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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three and Nine Months Ended September 30, 2002
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141
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 |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at October 31, 2002
- -------------------------- -------------------------------
Common Stock, No Par Value Shares 3,774,668
1
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
PART I. FINANCIAL INFORMATION Page Numbers
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 3-4
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2002 and 2001 6
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Nine Months Ended September 30, 2002 and the
Twelve Months Ended December 31, 2001 7
Notes To Unaudited Condensed Consolidated
Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24-25
Item 4. Controls and Procedures 25
PART II. Other Information
Items 1-5. 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Certificate of Chief Executive Officer Exhibit A
Certificate of Chief Financial Officer Exhibit B
2
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
Assets
September 30, December 31,
2002 2001
------------- ------------
Current Assets
Cash and cash equivalents $ 2,450 $ 2,173
Accounts receivable, net 10,925 8,498
Income tax receivable -- 1,205
Materials and supplies 1,840 2,999
Prepaid expenses and other 1,666 1,159
-------- --------
Total current assets 16,881 16,034
Securities and investments
Available-for-sale securities 127 12,025
Other investments 7,441 6,438
-------- --------
Total securities and investments 7,568 18,463
Property, plant and equipment, net 135,449 128,104
Other Assets
Cost in excess of net assets of business
acquired 3,313 3,313
Deferred charges and other assets, net 915 883
-------- --------
Total other assets 4,228 4,196
-------- --------
Total Assets $164,126 $166,797
======== ========
(continued)
See accompanying notes to unaudited condensed consolidated financial statements.
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
(Unaudited)
Liabilities, Minority Interests and Shareholders' Equity
September 30, December 31,
2002 2001
------------- ------------
Current Liabilities
Current maturities of long-term debt $ 4,428 $ 4,387
Notes payable 4,661 6,200
Accounts payable 4,522 5,394
Advance billings and deposits 2,991 2,889
Income taxes payable 926 --
Other current liabilities 3,098 2,771
--------- --------
Total current liabilities 20,626 21,641
Long-term debt, less current maturities 48,724 52,049
Other Liabilities
Deferred income taxes 13,167 14,402
Pension & other 2,793 2,265
--------- --------
Total other liabilities 15,960 16,667
Minority interests 1,790 1,838
Shareholders' Equity
Common stock 5,166 4,950
Retained earnings 71,876 69,610
Accumulated other comprehensive
income (loss) (16) 42
--------- --------
Total shareholders' equity 77,026 74,602
--------- --------
Total Liabilities, Minority Interests and
Shareholders' Equity $ 164,126 $166,797
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---------------------- ---------------------
Operating Revenues
Wireless $ 21,003 $ 16,319 $ 57,009 $ 39,545
Wireline 7,117 6,927 21,428 20,337
Other revenues 1,718 1,299 4,734 3,777
---------------------- ---------------------
Total revenues 29,838 24,545 83,171 63,659
Operating Expenses
Cost of goods and services 2,725 1,964 7,346 5,336
Network operating costs 8,892 8,270 25,446 21,839
Depreciation and amortization 3,907 3,117 11,040 8,509
Selling, general and administrative 7,588 4,825 19,107 12,633
---------------------- ---------------------
Total operating expense 23,112 18,176 62,939 48,317
---------------------- ---------------------
Operating income 6,726 6,369 20,232 15,342
Other Income (expense):
Non-operating income (expense), net (47) 12 141 431
Gain (loss) on investments, net (680) (644) (9,594) (2,042)
Interest expense (1,057) (1,035) (3,177) (3,072)
---------------------- ---------------------
Income before income taxes and minority 4,942 4,702 7,602 10,659
Interest
Income tax expense (1,418) (1,322) (1,457) (2,797)
Minority interest (1,300) (1,286) (3,879) (3,283)
---------------------- ---------------------
Net income $ 2,224 $ 2,094 $ 2,266 $ 4,579
====================== =====================
Net earnings per share, basic $ 0.59 $ 0.56 $ 0.60 $ 1.22
====================== =====================
Net earnings per share, diluted $ 0.58 $ 0.55 $ 0.60 $ 1.21
====================== =====================
Weighted average shares outstanding, basic 3,769 3,761 3,768 3,760
====================== =====================
Weighted average shares outstanding, diluted 3,802 3,778 3,794 3,774
====================== =====================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended September 30,
2002 2001
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,266 $ 4,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,035 8,222
Amortization 5 287
Deferred tax expense (benefit) (1,198) 2,288
Loss on investments 9,034 1,205
Equity in loss of investees and patronage, net 108 500
Loss on disposal of equipment 324 146
Minority interest of partnership 3,879 3,283
Other 614 162
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,427) (2,422)
Materials and supplies 1,159 (410)
Increase (decrease) in:
Accounts payable 1,361 (1,345)
Other prepaids, deferrals and accruals (179) (2,934)
----------------------------
Net cash provided by operating activities 25,981 13,561
Cash Flows from Investing Activities
Purchases of property, plant & equipment (18,772) (15,009)
Purchases of other investments (1,420) (1,054)
Proceeds from sale of available-for-sale securities 3,067 1,104
Proceeds from sale and disposal of assets 68 1,133
----------------------------
Net cash used in investing activities (17,057) (13,826)
Cash Flows from Financing Activities
Proceeds from long-term debt -- 5,099
Repayment of revolving debt facilities (1,539) --
Payments on long-term debt (3,285) (1,812)
Distributions to minority interest partners (3,927) (3,112)
Proceeds from issuance of common stock upon
exercise of stock options 104 63
----------------------------
Net cash provided by (used in) financing activities (8,647) 238
----------------------------
Net increase (decrease) in cash and cash equivalents 277 (27)
Cash and Cash Equivalents
Beginning 2,173 3,133
----------------------------
Ending $ 2,450 $ 3,106
============================
Cash paid for:
Interest $ 3,258 $ 3,171
Income taxes (net of refunds) $ 477 $ 231
Non-Cash Transactions:
On June 6, 2002, the Company granted 2,327 shares of Company stock to employees
valued at $0.1 million out of the Stock Option Plan. The stock grant was in
recognition of the Company's 100th year anniversary.
The Company closed on the sale of its GSM equipment in January 2001, for
approximately $6.5 million of which approximately $4.9 million was escrowed as
part of a like-kind exchange transaction. The escrowed funds were disbursed as
new equipment was received during the first six months of 2001.
