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 March 31, 2005
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 No.)
500 Shentel Way
P.O. 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 April 25, 2005
- -------------------------- -----------------------------
Common Stock, No Par Value 7,647,084 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 3-4
Unaudited Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2005 and 2004 5
Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 6
Unaudited Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Three Months Ended March 31, 2005 and the
Year Ended December 31, 2004 7
Notes to Unaudited Condensed Consolidated
Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22-23
Item 4. Controls and Procedures 23-24
PART II. OTHER INFORMATION
Item 6. Exhibits 24
Signatures 25
Exhibit Index 26
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
Assets 2005 2004
------------- -------------
Current Assets
Cash and cash equivalents $ 23,551 $ 14,172
Accounts receivable, net 8,752 9,019
Escrow receivable -- 5,000
Income tax receivable -- 2,341
Materials and supplies 2,160 2,108
Current deferred tax asset 423 --
Prepaid expenses and other 2,094 1,877
------------- -------------
Total current assets 36,980 34,517
Securities and investments
Available-for-sale securities 201 232
Other investments 6,948 7,018
------------- -------------
Total securities and investments 7,149 7,250
Property, plant and equipment, net 155,074 156,252
Other Assets
Intangible assets, net 3,296 3,401
Cost in excess of net assets of business acquired 8,863 8,863
Deferred charges and other assets, net 953 964
------------- -------------
Net other assets 13,112 13,228
------------- -------------
Total Assets $ 212,315 $ 211,247
============= =============
(continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
March 31, December 31,
Liabilities and Shareholders' Equity 2005 2004
------------- -------------
Current Liabilities
Current maturities of long-term debt $ 4,410 $ 4,372
Accounts payable 5,920 6,003
Advance billings and deposits 3,530 3,566
Income tax payable 1,133 --
Current deferred taxes -- 1,453
Other current liabilities 6,077 6,452
------------- -------------
Total current liabilities 21,070 21,846
Long-term debt, less current maturities 46,801 47,919
Other Liabilities
Deferred income taxes 24,641 24,826
Pension and other 3,375 2,859
------------- -------------
Total other liabilities 28,016 27,685
Shareholders' Equity
Common stock 6,574 6,319
Retained earnings 109,808 107,413
Accumulated other comprehensive income 46 65
------------- -------------
Total shareholders' equity 116,428 113,797
------------- -------------
Total Liabilities and Shareholders' Equity $ 212,315 $ 211,247
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
4
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
(in thousands, except per share data) March 31,
2005 2004
----------------------
Operating Revenues
Wireless $ 22,578 $ 18,863
Wireline 9,206 7,149
Other revenues 2,616 1,707
----------------------
Total revenues 34,400 27,719
Operating Expenses
Cost of goods and services (Note 3) 5,478 3,726
Network operating costs (Note 3) 9,807 8,311
Depreciation and amortization (Note 3) 5,049 4,337
Selling, general and administrative (Note 3) 9,449 7,061
----------------------
Total operating expense 29,783 23,435
----------------------
Operating Income 4,617 4,284
Other Income (expense):
Non-operating income (expense), net 305 224
Gain (loss) on investments, net (280) (18)
Interest expense (854) (797)
----------------------
Income before income taxes 3,788 3,693
Income tax provision (1,393) (1,380)
----------------------
Net income $ 2,395 $ 2,313
======================
Net income per share, basic $ 0.31 $ 0.30
======================
Net income per share, diluted $ 0.31 $ 0.30
======================
Weighted average shares outstanding, basic 7,638 7,600
======================
Weighted average shares, diluted 7,680 7,646
======================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31,
2005 2004
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,395 $ 2,313
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,296 4,334
Amortization 126 3
Deferred income taxes (2,050) 22
Gain on investments (75) --
Loss (income) from patronage and equity investments 260 (34)
Loss on disposal of assets 21 79
Other 507 303
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 267 (486)
Materials and supplies (52) 203
Increase (decrease) in:
Accounts payable (82) 275
Other prepaids, deferrals and accruals 7,845 (108)
--------------------
Net cash provided by operating activities (14,458) 6,904
Cash Flows from Investing Activities
Purchase and construction of plant and equipment, net
of retirements (4,195) (1,621)
Purchases of investment securities (139) (56)
Proceeds from investment activities 24 96
Proceeds from sale of equipment 56 15
--------------------
Net cash used in investing activities (4,254) (1,566)
Cash Flows from Financing Activities
Principal payments on long-term debt (1,080) (1,045)
Proceeds from exercise of incentive stock options 255 149
--------------------
Net cash used in financing activities (825) (896)
--------------------
Net increase in cash and cash equivalents 9,379 4,442
Cash and Cash Equivalents
Beginning 14,172 28,696
--------------------
Ending $ 23,551 $ 33,138
====================
Cash paid for:
Interest paid $ 835 $ 799
Income taxes (net of refunds) $ -- $ 410
See accompanying notes to unaudited condensed consolidated financial statements.
