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 quarterly period ended September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______________________ to ______________________
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 (I.R.S. Employer
incorporation or organization) Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip code)
(540) 984-4141
(Registrant's telephone number, including area code)
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. |X|YES |_|NO
Indicate by check mark whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X|YES |_|NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2003
Common Stock, No Par Value 3,793,913 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 3-4
Unaudited Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2003 and 2002 5-6
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 7
Unaudited Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Nine Months Ended September 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 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)
September 30, December 31,
Assets 2003 2002
------------- -----------
Current Assets
Cash and cash equivalents $ 31,690 $ 2,209
Accounts receivable, net 6,135 7,536
Income tax receivable -- 12
Materials and supplies 1,904 1,787
Prepaid expenses and other 1,652 2,205
Deferred income taxes 1,073 1,197
Assets held for sale -- 5,548
---------- ----------
Total current assets 42,454 20,494
Securities and investments
Available-for-sale securities 163 151
Other investments 7,230 7,272
---------- ----------
Total securities and investments 7,393 7,423
Property, plant and equipment, net 128,963 132,152
Other Assets
Cost in excess of net assets of business
acquired 3,313 3,313
Deferred charges and other assets, net 532 622
Escrow account (Note 8) 5,000 --
---------- ----------
Total other assets 8,845 3,935
---------- ----------
Total Assets $ 187,655 $ 164,004
========== ==========
(continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
September 30, December 31,
Liabilities and Shareholders' Equity 2003 2002
------------- -----------
Current Liabilities
Current maturities of long-term debt $ 4,186 $ 4,482
Notes payable -- 3,503
Accounts payable 5,615 5,003
Advance billings and deposits 3,304 3,538
Income taxes payable 4,429 --
Liabilities held for sale -- 542
Other current liabilities 3,453 2,832
---------- ----------
Total current liabilities 20,987 19,900
Long-term debt, less current maturities 40,196 47,561
Other Liabilities
Deferred income taxes 18,671 15,859
Pension & other 2,608 2,441
---------- ----------
Total other liabilities 21,279 18,300
Minority interests in discontinued operations -- 1,666
Shareholders' Equity
Common stock 5,633 5,246
Retained earnings 99,556 71,335
Accumulated other comprehensive income (loss) 4 (4)
---------- ----------
Total shareholders' equity 105,193 76,577
---------- ----------
Total Liabilities and Shareholders' Equity $ 187,655 $ 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 Nine months ended
(in thousands, except per share data) September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------
Operating Revenues
Wireless $ 18,008 $ 15,792 $ 50,411 $ 41,339
Wireline 7,774 7,121 21,722 21,441
Other revenues 1,800 1,718 5,240 4,734
-----------------------------------------------
Total revenues 27,582 24,631 77,373 67,514
Operating Expenses
Cost of goods and services 2,966 2,712 7,879 7,281
Network operating costs 8,448 8,327 25,175 23,715
Depreciation and amortization 4,180 3,759 12,328 10,592
Selling, general and administrative 7,012 7,462 20,463 18,621
-----------------------------------------------
Total operating expense 22,606 22,260 65,845 60,209
-----------------------------------------------
Operating Income 4,976 2,371 11,528 7,305
Other Income (expense):
Non-operating income (loss), net 234 (12) 457 176
(Loss) on investments, net (86) (680) (283) (9,594)
Interest expense (835) (1,057) (2,686) (3,177)
-----------------------------------------------
Income (loss) before income taxes, discontinued
operations and cumulative effect of change in accounting 4,289 622 9,016 (5,290)
Income tax (provision) benefit (1,572) (239) (3,324) 2,059
-----------------------------------------------
Income (loss) from continuing operations 2,717 383 5,692 (3,231)
Income (loss) from discontinued operations, net of
income taxes (23) 1,841 22,605 5,497
Cumulative effect of a change in accounting,
net of income taxes -- -- (76) --
-----------------------------------------------
Net income $ 2,694 $ 2,224 $ 28,221 $ 2,266
===============================================
Net income per share, basic
Continuing operations $ 0.72 $ 0.10 $ 1.50 $ (0.85)
Discontinued operations, net of income taxes (0.01) 0.49 5.97 1.45
Cumulative effect of a change in accounting,
net of income taxes -- -- (0.02) --
-----------------------------------------------
Total net income per share, basic (1) $ 0.71 $ 0.59 $ 7.45 $ 0.60
===============================================
Net income per share, diluted
Continuing operations $ 0.71 $ 0.10 $ 1.50 $ (0.85)
Discontinued operations, net of income taxes (0.01) 0.49 5.95 1.45
Cumulative effect of a change in accounting,
net of income taxes -- -- (0.02) --
-----------------------------------------------
Total net income per share, diluted (1) $ 0.71 $ 0.59 $ 7.43 $ 0.60
===============================================
Weighted average shares outstanding, basic 3,790 3,769 3,787 3,768
===============================================
Weighted average shares, diluted 3,808 3,802 3,800 3,768
===============================================
(1) Earnings (loss) per share may not foot due to rounding.
(continued)
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
Three months Nine months
ended ended
(in thousands, except per share data) September 30, September 30,
2002 2002
------------------------------
Pro forma amounts assuming the Company
adopted FAS 143 retroactively:
Pro forma income (loss) from continuing operations $ 380 $ (3,240)
Discontinued operations, net of income taxes 1,841 5,497
----------------------------
Pro forma net income (loss) $ 2,221 $ 2,257
============================
Pro forma net income (loss) per share, basic
Pro forma income (loss) from continued operations $ 0.10 $ (0.86)
Discontinued operations, net of income taxes 0.49 1.45
----------------------------
Pro forma net income per share, basic $ 0.59 $ 0.59
============================
Pro forma net income (loss) per share, diluted
Pro forma income (loss) from continuing operations $ 0.10 $ (0.86)
Discontinued operations, net of income taxes 0.49 1.45
----------------------------
Pro forma net income per share, diluted $ 0.59 $ 0.59
============================
See accompanying notes to unaudited condensed consolidated financial statements.
