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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
Commission File No.: 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1162807
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
124 South Main Street, Edinburg, VA 22824
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code: (540) 984-4141
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1999. $72,775,301. (In determining this figure, the
registrant has assumed that all of its officers and directors are affiliates.
Such assumption shall not be deemed to be conclusive for any other purpose.) The
Company's stock is not listed on any national exchange nor NASDAQ; therefore,
the value of the Company's stock has been determined based upon the average of
the prices of transactions in the Company's stock that were reported to the
Company during the year.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 1, 1999
Common Stock, No Par Value 3,755,760
Documents Incorporated by Reference
1998 Annual Report to Security Holders Parts II, IV
Proxy Statement, Dated March 26, 1999 Parts III
EXHIBIT INDEX PAGES 7 -8
SHENANDOAH TELECOMMUNICATIONS COMPANY
Item Page
Number Number
PART I
1. Business 1
2. Properties 1-2
3. Legal Proceedings 2
4. Submission of Matters to a Vote of Security Holders 2
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters 3
6. Selected Financial Data 3
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 4
8. Financial Statements and Supplementary Data 4
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 4
PART III
10. Directors and Executive Officers of the Registrant 5
11. Executive Compensation 5
12. Security Ownership of Certain Beneficial Owners
and Management 5
13. Certain Relationships and Related Transactions 5
PART IV
13. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 6-7
PART I
ITEM 1. BUSINESS
Shenandoah Telecommunications Company is a diversified
telecommunications holding company providing both regulated and
unregulated telecommunications services through its eight
wholly-owned subsidiaries. The Company's business strategy is to
provide integrated, full service telecommunications products and
services in the Northern Shenandoah Valley and surrounding areas.
This geographic area includes the four-state region from
Harrisonburg, Virginia to Chambersburg, Pennsylvania, and on a
limited basis into Northern Virginia. Our fiber network, consisting
of 4,778 fiber miles, is a state-of-the-art electronic backbone
utilized for many of our services. The main lines of this network
cover 146 miles on the Interstate-81 corridor and 62 miles on the
Interstate-66 corridor. The Company has also submitted an
application for authority to offer competitive local exchange
services in portions of the state that are outside of our present
telephone service area. The Company has approximately 170 employees.
The Company operates nine reporting segments based on the products
and services provided by the parent company and the operating
subsidiaries. There are minimal seasonal variations in the Company's
operations.
The Company holds licenses for personal communications
services, and as managing partner of the VA 10 RSA partnerships
controls a cellular license, all in the Northern Shenandoah Valley
of Virginia. The company also holds paging and other radio
telecommunications licenses.
Shenandoah Telecommunications Company
The Holding Company invests in both affiliated and non-affiliated
companies. The Company's largest investments in non-affiliated
companies are Loral Space and Communications Limited (Loral),
Concept Five Technologies, and South Atlantic Venture Fund III (SAVF
III), and South Atlantic Private Equity IV LP (SAPE IV). Loral is a
publicly traded corporation offering satellite communications.
Concept Five Technologies is a startup company developing security
software for electronic financial transactions. SAVF III and SAPE IV
are venture capitalist funds that generally invest in startup
telecommunications companies.
Shenandoah Telephone Company
This subsidiary provides both regulated and non-regulated telephone
services to approximately 22,000 customers, primarily in Shenandoah
County and small service areas in Rockingham, Frederick, and Warren
counties in Virginia. Its largest source of revenue is for access to
the local exchange network by interexchange carriers. In addition,
this subsidiary offers facility leases of fiber optic capacity in
Frederick, Rockingham, and Shenandoah Counties, and along the
Interstate-66 corridor into Herndon, Virginia. The Telephone
subsidiary has a 20 percent ownership in ValleyNet, which is a
partnership offering network facilities in western, central, and
northern Virginia, as well as the Interstate 81 corridor through
West Virginia, and Maryland, terminating in Carlisle, Pennsylvania.
The Company has one customer that accounts for greater than 10% of
its revenue, primarily consisting of carrier access charges for long
distance service as referenced in Note 8 to the Consolidated
Financial Statements.
Shenandoah Cable Television Company
This subsidiary provides coaxial-based cable television service to
approximately 8,500 customers in Shenandoah County. On September 30,
1996, the Company purchased the Shenandoah County cable television
assets of FrontierVision Operating Partners LP, more than doubling
the then existing Cable Television customer base. In 1997, the
rebuild and expansion of this wireline system to a state-of-the art
hybrid fiber coaxial network was initiated. The upgrade to 750
megahertz provides better signal quality, expands the number of
channels, and provides the infrastructure for future offerings of
broadband services.
ShenTel Service Company (ShenTel)
ShenTel Service Company sells and services telecommunications
equipment and provides Internet access to customers in the Northern
Shenandoah Valley. The Internet service, established in late 1994,
now represents over 54% of this subsidiary's total revenues. During
1998, work was completed on upgrading all of our modems to the v.90
standard, the latest available for dial-up access.
Shenandoah Valley Leasing Company
This subsidiary finances purchases of telecommunications equipment
to customers of the other subsidiaries, particularly ShenTel Service
Company.
Shenandoah Mobile Company
Shenandoah Mobile Company provides paging and mobile telephone
service throughout the Virginia portion of the Northern Shenandoah
Valley. This subsidiary also provides tower services along the
Interstate-81 corridor from Chambersburg, Pennsylvania to
Harrisonburg, Virginia, as well as the western most portions of the
Intersate-66 corridor in Virginia. The towers are typically located
where multiple wireless services can be jointly offered. Shenandoah
Mobile Company is the managing partner and 66% owner of the Virginia
10 RSA Limited Partnerships, which provide cellular service in the
Northern Shenandoah Valley of Virginia. The cellular service is
marketed under the Shenandoah Cellular name through retail stores in
Winchester and Front Royal, Virginia.
Shenandoah Long Distance Company
This subsidiary principally offers long distance service for calls
placed to locations outside the regulated telephone service area.
This operation purchases switching and billing and collection
services from the telephone subsidiary.
Shenandoah Network Company
This subsidiary operates the Maryland and West Virginia portions of
our fiber optic network in the Interstate-81 corridor. In
conjunction with the telephone subsidiary, Shenandoah Network
Company is associated with the ValleyNet fiber network.
Shenandoah Personal Communications Company
This subsidiary began offering personal communications services
(PCS) the next generation of wireless telephone and data service, in
1996. The service is offered from Chambersburg, Pennsylvania to
Harrisonburg, Virginia under an agreement with American Personal
Communications (APC) for the western part of the
Washington/Baltimore metropolitan trading area. The service is
marketed under the Sprint SpectrumSM name to a potential customer
base of 750,000. Retail stores are operated in Hagerstown, Maryland;
Winchester, Virginia; and Harrisonburg, Virginia.
Additional detail on the operating segments is referenced in Note 2
of the 1998 Annual Report.
The registrant does not engage in operations in foreign countries.
Working capital practices and competitive conditions are discussed
in Management Discussion and Analysis of the Consolidated Financial
Statements.
The Company has no research and development expenses.
This Annual Report contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in
the forward-looking statements. Factors that might cause such a
difference include, but are not limited to changes in the interest
rate environment; management's business strategy; national,
regional, and local market conditions; and legislative and
regulatory conditions. Readers should not place undue reliance on
forward-looking statements which reflect management's view only as
of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect subsequent events
or circumstances.
ITEM 2. PROPERTIES
The Company owns a 24,000 square foot building in Edinburg, Virginia
that houses the corporate headquarters and the main
telecommunications equipment. A separate 10,000 square foot building
in Edinburg, Virginia is used for customer services and retail
sales. The Company also owns eight telephone exchange buildings that
are located in the major towns and some of the rural communities,
serving the regulated service area. These buildings contain
switching and fiber optic equipment and associated local exchange
telecommunications equipment. The Company owns a 6,000 square foot
service building outside of the town limits of Edinburg, Virginia.
The Company owns a 10,000 square foot retail store in Winchester,
Virginia. The Company has fiber optic hubs or points of presence in
Hagerstown, Maryland; Harrisonburg, Herndon, Stephens City, Weyers
Cave, and Winchester, Virginia; and Martinsburg, West Virginia. The
buildings are a mixture of owned on leased land, leased space, and
leasehold improvements. The majority of the identified properties
are of masonry construction, are suitable to their existing use, and
are in adequate condition to meet the foreseeable future needs of
the organization. The Company also leases retail space in
Harrisonburg and Front Royal, Virginia and Hagerstown, Maryland.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders for the
three months ended December 31, 1998.
EXECUTIVE OFFICERS
Name Title Age Date In Position
Christopher E. French President 41 April 1988
David E. Ferguson Vice President of Customer 52 November 1982
Service
Laurence F. Paxton Vice President of Finance 46 June 1991
William L. Pirtle Vice President of PCS 39 November 1992
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Common stock price ranges are incorporated by reference -
1998 Annual Report to Security Holders
Market Information - Inside Front Cover
(b) Number of equity security holders are incorporated by
reference -
1998 Annual Report to Security Holders
Five-Year Summary of Selected Financial Data - Page 24
(c) Frequency and amount of cash dividends are incorporated
by reference -
1998 Annual Report to Security Holders
Market and Dividend Information - Inside Front Cover
Additionally, the terms of a mortgage agreement require the
maintenance of defined amounts of the subsidiary's equity and
working capital after payment of dividends. Accordingly,
approximately $3,067,000 of retained earnings was available
for payment of dividends at December 31, 1998.
