View:
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162806
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or Identification
organization) Number)
P.O. Box 459, Edinburg, Virginia 22824
--------------------------------------
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO Indicate the number of shares outstanding of each of
the issuer's classes of common stock as of the close of the period covered by
this report.
Class Outstanding at September 30, 1999
Common Stock, No Par Value 3,755,760 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 1 - 2
Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1999 and 1998 3 - 4
Consolidated Statements of Cash Flow
Nine Months Ended
September 30, 1999 and 1998 5
Condensed Consolidated Statement
of Stockholders' Equity 6
Notes To Consolidated Financial
Statements 7
Item II. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters To a Vote
of Security Holders 16
Item 6. Exhibits and Reports On Form 8-K 16
Signatures 17
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 1999 December 31, 1998
----------------- ----------------
(Unaudited)
Current Assets
Cash & cash equivalents 6,811,502 4,891,109
Certificates of deposit 0 499,581
Accounts receivable 4,974,835 4,272,016
Materials 3,859,860 3,488,137
Prepaid and other current assets 354,710 777,853
----------------- ----------------
Total current assets 16,000,907 13,928,696
Securities and Investments
Invest in available for sale 4,152,094 2,677,789
securities
Other investments 5,444,721 5,921,206
----------------- ----------------
9,596,815 8,598,995
Property, Plant and Equipment
Plant in service 92,560,958 88,427,844
Plant under construction 13,646,377 5,670,371
Less accumulated depreciation 32,857,975 29,063,738
----------------- ----------------
73,349,360 65,034,477
Other Assets
Cost in excess of net assets of
business less accumulated 4,499,911 4,876,215
amortization
Deferred charges and other assets 480,708 354,216
Radio spectrum license net of
accumulated amortization 1,214,430 653,145
----------------- ----------------
6,195,049 5,883,576
105,142,131 93,445,744
See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES & STOCKHOLDERS' EQUITY
September 30, 1999 December 31, 1998
----------------- ----------------
(Unaudited)
Current Liabilities
Current maturities of long-term 1,500,500 863,972
debt
Accounts payable 2,613,090 1,149,286
Advance billings & payments 377,164 712,581
Customers' deposits 120,095 113,586
Accrued compensation 812,477 890,443
Other current liabilities 970,748 1,072,422
Income taxes payable 362,572 0
Other taxes payable 481,399 214,433
----------------- ----------------
Total current liabilities 7,238,045 5,016,723
Long-Term Debt, less current 31,645,389 28,398,374
maturities
Other Liabilities and Deferred
Credits
Deferred investment tax credit 93,720 145,909
Deferred income taxes 7,038,337 6,741,121
Pension & other 1,644,843 1,331,465
----------------- ----------------
8,776,900 8,218,495
Minority Interests 2,288,414 2,265,426
Stockholders' Equity
Common stock 4,734,377 4,734,377
Retained earnings 49,381,834 44,173,730
Unrealized gains on available for
sale securities 1,077,172 638,619
----------------- ----------------
55,193,383 49,546,726
----------------- ----------------
$105,142,131 $93,445,744
See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
Operating revenues: 1999 1998 1999 1998
-------------------------- -----------------------
Telephone revenues:
Local service $1,040,129 $962,261 $3,009,197 $2,813,616
Access 1,825,230 1,914,811 5,665,161 5,861,962
Toll 6,588 18,800 18,536 49,142
Miscellaneous:
Directory 297,445 287,577 910,925 888,724
Facility leases 785,513 528,230 1,909,398 1,525,164
Billing & collection 100,226 133,238 337,693 389,372
Other miscellaneous 49,413 30,174 131,375 111,398
--------------------- -----------------------
Total telephone revenues 4,104,544 3,875,091 11,982,285 11,639,378
Cable television revenues 885,931 802,010 2,548,192 2,302,911
ShenTel service revenues 965,279 716,104 2,694,881 1,816,072
Leasing revenues 2,313 3,965 8,342 12,853
Mobile revenues 3,777,061 2,611,213 9,357,097 7,094,584
PCS revenues 890,963 847,990 2,531,263 2,425,674
Long distance revenues 263,116 251,484 784,898 686,479
Network revenues 200,970 153,733 524,013 461,200
-------------------------- ------------------------
Total operating revenues 11,090,177 9,261,590 30,430,971 26,439,151
Operating expenses:
Cost of products and
services sold 276,631 418,974 1,031,214 1,125,201
Line costs 125,228 89,812 344,629 299,178
Plant specific 880,108 833,803 2,450,170 2,142,949
Plant non-specific:
Network & other 1,854,467 1,384,463 4,992,822 4,068,187
Depreciation 1,598,945 1,386,371 4,774,580 3,980,466
Customer operations 1,436,481 1,271,145 3,934,768 3,683,190
