SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Three and Six Month Period Ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive offices) (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 by check mark whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of July 31, 2003 set forth below:
Class Outstanding at July 31, 2003
- -------------------------- ----------------------------
Common Stock, No Par Value 3,789,758 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 3-4
Unaudited Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2003 and 2002 5-6
Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and 2002 7
Unaudited Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Six Months Ended June 30, 2003 and the
Year Ended December 31, 2002 8
Notes to Unaudited Condensed Consolidated
Financial Statements 9-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26 - 27
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
Exhibit 31 30 - 31
Exhibit 32 32
2
Item 1. FINANCIAL STATEMENTS
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
Assets 2003 2002
-------- ------------
Current Assets
Cash and cash equivalents $ 31,735 $ 2,209
Accounts receivable, net 5,341 7,536
Income tax receivable -- 12
Materials and supplies 1,733 1,787
Prepaid expenses and other 2,028 2,205
Deferred income taxes 1,877 1,197
Assets held for sale -- 5,548
-------- --------
Total current assets 42,714 20,494
Securities and investments
Available-for-sale securities 183 151
Other investments 7,005 7,272
-------- --------
Total securities and investments 7,188 7,423
Property, plant and equipment, net 128,470 132,152
Other Assets
Cost in excess of net assets of business
acquired 3,313 3,313
Deferred charges and other assets, net 563 622
Escrow account (Note 8) 5,000 --
-------- --------
Total other assets 8,876 3,935
-------- --------
Total Assets $187,248 $164,004
======== ========
(continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
June 30, December 31,
Liabilities and Shareholders' Equity 2003 2002
-------- ------------
Current Liabilities
Current maturities of long-term debt $ 4,154 $ 4,482
Notes payable -- 3,503
Accounts payable 4,657 5,003
Advance billings and deposits 3,513 3,538
Income taxes payable 7,187 --
Liabilities held for sale -- 542
Other current liabilities 3,298 2,832
-------- ---------
Total current liabilities 22,809 19,900
Long-term debt, less current maturities 41,256 47,561
Other Liabilities
Deferred income taxes 18,188 15,859
Pension & other 2,553 2,441
-------- ---------
Total other liabilities 20,741 18,300
Minority interests in discontinued operations -- 1,666
Shareholders' Equity
Common stock 5,563 5,246
Retained earnings 96,862 71,335
Accumulated other comprehensive income (loss) 17 (4)
-------- ---------
Total shareholders' equity 102,442 76,577
-------- ---------
Total Liabilities and Shareholders' Equity $187,248 $ 164,004
======== =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
(in thousands, except per share data) June 30, June 30,
2003 2002 2003 2002
--------------------------------------------------
Operating Revenues
Wireless $ 16,769 $ 13,793 $ 32,403 $ 25,547
Wireline 6,309 6,899 13,948 14,320
Other revenues 1,766 1,495 3,440 3,016
--------------------------------------------------
Total revenues 24,844 22,187 49,791 42,883
Operating Expenses
Cost of goods and services 2,624 1,920 4,913 4,569
Network operating costs 8,680 8,341 16,727 15,388
Depreciation and amortization 4,127 3,489 8,148 6,833
Selling, general and administrative 7,011 5,819 13,451 11,159
--------------------------------------------------
Total operating expense 22,442 19,569 43,239 37,949
--------------------------------------------------
Operating Income 2,402 2,618 6,552 4,934
Other Income (expense):
Non-operating income, net 142 68 223 188
Gain (loss) on investments, net 8 (8,221) (197) (8,914)
Interest expense (897) (1,052) (1,851) (2,120)
--------------------------------------------------
Income before income taxes, discontinued
operations and cumulative effect 1,655 (6,587) 4,727 (5,912)
Income tax provision (611) 2,603 (1,752) 2,298
--------------------------------------------------
Income from continuing operations $ 1,044 $ (3,984) $ 2,975 $ (3,614)
Income from discontinued operations, net of
income taxes -- $ 1,870 $ 22,628 $ 3,656
Cumulative effect of a change in accounting,
net of income taxes -- -- (76) --
--------------------------------------------------
Net income $ 1,044 $ (2,114) $ 25,527 $ 42
==================================================
Net income per share, basic
Continuing operations $ 0.28 $ (1.06) $ 0.79 $ (0.96)
Discontinued operations, net of income taxes -- 0.50 5.97 0.97
Cumulative effect of a change in accounting,
net of income taxes -- -- (0.02) --
--------------------------------------------------
Total net income per share, basic $ 0.28 $ (0.56) $ 6.74 $ 0.01
==================================================
Net income per share, diluted
Continuing operations $ 0.27 $ (1.06) $ 0.78 $ (0.96)
Discontinued operations, net of income taxes -- 0.50 5.96 0.97
Cumulative effect of a change in accounting,
net of income taxes -- -- (0.02) --
--------------------------------------------------
Total net income per share, diluted $ 0.27 $ (0.56) $ 6.72 $ 0.01
==================================================
Weighted average shares outstanding, basic 3,785 3,769 3,785 3,768
==================================================
Weighted average shares, diluted 3,803 3,769 3,797 3,768
==================================================
(continued)
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
Three months Six months
(in thousands, except per share data) ended ended
June 30, June 30,
2002 2002
---------------------------
Pro forma amounts assuming the Company
adopted FAS 143 retroactively:
Pro forma income (loss) from continuing operations $ (3,987) $ (3,620)
Discontinued operations, net of income taxes 1,870 3,656
---------------------------
Pro forma net income (loss) $ (2,117) $ 36
===========================
Pro forma net income (loss) per share, basic
Pro forma income (loss) from continued operations $ (1.06) $ (0.96)
Discontinued operations, net of income taxes 0.50 0.97
---------------------------
Pro forma net income (loss) per share, basic $ (0.56) $ 0.01
===========================
Pro forma net income (loss) per share, diluted
Pro forma income from continuing operations $ (1.06) $ (0.96)
Discontinued operations, net of income taxes 0.50 0.97
---------------------------
Pro forma net income (loss) per share, diluted $ (0.56) $ 0.01
===========================
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
June 30,
2003 2002
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations $ 2,975 $ (3,614)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,145 6,830
Amortization 3 3
Deferred income taxes 1,683 (2,016)
(Gain) loss on investments (161) 8,453
Net loss from patronage and equity investments 288 172
Loss on disposal of equipment 29 121
Other (81) 794
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,195 (2,669)
Materials and supplies 54 775
Increase (decrease) in
Accounts payable (346) 1,569
Other prepaids, deferrals and accruals 1,047 (1,066)
----------------------
Net cash provided by operating activities 15,831 9,352
Cash Flows from Investing Activities
Purchases of property, plant & equipment (4,398) (14,835)
Purchases of other investments (384) (1,371)
Proceeds from investment activities 513 1,714
Proceeds from disposal of assets 33 65
----------------------
Net cash used in investing activities (4,236) (14,427)
Cash Flows from Financing Activities
Proceeds from revolving debt facilities -- 1,846
Payments on long-term debt and revolving loan (10,136) (2,183)
Proceeds from issuance of common stock upon
exercise of stock options 317 64
----------------------
Net cash used in financing activities (9,819) (273)
----------------------
Net provided by (used in) continuing operations 1,776 (5,348)
Net cash provided by discontinued operations 27,750 3,568
----------------------
Net increase (decrease) in cash and cash equivalents 29,526 (1,780)
Cash and Cash Equivalents
Beginning 2,209 2,037
----------------------
Ending $ 31,735 $ 257
======================
Cash paid for:
Interest paid $ 1,911 $ 2,173
Income taxes (net of refunds) $ 7,085 $ 83
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED 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, 2001 3,765 $4,950 $ 69,610 $ 42 $ 74,602
Comprehensive income:
Net income -- -- 4,519 -- 4,519
Net unrealized change in
securities available-for-sale,
net of tax of $ 29 -- -- -- (46) (46)
---------
Total comprehensive income 4,473
Dividends declared ($ 0.74 per share) (2,794) (2,794)
Common stock issued through the
exercise of incentive stock options
and stock grants 11 296 -- -- 296
-------------------------------------------------------------------
Balance, December 31, 2002 3,776 $5,246 $ 71,335 $ (4) $ 76,577
(unaudited) Comprehensive income:
Net income -- -- 25,527 -- 25,527
Net unrealized change in securities
available-for-sale, net of tax of $(12) -- -- -- 21 21
---------
Total comprehensive income 25,548
Common stock issued through the
exercise of incentive stock options 13 317 -- -- 317
-------------------------------------------------------------------
Balance, June 30, 2003 3,789 $5,563 $ 96,862 $ 17 $ 102,442
===================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
8
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 (collectively, 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 are incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002. The balance sheet information at December 31, 2002 was
derived from the audited December 31, 2002 consolidated balance sheet.
