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 and Nine Months Ended September 30, 2001
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at October 31, 2001
- -------------------------- -------------------------------
Common Stock, No Par Value 3,764,873 Shares
1
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3-4
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 6
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income (Loss)
for the Nine Months Ended
September 30, 2001 and the Twelve Months
Ended December 31, 2000 7
Notes To Unaudited Condensed Consolidated
Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
Current Assets
Cash and cash equivalents $ 3,106 $ 3,133
Accounts receivable, net 7,802 5,380
Income tax receivable 1,228 2,052
Materials and supplies 3,266 2,856
Prepaid expenses and other 583 854
-------- --------
Total current assets 15,985 14,275
Securities and Investments
Available-for-sale securities 16,967 11,771
Other investments 6,755 6,996
-------- --------
Total securities and investments 23,722 18,767
Property, Plant and Equipment, net 118,444 111,808
Other Assets
Cost in excess of net assets of business
acquired, less accumulated amortization
of $1,882 and $1,600 3,748 4,030
Deferred charges and other assets, net 493 340
Radio spectrum license, net -- 1,133
-------- --------
Total other assets 4,241 5,503
$162,392 $150,353
======== ========
(continued)
3
ANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
Liabilities and Shareholders' Equity
September 30, December 31,
2001 2000
(Unaudited)
------------- ------------
Current Liabilities
Current maturities of long-term debt $5,627 $2,403
Accounts payable 3,569 4,914
Refundable wireless liability 2,308 2,800
Advance billings and deposits 2,086 1,577
Refundable equipment payment -- 3,871
Other current liabilities 2,659 2,834
------------- ------------
Total current liabilities 16,249 18,399
Long-Term Debt, less current maturities 53,147 53,084
Other Liabilities
Deferred income taxes 14,053 9,218
Pension & other 1,917 1,602
------------- ------------
Total other liabilities 15,970 10,820
Minority Interests 1,886 1,715
Shareholders' Equity
Common stock 4,880 4,817
Retained earnings 60,452 55,873
Accumulated other comprehensive income 9,808 5,645
------------- ------------
Total shareholders' equity 75,140 66,335
$162,392 $150,353
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
(Unaudited) (Unaudited)
------------------------------------------------------------
Operating Revenues
Wireless $15,802 $8,514 $38,752 $21,785
Wireline 6,917 6,102 20,335 17,991
Other revenues 1,291 1,266 3,759 3,882
------------------------------------------------------------
Total revenues 24,010 15,882 62,846 43,658
Operating Expenses
Cost of goods and services 1,973 1,544 5,364 4,306
Network operating costs 8,270 5,096 21,839 12,836
Depreciation and amortization 3,117 1,819 8,509 5,593
Selling, general and administrative 4,281 2,840 11,793 8,691
------------------------------------------------------------
Total operating expense 17,641 11,299 47,505 31,426
------------------------------------------------------------
Operating Income 6,369 4,583 15,341 12,232
Other Income (expense):
Non-operating income (expense), net (64) 50 77 356
Gain (loss) on investments, net (643) 69 (2,041) 7,254
Interest expense (960) (741) (2,718) (1,741)
------------------------------------------------------------
Income before income taxes and
Minority interest 4,702 3,961 10,659 18,101
Income tax provision (1,322) (1,166) (2,797) (5,692)
------------------------------------------------------------
3,380 2,795 7,862 12,139
Minority interest (1,286) (863) (3,283) (2,319)
------------------------------------------------------------
Net income $2,094 $1,932 $4,579 $9,820
============================================================
Net earnings per share, basic $0.56 $0.50 $1.22 $2.61
============================================================
Net earnings per share, diluted $0.55 $0.50 $1.21 $2.60
============================================================
Weighted average shares outstanding, basic 3,761 3,757 3,760 3,757
============================================================
Weighted average shares outstanding, diluted 3,778 3,768 3,774 3,768
============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(Unaudited)
Nine months ended
September 30,
2001 2000
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $4,579 $9,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,222 5,248
Amortization 287 345
Deferred tax charges (benefit) 2,288 (22)
(Gain) loss on investments 1,205 (6,992)
Equity (earnings) loss in investee 500 (717)
Loss on impairment of equipment -- 673
Loss on disposal of equipment 146 --
Minority interest of partnership 3,283 2,319
Other 162 (197)
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,422) 356
Materials and supplies (410) 755
Increase (decrease) in
Accounts payable (1,345) 3,393
Other prepaids, deferrals and accruals (2,934) (300)
--------------------------
Net cash provided by operating activities 13,561 14,681
Cash Flows from Investing Activities
Purchases of property, plant & equipment (15,009) (36,554)
Purchases of other investments (1,054) (1,654)
Proceeds from sale of available-for-sale securities 1,104 7,680
Proceeds from disposal of radio spectrum license 1,133 --
--------------------------