Corporate operations 774,937 620,100 2,130,432 1,959,632
Other operating expenses 269,658 225,188 795,892 653,990
Taxes other than income 142,994 124,394 342,468 392,076
-------------------------- ------------------------
7,359,449 6,354,250 20,796,975 18,304,869
-------------------------- ------------------------
Operating income 3,730,728 2,907,340 9,633,996 8,134,282
-------------------------- ------------------------
See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
------------------------ ----------------------
Gain on sale of investment 0 2,000 0 2,000
Non-operating income less 468,530 965,914 1,342,550 1,588,681
expense
Interest expense 441,520 431,429 1,351,646 1,162,695
------------------------ ----------------------
Income before income taxes 3,757,738 3,443,825 9,624,900 8,562,268
Provision for income taxes 1,180,704 1,119,138 3,135,807 2,799,184
------------------------ ----------------------
Net income before minority
interest 2,577,034 2,324,687 6,489,093 5,763,084
Minority interest (623,270) (373,223) (1,280,989) (955,229)
------------------------ -----------------------
Net income $1,953,764 $5,208,104 $1,951,464 $4,807,855
Earnings per share
weighted average common
shares outstanding 3,755,760 3,755,760 3,755,760 3,756,602
Net earnings per share,
basic and diluted $0.52 $0.52 $1.39 $1.28
See notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended September 30,
1999 1998
---------------------------------
Cash Flows From Operating Activities
Net income 5,208,104 4,807,855
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation & amortization 4,774,580 3,980,466
Deferred taxes (75,074) (22,841)
Gain (loss) on disposal of assets (2,000)
Gain (loss) on equity investment (1,125,243) (1,331,463)
Minority share of income 22,988 610,228
Other (47,026) 258,227
Changes in assets and liabilities:
(Increase) decrease in
Accounts receivable (702,819) (3,056,497)
Materials and supplies (371,723) 897,391
Increase/(decrease) in
Accounts payable 1,463,804 (44,116)
Income taxes payable 362,572 1,027,417
Deferrals & accruals 494,939 261,578
---------------------------------
Net cash provided by operating
activities 10,005,102 7,386,245
Cash Flows From Investing Activities
Purchase of property plant & equipment (12,792,625) (10,745,522)
Purchase of intangible assets (561,285)
Purchase of investment securities (138,698) (1,037,263)
Maturities of certificates of deposit 499,581 104,122
Maturities of investment securities 0 1,622,433
Cash flows from securities 1,024,775 1,155,042
---------------------------------
Net cash used in investing
activities (11,968,252) (8,901,188)
Cash Flows From Financing Activities
Proceeds from long term debt 4,386,209 2,166,556
Stock redemption 0 (100,000)
Principal payments on long term debt (502,666) (179,438)
---------------------------------
Net cash provided by financing
activities 3,883,543 1,887,118
---------------------------------
Net increase in cash and cash
equivalents 1,920,393 372,175
Cash and cash equivalents
Beginning 4,891,109 5,203,521
Ending 6,811,502 5,575,696
See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
--------------------------------------------------------
Balance,
January 1, 1998 3,760,760 $4,740,677 $40,579,090 $1,190,717 $46,510,484
Comprehensive income
Net income 5,603,775 - 5,603,775
Change in unrealized gain
on securities
available-for-sale
net of tax ($368,110) (552,098) (552,098)
-----------
Total comprehensive
income 5,051,677
-----------
Dividends declared (1,915,435) (1,915,435)
Redemption of common
stock (5,000) (6,300) (93,700) (100,000)
-------------------------------------------------------
Balance,
December 31, 1998 3,755,760 4,734,377 44,173,730 638,619 49,546,726
Comprehensive income -
Net income 5,208,104 5,208,104
Change in unrealized
gain on securities
available-for-sale
net of tax $297,216 438,553 438,553
-----------
Total comprehensive
income 5,646,657
--------------------------------------------------------
Balance,
September 30, 1999 3,755,760 $4,734,377 $49,381,834 $1,077,172 $55,193,383
========================================================
See notes to condensed consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying condensed consolidated
financial statements, contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly Shenandoah
Telecommunications Company's financial position as of September 30, 1999
and the results of operations and cash flows for the nine-month periods
ended September 30, 1999 and 1998. While the Company believes that the
disclosures presented are adequate, to make the information not misleading
these financial statements should be read in conjunction with the financial
statements and notes included in the Company's annual report on Form 10-K.
