SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
Commission File No.: 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1162807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
124 South Main Street, Edinburg, VA 22824
(Address of principal executive office, including zip code)
Registrant's telephone number, including area code (540) 984-4141
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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. YES [X] NO [ ]
Aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 1998. $66,861,729. (In
determining this figure, the registrant has assumed that all of
its officers and directors are affiliates. Such assumption shall
not be deemed to be conclusive for any other purpose.) The
Company's stock is not listed on any national exchange nor
NASDAQ; therefore, the value of the Company's stock has been
determined based upon the average of the prices of transactions
in the Company's stock that were reported to the Company during
the year.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 1, 1998
Common Stock, No Par Value 3,755,760
Documents Incorporated by Reference
1997 Annual Report to Security Holders Parts I, II, IV
Proxy Statement, Dated March 27, 1998 Parts III
EXHIBIT INDEX PAGES 7 - 8 <PAGE> <PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Item Page
Number Number
PART I
1. Business 1
2. Properties 1-2
3. Legal Proceedings 2
4. Submission of Matters to a Vote of
Security Holders 2
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters 3
6. Selected Financial Data 3
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 4
8. Financial Statements and Supplementary Data 4
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 4
PART III
10. Directors and Executive Officers of the
Registrant 5
11. Executive Compensation 5
12. Security Ownership of Certain Beneficial
Owners and Management 5
13. Certain Relationships and Related
Transactions 5
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 6-7
PAGE
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General development of business is incorporated by
reference -
1997 Annual Report to Security Holders -
Page 2
(b) Financial information about industry segments -
Not Applicable
(c) Narrative description of business is incorporated
by reference -
1997 Annual Report to Security Holders -
Pages 6 - 7
(d) The registrant does not engage in operations in
foreign countries.
ITEM 2. PROPERTIES
The properties of the Company consist of land,
structures, plant and equipment required in providing
telephone, CATV, wireless communications and related
telecommunications services. The Company's main office
and corporate headquarters is in Edinburg, VA and a
service building is located outside the town limits of
Edinburg, VA. Additionally, the Company owns and
operates nine local telephone exchanges (switching
units) housed in brick/concrete buildings. One of
these is the main attended central office co-located
with the main office in Edinburg, Virginia. The
unattended central offices and outside plant are
located at:
(a) Basye, VA
(b) Bergton, VA
(c) Fort Valley, VA
(d) Mount Jackson, VA
(e) New Market, VA
(f) Strasburg, VA
(g) Toms Brook, VA
(h) Woodstock, VA
The Company owns long distance facilities outside of
its local franchised area as follows:
(a) Hagerstown, MD
(b) Harrisonburg, VA
(c) Martinsburg, WV
PAGE
<PAGE>
PART I (Continued)
ITEM 2. PROPERTIES (Continued)
(d) Stephens City, VA
(e) Weyers Cave, VA
(f) Winchester, VA
CATV reception equipment is located at the service
building, outside the town limits of Edinburg, Virginia
and at Basye, Virginia.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders for the three months ended December 31, 1997.
<PAGE> <PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) Common stock price ranges are incorporated by
reference -
1997 Annual Report to Security Holders
Market Information - Page 2
(b) Number of equity security holders are
incorporated by reference -
1997 Annual Report to Security Holders
Five-Year Summary of Selected Financial Data -
Page 5
(c) Frequency and amount of cash dividends are
incorporated by reference -
1997 Annual Report to Security Holders
Market and Dividend Information - Page 2
Additionally, the terms of a mortgage agreement
require the maintenance of defined amounts of the
subsidiary's equity and working capital after
payment of dividends. Accordingly, approximately
$11,000,000 of retained earnings was available for
payment of dividends at December 31, 1997.
For additional information, see Note 3 in the
Consolidated Financial Statements of the 1997
Annual Report to Security Holders, which is
incorporated as a part of this report.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data is
incorporated by reference -
1997 Annual Report to Security Holders
Five-Year Summary of Selected Financial Data - Page 5
PAGE
<PAGE>
PART II (Continued)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of operations, liquidity, and capital resources
are incorporated by reference -
1997 Annual Report to Security Holders
Management's Discussion and Analysis of Financial
Condition and Results of Operations - Pages 8-9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements included in the 1997
Annual Report to Security Holders are incorporated by
reference as identified in Part IV, Item 14, on
Pages 10-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PAGE
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers
is incorporated by reference -
Proxy Statement, Dated March 27, 1998 - Pages 4 - 7
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is
incorporated by reference -
Proxy Statement, Dated March 27, 1998 - Page 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) No person, director or officer owned over 5
percent of the common stock as of March 1, 1998.
(b) Security ownership by management is incorporated
by reference -
Proxy Statement, Dated March 27, 1998
Stock Ownership - Page 5
(c) Contractual arrangements -
The Company knows of no contractual arrangements
which may, at a subsequent date, result in change
of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions to disclose
other than services provided by Directors which are
incorporated by reference -
Proxy Statement, Dated March 27, 1998
Directors - Page 5
PAGE
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
A. Document List
The following documents are filed as part of this
Form 10-K. Financial statements are incorporated
by reference and are found on the pages noted.
