SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Three and Six Months Ended June 30, 2002
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162807
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the period covered by this report.
Class Outstanding at July 31, 2002
Common Stock, No Par Value 3,770,752 Shares
1
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 3-4
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 6
Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Six Months Ended June 30, 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 12-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23-24
PART II. Other Information
Items 1-5. 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Current Assets
Cash and cash equivalents $ 934 $ 2,173
Accounts receivable, net 11,182 8,498
Income tax receivable -- 1,205
Materials and supplies 2,193 2,999
Prepaid expenses and other 1,899 1,159
-------- --------
Total current assets 16,208 16,034
Securities and investments
Available-for-sale securities 2,039 12,025
Other investments 7,403 6,438
-------- --------
Total securities and investments 9,442 18,463
Property, plant and equipment, net 135,621 128,104
Other Assets
Cost in excess of net assets of business
acquired, 3,313 3,313
Deferred charges and other assets, net 916 883
-------- --------
Total other assets 4,229 4,196
-------- --------
Total Assets $165,500 $166,797
======== ========
(continued)
See accompanying notes to unaudited condensed consolidated financial statements.
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
Liabilities, Minority Interests and
Shareholders' Equity
June 30,
2002 December 31,
(Unaudited) 2001
----------- ------------
Current Liabilities
Current maturities of long-term debt $ 4,441 $ 4,387
Notes payable 8,046 6,200
Accounts payable 4,904 5,394
Advance billings and deposits 2,941 2,889
Income taxes payable 750 --
Other current liabilities 2,589 2,771
-------- --------
Total current liabilities 23,671 21,641
Long-term debt, less current maturities 49,812 52,049
Other Liabilities
Deferred income taxes 12,366 14,402
Pension & other 2,980 2,265
-------- --------
Total other liabilities 15,346 16,667
Minority interests 1,884 1,838
Shareholders' Equity
Common stock 5,126 4,950
Retained earnings 69,652 69,610
Accumulated other comprehensive income 9 42
-------- --------
Total shareholders' equity 74,787 74,602
-------- --------
Total Liabilities, Minority Interests and
Shareholders' Equity $165,500 $166,797
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data )
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
-------------------- --------------------
Operating Revenues
Wireless $ 19,096 $ 13,201 $ 36,006 $ 23,226
Wireline 6,896 6,733 14,311 13,410
Other revenues 1,495 1,346 3,016 2,478
-------------------- --------------------
Total revenues 27,487 21,280 53,333 39,114
Operating Expenses
Cost of goods and services 1,943 1,843 4,621 3,372
Network operating costs 8,953 7,351 16,554 13,569
Depreciation and amortization 3,638 2,909 7,133 5,392
Selling, general and administrative 5,950 4,102 11,519 7,808
-------------------- --------------------
Total operating expense 20,484 16,205 39,827 30,141
-------------------- --------------------
Operating income 7,003 5,075 13,506 8,973
Other Income (expense):
Non-operating income, net 69 166 188 419
Gain/(loss) on investments, net (8,222) 42 (8,914) (1,398)
Interest expense (1,052) (996) (2,120) (2,037)
-------------------- --------------------
Income/(loss) before income taxes and minority
interest (2,202) 4,287 2,660 5,957
Income tax (expense)/benefit 1,408 (1,177) (39) (1,475)
Minority interest (1,320) (1,114) (2,579) (1,997)
-------------------- --------------------
Net income/(loss) $ (2,114) $ 1,996 $ 42 $ 2,485
==================== ====================
Net earnings/ (loss) per share, basic $ (0.56) $ 0.53 $ 0.01 $ 0.66
==================== ====================
Net earnings/ (loss) per share, diluted $ (0.56) $ 0.53 $ 0.01 $ 0.66
==================== ====================
Weighted average shares outstanding, basic 3,769 3,761 3,768 3,760
==================== ====================
Weighted average shares outstanding, diluted 3,769 3,770 3,794 3,771
==================== ====================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Six months ended June 30,
2002 2001
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 42 $ 2,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,130 5,201
Amortization 3 191
Deferred tax expense (benefit) (2,016) 207
Loss on investments 8,453 --
Equity in loss of investee and patronage, net 172 1,059
Loss on disposal of equipment 121 --
Minority interest of partnership 2,579 1,997
Other 791 42
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,684) (2,540)
Materials and supplies 806 (714)
Increase (decrease) in:
Accounts payable 1,517 (1,157)
Other prepaids, deferrals and accruals (922) (917)
-------------------------
Net cash provided by operating activities 15,992 5,854
Cash Flows from Investing Activities
Purchases of property, plant & equipment (14,833) (9,560)
Purchases of other investments (1,371) (630)
Proceeds from sale of available-for-sale securities 1,714 1,053
Proceeds from sale and disposal of assets 65 1,592
-------------------------
Net cash used in investing activities (14,425) (7,545)
Cash Flows from Financing Activities
Proceeds from long-term debt -- 3,799
Proceeds from revolving debt facilities 1,846 200
Payments on long-term debt and revolving loan (2,183) (1,065)
Distributions to minority interest partners (2,533) (1,820)
Proceeds from issuance of common stock upon
exercise of stock options 64 35
-------------------------
Net cash provided by (used in) financing activities (2,806) 1,149
-------------------------
Net decrease in cash and cash equivalents (1,239) (542)
Cash and Cash Equivalents
Beginning 2,173 3,133
-------------------------
Ending $ 934 $ 2,591
=========================
Cash paid for:
Interest $ 2,173 $ 1,735
Income taxes (net of refunds) $ 83 $ 129
Non-Cash Transactions:
On June 6, 2002, the Company granted 2,327 shares of Company stock to employees
valued at $0.1 million out of the Stock Option Plan. The stock grant was in
recognition of the Company's 100th year anniversary.