For additional information, see Note 4 in the Consolidated
Financial Statements of the 1998 Annual Report to Security
Holders, which is incorporated as a part of this report.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data is incorporate
by reference -
1998 Annual Report to Security Holders
Five-Year Summary of Selected Financial Data - Page 24
PART II (Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of operations, liquidity, and capital resources are
incorporated by reference -
1998 Annual Report to Security Holders
Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pages 21`-23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements included in the 1998 Annual
Report to Security Holders are incorporated by reference as
identified in Part IV, Item 14, on Pages 6-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers
is incorporated by reference -
Proxy Statement, Dated March 26, 1999 - Pages 2 - 6
ITEM 11. EXECUTIVE COMPENSATION
by reference -
Proxy Statement, Dated March 26, 1999 - Pages 5 - 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) No person, director or officer owned over 5 percent of
the common stock as of March 1, 1999.
(b) Security ownership by management is incorporated by
reference -
Proxy Statement, Dated March 26, 1999
Stock Ownership - Page 3
(c) Contractual arrangements -
The Company knows of no contractual arrangements which
may, at a subsequent date, result in change of control
of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions to disclose other
than services provided by Directors which are incorporated by
reference -
Proxy Statement, Dated March 26, 1999
Directors - Page 3
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A. Document List
The following documents are filed as part of this Form 10-K.
Financial statements are incorporated by reference and are
found on the pages noted.
Page Reference
Annual Report
1. Financial Statements
The following consolidated financial statements of Shenandoah
Telecommunications are included in Part II, Item 8
Auditor's Report 1998, 1997, and 1996
Financial Statements 21
Consolidated Balance Sheets at
December 31, 1998, 1997, and 1996 6&7
Consolidated Statements of Income for
the Years Ended December 31, 1998,
1997, and 1996 8
Consolidated Statement of Changes in
Stockholders' Earnings Equity
Years Ended December 31, 1998, 1997, and 1996 9
Consolidated Statements of Cash Flow
for the Years Ended December 31, 1998,
1997, and 1996 10
Notes to Consolidated Financial Statements 11-20
PART IV (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
Page Reference
Annual Report
2. Financial Statement Schedules
All other schedules are omitted because they are not
applicable, or not required, or because the required
information is included in the accompanying financial
statements or notes thereto.
3. Exhibits
Exhibit No.
13. Annual Report to Security Holders -
Filed Herewith
20. Proxy Statement, prepared by Registrant
for 1999 Annual Stockholders Meeting -
21. List of Subsidiaries -
Filed Herewith
23. Consent of McGladrey & Pullen, LLP
27. Financial Data Schedule
B. Reports on Form 8-K
None
PART IV (Continued)
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
March 30, 1999 By /s/ CHRISTOPHER E. FRENCH
Christopher E. French, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
President & Chief Executive
/s/ CHRISTOPHER E. FRENCH Officer March 30, 1999
Christopher E. French
/s/ LAURENCE F. PAXTON Principal Financial March 30, 1999
Laurence F. Paxton Accounting Officer
/s/ DICK D. BOWMAN Treasurer & Director March 30, 1999
Dick D. Bowman
/s/ DOUGLAS C. ARTHUR Director March 30, 1999
Douglas C. Arthur
/s/ KEN L. BURCH Director March 30, 1999
Ken L. Burch
/s/ HAROLD MORRISON, Jr. Director March 30, 1999
Harold Morrison, Jr.
/s/ NOEL M. BORDEN Director March 30, 1999
Noel M. Borden
/s/ JAMES E. ZERKEL II Director March 30, 1999
James E. Zerkel II
Stockholder Information
OUR BUSINESS
Shenandoah Telecommunications Company is a holding company which provides
various telecommunications services through its operating subsidiaries. These
services include: telephone service, primarily in Shenandoah County and small
service areas in Rockingham, Frederick, and Warren counties, all in Virginia;
cable television service in Shenandoah County; unregulated communications
equipment and services; Internet access; financing of purchases of
telecommunications facilities and equipment; paging, mobile telephone, and
cellular telephone services in the Northern Shenandoah Valley; resale of long
distance services; operation and maintenance of an interstate fiber optic
network; and building and operating a personal communications network in the
four-state region from Chambersburg, Pennsylvania to Harrisonburg, Virginia.
ANNUAL MEETING
The Board of Directors extends an invitation to all stockholders to attend
the Annual Meeting of Stockholders. The meeting will be held Tuesday, April 20,
1999, at 11:00 a.m. in the Social Hall of the Edinburg Fire Department, Stoney
Creek Boulevard, Edinburg, Virginia. Notice of the Annual Meeting, Proxy
Statement, and Proxy were mailed to each stockholder on or about March 26, 1999.
FORM 10-K
The company's annual report on form 10-k filed with the securities and
exchange commission is available to stockholders, without charge, upon request
to mr. Laurence f. Paxton, vice president - finance, shenandoah
telecommunications company, p. O. Box 459, edinburg, va 22824.
INDEPENDENT AUDITOR
McGladrey & Pullen, LLP 1051 East Cary Street Richmond, VA 23219
CORPORATE HEADQUARTERS
Shenandoah Telecommunications Company
124 South Main Street
Edinburg, VA 22824
MARKET AND DIVIDEND INFORMATION
The stock of Shenandoah Telecommunications Company is not listed on any
national exchange or NASDAQ, and the Company is not aware of any broker who
maintains a position in the Company's stock. It, however, is aware of
unconfirmed transactions of the stock which have been handled privately and by
brokers and local auctioneers. Additionally, the stock is traded on the
over-the-counter bulletin board system. Some of these prices include commissions
and auctioneers' fees. Since some prices are not reported to the Company and
family transactions are not applicable, all transactions are not included in the
following summary of prices. The Company has maintained a policy of declaring an
annual cash dividend.
1997
- ----------------------------------------
No. No.
Quarter Trans. Shares High Low
1st 90 7,614 $30.00 $20.00
2nd 221 18,124 25.00 19.00
3rd 223 16,357 25.00 18.00
4th 36 3,380 25.00 17.00
Weighted average price per $20.59
share -
Annual cash dividend per .43
share -
1998
- ----------------------------------------
No. No.
Quarter Trans. Shares High Low
1st 58 16,948 $26.50 $18.00
2nd 87 11,779 25.00 18.00
3rd 21 2,591 24.75 18.00
4th 88 14,726 25.00 18.75
Weighted average price per $19.94
share -
Annual cash dividend per .51
share -
STOCKHOLDERS' QUESTIONS AND STOCK TRANSFERS - CALL (540) 984-5200 Transfer Agent
- - Common Stock Shenandoah Telecommunications Company
P.O. Box 459
Edinburg, VA 22824
This Annual Report to Stockholders contains forward-looking
statements. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to: changes in the interest rate environment; management's
business strategy; national, regional, and local market conditions; and
legislative and regulatory conditions. Readers should not place undue reliance
on forward-looking statements which reflect management's view only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect subsequent events or circumstances.
Letter to the Stockholders
March 26, 1999
Dear Stockholder: [GRAPHIC APPEARS HERE]
Your Company had an excellent year in 1998. Our financial performance was
very strong as we achieved net income of $1.49 per share, basic and diluted,
compared to $1.19 in 1997, an increase of 25 percent. Net income was $5.6
million, compared to $4.5 million in the previous year. In 1998, our revenues
grew to $35.6 million, compared to $31.0 million in 1997, an increase of 14.9
percent. The Board of Directors declared a cash dividend of 51 cents per share,
which was paid on December 1, 1998 to stockholders of record as of November 13,
1998. The $1.9 million total dividend was a cash payout to stockholders of 34.2
percent of the Company's net income and represented an 18.6 percent increase
over the 1997 dividend.
In addition to the improved financial performance, the quality of service
provided to our customers, as measured by our trouble index, improved to 1.41
from 1997's index of 1.59 troubles reported per 100 customers. This improvement
is in large part due to the significant investment we have made to upgrade our
CATV system; our continued deployment of fiber optic technology in our local
network facilities; and, our ongoing efforts to correct any deficiencies in our
facilities or services.
Telephone and Mobile Subsidiaries Lead Growth in Net Income
Both our Telephone and Mobile subsidiaries had solid increases in net income.
Our PCS, ShenTel, and CATV subsidiaries all reduced their losses from the
previous year but have not yet reached profitability. Our PCS operation's loss
was reduced by $578,000, from 1997's loss of $2.5 million. While this was a good
improvement, much more will be needed before we will have this line of business
at breakeven or profitable levels. We are continuing our efforts to reduce our
operating costs for this business while maintaining the quality of service that
our customers expect from our organization, and that we expect of ourselves.
Internet Business Fastest Growing
ShenTel Service Company's Internet business continued its strong growth, with
revenues increasing over 64 percent. Our Internet customer base grew 56 percent,
and Internet revenues now represent over 54 percent of this subsidiary's total
revenues. We are also finding that in addition to the rapid growth in customers,
the usage patterns of our customers are also changing. Our customers are
increasingly spending longer periods of time on the "Net", and are connecting
more frequently than in the past.
[GRAPHIC APPEARS HERE]
[CAPTION]James Wellard inspects state-of-the-art modem pool used by ShenTel
Internet
The Company has continued to invest heavily in this business and the
network needed to support this rapidly growing customer base. During 1998, work
was completed on upgrading all of our modems to the v.90 standard, the latest
available for dial-up access, and the Company continued to add additional modem
capacity. Expanding demand for this service has created some growing pains,
particularly in our ability to obtain additional trunking capacity from some of
the other network providers we must depend on in parts of our Internet service
area.
Along with the additions to our modem and trunking capacity, we have
recently replaced our mail server with a new redundant system, which has many
features to enhance reliability. The server and its associated disk array are
specifically designed to be extremely reliable, and to perform well in the most
demanding environments.