6
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, 2003 7,593 $ 5,733 $ 100,449 $ 26 $ 106,208
Comprehensive income:
Net income -- -- 10,243 -- 10,243
Net unrealized change in
securities available-for-sale,
net of tax of $ (21) -- -- -- 39 39
---------
Total comprehensive income 10,282
---------
Dividends declared ($ 0.43 per share) -- -- (3,279) -- (3,279)
Common stock issued through the
exercise of stock options
and stock grants 37 586 -- -- 586
------------------------------------------------------------
Balance, December 31, 2004 7,630 $ 6,319 $ 107,413 $ 65 $ 113,797
Comprehensive income:
Net income -- -- 2,395 -- 2,395
Net unrealized change in securities
available-for-sale, net of tax of $12 -- -- -- (19) (19)
---------
Total comprehensive income 2,376
Common stock issued through the
exercise of stock options 15 255 -- -- 255
------------------------------------------------------------
Balance, March 31, 2005 7,645 $ 6,574 $ 109,808 $ 46 $ 116,428
============================================================
See accompanying notes to unaudited condensed consolidated financial statements.
7
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim condensed consolidated financial statements of Shenandoah
Telecommunications Company and Subsidiaries (collectively, the "Company") are
unaudited. In the opinion of management, all adjustments necessary for a fair
presentation 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 on Form 10-K for the year ended December 31,
2004. The balance sheet information at December 31, 2004 was derived from the
audited December 31, 2004 consolidated balance sheet.
2. Operating revenues and income from operations for any interim period are not
necessarily indicative of results that may be expected for the entire year.
3. In connection with the adoption of a new affiliates agreement which was
approved by the Virginia State Corporation Commission effective January 1, 2005,
and pursuant to assignment and assumption agreements between Shentel Management
Company and Shenandoah Telephone Company, and the Company's other subsidiaries,
effective January 1, 2005, all employees and certain assets and liabilities of
these subsidiaries have been transferred to Shentel Management Company which
will be the entity through which all shared services and shared assets will be
provided to all existing and future affiliates of the Company.
Effective January 1, 2005, the Company implemented a new methodology for
allocating all shared services and shared assets of the Company. FAS 131,
"Disclosures about Segments of an Enterprise and Related Information" requires
the Company to restate previously reported segment information following a
change in the composition of an enterprise's segment information unless it is
impractical to do so. Further, if the Company is unable to restate previously
reported segment information, the Company is required to provide current-period
segment information on both the old and new bases of segmentation in the year in
which the change occurs unless it is impracticable to do so. Due to the nature
of the change in allocation methodology, and the process to derive the
allocation of shared costs, management has determined that it would be
impractical to restate prior year segment information or calculate the
allocation using both the old and new methods.
As a result of the new allocation methodology, for the three months ended March
31, 2005, approximately $0.3 million of depreciation expense was allocated to
the income statement line items: costs of goods and services, network operating
costs and selling, general and administrative expenses resulting in total
depreciation and amortization expense of $5.0 million reported for the first
quarter of 2005. Had the Company not implemented a new allocation methodology
for the first quarter of 2005, the depreciation and amortization income
statement line item would have totaled approximately $5.3 million.
8
4. 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 in accordance with APB
Opinion No. 25 and related interpretations. Accordingly, no compensation expense
has been recognized under the Plan for years prior to the grants made in the
year ended December 31, 2004 since all such options were granted with an
exercise price equal to the market price at the date of the grant. During the
year ended December 31, 2004, the Company issued tandem awards of stock options
and stock appreciation rights. The awards have been accounted for as stock
appreciation rights and therefore the Company recorded a liability for the
related expense since it is assumed the awards will be settled in cash. On March
18, 2005, the Company issued tandem awards of stock options and stock
appreciation rights with a net-share settlement feature. The cash-settlement
feature has been eliminated for the 2005 option grant, However, due to the
net-share feature there may be compensation expense recorded in the future. Had
compensation expense been recorded for the options 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 months ended March 31:
(in thousands, except Three Months Ended
per share amounts) March 31,
Net Income 2005 2004
------- -------
As reported $ 2,395 $ 2,313
Add: Recorded stock based compensation
expense included in reported net income, net
of related income tax effects. ------- -------
Deduct: Pro forma compensation expense, net
of related income tax effects. 74 19
------- -------
Pro forma $ 2,321 $ 2,294
Earnings per share, basic and diluted
As reported, basic $ 0.31 $ 0.30
As reported, diluted 0.31 0.30
Pro forma, basic 0.30 0.30
Pro forma, diluted $ 0.30 $ 0.29
9
5. 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. At March 31, 2005, the dilutive net income per share was
exclusive of approximately 117,000 stock options that were anti-dilutive. The
adjustments to net income reflect the impact of stock based compensation
recorded in the respective periods, and the impact of the pro forma compensation
expense, both net of the income tax effect.