The Company closed on the sale of its GSM equipment in January 2001, for
approximately $6.5 million of which approximately $4.9 million was escrowed as
part of a like-kind exchange transaction. The escrowed funds were disbursed as
new equipment was received during the first six months of 2001.
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(in thousands, except per share data)
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 -- -- 42 42
Change in unrealized loss
on securities available-for-sale
net of tax benefit of $(16) -- -- (27) (27)
Reclassification of net recognized
loss on securities available-for-sale
net of tax benefit of $(4) -- -- (6) (6)
--------
Total comprehensive income 9
Common stock issued through the
exercise of incentive stock options
and stock grant 3 176 176
---------------------------------------------------------
Balance, June 30, 2002 3,768 $5,126 $ 69,652 $ 9 $ 74,787
=========================================================
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements of Shenandoah
Telecommunications Company and Subsidiaries (the Company) for the three and six
months ended June 30, 2002 and June 30, 2001 are unaudited. In the opinion of
management, all adjustments necessary for a fair statement of the interim
results have been reflected therein. All such adjustments were of a normal and
recurring nature. These statements should be read in conjunction with the
consolidated financial statements and related notes in the Company's Annual
Report to Shareholders, which is included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
2. Operating revenues and net earnings for any interim period are not
necessarily indicative of results that may be expected for the entire year.
3. Basic net earnings per share were computed on the weighted average number of
shares outstanding. Diluted net earnings per share were computed under the
treasury stock method, assuming the conversion as of the beginning of the
period, for all dilutive stock options. There were no adjustments to net income
in the computation of dilutive net income per share for any period.
4. The Company has identified ten reporting segments based on the products and
services each provide. Each segment is managed and evaluated separately because
of diverse technologies and marketing strategies. A summary of unaudited
external operating revenues, internal operating revenues, EBITDA and net income
of each segment is as follows. The Company defines EBITDA as net income
increased by the provision for income taxes, depreciation, amortization of long
lived assets, and interest expense, and decreased by interest income. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income (loss) as a
measure of performance or to cash flows as a measure of liquidity.
In thousands For the three months ended
(unaudited) June 30, 2002
Net
External Internal Income
Revenues Revenues EBITDA (Loss)
----------------------------------------------
Holding $ -- $ -- $(7,055) $(4,873)
Telephone 5,340 802 3,608 1,544
Cable TV 1,079 -- 475 92
ShenTel 1,487 85 122 (13)
Leasing 5 -- 3 2
ShenTel Communications 3 -- (21) (13)
Mobile 5,914 452 3,385 1,886
PCS 13,182 12 1,433 (932)
Long Distance 270 156 164 100
Network 207 25 190 93
----------------------------------------------
Combined totals $27,487 $ 1,532 $ 2,304 $(2,114)
Inter-segment eliminations -- (1,532) (1,136) --
----------------------------------------------
Consolidated totals $27,487 $ -- $ 1,168 $(2,114)
=============================================
8
In thousands For the three months ended
(unaudited) June 30, 2001
Net
External Internal Income
Revenues Revenues EBITDA (Loss)
-----------------------------------------------
Holding $ -- $ -- $ 751 $ 147
Telephone 5,300 587 4,213 1,745
Cable TV 937 -- 323 (82)
ShenTel 1,339 85 262 38
Leasing 7 -- 2 1
ShenTel Communications -- -- -- --
Mobile 5,494 90 2,555 1,400
PCS 7,707 3 (347) (1,444)
Long Distance 263 142 101 63
Network 233 25 228 128
----------------------------------------------
Combined totals $21,280 $ 932 $ 8,088 $ 1,996
Inter-segment eliminations -- (932) (1,010) --
----------------------------------------------
Consolidated totals $21,280 $ -- $ 7,078 $ 1,996
==============================================
In thousands For the six months ended
(unaudited) June 30, 2002
Net
External Internal Income
Revenues Revenues EBITDA (Loss)
-----------------------------------------------
Holding $ -- $ -- $ (6,689) $(5,232)
Telephone 11,136 1,472 7,872 3,473
Cable TV 2,161 1 954 196
ShenTel 3,002 174 322 14
Leasing 11 -- 6 4
ShenTel Communications 3 -- (21) (13)
Mobile 11,663 775 6,581 3,656
PCS 24,343 21 1,610 (2,490)
Long Distance 543 307 326 199
Network 471 57 462 235
-----------------------------------------------
Combined totals $53,333 $ 2,807 $ 11,423 $ 42
Inter-segment eliminations -- (2,807) (2,089) --
-----------------------------------------------
Consolidated totals $53,333 $ -- $ 9,334 $ 42
==============================================
In thousands For the six months ended
(unaudited) June 30, 2001
Net
External Internal Income
Revenues Revenues EBITDA (Loss)
-----------------------------------------------
Holding $ -- $ -- $ (108) $ (656)
Telephone 10,543 1,166 8,604 3,509
Cable TV 1,870 1 691 (124)
ShenTel 2,465 176 398 3
Leasing 13 -- 5 3
ShenTel Communications -- -- -- --
Mobile 10,116 274 4,690 2,530
