SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 2002
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at April 30, 2002
Common Stock, No Par Value 3,768,004 Shares
1
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 3-4
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 6
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Three Months Ended March 31, 2002 and the
Twelve Months Ended December 31, 2001 7
Notes To Unaudited Condensed Consolidated
Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18-19
PART II.Other Information
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
March 31,
2002 December 31,
(Unaudited) 2000
--------- --------
Current Assets
Cash and cash equivalents $1,331 $2,173
Accounts receivable, net 10,431 8,498
Income tax receivable -- 1,205
Materials and supplies 5,083 2,999
Prepaid expenses and other 1,643 1,159
-------- --------
Total current assets 18,488 16,034
Securities and investments
Available-for-sale securities 7,219 12,025
Other investments 7,433 6,438
-------- --------
Total securities and investments 14,652 18,463
Property, plant and equipment, net 130,350 128,104
Other Assets
Cost in excess of net assets of business
acquired, less accumulated amortization
of $2,413 and $2,413 3,217 3,217
Deferred charges and other assets, net 1,009 979
-------- --------
Total other assets 4,226 4,196
-------- --------
$167,716 $166,797
======== ========
(continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
Liabilities and Shareholders' Equity
March 31,
2002 December 31,
(Unaudited) 2000
--------- --------
Current Liabilities
Current maturities of long-term debt $4,418 $4,387
Notes payable 5,376 6,200
Accounts payable 8,339 5,394
Advance billings and deposits 3,040 2,889
Income taxes payable 211 --
Other current liabilities 2,439 2,771
--------- --------
Total current liabilities 23,823 21,641
Long-term debt, less current maturities 50,933 52,049
Other Liabilities
Deferred income taxes 13,376 14,402
Pension & other 2,689 2,265
--------- --------
Total other liabilities 16,065 16,667
Minority interests 1,873 1,838
Shareholders' Equity
Common stock 5,003 4,950
Retained earnings 71,766 69,610
Accumulated other comprehensive income
(loss) (1,747) 42
--------- --------
Total shareholders' equity 75,022 74,602
--------- --------
$167,716 $166,797
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three months ended
March 31,
2002 2001
(Unaudited)
----------------------
Operating Revenues
Wireless $16,910 $10,025
Wireline 7,415 6,677
Other revenues 1,521 1,132
----------------------
Total revenues 25,846 17,834
Operating Expenses
Cost of goods and services 2,678 1,529
Network operating costs 7,601 6,218
Depreciation and amortization 3,495 2,483
Selling, general and administrative 5,569 3,706
----------------------
Total operating expense 19,343 13,936
----------------------
Operating Income 6,503 3,898
Other Income (expense):
Non-operating income, net 119 253
Loss on investments, net (692) (1,440)
Interest expense (1,068) (1,041)
----------------------
Income before income taxes and minority interest 4,862 1,670
Income tax provision (1,447) (298)
----------------------
3,415 1,372
Minority interest (1,259) (883)
----------------------
Net income $2,156 $489
======================
Net earnings per share, basic $0.57 $0.13
======================
Net earnings per share, diluted $0.57 $0.13
======================
Weighted average shares outstanding, basic 3,765 3,757
======================
Weighted average shares outstanding, diluted 3,783 3,768
======================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended
March 31,
2002 2001
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $2,156 $489
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,493 2,390
Amortization 2 93
Deferred tax expense 117 200
Loss on investments 394 990
Equity in loss of investee and patronage, net 126 109
Loss on disposal of equipment 14 --
Minority interest of partnership, net of distributions 35 118
Other 392 69
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,933) 105
Materials and supplies (2,084) (859)
Increase (decrease) in
Accounts payable 2,945 (1,674)
Other prepaids, deferrals and accruals 751 (2,027)
----------------------
Net cash provided by operating activities 6,408 3
Cash Flows from Investing Activities
Purchases of property, plant & equipment (5,753) (4,303)
Purchases of other investments (1,345) (24)
Proceeds from sale of available-for-sale securities 1,704 39
Proceeds from disposal of assets -- 1,592
----------------------
Net cash used in investing activities (5,394) (2,696)
Cash Flows from Financing Activities
Proceeds from long-term debt and revolving loan -- 4,620
Payments on long-term debt and revolving loan (1,909) (528)
Proceeds from issuance of common stock upon
exercise of stock options 53 15
----------------------