2. The results of operations for the nine-month period ended September 30,
1999 and 1998 are not necessarily indicative of the results to be expected
for the full year.
3. The earnings per common share were computed on the weighted average number
of shares outstanding. The Company has stock options outstanding, which are
not dilutive; therefore basic and diluted earnings per share are the same.
4. On July 8, 1999 AvData Systems, Inc. (AvData), in which the Company had a
book basis of $149,860, was merged with Interstate FiberNet, Inc., a
wholly-owned subsidiary of ITC^DeltaCom, Inc. (ITCD). At the closing, the
Company received 36,579 shares of ITCD common stock as the first of three
tranches. The remaining two tranches, designated as earn out shares and
escrowed shares, may or may not be distributed, based on specific measures.
The earn out and escrow shares have not been recognized by the Company at
this time. Through the investments in South Atlantic Venture Fund III, L.P.
and South Atlantic Private Equity Fund IV, L.P., two non-affiliated
companies that were also invested in AvData, the Company received
additional initial distributions of 20,117 shares of ITCD common stock. The
AvData-ITCD merger is primarily responsible for the changes in Available
For Sale Securities, Other Investments, and Unrealized Gain on Available -
For Sale Securities categories reflected in the consolidated balance
sheets.
A subsequent event in a non-affiliated investment was the initial public
offering (IPO) of Illuminet Holding, Inc. The Company's cost basis and book
value was $893,508 in 463,604 shares (post-IPO) or approximately $1.93 per
share. There is a six-month restriction on the Company selling these shares
from the offering date of October 7, 1999. The closing market price as of
November 4, 1999 was $44.00 per share.
SHENANDOAH TELECOMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. In the third quarter we began constructing a CDMA network for use by Sprint
PCS, activating the network the last week of October. On November 8, 1999
the Company finalized its agreements with Sprint PCS to manage and operate
an expanded CDMA network as a Sprint PCS Network member. The service will
be offered as part of the Sprint PCS nationwide network. Additionally, the
agreement expands our existing PCS territory from an area serving a
population of 679,000 to one of 2,043,000 people. The additional areas are
in the Altoona, Harrisburg, and York-Hanover BTA's of Pennsylvania. The
capital build out and initial operating losses are projected to require
additional capitalization of approximately $30 million, which will be
financed through equity and external debt.
6. The Company has identified nine reporting segments based on the products
and services each provide. Each segment is managed and evaluated separately
because of differing technologies and marketing strategies. A summary of
external revenues and net income es. A summary of external revenues and net
income for each segment is as follows: for each segment is as follows:
Nine Months Nine Months
September 30, 1999 September 30, 1998
External External
Subsidiary Revenues Income Revenues Income
Holding $ $ 476,094 $ $ 380,784
Telephone 11,982,285 4,210,689 11,639,378 4,517,627
Cable TV 2,548,192 (147,041) 2,302,911 (170,652)
ShenTel 2,694,881 (163,329) 1,816,072 (261,810)
Leasing 8,342 15,373 A2,853 21,469
Mobile 9,357,097 1,703,369 7,094,584 1,256,237
Long Distance 784,898 155,708 686,479 230,224
Network 524,013 258,493 461,200 112,398
PCS 2,531,263 (1,301,260) 2,425,674 (1,278,422)
Net Income $ 30,430,971 $ 5,208,105 $26,439,151 $ 4,807,855
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to changes in
the interest rate environment; management's business strategy; national,
regional, and local market conditions; and legislative and regulatory
conditions. Readers should not place undue reliance on forward-looking
statements, which reflect management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances.
