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 June 30, 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 July 28, 2005
- -------------------------- ----------------------------
Common Stock, No Par Value 7,662,799 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
Page
Numbers
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
June 30, 2005 and December 31, 2004 3-4
Unaudited Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2005 and 2004 5
Unaudited Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2005 and 2004 6
Unaudited Condensed Consolidated Statements of
Shareholders' Equity and Comprehensive Income
for the Six Months Ended June 30, 2005 and the
Year Ended December 31, 2004 7
Notes to Unaudited Condensed Consolidated
Financial Statements 8-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28-29
Item 4. Controls and Procedures 29-30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 4. Submissions of Matters to a Vote of Security Holders 30-31
Item 6. Exhibits 31
Signatures 32
Exhibit Index 33
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
Assets 2005 2004
-------- ------------
Current Assets
Cash and cash equivalents $ 9,050 $ 14,172
Accounts receivable, net 9,887 9,019
Escrow receivable -- 5,000
Income tax receivable -- 2,341
Materials and supplies 2,196 2,108
Deferred income taxes 378 --
Prepaid expenses and other 2,135 1,877
-------- --------
Total current assets 23,646 34,517
Securities and investments
Available-for-sale securities 194 232
Other investments 7,081 7,018
-------- --------
Total securities and investments 7,275 7,250
Property, plant and equipment, net 157,546 156,252
Other Assets
Intangible assets, net 3,190 3,401
Cost in excess of net assets of business acquired 8,863 8,863
Deferred charges and other assets, net 768 964
-------- --------
Net other assets 12,821 13,228
-------- --------
Total Assets $201,288 $211,247
======== ========
(continued)
3
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands)
June 30, December 31,
Liabilities and Shareholders' Equity 2005 2004
-------- ------------
Current Liabilities
Current maturities of long-term debt $ 4,448 $ 4,372
Accounts payable 5,966 6,003
Advance billings and deposits 3,477 3,566
Income tax payable 750 --
Current deferred taxes -- 1,453
Other current liabilities 6,915 6,452
-------- --------
Total current liabilities 21,556 21,846
Long-term debt, less current maturities 33,674 47,919
Other Liabilities
Deferred income taxes 24,612 24,826
Pension and other 2,217 2,859
-------- --------
Total other liabilities 26,829 27,685
Shareholders' Equity
Common stock 6,868 6,319
Retained earnings 112,320 107,413
Accumulated other comprehensive income 41 65
-------- --------
Total shareholders' equity 119,229 113,797
-------- --------
Total Liabilities and Shareholders' Equity $201,288 $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 Six Months Ended
(in thousands, except per share data) June 30, June 30,
2005 2004 2005 2004
--------------------------------------------------
Operating Revenues
Wireless $ 23,833 $ 20,568 $ 46,412 $ 39,432
Wireline 9,177 7,608 18,382 14,757
Other revenues 2,454 1,676 5,070 3,383
--------------------------------------------------
Total revenues 35,464 29,852 69,864 57,572
Operating Expenses
Cost of goods and services 5,674 3,886 11,152 7,610
Network operating costs 10,209 9,156 19,931 17,467
Depreciation and amortization 5,492 4,395 10,914 8,732
Selling, general and administrative 9,430 7,390 18,591 14,452
--------------------------------------------------
Total operating expense 30,805 24,827 60,588 48,261
--------------------------------------------------
Operating Income 4,659 5,025 9,276 9,311
Other Income (expense):
Non-operating income (expense), net 131 191 437 415
Gain (loss) on investments, net (11) 146 (293) 128
Interest expense (770) (773) (1,624) (1,571)
--------------------------------------------------
Income before income taxes 4,009 4,589 7,796 8,283
Income tax provision (1,497) (1,709) (2,889) (3,090)
--------------------------------------------------
Net income $ 2,512 $ 2,880 $ 4,907 $ 5,193
==================================================
Net income per share, basic $ 0.33 $ 0.38 $ 0.64 $ 0.68
==================================================
Net income per share, diluted $ 0.33 $ 0.38 $ 0.64 $ 0.68
==================================================
Weighted average shares outstanding, basic 7,650 7,609 7,644 7,608
==================================================
Weighted average shares, diluted 7,695 7,658 7,687 7,656
==================================================
See accompanying notes to unaudited condensed consolidated financial statements.
5
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
2005 2004
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,907 $ 5,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,692 8,726
Amortization 222 6
Stock based compensation expense 80 --
Deferred income taxes (2,031) 2,815
Gain on investments (142) --
Loss (income) from patronage and equity investments 274 (236)
Loss on disposal of assets 89 133
Other (484) (75)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (868) (1,151)
Materials and supplies (88) (262)
Increase (decrease) in:
Accounts payable (36) 494
Other prepaids, deferrals and accruals 8,207 (1,930)
--------------------
Net cash provided by operating activities 20,822 13,713
Cash Flows from Investing Activities
Purchase and construction of plant and equipment, net
of retirements (12,078) (5,489)
Purchases of investment securities (262) (479)
Proceeds from investment activities 66 278
Proceeds from sale of equipment 30 29
--------------------
Net cash used in investing activities (12,244) (5,661)
Cash Flows from Financing Activities
Principal payments on long-term debt (14,169) (2,100)
Proceeds from exercise of incentive stock options 469 283
--------------------
Net cash used in financing activities (13,700) (1,817)
--------------------
Net increase in cash and cash equivalents (5,122) 6,235
Cash and Cash Equivalents
Beginning 14,172 28,696
--------------------
Ending $ 9,050 $ 34,931
====================
Cash paid for:
Interest paid $ 1,654 $ 1,585
Income taxes (net of refunds) $ 1,878 $ 491
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 -- -- 4,907 -- 4,907
Net unrealized change in securities
available-for-sale, net of tax of $14 -- -- -- (24) (24)
---------
Total comprehensive income 4,883
Stock based compensation 80 80
Common stock issued through the
exercise of stock options 27 469 -- -- 469
------------------------------------------------------------
Balance, June 30, 2005 7,657 $6,868 $ 112,320 $ 41 $ 119,229
============================================================
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.
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 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, the Company accounts for these awards as stock
appreciation rights and recognizes compensation expense over the vesting period
to the extent the current stock price exceeds the exercise price of the options.