Net cash provided by (used in) financing activities (1,856) 4,107
----------------------
Net increase (decrease) in cash and cash equivalents (842) 1,414
Cash and Cash Equivalents
Beginning 2,173 3,133
----------------------
Ending $1,331 $4,547
======================
Cash paid for:
Interest $1,067 $1,027
Income taxes (net of refunds) $ 31 $ --
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 SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(in thousands)
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income (Loss) Total
--------------------------------------------------------------
Balance, December 31, 2000 3,759 $4,817 $55,873 $5,645 $66,335
Comprehensive income:
Net income -- -- 16,372 -- 16,372
Change in unrealized gain
on securities available-for-sale
net of tax benefit of $3,482 -- -- -- (5,603) (5,603)
--------
Total comprehensive income 10,769
Dividends declared ($0.70 per share) -- -- (2,635) -- (2,635)
Common stock issued through the
exercise of incentive stock options 6 133 -- -- 133
--------------------------------------------------------------
Balance, December 31, 2001 3,765 $4,950 $69,610 $42 $74,602
(Unaudited)
Comprehensive income:
Net income -- -- 2,156 -- 2,156
Change in unrealized loss
on securities available-for-sale
net of tax benefit of $1,415 -- -- -- (2,233) (2,233)
Reclassification of net recognized
loss on securities available-for-sale
net of tax of ($272) -- -- -- 444 444
--------
Total comprehensive income 367
Common stock issued through the
exercise of incentive stock options 2 53 -- -- 53
--------------------------------------------------------------
Balance, March 31, 2002 3,767 $5,003 $71,766 $(1,747) $75,022
==============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements of Shenandoah
Telecommunications Company and Subsidiaries (the Company) 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, which is included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
2. Operating revenues and net earnings for any interim period are not
necessarily indicative of results that may be expected for the entire year.
3. Basic net earnings per share were computed on the weighted average number of
shares outstanding. Diluted net earnings per share were computed under the
treasury stock method, assuming the conversion as of the beginning of the
period, for all dilutive stock options. There were no adjustments to net income
in the computation of dilutive net income per share for any period.
4. The Company has identified 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.
In thousands For the three months ended
(unaudited) March 31, 2002
External Internal Net
Revenues Revenues EBITDA Income (Loss)
----------------------------------------------------
Holding $ -- $ -- $ 366 $(359)
Telephone 5,796 670 4,264 1,929
Cable TV 1,082 1 479 104
ShenTel 1,515 89 200 27
Leasing 6 -- 3 2
Mobile 5,749 323 3,196 1,770
PCS 11,161 9 177 (1,558)
Long Distance 273 151 162 99
Network 264 32 272 142
----------------------------------------------------
Combined totals $25,846 $1,275 $9,119 $2,156
Inter-segment eliminations -- (1,275) (953) --
----------------------------------------------------
Consolidated totals $25,846 -- $8,166 $2,156
====================================================
8
In thousands For the three months ended
(unaudited) March 31, 2002
External Internal Net
Revenues Revenues EBITDA Income (Loss)
----------------------------------------------------
Holding $ -- $ -- $(859) $(803)
Telephone 5,243 579 4,391 1,764
Cable TV 933 1 368 (42)
ShenTel 1,126 91 136 (35)
Leasing 6 -- 3 2
Mobile 4,622 184 2,135 1,130
PCS 5,403 1 (1,240) (1,689)
Long Distance 275 89 52 32
Network 226 33 230 130
----------------------------------------------------
Combined totals $17,834 978 $5,216 $489
Inter-segment eliminations -- (978) (905) --
----------------------------------------------------
Consolidated totals $17,834 $ -- $4,311 $489
====================================================
The Company's assets by segment as of March 31, 2002 , December 31, 2001, and
March 31, 2001 are as follows:
In thousands March 31, December 31, March 31,
(unaudited) 2002 2001 2001
Holding (1) $111,702 $110,447 $71,922
Telephone (1) 57,292 55,942 77,706
Cable TV 10,952 11,466 12,050
ShenTel 5,201 5,359 5,125
Leasing 257 254 261
Mobile 18,686 15,273 16,698
PCS 55,630 61,530 46,353
Long Distance 367 22 156
Network 1,350 1,005 1,024
----------------------------------------
Combined totals $261,437 $261,298 $231,295
Inter-segment eliminations (93,721) (94,501) (80,333)
----------------------------------------
Consolidated totals $167,716 $166,797 $150,962
========================================
(1) During 2001, the Company transferred intercompany receivables and
intercompany debt from the Telephone subsidiary, to the Holding Company, of
approximately $23 million.