6. The Company has identified eleven reporting segments based on the products
and services each provides. 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), and net income (loss) of
each segment is as follows for the three months ended March 31, 2005 and March
31, 2004:
Three Months Ended March 31, 2005
In thousands (unaudited) External Internal Operating Net Income
Revenues Revenues Income (loss) (loss)
------------------------------------------------------
PCS $ 21,784 $ -- $ 1,838 901
Telephone 6,023 916 2,990 1,852
Converged Services (NTC) 2,359 -- (758) (629)
ShenTel Service 1,648 252 244 120
Cable TV 1,228 8 (124) (117)
Mobile 795 337 533 308
Long Distance 373 288 41 26
Network 176 33 133 86
ShenTel Communications 13 -- (1) (1)
Leasing 1 -- (3) (2)
Holding -- -- (276) (149)
------------------------------------------------------
Combined totals 34,400 1,833 4,617 2,395
Inter-segment eliminations (1,833) -- --
------------------------------------------------------
Consolidated totals $ 34,400 $ -- $ 4,617 2,395
======================================================
10
Three Months Ended March 31, 2004
Operating
In thousands (unaudited) External Internal Income Net Income
Revenues Revenues (loss) (loss)
------------------------------------------------------
PCS $ 18,131 $ -- $ 1,161 $ 484
Telephone 5,546 932 2,608 1,589
ShenTel Service 1,688 77 218 105
Cable TV 1,104 6 182 70
Mobile 732 320 462 250
Long Distance 338 332 49 32
Network 161 38 129 80
ShenTel Communications 17 -- 4 3
Leasing 2 -- (1) --
Holding -- -- (528) (300)
-----------------------------------------------------
Combined totals 27,719 1,705 4,284 2,313
Inter-segment eliminations -- (1,705) -- --
-----------------------------------------------------
Consolidated totals $ 27,719 $ -- $ 4,284 $ 2,313
=====================================================
The Company's assets by segment as of March 31, 2005, December 31, 2004, and
March 31, 2004 are as follows:
In thousands March 31, December 31, March 31,
(unaudited) 2005 2004 2004
---------------------------------------
PCS $ 65,910 $ 81,090 $ 68,864
Telephone 60,758 59,507 59,891
Converged Services (NTC) 23,503 24,423 --
ShenTel Service 7,041 10,636 6,679
Cable TV 9,024 9,970 10,271
Mobile 18,027 17,335 18,580
Long Distance 353 380 866
Network 2,298 2,117 1,721
ShenTel Communications (158) 93 69
Leasing 53 60 188
Holding 154,428 152,002 143,198
---------------------------------------
Combined totals 341,237 357,613 310,327
Inter-segment eliminations (128,922) (146,366) (123,569)
---------------------------------------
Consolidated totals $ 212,315 $ 211,247 $ 186,758
=======================================
See Note 3 for additional information about the new affiliates agreement to
allocate all shared services and shared assets to all current and future
affiliates of the Company.
11
7. Comprehensive income includes net income along with net unrealized gains and
losses on the Company's available-for-sale investments, net of the related
income tax effect. The following is a summary of comprehensive income for the
periods indicated:
Three Months Ended
In thousands (unaudited) March 31,
-----------------
2005 2004
-----------------
Net income $ 2,395 $ 2,313
Net unrealized income (loss) (19) 2
-----------------
Comprehensive income $ 2,376 $ 2,315
=================
8. Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
9. The following table presents pension information for the periods presented.
Three Months Ended
March 31,
--------------------
In thousands (unaudited) 2005 2004
- ------------------------------------------------------------------------------
Net periodic benefit cost recognized:
Service cost $ 223 $ 166
Interest cost 211 189
Expected return (198) (135)
Amortization of unrecognized transition asset -- (2)
Amortization of unrecognized loss 23 16
Amortization of unrecognized prior service cost 17 17
-------- --------
Total $ 276 $ 251
======== ========
10. As a result of the previously reported February 2003 sale of the Company's
cellular operation, $5.0 million of the sales price was held in escrow and is
reflected as an "Escrow receivable" at December 31, 2004 on the accompanying
balance sheet. The Company received the entire $5.0 million in February 2005.
11. In connection with the November 30, 2004 acquisition of NTC, the Company has
notified the sellers it may have claims for the entire $1 million held in escrow
for payment of specified liabilities. The final disposition of the escrow is
expected to be resolved in the second quarter of 2005.
12
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, 2004. 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, 2004, including the financial statements and related
notes included therein.
Unless indicated otherwise, dollar amounts fifty thousand and over have been
rounded to the nearest hundred thousand dollars and dollar amounts of less than
fifty thousand have been rounded to the nearest thousand dollars.
Overview
Shenandoah Telecommunications Company is a diversified telecommunications
company providing both regulated and unregulated telecommunications services
through its wholly owned subsidiaries. These subsidiaries provide local exchange
telephone services, wireless personal communications services (PCS), as well as
cable television, Internet access, long distance, sale of telecommunications
equipment, fiber optics facilities, paging and leased tower facilities. The
Company is the exclusive provider of wireless mobility communications network
products and services on the 1900 MHz band under the Sprint brand from
Harrisonburg, Virginia to Harrisburg, York and Altoona, Pennsylvania. The
Company refers to the Chambersburg, Pennsylvania; Hagerstown, Maryland;
Martinsburg, West Virginia; and Harrisonburg and Winchester, Virginia markets as
its Quad States markets. The Company refers to the Altoona, Harrisburg, and
York, Pennsylvania markets as its Central Penn markets. Competitive local
exchange carrier (CLEC) services were established on a limited basis during
2002. In addition, the Company sells and leases equipment, mainly related to
services it provides, and also participates in emerging services and
technologies by direct investment in non-affiliated companies. As a result of
the NTC Communications, L.L.C. (NTC) acquisition on November 30, 2004, the
Company, through its subsidiary Shentel Converged Services, provides local and
long distance voice, video, and internet services on an exclusive and
non-exclusive basis to multi-dwelling unit (MDU) communities (primarily
off-campus college student housing) throughout the southeastern United States
including Virginia, North Carolina, Maryland, South Carolina, Georgia, Florida,
Tennessee and Mississippi.
The Company reports revenues as wireless, wireline and other revenues. These
revenue classifications are defined as follows: Wireless revenues are made up of
revenues from the Personal
13
Communications Company (a PCS Affiliate of Sprint), and the Mobile Company.