6
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended
September 30,
2003 2002
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations $ 5,692 $ (3,231)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,324 10,587
Amortization 4 5
Deferred income taxes 2,977 (1,198)
(Gain) loss on investments (181) 9,034
Net loss from patronage and equity investments 247 108
Loss on disposal of equipment 93 324
Other 4 614
Changes in current assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,401 (2,398)
Materials and supplies (117) 1,120
Increase (decrease) in:
Accounts payable 612 1,519
Other prepaids, deferrals and accruals (1,389) (144)
---------------------
Net cash provided by operating activities 21,667 16,340
Cash Flows from Investing Activities
Purchases of property, plant & equipment (9,165) (18,817)
Purchases of other investments (547) (1,420)
Proceeds from investment activities 513 3,067
Proceeds from disposal of assets 64 68
---------------------
Net cash used in investing activities (9,135) (17,102)
Cash Flows from Financing Activities
Payments on long-term debt and revolving loan (11,164) (4,824)
Proceeds from issuance of common stock upon
exercise of stock options 387 104
---------------------
Net cash used in financing activities (10,777) (4,720)
---------------------
Net provided by (used in) continuing operations 1,755 (5,482)
Net cash provided by discontinued operations 27,726 5,594
---------------------
Net increase in cash and cash equivalents 29,481 112
Cash and Cash Equivalents
Beginning 2,209 2,037
---------------------
Ending $ 31,690 $ 2,149
======== ========
Cash paid for:
Interest paid $ 2,758 $ 3,258
Income taxes (net of refunds) $ 10,106 $ 477
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 -- -- 28,221 28,221
Net unrealized change in securities
available-for-sale, net of tax of $(5) -- -- 8 8
--------
Total comprehensive income 28,229
Common stock issued through the
exercise of incentive stock options 16 387 -- 387
-------------------------------------------------------
Balance, September 30, 2003 3,792 $5,633 $99,556 $ 4 $105,193
=======================================================
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 nine months ended
September 30:
-----------------------------------------------
(in thousands, except Three months ended Nine months ended
per share amounts) September 30, September 30
-----------------------------------------------
2003 2002 2003 2002
Net Income
As reported $ 2,694 $ 2,224 $ 28,221 $ 2,266
Pro forma 2,635 2,172 28,113 2,160
Earnings per share, basic and diluted
As reported, basic $ 0.71 $ 0.59 $ 7.45 $ 0.60
As reported, diluted 0.71 0.59 7.43 0.60
Pro forma, basic 0.70 0.58 7.42 0.57
Pro forma, diluted 0.69 0.57 7.40 0.57
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 nine month period ended September 30, 2002, therefore diluted net income
(loss) per share is the same as basic net income (loss) per share for that
period because the inclusion of 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 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 (revenues generated from outside customers or
subscribers), internal operating revenues (revenues generated between the
Company's operating segments), operating income (loss), income (loss) from
continuing operations, income (loss) from discontinued operations, cumulative
effect of accounting change, and net income (loss) of each segment is as follows
for the three and nine months ended September 30, 2003 and September 30, 2002.
For the three months ended September 30, 2003
Income Income (loss)
Operating (loss) from from
External Internal Income continuing discontinued Net income
In thousands (unaudited) Revenues Revenues (loss) operations operations (loss)
----------------------------------------------------------------------------
Holding $ -- $ -- $ (182) $ 113 $ -- $ 113
PCS 17,255 -- 739 9 -- 9
Telephone 6,281 802 3,311 2,010 -- 2,010
ShenTel Service 1,782 75 369 211 -- 211
Cable TV 1,106 15 235 60 -- 60
Mobile 753 313 303 188 (23) 165
Long Distance 206 55 50 31 -- 31
Network 181 37 157 98 -- 98
ShenTel Communications 15 -- (5) (3) -- (3)
Leasing 3 -- 1 -- -- --
---------------------------------------------------------------------------
Combined totals 27,582 1,297 4,978 2,717 (23) 2,694
Inter-segment eliminations -- (1,297) (2) -- -- --
---------------------------------------------------------------------------
Consolidated totals $ 27,582 -- $ 4,976 $ 2,717 (23) $ 2,694
===========================================================================
For the three months ended September 30, 2002
Income
Operating (loss) from Income from
External Internal Income continuing discontinued Net income
In thousands (unaudited) Revenues Revenues (loss) operations operations (loss)
----------------------------------------------------------------------------
Holding $ -- $ -- $ (147) $ (260) $ -- $ (260)
PCS 15,189 (38) (1,064) (1,301) -- (1,301)
Telephone 5,588 707 2,770 1,560 15 1,575
ShenTel Service 1,706 85 305 159 -- 159
Cable TV 1,084 1 267 71 1 72
Mobile 603 446 (23) (12) 1,841 1,829
Long Distance 281 149 159 98 -- 98
Network 168 25 119 72 -- 72
ShenTel Communications 7 -- (18) (6) -- (6)
Leasing 5 -- 285 2 -- 2
---------------------------------------------------------------------------
Combined totals 24,631 1,375 2,653 383 1,857 2,240
Inter-segment eliminations -- (1,375) (282) -- (16) (16)
---------------------------------------------------------------------------
Consolidated totals $ 24,631 -- $ 2,371 $ 383 $ 1,841 $ 2,224
===========================================================================
10
For the nine months ended September 30, 2003
Income Cumulative
Operating (loss) from Income from effect of
External Internal Income continuing discontinued accounting Net income
