SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    Form 10-Q

|X|   QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the Three Months Ended March 31,quarterly period ended September 30, 2003

                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
      1934

For the transition period from ______________________ to ______________________


                         Commission File NumberNumber: 0-9881

                      SHENANDOAH TELECOMMUNICATIONS COMPANY
             (Exact name of registrant as specified in its charter)

               Virginia                                       54-1162807
    (State or other jurisdiction of                         (I.R.S. Employer
     incorporation or organization)                      Identification  Number)

    PO Box 459, Edinburg, Virginia                              22824
(Address of principal executive offices and zipoffices)                      (Zip code)

                                 Registrant's(540) 984-4141
              (Registrant's telephone number, including area code:  (540) 984-4141code)

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 X            |_|NO
                       -----              -----

Indicate by check mark whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X|YES X           |_|NO
                                       -----             -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 30, 2003 set forth below:the latest practicable date.

          Class                                  Outstanding at April 30,October 31, 2003
Common Stock, No Par Value                              3,785,9753,793,913 Shares




         SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIESSUBSIDIARY COMPANIES
                                      INDEX

Page
                                                                         Numbers

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

          Unaudited Consolidated Balance Sheets
              March 31, 2003 and December 31, 2002                         3-4

          Unaudited Condensed Consolidated Statements of Income for the
              Three Months Ended March 31, 2003 and 2002                   5-6

          Unaudited Condensed Consolidated Statements of Cash Flows for
              the Three Months Ended March 31, 2003 and 2002               7

          Unaudited Condensed Consolidated Statements of
              Shareholders' Equity and Comprehensive Income
              for the Three Months Ended March 31, 2003 and the
              Twelve Months Ended December 31, 2002                        8

          Notes to Unaudited Condensed Consolidated
              Financial Statements                                         9-12