Wireline revenues include revenues from the Telephone Company, Network Company,
Cable Television Company, Converged Services (voice and video) and the Long
Distance Company. Other revenues are comprised of the revenues of Converged
Services (Internet), ShenTel Service Company, the Leasing Company, ShenTel
Communications Company and the Holding Company.
Selected Operating Statistics
The following table shows selected operating statistics of the Company for the
most recent five quarters. This information is provided as a supplement to the
financial statements. The table does not include NTC information.
(Unaudited) Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
2005 2004 2004 2004 2004
-----------------------------------------------------------------
Telephone Access Lines 24,802 24,691 24,818 24,867 24,901
Cable Television Subscribers 8,607 8,631 8,684 8,709 8,701
Dial-up Internet Subscribers 14,829 15,051 15,817 16,422 17,063
DSL Subscribers 2,923 2,646 2,152 1,856 1,637
Retail PCS Subscribers 106,924 102,613 98,053 94,475 89,632
Wholesale PCS Users (1) 31,504 27,337 19,603 18,059 16,349
Long Distance Subscribers 10,055 9,918 9,719 9,559 9,542
Fiber Route Miles 574 557 554 554 552
Total Fiber Miles 29,462 28,830 28,771 28,770 28,743
Long Distance Calls (000) (2) 6,326 6,265 6,117 6,228 5,821
Total Switched Access Minutes (000) 67,824 66,449 63,867 60,874 58,099
Originating Switched Access MOU (000) 19,376 18,870 18,596 18,280 18,252
Employees (full time equivalents) 358 374 303 284 272
CDMA Base Stations (sites) 280 271 261 257 257
Towers (100 foot and over) 81 80 78 78 78
Towers (under 100 foot) 11 11 10 10 11
PCS Market POPS (000) (3) 2,199 2,199 2,168 2,168 2,138
PCS Covered POPS (000) (3) 1,629 1,629 1,611 1,610 1,585
PCS Ave. Monthly Retail Churn % (4) 2.1% 2.2% 2.2% 1.9% 2.2%
(1) - Wholesale PCS Users are private label subscribers with numbers homed in
the Company's wireless network service area.
(2) - Originated by customers of the Company's Telephone subsidiary.
(3) - POPS refers to the estimated population of a given geographic area and
is based on information purchased by Sprint from Geographic Information
Services. Market POPS are those within a market area which the Company is
authorized to serve under its Sprint agreements, and Covered POPS are
those covered by the network's service area.
(4) - 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.
14
The following table shows selected operating statistics of NTC at March 31,
2005. This information is provided as a supplement to the financial statements.
Subscribers
---------------------------------------
(Unaudited)
Accounts Network Cable Phone
-----------------------------------------------------
Bulk Properties (1) 40 9,527 2,893 6,002
Retail Properties (2) 11,546 11,419 5,577 (3) 3,725
(1) - Service is provided under a single contract with the property owner who
typically provides service to tenants as part of their lease.
(2) - Service is provided under single contracts with the individual
subscribers.
(3) - Includes a limited number of premium cable subscribers whose basic cable
service is included in Bulk Cable Subscribers.
At March 31, 2005, the number of NTC properties served is 113. NTC properties
served refers to the multi-unit housing facilities with NTC service provided.
Significant Transactions
In connection with the November 30, 2004 acquisition of NTC, the Company has
notified the sellers it may have claims for the entire $1 million held in escrow
for payment of specified liabilities. The final disposition of the escrow is
expected to be resolved in the second quarter of 2005.
Results of Operations
Summary
The Company's three major lines of business are wireless, wireline and other
businesses. Each of the three areas has unique issues and challenges that are
critical to the understanding of the operations of the Company. The wireless
business is made up of two different operations, the PCS operation and the tower
business. The wireline business is made up of traditional telephone operations,
a cable TV operation, fiber network leasing, a company that resells
long-distance and beginning December 2004, NTC Communications which provides
voice and video. Other business includes the Company's Internet services, the
Interstate 81 corridor Travel 511 project, which expired on January 31, 2005,
and the sales and service of telecommunications systems.
The Company's strategy is to expand its services and the geographic areas
served. This strategy has been implemented primarily through enhancing the PCS
network, under the national brand of Sprint and the November 30, 2004
acquisition of NTC. 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 three months ended March 31,
2005. The Company had 280 PCS base stations in service at March 31, 2005,
compared to 257 base stations in service at March 31, 2004. This increase in
base stations is primarily the result of supplementing network capacity and
further extending coverage along highly traveled secondary roads in the
Company's market areas. NTC properties served increased from 107 at December 31,
2004 to 113 at March 31, 2005.
15
The Company operates its wireless network as a PCS affiliate of Sprint. The
Company receives revenues from Sprint for subscribers that obtain service in the
Company's network coverage area and other subscribers that use the Company's
network when they travel within the Company's service area. The Company relies
on Sprint to provide timely, accurate and complete information for the Company
to record the appropriate revenue and expenses for each financial period.
Through Sprint, the Company began receiving revenue from wholesale resellers in
late 2002. The Company's cost to handle this traffic is the incremental cost to
provide the necessary network capacity.
For the sixth consecutive quarter, the Company's PCS operation recorded
profitable operations, largely as a result of the PCS operation surpassing a
break-even level of revenue generated by the number of customers in the
Company's service area. Surpassing the break-even level has enabled the Company
to cover the fixed costs of operation in addition to the coverage of the
variable costs. The PCS operation achieved this level due to more favorable
pricing from Sprint for back office services such as customer care, a continued
favorable net travel position, increased wholesale revenues and a larger
customer base. A change in the contract with Sprint or change in economic
conditions could have an impact on the results of the PCS operation.
