SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1162807
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Shentel Way, Edinburg, VA 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (No Par Value)
(Title of Class)
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 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. |_|
Indicate by check mark whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| NO |_|
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004, based on the closing sale price of such stock on
the Nasdaq National Market on such date, was approximately $182 million. (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.)
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 FEBRUARY 23, 2005
Common Stock, No Par Value 7,641,536
---------------------------------
DOCUMENT INCORPORATED BY REFERENCE
Information in Part III is incorporated by reference to the Company's definitive
proxy statement for its 2005 Annual Meeting of Shareholders.
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SHENANDOAH TELECOMMUNICATIONS COMPANY
Item Page
Number Number
PART I
1. Business 5
2. Properties 25
3. Legal Proceedings 26
4. Submission of Matters to a Vote of Security Holders 26
PART II
5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchasers of Equity Securities 27
6. Selected Financial Data 28
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
7A. Quantitative and Qualitative Disclosures About Market Risk 47
8. Financial Statements and Supplementary Data 47
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
9A. Controls and Procedures 48
9B Other Information 49
PART III
10. Directors and Executive Officers of the Registrant 49
11. Executive Compensation 50
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters 50
13. Certain Relationships and Related Transactions 50
14. Principal Accountant Fees and Services 50
PART IV
15. Exhibits and Financial Statement Schedules 51
Index to the Consolidated 2004 Financial Statements F-1
Exhibits Index
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "may," "will," "anticipate," "estimate,"
"expect," "intend," "plan," "continue" and similar expressions as they relate to
us or our management are intended to identify these forward-looking statements.
All statements by us regarding our expected financial position, revenues, cash
flow and other operating results, business strategy, financing plans, forecasted
trends related to the markets in which we operate and similar matters are
forward-looking statements. Our expectations expressed or implied in these
forward-looking statements may not turn out to be correct. Our results could be
materially different from our expectations because of various risks, including
the risks discussed in this report under "Business-Recent Developments" and
"Risk Factors."
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PART I
Some of the information contained in this report concerning the
markets and industry in which we operate is derived from publicly
available information and from industry sources. Although we believe
that this publicly available information and the information
provided by these industry sources are reliable, we have not
independently verified the accuracy of any of this information.
Unless we indicate otherwise, references in this report to "we,"
"us," "our" and "the Company" means Shenandoah Telecommunications
Company and its subsidiaries.
ITEM 1. BUSINESS
Overview
Shenandoah Telecommunications Company is a diversified
telecommunications holding company that, through its operating
subsidiaries, provides both regulated and unregulated
telecommunications services to end-user customers and other
communications providers in the southeastern United States. The
Company offers a comprehensive suite of voice and data
communications services. The Company operates eleven reporting
segments based on the holding company's business and the products
and services provided by the operating subsidiaries.
The Company's primary market area historically has been the northern
Shenandoah Valley of Virginia and surrounding areas. This market
area includes, in addition to parts of Virginia ranging from
Harrisonburg in the south to Winchester in the north, parts of
Maryland, West Virginia and Pennsylvania, and on a limited basis,
northern Virginia. Pursuant to a management agreement with Sprint
Communications Company and its related parties (collectively,
"Sprint"), the Company is the exclusive personal communications
service ("PCS") Affiliate of Sprint providing mobility
communications network products and services in the 1900 megahertz
spectrum range in the four-state area extending from Harrisonburg,
Virginia to Harrisburg, York and Altoona, Pennsylvania. The Company
operates its PCS network under the Sprint radio spectrum license and
brand. The Company also holds paging radio telecommunications
licenses.
Following its acquisition of NTC Communications LLC ("NTC") in
November 2004, the Company provides high speed internet, cable
television and local and long distance voice services to
multi-dwelling unit communities (primarily off-campus student
housing) in Virginia, Maryland, North Carolina, South Carolina,
Georgia, Florida, Tennessee and Mississippi. At December 31, 2004,
NTC served 107 multi-unit, multi-building properties.
The Company offers many of its services over its own fiber optic
network of approximately 557 miles at December 31, 2004. The main
lines of the network follow the Interstate 81 corridor and the
Interstate 66 corridor in the northwestern part of Virginia.
Secondary routes provide alternate routing in the event of an
outage. In addition to its own fiber network, the Company through
its telephone subsidiary has a 20 percent ownership in Valley
Network Partnership ("ValleyNet"), which is a partnership offering
fiber network facility capacity in western, central, and northern
Virginia, as well as the Interstate 81 corridor from Johnson City,
Tennessee to Carlisle, Pennsylvania.
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The Company is certified to offer competitive local exchange
services in Virginia outside of its present telephone service area
and is in the process of obtaining certification to provide
competitive local exchange services in North Carolina.
There are minimal seasonal variations in the Company's core wireline
operations. The Company's PCS subsidiary experiences seasonality in
the retail sale of wireless handsets and services. Because NTC has
historically focused its marketing efforts on communities that cater
to college students, the sale of services by NTC is historically
lower in the summer months, when students are on vacation.
In February 2003, the Company sold its 66% general partner interest
in the Virginia 10 RSA Limited Partnership, which was engaged in
cellular operations, to Verizon Wireless for $37.0 million. The
total proceeds received were $38.7 million, of which $5.0 million
were held in escrow for the payment of potential specified
contingencies and indemnification obligations during the two-year
post-closing period. In February 2005, the full escrowed deposit of
$5.0 million, included as an escrow receivable at December 31, 2004,
was released to the Company. The Company's net after tax gain on the
total transaction was approximately $22.4 million. The operating
results of the partnership are reflected in discontinued operations
for the applicable periods presented in the Company's consolidated
financial statements appearing elsewhere in this report.
Recent Developments
On December 15, 2004, Sprint and Nextel Communications, Inc.
announced that they had entered into a definitive agreement to
merge. Nextel is a provider of digital wireless communications
services in the Company's PCS service area.
The impact of the Sprint-Nextel merger on the Company's PCS
operations is uncertain as of the date of this report. Based on
currently available information and assuming that no changes are
effected with respect to Sprint's agreements with the Company, it is
possible, that Sprint could be in violation of the exclusivity
provisions of the Company's agreements with Sprint at some point
following the completion of the Sprint-Nextel transaction.
The Company's agreements with Sprint provide for specific remedies
in the event of a material violation by Sprint of such agreements.
No determination has been made as to the impact on the value of the
Company or its business of any of such remedies or whether any such
remedy would be more or less favorable to the Company and its
shareholders than the existing arrangements with Sprint or any new
arrangements the Company may negotiate with Sprint.
As a result of the Sprint-Nextel merger, Sprint PCS may require the
Company to meet additional program requirements, which could
increase the Company's expenses.
The Company is committed to working with Sprint to reach mutually
acceptable arrangements with respect to the foregoing matters. There
can be no assurances, however, that the Company and Sprint will be
able to reach mutually acceptable arrangements or as to the terms of
any such arrangements or the likely impact on the Company of any
such arrangements.
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Services
The Company provides integrated voice and data communications
services to end-user customers and other communications providers
through the following operating subsidiaries:
Shenandoah Telephone Company
Shenandoah Telephone Company provides both regulated and
non-regulated telephone services to approximately 24,700 customers
as of December 31, 2004, primarily in Shenandoah County and small
service areas in Rockingham, Frederick, and Warren counties in
Virginia. This subsidiary provides access for inter-exchange
carriers to the local exchange network. This subsidiary has a 20
percent ownership interest in ValleyNet, which offers fiber network
facility capacity to other communications providers in western,
central, and northern Virginia, as well as the Interstate 81
corridor from Johnson City, Tennessee to Carlisle, Pennsylvania.
Shenandoah Personal Communications Company ("PCS")
PCS has offered personal communications services through a digital
wireless telephone and data network since 1995. In 1999, PCS
executed a management agreement with Sprint. The network, which
utilities call division multiple access, or CDMA, currently covers
233 miles of Interstates 81 and 83, and a 126-mile section of the
Pennsylvania Turnpike between Pittsburgh and Philadelphia. Under its
agreements with Sprint, the Company is the exclusive PCS Affiliate
of Sprint in the Company's territory, providing wireless mobility
communications network products and services in the 1900 megahertz
spectrum range. The Company had approximately 102,600 retail PCS
customers and 27,300 wholesale PCS customers at December 31, 2004.
Of the Company's total operating revenues, 63.5% in 2004, 61.3% in
2003 and 57.7% in 2002 were generated by or through Sprint and its
customers using the Company's portion of Sprint's nationwide PCS
network. No other customer relationship generated more than 2.5% of
the Company's total operating revenues in 2004, 2003 or 2002.
Under the Sprint agreements, Sprint provides the Company significant
support services such as customer service, billing, collections,
long distance, national network operations support, inventory
logistics support, use of the Sprint brand names, national
advertising, national distribution and product development. In
addition, the Company derives substantial travel revenue and incurs
substantial travel expenses when subscribers of Sprint and Sprint's
PCS Affiliate partners incur minutes of use in the Company's
territory and when the Company's subscribers incur minutes of use in
territories of Sprint and Sprint's PCS Affiliate partners.
Sprint provides back-office and other services including travel
clearing-house functions, to the Company. For periods before January
1, 2004, there was no prescribed formula defined in the agreements
with Sprint for the calculation of the fee charged to the Company
for these services. Sprint adjusted these fees at least annually.
This situation changed with the execution of an amendment to the
Agreement which occurred on January 31, 2004, retroactive to January
1, 2004 (the "Amended Agreement"). By simplifying the formulas used
and fixing certain fees, the Amended Agreement provides greater
certainty to the Company for certain future expenses and revenues
during the term of the agreement that expires on December 31, 2006
and simplifies the methods used to settle revenue and expenses
between the Company and Sprint. The Company entered into an
amendment to the Amended Agreement with Sprint on May 24, 2004.
Under the terms of the agreement, the Company has agreed to
participate in all new and
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renewed reseller agreements signed through December 31, 2006. In
addition, the Company signed an agreement to participate in all
existing Sprint reseller arrangements applicable to the Company's
service area. In consideration for this participation, the Company
received a reduction in the monthly fee per subscriber paid to
Sprint for back-office services and specified network services.
Prior to January 1, 2004, with the exception of certain roaming and
equipment sales revenues, the Company recorded its PCS revenues
based on the revenues collected by Sprint, net of the 8% fee
retained by Sprint. After the adoption of the Amended Agreement,
effective January 1, 2004, the Company records its PCS revenues,
with the exception of certain roaming and equipment sales revenues,
based on the PCS revenues billed, as opposed to collected, by
Sprint, net of the 8% fee retained by Sprint. The cash settlements
received from Sprint are net of the 8% fee, customer credits,
account write offs and other billing adjustments. The Amended
Agreement only changes the timing of the Company's receipt of the
cash settlements from Sprint and does not change the Company's
recording of revenue.
The Company receives and pays travel fees for inter-market usage of
the network by Sprint wireless subscribers not homed in a market in
which they may use the service. Sprint and its PCS Affiliates pay
the Company for the use of its network by their wireless
subscribers, while the Company pays Sprint and its PCS Affiliates
reciprocal fees for Company subscribers using other segments of the
network not operated by the Company. The rates paid on inter-market
travel were reduced to $0.10 per minute as of January 1, 2002. The
rate in effect for 2004 and 2003 was $0.058 per minute and will
remain at this rate through December 31, 2006.
The Sprint agreements require the Company to maintain certain
minimum network performance standards and to meet other performance
requirements. The Company was in compliance in all material respects
with these requirements as of December 31, 2004.
Additional information regarding the Company's agreements with
Sprint is set forth in Note 7 of the Company's consolidated
financial statements and related notes thereto appearing elsewhere
in this report.
Shenandoah Cable Television Company
Shenandoah Cable Television Company provides coaxial cable-based
television service to approximately 8,600 customers in Shenandoah
County at December 31, 2004. The system is a 750 megahertz hybrid
fiber coaxial network. Shenandoah Cable currently offers 75 channels
of analog and 173 channels of digital programming along with pay per
view.
ShenTel Service Company
ShenTel Service Company sells and services telecommunications
equipment and provides information services and Internet access to
customers in the northern Shenandoah Valley and surrounding areas.
The Internet service has approximately 15,000 dial-up customers and
nearly 2,600 digital subscriber line, or DSL, customers at December
31, 2004. This subsidiary offers broadband Internet access via
asymmetric digital subscriber line, or ADSL, technology in
Shenandoah County, Virginia.
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Shentel Converged Services, Inc. and NTC Communications, LLC.
These subsidiaries provide bundles of high speed internet, cable
television and local and long distance voice services to residential
communities throughout the southeastern United States outside of
Shenandoah County.
Shenandoah Valley Leasing Company
Shenandoah Valley Leasing Company finances purchases of
telecommunications equipment by customers of the other subsidiaries,
particularly ShenTel Service Company.
Shenandoah Mobile Company
Shenandoah Mobile Company owns and leases tower space in the PCS
service territory in Virginia, West Virginia, Maryland and
Pennsylvania to Shenandoah Personal Communications Company and other
wireless communications providers. This subsidiary provides paging
service throughout the Virginia portion of the northern Shenandoah
Valley.
Shenandoah Long Distance Company
Shenandoah Long Distance Company principally offers resale of long
distance service for calls placed to locations outside the regulated
telephone service area. This operation purchases billing and
collection services from the telephone subsidiary similar to other
long distance providers. In addition, this subsidiary offers
facility leases of fiber optic capacity in surrounding counties, and
into Herndon, Virginia. This subsidiary had approximately 9,900
customers at December 31, 2004.
Shenandoah Network Company
This subsidiary owns and operates the Maryland and West Virginia
portions of a fiber optic network along the Interstate 81 corridor.
In conjunction with the telephone subsidiary, Shenandoah Network
Company is associated with the ValleyNet fiber optic network.
ShenTel Communications Company
This subsidiary is certified as a competitive local exchange
carrier, or CLEC, in Virginia and currently provides DSL service in
Front Royal, Virginia. Currently there are minimal subscribers
receiving service from this subsidiary.
Additional information concerning the operating segments is set
forth in Note 15 of the Company's consolidated financial statements
appearing elsewhere in this report.
Competition
The communications industry is highly competitive. We compete
primarily on the basis of the price, availability, reliability,
variety and quality of our offerings and on the quality of our
customer service. Our ability to compete effectively depends on our
ability to maintain high-quality services at prices generally equal
to or below those charged by our competitors. In particular, price
competition in the integrated communications services markets
generally has been intense and is expected to
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increase. Our competitors include, among others, larger providers
such as AT&T Corp., MCI and Verizon Wireless, as well as various
competitive carriers. The larger providers have substantially
greater infrastructure, financial, personnel, technical, marketing
and other resources, larger numbers of established customers and
more prominent name recognition than the Company. We also may
increasingly face competition from businesses offering long distance
data and voice services over the internet. These businesses could
enjoy a significant cost advantage because currently they generally
do not pay carrier access charges or universal service fees.
In some markets, we compete in the provision of local services
against the incumbent local telephone company. Incumbent carriers
enjoy substantial competitive advantages arising from their
historical monopoly position in the local telephone market,
including pre-existing customer relationships with all or virtually
all end-users. In addition, incumbent carriers are expected to
compete in each other's markets in some cases, which will increase
the competition we face. Wireless communications providers are
competing with wireline local telephone service providers, which
further increases competition.
Competition is intense in the wireless communications industry.
Competition has caused, and we anticipate that competition will
continue to cause, the market prices for two-way wireless products
and services to decline in the future. Our ability to compete
effectively will depend, in part, on our ability to anticipate and
respond to various competitive factors affecting the wireless
industry.
The recent emergence of service providers that use Voice Over
Internet Protocol applications also could present a competitive
threat. Because the regulatory status of Voice Over Internet
Protocol applications is largely unsettled, providers of such
applications may be able to avoid costly regulatory requirements,
including the payment of intercarrier compensation. This could
impede our ability to compete with these providers on the basis of
price. More generally, the emergence of new service providers will
increase competition, which could adversely affect our ability to
succeed in the marketplace for communications services.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the communications industry also could
increase the level of competition we face.
Regulation
Our operations are subject to regulation by the Federal
Communications Commission ("FCC"), the Virginia State Corporation
Commission ("VSCC"), and other federal, state, and local
governmental agencies. The laws governing these agencies, and the
regulations and policies that they administer, are subject to
constant review and revision, and some of these changes might have
material impacts on our revenues and expenses.
The discussion below focuses on the regulation of our wireless
subsidiary, Shenandoah Personal Communications Company, and our
incumbent local exchange carrier ("ILEC") subsidiary, Shenandoah
Telephone Company. Other lines of business (e.g., Shenandoah Cable
Company our cable television operations, and our competitive local
exchange carrier ("CLEC") business) are also subject to regulation,
but those described below are the most significant to the Company as
a whole. NTC Communications, LLC while providing voice and video
services, services only multi-dwelling unit communities and as a
result operates in a manner that generally does not subject it to
direct regulation.
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Regulation of Shentel's Wireless Operations
We operate our wireless business primarily using radio spectrum
licensed to Sprint under the Sprint management agreements.
Nonetheless, we are directly or indirectly subject to, or affected
by, a number of regulations and requirements of the FCC and other
governmental authorities.
Interconnection. The FCC has the authority to order interconnection
between commercial mobile radio service ("CMRS") providers (which
includes us) and any other common carrier. The FCC has ordered local
exchange carriers to provide reciprocal compensation to CMRS
providers for the termination of traffic. Under these rules, we
benefit from interconnection agreements negotiated by us, or by
Sprint (for our wireless network) on our behalf, with Verizon and
with several smaller independent local exchange carriers.
Interconnection agreements are negotiated on a statewide basis. If
an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to federal or state
regulators for arbitration. Negotiated interconnection agreements
are subject to state approval.
The FCC has underway a rulemaking proceeding in which the agency is
considering making major changes to the inter-carrier compensation
rules that govern the telecommunications industry. In addition, the
FCC is considering a number of petitions for declaratory ruling and
other proceedings regarding disputes among carriers relating to
interconnection payment obligations; resolutions of these petitions
could set precedents that would affect us in the future.
Interconnection costs represent a significant expense item for the
Company and any significant changes in the inter-carrier
compensation scheme may have a material impact on the Company. The
Company is unable to determine at this time whether any such changes
would be beneficial to or detrimental to the Company financially.
Universal Service Contribution Requirements. Sprint PCS is required
to contribute, based in part on the revenues it receives in
connection with our wireless operations, to the federal universal
service fund. The purpose of this fund is to subsidize
telecommunications services in rural areas, for low-income
consumers, and for schools, libraries, and rural healthcare
facilities. Sprint PCS is permitted to, and does, pass through these
mandated payments as surcharges paid by customers. The FCC is
considering a number of major changes to the universal service rules
that could affect us. For example, the FCC is considering possible
changes to the current rules, in which contribution obligations are
assessed as a variable percentage of interstate end-user
telecommunications revenues. The FCC could, instead, impose the
contribution obligations based on the number of telephone numbers,
the number of end-user connections, or on some other basis. The FCC
may also broaden the base of the fund by requiring Voice over
Internet Protocol providers and other service providers to make
contributions. The share of payments from wireless companies may
increase or decrease, and the overall size of the fund could well
increase. At the present time it is not possible to predict whether
and how these changes could affect the extent of our total federal
universal service assessments or our ability to recover costs
associated with the universal service fund.
In addition, payments are due based on revenues received in
connection with our wireless (and wireline) operations to funds that
support and maintain the Telecommunications Relay Fund, the North
American Numbering Plan, and to the FCC itself (regulatory fees).
Under our agreement with Sprint, Sprint is responsible for
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making these payments with respect to our wireless operations, and
is able to pass through the costs in surcharges paid by customers.
Transfers, Assignments and Changes of Control of PCS Licenses. The
FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS
license. The FCC also requires licensees to maintain effective
working control over their licenses. Our agreements with Sprint PCS
reflect an alliance that the parties believe meets the FCC
requirements for licensee control of licensed spectrum. If the FCC
were to determine that the Sprint PCS agreements need to be modified
to increase the level of licensee control, we have agreed with
Sprint PCS under the terms of our Sprint PCS agreements to use our
best efforts to modify the agreements as necessary to cause the
agreements to comply with applicable law and to preserve to the
extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be modified, the agreements may
be terminated pursuant to their terms. The FCC could also impose
sanctions on the Company.
Personal communication service licenses are granted for ten-year
periods. Licensees have an expectance of license renewal if they
have provided "substantial" performance and complied with FCC rules,
policies and the Communications Act.
Construction and Operation of Wireless Facilities. Wireless systems
must comply with certain FCC and Federal Aviation Administration
regulations regarding the registration, siting, marking, lighting
and construction of transmitter towers and antennas. The FCC also
requires that aggregate radio wave emissions from every site
location meet certain standards. These regulations also affect site
selection for new network build-outs and may increase the costs of
improving our network. The increased costs and delays from these
regulations may have a material adverse affect on our operations.
In addition, the FCC's decision to license a proposed tower may be
subject to environmental review pursuant to the National
Environmental Policy Act of 1969, or NEPA, which requires federal
agencies to evaluate the environmental impacts of their decisions
under certain circumstances. FCC regulations implementing NEPA place
responsibility on each applicant to investigate any potential
environmental effects, including health effects relating to radio
frequency emissions, of a proposed operation and to disclose any
significant effects on the environment to the agency prior to
commencing construction. In the event that the FCC determines that a
proposed tower would have a significant environmental impact, the
FCC would require preparation of an environmental impact statement.
In addition, tower construction is subject to regulations
implementing the Historic Preservation Act. Compliance with
environmental or historic preservation requirements could
significantly delay or prevent the registration or construction of a
particular tower or make tower construction more costly. In certain
jurisdictions, local laws or regulations may impose similar
requirements.
Wireless Facilities Siting. State and localities are authorize to
engage forms of regulation, including zoning and land-use
regulation, that affect the Company's ability to select and modify
sites for wireless facilities. States and localities may not engage
in forms of regulation that effectively prohibit the provision of
wireless services, discriminate among providers of such services, or
use radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC
is considering numerous requests for preemption of local actions and
other ongoing proceedings affecting wireless facilities siting.
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Enhanced 911. In order to enable wireless customers to dial 911 for
emergency medical or police assistance, and ensure that emergency
service providers will be able to locate the wireless user, the FCC
has required all wireless providers to provide enhanced 911
("E-911") in a two-phased process. In Phase I, wireless providers
are required to provide the cell site from which a wireless call has
been made and the caller's wireless phone number. The triggering
event for Phase I compliance is a request from a Phase I-enabled
Public Safety Answering Point ("PSAP"), after which a wireless
provider has six months to reach compliance. In Phase II, wireless
providers must be capable of transmitting precise automatic location
identification ("ALI") of subscribers by latitude and longitude with
a specified accuracy. The FCC has adopted a number of deadlines and
benchmarks for compliance with the Phase I and Phase II E-911
requirements. Sprint PCS has obtained conditional waivers of certain
of these requirements based on a modified deployment plan, which
includes a number of interim benchmarks and other conditions, and
would provide for completing Phase II enhanced 911 deployment by
2005. These waivers apply to our operations. To date we are in
compliance with the provisions of these rules and conditional
waivers.
Communications Assistance for Law Enforcement Act ("CALEA"). CALEA
was enacted in 1994 to preserve electronic surveillance capabilities
by law enforcement officials in the face of rapidly changing
telecommunications technology. CALEA requires telecommunications
carriers, including us, to modify their equipment, facilities, and
services to allow for authorized electronic surveillance based on
either industry or FCC standards. Following adoption of interim
standards and a lengthy rulemaking proceeding, including an appeal
and remand proceeding, as of June 30, 2002, all carriers were
required to be in compliance with the CALEA requirements. We are
currently in compliance with the CALEA requirements.
Local Number Portability. Since November 24, 2003, all covered CMRS
providers, including us, are required to allow customers in the 100
largest metropolitan areas to retain their existing telephone
numbers when switching from one telecommunications carrier to
another. These rules are generally referred to wireless local number
portability ("WLNP"). As of May 24, 2004, FCC regulations require
that such CMRS providers must implement WLNP outside the 100 largest
metropolitan areas in the United States as well. Given how recently
these rules were implemented, it is not yet clear whether and to
what extent the WLNP mandate has resulted in increased operating
costs, higher subscriber churn rates, or increased subscriber
acquisition and retention costs. In addition, we may be able to
obtain additional new customers that wish to change their service
from other wireless carriers as a result of wireless number
portability. The future volume of any porting requests, and the
processing costs related thereto, may increase our operating costs
in the future. Any of the above factors could have an adverse affect
on our competitive position, costs of obtaining new subscribers,
liquidity, financial position and results of operations. In
addition, in September 2004, the FCC issued a proposal to reduce the
mandatory time interval during which number porting must be
achieved. These proceedings, the outcomes of which cannot be
determined at this time, may have a material impact on the porting
obligations to which the Company is subject.
Number Pooling. The FCC regulates the assignment and use of
telephone numbers by wireless and other telecommunications carriers
to preserve numbering resources. CMRS providers in the top 100
markets are required to be capable of sharing blocks of 10,000
numbers among themselves in subsets of 1,000 numbers ("1000s-block
number pooling"). In addition, all CMRS carriers, including those
operating outside the top 100 markets, must be able to support
roaming calls on their network placed by users with pooled numbers.
Wireless carriers must also maintain detailed records of the numbers
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they have used, subject to audit. The pooling requirements may
impose additional costs and increase operating expenses on us and
limit our access to numbering resources.
Telecommunications Relay Services ("TRS"). Federal law requires
wireless service providers to take steps to enable the hearing
impaired and other disabled persons to have reasonable access to
wireless services. The FCC has adopted rules and regulations
implementing this requirement to which the Company is subject, and
requires the Company to pay a regulatory assessment to support TRS
for the disabled. The Company is in compliance with these
requirements.
Consumer Privacy. The Company is subject to various federal and
state laws intended to protect the privacy of end-users who
subscribe to the Company's services. For example, the FCC has
regulations that place certain restrictions on the permissible uses
that the Company can make of customer-specific information (known as
"Customer Proprietary Network Information" or "CPNI") received from
subscribers. In addition, the FCC is considering adopting
restrictions on the extent to which wireless data customers will be
subjected to receiving unsolicited junk e-mail or spam. One such
restriction, which became effective October 18, 2004, is the
prohibition of sending commercial messages to any address
referencing an internet domain name associated with wireless
subscriber messaging services and the requirement that all CMRS
providers must submit to the FCC a list of their internet domain
names that are associated with wireless subscriber messaging
services. Complying with these requirements may impose costs on us
or force us to alter the way we provide or promote our services.
Consumer Protection. Many members of the wireless industry,
including us, have voluntarily committed to comply with the CTIA
Consumer Code for Wireless, which includes consumer protection
provisions regarding the content and format of bills; advance
disclosures regarding rates, terms of service, contract provisions,
and network coverage; and the right to terminate service after a
trial period or after changes to contract provisions are
implemented. Both the FCC and the state commissions are considering
imposing additional consumer protection requirements upon wireless
service providers, and a number of regulatory proceedings are
pending. Any further changes to these requirements could increase
our costs of doing business and the costs of acquiring and retaining
customers.
Radio Frequency Emissions. Some studies (and media reports) have
suggested that radio frequency emissions from handsets, wireless
data devices and cell sites may raise various health concerns,
including cancer, and may interfere with various electronic medical
devices, including hearing aids and pacemakers. Most of the expert
reviews conducted to date have concluded that the evidence does not
support a finding of adverse health effects but that further
research is appropriate. Courts have dismissed a number of lawsuits
filed against other wireless service operators and manufacturers,
asserting claims relating to radio frequency transmissions to and
from handsets and wireless data devices. However, there can be no
assurance that the outcome of other lawsuits, or general public
concerns over these issues, will not have a material adverse effect
on the wireless industry, including the Company.
Incumbent Local Exchange Carrier Regulation
As an incumbent local exchange carrier ("ILEC"), Shenandoah
Telephone Company's operations are regulated by federal and state
regulatory agencies.