Item 2.   Management's Discussion and Analysis of
              Financial Condition and Results of Operations                13-21
Page Numbers PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets September 30, 2003 and December 31, 2002 3-4 Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 5-6 Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 7 Unaudited Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Nine Months Ended September 30, 2003 and the Year Ended December 31, 2002 8 Notes to Unaudited Condensed Consolidated Financial Statements 9-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Item 4. Controls and Procedures 22 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 23 Certifications 23-25 Signatures 26 Item 4. Controls and Procedures 27 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 Exhibit Index 29 Exhibit 31 30 - 31 Exhibit 32 32
2 Item 1. FINANCIAL STATEMENTS SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) March 31,September 30, December 31, Assets 2003 2002 -------- --------------------- ----------- Current Assets Cash and cash equivalents $ 36,28831,690 $ 2,209 Accounts receivable, net 6,0836,135 7,536 Income tax receivable -- 12 Materials and supplies 1,7221,904 1,787 Prepaid expenses and other 2,0411,652 2,205 Deferred income taxes 1,2301,073 1,197 Assets held for sale -- 5,548 -------- ------------------ ---------- Total current assets 47,36442,454 20,494 Securities and investments Available-for-sale securities 132163 151 Other investments 7,0777,230 7,272 -------- ------------------ ---------- Total securities and investments 7,2097,393 7,423 Property, plant and equipment, net 130,267128,963 132,152 Other Assets Cost in excess of net assets of business acquired 3,217 3,2173,313 3,313 Deferred charges and other assets, net 689 718532 622 Escrow account (Note 8) 5,0055,000 -- -------- ------------------ ---------- Total other assets 8,9118,845 3,935 -------- ------------------ ---------- Total Assets $193,751 $164,004 ======== ========$ 187,655 $ 164,004 ========== ========== (continued) 3 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (in thousands) March 31,September 30, December 31, Liabilities and Shareholders' Equity 2003 2002 --------- ---------------------- ----------- Current Liabilities Current maturities of long-term debt $ 4,1814,186 $ 4,482 Notes payable -- 3,503 Accounts payable 5,2345,615 5,003 Advance billings and deposits 3,5413,304 3,538 Income taxes payable 13,7054,429 -- Liabilities held for sale -- 542 Other current liabilities (Note 9) 2,6253,453 2,832 --------- ------------------- ---------- Total current liabilities 29,28620,987 19,900 Long-term debt, less current maturities 43,02840,196 47,561 Other Liabilities Deferred income taxes 17,39218,671 15,859 Pension & other 2,7672,608 2,441 --------- ------------------- ---------- Total other liabilities 20,15921,279 18,300 Minority interests in discontinued operations -- 1,666 Shareholders' Equity Common stock 5,4725,633 5,246 Retained earnings 95,81899,556 71,335 Accumulated other comprehensive income (loss) (12)4 (4) --------- ------------------- ---------- Total shareholders' equity 101,278105,193 76,577 --------- ------------------- ---------- Total Liabilities and Shareholders' Equity $ 193,751187,655 $ 164,004 ========= =================== ========== See accompanying notes to unaudited condensed consolidated financial statements. 4 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended (in thousands, except per share data) September 30, September 30, 2003 2002 2003 2002 ----------------------------------------------- Operating Revenues Wireless $ 18,008 $ 15,792 $ 50,411 $ 41,339 Wireline 7,774 7,121 21,722 21,441 Other revenues 1,800 1,718 5,240 4,734 ----------------------------------------------- Total revenues 27,582 24,631 77,373 67,514 Operating Expenses Cost of goods and services 2,966 2,712 7,879 7,281 Network operating costs 8,448 8,327 25,175 23,715 Depreciation and amortization 4,180 3,759 12,328 10,592 Selling, general and administrative 7,012 7,462 20,463 18,621 ----------------------------------------------- Total operating expense 22,606 22,260 65,845 60,209 ----------------------------------------------- Operating Income 4,976 2,371 11,528 7,305 Other Income (expense): Non-operating income (loss), net 234 (12) 457 176 (Loss) on investments, net (86) (680) (283) (9,594) Interest expense (835) (1,057) (2,686) (3,177) ----------------------------------------------- Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting 4,289 622 9,016 (5,290) Income tax (provision) benefit (1,572) (239) (3,324) 2,059 ----------------------------------------------- Income (loss) from continuing operations 2,717 383 5,692 (3,231) Income (loss) from discontinued operations, net of income taxes (23) 1,841 22,605 5,497 Cumulative effect of a change in accounting, net of income taxes -- -- (76) -- ----------------------------------------------- Net income $ 2,694 $ 2,224 $ 28,221 $ 2,266 =============================================== Net income per share, basic Continuing operations $ 0.72 $ 0.10 $ 1.50 $ (0.85) Discontinued operations, net of income taxes (0.01) 0.49 5.97 1.45 Cumulative effect of a change in accounting, net of income taxes -- -- (0.02) -- ----------------------------------------------- Total net income per share, basic (1) $ 0.71 $ 0.59 $ 7.45 $ 0.60 =============================================== Net income per share, diluted Continuing operations $ 0.71 $ 0.10 $ 1.50 $ (0.85) Discontinued operations, net of income taxes (0.01) 0.49 5.95 1.45 Cumulative effect of a change in accounting, net of income taxes -- -- (0.02) -- ----------------------------------------------- Total net income per share, diluted (1) $ 0.71 $ 0.59 $ 7.43 $ 0.60 =============================================== Weighted average shares outstanding, basic 3,790 3,769 3,787 3,768 =============================================== Weighted average shares, diluted 3,808 3,802 3,800 3,768 ===============================================
(1) Earnings (loss) per share data) March 31, 2003 2002 -------- -------- Operating Revenues Wireless $ 15,634 $ 11,754 Wireline 7,639 7,421 Other revenues 1,674 1,521 -------- -------- Total revenues 24,947 20,696 Operating Expenses Cost of goods and services 2,289 2,649 Network operating costs 8,046 7,047 Depreciation and amortization 4,021 3,344 Selling, general and administrative 6,441 5,340 -------- -------- Total operating expense 20,797 18,380 -------- -------- Operating Income 4,150 2,316 Other Income (expense): Non-operating income, net 204 119 Loss on investments, net (328) (692) Interest expense (954) (1,068) -------- -------- Income before income taxes, discontinued operations and cumulative effect 3,072 675 Income tax provision (1,141) (305) -------- -------- Income from continuing operations 1,931 370 Income from discontinued operations, net of income taxes 22,628 1,786 Cumulative effect of a change in accounting, net of income taxes (76) -- -------- -------- Net income $ 24,483 $ 2,156 ======== ======== Net income per share, basic Continuing operations $ 0.51 $ 0.10 Discontinued operations, net of income taxes 5.98 0.47 Cumulative effect of a change in accounting, net of income taxes (0.02) -- -------- -------- Total net income per share, basic $ 6.47 $ 0.57 ======== ======== Net income per share, diluted Continuing operations $ 0.51 $ 0.10 Discontinued operations, net of income taxes 5.96 0.47 Cumulative effect of a change in accounting, Net of income taxes (0.02) -- -------- -------- Total net income per share, diluted $ 6.45 $ 0.57 ======== ======== Weighted average shares outstanding, basic 3,782 3,765 ======== ======== Weighted average shares, diluted 3,796 3,783 ======== ========may not foot due to rounding. (continued) 5 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued) Three months ended (in thousands, except per share data) March 31, 2002 --------- Pro forma amounts assuming the Company adopted FAS 143 retroactively: Pro forma income from continuing operations $ 367 Discontinued operations, net of income taxes 1,786 --------- Pro forma net income $ 2,153 ========= Pro forma net income per share, basic Pro forma income from continued operations $ 0.10 Discontinued operations, net of income taxes 0.47 --------- Pro forma net income per share, basic $ 0.57 ========= Pro forma net income per share, diluted Pro forma income from continuing operations $ 0.10 Discontinued operations, net of income taxes 0.47 --------- Pro forma net income per share, diluted $ 0.57 =========
Three months Nine months ended ended (in thousands, except per share data) September 30, September 30, 2002 2002 ------------------------------ Pro forma amounts assuming the Company adopted FAS 143 retroactively: Pro forma income (loss) from continuing operations $ 380 $ (3,240) Discontinued operations, net of income taxes 1,841 5,497 ---------------------------- Pro forma net income (loss) $ 2,221 $ 2,257 ============================ Pro forma net income (loss) per share, basic Pro forma income (loss) from continued operations $ 0.10 $ (0.86) Discontinued operations, net of income taxes 0.49 1.45 ---------------------------- Pro forma net income per share, basic $ 0.59 $ 0.59 ============================ Pro forma net income (loss) per share, diluted Pro forma income (loss) from continuing operations $ 0.10 $ (0.86) Discontinued operations, net of income taxes 0.49 1.45 ---------------------------- Pro forma net income per share, diluted $ 0.59 $ 0.59 ============================
See accompanying notes to unaudited condensed consolidated financial statements. 6 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ThreeNine months ended March 31,September 30, 2003 2002 -------- ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) from continuing operations $ 1,9315,692 $ 370(3,231) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,019 3,34212,324 10,587 Amortization 2 24 5 Deferred income taxes 1,554 1162,977 (1,198) (Gain) loss on investments (83) 394(181) 9,034 Net loss from patronage and equity investments 292 126247 108 Loss on disposal of equipment 20 1493 324 Other 99 3924 614 Changes in current assets and liabilities: (Increase) decrease in: Accounts receivable 1,453 (1,887)1,401 (2,398) Materials and supplies 65 (2,105)(117) 1,120 Increase (decrease) inin: Accounts payable 231 2,979612 1,519 Other prepaids, deferrals and accruals 138 730 -------- --------(1,389) (144) --------------------- Net cash provided by operating activities 9,721 4,47321,667 16,340 Cash Flows from Investing Activities Purchases of property, plant & equipment (2,027) (5,814)(9,165) (18,817) Purchases of other investments (177) (1,345)(547) (1,420) Proceeds from sale of available-for-sale securities 151 57investment activities 513 3,067 Proceeds from disposal of assets -- 1,704 -------- --------64 68 --------------------- Net cash used in investing activities (2,053) (5,398)(9,135) (17,102) Cash Flows from Financing Activities Payments on long-term debt and revolving loan (8,337) (1,909)(11,164) (4,824) Proceeds from issuance of common stock upon exercise of stock options 226 53 -------- --------387 104 --------------------- Net cash used in financing activities (8,111) (1,856) -------- --------(10,777) (4,720) --------------------- Net cash used inprovided by (used in) continuing operations (443) (2,781)1,755 (5,482) Net cash provided by discontinued operations 34,522 1,720 -------- --------27,726 5,594 --------------------- Net increase (decrease) in cash and cash equivalents 34,079 (1,061)29,481 112 Cash and Cash Equivalents Beginning 2,209 2,037 -------- ----------------------------- Ending $ 36,28831,690 $ 9762,149 ======== ======== Cash paid for: Interest paid $ 9622,758 $ 1,0673,258 Income taxes (net of refunds) $ 12110,106 $ 31477 See accompanying notes to unaudited condensed consolidated financial statements. 7 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands)