The Company's net travel and wholesale roaming, including the long distance and
3G data portions of that traffic, increased to a $2.7 million net contribution
to operating income for the current quarter, compared to a $2.3 million net
contribution to operating income for the same quarter last year. The Company's
travel receivable minutes increased 21.0% to 74.3 million and the travel payable
minutes increased by 27.7% to 55.3 million, compared to the first quarter of
2004. 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 176 minutes in the first quarter of 2005, which represented an
increase of 11 minutes from first quarter of 2004. A continuation of this trend
could negatively affect the results of the PCS operation and overall results of
the Company absent any changes in the Company's arrangements with Sprint.
In the first quarter of 2005, the Company's average PCS retail customer
turnover, or churn rate was 2.1%, compared to 2.2% in the first quarter of 2004.
To date, Wireless Local Number Portability has not had a significant effect on
the churn rate, although there is no certainty that the rate will not be
affected in future periods. In the first quarter of 2005, there was a decrease
in PCS bad debt expense to 3.5% of PCS service revenues compared to 3.6% in
first quarter 2004. Although management continues to monitor receivables,
collection efforts and new subscriber credit ratings, there is no certainty that
the bad debt expense will continue to remain at current levels in the future.
The wireline business is made up of traditional telephony, cable TV, fiber
network operations, the Company's long-distance resale business and the phone
and video services of NTC Communications. The Company's primary service area for
the telephone, cable TV and long-distance business is Shenandoah County,
Virginia. The county is a rural area in northwestern Virginia, with a population
of approximately 38,000 inhabitants, which has increased by approximately 3,000
since 2000. While a number of new housing developments are being planned for the
northern portion of Shenandoah County, the potential for significant numbers of
additional
16
wireline customers in the Shenandoah County operating area is limited. NTC
Communications provides local and long distance voice and video services on an
exclusive and non-exclusive basis to multi-dwelling unit communities throughout
the southeastern United States including Virginia, North Carolina, Maryland,
South Carolina, Georgia, Florida, Tennessee and Mississippi.
Growth in new housing starts in the Company's local telephone area resulted in
an increase of 111 access lines during the first quarter of 2005, however, the
trend over the past several quarters has been a decline in subscribers.
Migration to wireless and DSL services are believed to have caused the decline.
Although the construction of new homes within Shenandoah County appears to have
moderated and even reversed this trend, for the first quarter, based on industry
experience, the Company anticipates a downward trend in telephone subscriber
counts may dominate for the foreseeable future.
Other revenues include Internet and data services, both dial-up and DSL
high-speed service. The Company has seen a 2,234 subscriber decline in dial-up
subscriptions over the last year. From March 31, 2004 to March 31, 2005, the
number of DSL subscribers increased by 1,286 or 78.6%. The DSL growth in the
last year is driven by customer desire for faster Internet connections.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
General
Total revenues for the first quarter of 2005 were $34.4 million, which
represented an increase of $6.7 million, or 24.1%, compared to $27.7 million for
the first quarter of 2004. Total revenues include wireless revenue of $22.6
million, which increased by $3.7 million, or 19.6%; wireline revenues of $9.2
million, which increased by $2.1 million, or 28.8%; and other revenues of $2.6
million, which increased $0.9 million from the first quarter of 2004. Operating
income increased $0.3 million, to $4.6 million, compared to $4.3 million for the
same period in 2004. Net income per diluted share was $0.31 per share for the
2005 first quarter, compared to $0.30 per share for the 2004 first quarter. As a
result of the November 30, 2004 acquisition of NTC, the first quarter of 2005
includes the operating results of NTC compared to the first quarter of 2004
which does not include NTC.
Revenues
Wireless revenues are primarily derived from the PCS business. As of March 31,
2005, the Company had 106,924 retail PCS subscribers. The PCS operation added
17,292 net retail subscribers since March 31, 2004, and 4,311 since December 31,
2004. In addition, wholesale users increased by 15,155 since March 31, 2004 and
4,167 since December 31, 2004. Wireless service revenues were $14.2 million for
the first quarter of 2005, which represented an increase of $2.2 million, or
18.9%, compared to $12 million for the first quarter of 2004.
PCS travel, wholesale and roaming revenues combined for the first quarter 2005
were $6.6 million, which represented a $1.2 million, or 22.2%, increase compared
to the travel, wholesale and roaming revenue for the first quarter of 2004. The
travel, wholesale and roaming revenue increase, which resulted from an increase
in travel usage and growth in wholesale minutes, was offset in part by a decline
in roaming usage for the same period.
17
PCS equipment sales increased $0.1 million, or 18.6%, to $0.8 million for the
first quarter of 2005. The increase was primarily due to more subscribers
upgrading their handsets to access new features provided with the service.
The remainder of the Company's wireless revenue was generated through the
Company's tower business. Tower revenue was $0.8 million for the first quarter
of 2005, compared to $0.7 million for the first quarter of 2004.
Wireline revenues were $9.2 million in the 2005 first quarter, which represented
an increase of $2.1 million, or 28.8%, from the first quarter of 2004. The
increase was the result of $1.4 million in video and phone service revenues from
NTC. The remaining $0.7 million increase was primarily due to an increase in
access revenues and a Shenandoah Cable television rate increase in January 2005.