14
State Regulation. Shenandoah Telephone's rates for local exchange
service, intrastate toll service, and intrastate access charges are
subject to the approval of the Virginia State Corporation Commission
("VSCC"). The VSCC also establishes and oversees implementation of
the provisions of the federal and state telecommunications laws,
including interconnection requirements, promotion of competition,
and the deployment of advanced services. The VSCC also regulates
rates, service areas, service standards, accounting methods,
affiliated charge transactions and certain other financial
transactions.
Federal Regulation of Access Charges. Shenandoah Telephone
participates in the access revenue pools administered by the
FCC-supervised National Exchange Carrier Association ("NECA"), which
collects and distributes the revenues from interstate access charges
that long-distance carriers pay us for originating and terminating
interstate calls over our network. Shenandoah Telephone also
participates in certain NECA tariffs that govern the rates, terms,
and conditions of our interstate access offerings. Certain of those
tariffs are under review by the FCC, and we may be obligated to
refund certain access charges collected in the past or in the future
if the FCC ultimately finds that the tariffed rates were
unreasonable. We cannot predict whether, when, and to what extent
such refunds may be due.
The FCC is considering a number of broad possible changes to the
rules governing the interstate access rates charged by
small-to-midsize ILECs such as Shenandoah Telephone. For example,
the FCC is considering proposals to overhaul the rules regarding
inter-carrier compensation, including interstate and intrastate
access charges. These changes might include substantial reductions
in the access charges paid by long distance carriers - possibly to
zero, under a so-called "bill and keep" regime - accompanied by
increases to the subscriber line charges paid by business and
residential end users.
More narrowly, the FCC is also considering implementing
incentive-type regulation for rate of return carriers, including us.
The FCC is also considering additional questions regarding what
compensation wireless carriers, competitive local exchange carriers,
Voice over Internet Protocol providers, and providers of other
Internet-enabled services should pay (and receive) for their traffic
interconnected with ILECs networks. For example, the FCC recently
adopted policy changes that could increase the amounts of payments
from ILECs to competitive local exchange carriers that send traffic
to dial-up Internet service providers, and the FCC is considering
further changes to its policies governing these payments. These
changes are likely to increase our expenses, but at this time we
cannot estimate the amount of such additional expenses.
Interstate and intrastate access charges are an important source of
revenues for Shenandoah Telephone's operations. Unless these
revenues can be recovered through a new universal service mechanism,
or be reflected in higher rates to the local end user, or other
methods of cost recovery can be created, the loss of revenues could
be significant. There can be no assurance that access charges will
be continued or that sufficient substitutes for the lost revenues
will be provided. If access charges are reduced without sufficient
substitutes for the lost revenues, this could have a material
adverse effect on the Company's financial condition, results of
operations and cash flows. In addition, changes to the inter-carrier
compensation rules and policies could have a material impact on our
competitive position vis-a-vis other service providers.
Universal Service Fund. Shenandoah Telephone receives revenues from
the federal universal service fund ("USF"). As discussed above (in
the section on wireless regulation), the FCC is considering major
changes to the rules regarding carriers
15
mandated payments into the fund. In addition, the FCC is considering
potential changes to the rules governing disbursements from the
universal service fund to rural ILECs such as Shenandoah Telephone,
and to other providers. These rules are not likely to change until
July 2006, when the current plan governing USF disbursements to
rural ILECs (adopted in 2001) is set to expire. Despite interim
adjustments to make the funding more sustainable, the FCC has
indicated that additional changes are necessary to stabilize the
fund. Total federal funding has doubled since 1998, and some FCC
members and members of Congress have expressed concerns that it will
soon reach politically unacceptable levels. At the same time,
changes to the inter-carrier compensation rules that reduce levels
of access charges could be accompanied by increases in the universal
service fund. Changes in the universal service fund that reduce the
size of the fund and payments to Shenandoah Telephone could have a
material adverse impact on the Company's financial position, results
of operations, and cash flows.
All forms of federal USF support available to incumbent local
exchange carriers are now "portable" to any local competitor that
qualifies for support as an "eligible telecommunications carrier."
Recently, two wireless carriers - Nextel Partners and Virginia
Cellular - have received designation as eligible telecommunications
carriers in Shenandoah Telephone's service area. The FCC recently
adopted changes that make it somewhat more difficult for wireless
carriers and other prospective entrants to obtain designation as
eligible telecommunications carriers. The FCC and the Federal-State
Joint Board are also currently considering whether to change the
rules governing the amount of support to be disbursed to competitive
eligible telecommunications carriers, which could make it more or
less attractive for wireless carriers and other prospective entrants
to enter our Shenandoah Telephone service areas.
The FCC mandated that, effective October 1, 2004, the Universal
Service Administrative Company ("USAC") must begin accounting for
the USF program in accordance with generally accepted accounting
principles for federal agencies, rather than the accounting rules
that USAC formerly used. This accounting method change subjected
USAC to the Anti-Deficiency Act (the "ADA"), the effect of which
could have caused delays in USF payments to USF program recipients
and significantly increase the amount of USF regulatory fees charged
to wireline and wireless consumers. In December 2004, Congress
passed legislation to exempt USAC from the ADA for one year to allow
for a more thorough review of the impact the ADA would have on the
universal service program. It is likely that Congress will consider
additional changes to the USF program during 2005.
The FCC, USAC, and other authorities have expressed interest in
conducting more extensive audits of USF support recipients and
conducting other heightened oversight activities. The impact of
these activities on the Company, if any, is uncertain.
Other Regulatory Obligations. Shenandoah Telephone, like our
wireless operation, is subject to requirements relating to CALEA
implementation (to enable law enforcement agencies officers to
monitor and intercept telephone lines and otherwise assisting in
investigations), interconnection, access to rights of way number
portability (letting subscribers change to wireline and wireless
competitors' services without changing their telephone numbers),
number pooling (taking actions to preserve the available pool of
telephone numbers), and making telecommunications accessible for
those with disabilities, and other obligations. Many of these
requirements are discussed above in the section on regulation of
wireless operations.
16
Broadband Services. The FCC and other authorities continue to
consider policies to encourage nationwide advanced broadband
infrastructure development. For example, the FCC has largely
eliminated unbundling obligations relating to broadband facilities,
and has proposed to largely deregulate digital subscriber line and
other broadband services offered by ILECs. Such changes could
benefit our ILEC, but could also make it more difficult for us (or
for NECA) to tariff and pool digital subscriber line costs.
Long-Distance Services. Shentel, through its subsidiary, Shenandoah
Long Distance Company, provides long distance service to our
customers. Our long distance rates are not subject to FCC
regulation, but we are obligated to offer long-distance service
through a subsidiary other than Shenandoah Telephone, to disclose
our long distance rates on a website, to maintain geographically
averaged rates, to pay contributions to the universal service fund
and other mandatory payments based on our long-distance revenues,
and to comply with certain other filing and other requirements. We
are in compliance with these requirements.
Employees
At December 31, 2004, we had approximately 380 employees, of whom
approximately 345 were full-time employees. None of our employees is
represented by a union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is
good.
Websites and Additional Information
The Company maintains a corporate website at www.shentel.com. We
make available free of charge through our website our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such material
with or to the SEC. The contents of our website are not a part of
this report. In addition, the SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other
information regarding the Company
We also make available on our website, and in print to any
shareholder who requests them, copies of the charters of each
standing committee of our board of directors and our code of
business conduct and ethics. Requests for copies of these documents
may be directed to our Company Secretary at Shenandoah
Telecommunications Company, 500 Shentel Way, P.O. Box 459, Edinburg,
Virginia 22824. To the extent required by SEC rules, we intend to
disclose any amendments to our code of conduct and ethics, and any
waiver of a provision of the code with respect to the Company's
directors, principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, on our website referred to above within five
business days following any such amendment or waiver, or within any
other period that may be required under SEC rules from time to time.
Risk Factors
Our business and operations are subject to a number of risks and
uncertainties, including those set forth under "Recent Developments"
and the following:
Risks Related to the PCS Business
17
The performance of Shenandoah Personal Communications Company, our
largest operating subsidiary in terms of revenues and assets, may be
adversely affected by any interruption in Sprint's business.
We rely on Sprint's ongoing operations to continue to offer our PCS
subscribers the seamless national services that we currently
provide. Any interruption in Sprint's business could adversely
affect our results of operations, liquidity and financial condition.
Our business may suffer as a result of competitive pressures.
Our revenue growth is primarily dependent on the growth of the
subscriber base, average monthly revenues per user, travel and
roaming revenue. Competitive pressures may adversely affect our
ability to increase our future revenues at anticipated levels. A
continuation of competitive pressures in the wireless
telecommunications market has caused some major carriers to offer
plans with increasingly larger bundles of minutes of use at lower
prices that may compete with the Sprint wireless calling plans we
sell. Increased price competition may lead to lower average monthly
revenues per user than we anticipate. The current reciprocal travel
rate is effective through 2006. We anticipate that the rate may
decrease thereafter.
We may not be able to implement our business plan if our operating
costs are higher than we anticipate.
Increased competition may lead to higher promotional costs, losses
on sales of handsets and other costs to acquire subscribers.
Further, as described below under "Risks Related to Our Relationship
With Sprint," a substantial portion of costs of service and roaming
are attributable to fees and charges paid to Sprint for billing and
collection, customer care and other back-office support. Our ability
to manage costs charged by Sprint is limited. If these costs are
more than we anticipate, the actual amount of funds available to
implement our operating strategy and business plan may fall short of
our estimates.
The dynamic nature of the wireless market may limit management's
ability to quickly discern causes of volatility in key operating
performance measures.
Our business plan and estimated future operating results are based
on estimates of key operating performance measures, including
subscriber growth, subscriber turnover (commonly known as churn),
average monthly revenue per subscriber, losses on sales of handsets
and other subscriber acquisition costs and other operating costs.
The dynamic nature of the wireless market, economic conditions,
increased competition in the wireless telecommunications industry,
new service offerings by Sprint or competitors of increasingly
larger bundles of minutes of use at lower prices, and other issues
facing the wireless telecommunications industry in general have
created a level of uncertainty that may adversely affect our ability
to predict these key measures.
We may experience a high rate of subscriber turnover, which could
adversely affect our future financial performance.
The wireless personal communications services industry in general,
including the operations of Sprint and its PCS Affiliates, has
experienced a rate of churn higher than past cellular industry
average rates. We experienced a relatively consistent churn rate in
2003 and 2004. Our 2005 business plan assumes that our churn rate
will remain fairly stable under existing operating conditions.
Because of significant competition in the
18
industry and general economic conditions, among other factors, this
stability may not occur and the future rate of subscriber turnover
may be higher than rates in recent periods. Factors that may
contribute to higher churn include the following:
o inability or unwillingness of subscribers to pay,
which would result in involuntary deactivations;
o subscriber mix and credit class, particularly an
increase in sub-prime credit subscribers;
o competition of products, services and pricing of
other providers;
o inadequate network performance and coverage
relative to that provided by competitors in our
service area;
o inadequate customer service;
o increased prices; and,
o any future changes by Sprint and/or the Company in
the products and services offered.
A high rate of subscriber turnover could increase the costs and
losses we incur in obtaining new subscribers, especially because,
consistent with industry practice, we subsidize some of the costs
related to the purchases of handsets by subscribers.
The allowance for doubtful accounts is an estimate and may not be
sufficient to cover uncollectible accounts.
On an ongoing basis, we estimate the amount of subscriber
receivables that will not be collectible based on historical results
and actual write-offs reported by Sprint. The allowance for doubtful
accounts may underestimate actual unpaid receivables for various
reasons, including the following:
o the churn rate may exceed estimates;
o bad debt as a percentage of service revenues may
increase rather than remain consistent with
historical trends;
o general economic conditions may worsen; or
o there may be unanticipated changes in Sprint's
wireless products and services.
If the allowance for doubtful accounts is insufficient to cover
losses on receivables, our liquidity and financial condition could
be impaired.
Travel revenue, which is the fee paid to us by Sprint and the other
Sprint Affiliates when their customers use our network, could be
less than we anticipate, which could adversely affect our liquidity,
financial condition and results of operations.
The net balance of PCS travel revenue and expense could change
significantly due to changes in service plan offerings, changes in
the travel settlement rate, changes in travel
19
habits by the subscribers in the Company's market areas or other
Sprint subscribers and numerous other factors beyond the Company's
control.
We may incur significantly higher wireless handset subsidy costs
than we anticipate for existing subscribers who upgrade to a new
handset.
As our subscriber base matures, and technological innovations occur,
we anticipate that existing subscribers will continue to upgrade to
new wireless handsets. To discourage customer defections to
competitors, we subsidize a portion of the price of wireless
handsets and in some cases incur sales commissions for handset
upgrades. If more subscribers upgrade to new wireless handsets than
we project, our results of operations would be adversely affected.
If we do not continue to subsidize the cost of the handsets for
handset up-grades, subscribers could choose to deactivate the
handsets and move to other carriers.
If we are unable to secure additional tower sites or leases to
install equipment to expand the wireless coverage, or are unable to
renew expiring leases, the level of service we provide could be
adversely affected.
Many of our cell sites are co-located on leased tower facilities
shared with one or more wireless providers. A large portion of these
leased tower sites are owned by a limited number of companies. If
economic conditions affect the leasing company, our lease may be
affected and the ability to remain on the tower at reasonable rates
could be jeopardized, which could leave areas of our service area
without service and increase customer turnover.
Risks Related to the Wireless Industry
Media reports have suggested that certain radio frequency emissions
from wireless handsets may be linked to various health problems,
including cancer, and may interfere with various electronic medical
devices, including hearing aids and pacemakers. Concerns over radio
frequency emissions may discourage use of wireless handsets or
expose us to potential litigation. Any resulting decrease in demand
for wireless services, costs of litigation or damage awards could
impair our ability to sustain profitable operations.
Regulation by government or potential litigation relating to the use
of wireless phones while driving could adversely affect results of
our wireless operations. Some studies have indicated that some
aspects of using wireless phones while driving may impair drivers'
attention in certain circumstances, making accidents more likely.
These concerns could lead to litigation relating to accidents,
deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use. A number of U.S. states and local
governments are considering or have recently enacted legislation
that would restrict or prohibit the use of a wireless handset while
driving a vehicle or, alternatively, require the use of a hands-free
telephone. Legislation of this nature, if enacted, may require
wireless service providers to supply to their subscribers hands-free
enhanced services, such as voice activated dialing and hands-free
speaker phones and headsets, so that they can keep generating
revenue from their subscribers, who make many of their calls while
on the road. If we are unable to provide hands-free services and
products to subscribers in a timely and adequate fashion, the volume
of wireless phone usage would likely decrease, and the ability of
our wireless operations to generate revenues would suffer.
Risks Related to the Telecommunications Industry
20
Intensifying competition in all segments of our business may limit
our ability to sustain profitable operations.
As new technologies are developed and deployed by competitors in our
service area, some of our subscribers may select other providers'
offerings based on price, capabilities and personal preferences.
Most of our competitors possess greater resources, have more
extensive coverage areas, and offer more services than we do. If
significant numbers of our subscribers elect to move to other
competing providers, or if market saturation limits the rate of new
subscriber additions, we may not be able to sustain profitable
operations.
Alternative technologies, changes in the regulatory environment and
current uncertainties in the marketplace may reduce future demand
for existing telecommunication services.
The telecommunications industry is experiencing significant
technological change, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology,
shorter development cycles for new products and enhancements and
changes in end-user requirements and preferences. Technological
advances and industry changes could cause the technology we use to
become obsolete. We and our vendors may not be able to respond to
such changes and implement new technology on a timely basis, or at
an acceptable cost.
A recession in the United States or adverse economic conditions in
our market area involving significantly reduced consumer spending
could have a negative impact on our results of operations.
Our customers are individual consumers and businesses that provide
goods and services to others, and are located in a relatively
concentrated geographic area. An economic downturn on a national
scale or in our market could depress consumer spending and harm our
operating performance.
Regulation by government and taxing agencies may increase our costs
of providing service or require changes in services, either of which
could impair our financial performance.
Our operations are subject to varying degrees of regulation by the
Federal Communications Commission, the Federal Trade Commission, the
Federal Aviation Administration, the Environmental Protection
Agency, and the Occupational Safety and Health Administration, as
well as by state and local regulatory agencies. Action by these
regulatory bodies could negatively affect our operations and our
costs of doing business. For example, changes in tax laws or the
interpretation of existing tax laws by state and local authorities
could increase income, sales, property or other tax costs.
Risks Related to the Company's Relationship with Sprint
The termination of our affiliation with Sprint would severely
restrict our ability to conduct the wireless business.
We do not own the licenses to operate our PCS network. Our ability
to offer Sprint wireless products and services and operate a PCS
network is dependent on continuation of the agreements we have with
Sprint. Our management agreement with Sprint will be automatically
renewed at the expiration of the 20-year initial term, which ends in
2019,
21
for an additional 10-year period and two subsequent 10-year periods
unless we are in material default. Either Sprint or the Company may
choose not to renew the management agreement at the expiration of
any the renewal terms by giving at least two years prior notice. If
neither Sprint nor the Company exercises this right, the agreement
will terminate in 2049.
Each of our agreements with Sprint may be terminated by Sprint for
our breach of any material term, including, among others, marketing,
build-out and network operational requirements. Many of these
requirements are technical and detailed in nature. In addition, many
of these requirements may be changed by Sprint with little notice.
As a result, we may not always be in compliance with all
requirements of the Sprint agreements. The non-renewal or
termination of any of the Sprint agreements or the failure of Sprint
to perform its obligations under the Sprint agreements would
severely restrict our ability to conduct business.
Sprint may make business decisions that are not in our best
interests, which may adversely affect our relationships with
subscribers in our territory, increase our expenses and/or decrease
our revenues.
Under its agreements with us, Sprint has a substantial amount of
control over the conduct of our PCS business. Accordingly, Sprint
may make decisions that could adversely affect our PCS business,
such as the following:
o Sprint could price its national plans based on its own
objectives and could set price levels or other terms
that may not be economically advantageous for us;
o Sprint could develop products and services, or establish
credit policies, which could adversely affect our
results of operations;
o subject to limitations under our agreements, Sprint
could raise the costs to perform certain services or
maintain the costs above those we expect, reduce levels
of services, or otherwise seek to increase expenses and
other amounts charged;
o Sprint may reduce the reciprocal travel rate charged
when subscribers of Sprint or its PCS Affiliates use our
network after 2006;
o subject to limitations under our agreements, Sprint
could alter its network and technical requirements or
request us to build out additional areas within our
territories, which could result in increased equipment
and build-out costs; or
o Sprint could make decisions that could adversely affect
the Sprint brand names, products or services.
The occurrence of any of the foregoing events could harm our
business by adversely affecting our relationship with wireless
subscribers in our territories and damaging our reputation.
Our dependence on Sprint for services may limit our ability to
forecast operating results.
Our dependence on Sprint injects a degree of uncertainty into our
business and financial planning. We may, at times, disagree with
Sprint concerning the applicability, calculation approach or
accuracy of Sprint-supplied revenues and expenses. It is our
22
policy to reflect the information supplied by Sprint in our
financial statements for the applicable periods and to make
corrections, if any, no earlier than the period in which Sprint and
we agree to the corrections.
Inaccuracies in data provided by Sprint could overstate or
understate our expenses or revenues and result in out-of-period
adjustments that may adversely affect our financial results.
Because Sprint provides billing and collection services for us,
Sprint remits a significant portion of our total revenues. We rely
on Sprint to provide accurate, timely and sufficient data and
information to enable us to record properly revenues, expenses and
accounts receivable, which underlie a substantial portion of our
financial statements and other financial disclosures. We and Sprint
have previously discovered billing and other errors or inaccuracies,
which, while not material to Sprint, could be material to us. If we
are required in the future to make additional adjustments or incur
charges as a result of errors or inaccuracies in data provided by
Sprint, such adjustments or charges could materially affect our
financial results for the period with respect to which the
adjustments are made or charges are incurred. Such adjustments or
charges could require restatement of our financial statements.
We are subject to risks relating to Sprint's provision of back
office services, changes in products, services, plans and programs.
Any failure by Sprint to provide high quality back office services
could lead to subscriber dissatisfaction, increased churn or
otherwise increased costs. We rely on Sprint's internal support
systems, including customer care, billing and back office support.
Our operations could be disrupted if Sprint is unable to provide and
expand its internal support systems in a high quality manner, or to
efficiently outsource those services and systems through third-party
vendors.
Changes in Sprint's PCS products and services may reduce subscriber
additions, increase subscriber turnover and decrease subscriber
credit quality. The competitiveness of Sprint's PCS products and
services is a key factor in our ability to attract and retain
subscribers.
Sprint's roaming arrangements to provide service outside of the
Sprint National Network may not be competitive with other wireless
service providers, which may restrict our ability to attract and
retain subscribers and may increase our costs of doing business.
We rely on Sprint's roaming arrangements with other wireless service
providers for coverage in some areas where Sprint service is not yet
available. If customers are not able to roam quickly or efficiently
onto other wireless networks, we may lose current subscribers and
Sprint wireless services may be less attractive to new subscribers.
The risks related to our roaming arrangements include the following:
o the quality of the service provided by another provider
during a roaming call may not approximate the quality of
the service provided by the Sprint PCS network;
o the price of a roaming call off network may not be
competitive with prices of other wireless companies for
roaming calls;
23
o subscribers must end a call in progress and initiate a
new call when leaving the Sprint PCS network and
entering another wireless network;
o customers may not be able to use Sprint's advanced
features, such as voicemail notification, while roaming;
and
o Sprint or the carriers providing the service may not be
able to provide accurate billing information on a timely
basis.
Some provisions of the Sprint agreements may diminish the value of
our common stock and restrict or diminish the value of our business.
Under limited contractual circumstances, Sprint may purchase the
operating assets of our PCS operation at a discount. In addition,
Sprint must approve any assignment of the Sprint agreements by us.
Sprint also has a right of first refusal to purchase our PCS
operating assets if we decide to sell those assets to a third party.
These restrictions and other restrictions contained in the Sprint
agreements could adversely affect the value of our common stock, may
limit our ability to sell the foregoing assets on advantageous
terms, may reduce the value a buyer would be willing to pay, and may
reduce the "entire business value," as described in the Sprint
agreements.
We may have difficulty in obtaining an adequate supply of certain
handsets from Sprint.
PCS depends on the Company's relationship with Sprint to obtain
handsets. Sprint orders handsets from various manufacturers. We
could have difficulty obtaining specific types of handsets in a
timely manner if:
o Sprint does not adequately project the need for handsets
for itself, its PCS Affiliates and its other third-party
distribution channels, particularly in transition to new
technologies;
o Sprint gives preference to other distribution channels;
o we do not adequately project our need for handsets;
o Sprint modifies its handset logistics and delivery plan
in a manner that restricts or delays access to handsets;
or
o there is an adverse development in the relationship
between Sprint and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt subscribers'
service or result in a decrease in our subscribers.
If Sprint does not continue to enhance its nationwide digital
wireless network, we may not be able to attract and retain
subscribers.
Our PCS operations are dependent on Sprint's national network and on
the networks of Sprint's other Affiliates. Sprint's digital wireless
network may not provide nationwide coverage to the same extent as
the networks of its competitors, which could adversely affect our
ability to attract and retain subscribers. Sprint currently intends
to cover a significant portion of the population of the United
States, Puerto Rico and the U.S.
24
Virgin Islands by creating a nationwide network through its own
construction efforts and those of its PCS Affiliates. Sprint is
still constructing its nationwide network and does not offer PCS
services, either on its own network or through its roaming
agreements, in every part of the United States. Sprint has entered
into management agreements similar to its agreement with us with
companies in other markets under its nationwide digital wireless
build-out strategy.
If other PCS Affiliates of Sprint have financial difficulties or
cease operating, or if Sprint's PCS licenses are not renewed or are
revoked, our PCS business would be harmed.
Sprint's national digital wireless network is a combination of
networks. The large metropolitan areas are owned and operated by
Sprint, and the areas in between them are generally owned and
operated by Sprint PCS Affiliates, all of which are independent
companies. If other PCS Affiliates experience financial
difficulties, Sprint's digital wireless network could be disrupted.
Although Sprint may have the right operate the network in the
affected territory, there can be no assurance that the transition
would occur in a timely and effective manner. In addition, we do not
have the ability to require other PCS Affiliates to pay amounts due
for travel in our market areas by subscribers of such other PCS
Affiliates. We rely on Sprint to enforce the payment obligations of
such PCS Affiliates.
Non-renewal or revocation by the FCC of Sprint's PCS licenses would
significantly harm us. Wireless spectrum licenses are subject to
renewal and revocation by the FCC. There may be opposition to
renewal of Sprint's PCS licenses upon their expiration, and Sprint's
PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. Any failure by Sprint to
comply with these standards could cause revocation or forfeiture of
Sprint's PCS licenses. conduct business.
If Sprint does not maintain control over its licensed spectrum, our
Sprint agreements may be terminated, which would render us unable to
continue providing service to our subscribers.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters, which occupies a
60,000-square foot building in Edinburg, Virginia. The Company also
owns a 24,000-square foot building in Edinburg that houses the
Company's main switching center and technical staff, a 10,000-square
foot building in Edinburg used for customer services and retail
sales, a 6,000-square foot service building outside of the town
limits of Edinburg and a 10,000-square foot building in Winchester,
Virginia used for both the Company's retail sales and office space
and rental space to a non-affiliated tenant.
The Company owns eight telephone exchange buildings that are located
in the major towns and some of the rural communities that are served
by the regulated telecommunications operations. These buildings
contain switching and fiber optic equipment and associated local
exchange telecommunications equipment. The Company has fiber optic
hubs or points of presence in Hagerstown, Maryland; Ashburn,
Berryville, Edinburg, Front Royal, Harrisonburg, Herndon, Leesburg,
Stephens City, Warrenton and Winchester, Virginia; and Martinsburg,
West Virginia.
The Company leases a warehouse, office space and an operations area
in Pennsylvania to support the network and sales efforts in the
central Pennsylvania market. The Company also leases office space in
Harrisonburg and Blacksburg, Virginia, and retail
25
space in Harrisonburg and Front Royal, Virginia, Hagerstown,
Maryland, Martinsburg, West Virginia and Harrisburg, Mechanicsburg,
and York, Pennsylvania. The Company leases land, buildings and tower
space in support of its PCS operations. As of December 31, 2004, the
Company had 271 sites, including sites on property owned by the
Company. The leases for the foregoing land, buildings and tower
space expire on various dates between 2005 and 2043. For information
about these leases, see Note 13 to the consolidated financial
statements appearing elsewhere in this report.
The Company plans to lease additional land, equipment space, and
retail space in support of the ongoing PCS expansion.
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, 2004.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASERS OF EQUITY SECURITIES
The Company's stock is traded on the Nasdaq National Market under the symbol
"SHEN." The following table shows the high and low sales prices per share of
common stock as reported by the Nasdaq National Market for each quarter during
the last two years:
2004 High Low
---- ---- ---
Fourth Quarter $34.69 $23.99
Third Quarter 27.27 22.70
Second Quarter 30.71 22.37
First Quarter 27.36 21.91
2003 High Low
---- ---- ---
Fourth Quarter $27.50 $18.63
Third Quarter 26.37 18.88
Second Quarter 25.00 13.90
First Quarter 24.75 13.58
All share and per share figures are restated to reflect the 2-for-1 stock split
effected February 23, 2004.
As of February 23, 2005, there were approximately 4,129 holders of record of the
Company's common stock.
Shenandoah Telecommunications Company historically has paid an annual cash
dividend on or about December 1 of each year. The cash dividend was $0.43 per
share in 2004 and $0.39 per share in 2003. Dividends are paid to Shenandoah
Telecommunications Company shareholders from dividends paid to it by its
operating subsidiaries. The terms of a loan agreement between Shenandoah
Telephone Company and Rural Utility Service require the subsidiary to maintain
defined amounts of equity and working capital after payment of dividends to the
holding company. Approximately $400,000 of the subsidiary's retained earnings
were available for payment of dividends at December 31, 2004. The foregoing loan
agreement is not expected to limit dividends in amounts that Shenandoah
Telecommunications Company historically has paid to its shareholders.