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 and six months ended June 30:
(in thousands, except Three Months Ended Six Months Ended
per share amounts) June 30, June 30,
Net Income 2005 2004 2005 2004
------ ------ ------ ------
As reported $2,512 $2,880 $4,907 $5,193
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 18 34 41 65
------ ------ ------ ------
Pro forma $2,494 $2,846 $4,866 $5,128
Earnings per share, basic and diluted
As reported, basic $ 0.33 $ 0.38 $ 0.64 $ 0.68
As reported, diluted 0.33 0.38 0.64 0.68
Pro forma, basic 0.33 0.37 0.64 0.67
Pro forma, diluted $ 0.32 $ 0.37 $ 0.63 $ 0.67
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 June 30, 2005 the dilutive net income per share was
exclusive of approximately 170,000 stock options that were anti-dilutive. The
adjustments to net income reflect the impact of compensation related to stock
appreciation rights 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 June 30, 2005 and June 30,
2004:
Three Months Ended June 30, 2005
Operating
External Internal Income Net Income
In thousands (unaudited) Revenues Revenues (loss) (loss)
-----------------------------------------------
PCS $22,998 $ -- $ 2,198 $ 1,112
Telephone 5,976 1,003 2,945 1,791
Converged Services (NTC) 2,267 -- (1,018) (767)
ShenTel Service 1,549 250 208 94
Cable TV 1,257 8 (29) (65)
Mobile 835 344 570 328
Long Distance 373 311 55 37
Network 197 27 131 86
ShenTel Communications 11 -- 4 2
Leasing 1 -- 4 3
Holding -- -- (409) (109)
---------------------------------------------
Combined totals 35,464 1,943 4,659 2,512
Inter-segment eliminations -- (1,943) -- --
---------------------------------------------
Consolidated totals $35,464 $ -- $ 4,659 $ 2,512
=============================================
10
Three Months Ended June 30, 2004
Operating
External Internal Income Net Income
In thousands (unaudited) Revenues Revenues (loss) (loss)
-----------------------------------------------
PCS $19,802 $ -- $ 1,832 $ 896
Telephone 5,986 883 2,717 1,713
ShenTel Service 1,657 76 176 80
Cable TV 1,103 9 90 7
Mobile 766 325 494 250
Long Distance 349 336 79 50
Network 170 29 127 80
ShenTel Communications 17 -- (68) (43)
Leasing 2 -- (1) (1)
Holding -- -- (421) (152)
---------------------------------------------
Combined totals 29,852 1,658 5,025 2,880
Inter-segment eliminations -- (1,658) -- --
---------------------------------------------
Consolidated totals $29,852 $ -- $ 5,025 $ 2,880
=============================================
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 six months ended June 30, 2005 and June 30,
2004.
Six Months Ended June 30, 2005
Operating
External Internal Income Net Income
In thousands (unaudited) Revenues Revenues (loss) (loss)
-----------------------------------------------
PCS $44,782 $ -- $ 4,036 2,013
Telephone 11,999 1,919 5,935 3,643
Converged Services (NTC) 4,626 -- (1,776) (1,396)
ShenTel Service 3,198 502 452 214
Cable TV 2,485 16 (153) (182)
Mobile 1,630 680 1,103 636
Long Distance 746 599 96 63
Network 373 60 264 172
ShenTel Communications 24 -- 3 2
Leasing 1 -- 1 1
Holding -- -- (685) (259)
---------------------------------------------
Combined totals 69,864 3,776 9,276 4,907
Inter-segment eliminations -- (3,776) -- --
---------------------------------------------
Consolidated totals $69,864 $ -- $ 9,276 $ 4,907
=============================================
11
Six Months Ended June 30, 2004
Operating
External Internal Income Net Income
In thousands (unaudited) Revenues Revenues (loss) (loss)
-----------------------------------------------
PCS $37,934 $ 1 $ 2,995 $ 1,380
Telephone 11,532 1,815 5,325 3,302
ShenTel Service 3,345 153 394 185
Cable TV 2,207 15 272 77
Mobile 1,498 645 956 500
Long Distance 687 668 128 82
Network 331 67 256 160
ShenTel Communications 34 -- (64) (40)
Leasing 4 -- (2) (1)
Holding -- -- (949) (452)
---------------------------------------------
Combined totals 57,572 3,364 9,311 5,193
Inter-segment eliminations -- (3,364) -- --
---------------------------------------------
Consolidated totals $57,572 $ -- $ 9,311 $ 5,193
=============================================
The Company's assets by segment as of June 30, 2005, December 31, 2004, and June
30, 2004 are as follows:
In thousands June 30, December 31, June 30,
(unaudited) 2005 2004 2004
-----------------------------------------
PCS $ 68,149 $ 81,090 $ 74,430
Telephone 59,523 59,507 61,747
Converged Services (NTC) 21,665 24,423 --
ShenTel Service 7,375 10,636 6,957
Cable TV 8,925 9,970 10,230
Mobile 18,288 17,335 18,813
Long Distance 423 380 934
Network 2,704 2,117 1,807
ShenTel Communications (161) 93 43
Leasing 55 60 187
Holding 143,874 152,002 143,813
-----------------------------------------
Combined totals 330,820 357,613 318,961
Inter-segment eliminations (129,532) (146,366) (124,873)
-----------------------------------------
Consolidated totals $ 201,288 $ 211,247 $ 194,088
=========================================
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.
12
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 Six Months Ended
In thousands (unaudited) June 30, June 30,
---------------------------------------------
2005 2004 2005 2004
---------------------------------------------
Net income $ 2,512 $ 2,880 $ 4,907 $ 5,193
Net unrealized income (loss) (5) -- (24) (2)
---------------------------------------------
Comprehensive income $ 2,507 $ 2,880 $ 4,883 $ 5,191
=============================================
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 Six Months Ended
Ended June 30, June 30,
--------------------------------------
In thousands (unaudited) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------
Net periodic benefit cost recognized:
Service cost $ 223 $ 166 $ 446 $ 332
Interest cost 211 189 422 378
Expected return (198) (135) (396) (270)
Amortization of unrecognized transition asset -- (2) -- (4)
Amortization of unrecognized loss 23 16 46 32
Amortization of unrecognized prior service cost 17 17 34 34
--------------------------------------
Total $ 276 $ 251 $ 552 $ 502
======================================
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 has claims for the entire $1 million held in escrow for
payment of specified liabilities. The sellers have disputed a number of the
Company's claims. The final disposition of the escrow is expected to be resolved
in 2005. During the second quarter 2005, the Company reduced the outstanding
balance of its revolving line of credit with CoBank by $12 million. The line of
credit had been used to fund the acquisition of NTC.
12. 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
13
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 ultimately negotiate with Sprint.
In July 2005, Ubiquitel, Inc., iPCS Wireless, Inc, Enterprise Communications
Partnership and Gulf Coast Wireless LP each filed actions seeking injunctive
relief to prevent Sprint from breaching similar provisions of their respective
agreements with Sprint. In particular, all of the complaints would enjoin Sprint
from engaging in certain post-merger conduct in the respective parties' service
areas, including the operation of the Nextel network, marketing, sales and
promotional activities relating to Nextel products, and disclosing confidential
business information, in each case in a manner that would violate Ubiquitel's,
iPCS', Enterprise's and Gulf Coast Wireless' respective management agreements
with Sprint. Shentel believes that the terms of such other companies' agreements
with Sprint are substantially similar to the terms of the Company's agreement
with Sprint. As of August 2, 2005, Sprint PCS has entered into forbearance
agreements with Ubiquitel and iPCS . Under the respective forbearance
agreements, Ubiquitel and iPCS each agreed not to seek certain injunctive or
equitable relief against Sprint or Nextel relating to the matters specified in
their complaints and Sprint agreed to certain parameters for the operation of
Sprint's wireless business in the territories operated by Ubiquitel and iPCS
following the completion of the merger involving Sprint and Nextel. In light of
these developments, the Company has and will continue to review and assess its
options including but not limited to: initiating litigation; executing a
forbearance agreement and/or seek changes to the existing relationship with
Sprint.