PCS 13,110 4 (1,587) (3,133)
Long Distance 538 231 153 95
Network 459 58 458 258
-----------------------------------------------
Combined totals $39,114 $ 1,910 $ 13,304 $ 2,485
Inter-segment eliminations -- (1,910) (1,915) --
-----------------------------------------------
Consolidated totals $39,114 $ -- $ 11,389 $ 2,485
==============================================
9
The Company's assets by segment as of June 30, 2002, December 31, 2001, and June
30, 2001 are as follows:
June 30, 2002 December 31, June 30, 2001
In thousands (unaudited) 2001 (unaudited)
Holding $ 115,133 $ 110,347 $ 100,808
Telephone 56,739 55,942 54,666
Cable TV 10,443 11,466 11,878
ShenTel 4,949 5,359 5,160
Leasing 182 254 253
ShenTel Communications 84 100 --
Mobile 18,715 15,273 17,241
PCS 58,716 61,530 48,308
Long Distance 222 22 153
Network 1,045 1,005 1,103
-----------------------------------------------
Combined totals $ 266,228 $ 261,298 $ 239,570
Inter-segment eliminations (100,728) (94,501) (81,946)
-----------------------------------------------
Consolidated totals $ 165,500 $ 166,797 $ 157,624
===============================================
5. Comprehensive income includes net income along with net unrealized gains and
losses on the Company's available-for-sale investments. A summary of the
unaudited results follow:
In thousands For the three months ended For the six months ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------
Net income/ (loss) $(2,114) $1,996 $ 42 $2,485
Net unrealized gain/(loss) 1,756 2,691 (33) 2,388
------------------------------------------------------
Comprehensive income/(loss) $ (358) $4,687 $ 9 $4,873
======================================================
6. Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
7. During first quarter of 2002, the Company sold 50,000 shares of VeriSign,
Inc. (VeriSign) an available-for-sale security, for proceeds of approximately
$1.5 million or an average of $30.16 per share. The Company recognized a net
loss before taxes of approximately $0.4 million on this sale. During the second
quarter of 2002, the market value of VeriSign declined significantly. This
decline, along with the market outlook for the trading range of the stock,
required the Company to record an other than temporary write-down of the
VeriSign stock to the market value at June 28, 2002 of $7.19 per share. The
non-cash impairment charge recorded in the second quarter totaled $8.0 million
before taxes. The investment in VeriSign stems from prior investments in
predecessor companies of Illuminet Holdings, Inc. (Illuminet), which was
acquired by VeriSign in December 2001. As required by generally accepted
accounting principles, the Company recognized a non-cash pre-tax gain on the
exchange of the Illuminet shares in 2001, and as of December 31, 2001 had a
carrying value of $38.04 per share on the VeriSign stock, compared to $7.19 per
share at June 30, 2002.
10
Subsequent to the end of the second quarter, the Company sold its remaining
260,158 shares of VeriSign stock for net proceeds of $1.3 million. With this
sale the Company will record a $0.6 million pre-tax loss in the third quarter
2002 results.
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. The first phase of the impairment test is complete, and the
operating unit that has the goodwill recorded is currently profitable. The
Company does not anticipate a change in this operation and therefore there are
no other anticipated material impacts on the Company's financial statements as a
result of the adoption of this statement.
The following table presents the adjusted results of the Company's net income
and earnings per share to reflect the impact as if the adoption of SFAS No. 142
occurred at the beginning of 2001.
For the three months ended For the six months ended
(unaudited) June 30, June 30,
In thousands, except per share data 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Net income/(loss) $ (2,114) $ 1,996 $ 42 $ 2,485
Add back goodwill amortization expense, net of
taxes -- 54 -- 108
---------------------------------------------------------
Adjusted net income/(loss) $ (2,114) $ 2,050 $ 42 $ 2,593
=========================================================
Earnings/(loss) per share basic & diluted $ (0.56) $ 0.53 $ 0.01 $ 0.66
=========================================================
Adjusted basic earnings/(loss) per share $ (0.56) $ 0.55 $ 0.01 $ 0.69
Adjusted diluted earnings/(loss) per share $ (0.56) $ 0.54 $ 0.01 $ 0.69
=========================================================
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it becomes a
legal obligation. The Company will also record a corresponding asset, which is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003. The Company is evaluating the timing of adoption and the
effect that implementation of the new standard may have on its results of
operations and financial position.
11
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 operation and tower
revenues. The wireline revenues include the following subsidiary revenues in the
financial results: Telephone Company, Network Company, Cable Television Company,
and the Long Distance Company. Other revenues are comprised of the revenues of
ShenTel Service Company, the Leasing Company, and the Holding Company. As the
CLEC operation begins to develop the operation will be reported in other
revenues.