When we started our Internet business in September of 1994, one of our
objectives was to offer a service which approached the levels of reliability
that we had achieved with our telephone service, and which we believed our
customers would demand. The rate at which we are adding customers, and the rate
at which customers are increasing their time on-line, indicates that we are
making progress toward this goal.
CATV Service Improved
Our CATV operation had another loss for the year, primarily due to the
pressures on expenses from increased programming and royalty fees, as well as
increased depreciation and interest expenses to support our ongoing system
upgrades.
In 1998 over $2.2 million was spent on a major upgrade to a portion of our
cable system. Because of this significant investment, there has been a drastic
reduction in the number of customer complaints on picture quality and service
outages. By the end of 1999, our plans are to complete this upgrade throughout
the entire system. With this upgrade, and through the extensive use of our fiber
optic network, we will be able to offer additional enhanced services, such as
pay-per-view and multiple music audio channels.
In addition to these investments to provide a state-of-the-art cable
television system, we are faced with increased operating costs. In order to
provide better service, more channels, more original programming, and keep pace
with the cost of doing business, we will again have to adjust our service rates.
When compared to the cost of cable service in the surrounding communities and
other entertainment options, our offerings are still a great value for our
customer's entertainment dollars. To give our customers the option to reduce
their cable television cost if they do not wish to take advantage of all of the
programming that is available, we have introduced a new Economy Service Plan.
The new plan offers 12 channels of programming, including all of the major
networks.
[GRAPHIC APPEARS HERE]
[CAPTION]Company Participates in Development of Advanced Traveler Information
System
While most of our efforts during 1998 were focused on growing and
improving our present businesses, we also began to build the foundation for
future expansion and growth. One of these efforts led to our involvement in two
projects, valued at over $900,000, to develop and build a comprehensive advanced
traveler information system (ATIS) for the Shenandoah Valley region of Virginia,
and then to expand that model statewide. In addition to the contributions of
ShenTel, funding for this initiative is also being provided by the Virginia
Department of Transportation (VDOT), the Virginia Tourism Corporation, and the
Virginia Intelligent Transportation Systems Implementation Center.
The Shenandoah ATIS, called "Travel Shenandoah", will be an integrated
traveler information service, providing comprehensive, timely, accurate, and
useful information on traffic and travel conditions, traveler services, tourist
destinations, and emergency services information to travelers, potential
travelers and those serving travelers in the I-81 corridor. Additionally, VDOT
and the State Police will be able to use Travel Shenandoah to help manage I-81
traffic incidents, including disruptions in traffic flow created by highway
construction as I-81 is widened. Potential delivery mechanisms for this
information include the world-wide-web, kiosks, cellular phones, PCS/digital
wireless phones, pagers, changeable roadside advisory signs, radio, and cable
TV. ShenTel's wide array of telecommunications products and services makes the
Company an ideal partner to help put this project together.
[GRAPHIC APPEARS HERE]
[CAPTION]Early mockup of "Travel Shenandoah" web page
Application for Authority to Offer Competitive Local Services in Virginia
In November of 1998, the Company filed with the Virginia State Corporation
Commission for a certificate to provide competitive local exchange services in
portions of the state that are outside of our present telephone service area. A
hearing to consider granting this certificate was held by the Commission on
March 9, 1999. Having this authority will enable the Company to offer a package
of services to our customers that better meets all of their telecommunications
needs. Receiving the necessary regulatory authority is just the first step in a
lengthy process, which must then be followed with negotiations to interconnect
with the incumbent local telephone companies serving the areas we choose to
serve. We will closely evaluate each opportunity to expand our service offering
to ensure that we can maximize use of our existing infrastructure and
economically grow our business.
These competitive services will be provided under a new subsidiary,
ShenTel Communications Company.
Employee Efforts Lead System Changes
As covered in management's review later in this report, our Company
continued its work preparing for the date change to the year 2000 (Y2K). Many
employees have been involved in various aspects of our readiness efforts. When
it was recognized that our existing financial accounting software package would
not be Y2K compliant, we seized the opportunity to find a system which would not
only handle the date changes, but one which would also give us improved
accounting capabilities. Our project team handling the implementation of our new
financial accounting software package has expended a tremendous amount of
effort. Once the project is completed in the second quarter of 1999, we will
have a system which allows us to better track our costs and to produce more
timely and detailed management reports.
[GRAPHIC APPEARS HERE]
[CAPTION]Members of project team participate in one of many work sessions for
implementation of new financial accounting system
Board of Directors Adopts Dividend Reinvestment Plan
Last fall we surveyed your level of interest in the Company offering a
Dividend Reinvestment Plan, and the results were overwhelmingly in favor of the
Company putting such a plan in place. The Board of Directors has adopted a plan,
which has been filed with the Securities and Exchange Commission. A prospectus
and enrollment card is expected to be mailed to all stockholders sometime in May
of this year. The details of the plan and how it operates will be outlined in
the prospectus. Briefly, this optional plan will enable those who elect to
participate to have their dividends reinvested in Company stock. It is the
Board's intention that the shares to be purchased by the reinvested dividends
will come from open-market purchases. These purchases will be made by Legg Mason
Wood Walker, Inc., who will act as the Purchasing Agent for the plan. These
dividend dollars will then be reinvested in stock, based on the average market
price that the Purchasing Agent paid to obtain the required number of shares.
The Company will then transfer to the participating stockholders the number of
whole shares that their reinvested dividends are able to purchase; and, any
remaining cash balance will then be distributed.
Stock Price Did Not Reflect Improved Financial Performance
While our financial and service performances during the year were
excellent, the prices reported for transactions in our Company's stock continued
to be a disappointment. While we recognize the decreases in earnings that we had
prior to 1998 could have had a negative impact on our stock price, we would
expect that our strong growth in earnings and large increase in dividend payout
should now have a positive effect. We continue to have very low turnover in our
stockholder base; however, the number of shareholders grows steadily each year.
Prices reported on the over-the-counter bulletin board system for our stock
(which is traded under the symbol SHET) have varied and ranged from $19 to $23
since the beginning of December. This price range equates to a multiple of 12.8
to 15.4 times our 1998 earnings of $1.49 per share. By comparison, the multiple
for the S&P 500 and the average of the large telephone companies is over 20
times earnings, possibly indicating there is room for our price to increase.
Based on the prices reported to the Company for private and auction sales in
January and February of this year, these transactions appear to be approximately
10 percent greater than the same months for 1998. As we have talked with
stockholders and worked with our financial advisors, one clear message is that
we must continue to show long-term growth and profitability. We believe we are
on the right path to this continued, profitable growth, and trust this will
ultimately be reflected in the value of your investment in the Company.
For the Board of Directors
/s/ Christopher E. French
--------------------------
Christopher E. French, President
Comparative Highlights
Increase
(Decrease)
December 31
1998 1997 Amount Percent
Operating Revenues $35,594,025 $30,970,348 $ 4,623,677 14.9
Operating Expenses $25,089,784 $22,603,314 $ 2,486,470 11.0
Income Taxes $ 3,598,642 $ 2,593,631 $ 1,005,011 38.7
Interest Expense $ 1,501,729 $ 1,556,352 $ (54,623) (3.5)
Net Income $ 5,603,775 $ 4,479,563 $ 1,124,212 25.1
Net Income from Operations (1) $ 5,364,242 $ 4,530,642 $ 833,600 18.4
diluted $ 1.49 $ 1.19 $ .30 25.2
Cash Dividend per share $ .51 $ .43 $ .08 18.6
Percent Return on Equity 11.2 9.6 1.6 16.7
Common Shares Outstanding 3,755,760 3,760,760 (5,000) (.1)
No. of Stockholders 3,654 3,567 87 2.4
No. of Employees (full-time
equivalent) 170.5 176 (5.5) (3.1)
Wages & Salaries $ 6,129,485 $ 5,675,907 $ 453,578 8.0
Investment in Net Plant $65,034,477 $57,064,176 $ 7,970,301 14.0
Capital Expenditures $13,664,692 $10,687,958 $ 2,976,734 27.9
Access Lines 22,357 21,541 816 3.8
Long Distance Messages 14,550,514 13,423,706 1,126,808 8.4
CATV Customers 8,428 8,186 242 3.0
(1) Excludes gains and losses on external investments unaffiliated with
operations.
Officers
Christopher E. French Noel M. Borden
President Vice President
Dick D. Bowman Zane Neff
Treasurer Assistant Secretary
Harold Morrison, Jr. Laurence F. Paxton
Secretary Vice President-Finance
[GRAPHIC APPEARS HERE]
(Seated l to r ) Holler, Zerkel, Bowman, Morrison, and Borden. (Standing l to r)
Neff, French, Arthur, and Burch.