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(in thousands, except per share data)
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income (Loss) Total
--------------------------------------------------------
Balance, December 31, 2000 3,759 $4,817 $ 55,873 $ 5,645 $ 66,335
Comprehensive income:
Net income -- -- 16,372 -- 16,372
Change in unrealized gain
on securities available-for-sale
net of tax benefit of $3,482 -- -- -- (5,603) (5,603)
--------
Total comprehensive income 10,769
Dividends declared ($0.70 per share) -- -- (2,635) -- (2,635)
Common stock issued through the
exercise of incentive stock options 6 133 -- -- 133
--------------------------------------------------------
Balance, December 31, 2001 3,765 $4,950 $ 69,610 $ 42 $ 74,602
Comprehensive income:
Net income -- -- 2,266 2,266
Change in unrealized loss
on securities available-for-sale
net of tax benefit of $20 -- -- (52) (52)
Reclassification of net recognized
loss on securities available-for-sale
net of tax benefit of $2 -- -- (6) (6)
--------
Total comprehensive income 2,208
Common stock issued through the
exercise of incentive stock options
and stock grant 7 216 216
--------------------------------------------------------
Balance, September 30, 2002 3,772 $5,166 $ 71,876 $ (16) $ 77,026
========================================================
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements of Shenandoah
Telecommunications Company and Subsidiaries (the Company) for the three and nine
months ended September 30, 2002 and September 30, 2001 are unaudited. In the
opinion of management, all adjustments necessary for a fair statement of the
interim results have been reflected therein. All such adjustments were of a
normal and recurring nature. The balances at December 31, 2001 are derived from
the Company's audited consolidated financial statements. These statements should
be read in conjunction with the consolidated financial statements and related
notes in the Company's Annual Report to Shareholders, which is included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
2. Operating revenues and net earnings for any interim period are not
necessarily indicative of results that may be expected for the entire year.
3. Basic net earnings per share were computed on the weighted average number of
shares outstanding. Diluted net earnings per share were computed under the
treasury stock method, assuming the conversion as of the beginning of the
period, for all dilutive stock options. There were no adjustments to net income
in the computation of dilutive net income per share for any period.
4. The Company has identified ten reporting segments based on the products and
services each provide. Each segment is managed and evaluated separately because
of diverse technologies and marketing strategies. A summary of unaudited
external operating revenues, internal operating revenues, EBITDA and net income
of each segment is as follows. The Company defines EBITDA as net income
increased by the provision for income taxes, depreciation, amortization of
long-lived assets, and interest expense, and decreased by interest income.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to net income
as a measure of performance or to cash flows as a measure of liquidity.
In thousands For the three months ended
(unaudited) September 30, 2002
External Internal Net
Revenues Revenues EBITDA Income (Loss)
-------------------------------------------------
Holding $ -- $ -- $ 484 $ (260)
Telephone 5,588 707 3,669 1,560
Cable TV 1,080 1 451 71
ShenTel 1,706 85 406 159
Leasing 5 -- 4 2
ShenTel Communications 7 -- (11) (5)
Mobile 5,813 449 3,296 1,828
PCS 15,190 (38) 1,154 (1,301)
Long Distance 281 149 161 98
Network 168 26 159 72
-------------------------------------------------
Combined totals 29,838 1,379 9,773 2,224
Inter-segment eliminations -- (1,379) (1,169) --
-------------------------------------------------
Consolidated totals $29,838 $ -- $ 8,604 $ 2,224
=================================================
8
In thousands For the three months ended
(unaudited) September 30, 2001
External Internal Net
Revenues Revenues EBITDA Income (Loss)
------------------------------------------------------
Holding $ -- $ -- $ 449 $ (323)
Telephone 5,439 634 3,887 1,670
Cable TV 941 1 262 (115)
ShenTel 1,293 76 50 (89)
Leasing 6 -- 3 2
ShenTel Communications -- -- -- --
Mobile 6,068 259 3,061 1,727
PCS 10,251 5 540 (1,003)
Long Distance 295 154 147 91
Network 252 25 250 134
------------------------------------------------------
Combined totals 24,545 1,154 8,649 $ 2,094
Inter-segment eliminations (1,154) (1,080) --
------------------------------------------------------
Consolidated totals $ 24,545 -- $7,569 $ 2,094
======================================================
In thousands For the nine months ended
(unaudited) September 30, 2002
External Internal Net
Revenues Revenues EBITDA Income (Loss)
------------------------------------------------------
Holding $ -- $ -- $(6,205) $(5,492)
Telephone 16,724 2,179 11,541 5,033
Cable TV 3,241 2 1,405 267
ShenTel 4,708 259 728 173
Leasing 16 -- 10 6
ShenTel Communications 10 -- (32) (18)
Mobile 17,476 1,224 9,877 5,484
PCS 39,533 (17) 2,764 (3,791)
Long Distance 824 456 487 297
Network 639 83 621 307
------------------------------------------------------
Combined totals 83,171 4,186 21,196 2,266
Inter-segment eliminations -- (4,186) (3,258) --
------------------------------------------------------
Consolidated totals $ 83,171 $ -- $17,938 $ 2,266
======================================================
In thousands For the nine months ended
(unaudited) September 30, 2001
External Internal Net
Revenues Revenues EBITDA Income (Loss)
------------------------------------------------------
Holding $ -- $ -- $ 341 $ (979)
Telephone 15,982 1,800 12,491 5,179
Cable TV 2,811 2 953 (239)
ShenTel 3,758 252 448 (86)
Leasing 19 -- 8 5
ShenTel Communications -- -- -- --
Mobile 16,184 533 7,751 4,257
PCS 23,361 9 (1,047) (4,136)
Long Distance 833 385 300 186
Network 711 83 708 392
------------------------------------------------------
Combined totals $ 63,659 3,064 $21,953 $ 4,579
Inter-segment eliminations -- (3,064) (2,995) --
------------------------------------------------------
Consolidated totals $ 63,659 $ -- $18,958 $ 4,579
======================================================
9
The Company's assets by segment as of September 30, 2002, December 31, 2001, and
September 30, 2001 are as follows:
September 30, December 31, September 30,
2002 2001 2001
In thousands (unaudited) (unaudited)
---------------------------------------------------
Holding $ 111,193 $ 110,347 $ 107,015
Telephone 58,226 55,942 56,709
Cable TV 10,312 11,466 11,743
ShenTel 4,735 5,359 5,194
Leasing 183 254 254
ShenTel Communications 80 100 --
Mobile 16,186 15,273 18,214
PCS 61,880 61,530 49,398
Long Distance 213 22 201
Network 1,039 1,005 978
---------------------------------------------------
Combined totals $ 264,047 $ 261,298 $ 249,706
Inter-segment eliminations (99,921) (94,501) (87,314)
---------------------------------------------------
Consolidated totals $ 164,126 $ 166,797 $ 162,392
===================================================
5. Comprehensive income includes net income along with net unrealized gains and
losses on the Company's available-for-sale investments. A summary of the
unaudited results follow:
In thousands For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------
Net income $ 2,224 $2,094 $ 2,266 $4,579
Net unrealized gain (loss) (25) 1,775 (58) 4,163
----------------------------------------------------------
Comprehensive income $ 2,199 $3,869 $ 2,208 $8,742
==========================================================
6. Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
7. During first quarter of 2002, the Company sold 50,000 shares of VeriSign,
Inc. (VeriSign) an available-for-sale security, for proceeds of approximately
$1.5 million or an average of $30.16 per share. The Company recognized a net
loss before taxes of approximately $0.4 million on this sale. During the second
quarter of 2002, the market value of VeriSign declined significantly. This
decline, along with the market outlook for the trading range of the stock,
required the Company to record an other-than-temporary write-down of the
VeriSign stock to the market value at June 28, 2002 of $7.19 per share. The
non-cash impairment charge recorded in the first half of 2002 totaled $8.0
million before taxes. The Company's investment in VeriSign is the result of
investments in predecessor companies of Illuminet Holdings, Inc. (Illuminet),
which was acquired by VeriSign in December 2001. As required by generally
accepted accounting principles, the Company recognized a non-cash pre-tax gain
on the exchange of the Illuminet shares in 2001, and as of December 31, 2001 had
a carrying value of $38.04 per share on the VeriSign stock, compared to $7.19
per share at June 30, 2002. In July 2002, the Company sold its remaining 260,158
shares of VeriSign stock for net proceeds of $1.3 million. With this sale the
Company recorded a $0.6 million pre-tax loss in the third quarter 2002 results.