Net cash used in investing activities (13,826) (30,528)
Cash Flows from Financing Activities
Proceeds from long-term debt and revolving loan 5,099 16,223
Principal payments on long-term debt (1,812) (1,141)
Distributions to minority interest partners (3,112) (2,805)
Issue of common stock upon exercise of stock options 63 62
--------------------------
Net cash provided by financing activities 238 12,339
--------------------------
Net decrease in cash (27) (3,508)
Cash and Cash Equivalents
Beginning 3,133 7,156
--------------------------
Ending $3,106 $3,648
==========================
Cash paid for:
Interest $3,171 $2,135
Income taxes (net of refunds) $ 231 $6,622
Non-Cash Transaction:
The Company closed on the sale of its GSM equipment in January 2001, for
approximately $6,500 of which approximately $4,900 was escrowed as part of a
like-kind exchange transaction. The escrowed funds were disbursed as new
equipment was received during the first six months of 2001. See accompanying
notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
-------------------------------------------------------------------
Balance, December 31, 1999 3,756 $4,734 $48,499 $17,042 $70,275
Comprehensive income
Net income -- -- 9,855 -- 9,855
Change in unrealized gain
on securities available-for-sale
net of tax of $7,258 -- -- -- (11,860) (11,860)
Reclassification of net recognized
Loss on securities available-for-
sale, net of tax of ($284)
-- -- -- 463 463
-------------
Total comprehensive loss (1,542)
Dividends declared -- -- (2,481) -- (2,481)
Common stock issued 3 83 -- -- 83
-------------------------------------------------------------------
Balance, December 31, 2000 3,759 $4,817 $55,873 $5,645 $66,335
(Unaudited)
Comprehensive income
Net income -- -- 4,579 -- 4,579
Change in unrealized gain
on securities available-for-sale
net of tax of ($2,331) -- -- -- 3,809 3,809
Reclassification of net recognized
loss on securities available-for-
sale, net of tax of ($216)
-- -- -- 354 354
-------------
Total comprehensive income 8,742
Common stock issued 3 63 -- -- 63
-------------------------------------------------------------------
Balance, September 30, 2001 3,762 $4,880 $60,452 $9,808 $75,140
===================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements of Shenandoah
Telecommunications Company (the Company) are unaudited. In the opinion of
management, all adjustments necessary for a fair statement of the interim
results have been reflected therein. All such adjustments were of a normal and
recurring nature. These statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's Annual
Report to Shareholders and which are included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K").
2. Operating revenues and net earnings for any interim period are not
necessarily indicative of results that may be expected for the entire year.
3. Basic net earnings per share were computed on the weighted average number of
shares outstanding. Diluted net earnings per share were computed under the
treasury stock method, assuming the conversion as of the beginning of the
period, for all dilutive stock options. There were no adjustments to net income
in the computation of dilutive net income per share for any period.
4. The Company has identified nine reporting segments based on the products and
services each provide. Each segment is managed and evaluated separately because
of diverse technologies and marketing strategies. A summary of unaudited
external operating revenues, internal operating revenues, EBITDA and net income
of each segment is as follows. The Company defines EBITDA as net income
increased by the provision for income taxes, depreciation, amortization of long
lived assets, and interest expense, and decreased by interest income. 2001 PCS
results reflect the $0.9 million favorable travel adjustment recorded in
September 2001.
In thousands For the three months ended
(unaudited) September 30, 2001
External Internal Net
Revenues Revenues EBITDA Income (Loss)
---------------------------------------------------------------
Holding $ -- $ -- $ (717) $ (322)
Telephone 5,429 634 3,882 1,669
Cable TV 944 1 260 (115)
ShenTel 1,285 76 50 (89)
Leasing 6 - 3 2
Mobile 6,053 174 3,059 1,727
PCS 9,749 5 539 (1,003)
Long Distance 292 154 147 91
Network 252 25 248 134
---------------------------------------------------------------
Combined totals $24,010 $1,069 $7,471 $ 2,094
Inter-segment eliminations - (1,069) -- --
---------------------------------------------------------------
Consolidated totals $24,010 -- $7,471 $ 2,094
===============================================================
8
In thousands
(unaudited) For the three months ended
September 30, 2000
External Internal Net
Revenues Revenues EBITDA Income (Loss)
-------------------------------------------------------------------
Holding $ -- $ -- $ (703) $ 147
Telephone 4,757 658 3,884 1,480
Cable TV 923 1 279 (36)
ShenTel 1,260 56 62 (78)
Leasing 6 - 3 1
Mobile 4,602 245 3,058 1,116
PCS 3,912 8 248 (804)
Long Distance 278 90 147 40
Network 144 49 248 66
-------------------------------------------------------------------
Combined totals $15,882 $1,107 $ 7,226 $1,932
Inter-segment eliminations -- (1,107) -- --
-------------------------------------------------------------------
Consolidated totals $15,882 -- $ 7,226 $1,932
===================================================================