Board of Directors
Douglas C. Arthur, Attorney-at-Law; Director, First National Corporation
Noel M. Borden, President, H. L. Borden Lumber Co. (a retail building
materials firm); Chairman of the Board, First National Corporation
Dick D. Bowman, President, Bowman Brothers, Inc; Director, The Rockingham
Group; Director, Old Dominion Electric Cooperative
Ken L. Burch, Farmer
Christopher E. French, President, Shenandoah Telecommunications Co. & its
Subsidiaries; Director, First National Corporation
Grover M. Holler, Jr., President, Valley View, Inc. (a real estate developer)
Harold Morrison, Jr., Chairman of the Board, Woodstock Garage, Inc. (auto
sales & repair firm); Director, First Virginia Bank-Blue Ridge
Zane Neff, Retired Manager, Hugh Saum Co., Inc. (a hardware and furniture
store); Director, Crestar Bank
James E. Zerkel II, Vice President, James E. Zerkel, Inc. (a hardware firm);
Director, Shenandoah Valley Electric Cooperative; Member, Shenandoah County
Industrial Development Authority
Consolidated Balance Sheets
December 31, 1998, 1997 and 1996
ASSETS (Note 4) 1998 1997 1996
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 4,891,109 $5,203,521 $ 3,763,468
Certificates of deposit - 204,122 1,142,181
Held-to-maturity securities (Note
3) 499,581 1,622,433 2,148,945
Accounts receivable, including
interest 4,272,016 5,682,798 4,208,742
Materials and supplies 3,488,137 3,968,791 2,888,709
Prepaid expenses and other current
assets 777,853 507,165 399,074
---------------------------------------
Total current assets 13,928,696 17,188,830 14,551,119
---------------------------------------
Securities and Investments (Note 3)
Available-for-sale securities 2,677,789 3,597,997 2,738,431
Held-to-maturity securities - 499,581 1,622,433
Other investments 5,921,206 4,721,517 4,112,947
---------------------------------------
8,598,995 8,819,095 8,473,811
---------------------------------------
Property, Plant and Equipment
Plant in service 88,427,844 74,144,956 65,215,491
Plant under construction 5,670,371 8,232,517 5,626,710
---------------------------------------
94,098,215 82,377,473 70,842,201
Less accumulated depreciation 29,063,738 25,313,297 21,648,820
---------------------------------------
65,034,477 57,064,176 49,193,381
---------------------------------------
Other Assets
Cost in excess of net assets of
business 4,876,215 5,157,078 5,532,601
acquired, less accumulated
amortization
Deferred charges and other assets 354,216 476,687 523,185
Radio Spectrum License net of
accumulated amortization 653,145 702,036 -
Deposit - - 1,100,000
---------------------------------------
5,883,576 6,335,801 7,155,786
---------------------------------------
$ 93,445,744 $ 89,407,902 $79,374,097
=======================================
See Notes to Consolidated Financial Statements.
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 1996
- -------------------------------------------------------------------------------
Current Liabilities
Current maturities of long-
term debt (Note 4) $ 863,972 $ 544,954 $ 529,405
Accounts payable 1,149,286 3,743,701 2,097,115
Advance billings and payments 712,581 631,815 590,336
Customers' deposits 113,586 98,905 89,591
Accrued compensation 890,443 660,659 478,300
Other current liabilities 1,072,422 1,266,110 639,495
Other taxes payable 214,433 153,678 128,144
---------------------------------------
Total current liabilities 5,016,723 7,099,822 4,552,386
---------------------------------------
Long-Term Debt, less current
maturities (Note 4) 28,398,374 26,815,706 24,176,834
---------------------------------------
Other Liabilities and Deferred Credits
Deferred investment tax credit 145,909 216,256 291,957
Deferred income taxes (Note 5) 6,741,121 5,987,860 4,908,170
Pension and other (Note 6) 1,331,465 883,568 573,363
---------------------------------------
8,218,495 7,087,684 5,773,490
---------------------------------------
Minority Interests 2,265,426 1,894,206 1,743,465
---------------------------------------
Stockholders' Equity (Note 4)
Common stock, no par value,
authorized
8,000,000 shares; issued
1998-3,755,760
shares, 1997 and 1996-3,760,760
shares 4,734,377 4,740,677 4,740,677
Retained earnings 44,173,730 40,579,090 37,716,654
Accumulated other comprehensive
income,
Unrealized gain on
available-for-sale
Securities, net (Note 3) 638,619 1,190,717 670,591
---------------------------------------
49,546,726 46,510,484 43,127,922
---------------------------------------
$93,445,744 $89,407,902 $79,374,097
=======================================
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
- -------------------------------------------------------------------------------
Operating revenues:
Telephone:
Local service $3,782,026 $3,589,042 $3,319,648
Access and toll service 7,835,509 7,347,703 7,021,504
Directory 1,189,578 1,129,976 1,131,540
Facility leases 2,043,930 1,977,122 1,838,293
Billing, collection and other 680,802 589,443 549,360
---------------------------------------
Total telephone revenues 15,531,845 14,633,286 13,860,345
Other:
Cable television 3,098,160 2,513,802 1,277,017
ShenTel Service 2,530,982 2,115,443 1,688,795
Long distance 930,433 902,276 1,042,083
Mobile 9,754,858 8,424,016 6,620,093
Network 614,934 614,934 535,225
PCS 3,131,130 1,751,291 387,446
Other 1,683 15,300 18,850
---------------------------------------
Total operating revenues 35,594,025 30,970,348 25,429,854
---------------------------------------
Operating expenses:
Cost of products sold 1,464,505 2,189,810 1,626,181
Line costs 387,652 382,924 421,064
Plant specific 2,852,691 2,719,811 2,262,224
Plant nonspecific:
Network and other 5,483,253 4,480,998 3,291,073
Depreciation and amortization 5,429,815 4,681,858 3,529,554
Customer operations 4,925,552 4,312,552 3,347,804
Corporate operations 2,702,029 2,669,743 2,297,308
Taxes other than income 958,681 463,109 367,590
Other 885,606 702,509 342,405
---------------------------------------
25,089,784 22,603,314 17,485,203
---------------------------------------
Operating income $10,504,241 $ 8,367,034 $ 7,944,651
Other income (expenses):
Nonoperating income, less expenses 2,054,437 1,396,881 1,115,888
Interest expense (1,501,729) (1,556,352) (803,300)
Gain (loss) on disposal of assets (718,312) (48,628) 228,250
---------------------------------------
10,338,637 8,158,935 8,485,489
Income taxes (Note 5) 3,598,642 2,593,631 2,821,586
---------------------------------------
6,739,995 5,565,304 5,663,903
Minority interests (1,136,220) (1,085,741) (669,314)
---------------------------------------
Net income $5,603,775 $4,479,563 $4,994,589
=======================================
Net earnings per share,
basic and diluted $ 1.49 $ 1.19 $ 1.33
=======================================
Cash dividends per share $ 0.51 $ 0.43 $ 0.42
=======================================
Weighted average shares outstanding 3,756,388 3,760,760 3,760,760
=======================================
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
------------------------------------------------------------------------------
Balance, January 1, 1996 3,760,760 4,740,677 $34,301,584 $229,012 $39,271,273
----------
Comprehensive income:
Net income - - 4,994,589 - 4,994,589
Change in unrealized
gain on securities
available-for-sale,
net of tax of $285,198 - - - 441,579 441,579
---------
Total comprehensive income 5,436,168
---------
Dividends declared - - (1,579,519) - (1,579,519
-----------------------------------------------------
Balance, December 31,1996 3,760,760 4,740,677 37,716,654 670,591 43,127,922
----------
Comprehensive income:
Net income - - 4,479,563 - 4,479,563
Change in unrealized
gain on securities
available-for-sale,
net of tax of $346,046 - - - 520,126 520,126
--------
Total comprehensive
income 4,999,689
---------
Dividends declared - - (1,617,127) - (1,617,127)
-----------------------------------------------------
Balance, December 31, 1997 3,760,760 4,740,677 40,579,090 1,190,717 46,510,484
----------
Comprehensive income:
Net income - - 5,603,775 - 5,603,775
Change in unrealized
gain on securities
available-for-sale,
net of tax of ($368,110) - - - (552,098)(552,098)
--------
Total comprehensive
income 5,051,677
---------
Dividends declared - - (1,915,435) - (1,915,435)
Redemption of common
stock (5,000) (6,300) (93,700) - (100,000)
----------------------------------------------------
Balance, December 31, 1998 3,755,760 $4,734,377 $44,173,730 $638,619$49,546,726
====================================================
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
- -------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $5,603,775 $4,479,563 $4,994,589
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 4,976,079 4,246,049 3,402,794
Amortization 453,736 435,809 126,760
Deferred taxes 1,121,371 733,644 695,921
(Gain) loss on disposal of assets 718,312 48,628 (228,250)
(Gain) loss on equity investments (1,816,236) (301,435) 189,389
Minority share of income, net of
distributions 371,220 150,741 244,314
Other (70,347) (106,665) 75,883
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,410,782 (1,474,056) (1,134,612)
Material and supplies 480,654 (1,080,082) (952,981)
Increase (decrease) in:
Accounts payable (2,594,415) 808,119 1,283,228
Other prepaids, deferrals and
accruals 369,507 530,509 43,018
-------------------------------------
Net cash provided by 11,024,438 8,470,824 8,740,053
operating activities
-------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (13,664,692) 10,687,958) (15,217,862)
Acquisition of cable television - - (7,617,199)
assets
Deposit (refund) on licenses - 397,964 (1,100,000)
Purchase of certificates of deposit - (2,436,818) (1,134,528)
Maturities of certificates of 204,122 3,374,877 1,234,575
deposits
Cash flows from securities (Note 3) 2,238,980 1,328,857 185,437
Other, net (1,511) (16,337) 54,628
-------------------------------------
Net cash used in investing (11,223,101) (8,039,415) (23,594,949)
activities
-------------------------------------
Cash Flows From Financing Activities
Dividends paid $(1,915,435) $1,617,127) $1,579,519)
Redemption of common stock (100,000) - -
Proceeds from long-term debt 2,405,500 3,179,500 14,584,839
Principal payments on long-term debt (503,814) (553,729) (493,403)
-------------------------------------
Net cash provided by (used in)
financing activities (113,749) 1,008,644 12,511,917
-------------------------------------
Net increase (decrease) in
cash
and cash equivalents (312,412) 1,440,053 (2,342,979)
Cash and cash equivalents:
Beginning 5,203,521 3,763,468 6,106,447
=====================================
Ending $ 4,891,109 $5,203,521 $3,763,468
=====================================
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest, net of capitalized
interest of $422,403 in 1998,
$279,398 in 1997, and $210,168
in 1996 $2,116,323 $1,835,750 $ 726,242
=====================================
Income taxes $2,760,400 $1,929,172 $2,071,027
=====================================
Proceeds of long-term debt for stock
in Rural Telephone Bank $ - $ 28,650 $ 55,850
=====================================
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Summary of Accounting Policies
Shenandoah Telecommunications Company and subsidiaries (the "Company") operates
entirely in the telecommunications industry. The Company provides telephone
service, cable television service, unregulated communications equipment and
services, paging, mobile telephone, cellular telephone, Internet access, and
personal communications services. In addition, through its subsidiaries, the
Company finances purchases of telecommunications facilities and equipment and
operates and maintains an interstate fiber optic network. The Company's
operations are located primarily in the Northern Shenandoah Valley of Virginia
and the surrounding areas. The Company grants credit in accordance with standard
industry practices. Accounts receivable are concentrated among customers within
the Company's geographic service area and large telecommunications companies. A
summary of the Company's significant accounting policies follows:
Principles of consolidation: The consolidated financial statements include the
accounts of all wholly-owned subsidiaries and other entities where effective
control is exercised. All significant intercompany accounts and transactions
have been eliminated.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents: The Company considers all temporary cash investments
with a purchased maturity of three months or less to be cash equivalents. The
Company places its temporary cash investments with high credit quality financial
institutions. At times, these investments may be in excess of the FDIC insurance
limit.