Total switched minutes of use increased by 16.7% compared to the first quarter
of 2004. The mix of minutes that terminate to wireless carriers compared to
total minutes shifted from 42.8% for the first quarter of 2004 to 49.0% for the
first quarter of 2005. The increase in minutes was primarily attributable to
wireless traffic transiting the Company's telephone network.
Other revenues of $2.6 million increased $0.9 million compared to other revenues
for the first quarter of 2004. Internet revenues increased $1.0 million with NTC
contributing $0.9 million of the increase. The total subscriber base for the
dial-up and DSL Internet services provided by the Company's Shenandoah Telephone
and Shentel Services subsidiaries was 17,752 as of March 31, 2005, compared to
18,700 as of March 31, 2004, a decrease of 5%. While the subscribers to DSL
service increased 1,286 or 78.6%, compared to the March 31, 2004 subscriber
base, there was a decline of 2,234 dial-up subscribers, or 13.1%, from the level
at March 31, 2004. The Company has experienced increased dial-up subscriber
deactivations due to migration to competing high-speed Internet services,
including the Company's DSL services. The Travel 511 contract revenue from the
Virginia Department of Transportation, which expired January 31, 2005, decreased
by $0.2 million compared to first quarter 2004.
Operating Expenses
Total operating expense for the first quarter of 2005 was $29.8 million, which
represented an increase of $6.3 million, or 26.9%, compared to the first quarter
of 2004. The higher operating expense was primarily attributable to the
inclusion of $3.1 million from NTC's operations and an increase in selling,
general and administrative expenses of $1.5 million, exclusive of NTC. The
remaining $1.7 million is primarily the result of an increase in the number of
PCS subscribers and the expanded PCS network operations.
Costs of goods and services were $5.5 million, which represented an increase of
$1.8 million, or 47%, from the first quarter of 2004. Costs associated with NTC
account for $1.1 million of the increase with the remaining increase primarily
due to higher volumes of handsets sold through Company owned stores and PCS
handset subsidies paid to third-party retailers. The cost of handset upgrades
sold to existing customers is expected to increase as the customer base matures
and handset manufacturers introduce new technologies in new handsets. During the
first quarter of 2005, the Company added 10,719 gross new PCS subscribers
compared to 10,343 in the first quarter of 2004.
Network operating costs for the first quarter of 2005 were $9.8 million, which
represented an increase of $1.5 million, or 18.1%, compared to the first quarter
of 2004. The increase was
18
primarily the result of NTC's network operating costs of $0.4 million and an
increase in PCS travel and line costs of $1.0 million. The travel costs
increased due to an increase in subscribers and an increase in the average
travel minutes used by the Company's subscribers on the Sprint or Sprint
affiliate network not operated by the Company.
Depreciation and amortization expense for the 2005 first quarter was $5.0
million, which represented an increase of $0.7 million, or 16.3%, compared to
$4.3 million for the first quarter of 2004. The increase is primarily due to
NTC's depreciation expense for the first quarter of 2005 of $0.6 million, new
assets in the PCS and telephone operations and a change in depreciable asset
lives in the fourth quarter of 2004. See Note 3 for information on the impact of
the new allocation methodology on depreciation expense for the three months
ended March 31, 2005.
Selling, general and administrative costs were $9.4 million, which represented
an increase of $2.3 million, or 32.4%. NTC's costs for first quarter 2005 were
$0.9 million and the Sprint customer care costs increased $0.3 million from the
first quarter of 2004. The remaining $1.1 million increase was related to salary
and benefits expense for new and existing employees.
Other Income (Expense)
Losses on external investments totaled $0.3 million in the first quarter of
2005, compared to a $18 thousand loss in the first quarter of 2004. First
quarter 2005 interest expense increased by $57 thousand, or 7.2%, compared to
the first quarter of 2004. The Company's total debt as of March 31, 2005 was
$51.2 million, compared to $42.3 million as of March 31, 2004 and $52.3 million
as of December 31, 2004. The increased borrowings are a result of the November
30, 2004 acquisition of NTC.
The Company's 2005 first quarter net income was $2.4 million compared to $2.3
million in the first quarter of 2004.
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. For those investments that eventually become
publicly-traded, the Company evaluates whether to hold or sell parts or all of
each investment on an individual basis.
As of March 31, 2005, the Company held shares in two companies that are
publicly-traded, with the following market values: $43 thousand in Net IQ
(NTIQ), with 3,744 shares held, and $158 thousand in Deutsche Telekom, AG (DT),
with 8,219 shares held.
Liquidity and Capital Resources
The Company generated $14.5 million in cash from operations in the first quarter
of 2005, compared to $6.9 million in the first quarter of 2004. The $7.6 million
increase from the first quarter of 2004 includes $5 million from escrow received
in February 2005 related to the Company's February 2003 sale of its cellular
operations.
19
The Company expects that operations will continue to generate positive cash
flows.
As of March 31, 2005, the Company's total debt was $51.2 million, with an
annualized overall weighted average interest rate of approximately 6.47%. As of
March 31, 2005, the Company was in compliance with the covenants in its credit
agreements.
The Company is obligated to make future payments under various contracts,
including amounts pursuant to its various long-term debt facilities, and
non-cancelable operating lease agreements for retail space, tower space and cell
sites.