27
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data as of December 31, 2004,
2003, 2002, 2001 and 2000 and for each of the five years ended December 31,
2004.
The selected financial data as of December 31, 2004, 2003 and 2002 and for each
of the years in the three-year period ended December 31, 2004 are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this report.
The selected financial data as of December 31, 2001 and 2000 and for the years
ended December 31, 2001 and 2000 are derived from the Company's financial
statements which have been audited.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes thereto appearing
elsewhere in this report.
(Dollar figures in thousands, except per share data.)
2004 2003 2002 2001 2000
---------- ----------- ----------- ---------- ----------
Operating Revenues $ 120,974 $ 105,617 $ 92,720 $ 68,722 $ 44,426
Operating Expenses 101,349 86,989 83,382 62,298 39,048
Interest Expense 3,129 3,510 4,195 4,127 2,936
Income Taxes (Benefit) 6,078 5,304 (2,109) 5,811 2,975
Income (Loss) from Continuing
Operations $ 10,243 $ 9,761 $ (2,893) $ 9,694 $ 5,091
Discontinued Operations, net of tax -- 22,389 7,412 6,678 4,764
Cumulative effect of a change in
accounting, net of tax -- (76) -- -- --
Net Income 10,243 32,074 4,519 16,372 9,855
Total Assets 211,247 185,364 164,004 167,372 152,585
Long-term Obligations 52,291 43,346 52,043 56,436 55,487
Shareholder Information
Number of Shareholders 4,116 3,930 3,954 3,752 3,726
Shares Outstanding 7,629,810 7,592,768 7,551,818 7,530,956 7,518,462
Income (Loss) per share from
Continuing Operations-diluted $ 1.34 $ 1.28 $ (0.38) $ 1.28 $ 0.68
Income per share from
Discontinued Operations-diluted -- 2.94 0.98 0.88 ..63
Loss per share from cumulative effect of
a change in accounting -- (0.01) -- -- --
Net Income per share-diluted 1.34 4.22 0.60 2.17 1.31
Cash dividends per share $ 0.43 $ 0.39 $ 0.37 $ 0.35 $ 0.33
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E 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 legislative and regulatory conditions.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances, except as required by
law.
General
Shenandoah Telecommunications Company is a diversified telecommunications
company providing both regulated and unregulated telecommunications services
through ten wholly owned subsidiaries. These subsidiaries provide local exchange
telephone services, wireless personal communications services (PCS), as well as
cable television, paging, Internet access, long distance, fiber optics
facilities, and leased tower facilities. The Company is the exclusive provider
of wireless mobility communications network products and services on the 1900
MHz band under the Sprint brand from Harrisonburg, Virginia to Harrisburg, York
and Altoona, Pennsylvania. The Company refers to the Hagerstown, Maryland;
Martinsburg, West Virginia; and Harrisonburg and Winchester, Virginia markets as
its Quad State markets. The Company refers to the Altoona, Harrisburg, and York,
Pennsylvania markets as its Central Penn markets. Competitive local exchange
carrier (CLEC) services were established on a limited basis during 2002. In
addition, the Company sells and leases equipment, mainly related to services it
provides, and also participates in emerging services and technologies by direct
investment in non-affiliated companies. As a result of the NTC Communications,
L.L.C.(NTC) acquisition, the Company, through its newly created subsidiary
Shentel Converged Services, provides local and long distance voice, cable
television, internet and data services on an, at times, exclusive basis to
multi-dwelling unit (MDU) communities (primarily off-campus student housing)
throughout the southeastern United States including Virginia, North Carolina,
Maryland, South Carolina, Georgia, Florida, Tennessee and Mississippi.
The Company reports revenues as wireless, wireline and other revenues. These
revenue classifications are defined as follows: Wireless revenues are made up of
revenues from the Personal Communications Company (a PCS Affiliate of Sprint),
and the Mobile Company. Wireline revenues include revenues from the Telephone
Company, Network Company, Cable Television Company, Converged Services and the
Long Distance Company. Other revenues are comprised of the revenues of ShenTel
Service Company, the Leasing Company, ShenTel Communications Company, the
Holding Company and the data services revenue from Converged Services. For
additional information on the Company's business segments, see Note 15 to the
audited consolidated financial statements appearing elsewhere in this report.
The Company operations require substantial investment in fixed assets or plant.
This significant capital requirement may preclude profitability during the
initial years of operation. The strategy of the Company is to grow and diversify
the business by adding services and geographic areas that can leverage the
existing plant, but to do so within the opportunities and constraints presented
by the industry. For many years the Company focused on reducing reliance on its
regulated telephone operation, which up until 1981 was the only significant
business within the Company. This initial diversification was concentrated in
other wireline businesses, such as the cable television and regional fiber
facility businesses. In 1990 the Company made its first significant investment
in the wireless sector through its former investment in the Virginia 10 RSA
Limited partnership. By 1998, revenues of the regulated telephone operation had
decreased to 59.2% of total revenues. In that same year more than 76.6% of the
Company's total revenue was generated by wireline operations, and initiatives
were already underway to make wireless a more significant contributor to total
revenues.
During the 1990's significant investments were made in the cellular and PCS
(wireless) businesses. The VA 10 RSA cellular operation, in which the Company
held a 66% interest and was the general partner, experienced rapid revenue
growth and excellent margins in the late 1990's. The cellular operation covered
only six counties, and became increasingly dependent on roaming revenues.
Management believed the roaming revenues and associated margins would be
unsustainable as other wireless providers increasingly offered
nationally-branded services with significantly reduced usage charges. To
position it to participate in the newer, more advanced, digital wireless
services, in 1995 the Company entered the PCS business through an affiliation
with American Personal Communications (APC), initiating service along the
Interstate 81 corridor from Harrisonburg, Virginia to Chambersburg,
Pennsylvania. This territory was
29
a very close match to the Company's fiber network, thereby providing economic
integration that might not be available to other wireless carriers. In 1999, the
Company entered a new affiliation arrangement with Sprint, the successor to APC
thereby becoming part of a nationally branded wireless service and expanded the
PCS footprint further into Central Pennsylvania.
The growing belief that national branding was critical to our wireless
operations, the expectation that roaming revenues from our analog cellular
operation would not continue to grow, and the increase in the number of wireless
competitors in our markets, prompted the Company to exit the cellular business
in order to focus on our PCS operations. The Company entered into an agreement
on November 21, 2002, to sell its 66% ownership interest in the Virginia 10 RSA
cellular operation which was classified as a discontinued operation. The closing
occurred February 28, 2003. The Company received $37.0 million in proceeds,
including $5.0 million in escrow for two years and $1.7 million for working
capital. The $5.0 million was released from escrow in February 2005.
In 2004, the Company continued its profitable growth. The PCS operation
contributed $80.2 million of revenue, a $13.4 million or 20% increase compared
to 2003. PCS net income of $2.9 million for the year ended 2004 is a $2.6
million improvement over 2003. Churn was 2.2%, comparable to the same period
last year. The NTC acquisition provided for growth in the fourth quarter of 2004
as well as a driver for future growth as the Company continues to diversify away
from its traditional wireline business. The Company had approximately 17,700
internet customers of which 2,646 access the service through Digital Subscriber
Lines (DSL) for an increase of 104% over the same period in 2003.
Additional Information About the Company's Business
(unaudited)
Three Month Period Ended Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31,
2004 2004 2004 2004 2003
----------------------------------------------------------------------
Telephone Access Lines 24,691 24,818 24,867 24,901 24,877
CATV Subscribers 8,631 8,684 8,709 8,701 8,696
Internet Subscribers dial-up 15,051 15,817 16,422 17,063 17,420
DSL Subscribers 2,646 2,152 1,856 1,637 1,298
Retail PCS Subscribers 102,613 98,053 94,475 89,632 85,139
Wholesale PCS Users (1) 27,337 19,603 18,059 16,349 12,858
Paging Subscribers 1,595 1,684 1,782 1,862 1,989
Long Distance Subscribers 9,918 9,719 9,559 9,542 9,526
Fiber Route Miles 557 554 554 552 552
Total Fiber Miles 28,830 28,771 28,770 28,743 28,740
Long Distance Calls (000) (2) 6,265 6,117 6,228 5,821 5,851
Total Switched Access Minutes (000) 66,449 63,867 60,874 58,099 55,932
Originating Switched Access MOU (000) 18,870 18,596 18,280 18,252 17,829
Employees (full time equivalents) 374 303 284 272 268
CDMA Base Stations (sites) 271 261 257 257 253
Towers (100 foot and over) 80 78 78 78 77
Towers (under 100 foot) 11 10 10 11 11
NTC properties served (3) 107 -- -- -- --
PCS Market POPS (000) (4) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) (4) 1,629 1,611 1,610 1,585 1,581
PCS Ave. Monthly Churn % (5) 2.2% 2.2% 1.9% 2.2% 2.00%
December 31, 2004
----------------------
Telephone CATV
PLANT FACILITY STATISTICS(6) ----------------------
Route Miles 2,177 558
Customers Per Route Mile 11 15
Miles of Distribution Wire 601 166
Telephone Poles 7,662 36
Miles of Aerial Copper Cable 330 163
Miles of Buried Copper Cable 1,340 360
Miles of Underground Copper Cable 39 2
Fiber Optic Cable-Fiber Miles 262 --
Inter-toll Circuits to Interexchange Carriers 1,790 --
Special Service Circuits to Interexchange Carriers 345 --
30
(1) - Wholesale PCS Users are private label subscribers with numbers homed in
the Company's wireless network service area.
(2) - Originated by customers of the Company's Telephone subsidiary.
(3) - NTC properties served refers to multi-unit housing facilities with NTC
services provided.
(4) - POPS refers to the estimated population of a given geographic area and
is based on information purchased by Sprint from Geographic Information
Services. Market POPS are those within a market area which the Company is
authorized to serve under its Sprint agreements, and Covered POPS are
those covered by the network's service area.
(5) - PCS Ave Monthly Churn is the average of three monthly calculations of
deactivations (excluding returns less than 30 days) divided by beginning
of period subscribers.
(6) - Excludes NTC
Significant Transactions
Reflected in the 2004 results are several unusual items, which should be noted
in understanding the financial results of the Company for 2004.
On November 30, 2004, the Company purchased the 83.9% of NTC that it did not
already own for $10 million and the assumption of NTC's existing debt. The
results of NTC's operations have been included in the consolidated financial
statements since the purchase date.
On January 30, 2004, the Company, a PCS Affiliate of Sprint, signed agreements
with Sprint that resolved disputed items and documented changes in the
management and operating agreements between the two companies related to the
operations of the nationwide Sprint PCS network. The agreements provide the
Company with the ability to better estimate the future costs of certain
operating expenses and in the Company's opinion improve the contract between
Sprint and itself. Under the agreements:
1. For the period 2004 through 2006, the travel and reseller rates
between the Company and Sprint were set at $0.058 per minute for
voice and $0.002 per kilobyte for data. Without this agreement the
voice travel rate for 2004 would have decreased to $0.041. Since the
Company is in a net receivable position related to travel with
Sprint, the impact on net travel and reseller revenue would have
been a reduction of $1.4 million had the $0.041 rate been in effect
in 2004. Beginning in 2007, the Sprint travel and reseller rate will
be changed annually to equal 90% of Sprint's retail yield from the
prior year. Sprint's retail yield will be determined based on
Sprint's average revenue per PCS user for voice services divided by
the average minutes of use per user.
2. Sprint agreed to meet certain service level goals related to the
provision of customer services. If Sprint does not reach the stated
goals before the end of 2006, the Company will have the opportunity
to either provide the services itself or contract with a third
party.
3. Sprint agreed to provide back office and network services through
2006 at a fixed rate per subscriber per month of $7.70.
4. Through 2006, a methodology is provided to determine if the Company
is required to make certain capital expenditures and participate in
Sprint national marketing programs.
5. Effective January 1, 2004, the method of cash settlement changed
from Sprint distributing cash from customers based on collected
revenue to billed revenue. The absolute amount of cash received by
the Company should remain the same, but the Company should receive
cash on a more timely basis.
31
6. The Company is entitled to a Most Favored Nations (MFN) clause.
During the period through 2006, the Company will have the
opportunity to adopt any addendum to the Management and/or Service
Agreements that Sprint signs with another PCS Affiliate.
The Management and Services Agreements were further amended in May 2004, Under
the terms of the May amendment, the Company has agreed to participate in all new
and renewed reseller agreements signed through December 31, 2006. Additionally,
the Company signed a letter of agreement to participate in all existing Sprint
reseller arrangements applicable to the Company's service area. In consideration
for this participation, the Company received a reduction in the monthly fee per
subscriber paid to Sprint for back office services and certain network services.
The reduction per subscriber per month is $0.45 in 2004, $0.70 in 2005 and $0.95
in 2006, from the amounts agreed upon in the management agreement amendment
dated January 2004.
Beginning in November 2003 and continuing through 2004, the Company has
undergone a management reorganization. The reorganization was in recognition of
the Company's growth and changes in the telecom industry. The Company shifted
from an organization structure that was focused on lines of business to a plan
that organizes on function. As a result, the Company has expanded the senior
staff and corresponding departments to better position itself for future
opportunities.
Summary
The Company's three major lines of business are wireless, wireline and other
businesses. Each of the three areas has unique issues and challenges that are
critical to the understanding of the operations of the Company. The wireless
business is made up of two different operations, the PCS operation and the tower
business. The wireline business is made up of traditional telephone operations,
a cable TV operation, fiber network leasing, a company that resells
long-distance and beginning December 2004, NTC Communications which provides
voice and video. Other business includes the Company's Internet operation, the
Interstate 81 corridor Travel 511 project and the sales and service of
telecommunications systems.
The PCS operation must be understood within the context of the Company's
relationship with Sprint and its PCS Affiliates. The Company operates its PCS
wireless network as an affiliate of Sprint. The Company receives revenues from
Sprint for subscribers that obtain service in the Company's network coverage
area and those subscribers using the Company's network when they travel. The
Company relies on Sprint to provide timely, accurate and complete information
for the Company to record the appropriate revenue and expenses for the periods
reflected.
The Company's PCS business has operated in a net travel receivable position for
several years. The Company received $6.0 million in net travel revenue in 2004,
compared to $6.0 million in 2003, and $5.8 million in 2002. This relationship
could change due to service plan changes, subscriber travel habit changes, a
rate reduction after 2006 and other changes beyond the control of the Company.
Through Sprint, the Company began receiving revenue from wholesale resellers of
wireless PCS service in late 2002. These resellers pay a flat rate per minute of
use for all traffic their subscribers generate on the Company's network. The
Company's cost to handle this traffic is the incremental cost to provide the
necessary network capacity.
The Company faces vigorous competition in the wireless business as numerous
national carriers are aggressively marketing their services in the Company's
markets. The competitive landscape could change significantly depending on the
marketing initiatives of our competitors, or in the event of consolidation in
the wireless industry.
The wireline business is made up of traditional telephony, cable TV, fiber
network operations, the Company's long-distance resale business and NTC
Communications. The Company's primary service area for the telephone, cable TV
and long-distance business is Shenandoah County, Virginia. The county is a rural
area in northwestern Virginia, with a population of approximately 37,300
inhabitants, which has increased by approximately 2,200 since 2000. While a
number of new housing developments are being planned for the northern portion of
Shenandoah County, the potential for significant numbers of additional wireline
customers in the Shenandoah County operating area is limited. NTC Communications
provides local and long distance voice, cable television, internet and data
services on an, at times, exclusive basis to multi-dwelling unit communities
throughout the southeastern United States including Virginia, North Carolina,
Maryland, South Carolina, Georgia, Florida, Tennessee and Mississippi.
The Company's telephone subscriber count declined in the third quarter and again
in the fourth quarter of 2004. Migration to wireless and DSL services are
believed to be driving this change. Based on industry experience, the
32
Company anticipates this trend may continue for the foreseeable future, although
the planned construction of new homes within Shenandoah County may moderate this
trend.
Other revenues include Internet services, both dial-up and DSL high-speed
service. The Company has seen a decline in dial-up subscriptions over the last
year. The DSL service has grown 100% in the last year driven by customer desire
for faster Internet connections.
The Company is facing competition for revenues it generates in the other lines
of business, which will require the Company to differentiate itself from other
providers through its service levels and evolving technologies that are more
reliable and cost effective for customers.
CRITICAL ACCOUNTING POLICIES
The Company relies on the use of estimates and makes assumptions that impact its
financial condition and results. These estimates and assumptions are based on
historical results and trends as well as the Company's forecasts as to how these
might change in the future. The most critical accounting policies that
materially impact the Company's results of operations include:
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are
based on historical collection and write-off experience, current trends, credit
policies, and the analysis of the accounts receivable by aging category. In
determining these estimates, the Company compares historical write-offs in
relation to the estimated period in which the subscriber was originally billed.
The Company also looks at the historical average length of time that elapses
between the original billing date and the date of write-off and the financial
position of its larger customers in determining the adequacy of the allowance
for doubtful accounts. From this information, the Company assigns specific
amounts to the aging categories. The Company provides an allowance for
substantially all receivables over 90 days old.
The allowance for doubtful accounts balance as of December 31, 2004, 2003 and
2002 was $0.4 million, $0.5 million and $0.9 million, respectively. If the
allowance for doubtful accounts is not adequate, it could have a material
adverse effect on our liquidity, financial position and results of operations.
The Company also reviews current trends in the credit quality of the subscriber
bases in its various businesses and periodically changes its credit policies. As
of December 31, 2004, the Sprint PCS subscriber base in the Company's market
area consisted of 15.0% sub-prime credit quality subscribers compared to 17.9%
at December 31, 2003, a decline of 2.9%. In the fourth quarter of 2004, the
Company identified several target markets where it has loosened its credit
policies to evaluate the impact on increasing sales. This policy change has
generated additional activations and is being closely monitored. This could
result in additional bad debt in the future, but management believes the added
revenues offset the bad debt risk.
The remainder of the Company's receivables are associated with services provided
on a more localized basis, where the Company exercises total control in setting
credit policy parameters. Historically there have been limited losses generated
from the non-PCS revenue streams. Prior to 2002, the Company had not faced
significant write-offs of inter-carrier accounts, but due to the
telecommunication industry down-turn in 2002, the Company experienced write-offs
in this area of the business totaling $0.5 million in 2002, due to bankruptcy
filings of several significant telecommunications companies. In 2004 and 2003,
the inter-carrier segment of the business improved and the Company recovered
$113 thousand and $240 thousand, respectively, of bad debt from the sale of
certain accounts that were previously written-off.
Bad debt expense summary, net of recoveries for the three years ended December
31, 2004:
In thousands
2004 2003 2002
-------------------------------
PCS subscribers $ 1,560 $ 1,716 $ 3,744
Interexchange carriers (71) 48 488
Other subscribers and entities 82 71 170
-------------------------------
Total bad debt expense $ 1,571 $ 1,835 $ 4,402
===============================
33
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition polices are consistent with the
guidance in Staff Accounting Bulletin ("SAB") No. 101, as amended by SAB 104,
Revenue Recognition in Financial Statements promulgated by the Securities and
Exchange Commission, and the Emerging Issues Task Force ("EITF") 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). Effective July 1, 2003
the Company adopted EITF 00-21. The EITF guidance addresses how to account for
arrangements that may involve multiple revenue-generating activities, i.e., the
delivery or performance of multiple products, services, and/or rights to use
assets. In applying this guidance, separate contracts with the same party,
entered into at or near the same time, will be presumed to be a bundled
transaction, and the consideration will be measured and allocated to the
separate units based on their relative fair values. The consensus guidance was
applicable to new PCS service agreements entered into for quarters beginning
July 1, 2003. The adoption of EITF 00-21 required evaluation of each arrangement
entered into by the Company for each sales channel. The Company will continue to
monitor arrangements with its sales channels to determine if any changes in
revenue recognition will need to be made in the future. The adoption of EITF
00-21 has resulted in substantially all of the PCS activation fee revenue
generated through Company-owned retail stores and associated direct costs being
recognized at the time the related wireless handset is sold and it is classified
as equipment revenue and cost of equipment, respectively. Upon adoption of EITF
00-21, previously deferred PCS revenue and costs will continue to be amortized
over the remaining estimated life of a subscriber, not to exceed 30 months. PCS
revenue and costs for activations at other retail locations and through other
sales channels will continue to be deferred and amortized over their estimated
lives as prescribed by SAB 101. The adoption of EITF 00-21 in 2003, had the
effect of increasing equipment revenue by $68 thousand and increasing costs of
equipment by $23 thousand, which otherwise would have been deferred and
amortized.
The Company records equipment revenue from the sale of handsets and accessories
to subscribers in its retail stores and to local distributors in its territories
upon delivery. The Company does not record equipment revenue on handsets and
accessories purchased by subscribers in the Company's territories from national
third-party retailers or those provided by Sprint. The Company believes the
equipment revenue and related cost of equipment associated with the sale of
wireless handsets and accessories is a separate earnings process from the sale
of wireless services to subscribers. For competitive marketing reasons, the
Company usually sells wireless handsets at prices lower than the cost. In
certain instances the Company may offer larger handset discounts as an incentive
for the customer to agree to a multi-year service contract. The Company also
sells wireless handsets to existing customers at a loss and accounts for these
transactions separately from agreements to provide customers wireless service.
These transactions are viewed as a cost to retain the existing customers and
deter churn.
For the Company's wireless customers that purchase and activate their service
through a channel not covered by EITF 00-21, the wireless customers generally
pay an activation fee to the Company when they initiate service. The Company
defers the activation fee revenue (except when a special promotion reduces or
waives the fee) over the average life of its subscribers, which is estimated to
be 30 months. The Company recognizes service revenue from its subscribers as
they use the service. The Company provides a reduction of recorded revenue for
billing adjustments and a fee of 8% that is retained by Sprint. The Company also
reduces recorded revenue for rebates and discounts given to subscribers on
wireless handset sales at Company owned retail stores in accordance with
("EITF") Issue No. 01-9 "Accounting for Consideration Given by a Vendor to a
Subscriber (Including a Reseller of the Vendor's Products)." The Company
participates in the Sprint national and regional distribution programs in which
national retailers sell Sprint wireless products and services. In order to
facilitate the sale of Sprint wireless products and services, national retailers
purchase wireless handsets from Sprint for resale and receive compensation from
Sprint for Sprint wireless products and services sold. For industry competitive
reasons, Sprint subsidizes the price of these handsets by selling the handsets
at a price below cost. Under the Company's agreements with Sprint, when a
national retailer sells a handset purchased from Sprint to a subscriber in the
Company's territories, the Company is obligated to reimburse Sprint for the
handset subsidy. The Company does not receive any revenues from the sale of
handsets and accessories by national retailers. The Company classifies these
handset subsidy charges as a cost of goods expense.
Sprint retains 8% of billed revenues from subscribers based in the Company's
markets and from non-Sprint wholesale subscribers who roam onto the Company's
network. The amount of affiliation fees retained by Sprint is recorded as an
offset to the revenues recorded. Revenues derived from the sale of handsets and
accessories by the Company and from certain roaming services (outbound roaming
and travel revenues from Sprint and its PCS Affiliate subscribers) are not
subject to the 8% affiliation fee from Sprint.
34
The Company defers direct subscriber activation costs on subscribers whose
activation falls within the SAB 101, as amended by SAB 104,guidelines. The
activation costs are deferred when incurred, and then amortized using the
straight-line method over 30 months, which is the estimated average life of a
subscriber. Direct subscriber activation costs also include the activation
charge from Sprint, and credit check fees. These fees are charged to the Company
by Sprint at approximately $12.92 per subscriber.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company evaluates the recoverability of tax assets generated
on a state-by-state basis from net operating losses apportioned to that state.
Management uses a more likely than not threshold to make that determination and
has established a valuation allowance against the tax assets, in case they are
not recoverable. For 2004, the Company's valuation allowance decreased $0.1
million due to the improved operating performance of the Company's PCS segment.
The valuation allowance now stands at $0.7 million as of December 31, 2004.
Management will evaluate the effective rate of taxes based on apportionment
factors, the Company's operating results, and the various state income tax
rates. Currently, management anticipates the future effective income tax rate to
be approximately 38%.
Other
The Company does not have any unrecorded off-balance sheet transactions or
arrangements, however, the Company has commitments under operating leases and is
subject to certain capital calls under one of its investments.
Results of Continuing Operations
2004 compared to 2003
Total revenue was $121.0 million in 2004, an increase of $15.4 million or 14.5%.
Total revenues included $83.2 million of wireless revenues, an increase of $13.6
million or 19.5%; wireline revenues of $30.7 million, an increase of $1.7
million or 5.7%; and other revenues of $7.1 million, an increase of $0.1 million
or 1.2 %.
Within wireless revenues, the PCS operation contributed $80.2 million, an
increase of $13.4 million, or 20.0%. PCS service revenues were $52.3 million, an
increase of $7.9 million or 17.7%. Service revenue growth was driven by the
increase in subscribers, totaling 102,613 at December 31, 2004, an increase of
17,474 or 20.5%, compared to 85,139 subscribers at year-end 2003. The Company
had churn of 2.2% in 2004 compared to 2.1% in 2003 which is essentially
unchanged and reflects the Company's maintenance of tight credit screening for
new subscribers as well as continued efforts to improve the after sales support.
Competition in the wireless industry continues to have a significant impact on
the results of the Company's PCS operation.
PCS travel revenue, including reseller revenue, which is compensation between
Sprint and its PCS Affiliates for use of the other party's network, was $22.0
million, an increase of $5.2 million or 31.1%. Travel revenue is impacted by the
geographic size of the Company's network service area (which increased by 18
cell sites in 2004) , the overall number of Sprint and Sprint affiliate retail
wireless customers, their travel patterns and the travel exchange rate. The rate
received on travel was $0.058 per minute in 2004,the same rate per minute as
2003. As a part of the amended management agreement signed on January 30, 2004,
Sprint and the Company agreed to maintain the reciprocal travel rate at $0.058
per minute through December 31, 2006.
PCS equipment sales were $3.2 million, an increase of $1.4 million or 73.9%. The
equipment sales at Company stores are net of $2.9 million of rebates and
discounts given at the time of sale. Rebates and discounts continue to be
required to meet significant industry competition for subscriber additions and
subscriber retention. These discounts and rebates are primarily transacted in
the form of instant rebates, providing a second phone free when a customer
purchases one or offering deep discounts.
Wireless revenues included tower leases of $2.9 million, an increase of $0.3
million or 11.3%. The increase was the result of other wireless carriers
executing additional leases to use space on the Company's portfolio of towers
and
35
increasing lease rates. Of the 91 towers and poles owned by the Company as of
December 31, 2004, 53 towers have a total of 143 tenants, compared to 52 towers
with 130 tenants at the end of 2003.
Wireless revenues from the Company's paging operation were $0.2 million, a
decrease of $0.06 million as the customer base increasingly chose alternative
wireless services. Paging service subscribers declined by 19.8% in 2004 from
1,989 subscribers to 1,595 subscribers. The paging operation continues to
decline as more areas are covered by wireless voice services which have features
that surpass those of paging technologies. The Company anticipates that its
paging customer base will continue to decline in the future.
Within wireline revenues, the Telephone operation contributed $23.7 million, an
increase of $1.0 million, or 4.4%. Telephone access revenues were $13.2 million,
an increase of $1.6 million or 13.8%. During 2003, the Company recorded a $1.2
million reduction to access revenue, of which $0.7 million was related to
resolving 2002 disputes with interexchange carriers on the rating of long
distance calls transiting the Telephone switching network for termination on
wireless networks. The NTC acquisition's contribution to wireline revenues was
$0.5 million in 2004, including $0.2 million in voice services revenue and $0.3
million in cable television revenue.
The following table shows the access traffic minutes of use recorded by the
telephone operations for the two years of 2004 and 2003.