5. Comprehensive income includes net income along with net unrealized gains and
losses on the Company's available-for-sale investments. A summary of the
unaudited results follow:
In thousands For the three months ended
March 31,
2002 2001
-----------------------------------
Net income $ 2,156 $ 489
Net unrealized loss (1,789) (303)
-----------------------------------
Comprehensive income $367 $186
===================================
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.
9
7. During the quarter, the Company sold 50,000 shares of VeriSign, Inc. (VRSN)
an available-for-sale security, for proceeds of approximately $1.5 million or an
average of $30.16 per share. The Company recognized a net loss before taxes of
approximately $0.4 million on the sales of these securities. The investment in
VeriSign stems from prior investments in predecessor companies of Illuminet
Holdings, Inc. (Illuminet), which merged with VeriSign in December 2001. The
Company's average original investment in the VeriSign stock is $2.72 per share.
As required by generally accepted accounting principles, the Company recognized
a gain on the exchange of the Illuminet shares in 2001, and as of December 31,
2001 had a carrying value of $38.04 per share on the VeriSign stock. The market
price of VeriSign has declined to $8.07 on April 29, 2002. The difference
between the carrying value of the investment at $38.04 and the recent $8.07
closing price is approximately $7.8 million before taxes. Should the VeriSign
stock price remain depressed through the end of second quarter 2002, a charge
against earnings may be recognized as the investment's value could be deemed to
be impaired on an other than temporary basis.
8. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires discontinuation of amortization of goodwill and
intangible assets that have indefinite useful lives and also requires annual
tests of impairments of those assets. The statement also provides specific
guidance about how to determine and measure goodwill and intangible asset
impairments, and requires additional disclosure of information about goodwill
and other intangible assets. The Company adopted SFAS No. 142 beginning January
1, 2002, thus eliminating $0.1 million of amortization expense in each
subsequent quarter. There are no other anticipated material impacts on the
Company's financial statements as a result of the adoption of this statement.
The following table presents the adjusted results of the Company's net income
and earnings per share to reflect the impact as if the adoption of SFAS No. 142
occurred at the beginning of 2001.
For the three months ended March 31,
In thousands, except per share data 2002 2001
- -----------------------------------------------------------------------------
Net income $2,156 $ 489
Add back goodwill amortization
expense, net of taxes -- 54
------ -----
Adjusted net income $2,156 $ 543
====== =====
Earnings per share basic & diluted $ 0.57 $0.13
====== =====
Adjusted basic and diluted
earnings per share $ 0.57 $0.14
====== =====
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it becomes a
legal obligation. The Company will also record a corresponding asset, which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003. The Company is currently evaluating the timing of
adoption and the effect that implementation of the new standard may have on its
results of operations and financial position.
10
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement requires that long-lived assets
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs of sale. The Company adopted SFAS No. 144 on January 1, 2002 with no
impact on the Company's results of operations or financial position.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this report on Form 10Q that are not purely
historical are forward looking statements within the meaning of Section 27 A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934, including statements regarding our expectations, hopes, intentions or
strategies regarding the future. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those anticipated in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, changes in the interest rate
environment, management's business strategy, national, regional and local market
conditions, and 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 offered on a limited basis
in a test market. The Company's operations are principally along the Interstate
81 corridor from the Northern Shenandoah Valley of Virginia through West
Virginia, Maryland, and into South Central Pennsylvania.
