements 8-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
PART II. OTHER INFORMATION 18
SIGNATURES 19-20
2
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
September 30, 1999
(Unaudited) December 31, 1998
--------------------- --------------------
ASSETS
Current Assets
Cash and cash equivalents $ 100,268 $ 42,890
Accounts receivable, net of allowance of $1.0 million ($0.6 million
in 1998) 13,674,162 12,120,985
Receivable from affiliates 1,138,459 5,681,978
Materials and supplies 3,384,865 2,176,895
Prepaid expenses and other 1,177,276 448,775
Income tax receivable - 691,221
--------------------- --------------------
19,475,030 21,162,744
--------------------- --------------------
Securities and Investments 7,359,205 11,671,417
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Property and Equipment
Land 2,038,127 1,957,874
Buildings and improvements 21,367,697 19,007,349
Network plant and equipment 103,161,434 93,247,587
Furniture, fixtures and other equipment 26,075,825 20,022,238
Radio spectrum licenses 15,477,121 15,468,649
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Total in service 168,120,204 149,703,697
Under construction 8,060,089 3,916,819
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176,180,293 153,620,516
Less accumulated depreciation 58,765,827 50,760,242
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117,414,466 102,860,274
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Other Assets
Cost in excess of net assets of business acquired, less accumulated
amortization of $1.8 million ($1.4 million in 1998) 19,325,939 12,705,900
Deferred charges 433,797 533,540
Radio spectrum licenses and license deposits 7,805,249 6,090,791
--------------------- --------------------
27,564,985 19,330,231
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$ 171,813,686 $ 155,024,666
===================== ====================
See Notes to Condensed Consolidated Financial Statements.
3
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Balance Sheets
September 30, 1999 December 31,
(Unaudited) 1998
------------------- --------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 6,131,529 $ 7,042,966
Customers' deposits 419,560 400,655
Advance billings 2,558,143 2,303,696
Accrued payroll 744,811 1,283,083
Accrued interest 273,197 623,412
Income tax payable 480,159 -
Other accrued liabilities 3,498,400 2,490,386
Deferred revenue 1,709,071 1,221,849
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15,814,870 15,366,047
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Long-Term Debt 29,914,814 19,774,262
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Long-Term Liabilities
Deferred income taxes 16,528,842 14,243,872
Retirement benefits other than pensions 9,880,509 9,317,424
Other 1,507,210 1,440,157
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27,916,561 25,001,453
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Minority Interests 1,874,092 1,472,419
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Commitments
Shareholders' Equity
Preferred stock, no par - -
Common stock, no par 43,890,270 43,527,636
Retained earnings 52,403,079 49,882,849
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96,293,349 93,410,485
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$ 171,813,686 $ 155,024,666
=================== ====================
See Notes to Condensed Consolidated Financial Statements.
4
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Income
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
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Operating Revenues
Wireline communications $ 11,378,606 $ 9,526,529 $ 31,380,122 $ 27,989,022
Wireless communications 3,600,328 3,526,203 10,582,117 10,006,504
Directory assistance 3,279,913 3,379,243 9,146,547 9,917,092
Other communications services 1,107,630 723,684 3,164,590 2,029,595
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19,366,477 17,155,659 54,273,376 49,942,213
-----------------------------------------------------------------------------
Operating Expenses
Maintenance and support 4,473,510 2,754,780 11,219,609 7,989,006
Depreciation and amortization 3,236,276 2,655,921 9,015,403 7,636,712
Asset impairment charge 2,713,221 - 2,713,221 -
Customer operations 5,016,179 4,198,668 14,574,061 12,068,200
Corporate operations 2,190,555 1,788,913 5,403,845 5,231,771
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17,629,741 11,398,282 42,926,139 32,925,689
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Operating Income 1,736,736 5,757,377 11,347,237 17,016,524
Other Income (Expenses)
Other expenses, principally interest (420,345) (122,874) (1,105,346) (483,492)
Interest and dividend income 40,816 22,202 242,379 78,987
Equity loss from PCS investees (2,701,184) (1,547,594) (7,970,465) (3,789,224)
Equity income from other
wireless investees 45,665 59,236 133,431 101,244
Gain on sale of tower asset and investment 8,366,378 - 8,366,378 -
Loss on write-down of investment - (353,028) - (623,095)
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7,068,066 3,815,319 11,013,614 12,300,944
Income Taxes 2,568,055 1,462,437 3,660,211 4,728,539
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4,500,011 2,352,882 7,353,403 7,572,405
Minority Interests (122,586) (178,998) (341,144) (480,417)
