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