10
8. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires discontinuation of amortization of goodwill and
intangible assets that have indefinite useful lives and also requires annual
tests of impairments of those assets. The statement also provides specific
guidance about how to determine and measure goodwill and intangible asset
impairments, and requires additional disclosure of information about goodwill
and other intangible assets. The Company adopted SFAS No. 142 beginning January
1, 2002, thus eliminating $0.1 million of amortization expense in the cable
television subsidiary in each subsequent quarter. The first phase of the
impairment test is complete, and the operating unit that has the goodwill
recorded remains profitable. The Company does not anticipate a change in this
operation and therefore there are no other anticipated material impacts on the
Company's financial statements as a result of the adoption of this statement.
The following table presents the adjusted results of the Company's net income
and earnings per share to reflect the impact as if the adoption of SFAS No. 142
occurred January 1, 2001.
For the three months For the nine months
(unaudited) ended September 30, ended September 30,
In thousands, except per share data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2,224 $ 2,094 $ 2,266 $ 4,579
Add back goodwill amortization expense, net of taxes -- 59 -- 175
---------------------------------------------------------
Adjusted net income $ 2,224 $ 2,153 $ 2,266 $ 4,754
=========================================================
Earnings per share basic $ 0.59 $ 0.56 $ 0.60 $ 1.22
=========================================================
Earnings per share diluted $ 0.58 $ 0.55 $ 0.60 $ 1.21
=========================================================
Adjusted basic earnings per share $ 0.59 $ 0.57 $ 0.60 $ 1.26
=========================================================
Adjusted diluted earnings per share $ 0.58 $ 0.57 $ 0.60 $ 1.26
=========================================================
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it becomes a
legal obligation. The Company will also record a corresponding asset, which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003. The Company is evaluating the timing of adoption and the
effect that implementation of the new standard may have on its results of
operations and financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." It applies to costs
associated with an exit activity that does not involve an entity newly acquired
in a business combination and costs associated with a disposal activity covered
by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This standard requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value
when the liability is incurred, rather than at the date of commitment to an exit
or disposal plan. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company has not yet determined the
impact, if any, of adopting this standard.
9. On November 1, 2002 the Company entered into a new one-year revolving credit
agreement with CoBank totaling $20 million. The facility expires on November 1,
2003 and is available
11
for general corporate purposes, with rates and financial covenants similar to
the current facility. This facility replaces the $35 million revolving credit
facility, with the availability reduced due to decreased needs for capital
spending, as capital spending for the PCS network declined with the completion
of the initial build-out requirements. Additionally, the Company renewed and
expanded its revolving line of credit with SunTrust Bank. The new SunTrust
revolving line of credit is a $2.5 million facility that expires on May 31, 2003
(which is one year after the previous revolving credit line matured), and will
be available for short-term variations in the Company's treasury management
activities. The rate and terms of both of these facilities are similar to the
previous facilities that are being replaced. As of September 30, 2002, the
outstanding balance on the CoBank revolving credit facility was $4.4 million,
and $0.3 million on the SunTrust facility.
10. Subsequent to the close of the quarter, the Company declared a $0.74 per
share dividend payable on December 2, 2002 to shareholders of record on November
15, 2002.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report on Form 10Q that are not purely
historical are forward looking statements within the meaning of Section 27 A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934, including statements regarding our expectations, hopes, intentions or
strategies regarding the future. 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 state and federal legislative and regulatory changes. Readers
should not place undue reliance on forward-looking statements, which reflect
management's view only as of the date hereof. The Company takes no obligation to
publicly revise these forward-looking statements to reflect subsequent events or
circumstances.
Shenandoah Telecommunications Company and subsidiaries (the Company) provide
telephone service, long distance, personal communications service (PCS),
cellular telephone, cable television, unregulated telecommunications equipment
and services, Internet access, paging, and digital subscriber loop (DSL)
services. In addition, through its subsidiaries, the Company leases towers and
operates and maintains an interstate fiber optic network. Competitive local
exchange carrier (CLEC) services are currently being offered on a limited basis
in a test market. The Company's operations are principally along the Interstate
81 corridor from the Northern Shenandoah Valley of Virginia through West
Virginia, Maryland, and into South Central Pennsylvania.
The Company reports revenues in three categories, wireless, wireline and other
revenues. These revenue classifications are defined as follows: Wireless
revenues are made up of Shenandoah Personal Communications Company (PCS), and
Mobile Company, which includes the revenues of the cellular operation and tower
revenues. The wireline revenues include the following subsidiary revenues in the
financial results: Telephone Company, Network Company, Cable Television Company,
and the Long Distance Company. Other revenues are comprised of the revenues of
ShenTel Service Company, the Leasing Company, ShenTel Communications, and the
Holding Company.
12
SELECTED OPERATING STATISTICS
The following table shows selected operating statistics of the Company for the
previous five quarters. This information is unaudited, and is a supplement to
the financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
SELECTED OPERATING STATISTICS
(Unaudited)
Three Month Period Ended
Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30,
2002 2002 2002 2001 2001
------------------------------------------------------
Telephone Access Lines 24,933 24,859 24,751 24,704 24,583
CATV Subscribers 8,707 8,729 8,740 8,770 8,834
Internet Subscribers 18,559 18,300 18,083 17,423 16,923
Digital PCS Subscribers 62,434 59,962 56,624 47,318 37,880
Analog Cellular Subscribers 7,352 8,683 9,246 9,440 9,526
Paging Subscribers 3,002 3,071 3,136 3,190 4,160
Long Distance Subscribers 9,338 9,316 9,341 9,159 9,047
DSL Subscribers 537 434 341 288 234
Fiber Route Miles 543 543 524 485 482
Total Fiber Miles 28,243 28,243 26,804 23,893 23,854
Long Distance Calls (000) 5,712 5,949 5,431 5,561 5,712
Switched Access Minutes (000) 46,525 42,816 38,398 33,067 31,873
CDMA Base Stations (sites) 231 220 207 184 150
Cellular Base Stations 20 20 20 20 20
Towers Owned (over 100 foot) 80 80 78 70 64
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,555 1,512 1,455 1,395 1,100
Cellular Market POPS (000) 170 170 170 170 170
PCS ARPU (ex. Travel) (1) $53.58 $49.93 $50.49 $49.71 $51.28
PCS Travel rev. per sub. (1) $31.90 $26.56 $21.91 $35.01 $49.73
PCS Ave. Mgmt. Fee per sub. (1) $ 4.29 $ 3.99 $ 4.04 $ 3.98 $ 4.10
PCS Ave. monthly churn % 3.42% 2.75% 2.20% 2.53% 2.13%
PCS CPGA Ave. (1) $344.77 $281.79 $235.40 $228.22 $244.57
PCS CCPU Ave. (1) $53.93 $48.26 $46.45 $54.50 $68.12
(1) Values reflect definition changes since prior filing.