As of the date hereof, the Company has had on-going discussions with Sprint
regarding the continuance of their long-term relationship and the impact of the
Sprint Nextel merger. As a result of the Sprint Nextel merger, Sprint may
require the Company to meet additional program requirements, which the Company
anticipates will increase capital expenditures and operating 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, that a mutually acceptable arrangement will be reached prior to or
subsequent to the closing of the Sprint Nextel merger or the likely impact on
the Company or its relationship with Sprint of any such arrangements.
The Company believes that a significant portion of its PCS service area overlaps
the service area operated by Nextel Partners under the Nextel brand. Nextel
Partners is not a party to the Sprint Nextel merger. The agreements between
Nextel Partners and Nextel contain exclusivity and other provisions that will
remain in place following the Sprint Nextel merger until such time that Nextel
Partners may be acquired by Sprint Nextel. The Company believes that the
provisions under the agreements between Nextel and Nextel Partners may conflict
with the Company's rights under its Management Agreement. Even if such
provisions do not conflict, as long as Nextel Partners remains a stand-alone
entity, the ability of the Company to fully realize any of the benefits from the
merger of Sprint and Nextel may be limited. Furthermore, the continued operation
by Nextel Partners of a competing network could have a negative impact on the
Company's results of operations. Although the board of directors of Nextel
Partners has recommended that its
14
shareholders vote to put their Nextel Partners shares to Sprint Nextel following
the merger, such an acquisition is unlikely to occur prior to 2006 and there can
be no assurance that Nextel Partners' shareholders will accept the
recommendation.
13. On August 4, 2005, the board of directors of the Rural Telephone Bank (the
"RTB") adopted a number of resolutions for the purpose of dissolving RTB as of
October 1, 2005. The proposed dissolution is subject to Congress passing the
agricultural appropriations bill which contains language removing restrictions
on the annual retirement of government stock in the RTB. The Company currently
holds 10,821,770 shares of Class B and Class C RTB Common Stock ($1.00 par
value) which is reflected on the Company's books at $796,000 under the cost
method. If Congress passes and the President signs the agricultural
appropriations bill with the necessary language, the Company has been advised
that it can expect to receive the full par value of its shares or $10,821,770 in
either the first or second quarter of 2006, with an estimated gain of $6.1
million, net of tax, recorded in the period the necessary legislation is
enacted. However, there can be no assurance that the necessary legislation will
be enacted or that changes will not be made to the proposed dissolution of RTB
which would have the effect of either delaying or reducing the amount received
by the Company.
15
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 and data services, 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.
16
The Company reports revenues as wireless, wireline and other revenues. These
revenue classifications are defined as follows: Wireless revenues are comprised
of revenues from the Personal 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) June 30 Mar. 31, Dec. 31, Sept. 30, Jun. 30,
2005 2005 2004 2004 2004
----------------------------------------------------------------
Telephone Access Lines 24,877 24,802 24,691 24,818 24,867
Cable Television Subscribers 8,627 8,607 8,631 8,684 8,709
Dial-up Internet Subscribers 14,052 14,829 15,051 15,817 16,422
DSL Subscribers 3,427 2,923 2,646 2,152 1,856
Retail PCS Subscribers 112,090 106,924 102,613 98,053 94,475
Wholesale PCS Users (1) 32,733 31,504 27,337 19,603 18,059
Long Distance Subscribers 10,258 10,055 9,918 9,719 9,559
Fiber Route Miles 576 574 557 554 554
Total Fiber Miles 29,566 29,462 28,830 28,771 28,770
Long Distance Calls (000) (2) 6,808 6,326 6,265 6,117 6,228
Total Switched Access Minutes (000) 70,419 67,824 66,449 63,867 60,874
Originating Switched Access MOU (000) 19,570 19,376 18,870 18,596 18,280
Employees (full time equivalents) (3) 408 358 374 303 284
CDMA Base Stations (sites) 288 280 271 261 257
Towers (100 foot and over) 81 81 80 78 78
Towers (under 100 foot) 11 11 11 10 10
PCS Market POPS (000) (4) 2,199 2,199 2,199 2,168 2,168
PCS Covered POPS (000) (4) 1,649 1,642 1,629 1,611 1,610
PCS Ave. Monthly Retail Churn % (5) 1.9% 2.1% 2.2% 2.2% 1.9%
(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) - The June 30, 2005 employee count includes 44 summer interns.
(4) - 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.
(5) - 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.
17
The following table shows selected operating statistics for NTC. This
information is provided as a supplement to the financial statements.
At March 31, 2005
-----------------------------------------------
Subscribers
---------------------------------------
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
NTC Properties Served (4) 113
At June 30, 2005
-----------------------------------------------
Subscribers
---------------------------------------
Accounts Network Cable Phone
-----------------------------------------------
Bulk Properties (1) 36 8,768 2,622 6,244
Retail Properties (2) 9,708 9,261 4,356(3) 2,830
NTC Properties Served (4) 114
(1) - Service is provided under a single contract with the property owner who
typically provides service to tenants as part of their lease. During the
second quarter 2005, 4 bulk accounts migrated to retail.
(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.
(4) - Multi-unit housing complexes where NTC provides service.
The decrease in the number of NTC subscribers, from March 31, 2005 to June 30,
2005, is primarily due to the seasonality of NTC's customer base, which is
primarily college students living in off-campus student housing.
Significant Transactions
In connection with the November 30, 2004 acquisition of NTC, the Company has
notified the sellers it has claims for the entire $1 million held in escrow for
payment of specified liabilities. The sellers have disputed a number of the
Company's claims. The final disposition of the escrow is expected to be resolved
in 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 local telephone
operations, the franchise cable TV operation, fiber network leasing, a company
that resells long-
18
distance and, beginning December 2004, the voice and video services of NTC.
Other business includes the Company's Internet services provided through Shentel
Services and NTC, 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 resulted in new subscribers purchasing phones and services,
which continued to increase revenues during the three months ended June 30,
2005. The Company had 288 PCS base stations in service at June 30, 2005,
compared to 257 base stations in service at June 30, 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 114 at
June 30, 2005.
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 use PCS service 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 seventh 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 $2.9 million net contribution
to operating income for the current quarter, compared to a $2.7 million net
contribution to operating income for the same quarter last year. The Company's
travel receivable minutes increased 16.0% to 83.3 million and the travel payable
minutes increased by 21.3% to 60.4 million, compared to the second 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 using PCS service outside of the Company's service area.
On a per-subscriber basis, the Company's average of travel payable minutes
increased to 184 minutes in the second quarter of 2005, which represented an
increase of 8 minutes from the second quarter of 2004. A continuation of this
trend could negatively affect the results of the PCS
19
operation and overall results of the Company absent any changes in the Company's
arrangements with Sprint.
In the second quarter of both 2005 and 2004, the Company's average PCS retail
customer turnover, or churn rate was 1.9%. 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
second quarter of 2005, there was an increase in PCS bad debt expense to 3.0% of
PCS service revenues compared to 1.4% in second quarter 2004. The second quarter
2004 bad debt expense of 1.4% was low relative to the other quarters in 2004.