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Net Income $ 4,377,425 $ 2,173,884 $ 7,012,259 $ 7,091,988
================================================================================================================================
Net income per common share - basic $ 0.34 $ 0.17 $ 0.54 $ 0.55
Net income per common share - diluted $ 0.33 $ 0.17 $ 0.54 $ 0.54
Average shares outstanding - basic 13,050,090 13,013,848 13,037,438 13,005,791
Average shares outstanding - diluted 13,110,152 13,087,365 13,093,342 13,096,447
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Cash dividends per share $ 0.11475 $ 0.10875 $ 0.34425 $ 0.32625
================================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
5
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
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September 30, September 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,012,259 $ 7,091,988
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 8,331,575 7,110,968
Amortization 683,828 525,744
Gain on sale of tower asset and investment (8,317,646) -
Asset impairment charge 2,713,221 -
Deferred taxes 2,284,970 3,677,721
Retirement benefits other than pensions 563,085 535,104
Other 235,132 (108,488)
Equity loss from wireless investees 7,837,034 3,687,980
Minority interests, net of distributions 37,113 56,237
Distributions received from investments 132,090 148,855
Loss on write-down of investment - 623,095
Changes in assets and liabilities from operations:
(Increase) decrease in accounts receivable (1,158,261) 1,138,484
(Increase) decrease in materials and supplies (1,207,970) 221,061
Increase in other current assets (728,501) (354,130)
Increase (decrease) in income taxes payable 1,171,380 (124,545)
Decrease in accounts payable (1,482,928) (59,182)
Increase (decrease) in other accrued liabilities 119,527 (96,744)
Increase in other current liabilities 273,352 143,120
-------------------- ------------------
Net cash provided by operating activities 18,499,260 24,217,268
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (24,835,308) (9,820,763)
Purchase of radio spectrum licenses, net of minority interest (1,349,898) (602,958)
Investments in PCS alliances (3,892,138) (2,262,155)
Repayments from PCS alliances 4,543,519 1,510,632
Acquisition of internet subscribers (1,497,652) -
Acquisition of internet company, net of cash acquired (6,000,000) -
Investment in national directory assistance database provider - (1,000,000)
Proceeds from the sale of tower asset and investments 9,463,434 934,146
Maturities and distributions from (contributions to) other investments (1,136) 213,098
-------------------- ------------------
Net cash used in investing activities (23,569,179) (11,028,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (4,492,029) (4,244,700)
Payments on senior notes (3,636,364) (3,749,763)
Additional borrowing (payments) on lines of credit, net 12,893,056 (3,000,000)
Net proceeds from exercise of stock options 362,634 84,084
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Net cash provided by (used in) financing activities 5,127,297 (10,910,379)
-------------------- ------------------
Net increase in cash and cash equivalents 57,378 2,278,889
Cash and cash equivalents:
Beginning 42,890 1,224,347
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Ending $ 100,268 $ 3,503,236
==================== ==================
See Notes to Condensed Consolidated Financial Statements.
6
CFW COMMUNICATIONS COMPANY
Condensed Consolidated Statement of Shareholders' Equity
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
------------- ------------ ------------- --------------- ----------------
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
available for sale, net of $1.0
million deferred tax obligation 1,580,294
Comprehensive income 2,920,020
Cash dividends (1,495,905) (1,495,905)
Stock options exercised, net 19,428 75,022 75,022
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Balance, March 31, 1999 13,036,416 43,602,658 49,726,670 1,580,294 94,909,622
Comprehensive income:
Net Income 1,295,108
Unrealized gain on securities
available for sale, net of $1.7
million deferred tax obligation 2,719,995
Comprehensive income 4,015,103
Cash dividends (1,498,100) (1,498,100)
Stock options exercised, net 5,663 76,737 76,737
------------- ------------ ------------- --------------- ----------------
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 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
============= ============ ============= =============== ================
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 September 30, 1999 and
December 31, 1998 and the results of operations for the three and nine
months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. The results of operations for
the three and nine months ended September 30, 1999 and 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain amounts on the prior year financial statements have been
reclassified, with no effect on net income, to conform with
classifications adopted in 1999.
(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 1998 Annual Report. Summarized financial information
concerning the Company's reportable segments is shown in the following
table.