Shenandoah Telecommunications Company is a diversified telecommunications
holding company providing both regulated and unregulated telecommunications
services through its nine wholly-owned subsidiaries.
This industry has, for some time, been in a period of transition from a
protected monopoly to a competitive environment. A milestone in this transition
was the passage of the Telecommunications Act of 1996. As a result of this
ongoing change, Shenandoah Telecommunications has made and plans to continue to
make significant investments in the new and emerging technologies.
The most significant revenues are from the telephone local exchange company
accounting for 37.0% of revenue and the cellular dominated operations of the
Mobile subsidiary, accounting for 34.1% of revenue during the most recent
quarter. Other significant services provided are paging, personal communications
services (PCS), cable television, Internet access, long distance, and leased
fiber and tower facilities. The Company also sells and leases equipment, mainly
related to services provided, and also participates in emerging technologies by
direct investment in non-affiliated companies.
RESULTS OF OPERATIONS
Access revenues are fees for connection to the local exchange network charged to
interexchange carriers. The volume for approximately two-thirds of these access
revenues typically correlates with changes in minutes of use. This has not held
true in 1999 due to rate reductions effective January 1 and July 1, 1999. The
minutes of use during the third quarter and the first nine months of 1999
increased .1% and 2.3% respectively from the total minutes of use in comparative
periods in 1998. The revenue decreased 4.7% in the third quarter and 3.4%
year-to-date for the associated revenues.
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Second quarter cable television revenues increased 10.5% over the third quarter
of 1998, due principally to a rate increase effective April 1, 1999. The
year-to-date increase is 10.7%.
The increase in the ShenTel Service revenues category for the third quarter of
1999 compared to 1998 was 34.8%. The year-to-date increase is 48.4%. This was
due to increases in Internet Service revenues. The third quarter Internet
revenues increased $174,517 or 43.4%. Third quarter 1998 revenues from our
Internet Service operations increased $159,069 or 65.5% compared to the third
quarter of 1997. Equipment sales revenue for the third quarter of 1999 increased
$62,253 over third quarter 1998.
The Mobile revenues are mainly comprised of revenues from cellular services.
Total cellular revenues represented 32.2% of the Company's revenues during the
third quarter. Third quarter 1999 local service cellular revenues increased
$153,698 or 13.6% compared to the same period in 1998. The year-to-date increase
is $386,715 or 12.0%. Price reductions in our service plans instituted in
January 1999 were more than offset by customer growth. The year-to-date increase
in outcollect roamer revenues is $1,657,542 or 48.0%. This change is attributed
to additional network facilities our Company placed in service in late 1998,
complemented by growth in usage. Total revenues from the Cellular operation
accounted for 28.9% of total Company revenues year-to-date, compared to 25.4%
for the first nine months of 1998.
Long Distance revenues are principally for toll calls placed to locations
outside the regulated telephone service area. These revenues increased by 4.6%
for the third quarter and 14.3% for the first nine months as compared to the
corresponding periods in 1998.
Network revenues are derived from fiber facility leases in Maryland and West
Virginia. These revenues increased 30.7% in the third quarter and 13.6% in the
first six months as compared to the corresponding periods in 1998. A portion of
these increases are attributable to reclassification from other categories.
Additional leases secured in 1999 have been offset in part by rate reductions in
this increasingly competitive business.
Cost of Goods Sold decreased 34.0% in the third quarter compared to the same
period in 1998. The year-to-date decrease is 8.4%. This is due primarily to a
decrease in PCS handset sales.
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Plant Specific expense consists mainly of maintenance to the Company's plant in
service. This expense category increased 5.6% in the third quarter compared to
the third quarter of 1998. The year-to-date increase is 14.3% over the same
period of 1998, principally in the Telephone, Cable Television, and PCS
companies due to network expansions.
The expense category Network and Other consists primarily of network support,
engineering and leased facilities costs. This was our largest expense category
in the third quarter. These costs increased 34.0% in the third quarter compared
to the third quarter of 1998. The year-to-date increase is 22.7%. These
increases are primarily due to increased incollect roaming costs in the cellular
operation, and increased leased facilities costs in the PCS and Internet
operations due to network expansion.