Although management continues to monitor receivables, collection efforts and new
subscriber credit ratings, there is no certainty that the bad debt expense will
not continue to increase 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. 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 Shenandoah County,
the potential for significant numbers of additional 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 75 access lines during the second quarter of 2005. While this is
the second consecutive quarter during which there has been a net increase in
access lines, the trend over the prior 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 second quarter,
based on industry experience and national trends, the Company believes that a
downward trend in telephone subscriber counts could re-emerge.
Other revenues include Internet and data services, both dial-up and DSL
high-speed service. The Company's DSL subscribers are in the local telephone
service area. The Company's dial-up subscribers are in seven counties in the
northern Shenandoah Valley of Virginia, western Maryland and eastern West
Virginia. The Company has seen a 2,370 subscriber decline in dial-up
subscriptions over the last year. From June 30, 2004 to June 30, 2005, the
number of DSL subscribers increased by 1,571 or 84.6%. The DSL growth in the
last year is driven by customer desire for faster Internet connections.
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
General
Total revenues for the second quarter of 2005 were $35.5 million, which
represented an increase of $5.6 million, or 18.8%, compared to $29.9 million for
the second quarter of 2004. Total revenues include wireless revenue of $23.8
million, which increased by $3.3 million, or 15.9%; wireline revenues of $9.2
million, which increased by $1.6 million, or 20.6%; and other revenues of $2.5
20
million, which increased $0.8 million from the second quarter of 2004. Operating
income decreased $0.3 million, to $4.7 million, compared to $5.0 million for the
same period in 2004. Net income per diluted share was $0.33 per share for the
2005 second quarter, compared to $0.38 per share for the 2004 second quarter. As
a result of the November 30, 2004 acquisition of NTC, the second quarter of 2005
includes a $1.0 million operating loss for NTC compared to the second quarter of
2004 which does not include NTC. The startup loss from NTC was expected as the
Company integrates NTC's operations and builds upon NTC's growth potential.
Revenues
Wireless revenues are primarily derived from the PCS business. As of June 30,
2005, the Company had 112,090 retail PCS subscribers. The PCS operation added
17,615 net retail subscribers since June 30, 2004, and 9,477 since December 31,
2004. In addition, net wholesale users increased by 14,674 since June 30, 2004
and 5,396 since December 31, 2004. Wireless service revenues from retail
customers were $15.0 million for the second quarter of 2005, which represented
an increase of $2.3 million, or 17.9%, compared to $12.7 million for the second
quarter of 2004.
PCS travel, wholesale and roaming revenues combined for the second quarter 2005
were $7.2 million, which represented a $0.9 million, or 14.8%, increase compared
to the travel, wholesale and roaming revenue for the second 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.
PCS equipment sales increased $16 thousand, or 2.0%, to $0.8 million for the
second quarter of 2005. The increase was primarily due to more gross new PCS
subscribers and a lower phone price in the second quarter of 2005 and 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 second quarter
of 2005, compared to $0.7 million for the second quarter of 2004.
Wireline revenues were $9.2 million in the 2005 second quarter, which
represented an increase of $1.6 million, or 20.6%, from the second quarter of
2004. The increase was the result of $1.4 million in video and phone service
revenues from NTC. The remaining $0.2 million increase was primarily due to an
increase in directory advertising, long distance services and a Shenandoah Cable
television rate increase in January 2005. Total switched minutes of use on the
local telephone network increased by 15.7% compared to the second quarter of
2004, however, access revenues did not increase due to declining wireline rates.
The mix of minutes that terminate to wireless carriers compared to total minutes
shifted from 40.8% for the second quarter of 2004 to 51.1% for the second
quarter of 2005. The increase in minutes was primarily attributable to wireless
traffic transiting the Company's telephone network.
Other revenues of $2.5 million increased $0.8 million compared to other revenues
for the second quarter of 2004. Internet revenues increased $1.0 million, which
includes $0.9 million from NTC. The total subscriber base for the dial-up and
DSL Internet services provided by Shentel Services was 17,479 as of June 30,
2005, compared to 18,278 as of June 30, 2004, a decrease of 4.4%. While the
subscribers to DSL service increased 1,571 or 84.6%, compared to the June 30,
2004 subscriber base, there was a decline of 2,370 dial-up subscribers, or
14.4%, from the level at June
21
30, 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, resulted in a
decrease of $0.3 million in other revenue compared to the second quarter 2004.
Operating Expenses
Total operating expense for the second quarter of 2005 was $30.8 million, which
represented an increase of $6.0 million, or 24.1%, compared to the second
quarter of 2004. The higher operating expense was primarily attributable to the
inclusion of $3.3 million from NTC's operations, with the remaining $2.7 million
increase, exclusive of NTC, primarily the result of $1.6 million in expense
related to the increase in the number of PCS subscribers and expanded PCS
network operations and a $1.1 million increase in selling, general and
administrative expenses.
Costs of goods and services were $5.7 million, which represented an increase of
$1.8 million, or 46.0%, from the second quarter of 2004. Costs associated with
NTC account for $1.0 million of the increase with the remaining increase
primarily due to higher volumes of handsets sold through Company owned stores
and PCS handset commissions and 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 second quarter of 2005, the Company added 11,355
gross new PCS subscribers compared to 10,201 in the second quarter of 2004.
Network operating costs for the second quarter of 2005 were $10.2 million, which
represented an increase of $1.1 million, or 11.5%, compared to the second
quarter of 2004. The increase was primarily the result of NTC's network
operating costs of $0.5 million and an increase in PCS travel and line costs of
$0.8 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 networks not operated by the Company.
Depreciation and amortization expense for the 2005 second quarter was $5.5
million, which represented an increase of $1.1 million, or 25.0%, compared to
$4.4 million for the second quarter of 2004. The increase is primarily due to
NTC's depreciation expense for the second quarter of 2005 of $0.7 million, new
assets in the PCS and telephone operations and a change in depreciable asset
lives in the fourth quarter of 2004.
Selling, general and administrative costs were $9.4 million, which represented
an increase of $2.0 million, or 27.6%. NTC's costs for second quarter 2005 were
$1.0 million and the Sprint customer care costs increased $0.3 million from the
second quarter of 2004. Stock Appreciation Rights (SARS) expense was $0.5
million for the second quarter 2005, due to a significant increase in the
Company's stock price, and the remaining $0.2 million increase was related to
salary and benefits expense for new and existing employees.
Other Income (Expense)
Losses on external investments totaled $11 thousand in the second quarter of
2005, compared to a $146 thousand gain in the second quarter of 2004. Second
quarter 2005 interest expense decreased by $3 thousand, or 0.5%, compared to the
second quarter of 2004. The Company's total debt as of
22
June 30, 2005 was $38.1 million, compared to $41.2 million as of June 30, 2004
and $52.3 million as of December 31, 2004. The decrease in borrowings from
December 31, 2004 to June 30, 2005 was the result of the second quarter 2005
repayment of a revolving line of credit with CoBank.