Telephone Network & Internet Wireless Directory Cable Other Total
(in thousands) CLEC Assistance
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As of and for the nine months ended September 30, 1999
Revenues $23,428 $3,928 $2,818 $8,489 $9,147 $2,094 $4,369 $54,273
EBITDA 16,396 837 (872) 3,578 1,130 316 1,690 23,075
Depreciation &
amortization 2,755 879 611 696 929 1,797 1,348 9,015
Asset impairment
charge - - - - - 2,713 - 2,713
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Operating Income 11,347
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Total segment
assets 42,305 21,532 11,427 8,616 15,500 20,785 12,935 133,100
Corporate assets 38,714
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Total Assets $171,814
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As of and for the nine months ended September 30, 1998
Revenues $22,835 $2,974 $974 $7,806 $9,917 $2,200 $3,236 $49,942
EBITDA 16,286 1,534 (202) 3,831 2,309 186 710 24,654
Depreciation &
amortization 2,476 701 186 425 771 2,027 1,051 7,637
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Operating Income 17,017
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Total segment
assets 41,255 12,951 1,023 6,528 10,561 26,494 14,156 112,968
Corporate assets 37,796
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Total Assets $150,764
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For the three months ended September 30, 1999
Revenues $7,917 $1,508 $1,551 $2,949 $3,281 $652 $1,508 $19,366
EBITDA 5,372 335 (264) 1,237 450 30 526 7,686
Depreciation &
amortization 933 329 376 249 348 517 484 3,236
Asset impairment
charge - - - - - 2,713 - 2,713
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Operating Income 1,737
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For the three months ended September 30, 1998
Revenues $7,763 $986 $371 $2,827 $3,379 $699 $1,131 $17,156
EBITDA 5,574 425 (40) 1,364 774 20 296 8,413
Depreciation &
amortization 832 257 88 144 257 679 399 2,656
-------------
Operating Income 5,757
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(3) In September 1999 the Company sold its investment in American
Telecasting, Inc. for $7.9 million in cash and recognized a gain of $7.6
million ($4.7 million after tax). In 1998 and 1997 the Company had
recognized losses from write-down of this investment to reflect market
values at that time.
8
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
(4) The weighted average number of common shares outstanding, which was used
to compute diluted net income per share in accordance with FASB
Statement No. 128, Earnings Per Share, were increased by 60,062 and
73,517 shares for the three months ended September 30, 1999 and 1998,
respectively, and by 55,904 and 90,656 shares for the nine months ended
September 30, 1999 and 1998, respectively, to reflect the assumed
conversion of dilutive stock options. The Company currently has 543,386
options outstanding to acquire shares of common stock, of which 253,089
are currently exercisable.
(5) The Company has a 21% common ownership interest in Virginia PCS
Alliance, L.C. ("VA Alliance"), a provider of personal communications
services (PCS) serving a 1.6 million populated area in central and
western Virginia. The Company is managing such build-out pursuant to a
service agreement. PCS operations began throughout the Virginia region
in the fourth quarter of 1997.
The Company has a 45% common ownership interest in the West Virginia PCS
Alliance, L.C. ("WV Alliance"), a provider of PCS serving a 2.0 million
populated area in West Virginia and parts of eastern Kentucky,
southwestern Virginia and eastern Ohio. The Company is managing this
build-out pursuant to a service agreement. The WV Alliance commenced
operations in the fourth quarter of 1998, offering services along the
Charleston and Huntington corridor and expanded to the northern corridor
of West Virginia, including the cities of Clarksburg, Fairmont and
Morgantown, in the third 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):
September 30, 1999 December 31, 1998
------------------ -----------------
Current assets $ 17.1 $ 4.1
Noncurrent assets 151.8 131.3
Current liabilities 18.0 22.7
Noncurrent liabilities 161.2 98.4
Redeemable preferred stock 12.9 14.3
For the Three Months Ended, For the Nine Months Ended,
--------------------------- --------------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
Net sales $ 4.3 $ 0.9 $ 10.4 $ 1.8
Gross profit (loss) 1.8 0.2 4.1 (0.0)
Net loss applicable to common
owners (9.4) (6.7) (28.5) (17.2)
Company's share of net loss (2.7) (1.5) (8.0) (3.8)
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 September 30,
1999, the Company has guaranteed $59.4 million of the Alliances'
obligations.
(6) Acquisitions and investments
In October 1999, the Company announced that it acquired the assets of
Cornerstone Networks, Inc. (Cornerstone), a leading Internet service
provider serving central and southern Virginia, for $4.5 million plus a
contingent payment in 2001, based on Cornerstone achieving certain
defined year 2000 revenue and earnings levels. At closing, Cornerstone
had over 9,000 Internet subscribers.