Minutes of use (in thousands) 2004 2003
(net of intercompany usage) --------------------------------------------------------------
Originating Terminating Originating Terminating
--------------------------------------------------------------
Interstate 43,293 115,542 29,373 87,539
Intrastate 29,333 59,739 37,190 49,103
--------------------------------------------------------------
Total 72,626 175,281 66,563 136,642
==============================================================
Access revenue (in thousands) 2004 2003
(net of intercompany usage) --------------------------------------------------------------
As reported Pro forma As reported Pro forma
--------------------------------------------------------------
Traffic sensitive (1) $ 5,506 $ 5,506 $ 4,274 $ 4,974
Special access revenues 1,778 1,778 1,606 1,606
Carrier common line settlement 5,969 5,969 5,750 5,750
--------------------------------------------------------------
Total $ 13,253 $ 13,253 $ 11,630 $ 12,330
==============================================================
(1) For 2003, traffic sensitive revenue has been adjusted in the proforma column
to remove the impact of the access billing dispute adjustment and the impact of
the NECA settlement adjustments.
Facility lease revenue contributed $5.1 million to wireline revenues, a decrease
of $0.4 million or 7.8%. The decrease was primarily the result of the prolonged
decline of lease rates associated with competitive pricing pressures.
Long distance, billing and collection services and other revenues contributed
$1.2 million to wireline revenues, a decrease of $0.2 million compared to 2003
results. Revenues from these services has declined in recent years as wireless
users are making long distance calls on their wireless phones and interexchange
carriers now issue a greater proportion of their bills directly to their
customers.
Wireline revenues from cable television services were $4.4 million in 2004 and
2003.In January 2005, the Company raised its cable television services rates by
$6 per month for all non-basic subscribers primarily to offset higher
programming costs.
Other revenues, primarily consisting of Internet service and revenues from the
511 Virginia contract, were $7.1 million in 2004, an increase of $0.1 million or
1.2%. The Company had 15,051 dial-up Internet subscribers at December 31, 2004,
compared to 17,420 at the end of the previous year. During 2004, the Company's
DSL high-speed Internet access subscriber count increased to 2,646 from 1,298.
Total Internet service revenue was $4.9 million, an increase of $0.5 million or
10.1%. The 511Virginia contract with the Virginia Department of Transportation
contributed $1.2 million to other revenues, a decrease of $0.1 million or 11.1%.
The 511 Virginia contract expired in February 2005. Telecommunications equipment
sales, services and lease revenues were $0.9 million, which reflects a $0.2
million decrease from 2003 results. NTC contributed $0.3 million in data
services revenue.
36
Total operating expenses were $101.3 million, an increase of $14.4 million or
16.5%. The primary drivers in the increase in operating expenses are continued
growth in the PCS operation, an increase in the number of employees and higher
compliance costs to fulfill Sarbanes-Oxley requirements.
Cost of goods and services was $15.8 million, an increase of $2.4 million or
18.0%. The PCS cost of goods sold was $11.6 million, an increase of $1.6 million
or 15.6%. This change is due primarily to higher volumes of handsets sold
through Company owned stores and PCS handset subsidies paid to third-party
retailers. In 2004, the Company recorded approximately $2.1 million in handset
costs related to existing subscribers upgrading their handsets, an increase of
$1.2 million or 142%. The cost of handset up-grades sold to existing customers
is expected to increase as the customer base matures and handset manufacturers
introduce new technologies in new handsets. The cable television programming
(cost of service) expense was $2.0 million, an increase of $0.4 million or
21.2%. The Company has seen continuing upward pressure on the cost of cable TV
programming by cable TV program providers. The cost of providing the Company's
Shentel Pages directory increased $0.4 million due to an expanded distribution
area in 2004.
Network operating costs were $36.2 million, an increase of $4.4 million or
13.9%. The largest item in network operating costs is travel expense. These
costs made up 39.7% and 33.8% of the total network and other costs in 2004 and
2003, respectively. Travel expense is the cost of minutes used by the Company's
PCS subscribers on Sprint or other Sprint Affiliates' networks. Travel expense
in 2004 was $14.4 million, an increase of $3.6 million due to a significant
increase in travel minutes in 2004. The travel rate for 2004 was $0.058 and did
not change from 2003. Our PCS customers increased their average monthly travel
minutes by 26% compared to 2003. In 2003, the average customer's travel usage
was 159 minutes per month and in 2004 that average travel usage increased to 179
minutes per month.
Network infrastructure maintenance costs were $10.2 million or 28.1% of total
network operating costs, an increase of $0.1 million from 2003. Rent for towers,
tower sites, and buildings increased $0.1 million or 1.4 % to $4.4 million. Rent
increases plus the increase in the number of sites leased contributed to the
increase. Line costs in 2004 were $6.2 million or 17.1% of the network operating
costs, consistent with 2003 results.
Depreciation and amortization expense was $19.0 million, an increase of $2.4
million or 14.4%. The decrease in the estimated useful lives of certain asset
classes resulted in a $0.5 million increase in depreciation expense in 2004. The
PCS operation had depreciation expense of $11.9 million, an increase of $1.7
million or 16.3%. The 18 additional PCS base stations placed in service during
2004 resulted in higher depreciation expense for the year. In the telephone
operation, depreciation increased $0.4 million or 9.3%, due to new assets
deployed in the operation and a change in the estimated useful lives of certain
assets.
Selling, general and administrative expenses were $30.3 million an increase of
$5.0 million or 19.8%. The 2004 results include $1.3 million of additional
employee expenses and over $1.1 million of expenses to support compliance with
Sarbanes-Oxley regulations. Other costs including pension expense of $0.3
million, insurance expense of $0.1 million, $0.6 million in commissions paid in
PCS due to increased phone sales and $0.3 for NTC's operations.
Bad debt expense decreased $0.3 million to $1.6 million or 14.4%. This decrease
was due to a continuation of the credit terms for new PCS subscribers (limiting
the high credit risk customers who obtained service) and improvement in the
interexchange carrier segment of the business. This expense is net of normal
recoveries and includes a recovery of $113 thousand for an interexchange carrier
settlement the Company received in 2004 which was written off in 2002. In 2004,
the Company identified several target markets to loosen its credit policies to
evaluate the impact on increasing sales. This policy change has generated
additional activations and is being closely monitored.
Operating income grew to $19.6 million, an increase of $1.0 million or 5.4%. The
Company's operating margin was 16.2%, compared to 17.6% in 2003, a decrease of
1.4%, due primarily to increases in network operating costs and selling, general
and administrative expenses.
Other income (expense) is comprised of non-operating income and expenses,
interest expense and gain or loss on investments. Collectively, the net impact
of these items to pre-tax income was an expense of $3.3 million for 2004,
compared to expense of $3.6 million from 2003.
Interest expense was $3.1 million, a decrease of $0.4 million or 10.9%.
Long-term debt (inclusive of current maturities), was $52.8 million at year-end
2004, versus $43.3 million at year-end 2003. Long term debt includes $13 million
incurred in the November 30, 2004 acquisition of NTC.
37
Net losses on investments were $0.2 million, compared to a loss of $.04 million
from 2003. See Note 3 to the consolidated financial statements.
Non-operating income was a gain of $0.03 million, a decrease of $0.4 million,
primarily due to a $0.9 million loss on the disposal of PCS base stations in a
network upgrade, offset by $0.5 million increase in dividend income.
The Company provided for income taxes of $6.1 million in 2004, which is an
effective tax rate of 38%. Last year's effective tax rate was 35.2% due to the
effect of state tax apportionment rules and reduction in the liability for tax
purposes. The Company currently operates in ten states. Due to apportionment
rules and geographic operations of subsidiaries where the Company's profits and
losses arise, the Company is generating profits in states with lower tax rates,
while generating losses in states with higher tax rates. The Company cautions
readers that the current effective tax rate may not be the same rate at which
tax benefits or tax expenses are recorded in the future. The Company's state
apportionments, profits and losses and state tax rates may change, therefore
changing the effective rate at which taxes are provided for or at which tax
benefits accrue. In the near term, under existing operating results and current
tax rates, the Company anticipates its future effective tax rate will be
approximately 38%.
Net income from continuing operations was $10.2 million, an increase of $0.7
million from 2003. The results are primarily made up of the improvement in the
PCS operation.
Income from discontinued operations was $22.4 million in 2003. The income from
discontinued operations in 2003 includes the sale of the partnership interest in
February 2003 and results from the two months of its operations in 2003. There
was no income or loss from discontinued operations in 2004.
The Company adopted FAS 143 "Accounting for Asset Retirement Obligations."
effective January 1, 2003, and as a result recorded a charge to earnings for the
cumulative effect of this change in accounting of $76 thousand after taxes.
Net income was $10.2 million, a decrease of $21.7 million or 68%. The decrease
is primarily the result of $22.4 million in income from discontinued operations
recorded in 2003. See Note 2 to the consolidated financial statements.
DISCONTINUED OPERATIONS
The Company invested $2.0 million in the Virginia 10 RSA limited partnership in
the early 1990's. The partnership's local customer base peaked in early 2000
with nearly 12,000 subscribers, then steadily declined to 6,700 by December 31,
2002. The decline was the result of competition with digital technologies and
increased competition from national carriers. As a result of the decline in the
subscriber base, and the need for extensive capital expenditures to transform
the analog network into a digital cellular network, the Company elected to sell
its 66% interest in the partnership to one of the minority partners. The
agreement was signed in November 2002, and closing was February 28, 2003. The
Company's portion of the net income from its operations for 2003 and 2002 was
$1.2 million and $7.4 million, respectively. There was no net income or loss
from discontinued operations in 2004.
CONTINUING OPERATIONS
2003 compared to 2002
Total revenue was $105.6 million in 2003, an increase of $12.9 million or 13.9%.
Total revenues included $69.6 million of wireless revenues, an increase of $12.0
million or 20.9%; wireline revenues of $29.0 million, an increase of $0.3
million or 0.9%; and other revenues of $7.0 million, an increase of $0.6 million
or 9.7%.
Within wireless revenues, PCS operation contributed $66.8 million, an increase
of $11.6 million, or 21.0%. PCS service revenues were $44.4 million, an increase
of $10.9 million or 32.4%. Service revenue growth was driven by the increase in
subscribers, totaling 85,139 at December 31, 2003, an increase of 17,297 or
25.5%, compared to 67,842 subscribers at year-end 2002. The company had churn of
2.1% in 2003 compared to 2.8% in 2002. The decline in the churn rate is the
result of tightening the credit screening for new subscribers as well as
continued efforts to improve the after sales support. Competition in the
wireless industry continues to have a significant impact on the results of the
Company's PCS operation.
PCS travel revenue, including reseller revenue, which is compensation between
Sprint and its PCS Affiliates for use of the other party's network, was $16.8
million, an increase of $0.3 million or 1.8%. Travel revenue is impacted by the
geographic size of the Company's network service area, the overall number of
Sprint wireless customers, their travel
38
patterns and the travel exchange rate. The rate received on travel was $0.058
per minute in 2003, compared to $0.10 per minute in 2002. As a part of the
amended management agreement signed on January 30, 2004, Sprint and the Company
agreed to maintain the travel rate at $0.058 per minute through December 31,
2006.
PCS equipment sales were $1.8 million, an increase of $0.4 million or 32.2%. The
equipment sales are net of $2.1 million of rebates and discounts given at the
time of sale. Rebates and discounts continue to be required to meet significant
industry competition for subscriber additions and subscriber retention. These
discounts and rebates are primarily transacted in the form of instant rebates,
providing a second phone free when a customer purchases one, or providing free
phones if the subscriber signs up for a specific contract term and a specific
service plan.
In accordance with Sprint's requirements, the Company launched third generation
(3G 1X) wireless service in August 2002 The impact of 3G 1X-network enhancements
on revenues became more pronounced in 2003, as use of new 3G services and
features generated approximately $1.0 million for the year, compared to $0.2
million in 2002. The growth in 3G revenue is the result of more subscribers on
3G plans and the increase in popularity of camera phones during 2003.
Wireless revenues included tower leases of $2.6 million, an increase of $0.5
million or 24.8%. The increase was the result of other wireless carriers leasing
additional space on the Company's portfolio of towers. Of the 88 towers and
poles owned by the Company as of December 31, 2003, 52 towers have one or more
external tenants, compared to 46 towers with external tenants at the end of
2002.
Wireless revenues from the Company's paging operation were $0.2 million, a
decrease of $0.1 million as the customer base increasingly chose alternative
wireless services. Paging service subscribers declined by 32.3% in 2003 from
2,940 subscribers to 1,989 subscribers. The paging operation continues to
decline as more areas are covered by wireless voice services which have features
that surpass those of paging technologies. The Company anticipates that its
paging customer base will continue to decline in the future.
Within wireline revenues, the Telephone operation contributed $22.7 million, an
increase of $0.3 million, or 1.2%. Telephone access revenues were $11.1 million,
an increase of $0.2 million or 1.6%. During 2003, the Company recorded a $1.2
million reduction to access revenue, of which $0.7 million was related to 2002,
resolving disputes with interexchange carriers on the rating of long distance
calls transiting the Telephone switching network for termination on wireless
networks.
Originating access revenue increased in 2003 due in part to a shift from
interstate to intrastate traffic. On similar traffic volume in both years, the
Company generated an additional $0.4 million due to a favorable rate
differential of $0.03 per minute on the increase in the mix of intrastate
traffic. The Company's increased access revenue was also a result of the benefit
gained through handling more minutes through the switch, which increased 36.0
million minutes or 35.7% over 2002. The rates for terminating traffic were
similar in both years, although the percentage of terminating traffic to total
traffic increased from 58% in 2002 to 65% in 2003.
The shift in originating traffic is the result of implementing software capable
of identifying actual interstate and intrastate traffic specifically delivered
to the wireline switch, where previously usage was allocated between interstate
and intrastate traffic types by the interexchange carriers.
39
The following table shows the access traffic minutes of use for the two years of
2003 and 2002.
Minutes of use (in thousands) 2003 2002
(net of intercompany usage) --------------------------------------------------------------
Originating Terminating Originating Terminating
--------------------------------------------------------------
Interstate 29,373 87,539 42,929 63,959
Intrastate 37,190 49,103 22,684 36,712
--------------------------------------------------------------
Total 66,563 136,642 65,613 100,671
==============================================================
Access revenue (in thousands) 2003 2002
(net of intercompany usage) --------------------------------------------------------------
As reported Pro forma As reported Pro forma
--------------------------------------------------------------
Traffic sensitive (1) $ 4,274 $ 4,974 $ 4,676 $ 3,976
Special access revenues 1,606 1,606 1,247 1,247
Carrier common line settlement 5,750 5,750 4,978 4,978
--------------------------------------------------------------
Total $ 11,630 $ 12,330 $ 10,901 $ 10,201
==============================================================
(1) Traffic sensitive revenue has been normalized in the proforma column to
remove the impact of the access billing dispute adjustment and the impact of the
NECA settlement adjustments.
Facility lease revenue contributed $5.5 million to wireline revenues, a decrease
of $0.2 million or 3.5%. The decrease was primarily the result of the prolonged
decline of lease rates associated with competitive pricing pressures and the
economic downturn in the telecommunications industry. During 2002 the Company
completed a second, diverse fiber route to its existing interconnection point in
the Dulles airport area of Northern Virginia. This fiber route provides
increased reliability for customers in the event of fiber cuts or breaks, and
extends the availability of the Company's fiber network to additional market
locations.
Billing and collection services and other revenues contributed $0.4 million to
wireline revenues, which was the same as 2002 results. Revenues from this
service had declined in recent years, with interexchange carriers now issuing a
greater proportion of their bills directly to their customers.
Wireline revenues from cable television services were $4.4 million, an increase
of $0.1 million or 1.7%. The number of subscribers and service plan prices
remained relatively constant during 2003.
Other revenues, primarily consisting of Internet and 511Virginia service
revenues were $5.8 million in 2003, an increase of $0.7 million or 13.5%. The
Company had 17,420 dial-up Internet subscribers at December 31, 2003, compared
to 18,050 at the end of the previous year. During 2003, the Company's DSL
high-speed Internet access subscriber count increased to 1,298 from 646. Total
Internet service revenue was $4.5 million, an increase of $0.3 million or 10.7%.
The 511Virginia contract with the Virginia Department of Transportation
contributed $1.3 million to other revenues, an increase of $0.4 million or
41.3%. Telecommunications equipment sales, services and lease revenues were $1.1
million, which reflects a $0.1 million decrease from 2002 results.
Total operating expenses were $87.0 million, an increase of $3.6 million or
4.3%. The primary driver in the increase in operating expenses is continued
growth in the PCS operation somewhat offset by a significant decline in bad debt
expense compared to 2002.
Late in 2003, the Company made an employee benefits policy change, which
eliminated the requirement for the Company to accrue a vacation liability in
advance of the year in which the benefit was used. The result of this change was
a reduction of benefit expense of $0.5 million for the year compared to 2002.
Benefit expenses impact all operating departments based on the amount of direct
labor charged to the department. The change has a one-time impact on the
financial statements of the Company. The benefits policy now provides that
employees earn and use their paid time off in the same period. In the future,
under this policy unused hours up to a prescribed limit can be banked but only
used for extended illness, not carried over for use as vacation.
Cost of goods and services was $13.4 million, an increase of $1.7 million or
14.5%. The PCS cost of goods sold was $10.1 million, an increase of $1.4 million
or 16.2%. This change is due primarily to higher volumes of handsets sold
through Company owned stores and PCS handset subsidies paid to third-party
retailers. In 2003, the Company recorded approximately $1.8 million in handset
costs related to existing subscribers upgrading their handsets. Prior to
40
2003, the Company did not track the specific costs related to subsidizing new
handsets to existing customers. The cost of handset up-grades sold to existing
customers is expected to increase as the customer base matures and handset
manufacturers introduce new features. The cable television programming (cost of
service) expense was $1.6 million, an increase of $0.2 million or 16.3%. The
Company has seen continuing upward pressure on the cost of cable TV programming
by cable TV program providers.
Network operating costs were $31.8 million, an increase of $0.5 million or 1.6%.
The largest item in network operating costs is travel expense. These costs made
up 33.8% and 34.2% of the total network and other costs in 2003 and 2002,
respectively. Travel expense is the cost of minutes used by the Company's PCS
subscribers on Sprint or other Sprint Affiliates' networks. Travel expense in
2003 was $10.8 million, an increase of $0.1 million due to a significant
increase in travel minutes in 2003 which was offset by the impact of the rate
decline. The travel rate declined from $0.10 per minute in 2002 to $0.058 per
minute in 2003. Our PCS customers increased their average monthly travel minutes
by 22% compared to 2002. In 2002, the average customer's travel usage was 130
minutes per month and in 2003 that average travel usage increased to 159 minutes
per month.
Network infrastructure maintenance costs were $4.9 million or 15.5% of total
network operating costs, a decrease of $0.2 million from 2002. Rent for towers,
tower sites, and buildings increased $0.9 million or 27.3% to $4.2 million.
Lease escalators plus the increase in the number of sites leased contributed to
the increase. Line costs in 2003 were $8.0 million or 25.2% of the network
operating costs, an increase of $0.1 million.
Depreciation and amortization expense was $16.6 million, an increase of $2.1
million or 14.8%. The PCS operation had depreciation expense of $10.2 million,
an increase of $1.6 million or 18.9%. The 16 additional PCS base stations placed
in service during 2003 resulted in higher depreciation expense for the year. In
the telephone operation, depreciation increased $0.5 million or 12.6%, due to
new assets deployed in the operation. There was no amortization of goodwill in
2003 or 2002, compared to goodwill amortization of $360 thousand expensed in
2001, due to the required accounting change.
Selling, general and administrative expenses were $25.3 million, a decrease of
$0.6 million or 2.4%. Customer support costs were $10.4 million, an increase of
$1.6 million due primarily to the growth in Sprint wireless subscribers. Selling
and advertising expenses were $6.8 million, a decrease of $0.6 million,
primarily due to the third party national programs that were modified to rebate
programs. Administrative expenses increased $1.0 million or 17.1%. The increase
was the result of increased professional fees, insurance and pension costs.
Bad debt expense decreased $2.6 million to $1.8 million or 58.3%. This decrease
was due to more restrictive credit terms for new PCS subscribers (limiting the
high credit risk customers who obtained service), lower churn in the PCS
operation and improvement in the interexchange carrier segment of the business.
This expense is net of normal recoveries and includes a recovery of $0.2 million
for an interexchange carrier settlement the Company received in 2003 which was
written off in 2002.
Operating income grew to $18.6 million, an increase of $9.3 million or 100%.
Revenue growth, primarily in the PCS operation in addition to the reduced bad
debt expenses, adjustments of management estimates, and the settlement of
disputed items with Sprint, all contributed to the operating income
improvements. The Company's operating margin was 17.6%, compared to 10.0% in
2002.
Other income (expense) is comprised of non-operating income and expenses,
interest expense and gain or loss on investments. Collectively, the net impact
of these items to pre-tax income was an expense of $0.1 million for 2003,
compared to expense of $10.1 million from 2002. The 2002 results were primarily
the results of the previously disclosed $9.0 million loss recorded on the sale
of the VeriSign stock.
Interest expense was $3.5 million, a decrease of $0.7 million or 16.3%. The
Company's average debt outstanding decreased approximately $4.8 million.
Long-term debt (inclusive of current maturities), was $43.3 million at year-end
2003, versus $52.0 million at year-end 2002. The Company did not borrow any
money on its revolving facilities in 2003.
Net losses on investments were $0.4 million, compared to a loss of $10.1 million
from 2002. Results in 2002 include the sale of the VeriSign, Inc. stock for a
loss of $9.0 million. See Note 3 to the consolidated financial statements.
41
Non-operating income was a gain of $0.4 million, an increase of $0.5 million,
due to an increase in patronage equity earned from CoBank, the Company's primary
lender, and due to interest income from the proceeds on the sale of the Virginia
10 RSA Limited partnership, offset by losses recorded for the Company's
portfolio of investments.
The Company provided for income taxes of $5.3 million in 2003, which is an
effective tax rate of 35.2% due to the effect of state tax apportionment rules
and reduction in the liability for tax exposures. On a normalized basis the
Company would have recorded taxes at an effective tax rate of approximately 39%.
Last year's effective tax rate was 42.2% due to the impact of net operating loss
carry forwards generated in several states with higher tax rates. The Company
currently operates in four states. Due to apportionment rules and geographic
operations of subsidiaries where the Company's profits and losses arise, the
Company is generating profits in states with lower tax rates, while generating
losses in states with higher tax rates. The Company cautions readers that the
current effective tax rate may not be the same rate at which tax benefits or tax
expenses are recorded in the future. The Company's state apportionments, profits
and losses and state tax rates may change, therefore changing the effective rate
at which taxes are provided for or at which tax benefits accrue. Net income from
continuing operations was $9.8 million, an increase of $12.7 million from 2002.
The results are primarily made up of the improvement in the PCS operation and
the one-time impact of the losses on the sale of VeriSign stock in 2002.
Income from discontinued operations was $22.4 million after taxes, an increase
of $15.0 million or 202%. The income from discontinued operations in 2003
includes the sale of the partnership interest in February 2003 and results from
the two months of its operations in 2003.
The Company adopted FAS 143 "Accounting for Asset Retirement Obligations."
effective January 1, 2003, and as a result recorded a charge to earnings for the
cumulative effect of this change in accounting of $76, thousand after taxes.
Net income was $32.1 million, an increase of $27.6 million or 610%. The increase
is a result of improved operating results in the PCS operations, the 2002
VeriSign stock loss and the sale of the cellular operations.
Investments in Non-Affiliated Companies
The Company has investments in several available-for-sale securities, which the
Company may choose to liquidate from time to time, based on market conditions,
capital needs, other investment opportunities, or a combination of any number of
these factors. As a result of the uncertainty of these factors, there is also
uncertainty as to what the value of the investments may be when they are sold.
The fair value of the Company's available-for-sale securities was $0.2 million
at the end of 2004, compared to $0.2 million at the end of 2003. The Company's
available-for-sale portfolio at December 31, 2004 is made up of two investments,
both of which are within the telecommunications industry. Due to the volatility
of the securities markets, particularly in the telecommunications industry,
there is uncertainty about the ultimate value the Company will realize with
respect to these investments in the future. During 2004, the Company recognized
an impairment loss from its available-for-sale securities of $28 thousand on
NetIQ Corp.
The Company participates in emerging technologies by investing in entities that
invest in start-up companies. This includes indirect participation through
capital venture funds of South Atlantic Venture Fund III, South Atlantic Private
Equity IV, Dolphin Communications Parallel Fund, Dolphin Communications Fund II
and the Burton Partnership. For those companies that eventually make public
offerings of their securities, it is the intent of the Company to evaluate
whether to hold or sell parts or all of each investment on an individual basis.
At December 31, 2004, the Company had external investments totaling $7.0
million. During 2004, the Company had a direct investment in NTC Communications.
On November 30, 2004, the Company purchased the remaining 83.9% of NTC that it
did not already own.
In 2005, the Company anticipates taking advantage of converting additional Rural
Telephone Bank stock from Class B to Class C. In 2004, the Company converted a
portion of its holdings into a different class of stock that pays cash
dividends. The bank declares a dividend rate that varies, each year. The range
of the dividend has been between 4.2% and 6.0% over the last 5 years. The rate
in 2004 was 6.0%. This transaction provided the Company with approximately $0.3
million in income for 2004.
Financial Condition, Liquidity and Capital Resources
42
The Company has four principal sources of funds available to meet the financing
needs of its operations, capital projects, debt service, investments and
potential dividends. These sources include cash flows from operations, cash and
cash equivalents, the liquidation of investments and borrowings. Management
routinely considers the alternatives available to determine what mix of sources
are best suited for the long-term benefit of the Company.
The term debt loan agreements with CoBank have three financial covenants. These
are measured on a trailing 12-month basis and are calculated on continuing
operations. At December 31, 2004, the covenant calculations were as follows; the
ratio of total debt to operating cash flow, which must be 2.5 or lower, was 1.4.
The equity to total assets ratio, which must be 35% or higher, was 53.9%. The
ratio of operating cash flow to scheduled debt service, which must exceed 2.0,
was 5.1. The Company was in compliance with all other covenants related to its
debt agreements at December 31, 2004. The Company has pledged all of its
affiliates capital stock and the outstanding ownership interest in NTC as
collateral for the CoBank loans.
On November 30, 2004, the Company amended the terms of its Master Loan Agreement
with CoBank, ACB to provide for a $15 million revolving reducing credit
facility. Under the terms of the amended credit facility, the Company can borrow
up to $15 million for use in connection with the acquisition of NTC
Communications LLC and other corporate purposes. The revolving credit facility
has a 12 year term with quarterly payments beginning June 2006. Borrowings under
the facility are at an adjustable rate that can be converted to a fixed rate at
the Company's option. The loan is secured by a pledge of the stock of all of the
subsidiaries of the Company as well as all of the outstanding membership
interests in NTC. At December 31, 2004, $13.2 million was outstanding under this
facility.
The Company's covenants on the RUS/RTB debt require the pledge of all current
and future assets of the Telephone subsidiary until the debt is retired.
Another external source of funding is a $0.5 million unsecured, variable rate
revolving line of credit with SunTrust Bank. This facility is in place to allow
the Company to better manage its daily cash balances. The facility expires May
31, 2005. Management anticipates renewing this facility with SunTrust Bank under
similar terms and conditions. At December 31, 2004 there were no balances
outstanding under this facility.
In February 2005, the Company received the $5.0 million placed in escrow, and
reflected as an escrow receivable at December 31, 2004, as part of the sales
agreement on the Virginia 10 RSA limited partnership.
Pursuant to the NTC Interest Purchase Agreement, $1.0 million of the purchase
price was placed in escrow to satisfy any post-closing adjustments to the
purchase price and any indemnification obligations of the Interest holders for a
period of six months after the November 30, 2004 closing date.
The Company spent $34 million on capital projects in 2004, or about $4 million
below what was budgeted for the year. The variance was primarily due to delays
in the start dates for construction of a fiber route and various PCS related
expenditures.