In thousands For the nine months ended
(unaudited) September 30, 2001
External Internal Net
Revenues Revenues EBITDA Income (Loss)
-------------------------------------------------------------------
Holding $ -- $ -- $(2,267) $ (979)
Telephone 15,967 1,800 11,701 5,179
Cable TV 2,830 2 952 (239)
ShenTel 3,740 252 447 (86)
Leasing 19 - 8 5
Mobile 16,173 533 7,735 4,257
PCS 22,579 9 (1,136) (4,136)
Long Distance 827 385 299 186
Network 711 83 704 392
-------------------------------------------------------------------
Combined totals $62,846 $3,064 $18,443 $4,579
Inter-segment eliminations -- (3,064) -- --
-------------------------------------------------------------------
Consolidated totals $62,846 -- $18,443 $4,579
===================================================================
In thousands For the nine months ended
(unaudited) September 30, 2000
External Internal Net
Revenues Revenues EBITDA Income (Loss)
-------------------------------------------------------------------
Holding $ -- $ -- $(2,065) $ 425
Telephone 14,041 1,778 11,673 4,487
Cable TV 2,708 2 954 (104)
ShenTel 3,871 170 476 (19)
Leasing 11 -- 6 10
Mobile 12,728 650 7,621 7,401
PCS 9,057 20 (2,278) (2,748)
Long Distance 808 285 298 135
Network 434 143 703 233
-------------------------------------------------------------------
Combined totals $43,658 $3,048 $17,388 $9,820
Inter-segment eliminations -- (3,048) -- --
-------------------------------------------------------------------
Consolidated totals $43,658 -- $17,388 $9,820
===================================================================
9
The Company's assets by segment for the periods ended September 30, 2001 and
September 30, 2000 are as follows:
In thousands September 30, September 30,
(unaudited) 2001 2000
Holding $107,015 $63,413
Telephone 56,709 75,749
Cable TV 11,743 12,053
ShenTel 5,194 5,226
Leasing 254 290
Mobile 18,214 5,566
PCS 49,398 41,079
Long Distance 201 214
Network 978 1,146
-------------------------------------
Combined totals $249,706 $204,736
Inter-segment eliminations (87,314) (60,444)
-------------------------------------
Consolidated totals $162,392 $144,292
=====================================
5. Comprehensive income (loss) includes net income along with net unrealized
gains and losses on the Company's available-for-sale investments. A summary of
the unaudited results follow:
In thousands For the three months ended For the nine months ended
September 30, September 30,
2001 2000 2001 2000
-------------------------------------------------------------------------
Net income $2,094 $1,932 $4,579 $9,820
Net unrealized gain (loss) 1,775 (7,133) 4,163 (10,020)
-------------------------------------------------------------------------
Comprehensive income (loss) $3,869 ($5,201) $8,742 ($200)
=========================================================================
6. Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
7. On June 22, 2001, the Company closed on a 12 year, $23 million long-term
financing facility with CoBank, at 7.37 %. This facility will be paid back in
equal monthly installments of $241 thousand including interest. The Company also
extended its $35 million revolving line of credit through June 2002. At
September 30, 2001, the Company had $1.3 million borrowed on the $35 million
revolving credit facility with CoBank, and no outstanding balance on its $2
million line of credit with SunTrust Bank.
8. The Company negotiated a settlement of the travel revenue issue with Sprint
PCS during September 2001. The agreement finalizes the allocation of travel
revenue, which impacted the Company's results prior to March 2001. As a result,
for the three months ended September 30, 2001, the Company recognized a $926,000
one-time favorable adjustment to travel revenue. The Company will repay the
remaining $3.8 million liability previously recorded in equal monthly
installments by December 15, 2001.
9. Subsequent to the end of the quarter, the Company liquidated 100,000 shares
of Illuminet (ILUM) an available-for-sale security, for proceeds of
approximately $4.4 million. The Company also liquidated all its holdings of
ITC^DeltaCom (ITCD) and Loral (LOR) for proceeds of approximately $0.2 million.
The Company recognized approximately $4.2 million net gain before taxes on the
sales of these securities.
10
10. Subsequent to the end of the quarter, The Board of Directors declared a cash
dividend of $0.70 per share payable on November 30, 2001, to shareholders of
record on November 9, 2001. The total dividend will be approximately $2.6
million.
11. In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" , which is effective for all business combinations initiated after
June 30, 2001. SFAS No. 141 requires companies to account for all business
combinations using the purchase method of accounting, recognize intangible
assets if certain criteria are met, as well as provide additional disclosures
regarding business combinations and allocation of purchase price.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires nonamortization of goodwill and intangible assets that
have indefinite useful lives and also requires annual tests of impairments of
those assets. The statement also provides specific guidance about how to
determine and measure goodwill and intangible asset impairments, and requires
additional disclosure of information about goodwill and other intangible assets.