In July 1999, the Company completed it's purchase of common ownership
interest in NetAccess , Inc. (NetAccess), an internet service provider
serving a 1.5 million populated area in East Tennessee and Southwestern
Virginia. The Company made an investment in NetAccess of $0.6 million in
February 1999 and in July 1999, exercised its option to purchase the
remainder of the outstanding stock of NetAccess for $5.4 million, plus a
contingent payment in 2001, based on NetAccess achieving certain defined
year 2000 earnings levels. At closing, NetAccess had over 13,500
internet subscribers.
In July 1999, the Company sold a tower property located in Richmond,
Virginia for $1.6 million in cash, recognizing a gain of $0.7 million
($0.4 million after tax).
9
CFW COMMUNICATIONS COMPANY
Notes to Condensed Consolidated Financial Statements
Continued
In May 1999, the Company acquired 4,500 internet subscribers from
Charleston, WV based NewWave Communications for $1.2 million. Similarly,
in March 1999, the Company acquired 1,400 internet subscribers from
Charleston, WV based WVInter.net for a purchase price of $0.3 million.
(7) Asset impairment
In September 1999, the Company recognized an asset impairment charge
relating to certain wireless analog cable equipment of $2.7 million
($1.7 million after tax). The Company provides wireless analog cable
services over MMDS spectrum. Acquisitions of MMDS spectrum by Sprint
Corp. and MCI WorldCom is 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 estimated net realizable value of $0.3 million based on
the Company's assessment of fair value of similar used equipment.
(8) Income taxes
The Company anticipates an effective tax rate for fiscal year 1999 of
34% versus the effective rate for 1998 of 40%. Rehabilitation tax
credits and job employment credits account for 4% of the 6% decrease.
The remaining 2% relates to favorable tax treatment of a charitable
contribution of an appreciated asset. Other reconciling items from the
statutory rate of 38% are consistent with those of the prior year.
(9) Subsequent events
In October 1999, Illuminet, Inc. completed an initial public offering
and began trading on NASDAQ under the symbol ILUM. The Company holds
approximated 0.7 million shares of Illuminet, Inc. at a cost of $1.8
million. The Company will classify this security as available-for-sale.
The closing price for Illuminet, Inc. on November 12, 1999 was $54.75.
At this price, the Company's investment in Illuminet, Inc. would be
valued at $38 million.
10
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Three and Nine Months Ended September 30, 1999 and 1998
OVERVIEW
CFW Communications Company ("CFW" or the "Company") is a diversified
communications company providing a broad range of products and services to
business and residential customers primarily in Virginia and West Virginia.
These communications products and services include local telephone, long
distance, cellular, personal communications services (PCS), paging, wireless and
wireline cable television, directory assistance, competitive access, local
internet access, and alarm monitoring and installation.
The Company's strategy is to be a regional full-service provider of
communications products and services to customers within an expanding service
area. The Company has implemented this strategy through acquisitions,
investments in spectrum licenses and internal growth through capital investment
and geographic expansion. In addition, the Company has leveraged its existing
switching platform and fiber optic network by introducing new services such as
long distance directory assistance, long distance services to local telephone
customers and surrounding communities, cable television, local internet access,
and various enhanced services such as Call Waiting and Caller Identification.
These activities continue to contribute to growth in the Company's operating
revenues. In addition to these activities, the Company has commenced offering,
in selected markets within Virginia, a competitive local telephone service and
digital subscriber line (DSL) internet service. Further, the Company will be
expanding its operations base and its service offerings in Virginia and West
Virginia through the remainder of 1999 and into 2000. Finally, the Company has
expanded into new national directory assistance offerings to offset the
significant call volume decline in the base directory assistance business.
As a result of the Company's increasing focus on and growth in wireless
communications and other competitive communications related businesses, a
significant portion of the Company's operating revenues and operating cash flows
(operating cash flow is defined as operating income before depreciation and
amortization) are being generated by businesses other than the mature telephone
operations. Throughout 1999, management expects continued growth in revenue from
its current consolidated operations. However, the Company is experiencing lower
operating margins due to start-up costs of newer businesses associated with
expansion into new markets and introduction of new service offerings throughout
the region. This is expected to continue.
As mentioned above, the Company references operating cash flows as one measure
of operating performance. Management believes operating cash flow is a
meaningful indicator of the Company's performance. Operating cash flows are
commonly used in the wireless communications industry and by financial analysts
and others who follow the industry to measure operating performance. Operating
cash flows should not be construed as an alternative to operating income or cash
flows from operating activities (both of which are determined in accordance with
generally accepted accounting principles) or as a measure of liquidity.