Accumulated Other Common Retained Comprehensive Shares Stock Earnings Income (Loss) Total --------- --------- --------- --------- ---------------------------------------------------------------- Balance, December 31, 2001 3,765 $ 4,950 $ 69,610$4,950 $69,610 $ 42 $ 74,602 Comprehensive income: Net income -- -- 4,519 -- 4,519 Net unrealized change in securities available-for-sale, net of tax of $ 29 -- -- -- (46) (46) ----------------- Total comprehensive income 4,473 Dividends declared ($ 0.74 per share) (2,794) (2,794) Common stock issued through the exercise of incentive stock options and stock grants 11 296 -- -- 296 --------- --------- --------- --------- ---------------------------------------------------------------- Balance, December 31, 2002 3,776 $ 5,246 $ 71,335$5,246 $71,335 $ (4) $ 76,577 (unaudited) Comprehensive income: Net income -- -- 24,483 -- 24,48328,221 28,221 Net unrealized change in securities available-for-sale, net of tax of $ 5$(5) -- -- -- (8) (8) ---------8 8 -------- Total comprehensive income 24,47528,229 Common stock issued through the exercise of incentive stock options 10 22616 387 -- -- 226 --------- --------- --------- --------- ---------387 ------------------------------------------------------- Balance, March 31,September 30, 2003 3,7863,792 $5,633 $99,556 $ 5,472 $ 95,818 $ (12) $ 101,278 ========= ========= ========= ========= =========4 $105,193 =======================================================
See accompanying notes to unaudited condensed consolidated financial statements. 8 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The interim condensed consolidated financial statements of Shenandoah Telecommunications Company and Subsidiaries (collectively, the Company) are unaudited. In the opinion of management, all adjustments necessary for a fair statement of the interim results have been reflected therein. All such adjustments were of a normal and recurring nature. These statements should be read in conjunction with the consolidated financial statements and related notes in the Company's Annual Report to Shareholders, which are incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The balance sheet information at December 31, 2002 was derived from the audited December 31, 2002 consolidated balance sheet. 2. Operating revenues and income from continuing operations and discontinued operations for any interim period are not necessarily indicative of results that may be expected for the entire year. 3. To account for its stock options granted under the Company Stock Incentive Plan (the Plan), the Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25 issued in March 2000. Under this method, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. Grants of options under the Plan are accounted for following the APB Opinion No. 25 and related interpretations. Accordingly, no compensation expense has been recognized under the Plan. Had compensation expense been recorded based on fair values of the awards at the grant date (the method prescribed in SFAS No. 123), reported net income and earnings per share would have been reduced to the pro forma amounts shown in the following table: Fortable for the three and nine months ended March 31, 2003 2002 ---- ----September 30:
----------------------------------------------- (in thousands, except Three months ended Nine months ended per share amounts) September 30, September 30 ----------------------------------------------- 2003 2002 2003 2002 Net Income As reported $ 24,483 $ 2,156 Pro forma 24,427 2,100 Earnings per share, basic and diluted As reported, basic $ 6.47 $ 2,694 $ 2,224 $ 28,221 $ 2,266 Pro forma 2,635 2,172 28,113 2,160 Earnings per share, basic and diluted As reported, basic $ 0.71 $ 0.59 $ 7.45 $ 0.60 As reported, diluted 0.71 0.59 7.43 0.60 Pro forma, basic 0.70 0.58 7.42 0.57 Pro forma, diluted 0.69 0.57 7.40 0.57 As reported, diluted 6.45 0.57 Pro forma, basic 6.45 0.56 Pro forma, diluted 6.43 0.56
9 4. Basic net income per share was computed on the weighted average number of shares outstanding. Diluted net income per share was computed under the treasury stock method, assuming the conversion as of the beginning of the period, for all dilutive stock options. The Company reported a loss from continuing operations for the nine month period ended September 30, 2002, therefore diluted net income (loss) per share is the same as basic net income (loss) per share for that period because the inclusion of any potentially dilutive securities would be antidilutive to the net loss per share. There were no adjustments to net income in the computation of dilutive net income per share for any period. 5. The Company has identified nineten reporting segments based on the products and services each provide. Each segment is managed and evaluated separately because of diverse technologies and marketing strategies. A summary of unaudited external operating revenues (revenues generated from outside customers or subscribers), internal operating revenues (revenues generated between the Company's operating segments), operating income (loss), income (loss) from continuing operations, income (loss) from discontinued operations, cumulative effect of accounting change, and net income (loss) of each segment is as follows.follows for the three and nine months ended September 30, 2003 and September 30, 2002.
In thousands For the three months ended September 30, 2003 Income Income (loss) Operating (loss) from from External Internal Income continuing discontinued Net income In thousands (unaudited) MarchRevenues Revenues (loss) operations operations (loss) ---------------------------------------------------------------------------- Holding $ -- $ -- $ (182) $ 113 $ -- $ 113 PCS 17,255 -- 739 9 -- 9 Telephone 6,281 802 3,311 2,010 -- 2,010 ShenTel Service 1,782 75 369 211 -- 211 Cable TV 1,106 15 235 60 -- 60 Mobile 753 313 303 188 (23) 165 Long Distance 206 55 50 31 -- 31 Network 181 37 157 98 -- 98 ShenTel Communications 15 -- (5) (3) -- (3) Leasing 3 -- 1 -- -- -- --------------------------------------------------------------------------- Combined totals 27,582 1,297 4,978 2,717 (23) 2,694 Inter-segment eliminations -- (1,297) (2) -- -- -- --------------------------------------------------------------------------- Consolidated totals $ 27,582 -- $ 4,976 $ 2,717 (23) $ 2,694 =========================================================================== For the three months ended September 30, 2002 Income Operating (loss) from Income from External Internal Income continuing discontinued Net income In thousands (unaudited) Revenues Revenues (loss) operations operations (loss) ---------------------------------------------------------------------------- Holding $ -- $ -- $ (147) $ (260) $ -- $ (260) PCS 15,189 (38) (1,064) (1,301) -- (1,301) Telephone 5,588 707 2,770 1,560 15 1,575 ShenTel Service 1,706 85 305 159 -- 159 Cable TV 1,084 1 267 71 1 72 Mobile 603 446 (23) (12) 1,841 1,829 Long Distance 281 149 159 98 -- 98 Network 168 25 119 72 -- 72 ShenTel Communications 7 -- (18) (6) -- (6) Leasing 5 -- 285 2 -- 2 --------------------------------------------------------------------------- Combined totals 24,631 1,375 2,653 383 1,857 2,240 Inter-segment eliminations -- (1,375) (282) -- (16) (16) --------------------------------------------------------------------------- Consolidated totals $ 24,631 -- $ 2,371 $ 383 $ 1,841 $ 2,224 ===========================================================================
10
For the nine months ended September 30, 2003 Income Cumulative Operating (loss) from Income from effect of External Internal Income continuing discontinued accounting Net income In thousands (unaudited) Revenues Revenues (loss) operations operations change (loss) --------- --------- --------- --------- --------- --------- ----------------------------------------------------------------------------------------------- Holding $ -- $ -- $ (140)(495) $ (47)176 $ -- $ -- $ 176 PCS 48,287 1 8 (1,463) -- -- $ (47)(1,463) Telephone 6,003 734 3,573 2,16216,969 2,300 8,795 5,307 12 -- 2,1625,319 ShenTel Service 5,188 230 1,023 570 -- -- 570 Cable TV 1,097 1 246 733,312 17 696 178 -- -- 73 ShenTel 1,659 80 370 209178 Mobile 2,124 918 929 434 22,605 (76) 22,963 Long Distance 877 182 336 213 -- -- 209 Leasing 4 -- 1 1213 Network 564 107 461 286 -- -- 1 Mobile 658 300 258 (6) 22,628 (76) 22,546 PCS 14,976286 ShenTel Communications 41 -- (305) (684)(19) (11) -- -- (684) Long Distance 341 127 206 131(11) Leasing 11 -- 3 2 -- -- 131 Network 198 31 155 96 -- -- 96 ShenTel Communications 11 -- (8) (4) -- -- (4) --------- --------- --------- --------- --------- --------- ---------2 ------------------------------------------------------------------------------------- Combined totals $ 24,947 $ 1,273 $ 4,356 $ 1,931 $ 22,64077,373 3,755 11,737 5,692 22,617 (76) $ 24,48328,233 Inter-segment eliminations -- (1,273) (206)(3,755) (209) -- (12) -- -- --------- --------- --------- --------- --------- --------- ---------(12) ------------------------------------------------------------------------------------- Consolidated totals $ 24,94777,373 $ -- $ 4,15011,528 $ 1,931 22,6285,692 $ 22,605 (76) $ 24,483 ========= ========= ========= ========= ========= ========= =========
10 28,221 =====================================================================================
In thousands For the threenine months ended (unaudited) March 31,September 30, 2002 Income Cumulative Operating (loss) from Income from effect of External Internal OperatingIncome continuing discontinued accounting Net income In thousands (unaudited) Revenues Revenues Income(loss) operations operations change (loss) -------- -------- -------- -------- -------- -------- ---------------------------------------------------------------------------------------------- Holding $ -- $ -- $ (156)(422) $ (359)(5,492) $ -- $ -- $ (5,492) PCS 39,532 (17) (3,448) (3,791) -- -- $ (359)(3,791) Telephone 5,797 670 3,396 1,929 1816,724 2,179 8,878 5,033 51 -- 1,9295,084 ShenTel Service 4,708 259 496 173 -- -- 173 Cable TV 1,087 1 308 104 13,254 2 882 267 2 -- 104 ShenTel 1,515 89 173 27269 Mobile 1,807 1,214 836 (12) 5,497 -- 5,485 Long Distance 824 456 483 297 -- -- 27297 Network 639 83 492 307 -- -- 307 ShenTel Communications 10 -- (39) (19) -- -- (19) Leasing 16 -- 9 6 -- (135) 2 -- -- 2 Mobile 593 320 395 (16) 1,786 -- 1,770 PCS 11,161 9 (1,761) (1,558) -- -- (1,558) Long Distance 273 151 161 99 -- -- 99 Network 264 32 223 142 -- -- 142 ShenTel Communications -- -- (3) -- -- -- -- -------- -------- -------- -------- -------- -------- --------6 ------------------------------------------------------------------------------------- Combined totals $ 20,696 $ 1,272 $ 2,601 $ 370 $ 1,80567,514 4,176 8,167 (3,231) 5,550 -- $ 2,1562,319 Inter-segment eliminations -- (1,272) (285)(4,176) (862) -- (19)(53) -- -- -------- -------- -------- -------- -------- -------- --------(53) ------------------------------------------------------------------------------------- Consolidated totals $ 20,69667,514 $ -- $ 2,3167,305 $ 370(3,231) $ 1,7865,497 -- $ 2,156 ======== ======== ======== ======== ======== ======== ========2,266 =====================================================================================
11 The Company's assets by segment as of March 31,September 30, 2003, December 31, 2002, and March 31,September 30, 2002 are as follows: In thousands March 31,September 30, December 31, March 31,September 30, (unaudited) 2003 2002 2002 --------- --------- --------- Holding $ 143,631142,749 $ 112,765 $ 114,390111,193 PCS 63,179 71,256 64,246 Telephone 57,17357,210 59,554 58,97758,716 ShenTel Service 6,841 6,255 6,149 Cable TV 10,7769,963 10,961 10,953 ShenTel 6,115 6,255 5,227 Leasing 183 187 25710,446 Mobile 16,85416,897 17,482 18,804 PCS 68,104 71,256 62,48217,741 Long Distance 5521,072 343 367213 Network 1,2321,967 1,084 1,5451,051 ShenTel Communications 111152 115 100 --------- --------- ---------101 Leasing 273 187 183 ----------------------------------------- Combined totals 304,731$ 300,303 $ 280,002 $ 273,102270,039 Inter-segment eliminations (110,980)(112,648) (115,998) (104,812) --------- --------- ---------(105,339) ----------------------------------------- Consolidated totals $ 193,751187,655 $ 164,004 $ 168,290 ========= ========= =========164,700 ========================================= 6. Comprehensive income includes net income along with net unrealized gains and losses on the Company's available-for-sale investments. AFollowing is a summary of comprehensive income for the unaudited results follow: In thousands For the three months ended March 31, 2003 2002 -------- -------- Net income $ 24,483 $ 2,156 Net unrealized loss (8) (1,789) -------- -------- Comprehensive income $ 24,475 $ 367 ======== ======== 11 periods indicated:
In thousands For the three months ended For the nine months ended September 30, September 30, 2003 2002 2003 2002 ------------------------------------------------------- Net income $ 2,694 $ 2,224 $ 28,221 $ 2,266 Net unrealized income (loss) (13) (25) 8 (58) ----------------------------------------------------- Comprehensive income $ 2,681 $ 2,199 $ 28,229 $ 2,208 =====================================================
7. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings. 8. On February 28, 2003, the Company completed the sale of its 66% interest in the Virginia 10 RSA Limited Partnership for $37.0 million. At closing, the Company received cash of $33.7 million, which included $1.7 million related to the Company's portion of the partnership's working capital as of the closing date. As part of the sales agreement, $5.0 million was paid into an escrow account for a period of two years to offset certainspecified partnership liabilities of the partnership that may arise which relate to itsas a result of the partnership's operation during the Company's management ofperiod in which the Company managed the partnership. The Company recorded a gain on the sale of $21.5 million after taxes, and has recorded the transaction as a component of the discontinued operations in the condensed consolidated statements of income for the three-monthnine-month period ended March 31,September 30, 2003. During the third quarter of 2003, the Company completed the working capital true-up related to the sale of the Virginia 10 RSA Limited Partnership. This transaction was completed in the third quarter, and required the Company to refund $39 thousand to the purchaser which reduced the after tax gain by $23 thousand. 12 9. The Company adopted Statements of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it becomes a legal obligation. The impact of the adoption of this statement is reflected as a cumulative effect of a change in accounting on the condensed consolidated statements of income for the three-monthnine-month period ended March 31,September 30, 2003. The impact of the adoption of SFAS No. 143 was the recording of a capitalized asset retirement obligation of $158 thousand, the related accumulated depreciation of $32 thousand, the present value of the future removal obligation of $249 thousand, and the cumulative effect of the accounting change of $76 thousand after taxes recorded on the income statement. The Company recorded the retirement obligation on towers owned where there is a legal obligation to remove the tower at the time the Company discontinues its use. The obligation was estimated based on the size of the tower. The Company's cost to remove the towers is accruedamortized over the life of the tower. The pro forma liability on January 1, 2002 would have been $236 thousand, and was $249 thousand on December 31, 2002. On March 31,September 30, 2003, the liability was $252$282 thousand. The current year-to-date expense for the accretion and depreciation related to the adoption of SFAS No.143 is $5approximately $16 thousand before taxes. 10. Subsequent to March 31, 2003, becauseThe Company adopted Emerging Issues Task Force 00-21,"Revenue Arrangements with Multiple Deliverables" (EITF 00-21) in the third quarter of the Company's enhanced liquidity resulting from the asset sale described in Note 8, the Company elected to terminate its $20.0 revolving line of credit with CoBank effective May 15, 2003. The Company applied the pronouncement prospectively for transactions meeting the stated criteria. Adoption of EITF 00-21 did not have a material impact on the Company's results of operations or financial position. The impact for the third quarter 2003 was additional revenue recognized of $90 thousand compared to the previous method of revenue recognition. 11. During the second quarter, the Company adopted a Supplemental Executive Retirement Plan for certain executives of the Company. The plan is an unfunded defined benefit plan, with any benefits to be paid out of general corporate funds. The expense related to this plan is not significant for the three or nine-month periods ended September 30, 2003. 12. On October 22, 2003, the Company declared a dividend per common share of $0.78, payable on December 1, 2003 to shareholders of record on November 14, 2003. The Company also considering terminating its $2.5 million revolving lineannounced a 2-for-1 stock split with a record date of credit with SunTrust Bank, as a resultJanuary 30, 2004. Shareholders will receive one additional share of its enhanced liquidity position. 12common stock for each share of common stock held on the record date. The Company anticipates distributing the additional shares on or about February 20, 2004. 13 ItemITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in thisThis management's discussion that are not purely historical are forward-looking statementsand analysis includes "forward-looking statements" within the meaning of Section 27 A27A of the Securities Act of 1933 and Section 21 E21E of the Securities Exchange Act of 1934, including1934. 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 our expectations, hopes, intentions or strategies regardingShenandoah Telecommunications Company's expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the future. These statementsmarkets in which Shenandoah Telecommunications Company operates and similar matters are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. FactorsWe cannot assure you that might cause such a difference include, but are not limited to, changesthe Company's expectations expressed or implied in the interest rate environment, management's business strategy, national, regional and local market conditions, and legislative and regulatory conditions. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date hereof. The Company takes no obligation to publicly revise these forward-looking statements will turn out to reflect subsequent events or circumstances.be correct. The Company's actual results could be materially different from its expectations because of various factors, including those discussed below and under the caption "Business--Risk Factors" in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2002. The following management's discussion and analysis should be read in conjunction with the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2002 including the financial statements and related notes incorporated by reference therein. Unless indicated otherwise, dollar amounts over $1 million have been rounded to the nearest hundred thousand dollars and dollar amounts of less than $1 million have been rounded to the nearest thousand dollars. Overview Shenandoah Telecommunications Company and subsidiaries (the Company)(collectively the "Company") provide local telephone service, long distance telephone service, personal communications service (PCS), cable television, unregulated telecommunications equipment and services, internet access, paging, and digital subscriber loop (DSL) services.services on a retail basis to residential and business customers. In addition, through its subsidiaries, the Company leases space on wireless telecommunication towers and operates and maintains an interstate fiber optic network. CompetitiveThe Company also offers competitive local exchange carrier (CLEC) services are currently being offered on a limited basis. The Company's operations and assets including its towers and fiber optic network, are principally located along the Interstate 81 corridor from the Northern Shenandoah Valley of Virginia through West Virginia, Maryland, and into South Central Pennsylvania. The Company reports revenues in three categories; wireless, wireline and other revenues.other. These revenue classifications are defined as follows: Wireless revenues are made up of Shenandoah Personal Communications Company (PCS), and the Mobile Company, including tower revenues. The wireline revenues include the following subsidiary revenues in the financial results: the Telephone Company, the Network Company, the Cable Television Company, and the Long Distance Company. Other revenues are comprised of the revenues of ShenTel Service Company, the Leasing Company, ShenTel Communications Company, and the Holding Company. 1314 Selected Operating Statistics The following table shows selected operating statistics of the Company for the previousmost recent five quarters. This information is unaudited, and is provided as a supplement to the financial statements.
Three Month Period Ended ------------------------------------------------------ (Unaudited) MarSept. 30, Jun. 30, Mar. 31, DecDec. 31, SepSept. 30, Jun 30, Mar 31,2003 2003 2003 2002 2002 2002 2002 -------- -------- -------- -------- -------------------------------------------------------------- Telephone Access Lines 24,951 24,972 24,903 24,879 24,933 24,859 24,751 CATV Subscribers 8,796 8,750 8,704 8,677 8,707 8,729 8,740 Internet Subscribers 19,026 18,696 18,559 18,300 18,083dial-up 17,616 17,798 18,174 18,050 18,022 DSL Subscribers 1,163 1,080 852 646 537 Retail Digital PCS Subscribers 81,015 77,398 72,480 67,842 62,434 59,962 56,624Wholesale Digital PCS Users (1) 7,531 4,690 3,280 1,672 N/A Paging Subscribers 2,107 2,315 2,805 2,940 3,002 3,071 3,136 Long Distance Subscribers 9,517 9,520 9,312 9,310 9,338 9,316 9,341 Fiber Route Miles 552 552 552 549 543 543 524 Total Fiber Miles 28,740 28,739 28,729 28,403 28,243 28,243 26,804Wholesale PCS Minutes (000) 3,207 2,303 1,562 530 168 Long Distance Calls (000) (1) 6,812(2) 6,078 5,001 5,074 5,969 6,138 5,949 5,431Total Switched Access Minutes (000) (1)54,349 51,124 48,380 46,627 46,525 42,816 38,398Originating Switched Access MOU (000) 18,285 18,343 18,685 18,476 19,225 CDMA Base Stations (sites) 248 246 240 237 231 220 207 Towers (over 100 foot)(100 foot and over) 76 73 72 72 72 72 65 Towers (under 100 foot) 10 10 10 10 10 (See (2)note (3) for definitions of terms) PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048 PCS Covered POPS (000) 1,581 1,574 1,574 1,555 1,555 1,555 1,512 1,455 PCS ARPU (ex. Travel) $ 55.09 $ 52.84 $ 52.22 $ 51.38 $ 53.58 $ 49.93 $ 50.49 PCS Travel rev. per sub $ 16.50 $ 17.18 $ 17.39 $ 31.21 $ 31.90 $ 26.56 $ 21.91 PCS Ave. mgmt. Fee per sub $ 4.62 $ 4.58 $ 4.40 $ 4.64 $ 4.29 $ 3.99 $ 4.04 PCS Ave. monthly churn % 2.20% 1.90% 2.30% 3.40% 4.00% 3.21% 2.84% PCS CPGA $ 276.97 $ 390.66 $ 344.77 $ 281.79 $ 235.40$418.22 $376.98 $276.97 $390.66 $344.77 PCS CCPU $ 45.8740.05 $ 53.5244.23 $ 53.9345.87 $ 48.2653.52 $ 46.4553.93
(1) - Wholesale Digital PCS Users are private label subscribers homed in the Company's wireless network service area and primarily include Virgin Mobile subscribers. (2) - Originated by customers of the Company's Telephone subsidiary (2)(3) - POPS refers to the estimated population of a given geographic area. Market POPS are those within a market area, and Covered POPS are those covered by the network's service area. ARPU is Average Revenue Per User, before travel, roaming revenue, and management fee, net of adjustments divided by average subscribers. PCS Travel revenue includes roamer revenue and is divided by average subscribers. PCS Average management fee per subscriber is 8 % of collected revenue paid to Sprint, excluding travel revenue. PCS Ave Monthly Churn is the average of three monthly calculations of deactivations (excluding returns less than 30 days) divided by beginning of period subscribers. CPGA is Cost Per Gross Add, and includes selling costs, product costs, and advertising costs. CCPU is Cash Cost Per User, and includes network, customer care and other costs. 