POPS - is the estimated population of people in a geographic service area.
ARPU - Average Revenue Per User - before travel, roaming revenue, and management
fee, net of adjustments, divided by average subscribers.
PCS Travel rev. per sub. - including roamer revenue divided by average
subscribers.
PCS Ave. mgmt. fee per sub. - 8 % of collected revenue paid to Sprint excluding
travel.
PCS Ave. monthly churn - average of 3 monthly calculations of deactivations
(excluding returns less than 30 days) divided by average subscribers in the
period.
CPGA - Cost Per Gross Add - including selling costs, product costs, and
advertising costs.
CCPU - Cash Cost Per User - including network, customer care and other costs.
13
RECENT DEVELOPMENTS
The Company's largest source of revenues is derived from its wireless
operations. For the three months ended September 30, 2002, wireless revenue was
70.4% of total revenue, wireline revenue contributed 23.9% of total revenue, and
other revenue was 5.7% of total revenue. These results compare to 66.5% for
wireless, 28.2% for wireline and 5.3% for other, for the comparable three months
of 2001.
The Company's strategy in the last several years has been to expand its services
and the geographic areas served. This strategy has been implemented primarily
through enhancing the PCS network, using CDMA technology, under the national
brand of Sprint. The Company's efforts to market its services in the expanded
PCS network area contributed to new subscribers purchasing phones and services
which continued to produce higher revenues during the first nine months of 2002.
In late-December 2001, the Company turned up the PCS network in the Altoona,
Pennsylvania market, which completed the initial network build-out requirements.
The Company had 231 PCS CDMA base stations in service at September 30, 2002,
compared to 184 base stations that were in service December 31, 2001 and 150
base stations in service September 30, 2001. This increase in base stations
during the current year is primarily the result of enhancing network coverage
and expanding coverage along several highly traveled secondary roads in the
Company's market areas. The Company continues to focus on enhancing service and
improving operating results in the PCS operation.
With the growth in our PCS business, we are increasingly dependent on Sprint to
provide us with accurate and timely information, as well as dependent on Sprint
to make marketing, network, and other business decisions that will not have an
unfavorable impact on our operations. The Company is dependent on Sprint for the
reporting of a significant portion of PCS revenues, particularly travel and
service revenue, as well as many expenses, and metrics such as customer counts
and third party sales. For the three months ended September 30, 2002, the
Company is relying on Sprint to provide accurate and timely information on
approximately $14.7 million or 49.5% of total revenue compared to $9.8 million
or 39.9% for the same period of 2001. The Company and Sprint are continuing to
develop and adopt new controls and improve processes to review, test, and
validate information being reported to the Company. The Company continually
monitors and tracks the data provided by Sprint to identify potential unexpected
trends in the information. Areas of risk include, but are not limited to:
Sprint may make nationally-based business decisions that increase our
expenses and/or decrease our revenues, and/or negatively impact customer
quality, making it more difficult to attain profitability in our PCS
service area.
Sprint may be unable to maintain high quality back office services and
systems, thereby impacting the Company's reported results. Revenues and/or
expenses may be misstated and therefore the Company's financial statements
could be subject to out of period adjustments.
Sprint may be unable to maintain high quality customer care and billing
services, possibly leading to customer dissatisfaction and a loss of
revenues.
The Company has and continues to work with Sprint to identify and mitigate the
risks associated with the Sprint Network Partner program.
14
In accordance with Sprint requirements, the Company turned up its PCS third
generation (3G 1x) wireless technology during August 2002, enabling additional
voice capacity and increased data speeds. The network upgrade, comprised of
software changes, channel card upgrades, and some new network elements for
packet data, is backwards compatible with the existing 2G network, thereby
allowing the Company to provide 3G 1x service without base station or customer
handset replacement. These enhancements cost approximately $3.0 million, with
all of the items installed in the first nine months of 2002 being reflected in
the property, plant and equipment section of the balance sheet.
As previously reported, a further reduction in the Sprint travel rate took
effect January 1, 2002. The current rate is $0.10 per minute for payable and
receivable minutes. In addition, the long distance travel rate, charged or
received for long distance messages associated with travel, was adjusted from
$0.06 to $0.0203 per minute effective January 1, 2002. The Company is in a net
travel receivable position for the current quarter by $1.6 million, and $3.8
million for year-to-date 2002, compared to $2.0 million for third quarter last
year, and $2.3 million year-to-date 2001. Subsequent to the quarter, Sprint
informed the Company the travel rate would be $0.058 per minute effective
January 1, 2003. There is no guarantee that the net travel position will remain
in the Company's favor, as it may change due to factors beyond the Company's
control, including but not limited to: travel trends, geographic population
shifts, weather, and other factors.
Tempering the impact of wireless revenue growth was the impact of the PCS Clear
Pay program; designed to attract credit challenged customers to the PCS service.
During the first part of 2002, Clear Pay was available as a no-deposit offering,
leading to strong customer additions. However, as the payment history of these
customers materialized, it became clear there was a low probability of being
paid for the service. The Clear Pay no-deposit offering was suspended in
mid-April, when a $125 deposit was implemented. The Clear Pay no-deposit program
generated three significant impacts on the Company. The first of these impacts
is customer counts. Gross additions were 32,360 in the nine months ended
September 30, 2002, an increase of 46.5% compared to 22,083 for the same period
in 2001. Disconnects also changed dramatically, increasing by 11,227 or 187% to
17,244 in the nine months ended September 30, 2002, compared to 6,017 for the
same period in 2001. The second impact was in cost of goods sold for the PCS
operation, which, due principally to the expense for handsets for additional
customers, increased by $1.8 million or 48.0% to $5.6 million in the nine months
ended September 30, 2002, as compared to the same period in 2001. The third area
significantly impacted is bad debt expense. Generally, the Clear Pay no-deposit
customers added prior to mid-April were deactivated in the second quarter, then
their unpaid account balances were written off in the third quarter. Bad debt
expense in the PCS operation was $1.5 million in the third quarter of 2002
compared to $0.5 million in the third quarter of 2001. Bad debt expense in the
PCS operation was $2.6 million for the nine months ended September 30, 2002
compared to $0.8 million for the nine months ended September 30, 2001.
The Company also recognized $0.5 million in bad debt expense in the Telephone
subsidiary through the nine months ended September 30, 2002, compared to $16,000
for the nine months ended September 30, 2001. This is principally associated
with the financial difficulties, and in some situations bankruptcy proceedings,
for interexchange carriers served by the Company.
The Company has a minimal number of customers on DSL service in a nearby
Virginia community, outside of the Telephone subsidiary's regulated service
area. This service is
15
offered by the Company's CLEC subsidiary, ShenTel Communications Company, and as
presently structured does not require significant capital or operating
resources. This service utilizes line-sharing arrangements with the incumbent
local exchange carrier. The Company is currently monitoring regulatory
proceedings that may require a change to line-sharing arrangements, including
the possibility of dissolution of line-sharing as an option. Due to the limited
number of customers involved, any change in line-sharing arrangements would have
minimal impact on the Company's operations and financial results.