Depreciation and Amortization, historically our largest expense category, was
15.3% higher in the third quarter of 1999 compared to the same period in 1998.
This is principally due to the pace of plant additions due mainly to the
expansion of our fiber network and Cable TV upgrade. Plant in Service increased
$4,133,000 or 4.7% at the end of third quarter 1999 compared to year-end 1998.
Depreciation expense has also been increased as a result of decreasing the
useful life estimates on a portion of the wireless equipment, effective January
1, 1999. The year-to-date increase is 20.0%.
Customer operations increased 13.0% for the quarter and 6.8% year-to-date
compared to the same periods in 1998. These costs are for the marketing and
sales, billing, and customer service functions. Customer growth in the Internet
and cellular businesses is primarily responsible for the increase.
The Other Operating Expense category consists of royalty expense paid to
programming providers for the Cable Television subsidiary. As part of the April
1, 1999 rate increase on CATV services, the channel lineup was expanded,
resulting in increased royalty expense. The increase for the third quarter was
19.8% compared to the third quarter of 1998.
Interest expense increased 2.3% in the third quarter compared to the third
quarter of 1998, and increased 16.3% year-to-date.
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENTS IN NON-AFFILIATED COMPANIES
During the third quarter of 1999 AvData Systems, Inc. (AvData), in which the
Company had a cost basis of $369,860 and a book basis of $149,860 as a result of
a $220,000 writedown recorded in 1992, was merged with Interstate FiberNet,
Inc., a wholly-owned subsidiary of ITC^DeltaCom, Inc. (ITCD). At the closing,
the Company received 36,579 shares of ITCD common stock as the first of three
tranches. The remaining two tranches, designated as earn out shares and escrowed
shares, may or may not be distributed, based on specific measures. The earn out
and escrow shares have not been recognized by the Company at this time. Through
the investments in South Atlantic Venture Fund III, L.P. and South Atlantic
Private Equity Private Equity Fund IV, L.P., two non-affiliated companies that
were also invested in AvData, the Company received additional initial
distributions of 20,117 shares of ITCD common stock. As of September 30, 1999,
the shares of ITCD had a market value of $1,559,140. The AvData - ITCD merger is
primarily responsible for the changes in Available For Sale Securities, Other
Investments, and Unrealized Gain on Available - For Sale Securities categories
reflected in the consolidated balance sheets. A subsequent event in a
non-affiliated investment was the initial public offering (IPO) of Illuminet
Holding, Inc. The Company's cost basis and book value was $893,508 in 463,604
shares (post-IPO) or approximately $1.93 per share. There is a six-month
restriction on the Company selling these shares from the offering date of
October 7, 1999. The closing market price as of November 4, 1999 was $44.00 per
share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a note with CoBank to borrow up to $25 million. The term of the
loan is for 15 years, with multiple interest options. The Company has borrowed
approximately $22,600,000 at September 30, 1999 against this note, with the last
draw made on September 30, 1999. The Company is currently in discussions with
CoBank about enlarging this facility, particularly with regard to potential
capital requirements for our PCS operation. A loan agreement with the RTB allows
for additional borrowings of approximately $2,800,000. Expenditures of the RTB
loan funds are limited to capital projects for the regulated local exchange
carrier.
The Company has a $2 million line of credit with First Union Bank and a $5
million line of credit with CoBank. No draws are outstanding on these lines of
credit as of October 31, 1999.
The Company budgeted potential capital expenditures of approximately $17,800,000
for our subsidiaries in 1999. These capital needs will be met through internally
generated cash flows and the existing CoBank facility and Rural Telephone Bank
note.
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PCS ACTIVITIES
Our PCS subsidiary has operated a GSM network since January 1996 under an
agreement with American Personal Communications (APC), in which switching,
billing, and other services are provided by APC. Sprint Spectrum, the current
controlling interest of APC, announced in early 1999 the APC customer base would
be transitioned to CDMA as Sprint PCS customers. In the third quarter we began
constructing a CDMA network for use by Sprint PCS, activating the network the
last week of October. On November 8, 1999 the Company finalized its agreements
with Sprint PCS to manage and operate the CDMA network as a Sprint PCS (network
partner). The service will be offered as part of the Sprint PCS nationwide
network. Additionally, the agreement expands our existing PCS territory from an
area serving a population of 679,000 to one of 2,048,000 people. The additional
areas are in the Altoona, Harrisburg, and York-Hanover BTA's of Pennsylvania.