2. Operating revenues and income from continuing operations and discontinued
operations for any interim period are not necessarily indicative of results that
may be expected for the entire year.
3. To account for its stock options granted under the Company Stock Incentive
Plan (the Plan), the Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations including
Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25 issued in March 2000. Under this method, compensation expense is
recorded on the date of the grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123, as amended
by SFAS No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123.
Grants of options under the Plan are accounted for following the APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense has been
recognized under the Plan. Had compensation expense been recorded based on fair
values of the awards at the grant date (the method prescribed in SFAS No. 123),
reported net income and earnings per share would have been reduced to the pro
forma amounts shown in the following table for the three and six months ended
June 30:
---------------------------------------------
(in thousands, except Three months ended Six months ended
per share amounts) June 30, June 30
---------------------------------------------
Net Income (loss) 2003 2002 2003 2002
As reported $1,044 $(2,114) $25,527 $ 42
Pro forma 989 (2,166) 25,419 (64)
Earnings (loss) per share, basic and diluted
As reported, basic $ 0.28 $ (0.56) $ 6.74 $ 0.01
As reported, diluted 0.27 (0.56) 6.72 0.01
Pro forma, basic 0.26 (0.57) 6.72 (0.02)
Pro forma, diluted 0.26 (0.57) 6.69 (0.02)
9
4. Basic net income per share was computed on the weighted average number of
shares outstanding. Diluted net income per share was computed under the treasury
stock method, assuming the conversion as of the beginning of the period, for all
dilutive stock options. The Company reported a loss from continuing operations
for the three and six month periods ended June 30, 2003, therefore diluted net
income (loss) per share is the same as basic net income (loss) per share for
those periods because including any potentially dilutive securities would be
antidilutive to the net loss per share. There were no adjustments to net income
in the computation of dilutive net income per share for any period.
5. 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, operating income
(loss), income (loss) from continuing operations, income from discontinued
operations, cumulative effect of accounting change, and net income (loss) of
each segment is as follows for the three and six months ended June 30, 2003 and
June 30, 2002.
For the three months ended June 30, 2003
Income
Operating (loss) from Income from
In thousands External Internal Income continuing discontinued Net income
(unaudited) Revenues Revenues (loss) operations operations (loss)
----------------------------------------------------------------------------------------
Holding $ -- $ -- $ (173) $ 110 -- $ 110
PCS 16,056 1 (426) (788) -- (788)
Telephone 4,685 764 1,911 1,135 -- 1,135
ShenTel Service 1,747 75 284 150 -- 150
Cable TV 1,109 1 215 45 -- 45
Mobile 713 305 368 252 -- 252
Long Distance 330 0 80 51 -- 51
Network 185 39 149 92 -- 92
ShenTel Communications 15 -- (6) (4) -- (4)
Leasing 4 -- 1 1 -- 1
--------------------------------------------------------------------------------------
Combined totals 24,844 1,185 2,403 1,044 -- 1,044
Inter-segment eliminations -- (1,185) (1) -- -- --
--------------------------------------------------------------------------------------
Consolidated totals $24,844 $ -- $ 2,402 $ 1,044 -- $ 1,044
======================================================================================
For the three months ended June 30, 2002
Income
Operating (loss) from Income from
In thousands External Internal Income continuing discontinued Net income
(unaudited) Revenues Revenues (loss) operations operations (loss)
----------------------------------------------------------------------------------------
Holding $ -- $ -- $ (119) $(4,873) -- $(4,873)
PCS 13,182 12 (623) (932) -- (932)
Telephone 5,339 802 2,712 1,544 18 1,562
ShenTel Service 1,487 85 18 (13) -- (13)
Cable TV 1,083 -- 307 92 -- 92
Mobile 611 448 464 16 1,870 1,886
Long Distance 270 156 163 100 -- 100
Network 207 26 150 93 -- 93
ShenTel Communications 3 -- (18) (13) -- (13)
Leasing 5 -- (141) 2 -- 2
--------------------------------------------------------------------------------------
Combined totals 22,187 1,529 2,913 (3,984) 1,888 (2,096)
Inter-segment eliminations -- (1,529) (295) -- (18) (18)
--------------------------------------------------------------------------------------
Consolidated totals $22,187 $ -- $ 2,618 $(3,984) $ 1,870 $(2,114)
======================================================================================
10
For the six months ended June 30, 2003
Income (loss) Cumulative
Operating from Income from effect of
In thousands External Internal Income continuing discontinued accounting Net income
(unaudited) Revenues Revenues (loss) operations operations change (loss)
------------------------------------------------------------------------------------------------
Holding $ -- $ -- $ (313) $ 63 $ -- $ -- $ 63
PCS 31,032 -- (731) (1,472) -- -- (1,472)
Telephone 10,688 1,498 5,484 3,297 12 -- 3,309
ShenTel Service 3,406 155 654 359 -- -- 359
Cable TV 2,206 2 461 118 -- -- 118
Mobile 1,371 605 626 246 22,628 (76) 22,798
Long Distance 671 127 286 182 -- -- 182
Network 383 70 304 188 -- -- 188
ShenTel Communications 26 1 (14) (8) -- -- (8)
Leasing 8 -- 2 2 -- -- 2
-----------------------------------------------------------------------------------------------
Combined totals 49,791 2,458 6,759 2,975 22,640 (76) 25,539
Inter-segment eliminations -- (2,458) (207) -- (12) -- (12)
-----------------------------------------------------------------------------------------------
Consolidated totals $49,791 $ -- $ 6,552 $ 2,975 $ 22,628 $(76) $ 25,527
===============================================================================================
For the six months ended June 30, 2002
Income (loss) Cumulative
Operating from Income from effect of
In thousands External Internal Income continuing discontinued accounting Net income
(unaudited) Revenues Revenues (loss) operations operations change (loss)
------------------------------------------------------------------------------------------------
Holding $ -- $ -- $ (275) $(5,232) $ -- $ -- $ (5,232)
PCS 24,343 21 (2,384) (2,490) -- -- (2,490)
Telephone 11,136 1,472 6,108 3,473 36 -- 3,509
ShenTel Service 3,002 174 191 14 -- -- 14
Cable TV 2,170 1 615 196 1 -- 197
Mobile 1,204 768 859 -- 3,656 -- 3,656
Long Distance 543 307 324 199 -- -- 199
Network 471 58 373 235 -- -- 235
ShenTel Communications 3 -- (21) (13) -- -- (13)
Leasing 11 -- (276) 4 -- -- 4
-----------------------------------------------------------------------------------------------
Combined totals 42,883 2,801 5,514 (3,614) 3,693 -- 79
Inter-segment eliminations -- (2,801) (580) -- (37) -- (37)