The Company is obligated to make future payments under various contracts it has
entered into, including amounts pursuant to its various long-term debt
facilities, and non-cancelable operating lease agreements for retail space,
tower space and cell sites. Expected future minimum contractual cash obligations
for the next five years and in the aggregate at December 31, 2004, are as
follows:
Payments due by periods
Less than 1
(unaudited) (in thousands) Total year 1-3 years 4-5 years After 5 years
---------------------------------------------------------------------
Long-term debt principal $ 52,291 $ 4,372 $ 11,142 $ 12,417 $ 24,360
Interest on long -term debt 16,412 3,562 5,913 4,101 2,836
Retirement plan benefit contributions 500 500 -- -- --
Operating leases 17,312 4,416 6,770 4,284 1,842
Capital calls on investments 1,121 1,121 -- -- --
Purchase obligations 1,667 1,667 -- -- --
---------------------------------------------------------------------
Total obligations $ 89,303 $ 15,638 $ 23,825 $ 20,802 $ 29,038
=====================================================================
The Company has no other off-balance sheet arrangements and has not entered into
any transactions involving unconsolidated, limited purpose entities or commodity
contracts.
43
Capital expenditures budgeted for 2005 total approximately $36 million,
including approximately $20 million for additional PCS base stations, additional
towers, and switch upgrades to enhance the PCS network. Approximately $6 million
is budgeted for telecommunication services currently outside of the Company's
primary operating area, Improvements and replacements of approximately $5
million are planned for the telephone operation and the remaining $5 million
covers technology upgrades and other capital needs.
The Company anticipates using funds from operations, to fund the capital
expenditures and the payment of debt and interest. Due to lower than expected
tax expenses in 2004, the Company will apply the tax receivable to the 2005-year
tax liability. It is anticipated in 2005, that additional federal tax payments
will be due based on anticipated profits expected to be generated in the
operation.
Management anticipates its operations will generate higher operating cash flows
in 2005, compared to those of continuing operations in 2004, although there are
events outside the control of the Company that could have an adverse impact on
cash flows from operations. The events that could adversely impact operating
cash flow results include, but are not limited to; changes in overall economic
conditions, regulatory requirements, changes in technologies, availability of
labor resources and capital, and other conditions. The PCS subsidiary's
operations are dependent upon Sprint's ability to execute certain functions such
as billing, customer care, and collections; their ability to develop and
implement successful marketing programs and new products and services; and their
ability to effectively and economically manage other operating activities under
the Company's agreements with Sprint. Additionally, the Company's ability to
attract and maintain a sufficient customer base is critical to maintaining a
positive cash flow from operations. These items individually and/or collectively
could impact the Company's results. The Company is currently assessing the
impact of the planned merger of Sprint and Nextel Communications on the
Company's operations.
Management expects cash from operations, along with cash on hand, investments
and funds available under the Company's existing credit facilities, should be
sufficient to meet its short-term and long-term cash needs, including working
capital requirements, capital projects and debt payments, and to fund potential
dividend payments. Significant new ventures, acquisitions or other new business
opportunities may require outside funding.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 (R) replaces SFAS No. 123, and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. The approach in SFAS 123 (R) is similar to the approach
described in SFAS No. 123, however, SFAS No. 123 (R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure will no longer be an alternative. SFAS No. 123 (R) will be effective
for the Company beginning July 1, 2005. The Company is evaluating the impact of
applying SFAS No. 123 (R) and does not believe the application will have a
material impact on the Company's consolidated financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which provides new guidance for assessing impairment losses on debt and equity
investments. EITF Issue No. 03-1 also includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective for the Company's year ended December
31, 2004. The Company will evaluate the effect, if any, of EITF Issue No. 03-1
when final guidance is released. During the fourth quarter, the Company
recognized a $28 thousand impairment loss on NetIQ Corp. and as a result the
Company does not have any unrealized losses or additional disclosures required
by EITF issue No. 03-1 at December 31, 2004.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003),"Consolidation of Variable Interest Entities," which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," (VIE), which was issued in
January 2003. The Company does not have any investments in entities it believes
are variable interest entities.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity," which was effective at the beginning of the first
44
interim period beginning after June 15, 2003. This Statement establishes
standards for the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The Statement
also includes required disclosures for financial instruments within its scope.
For the Company, the Statement was effective for instruments entered into or
modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatorily redeemable financial instruments. For certain
mandatory redeemable financial instruments, the Statement will be effective for
the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatory redeemable financial
instruments. The Company currently does not have any financial instruments that
are within the scope of this Statement.
In December 2003, the Financial Accounting Standards Board issued FASB Statement
No. 132(R). Statement No. 132(R) is a revision of Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS 132(R) is
effective for financial statements with fiscal years ending after December 15,
2003. SFAS 132(R) requires additional disclosures including information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows, and components of net periodic benefit cost
recognized during interim periods. The objectives of the revisions are to
provide qualitative information about the items in the financial statements,
quantitative information about items recognized or disclosed in the financial
statements, information that enables users of financial statements to assess the
effect that pension plans and other postretirement benefit plans have on
entities' results of operations, and information to facilitate assessments of
future earnings and cash flows. With the exception of the 2004 adoption of the
requirement to include estimated future benefit payments, the Company adopted
this statement effective December 31, 2003, with disclosures included in Note 9.
RISKS
At December 31, 2004, the Company is one of eleven PCS Affiliates of Sprint, and
accordingly, is impacted by decisions and requirements adopted by Sprint in
regard to its wireless operation. Management continually reviews its
relationship with Sprint as new developments and requirements are added. Note 7
to the accompanying consolidated financial statements contains a detailed
description of the significant contractual relationship. See Item 1. "Business -
Risk Factors", "-Recent Developments" and "-Regulation" for a discussion of
risks relating to the Company's PCS business, its relationship with Sprint and
the Wireless Industry in general.
The Company's access revenue may be adversely impacted by legislative or
regulatory actions that decrease access rates or exempt certain traffic from
paying access to the Company's regulated telephone network. The Federal
Communications Commission is currently reviewing the issue of Voice over
Internet Protocol (VOIP) as it relates to access charges. An unfavorable finding
may have an adverse effect on the Company's telephone operations. See Item 1
"Business -Regulation."
There has been a trend for incumbent local exchange carriers to see a decrease
in access lines due to the effect of wireless and wireline competition and the
elimination of a second line dedicated to dial up Internet as customers migrate
to broadband connections. Although the Company has not seen a material reduction
in its number of access lines to date, it experienced line decreases in each of
the last two quarters. There is a significant risk that this trend could have a
material adverse effect on the Company's telephone operations in the future.
The Company's revenue from fiber leases may be adversely impacted by further
erosion in demand or in price competition for these facilities. The Company
monitors each of its fiber lease customers closely to minimize the risk related
to this business.
The Company operates the cable television system in Shenandoah County, Virginia.
The Company has seen increased competition from satellite providers that are
larger and have cost advantages over the Company in the procurement of
programming. The continued success of the satellite television providers may
have an adverse impact on the Company's cable television results.
The Company may not be able to utilize all of its net operating loss carry
forwards for taxes in certain states before they expire, resulting in the
Company writing off some of its deferred tax assets and impacting its cash
position.
45
Evaluation of Disclosure Controls and Procedures
Management, with the participation of the President and Chief Executive Officer,
who is the principal executive officer, and the Executive Vice President and
Chief Financial Officer, who is the principal financial officer, conducted an
evaluation of our disclosure controls and procedures, as defined by Rule
13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation,
the Company's principal executive officer and its principal financial officer
concluded that the Company's disclosure controls and procedures were effective
as of December 31, 2004.
During 2004, there were changes in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting as follows:
1. The Company dedicated significant resources during the second
quarter of 2004 in preparing for the conversion of its new PCS point
of sale system. The conversion involved a change from a stand-alone,
Company-hosted system, to a system hosted and integrated into the
Sprint PCS billing system. Through this integration, the Company
eliminated several points of multiple data entry, thereby reducing
the risk of error, and enhancing internal control, while improving
the sales process. The new system was placed in service during
mid-July 2004.
2. The Company has put into place processes that have steadily improved
our ability to identify material errors in Sprint financial
information on a timely basis. These processes are in part a result
of a new Amended Management and Services Agreement
3. In connection with the requirements imposed under Section 404 of the
Sarbanes-Oxley Act of 2002, we retained an outside consulting firm
to assist us in reviewing, documenting, and improving our internal
control processes and have engaged Goodman and Company, a regional
accounting firm to assist in the testing of these controls. On an
ongoing basis, the Company contracted with Goodman and Company to
perform internal audit functions.
Under our agreements with Sprint, Sprint provides us with billing, collections,
customer care, certain network operations and other back office services for the
PCS operation. As a result, Sprint remits to the Company approximately 64% of
the Company's total revenues, while approximately 37.1% of the expenses
reflected in the Company's consolidated financial statements relate to charges
by or through Sprint for expenses such as billing, collections and customer
care, roaming expense, long-distance, and travel. Due to this relationship, the
Company necessarily relies on Sprint to provide accurate, timely and sufficient
data and information to properly record our revenues, expenses and accounts
receivable, which underlie a substantial portion of our periodic financial
statements and other financial disclosures.
Information provided by Sprint includes reports regarding the subscriber
accounts receivable in our markets. Sprint provides us monthly accounts
receivable, billing and cash receipts information on a market level, rather than
a subscriber level. We review these various reports to identify discrepancies or
errors. However, under our agreements with Sprint, we are entitled to only a
portion of the receipts, net of items such as taxes, government surcharges,
certain allocable write-offs and the 8% of revenue retained by Sprint. Because
of our reliance on Sprint for financial information, we must depend on Sprint to
design adequate internal controls with respect to the processes established to
provide this data and information to the Company and Sprint's other PCS
affiliate network partners. To address this issue, Sprint engages independent
auditors to perform a periodic evaluation of these controls and to provide a
"Report on Controls Placed in Operation and Tests of Operating Effectiveness for
Affiliates" under guidance provided in Statement of Auditing Standards No. 70
("SAS 70 reports"). The report is provided to the Company on semi-annual basis
and covers a twelve-month period. The current recent report covers the period
from October 1, 2003 to September 30, 2004. The most recent report indicated
there were no material issues, that were not remediated by year end, which would
adversely affect the information used to support the recording of the revenues
and expenses provided by Sprint related to the Company's relationship with them.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks relate primarily to changes in interest rates on
instruments held for other than trading purposes. Our interest rate risk
involves three components. The first component is outstanding debt with variable
rates. As of December 31, 2004, the Company's variable rate debt balance was
$13.2 million. The Company's interest rate risk on the variable rate debt is $49
thousand for a 10% increase in the interest rate. The Company's remaining debt
has fixed rates through its maturity. A 10.0% increase in interest rates would
decrease the fair value of the total debt by approximately $1.3 million, while
the estimated current fair value of the fixed rate debt is approximately $49.3
million.
The second component of interest rate risk is temporary excess cash, primarily
invested in overnight repurchase agreements and Treasury bills with a maturity
of less than 90 days. The Company currently has approximately $14.2 million of
cash equivalents in Treasury bills, which are earning rates of approximately 2%
per year. The cash is currently in short-term investment vehicles that have
limited interest rate risk. Management continues to evaluate the most beneficial
use of these funds.
The third component of interest rate risk is marked increases in interest rates
which may adversely impact the rate at which the Company may borrow funds for
growth in the future. Although this risk is real, it is not significant at this
time as the Company has adequate cash for operations, payment of debt and
near-term capital projects.
Management does not view market risk as having a significant impact on the
Company's results of operations, although future results could be adversely
impacted if interest rates were to escalate markedly and the company required
external financing. Since the Company does not currently have significant
investments in publicly traded stock, currently there is limited risk related to
the Company's available for sale securities. General economic conditions
impacted by regulatory changes, competition or other external influences may
play a higher risk to the Company's overall results.
As of December 31, 2004, the Company has $7.0 million invested in privately held
companies directly or through investments with portfolio managers. Most of the
companies are early stage and significant increases in interest rates could have
an adverse impact on their results, ability to raise capital and viability. The
Company's market risk is limited to the funds previously invested and an
additional $1.1 million committed under contracts the Company has signed with
portfolio managers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 15 are filed as part of this report and
appear on pages F-2 through F-37.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation Regarding the Effectiveness of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer,
who is the principal executive officer, and the Executive Vice President and
Chief Financial Officer, who is the principal financial officer, conducted an
evaluation of our disclosure controls and procedures, as defined by Rule 13a -
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the
Company's principal executive officer and its principal financial officer
concluded that the Company's disclosure controls and procedures were effective
as of December 31, 2004.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a -15(f)
under the Securities Exchange Act of 1934. Under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, an evaluation of the effectiveness of the internal
control over financial reporting was conducted based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In conducting the evaluation of the effectiveness of the internal control over
financial reporting, the Company did not include the internal controls of NTC
Communications, L.L.C., which the Company acquired on November 30, 2004. The
acquired entity constituted approximately 12% of the total consolidated assets
of the Company as of December 31, 2004 and accounted for less than 1% of total
consolidated revenues and total consolidated net income of the Company for the
year then ended. Refer to Note 14 to the consolidated financial statements for a
further discussion of the acquisition and its impact on the Company's
consolidated financial statements.
Based on the evaluation under the framework in Internal Control -- Integrated
Framework, management concluded that the internal control over financial
reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of the internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report, which
is included herein.
48
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS
The following table presents information about our executive
officers who, other than Christopher E. French, are not
directors.
Name Title Age Date in Position
-------------------------------------------------------------------------------------------
Christopher E. French President 47 April 1988
Earle A. MacKenzie Executive Vice President, Chief 52 June 2003
Financial Officer and Treasurer
David E. Ferguson Vice President of Customer Services 59 November 1982
David K. MacDonald Vice President of Operations 51 May 1998
Laurence F. Paxton Vice President of Information 52 June 2003
Technology and Secretary
William L. Pirtle Vice President of Sales 45 April 2004
Alan R. Prusak Vice President, Technology 41 April 2004
Jeffery R. Pompeo Vice President, Converged Services 37 September 2004
Jonathan R. Spencer General Counsel 43 July 2004
Nancy A. Stadler Vice President, Marketing 39 August 2004
Mr. French has served as President and Chief Executive Officer of the Company
and its subsidiaries since 1988 and a director of the Company since 1996. Prior
to his appointment as President, he held a variety of positions with the
Company, including Executive Vice President and Vice President-Network Service.
Mr. French also serves on the Board of Directors of First National Corporation.
Before joining the Company, Mr. MacKenzie served from May 1999 to November 2002
as President of Broadslate Networks, Inc., a start-up data services provider.
Previously, from June 1998 to May 1999, he was a consultant to several venture
capital firms.
Prior to becoming Vice President of Information Technology, Mr. Paxton had
served as the Company's Vice President of Finance since June 1991.
Prior to becoming Vice President of Sales, Mr. Pirtle had served as the
Company's Vice President of Personal Communications Services since November
1996.
Before joining the Company as Vice President, Technology, Mr. Prusak was Vice
President of Engineering from 2001 to 2004 for ALLTEL Communications, a
full-service telecommunications service provider. From 1992 to 2001 he served in
various operational and corporate positions with ALLTEL Communications.
Before joining the Company as Vice President, Converged Services, Mr. Pompeo was
Chief Technology Officer at Netifice Communications from 2002-2004, a national
Voice Over Internal Protocol and Virtual Private Network service provider from
2002 to 2004. From 2000-2002 he served as Vice President of Business Development
for Broadslate Networks, a DSL provider. Prior to his service with that company,
Mr. Pompeo held a number of executive positions with the General Electric
Company from 1995-2000, including President & CEO of GE-Cisco Industrial
Networks, a joint venture between GE and Cisco systems
Before joining the Company as General Counsel, Mr. Spencer was an attorney in
private practice in Washington, D.C., where he specialized in
telecommunications, corporate and securities law. From May 2000 until June 2003
Mr. Spencer was Vice President and Associate General Counsel of Cable & Wireless
Global, a global telecommunications provider, and from January 1999 through May
2000 he served as Senior Corporate Counsel and Assistant Secretary of Cable &
Wireless USA, Inc. While with Cable & Wireless, Mr. Spencer also served as a
director of a number of that company's European subsidiaries.
Before joining the Company as Vice President, Marketing, Ms. Stadler served as
Vice President, Corporate Marketing and Communications for Rexnord Industries,
Inc., a mechanical power transmission components manufacturing company, from
July 2001 to August 2004. Previously she served as Director, Strategic Marketing
for Siemens Building Technologies, a provider of technical infrastructure
solutions for security, comfort and efficiency in buildings, from 1998 to 2001.
Our employees, officers and members of our Board of Directors are expected to
conduct business legally and ethically and insist that our vendors and business
associates do the same. The Company has adopted a
49
Code of Business Conduct and Ethics applicable to all employees, officers and
directors and which is available on the Company's website www.shentel.com .
Other information responsive to this Item 10 is incorporated herein by reference
to the Company's definitive proxy statement for its 2005 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item 11 is incorporated herein
by reference to the Company's definitive proxy statement for
its 2005 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information responsive to this Item 12 is incorporated herein
by reference to the Company's definitive proxy statement for
its 2005 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item 13 is incorporated herein
by reference to the Company's definitive proxy statement for
its 2005 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this Item 14 is incorporated herein
by reference to the Company's definitive proxy statement for
its 2005 Annual Meeting of Shareholders.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of the
Company appear on pages F-2 through F-37 of this report and
are incorporated by reference in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004,
2003 and 2002
Consolidated Statements of Income for the three years
ended December 31, 2004
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the three years ended December
31, 2004
Consolidated Statements of Cash Flows for the three
years ended December 31, 2004
Notes to Consolidated Financial Statements
(a)(2) All schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(a)(3) The following exhibits are either filed with this
Form 10K or incorporated herein by reference. Our
Securities Exchange Act file number is 000-09881.
51
Exhibit
Number Exhibit Description
- ------ -------------------
3.1 Amended and Restated Articles of Incorporation of Shenandoah
Telecommunications Company filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (No. 333-21733) and incorporated
herein by reference.
3.2 Shenandoah Telecommunications Company Bylaws, as amended, filed as
Exhibit 3.2 to the Company's Report on Form 10-K for the year ended
December 31, 2003.
4.1 Rights Agreement, dated as of February 8, 1998 between the Company
and Crestar Bank incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K, dated February 9, 1998).
4.2 Shenandoah Telecommunications Company Dividend Reinvestment Plan
filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-3 (No. 333-74297) and incorporated herein by reference.
*4.3 Specimen representing the Common Stock, no par value, of Shenandoah
Telecommunications Company
10.1 Shenandoah Telecommunications Company Stock Incentive Plan filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No.
333-21733) and incorporated herein by reference.
10.2 Shenandoah Telecommunications Company Dividend Reinvestment Plan
filed as Exhibit 4.4 to the Company's Registration Statement on Form
S-3D (No. 333-74297) and incorporated herein by reference.
10.3 Settlement Agreement and Mutual Release dated as of January 30, 2004
by and among Sprint Spectrum L.P., Sprint Communications Company
L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P. and Shenandoah
Personal Communications Company and Shenandoah Telecommunications
Company, dated January 30, 2004 filed as Exhibit 10.3 to the
Company's Report on Form 10-K for the year ended December 31, 2003
10.4 Sprint PCS Management Agreement dated as of November 5, 1999 by and
among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.4 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.5 Sprint PCS Services Agreement dated as of November 5, 1999 by and
between Sprint Spectrum L.P. and Shenandoah Personal Communications
Company filed as Exhibit 10.5 to the Company's Report on Form 10-K
for the year ended December 31, 2003.
10.6 Sprint Trademark and Service Mark License Agreement dated as of
November 5, 1999 by and between Sprint Communications Company, L.P.
and Shenandoah Personal Communications Company filed as Exhibit 10.6
to the Company's Report on Form 10-K for the year ended December 31,
2003.
10.7 Sprint Spectrum Trademark and Service Mark License Agreement dated
as of November 5, 1999 by and between Sprint Spectrum L.P. and
Shenandoah Personal Communications Company filed as Exhibit 10.7 to
the Company's Report on Form 10-K for the year ended December 31,
2003.
52
10.8 Addendum I to Sprint PCS Management Agreement by and among Sprint
Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and
Shenandoah Personal Communications Company filed as Exhibit 10.8 to
the Company's Report on Form 10-K for the year ended December 31,
2003.
10.9 Asset Purchase Agreement dated November 5, 1999 by and among Sprint
Spectrum L.P., Sprint Spectrum Equipment Company, L. P., Sprint
Spectrum Realty Company, L.P., and Shenandoah Personal
Communications Company, serving as Exhibit A to Addendum I to the
Sprint PCS Management Agreement and as Exhibit 2.6 to the Sprint PCS
Management Agreement filed as Exhibit 10.9 to the Company's Report
on Form 10-K for the year ended December 31, 2003.
10.10 Addendum II dated August 31, 2000 to Sprint PCS Management Agreement
by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.10 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.11 Addendum III dated September 26, 2001 to Sprint PCS Management
Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC
PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications
Company filed as Exhibit 10.11 to the Company's Report on Form 10-K
for the year ended December 31, 2003.
10.12 Addendum IV dated May 22, 2003 to Sprint PCS Management Agreement by
and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.12 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.13 Addendum V dated January 30, 2004 to Sprint PCS Management Agreement
by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.13 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.14 Supplemental Executive Retirement Plan filed as Exhibit 10.14 to the
Company's Report on Form 10-K for the year ended December 31, 2003.
10.15 Addendum VI dated May 24, 2004 to Sprint PCS Management Agreement by
and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.15 to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 2004.
10.16 Second Amended and Restated Master Loan Agreement, dated as of
November 30, 2004, by and between CoBank, ACB and Shenandoah
Telecommunications Company filed as Exhibit 10.16 to the Company's
Current Report on Form 8-K dated December 3, 2004.
10.17 Third Supplement to the Master Loan Agreement dated as Of November
30, 2004, between CoBank, ACB and Shenandoah Telecommunications
Company filed as Exhibit 10.17 to the Company's Current Report on
Form 8-K dated December 3, 2004.
10.18 Second Amendment to the Term Supplement to the Master Loan Agreement
dated as Of November 30, 2004, between CoBank, ACB and Shenandoah
Telecommunications Company filed as Exhibit 10.18 to the Company's
Current Report on Form 8-K dated December 3, 2004.
53
10.19 Pledge Agreement dated November 30, 2004 between CoBank, ACB and
Shenandoah Telecommunications Company filed as Exhibit 10.19 to the
Company's Current Report on Form 8-K dated December 3, 2004.
10.20 Membership Interest Pledge Agreement dated November 30, 2004 between
CoBank, ACB and Shenandoah Telecommunications Company filed as
Exhibit 10.20 to the Company's Current Report on Form 8-K dated
December 3, 2004.
10.21 Membership Interest Pledge Agreement dated November 30, 2004 between
CoBank, ACB and Shentel Converged Services, Inc. filed as Exhibit
10.21 to the Company's Current Report on Form 8-K dated December 3,
2004.
10.22 Interest Purchase Agreement dated November 30, 2004 by and among
Shentel Converged Services, Inc., NTC Communications LLC and the
Interest holders named therein filed as Exhibit 10.22 to the
Company's Current Report on Form 8-K dated January 21, 2005.
10.23 Form of Incentive Stock Option Agreement under the 1996 Shenandoah
Telecommunications Company Stock Incentive Plan (for routine formula
grants) filed as Exhibit 10.23 to the Company's Current Report on
Form 8-K dated January 21, 2005.
10.24 Forms of Incentive Stock Option Agreement under the 1996 Shenandoah
Telecommunications Company Stock Incentive Plan (for newly hired
executive employees) filed as Exhibit 10.24 to the Company's Current
Report on Form 8-K dated January 21, 2005.
10.25 Description of the Shenandoah Telecommunications Company Incentive
Plan filed as Exhibit 10.25 to the Company's Current Report on Form
8-K dated January 21, 2005.
*10.26 Description of Compensation of Non-Employee Directors.
*10.27 Description of Management Compensatory Plans and Arrangements.
*21 List of Subsidiaries.
*23.1 Consent of KPMG LLP, Independent Registered Public Accounting Firm.
*31.1 Certification of President and Chief Executive Officer of Shenandoah
Telecommunications Company pursuant to Rule 13a-14(a)under the
Securities Exchange Act of 1934.
*31.2 Certification of Executive Vice President and Chief Financial
Officer of Shenandoah Telecommunications Company pursuant to Rule
13a-14(a)under the Securities Exchange Act of 1934.
*32 Certifications pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. ss. 1350.
- -----------
* Filed herewith.
54
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
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 22, 2005 By: /s/ CHRISTOPHER E. FRENCH
Christopher E. French, President
(Duly Authorized Officer)
PART IV (Continued)
SIGNATURES
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.
/s/CHRISTOPHER E. FRENCH President & Chief Executive Officer,
March 22, 2005 Director (Principal Executive Officer)
Christopher E. French
/s/EARLE A. MACKENZIE Executive Vice President & Treasurer
March 22, 2005 (Principal Financial Officer and
Earle A. MacKenzie Principal Accounting Officer)
/s/DOUGLAS C. ARTHUR Director
March 22, 2005
Douglas C. Arthur
/s/NOEL M. BORDEN Director
March 22, 2005
Noel M. Borden
/s/KEN L BURCH Director
March 22, 2005
Ken L. Burch
/s/GROVER M. HOLLER, JR. Director
March 22, 2005
Grover M. Holler, Jr.
/s/DALE S. LAM Director
March 22, 2005
Dale S. Lam
55
/s/HAROLD MORRISON, JR. Director
March 22, 2005
Harold Morrison, Jr.
/s/ZANE NEFF Director
March 22, 2005
Zane Neff
/s/JAMES E. ZERKEL II Director
March 22, 2005
James E. Zerkel II
56
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
Index to the Consolidated 2004 Financial Statements
Page
Reports of Independent Registered Public Accounting Firm F-2 through F-4
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004, 2003 and 2002 F-5 and F-6
Consolidated Statements of Income for the three years ended December 31, 2004 F-7 and F-8
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the three years ended December 31, 2004 F-9
Consolidated Statements of Cash Flows for the three years ended December 31, 2004 F-10 and F-11
Notes to Consolidated Financial Statements F-12 through F-37
F-1
[LOGO] KPMG
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Shenandoah Telecommunications Company:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Shenandoah Telecommunications Company and subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
F-2
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In conducting their evaluation of the effectiveness of internal control over
financial reporting, the Company did not include the internal controls of NTC
Communications, L.L.C. (NTC), which the Company acquired on November 30, 2004.
The acquired entity constituted approximately 12% of the total consolidated
assets of the Company as of December 31, 2004 and less than 1% of total
consolidated revenues and total consolidated net income of the Company for the
year then ended. Refer to Note 14 to the consolidated financial statements for a
further discussion of the acquisition and its impact on the Company's
consolidated financial statements. Our audit of internal control over financial
reporting of the Company also excluded an evaluation of the internal control
over financial reporting of NTC.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Shenandoah Telecommunications Company and subsidiaries, as of December 31, 2004,
2003, and 2002, and the related consolidated statements of income, shareholders'
equity and comprehensive income, and cash flows for the years then ended, and
our report dated March 21, 2005 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Richmond, Virginia
March 21, 2005
F-3
[LOGO] KPMG
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Shenandoah Telecommunications Company:
We have audited the accompanying consolidated balance sheets of Shenandoah
Telecommunications Company and subsidiaries (the Company), as of December 31,
2004, 2003, and 2002, and the related consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004, 2003 and
2002, and the results of their operations and their cash flows for the years
then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for asset retirement obligations in 2003.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 21, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Richmond, Virginia
March 21, 2005
F-4
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004, 2003 and 2002
in thousands
ASSETS (Note 5) 2004 2003 2002
- -------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 14,172 $ 28,696 $ 2,209
Accounts receivable, net (Notes 1 and 8) 9,019 6,488 7,536
Escrow receivable (Note 2) 5,000 -- --
Income taxes receivable 2,341 1,526 12
Materials and supplies 2,108 2,062 1,787
Prepaid expenses and other 1,877 1,669 2,205
Deferred income taxes (Note 6) -- 522 1,197
Assets held for sale (Note 2) -- -- 5,548
------------------------------------
Total current assets 34,517 40,963 20,494
------------------------------------
Securities and Investments (Notes 3 and 8)
Available-for-sale securities 232 199 151
Other investments 7,018 7,268 7,272
------------------------------------
Total securities and investments 7,250 7,467 7,423
------------------------------------
Property, Plant and Equipment
Plant in service (Note 4) 227,004 197,431 184,069
Plant under construction 3,319 2,261 5,209
------------------------------------
230,323 199,692 189,278
Less accumulated depreciation 74,071 72,006 57,126
------------------------------------
Net property, plant and equipment 156,252 127,686 132,152
------------------------------------
Other Assets
Intangible assets, net (Note 1) 3,401 -- --
Cost in excess of net assets of business acquired (Note 1) 8,863 3,313 3,313
Deferred charges and other assets, net (Notes 1 and 2) 964 5,935 622
------------------------------------
Net other assets 13,228 9,248 3,935
------------------------------------
Total assets $211,247 $185,364 $164,004
====================================
See accompanying notes to consolidated financial statements.