In early May, and twice since that time, the Company received short-term
extensions on its existing revolving lines of credit from CoBank and SunTrust
Bank. The extensions were granted at the Company's request, while the Company
considered changes in the facility amounts. These lines of credit were renewed
in early November. Terms and conditions of the CoBank facility are similar to
the previous $35.0 million revolving credit facility, but has been reduced to
$20.0 million, due to anticipated lower expenditures for capital projects. The
SunTrust Bank unsecured line of credit amount was increased from $2.0 million to
$2.5 million to accommodate the growing needs of the Company's treasury
management activities.
In July 2002, the Company liquidated its remaining holdings of VeriSign, Inc.
The Company sold all 260,158 shares of the VeriSign stock, for $1.3 million. The
Company recognized a loss of $0.6 million before taxes on the sale in the third
quarter of 2002. Beginning in 1981, when the Company first invested in
VeriSign's predecessor companies, the Company invested $0.9 million in cash.
Including the sale in early July 2002, the Company realized proceeds of $8.1
million before taxes from all sales of its stock in VeriSign and its predecessor
companies.
RESULTS OF OPERATIONS THIRD QUARTER 2002 VS THIRD QUARTER 2001
General
Total revenue for the third quarter was $29.8 million, an increase of $5.3
million or 21.6%, compared to $24.5 million the same period last year. Total
revenues include wireless revenue of $21.0 million, an increase of $4.7 million
or 28.7%; wireline revenues of $7.1 million, an increase of $0.2 million or
2.7%; and other revenues of $1.7 million, an increase of $0.4 million or 32.3%.
Net income increased $0.1 million or 6.2%, to $2.2 million compared to $2.1
million net income for the third quarter of 2001. Net income per diluted share
was $0.58, compared to a $0.55 per share for the third quarter last year.
Revenues
Within wireless revenues, the PCS operation added 24,554 PCS subscribers since
September 30, 2001, which contributed to a $4.2 million or 90.4% increase in
subscriber revenue compared to third quarter of 2001. As of September 30, 2002,
the Company's base of PCS subscribers was 62,434. The Company's average revenue
per user (ARPU) increased 4.5% to $53.58 compared to the third quarter 2001, and
increased 7.1% from the June 2002 quarter of $49.93. Combined PCS travel and
roamer revenue were $5.9 million, an increase of $0.8 million or 14.9%. Roaming
revenue was the primary source of the $0.8 million increase in the travel and
roaming revenues. The increase in travel and roamer revenue growth is primarily
attributed to increased use of the Company's expanded network and to a new
roaming agreement with a major wireless carrier. The Company has 231 base
stations deployed at September 30, 2002 compared to 150 base stations that were
deployed at September 30, 2001. The travel revenue
16
rate declined from $0.20 per minute in first quarter of 2001, to $0.15 in May
2001 through September 2001, to $0.10 per minute as of January 1, 2002.
Additionally, the inter-market long-distance rate has declined from $0.06 per
minute for all of 2001, to less than $0.02 for portions of 2002. Further
material declines in travel rates or long-distance rates are not anticipated for
the remainder of 2002. Subsequent to the close of the quarter, Sprint announced
the travel rate would be $0.058 per minute in 2003.
Cellular revenue was $5.2 million, a decrease of $0.3 million or 5.1% compared
to the third quarter of 2001. Roamer revenues, generated from other providers'
customers using our network, remained the same at $4.5 million for the third
quarters of 2002 and 2001, a marked contrast to the significant increases
experienced in recent years. Roamer revenue is expected to decline in the future
in the cellular operation, due to increased competition from other providers and
reduced roaming rates. Cellular local service revenue declined $0.2 million, or
27.1%, due to a decline of 1,331 cellular subscribers or 15.3% to 7,352
subscribers at the end of September 2002, compared to 9,526 cellular subscribers
at the end of September 2001. Due to competition from digital carriers, the
subscriber count in the analog cellular operation is anticipated to continue to
decline.
Tower lease revenue was the primary contributor to the remaining $0.1 million
increase in wireless revenues over third quarter 2001 results.
Wireline revenues were $7.1 million, an increase of $0.2 million or 2.7%. Access
revenue in the telephone business increased $0.4 million, impacted by increased
use of the Company's network by other telecommunications providers. Access
revenue increased primarily due to increased traffic from wireless carriers
using the Company's wireline network. Recent petitions before the FCC requested
inter-carrier compensation arrangements between wireless providers be evaluated,
thereby placing the source of the Company's access revenue increase at risk.
Lease revenue for the Company's fiber network facilities decreased $0.3 million
compared to the same period last year due to competitive pricing pressure on
fiber facility lease rates and the financial difficulties of some of the network
customers. The Company expects rates to continue to decline in the near-term,
but cannot predict the overall impact on revenues due to additional fiber
facilities now being constructed, overall industry capacity levels, and the
current downturn in the overall telecommunications market. The Cable Television
business contributed the other $0.2 million to the increase in wireline
revenues. A rate adjustment implemented December 1, 2001 increased basic cable
service rates and promoted increased adoption of premium services, but the
impact has been somewhat offset by a nominal decline in cable television
subscriptions, primarily due to program offerings not meeting specific market
niche expectations.
Other revenues were $1.7 million, an increase of $0.4 million or 32.3%. Internet
revenues increased $0.1 million or 15.9%. Internet subscribers increased 1,636
or 9.7%, compared to September 30, 2001 subscribers. The total subscriber base
for the Company's Internet service was 18,559 as of September 30, 2002.
Operating Expenses
Total operating expense was $23.1 million, an increase of $4.9 million or 27.2%,
compared to $18.2 million for third quarter last year. The increases in PCS
subscribers and in operating costs from the expanded PCS network were the
principal factors driving costs higher.
17
Costs of goods and services were $2.7 million, an increase of $0.8 million or
38.8%, changing primarily due to the increased number of PCS handsets sold as
discussed above, somewhat offset by a decline in cellular equipment sales. These
costs include expenses paid to third parties for the activation of services,
handset subsidies, and residuals on recurring service revenues in the PCS
operation. The PCS operation CPGA (cost per gross add) increased 41% or $100 per
gross subscriber added, compared to the third quarter 2001. The principal reason
for this change is an increase in the rate that existing subscribers are
upgrading their handsets for new models, thereby increasing cost of goods
without a corresponding increase in customer additions. Advertising costs,
associated with the introduction of 3G 1x services, also contributed to the
increased in CPGA, as compared to the third quarter 2001. The CCPU (cash cost
per user) was $53.93 compared to $68.12 for the third quarter of 2001. The
decrease is mainly attributable to lower fixed operating costs on a per user
basis. However, CCPU has increased compared to more recent quarters, due to the
significant rise in bad debt expense associate with the Clear Pay no-deposit
program. This accounted for approximately $5 of the CCPU increase from the June
2002 quarter to the September 2002 quarter. In the near future the Company
anticipates reclassifying handset upgrades from CPGA to CCPU, a practice
recently adopted by others in the industry.