Capital expenditures budgeted for 2005 total approximately $37.0 million,
including approximately $20.0 million for additional PCS base stations,
additional towers, additional sites and switch upgrades to enhance the PCS
network, approximately $5.0 million for the telephone operation, $4.0 for NTC's
operation and approximately $4.0 million for internal information technology
expenditures and the implementation of new technologies.
For the three months ended March 31, 2005, the Company spent $4.2 million in
capital projects. Management anticipates capital spending for 2005 will be
approximately $37 million.
The Company's short-term and long-term cash needs are expected to be met
including working capital requirements, capital projects, debt payments, and
dividend payments, from cash on hand, operating cash flow, and amounts expected
to be available under the Company's existing financing facility. The Company may
liquidate some of its investments to generate additional cash for its capital
needs.
On December 15, 2004, Sprint and Nextel Communications, Inc. announced that they
entered into a definitive agreement to merge. The impact of this transaction on
the Company's PCS operation is uncertain as of the date of this report.
In connection with the November 30, 2004 acquisition of NTC, the Company has
notified the sellers it may have claims for the entire $1 million held in escrow
for payment of specified liabilities. The final disposition of the escrow is
expected to be resolved in the second quarter of 2005.
Risks
At March 31, 2005, the Company is one of eleven PCS Affiliates of Sprint, and
accordingly, is impacted by decisions and requirements adopted by Sprint in
regard to its wireless operation. Management continually reviews its
relationship with Sprint as new developments and requirements are added.
The Company's access revenue may be adversely impacted by legislative or
regulatory actions that decrease access rates or exempt certain traffic from
paying for access to the Company's regulated telephone network. The Federal
Communications Commission is currently reviewing the issue of Voice over
Internet Protocol (VOIP) as it relates to access charges as well as an overhaul
of intercarrier compensation. An unfavorable change may have an adverse effect
on the Company's telephone operations.
20
There has been a trend for incumbent local exchange carriers to see a decrease
in access lines due to the effect of wireless and wireline competition and the
elimination of second lines dedicated to dial-up Internet as customers migrate
to broadband connections. Although the Company has not seen a material reduction
in its number of access lines to date, and reported a slight increase during the
first quarter of 2005, the dominating trend has been a decline in the number of
access lines. There is a significant risk that this trend could have a material
adverse effect on the Company's telephone operations in the future.
The Company's revenue from fiber leases may be adversely impacted by price
competition for these facilities. The Company monitors each of its fiber lease
customers closely to minimize the risk related to this business.
The Company operates the cable television system in Shenandoah County, Virginia.
The Company has seen increased competition from satellite providers that are
larger and have cost advantages over the Company in the procurement of
programming. The continued success of the satellite television providers may
have an adverse impact on the Company's cable television results.
The Company may not be able to utilize all of its net operating loss carry
forwards for taxes in certain states before they expire, resulting in the
Company writing off some of its deferred tax assets.
On December 15, 2004, Sprint and Nextel Communications, Inc. announced that they
had entered into a definitive agreement to merge. Nextel is a provider of
digital wireless communications services in the Company's PCS service area. The
impact of the Sprint-Nextel merger on the Company's PCS operations is uncertain
as of the date of this report. Based on currently available information and
assuming that no changes are effected with respect to Sprint's agreements with
the Company, it is possible, that Sprint could be in violation of the
exclusivity provisions of the Company's agreements with Sprint at some point
following the completion of the Sprint-Nextel transaction. The Company's
agreements with Sprint provide for specific remedies in the event of a material
violation by Sprint of such agreements. No determination has been made as to the
impact on the value of the Company or its business of any of such remedies or
whether any such remedy would be more or less favorable to the Company and its
shareholders than the existing arrangements with Sprint or any new arrangements
the Company may negotiate with Sprint. As a result of the Sprint-Nextel merger,
Sprint PCS may require the Company to meet additional program requirements,
which could increase the Company's expenses. The Company is committed to working
with Sprint to reach mutually acceptable arrangements with respect to the
foregoing matters. There can be no assurances, however, that the Company and
Sprint will be able to reach mutually acceptable arrangements or as to the terms
of any such arrangements or the likely impact on the Company of any such
arrangements.
21
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), Share Based Payments, which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123 (R) replaces SFAS No. 123, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. The
approach in SFAS 123 (R) is similar to the approach described in SFAS No. 123,
however, SFAS No. 123 (R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure will no longer be an
alternative. SFAS No. 123 (R) will be effective for the Company beginning the
first quarter 2006. The Company is evaluating the impact of applying SFAS No.
123 (R) and does not believe the application will have a material impact on the
Company's consolidated financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
which provides new guidance for assessing impairment losses on debt and equity
investments. EITF Issue No. 03-1 also includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the
disclosure requirements remain effective for the first quarter of 2005. The
Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final
guidance is released.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risks relate primarily to changes in interest rates on
instruments held for other than trading purposes. The Company's interest rate
risk involves three components, although the Company believes only the first
component, outstanding debt with variable rates, is of any significance at this
time. As of March 31, 2005, the Company's variable rate debt balance was $13.2
million. The Company has a $15 million variable rate revolving reducing credit
facility with Cobank and a variable rate line of credit totaling $0.5 million
with SunTrust Bank. The Company's remaining debt has fixed rates through its
maturity. A 10.0% decline in market interest rates would decrease the fair value
of the fixed rate debt by approximately $1.3 million, while the estimated
current fair value of the fixed rate debt is approximately $48.3 million.