The provisions of this statement are applied starting with fiscal years
beginning after December 15, 2001 and apply to all goodwill and other intangible
assets recognized in the financial statements at that date. Goodwill and
intangible assets acquired after June 30, 2001 will be subject to the
nonamortization provisions of the statement. The Company will adopt SFAS No. 142
beginning January 1, 2002, and such adoption is not anticipated to have a
material adverse impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the asset. SFAS No.143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, the Company will recognize
a gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS No. 143 no
later than the quarter ending March 31, 2003. At the present time, the Company
has not made a final determination of the impact this statement will have on the
Company's results of operations and financial position.
On October 3, 2001, the FASB issued SFAS No. 144, " Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and
will provide a single accounting model for long-lived assets held-for-sale. SFAS
No. 144 will also supercede the provisions of Accounting Principles Board
Opinion ("APB") 30 with regard to reporting the effects of a disposal of a
segment of a business and requires expected future operating losses from
discontinued operations to be reported in the periods in which the losses are
incurred (rather than as of the measurement date as previously required by APB
30). In addition, more dispositions will qualify for discontinued operations
treatment in the income statement. SFAS
11
No. 144 is effective for the Company for the first quarter of 2002. No final
determination has been made of the impact this statement will have on the
Company's results of operations and financial position.
12
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this report on Form 10Q that are not purely
historical are forward looking statements within the meaning of Section 27 A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934, including statements regarding our expectations, hopes, intentions or
strategies regarding the future. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those anticipated in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, changes in the interest rate
environment, management's business strategy, national, regional and local market
conditions, and 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 takes no obligation to publicly revise
these forward-looking statements to reflect subsequent events or circumstances.
Shenandoah Telecommunications Company and subsidiaries (the Company) provide
telephone service, long distance, personal communications service (PCS),
cellular telephone, cable television, unregulated telecommunications equipment
and services, internet access, paging, and digital subscriber loop (DSL)
services. In addition, through its subsidiaries, the Company leases towers and
operates and maintains an interstate fiber optic network. Competitive local
exchange carrier (CLEC) services are currently being evaluated in certain target
markets. The Company's operations are principally along the Interstate 81
corridor from the Northern Shenandoah Valley of Virginia through West Virginia,
Maryland, and into South Central Pennsylvania.
The Company reports revenues in three categories; wireless, wireline and other
revenues. These revenue classifications are defined as follows: Wireless
revenues are made up of Shenandoah Personal Communications Company (PCS), and
Mobile Company, which includes the revenues of the Cellular Partnership and
tower revenues. The wireline revenues include the following subsidiary revenues
in the financial results: Telephone Company, Network Company, Cable Television
Company, and the Long Distance Company. Other revenues are comprised of the
revenues of ShenTel Service Company, the Leasing Company, and the Holding
Company. The Company adopted this presentation in the first quarter of 2001, and
has reclassified prior period results to reflect this change.
13
SELECTED OPERATING STATISTICS
The following table shows selected operating statistics of the Company for the
previous five quarters. This information is unaudited, and is provided as a
supplement to the financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
SELECTED OPERATING STATISTICS (Unaudited)
Three Month Period Ended
Sep 30, Jun 30, Mar 31, Dec 31, Sep 30,
2001 2001 2001 2000 2000
------------------------------------------------------------------
Telephone Access Lines 24,583 24,432 24,288 24,117 23,994
CATV Subscribers 8,834 8,756 8,742 8,707 8,683
Internet Subscribers 16,923 16,385 16,045 14,900 13,956
Digital PCS Subscribers 39,724 32,067 27,339 23,232 18,409
Analog Cellular Subscribers 9,526 9,985 10,416 10,836 11,289
Paging Subscribers 4,160 4,640 4,710 4,786 4,861
Fiber Route Miles 482 468 438 408 N/A
Total Fiber Miles 23,854 23,162 20,229 17,295 N/A
CDMA Base Stations (sites) 150 130 126 58 58
Cellular Base Stations 20 20 20 20 20
Towers Owned (over 100 foot) 64 64 64 64 39
PCS Market POPS (000) 2,048 2,048 2,048 2,048 700
PCS Covered POPS (000) 1,100 1,100 1,100 400 400
Cellular Market POPS (000) 170 170 170 170 170
PCS ARPU (ex. travel) $53.49 $54.11 $50.86 $54.36 $53.60
PCS Travel rev. per subscriber $25.53 $27.78 $19.97 $15.06 $15.95
PCS Ave. mgmt. fee per sub. $4.28 $4.33 $4.07 $4.35 $4.29
PCS Ave monthly churn % 2.02% 1.83% 2.18% 2.33% 2.57%
PCS CPGA $294.34 $395.60 $350.97 $311.57 $278.86
PCS CCPU $55.29 $56.07 $55.02 $53.70 $56.68
N/A - data is not available as of these dates.