-----------------------------------------------------------------------------------------------
Consolidated totals $42,883 $ -- $ 4,934 $(3,614) $ 3,656 $ -- $ 42
===============================================================================================
11
The Company's assets by segment as of June 30, 2003, December 31, 2002, and June
30, 2002 are as follows:
In thousands June 30, December 31, June 30,
(unaudited) 2003 2002 2002
Holding $ 142,828 $ 112,765 $ 115,140
PCS 67,811 71,256 72,684
Telephone 57,903 59,554 57,451
ShenTel Service 6,365 6,255 6,459
Cable TV 10,782 10,961 10,891
Mobile 16,826 17,482 18,848
Long Distance 570 343 225
Network 1,284 1,084 1,051
ShenTel Communications 110 115 120
Leasing 187 187 182
-----------------------------------------
Combined totals $ 304,666 $ 280,002 $ 283,051
Inter-segment eliminations (117,418) (115,998) (116,976)
-----------------------------------------
Consolidated totals $ 187,248 $ 164,004 $ 166,075
=========================================
6. 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,
2003 2002 2003 2002
------------------------------------------------------
Net income (loss) $1,044 $(2,114) $25,527 $ 42
Net unrealized income (loss) 33 1,756 21 (33)
-------------------------------------------------
Comprehensive income $1,077 $ (358) $25,548 $ 9
=================================================
7. 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.
8. On February 28, 2003, the Company completed the sale of its 66% interest in
the Virginia 10 RSA Limited Partnership for $37.0 million. At closing, the
Company received cash of $33.7 million, which included $1.7 million related to
the Company's portion of the partnership's working capital as of the closing
date. As part of the sales agreement, $5.0 million was paid into an escrow
account for a period of two years to offset certain liabilities of the
partnership that may arise which relate to its operation during the Company's
management of the partnership. The Company recorded a gain on the sale of $21.5
million after taxes, and has recorded the transaction as a component of the
discontinued operations in the condensed consolidated statements of income for
the six-month period ended June 30, 2003.
9. The Company adopted Statements of Financial Accounting Standards (SFAS) No.
143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
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 impact of the adoption of this statement is reflected as a cumulative effect
of a change in accounting on the condensed consolidated statements of income for
the six-month period ended June 30, 2003. The impact of the adoption of SFAS No.
143 was the recording of a capitalized asset retirement obligation of $158
thousand, the related accumulated
12
depreciation of $32 thousand, the present value of the future removal obligation
of $249 thousand, and the cumulative effect of the accounting change of $76
thousand after taxes recorded on the income statement.
The Company recorded the retirement obligation on towers owned where there is a
legal obligation to remove the tower at the time the Company discontinues its
use. The obligation was estimated based on the size of the tower. The Company's
cost to remove the towers is accrued over the life of the tower. The pro forma
liability on January 1, 2002 would have been $236 thousand, and was $249
thousand on December 31, 2002. On June 30, 2003, the liability was $258
thousand. The current year to date expense for the accretion and depreciation
related to the adoption of SFAS No.143 is approximately $10 thousand before
taxes.
10. Effective May 15, 2003, because of the Company's enhanced liquidity
resulting from the asset sale described in Note 8, the Company elected to
terminate its $20.0 revolving line of credit with CoBank and also terminated its
$2.5 million revolving line of credit with SunTrust Bank.
11. The Company will adopt Emerging Issues Task Force 00-21,"Revenue
Arrangements with Multiple Deliverables", (EITF 00-21) in the third quarter of
2003. The Company is evaluating the transition method it will use, but does not
expect the adoption of EITF 00-21 to have a material impact on the Company's
results of operations or financial position.
12. During the second quarter, the Company adopted a Supplemental Executive
Retirement Plan for certain executives of the Company. The plan is an unfunded
defined benefit plan, with any benefits to be paid out of general corporate
funds. The expense related to this plan is not significant for the three-month
period ended June 30, 2003.
13
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This management's discussion and analysis includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and
similar expressions as they relate to Shenandoah Telecommunications Company or
its management are intended to identify these forward-looking statements. All
statements regarding Shenandoah Telecommunications Company's expected future
financial position and operating results, business strategy, financing plans,
forecasted trends relating to the markets in which Shenandoah Telecommunications
Company operates and similar matters are forward-looking statements. We cannot
assure you that the Company's expectations expressed or implied in these
forward-looking statements will turn out to be correct. The Company's actual
results could be materially different from its expectations because of various
factors, including those discussed below and under the caption "Business--Risk
Factors" in the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 2002. The following management's discussion and analysis should be
read in conjunction with the Company's Annual Report on Form 10-K for its fiscal
year ended December 31, 2002 and the financial statements and related notes
thereto.
Unless indicated otherwise, dollar amounts over $1 million have been
rounded to the nearest hundred thousand dollars and dollar amounts of less than
$1 million have been rounded to the nearest thousand dollars.
Overview
Shenandoah Telecommunications Company and subsidiaries (the "Company") provide
telephone service, long distance, personal communications service (PCS), 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. The Company's
operations are principally located 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.
These revenue classifications are defined as follows: Wireless revenues are made
up of Shenandoah Personal Communications Company (PCS), and the Mobile Company,
including tower revenues. The wireline revenues include the following subsidiary
revenues in the financial results: the Telephone Company, the Network Company,
the Cable Television Company, and the Long Distance Company. Other revenues are
comprised of the revenues of ShenTel Service Company, the Leasing Company,
ShenTel Communications Company, and the Holding Company.
14
Selected Operating Statistics
The following table shows selected operating statistics of the Company for the
most recent five quarters. This information is unaudited, and is provided as a
supplement to the financial statements.