The Company's 2005 second quarter net income was $2.5 million compared to $2.9
million in the second quarter of 2004. The reduction is due primarily to NTC's
$0.8 million net loss and the $0.5 million SARS expense.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
General
Total revenues for the six months ended June 30, 2005 was $69.9 million, which
represented an increase of $12.3 million, or 21.4%, compared to $57.6 million
for the six months ended June 30, 2004. Total revenues include wireless revenue
of $46.4 million, which increased by $7.0 million, or 17.7%; wireline revenues
of $18.4 million, which increased by $3.6 million, or 24.6%; and other revenues
of $5.1 million, which increased $1.7 million from the six months ended June 30,
2004. Operating income was $9.3 million for both the first six months of 2005
and 2004. Net income per diluted share was $0.64 per share for the 2005 six
month period, compared to $0.68 per share for the same period of 2004. As a
result of the November 30, 2004 acquisition of NTC, the six months ended June
30, 2005 includes a $1.8 million operating loss for NTC compared to the six
months ended June 30, 2004 which does not include NTC. The startup loss from NTC
was expected as the Company integrates NTC's operations and builds upon NTC's
growth potential.
Revenues
Wireless revenues are primarily derived from the PCS business. Wireless service
revenues were $29.2 million for the six months ended June 30, 2005, which
represented an increase of $4.5 million, or 18.4%, compared to $24.7 million for
the six months ended June 30, 2004.
PCS travel, wholesale and roaming revenues combined for the six months ended
June 30, 2005 were $13.8 million, which represented a $2.2 million, or 18.7%,
increase compared to the travel, wholesale and roaming revenue for the six
months ended June 30, 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.
PCS equipment sales increased $0.1 million, or 6.7%, to $1.6 million for the six
months ended June 30, 2005. The increase was primarily due to more gross new PCS
subscribers and a lower phone price in the second quarter of 2005 and 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 $1.6 million for the six months
ended June 30, 2005, compared to $1.4 million for the six months ended June 30,
2004.
Wireline revenues were $18.4 million in the 2005 six month period, which
represented an increase of $3.6 million, or 24.6%, from the 2004 six month
period. The increase was the result of $2.8 million in video and phone service
revenues from NTC. The remaining $0.8 million increase was primarily due to a
January 2005 Shenandoah Cable Television rate increase amounting to $0.3
23
million, a $0.2 million increase in access revenues and a $0.2 million increase
in directory advertising. Total switched minutes of use increased by 16.2%
compared to the six months ended June 30, 2004. The mix of minutes that
terminate to wireless carriers compared to total minutes shifted from 38.3% for
the six months ended June 30, 2004 to 50.1% for the six months ended June 30,
2005. The increase in minutes was primarily attributable to wireless traffic
transiting the Company's telephone network.
Other revenues of $5.1 million increased $1.7 million compared to other revenues
for the 2004 six month period. Internet revenues increased $2.0 million with NTC
contributing $1.8 million of the increase. The Travel 511 contract revenue from
the Virginia Department of Transportation, which expired January 31, 2005,
decreased by $0.5 million compared to six months ended June 30, 2004.
Operating Expenses
Total operating expense for the 2005 six month period was $60.6 million, which
represented an increase of $12.3 million, or 25.5%, compared to the 2004 six
month period. The higher operating expense was primarily attributable to the
inclusion of $6.4 million from NTC's operations and an increase in selling,
general and administrative expenses of $2.2 million, exclusive of NTC. The
remaining $3.7 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 $11.2 million, which represented an increase of
$3.5 million, or 46.5%, from the 2004 six month period. Costs associated with
NTC account for $2.3 million of the increase with the remaining increase
primarily due to higher volumes of handsets sold through Company owned stores
and PCS handset commissions and 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 2005 six month period, the Company added 22,074
gross new PCS subscribers compared to 20,544 in the 2004 six month period.
Network operating costs for the 2005 six month period were $19.9 million, which
represented an increase of $2.5 million, or 14.1%, compared to the 2004 six
month period. The increase was primarily the result of NTC's network operating
costs of $0.9 million and an increase in PCS travel and line costs of $1.7
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 six month period, was $10.9
million, which represented an increase of $2.2 million, or 25.0%, compared to
$8.7 million for the 2004 six month period. The increase is primarily due to
NTC's depreciation expense for the 2005 six month period of $1.4 million, new
assets in the PCS and telephone operations and a change in depreciable asset
lives in the fourth quarter of 2004.
Selling, general and administrative costs were $18.6 million, which represented
an increase of $4.1 million, or 28.6%, compared to the 2004 six month period.
NTC's costs for the 2005 six month period were $1.9 million and the Sprint
customer care costs increased $0.5 million from the 2004 six month period. SARS
expense was $0.6 million for the 2005 six month period, due to a significant
second quarter increase in the Company's stock price, and the remaining $1.1
million increase related to salary and benefits expense for new and existing
employees.
24
Other Income (Expense)
Losses on external investments totaled $0.3 million in the 2005 six month
period, compared to a $0.1 million gain in the 2004 six month period. Interest
expense increased by $53 thousand, or 3.4%, in the 2005 six month period
compared to the 2004 six month period
The Company's net income for the 2005 six month period was $4.9 million compared
to $5.2 million for the 2004 six month period. The reduction is due to NTC's
$1.4 million net loss and the $0.6 million SARS expense.
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 June 30, 2005, the Company held shares in two companies that are
publicly-traded, with the following market values: $42 thousand in Net IQ
(NTIQ), with 3,744 shares held, and $151 thousand in Deutsche Telekom, AG (DT),
with 8,219 shares held.
Liquidity and Capital Resources
The Company generated $20.7 million in cash from operations in the 2005 six
month period, compared to $13.7 million in the 2004 six month period. The $7.0
million increase from the 2004 six month period includes $5 million from escrow
received in February 2005 related to the Company's February 2003 sale of its
cellular operations.
The Company expects that operations will continue to generate positive cash
flows.
As of June 30, 2005, the Company's total debt was $38.1 million, with an
annualized overall weighted average interest rate of approximately 7.2%. As of
June 30, 2005, the Company was in compliance with the covenants in its credit
agreements. During the second quarter 2005, the Company reduced the outstanding
balance of its revolving line of credit with CoBank by $12 million.
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 2005 six month
period, the Company spent $11.9 million on capital projects.
25
The Company's short-term and long-term cash needs, including working capital
requirements, capital projects, debt payments, and dividend payments, are
expected to be met 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.
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 2005.
Risks
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 ultimately negotiate with Sprint.
In July 2005, Ubiquitel, Inc., iPCS Wireless, Inc, Enterprise Communications
Partnership and Gulf Coast Wireless LP each filed actions seeking injunctive
relief to prevent Sprint from breaching similar provisions of their respective
agreements with Sprint. In particular, all of the complaints would enjoin Sprint
from engaging in certain post-merger conduct in the respective parties' service
areas, including the operation of the Nextel network, marketing, sales and
promotional activities relating to Nextel products, and disclosing confidential
business information, in each case in a manner that would violate Ubiquitel's,
iPCS', Enterprise's and Gulf Coast Wireless' respective management agreements
with Sprint. Shentel believes that the terms of such other companies' agreements
with Sprint are substantially similar to the terms of the Company's agreement
with Sprint. As of August 2, 2005, Sprint PCS has entered into forbearance
agreements with Ubiquitel and iPCS . Under the respective forbearance
agreements, Ubiquitel and iPCS each agreed not to seek certain injunctive or
equitable relief against Sprint or Nextel relating to the matters specified in
their complaints and Sprint agreed to certain parameters for the operation of
Sprint's wireless business in the territories operated by Ubiquitel and iPCS
following the completion of the merger involving Sprint and Nextel In light of
these developments, the Company has and will continue to review and assess its
options including but not limited to: initiating litigation; executing a
forbearance agreement and/or seek changes to the existing relationship with
Sprint.