Total Fiber Miles - This statistic reported in previous filings only reflected a
portion of the Company's total fiber miles.
POPS - is the estimated population of people in a geographic area covered by the
service.
ARPU - Average Revenue Per User - before travel, roaming revenue, and management
fee.
PCS Travel revenue - including roamer revenue divided by average subscribers.
PCS Ave. mgmt fee per sub. - 8 % of collected revenue paid to Sprint PCS
excluding travel.
PCS Ave Monthly Churn - average of 3 monthly calculations of deactivations
(excluding returns less than 30 days) divided by beginning of period
subscribers.
CPGA - Cost Per Gross Add - including selling costs, product costs, and
advertising costs.
CCPU - Cash Cost Per User - including network, customer care and other costs.
RECENT DEVELOPMENTS
The Company's efforts to market its services in the expanded PCS network area
contributed to new subscribers purchasing phones and services which produced
higher revenues during the first nine months of 2001. In mid-February
14
2001, the Company turned up the PCS network in the Central Pennsylvania market,
which encompasses the Harrisburg and York areas. In recent years, the source of
the Company's revenues has shifted from traditional wireline revenues to
wireless revenues. For the nine months ended September 30, 2001, wireless
revenue was 61.7% of total revenue, wireline revenue contributed 32.3% of total
revenue, and other revenue was 6.0% of total revenue. These results compare to
49.9% for wireless, 41.2% for wireline and 8.9% for other, for the comparable
nine months of 2000. This significant shift in revenue will likely continue as
the Company's PCS revenues grow from the increased subscribers that are
purchasing the service.
The Company's strategy is to continue the expansion of its services and the
geographic areas served primarily through the expansion and fill-in of the PCS
network using the CDMA technology under the national brand of Sprint PCS. At the
end of 2001, the Company expects to have approximately 200 base stations in
service, compared to the 150 base stations that were in service September 30,
2001. This increase in base stations includes the installation of base stations
in the Altoona, Pennsylvania market. Over the past 24 months, the Company
focused on building its CDMA PCS wireless network to meet Sprint PCS contractual
requirements. Upon completion of the contractual build-out, the Company will
shift its focus to improving service and operating results of the network. The
Company expects to continue adding new sites to enhance the existing network and
provide improved service to the customers in the Company's service area.
In accordance with Sprint PCS requirements, the Company is beginning to invest
in third generation (3G 1x) wireless technology. 3G 1x is the first of a
four-stage migration path that will enable additional voice capacity and
increased data speeds. The network upgrades are comprised of software changes,
channel card upgrades, and some new network elements for packet data. The
Company's existing base stations are compatible with the network card
enhancements, thereby allowing the Company to provide 3G 1x service without base
station replacement. 3G 1x technology is backwards compatible with the existing
2G network, thereby allowing continued use of current customer handsets. These
enhancements will require the Company to invest approximately $3 million of
additional capital over the next twelve months, in the PCS network and switch to
deliver this improved technology and service.
The Company is dependent on Sprint PCS for the reporting of a significant
portion of PCS revenues, particularly travel and service revenue. During the
third quarter of 2001, the Company negotiated a settlement of the travel revenue
issue with Sprint PCS that was identified in March 2001 and discussed in
previous quarters of 2001. The final settlement of the travel revenue issue was
for $3.8 million, payable in five installments through December 2001. A
favorable adjustment of $926,000 was recorded to travel revenue in the third
quarter of 2001, to reflect the change in the previously recorded estimate of
the misallocated travel revenue. Controls and processes have been adopted by the
Company and Sprint PCS to review, test, and validate travel information being
reported to the Company and all affiliates. The Company continually monitors and
tracks the data provided to identify potential unexpected trends in the
information provided by Sprint PCS.
On October 1, 2001, the travel revenue rate paid by and received from Sprint PCS
and the other affiliates to the Company is declining to $0.12 per minute, down
from a rate of $0.15 per minute. The $0.15 per minute rate was in place from
June 1, 2001 through September 30, 2001. Prior to June 1, 2001 the travel rate
was $0.20 per minute. As previously reported, there is a further reduction in
the travel rate scheduled to take effect January 1, 2002. The new rate will
decline to around $0.10 per minute.
15
In early July 2001, the Company announced the planned rollout of DSL service in
a nearby Virginia community, outside of the Telephone subsidiary's regulated
service area in the next six to nine months. The targeted roll out is
anticipated to be in December 2001. The Company executed the necessary
agreements with the local exchange carrier, and is in the process of installing
equipment and establishing information exchange procedures. This service will be
offered by the Company's CLEC subsidiary, ShenTel Communications Company, and is
not expected to require significant capital or operating resources.
Subsequent to the end of the third quarter, the Company sold 100,000 shares of
Illuminet stock for proceeds of approximately $4.4 million. Additionally, to
reduce the impact of taxes on this transaction, the Company sold all of its
shares of Loral and ITC^DeltaCom for proceeds of approximately $0.2 million.