In thousands (unaudited) Revenues Revenues (loss) operations operations change (loss)
--------------------------------------------------------------------------------------
Holding $ -- $ -- $ (495) $ 176 $ -- $ -- $ 176
PCS 48,287 1 8 (1,463) -- -- (1,463)
Telephone 16,969 2,300 8,795 5,307 12 -- 5,319
ShenTel Service 5,188 230 1,023 570 -- -- 570
Cable TV 3,312 17 696 178 -- -- 178
Mobile 2,124 918 929 434 22,605 (76) 22,963
Long Distance 877 182 336 213 -- -- 213
Network 564 107 461 286 -- -- 286
ShenTel Communications 41 -- (19) (11) -- -- (11)
Leasing 11 -- 3 2 -- -- 2
-------------------------------------------------------------------------------------
Combined totals 77,373 3,755 11,737 5,692 22,617 (76) 28,233
Inter-segment eliminations -- (3,755) (209) -- (12) -- (12)
-------------------------------------------------------------------------------------
Consolidated totals $ 77,373 $ -- $ 11,528 $ 5,692 $ 22,605 (76) $ 28,221
=====================================================================================
For the nine months ended September 30, 2002
Income Cumulative
Operating (loss) from Income from effect of
External Internal Income continuing discontinued accounting Net income
In thousands (unaudited) Revenues Revenues (loss) operations operations change (loss)
--------------------------------------------------------------------------------------
Holding $ -- $ -- $ (422) $ (5,492) $ -- $ -- $ (5,492)
PCS 39,532 (17) (3,448) (3,791) -- -- (3,791)
Telephone 16,724 2,179 8,878 5,033 51 -- 5,084
ShenTel Service 4,708 259 496 173 -- -- 173
Cable TV 3,254 2 882 267 2 -- 269
Mobile 1,807 1,214 836 (12) 5,497 -- 5,485
Long Distance 824 456 483 297 -- -- 297
Network 639 83 492 307 -- -- 307
ShenTel Communications 10 -- (39) (19) -- -- (19)
Leasing 16 -- 9 6 -- -- 6
-------------------------------------------------------------------------------------
Combined totals 67,514 4,176 8,167 (3,231) 5,550 -- 2,319
Inter-segment eliminations -- (4,176) (862) -- (53) -- (53)
-------------------------------------------------------------------------------------
Consolidated totals $ 67,514 $ -- $ 7,305 $ (3,231) $ 5,497 -- $ 2,266
=====================================================================================
11
The Company's assets by segment as of September 30, 2003, December 31, 2002, and
September 30, 2002 are as follows:
In thousands September 30, December 31, September 30,
(unaudited) 2003 2002 2002
Holding $ 142,749 $ 112,765 $ 111,193
PCS 63,179 71,256 64,246
Telephone 57,210 59,554 58,716
ShenTel Service 6,841 6,255 6,149
Cable TV 9,963 10,961 10,446
Mobile 16,897 17,482 17,741
Long Distance 1,072 343 213
Network 1,967 1,084 1,051
ShenTel Communications 152 115 101
Leasing 273 187 183
-----------------------------------------
Combined totals $ 300,303 $ 280,002 $ 270,039
Inter-segment eliminations (112,648) (115,998) (105,339)
-----------------------------------------
Consolidated totals $ 187,655 $ 164,004 $ 164,700
=========================================
6. Comprehensive income includes net income along with net unrealized gains and
losses on the Company's available-for-sale investments. Following is a summary
of comprehensive income for the periods indicated:
In thousands For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------------------------------
Net income $ 2,694 $ 2,224 $ 28,221 $ 2,266
Net unrealized income (loss) (13) (25) 8 (58)
-----------------------------------------------------
Comprehensive income $ 2,681 $ 2,199 $ 28,229 $ 2,208
=====================================================
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 specified partnership liabilities
that may arise as a result of the partnership's operation during the period in
which the Company managed 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 nine-month period ended September 30, 2003.
During the third quarter of 2003, the Company completed the working capital
true-up related to the sale of the Virginia 10 RSA Limited Partnership. This
transaction was completed in the third quarter, and required the Company to
refund $39 thousand to the purchaser which reduced the after tax gain by $23
thousand.
12
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 nine-month period ended September 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 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 amortized 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 September 30, 2003, the liability was $282
thousand. The current year-to-date expense for the accretion and depreciation
related to the adoption of SFAS No.143 is approximately $16 thousand before
taxes.
10. The Company adopted Emerging Issues Task Force 00-21,"Revenue Arrangements
with Multiple Deliverables" (EITF 00-21) in the third quarter of 2003. The
Company applied the pronouncement prospectively for transactions meeting the
stated criteria. Adoption of EITF 00-21 did not have a material impact on the
Company's results of operations or financial position. The impact for the third
quarter 2003 was additional revenue recognized of $90 thousand compared to the
previous method of revenue recognition.
11. 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 or
nine-month periods ended September 30, 2003.
12. On October 22, 2003, the Company declared a dividend per common share of
$0.78, payable on December 1, 2003 to shareholders of record on November 14,
2003. The Company also announced a 2-for-1 stock split with a record date of
January 30, 2004. Shareholders will receive one additional share of common stock
for each share of common stock held on the record date. The Company anticipates
distributing the additional shares on or about February 20, 2004.
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 including the financial statements and related
notes incorporated by reference therein.