As of the date hereof, the Company has had on-going discussions with Sprint
regarding the continuance of their long-term relationship and the impact of the
Sprint Nextel merger. As a result of the Sprint Nextel merger, Sprint may
require the Company to meet additional program requirements, which the Company
anticipates will increase capital expenditures and operating
26
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, that a mutually acceptable arrangement will be reached
prior to or subsequent to the closing of the Sprint Nextel merger or the likely
impact on the Company or its relationship with Sprint of any such arrangements.
The Company believes that a significant portion of its PCS service area overlaps
the service area operated by Nextel Partners under the Nextel brand. Nextel
Partners is not a party to the Sprint Nextel merger. The agreements between
Nextel Partners and Nextel contain exclusivity and other provisions that will
remain in place following the Sprint Nextel merger until such time that Nextel
Partners may be acquired by Sprint Nextel. The Company believes that the
provisions under the agreements between Nextel and Nextel Partners may conflict
with the Company's rights under its Management Agreement. Even if such
provisions do not conflict, as long as Nextel Partners remains a stand-alone
entity, the ability of the Company to fully realize any of the benefits from the
merger of Sprint and Nextel may be limited. Furthermore, the continued operation
by Nextel Partners of a competing network could have a negative impact on the
Company's results of operations. Although the board of directors of Nextel
Partners has recommended that its shareholders vote to put their Nextel Partners
shares to Sprint Nextel following the merger, such an acquisition is unlikely to
occur prior to 2006 and there can be no assurance that Nextel Partners'
shareholders will accept the recommendation.
At June 30, 2005, the Company is one of ten 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 access charges as
well as an overhaul of intercarrier compensation. An unfavorable change may have
an adverse effect on the Company's telephone operations.
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
2005 six month period, the dominating nationwide 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.
27
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.
28
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 still evaluating the impact of applying SFAS
No. 123 (R), however, the Company 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 second 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. The Company has a $15 million variable rate revolving reducing credit
facility with CoBank and, as of June 30, 2005, the outstanding debt balance was
$1.2 million. The Company's remaining debt has fixed rates through its maturity.
A 10.0% decline in market interest rates would increase the fair value of the
fixed rate debt by approximately $1.0 million, while the estimated current fair
value of the fixed rate debt is approximately $37.2 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 $5.2
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.
29
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 June 30, 2005, the Company's external investments totaled $7.3 million
with $7.1 million 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 $0.8 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 June 30, 2005.
During the second fiscal quarter of 2005, there were 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.
Under the Company's agreements with Sprint, Sprint provides the Company 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 65% of the Company's total revenues, while approximately 39% 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 the Company's
revenues, expenses and accounts receivable, which underlie a substantial portion
of the Company's periodic financial statements and other financial disclosures.
Information provided by Sprint includes reports regarding the subscriber
accounts receivable in the Company's markets. Sprint provides the Company with
monthly accounts receivable, billing and cash receipts information on a market
level, rather than a subscriber level. The Company reviews these various reports
to identify discrepancies or errors. However, under the Company's agreements
with Sprint, the Company is 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 the Company's reliance on Sprint
for financial information, the Company must depend on Sprint to design adequate
internal controls with respect to the processes established to
30
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 April 1, 2004 to March 31, 2005. The most recent report
indicated there were no material issues 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 1. Legal Proceedings
In April, 2005, Shenandoah Personal Communications Services Company (Shenandoah
PCS) submitted to arbitration a claim against Verizon South Inc., Verizon
Virginia Inc., Verizon West Virginia Inc., Verizon Pennsylvania Inc., Verizon
North Inc. and Verizon Maryland (collectively "Verizon") with respect to
overcharges for completing local calls from Shenandoah PCS customers to
Verizon's customers. On May 16, 2005,Verizon filed actions in the US District
Court, Maryland District, and in the US District Court, Eastern District of
Virginia, seeking to stay the arbitration proceedings. On July 18, 2005,
Shenandoah PCS filed a response to Verizon's request for a stay and filed
counterclaims against Verizon seeking the same relief as originally set forth in
its demand for arbitration. Shenandoah PCS is claiming that Verizon failed to
charge Shenandoah the interconnection rate that it was entitled to under a
number of interconnection agreements negotiated between Sprint PCS (on behalf of
Shenandoah PCS) and Verizon. In the alternative, Shenandoah PCS is claiming that
Verizon failed to comply with federal law by not offering Shenandoah PCS the
"mirror rate" as required by the FCC, and by charging Shenandoah PCS
discriminatory rates. Although Verizon has acknowledged that Shenandoah PCS is
entitled to the lower rate on a going forward basis, it has not refunded any
overcharges for the period prior to November 2004. The Company estimates that
the amount of overcharges for the period prior to November 2004 may be as much
as $1.5 million; however, there can be no assurance that the Company will be
able to recover the full amount. As of June 30, 2005, no amount has been
recorded as a receivable in the Company's consolidated financial statements.
ITEM 4. Submissions of Matters to a Vote of Security Holders set forth below:
(a) The Company held its 2005 annual meeting of shareholders on May
3, 2005.
(c) The following sets forth information regarding the election of
Directors and approval of the 2005 Shenandoah Telecommunications
Company Stock Incentive Plan at the 2005 annual meeting. There were
7,644,538 shares of common stock outstanding as of the record date
for, and entitled to vote at, the 2005 annual meeting, of which
5,541,785 shares were present in person or by proxy, and constituted
a quorum.
The shareholders approved a proposal to elect each of the three
nominees to the board of directors for a three-year term, which will
expire at the annual meeting of shareholders in 2008. The tabulation
31
of votes on this proposal is as follows:
NOMINEE FOR
Douglas C. Arthur 5,428,029
Tracy Fitzsimmons 5,372,009
William A. Truban, Jr. 5,495,444
The shareholders approved the 2005 Shenandoah Telecommunications
Company Stock Incentive Plan with 5,228,281 voting for the proposal.
ITEM 6. Exhibits
(a) The following exhibits are filed with this Quarterly Report on
Form 10-Q:
4.2 Amended and Restated Dividend Reinvestment Plan
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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
August 5, 2005 /s/ Earle A. MacKenzie
----------------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
33
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
4.2 Amended and Restated Dividend Reinvestment
Plan
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.
34
Exhibit 4.2.
SHENANDOAH TELECOMMUNICATIONS COMPANY
AMENDED AND RESTATED DIVIDEND REINVESTMENT PLAN
DESCRIPTION, TERMS AND CONDITIONS
1. PURPOSE OF THE PLAN
The purpose of this Amended and Restated Dividend Reinvestment Plan (the
"Plan") is to provide the participating shareholders of Shenandoah
Telecommunications Company (the "Company") with a convenient method of investing
cash dividends in additional shares of the common stock of the Company at a cost
that may, because of the Company's payment of brokerage fees associated with the
purchases of Common Stock under the Plan, represent a savings over that
available in normal open market purchases.