The Company reports revenues in three categories; wireless, wireline and other
revenues. These revenue classifications are defined as follows: Wireless
revenues are made up of Shenandoah Personal Communications Company (PCS), and
Mobile Company, which includes the revenues of the Cellular 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. As the CLEC operation begins to develop the operation will be reported
in wireline revenues.
11
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 SUBSIDIARIES
SELECTED OPERATING STATISTICS (Unaudited)
Three Month Period Ended
Mar 31, Dec 31, Sep 30, Jun 30, Mar 31,
2002 2001 2001 2001 2001
----------------------------------------------------------
Telephone Access Lines 24,751 24,704 24,583 24,432 24,288
CATV Subscribers 8,740 8,770 8,834 8,756 8,742
Internet Subscribers 18,083 17,423 16,923 16,385 16,045
Digital PCS Subscribers 58,120 48,914 39,724 32,067 27,339
Analog Cellular Subscribers 9,246 9,440 9,526 9,985 10,416
Paging Subscribers 3,136 3,190 4,160 4,640 4,710
Long Distance Subscribers 9,341 9,159 9,047 8,718 8,532
Fiber Route Miles 524 485 482 468 438
Total Fiber Miles 26,804 23,893 23,854 23,162 20,229
Long Distance Calls (000) 5,431 5,561 5,712 5,335 4,858
Switched Access Minutes (000) 38,398 33,067 31,873 30,550 30,417
CDMA Base Stations (sites) 207 184 150 130 126
Cellular Base Stations 20 20 20 20 20
Towers Owned (over 100 foot) 78 70 64 64 64
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,455 1,395 1,100 1,100 1,100
Cellular Market POPS (000) 170 170 170 170 170
PCS ARPU (ex. Travel) $52.53 $53.28 $53.49 $54.11 $50.86
PCS Travel rev. per sub $16.61 $33.73 $25.53 $27.78 $19.97
PCS Ave. mgmt. Fee per sub $4.20 $4.26 $4.28 $4.33 $4.07
PCS Ave. monthly churn % 2.58% 2.77% 2.02% 1.83% 2.18%
PCS CPGA $274.02 $317.72 $294.34 $395.60 $350.97
PCS CCPU $39.75 $45.14 $55.29 $56.07 $55.02
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 service area.
ARPU - Average Revenue Per User - before travel, roaming revenue, and management
fee.
PCS Travel rev. per sub. - including roamer revenue divided by average
subscribers.
PCS Ave. mgmt. fee per sub. - 8 % of collected revenue paid to Sprint 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.
12
RECENT DEVELOPMENTS
In recent years, the principal source of the Company's revenues has shifted from
traditional wireline revenues to wireless revenues. For the three months ended
March 31, 2002, wireless revenue was 65.4% of total revenue, wireline revenue
contributed 28.7% of total revenue, and other revenue was 5.9% of total revenue.
These results compare to 56.2% for wireless, 37.4% for wireline and 6.4% for
other, for the comparable three months of 2001.
The Company's strategy in the last several years has been to expand its services
and the geographic areas served. This strategy has been implemented primarily
through enhancing the PCS network, using CDMA technology, under the national
brand of Sprint PCS. The Company's efforts to market its services in the
expanded PCS network area contributed to new subscribers purchasing phones and
services which continued to produce higher revenues during the first three
months of 2002. In late-December 2001, the Company turned up the PCS network in
the Altoona, Pennsylvania market, which completed the build-out of the initial
network requirements. The Company had 207 PCS CDMA base stations in service at
March 31, 2002, compared to 184 base stations that were in service December 31,
2001. This increase in base stations during the current year is primarily the
result of filling minor holes in the network coverage and building coverage
along several highly traveled secondary roads in the Company's market areas. The
Company is shifting its focus from building the initial network to improving
service and operating results of the network.