These transactions generated a net gain of approximately $4.2 million before
taxes which will be recognized in October 2001.
At its October 2001 meeting, the Board of Directors of the Company declared a
cash dividend of $0.70 per share payable on November 30, 2001, to shareholders
of record on November 9, 2001. The total dividend will be approximately $2.6
million.
RESULTS OF OPERATIONS THIRD QUARTER 2001 VS THIRD QUARTER 2000
General
Total revenue for the third quarter 2001 increased $8.1 million, or 51.2%, to
$24.0 million compared to $15.9 million the same period last year. Net income
increased $0.2 million, or 8.4% to $2.1 million compared to $1.9 million for the
same quarter last year. Net earnings per share diluted were $0.55 cents per
share, compared to $0.50 cents for the same period last year.
Revenues
Total revenues increased $8.1 million, or 51.2%, to $24.0 million from $15.9
million in third quarter 2000. Wireless revenue increased $7.3 million or 85.6%
due in part to adding over 21,300 PCS subscribers since September 30, 2000,
which contributed to the $3.7 million increase in subscriber revenue compared to
third quarter last year. Additionally, higher travel and roamer revenue of $3.3
million on the PCS network contributed to the higher revenues, including the
$0.9 million travel adjustment settled during the third quarter of 2001.
Cellular revenue increased $1.1 million, primarily due to higher roamer revenues
generated from other providers' customers using our network, compared to the
same period a year ago, somewhat offset by a decline in service revenue in the
cellular business. Wireline revenues increased $0.8 million, or 13.4%, due to a
$0.3 million increase in access revenue in the telephone business, and an
increase in the usage of the Company's fiber network facilities of $0.5 million
compared to the same period last year.
Operating Expenses
Operating expenses increased $6.3 million or 56.1%, to $17.6 million, compared
to third quarter last year. Network operating costs increased $3.2 million, or
62.3%, due primarily to additional lines and added traffic over the network,
particularly in support of the expanded wireless
16
services related to the PCS expansion into Pennsylvania. Depreciation and
amortization expense increased by $1.3 million or 71.4% compared to the same
period last year, as new assets, particularly in the PCS expansion, have been
added to the networks. Selling, general and administrative costs increased $1.4
million or 50.7% due primarily to opening new PCS stores in the Harrisburg and
York, Pennsylvania markets and adding new employees to support those operations.
The Company's operating margin was 26.5%, down from 28.9% for the same period
last year. This decline was primarily due to the impact of the increased costs
incurred to support the expanded PCS network in Central Pennsylvania, which were
not totally offset by the increase in the number of subscribers,(nearly 2,100)
and the corresponding service revenue in that area of the market. Costs
increased $6.3 million or 56.1% while revenues increased $8.1 million or 51.2%
compared to the third quarter 2000 results. The Company expects operating
margins will continue to be impacted until there are adequate subscribers and
additional revenues generated from the PCS operation to offset the significant
fixed costs being added during the PCS expansion.
Gain (loss) on the sale of investments declined $0.7 million due to write downs
of several available-for-sale securities.
Interest expense increased $0.2 million, or 29.6% to $1.0 million in third
quarter 2001, a result of increased borrowing levels to support the PCS
expansion. Interest expense is expected to remain elevated until the PCS
operation generates sufficient revenues and cash flows to adequately fund cash
needs for the business.
Income before income taxes and minority interest increased $0.7 million due to
higher revenues offset somewhat by increased expenses compared to the third
quarter 2000 results.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. This calculation
eliminates the impact of investment gains or losses which management cannot
directly influence. The third quarter results generated $2.5 million of net
income from ongoing operations, compared to $1.9 million during the third
quarter of 2000. The $0.6 million change in ongoing operations after taxes
reflects increased wireless revenues including the $0.9 million favorable
adjustment to PCS travel revenues for the settlement of the travel adjustment
with Sprint PCS. Excluding this adjustment, ongoing operations decreased
nominally over third quarter 2000 results.
Income tax provision increased $0.2 million due to higher earnings compared to
the same period last year.
Minority interest increased $0.4 million or 49.0% to $1.3 million, due to the
improved performance of the cellular operation, primarily the result of
wholesale roamer revenues.
Net income increased $0.2 million or 8.4% to $2.1 million for the quarter, due
to improved wireless results, somewhat offset by start up costs incurred in
Pennsylvania from the PCS network.
17
RESULTS OF OPERATIONS NINE MONTHS 2001 YEAR-TO-DATE VS NINE MONTHS 2000
YEAR-TO-DATE
General
Total revenue for the nine months of 2001 increased $19.2 million, or 44.0% to
$62.8 million compared to $43.7 million for the same period last year. Net
earnings decreased $5.2 million, or 53.4% to $4.6 million compared to $9.8
million for year-to-date 2000. Diluted earnings per share were $1.21 per share,
compared to $2.60 for the same period last year.