1415 Recent Developments In recent years,From the mid 1990's through 2002, the principal source of the Company's revenues hashad shifted from traditional wireline revenues to wireless and other revenues. In 2003, this trend has slowed significantly. For the three months ended March 31,September 30, 2003, wireless revenue was 62.7%65.3% of total revenue, wireline revenue contributed 30.6%28.2% of total revenue, and other revenue was 6.7%6.5% of total revenue. These results compare to 56.8%64.1% for wireless, 35.9%28.9% for wireline and 7.3%7.0% for other, for the three months ended March 31,September 30, 2002. The Company's strategy in the last several years has been to expand its services and the geographic areas served. This strategy has been implemented primarily through enhancing the PCS network, using CDMA technology, under the national brand of Sprint. The Company's efforts to market its services in the expanded PCS network area contributed to new subscribers purchasing phones and services which continued to contribute higherincrease revenues during the first threenine months of 2003. The Company had 240248 PCS CDMA base stations in service at March 31,September 30, 2003, compared to 207231 base stations in service March 31,on September 30, 2002. This increase in base stations is primarily the result of supplementing the network coveragecapacity and extending coverage along several highly traveled secondary roads in the Company's market areas. The CompanyCompany's primary focus has shifted its focus from building the initial PCS network to improving service and operating the network in an effective manner to provide goodquality service to the subscribers and to improve operating results. In August of 2002, the Company entered into a resale agreement for its PCS wireless network through Sprint to Virgin Mobile USA, LLC a joint venture of Sprint and the Virgin global family of companies. The agreement allows the Company to receive wholesale revenue for usage of the network by Virgin Mobile subscribers traveling in or based in the Company's network coverage area. The Company is dependenthas also agreed to sell Virgin Mobile handsets and plans in its retail stores. The plans offered by Virgin Mobile are pre-paid plans, a type not currently offered by Sprint. Prior to the beginning of 2003, the Company had not seen significant revenue from or usage by wholesale users. During the third quarter of 2003, the network minutes generated by wholesale users, primarily from Virgin Mobile subscribers active on Sprintthe Company's PCS network were over 3 million minutes compared to 40 thousand minutes for the reporting of a significant portion of PCS revenues, particularly travel and service revenue. Controls and processes have been adopted by the Company and Sprint to review, test, and validate information being reported to the Company. The Company continually monitors and tracks the data provided by Sprint to identify potential unexpected trendssame period in the information.2002. As previously reported, a further reduction in the Sprint travel rate took effect January 1, 2003. The new rate isdecreased from $0.10 per minute to $0.058 per minute for payable and receivable minutes. The Company is in aIncorporating the rate change, the Company's net travel receivable position ofdecreased to $1.1 million for the current quarter, compared to $1.8 million for the same quarter last year, including the long distance portion of that traffic. The Company's travel receivable minutes increased 43% to 58.7 million while the travel payable minutes increased by 66% to 41.6 million for the quarter. The increases in travel minutes receivable and payable are primarily the result of an increase in usage of the Company's network facilities by subscribers based in other markets and growth in subscribers in the Company's markets. On a per subscriber basis, the Company's average of travel payable minutes increased to 175 minutes in the third quarter of 2003, an increase of 39 minutes from third quarter of 2002, and an increase of 21 minutes from second quarter 2003. A continuation of this trend will negatively impact the results of the PCS operation and overall results of the Company absent any changes in the economic arrangements with Sprint. As discussed in the Company's annual report on Form 10-K for the 2002 year, the Company experienced a shift in PCS customer additions from prime to sub-prime credit classes in late 2001 and early 2002, associated with the Sprint ClearPayClear Pay no-deposit program. To limit additional exposure toAs a result of increased 16 bad debt expense and customer churn (customer disconnects),disconnects for non-payments, the Company initiated a deposit of $125$250 in April 2002, for credit challenged prospective customers. ForAs a result of the remainder ofincrease in sub-prime customers prior to April 2002, the Company experienced high rates of churn and bad debt expense.expense for the period of May 2002 through early 2003. In the firstthird quarter of 2003 the Company's average churn rate declineddecreased to 2.30%2.2%, down from 3.40% in fourth quarter 2002, and below third quarter's high of 4.00%. Management is encouraged by this decline, but remains cautious as there is no guarantee this improving trend will continue into the future. Bad debt expense reflected a similar improvement compared to fourththe peak of 4.0% in the third quarter results, but the expense still remains above management's expectations.of 2002. It is unknown what impact Wireless Local Number Portability, scheduled to begin November 24, 2003, will have on churn. Bad debt expense increased significantly in the third and fourth quarters of 2002, as a downstream result of the ClearPayClear Pay no-deposit program suspended in April 2002. Bad debt expense for the PCS operation, as a percentage of service revenues, was 16.8% in third quarter 2002, 12.5% in fourth quarter 2002, and 8.7% in first quarter 2003, 6.0% in second quarter 2003 and 2.7% of service revenues in the third quarter 2003. 15 There is no certainty that the improving bad debt trend will continue in the future. The financial situationliquidity position of the Company changedimproved during the first quarter of 2003, due principally to the sale of the Company's 66% interest in the Virginia 10 RSA partnership. At the close of this transaction onOn February 28, 2003, the Company received $37.0 million, of which $5.0 million was placed in escrow. In addition to the initial proceeds of $32.0 million, the Company received an additional $1.7 million for working capital adjustments. The proceeds have been invested in low risk, highly liquid federal government instruments. The Company will pay approximately $12.0 million in taxes on the VA 10 RSA transaction this year, withof which approximately $8.9 million have been paid through September 30, 2003. The remaining $3.1 million of taxes will be paid in a final installment in December of 2003. Additional taxes will be due on the remaining taxes due$5.0 million held in escrow upon the release of amounts remaining inthe funds to the Company at the termination of the escrow arrangement, which terminates inon February 28, 2005. - In addition to thisthe Virginia 10 RSA transaction discussed above, the Company experienced improved operating incomeCompany's cash and decreasedcash equivalent balances remained above expected levels, due to a slower capital spending duringrate for the quarter.first nine months of 2003. The Company paid off $8.3repaid $11.2 million in total debt during the quarter,first nine months of 2003, of which $3.8$3.1 million was for scheduled debt payments, $4.6 million was a prepayment of fixed rate debt and the remaining $3.5 million was the payment of revolving term debt. This was done without using proceedsThe capital spending and debt retirement were accomplished from the Virginia 10 RSA transaction.funds generated through operations. The Company's ratio of total debt to total assets ended the quarter at 24.4%,23.7% compared to 24.3% at June 30, 2003, 24.4% at March 31, 2003 and 33.8% at December 31, 2002. The Company is evaluating software packages and consulting arrangements to comply with the endvarious elements of 2002.the Sarbanes Oxley. Management anticipates this will be a significant undertaking for the Company, and will require resources beyond the expertise of the existing staff. Management has not been able to reasonably estimate the cost of implementation or the ongoing cost of compliance related to this legislation. Operating Risks The Company has been contacted byis dependent on Sprint aboutfor the potential requirement to replace certainreporting of a significant majority of PCS base station equipment by the end of 2005. Sprint, its affected PCS affiliates,revenues, particularly travel and the equipment vendorservice revenue. Controls and processes are actively discussing options for extending the life of this equipment into 2008. Ifcontinually refined, so the Company is requiredcan monitor, review, test, and validate information being reported to replace this equipmentthe Company by 2005, the impact of this change in the asset lives could increase depreciation expense and have a significant adverse impact on the results of operations and also on the liquidity of the Company.Sprint. The Company continues to monitor theis at risk for reporting errors that may be made by Sprint. 17 The net balance of PCS travel revenue and expense. Thisexpense could change significantly due to changes in service plan offerings, weather, natural disasters,changes in the travel settlement rate, changes in travel habits by the subscribers in the Company's market areas or other Sprint subscribers and numerous other factors beyond the Company's control. Changes in travel habits byThe Company is continuing to monitor the Company's subscribers or other Sprint subscribers could also impact this relationship. Onefinancial strength of the other PCSpublic affiliates of Sprint, has filed for bankruptcy, and two other affiliates have recently received going concern audit opinions fromas their external accountants.ability to maintain their segment of the Sprint network may impact the ability of the Company to add new subscribers. The Company's PCS churn rate, bad debt expense and handset upgrades for existing customers are items that can individually andor collectively have a material adverse impact on the operating results of the Company. Recent trends of churn and bad debt expense have been favorable for the first nine months of 2003 compared to 2002. The handset upgrade costs were $6.69 per average subscriber per month for third quarter of 2003 compared to $7.41 per average subscriber per month for second quarter 2003, and $3.88 per average subscriber in first quarter 2003. The handset upgrade cost is the result of existing subscribers upgrading their handsets for newer models with features not available on the old handsets. Wireless Local Number Portability (WLNP) will permit a subscriber to change wireless service providers in the same market area while retaining their existing telephone number. This Federal Communications Commission mandate is scheduled to be effective November 24, 2003. As a result of WLNP, portions of the PCS subscriber base may migrate to other wireless providers, thereby contributing to increased churn. Alternatively, the implementation of WLNP may allow the Company to attract subscribers from other wireless providers. The Company does not have significanthas limited control over the service plan mixesplans offered to Sprint customers in the increasingly competitive wireless telecommunications industry. As a result, the plans offered may have a material adverse effect on the Company's results of operations. The Company's access revenue may be adversely impacted by legislative or regulatory actions that decrease access rates or exempt certain traffic from paying access to the Company's regulated telephone network. During the second quarter of 2003, the Company recorded a reduction in access revenue of $1.5 million from interexchange customers related to certain charges the Company billed for access to the Company's switching facilities and the local exchange network. The disputes cover a two-year period beginning in 2001 through and including second quarter of 2003. The total amount of the reduction related to the first six-months of 2003 was $0.7 million. The amount of the reduction that relates to billings in the third quarter and the first nine months of 2002 is $0.2 million and $0.5 million, respectively. These disputes have been resolved and the Company recorded a positive adjustment of $0.3 million in the third quarter to reflect the final analysis of the issue. The Company's revenue from fiber leases may be adversely impacted by continuedfurther erosion in demand or in prices chargedprice competition for these facilities. There is also the potential for additional bankruptcies of the Company's lease customers. The Company is monitoring each of its fiber lease customers closely to minimize the risk related to this business. The Company's access revenue may be adversely impacted by legislative or regulatory action that decrease access rates or exempt certain traffic from paying access to the Company's regulated telephone network. 