Three Month Period Ended
(Unaudited) June 30, Mar 31, Dec 31, Sep 30, Jun 30,
2003 2003 2002 2002 2002
-------------------------------------------------------
Telephone Access Lines 24,972 24,903 24,879 24,933 24,859
CATV Subscribers 8,750 8,704 8,677 8,707 8,729
Internet Subscribers dial-up 17,798 18,174 18,050 18,022 17,866
DSL Subscribers 1,080 852 646 537 434
Digital PCS Subscribers 77,398 72,480 67,842 62,434 59,962
Paging Subscribers 2,315 2,805 2,940 3,002 3,071
Long Distance Subscribers 9,520 9,312 9,310 9,338 9,316
Fiber Route Miles 552 552 549 543 543
Total Fiber Miles 28,739 28,729 28,403 28,243 28,243
Long Distance Calls (000) (1) 5,001 5,074 5,969 6,138 5,949
Total Switched Access Minutes (000) 51,124 48,380 46,627 46,525 42,816
Originating Switched Access MOU (000) 18,343 18,685 18,476 19,225 18,341
CDMA Base Stations (sites) 246 240 237 231 220
Towers (100 foot and over) 73 72 72 72 72
Towers (under 100 foot) 10 10 10 10 10
(See (2) for definitions of terms)
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,574 1,574 1,555 1,555 1,512
PCS ARPU (ex. Travel) $ 52.84 $ 52.22 $ 51.38 $ 53.58 $ 49.93
PCS Travel rev. per sub $ 17.18 $ 17.39 $ 31.21 $ 31.90 $ 26.56
PCS Ave. mgmt. Fee per sub $ 4.58 $ 4.40 $ 4.64 $ 4.29 $ 3.99
PCS Ave. monthly churn % 1.90% 2.30% 3.40% 4.00% 3.21%
PCS CPGA $376.98 $276.97 $390.66 $344.77 $281.79
PCS CCPU $ 44.23 $ 45.87 $ 53.52 $ 53.93 $ 48.26
(1) - Originated by customers of the Company's Telephone subsidiary
(2) - POPS refers to the estimated population of a given geographic area.
Market POPS are those within a market area, and Covered POPS are those
covered by the network's service area. ARPU is Average Revenue Per User,
before travel, roaming revenue, and management fee, net of adjustments
divided by average subscribers. PCS Travel revenue includes roamer revenue
and is divided by average subscribers. PCS Average management fee per
subscriber is 8 % of collected revenue paid to Sprint, excluding travel
revenue. PCS Ave Monthly Churn is the average of three monthly
calculations of deactivations (excluding returns less than 30 days)
divided by beginning of period subscribers. CPGA is Cost Per Gross Add,
and includes selling costs, product costs, and advertising costs. CCPU is
Cash Cost Per User, and includes network, customer care and other costs.
15
Recent Developments
In recent years, the principal source of the Company's revenues has shifted from
traditional wireline revenues to wireless and other revenues. For the three
months ended June 30, 2003, wireless revenue was 67.5% of total revenue,
wireline revenue contributed 25.4% of total revenue, and other revenue was 7.1%
of total revenue. These results compare to 62.2% for wireless, 31.1% for
wireline and 6.7% for other, for the three months ended June 30, 2002.
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. 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 increase revenues during the first six months of 2003. The
Company had 246 PCS CDMA base stations in service at June 30, 2003, compared to
220 base stations in service June 30, 2002. This increase in base stations is
primarily the result of supplementing the network capacity and extending
coverage along highly traveled secondary roads in the Company's market areas.
The Company's primary focus has shifted from building the initial PCS network to
improving service and operating the network in an effective manner to provide
quality service to the subscribers and to improve operating results.
As previously reported, a further reduction in the Sprint travel rate took
effect January 1, 2003. The rate decreased from $0.10 per minute to $0.058 per
minute for payable and receivable minutes. The Company is in a net travel
receivable position of $1.4 million for the current quarter, compared to $1.3
million for the same quarter last year, including the long distance portion of
that traffic.
As discussed in the Company's annual report on Form 10-K for the 2002 year, the
Company experienced a shift in PCS customer additions from prime to sub-prime
credit classes in late 2001 and early 2002, associated with the Sprint Clear Pay
no-deposit program. To limit additional exposure to bad debt expense and
customer churn (customer disconnects), the Company initiated a deposit of $125
in April 2002 for credit challenged prospective customers. As a result of the
increase in sub-prime customers prior to April 2002, the Company experienced
high rates of churn and bad debt expense for much of 2002. In the second quarter
of 2003 the Company's average churn rate declined to 1.90%, down from 2.30% in
first quarter 2003, and 3.40% at the end of fourth quarter 2002. This was the
third quarter in a row of improvement in the churn measure and bad debt expense.
Bad debt expense increased significantly in the third and fourth quarters of
2002, as a downstream result of the Clear Pay no-deposit program suspended in
April 2002. Bad debt expense for the PCS operation, as a percentage of service
revenues, was 12.5% in fourth quarter 2002, 8.7% in first quarter 2003 and 6.0%
in second quarter 2003. There is no certainty that the improving bad debt and
churn trends will continue in the future.
The liquidity position of the Company improved during the first quarter of 2003,
due principally to the sale of the Company's 66% interest in the Virginia 10 RSA
partnership. At the close of this transaction on February 28, 2003, the Company
received $37.0 million, of which $5.0 million was placed in escrow. In addition
to the initial proceeds of $32.0 million, the Company received $1.7 million for
working capital adjustments. The proceeds have been invested in low risk, highly
liquid federal government instruments. The Company will pay approximately $12.0
million in taxes on the transaction this year, of which approximately $5.9
million have been paid through June 30, 2003. The remaining $6.1 million of
taxes will be paid in two equal installments in September and December of 2003.
Additional taxes will be due on the $5 million held in escrow upon the release
16
of the funds to the Company at the termination of the escrow arrangement, in
2005. The Company liquidated $6.0 million of short-term investments from the
proceeds of the sale of the Virginia 10 RSA partnership proceeds to pay income
taxes on the transaction. The Company's ratio of total debt to total assets
ended the quarter at 24.3%, compared to 24.4% at March 31, 2003 and 33.8% at
December 31, 2002.
In addition to the Virginia 10 RSA transaction discussed above, the Company's
cash was impacted by a slower than expected capital spending rate for the first
half of 2003. The Company repaid $10.1 million in total debt during the first
six months of 2003, of which $2.0 million was for scheduled debt payments, $4.6
million was a prepayment of fixed rate debt and the remaining $3.5 million was
the payment of revolving term debt. The capital spending and debt retirement
were accomplished from funds generated through operations.
Operating Risks
The Company is dependent on Sprint 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 to review, test, and validate
information being reported to the Company. The Company continually monitors and
tracks the data provided by Sprint to identify potential unexpected trends in
the information.
In its previous report on Form 10Q filed in May 2003, the Company noted it may
need to prematurely retire up to 205 of its current PCS base stations. The
Company has recently been informed by Lucent, the equipment provider, that this
equipment will be supported into 2008. Current depreciation rates will result in
these assets being fully depreciated prior to that date. Lucent has offered
significant price discounts to accelerate the replacement of this equipment. The
Company is evaluating whether to take advantage of these price discounts to
upgrade the PCS network in the near future.
The net balance of PCS travel revenue and expense could change significantly due
to changes in service plan offerings, changes in the travel settlement rate,
changes in travel habits by the subscribers in the Company's market areas or
other Sprint subscribers and numerous other factors beyond the Company's
control. The Company is continuing to monitor the financial strength of the
other public affiliates of Sprint, as their ability to maintain their segment of
the Sprint network may impact the ability of the Company to add new subscribers
in the Company's market area.