Revenues
Total revenues increased $19.2 million, or 44.0 % to $62.8 million, up from
$43.7 million for year-to-date 2000. Wireless revenue increased $17.0 million or
77.9% primarily due to higher travel and roamer revenue of $7.3 million on the
PCS network. The Company added over 21,300 PCS subscribers since September 30,
2000, which contributed to the $6.0 million increase in subscriber revenue
compared to nine months last year. Additionally, mobile revenue increased $3.4
million, due to higher roaming revenues generated from other provider's
customers using our cellular network, and increased tower rental revenue
compared to the same period a year ago. Wireline revenues increased $2.3 million
or 13.0%, due to a $1.1 million increase from the usage of the fiber network
facilities in addition to $0.9 million increase in access revenue in the
telephone business, compared to the same period last year.
Operating Expenses
Operating expenses increased $16.1 million, or 51.2% to $47.5 million compared
to $31.4 million for 2000 year-to-date expenses. Cost of goods and services
increased $1.1 million or 24.6%, primarily as a result of the costs of handsets
sold in the PCS operation and the increasing cost for cable TV programming.
Network operating costs increased $9.0 million or 70.1% due to the PCS expansion
in Pennsylvania. The geographic area covered by the expanded PCS network is over
two times the Company's original Quad-State network area, thereby generating
significantly higher network costs. Depreciation and amortization increased by
$2.9 million, or 52.1% compared to the same period last year, as new assets,
primarily in the PCS operation, have been added to the networks. Selling,
general and administrative costs are up $3.1 million or 35.7% due primarily to
opening new PCS stores in the Harrisburg and York, Pennsylvania markets,
customer support costs for the added subscribers in the PCS operation and adding
new employees to support those operations. The Company's customer support costs
have also increased with the over 115% growth in PCS subscriptions from the end
of September 2000.
The Company's operating margin is 24.4%, down from 28.0% for the same period
last year. This decline was primarily due to the impact of the increases in all
operating costs related to the support of the expanded PCS network in South
Central Pennsylvania. The Company expects operating margins will continue to be
impacted until there are adequate subscribers and additional revenues generated
from the PCS operation to offset the significant fixed costs being added during
the PCS expansion.
Gain (loss) on the sale of investments declined $9.3 million due primarily to
the one-time sale of the Company's interest in the Virginia RSA 6 partnership in
May 2000 and the impact of losses on several of the Company's investments during
the nine months of 2001.
18
Interest expense increased $1.0 million, or 56.1% to $2.7 million in 2001, a
result of increased borrowing levels to support the PCS expansion.
Income before income taxes and minority interest decreased $7.4 million,
primarily due to the impact of the one-time sale of the Virginia 6 RSA
partnership in 2000.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. This calculation
eliminates the impact of investment gains or losses which management cannot
directly influence. Net income from ongoing operations reflect improved results
of $5.8 million for the nine months of 2001, compared to $5.3 million for the
nine months of 2000. The improved year-to-date results are due to increased
wireless revenues from the PCS including the travel adjustment discussed earlier
and the cellular operations, somewhat offset by higher operating costs, interest
and minority interest charges. Excluding the travel adjustment, ongoing
operations decreased nominally compared to the nine-month results of 2000.
Income tax provision decreased $2.9 million due to lower earnings and the impact
of the minority interest effect on the cellular partnership earnings within the
operation.
Minority interest increased $1.0 million, or 41.6% to $3.3 million, due to the
improved performance of the cellular operation, which is 66% owned by the
Company.
Net income decreased $5.2 million or 53.4% to $4.6 million for 2001, due to the
change in investment results, and start up costs incurred in Pennsylvania from
the PCS network.
INVESTMENTS IN NON-AFFILIATED COMPANIES
The Company participates in emerging technologies by investing in start-up
companies. This includes indirect participation through capital venture funds
such as South Atlantic Venture Fund III, South Atlantic Private Equity IV,
Dolphin Communications Parallel Fund, Dolphin Communications Fund II and Burton
Partnership. It also includes direct participation in start-up companies such as
NTC Communications. For those investments that eventually go public, it is the
intent of the Company to evaluate whether to hold or sell parts or all of each
investment on an individual basis. As of September 30, 2001, the Company held
shares of four companies that are publicly traded, with the following market
values: $16.6 million in Illuminet (ILUM) with 433,504 shares, $0.1 million in
ITC^DeltaCom (ITCD) with 62,276 shares, $0.2 million in Loral Communications
(LOR) with 150,332 shares, and $0.1 million in Net IQ (NTIQ) with 3,744 shares
held. Net unrealized gains on the securities available-for-sale increased $2.9
million during the third quarter of 2001 to $15.8 million, reflecting the
volatile stock prices of these technology securities and current market
conditions.