Through the Virginia PCS Alliance, L.C. ("VA Alliance") and West Virginia PCS
Alliance, L.C. ("WV Alliance"), and other PCS joint ventures, the Company has
acquired radio spectrum licenses for personal communications services ("PCS")
for markets with an aggregate population of 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. Due to start-up costs resulting from the Alliances' market
expansion and subsidies taken on the sale of the Alliances' digital products,
the Alliances are generating significant operating losses. The Company's
recognition of its share of these losses associated with its investments in the
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
11
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
relating to deployment of PCS services. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that any significant deviations from these
assumptions could cause actual results to differ materially from those in the
above and other forward-looking statements. Forward-looking statements included
herein are as of the date hereof and the Company undertakes no obligation to
revise or update such statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company had net income of $4.4 million, or $0.33 per share, for the third
quarter 1999, an increase of 101% from net income of $2.2 million, or $0.17 per
share for the third quarter 1998. Net income for the nine months ended September
30, 1999 and 1998 was $7.0 and $7.1 million, respectively. Net income for the
third quarter of 1999 included a $2.7 million loss ($1.7 million loss
after-tax), up from $1.5 million ($0.9 million loss after-tax) in the third
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. The company's share of losses
from our PCS investment for the nine months ending September 30, 1999 and 1998
were $8.0 million ($5.0 million after tax) and $3.8 million ($2.3 million after
tax), respectively. For the quarter ending September 30, 1999, the Company also
recorded $7.6 million ($4.7 million after tax) and $0.7 million ($0.4 million
after tax) in gains on the sale of an investment and the sale of tower property,
respectively (Note 6), and recognized an asset impairment charge of $2.7 million
($1.7 million after tax) to write-down certain wireless analog cable equipment
(Note 7). In the prior year, the Company recorded a permanent write-down of its
ATEL investment of $0.4 million ($0.2 million after tax) and $0.6 million ($0.4
million after tax) for the three and nine months ending September 30, 1998,
respectively (Note 6). Excluding the gains and losses noted above, net income
for the three and nine months ending September 30, 1999 was $2.6 million and
$8.5 million, respectively, versus $3.3 million and $9.8 million for the prior
year comparable periods.
Operating revenues were $19.4 million for the three months ended September 30,
1999 which is a $2.2 million or 13% increase over operating revenues of $17.2
million for the three months ended September 30, 1998 and a $1.5 million (8%)
increase over the second quarter 1999. Operating revenues for the nine months
ended September 30, 1999 and 1998 were $54.3 million and $49.9 million,
respectively. Operating cash flows for the three and nine months ended September
30, 1999 were $7.7 million (a 9% decrease over third quarter 1998 operating cash
flows of $8.4 million) and $23.1 million (a 6% decrease over the nine months
ended 1998 of $24.7 million), respectively. Operating income for the three
months ended September 30, 1999 was $1.7 million, which included the asset
impairment charge of $2.7 million, versus operating income for the prior year
comparable period of $5.8 million. Excluding the asset impairment charge,
operating income was down $1.3 million or 23% for these three month current
versus prior year periods. Similarly, operating income for the nine month
periods ending September 30, 1999 and 1998 was $11.3 million and $17.0 million,
respectively. Exclusive of the asset impairment charge, this is a $3.0 million
or 18% year over year decrease.
These results reflect customer growth with our wireless products of 20%, as the
combined wireless subscribers exceeded 43,000, internet customer growth from
6,500 as of September 30, 1998 to 31,500 as of September 30, 1999 through
acquisitions and internal growth in existing and new geographic markets, and the
addition of 4,000 new CLEC customers. Operating cash flows and operating income
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
Total operating revenue increased $2.2 million (13%) and $4.3 million (9%) for
the three and nine months ended September 30, 1999 versus 1998, respectively.
This was driven primarily by an increase in the network (primarily CLEC) and
internet customer growth noted above, wireless customer growth and revenues from
other communication services for asset and service fees charged to related
parties. The network growth was primarily due to a $0.8 million increase in CLEC
revenue and a $1.8 million increase in internet revenue for the nine months
ended September 30, 1999 versus 1998. Wireless's total subscriber revenues grew
$1.7 million for the nine months ended September 30, 1999 versus the comparable
prior year period primarily from access and airtime. This was offset to a large
extent by the related phone subsidy increases of $1.2 million over the same
periods. In relation to gross sales, phone subsidies in the current year
exceeded those of the prior year due to a higher percentage of wireless sales
coming from the higher subsidies on digital PCS phones versus analog cellular
phones. Through the third quarter 1999, directory assistance operating revenues
declined $0.8 million or 8% due to an 18% reduction in call volume partially
offset by higher prices associated with the national directory service product.