Securities and investments: The Company has investments in debt and equity
securities, which consist of shares of common and preferred stock and
partnership interests. Debt securities consist primarily of obligations of the
U. S. Government.
The classification of debt and equity securities is determined by management at
the date individual investment securities are acquired. The appropriateness of
such classification is reassessed continually. The classification of those
securities and the related accounting policies are as follows:
Held-to-maturity securities: Debt securities for which the Company has both
the intent and ability to hold to maturity, regardless of changes in market
conditions, liquidity needs or changes in general economic conditions, are
classified as held-to-maturity securities. They are carried at amortized
historical cost.
Available-for-sale securities: Debt and equity securities classified as
available-for-sale consist of securities which the Company intends to hold
for an indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale would be based
on various factors, including changes in market conditions, liquidity needs
and similar criteria. Available-for-sale securities are carried at fair
value as determined by quoted market prices. Unrealized gains and losses are
reportable as increases and decreases in other comprehensive income net of
tax. Realized gains and losses, determined on the basis of the cost of
specific securities sold, are included in net income.
Investments carried at cost: Investments in which the Company does not have
significant ownership and for which there is no ready market are carried at
cost. Information regarding these and all other investments is reviewed
continuously for evidence of impairment in value. No impairment was deemed
to have occurred at December 31, 1998.
Equity method investments: Investments in partnerships and investments in
unconsolidated corporations where the Company's ownership is 20% or more are
reported under the equity method. Under this method, the Company's equity in
earnings or losses of investees is reflected in net income. Distributions
received reduce the carrying value of these investments.
Materials and supplies: New and reusable materials are carried in inventory
principally at average original cost. Specific costs are used in the case of
large individual items.
Nonreusable material is carried at estimated salvage value.
Note 1. Summary of Accounting Policies (Continued)
Property, plant and equipment: Property, plant and equipment is stated at cost.
Accumulated depreciation is charged with the cost of property retired, plus
removal cost, less salvage. Depreciation is determined under the remaining life
method and straight-line composite rates. Depreciation provisions were
approximately 6.1%, 6.1% and 5.8% of average depreciable assets for the years
1998, 1997 and 1996, respectively.
Cost in excess of net assets of business acquired: Intangible assets consisting
of the cost in excess of identifiable net assets of businesses acquired are
amortized on a straight-line basis over 15 years. The Company periodically
evaluates the recoverability of intangibles resulting from business acquisitions
and measures the amount of impairment, if any, by assessing current and future
levels of income and cash flows as well as other factors, such as business
trends and prospects, as well as market and economic conditions.
Pension plan: The Company maintains a noncontributory defined benefit retirement
plan covering substantially all employees. Pension benefits are based primarily
on the employee's compensation and years of service. The Company's policy is to
fund the maximum allowable contribution calculated under federal income tax
regulations.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets and liabilities are
adjusted for the effect of changes in tax laws and rates on the date of
enactment. Investment tax credits have been deferred and are amortized over the
estimated life of the related assets.
Revenue recognition: Revenues are recognized when earned, regardless of the
period in which they are billed.
Earnings per share: The Company presents both basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock instruments such as options, warrants and
convertible securities, unless the effect is to reduce a loss or increase
earnings per share. The Company has stock options outstanding which are
antidilutive; therefore, basic and diluted earnings per share are equal.
Reporting changes: In 1998, the Company adopted FASB Statements No. 130,
Reporting Comprehensive Income and No. 131, Disclosures about Segments of an
Enterprise and Related Information.
Statement No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company has elected to present comprehensive
income together with other changes in stockholders' equity in a consolidated
statement of changes in stockholders' equity for all years presented.
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires public business enterprises to report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. Segments are components of an enterprise about which separate
financial information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The statement also requires public business enterprises to report
certain information about their products and services, the geographic areas in
which they operate, and their major customers. The Company has defined its
operating segments as the parent Company and individual operating subsidiaries
and has provided disclosures about these segments elsewhere in the consolidated
financial statements.
Note 2. Segment Reporting
The Company has identified nine reporting segments based on the products and
services each provide. Each segment is managed and evaluated separately because
of differing technologies and marketing strategies.
The reporting segments and the nature of their activities are as follows:
Shenandoah Telecommunications Holding company which invests in both Company
(Holding) affiliated and non-affiliated companies.
Shenandoah Telephone Company Provides both regulated and
(Telephone) non-regulated telephone services
primarily throughout the Shenandoah
Valley.
Shenandoah Cable Television Provides cable service in Shenandoah
Company (CATV) County.
ShenTel Service Company (ShenTel) Sells and services telecommunications
equipment and provides Internet access to
customers in the Northern Shenandoah Valley
Shenandoah Valley Leasing Company
(Leasing) Finances purchases of telecommunications
equipment to customers of other segments.
Shenandoah Mobile Company (Mobile) Provides paging, mobile telephone, and
cellular services throughout the Northern
Shenandoah Valley.
Shenandoah Long Distance Company Provides long distance services.
(Long Distance)
Shenandoah Network Company Leases interstate fiber optic facilities.
(Network)
Shenandoah Personal Provides digital wireless service to a
Communications Company four-state region from Chambersburg,
(PCS) Pennsylvania to Harrisonburg, Virginia.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Performance is evaluated based on
the net income of each company, less dividend income from other segments. Each
segment accounts for intersegment sales and transfers as if the sales or
transfers were to outside parties.
Income recognized from equity method nonaffiliated investees by segment is as
follows:
Consolidated
Holding Telephone Mobile Totals
-----------------------------------------
1998 $ 485,542 $ 934,249 $ 396,445 $1,816,236
1997 267,967 191,550 339,562 799,079
1996 95,343 145,489 211,969 452,801
Note 2. Segment Reporting (Continued)
Selected financial data for each segment is as follows:
Holding Telephone CATV ShenTel Leasing
----------------------------------------------------------
Operating revenues - external:
1998 $ - $15,531,845 $3,098,160 $2,530,982 $ 1,683
1997 - 14,633,286 2,513,802 2,115,443 15,300
1996 - 13,860,345 1,277,017 1,688,795 18,850
Operating revenues - internal:
1998 $ - $ 1,411,023 $ 2,340 $ 224,561 -
1997 - 1,248,694 2,329 222,137 -
1996 - 1,257,076 2,328 170,826 -
Depreciation and amortization:
1998 $ - $ 2,735,658 $ 841,452 $300,122 -
1997 - 2,370,817 773,560 260,585 -
1996 - 2,230,135 378,603 151,435 -
Nonoperating income less
expenses:
1998 $1,005,372 $ 2,245,060 $ 537 $ 2,794 $ 5,069
1997 991,413 1,607,327 3,013 1,017 12,980
1996 802,099 743,012 3,149 925 29,549
Interest expense:
1998 $ 68 $ 1,491,954 $ 685,537 $167,998 $ -
1997 - 1,549,799 654,504 161,397 -
1996 7,985 795,141 234,318 92,566 -
Income tax expense (benefit)
1998 $ 294,600 $ 3,712,719 $(232,061) $(197,800) $ (15,316)
1997 298,368 3,002,628 (224,947) (204,627) (8,106)
1996 354,004 2,866,818 (132,479) (132,751) (2,358)
Net income
1998 $ 480,476 $ 5,737,264 $(378,124) $(326,786) $ 14,783
1997 562,806 5,497,074 (379,561) (340,569) 26,257
1996 580,491 5,027,579 (199,913) (217,668) 36,239
Total assets
1998 $27,714,953 $61,249,082 $11,266,265 $3,658,486 $ 302,126
1997 24,727,104 60,061,156 10,616,821 3,668,737 386,950
1996 22,889,905 53,209,710 10,331,933 3,146,251 476,259
Note 2. Segment Reporting (Continued)
Long Combined Eliminating Consolidated
Mobile Distance Network PCS Totals Entries Totals
-----------------------------------------------------------------------------
$ 9,754,858 $ 930,433 $ 614,934 $3,131,130 $ 35,594,025 $ - $35,594,025
8,424,016 902,276 614,934 1,751,291 30,970,348 - 30,970,348
6,620,093 1,042,083 535,225 387,446 25,429,854 - 25,429,854
$ 340,382 $ 206,525 $ 105,836 $ 13,623 $ 2,304,290 $(2,304,290)$ -
318,577 170,143 99,317 6,888 2,068,085 (2,068,085) -
189,581 267,909 88,320 - 1,976,040 (1,976,040) -
$ 636,512 $ - $ 161,604 $ 754,467 $ 5,429,815 $ - $ 5,429,815
553,484 - 118,498 604,914 4,681,858 - 4,681,858
411,808 - 83,538 274,035 3,529,554 - 3,529,554
$ 501,061 $ 2,682 $ 15,512 $ (10,548)$ 3,767,539 $(1,713,102)$2,054,437
428,518 6,256 8,755 2,297 3,061,576 (1,664,695) 1,396,881
276,026 11,993 5,200 3,858 1,875,811 (759,923) 1,115,888
$ 224,600 $ - $ - $ 644,674 $ 3,214,831 $(1,713,102)$1,501,729
341,461 - - 513,886 3,221,047 (1,664,695) 1,556,352
248,381 - 2,632 182,200 1,563,223 (759,923) 803,300
$ 924,000 $ 98,400 $ 174,500$(1,160,400)$ 3,598,642 $ - $3,598,642
887,496 97,506 200,972 (1,455,659) 2,593,631 - 2,593,631
473,091 121,515 172,511 (898,765) 2,821,586 - 2,821,586
$ 1,531,128 $ 160,602 $ 284,522$(1,900,090)$ 5,603,775 $ - $5,603,775
1,203,018 160,194 325,215 (2,477,721) 4,576,713 (97,150) 4,479,563
759,310 197,487 280,397 (1,469,333) 4,994,589 - 4,994,589
$15,100,474 $201,735 $1,314,393 $13,614,839 $134,422,353$(40,976,609)$93,445,744
13,029,769 231,165 1,437,188 10,209,395 124,368,285 (34,960,383) 89,407,902
12,710,637 284,197 1,202,415 6,851,836 111,103,143 (31,729,046) 79,374,097
Note 3. Investments
Investments consist of the following:
1998 1997 1996
----------------------------------
Investment in held-to-maturity
securities:
U. S. Treasury securities, current $499,581 $1,622,433 $2,148,945
U. S. Treasury securities, noncurrent - 499,581 1,622,433
----------------------------------
$499,581 $2,122,014 $3,771,378
==================================
Fair value approximates carrying value for all held-to-maturity investments at
December 31, 1998, 1997 and 1996.