12
SELECTED OPERATING STATISTICS
The following table shows selected operating statistics of the Company for the
previous five quarters. This information is unaudited, and is a supplement to
the financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
SELECTED OPERATING STATISTICS
(Unaudited) Three Month Period Ended
Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30,
2002 2002 2001 2001 2001
------------------------------------------------------------------
Telephone Access Lines 24,859 24,751 24,704 24,583 24,432
CATV Subscribers 8,729 8,740 8,770 8,834 8,756
Internet Subscribers 18,300 18,083 17,423 16,923 16,385
Digital PCS Subscribers (1) 59,997 56,624 47,318 37,880 30,745
Analog Cellular Subscribers 8,683 9,246 9,440 9,526 9,985
Paging Subscribers 3,071 3,136 3,190 4,160 4,640
Long Distance Subscribers 9,316 9,341 9,159 9,047 8,718
DSL Subscribers 434 341 288 234 193
Fiber Route Miles 543 524 485 482 468
Total Fiber Miles 28,243 26,804 23,893 23,854 23,162
Long Distance Calls (000) 5,949 5,431 5,561 5,712 5,335
Switched Access Minutes (000) 42,816 38,398 33,067 31,873 30,550
CDMA Base Stations (sites) 220 207 184 150 130
Cellular Base Stations 20 20 20 20 20
Towers Owned (over 100 foot) 80 78 70 64 64
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,512 1,455 1,395 1,100 1,100
Cellular Market POPS (000) 170 170 170 170 170
PCS ARPU (ex. Travel) (1) $54.85 $52.00 $55.33 $56.13 $56.60
PCS Travel rev. per sub.(1) $26.81 $21.88 $34.87 $26.77 $28.97
PCS Ave. mgmt. Fee per sub.(1) $4.38 $4.16 $4.43 $4.49 $4.53
PCS Ave. monthly churn % (2) 2.75% 2.20% 2.53% 2.13% 1.73%
PCS CPGA Ave. $314.76 $271.08 $317.72 $294.34 $395.60
PCS CCPU Ave. (1) $43.76 $40.87 $46.77 $57.71 $58.65
(1) The Digital PCS Subscriber numbers for periods prior to June 30, 2002 have
been revised from previous amounts disclosed, to correct an internal data
tabulation error. This correction had no financial impact, but the related
metrics are revised.
(2) Churn is revised from previous amounts disclosed due to Sprint PCS change
in churn calculation.
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 average subscribers in the
period.
CPGA - Cost Per Gross Add - including selling costs, product costs, and
advertising costs.
CCPU - Cash Cost Per User - including network, customer care and other costs.
13
RECENT DEVELOPMENTS
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
June 30, 2002, wireless revenue was 69.5% of total revenue, wireline revenue
contributed 25.1% of total revenue, and other revenue was 5.4% of total revenue.
These results compare to 61.8% for wireless, 31.9% for wireline and 6.3% for
other, for the comparable three months of 2001.
The Company's strategy in the last several years has been to expand its services
and the geographic areas served. This strategy has been implemented primarily
through enhancing the PCS network, using CDMA technology, under the national
brand of Sprint 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 six 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 220 PCS CDMA base stations in service at
June 30, 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 enhancing network coverage and expanding coverage along several highly
traveled secondary roads in the Company's market areas. The Company continues to
focus on enhancing service and improving operating results in the PCS operation.
In accordance with Sprint PCS requirements, the Company is in the final stages
of 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 cost approximately $3.0 million, with nearly all of the items
already purchased in the first half of 2002 and reflected in the plant under
construction section of property, plant and equipment section of the balance
sheet, awaiting final deployment.
The Company is dependent on Sprint PCS for the reporting of a significant
portion of PCS revenues, particularly travel and service revenue as well as many
other metrics such as customer counts, sales, etc. For the three months ended
June 30, 2002, the Company is relying on Sprint PCS to provide accurate and
timely information on approximately $13.1 million or 47.6% of total revenue
compared to $7.7 million or 36.2% for the same period of 2001. The Company and
Sprint PCS are developing and adopting new controls and processes 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.
During second quarter, the Company implemented a $125 deposit for sales of PCS
handsets and services to certain prospective customers deemed to be credit
challenged. The deposit requirement slowed overall handset sales and subscriber
additions for the period.
14
As previously reported, a further reduction in the Sprint PCS travel rate took
effect January 1, 2002. The current rate is $0.10 per minute for payable and
receivable minutes. In addition, the long distance travel rate charged or
received for travel calls that are rated as long distance calls, was adjusted
from $0.06 to $0.0203 per minute effective January 1, 2002. The Company is in a
net travel receivable position for the current quarter by $1.4 million, and $2.6
million for year-to-date 2002, compared to $0.6 million for second quarter last
year, and $0.3 million year-to-date 2001. The travel and long distance travel
rates are being reviewed within the Sprint PCS organization for further
adjustment in the future. There have not been any definitive rate changes
announced at this time, but there is a reasonable chance that the rates could be
lowered after this year. There is no guarantee that the net travel position will
remain in the Company's favor or it may change due to factors beyond the
Company's control, including but not limited to: travel trends, geographic
population shifts, weather, and other factors.
The Company has 22 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.
In early May, the Company received a 90 day extension on its existing revolving
lines of credit from SunTrust Banks and also with CoBank. The extension from
SunTrust Banks was granted to allow the Company to evaluate the benefits of a
multiple-year facility and also to evaluate the amount of funding necessary for
effective operations of the Company's cash management system. As of June 30,
2002 the amount outstanding under the SunTrust facility was $1.2 million and
ranged between $0 and $2.0 million during the quarter. Management expects the
loan terms and financial covenants to be similar to the existing loan. The new
facility will be used primarily to cover short-term fluctuations in cash flow.