2. DEFINITIONS.
For purposes of the Plan, the following words or phrases shall have
meanings assigned to them below:
(a) "Common Stock" shall mean the common stock, without par value, of
the Company.
(b) "Company" shall mean Shenandoah Telecommunications Company.
(c) "Fair Market Value" shall mean the value of the Common Stock
determined by the Company as follows:
(i) Exchange Traded. In the event that the Common Stock is listed on
a national securities exchange, the fair market value per share
shall be the average of the high and low sale prices of the Common
Stock as reported on such exchange for each of the ten trading days
immediately preceding the determination date.
(ii) NASDAQ Listed. In the event that the Common Stock is not listed
on a national securities exchange, but is then quoted on The NASDAQ
Stock Market (whether the National or SmallCap Market), the fair
market value per share shall be the average of the high and low sale
prices of the Common Stock as reported on The NASDAQ Stock Market
for each of the ten trading days immediately preceding the
determination date.
(iii) OTC Traded. In the event that the Common Stock is not listed
on a national securities exchange and is not quoted on The NASDAQ
Stock Market, the fair market value per share shall be the average
of the high and low bid and asked quotations of the Common Stock for
each of the ten trading days immediately preceding the determination
date as reported by two brokerage firms to be selected by the
Company which are then making a market in the Common Stock, except
that if no closing bid or asked quotation is available on one or
more of such trading days, fair market value shall be determined by
reference to the ten trading days preceding the determination date
on which closing bid and asked quotations are available.
(iv) Other. In the event that the Common Stock is not listed on a
national securities exchange, is not quoted on The NASDAQ Stock
Market and no closing bid and asked quotations are available, or
that the fair market value per share cannot otherwise be determined
as contemplated above, then fair market value per share shall be
determined in good faith by the Company.
(d) "Full Dividend Reinvestment Option" shall mean a Participant's
option to reinvest dividends on all shares of Common Stock then or
thereafter registered in his name.
Amended and Restated Drip adopted July 18, 2005
(e) "Investment Date" shall mean the date a dividend is actually paid by
the Company.
(f) "Partial Dividend Reinvestment Option" shall mean a Participant's
option to reinvest dividends on only a specified number of shares of
Common Stock then registered in his name.
(g) "Participant" shall mean a holder of record of Common Stock of the
Company who has elected to participate in the Plan by delivering an
executed Participant Card to the Plan Agent.
(h) "Participant Card" shall mean the card or other document designated
by the Plan Agent as the required evidence of a shareholder's
election to participate in the Plan.
(i) "Plan Agent" shall mean the Company, and shall also mean any other
entity to which the Company has delegated all or any part of its
responsibilities hereunder, other than the function of purchasing
Plan Shares pursuant to the Plan.
(j) "Plan Shares" shall mean shares of Common Stock that have been
purchased on behalf of a Participant under the Plan.
(k) "Purchasing Agent" shall mean the unaffiliated entity designated
from time to time by the Board of Directors of the Company, the
Company's Chief Executive Officer or the Company's Chief Financial
Officer to purchase Plan Shares for the Participants.
(l) "Record Date" shall mean the date on which a person must be
registered as a shareholder on the stock books of the Company in
order to receive a dividend.
3. ADMINISTRATION
The Plan Agent shall administer the Plan for Participants. Purchases of
Common Stock for issuance pursuant to the Plan will be made by the Purchasing
Agent.
4. PARTICIPATION
Subject to the provisions of Sections 4, 5, and 13 herein, all holders of
record of the Common Stock of the Company are eligible to participate in the
Plan. A beneficial owner whose shares are registered in a name other than his
own must become a shareholder of record with respect to any such shares that the
shareholder desires to participate in the Plan by transferring such shares into
his own name in order to participate in the Plan.
The Plan Agent reserves the right not to offer participation in the Plan
to those holders of record who reside in jurisdictions that require registration
of the Plan with the securities commission of that jurisdiction.
5. ENROLLMENT; CHANGE IN PARTICIPATION LEVEL
A shareholder of record may enroll in the Plan at any time by completing
and signing a Participant Card and returning it to the Plan Agent, unless the
Plan Agent or the Purchasing Agent has reason to believe that such enrollment is
not, at such time, permitted under the laws of the jurisdiction in which such
shareholder resides or under the laws of the United States. If a Participant
Card requesting reinvestment of dividends is received by the Plan Agent on or
before the Record Date established for a particular dividend, reinvestment will
commence with that dividend. If a Participant Card is received by the Plan Agent
after the Record Date established for a particular dividend, the reinvestment of
dividends will begin on the Investment Date following the next Record Date if
the shareholder is still a holder of record on such next Record Date. A
Participant who elects to enroll in the Plan may choose to participate through
either the Full Dividend Reinvestment Option or the Partial Dividend
Reinvestment Option. Once a Participant has enrolled in the Plan, his
participation continues with respect to his participating shares until the
Participant
Amended and Restated Drip adopted July 18, 2005
changes his participation level, as described in the next paragraph, or his
participation is terminated pursuant to the terms of the Plan.
A Participant may, at any time or from time to time, change his
participation level and thereby increase or decrease his number of participating
shares in the Plan by completing and signing a new Participant Card and
returning it to the Plan Agent. If a new Participant Card requesting a change in
participation level is received by the Plan Agent on or before the Record Date
established for a particular dividend, the change will be reflected with that
dividend. If a new Participant Card is received by the Plan Agent after the
Record Date established for a particular dividend, the change in participation
level will begin on the Investment Date following the next Record Date if the
shareholder is still a holder of record on such next Record Date.
6. PURCHASES
On each Investment Date, or the next trading day if the Investment Date
does not fall on a trading day, the Company will pay to the Purchasing Agent the
total amount of dividends payable on each Participant's shares of Common Stock
enrolled in the Plan (including Plan Shares) and, except as otherwise directed
by the Plan Agent, the Purchasing Agent shall use that amount to purchase Common
Stock from the Company, in the open market, or a combination of both, for the
Participant. Participants cannot choose the source of the shares of Common
Stock. The price of Common Stock purchased from the Company will be the Fair
Market Value of such Common Stock determined as of the Investment Date.
Share purchases in the open market may be made in transactions effected on
a national securities exchange, The NASDAQ Stock Market or over-the-counter
trades, as applicable, or through negotiated transactions on terms that the
Purchasing Agent may reasonably determine. Neither the Plan Agent nor any
Participant will have any authority or power to direct the date, time, or price
at which shares of Common Stock may be purchased or the selection of a broker or
dealer through or from whom purchases are to be made by the Purchasing Agent.
The price of all the shares of Common Stock purchased in the open market will be
the weighted average price of all the shares purchased for the Plan for that
investment (excluding brokerage commissions).