The second component of interest rate risk is temporary excess cash, primarily
invested in overnight repurchase agreements and short-term certificates of
deposit and money market funds. The Company currently has approximately $23.6
million of cash equivalents in overnight repurchase agreements, which are
accruing interest at rates of approximately 2.0% per year. The cash is currently
in short-term investment vehicles that have limited interest rate risk.
Management continues to evaluate the most beneficial use of these funds.
The third component of interest rate risk is marked increases in interest rates,
which may adversely affect the rate at which the Company may borrow funds for
growth in the future. Although this risk is real, it is not significant at this
time as the Company has adequate cash for operations, payment of debt and
near-term capital projects.
22
Management does not view market risk as having a significant impact on the
Company's results of operations, although future results could be adversely
affected if interest rates were to escalate markedly and the Company required
external financing. Since the Company does not currently have significant
investments in publicly traded stock, there is limited risk related to the
Company's available-for-sale securities. General economic conditions affected by
regulatory changes, competition or other external influences may play a higher
risk to the Company's overall results.
As of March 31, 2005, the Company's external investments totaled $7.1 million
with $6.9 of the total invested in privately-held companies directly or through
investments with portfolio managers. Most of the companies are at an early stage
of development, and significant increases in interest rates could have an
adverse impact on their results, ability to raise capital and viability. The
Company's market risk is limited to the funds previously invested and an
additional $1.0 million committed under contracts the Company has signed with
portfolio managers.
ITEM 4. Controls and Procedures
Evaluation Regarding the Effectiveness of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer,
who is the principal executive officer, and the Executive Vice President and
Chief Financial Officer, who is the principal financial officer, conducted an
evaluation of our disclosure controls and procedures, as defined by Rule 13a -
15(e) under the Securities Exchange Act of 1934. Based on this evaluation, the
Company's principal executive officer and its principal financial officer
concluded that the Company's disclosure controls and procedures were effective
as of March 31, 2005.
During the first fiscal quarter of 2005, there were 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 as follows:
As noted in the Company's 10-K for the year ending December 31, 2004, the
operations of NTC Communications LLC, which was acquired on November 30,
2004, was excluded from Management's assessment of internal control over
financial reporting as of December 31, 2004. During the first quarter of
2005, a number of NTC Communications operations and processes, including
but not limited to general ledger accounting, accounts payable, purchasing
and treasury, have been either modified or integrated with those of the
Company resulting in a material improvement in internal controls over
financial reporting with respect to the operations of NTC and the Company.
Under our agreements with Sprint, Sprint provides us with billing, collections,
customer care, certain network operations and other back office services for the
PCS operation. As a result, Sprint remits to the Company approximately 63% of
the Company's total revenues, while approximately 38% of the expenses reflected
in the Company's consolidated financial statements relate to charges by or
through Sprint for expenses such as billing, collections and customer care,
roaming expense, long-distance, and travel. Due to this relationship, the
Company necessarily relies on Sprint to provide accurate, timely and sufficient
data and information to properly record our revenues, expenses and accounts
receivable, which underlie a substantial portion of our periodic financial
statements and other financial disclosures.
23
Information provided by Sprint includes reports regarding the subscriber
accounts receivable in our markets. Sprint provides us with monthly accounts
receivable, billing and cash receipts information on a market level, rather than
a subscriber level. We review these various reports to identify discrepancies or
errors. However, under our agreements with Sprint, we are entitled to only a
portion of the receipts, net of items such as taxes, government surcharges,
certain allocable write-offs and the 8% of revenue retained by Sprint. Because
of our reliance on Sprint for financial information, we must depend on Sprint to
design adequate internal controls with respect to the processes established to
provide this data and information to the Company and Sprint's other PCS
affiliate network partners. To address this issue, Sprint engages independent
registered accountants to perform a periodic evaluation of these controls and to
provide a "Report on Controls Placed in Operation and Tests of Operating
Effectiveness for Affiliates" under guidance provided in Statement of Auditing
Standards No. 70 ("SAS 70 reports"). The report is provided to the Company on
semi-annual basis and covers a twelve-month period. The most recent report
covers the period from October 1, 2003 to September 30, 2004. The most recent
report indicated there were no material issues, that were not remediated by year
end, which would adversely affect the information used to support the recording
of the revenues and expenses provided by Sprint related to the Company's
relationship with them.
PART II. OTHER INFORMATION
ITEM 6. Exhibits
(a) The following exhibits are filed with 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.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
May 9, 2005 /S/ EARLE A. MACKENZIE
----------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
25
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.
26
EXHIBIT 31.1
CERTIFICATION
I, Christopher E. French, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shenandoah
Telecommunications Company, Inc.;
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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
27
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
functions):
(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.
/S/ CHRISTOPHER E. FRENCH
-------------------------
Christopher E. French, President and Chief Executive Officer
Date: May 9, 2005
28
Exhibit 31.2
CERTIFICATION
I, Earle A. MacKenzie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Shenandoah
Telecommunications Company, Inc.;
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) 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
(d) 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
29
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(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.
/s/EARLE A. MACKENZIE
---------------------
Earle A. MacKenzie, Executive Vice President and Chief Financial Officer
Date: May 9, 2005
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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 March 31, 2005 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
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Christopher E. French
President and Chief Executive Officer
May 9, 2005
/S/EARLE A. MACKENZIE
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Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
May 9, 2005
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.
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