The 90-day extension to renew the $35.0 million revolver with CoBank expires
August 30, 2002. The amount outstanding under this facility at June 30, 2002 is
$6.9 million. 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
but may be reduced below the existing $35.0 million amount, due to decreased
need for capital funds for expansion of the PCS operation.
During the quarter, the value of the Company's investment in VeriSign, Inc.
stock (260,158 shares) declined from $27.00 per share at March 31, 2002 to $7.16
at June 28, 2002, the final day of trading in June, requiring an other than
temporary write-down of the investment totaling $ 8.0 million. Based on analyst
expectations and other information available to management, the Company deemed
the write-down to be other than temporary. The impairment charge recorded
through operations in the second quarter 2002 was $8.0 million before taxes.
This charge resulted in a net loss of approximately $4.8 million after taxes.
Subsequent to the close of the quarter, the Company elected to liquidate the
remaining holdings of VeriSign, Inc. The Company sold all 260,158 shares of the
VeriSign stock, for $1.3 million. The Company will recognize a loss of $0.6
million before taxes on the sale in the third quarter of 2002. Beginning in
1981, when the Company first invested in VeriSign's predecessor companies, the
Company invested $0.9 million in cash. Including the sale in early July 2002,
the Company realized proceeds of $8.1 million before taxes from all sales of its
stock in VeriSign and its predecessor companies.
15
In the past few months, the telecommunication industry has been impacted
adversely by several public companies that have filed for bankruptcy protection,
or announced accounting irregularities in their financial reports. These actions
have a potential direct or indirect impact on the results of the Company on an
on-going basis. The primary customers for access services, tower leases and
fiber leases are other telecommunications carriers. The Company has recently
experienced delayed payment by some of the financially distressed carriers.
Accordingly, the Company's allowance for uncollectible accounts was increased
$0.1 million in the second quarter. Management will continue to monitor and
adjust this allowance as specific customer conditions change and require an
adjustment to the reserve.
As of July 22, 2002, MCI WorldCom filed for bankruptcy protection. The Company
will take a charge in the third quarter of 2002, for approximately $0.3 million
to reserve the total amount owed to the Company by MCI WorldCom. Management will
monitor this account and pursue available steps necessary to protect the
interests of the Company.
RESULTS OF OPERATIONS SECOND QUARTER 2002 VS SECOND QUARTER 2001
General
Total revenue for the second quarter was $27.5 million, an increase of $6.2
million or 29.2%, compared to $21.3 million the same period last year. Total
revenues include wireless revenue of $19.1 million, an increase of $5.9 million
or 44.6%; wireline revenues of $6.9 million, an increase of $0.2 million or
2.4%; and other revenues of $1.5 million, an increase of $0.2 million or 11.2%.
Net income decreased $4.1 million, to a $2.1 million loss compared to $2.0
million net income for the second quarter of 2001. Net loss per diluted share
was $(0.56) per share, compared to a $0.53 profit for the second quarter last
year. The VeriSign impairment charge was principally responsible for this
change.
Revenues
Within wireless revenues, the PCS operation added 29,252 PCS subscribers since
June 30, 2001, which contributed to a $4.1 million or 104% increase in
subscriber revenue compared to second quarter of 2001. As of June 30, 2002, the
Company's base of Sprint PCS subscribers was 59,997. The Company's average
revenue per user (ARPU) decreased 3.1% to $54.85 compared to the second quarter
2001, but increased 5.5% from the March 2002 quarter of $52.00. Combined PCS
travel and roamer revenue were $4.7 million, an increase of $1.3 million or
36.4%. The growth in travel and roamer revenue growth is primarily attributed to
network expansion as the Company has 220 base stations deployed at June 30, 2002
compared to 130 base stations that were deployed at June 30, 2001. The travel
revenue rate declined from $0.20 per minute in first quarter of 2001, to $0.15
in May 2001 through September 2001, to $0.10 per minute as of January 1, 2002.
Additionally, the inter-market long-distance rate has declined from $0.06 per
minute for all of 2001, to $0.0203 for 2002. Further declines in travel rates or
long-distance rates are not anticipated for the remainder of 2002.
Cellular revenue was $5.3 million, an increase of $0.3 million or 6.1%. Roamer
revenues, generated from other providers' customers using our network, increased
$0.5 million or 12.5% compared to the same period in 2001. Cellular local
service revenue declined $0.1 million, or 18.7%, due to a decline of 1,302
cellular subscribers or 13.0% to 8,683 subscribers at the end of
16
June 2002, compared to 9,985 cellular subscribers at the end of June 2001. Due
to increased competition and the deployment of digital technologies that allows
data transmission, the subscriber count in the analog cellular operation is
anticipated to continue to decline.
Tower lease revenue was the primary contributor to the remaining $0.2 million
increase in wireless revenues over second quarter 2001 results.