(Continued)
F-5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004, 2003 and 2002
in thousands
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of long-term debt (Note 5) $ 4,372 $ 4,230 $ 4,482
Revolving line of credit (Note 5) -- -- 3,503
Accounts payable (Note 7) 6,003 4,729 5,003
Advanced billings and customer deposits 3,566 3,326 3,538
Accrued compensation 1,785 1,015 1,268
Current deferred income taxes 1,453 -- --
Accrued liabilities and other 4,667 2,496 1,564
Current liabilities held for sale (Note 2) -- -- 542
-------------------------------------
-------------------------------------
Total current liabilities 21,846 15,796 19,900
-------------------------------------
Long-term debt, less current maturities (Note 5) 47,919 39,116 47,561
-------------------------------------
Other Liabilities
Deferred income taxes (Note 6) 24,826 20,819 15,859
Pension and other (Note 9) 2,859 3,425 2,441
-------------------------------------
Total other liabilities 27,685 24,244 18,300
-------------------------------------
Minority Interests in discontinued operations (Note 2) -- -- 1,666
-------------------------------------
Commitments and Contingencies (Notes 2,3,5,6,7,9,12, and 13)
Shareholders' Equity (Notes 5 and 10)
Common stock, no par value, authorized 16,000 shares; issued and
outstanding 7,630 shares in 2004, 7,593
shares in 2003, and 7,552 shares in 2002 6,319 5,733 5,246
Retained earnings 107,413 100,449 71,335
Accumulated other comprehensive income (loss) (Note 3) 65 26 (4)
-------------------------------------
Total shareholders' equity 113,797 106,208 76,577
-------------------------------------
Total liabilities and shareholders' equity $211,247 $185,364 $ 164,004
=====================================
See accompanying notes to consolidated financial statements.
F-6
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
in thousands, except per share amounts
2004 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Operating revenues:
Wireless (Notes 7 and 8) $ 83,238 $ 69,629 $ 57,613
Wireline 30,684 29,022 28,755
Other 7,052 6,966 6,352
----------------------------------------
Total operating revenues 120,974 105,617 92,720
----------------------------------------
Operating expenses:
Cost of goods and services, exclusive of depreciation and
amortization shown separately below (Note 7) 15,793 13,386 11,687
Network operating costs, exclusive of depreciation and
amortization shown separately below (Note 8) 36,220 31,666 31,283
Selling, general and administrative, exclusive of
depreciation and amortization shown separately below (Note 7) 30,316 25,306 25,930
Depreciation and amortization 19,020 16,631 14,482
----------------------------------------
Total operating expenses 101,349 86,989 83,382
----------------------------------------
Operating income 19,625 18,628 9,338
----------------------------------------
Other income (expense):
Interest expense (3,129) (3,510) (4,195)
Net (loss) on investments (Note 3) (206) (443) (10,004)
Non-operating income (expense), net 31 390 (141)
----------------------------------------
(3,304) (3,563) (14,340)
----------------------------------------
Income (loss) before income taxes, cumulative effect of a
change in accounting and discontinued operations 16,321 15,065 (5,002)
Income tax provision (benefit) (Note 6) 6,078 5,304 (2,109)
----------------------------------------
Income (loss) from continuing operations 10,243 9,761 (2,893)
Discontinued operations, net of income taxes (Note 2) -- 22,389 7,412
Cumulative effect of a change in accounting,
net of income taxes (Note 1) -- (76) --
----------------------------------------
Net income $ 10,243 $ 32,074 $ 4,519
========================================
F-7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002
in thousands, except per share amounts
Income (loss) per share:
Basic Net income (loss) per share:
Continuing operations $ 1.35 $ 1.29 $(0.38)
Discontinued operations -- 2.95 0.98
Cumulative effect of a change in accounting, net of
income taxes -- (0.01) --
-------------------------------
$ 1.35 $ 4.23 $ 0.60
===============================
Weighted average shares outstanding, basic 7,611 7,577 7,542
===============================
Diluted Net income (loss) per share:
Continuing operations $ 1.34 $ 1.28 $(0.38)
Discontinued operations -- 2.94 0.98
Cumulative effect of a change in accounting, net -- (0.01) --
------ ------ ------
$ 1.34 $ 4.22 $ 0.60
===============================
Weighted average shares, diluted 7,657 7,608 7,542
===============================
See accompanying notes to consolidated financial statements.
F-8
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years Ended December 31, 2004, 2003 and 2002 in
thousands, except per share amounts
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income (loss) Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2002 7,530 $ 4,950 $ 69,610 $ 42 $ 74,602
Comprehensive income:
Net income -- -- 4,519 -- 4,519
Net unrealized change in
securities available-for-sale, net
of tax of $29 -- -- -- (46) (46)
---------
Total comprehensive income 4,473
---------
Dividends declared ($0.37 per share) -- -- (2,794) -- (2,794)
Common stock issued through
exercise of incentive stock
options and stock grants 22 296 -- -- 296
-----------------------------------------------------------------------
Balance, December 31, 2002 7,552 $ 5,246 $ 71,335 $ (4) $ 76,577
Comprehensive income:
Net income -- -- 32,074 -- 32,074
Net unrealized change in
securities available-for-sale, net
of tax of $(18) -- -- -- 30 30
---------
Total comprehensive income 32,104
---------
Dividends declared ($0.39 per share) -- -- (2,960) -- (2,960)
Common stock issued through
exercise of incentive stock
options 41 487 -- -- 487
-----------------------------------------------------------------------
Balance, December 31, 2003 7,593 $ 5,733 $ 100,449 $ 26 $ 106,208
Comprehensive income
Net income -- -- 10,243 -- 10,243
Net unrealized change in
securities available-for-sale, net
of tax of $(21) -- -- -- 39 39
---------
Total comprehensive income 10,282
---------
Dividends declared ($0.43 per share) -- -- (3,279) -- (3,279)
Common stock issued through
exercise of incentive stock
options 37 586 -- -- 586
-----------------------------------------------------------------------
Balance, December 31, 2004 7,630 $ 6,319 $ 107,413 $ 65 $ 113,797
=======================================================================
See accompanying notes to consolidated financial statements.
F-9
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
in thousands
2004 2003 2002
- --------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Income (loss) from continuing operations $ 10,243 $ 9,761 $ (2,893)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 18,976 16,612 14,476
Amortization 44 19 6
Deferred income taxes 5,960 5,664 289
Loss on disposal of assets 1,251 348 739
Net (gain) loss on disposal of investments (144) 3 9,034
Net loss from patronage and equity
investments 33 52 393
Other (777) 399 443
Changes in assets and liabilities, exclusive of
acquired business:
(Increase) decrease in:
Accounts receivable (2,140) 1,069 (1,797)
Materials and supplies 75 (275) 1,147
Increase (decrease) in:
Accounts payable (172) (275) 1,067
Other prepaids, deferrals and accruals 1,067 (2,778) 120
--------------------------------------
Net cash provided by operating activities $ 34,416 $ 30,599 $ 23,024
--------------------------------------
Cash Flows From Investing Activities
Purchase and construction of plant and equipment, net
of retirements $(34,095) $(12,476) $(22,612)
Acquisition of business, net of cash acquired (9,153) -- --
Purchase of investment securities (736) (796) (1,775)
Proceeds from sale of equipment 39 109 77
Proceeds from investment activities (Note 3) 416 714 3,301
--------------------------------------
Net cash used in investing activities $(43,529) $(12,449) $(21,009)
--------------------------------------
(Continued)
F-10
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002
in thousands
2004 2003 2002
- ----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term debt $ 13,177 $ -- $ --
Principal payments on long-term debt (15,895) (8,697) (4,393)
Net proceeds from (payments of) lines of credit -- (3,503) (2,697)
Dividends paid (3,279) (2,960) (2,794)
Proceeds from exercise of incentive stock options 586 487 296
-------------------------------------
Net cash (used in) financing activities $ (5,411) $(14,673) $(9,588)
-------------------------------------
Net cash provided by (used in) continuing operations $(14,524) $ 3,477 $(7,573)
Net cash provided by discontinued operations -- 23,010 7,745
-------------------------------------
Net increase (decrease) in cash and cash
equivalents $(14,524) $ 26,487 $ 172
Cash and cash equivalents:
Beginning 28,696 2,209 2,037
-------------------------------------
Ending $ 14,172 $ 28,696 $ 2,209
=====================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of capitalized interest of $30 in
2004; $26 in 2003, and $93 in 2002 $ 3,112 $ 3,577 $ 4,274
=====================================
Income taxes $ 935 $ 15,569 $ 1,045
=====================================
Non-cash transactions:
During 2002, the Company issued 4,654 shares of Company stock to employees
valued at $0.1 million in recognition of the Company's 100th year
anniversary.
See accompanying notes to consolidated financial statements.
F-11
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of business: Shenandoah Telecommunications Company and its
subsidiaries (collectively, the "Company") provide telephone service, wireless
personal communications service ("PCS") under the Sprint brand name, cable
television, unregulated communications equipment sales and services, Internet
access, and paging services. In addition, the Company leases towers and operates
and maintains an interstate fiber optic network. Following its acquisition of
NTC Communications LLC ("NTC") in November 2004 (Note 14), the Company provides
local and long distance voice, cable television, internet and data services on
an, at times, exclusive basis to multi-dwelling unit communities primarily
located near colleges and universities in the southeastern United States. The
Company's other operations are located in the four-state region surrounding the
Northern Shenandoah Valley of Virginia. Pursuant to a management agreement with
Sprint Communications Company and its related parties (collectively, "Sprint"),
the Company is the exclusive PCS Affiliate of Sprint providing wireless mobility
communications network products and services on the 1900 megahertz spectrum
range in the geographic area extending from Altoona, Harrisburg and York,
Pennsylvania, south through Western Maryland, and the panhandle of West
Virginia, to Harrisonburg, Virginia. The Company is licensed to use the Sprint
brand name in this territory, and operates its network under the Sprint radio
spectrum license ( See Note 7). 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 balances and transactions
have been eliminated in consolidation.
Use of estimates: Management of the Company has made a number of estimates and
assumptions related to the reporting of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management reviews its estimates, including those related to
recoverability and useful lives of assets as well as liabilities for income
taxes and pension benefits. Changes in facts and circumstances may result in
revised estimates, and actual results could differ from those reported
estimates.
Cash and cash equivalents: The Company considers all temporary cash investments
purchased with a 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 FDIC insurance
limits. Cash equivalents were $14.1 million, $27.9 million, and $2.2 million at
December 31, 2004, 2003 and 2002, respectively.
Accounts receivable: Accounts receivable are recorded at the invoiced amount and
do not bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience and by industry and national economic data. The Company
reviews its allowance for doubtful accounts monthly. Past due balances meeting
specific criteria are reviewed individually for collectibility. All other
balances are reviewed on a pooled basis. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. Accounts receivable are
concentrated among customers within the Company's geographic service area and
large telecommunications companies. The Company's allowance for uncollectable
receivables related to continuing operations was $376 thousand, $477 thousand
and $914 thousand at December 31, 2004, 2003 and 2002, respectively.
Securities and investments: The classifications of debt and equity securities
are determined by management at the date individual investments are acquired.
The appropriateness of such classification is continually reassessed. The
Company monitors the fair value of all investments, and based on factors such as
market conditions, financial information and industry conditions, the Company
will reflect impairments in values as is warranted. The classification of those
securities and the related accounting policies are as follows:
F-12
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
recorded at fair value as determined by quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of other comprehensive
income until realized. Realized gains and losses are determined on a
specific identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than
temporary results in a reduction in the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established.
Investments Carried at Cost: Investments in common stock in which the
Company does not have a significant ownership (less than 20%) and for
which there is no ready market, are carried at cost. Information regarding
investments carried at cost is reviewed continuously for evidence of
impairment in value. Impairments are charged to earnings and a new cost
basis for the investment is established.
Equity Method Investments: Investments in partnerships and unconsolidated
corporations where the Company's ownership is 20% or more, or where the
Company otherwise has the ability to exercise significant influence, are
reported under the equity method. Under this method, the Company's equity
in earnings or losses of investees is reflected in earnings. Distributions
received reduce the carrying value of these investments. The Company
recognizes a loss when there is a decline in value of the investment which
is other than a temporary decline.
Materials and supplies: New and reusable materials are carried in inventory at
the lower of average cost or market value. Inventory held for sale, such as
telephones and accessories, are carried at the lower of average cost or market
value. Non-reusable material is carried at estimated salvage value.
Property, plant and equipment: Property, plant and equipment is stated at cost.
The Company capitalizes all costs associated with the purchase, deployment and
installation of property, plant and equipment, including interest on major
capital projects during the period of their construction. Expenditures,
including those on leased assets, which extend the useful life or increase its
utility, are capitalized. Maintenance expense is recognized when repairs are
performed. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Depreciation and amortization is not
included in the income statement line items "Costs of goods and services,"
"Network operating costs" or "Selling, general and administrative". Depreciation
expense for continuing operations was approximately 8.9%, 8.7% and 8.6% of
average depreciable assets for the years ended December 31, 2004, 2003 and 2002,
respectively. Depreciation lives are assigned to assets based on their estimated
useful lives in conjunction with industry and regulatory guidelines, where
applicable. Such lives, while similar, may exceed the lives that would have been
used if the Company did not operate certain segments of the business in a
regulated environment. The Company takes technology changes into consideration
as it assigns the estimated useful lives, and monitors the remaining useful
lives of asset groups to reasonably match the remaining economic life with the
useful life and makes adjustments when necessary. During the year ended December
31, 2004, the estimated useful lives of certain asset classes were decreased to
reflect the remaining economic useful lives of their assets. As a result, the
Company recorded a $0.5 million charge for the change in estimated useful lives.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires the Company to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from acquisition, construction, development and/or
normal use of the assets. The Company also records 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 adopted SFAS No. 143 on
January 1, 2003. The impact of the adoption of SFAS No. 143 was the recording of
a capitalized asset retirement obligation of $158 thousand, the related
accumulated depreciation of $32 thousand, the present value of the future
removal obligation of $249 thousand, and the cumulative effect of the accounting
change of $76 thousand after taxes recorded on the consolidated statements of
income.
F-13
The Company records the retirement obligation on towers owned where there is a
legal obligation to remove the tower and restore the site to its original
condition, as required by certain operating leases and applicable zoning
ordinances of certain jurisdictions, at the time the Company discontinues its
use. The obligation was estimated based on the size of the tower. The Company's
cost to remove the towers is amortized over the life of the tower. The pro forma
liability on January 1, 2002 would have been $236 thousand, and was $249
thousand on December 31, 2002. On December 31, 2004 and 2003, the liability was
$334 thousand and $300 thousand, respectively. Accretion and depreciation
expense for the years ended December 31, 2004 and 2003 was approximately $20 and
$8 thousand before taxes, respectively.
Cost in excess of net assets of business acquired and intangible assets: In June
2001, FASB issued SFAS No.142, "Goodwill and Other Intangible Assets," which
eliminates amortization of goodwill and intangible assets that have indefinite
useful lives and requires annual tests of impairment of those assets. SFAS No.
142 also provides specific guidance about how to determine and measure goodwill
and intangible asset impairments, and requires additional disclosures of
information about goodwill and other intangible assets. The provisions of SFAS
No. 142 were required to be applied starting with fiscal years beginning after
December 15, 2001 and applied to all goodwill and other intangible assets
recognized in financial statements at that date. Goodwill and intangible assets
are assessed annually for impairment and in interim periods if certain events
occur indicating that the carrying value may be impaired. No impairment of
goodwill or intangible assets was required to be recorded in the year ended
December 31, 2004, 2003 or 2002. In the year ended December 31, 2004, $5.6
million of goodwill was recorded related to the NTC acquisition (Note 14).
Goodwill is allocated to the reporting segment responsible for the acquisition
that gave rise to the goodwill. The following presents the goodwill balance
allocated by segment and changes in the balances for the year ended December 31,
2004:
Converged
CATV Services
Segment Segment Total
------------------------------------
(in thousands)
Balance as of December 31, 2003 3,313 -- 3,313
Acquisition (Note 14) -- 5,550 5,550
------------------------------------
Balance as of December 31, 2004 3,313 5,550 8,863
====================================
There were no changes in the goodwill balance for the years ended December 31,
2003 and 2002.
Acquired intangible assets consist of the following at December 31, 2004:
Useful Gross
Life Carrying Accumulated
(Years) Amount Amortization Net
---------------------------------------------------
(in thousands)
Business contracts 13.7 $ 2,433 $ (15) $ 2,418
Non-compete agreement 4 835 (17) 818
Trade name 5 168 (3) 165
-------------------------------------
$ 3,436 $ (35) $ 3,401
-------------------------------------
There were no acquired intangible assets at December 31, 2003 and 2002.
Amortization expense related to intangible assets was $35 thousand for the year
ended December 31, 2004 and there was no intangible asset amortization expense
for the years ended December 31, 2003 and 2002. Aggregate amortization expense
for intangible assets for the periods shown will be as follows:
December 31, Amount
- ----------------------------------------------
(in thousands)
2005 $ 422
2006 422
2007 422
2008 404
2009 209
F-14
Retirement plans: The Company maintains a noncontributory defined benefit 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. During the year ended December 31, 2003, the Company adopted a
Supplemental Executive Retirement Plan for selected employees. This is an
unfunded plan and is maintained primarily for the purpose of providing
additional retirement benefits for a select group of management employees. The
Company also maintains a defined contribution plan under which substantially all
employees may defer a portion of their earnings on a pretax basis, up to the
allowable federal maximum. The Company may make matching and discretionary
contributions to this plan. Neither of the funded retirement plans holds Company
stock in the plan's portfolio.
Income taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company evaluates the
recoverability of tax assets generated on a state-by-state basis from net
operating losses apportioned to that state. Management uses a more likely than
not threshold to make that determination and has established a valuation
allowance against the deferred tax assets, in case they may not be recoverable.
Revenue recognition: The Company recognizes revenue when persuasive evidence of
an arrangement exists, services have been rendered or products have been
delivered, the price to the buyer is fixed and determinable and collectibility
is reasonably assured. Revenues are recognized by the Company based on the
various types of transactions generating the revenue. For equipment sales,
revenue is recognized when the sales transaction is complete. For services,
revenue is recognized as the services are performed.
Beginning in the year ended December 31, 2000, coinciding with the inception of
activation fees in its PCS segment, nonrefundable PCS activation fees and the
portion of the activation costs deemed to be direct costs of acquiring new
customers (primarily activation costs and credit analysis costs) were deferred
and recognized ratably over the estimated life of the customer relationship of
30 months in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin ("SAB") No. 101. Effective July 1, 2003, the Company adopted
Emerging Issues Task Force ("EITF") No. 00-21, "Accounting for Revenue
Arrangements with Multiple Element Deliverables." The EITF guidance addresses
how to account for arrangements that may involve multiple revenue-generating
activities, i.e., the delivery or performance of multiple products, services,
and/or rights to use assets. In applying this guidance, separate contracts with
the same party, entered into at or near the same time, will be presumed to be a
bundled transaction, and the consideration will be measured and allocated to the
separate units based on their relative fair values. The adoption of EITF 00-21
has required evaluation of each arrangement entered into by the Company for each
sales channel. The Company will continue to monitor arrangements with its sales
channels to determine if any changes in revenue recognition would need to be
made in the future. The adoption of EITF 00-21 has resulted in substantially all
of the activation fee revenue generated from Company-owned retail stores and
associated direct costs being recognized at the time the related wireless
handset is sold and is classified as equipment revenue and cost of goods and
services, respectively. Upon adoption of EITF 00-21, previously deferred
revenues and costs will continue to be amortized over the remaining estimated
life of a subscriber, not to exceed 30 months. Revenue and costs for activations
at other retail locations will continue to be deferred and amortized over their
estimated lives as prescribed by SAB 101, as amended by SAB 104. The adoption of
EITF 00-21 had the effect of increasing equipment revenue by $68 thousand and
increasing costs of activation by $23 thousand in the year ended December 31,
2003, which otherwise would have been deferred and amortized. The amounts of
deferred revenue under SAB101, as amended by SAB 104, at December 31, 2004, 2003
and 2002 were $ 0.8 million, $1.2 million and $1.5 million, respectively. The
deferred costs at December 31, 2004, 2003 and 2002 were $ 0.3 million, $0.4
million and $0.7 million, respectively.
Prior to January 1, 2004, with the exception of certain roaming and equipment
sales revenues, the Company recorded its PCS revenues based on the revenues
collected by Sprint, net of the 8% fee retained by Sprint. After the adoption of
the Amended Agreement, effective January 1, 2004, the Company records its PCS
revenues, with the exception of certain roaming and equipment sales revenues,
based on the PCS revenues billed, as opposed to collected, by Sprint, net of the
8% fee retained by Sprint. The cash settlements received from Sprint are net of
the 8% fee, customer credits, account write offs and other billing adjustments.
The Amended Agreement only changes the timing of the Company's receipt of the
cash settlements from Sprint and does not change the Company's recording of
revenue.
F-15
Stock Option Plan: To account for its stock options granted under the Company
Stock Incentive Plan (the "Plan"), the Company applies the intrinsic value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
including FASB Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of APB Opinion No. 25 issued in
March 2000. Under this method, compensation expense is recorded on the date of
the grant only if the current market price of the underlying stock exceeded the
exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123."
Grants of options under the Plan are accounted for following the APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense has been
recognized under the Plan for years prior to the grants in the year ended
December 31, 2004. During the year ended December 31, 2004, the Company issued
tandem awards of stock options and stock appreciation rights. The awards have
been accounted for as stock appreciation rights and therefore the Company
recorded a liability for the related expense since it is assumed the awards will
be settled in cash. As a result of the tandem awards, the Company recognized
compensation expense for the vested portion of the awards of $162 thousand for
the year ended December 31, 2004. Had compensation expense been recorded for the
options based on fair values of the awards at the grant date (the method
prescribed in SFAS No. 123), reported net income and earnings per share would
have been reduced to the pro forma amounts shown in the following table for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------------------------------------------
Net Income (in thousands, except per share amounts)
As reported $ 10,243 $ 32,074 $ 4,519
Add: Recorded stock based compensation expense
included in reported net income, net of related
income tax effects -- -- --
Deduct: Pro forma compensation expense, net of
related income tax effects 143 185 212
Pro forma 10,100 31,889 4,307
Earnings per share, basic and diluted
As reported, basic $ 1.35 $ 4.23 $ 0.60
As reported, diluted 1.34 4.22 0.60
Pro forma, basic 1.33 4.21 0.57
Pro forma, diluted 1.32 4.19 0.57
Earnings per share: Basic income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the year. Diluted income (loss) per share is computed by dividing the income
(loss) by the sum of the weighted average number of common shares outstanding
and potential dilutive common shares determined using the treasury stock method.
Because the Company reported a net loss from continuing operations in 2002, the
diluted income (loss) per share is the same as basic income (loss) per share,
since including any potentially dilutive securities would be antidilutive to the
net loss per share from continuing operations. In the years ended December 31,
2004 and 2003, all options were dilutive. There were no adjustments to net
income (loss) in the computation of diluted earnings per share for any of the
years presented. The following tables show the computation of basic and diluted
earnings per share for the years ended December 31, 2004, 2003 and 2002:
F-16
2004 2003 2002
--------------------------------------
Basic income (loss) per share (in thousands, except per share amounts)
Net income (loss) from continuing operations $ 10,243 $ 9,761 $ (2,893)
--------------------------------------
Weighted average shares outstanding 7,611 7,577 7,542
--------------------------------------
Basic income (loss) per share - continuing operations $ 1.35 $ 1.29 $ (0.38)
======================================
Effect of stock options outstanding:
Weighted average shares outstanding 7,611 7,577 7,542
Assumed exercise, at the strike price at the beginning of year 170 172 --
Assumed repurchase of options under treasury stock method (124) (141) --
--------------------------------------
Diluted weighted average shares 7,657 7,608 7,542
--------------------------------------
Diluted income (loss) per share - continuing operations $ 1.34 $ 1.28 $ (0.38)
======================================
Recently Issued Accounting Standards:
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which provides new guidance for assessing impairment losses on debt and equity
investments. EITF Issue No. 03-1 also includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective for the Company's year ended December
31, 2004. The Company will evaluate the effect, if any, of EITF Issue No. 03-1
when final guidance is released. During the fourth quarter of the year ended
December 31, 2004, the Company recognized a $28 thousand impairment loss on
NetIQ Corp. and as a result the Company does not have any unrealized losses or
additional disclosures required by EITF issue No. 03-1at December 31, 2004.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 (R) replaces SFAS No. 123, and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No.
95, "Statement of Cash Flows." The approach in SFAS 123 (R) is similar to the
approach described in SFAS No. 123, except that SFAS No. 123 (R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS No. 123 (R) will be effective for
the Company beginning July 1, 2005. The Company is evaluating the impact of
applying SFAS No. 123 (R) and does not believe the application will have a
material impact on the Company's consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003),"Consolidation of Variable Interest Entities," which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities," which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in variable
interest entities ("VIEs") created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will be
applied beginning on January 1, 2005, except it must be applied in the fourth
quarter of the year ended December 31, 2003 for any VIEs that are considered to
be special purpose entities. For any VIEs that must be consolidated under FIN
46R that were created before January 1, 2004, the assets, liabilities and
non-controlling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46R first applies may be used to measure
the assets, liabilities and non-controlling interest of the VIE. The Company
does not have any investments in entities it believes are variable interest
entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Liabilities and Equity," which was effective
at the beginning of the first interim period beginning after June 15, 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatory redeemable financial
instruments. For certain mandatory redeemable financial instruments, the
Statement will be effective for the Company on January 1,
F-17
2005. The effective date has been deferred indefinitely for certain other types
of mandatory redeemable financial instruments. The Company currently does not
have any financial instruments that are within the scope of this Statement.
In December 2003, the FASB issued Statement No. 132(R). Statement No. 132(R) is
a revision of Statement No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS 132(R) is effective for financial
statements with fiscal years ending after December 15, 2003. SFAS 132(R)
requires additional disclosures including information describing the types of
plan assets, investment strategy, measurement date(s), plan obligations, cash
flows, and components of net periodic benefit cost recognized during interim
periods. The objectives of the revisions are to provide qualitative information
about the items in the financial statements, quantitative information about
items recognized or disclosed in the financial statements, information that
enables users of financial statements to assess the effect that pension plans
and other postretirement benefit plans have on entities' results of operations,
and information to facilitate assessments of future earnings and cash flows.
With the exception of the 2004 adoption of the requirement to include estimated
future benefit payments, the Company adopted this statement effective December
31, 2003, with disclosures included in Note 9.