The Company's PCS churn rate, bad debt expense and handset upgrades for existing
customers are items that can individually or collectively have a material
adverse impact on the operating results of the Company. Although recent trends
of churn and bad debt expense have been favorable for the first six months of
2003, the handset upgrade costs increased to $7.41 per average subscriber per
month for second quarter of 2003 compared to $3.88 per average subscriber per
month in the first quarter of 2003. This increase in handset upgrade cost is the
result of existing subscribers upgrading their handsets for newer models with
features not available on the old handset.
Wireless Local Number Portability (WLNP) will permit a subscriber to change
wireless service providers in the same market area while retaining their
existing telephone number. This Federal Communications Commission mandate is
scheduled to be effective in late fall 2003. As a result of WLNP, portions of
the PCS subscriber base may migrate to other wireless providers, thereby
17
contributing to increased churn. Alternatively, the implementation of WLNP may
allow us to attract subscribers from other wireless providers.
The Company does not have significant control over the service plan mixes
offered to Sprint customers in the competitive wireless telecommunications
industry. As a result, the plans offered may have a material adverse effect on
the Company's results of operations.
The Company's access revenue may be adversely impacted by legislative or
regulatory action that decrease access rates or exempt certain traffic from
paying access to the Company's regulated telephone network. During the second
quarter of 2003, the Company reduced access revenue by $1.5 million due to two
of the Company's inter-exchange customers filing disputes related to certain
charges the Company billed for access to the Company's switching facilities and
the local exchange network. The disputes cover a two-year period beginning in
2001 through and including the current quarter of 2003. The total amount of the
reduction related to the current quarter is $0.4 million with the six-month
reduction for 2003 at $0.7 million. The amount of the reduction that relates to
billings in the second quarter and the first six months of 2002 is $0.2 million
and $0.3 million, respectively. This dispute has not been resolved. The Company
will continue to adjust access revenue for these items until negotiations are
concluded. Management is unable to predict the outcome of these negotiations.
In a related matter, and due to recent discussions with regulators and other
industry officials in regard to access to wireless switches by inter-exchange
carriers, the Company is exploring plans to pursue interconnection agreements
between the inter-exchange carriers and its wireless subsidiary. This effort may
result in a partial offset to the disputed access revenue charges, but until
such agreements are in place no revenue has been, or will be recorded.
Management is not able to project if and when these agreements may be executed.
The Company's revenue from fiber leases may be adversely impacted by further
erosion in demand or in prices charged for these facilities. There is also the
potential for additional bankruptcies of the Company's lease customers. The
Company is monitoring each of its fiber lease customers closely to minimize the
risk related to this business.
Results Of Operations Second Quarter 2003 vs. Second Quarter 2002
General
Total revenue for the second quarter of 2003 was $24.8 million, an increase of
$2.6 million, or 12.0% compared to $22.2 million for the second quarter of 2002.
Total revenues include wireless revenue of $16.8 million, an increase of $3.0
million or 21.6%; wireline revenues of $6.3 million, a decrease of $0.6 million,
or 8.6%; and other revenues of $1.8 million, an increase of $0.3 million or
18.1%. Income from continuing operations increased $5.0 million, to $1.0
million, compared to $4.0 million loss for the same period in 2002. Income per
share from continuing operations, diluted was $0.27 cents per share, compared to
a loss of $1.06 per share for the same period last year.
18
Revenues
Wireless revenues are primarily derived from the PCS business. The PCS operation
added 17,436 net subscribers since June 30, 2002, which contributed to a $2.7
million or 33.6% increase in subscriber revenue compared to the period ended
June 30, 2002. Total service revenues were $10.7 million for second quarter
2003, an increase of $2.7 million or 33.6% compared to $8.0 million for second
quarter 2002. As of June 30, 2003, the Company had 77,398 PCS subscribers. The
Company's Average Revenue Per User (ARPU) increased 5.8% to $52.84 for the
second quarter of 2003, compared to $49.93 for the second quarter of 2002, and
increased 2.8% from the first quarter 2003 ARPU of $51.38. PCS travel and roamer
revenue combined for the second quarter 2003 were $4.9 million, a $0.2 million
or 4.0% increase compared to the travel and roaming revenue for second quarter
2002. Travel and roamer revenue growth was attributable to increased usage of
the network by Sprint wireless customers residing outside of our PCS territory
and other carriers' customers using the network offset by a decrease in the
travel rate per minute. The travel revenue rate, set by Sprint, declined from
$0.10 per minute in 2002 to $0.058 per minute as of January 1, 2003.
Wireline revenues were $6.3 million, a decrease of $0.6 million or 8.6%. Access
revenue in the telephone business decreased $0.8 million, due primarily to the
impact of a $1.5 million reduction in revenues recorded in the quarter, the
result of two of the Company's inter-exchange customers filing disputes related
to certain charges the Company billed for access to the Company's switching
facilities and the local exchange network. The disputes cover a two-year period
beginning in 2001 through and including the current quarter of 2003. The total
amount of the reduction related to the current quarter is $0.4 million. The
amount of the reduction that relates to billings in the second quarter of 2002
was $0.2 million. This dispute has not been resolved. The Company will continue
to adjust access revenue for these items until negotiations are concluded, as
management is currently unable to predict the outcome of these negotiations.
Other revenues were $1.8 million, an increase of $0.3 million or 18.1%. Internet
revenues increased $0.1 million or 6.8%. Total Internet subscribers increased
578 or 3.2% compared to June 2002, while DSL subscribers increased 646 or 149%
compared to the June 30, 2002 subscriber base, while there was a slight decline
in dial-up subscribers over the same time period. The total subscriber base for
the Company's dial-up and DSL Internet services was 18,878 as of June 30, 2003
compared to 18,300 as of June 30, 2002. In those areas where the Company is
limited to only dial-up Internet service, the Company has recently experienced
increased subscriber deactivations due to migration to competing high-speed
Internet services. The 511Virginia travel information project contributed $0.3
million to the increased revenues in the second quarter of 2003, due to the new
contract established with the Commonwealth of Virginia mentioned in the first
quarter 10Q.
Operating Expenses
Total operating expense for second quarter 2003 was $22.4 million, an increase
of $2.9 million or 14.7%, compared to $19.6 million for second quarter 2002. The
increase in PCS subscribers and the expanded PCS operation were the principal
factors driving costs higher.
Costs of goods and services were $2.6 million, an increase of $0.7 million or
36.7%, changing primarily due to an increase in gross additions of subscribers
in the PCS operation. During the second quarter of 2003, the Company added 9,735
gross new subscribers compared to 8,602 gross new subscribers added in the
second quarter 2002. This 13.2% increase in gross additions, along
19
with sales of handset upgrades for existing subscribers, drove the PCS cost of
sales higher by $0.6 million. Subscribers are purchasing new handsets to replace
their existing handsets as new features become available and new services are
offered that are not available on earlier model handsets. The average cost of a
handset increased due to new feature additions in many of the handsets sold.
Management anticipates the upgrade trend will continue, and may increase
significantly in the future.
Network operating costs were $8.7 million, an increase of $0.4 million, or 4.1%
compared to second quarter 2002. Increased rental costs for towers and buildings
contributed $0.5 million to the increased network operating costs. Line costs in
the PCS operation increased $0.1 million, while travel expense decreased
nominally compared to second quarter last year. Maintenance expense and other
network operating costs decreased $0.2 million, due to improved efficiencies
particularly in the PCS operation.