Purchases will be made as soon as possible after the applicable Investment
Date, but not more than thirty (30) days after such date. Interest will not be
paid on funds held pending investment. No shares of Common Stock will be
allocated to a Participant's account until the date on which the Purchasing
Agent has purchased sufficient shares from the Company and/or in the open market
to cover purchases for all Participants in the Plan.
7. TEMPORARY CURTAILMENT OF PURCHASES OR SALES
Temporary curtailment or suspension of purchases of shares may be made at
any time when such purchases would, in the judgment of the Plan Agent,
contravene or be restricted by applicable regulations, interpretations or orders
of the Securities and Exchange Commission, or any other governmental commission,
agency or instrumentality, of any court or securities exchange or of The NASDAQ
Stock Market or the National Association of Securities Dealers, Inc. The Plan
Agent shall not be accountable or otherwise liable for failure to make purchases
at such times.
8. COSTS
Participants will be charged the actual cost (excluding brokerage
commissions, which shall be paid by the Company) of all Common Stock purchased.
All costs of administration of the Plan will be borne by the Company; however,
reasonable service charges may be assessed by the Company upon thirty (30) days'
notice to the Participants.
Amended and Restated Drip adopted July 18, 2005
9. REPORTS TO PARTICIPANTS
As soon as practicable after completion of each investment on behalf of a
Participant, the Plan Agent will mail to such Participant a statement of account
showing (i) the amount of the dividend applied toward such investment, (ii) the
taxes withheld, if any, (iii) the net amount invested, (iv) the number of shares
purchased, (v) the average cost per share, (vi) the cost basis of whole shares
purchased, (vii) the date of purchase and (viii) the amount of the dividend paid
in cash in lieu of the issuance of fractional shares. Each Participant will
receive annually Internal Revenue Service Form 1099, or any successor form,
reporting dividend income received.
10. CERTIFICATES FOR SHARES
Certificates for whole Plan Shares will be issued to Participants upon
request. Certificates for fractional shares will not be issued under any
circumstances. Instead, each Participant's account maintained by the Plan Agent
will be credited with the number of fractional shares (calculated to at least
three (3) decimal places) allocated to such Participant as a result of that
investment.
11. TERMINATION OF ACCOUNT AND WITHDRAWALS
A Participant may terminate his account at any time prior to a Record Date
by giving written notice of termination to the Plan Agent. The effective date of
any such termination shall be the fifth trading day following receipt by the
Plan Agent of such notice, provided that the effective date of termination in
the case of any termination notice received by the Plan Agent after a Record
Date shall be the fifth trading day after the completion of the investment in
Plan Shares in respect of the Investment Date following such Record Date. Within
a reasonable time after the effective date of termination, the Plan Agent will
deliver to the Participant (i) a certificate representing any previously
unissued Plan Shares held under the Plan, if any, and (ii) a check for any
uninvested dividends and the cash payable in lieu of fractional shares, if any
then held in the Participant's account maintained by the Plan Agent. The amount
of cash payable in lieu of any fractional shares will be calculated based on the
Fair Market Value of the Common Stock determined as of the effective date of
termination. A Participant's account will be automatically terminated if at
anytime, the Participant has less than 1 whole share either enrolled or held by
the Plan.
12. STOCK DIVIDENDS; STOCK SPLITS
Reports detailing any stock dividends or split shares distributed by the
Company will be mailed to each Participant. Stock Splits and stock dividends on
enrolled and plan shares shall automatically be enrolled in the Plan, unless the
Participant notifies the Plan Agent to the contrary.
13. AMENDMENT OR DISCONTINUANCE OF THE PLAN
The Plan Agent may amend, supplement, suspend, modify or terminate the
Plan at any time without the approval of the Participants. Thirty (30) days'
notice of any suspension or material amendment shall be sent to all
Participants, who shall in all events have the right to withdraw from the Plan.
The Plan Agent shall have the right at any time upon written notice to a
Participant to suspend or terminate such Participant's participation in the Plan
if it determines in its sole discretion that suspension or termination is
appropriate because shares of Common Stock may not lawfully be offered or sold
in the state in which the Participant resides or that the Participant is using
the Plan for purposes inconsistent with the intended purpose of the Plan, or for
any other reasons. In the event that a Participant's right to participate in the
Plan is terminated, the Participant shall be treated as though a notice to
withdraw from the Plan had been received pursuant to Section 11 of the Plan on
the effective date of such termination.
14. INTERPRETATION OF THE PLAN
Any question of interpretation arising under the Plan will be determined
by the Board of Directors of the Company pursuant to applicable federal and
state law and the rules and regulations of all regulatory authorities, and such
determination shall be final and binding on all Participants.
Amended and Restated Drip adopted July 18, 2005
15. NOTICES
All communications with or notices to the Participants may be given by
letter addressed to the Participant at the Participant's last address of record
with the Company. The Participant agrees to give prompt written notice to the
Company of any change of address.
All communications with or notices required to be given to the Plan Agent
should be addressed to:
Shenandoah Telecommunications Company
500 Shentel Way
Post Office Box 459
Edinburg, Virginia 22824
Attention: Dividend Reinvestment Plan
Additional Participant Cards may be requested and inquiries made about the
Plan by writing to the mailing address shown above or by calling the Plan Agent
at (540) 984-4141.
In the event of any change in or substitution of the Plan Agent, a notice
of the new Plan Agent's address and telephone number shall be sent to all
participants and this Section 15 shall be amended accordingly.
16. DUTIES AND RESPONSIBILITIES
Neither the Company, the Plan Agent nor its nominees shall have any
responsibility beyond the exercise of ordinary care for any action taken or
omitted pursuant to the Plan, nor shall they have any duties, responsibilities
or liabilities, except such as are expressly set forth herein. Neither the
Company nor the Plan Agent shall be liable for any act done in good faith, or
for any good faith omission to act, including, without limitation, any claims of
liability (a) with respect to the time or prices at which Common Stock is
purchased for a Participant, or any inability to purchase Common Stock for any
reason or (b) for any fluctuation in the market value of the Common Stock.
17. GOVERNING LAW
This Plan is governed by the laws of the Commonwealth of Virginia.
18. NO TERMINATION BY OPERATION OF LAW
The delivery by a Participant of a signed Participant Card to the Plan
Agent shall constitute an irrevocable appointment of the Plan Agent as such
Participant's agent, which appointment can only be terminated by terminating
such Participant's account in the manner provided in Section 11 or 13. The
authority conferred by the Participant Card shall not be terminated by operation
of law, whether by the death or incapacity of the Participant, the termination
of any trust, the dissolution of any corporation or the occurrence of any other
event.
19. GENDER AND NUMBER
Except when otherwise indicated by the context, the masculine gender shall
also include the feminine gender, and the definition of any term herein in the
singular shall also include the plural.
20. EFFECTIVE DATE
The effective date of the Plan is August 12, 2005.
Amended and Restated Drip adopted July 18, 2005
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
35
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: August 5, 2005
36
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
37
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: August 5, 2005
38
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 June 30, 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
-------------------------------------
Christopher E. French
President and Chief Executive Officer
August 5, 2005
/s/ Earle A. MacKenzie
-------------------------------------
Earle A. MacKenzie
Executive Vice President and
Chief Financial Officer
August 5, 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.