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 (collectively the
"Company") provide local telephone service, long distance telephone service,
personal communications service (PCS), cable television, unregulated
telecommunications equipment and services, internet access, paging, and digital
subscriber loop (DSL) services on a retail basis to residential and business
customers. In addition, through its subsidiaries, the Company leases space on
wireless telecommunication towers and operates and maintains an interstate fiber
optic network. The Company also offers competitive local exchange carrier (CLEC)
services on a limited basis. The Company's operations and assets including its
towers and fiber optic network, 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) Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30,
2003 2003 2003 2002 2002
------------------------------------------------------
Telephone Access Lines 24,951 24,972 24,903 24,879 24,933
CATV Subscribers 8,796 8,750 8,704 8,677 8,707
Internet Subscribers dial-up 17,616 17,798 18,174 18,050 18,022
DSL Subscribers 1,163 1,080 852 646 537
Retail Digital PCS Subscribers 81,015 77,398 72,480 67,842 62,434
Wholesale Digital PCS Users (1) 7,531 4,690 3,280 1,672 N/A
Paging Subscribers 2,107 2,315 2,805 2,940 3,002
Long Distance Subscribers 9,517 9,520 9,312 9,310 9,338
Fiber Route Miles 552 552 552 549 543
Total Fiber Miles 28,740 28,739 28,729 28,403 28,243
Wholesale PCS Minutes (000) 3,207 2,303 1,562 530 168
Long Distance Calls (000) (2) 6,078 5,001 5,074 5,969 6,138
Total Switched Access Minutes (000) 54,349 51,124 48,380 46,627 46,525
Originating Switched Access MOU (000) 18,285 18,343 18,685 18,476 19,225
CDMA Base Stations (sites) 248 246 240 237 231
Towers (100 foot and over) 76 73 72 72 72
Towers (under 100 foot) 10 10 10 10 10
(See note (3) for definitions of terms)
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,581 1,574 1,574 1,555 1,555
PCS ARPU (ex. Travel) $ 55.09 $ 52.84 $ 52.22 $ 51.38 $ 53.58
PCS Travel rev. per sub $ 16.50 $ 17.18 $ 17.39 $ 31.21 $ 31.90
PCS Ave. mgmt. Fee per sub $ 4.62 $ 4.58 $ 4.40 $ 4.64 $ 4.29
PCS Ave. monthly churn % 2.20% 1.90% 2.30% 3.40% 4.00%
PCS CPGA $418.22 $376.98 $276.97 $390.66 $344.77
PCS CCPU $ 40.05 $ 44.23 $ 45.87 $ 53.52 $ 53.93
(1) - Wholesale Digital PCS Users are private label subscribers homed in the
Company's wireless network service area and primarily include Virgin
Mobile subscribers.
(2) - Originated by customers of the Company's Telephone subsidiary
(3) - 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
From the mid 1990's through 2002, the principal source of the Company's revenues
had shifted from traditional wireline revenues to wireless and other revenues.
In 2003, this trend has slowed significantly. For the three months ended
September 30, 2003, wireless revenue was 65.3% of total revenue, wireline
revenue contributed 28.2% of total revenue, and other revenue was 6.5% of total
revenue. These results compare to 64.1% for wireless, 28.9% for wireline and
7.0% for other, for the three months ended September 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 nine months of 2003. The
Company had 248 PCS CDMA base stations in service at September 30, 2003,
compared to 231 base stations in service on September 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.
In August of 2002, the Company entered into a resale agreement for its PCS
wireless network through Sprint to Virgin Mobile USA, LLC a joint venture of
Sprint and the Virgin global family of companies. The agreement allows the
Company to receive wholesale revenue for usage of the network by Virgin Mobile
subscribers traveling in or based in the Company's network coverage area. The
Company has also agreed to sell Virgin Mobile handsets and plans in its retail
stores. The plans offered by Virgin Mobile are pre-paid plans, a type not
currently offered by Sprint. Prior to the beginning of 2003, the Company had not
seen significant revenue from or usage by wholesale users. During the third
quarter of 2003, the network minutes generated by wholesale users, primarily
from Virgin Mobile subscribers active on the Company's PCS network were over 3
million minutes compared to 40 thousand minutes for the same period in 2002.
As previously reported, a 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. Incorporating the rate change, the Company's
net travel receivable position decreased to $1.1 million for the current
quarter, compared to $1.8 million for the same quarter last year, including the
long distance portion of that traffic. The Company's travel receivable minutes
increased 43% to 58.7 million while the travel payable minutes increased by 66%
to 41.6 million for the quarter. The increases in travel minutes receivable and
payable are primarily the result of an increase in usage of the Company's
network facilities by subscribers based in other markets and growth in
subscribers in the Company's markets. On a per subscriber basis, the Company's
average of travel payable minutes increased to 175 minutes in the third quarter
of 2003, an increase of 39 minutes from third quarter of 2002, and an increase
of 21 minutes from second quarter 2003. A continuation of this trend will
negatively impact the results of the PCS operation and overall results of the
Company absent any changes in the economic arrangements with Sprint.
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. As a result of increased
16
bad debt expense and disconnects for non-payments, the Company initiated a
deposit of $250 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 the period of May 2002
through early 2003.