Wireline revenues were $6.9 million, an increase of $0.2 million or 2.4%. Access
revenue in the telephone business increased $0.3 million, impacted by increased
use of the Company's network by other telecommunications providers. Lease
revenue for the Company's fiber network facilities decreased $0.4 million
compared to the same period last year due to pressure from competitive pricing
resulting in a decline for lease rates on fiber facilities. The Company expects
rates to continue to decline in the near-term, but cannot predict the overall
impact on revenues due to additional fiber facilities now being constructed and
the current downturn in this segment of the telecommunications market. 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 $0.1 million or 11.1%. Internet
revenues increased $0.1 million or 13.0%. Internet subscribers increased 1,915,
or 11.7%, compared to June 30, 2001 subscribers. The total subscriber base for
the Company's Internet service was 18,300 as of June 30, 2002.
Operating Expenses
Total operating expense was $20.5 million, an increase of $4.2 million or 26.4%,
compared to $16.2 million for second quarter last year. The increase in PCS
subscribers and operating costs from the expanded PCS network were the principal
factors driving costs higher.
Costs of goods and services were $1.9 million, an increase of $0.1 million or
5.4%, changing primarily due to the increase in PCS handsets sold, somewhat
offset by a decline in cellular equipment sales. During second quarter, the
Company implemented a $125 deposit for sales of PCS handsets and services to
certain prospective customers deemed to be credit challenged. The deposit
requirement slowed overall handset sales and subscriber additions for the
period.
Network operating costs were $9.0 million, an increase of $1.6 million, or
21.8%. Additional network line cost contributed $1.2 million to the increase.
Additionally, switching costs, site rental, travel and long distance expense 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 expense was $3.6 million, an increase of $0.7 million or 25.1%
compared to $2.9 million for the second quarter of 2001, as new assets,
particularly in the PCS operation, have been added to the networks. Gross plant
in service increased to $189.6 million at June 30, 2002 compared to $158.6
million at June 30, 2001.
Selling, general and administrative costs were $6.0 million, an increase of $1.8
million or 45.1%. Selling expenses and customer support made up $0.8 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
17
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 $0.6 million, the result of an increased customer base, the
growing credit challenged subscribers in the customer base in the PCS operation
and to a lesser extent, the $0.1 million of allowance reserved for the financial
uncertainty of certain telecommunication service providers.
The Company's operating margin was 25.5% for the quarter ended June 30, 2002,
compared to 23.8% for the same period last year. This change was primarily due
to the impact of the increased revenues generated in the wireless category of
the business, contributing more toward the fixed costs which have not increased
as significantly since second quarter 2001.
Losses on investments increased to $8.3 million, due primarily to the impact of
the impairment charge recorded on the VeriSign stock. The Company holds several
other available for sale stocks, none of which currently have significant value
in relation to the consolidated balance sheet.
Interest expense increased to $1.1 million, or 5.6%, a result of increased
average borrowing levels compared to second quarter 2001. Total debt was $62.3
million at June 30, 2002, compared to $62.6 million at December 31, 2001 and
$58.4 million at June 30, 2001.
Income/(loss) before income taxes and minority interest was $(2.2) million, a
decrease of $6.5 million from second quarter of 2001. The $8.2 million loss on
investments, somewhat offset by the $1.9 million increase in gross margin was
the primary cause of this marked swing in 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 external investment gains or losses. After taxes, net
income from ongoing operations for the second quarter was $2.9 million, a 47.3%
increase compared to $2.0 million during the second quarter of 2001. The $0.9
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 benefit was $1.4 million, a $2.6 million change due to the loss from
the impairment of the VeriSign stock, compared to the same period last year. The
effective tax rate is 39%.
Minority interest was $1.3 million, an increase of $0.2 million or 18.5%, due to
the improved performance of the cellular operation, primarily the result of
roamer revenue growth.
Net loss for the quarter was $2.1 million, compared to a $2.0 million net income
for the second quarter of 2001. The Company's operating margin improved $1.9
million, but was more than offset by the significant decline in the external
investments performance during the second quarter of 2002.
18
RESULTS OF OPERATIONS YEAR-TO-DATE 2002 VS YEAR-TO-DATE 2001
General
Total revenue for the six months of 2002, was $53.3 million, an increase of
$14.2 million, or 36.3% compared to $39.1 million the same period last year.
Total revenues include wireless revenue of $36.0 million, an increase of $12.8
million or 55.0%; wireline revenues of $14.3 million, an increase of $0.9
million, or 6.7%; and other revenues of $3.0 million, an increase of $0.5
million or 21.7%. Net income decreased $2.4 million to $42 thousand, compared to
$2.5 million net income for the first six months of 2001. Net income per diluted
share was $0.01 per share, compared to $0.66 per share for the same period last
year. The losses from the sale and impairment charge on the VeriSign stock were
principally responsible for this change in the six-month results.
Revenues
Within wireless revenues, the PCS operation added 29,252 PCS subscribers since
June 30, 2001, which contributed an $8.1 million or 114% increase in subscriber
revenue compared to the first six months of 2001. Combined PCS travel and roamer
revenue were $8.1 million, and an increase $2.7 million, 49.2% compared to the
first six months of 2001. Travel and roamer revenue growth is primarily
attributed to network expansion along with the increase in total wireless
subscribers using the Company's network. The travel revenue rate declined from
$0.20 per minute in first quarter of 2001, to $0.15 in May 2001 through
September 2001, to $0.10 per minute as of January 1, 2002. Additionally, the
inter-market long-distance rate has declined from $0.06 per minute for all of
2001, to $0.0203 for 2002. Further declines in travel rates or long-distance
rates are not anticipated for the remainder of 2002.