1618 Results Of Operations FirstThird Quarter 2003 vs. FirstThird Quarter 2002 General Total revenue for the firstthird quarter of 2003 was $24.9$27.6 million, an increase of $4.2$3.0 million, or 20.5%12.0% compared to $20.7$24.6 million for the firstthird quarter of 2002. Total revenues include wireless revenue of $15.6$18.0 million, an increase of $3.9$2.2 million or 33.0%14.0%; wireline revenues of $7.6$7.8 million, an increase of $0.2$0.7 million, or 2.9%9.2%; and other revenues of $1.7$1.8 million, an increase of $0.2$0.1 million or 10.1%4.8%. Income from continuing operations increased $1.5$2.3 million, to $1.9$2.7 million, or 422%, compared to $0.4 million for the same period in 2002. Income per share from continuing operations, diluted was $0.51$0.71 cents per share, compared to $0.10 centsper share for the same period last year. Revenues Within wirelessWireless revenues are primarily derived from the PCS business. As of September 30, 2003, the Company had 81,015 retail PCS subscribers. The PCS operation added 15,856 PCS18,581 net subscribers since March 31,September 30, 2002, which contributed to a $2.6 million or 37% increase in subscriber revenue compared to first quarter of 2002.and 3,617 since June 30, 2003. Total wireless service revenues were $9.9$11.8 million for third quarter 2003, an increase of $2.6$2.8 million or 36.6%32.0% compared to $7.3$8.9 million for third quarter 2002. As of March 31, 2003, the Company has 72,480 PCS subscribers. The Company's Average Revenue Per User (ARPU) exclusive of travel revenue, increased 3.4%2.8% to $52.22$55.09 for the firstthird quarter of 2003, compared to $50.49$53.58 for the firstthird quarter of 2002, and2002. The third quarter 2003 ARPU also increased 1.6% from4.3% compared to the fourthsecond quarter 20022003 ARPU of $51.38. As discussed in$52.84. These increases are the Operating Risks section, competitive pressures may result in decreased ARPU going forward.of adding new subscribers adopting higher rate plans, increased data usage, and subscribers adding new features to their existing plans. PCS travel and roamer revenue combined for the third quarter 2003 were $4.6$4.9 million, and contributed a $1.2$1.0 million or 28.6% increase16.5% decrease compared to the travel and roaming revenue growth for the firstthird quarter of 2003. Travel2002. The travel and roamer revenue growthreduction was attributable to increased usageprimarily a result of the network by Sprint wireless customers residing outside of our PCS territory and other carriers customers usingdecline in the network. Theper minute travel revenue rate has declined from $0.10 per minute in 2002 to $0.058 per minute as of January 1, 2003. Handset sales revenue decreased nominallyThis 42% rate decrease was somewhat offset by an increase in usage of our network by Sprint wireless customers residing outside of the first quarter of 2003, while tower lease revenue contributed to the additional $50 thousand increase over the first quarter 2002 results.Company's PCS territory and other carriers' customers. Wireline revenues were $7.6$7.8 million, an increase of $0.7 million or 9.2%. Access revenue in the telephone business increased $0.7 million, due primarily to increased traffic compared to the same period last year and $0.3 million related to the final analysis of the interexchange carrier access charges previously described. Total switched minutes of use increased 16.8% compared to the third quarter of 2002. This increase primarily consists of terminating traffic, of which approximately 85% are wireless calls coming into the Company's network and being delivered to wireless users. Other revenues were $1.8 million, an increase of $0.1 million or 4.8%. Internet revenues increased $0.1 million or 5.0%. The total subscriber base for the Company's dial-up and DSL Internet services was 18,779 as of September 30, 2003 compared to 18,559 as of September 30, 2002. Total dial-up and DSL Internet subscribers increased 220 or 1.2% compared to September 2002. While DSL subscribers increased 626 or 117% compared to the September 30, 2002 subscriber base, there was a decline of 406 subscribers in dial-up subscribers from the same time period last year. In those areas where the Company is limited to only dial-up Internet service, the Company has recently experienced increased subscriber deactivations due to migration to competing high-speed Internet services. 19 Operating Expenses Total operating expense for third quarter 2003 was $22.6 million, an increase of $0.3 million or 1.6%, compared to third quarter 2002. The principal factors reflected in the higher operating expense were increases in PCS subscribers and the expanded PCS operation, offset by a significant decline in bad debt expenses. Costs of goods and services were $3.0 million, an increase of $0.3 million or 9.3%, due to an increase in gross subscriber additions and current customers upgrading their handsets in the PCS operation. During the third quarter of 2003, the Company added 9,354 gross new subscribers compared to 9,259 gross new subscribers added in the third quarter 2002. Existing subscribers are purchasing new handsets to replace their current handsets as new features become available and new services are offered that are not available on earlier model handsets. The upgrade cost for the third quarter of 2003 was $0.5 million. The Company requires the existing subscribers to sign a new one or two year service contract in order to receive a discount on the purchase price of a handset. Management anticipates the upgrade trend will continue, and may increase significantly in the future as handsets are offered as enticement for a subscriber to extend their service agreement. Network operating costs were $8.4 million, an increase of $0.1 million, or 1.5% compared to third quarter 2002. Increased rental costs for towers and buildings and increased line costs in the PCS operation were offset by lower travel costs. Depreciation and amortization expense was $4.2 million, an increase of $0.4 million or 11.2% compared to $3.8 million for the third quarter of 2002, as new assets, primarily in the PCS and telephone operation, have been added to the networks. Selling, general and administrative costs were $7.0 million, a decrease of $0.5 million or 6.0%. Bad debt expense decreased $1.2 million; primarily due to reduced PCS subscriber terminations for non-payment compared to previous periods. Bad debt expense was 2.2% of total revenue for the third quarter of 2003, compared to 7.4% of total revenue for third quarter of 2002. Billing and customer care costs incurred in the PCS operation, primarily charges from Sprint, increased $0.5 million as a result of the increase in the total number of PCS subscribers. Advertising, customer support and selling expenses increased $0.2 million, due to the ongoing sales activity. In the Company's PCS operation, cash cost per user (CCPU) declined to $40.05, a 25.7% decrease from the third quarter of 2002. The reduction was primarily the result of a decrease in the travel rate and to a lesser degree improved economies of scale due to the increase in total subscribers. The Company's cost per gross add (CPGA) in the PCS business increased to $418.22 or 21.3% from third quarter of 2002, due to increased selling, advertising and promotional costs over the same period last year and increased handset upgrades. The Company includes the cost of upgrading existing subscribers handsets in its CPGA calculation. Other Income (Expense) Non-operating income increased $0.2 million due primarily to the interest income on the proceeds from the sale of the VA 10 RSA Limited Partnership interest. 20 Losses on external investments were $0.1 million in third quarter 2003, compared to a $0.7 million loss in the third quarter 2002. The improvement is primarily a result of last year's third quarter loss on the sale of the VeriSign stock discussed in previous filings. Third quarter 2003 interest expense decreased by $0.2 million, or 2.9%21.0%, a result of decreased borrowing levels compared to third quarter 2002. The Company's total debt decreased by $9.0 million from September 30, 2002 to September 30, 2003 including $4.5 million paid in advance of its scheduled due date. The Company's total debt as of September 30, 2003 was $44.4 million, compared to $53.4 million as of September 30, 2002 and $55.5 million at December 31, 2002. Income before income taxes, discontinued operations and cumulative effect of accounting changes was $4.3 million, an increase of $3.7 million from the $0.6 million reported for the third quarter of 2002. The change in operating income was an increase of $2.7 million. Increased revenues, lower bad debt expense, and the impact of the loss from the sale of the VeriSign stock in the third quarter of 2002 results were the primary factors that contributed to the Company's improved 2003 results before taxes. Income tax provision was $1.6 million, an increase of $1.4 million due to higher earnings compared to the same period last year. The Company operates in multiple states with varying income tax rates. The Company's effective tax rate reflects the change in income and losses recorded in those states. Income from continuing operations was $2.7 million for third quarter 2003, compared to $0.4 million for the third quarter 2002, an increase of $2.3 million. There was a loss from discontinued operations of $23 thousand after taxes in the third quarter 2003, compared to a profit of $1.8 million for the third quarter of 2002 from the Company's cellular operations sold in February 2003. The current quarter loss was the result of the settlement of the working capital adjustment through the payment of cash from the Company back to the purchaser for certain adjustments provided for in the sales agreement of the Company's 66% interest in the Virginia 10 RSA Limited Partnership. There have been no claims initiated against the funds in escrow related to this sale. The Company adopted FAS 143 effective January 1, 2003, and as a result recorded a charge to earnings for the cumulative effect of this change in accounting of $76 thousand after taxes. The impact of adopting this statement was a $3 thousand charge after taxes in third quarter of 2003 and would have been a similar figure in the third quarter of 2002, had the change been adopted previously. The Company's third quarter net income was $2.7 million compared to $2.2 million in 2002. Income from continuing operations increased $2.3 million. Income from discontinued operations was a nominal loss in third quarter 2003, compared to a $1.8 million profit in third quarter 2002 from the Company's cellular operations. Results Of Operations First Nine Months of 2003 vs. First Nine Months of 2002 General 21 Total revenue from continuing operations for the first nine months of 2003 was $77.4 million, an increase of $9.9 million, or 14.6% compared to $67.5 million for the first nine months of 2002. Total revenues include wireless revenue of $50.4 million, an increase of $9.1 million or 21.9%; wireline revenues of $21.7 million, an increase of $0.3 million, or 1.3%; and other revenues of $5.2 million, an increase of $0.5 million or 10.7%. Income from continuing operations increased $8.9 million, to $5.7 million, compared to a $3.2 million loss for the same period in 2002. Income from continuing operations diluted was $1.49 cents per share for the first nine months of 2003, compared to a $0.85 loss per share for the first nine months of 2002. Revenues Wireless revenues are primarily derived from the PCS business. As of September 30, 2003, the Company has 81,015 PCS subscribers. The PCS operation added 18,581 net subscribers since September 30, 2002, which contributed to a $8.3 million or 34.4% increase in subscriber revenue compared to the year-to-date results as of September 30, 2002. Total service revenues were $32.4 million for year-to-date 2003, an increase of $8.4 million or 34.4% from the same period last year. The Company's Average Revenue Per User (ARPU) increased to $53.44 for the first nine months of 2003, compared to $52.05 for the same period of 2002. PCS travel and roamer revenue combined were $14.4 million, and increased $0.4 million or 3.1% compared to 2002 year-to-date results. Travel and roamer revenue growth was attributable to increased usage of our network by Sprint wireless customers residing outside of our PCS territory and other carriers' customers offset by a decline in the travel rate from $0.10 per minute in 2002 to $0.058 per minute as of January 1, 2003. Roaming rates also declined in 2003 compared to 2002. Wireline revenues were $21.7 million, an increase of $0.3 million or 1.3%. Access revenue in the telephone business increased $0.6 million, due primarily to the growing numberimpact of wireless customers' calls transiting segmentsincreased traffic this year, somewhat offset by a $1.2 million net reduction in access revenue the Company recorded during 2003. The total net amount of the regulated telephone network.reduction related to the nine-month period for 2003 was $0.7 million. The amount of the reduction that relates to billings in the nine months of 2002 was $0.5 million. The Company has resolved the issue, and credits have been issued to the impacted customers. Lease revenue for the Company's fiber network facilities decreased $0.4$0.2 