During the quarter ended September 30, 2001, the Company charged $0.3 million to
earnings as a result of the lower market valuations for its investments in
ITC^DeltaCom and Loral. This change in valuation is the result of management's
view, that for the foreseeable future the market decline of these investments
are other than temporary. Management monitors the carrying value of all
investments on an ongoing basis, including those investments that have
previously been written down.
19
Subsequent to the end of the third quarter, the Company sold 100,000 shares of
Illuminet stock for proceeds of approximately $4.4 million. Additionally, to
reduce the impact of taxes from the Illuminet transaction, the Company sold all
of its shares of Loral and ITC^DeltaCom for proceeds of approximately $0.2
million. These transactions generated a net gain of approximately $4.2 million
before taxes. The funds generated from these transactions were used for general
corporate purposes and to reduce the amount borrowed on the revolving line of
credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two principal sources of funds for financing expansion activities
and operations are internally generated funds and loan arrangements primarily
with CoBank. The Company has a $35.0 million revolver loan agreement with
CoBank, which matures on June 1, 2002. Outstanding draws on the $35.0 million
facility as of September 30, 2001 were $1.3 million, which is reflected in the
current liabilities section of the balance sheet. The rate on this short term
borrowing was 4.4%. Subsequent to the close of the quarter, the Company repaid
the $1.3 million to CoBank, as a result of liquidating a portion of the
Illuminet investment mentioned above. The Company's outstanding long-term CoBank
debt is $45.5 million, all of which is at fixed rates ranging from approximately
6% to 8%. The weighted average rate of the CoBank debt at September 30, 2001 was
approximately 7.6%. The stated rate excludes patronage credits that are paid to
CoBank borrowers after CoBank's year-end. Historically, the Company has received
patronage credits, and expects to receive comparable patronage credits, which
reduce the effective borrowing rate by approximately 60 basis points. Repayment
of the CoBank long-term debt facilities requires monthly payments on this debt
through September 2013.
Additionally, the Company has long-term debt with RUS/RTB that totals $12.3
million at the end of September 2001, with maturities through 2019. The weighted
average interest rate on the RUS/RTB debt is approximately 6.49%.
The Company's long-term debt facilities require the Company to maintain certain
operating results and debt coverage ratios, including leverage, equity to total
assets, and debt service coverage. A portion of the Company's debt pricing is
tied to the Company's coverage covenant.
The Company maintains an unsecured line of credit for $2.0 million with a local
bank. No draws were made on this line during 2001, and no amounts are
outstanding as of September 30, 2001. This facility matures in June 2002.
At its option, the Company may also liquidate portions of the securities
available for sale portfolio, to provide for its cash and capital needs. These
securities had a market value of $17.0 million as of September 30, 2001.
Year-to-date capital spending was $19.4 million, compared to a total capital
budget of $34.9 million. The total spending includes $4.9 million of proceeds
from the sale of the GSM equipment that was previously escrowed, used to
purchase base stations for the PCS network. Management expects cash flow from
operations, current loan facilities, and the potential liquidation of portions
of its available for sale securities will provide the Company with adequate cash
resources.
20
The Board of Directors of the Company declared a cash dividend of $0.70 per
share payable on November 30, 2001, to shareholders of record on November 9,
2001. The total dividend will be approximately $2.6 million.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks relate primarily to changes in interest rates, on
instruments held for other than trading purposes. Our interest rate risk
involves two components. The first component is outstanding debt with variable
rates. As of September 30, 2001, the balance of Company's variable rate debt is
$1.3 million, made up of a single traunch of the revolving note payable to
CoBank, which matures June 1, 2002. The rate of this note is based upon the
lender's cost of funds. The Company also has variable rate line-of-credit
totaling $2 million, with no outstanding borrowings at September 30, 2001. The
Company's remaining debt has fixed rates through its maturity. A 10% decline in
interest rates would reduce the fair value of the fixed rate debt by
approximately $ 1.2 million. The second component of interest rate risk is
temporary excess cash, primarily invested in overnight repurchase agreements and
short-term certificates of deposit. As the Company continues to expand its
operations, temporary excess cash is expected to be minimal. Available cash will
be used to repay existing and anticipated new debt obligations, maintaining and
upgrading capital equipment, ongoing operations, investment opportunities in new
and emerging technologies, and potential dividends to the Company's
shareholders. Management does not view market risk as having a significant
impact on the Company's results of operations, although adverse results could be
generated if interest rates were to escalate markedly.
ITEM 4. Submission of Matters to a Vote of Security Holders set forth below:
None
ITEM 6. Exhibits and Reports on Form 8-K
September 14, 2001
October 26, 2001
21
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
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 8, 2001 /s/ CHRISTOPHER E. FRENCH
Christopher E. French
President
November 8, 2001 /s/ LAURENCE F. PAXTON
Laurence F. Paxton
Vice President - Finance