1998 1997 1996
----------------------------------
Investment in available-for-sale
securities:
Loral Space and Communications, Ltd,
(formerly Orion Network Systems), Common
stock (including unrealized gains of
$1,041,877 in 1998, $1,962,085 in 1997
and $1,070,007 in 1996) $2,677,789 $3,597,997 $2,705,926
Comsat Corporation (including
unrealized gains of
$25,906 in 1996) - - 32,505
----------------------------------
$2,677,789 $3,597,997 $2,738,431
==================================
No gains were realized in 1998. The Company realized gains of approximately
$25,900 and $228,000 in 1997 and 1996, respectively, on the sale of
available-for-sale securities.
Changes in the unrealized gain on available-for-sale securities during the years
ended December 31, 1998, 1997 and 1996 reported as a separate component of
stockholders' equity are as follows:
1998 1997 1996
----------------------------------
Unrealized holding gains, beginning
balance $1,962,085 $1,095,913 $369,136
Unrealized holding gains (losses) during
the year (920,208) 892,072 937,527
Realization of prior year unrealized
gains - (25,900) (210,750)
----------------------------------
Unrealized holding gains, ending balance 1,041,877 1,962,085 1,095,913
Deferred tax effect related to net
unrealized gains 403,258 771,368 425,322
----------------------------------
Unrealized gain included in
stockholders' equity $ 638,619 $1,190,717 $670,591
==================================
Cash flows from purchases, sales and maturities of securities consist of the
following:
1998 1997 1996
----------------------------------
Available-for-sale securities:
Sales $ - $1,226,489 $ 550,000
Purchases - (1,196,296) -
Held-to-maturity securities:
Maturities 1,622,433 2,148,945 2,488,773
Purchases - (499,581) (1,672,410)
Other investments:
Sales and distributions 1,468,787 48,412 -
Purchases (852,240) (399,112) (1,180,926)
----------------------------------
Total $2,238,980 $1,328,857 $ 185,437
==================================
Note 3. Investments (Continued)
Other investments, comprised of equity securities which do not have readily
determinable fair values, consist of the following:
1998 1997 1996
----------------------------------
Cost method:
Illuminet Holdings, Inc. $ 843,486 $843,486 $843,486
AvData Systems, Inc. 149,860 149,860 149,860
Rural Telephone Bank 653,492 653,492 624,837
Concept Five Technologies 1,304,083 1,000,003 1,000,003
CoBank 227,913 19,380 -
Other 330,601 133,381 163,002
----------------------------------
3,509,435 2,799,602 2,781,188
----------------------------------
Equity method (with approximate % owned at December 31, 1998):
South Atlantic Venture Fund III L.P.(1%) 605,816 765,966 589,632
South Atlantic Venture Fund IV L.P.(1%) 745,122 300,121 -
Dolphin Communications, L.P. (1%) 168,258 - -
Virginia Independent Telephone 299,483 271,509 234,943
Alliance (22%)
Rural Service Area - 6 (11%) 416,148 543,255 474,007
ValleyNet (20%) 176,944 41,064 33,177
----------------------------------
2,411,771 1,921,915 1,331,759
----------------------------------
$5,921,206 $4,721,517 $4,112,947
==================================
The Company has committed to invest an additional $500,000 in the South Atlantic
Venture Fund IV L.P. during 1999 and approximately $830,000 in Dolphin
Communications, L.P.pursuant to capital calls.
It was not practical to estimate the fair value of these investments due to
their limited market and the restrictive nature of their transferability.
Note 4. Long-Term Debt and Lines of Credit Long-term debt consists of the
following:
Interest Rate 1998 1997 1996
----------------------------------------------------
Rural Telephone Bank (RTB) 6.04% - 8% $10,305,886 10,765,742 10,582,040
Rural Utilities Service
(RUS) 2% - 5% 476,622 520,580 619,638
CoBank 6.69% - 7.97% 18,279,838 16,074,338 13,467,838
RUS development loan interest free 200,000 - -
Other 77.7% of prime - - 36,723
----------------------------------
29,262,346 27,360,660 24,706,239
Current maturities 863,972 544,954 529,405
----------------------------------
Total long-term debt $28,398,374 $26,815,706 $24,176,834
==================================
The notes payable to RTB are pursuant to an agreement which allows for
additional borrowings of approximately $3,000,000.
In July 1996, the Company entered into a financing agreement with CoBank.
Pursuant to this agreement, the Company can borrow up to $25,000,000, for a
three-year period ending September 1, 1999. During this period only interest is
payable. On September 1, 1999, the outstanding principal balance will be
amortized and repaid in monthly installments over twelve years, with the final
installment due 2011. As borrowings occur, the Company can choose between
several fixed and variable rate interest options.
Note 4. Long-Term Debt and Lines of Credit (Continued)
The approximate annual debt maturities for the five years subsequent to December
31, 1998 are as follows:
Year
Amount
- -----------------------------------
1999 $
863,972
2000 1,436,123
2001 1,739,654
2002 2,325,385
2003 2,312,029
Later years 20,585,183
-----------
$
29,262,346
===========
Substantially all of the Company's assets serve as collateral for the long-term
debt. The long-term debt agreements contain restrictions on the payment of
dividends and redemption of capital stock. The terms of the agreements require
the maintenance of defined amounts of equity and working capital after payment
of dividends. Approximately $3,067,000 of retained earnings was available for
payment of dividends at December 31, 1998.
Long-term debt carries rates which approximate market rates for similar debt
being issued. Therefore, the carrying value of long-term debt is not
significantly different than fair value at December 31, 1998.
As of December 31, 1998, the Company had no borrowings outstanding on other
approved lines of credit totaling $7,000,000.
Note 5. Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. The provision for income taxes included in the consolidated statements
of income consists of the following components:
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
Current $2,477,271 $1,859,987 $2,125,665
Deferred 1,121,371 733,644 695,921
---------------------------------
Total provision for income taxes $3,598,642 $2,593,631 $2,821,586
=================================
A reconciliation of income taxes determined using the statutory federal income
tax rates to actual income taxes provided is as follows:
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
Federal income tax expense at statutory
rates $3,128,822 $2,404,886 $2,657,499
State income taxes, net of federal tax
benefit 364,416 220,803 217,614
Amortization of investment tax credit (70,347) (75,701) (75,701)
Other 175,751 43,643 22,174
---------------------------------
Provision for income taxes $3,598,642 $2,593,631 $2,821,586
=================================
Net deferred tax liabilities consist of the following at December 31:
1998 1997 1996
---------------------------------
Deferred tax liabilities:
Accelerated depreciation $6,708,551 $5,556,071 $4,776,802
Unrealized gain on securities
available-for-sale 403,258 771,368 425,32
Other 53,515 4,701 -
---------------------------------
7,165,324 6,332,140 5,202,124
---------------------------------
Deferred tax assets:
Accrued compensation costs 128,607 115,512 96,292
Accrued pension costs 295,596 228,768 152,684
Equity investments - - 44,978
---------------------------------
424,203 344,280 293,954
---------------------------------
Net deferred tax liabilities $6,741,121 $5,987,860 $4,908,170
=================================
Note 6. Pension Plan
The Company maintains a noncontributory defined benefit pension plan. The
following table presents the plan's funded status and amounts recognized in the
Company's consolidated balance sheets.