The capital build out and initial operating losses are projected to require
additional capitalization of approximately $30 million, which will be financed
through equity and external debt. Our GSM customers are now being transferred to
the CDMA network. Operation of this additional PCS network may lead to increased
Network and Other and Depreciation expense in the fourth quarter 1999. The
Company's GSM equipment has a book value of approximately $6 million. Management
is exploring various options for use of the GSM network or disposing of the
equipment.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 (Y2K) issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Some computer systems
may be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
Year 2000 readiness means the ability to (a) continue to operate without
substantial interruption attributable to the inability of systems to correctly
process, provide, store and receive date data in and around the Year 2000 and
(b) to mitigate the risks associated with such system limitations to an
acceptable level. The Company developed and implemented a four-phase program for
Y2K readiness.
Phase I (Inventory and Assessment): In this Phase, an inventory was conducted of
all hardware and software that might be at risk, including third-party
businesses whose Y2K failures might significantly impact the Company, and an
assessment was made on corrective direction. A Y2K Task Force, reporting to
senior management, started work on this Phase in 1997. The Company determined
that software provided by third parties was its most vulnerable link to the Y2K
event.
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF THE YEAR 2000 ISSUE (Continued)
Phase II (Strategy): In this Phase, the Company classified each at-risk system
as "routine upgrade", "obsolete", or "non-critical." The majority of this
classification work was completed mid-1998.
Phase III (Installation and Testing): In this Phase, the selected approach to
Y2K remediation was executed. The information that follows reflects the
Company's current plans and estimates as of October 1999 and is subject to
change. Routine upgrade classification: A performance enhancing upgrade of the
mainframe computer, which also made the hardware and operating system Y2K
compliant, was performed in the first quarter of 1998. The main telephone
switches received new feature upgrades, incorporating Y2K compliance, in the
fourth quarter of 1998. The latest releases of end user billing software, placed
in service in the second quarter of 1999, have been represented by the vendors
to be Y2K compliant. A comprehensive Y2K test of the mainframe computer hardware
and software, conducted in October 1999 to validate vendor representations,
identified three minor Y2K problems that have been submitted to the vendors for
correction. The local area network, comprised of the hardware and software on
the server and the microcomputers, was approaching full Y2K compliance at the
end of October with 1999, with the remaining known work regarded as
non-critical. Obsolete classification: The new financial software and new
carrier access billing software were placed in service in the second quarter of
1999. Non-critical classification: The few remaining measures identified to deal
with these low priority systems are expected to be implemented by the end of the
year, potentially through manual steps.
Phase IV (Monitoring and Contingency planning): In this Phase, the implemented
changes have been monitored and backup plans designed where necessary. With the
majority of the required hardware and software changes completed by mid-1999,
the Company has been utilizing the changes in a production setting. This
approach minimized disruption to current operations and has provided a basis for
ongoing testing and monitoring. Other contingency plans are now being finalized.
A full backup of all computer systems will be performed the evening of December
31, 1999. The appropriate managers and technicians are scheduled to be on-site
and/or available the night of the date change as well as January 1 and 2 to
correct any unforeseen problems. With this four-phase program, where the normal
business practice of weighing replacement against adopting routine upgrades was
followed, the Company's non-routine expenditures in making its core operations
Y2K compliant has thus far been minimal. The Company has been expensing or
capitalizing these costs in accordance with appropriate accounting policies. The
Company has also reviewed other third party relationships that could affect its
operation. Most relationships are with large interexchange carriers and
suppliers who state that they are or will be Y2K compliant.
SHENANDOAH TELECOMMUNICATIONS COMPANY
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibit No. 27 - Financial Data Schedule
B. No reports on Form 8-K were file for the period covered
by this report.
SHENANDOAH TELECOMMUNICATIONS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
November 15, 1999
Christopher E. French
President
November 15, 1999
Laurence F. Paxton
Vice President - Finance