Network operating costs were $8.9 million, an increase of $0.6 million, or 7.5%.
PCS travel and associated long distance expense, despite rate decreases,
increased $0.4 million due to the larger customer base as well as a 12.4%
increase in average subscriber usage. Tower and land rentals increased $0.3
million or 44.3%, principally due to the expanded PCS network. Network line cost
increases of $0.3 million in the PCS operation were offset by a decrease of $0.3
million in network line costs of the cellular operation. A reduction in
provisioning expense offset the remaining network operating costs by $0.1
million.
Depreciation expense was $3.9 million, an increase of $0.8 million or 25.4%
compared to $3.1 million for the third quarter of 2001, as new assets,
particularly in the PCS operation, have been added to the networks. Gross plant
in service increased to $193.0 million at September 30, 2002 compared to $169.0
million at September 30, 2001.
Selling, general and administrative costs were $7.6 million, an increase of $2.8
million or 57.3%. Bad debt increased $1.3 million to $1.8 million for a 234%
increase over the third quarter 2001 bad debt expense, principally due to the
PCS Clear Pay no-deposit program and the wireline interexchange carrier
situations discussed above, and to a lesser degree financial difficulties of
some companies leasing Company tower facilities. The $125 deposit for Clear Pay
customers implemented in early second quarter 2002 is intended to minimize PCS
bad debt expense as a percentage of revenues on a going forward basis. However,
with the increasing size of the PCS customer base, and the potential for future
financial difficulties of interexchange and wireless carriers using our
facilities, there can be no assurance that bad debt expense will not continue to
increase. Customer support increased $0.6 million or 64.0% to $1.5 million, due
principally to the increase in PCS customers. Sales and marketing expenses
increased $0.4 million or 21.0% compared to third quarter 2001, due to increased
sales efforts and the addition of sales personnel, primarily in the PCS
operation. Administrative costs increased $0.5 million, due to additional staff
added to support the growing Company operations.
The Company's operating income increased by $0.4 million or 5.6% to $6.7 million
compared to the same period last year. But the operating margin decreased to
22.5% for the quarter ended September 30, 2002, compared to 25.9% for the same
period last year. This change was principally due to the significant increase in
bad debt expense in the third quarter.
18
Losses on investments increased to $0.7 million, due primarily to the impact of
the sale of the VeriSign stock during early July 2002. The Company holds several
other available-for-sale stocks, none of which currently have significant value
in relation to total assets.
Interest expense increased to $1.1 million, or 2.1%, a result of increased
average borrowing levels compared to third quarter 2001. Total debt was $57.8
million at September 30, 2002, compared to $62.6 million at December 31, 2001
and $58.8 million at September 30, 2001.
Income before income taxes and minority interest was $4.9 million, an increase
of $0.2 million from third quarter of 2001, primarily the result of improved
operating results.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. After taxes, net income
from ongoing operations for the third quarter was $2.6 million, a 5.9% increase
compared to $2.5 million during the third quarter of 2001. The $0.1 million
change in ongoing operations reflects increased wireless revenues, offset by a
significant increase in bad debt expense recorded in the third quarter of 2002.
Income tax expense was $1.4 million, a $0.1 million change due to increased
earnings, compared to the same period last year. The effective tax rate is 39%
compared to 38% for 2001.
Minority interest was $1.3 million, for both quarters, due to the consistent
financial performance of the cellular operation.
Net income for the quarter was $2.2 million, compared to a $2.1 million net
income for the third quarter of 2001. The Company's operating margin improved
$0.4 million, but was somewhat offset by the loss on the sale of the VeriSign
stock and the increase in the effective tax rate compared to the third quarter
of 2001.
RESULTS OF OPERATIONS YEAR-TO-DATE 2002 VS YEAR-TO-DATE 2001
General
Total revenue for the nine months of 2002 was $83.2 million, an increase of
$19.5 million, or 30.7% compared to $63.7 million the same period last year.
Total revenues include wireless revenue of $57.0 million, an increase of $17.5
million or 44.2%; wireline revenues of $21.4 million, an increase of $1.1
million, or 5.4%; and other revenues of $4.7 million, an increase of $0.9
million or 25.3%. Net income decreased $2.3 million or 50.5% to $2.3 million,
compared to $4.6 million for the nine months of 2001. Net income per diluted
share was $0.60 per share, compared to $1.21 per share for the same period last
year. The losses from the sale and impairment charge on the VeriSign stock,
recognized primarily in the second quarter of 2002, were principally responsible
for this change in the nine-month results, somewhat offset by a $4.9 million
increase in operating margin.
Revenues
Within wireless revenues, the PCS operation contributed a $12.3 million or 104%
increase in subscriber revenue compared to the nine months of 2001. The PCS
operation had net additions
19
of 24,554 PCS subscribers since September 30, 2001. Combined PCS travel and
roamer revenue were $14.0 million, an increase of $3.4 million, or 32.6%
compared to the nine months of 2001. Travel and roamer revenue growth is
primarily attributed to network expansion along with the increase in total
wireless subscribers using the Company's network. The travel revenue rate
declined from $0.20 per minute as of January 1, 2001, to $0.15 as of May 1,
2001, to $0.12 as of October 1, 2001, and to $0.10 per minute as of January 1,
2002. Additionally, the inter-market long-distance rate has declined from $0.06
per minute for all of 2001, to $0.0203 for 2002. Further declines in travel
rates or long-distance rates are not anticipated for the remainder of 2002.
Subsequent to the quarter close, Sprint announced travel rates of $0.058 per
minute for 2003.
Cellular revenue was $15.7 million, an increase of $1.0 million or 7.0%. Roamer
revenues, generated from other providers' customers using our network, increased
$1.7 million or 14.6% compared to the same period in 2001, with the majority of
the increase occurring in the first six months of 2002. Cellular roaming revenue
was somewhat offset by a decline in local service revenue of $0.6 million, or
20.9%, due to the decline of cellular subscribers. Other wireless services are
increasingly available in the cellular market coverage area. Total cellular
local subscriber counts have declined to 7,352 compared to 9,526 at September
30, 2001.
Increases in handset sales, tower lease revenue and other wireless revenues
contributed to the additional $0.8 million increase in revenues over the
year-to-date 2001 results.
Wireline revenues were $21.4 million, an increase of $1.1 million or 5.4%.
Access revenue in the telephone business increased $1.0 million. Lease revenue
for the Company's fiber network facilities declined $0.4 million on a
year-to-date basis, as lease prices are changed to meet price competition and
the financial conditions of some of the network customers. Cable television
contributed the other $0.4 million to the increase in wireline revenues, largely
due to the increase in basic cable service rates that became effective December
1, 2001, and a shift of some subscribers to the higher priced digital cable
services and programming.
Other revenues were $4.7 million, an increase of $1.0 million or 25.3%. Internet
revenues increased $0.4 million or 15.5%. Additionally, in 2002, the Company
enhanced its Travel Shenandoah network, which supports a joint service with the
Virginia Department of Transportation and the Virginia Tech Transportation
Institute. This program, now called 511Virginia.org, contributed $0.4 million to
the increased revenues in 2002. Sales, installation and service of
telecommunications equipment contributed the most significant portion of the
remaining $0.2 million increase in other revenues compared to 2001 nine month
results.