million compared to the same period last year. The Company's fiber network facility lease business was impacted by the decrease in demand for fiber capacity. During mid 2002 the Company experienced disconnects and lower revenues due to bankruptcies of several fiber customers. Highly competitive pricing by other fiber providers may result in additional pricing reductions as expiring leases come up for renewal. To maintain competitive advantage, the Company increasingly offers diversity in its fiber facilities. Cable television revenues for the first quarter were approximately the same for both 2003 and 2002. Other revenues were $1.7$5.2 million, an increase of $0.2$0.5 million or 10.1%10.7%. Internet revenues increased $0.1$0.2 million or 11.0%7.5%. Internet subscribers increased 943, or 5.2%, compared to March 31, 2002 subscribers. The total1.2% but the subscriber base forhas begun to shift from dial-up service to the Company's Internetfaster DSL service was 19,026offering, as of March 31, 2003.discussed above. The 511Virginia travel information project contributed $0.1 17 $0.3 million to the increased revenues in the first quarter of 2003, due to athe renewed contract with the Commonwealth of Virginia.Virginia mentioned in earlier filings. Operating Expenses Total operating expense was $20.8$65.8 million, an increase of $2.4$5.6 million or 13.2%9.4%, compared to $18.4$60.2 million for first quarter last year.the nine months of 2002. The increase in total number of PCS subscribers and the expanded PCS operation were the principal factors driving costs higher. Costs of goods and services were $2.3 million, a decrease of $0.4increased $0.6 million or 13.6%, changing8.2% to $7.9 million, primarily due to the decrease in gross additionsnumber of subscribersPCS handset upgrades sold in the PCS operation.nine months of 2003 compared to the handset upgrades in 2002, offset by lower gross adds. Handset upgrade costs were in excess of $1.2 million for the 22 nine months of 2003 compared to an immaterial amount in 2002. During the first quarternine months of 2003, the Company added 10,35929,448 new gross PCS subscribers before disconnections compared to 13,37730,989 new gross PCS subscribers added in the first quarter last year. This 22.6% declinenine months of 2002. The decrease in gross additions is greater than the decreasedue in cost of goods sold due to increased average handset costs. The average cost of a handset has increased due to new feature additions in many of the handsets sold. The Company also experienced a growing number of handset upgrades by existing subscribers. This contributed to higher cost of goods sold over prior period results. Management anticipates this trend will continue, and may increase significantly in the future. Other costs of goods and services remained approximately the same comparedpart to the first quartertightening of 2002.credit policies in mid-2002. Network operating costs were $8.0$25.2 million, an increase of $1.0$1.5 million, or 14.2%6.2%. AdditionalIncreased rental costs for PCS towers and buildings contributed $0.8 million to the increased network lines and added traffic over the network were the major causes for the increase inoperating costs. Line costs in the PCS operation increased $0.3$0.7 million, while travel expense was up $0.3increased $0.1 million compared to the first quarter last year. Increased maintenance costs for towers and buildings contributednine months of 2002. Other expenses decreased $0.1 million compared to the increased network operating costs. The Company's rent expense increased $0.1 million due to added sites in the PCS operation. In the Company's PCS operation cash cost per user (CCPU) declined to $45.87, a 1.2% decrease from the first quarter of 2002. The reduction in the travel rate was responsible for part of the decrease, in addition to the increase in total subscribers contributing to the fixed costs of operating the network. The Company's cost per gross add (CPGA) increased to $276.97 or 17.7% from first quarter of 2002, due to decreased gross additions and increased selling costs over the same period last year. This CPGA figure is a reduction of $115 from the fourth quarter 2002 high of $390.66 due to the seasonal promotions run in that period, particularly on the handset sales around the holiday season. Depreciation and amortization expense was $4.0$12.3 million, an increase of $0.7$1.7 million or 20.2%16.4% compared to $3.3$10.6 million for the first quarternine months of 2002, as new assets, particularly in the PCS operation, have been added to the networks. Depreciation expense has not increased as rapidly over the most recent quarters as the Company's rate of capital spending has slowed from its peak in mid-2001. Selling, general and administrative costs were $6.4$20.5 million, an increase of $1.1$1.8 million or 20.6%9.9%. SellingAdvertising, customer care, billing and selling expenses and customer support made up $0.6 million of theincreased $2.1 million. This increase in selling, general and administrative expenses,was primarily due to the increase in advertising and promotions in the PCS operation. PCS billing and customer care costs andbilled from Sprint increased customers being served particularly in thedue to increased PCS operation.subscribers. Administrative and other costs increased $0.4 million, due to additional staff added to support the growing Company operations. Bad debt expense increased $0.1was $1.8 million for the nine months of 2003, a decrease of $1.3 million from $3.1 million for the nine months of 2002, due primarily to the resultelimination of the growing customer base in the PCS operation, offset in part by a decrease in bad debt expense as a 18 percentage of PCS local service revenues. As discussed above, bad debt expense increased significantly in the third and fourth quarters of 2002, as a downstream result of the ClearPay no-deposit program suspendedClear Pay promotion in April 2002. Bad debt expense for the PCS operation, as a percentage of local servicetotal PCS revenues, was 16.8%$1.8 million or 3.7% for the first nine months of 2003, compared to $2.6 million or 6.5% for the same period in third quarter 2002, 12.5%2002. Bad debt expense in fourth quarter 2002, and 8.7%other operations was nominal in first quarter 2003.2003, compared to $0.5 million, last year due to the write off of accounts from several large interexchange carriers. The Company's operating margin for the nine months of 2003 (operating income divided by total revenue) was 16.6%14.9%, up from 11.2%10.8% for the same period last year. This change was primarily due to increased revenues generated in the wireless segmentsegments of the business, and the significant decline in bad debt expense. Revenues grew at a 14.6% rate, while expenses grew at a 9.4% rate. In the Company's PCS operation the average cash cost per user (CCPU) for the nine months ended September 2003, was $43.76 per month, compared to $51.82 per month for nine months ended September 2002. This decrease of 15.6% is the result of an increase in total subscribers contributing more towardto economies of scale, and a decrease in the fixedcustomer travel rate, somewhat offset by increased travel minutes used by each customer. The Company's cost per gross add (CPGA) increased to $338.41 for 2003 compared to $280.68 for 2002, due to increased selling costs, which have notadvertising and promotion costs over the same period of last year. The Company's policy of subsidizing handset upgrades to retain existing subscribers increased as significantly since first quarter 2002.the CPGA measure by approximately $30.00 per gross customer added thus far in 2003. Other Income (Expense) Non-operating income was up $0.1increased $0.2 million due to $0.3 million, primarily the contributionresult of interest income, onwhich was generated from the proceeds fromof the sale of the VA 10 RSA limited partnershipLimited Partnership interest. Loss23 The Company has investments in several venture funds that invest primarily in high-risk technology start-up companies. Losses on external investments waswere $0.3 million,million; an improvement of $0.4$9.3 million or 52.6%, due primarily to the first quarter 2002 loss of $0.4 millionlosses on the write down of VeriSign Inc. andinvestment recorded for the sale of 50,000 shares of VeriSign, Inc. Excluding the VeriSign transaction, the Company recorded similar results on external investment in the first quarter of both years.nine months ended September 30, 2002. Interest expense decreased by $0.1$0.5 million, or 10.7%15.5%, a result of decreased borrowing levels compared to first quarter 2002. The Company paid back nearly $8.3Company's total debt decreased by $13.4 million in debt during the quarter,from September 30, 2002 to September 30, 2003, including $3.7$4.6 million paid late in March 2003.advance and the repayment of the revolving notes of $4.7 million. The Company's total debt as of March 31,September 30, 2003 was $47.2$44.4 million, compared to $60.7$57.8 million as of March 31,September 30, 2002 and $55.5 million at December 31, 2002. IncomeFor the nine months ended September 30, 2003, income before income taxes, discontinued operations and cumulative effect of accounting changes was $3.1$9.0 million, an increase of $2.4 million.$14.3 million from the $5.3 million loss for the same period last year. Operating income increased $1.8$4.4 million and other income (expense) improved $9.9 million compared to first quarterthe 2002 results. Lower other expense and interest expense also contributed to the Company's improved results. Income tax provision was $1.1$3.3 million, an increase of $0.8$5.4 million due to higher earnings compared to the same period last year. The change in the effective tax rate was the result of changes in the apportionment of income and losses between states where the Company operates. Income from continuing operations was $1.9$5.7 million, compared to $0.4a loss of $3.2 million, an increase of $1.5 million.$8.9 million due primarily to the improvement in operating income in 2003, and the impact of the VeriSign transactions from 2002. Income from discontinued operations before the gain onwas $22.6 million in 2003, including two months of operations and the sale of the partnership was $1.1 million forCompany's portion of the two months of 2003 prior toVirginia 10 RSA Limited Partnership interest in the sale, compared to $1.8 million for the entire first quarter of 2002. The gain on the sale2003, compared to $5.5 million for operating results of that segment of the partnership netbusiness recorded in the first nine months of the taxes was $21.5 million.2002. The Company adopted FAS 143 effective January 1, 2003, and as a result recorded a charge to earnings for the cumulative effect of this change in accounting of $76 thousand after taxes. The quarterly impact of the adoption ofadopting this statement was a $3$16 thousand charge after taxes in first quarternine months of 2003 and first quarter of 2002. 19 is reflected in operating expenses for 2003. The Company's net income for the nine months ended September 30, 2003 increased to $24.5$25.9 million compared to $2.2$2.3 million in the same period of 2002. Income from continuing operations increased $1.5 million. Income from discontinued operations was $22.6 million compared to $1.8 million. 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 such asof South Atlantic Venture Fund III, South Atlantic Private Equity IV, Dolphin Communications Parallel Fund, Dolphin Communications Fund II and Burton Partnership. ItThe Company also includesparticipates by direct participationinvestment in companies such asprivately held companies. Currently the Company's only direct investment is in NTC Communications.Communications, a provider of voice, video and data connections to off campus housing properties at universities and colleges. For those investments that eventually go public, it is the intent of the Company to evaluate whether to hold or sell parts or all of each investment on an individual basis. 