12
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
WIRELINE COMMUNICATIONS
Revenues from the Company's wireline operations, which include telephone
revenues, CLEC long distance and Internet service revenues, fiber optic network
usage and wireline cable revenues, increased $1.9 million or 19% for the three
months ended September 30, 1999 versus the comparable 1998 period and $3.4
million or 12% for the nine months ended September 30, 1999 versus 1998. As
mentioned above, network revenues hereinafter referred to as "network/CLEC",
which include revenues from carrier access, CLEC and long distance, increased
$0.5 million for the third quarter 1999 versus 1998 and $1.0 million for the
nine months ended September 30, 1999 versus 1998. Again, this is due to
significant additions of CLEC business lines in the Company's four markets that
were in service throughout 1999. CLEC revenues are expected to increase in
future periods due to commencement of CLEC offerings in Lynchburg and
Winchester, VA at the end of the third quarter of 1999 and Charleston and
Huntington, West Virginia in the fourth quarter of 1999. Internet increased $1.2
million for the third quarter 1999 versus 1998 and $1.8 million for the nine
months ending September 30, 1999 versus 1998 due to internet customer growth
from 6,500 at the prior year comparable period end to 31,500 as of September 30,
1999. This is due to internal growth (6,000 customers) and acquisitions (19,000
customers)(Note 6). The Company now provides Internet access services through a
local presence in 48 markets. Telephone revenues, which include local service,
access and toll services, directory advertising and calling feature revenues
were up $0.2 million or 2% for the third quarter 1999 over 1998 and $0.6 million
or 3% for the nine month periods ended September 30, 1999 versus 1998 due to
growth in telephone access minutes and lines of 7% and 2%, respectively.
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 2% for the three months ended September 30, 1999 versus 1998 and
$0.6 million or 6% for the nine months ended September 30, 1999 versus the
comparable 1998 period. Excluding the effect of additional phone subsidies from
a higher customer growth rate and the change in the product sales mix to a
higher percentage of digital PCS phones, this revenue stream was up $0.4 million
and $1.4 million for the three and nine months ended September 30, 1999,
respectively, versus the prior year comparable periods.
DIRECTORY ASSISTANCE
Directory assistance revenue declined $0.1 million (3%) and $0.8 million (8%)
for the three and nine months ended September 30, 1999, respectively, over that
of the prior year. Over the three and nine months ended September 30, 1999, call
volume declined 17% and 18%, respectively. This was attributable to the impact
of call around plans versus traditional directory assistance traffic being
handled at our two call centers without sufficient new business to offset the
continued base business decline. The year over year volume decline of 17%
experienced in the third quarter is an improvement over the second quarter year
over year volume decline of 22%. Additionally, while the volume declined 17%,
operating revenues declined only 3%. The new national directory assistance
offerings are closing the rate of call volume decline from the original contract
business and are more rapidly closing the rate of revenue decline as these
products involve a higher level of service and price.
OTHER COMMUNICATIONS SERVICES
Other communications services revenues 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 third quarter 1999 versus the
third quarter of 1998 and $1.1 million for the comparable nine month periods in
1999 and 1998. The Company receives rentals primarily for company owned assets
which are being used by the PCS Alliances. These revenues increased $1.0 million
in the nine months ended September 30, 1999 versus 1998, primarily due to CFW
owned retail store additions and the addition of the WV headquarters facility.
13
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
OPERATING EXPENSES
Excluding the asset impairment charge of $2.7 million (Note 7) in the third
quarter of 1999, operating expenses increased $3.5 million or 31% for the three
month period ended September 30, 1999 as compared to the same period in 1998 and
increased $7.3 million or 22% for the nine months ended September 30, 1999
versus the 1998 comparable period. Of these increases, approximately 42%
represent a period to period increase in the operating expenses from the
internet business, almost half of which relate to the operating expenses of
NetAccess that was acquired in August 1999 (Note 6). Other significant
contributors to the increase in internet operating expenses include operating
expenses related to customer acquisitions, access expense and other start-up
related costs of bringing on new internet customers and entering new geographic
markets. Another significant contributor to the Company's cost escalations in
excess of revenue growth is in the network/CLEC business segment. The costs in
this business segment rose 114% for the nine months ending September 30, 1999
versus the same prior year period while the related revenues grew 32% over the
same period. This is due to start-up costs associated with rapid customer growth
and market expansion noted above. To the extent that the networking functions
related to both network/CLEC and the internet business segments can be migrated
onto Company owned facilities, these costs are being reduced, with further
reductions expected in the fourth quarter of 1999 and continuing into 2000. In
addition to the network/CLEC and internet operating expense increase, wireless
operating expenses increased $0.2 million and $0.9 million for the three and
nine months ended September 30, 1999, respectively, which accounts for
approximately 16% of the total operating expense increase. This represents an
increase in wireless operating expenses as a percent of sales from 51% to 58%.