Depreciation and amortization expense was $4.1 million, an increase of $0.6
million or 18.3% compared to $3.5 million for the second quarter of 2002, as new
assets, primarily in the PCS operation, have been added to the networks.
Depreciation expense has increased marginally thus far 2003, as the Company's
rate of capital spending has slowed significantly from its peak in mid-2001.
Selling, general and administrative costs were $7.0 million, an increase of $1.2
million or 20.5%. Advertising, customer support and selling expenses made up
$1.0 million of the increase in selling, general and administrative expenses,
due to the increase in advertising and promotion activity. Billing and customer
care costs incurred in the PCS operation, primarily charges from Sprint
increased as a result of the increase in the total number of PCS subscribers
compared to the second quarter of 2002. Administrative and other costs increased
$0.4 million, due to additional staff added to support the growing Company
operations. Bad debt expense decreased $0.1 million; primarily due to the lower
churn rate and the reduced subscriber removals compared to previous periods. Bad
debt expense was 2.6% of total revenue for the second quarter of 2003, compared
to 3.4% of total revenue for second quarter of 2002. Bad debt expense for the
PCS operation, as a percentage of local service revenues, was 12.5% in fourth
quarter 2002, 8.7% in first quarter 2003 and 5.6% in second quarter 2003.
In the Company's PCS operation cash cost per user (CCPU) declined to $44.23, an
8.4% decrease from the second quarter of 2002. The reduction in the travel rate
was responsible for part of the decrease, and the increase in total subscribers
contributed to providing greater economies of scale. The Company's cost per
gross add (CPGA) in the PCS business increased to $376.98 or 34.6% from second
quarter of 2002, due to increased selling, advertising and promotional costs
over the same period last year. Additionally, more existing subscribers are
upgrading their handsets, which influence this cost. The Company includes the
cost of upgrading existing subscribers handsets in its CPGA calculation.
Other Income (Expense)
Non-operating income was up $0.1 million due primarily to the contribution of
interest income on the proceeds from the sale of the VA 10 RSA Limited
Partnership interest.
20
Loss on external investments was nominal in second quarter 2003, an improvement
of $8.2 million due primarily to the second quarter 2002 loss of $8.2 million
associated with the VeriSign transactions discussed in previous filings.
Interest expense decreased by $0.2 million, or 14.7%, a result of decreased
borrowing levels compared to second quarter 2002. The Company's total debt
decreased by $8.8 million from June 30, 2002 to June 30, 2003 including $4.5
million paid in advance of its scheduled due date. The Company's total debt as
of June 30, 2003 was $45.4 million, compared to $54.3 million as of June 30,
2002 and $55.5 million at December 31, 2002.
Income before income taxes, discontinued operations and cumulative effect of
accounting changes was $1.7 million, an increase of $8.1 million from the $6.6
million loss in second quarter 2002. The change in operating income was a
decrease of $0.2 million. The impact of the $8.2 million loss on investments in
second quarter 2002 compared to a nominal breakeven in 2003, and a reduction of
other expense and interest expense also contributed to the Company's improved
results before taxes.
Income tax provision was $0.6 million, an increase of $3.2 million due to higher
earnings compared to the same period last year. The Company operates in multiple
states with varying income tax rates. The Company's effective tax rate reflects
the change in income and losses recorded in those states.
Income from continuing operations was $1.0 million for second quarter 2003,
compared to a loss of $4.0 million for the second quarter 2002, an increase of
$5.0 million.
There was no income from discontinued operations in second quarter 2003,
compared to $1.9 million for the second quarter of 2002, since the sale of the
discontinued operations happened in the first quarter of 2003.
The Company adopted FAS 143 effective January 1, 2003, and as a result recorded
a charge to earnings for the cumulative effect of this change in accounting of
$76 thousand after taxes. The impact of the adoption of this statement was a $3
thousand charge after taxes in second quarter of 2003 and would have been a
similar figure in the second quarter of 2002, had the change been adopted
prospectively.
The Company's second quarter net income was $1.0 million compared to a loss of
$2.1 million in 2002. Income from continuing operations increased $5.0 million.
Income from discontinued operations was zero in 2003 compared to $1.9 million in
2002.
Results Of Operations First Half of 2003 vs. First Half of 2002
General
Total revenue from continuing operations for the first six months of 2003 was
$49.8 million, an increase of $6.9 million, or 16.1% compared to $42.9 million
for the first six months of 2002. Total revenues include wireless revenue of
$32.4 million, an increase of $6.9 million or 26.8%; wireline revenues of $13.9
million, a decrease of $0.4 million, or 2.6%; and other revenues of $3.4
million, an increase of $0.4 million or 14.1%. Income from continuing operations
increased $6.6 million, to $3.0 million, compared to a $3.6 million loss for the
same period in 2002. Income from continuing
21
operations diluted was $0.78 cents per share for the first six months of 2003,
compared to a $ 0.96 loss per share for the first six months of 2002.
Revenues
Wireless revenues are primarily derived from the PCS business. The PCS operation
added 17,436 net subscribers since June 30, 2002, which resulted in a $6.7
million or 27.5% increase in subscriber revenue compared to June 30, 2002. Total
service revenues were $20.6 million for year-to-date 2003, an increase of $5.4
million or 35.9%. As of June 30, 2003, the Company has 77,398 PCS subscribers.
The Company's Average Revenue Per User (ARPU) increased 3.9% to $52.54 for the
first six months of 2003, compared to $50.59 for the same period of 2002. PCS
travel and roamer revenue combined were $9.5 million, and increased $1.4 million
or 17.2% compared to 2002 year-to-date results. Travel and roamer revenue growth
was attributable to increased usage of the network by Sprint wireless customers
residing outside of our PCS territory and other carriers' customers using the
network. The travel revenue rate declined from $0.10 per minute in 2002, to
$0.058 per minute as of January 1, 2003. Roaming rates have also declined in
2003 compared to 2002.
Tower lease revenue contributed to the additional $0.2 million increase over the
2002 year-to-date results while handset sales revenue remained flat on a
year-to-date comparison and other miscellaneous wireless revenue declined $0.1
million compared to the first six months of 2002.
Wireline revenues were $13.9 million, a decrease of $0.4 million or 2.6%. Access
revenue in the telephone business decreased $0.2 million, due primarily to the
impact of a $1.5 million reduction in revenue the Company recorded during the
second quarter of 2003. The total amount of the reduction related to the current
six-month period for 2003 is $0.7 million. The amount of the reduction that
relates to billings in the first six months of 2002 was $0.3 million. This
dispute has not been resolved. The Company will continue to adjust access
revenue for these items until a settlement is negotiated, as management is
currently unable to predict the outcome of these negotiations. Lease revenue for
the Company's fiber network facilities decreased $0.3 million compared to the
same period last year.
Other revenues were $3.4 million, an increase of $0.4 million or 14.1%. Internet
revenues increased $0.2 million or 8.8%. Internet subscribers increased 3.2% but
the subscriber base has begun to shift from dial-up service to the faster DSL
service offering, as discussed above. The 511Virginia travel information project
contributed $0.3 million to the increased revenues in 2003, due to the renewed
contract with the Commonwealth of Virginia mentioned in earlier filings.