Cellular revenue was $10.5 million, an increase of $1.3 million or 14.3%. Roamer
revenues, generated from other providers' customers using our network, increased
$1.7 million or 23.8% compared to the same period in 2001. Cellular roaming
revenue was somewhat offset by a decline in local service revenue of $0.3
million, or 18.4%, due to the decline of cellular subscribers as other wireless
services are available in the cellular market coverage area.
Increases in handset sales, tower lease revenue and other wireless revenues each
contributed to the additional $0.7 million increase in revenues over the
year-to-date 2001 results.
Wireline revenues were $14.3 million, an increase of $0.9 million or 6.7%.
Access revenue in the telephone business increased $0.6 million. Lease revenue
for the Company's fiber network facilities remained flat on a year-to-date
comparison, although the trend appears that revenues will decline as lease
prices are changed to meet price competition. Cable TV contributed the other
$0.3 million to the increase in wireline revenues, largely due to the increase
in basic cable service rates that became effective December 1, 2001, and a shift
of approximately 12% of the subscribers to the higher priced digital cable
services and programming.
Other revenues were $3.0 million, an increase of $0.5 million or 21.7%. Internet
revenues increased $0.3 million or 15.3%. Additionally, in 2002, the Company
enhanced its Travel Shenandoah network, which supports a joint service with the
Virginia Department of
19
Transportation and Virginia Tech Transportation Institute. This program, now
called 511Virginia.org, contributed $0.2 million to the increased revenues in
2002.
Operating Expenses
Total operating expense was $39.8 million, an increase of $9.7 million or 32.1%,
compared to $30.1 million for the first six months of last year. The increase in
PCS subscribers and expanded PCS network, and the operating expenses of the
three PCS stores in the Central Pennsylvania market were the principal factors
driving costs higher on a year to date comparison.
Costs of goods and services were $4.6 million an increase of $1.2 million or
37.0%, changing primarily due to the increase in handsets sold and costs related
to the sales of PCS services. The Company added 12,679 PCS subscribers
year-to-date 2002 compared to 8,931 PCS subscribers year-to-date 2001. This
increase in net added subscribers impacted handset subsidies and other charges
in cost of goods and services.
Network operating costs were $16.6 million, an increase of $3.0 million, or
22.0%. Additional network facilities made up $2.0 million of the network
operating cost increase. Added traffic over the network, particularly in support
of the expanded wireless services related to the PCS expansion into the
Pennsylvania market, added sites, travel and switching costs all added to the
increase in the network operating costs.
Depreciation expense was $7.1 million, an increase of $1.7 million or 32.3%
compared to $5.4 million for the six months of 2001, as new assets, particularly
in the PCS operation, have been added to the networks.
Selling, general and administrative costs were $11.5 million, an increase of
$3.7 million or 47.5%. Selling expenses and customer support made up $2.1
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 $0.6 million, due to additional staff added
to support the growing Company operations. Bad debt expense increased $1.0
million, primarily the result of the growing customer base in the PCS operation.
The Company's operating margin was 25.3% for year-to-date operations, compared
to 22.9% for the same period last year. This change was primarily due to the
impact of the increased revenues generated in the wireless category of the
business, contributing more toward the fixed costs which have not increased as
significantly compared to the first six months of 2001.
Losses on investments were $8.9 million year-to-date 2002, compared to a $1.4
million loss year-to-date 2001. In 2002, the majority of the loss was the result
of the VeriSign impairment charge along with the $0.4 million loss on the sale
of 50,000 shares of VeriSign stock in the first quarter of 2002. In 2001, the
Company recorded charges against the operation to write-down several
available-for-sale securities, which are no longer held by the Company.
Interest expense increased to $2.1 million, or 4.1%, a result of increased
average borrowing levels compared to 2001.
20
Income before income taxes and minority interest was $2.7 million, a decrease of
$3.3 million or 55.3%. Increased operating margin of $4.5 million was more than
offset by the $7.5 million additional losses recorded in 2002 on external
investments, in addition to a $0.2 million decline in non-operating income
between year-to-date 2001 and year-to-date 2002.
The Company measures ongoing operations as net income excluding gains and losses
on external investments unaffiliated with operations. This calculation
eliminates the impact of external investment gains or losses. After taxes, net
income from ongoing operations for the first six months of 2002 was $5.5
million, or a 63.4% increase compared to $3.4 million during the first six
months of 2001. The $1.9 million change in ongoing operations reflects increased
wireless revenues, and increased contribution to cover the fixed costs in the
operation compared to the same period last year.
Income tax expense decreased $1.4 million, a reflection of nominal income in
2002 after recording the impairment charge on the external investment. The
effective tax rate is now 39% compared to 38 % in 2001, to reflect the increased
business activity in states with higher income tax rates.
Minority interest was $2.6 million, an increase of $0.6 million or 29.1%, due to
the improved performance of the cellular operation, primarily the result of
roamer revenue growth.
Net income was $42 thousand, a decrease of $2.4 million, due to improved
operating results, more than offset by the impairment charge on the external
investments.