In the third quarter of 2003 the Company's average churn rate decreased to 2.2%,
compared to the peak of 4.0% in the third quarter of 2002. It is unknown what
impact Wireless Local Number Portability, scheduled to begin November 24, 2003,
will have on churn. 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, 6.0% in second quarter 2003 and 2.7% of service revenues in the
third quarter 2003. There is no certainty that the improving bad debt trend 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. 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 VA 10 RSA
transaction this year, of which approximately $8.9 million have been paid
through September 30, 2003. The remaining $3.1 million of taxes will be paid in
a final installment in December of 2003. Additional taxes will be due on the
$5.0 million held in escrow upon the release of the funds to the Company at the
termination of the escrow arrangement, on February 28, 2005. -
In addition to the Virginia 10 RSA transaction discussed above, the Company's
cash and cash equivalent balances remained above expected levels, due to a
slower capital spending rate for the first nine months of 2003. The Company
repaid $11.2 million in total debt during the first nine months of 2003, of
which $3.1 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. The Company's ratio of total debt to
total assets ended the quarter at 23.7% compared to 24.3% at June 30, 2003,
24.4% at March 31, 2003 and 33.8% at December 31, 2002.
The Company is evaluating software packages and consulting arrangements to
comply with the various elements of the Sarbanes Oxley. Management anticipates
this will be a significant undertaking for the Company, and will require
resources beyond the expertise of the existing staff. Management has not been
able to reasonably estimate the cost of implementation or the ongoing cost of
compliance related to this legislation.
Operating Risks
The Company is dependent on Sprint for the reporting of a significant majority
of PCS revenues, particularly travel and service revenue. Controls and processes
are continually refined, so the Company can monitor, review, test, and validate
information being reported to the Company by Sprint. The Company is at risk for
reporting errors that may be made by Sprint.
17
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.
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. Recent trends of churn
and bad debt expense have been favorable for the first nine months of 2003
compared to 2002. The handset upgrade costs were $6.69 per average subscriber
per month for third quarter of 2003 compared to $7.41 per average subscriber per
month for second quarter 2003, and $3.88 per average subscriber in first quarter
2003. The handset upgrade cost is the result of existing subscribers upgrading
their handsets for newer models with features not available on the old handsets.
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 November 24, 2003. As a result of WLNP, portions of
the PCS subscriber base may migrate to other wireless providers, thereby
contributing to increased churn. Alternatively, the implementation of WLNP may
allow the Company to attract subscribers from other wireless providers.
The Company has limited control over the service plans 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 actions 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 recorded a reduction in access revenue of $1.5
million from interexchange customers 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 second quarter of 2003. The total amount of the reduction related to
the first six-months of 2003 was $0.7 million. The amount of the reduction that
relates to billings in the third quarter and the first nine months of 2002 is
$0.2 million and $0.5 million, respectively. These disputes have been resolved
and the Company recorded a positive adjustment of $0.3 million in the third
quarter to reflect the final analysis of the issue.
The Company's revenue from fiber leases may be adversely impacted by further
erosion in demand or in price competition 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.
18
Results Of Operations Third Quarter 2003 vs. Third Quarter 2002
General
Total revenue for the third quarter of 2003 was $27.6 million, an increase of
$3.0 million, or 12.0% compared to $24.6 million for the third quarter of 2002.
Total revenues include wireless revenue of $18.0 million, an increase of $2.2
million or 14.0%; wireline revenues of $7.8 million, an increase of $0.7
million, or 9.2%; and other revenues of $1.8 million, an increase of $0.1
million or 4.8%. Income from continuing operations increased $2.3 million, to
$2.7 million, compared to $0.4 million for the same period in 2002. Income per
share from continuing operations, diluted was $0.71 cents per share, compared to
$0.10 per share for the same period last year.
Revenues
Wireless revenues are primarily derived from the PCS business. As of September
30, 2003, the Company had 81,015 retail PCS subscribers. The PCS operation added
18,581 net subscribers since September 30, 2002, and 3,617 since June 30, 2003.
Total wireless service revenues were $11.8 million for third quarter 2003, an
increase of $2.8 million or 32.0% compared to $8.9 million for third quarter
2002. The Company's Average Revenue Per User (ARPU) exclusive of travel revenue,
increased 2.8% to $55.09 for the third quarter of 2003, compared to $53.58 for
the third quarter of 2002. The third quarter 2003 ARPU also increased 4.3%
compared to the second quarter 2003 ARPU of $52.84. These increases are the
result of adding new subscribers adopting higher rate plans, increased data
usage, and subscribers adding new features to their existing plans.
PCS travel and roamer revenue combined for the third quarter 2003 were $4.9
million, a $1.0 million or 16.5% decrease compared to the travel and roaming
revenue for third quarter 2002. The travel and roamer revenue reduction was
primarily a result of the decline in the per minute travel rate from $0.10 per
minute in 2002 to $0.058 per minute as of January 1, 2003. This 42% rate
decrease was somewhat offset by an increase in usage of our network by Sprint
wireless customers residing outside of the Company's PCS territory and other
carriers' customers.
Wireline revenues were $7.8 million, an increase of $0.7 million or 9.2%. Access
revenue in the telephone business increased $0.7 million, due primarily to
increased traffic compared to the same period last year and $0.3 million related
to the final analysis of the interexchange carrier access charges previously
described. Total switched minutes of use increased 16.8% compared to the third
quarter of 2002. This increase primarily consists of terminating traffic, of
which approximately 85% are wireless calls coming into the Company's network and
being delivered to wireless users.
Other revenues were $1.8 million, an increase of $0.1 million or 4.8%. Internet
revenues increased $0.1 million or 5.0%. The total subscriber base for the
Company's dial-up and DSL Internet services was 18,779 as of September 30, 2003
compared to 18,559 as of September 30, 2002. Total dial-up and DSL Internet
subscribers increased 220 or 1.2% compared to September 2002. While DSL
subscribers increased 626 or 117% compared to the September 30, 2002 subscriber
base, there was a decline of 406 subscribers in dial-up subscribers from the
same time period last year. 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.