1998 1997 1996
---------------------------------
Change in benefit obligation:
Benefit obligation, beginning $5,504,065 $5,112,231 $4,408,161
Service cost 261,595 231,270 170,089
Interest cost 380,726 378,404 326,314
Actuarial (gain) loss 428,028 (86,162) 332,300
Benefits paid (140,281) (131,678) (124,633)
---------------------------------
Benefit obligation, ending 6,434,133 5,504,065 5,112,231
---------------------------------
Change in plan assets:
Fair value of plan assets, beginning 5,712,651 5,077,518 4,669,840
Actual return on plan assets 1,302,256 766,811 532,311
Employer contribution - - -
Benefits paid (140,281) (131,678) (124,633)
---------------------------------
Fair value of plan assets, ending 6,874,626 5,712,651 5,077,518
---------------------------------
Funded status 440,493 208,586 (34,713)
Unrecognized net gain (1,344,253) (943,738) (466,565)
Unrecognized prior service cost 216,398 237,103 257,808
Unrecognized net transition asset (153,002) (181,746) (210,490)
---------------------------------
Accrued benefit cost $(840,364) $679,795) $453,960)
=================================
Components of net periodic benefit cost:
Service cost $ 261,595 $231,270 $170,089
Interest cost 380,726 378,404 326,314
Expected return on plan assets (451,803) (375,800) (345,940)
Amortization of prior service cost 20,705 20,705 20,705
Amortization of net (gain) loss (21,910) - (9,094)
Amortization of net transition asset (28,744) (28,744) (28,744)
---------------------------------
Net periodic benefit cost $ 160,569 $225,835 $133,330
=================================
Assumptions used by the Company in the determination of pension plan information
consisted of the following at December 31, 1998, 1997 and 1996:
1998 1997 1996
---------------------------------
Discount rate 7.00% 7.00% 7.50%
Rate of increase in compensation levels 5.00% 5.00% 5.50%
Expected long-term rate of return on
plan assets 8.00% 7.50% 7.50%
Note 7. Stock Incentive Plan
On April 16, 1996, the stockholders approved a Company Stock Incentive Plan
providing for the possible grant of incentive compensation to employees in the
form of stock options. The Plan authorizes grants of options to purchase up to
240,000 shares of common stock over a ten-year period. The option price is the
market value of the stock at the date of grant. One-half of the options are
exercisable on each of the first and second anniversaries of the date of grant
and the options expire five years from the date they are granted.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions (no options
were granted in 1996):
1998 1997
--------------- ------------
Dividend rate 2.48% 1.96%
Risk free interest rate 5.44% 6.13%
Expected lives of options 5 years 5 years
Price volatility 17.98% 19.70%
Note 7. Stock Incentive Plan (Continued)
Grants of options under the Plan are accounted for following Accounting
Principles Board Opinion No. 25 and related interpretations. Accordingly, no
compensation cost has been recognized under the Plan. Had compensation cost for
the Plan been determined based on fair values of the awards at the grant date
(the method described in FASB Statement No. 123), reported net income and
earnings per share would have been reduced to the proforma amounts shown below:
1998 1997
--------- ---------
Net income
As reported $ 5,603,775 $ 4,479,563
Pro forma $ 5,539,768 $ 4,445,578
Earnings per share
As reported $ 1.49 $ 1.19
Pro forma $ 1.47 $ 1.18
A summary of the status of the option plan at December 31, 1998 and 1997 and
changes during the years ended on those dates is as follows:
1998 1997
---------------------- -----------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
Price Price
---------------------- -----------------------
Outstanding at
beginning of year 13,375 $ 21.98 - $ -
Granted 15,565 20.59 14,044 21.98
Exercised - - - -
Forfeited (1,158) 21.33 (669) 21.98
---------------------- -----------------------
Outstanding at end of year 27,782 $ 21.23 13,375 $ 21.98
====== ======
Exercisable at end of year 6,378 -
Fair value of options granted
during the year $ 4.11 $ 5.35
Note 8. Major Customer
The Company has one customer that accounts for greater than 10% of its revenue,
primarily consisting of carrier access charges for long distance service
provided by the Shenandoah Telephone Company segment, as follows:
Percent of
Operating
Year Revenue
- --------------------------------
1998 11%
1997 12%
1996 19%
Note 9. Stockholder Rights
The Board of Directors has adopted a Stockholder Rights Plan whereby, under
certain circumstances, holders of each right will be entitled to purchase the
Company's common stock at one-half of the then current market price. As of
December 31, 1998, the Rights are neither exercisable nor traded separately from
the Company's common stock. The Rights are only exercisable if a person or group
becomes or attempts to become the beneficial owner of 15% or more of the
Company's common stock. Under the terms of the Plan, such person or group is not
entitled to the benefits of the Rights.
Independent Auditor's Report
The Board of Directors and Stockholders
Shenandoah Telecommunications Company
Edinburg, Virginia
We have audited the accompanying consolidated balance sheets of Shenandoah
Telecommunications Company and Subsidiaries as of December 31, 1998, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shenandoah
Telecommunications Company and Subsidiaries as of December 31, 1998, 1997 and
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
January 29, 1999
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Shenandoah Telecommunications Company is a diversified telecommunications
holding company providing both regulated and unregulated telecommunications
services through its eight wholly-owned subsidiaries.
This industry is in a period of transition from a protected monopoly to a
competitive environment as evidenced by the passage of the Telecommunications
Act of 1996. As a result, Shenandoah Telecommunications has made, and plans to
continue to make, significant investments in the new and emerging technologies.
The most significant revenue contributors are the regulated local exchange
telephone company, which accounted for 54.5% of total revenues in 1996, 47.2% in
1997, and 43.6% in 1998, and the cellular dominated operations of the Mobile
subsidiary, which accounted for 26.0% of total revenues in 1996, 27.2% in 1997,
and 27.4% in 1998. Other significant services provided are paging, personal
communications services (PCS), cable television, Internet access, long distance,
and fiber facilities and towers leased to other telecommunications carriers. The
Company also sells and leases equipment, mainly related to services provided.
The Company also participates in emerging technologies by direct investments in
non-affiliated companies.
RESULTS OF OPERATIONS
The regulated telephone company's largest source of revenue continues to
be for access to the local exchange network by interexchange carriers. These
revenues increased 6.6% in 1998 compared to 4.6% in 1997. The change in access
revenues generally corresponds with growth in minutes of use and in access
lines. The minutes of use increased 9.3% during 1998 compared to an increase of
5.7% in 1997. The number of access lines increased by 3.8% in 1998 and 4.2% in
1997.
Mobile revenues, which are the single largest revenue source outside of
the regulated telephone local exchange operations, are mainly derived from
wireless communications services. Local cellular service revenues increased
$737,243 or 20.1% in 1998, compared to $682,021 or 22.8% in 1997. Outcollect
roamer revenues increased $387,668 or 8.9% in 1998, compared to $960,240 or
28.2% in 1997. The increase in local cellular revenues reflects a 21.0% increase
in the customer base in 1998 and a 31.8% increase in 1997.
Cable Television revenues increased principally as a result of an increase
in rates in early 1998. In 1997, revenues increased significantly due to the
September 30, 1996 acquisition of the Shenandoah County cable television assets
of FrontierVision Operating Partners, LP, which more than doubled the customer
base. Cable Television revenues increased 23.2% in 1998 as compared to 96.8% in
1997.
The increase in ShenTel Service revenues was 19.6% for 1998 compared to a
25.3% increase in 1997. Both increases are due to expansion of our Internet
service operation.
Long Distance revenues are principally for toll calls placed to locations
outside the regulated telephone service area. These revenues increased by 3.1%
in 1998 following a decline of 13.4% in 1997, due principally to market share
changes.
PCS revenues increased by 78.8% in 1998 and 352.0% in 1997, due to
customer growth. Network revenues are for leasing capacity tointerexchange
carriers on the Company's fiber optic facilities in West Virginia and Maryland.
This service experienced no revenue increase in 1998, and a 14.9% increase in
1997.
Cost of Products Sold decreased by $725,305 or 33.1% in 1998, following an
increase of 563,629 or 34.7% in 1997, due principally to volume changes in
handsets sold in the Personal Communications Service operation.
Plant Specific is chiefly comprised of ongoing operating and maintenance
expenses for the physical plant. This category increased by 4.9% in 1998 and
20.2% in 1997. The cable television acquisition discussed above is principally
responsible for the large increase in 1997.
The largest expense category in 1998 was Network and Other. The increase
in this category was due primarily to increases of switching and facility costs
attributed to the PCS, Cellular, and Internet service operations. These costs
increased $1,002,255 or 22.4% in 1998 compared to $1,189,925 or 36.2% in 1997,
primarily due to the rapidly increasing customer base for these operations.
Depreciation and Amortization increased by 16.0% in 1998 compared to 32.6%
in 1997. The smaller percentage increase in 1998 is attributed to the longer
useful lives of plant placed in service in 1998, as compared to 1997.
The increases in Taxes other than income in 1998 and 1997 were primarily
due to property taxes associated with the increased amount of Plant in Service.
The Non-operating Income Less Expenses category consists mainly of the
income or loss from interest bearing instruments and external investments made
by the Company. The increase reflected on the income statement is principally
due to income recognized in one of the Company's partnership investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company has two principal sources of funds for financing current
expansion activities. First, the Company has a loan agreement with the Rural
Telephone Bank (RTB) with approximately $3,000,000 remaining for future
advances. Expenditure of these loan funds is limited to capital projects for the
regulated local exchange carrier subsidiary.