In accordance with Sprint PCS requirements, the Company is currently installing
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
cost approximately $3 million, of which approximately $2.5 million has already
been purchased in the first quarter of 2002 and is reflected in materials and
supplies since the network components have not been deployed in the network.
The Company is dependent on Sprint PCS for the reporting of a significant
portion of PCS revenues, particularly travel and service revenue. Controls and
processes have been adopted by the Company and Sprint PCS to review, test, and
validate information being reported to the Company. The Company continually
monitors and tracks the data provided by Sprint PCS to identify potential
unexpected trends in the information.
As previously reported, a further reduction in the Sprint PCS travel rate took
effect January 1, 2002. The new rate is $0.10 per minute for payable and
receivable minutes. In addition, the long distance travel rate was also adjusted
from $0.06 to $0.0203 per minute for both payable and receivable travel. The
Company is in a net receivable position for the current quarter by $1.2 million
as a result of travel. There is no guarantee that the net travel position will
remain in the Company's favor, and may change due to many factors beyond the
Company's control, including travel trends, highway closures, geographic
population shifts, weather, and other factors.
13
At the close of the quarter, the Company was running several test customers on
DSL service in a nearby Virginia community, outside of the Telephone
subsidiary's regulated service area. This service is offered by the Company's
CLEC subsidiary, ShenTel Communications Company, and as currently planned will
not require significant capital or operating resources.
Management is negotiating with a local Bank to renew the $2.0 million revolving
credit facility during the second quarter of 2002. The new facility is
anticipated to have terms similar to the existing facility, which is used
primarily to cover short-term fluctuations in cash flow.
The Company is also negotiating to renew the $35.0 million revolver with CoBank
by June 1, 2002. This facility has been used primarily to fund the Company's
expansion of its PCS business. Terms and conditions of the new facility are
anticipated to be similar to the existing $35.0 million revolving loan facility.
During the quarter, the Company sold 50,000 shares of Verisign, Inc. stock for
proceeds of approximately $1.5 million. This transaction generated a net loss of
approximately $0.4 million before taxes. Management is continuing to monitor its
investments and may liquidate more of its available-for-sale holdings.
Subsequent to the close of the quarter, the VeriSign, Inc. stock price declined
to $8.07 per share as of April 29, 2002. The difference between the carrying
value of the investment at $38.04 and the recent $8.07 closing price is
approximately $7.8 million before taxes. Should the VeriSign stock price remain
depressed through the end of second quarter 2002, a charge against earnings may
be recognized as the investment's value could be deemed to be impaired on an
other than temporary basis.
RESULTS OF OPERATIONS FIRST QUARTER 2002 VS FIRST QUARTER 2001
General
Total revenue for the first quarter was $25.8 million, an increase of $8.0
million, or 44.9% compared to $17.8 million the same period last year. Total
revenues include wireless revenue of $16.9 million, an increase of $6.9 million
or 68.7%; wireline revenues of $7.4 million, an increase of $0.7 million, or
11.1%; and other revenues of $1.5 million, an increase of $0.4 million or 34.4%.
Net income increased $1.7 million, or 341% to $2.2 million compared to $0.5
million for the same period in 2001. Net earnings per share diluted were $0.57
cents per share, compared to $0.13 cents for the same period last year.
Revenues
Within wireless revenues, the PCS operation added 30,781 PCS subscribers since
March 31, 2001, which contributed to a $4.0 million or 126% increase in
subscriber revenue compared to first quarter of 2001. As of March 31, 2002, the
Company has 58,120 PCS subscribers. The Company's ARPU (defined in the Selected
Operating Statistics section of this report) increased 3.3% to $52.53 for the
first quarter 2002, compared to $50.86 for the first quarter of 2001, but has
declined 2.9% from the June 2001 quarter high of $54.11. PCS travel and roamer
revenue combined were $3.4 million, and contributed a $1.4 million or 71.2%
increase to the revenue
14
growth for the first quarter of 2002. Travel and roamer revenue growth is
primarily attributed to network expansion. The travel revenue rate has declined
from $0.20 per minute in first quarter of 2001, to $0.10 per minute as of
January 1, 2002. Additionally, the inter-market long-distance rate has declined
from $0.06 per minute for all of 2001, to $0.0203 for 2002. Further declines in
travel rates or long-distance rates are not anticipated for the remainder of
2002.