Operating Expenses
Total operating expense was $43.2 million, an increase of $5.3 million or 13.9%,
compared to $37.9 million for the first six months of 2002. The increase in
total number of PCS subscribers and the expanded PCS operation were the
principal factors driving costs higher.
Costs of goods and services were $4.9 million, an increase of $0.3 million or
7.5%, changing primarily due to an increase in the number of handset-upgrades
sold in the first six months of 2003 compared to the handset upgrades in 2002.
During the first six months of 2003, the Company added 20,101 new gross
subscribers compared to 22,583 new gross subscribers added in the first half of
2002. This 11% decline in gross activations was more than offset by the handsets
that were
22
sold as equipment upgrades to existing customers in 2003. Handset upgrade costs
were in excess of $0.8 million for the six months of 2003 compared to an
immaterial amount in 2002.
Network operating costs were $16.7 million, an increase of $1.3 million, or
8.7%. Increased rental costs for towers and buildings contributed $0.6 million
to the increased network operating costs. Line costs in the PCS operation
increased $0.4 million, while travel expense increased $0.2 million compared to
the first six months of 2002. Other expenses increased $0.1 million as the
Company continued to expand its services and support its growing networks.
Depreciation and amortization expense was $8.1 million, an increase of $1.3
million or 19.2% compared to $6.8 million for the six months of 2002, as new
assets, particularly in the PCS operation, have been added to the networks.
Depreciation expense increased slightly in the first two quarters of 2003 as
compared to the fourth quarter of 2002, as the Company's rate of capital
spending has slowed significantly from its peak in mid-2001.
Selling, general and administrative costs were $13.5 million, an increase of
$2.3 million or 20.5%. Advertising, customer support and selling expenses made
up $1.7 million of the increase in selling, general and administrative expenses.
This increase was primarily due to the increase in advertising and promotion
centered in the PCS operation. PCS billing and customer care costs primarily
billed from Sprint, increased due to the larger number of PCS subscribers,
compared to the same period last year. Administrative and other costs increased
$0.4 million, due to additional staff added to support the growing Company
operations. Bad debt expense was the same for the first six months of both
years. Bad debt expense for the PCS operation, as a percentage of local service
revenues, was 6.1% for the first six months of 2003, and 8.5% for the same
period in 2002.
The Company's operating margin for the six months of 2003 (operating income
divided by total revenue) was 13.2%, up from 11.5% for the same period last
year. This change was primarily due to increased revenues generated in the
wireless segment of the business, somewhat offset by the significant reduction
in access revenues in the wireline business. Revenues grew at a 16.1% rate,
while expenses grew at a 13.9% rate, resulting in the improved operating margin.
In the Company's PCS operation the average cash cost per user (CCPU) for the six
months ended June 2003, was $45.02, compared to $49.30 for six months ended June
2002. This decrease of 8.7% is primarily the result of a decrease in the
customer travel rate, and an increase in total subscribers contributing to
economies of scale. The Company's cost per gross add (CPGA) increased to $325.43
for 2003 compared to $253.37 for 2002, due to increased selling costs and
promotion costs over the same period of last year. The increase is also the
result of promotions and advertising run during the first half of 2003, which
contributed to the promotion of handset upgrades for existing subscribers
thereby increasing the CPGA measure by approximately $40.00 per gross customer
added in 2003.
Other Income (Expense)
Non-operating income was about the same, while interest income increased $0.1
million due primarily to the contribution of interest income on the proceeds
from the sale of the VA 10 RSA limited partnership interest, in addition to
lower losses from other non-operating items.
Loss on external investments was $0.2 million, an improvement of $8.7 million
due primarily to the losses on the VeriSign investment recorded in 2002.
23
Interest expense decreased by $0.3 million, or 12.7%, a result of decreased
borrowing levels compared to 2002. The Company's total debt decreased by $8.8
million from June 30, 2002 to June 30, 2003, including $4.6 million paid in
advance. The Company's total debt as of June 30, 2003 was $45.4 million,
compared to $54.3 million as of June 30, 2002 and $55.5 million at December 31,
2002.
Income before income taxes, discontinued operations and cumulative effect of
accounting changes was $4.7 million, an increase of $10.6 million from the $5.9
million loss for the six months of last year. Operating income increased $1.6
million and other income (expense) improved $9.0 million compared to the 2002
results.
Income tax provision was $1.8 million, an increase of $4.1 million due to higher
earnings compared to the same period last year. The change in the effective tax
rate was the result of changes in the apportionment of income and losses between
states where the Company operates.
Income from continuing operations was $3.0 million, compared to a loss of $3.6
million, an increase of $6.6 million due primarily to the improvement in
operating income in 2003, and the impact of the VeriSign transactions from 2002.
Income from discontinued operations was $22.6 million in 2003, the result of
operations and the impact of the sale of the discontinued operations of the
Company's portion of the Virginia 10 RSA Limited Partnership interest which
occurred in the first quarter of 2003 compared to $3.7 million for operating
results of that segment of the business recorded in the first six months of
2002.
The Company adopted FAS 143 effective January 1, 2003, and as a result recorded
a charge to earnings for the cumulative effect of this change in accounting of
$76 thousand after taxes. The impact of the adoption of this statement was a $7
thousand charge after taxes in first half of 2003 and is reflected in operating
expenses for 2003.
The Company's net income increased to $25.5 million compared to $42 thousand in
2002.
Investments In Non-Affiliated Companies
The Company participates in emerging technologies by investing in entities that
invest in start-up companies. This includes indirect participation through
capital venture funds of South Atlantic Venture Fund III, South Atlantic Private
Equity IV, Dolphin Communications Parallel Fund, Dolphin Communications Fund II
and Burton Partnership. The Company also participates by direct investment in
privately held companies. Currently the Company's only direct investment is in
NTC Communications a provider of voice, video and data connections to off campus
college and university housing properties. 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, 2003, the
Company held shares in two companies that are publicly traded, with the
following market values: $58 thousand in Net IQ (NTIQ) with 3,744 shares held,
and $125 thousand in Deutsche Telekom, AG (DT) with 8,219 shares held. Net
unrealized gains on the securities available-for-sale increased $18 thousand
during the second quarter of 2003 to $33 thousand, reflecting the improved value
of the technology securities in the Company's portfolio and current market
conditions.
24
Liquidity And Capital Resources
The Company generated $15.8 million in cash from operations in first half of
2003, compared to $9.4 million generated in the same period of 2002. The change
in cash from operations is made up of a $6.6 million increase in income from
continuing operations, an increase in depreciation of $1.3 million, a $3.7
million increase in deferred taxes, an $8.6 million decrease in loss on
investments, a reduction in receivables of $4.8 million, and $1.3 million
decrease from changes in other items, primarily current asset and liability
accounts. The change in receivables was primarily the result of two items: a
$1.5 million reduction in revenues and the corresponding reserve to receivables
during the second quarter of 2003, and a $1.5 million cash true up from Sprint
during the early part of 2003.
The Company's investing activity was approximately 29.4% of the level in the
first six months of last year. Total investing was $4.2 million for 2003, versus
$14.4 million used in the first six months of 2002. Capital spending was $4.4
million, a decrease of $10.4 million or 57.7% compared to spending in the first
six months of 2002. The capital budget for 2003 is approximately $19.4 million,
and management anticipates the rate of spending will increase over the remaining
six months of 2003, but anticipates total spending will be below the original
budgeted amount for the year. Projects originally included in the budget have
been delayed, due to continued low demand for increased facility needs in the
Company's operating area.