Operating Expenses
Total operating expense was $62.9 million, an increase of $14.6 million or
30.3%, compared to $48.3 million for the nine months of 2001. The increase in
PCS subscribers and expanded PCS network, bad debt expense, and the operating
expenses of the three PCS stores in the Central Pennsylvania market were the
principal factors driving costs higher on a period-to-period comparison.
Costs of goods and services were $7.3 million, an increase of $2.0 million or
37.7%, primarily due to the increase in handsets sold for PCS services. The
Company's gross PCS subscribers added were 32,482 for year-to-date 2002 compared
to 22,083 gross PCS subscribers added year-to-date in 2001.
20
Network operating costs were $25.4 million, an increase of $3.6 million, or
16.5%. Additional network costs are primarily comprised of $1.6 million in line
cost increases and of $0.9 million in increased rent expense for new wireless
sites. Maintenance costs for expanding facilities and equipment contributed $0.5
million of the remaining increase. Travel expense, generated by the Company's
PCS subscribers using the Sprint Nationwide Network outside of the Company's
area, also increased $0.5 million compared to nine months of 2001 results. The
remaining change of $0.1 million is spread among miscellaneous network operating
costs.
Depreciation expense was $11.0 million, an increase of $2.5 million or 29.7%
compared to $8.5 million for the nine months of 2001, as new assets,
particularly in the PCS operation, have been added to the network.
Selling, general and administrative costs were $19.1 million, an increase of
$6.5 million or 51.2%. Selling expenses and customer support made up $3.2
million of the increase, due principally to the increase in PCS customers and
PCS sales efforts. The Company opened three new PCS stores in the Harrisburg and
York, Pennsylvania markets in the second quarter of 2001. Administrative costs
and other costs increased $1.0 million, due to additional staff added to support
the growing Company operations. Bad debt expense increased $2.3 million,
primarily the result of the PCS Clear Pay no-deposit program and financial
difficulties of interexchange customers, as discussed above.
The Company's operating income was $20.2 million, an increase of $4.9 million or
31.9%. The operating margin was 24.3% for year-to-date operations, compared to
24.1% for the same period last year. While increased revenues generated in the
wireless category of the business contributed more toward fixed costs as
compared to the nine months of 2001, the marked increase in bad debt expense
limited the overall improvement.
Losses on investments were $9.6 million year-to-date 2002, compared to a $2.0
million loss year-to-date 2001. In 2002, the majority of the loss was the result
of the VeriSign impairment charge and the $1.1 million loss on the sale of the
VeriSign stock, which occurred by early July 2002. In 2001, the Company recorded
charges to write-down several available-for-sale securities that are no longer
held by the Company.
Interest expense increased to $3.2 million, a change of $0.1 million or 3.4%, a
result of increased average borrowing levels compared to 2001.
Income before income taxes and minority interest was $7.6 million, a decrease of
$3.1 million or 28.7%. The increased operating margin of $4.9 million was more
than offset by the $7.6 million additional external investment losses recorded
in 2002. There was also a $0.3 million decline in non-operating income between
year-to-date 2001 and year-to-date 2002.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. After taxes, net income
from ongoing operations for the nine months of 2002 was $8.1 million, or a 38.9%
increase compared to $5.8 million during the nine months of 2001. The $2.3
million change in ongoing operations reflects increased wireless revenues and
decreased growth in fixed costs, somewhat offset by the elevated bad debt
expenses discussed previously, as compared to the same period for 2001.
21
Income tax expense decreased $1.3 million, a reflection of lower income before
taxes in 2002 after recording the impairment charge on the external investment.
The effective tax rate is now 39% compared to 38 % in 2001, to reflect the
increased business activity in states with higher income tax rates.
Minority interest was $3.9 million, an increase of $0.6 million or 18.2%, due to
the improved performance of the cellular operation, primarily the result of
roamer revenue growth in the first half of the year.
Net income was $2.3 million, a decrease of $2.3 million or 50.5%, due to the
losses on external investments more than offsetting the improved operating
results.
INVESTMENTS IN NON-AFFILIATED COMPANIES
The Company participates in emerging technologies by investing in start-up
companies. This includes indirect participation through capital venture funds
such as South Atlantic Venture Fund III, South Atlantic Private Equity IV,
Dolphin Communications Parallel Fund, Dolphin Communications Fund II and Burton
Partnership. It also includes direct participation in start-up companies such as
NTC Communications. NTC provides telephone, cable television, and Internet
access to multiple-tenant buildings in close proximity to colleges and
universities. For those investments that eventually go public, it is the intent
of the Company to evaluate whether to hold or sell parts or all of each
investment on an individual basis. As of September 30, 2002, the Company held
shares in three companies that are publicly traded, with the following market
values: $54 thousand in Net IQ (NTIQ) with 3,744 shares held; $46 thousand in
Deutsche Telekom, AG (DT) with 5,594 shares held; and, $27 thousand in
Prudential Insurance Company ( PRU) with 940 shares. Net unrealized losses on
the securities available-for-sale increased to a $58 thousand loss as of
September 30, 2002, reflecting the continuation of the volatile stock prices
over the past few months. An additional investment of $0.8 million was made in
NTC in first quarter 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $26.0 million in cash from operations in the nine months
of 2002, compared to $13.6 million generated in same period of 2001. The $12.4
million change was primarily the result of approximately a $5.4 million
improvement in operating results. Additionally, $2.7 million of the change was
generated from the increase in payables and a $2.8 million decrease in other
prepaids, deferrals and accruals, with the remaining difference primarily made
up of a $1.5 million reduction in materials and supplies.
The Company's investing activities were greater than the nine months of 2001,
due to the impact of the non-cash transaction related to the like-kind exchange
of assets in early 2001. That transaction escrowed cash of $4.9 million for the
purchase of new equipment. Net cash used for investing was $17.1 million for the
nine months of 2002, compared to $13.8 million used in same period of 2001.
Capital spending was $18.8 million, an increase of $3.8 million or 25.1%
compared to $15.0 million for the same period last year. The capital budget
remains at approximately $30.3 million for the total 2002 year. As mentioned
above, an additional investment of $0.8 million was made in NTC in the first
quarter of 2002. The Company sold its remaining shares of VeriSign stock in
2002, which generated $2.8 million of cash, an increase
22
of $1.8 million from last year. The Company also received cash from patronage
distributions totaling $0.2 million from CoBank, its primary lender in 2002.
The Company's financing activities include the payment of long-term debt
principal, currently at about $1.0 million per quarter, and the receipt or
return of revolving debt proceeds. With the completion of the initial PCS
network build-out, it is anticipated there will be less need to borrow on the
Company's debt facilities to finance capital projects, subject to economic,
competitive and regulatory changes.