19
Operating Expenses
Total operating expense for third quarter 2003 was $22.6 million, an increase of
$0.3 million or 1.6%, compared to third quarter 2002. The principal factors
reflected in the higher operating expense were increases in PCS subscribers and
the expanded PCS operation, offset by a significant decline in bad debt
expenses.
Costs of goods and services were $3.0 million, an increase of $0.3 million or
9.3%, due to an increase in gross subscriber additions and current customers
upgrading their handsets in the PCS operation. During the third quarter of 2003,
the Company added 9,354 gross new subscribers compared to 9,259 gross new
subscribers added in the third quarter 2002. Existing subscribers are purchasing
new handsets to replace their current handsets as new features become available
and new services are offered that are not available on earlier model handsets.
The upgrade cost for the third quarter of 2003 was $0.5 million. The Company
requires the existing subscribers to sign a new one or two year service contract
in order to receive a discount on the purchase price of a handset. Management
anticipates the upgrade trend will continue, and may increase significantly in
the future as handsets are offered as enticement for a subscriber to extend
their service agreement.
Network operating costs were $8.4 million, an increase of $0.1 million, or 1.5%
compared to third quarter 2002. Increased rental costs for towers and buildings
and increased line costs in the PCS operation were offset by lower travel costs.
Depreciation and amortization expense was $4.2 million, an increase of $0.4
million or 11.2% compared to $3.8 million for the third quarter of 2002, as new
assets, primarily in the PCS and telephone operation, have been added to the
networks.
Selling, general and administrative costs were $7.0 million, a decrease of $0.5
million or 6.0%. Bad debt expense decreased $1.2 million; primarily due to
reduced PCS subscriber terminations for non-payment compared to previous
periods. Bad debt expense was 2.2% of total revenue for the third quarter of
2003, compared to 7.4% of total revenue for third quarter of 2002. Billing and
customer care costs incurred in the PCS operation, primarily charges from
Sprint, increased $0.5 million as a result of the increase in the total number
of PCS subscribers. Advertising, customer support and selling expenses increased
$0.2 million, due to the ongoing sales activity.
In the Company's PCS operation, cash cost per user (CCPU) declined to $40.05, a
25.7% decrease from the third quarter of 2002. The reduction was primarily the
result of a decrease in the travel rate and to a lesser degree improved
economies of scale due to the increase in total subscribers. The Company's cost
per gross add (CPGA) in the PCS business increased to $418.22 or 21.3% from
third quarter of 2002, due to increased selling, advertising and promotional
costs over the same period last year and increased handset upgrades. The Company
includes the cost of upgrading existing subscribers handsets in its CPGA
calculation.
Other Income (Expense)
Non-operating income increased $0.2 million due primarily to the interest income
on the proceeds from the sale of the VA 10 RSA Limited Partnership interest.
20
Losses on external investments were $0.1 million in third quarter 2003, compared
to a $0.7 million loss in the third quarter 2002. The improvement is primarily a
result of last year's third quarter loss on the sale of the VeriSign stock
discussed in previous filings.
Third quarter 2003 interest expense decreased by $0.2 million, or 21.0%, a
result of decreased borrowing levels compared to third quarter 2002. The
Company's total debt decreased by $9.0 million from September 30, 2002 to
September 30, 2003 including $4.5 million paid in advance of its scheduled due
date. The Company's total debt as of September 30, 2003 was $44.4 million,
compared to $53.4 million as of September 30, 2002 and $55.5 million at December
31, 2002.
Income before income taxes, discontinued operations and cumulative effect of
accounting changes was $4.3 million, an increase of $3.7 million from the $0.6
million reported for the third quarter of 2002. The change in operating income
was an increase of $2.7 million. Increased revenues, lower bad debt expense, and
the impact of the loss from the sale of the VeriSign stock in the third quarter
of 2002 results were the primary factors that contributed to the Company's
improved 2003 results before taxes.
Income tax provision was $1.6 million, an increase of $1.4 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 $2.7 million for third quarter 2003,
compared to $0.4 million for the third quarter 2002, an increase of $2.3
million.
There was a loss from discontinued operations of $23 thousand after taxes in the
third quarter 2003, compared to a profit of $1.8 million for the third quarter
of 2002 from the Company's cellular operations sold in February 2003. The
current quarter loss was the result of the settlement of the working capital
adjustment through the payment of cash from the Company back to the purchaser
for certain adjustments provided for in the sales agreement of the Company's 66%
interest in the Virginia 10 RSA Limited Partnership. There have been no claims
initiated against the funds in escrow related to this sale.
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 adopting this statement was a $3
thousand charge after taxes in third quarter of 2003 and would have been a
similar figure in the third quarter of 2002, had the change been adopted
previously.
The Company's third quarter net income was $2.7 million compared to $2.2 million
in 2002. Income from continuing operations increased $2.3 million. Income from
discontinued operations was a nominal loss in third quarter 2003, compared to a
$1.8 million profit in third quarter 2002 from the Company's cellular
operations.
Results Of Operations First Nine Months of 2003 vs. First Nine Months of 2002
General
21
Total revenue from continuing operations for the first nine months of 2003 was
$77.4 million, an increase of $9.9 million, or 14.6% compared to $67.5 million
for the first nine months of 2002. Total revenues include wireless revenue of
$50.4 million, an increase of $9.1 million or 21.9%; wireline revenues of $21.7
million, an increase of $0.3 million, or 1.3%; and other revenues of $5.2
million, an increase of $0.5 million or 10.7%. Income from continuing operations
increased $8.9 million, to $5.7 million, compared to a $3.2 million loss for the
same period in 2002. Income from continuing operations diluted was $1.49 cents
per share for the first nine months of 2003, compared to a $0.85 loss per share
for the first nine months of 2002.