More than 75% of these increases are customer operations related expenses
incurred to support the significant customer growth. Finally, directory
assistance operating expenses increased $0.4 million for the nine months ending
September 30, 1999 versus 1998, despite lower call volumes, due to training and
development costs incurred in taking on new national database contracts,
start-up costs associated with the new call center opened in Winchester, VA in
the second quarter of 1999 and the commencement of new national directory
contracts. Finally, depreciation expense accounted for 19% of the total
operating expense increase.
MAINTENANCE AND SUPPORT EXPENSE
Maintenance and support expense, which includes property and equipment
maintenance, general engineering and general administration of plant operations,
increased $1.7 million or 62% and $3.2 million or 40% for the three and nine
months ended September 30, 1999 versus comparable periods in the prior year. Of
the total increase, approximately 90% is the result of network/CLEC and internet
maintenance and support expense increases. This is due primarily to increased
access and other related costs in support of revenue growth coupled with
start-up costs incurred relative to launching CLEC and internet services in new
geographic markets and expanding our internet service offerings.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $0.6 million or 22% and $1.4
million or 18% for the three and nine months ended September 30, 1999 versus the
comparable period in 1998. This is due to a period to period increase in the
property and equipment asset base of approximately 20%, from $147 million as of
September 30, 1998 to $176 million as of September 30, 1999. Depreciation as a
percent of the related assets decreased nominally, from 5.2% to 5.1% for the
respective periods. The property and equipment increase was primarily due to
digital switching hardware and other network infrastructure assets and, to a
lesser extent, additions supporting back office functions.
In addition to normal depreciation and amortization expenses, the Company
recognized a $2.7 million asset impairment charge in the third quarter of 1999
(Note 7).
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 $0.8 million or
19% and $2.5 million or 21% for the three and nine month periods ended September
30, 1999 versus the same periods of the prior year. Cellular and network/CLEC
accounted for $1.9 million of the nine month increase and directory assistance
accounted for another $0.6 million. 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 call
center.
14
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 $0.2 million for the nine month period ended September 30, 1999 versus
the nine month period ended September 30, 1998. This increase represents a
decrease in such costs as a percentage of revenue. This is reflective of
favorable claims experience with respect to medical insurance costs and a
reduction in earnings performance based incentive compensation.
EQUITY LOSS FROM PCS INVESTEES
The Company's share of losses from the VA and WV PCS Alliances was $2.7 million
and $8.0 million for the three and nine months ended September 30, 1999,
respectively, versus 1998 losses for the comparable periods of $1.5 million and
$3.8 million, respectively.
The Company has a 21% common ownership interest in the VA Alliance. The
Company's share of losses from the VA Alliance was $1.3 million and $4.1 million
for the three and nine months ended September 30, 1999, respectively. This
compares to losses of $1.2 million and $3.4 million for comparable periods in
the prior year. The Company expects the VA Alliance losses to begin decreasing
in 2000 as it reaches critical mass in customers and revenues necessary to
support the capital and operational investments. The VA Alliance ended the third
quarter of 1999 with 24,800 customers, an increase of 17,800 customers over the
prior year third quarter.
The Company has a 45% common ownership interest in the WV Alliance which
commenced operations in the latter part of the third quarter of 1998. The
Company experienced losses from the WV Alliance in the three and nine months
ended September 30, 1999 of $1.4 million and $3.8 million, respectively. This
compares to losses of $0.3 million and $0.4 million for the comparable periods
of the prior year. Losses from the WV Alliance are expected to increase as it
builds the customer base, recognizes start-up related losses from the operation
of the northern corridor of West Virginia which commenced providing services in
the second quarter of 1999, and continues its network build-out throughout its
license area. The WV Alliance ended the third quarter of 1999 with 5,700
customers, all of which were added in the last 12 months.
OTHER EXPENSES, PRINCIPALLY INTEREST
Other expenses, principally interest increased $0.3 million and $0.6 million for
the three and nine month periods ending September 30, 1999, respectively, versus
comparable periods in the prior year. This is primarily due to a net increase in
borrowings of $10.1 million to support the Company's cash requirements for its
investing activities during the nine months ended September 30, 1999, which
totaled $23.6 million (versus $11.0 million for the same period in the period
year). During this same period, cash provided by operating activities decreased
$5.7 million.