The Company's two principal sources of funds for financing expansion activities
and operations are internally generated funds and loan arrangements, the latter
primarily with CoBank. The Company has recently renewed but reduced its
revolving loan agreement with CoBank to $20.0 million, maturing November 1,
2003. The outstanding balance on this facility as of September 30, 2002 was $4.4
million, which is reflected in the current liabilities section of the balance
sheet. The variable rate on this short-term borrowing was 3.3% at September 30,
2002. The Company's outstanding long-term CoBank debt is $41.9 million, at fixed
rates ranging from approximately 6% to 8%. The weighted average rate of the
CoBank fixed-rate debt at September 30, 2002 was approximately 7.6%. The stated
rate excludes patronage credits that are paid to CoBank borrowers after CoBank's
year-end. Earlier this year, the Company received patronage credits of
approximately 60 basis points on its outstanding CoBank debt balance. In
addition, a special one-time patronage distribution from CoBank was received in
the first quarter of 2002, amounting to 20 basis points on the debt outstanding.
The patronage credits have the effect of reducing the borrowing rate by the
amount of the credit distributed. Repayment of the CoBank long-term debt
facilities requires monthly payments on the debt through September 2013.
Additionally, the Company has debt with RUS/RTB that totaled $11.2 million at
the end of September 2002, with maturities through 2019. The weighted average
interest rate on the RUS/RTB debt is approximately 6.5%.
The Company's long-term debt facilities require the Company to maintain certain
financial ratios, including leverage, equity to total assets, and debt service
coverage. A portion of the Company's debt pricing is tied to the Company's
coverage covenant. The Company is in compliance with the debt covenant
requirements as of September 30, 2002, and is therefore provided with the most
favorable pricing allowed under the facility.
As part of the cash management services provided by SunTrust Bank, the Company
maintains an unsecured line of credit to cover temporary variations in
liquidity. The Company made numerous draws and payments on the line of credit
during the quarter, and there was $0.3 million outstanding at September 30,
2002. The interest rate is variable and is currently at 2.5% as of September 30,
2002. The Company recently renewed and expanded this facility to $2.5 million to
allow for greater flexibility under its cash management system. The terms and
financial covenants are similar to the previous facility, with maturity on May
31, 2003, which is one year from the original renewal date of the $2 million
facility it replaced.
At its option, the Company may also liquidate portions of the securities
available-for-sale portfolio, to provide for its cash and capital needs. These
securities in total had a market value of $127 thousand as of September 30,
2002.
23
Year-to-date capital spending was $18.8 million, compared to a total capital
budget for the year of approximately $30.3 million. Major projects in the
year-to-date spending include renovations of office and meeting space in
Edinburg, Va., enhancements to the PCS network, and the final construction phase
of a diverse fiber network route to Northern Virginia. Capital spending in the
PCS subsidiary has slowed recently since the Company has met the contractual
requirements of the agreement with Sprint. Management expects cash flow from
operations and the renewed debt facilities will provide the Company with
adequate cash resources for the remainder of 2002.
Subsequent to the close of the third quarter, the Board of Directors declared a
cash dividend of $0.74 per share, payable on December 2, 2002 to shareholders of
record on November 15, 2002. This is a $0.04 per share increase or 5.7% increase
over the $0.70 per share dividend paid in 2001. The total payout to shareholders
will be approximately $2.8 million, with the cash for the dividend coming from
operating cash flows or the revolving loan facilities.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks relate primarily to changes in business risk, interest rates,
and changes in securities available-for-sale. Business risk is the most
prevalent risk faced by the Company. The Company is heavily dependent on Sprint
for more significant portions of its total revenue, as well as its expenses,
than in past periods. For the quarter ended September 30, 2002, $14.7 million or
49.5% of the $29.8 million of revenue was processed through Sprint. For the nine
months ended September 30, 2002, $38.0 million or 45.7% of the $83.2 million of
total revenue was provided to the PCS operation by Sprint. The Company relies on
the accuracy and timeliness of Sprint's processes and systems; accordingly
erroneous or untimely data provided by Sprint could have a material impact on
the Company's operations. The Company continues to work with Sprint to monitor
and develop processes that will minimize these risks.
The interest rate risk involves two components. The first component is
outstanding debt with variable rates. As of September 30, 2002, the balance of
the Company's variable rate debt is $4.7 million, consisting primarily of a $4.4
million balance of the revolving line of credit with CoBank. The rate of this
borrowing, based upon the lender's cost of funds, was approximately 3.3% as of
September 30, 2002. The Company's remaining variable debt outstanding was $0.3
million on the line-of-credit with SunTrust Bank, with an interest rate of
approximately 2.5%. The Company's remaining debt has fixed rates through its
maturity. A 10% decline in interest rates would increase the fair value of the
fixed rate debt by approximately $1.7 million.
A second component of interest rate risk is temporary excess cash, primarily
invested in overnight investments. As the Company continues to expand its
operations, temporary excess cash is expected to be minimal. Available cash will
be used to repay existing and anticipated new debt obligations, maintain and
upgrade capital equipment, pay ongoing operating expenses, make additional
investments in unaffiliated operations, and potentially pay dividends to the
Company's shareholders. Management does not view market risk as having a
significant impact on the Company's results of operations, although adverse
results could be generated if interest rates were to escalate markedly.
Market risk as it relates to the Company's available-for-sale securities has
decreased as compared to recent years. With the liquidation of the VeriSign
stock, the market risk of the available-for-sale securities have been reduced as
the market value of each investment is below
24
$0.1 million. The Company will monitor the value of all available-for-sale
investments and determine the appropriate course of action for each. Readers are
cautioned about the volatility of values of the Company's external investments,
which are typically early development companies.
In addition to the specific risks described above, the Company's general
business risks include: customer churn rates in all business lines; customer
credit quality; financial conditions of wholesale customers and vendors;
economic, legislative and regulatory changes; and, changes in pricing,
technologies, competition and customer preferences. These risks also include the
ability of the Company's vendors' to deliver necessary products and services to
support its business operations. These and other applicable risks individually
and collectively may impact the financial condition, and the results of
operations of the Company.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer and Vice President-Finance and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of
1934. Based upon that evaluation, the Company's President and Chief Executive
Officer and Vice President-Finance and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
Since the date of the evaluation, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K:
October 23, 2002 Other Event
News Release of Declaration of Dividend and
Third Quarter Results for 2002
25
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
November 12, 2002 /s/ CHRISTOPHER E. FRENCH
Christopher E. French
President and
Chief Executive Officer
November 12, 2002 /s/ LAURENCE F. PAXTON
Laurence F. Paxton
Vice President - Finance and
Chief Financial Officer
26
EXHIBIT A
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, Christopher E. French, President and Chief executive Officer of Shenandoah
Telecommunications Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shenandoah
Telecommunications Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 /S/ CHRISTOPHER E. FRENCH
-------------------------
Christopher E. French
President and
Chief Executive Officer
27
EXHIBIT B
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Laurence F. Paxton, Vice President-Finance and Chief Financial Officer of
Shenandoah Telecommunications Company certify that:
4. I have reviewed this quarterly report on Form 10-Q of Shenandoah
Telecommunications Company;
5. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
6. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
b) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 /S/ LAURENCE F. PAXTON
---------------------------
Laurence F. Paxton
Vice President-Finance and
Chief Financial Officer
28