Reclassifications: Certain amounts reported in the 2003 and 2002 financial
statements have been reclassified to conform with the 2004 presentation, with no
effect on net income or shareholders' equity, including the following
reclassifications:
o In 2004, the Company evaluated the income statement classification
of wireless handset mail-in rebates in Company retail stores and
determined the most appropriate treatment is to include the mail-in
rebates as a reduction of wireless revenues. Prior to 2004, the
Company recorded mail-in rebates in selling, general and
administrative expenses. As a result of this change, both total
operating revenues and selling, general and administrative expenses
were decreased by mail-in rebate amounts of $0.2 million and $0.3
million for the years ended December 31, 2003 and 2002,
respectively.
o As a result of an amendment to the Management Agreement with Sprint
in 2004, network support costs are bundled in a $7.25 per subscriber
monthly charge. Prior to the amendment, network support costs were
included in network operating costs. As a result of the amendment,
network support costs are not separately identifiable and are
therefore included in selling, general and administrate expenses as
part of the per subscriber monthly charge in 2004. Approximately
$1.8 million and $0.7 million was reclassified from network
operating costs to selling, general and administrative expenses for
the years ended December 31, 2003 and 2002, respectively, to conform
with the 2004 presentation.
o In 2004, for the purpose of classifying all wireless handset costs
associated with national retailers in costs of goods and services,
the Company recorded wireless handset rebates given to national
retailers in costs of goods sold instead of selling, general and
administrative expenses as was the practice in prior years. To
conform to the 2004 presentation, $0.7 million for each of the prior
years ended December 31, 2003 and 2002, was reclassified from
selling, general and administrative expenses to cost of goods sold.
o In 2004, the Company recorded costs associated with its Shentel
Pages directory to cost of goods sold. To conform with the 2004
presentation, the Company reclassified $0.7 million for each of the
years ended December 31, 2003 and 2002 from selling, general and
administrative expenses to cost of goods sold.
Note 2. Discontinued Operations
In November 2002, the Company entered into an agreement to sell its 66% General
Partner interest in the Virginia 10 RSA Limited Partnership (cellular operation)
to Verizon Wireless for $37.0 million. The closing of the sale took place at the
close of business on February 28, 2003. The total proceeds received were $38.7
million, including $5.0 million held in escrow, and a $1.7 million adjustment
for estimated working capital at the time of closing. There was a post- closing
adjustment based on the actual working capital balance as of the closing date,
which resulted in a $39 thousand charge for the Company. The $5.0 million escrow
was established for any contingencies and indemnification issues that would
arise during the two-year post-closing period and is included in deferred
charges and other assets in the consolidated balance sheet at December 31, 2003
and as an escrow receivable at December 31, 2004. In February 2005, the Company
received the $5.0 million from the escrow agent. The Company's gain on the
transaction was approximately $35 million. After the closing, the Company
provided transition services to Verizon for a period of approximately three
months for fees of approximately $40 thousand per month.
The assets and liabilities attributable to the cellular operation classified as
held for sale in the consolidated balance sheets and consist of the following at
December 31, 2002:
F-18
2002
------------
Assets (in thousands)
Accounts receivable $ 2,608
Other current assets 309
Property, plant and equipment, (net) 2,631
------------
Total assets $ 5,548
============
Liabilities and minority interest
Accounts payable and accrued expenses $ 381
Deferred revenue and deposits 161
Minority interest 1,666
------------
Total liabilities and minority interest $ 2,208
============
The operations of the cellular partnership, including the minority interest,
have been reclassified as discontinued operations, net of taxes in the
consolidated statements of income for all periods presented. Operating results
and the sale of the discontinued operations are summarized as follows:
(in thousands) 2003 2002
-------- --------
Revenues $ 3,056 $ 20,895
Operating expenses 453 3,618
Other income -- 3
-------- --------
Income before minority interest and taxes 2,603 17,280
Minority interests (773) (5,200)
Sale of partnership interest 34,973 --
Income taxes (14,414) (4,668)
-------- --------
Net income from discontinued operations $ 22,389 $ 7,412
======== ========
Note 3. Securities and Investments
The Company has three classifications of investments: available for sale
securities, investments carried at cost, and equity method investments. See Note
1 for definitions of each classification of investment. The following tables
present the investments of the Company for the three-year period ended December
31, 2004.
Available-for-sale securities at December 31, 2004, 2003 and 2002 consist of the
following:
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
--------------------------------------------------
(in thousands)
2004
- ----------------------------------------------------------------------------
Deutsche Telekom, AG $ 85 $ 101 $ -- $ 186
NetIQ Corp. 46 -- -- 46
--------------------------------------------------
$ 131 $ 101 $ -- $ 232
==================================================
2003
- ----------------------------------------------------------------------------
Deutsche Telekom, AG $ 85 $ 64 $ -- $ 149
Other 73 -- 23 50
--------------------------------------------------
$ 158 $ 64 $ 23 $ 199
==================================================
- ----------------------------------------------------------------------------
2002
- ----------------------------------------------------------------------------
Deutsche Telekom, AG $ 85 $ 20 $ -- $ 105
Other 73 -- 27 46
--------------------------------------------------
$ 158 $ 20 $ 27 $ 151
==================================================
In the year ended December 31, 2002, the Company sold its holdings of VeriSign,
Inc, for proceeds of $2.8 million and a realized loss of $9.0 million. The
VeriSign stock was valued at $38 per share at December 31, 2001, and declined
over the ensuing months to approximately $6 per share in early July 2002. The
Company sold all of its holdings in the
F-19
stock early in the third quarter of the year ended December 31, 2002. The
Company's original investment in VeriSign's predecessor companies was
approximately $1.0 million. Total proceeds from all sales of stock in VeriSign
and its predecessor companies were $8.1 million, or more than eight times the
original investment.
There were no gross realized gains on available-for-sale securities included in
income in the year ended December 31, 2004, 2003 or 2002. Gross realized losses
included in income in the years ended December 31, 2004, 2003 and 2002 were $28
thousand, $3 thousand and $9.0 million, respectively.
Changes in the unrealized gains (losses) on available-for-sale securities during
the years ended December 31, 2004, 2003 and 2002 are reported as a separate
component of shareholders' equity are as follows:
2004 2003 2002
-------------------------------------
Available-for-sale securities: (in thousands)
Beginning Balance $ 41 $ (7) $ 68
Unrealized holding gains (losses) during the year, net 32 48 (75)
Reclassification of recognized (gains) during the year, net 28 -- --
-------------------------------------
101 41 (7)
Deferred tax effect related to net unrealized gains 36 15 (3)
--------------------------------------
Ending Balance $ 65 $ 26 $ (4)
=====================================
At December 31, 2004, 2003 and 2002, other investments, comprised of equity
securities, which do not have readily determinable fair values, consist of the
following:
2004 2003 2002
------------------------------
Cost method: (in thousands)
Rural Telephone Bank $ 796 $ 796 $ 796
NECA Services, Inc. 500 500 500
CoBank 1,486 1,321 1,126
Other 151 182 241
------------------------------
2,933 2,799 2,663
------------------------------
Equity method:
South Atlantic Venture Fund III L.P. 52 89 263
South Atlantic Private Equity Fund IV L.P. 513 541 707
Dolphin Communications Parallel Fund, L.P. 190 184 273
Dolphin Communications Fund II, L.P. 1,870 1,290 1,024
Burton Partnership 1,252 1,149 988
NTC Communications LLC (Note 14) -- 971 1,089
Virginia Independent Telephone Alliance 173 228 248
ValleyNet 35 17 17
------------------------------
4,085 4,469 4,609
------------------------------
Total investments $7,018 $7,268 $7,272
==============================
The Company's investment in CoBank increased $165 thousand, $195 thousand and
$358 thousand in the years ended December 31, 2004, 2003 and 2002, respectively,
due to the ongoing patronage earned from the outstanding investment and loan
balances the Company has with CoBank.
In the year ended December 31, 2004, the Company received distributions from its
equity investments totaling $378 thousand in cash and invested $736 thousand in
two equity investments, Dolphin Communications Parallel Fund, LP and Dolphin
Communications Fund II, LP. These two investments recorded a net gain of
approximately $42 thousand in the year ended December 31, 2004. Other equity
investments had a net loss of $75 thousand in the year ended December 31, 2004.
The Company was committed to invest an additional $1.1 million at December 31,
2004 in various equity method investees pursuant to capital calls from the fund
managers. It is not practicable to estimate the fair value of the other
investments due to their limited market and restricted nature of their
transferability.
F-20
The Company's ownership interests in Virginia Independent Telephone Alliance and
ValleyNet at December 31, 2004 were approximately 22% and 20%, respectively. The
Company purchases services from Virginia Independent Telephone Alliance and
ValleyNet at rates comparable to those charged to other customers. Other equity
method investees are investment limited partnerships, in each of which the
Company had an ownership interest of approximately 2% at December 31, 2004.
Note 4. Plant in Service
Plant in service consists of the following at December 31, 2004, 2003 and 2002:
Estimated
Useful Lives 2004 2003 2002
---------------------------------------------------
(in thousands)
Land $ 802 $ 802 $ 792
Buildings and structures 15 - 40 years 36,626 30,956 28,949
Cable and wire 15 - 40 years 61,674 51,041 49,495
Equipment and software 3 - 16.6 years 127,902 114,632 104,833
----------------------------------
$ 227,004 $ 197,431 $ 184,069
==================================
Note 5. Long-Term Debt and Revolving Lines of Credit
Total debt consists of the following at December 31, 2004, 2003 and 2002:
Weighted
Average
Interest Rate 2004 2003 2002
------------------------------------------------
(in thousands)
Rural Telephone Bank ("RTB") Fixed 6.02% $ 5,120 $ 5,599 $ 10,645
Rural Utilities Service ("RUS") Fixed 5.00% 142 149 159
CoBank (term loan) Fixed 7.56% 33,652 37,398 41,039
CoBank revolving credit facility Variable 3.66% 13,177 -- --
RUS Development Loan Interest free 200 200 200
------------------------------
52,291 43,346 52,043
Current maturities 4,372 4,230 4,482
------------------------------
Total long-term debt $ 47,919 $ 39,116 $ 47,561
==============================
CoBank 1-year revolver Variable 2.79% - 5.03% $ -- $ -- $ 3,200
SunTrust Bank revolver Variable 2.05% - 2.53% $ -- $ -- $ 303
==============================
On November 30, 2004, the Company amended the terms of its Master Loan Agreement
with CoBank, ACB to provide for a $15 million revolving reducing credit
facility. Under the terms of the amended credit facility, the Company can borrow
up to $15 million for use in connection with the acquisition of NTC
Communications LLC and other corporate purposes. The revolving credit facility
has a 12 year term with quarterly payments beginning June 2006. Borrowings under
the facility have an adjustable rate, less patronage credits, that can be
converted to a fixed rate at the Company's option. The loan is secured by a
pledge of the stock of all of the subsidiaries of the Company as well as all of
the outstanding membership interests in NTC.
The RTB loans are payable $67 thousand monthly, including interest. RUS loans
are payable $4 thousand quarterly, including interest. The RUS and RTB loan
facilities have maturities through 2019. The CoBank term facility requires
monthly payments of $580 thousand, including interest. The final maturity of the
CoBank term loan is in 2013.
The Company has a $0.5 million revolving credit facility with SunTrust Bank that
the Company uses to fund short-term liquidity variations due to the timing of
customer receipts and vendor payments for services. This facility matures on May
31, 2005, and is priced at the 30-day LIBOR rate plus 1.25%. The Company has not
borrowed on this facility. The long-term debt is secured by a pledge of the
stock of the Company's subsidiaries. The CoBank term loan is $33.7 million, all
of which is at fixed rates ranging from approximately 3.7% to 8.0%. The stated
rate excludes patronage credits that are received from CoBank. These patronage
credits are a distribution of profits of CoBank, which is a
F-21
cooperative required to distribute its profits to its members. During the first
quarter in each of the reported years, the Company received patronage credits of
approximately 81 basis points on its outstanding CoBank debt balance. The
Company accrued a similar amount in the year ended December 31, 2004, in
anticipation of the early 2005 distribution of the credits by CoBank.
The Company is required to meet financial covenants measured at the end of each
quarter, based on a trailing 12-month basis and calculated on continuing
operations. At December 31, 2004, the covenant calculations were as follows; the
ratio of total debt to operating cash flow, which must be 2.5 or lower, was 1.4.
The equity to total assets ratio, which must be 35% or higher, was 53.9%. The
ratio of operating cash flow to scheduled debt service, which must exceed 2.0,
was 5.1. The Company was in compliance with all other covenants related to its
debt agreements at December 31, 2004.
The aggregate maturities of long-term debt for each of the five years subsequent
to December 31, 2004 are as follows:
Year Amount
---- -------------
(in thousands)
2005 $ 4,372
2006 5,203
2007 5,939
2008 6,114
2009 6,303
Later years 24,360
-------------
$ 52,291
=============
The estimated fair value of fixed rate debt instruments as of December 31, 2004,
2003 and 2002 was $49.3 million, $42.6 million and $51.1 million, respectively,
determined by discounting the future cash flows of each instrument at rates
offered for similar debt instruments of comparable maturities as of the
respective year-end dates.
All other financial instruments presented on the consolidated balance sheets
approximate fair value. They include cash and cash equivalents, receivables,
investments, payables, and accrued liabilities.
Note 6. Income Taxes
Total income taxes for the years ended December 31, 2004, 2003 and 2002 were
allocated as follows:
2004 2003 2002
------------------------------------
(in thousands)
Income tax provision (benefit) from continuing operations $ 6,078 $ 5,304 $ (2,109)
Income taxes on discontinued operations -- 14,414 4,668
Income tax from cumulative effect of an accounting change -- (47) --
Accumulated other comprehensive income for unrealized
holding gains (losses) on equity securities 21 18 (29)
-----------------------------------
$ 6,099 $ 19,689 $ 2,530
===================================
The Company and its subsidiaries file income tax returns in several
jurisdictions. The provision for the federal and state income taxes attributable
to income (loss) from continuing operations consists of the following
components:
F-22
Years Ended December 31,
-------------------------------------------
2004 2003 2002
-------------------------------------------
(in thousands)
Current provision (benefit)
Federal taxes $ (323) $ 762 $ (2,076)
State taxes 442 147 (212)
-------------------------------------------
Total current provision (benefit) 119 909 (2,288)
Deferred provision (benefit)
Federal taxes 5,528 4,091 592
State taxes 431 304 (413)
-------------------------------------------
Total deferred provision 5,959 4,395 179
-------------------------------------------
Income tax provision (benefit) $ 6,078 $ 5,304 $ (2,109)
===========================================
A reconciliation of income taxes determined by applying the Federal and state
tax rates to income (loss) from continuing operations is as follows for the
years ended December 2004, 2003 and 2002:
Years Ended December 31,
--------------------------------------------
2004 2003 2002
--------------------------------------------
(in thousands)
Computed "expected" tax expense $ 5,548 $ 5,122 $ (1,701)
State income taxes, net of federal tax effect 576 298 (460)
Other, net (46) (116) 52
--------------------------------------------
Income tax provision (benefit) $ 6,078 $ 5,304 $ (2,109)
============================================
Net deferred tax assets and liabilities consist of the following at December 31,
2004, 2003 and 2002:
2004 2003 2002
---------------------------------------
Deferred tax assets: (in thousands)
Allowance for doubtful accounts $ 129 $ 192 $ 370
Accrued compensation costs 61 -- 181
State net operating loss carryforwards, net of federal
tax 1,583 1,569 1,425
Recognized investment losses including impairments -- -- 593
Deferred revenues 212 304 338
AMT credits -- -- 285
Accrued pension costs 175 476 395
Other, net 128 81 23
---------------------------------------
Total gross deferred tax assets 2,288 2,622 3,610
Less valuation allowance (728) (864) (704)
---------------------------------------
Net deferred tax assets 1,560 1,758 2,906
------------------------------- -------
Deferred tax liabilities:
Plant-in-service 25,844 20,058 17,568
Escrowed gain on sale of discontinued operations 1,859 1,859 --
Unrealized gain on investments 38 15 --
Gain on investments, net 98 123 --
---------------------------------------
Total gross deferred tax liabilities 27,839 22,055 17,568
---------------------------------------
Net deferred tax liabilities $ 26,279 $ 20,297 $ 14,662
=======================================
F-23
In assessing the ability to realize deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generating future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods for which the deferred tax assets are deductible, management believes it
more likely than not that the Company will realize the benefits of the
deductible differences that are not reserved by the valuation allowance, which
decreased by $136 thousand, to $728 thousand in the year ended December 31, 2004
from $864 thousand in the year ended December 31, 2003. The Company has
generated net operating loss carryforwards of approximately $26.1 million from
its PCS operations in several states. The carry forwards expire at varying dates
beginning in the year ending December 31, 2005.
Note 7. Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the "Agreement") with
Sprint whereby the Company committed to construct and operate a PCS network
using CDMA air interface technology, replacing an earlier PCS network based on
GSM technology. Under the Agreement, the Company is the exclusive PCS Affiliate
of Sprint providing wireless mobility communications network products and
services on the 1900 MHz band in its territory which extends from Altoona, York
and Harrisburg, Pennsylvania, and south along the Interstate 81 corridor through
Western Maryland, the panhandle of West Virginia, to Harrisonburg, Virginia. The
Company is authorized to use the Sprint brand name in its territory, and operate
its network under the Sprint radio spectrum license. As an exclusive PCS
Affiliate of Sprint, the Company has the exclusive right to build, own and
maintain its portion of Sprint's nationwide PCS network, in the aforementioned
areas, to Sprint's specifications. The initial term of the Agreement is for 20
years and is automatically renewable for three 10-year options, unless
terminated by either party under provisions outlined in the Agreement.
Under the Sprint agreements, Sprint provides the Company significant support
services such as customer service, billing, collections, long distance, national
network operations support, inventory logistics support, use of the Sprint brand
names, national advertising, national distribution and product development. In
addition, the Company derives substantial travel revenue and incurs substantial
travel expenses when Sprint and Sprint's PCS Affiliate partners' subscribers
incur minutes of use in the Company's territory and when the Company's
subscribers incur minutes of use in Sprint and Sprint's PCS Affiliate partners'
territories. These transactions are recorded as travel revenue, network
operating cost and travel cost, cost of equipment and selling and marketing
expense in the Company's consolidated statements of income. Cost of service
related to access to the nationwide network, including travel transactions and
long distance expenses, are recorded in network operating costs. The costs of
services such as billing, collections and customer service are included in
selling, general and administrative costs. Cost of equipment transactions
between the Company and Sprint relate to inventory purchased and subsidized
costs of handsets. These costs also include transactions related to subsidized
costs on handsets and commissions paid to Sprint for sales of handsets through
Sprint's national distribution programs.
Historically, Sprint determined charges for services provided at the beginning
of each calendar year. Sprint calculated the costs to provide these services for
its network partners and required a final settlement against the charges
actually paid. If the costs to provide these services were less than the amounts
paid by Sprint's network partners, Sprint issued a credit for these amounts. If
the costs to provide the services were more that the amounts paid by Sprint's
network partners, Sprint charged the network partners for these amounts. For the
years presented, the Company recorded the actual costs, after the adjustments,
which were recorded for these services provided by Sprint.
The wireless market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out and enhancement of Sprint's nationwide digital wireless network.
Sprint provides back-office and other services including travel clearing-house
functions, to the Company. For periods before January 1, 2004, there was no
prescribed formula defined in the agreements with Sprint for the calculation of
the fee charged to the Company for these services. Sprint adjusted these fees at
least annually. This situation changed with the execution of an amendment to the
Agreement which occurred on January 31, 2004, retroactive to January 1, 2004
(the "Amended Agreement"). By simplifying the formulas used and fixing certain
fees, the Amended Agreement provides greater certainty to the Company for
certain future expenses and revenues during the term of the agreement that
expires on December 31, 2006 and simplifies the methods used to settle revenue
and expenses between the Company and Sprint.
F-24
The Company entered into an amendment to the Amended Agreement with Sprint on
May 24, 2004 (the "May 2004 Amendment"). Under the terms of the May 2004
Amendment, the Company has agreed to participate in all new and renewed reseller
agreements signed through December 31, 2006. In addition, the Company signed an
agreement to participate in all existing Sprint reseller arrangements applicable
to the Company's service area. In consideration for this participation, the
Company received a reduction in the monthly fee per subscriber paid to Sprint
for back office services and certain network services.
The Company's PCS subsidiary is dependent upon Sprint's ability to execute
certain functions such as billing, customer care, collections and other
operating activities under the Company's agreements with Sprint. Due to the high
degree of integration within many of the Sprint systems, and the Company's
dependency on these systems, in many cases it would be difficult for the Company
to perform these services in-house or to outsource the services to another
provider. If Sprint was unable to perform any such service, the change could
result in increased operating expenses and have an adverse impact on the
Company's operating results and cash flow. In addition, the Company's ability to
attract and maintain a sufficient customer base is critical to generating
positive cash flow from operations and ultimately profitability for its PCS
operation. Changes in technology, increased competition, or economic conditions
in the wireless industry or the economy in general, individually and/or
collectively, could have an adverse effect on the Company's financial position
and results of operations.
Prior to January 1, 2004, with the exception of certain roaming and equipment
sales revenues, the Company recorded its PCS revenues based on the revenues
collected by Sprint, net of the 8% fee retained by Sprint. After the adoption of
the Amended Agreement, effective January 1, 2004, the Company records its PCS
revenues, with the exception of certain roaming and equipment sales revenues,
based on the PCS revenues billed, as opposed to collected, by Sprint, net of the
8% fee retained by Sprint. The cash settlements received from Sprint are net of
the 8% fee, customer credits, account write offs and other billing adjustments.
The Amended Agreement only changes the timing of the Company's receipt of the
cash settlements from Sprint and does not change the Company's recording of
revenue.
The Company receives and pays travel fees for inter-market usage of the network
by Sprint wireless subscribers not homed in a market in which they may use the
service. Sprint and its PCS Affiliates pay the Company for the use of its
network by their wireless subscribers, while the Company pays Sprint and its PCS
Affiliates reciprocal fees for Company subscribers using other segments of the
network not operated by the Company. The rates paid on inter-market travel were
reduced to $0.10 per minute as of January 1, 2002. The $0.10 rate was in effect
for the full year ended December 31, 2002. The travel rate for the years ended
December 31, 2004 and 2003 was $0.058 per minute and will remain at this rate
through December 31, 2006.
In connection with execution of the Amended Agreement, the Company and Sprint
resolved several outstanding issues. The result of the resolution of these
disputes was a favorable adjustment to revenue of $0.4 million for the
settlement of a dispute related to inter-market travel revenue generated by
certain other affiliate subscribers traveling in the Company's market.
Additionally, there was a reduction to previously billed disputed software
maintenance fees of $0.3 million that resulted from a re-allocation of the fees
from Sprint on a per subscriber basis versus the prior allocation which was on a
per switch basis.
The Sprint agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. The Company
was in compliance in all material respects with these requirements as of
December 31, 2004.
On December 15, 2004, Sprint and Nextel Communications, Inc. announced that they
entered into a definitive agreement to merge. The impact of this transaction on
the Company's PCS operation is uncertain as of the date of this report.
Note 8. Related Party Transactions
ValleyNet, an equity method investee of the Company, resells capacity on the
Company's fiber network under an operating lease agreement. Facility lease
revenue from ValleyNet was approximately $2.7 million, $3.1 million and $3.5
million in the years ended December 31, 2004, 2003 and 2002, respectively. At
December 31, 2004, 2003 and 2002, the Company had accounts receivable from
ValleyNet of approximately $0.3 million, $0.4 million and $0.4 million,
respectively. The Company's PCS operating subsidiary leases capacity through
ValleyNet fiber facilities. Payment for usage of these facilities was $0.8
million, $0.8 million and $1.2 million in the years ended December 31, 2004,
2003 and 2002 respectively.
F-25
Virginia Independent Telephone Alliance, an equity method investee of the
Company, provides SS7 signaling services to the Company. These transactions are
recorded as expense on the Company's books and were less than $30 thousand in
each of the years ended December 31, 2004, 2003 and 2002.
Two current directors of the Company, along with their family members,
collectively held 2.1% of the outstanding membership units of NTC which were
acquired by the Company on November 30, 2004 when the Company purchased the
remaining 83.9% of NTC that it did not already own. See Note 14 for additional
information about the purchase of NTC.
Note 9. Retirement Plans
The Company maintains a noncontributory defined benefit pension plan and a
separate defined contribution plan. The following table presents the defined
benefit plan's funded status and amounts recognized in the Company's
consolidated balance sheets.
2004 2003 2002
-----------------------------------------
Change in benefit obligation: (in thousands)
Benefit obligation, beginning $ 11,650 $ 9,585 $ 8,538
Service cost 604 486 420
Interest cost 691 615 591
Actuarial (gain) loss 910 1,211 252
Benefits paid (261) (247) (216)
-----------------------------------------
Benefit obligation, ending 13,594 11,650 9,585
-----------------------------------------
Change in plan assets:
Fair value of plan assets, beginning 7,853 6,705 7,375
Actual return on plan assets 1,154 948 (794)
Benefits paid (261) (247) (216)
Contributions made 1,971 447 340
-----------------------------------------
Fair value of plan assets, ending 10,717 7,853 6,705
-----------------------------------------
Funded status (2,876) (3,797) (2,880)
Unrecognized net (gain) loss 2,501 2,229 1,505
Unrecognized prior service cost 220 252 283
Unrecognized net transition asset -- (9) (38)
-----------------------------------------
Accrued benefit cost $ (155) $ (1,325) $ (1,130)
=========================================
Components of net periodic benefit costs:
Service cost $ 604 $ 486 $ 420
Interest cost 691 615 591
Expected return on plan assets (579) (494) (582)
Amortization of prior service costs 31 31 31
Amortization of net loss 62 32 --
Amortization of net transition asset (9) (29) (29)
-----------------------------------------
Net periodic benefit cost $ 800 $ 641 $ 431
=========================================
F-26
The accumulated benefit obligation for the qualified retirement plan was $9,115,
$7,872 and $6,551 at December 31, 2004, 2003 and 2002, respectively.
Weighted average assumptions used by the Company in the determination of benefit
obligations at December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
-----------------------------
Discount rate 5.75% 6.00% 6.50%
Rate of increase in compensation levels 4.50% 4.50% 4.50%
Weighted average assumptions used by the Company in the determination of net
pension cost for the years ended December 31, 2004, 2003, and 2002 were as
follows:
2004 2003 2002
----------------------------
Discount Rate 6.00% 6.50% 7.00%
Rate of increase in compensation level 4.50% 4.50% 5.00%
Expected long-term rate of return on plan assets 7.50% 7.50% 8.00%
The Company's pension plan asset allocations based on market value at December
31, 2004 and 2003, by asset category were as follows:
Asset Category 2004 2003
-------------------
Equity securities 64.9% 69.8%
Debt securities 20.5% 26.6%
Cash and cash equivalents 14.6% 3.6%
-------------------
100% 100.0%
===================
The following benefits payments, which reflect expected future service, as
appropriate, are expected to be paid by the plan as follows:
Year Ending Amount
- ---------------------------------------
(in thousands)
2005 $ 279
2006 277
2007 271
2008 275
2009 275
2010 - 2014 2,658
---------
$ 4,035
=========
Investment Policy
The investment policy of the Company's Pension Plan is for assets to be invested
in a manner consistent with the fiduciary standards of the Employee Retirement
Income Security Act of 1974, as amended. This investment policy is to preserve
capital, which includes the investment objectives of inflationary protection and
protection of the principal amounts contributed to the Pension Plan. Of lesser
importance is the consistency of growth, which will tend to minimize the annual
fluctuations in the normal cost. It is anticipated that growth of the fund will
result from both capital appreciation and the re-investment of current income.
Contributions
The Company expects to contribute $0.5 million to the noncontributory defined
benefit plan in 2005 and contributed $2.0 million in the year ended December 31,
2004 and $0.4 million in the year ended December 31, 2003
F-27
The Company's matching contributions to the defined contribution plan were
approximately $254 thousand, $228 thousand and $210 thousand for the years ended
December 31, 2004, 2003 and 2002, respectively.