The Company's financing activities include the payment of long-term debt, and
the payment of revolving debt which occurred in the early part of 2003. As cash
is generated from operations, and with the cash balances available from the sale
of the partnership interest, management anticipates there will be a limited need
to borrow any funds for the remainder of the year.
The Company currently does not have specific plans for the proceeds from the
sale of its cellular interest. The Company is holding the proceeds in short-term
investments to provide flexibility for investment opportunities that may arise.
As of June 30, 2003 the Company has $31.3 million invested in cash equivalents
comprised of liquid, low risk, United States government and agency instruments.
The Company selected numerous funds, and several managers to reduce its exposure
to fund and management risk. Approximately $6.0 million will be used in the
remaining months of 2003 for tax payments associated with the partnership sale.
The $5.0 million escrow funds are also invested in similar instruments, although
the Company cannot access those funds until February 28, 2005. The funds in the
escrow account are available for unrecorded liabilities of the partnership for a
period of up to two years from the date of closing. The Company receives the
income from the invested proceeds, but cannot access the principal until it is
released on February 28, 2005.
The Company terminated its $20.0 million revolving line of credit with CoBank
May 15, 2003. The Company's outstanding long-term CoBank debt is $39.2 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, 2003 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 2003, the Company received
patronage credits of approximately 60 basis points on its outstanding CoBank
debt balance. Repayment of the CoBank long-term debt facilities requires monthly
payments on the debt through September 2013. There are three financial covenants
tied to these facilities. These are measured at
25
the end of the quarter, based on a trailing 12-month basis and are calculated on
continuing operations. The ratio of total debt to operating cash flow, which
must be 3.5 or lower, was 1.9. The equity to total assets ratio, was 54.7% and
must be 35% or higher. The ratio of operating cash flow to scheduled debt
service, which must exceed 2.0, was 2.89.
The Company has long-term debt with Rural Utilities Service /Rural Telephone
Bank (RUS/RTB) that totaled $6.2 million at the end of June 2003, compared to
$11.0 million at December 31, 2002, with maturities through 2019. The weighted
average interest rate on the RUS/RTB debt is approximately 5.93%, down from
6.51% as a result of repaying several notes with higher rates of interest during
the first six months of 2003.
Year-to-date capital spending was $4.4 million, compared to a total capital
budget for the year of approximately $19.4 million. Major projects in the
year-to-date spending primarily include enhancements to the PCS network.
Management expects cash flow from operations and current cash and cash
equivalent balances will provide the Company with adequate capital resources for
the remainder of 2003.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks relate primarily to changes in interest rates on debt or
investment instruments held to maturity. Our interest rate risk involves two
components. The first component is outstanding debt with variable rates, which
for the foreseeable future is not expected. As of June 30, 2003, the Company did
not have any variable rate debt outstanding. 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 $1.5 million.
The second component of interest rate risk is temporary excess cash, primarily
invested in overnight investments. Available cash will continue to be used to
repay existing and anticipated new debt obligations when economically
beneficial, maintain and upgrade capital equipment, fund ongoing operating
expenses, and fund dividends (as declared) to the Company's shareholders. With
its current level of available cash and cash equivalents, the Company is
positioned to evaluate potential investment or acquisition opportunities that
may arise. Management does not view market risk as having a significant impact
on the Company's results of operations.
ITEM 4. Controls and Procedures
The Company's management, with the participation of its Chief Executive Officer
and President, who is the Company's principal executive officer, and its
Executive Vice President and Chief Financial Officer, who is the Company's
principal financial officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures as of June 30, 2003. Based upon that
evaluation, the Chief Executive and President and the Executive Vice President
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company, including its consolidated subsidiaries,
required to be included in this report and the other reports that the Company
files or submits under the Securities Exchange Act of 1934.
26
During the second fiscal quarter, there have been no changes in the Company's
internal control over financial reporting that have materially affected, or that
are reasonably likely to materially affect, its internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders set forth below:
(a) The Company held its 2003 annual meeting of shareholders on
April 15, 2003.
(c) The following sets forth information regarding the election of
directors at the 2003 annual meeting, which was the only matter
voted upon at the 2003 annual meeting. There were 3,785,913 shares
of common stock outstanding as of the record date for, and entitled
to vote at, the 2003 annual meeting, of which 2,860,608 shares were
present in person or by proxy, and constituted a quorum.
The shareholders approved a proposal to elect each of the three
nominees to the board of directors for a three-year term which will
expire at the annual meeting of shareholders in 2006. The tabulation
of votes on this proposal is as follows:
NOMINEE FOR WITHHELD
Noel M. Borden 2,847,781 12,827
Ken L. Burch 2,762,764 97,844
Grover M. Holler, Jr. 2,839,456 21,152
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are attached to this Quarterly Report on Form
10-Q:
31 Certifications pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, filed under Exhibit 31 of Item 601 of
Regulation S-K.
32 Certifications pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. 1350, furnished under
Exhibit 32 of Item 601 of Regulation S-K.
(b) The following Current Reports on Form 8-K were filed during the
period covered by this report:
Filing Date of Report Item Reported
--------------------- -------------
April 15, 2003 Item 5 (press release announcing
first quarter 2003 financial
results)
June 3, 2003 Item 5 (press release announcing
Earle A. MacKenzie joins
Shenandoah Telecommunications
Company as executive vice
president)
27
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 11, 2003 /S/ EARLE A. MACKENZIE
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
28
EXHIBIT INDEX
Exhibit No. Exhibit
31 Certifications pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934,
filed under Exhibit 31 of Item 601 of
Regulation S-K.
32 Certifications pursuant to Rule 13a-14(b)
under the Securities Exchange Act of 1934
and 18 U.S.C. 1350, furnished under Exhibit
32 of Item 601 of Regulation S-K.
29
Exhibit 31
CERTIFICATION
I, Christopher E. French, President and Chief Executive Officer of Shenandoah
Telecommunications Company certify that:
1. I have reviewed this report on Form 10-Q of Shenandoah
Telecommunications Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent function(s)):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 11, 2003 /S/ CHRISTOPHER E. FRENCH
Christopher E. French
President and
Chief Executive Officer
30
CERTIFICATION
I, Earle A. MacKenzie, Executive Vice President and Chief Financial Officer of
Shenandoah Telecommunications Company certify that:
1. I have reviewed this report on Form 10-Q of Shenandoah
Telecommunications Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent function(s)):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 11, 2003 /S/ EARLE A. MACKENZIE
----------------------------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
31
Exhibit 32
Written Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, the President and Chief Executive Officer and the
Executive Vice President and Chief Financial Officer, of Shenandoah
Telecommunications Company (the "Company"), hereby certifies that, on the date
hereof:
(1) the report on Form 10-Q of the Company for the quarterly ended June
30, 2003 filed on the date hereof with the Securities and Exchange Commission
(the "Report") fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/S/ CHRISTOPHER E. FRENCH
----------------------------------------
Christopher E. French
President and Chief Executive Officer
August 11, 2003
/S/ EARLE A. MACKENZIE
----------------------------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
August 11, 2003