INCOME TAXES
Income taxes increased $1.1 million and decreased $1.1 million for the three and
nine months ended September 30, 1999 versus 1998, respectively. The increase in
the current quarter versus the prior year comparable quarter is due to the
non-operating gains totaling $8.3 (Note 6) for the third quarter of 1999 but
partially offset by the $2.7 million asset impairment charge (Note 7). The
decrease over the comparable nine month period is due primarily to lower pre-tax
income for the first nine months of 1999 versus 1998. Additionally,
rehabilitation tax credits and job employment credits totaling $0.5 million and
a favorable tax treatment of a $0.3 million charitable contribution of an
appreciated asset reduced the total 1999 tax expense and effective tax rate.
These factors were partially offset by the non-recurring third quarter 1999
activity mentioned above. The effective tax rate for the first nine months of
1999 excluding the tax credits would approximate the tax rate for 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1999, net cash provided by operating
activities was $18.5 million. Principal changes in operating assets and
liabilities were as follows: Accounts receivable increased $1.2 million due to
the timing of receipts from a significant customer and the overall sales growth.
Materials and supplies increased $1.2 million which relates to the increases in
digital handset inventories necessary to support the sales growth. Income taxes
increased $1.2 million, as the Company went from a taxes receivable position of
$0.7 million to a payables position of $0.5 million, primarily due to the
non-recurring net gain activity discussed in the income taxes section above.
15
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
The Company's investing activities for the nine months ended September 30, 1999
included $24.8 million for the purchase of property and equipment, $10.5 million
of which is for network plant and equipment additions relating primarily to
network/CLEC, internet, switching equipment, network fiber builds and directory
assistance digital equipment, $4.9 million which represents the Winchester
directory assistance center building and related assets, and $6.8 for computer
hardware and software. These investments were necessary for service expansion
and enhancements. The Company also invested an additional $3.9 million in the
Alliances and received repayments from the Alliances against affiliate advances
totaling $4.5 million. Additionally, the Company acquired NetAccess and
purchased Internet subscribers for an aggregate price of $7.5 million (Note 6),
acquired PCS radio spectrum licenses for $1.3 million, received proceeds from
the sale of an investment and a tower property of $7.9 million and $1.6 million
(Note 6), respectively.
Net cash provided by financing activities for the nine months ended September
30, 1999 aggregated $5.1 million which primarily represents payment of dividends
on outstanding capital stock of $4.5 million, payment on senior notes of $3.6
million and the additional borrowing under lines of credit of $12.9 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 (income tax
payments were $0.3 million for the first nine months of 1999) 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. The Company has committed lines of
credit facilities of $45.0 million in the aggregate and borrowings of $15.7
million under such lines of credit at September 30, 1999.
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 96% of the confirmations sent and
continues to follow-up on non-responses and instances where potential issues
were noted. Regarding the third component, the Company has completed a
comprehensive review of its computer systems to identify the internal systems
that could be impacted by the year 2000 issue. Based on findings from this
review, the Company has developed an implementation plan to resolve potential
issues and is in the late stage of implementing such a plan. Both the second and
third components were further broken down by category of system (network
systems, information technology systems and other supporting systems).
Significant focal areas are the Company's network/switching related equipment
and the corporate billing, customer provisioning and accounting systems. The
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 Company's year 2000 project is complete in all
material respects. There are a few areas where testing is not 100% complete and
a few areas where the Company is working through post conversion issues. While
the Company does not anticipate any significant problems in these areas, should
the Company encounter problems, implementation of any contingency plan could
cause the project's cost to be effected.
Based on its findings and assessment to date, the Company has performed certain
planned telephone switching software upgrades and computer software and system
upgrades, which were performed primarily to better meet the business and growth
needs of the Company. The total year 2000 project costs have not been material
to the Company's business operations or financial condition. The Company will
review and update this estimate through resolution of the remaining issues
mentioned above.
16
CFW COMMUNICATIONS COMPANY
Item 2. Management's Discussion And Analysis
Of Financial Conditions And Results Of Operations
Continued
As noted previously, the Company's year 2000 project is substantially complete.
It should be noted that the Company has devoted all resources required to
resolve significant year 2000 issues and we believe the items that remain
outstanding are not material. However, if the final testing and completion of
system conversion issues results in problems not anticipated 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 have been 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.
17
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
Not applicable
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 September 30, 1999
18
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
November 15, 1999 s/J. S. Quarforth
---------------------------------------------
J. S. Quarforth, Chairman and Chief Executive
Officer
November 15, 1999 s/M. B. Moneymaker
---------------------------------------------
M. B. Moneymaker, Vice President and
Chief Financial Officer, Treasurer, and Secretary
19