The second principal liquidity source is a credit facility agreement with
CoBank, entered into in July 1996. Pursuant to this agreement, the Company can
borrow up to $25,000,000 for a three-year period ending September 1, 1999.
During this period only interest is payable. On September 1, 1999, the
outstanding principal balance will be amortized and repaid in monthly
installments over the next twelve years, with the final installment due August
20, 2011. Draws on this loan for 1998 totaled $2,205,500 compared to $2,606,500
in 1997. These draws, on top of 1996's draws of $13,468,000, leave approximately
$6,720,000 for future advances.
The Company's Board of Directors has approved a 1999 capital budget of
potential projects totaling approximately $17,780,000. This budget includes
approximately $8,660,000 for the telephone local exchange company, primarily for
central office equipment and fiber optic and metallic cable facilities. The
Company expects to finance these planned additions through internally generated
cash flows and additional advances from the RTB note and CoBank agreement. The
Company secured lines of credit for $2 million with First Union Bank and for $5
million with CoBank in 1998. No draws were outstanding on these lines of credit
as of December 31, 1998.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Some computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
Year 2000 readiness means the ability to (a) continue to operate without
substantial interruption attributable to the inability of systems to correctly
process, provide, store and receive date data in and around the Year 2000 and
(b) to mitigate the risks associated with such system limitations to an
acceptable level. The Company has developed a four-phase program for Y2K
readiness.
Phase I (Inventory and Assessment): In this Phase, an inventory was conducted
of all hardware and software that might be at risk, including third-party
businesses whose Y2K failures might significantly impact the Company, and an
assessment was made on corrective direction. A Y2K Task Force, reporting to
senior management, started work on this Phase in 1997. The Company determined
that software provided by third parties was its most vulnerable link to the Y2K
event. The at-risk software included switching, end user billing, carrier access
billing, and financial accounting systems. The Company further identified that
it had one mainframe and a local area network consisting of a server and
approximately 75 individual microcomputers that may be vulnerable.
Phase II (Strategy): In this Phase, the Company determined whether each
at-risk system should be classified as "routine upgrade", "obsolete", or
"non-critical." A "routine upgrade" involves the upgrade of hardware or software
as part of the normal course of doing business. An "obsolete" designation
involves total replacement in that the application no longer meets our business
needs. A "non-critical" designation is for those applications that can be
addressed through simple work-around solutions, manual updates, or other
inexpensive measures. The majority of this classification work was completed
mid-1998.
Phase III (Installation and Testing): In this Phase, the selected approach to
Y2K remediation is executed. The information that follows reflects the Company's
current plans and estimates as of February 1999 and is subject to change.
Routine upgrade classification: A performance enhancing upgrade of the mainframe
computer, which also made the hardware and operating system Y2K compliant, was
performed in the first quarter of 1998. The main telephone switches received new
feature upgrades, incorporating Y2K compliance, in the fourth quarter of 1998.
The latest releases of end user billing software, which are currently in testing
and are expected to be in service in the second quarter of 1999, have been
represented by the vendors to be Y2K compliant. The local area network,
comprised of the hardware and software on the server and the microcomputers, is
scheduled to be Y2K compliant by the end of the second quarter of 1999. Obsolete
classification: Approximately 90% of the testing has been completed on new
financial software and new carrier access billing software, with both systems
scheduled to be placed in service in the second quarter of 1999. Non-critical
classification: The measures identified to deal with these low priority systems
are expected to be tested by the end of the second quarter of 1999, and
implemented as necessary.
Phase IV (Monitoring and Contingency Planning): In this Phase, the
implemented changes are monitored and backup plans designed where necessary.
With the majority of the required hardware and software changes completed by
mid-1999, the Company will be utilizing the changes in a production setting.
This approach minimizes disruption to current operations and provides a basis
for ongoing testing and monitoring. Contingency plans, if deemed necessary, will
be developed in mid-1999.
With this four-phase program, where the normal business practice of
weighing replacement against adopting routine upgrades was followed, the Company
believes that its non-routine expense in making its core operations Y2K
compliant will be minimal. The Company has also reviewed other third party
relationships that could affect its operation. Most relationships are with large
interexchange carriers and suppliers who state that they are or will be Y2K
compliant.
/s/ Laurence F. Paxton
----------------------
Laurence F. Paxton
Vice President-Finance
[GRAPH APPEARS HERE]
1993 REVENUES 1998 REVENUES
Telephone 63.30% 43.64%
Cable TV 3.75% 8.70%
ShenTel Service 6.28% 7.11%
Long Distance 6.39% 2.61%
Mobile 17.31% 27.41%
Network 2.09% 1.73%
PCS 0.00% 8.80%
Other 0.89% 0.00%
[CAPTION) Five Year Comparison of Revenue Sources
[GRAPHIC APPEARS HERE]
Members of Shentel Senior Management Team
(Seated l to r) Pirtle, Paxton. (Standing l to r) Fadely, Soltis, French,
Ferguson, MacDonald.
Five-Year Summary of Selected Financial Data
1998 1997 1996 1995 1994
---------- ----------- ----------- ----------- -----------
Operating Revenues $ 35,594,025 $ 30,970,348 $25,429,854 $21,919,150 $20,229,178
Operating Expenses $ 25,089,784 $ 22,603,314 $17,485,203 $13,027,468 $12,050,713
Income Taxes $ 3,598,642 $ 2,593,631 $ 2,821,586 $ 3,572,956 $ 2,577,641
Interest Expenses $ 1,501,729 $ 1,556,352 $ 803,300 $ 685,971 $ 658,908
Gain (loss) on Security
Dispositions $ - $ (48,628)$ 228,250 $ 1,141,386 $ -
Net Income $ 5,603,775 $ 4,479,563 $ 4,994,589 $ 6,230,685 $ 4,851,019
Net Income from
Operations (1) $ 5,364,242 $ 4,530,642 $ 4,790,006 $ 5,522,904 $ 4,851,019
Total Assets $ 93,445,744 $ 89,407,902 $79,374,097 $59,896,990 $52,464,150
Long-term Obligations $ 29,262,346 $ 27,360,660 $24,706,239 $10,558,953 $ 9,941,209
Stockholder Information (2)
Number of Stockholders 3,654 3,567 3,399 3,226 2,979
Shares of Stock 3,755,760 3,760,760 3,760,760 3,760,760 3,760,760
Earnings per Share
- basic & diluted $ 1.49 $ 1.19 $ 1.33 $ 1.66 $ 1.29
Cash Dividend per Share
- regular $ .51 $ .43 $ .42 $ .42 $ .375
- special $ - $ - $ - $ .06 $ -
(1) Excludes gains and losses on external investments unaffiliated with
operations. (2) The information has been restated to reflect a 2-for-1 split to
stockholders of record January 23, 1995.
Statistics
Percent
Increase Increase
1998 1997 (Decrease) (Decrease)
TELEPHONE
Access Lines
Residential 17,176 16,505 671 4.1
Business Single-Line 3,580 3,473 107 3.1
Paystations 288 273 15 5.5
Business Multi-Line 1,313 1,290 23 1.8
------------------------------------------------
Totals 22,357 21,541 816 3.8
Access Lines by Exchange
New Market 2,655 2,534 121 4.8
Mt. Jackson 2,432 2,332 100 4.3
Edinburg 2,911 2,904 7 .2
Fort Valley 693 670 23 3.4
Woodstock 5,278 5,067 211 4.2
Toms Brook 1,634 1,552 82 5.3
Strasburg 4,348 4,166 182 4.4
Basye 1,978 1,910 68 3.6
Bergton 428 406 22 5.4
------------------------------------------------
Totals 22,357 21,541 816 3.8
Exchanges 9 9 - -
Long Distance Calls
Operator Handled 275,403 393,345 (117,942) (30.0)
Direct Dialed 14,275,111 13,030,361 1,244,750 9.6
------------------------------------------------
Totals 14,550,514 13,423,706 1,126,808 8.4
Switched Access Minutes 105,465,690 96,474,853 8,990,837 9.3
OTHER SERVICES
CATV 8,428 8,186 242 3.0
Paging 4,112 3,089 1,023 33.1
VoiceMail 1,843 1,660 183 11.0
PLANT FACILITIES Telephone CATV
Route Miles 1,976.2 457.6
Customers Per Route Mile 11.3 18.4
Miles of Distribution Wire 530.3 -
Telephone Poles 7,857 13
Miles of Aerial Copper Cable 359.8 149.2
Miles of Buried Copper Cable 1,310.9 267.3
Miles of Underground Copper Cable 36.8 1.5
Fiber Optic Cable - Fiber Miles 4,778.0 -
Lines of Switching Equipment 30,130 -
Intertoll Circuits to Interexchange 1,228 -
Carriers
Special Service Circuits to 197 -
Interexchange Carriers
SHENANDOAH TELECOMMUNICAITONS COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following are all subsidiaries of Shenandoah Telecommunications
Company, and are incorporated in the State of Virginia.
- - Shenandoah Telephone Company
- - Shenandoah Cable Television Company
- - Shenandoah Long Distance Company
- - Shenandoah Valley Leasing Company
- - Shenandoah Mobile Company
- - Shenandoah Network Company
- - Shenandoah Personal Communications Company
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our
report, dated January 29, 1999, incorporated by reference in this annual report
of Shenandoah Telecommunications Company on Form 10-K, into the Company's
previously filed Form S-8 Registration Statement, File No. 333-21733 and Form
S-3D Registration Statement No.333-74297.
Richmond, Virginia
March 30, 1999