Cellular revenue was $5.2 million, an increase of $1.0 million or 24.2%. Roamer
revenues, generated from other providers' customers using our network, increased
$1.2 million or 38% compared to the same period in 2001. Cellular roaming
revenue was somewhat offset by a decline in local service revenue of $0.2
million, or 18.8%, due to a decline of 1,170 cellular subscribers to 9,246 at
the end of March 2002, compared to 10,416 cellular subscribers at the end of
March 2001.
Increases in handset sales, tower lease revenue and other wireless revenues each
contributed to the additional $0.5 million increase over the first quarter 2001
results.
Wireline revenues were $7.4 million, an increase of $0.7 million or 11.1%.
Access revenue in the telephone business increased $0.3 million. Lease revenue
for the Company's fiber network facilities increased $0.3 million compared to
the same period last year. Cable TV contributed the other $0.1 million to the
increase in wireline revenues, largely due to the increase in basic cable
service rates that became effective December 1, 2001.
Other revenues were $1.5 million, an increase of $0.4 million or 34.4%. Internet
revenues increased $0.1 million or 15.7%. Internet subscribers increased 2,038,
or 12.7%, compared to March 31, 2001 subscribers. The total subscriber base for
the Company's Internet service was 18,083 as of March 31, 2002. Additionally,
during the quarter, the Company enhanced its Travel Shenandoah network, which
supports a joint service with the State of Virginia and Virginia Tech. This
program, now called 511 Virginia, contributed $0.2 million to the increased
revenues in the first quarter of 2002.
Operating Expenses
Total operating expense was $19.3 million, an increase of $5.4 million or 38.8%,
compared to $13.9 million for first quarter last year. The increase in PCS
subscribers and expanded PCS network were the principal factors driving costs
higher.
Costs of goods and services were $2.7 million, an increase of $1.2 million or
75.1%, changing primarily due to the increase in handsets sold and costs related
to the sales of PCS services. The Company added 9,206 PCS subscribers in the
first quarter of 2002 compared to 4,107 PCS subscribers in first quarter in
2001. This increase in net added subscribers impacted handset subsidies and
other charges in cost of goods and services.
Network operating costs were $7.6 million, an increase of $1.4 million, or
22.2%. Additional network lines and added traffic over the network, particularly
in support of the expanded wireless services related to the PCS expansion into
the Pennsylvania market, were the major causes for the increase in costs.
Depreciation and amortization expense was $3.5 million, an increase of $1.0
million or 40.8% compared to $2.5 million for the first quarter of 2001, as new
assets, particularly in the PCS operation, have been added to the networks.
15
Selling, general and administrative costs were $5.6 million, an increase of $1.9
million or 50.3%. Selling expenses and customer support made up $1.2 million of
the increase in selling, general and administrative expenses, due to the
increase in customers and sales efforts. The Company opened three new PCS stores
in the Harrisburg and York, Pennsylvania markets in the second quarter of 2001.
Administrative costs increased $0.3 million, due to additional staff added to
support the growing Company operations. Bad debt expense increased $0.4 million,
primarily the result of the growing customer base in the PCS operation.
The Company's operating margin was 25.2%, up from 21.9% for the same period last
year. This change was primarily due to the impact of the increased revenues
generated in the wireless segment of the business, contributing more toward the
fixed costs which have not increased as significantly since first quarter 2001.
Loss on investments was an improvement of $0.7 million or 51.9%. In the first
quarter of 2001, the Company recorded charges against the operation to
write-down several available-for-sale securities, which are no longer held by
the Company. The Company incurred a loss of $0.4 million on the sale of 50,000
shares of VeriSign, Inc. in the first quarter of 2002. (See Note 7 of the
Unaudited Financial Statements, included herein, for a further description on
available-for sale securities).