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 June 30, 2002, the Company held shares
in four companies that are publicly traded, with the following market values:
$1.9 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; and, $31 thousand in Prudential Insurance Company ( PRU
) with 940 shares. Net unrealized losses on the securities available-for-sale
decreased to a $33 thousand loss as of June 30, 2002, reflecting the volatile
stock prices and the recognition of the other than temporary decline in the
VeriSign stock.
Late in the first quarter of 2002, the Company invested an additional $0.8
million 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 began accounting for the NTC
investment as an equity method investment, and therefore the Company's portion
of NTC's operating results are recorded in the statements of operations of the
Company.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $16.0 million in cash from operations in first six months
of 2002, compared to $5.9 million generated in same period of 2001. The $10.1
million change was primarily the result of approximately a $5.5 million
improvement in operating results. Additionally, $2.6 million of the change was
generated from the increase in payables with the remaining difference primarily
made up of a $1.5 million change in materials and supplies.
The Company's investing activity was significantly above the first six months of
last year, due in part to the non-cash transaction related to the like-kind
exchange of assets in early 2001which escrowed cash for the purchase of new
equipment. Net cash used for investing was $14.4 million for the six months of
2002, compared to $7.5 million used in same period of 2001. Capital spending was
$14.8 million, an increase of $5.3 million or 55.1% compared to the first six
months last year. The capital budget remains at approximately $30.3 million for
the total 2002 year. As mentioned above, an additional investment of $0.8
million was made in NTC in the first quarter of 2002. The Company sold 50,000
shares of VeriSign stock in the first quarter of 2002. The Company also received
cash on patronage distributions totaling $0.2 million from CoBank, its primary
lender in first quarter of 2002.
The Company's financing activities include the payment of long-term debt, and
the receipt of proceeds on 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, the latter,
primarily with CoBank. The Company has a $35.0 million revolver loan agreement
with CoBank, which matures on September 1, 2002. Outstanding draws on the $35.0
million facility as of June 30, 2002 were $6.9 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 $42.8 million, all of which is at fixed rates ranging from approximately 6%
to 8%. The weighted average rate of the CoBank debt at June 30, 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 six months of 2002,
the Company received patronage credits of approximately 60 basis points on its
outstanding CoBank debt balance. In addition, a special one-time patronage
distribution from CoBank was received, 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 total debt with RUS/RTB that totals $11.4 million
at the end of June 2002, with maturities through 2019. The weighted average
interest rate on the RUS/RTB debt is approximately 6.5%.
The Company's long-term debt facilities require the Company to maintain certain
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.
22
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 of credit with SunTrust Bank during the quarter and there was $1.1 million
outstanding at June 30, 2002. The interest rate is variable and is currently at
2.5% as of June 30, 2002. The Company received an extension of the existing
facility and expects to renew this facility in conjunction with the renewal of
the CoBank revolver facility prior to its expiration on August 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 $2.0 million as of June 30, 2002,
which included $1.9 million for the VeriSign stock which was subsequently
liquidated on July 9, 2002.
Year-to-date capital spending was $14.8 million, compared to a total capital
budget for the year of approximately $30.3 million. Major projects in the
year-to-date spending include renovations of office and meeting space in
Edinburg, Va., enhancements to the PCS network, and the final construction phase
of a diverse fiber network route to Northern Virginia. Management expects cash
flow from operations, current loan facilities and the new replacement facilities
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 and 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 June 30, 2002, the balance of the Company's variable rate debt is
$8.1 million, consisting primarily of a $6.9 million traunch of the revolving
note payable to CoBank, which matures September 1, 2002. The rate of this note
is based upon the lender's cost of funds. The Company's remaining variable debt
outstanding was $1.1 million on the $2.0 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 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. With the sale of the VeriSign stock subsequent to
the quarter close, the remaining market risk of the available-for-sale
securities have been reduced as the market value of each stock is below $0.1
million. 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.
23
Business risk is a more prevalent risk faced by the Company. The Company is
heavily dependent on Sprint PCS for more significant portions of its total
revenue than was true in the past. For the quarter ended June 30, 2002, $12.7
million or 46.2% of the $27.5 million of revenue was processed through Sprint
PCS's accounting systems, while for the six months ended June 30, 2002, $23.3
million or 43.7% of the $53.3 million of total revenue were provided by the PCS
operation through Sprint PCS's business systems. The Company relies on the
accuracy and timeliness of Sprint PCS's systems, but there is the potential for
erroneous data to be provided by Sprint PCS, which could have an impact on the
Company's operations. The Company continues to work with Sprint PCS to monitor
and develop processes that will minimize these risks.
In addition to the specific risks related to the relationship with Sprint PCS,
the Company's general business risks include: customer churn rates in all
business lines; customer credit quality, and ability to pay; financial
conditions of customers and vendors; economic and regulatory changes; and,
changes in pricing, technologies, competition and customer preferences. These
risks also include the Company's vendors' ability to deliver necessary products
and services to support its business operations. These and other applicable
risks individually and collectively may impact the financial condition and
operations of the Company.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K:
July 11, 2002 - Other Event
Sale of VeriSign Stock
July 16, 2002 Other Event
News Release of Second Quarter Results for 2002
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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)
August 9, 2002 /s/ CHRISTOPHER E. FRENCH
Christopher E. French
President
August 9, 2002 /s/ LAURENCE F. PAXTON
Laurence F. Paxton
Vice President - Finance
25