In May 2003, the Company adopted an unfunded nonqualified Supplemental Executive
Retirement Plan (the "SERP") for named executives. The plan was established to
provide retirement benefits in addition to those provided under the Retirement
Plan that covers all employees. The following table presents the actuarial
information for the SERP at December 31, 2004 and 2003.
2004 2003
-----------------------
Change in benefit obligation: (in thousands)
Benefit obligation, beginning $ 869 $ --
Service cost 113 22
Interest cost 52 23
Actuarial loss 201 278
Plan adoption -- 546
-----------------------
Benefit obligation, ending 1,235 869
-----------------------
Funded status $ (1,235) $ (869)
Unrecognized net loss 465 278
Additional minimum liability (387) (380)
Intangible asset 387 380
Unrecognized prior service cost 485 521
-----------------------
Accrued benefit cost (285) (70)
-----------------------
Components of net periodic benefit costs:
Service cost $ 113 $ 22
Interest cost 52 23
Amortization of prior service costs 36 25
Amortization of net loss 14 --
-----------------------
Net periodic benefit cost $ 215 $ 70
=======================
Assumptions used by the Company in the determination of benefit obligations for
the SERP consisted of the following at December 31, 2004 and 2003:
2004 2003
-----------------
Discount rate 5.75% 6.00%
Rate of increase in compensation levels 4.50% 4.50%
The following benefits payments, which reflect expected future service, as
appropriate, are expected to be paid for the SERP:
Year Ending Amount
- ---------------------------------------
(in thousands)
2005 $ --
2006 --
2007 --
2008 --
2009 1
2010 - 2014 87
-------
$ 88
=======
Note 10. Stock Incentive Plan
F-28
The Company maintains a shareholder-approved Company Stock Incentive Plan (the
"Plan"), providing for the grant of incentive compensation to essentially all
employees in the form of stock options. The Plan authorizes grants of options to
purchase up to 480,000 shares of common stock over a ten-year period beginning
in 1996. The option price for all grants has been at the current market price at
the time of the grant. Grants generally provide that one-half of the options
vest and become exercisable on each of the first and second anniversaries of the
grant date, with the options expiring on the fifth anniversary of the grant
date. In the year ended December 31, 2003, the Company also issued a grant
pursuant to which the options are vested over a five-year period beginning on
the third anniversary of the grant date. The participant may exercise 20% of the
total grant after each anniversary date from the third through the seventh year,
with the options expiring on the tenth anniversary of the grant date. In the
year ended December 31, 2004, the Company also made grants pursuant to which the
options are vested over a four-year period beginning on the third anniversary of
the grant date. The participants may exercise 25% of the total grant after each
anniversary date from the third through the sixth year, with the options
expiring on the seventh anniversary of the grant date.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2004 2003 2002
-----------------------------------------------
Dividend rate 1.77% 1.68% to 2.35% 1.52%
Risk-free interest rate 2.74% 3.00% to 3.18% 4.24%
Expected lives of options 5 years 5 to 10 years 5 years
Price volatility 49.68% 38.83% to 51.02% 30.03%
In the year ended December 31, 2004, the Company issued tandem awards of stock
options and stock appreciation rights. Because the employee has the choice of
receiving cash or shares of stock, this plan results in the Company recording a
liability, which will be adjusted each period to reflect the current stock
price. If employees subsequently choose to receive shares of stock rather than
cash, the liability is settled by issuing stock.
A summary of the status of the Plan at December 31, 2004, 2003 and 2002 and
changes during the years ended on those dates is as follows:
Weighted Average
Grant Price Per Fair Value
Shares Share Per Share
--------------------------------------------------------
Outstanding January 1, 2002 138,054 $ 13.51
Granted 47,646 17.59 $ 4.08
Cancelled (19,758) 13.95
Exercised (16,238) 11.27
---------
Outstanding December 31, 2002 149,704 14.99
Granted 75,396 18.89 4.24 to 11.37
Cancelled (11,892) 16.62
Exercised (40,988) 11.89
---------
Outstanding December 31, 2003 172,220 16.92
Granted 108,178 24.56 9.66
Cancelled (4,368) 12.66
Exercised (37,219) 15.80
---------
Outstanding December 31, 2004 238,811 20.97
=========
There were options for 88,626, 85,670 and 91,658 shares exercisable at December
31, 2004, 2003 and 2002, at weighted average exercise prices per share of
$17.13, $15.94, and $13.70, respectively. For the tandem awards issued in the
year ended December 31, 2004, there were 308 shares cancelled and no shares
exercised during the year ended December 31, 2004. During the year ended
December 31, 2002, the Company issued 4,654 shares of common stock to employees
valued at $100 thousand in recognition of the Company's 100th year anniversary.
The following table summarizes information about stock options outstanding at
December 31, 2004:
F-29
Exercise Shares Option Life Shares
Prices Outstanding Remaining Exercisable
---------------------------------------------------------------------
2000 $ 17.19 10,737 1 years 10,737
2001 15.79 25,242 2 years 25,242
2002 17.59 30,332 3 years 30,332
2003 17.98-22.01 64,630 4 to 9 years 22,315
2004 23.00-26.46 107,870 5 to 7 years --
Note 11. Major Customers
The Company has one major customer and relationship that is a significant source
of revenue. In the year ended December 31, 2004, as during the past number of
years, the Company's relationship with Sprint continued to increase, due to
growth in the PCS business segment. Approximately 63.5% of total operating
revenues in the year ended December 31, 2004, 61.3% of total operating revenues
in the year ended December 31, 2003, and 57.7% of total operating revenues in
the year ended December 31, 2002 were generated by or through Sprint and its
customers using the Company's portion of Sprint's nationwide PCS network. No
other customer relationship generated more than 2.5% of the Company's total
operating revenues for the year ended December 31, 2004, 2003 or 2002.
Note 12. Shareholder Rights Plan
The Board of Directors adopted a Shareholder Rights Plan in 1998, whereby, under
certain circumstances, holders of each right (granted in 1998 at one right per
share of outstanding common stock) will be entitled to purchase $80 worth of the
Company's common stock for $40. 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 Shareholder Rights
Plan, such a person or group would not be entitled to the benefits of the
rights.
Note 13. Lease Commitments
The Company leases land, buildings and tower space under various non-cancelable
agreements, which expire between the years ending December 31, 2005 and 2043 and
require various minimum annual rental payments. The leases generally contain
certain renewal options for periods ranging from 5 to 20 years.
Future minimum lease payments under non-cancelable operating leases with initial
variable lease terms in excess of one year as of December 31, 2004 are as
follows:
Year Ending Amount
----------------------------------------
(in thousands)
2005 $ 4,416
2006 3,729
2007 3,041
2008 2,552
2009 1,732
2010 and beyond 1,842
-----------
$ 17,312
===========
The Company's total rent expense from continuing operations for each of the
previous three years was $4.4 million in the year ended December 31, 2004, $4.4
million in the year ended December 31, 2003, and $3.4 million in the year ended
December 31, 2002.
As lessor, the Company has leased buildings, tower space and telecommunications
equipment to other entities under various non-cancelable agreements, which
require various minimum annual payments. The total minimum rental receipts at
December 31, 2004 are as follows:
F-30
Year Ending Amount
--------------------------------------
(in thousands)
2005 $ 2,944
2006 1,837
2007 1,469
2008 882
2009 402
2010 and beyond 463
----------
$ 7,997
==========
F-31
Note 14. Acquisitions
On November 30, 2004, the Company purchased the 83.9% of NTC that it did not
currently own for $10 million, of which $1 million is held in escrow for payment
of specified potential liabilities, and the assumption of NTC's existing debt
and other liabilities. The results of NTC's operations have been included in the
consolidated financial statements since that date. NTC provides local and long
distance voice, cable television, internet and data services on an, at times,
exclusive basis to multi-dwelling unit communities primarily located near
colleges and universities.
The Company recorded the purchase of NTC as a step acquisition, and as a result,
the step-up in basis of the net assets was limited to 83.9% of the fair market
value. The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisition (in thousands):
At November
30, 2004
-----------
Current Assets $ 1,532
Property and Equipment 14,736
Intangible Assets 3,436
Goodwill 5,550
-----------
Total assets acquired 25,254
-----------
Current liabilities (3,103)
Long-term debt (11,838)
-----------
Total liabilities assumed (14,941)
Pre-acquisition ownership (718)
-----------
Net assets acquired $ 9,595
===========
The $3.4 million of acquired intangible assets has a weighted-average useful
life of approximately 11 years. The intangible assets that make up that amount
include business contracts of $2.4 million (useful life of 13.7 years), trade
name of $168 thousand (useful life of 5.0 years) and a non-compete agreement of
$835 thousand (useful life of 4.0 years). The $5.6 million of goodwill was
assigned to the Shentel Converged Services segment. The goodwill recorded in the
acquisition is deductible for income tax purposes.
The table below reflects the unaudited pro forma results of the Company and NTC
for the years ended December 31, 2004 and 2003 and as if the acquisition had
taken place at the beginning of the respective calendar year (in thousands):
2004 2003
-------- ---------
Operating revenue $129,864 $ 112,542
Income from continuing operations 9,370 9,286
Discontinued operations, net of income taxes -- 22,389
Cumulative effect of a change in accounting,
net of income taxes -- (76)
Net income $ 9,370 $ 31,599
Diluted net income per share $ 1.22 $ 4.15
The pro forma adjustments include amortization of the acquired intangible
assets, depreciation of the incremental fair value of the acquired fixed assets,
interest expense and income taxes.
Note 15. Segment Reporting
The Company, as a holding company with various operating subsidiaries, has
identified eleven reporting segments based on the activities of the holding
company and the products and services each subsidiary provides. 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 Company (Holding) Invests, in both affiliated
and non-affiliated companies.
F-32
Shenandoah Telephone Company (Telephone) Provides both regulated and
unregulated telephone services
and leases fiber optic
facilities primarily
throughout the Northern
Shenandoah Valley.
Shenandoah Cable Television Company (CATV) Provides cable television
service in Shenandoah County.
ShenTel Service Company (ShenTel) Provides Internet access to a
multi-state region surrounding
the northern Shenandoah
Valley, hosts Travel 511 for
Virginia, and sells and
services telecommunication
equipment.
Shenandoah Valley Leasing Company (Leasing) Finances purchases of
telecommunications equipment
to customers of other
segments.
Shenandoah Mobile Company (Mobile) Provides tower rental space in
the Company's PCS markets and
paging services throughout the
northern Shenandoah Valley.
Shenandoah Long Distance Company (Long Distance) Provides long distance
services on a resale basis.
Shenandoah Network Company (Network) Leases interstate fiber optic
facilities.
ShenTel Communications Company (Shen Comm) Provides DSL services as a
CLEC operation.
Shenandoah Personal Communications Company (PCS) As a PCS Affiliate of Sprint,
provides digital wireless
service to a portion of a
four-state area covering the
region from Harrisburg, York
and Altoona, Pennsylvania, to
Harrisonburg, Virginia.
Shentel Converged Services, Inc. Provides local and long
distance voice, cable
television, internet and data
services on an, at times,
exclusive basis to
multi-dwelling unit
communities throughout the
southeastern United States.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Each segment accounts for
inter-segment sales and transfers as if the sales or transfers were to outside
parties.
Income (loss) recognized from equity method nonaffiliated investees by segment
is as follows:
Consolidated
Year Holding Telephone Totals
---------------------------------------------------
(in thousands)
2004 $ (179) $ 148 $ (31)
2003 (441) 65 (376)
2002 (822) 45 (777)
F-33
Selected financial data for each segment is as follows:
PCS Telco Shen Tel CATV Mobile
----------------------------------------------------------------
Operating revenues - external:
(in thousands)
2004 $ 80,165 $ 23,740 $ 6,718 $ 4,377 $ 3,073
2003 66,788 22,729 6,897 4,433 2,840
2002 55,214 22,461 6,312 4,358 2,399
================================================================
Operating revenues - internal:
2004 $ 1 $ 3,635 $ 457 $ 31 $ 1,298
2003 1 3,062 307 24 1,238
2002 -- 2,888 349 5 1,661
================================================================
Depreciation and amortization:
2004 $ 11,915 $ 4,633 $ 532 $ 888 $ 611
2003 10,246 4,279 410 777 599
2002 8,617 3,798 414 718 581
================================================================
Operating income (loss):
2004 $ 7,286 $ 10,767 $ 781 $ 308 $ 2,208
2003 2,916 11,927 1,469 890 1,347
2002 (5,294) 11,908 776 1,145 1,224
================================================================
Non-operating income less expenses:
2004 $ (884) $ 103 $ -- $ (83) $ 57
2003 (76) (151) 9 (31) (13)
2002 (91) (474) (93) (23) 5
================================================================
Interest expense:
2004 $ 1,626 $ 305 $ 202 $ 288 $ 254
2003 2,920 443 171 514 26
2002 3,693 662 165 583 6
================================================================
Income tax expense (benefit) from continuing operations:
2004 $ 1,884 $ 3,858 $ 208 $ (23) $ 786
2003 (411) 4,268 501 146 377
2002 (3,660) 3,237 191 198 790
================================================================
Income (loss) from continuing operations:
2004 $ 2,892 $ 6,707 $ 371 $ (40) $ 1,225
2003 331 7,064 805 200 724
2002 (5,416) 7,536 327 341 (734)
================================================================
Income from discontinued operations, net of taxes:
2004 $ -- $ -- $ -- $ -- $ --
2003 -- 12 -- -- 22,389
2002 -- 72 -- 2 7,468
================================================================
Net income (loss) including cumulative effect
2004 $ 2,892 $ 6,707 $ 371 $ (40) $ 1,225
2003 331 7,076 805 200 23,037
2002 (5,416) 7,608 327 343 6,734
================================================================
Total assets:
2004 $ 81,090 $ 59,507 $ 10,636 $ 9,970 $ 17,335
2003 68,773 57,533 6,721 10,340 18,396
2002 71,256 59,554 6,255 10,961 17,482
====================================================================
F-34
Note 15. Segment Reporting (Continued)
Long Converged Shen
Distance Services Network Comm Leasing
-----------------------------------------------------------------
Operating revenues - external:
2004 $1,430 $ 736 $ 664 $ 64 $ 7
2003 1,116 -- 744 56 14
2002 1,101 -- 835 20 20
================================================================
Operating revenues - internal:
2004 $1,323 $ -- $ 180 $ -- $ --
2003 228 -- 151 -- --
2002 643 -- 110 -- --
================================================================
Depreciation and amortization:
2004 $ -- $ 232 $ 113 $ 1 $ --
2003 -- 124 -- --
2002 -- 158 -- --
================================================================
Operating income (loss):
2004 $ 273 $ (167) $ 567 $ (229) $ (6)
2002 407 -- 624 (23) 4
2002 695 -- 641 (49) 11
================================================================
Non-operating income less expenses:
2004 $ 7 $ -- $ 11 $ -- $ 2
2003 4 -- 4 1 1
2002 4 -- 10 8 1
================================================================
Interest expense:
2004 $ -- $ 19 $ -- $ 1 $ --
2003 -- -- -- -- --
2002 -- -- -- -- --
================================================================
Income tax expense (benefit) from continuing operations:
2004 $ 104 $ (69) $ 219 $ (85) $ (2)
2003 157 -- 242 (7) 2
2002 259 -- 249 (15) 5
================================================================
Income (loss) from continuing operations:
2004 $ 176 $ (117) $ 359 $ (145) $ (2)
2003 255 -- 386 (14) 3
2002 441 -- 401 (26) 8
================================================================
Income from discontinued operations, net of taxes:
2004 $ -- $ -- $ -- $ -- $ --
2003 -- -- -- -- --
2002 -- -- -- -- --
================================================================
Net income (loss) including cumulative effect
2004 $ 176 $ (117) $ 359 $ (145) $ (2)
2003 255 -- 386 (14) 3
2002 441 -- 401 (26) 8
================================================================
Total assets:
2004 $ 380 $ 24,423 $ 2,117 $ 93 $ 60
2003 808 -- 1,557 78 188
2002 343 -- 1,084 115 187
================================================================
F-35
Note 15. Segment Reporting (Continued)
Combined Eliminating Consolidated
Holding Totals Entries Totals
----------------------------------------------------------
Operating revenues - external:
2004 $ -- $ 120,974 $ -- $ 120,974
2003 -- 105,617 -- 105,617
2002 -- 92,720 -- 92,720
=========================================================
Operating revenues - internal:
2004 $ -- $ 6,925 $ (6,925) $ --
2003 -- 5,011 (5,011) --
2002 -- 5,656 (5,656)
=========================================================
Depreciation and amortization:
2004 $ 95 $ 19,020 $ -- $ 19,020
2003 196 16,631 -- 16,631
2002 196 14,482 -- 14,482
=========================================================
Operating income (loss):
2004 $ (2,163) $ 19,625 $ -- $ 19,625
2003 (726) 18,835 (207) 18,628
2002 (555) 10,502 (1,164) 9,338
=========================================================
Non-operating income less expenses:
2004 $ 2,982 $ 2,195 $ (2,370) $ (175)
2003 4,275 4,023 (3,633) 390
2002 4,966 4,313 (4,454) (141)
=========================================================
Interest expense:
2004 $ 2,804 $ 5,499 $ (2,370) $ 3,129
2003 3,070 7,144 (3,634) 3,510
2002 3,540 8,649 (4,454) 4,195
=========================================================
Income tax expense (benefit) from continuing operations:
2004 $ (802) $ 6,078 $ -- $ 6,078
2003 29 5,304 -- 5,304
2002 (3,363) (2,109) -- (2,109)
=========================================================
Income (loss) from continuing operations:
2004 $ (1,183) $ 10,243 $ -- $ 10,243
2003 7 9,761 -- 9,761
2002 (5,771) (2,893) -- (2,893)
=========================================================
Income from discontinued operations, net of taxes:
2004 $ -- $ -- $ -- $ --
2003 -- 22,401 (12) 22,389
2002 -- 7,542 (130) 7,412
=========================================================
Net income (loss) including cumulative effect
2004 $ (1,183) $ 10,243 $ -- $ 10,243
2003 7 32,086 (12) 32,074
2002 (5,771) 4,649 (130) 4,519
=========================================================
Total assets:
2004 $ 152,002 $ 357,613 $(146,366) $ 211,247
2003 141,658 306,052 (120,688) 185,364
2002 112,765 280,002 (115,998) 164,004
=========================================================
F-36
Note 16. Quarterly Results (unaudited)
The following table shows selected quarterly results for the Company.
(in thousands except for per share data)
For the year ended December 31, 2004 First Second Third Fourth Total
-------------------------------------------------------------------
Revenues $ 27,719 $29,852 $ 31,103 $ 32,300 $ 120,974
Operating income 4,284 5,026 6,471 3,844 19,625
Income from
Continuing operations 2,313 2,880 3,111 1,939 10,243
Net income $ 2,313 $ 2,880 $ 3,111 $ 1,939 $ 10,243
Income per share -
Continuing operations-diluted 0.30 0.38 0.41 0.25 1.34
Net income per share - basic $ 0.30 $ 0.38 $ 0.41 $ 0.25 $ 1.35
Net income per share - diluted 0.30 0.38 0.41 0.25 1.34
For the year ended December 31, 2003 First Second Third Fourth Total
-------------------------------------------------------------------
Revenues $ 24,947 $24,844 $ 27,583 $ 28,243 $ 105,617
Operating income 4,150 2,402 4,977 7,099 18,628
Income from
Continuing operations 1,931 1,044 2,717 4,069 9,761
Income from Discontinued
operations, net of taxes 22,628 -- (23) (216) 22,389
Cumulative effect of change in
accounting (76) -- -- -- (76)
Net income (a) $ 24,483 $ 1,044 $ 2,694 $ 3,853 $ 32,074
Income per share -
Continuing operations -diluted $ 0.26 0.14 0.36 0.53 1.28
Discontinued operations -diluted 2.98 -- -- (0.03) 2.94
Cumulative effect of change in
accounting - diluted (0.01) -- -- -- (0.01)
Net income per share - basic $ 3.24 $ 0.14 $ 0.36 $ 0.51 $ 4.23
Net income per share - diluted 3.23 0.14 0.35 0.50 4.22
(a) Fourth quarter results of 2003 include favorable adjustments to revenue
and expenses totaling $2.5 million, related to reconciliations of management's
estimates and settlements of disputes with Sprint and a $0.4 million benefit
related to a change in vacation benefit accrual for employees.
Note 17. Subsequent Events
In February 2005, the Company received $5.0 million held in escrow from the
closing of the Virginia 10 RSA Limited Partnership sale to Verizon Wireless. See
Note 2 for information about the sale. At December 31, 2004, the $5 million held
in escrow is included as an escrow receivable on the accompanying balance sheet.
F-37
Exhibits Index
Exhibit
Number Exhibit Description
- ------ -------------------
3.1 Amended and Restated Articles of Incorporation of Shenandoah
Telecommunications Company filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 (No. 333-21733) and incorporated
herein by reference.
3.2 Shenandoah Telecommunications Company Bylaws, as amended, filed as
Exhibit 3.2 to the Company's Report on Form 10-K for the year ended
December 31, 2003.
4.1 Rights Agreement, dated as of February 8, 1998 between the Company
and Crestar Bank incorporated by reference to Exhibit 1 to the
Company's Current Report on Form 8-K, dated February 9, 1998).
4.2 Shenandoah Telecommunications Company Dividend Reinvestment Plan
filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-3 (No. 333-74297) and incorporated herein by reference.
*4.3 Specimen representing the Common Stock, no par value, of Shenandoah
Telecommunications Company
10.1 Shenandoah Telecommunications Company Stock Incentive Plan filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8 (No.
333-21733) and incorporated herein by reference.
10.2 Shenandoah Telecommunications Company Dividend Reinvestment Plan
filed as Exhibit 4.4 to the Company's Registration Statement on Form
S-3D (No. 333-74297) and incorporated herein by reference.
10.3 Settlement Agreement and Mutual Release dated as of January 30, 2004
by and among Sprint Spectrum L.P., Sprint Communications Company
L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P. and Shenandoah
Personal Communications Company and Shenandoah Telecommunications
Company, dated January 30, 2004 filed as Exhibit 10.3 to the
Company's Report on Form 10-K for the year ended December 31, 2003
10.4 Sprint PCS Management Agreement dated as of November 5, 1999 by and
among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.4 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.5 Sprint PCS Services Agreement dated as of November 5, 1999 by and
between Sprint Spectrum L.P. and Shenandoah Personal Communications
Company filed as Exhibit 10.5 to the Company's Report on Form 10-K
for the year ended December 31, 2003.
10.6 Sprint Trademark and Service Mark License Agreement dated as of
November 5, 1999 by and between Sprint Communications Company, L.P.
and Shenandoah Personal Communications Company filed as Exhibit 10.6
to the Company's Report on Form 10-K for the year ended December 31,
2003.
10.7 Sprint Spectrum Trademark and Service Mark License Agreement dated
as of November 5, 1999 by and between Sprint Spectrum L.P. and
Shenandoah Personal Communications
57
Company filed as Exhibit 10.7 to the Company's Report on Form 10-K
for the year ended December 31, 2003.
10.8 Addendum I to Sprint PCS Management Agreement by and among Sprint
Spectrum L.P., WirelessCo, L.P., APC PCS, LLC, PhillieCo, L.P., and
Shenandoah Personal Communications Company filed as Exhibit 10.8 to
the Company's Report on Form 10-K for the year ended December 31,
2003.
10.9 Asset Purchase Agreement dated November 5, 1999 by and among Sprint
Spectrum L.P., Sprint Spectrum Equipment Company, L. P., Sprint
Spectrum Realty Company, L.P., and Shenandoah Personal
Communications Company, serving as Exhibit A to Addendum I to the
Sprint PCS Management Agreement and as Exhibit 2.6 to the Sprint PCS
Management Agreement filed as Exhibit 10.9 to the Company's Report
on Form 10-K for the year ended December 31, 2003.
10.10 Addendum II dated August 31, 2000 to Sprint PCS Management Agreement
by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.10 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.11 Addendum III dated September 26, 2001 to Sprint PCS Management
Agreement by and among Sprint Spectrum L.P., WirelessCo, L.P., APC
PCS, LLC, PhillieCo, L.P., and Shenandoah Personal Communications
Company filed as Exhibit 10.11 to the Company's Report on Form 10-K
for the year ended December 31, 2003.
10.12 Addendum IV dated May 22, 2003 to Sprint PCS Management Agreement by
and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.12 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.13 Addendum V dated January 30, 2004 to Sprint PCS Management Agreement
by and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.13 to the Company's Report on Form 10-K for the
year ended December 31, 2003.
10.14 Supplemental Executive Retirement Plan filed as Exhibit 10.14 to the
Company's Report on Form 10-K for the year ended December 31, 2003.
10.15 Addendum VI dated May 24, 2004 to Sprint PCS Management Agreement by
and among Sprint Spectrum L.P., WirelessCo, L.P., APC PCS, LLC,
PhillieCo, L.P., and Shenandoah Personal Communications Company
filed as Exhibit 10.15 to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 2004.
10.16 Second Amended and Restated Master Loan Agreement, dated as of
November 30, 2004, by and between CoBank, ACB and Shenandoah
Telecommunications Company filed as Exhibit 10.16 to the Company's
Current Report on Form 8-K dated December 3, 2004.
10.17 Third Supplement to the Master Loan Agreement dated as Of November
30, 2004, between CoBank, ACB and Shenandoah Telecommunications
Company filed as Exhibit 10.17 to the Company's Current Report on
Form 8-K dated December 3, 2004.
10.18 Second Amendment to the Term Supplement to the Master Loan Agreement
dated as Of November 30, 2004, between CoBank, ACB and Shenandoah
Telecommunications
58
Company filed as Exhibit 10.18 to the Company's Current Report on
Form 8-K dated December 3, 2004.
10.19 Pledge Agreement dated November 30, 2004 between CoBank, ACB and
Shenandoah Telecommunications Company filed as Exhibit 10.19 to the
Company's Current Report on Form 8-K dated December 3, 2004.
10.20 Membership Interest Pledge Agreement dated November 30, 2004 between
CoBank, ACB and Shenandoah Telecommunications Company filed as
Exhibit 10.20 to the Company's Current Report on Form 8-K dated
December 3, 2004.
10.21 Membership Interest Pledge Agreement dated November 30, 2004 between
CoBank, ACB and Shentel Converged Services, Inc. filed as Exhibit
10.21 to the Company's Current Report on Form 8-K dated December 3,
2004.
10.22 Interest Purchase Agreement dated November 30, 2004 by and among
Shentel Converged Services, Inc., NTC Communications LLC and the
Interest holders named therein filed as Exhibit 10.22 to the
Company's Current Report on Form 8-K dated January 21, 2005.
10.23 Form of Incentive Stock Option Agreement under the 1996 Shenandoah
Telecommunications Company Stock Incentive Plan (for routine formula
grants) filed as Exhibit 10.23 to the Company's Current Report on
Form 8-K dated January 21, 2005.
10.24 Forms of Incentive Stock Option Agreement under the 1996 Shenandoah
Telecommunications Company Stock Incentive Plan (for newly hired
executive employees) filed as Exhibit 10.24 to the Company's Current
Report on Form 8-K dated January 21, 2005.
10.25 Description of the Shenandoah Telecommunications Company Incentive
Plan filed as Exhibit 10.25 to the Company's Current Report on Form
8-K dated January 21, 2005.
*10.26 Description of Compensation of Non-Employee Directors.
*10.27 Description of Management Compensatory Plans and Arrangements.
*21 List of Subsidiaries.
*23.1 Consent of KPMG LLP, Independent Registered Public Accounting Firm.
*31.1 Certification of President and Chief Executive Officer of Shenandoah
Telecommunications Company pursuant to Rule 13a-14(a)under the
Securities Exchange Act of 1934.
*31.2 Certification of Executive Vice President and Chief Financial
Officer of Shenandoah Telecommunications Company pursuant to Rule
13a-14(a)under the Securities Exchange Act of 1934.
*32 Certifications pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. ss. 1350.
- -----------
* Filed herewith
59