Revenues
Wireless revenues are primarily derived from the PCS business. As of September
30, 2003, the Company has 81,015 PCS subscribers. The PCS operation added 18,581
net subscribers since September 30, 2002, which contributed to a $8.3 million or
34.4% increase in subscriber revenue compared to the year-to-date results as of
September 30, 2002. Total service revenues were $32.4 million for year-to-date
2003, an increase of $8.4 million or 34.4% from the same period last year. The
Company's Average Revenue Per User (ARPU) increased to $53.44 for the first nine
months of 2003, compared to $52.05 for the same period of 2002.
PCS travel and roamer revenue combined were $14.4 million, and increased $0.4
million or 3.1% compared to 2002 year-to-date results. Travel and roamer revenue
growth was attributable to increased usage of our network by Sprint wireless
customers residing outside of our PCS territory and other carriers' customers
offset by a decline in the travel rate from $0.10 per minute in 2002 to $0.058
per minute as of January 1, 2003. Roaming rates also declined in 2003 compared
to 2002.
Wireline revenues were $21.7 million, an increase of $0.3 million or 1.3%.
Access revenue in the telephone business increased $0.6 million, due primarily
to the impact of increased traffic this year, somewhat offset by a $1.2 million
net reduction in access revenue the Company recorded during 2003. The total net
amount of the reduction related to the nine-month period for 2003 was $0.7
million. The amount of the reduction that relates to billings in the nine months
of 2002 was $0.5 million. The Company has resolved the issue, and credits have
been issued to the impacted customers. Lease revenue for the Company's fiber
network facilities decreased $0.2 million compared to the same period last year.
Other revenues were $5.2 million, an increase of $0.5 million or 10.7%. Internet
revenues increased $0.2 million or 7.5%. Internet subscribers increased 1.2% 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 $65.8 million, an increase of $5.6 million or 9.4%,
compared to $60.2 million for the nine 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 increased $0.6 million or 8.2% to $7.9 million,
primarily due to the number of PCS handset upgrades sold in the nine months of
2003 compared to the handset upgrades in 2002, offset by lower gross adds.
Handset upgrade costs were in excess of $1.2 million for the
22
nine months of 2003 compared to an immaterial amount in 2002. During the first
nine months of 2003, the Company added 29,448 new gross PCS subscribers compared
to 30,989 new gross PCS subscribers added in the first nine months of 2002. The
decrease in gross additions is due in part to the tightening of credit policies
in mid-2002.
Network operating costs were $25.2 million, an increase of $1.5 million, or
6.2%. Increased rental costs for PCS towers and buildings contributed $0.8
million to the increased network operating costs. Line costs in the PCS
operation increased $0.7 million, while travel expense increased $0.1 million
compared to the first nine months of 2002. Other expenses decreased $0.1 million
compared to the same period last year.
Depreciation and amortization expense was $12.3 million, an increase of $1.7
million or 16.4% compared to $10.6 million for the nine months of 2002, as new
assets, particularly in the PCS operation, have been added to the networks.
Selling, general and administrative costs were $20.5 million, an increase of
$1.8 million or 9.9%. Advertising, customer care, billing and selling expenses
increased $2.1 million. This increase was primarily due to the increase in
advertising and promotions in the PCS operation. PCS billing and customer care
costs billed from Sprint increased due to increased PCS subscribers.
Administrative and other costs increased $0.4 million, due to additional staff
added to support the growing Company operations. Bad debt expense was $1.8
million for the nine months of 2003, a decrease of $1.3 million from $3.1
million for the nine months of 2002, due primarily to the elimination of the
Clear Pay promotion in April 2002. Bad debt expense for the PCS operation, as a
percentage of total PCS revenues, was $1.8 million or 3.7% for the first nine
months of 2003, compared to $2.6 million or 6.5% for the same period in 2002.
Bad debt expense in other operations was nominal in 2003, compared to $0.5
million, last year due to the write off of accounts from several large
interexchange carriers.
The Company's operating margin for the nine months of 2003 (operating income
divided by total revenue) was 14.9%, up from 10.8% for the same period last
year. This change was primarily due to increased revenues generated in the
wireless segments of the business, and the significant decline in bad debt
expense. Revenues grew at a 14.6% rate, while expenses grew at a 9.4% rate.
In the Company's PCS operation the average cash cost per user (CCPU) for the
nine months ended September 2003, was $43.76 per month, compared to $51.82 per
month for nine months ended September 2002. This decrease of 15.6% is the result
of an increase in total subscribers contributing to economies of scale, and a
decrease in the customer travel rate, somewhat offset by increased travel
minutes used by each customer. The Company's cost per gross add (CPGA) increased
to $338.41 for 2003 compared to $280.68 for 2002, due to increased selling
costs, advertising and promotion costs over the same period of last year. The
Company's policy of subsidizing handset upgrades to retain existing subscribers
increased the CPGA measure by approximately $30.00 per gross customer added thus
far in 2003.
Other Income (Expense)
Non-operating income increased $0.2 million to $0.3 million, primarily the
result of interest income, which was generated from the proceeds of the sale of
the VA 10 RSA Limited Partnership interest.
23
The Company has investments in several venture funds that invest primarily in
high-risk technology start-up companies. Losses on external investments were
$0.3 million; an improvement of $9.3 million due primarily to the losses on the
VeriSign investment recorded for the nine months ended September 30, 2002.
Interest expense decreased by $0.5 million, or 15.5%, a result of decreased
borrowing levels compared to 2002. The Company's total debt decreased by $13.4
million from September 30, 2002 to September 30, 2003, including $4.6 million
paid in advance and the repayment of the revolving notes of $4.7 million. The
Company's total debt as of September 30, 2003 was $44.4 million, compared to
$57.8 million as of September 30, 2002 and $55.5 million at December 31, 2002.