24 As of March 31,September 30, 2003, the Company held shares in two companies that are publicly traded, with the following market values: $42$45 thousand in Net IQ (NTIQ) with 3,744 shares held, and $91 thousand$119thousand in Deutsche Telekom, AG (DT) with 8,219 shares held. Net unrealized lossesgains on the securities available-for-sale increased $11decreased $27 thousand during the firstthird quarter of 2003 to $15$6 thousand reflecting the continuing low value placed onvolatility of the technology securities in the Company's portfolio and current market conditions. Liquidity And Capital Resources The Company generated $9.7$21.7 million in cash from operations in the first quarternine months of 2003, compared to $4.5$16.3 million generated in first quarterthe same period of 2002. The change in cash from operations is made up of a $1.5an $8.9 million increase fromin income from continuing operations, ana $1.7 million increase in depreciation of $0.7expensef, a $4.2 million increase in deferred taxes, an $9.3 million decrease in loss on investments, a reduction in receivables of $3.3$1.4 million, and $0.3$1.5 million decrease from changes in other items, primarily current asset and liability accounts. The change in receivables was primarily the result of the Company receivinga $1.5 million in cash of its outstanding receivable balance from Sprint. In reviewing its cash settlement process, Sprint determined additional cash was owed to the affiliates. This receipt of cashtrue up from Sprint reducedduring the receivable balance from Sprintearly part of 2003, somewhat offset by 26.8%.an increase in overall receivables. The Company's investing activity was approximately 38.0%53.4% of the level in the first quarter last year.nine months of 2002. Total investing was $2.1$9.1 million for the first quarter of 2003, versus $5.4$17.1 million used in the first quarternine months of 2002. Capital spending was $2.0$9.2 million, a decrease of $3.8$9.7 million or 65.1%51.3% compared to spending in the first quarter last year. Thenine months of 2002. Management anticipates total capital spending will be less than $15 million for 2003, compared to an original capital budget of $19.4 million. Projects originally included in the budget have generally been delayed and will likely be undertaken in the future as demand for 2003 is approximately $19.4 million, and management anticipatesadditional services makes the rate of spending will increase over the remaining three quarters of 2003.projects economically justifiable. The Company's current financing activities include the payment of long-term debt, and the payment of revolving debt.debt, which occurred in the early part of 2003. As cash is generated from operations, and with the cash balances available from the sale of the partnership interest, management anticipates there will be a limited need to borrow on the Company's revolving debt facilitiesany funds for the remainder of the year. The Company presently has the financial strength to consider investment or acquisition opportunities that may arise as the telecommunications industry works through its financial difficulties. The Company's two principal sources of fundscurrently does not have specific plans for financing expansion activities and operations are internally generated funds and cash equivalents, the latter primarily derived from the proceeds from the sale of its cellular interest. The Company is holding the VA 10 RSA partnership interest.proceeds in short-term investments to provide flexibility for investment opportunities that may arise. As of March 31,September 30, 2003 the Company has the $33.8$29.7 million invested in cash equivalents comprised of liquid, low risk, 20 United States government and agency instruments. The Company selected numerous funds, and several managers to reduce its exposure to fund and fund management risk. Approximately $12$3.0 million of this amount will be used in the remaining months of 2003 for tax payments associated with the partnership sale. The $5$5.0 million escrow funds are also invested in similar instruments, althoughinstruments. The funds in the Company cannot access those fundsescrow account are available for unrecorded liabilities of the partnership for a period of up to two years from the close date which wasof closing. The Company receives the income from the invested proceeds, but cannot access the principal prior to February 28, 2003. The Company has a $20.0 million revolving line of credit with CoBank scheduled to mature November 1, 2003. There were no outstanding balances on the $20.0 million facility as of March 31, 2003. Given the Company's current levels of cash equivalents, the Company elected to terminate this line of credit effective May 15, 2003.2005. The Company's outstanding long-term CoBank debt is $40.1$38.3 million, allconsisting of which ismultiple notes at fixed rates ranging from approximately 6% to 8%. The weighted average rate of the CoBank debt at March 31,September 30, 2003 was approximately 7.6%. The stated rate excludes patronage credits that are paid to CoBank borrowers after CoBank's year-end. During the first quarter of 2003, the Company received patronage credits of approximately 60 basis points on its outstanding CoBank debt balance. Repayment of the CoBank long-term debt facilities requires monthly payments on the debt 25 through September 2013. There are three financial covenants tied to these facilities. These are measured at the end of the quarter, based on a trailing 12-month basis, and are calculated on continuing operations. The ratio of total debt to operating cash flow, which must be 3.5 or lower, was 1.3.1.5. The equity to total assets ratio, which must be 35% or higher, was 52%56.1%. The ratio of operating cash flow to scheduled debt service, which must exceed 2.0, was 4.5.3.66. The CompanyCompany's Telephone subsidiary has long-term debt with RUS/RTBRural Utilities Service /Rural Telephone Bank (RUS/RTB) that totals $7.1totaled $6.1 million at the end of MarchSeptember 30, 2003, compared to $11.0 million at December 31, 2002, with maturities through 2019. The Company prepaid $4.6 million earlier in 2003, with nominal prepayment penalties. The weighted average interest rate on the RUS/RTB debt is approximately 6.03%5.93%, down from 6.51% as a result of repaying several notes with higher rates of interest. There were no prepayment penalties incurred with the repayment of $3.8 million on these notes in March 2003. As part of the cash management services provided by SunTrust Banks, the Company maintains an unsecured line of credit for $2.5 million to cover temporary variations in liquidity. The Company made numerous payments on the lineinterest during the quarter and there was no balance outstanding at March 31, 2003. The interest rate on this facility is variable. The Company is evaluating the need to renew this facility because of the liquidity available for the remainderfirst six months of 2003. Management may determine that this line of credit is not necessary at this time. Year-to-date capital spending was $2.0$9.1 million, compared to a total capital budget for the year of approximately $19.4 million. Major projects in the year-to-date spending primarily include enhancements to the PCS network. Management expects cash flow from operations and current cash and cash equivalent balances will provide the Company with adequate capital resources for the remainder of 2003. 21 The Company declared a cash dividend of $0.78 per share payable to shareholders of record on December 1, 2003. The Company will pay approximately $3.0 million in cash dividends, which are anticipated to be funded from operations. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk OurThe Company's market risks relate primarily to changes in interest rates on debt or investment instruments held to maturity. Our interest rate risk involves two components. The first component is outstanding debt with variable rates, which for the foreseeable future will likely be limited to temporary draws on the SunTrust cash management facility. Ascurrently is not applicable because as of March 31,September 30, 2003, the Company did not have any variable rate debt outstanding. The Company's remaining debt has fixed rates through its maturity. A 10% decline in interest rates would increase the fair value of the fixed rate debt by approximately $1.6 million. The second component of interest rate risk is temporary excess cash, primarily invested in overnight investments. Available cash will continue to be used to repay existing and anticipated new debt obligations when economically beneficial,if incurred, maintain and upgradingupgrade capital equipment, fund ongoing operating expenses, and fund potential dividends (as declared) to the Company's shareholders. With its current level of available cash and cash equivalents, the Company is positioned to evaluate potential investment or acquisition opportunities that may arise. Management does not view either market risk as having a significant impact on the Company's results of operations. 26 ITEM 4. Controls and Procedures Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision andThe Company's management, with the participation of the Company's management, including the President andits Chief Executive Officer and President, who is the Company's principal executive officer, and its Executive Vice President-FinancePresident and Chief Financial Officer, ofwho is the effectiveness ofCompany's principal financial officer, has evaluated the design and operationeffectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Actas of 1934.September 30, 2003. Based upon that evaluation, the President and Chief Executive Officer and President and the Executive Vice President-FinancePresident and Chief Financial Officer, have concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company, (includingincluding its consolidated subsidiaries)subsidiaries, required to be included in this report and the Company's periodic SEC filings. Sinceother reports that the dateCompany files or submits under the Securities Exchange Act of 1934. During the evaluation,third fiscal quarter, there have been no significant changes in the Company's internal controlscontrol over financial reporting that have materially affected, or in other factors that could significantlyare reasonably likely to materially affect, these controls. 22 its internal control over financial reporting. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K There(a) The following exhibits are attached to this Quarterly Report on Form 10-Q: 31 Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32 Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350. (b) The following Current Reports on Form 8-K were four Form 8-Ks filed forduring the three months ended March 31, 2003, as set forth below:period covered by this report: Filing Date of Report Item Reported January 22,--------------------- ------------- July 17, 2003 Item 9 (press release announcing receipt of approvals required for the proposed sale of the Company's Virginia 10 RSA Limited Partnership interest to Verizon) February 28,second quarter 2003 Item 9 (press release announcing the 2002 year endfinancial results) February 28, 2003 Item 9 (press release announcing the completion of the sale of the Virginia 10 RSA Limited Partnership interest to Verizon) March 17, 2003 Items 2 and 7 (sale of assets and the discontinuance of operations of the Virginia 10 RSA Limited Partnership, including pro forma financial statements of the Company as of December 31, 2001 and for the period ended September 30, 2002) Certifications The Chief Executive Officer and the Chief Financial Officer submitted certifications to the Securities and Exchange Commission required by section 906 of the Sarbanes - Oxley Act of 2002. 2327 EXHIBIT A CERTIFICATE OF CHIEF EXECUTIVE OFFICER I, Christopher E. French, President and Chief executive Officer of Shenandoah Telecommunications Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /S/ CHRISTOPHER E. FRENCH ------------------------- Christopher E. French President and Chief Executive Officer 24 EXHIBIT B CERTIFICATE OF CHIEF FINANCIAL OFFICER I, Laurence F. Paxton, Vice President-Finance and Chief Financial Officer of Shenandoah Telecommunications Company certify that: 1. I have reviewed this quarterly report on Form 10-Q of Shenandoah Telecommunications Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /S/ LAURENCE F. PAXTON ---------------------- Laurence F. Paxton Vice President-Finance and Chief Financial Officer 25 SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHENANDOAH TELECOMMUNICATIONS COMPANY (Registrant) May 13,November 12, 2003 /s/ CHRISTOPHER E. FRENCH Christopher E. French President May 13, 2003 /s/ LAURENCE F. PAXTON Laurence F. Paxton/S/ EARLE A. MACKENZIE Earle A. MacKenzie Executive Vice President - Finance 26and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 28 EXHIBIT INDEX Exhibit No. Exhibit ----------- ------- 31 Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32 Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350. 29