Interest expense increased to $1.1 million, or 2.6%, a result of nominal
increased borrowing levels compared to first quarter 2001.
Income before income taxes and minority interest was $4.9 million, an increase
of $3.2 million or 191%. Increased revenues were offset somewhat by increased
expenses compared to the first quarter 2001 results which contributed to the
improved results in the first quarter of 2002.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. This calculation
eliminates the impact of external investment gains or losses. After taxes, net
income from ongoing operations for the first quarter was $2.6 million, or an
86.7% increase compared to $1.4 million during the first quarter of 2001. The
$1.2 million change in ongoing operations reflects increased wireless revenues,
and increased contribution to cover the fixed costs incurred to start up the
Central Pennsylvania PCS market.
Income tax provision was $1.4 million, an increase of $1.1 million due to higher
earnings compared to the same period last year, and an increase in the effective
tax rate to 39% to reflect the increased presence in states with higher tax
rates.
Minority interest was $1.3 million, an increase of $0.4 million or 42.6%, due to
the improved performance of the cellular operation, primarily the result of
roamer revenue growth.
Net income was $2.2 million, an increase of $1.7 million or 341% for the
quarter, due to improved wireless results, somewhat offset by ongoing fixed
costs incurred from the Pennsylvania market of the PCS network.
16
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 March 31, 2002, the Company held shares
in three companies that are publicly traded, with the following market values:
$7.0 million in Verisign, Inc.(VRSN) with 260,158 shares, and $0.1 million in
Net IQ (NTIQ) with 3,744 shares held, $0.1 million in Deutsche Telekom, AG (DT)
with 5,594 shares held. Net unrealized losses on the securities
available-for-sale increased $2.9 million during the first quarter of 2002 to
$2.9 million, reflecting the volatile stock prices of these technology
securities and current market conditions.
Late in the first quarter of 2002, the Company invested an additional $750
thousand in NTC Communications, (NTC). Along with the investment, the Company
gained a seat on the Board of Directors of NTC. As a result of the additional
investment, effective April 1, 2002, the Company will account for the NTC
investment as an equity method investment.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $6.4 million in cash from operations in first quarter of
2002, compared to a nominal amount generated in first quarter of 2001. Net
income provided $1.5 million of the increase, depreciation added another $1.0
million, with the remaining $3.9 million generated primarily from changes in
current asset and liability accounts.
The Company's investing activity nearly doubled compared to first quarter last
year. Total investing was $5.4 million for the first quarter of 2002, with $2.7
million used in first quarter 2001. Capital spending was $5.8 million, an
increase of $1.5 million or 33.7% compared to first quarter last year. The
capital budget for 2002 is approximately $30.3 million. As mentioned above, an
additional investment of $750 thousand was made in NTC. The Company sold 50,000
shares of VeriSign stock in the first quarter of 2002. The Company also received
cash on patronage distributions from CoBank, its primary lender.
The Company's financing activities include the payment of long-term debt, and
the payment of revolving debt. As cash is generated from operations, it is
anticipated there will be less need to borrow on the Company's debt facilities
to finance capital projects and other investment items.
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 March 31, 2002 were $5.2 million, which is reflected in the
current liabilities section of the balance sheet. The rate on this short-term
borrowing was 3.3%. 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 March 31, 2002 was approximately
7.6%. The stated rate excludes patronage credits that are paid to CoBank
borrowers after CoBank's year-end. During the first quarter of 2002, the Company
received patronage credits of approximately 60 basis points on its
17
outstanding CoBank debt balance. In addition, a special one-time patronage
distribution from CoBank was received, amounting to 20 basis points on the debt
outstanding. The patronage credits have the effect of reducing the borrowing
rate by the amount of the credit distributed. Repayment of the CoBank long-term
debt facilities requires monthly payments on the debt through September 2013.
Additionally, the Company has long-term debt with RUS/RTB that totals $9.9
million at the end of March 2002, with maturities through 2019. The weighted
average interest rate on the RUS/RTB debt is approximately 6.51%.