For the nine months ended September 30, 2003, income before income taxes,
discontinued operations and cumulative effect of accounting changes was $9.0
million, an increase of $14.3 million from the $5.3 million loss for the same
period last year. Operating income increased $4.4 million and other income
(expense) improved $9.9 million compared to the 2002 results.
Income tax provision was $3.3 million, an increase of $5.4 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 $5.7 million, compared to a loss of $3.2
million, an increase of $8.9 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, including two
months of operations and the sale of the Company's portion of the Virginia 10
RSA Limited Partnership interest in the first quarter of 2003, compared to $5.5
million for operating results of that segment of the business recorded in the
first nine 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 adopting this statement was a $16
thousand charge after taxes in first nine months of 2003 and is reflected in
operating expenses for 2003.
The Company's net income for the nine months ended September 30, 2003 increased
to $25.9 million compared to $2.3 million in the same period of 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 housing properties at universities and colleges. 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.
24
As of September 30, 2003, the Company held shares in two companies that are
publicly traded, with the following market values: $45 thousand in Net IQ (NTIQ)
with 3,744 shares held, and $119thousand in Deutsche Telekom, AG (DT) with 8,219
shares held. Net unrealized gains on the securities available-for-sale decreased
$27 thousand during the third quarter of 2003 to $6 thousand reflecting the
volatility of the technology securities in the Company's portfolio and current
market conditions.
Liquidity And Capital Resources
The Company generated $21.7 million in cash from operations in the first nine
months of 2003, compared to $16.3 million generated in the same period of 2002.
The change in cash from operations is made up of an $8.9 million increase in
income from continuing operations, a $1.7 million increase in depreciation
expensef, a $4.2 million increase in deferred taxes, an $9.3 million decrease in
loss on investments, a reduction in receivables of $1.4 million, and $1.5
million decrease from changes in other items, primarily current asset and
liability accounts. The change in receivables was primarily the result of a $1.5
million cash true up from Sprint during the early part of 2003, somewhat offset
by an increase in overall receivables.
The Company's investing activity was 53.4% of the level in the first nine months
of 2002. Total investing was $9.1 million for 2003, versus $17.1 million used in
the first nine months of 2002. Capital spending was $9.2 million, a decrease of
$9.7 million or 51.3% compared to spending in the first nine months of 2002.
Management anticipates total capital spending will be less than $15 million for
2003, compared to an original capital budget of $19.4 million. Projects
originally included in the budget have generally been delayed and will likely be
undertaken in the future as demand for additional services makes the projects
economically justifiable. 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 September 30, 2003 the Company has $29.7 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 fund management risk. Approximately $3.0 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. 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 prior to February 28, 2005.
The Company's outstanding long-term CoBank debt is $38.3 million, consisting of
multiple notes at fixed rates ranging from approximately 6% to 8%. The weighted
average rate of the CoBank debt at September 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
25
through September 2013. There are three financial covenants tied to these
facilities. These are measured at 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 1.5. The equity to
total assets ratio, which must be 35% or higher, was 56.1%. The ratio of
operating cash flow to scheduled debt service, which must exceed 2.0, was 3.66.
The Company's Telephone subsidiary has long-term debt with Rural Utilities
Service /Rural Telephone Bank (RUS/RTB) that totaled $6.1 million at the end of
September 30, 2003, compared to $11.0 million at December 31, 2002, with
maturities through 2019. The Company prepaid $4.6 million earlier in 2003, with
nominal prepayment penalties. 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 $9.1 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.
The Company declared a cash dividend of $0.78 per share payable to shareholders
of record on December 1, 2003. The Company will pay approximately $3.0 million
in cash dividends, which are anticipated to be funded from operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's 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
currently is not applicable because as of September 30, 2003, the Company did
not have any variable rate debt outstanding. The Company's debt has fixed rates
through its maturity.
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 new debt obligations if incurred, 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.
26
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 September 30, 2003. Based upon that
evaluation, the Chief Executive Officer 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.
During the third 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 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.
32 Certifications pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934 and 18 U.S.C. 1350.
(b) The following Current Reports on Form 8-K were filed during the
period covered by this report:
Filing Date of Report Item Reported
--------------------- -------------
July 17, 2003 Item 9 (press release announcing second
quarter 2003 financial results)
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)
November 12, 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.
32 Certifications pursuant to Rule 13a-14(b) under
the Securities Exchange Act of 1934 and 18 U.S.C.
1350.
29
Exhibit 31
CERTIFICATION
I, Christopher E. French, President and Chief Executive Officer of Shenandoah
Telecommunications Company certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shenandoah
Telecommunications Company;
2. Based on my knowledge, this quarterly 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: November 12, 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 quarterly report on Form 10-Q of Shenandoah
Telecommunications Company;
2. Based on my knowledge, this quarterly 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: November 12, 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 quarterly report on Form 10-Q of the Company for the three months
ended September 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
November 12, 2003
/S/EARLE A. MACKENZIE
------------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
November 12, 2003
The foregoing certification is being furnished solely pursuant to Rule 13a-14(b)
under the Securities Exchange Act of 1934 (the "Exchange Act") and 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document. This certification shall not be deemed "filed" for purposes
of Section 18 of the Exchange Act or otherwise subject to liability under that
section. This certification shall not be deemed to be incorporated by reference
into any filing under the Securities Act of 1933 or the Exchange Act except to
the extent this Exhibit 32 is expressly and specifically incorporated by
reference in any such filing.
32