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 is in compliance with the
debt covenant requirements.
As part of the cash management services provided by a local bank, the Company
maintains an unsecured line of credit for $2.0 million to cover temporary
variations in liquidity. The Company made numerous draws and payments on the
line during the quarter and there was $176 thousand outstanding at March 31,
2002. The interest rate is variable and is currently at 2.58% as of March 31,
2002. The Company expects to renew this facility prior to its expiration on May
31, 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 in total had a market value of $7.2 million as of March 31, 2002, but
due to the market decline of the VeriSign stock, at April 29, 2002, the value
was approximately $2.3 million.
Year-to-date capital spending was $5.8 million, compared to a total capital
budget for the year of approximately $30.3 million. Major projects in the
year-to-date spending include renovations of the Shentel Center in Edinburg,
enhancements to the PCS network, and the final construction phase of a diverse
fiber network route to Northern Virginia. Management expects cash flow from
operations, current loan facilities and the new replacement facilities, in
addition to the potential liquidation of portions of its available-for-sale
securities, will provide the Company with adequate cash resources for the
remainder of 2002.
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 March 31, 2002, the balance of the Company's variable rate debt is
$5.4 million, consisting primarily of a $5.2 million 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's remaining variable debt
outstanding was $176 thousand on the $2 million line-of-credit with the
Company's local bank. The Company's remaining debt has fixed rates through its
maturity. A 10% decline in interest rates would increase the fair value of the
fixed rate debt by approximately $1.7 million.
The second component of interest rate risk is temporary excess cash, primarily
invested in overnight investments. As the Company continues to expand its
operations, temporary excess cash is expected to be minimal. Available cash will
be used to repay existing and anticipated
18
new debt obligations, maintaining and upgrading capital equipment, ongoing
operating expenses, 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.
A third component of risk is market risk, which relates to the Company's
available-for-sale securities. Due to the significant investment in VeriSign,
Inc. stock, the Company has a market price risk related to the investment. The
closing price for the stock at March 28, 2002, (the last trading day of the
quarter) was $27.00. Subsequent to the end of the quarter, VeriSign has declined
to an $8.07 close on April 29, 2002. Should the VeriSign stock price remain
depressed through the end of second quarter 2002, a charge against earnings may
be recognized. With 260,158 shares, the Company's value on the stock has
decreased from $7.0 million at March 31, 2002 to $2.1 million as of April 29,
2002. The Company will monitor the value of all available-for-sale investments
and determine the appropriate course of action for each of them. With the market
uncertainty, readers are cautioned about the volatility of values of the
Company's external investments.
ITEM 4. Submission of Matters to a Vote of Security Holders set forth below:
At the Annual Meeting of the Shareholders of the Company held on April
16, 2002, 2,766,063 of the Company's 3,767,884 outstanding shares were
present in person or proxy and entitled to vote, which constituted a
quorum.
(b) At the Annual Meeting, the following nominees were elected:
CLASS I DIRECTORS - To serve until the 2005 Annual Meeting
Douglas C. Arthur
Harold Morrison, Jr.
Zane Neff
(c) At the Annual Meeting, the following matters were voted upon and
received the vote set forth below:
Election of Directors. Provided that a quorum is present, the nominees
receiving the greatest number of votes cast are elected as directors
and, as a result in tabulating the vote, votes withheld have no effect
upon the election of directors; Each nominee for director was elected,
having received the following vote:
NOMINEE FOR WITHHELD
Douglas C. Arthur 2,688,188 77,875
Harold Morrison Jr. 2,706,710 59,353
Zane Neff 2,731,114 34,949
ITEM 6. Exhibits and Reports on Form 8-K
April 16, 2002 News Release of First Quarter Results for 2002
19
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
May 8, 2002 /s/ CHRISTOPHER E. FRENCH
Christopher E. French
President
May 8, 2002 /s/ LAURENCE F. PAXTON
Laurence F. Paxton
Vice President - Finance