Page
Reference
Annual
Report
1. Financial Statements
The following consolidated financial
statements of Shenandoah Telecommunications
are included in Part II, Item 8
Auditor's Report 1997, 1996, and 1995
Financial Statements 17
Consolidated Balance Sheets at
December 31, 1997, 1996, and 1995 10 & 11
Consolidated Statements of Income for
the Years Ended December 31, 1997,
1996, and 1995 12
Consolidated Statement of Retained Earnings
Years Ended December 31, 1997, 1996, and 1995 12
Consolidated Statements of Cash Flow
for the Years Ended December 31, 1997,
1996, and 1995 13
Notes to Consolidated Financial Statements 14-17
PAGE
<PAGE>
PART IV (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
Page
Reference
Annual
Report
2. Financial Statement Schedules
All other schedules are omitted because
they are not applicable, or not required,
or because the required information is
included in the accompanying financial
statements or notes thereto.
3. Exhibits
Exhibit No.
99. Proxy Statement, prepared by Registrant
for 1997 Annual Stockholders Meeting -
Filed Herewith
13. Annual Report to Security Holders -
Filed Herewith
21. List of Subsidiaries -
Filed Herewith
27. Financial Data Schedule
B. Reports on Form 8-K
None
PAGE
<PAGE>
PART IV (Continued)
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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
March 27, 1998 By CHRISTOPHER E. FRENCH, PRESIDENT
Christopher E. French, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
President & Chief Executive
CHRISTOPHER E. FRENCH Officer March 27, 1998
Christopher E. French
LAURENCE F. PAXTON Principal Financial March 27, 1998
Laurence F. Paxton Accounting Officer
DICK D. BOWMAN Treasurer & Director March 27, 1998
Dick D. Bowman
DOUGLAS C. ARTHUR Director March 27, 1998
Douglas C. Arthur
KEN L. BURCH Director March 27, 1998
Ken L. Burch
HAROLD MORRISON Director March 27, 1998
Harold Morrison
NOEL M. BORDEN Director March 27, 1998
Noel M. Borden
JAMES E. ZERKEL II Director March 27, 1998
James E. Zerkel II
PAGE
<PAGE>
EXHIBIT 21. LIST OF SUBSIDIARIES
The following are all subsidiaries of Shenandoah
Telecommunications Company, all incorporated in
the State of Virginia:
- Shenandoah Telephone Company
- ShenTel Service Company
- Shenandoah Cable Television Company
- Shenandoah Long Distance Company
- Shenandoah Valley Leasing Company
- Shenandoah Mobile Company
- Shenandoah Network Company
- Shenandoah Personal Communications Company
PAGE
<PAGE>
EXHIBIT 99. PROXY STATEMENT
SHENANDOAH TELECOMMUNICATIONS COMPANY
124 South Main Street
Edinburg, Virginia
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 21, 1998
March 27, 1998
TO THE STOCKHOLDERS OF SHENANDOAH TELECOMMUNICATIONS COMPANY:
The annual meeting of stockholders of Shenandoah
Telecommunications Company will be held in the Social Hall of the
Edinburg Fire Department, Stoney Creek Boulevard, Edinburg,
Virginia, on Tuesday, April 21, 1998, at 11:00 a.m. for the
following purposes:
1. To vote upon a proposed amendment to the Company's Articles
of Incorporation to classify the Board of Directors into
three classes;
2. If the amendment is approved, to elect three directors to
serve until the 1999 Annual Stockholders' Meeting, three
directors to serve until the 2000 Annual Stockholders'
Meeting, and three directors to serve until the 2001 Annual
Stockholders' Meeting;
3. If the amendment is not approved, to elect nine directors to
serve for the ensuing year; and
4. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Only stockholders of record at the close of business March
24, 1998, will be entitled to vote at the meeting. Approval of
the Amendment to the Articles of Incorporation requires the
affirmative vote of the holders of more than two-thirds (2/3) of
the Company's outstanding shares of common stock.
Lunch will be provided.
By Order of the Board of Directors
Harold Morrison, Jr.
Secretary
IMPORTANT
YOU ARE URGED TO COMPLETE, SIGN, AND RETURN THE ENCLOSED PROXY
CARD IN THE SELF-ADDRESSED STAMPED (FOR U. S. MAILING) ENVELOPE
PROVIDED AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING IN
PERSON, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE YOUR OWN
SHARES. SEE PROXY STATEMENT ON THE FOLLOWING PAGES.
PAGE
<PAGE>
PROXY STATEMENT
P. O. Box 459
Edinburg, VA 22824
March 27, 1998
TO THE STOCKHOLDERS OF SHENANDOAH TELECOMMUNICATIONS COMPANY:
Your proxy in the enclosed form is solicited by the
management of the Company for use at the Annual Meeting of
Stockholders to be held in the Social Hall of the Edinburg Fire
Department, Stoney Creek Boulevard, Edinburg, Virginia, on
Tuesday, April 21, 1998, at 11:00 a.m., and any adjournment
thereof.
The mailing address of the Company's executive offices is
P. O. Box 459, Edinburg, Virginia 22824.
The Company has 8,000,000 authorized shares of common stock,
of which 3,755,760 shares were outstanding on March 24, 1998.
This proxy statement and the Company's annual report, including
financial statements for 1997, are being mailed on or about March
27, 1998, to approximately 3,575 stockholders of record on March
24, 1998. Only stockholders of record on that date are entitled
to vote. Each outstanding share will entitle the holder to one
vote at the Annual Meeting. No director, officer, or other party
beneficially owns as much as five percent of the outstanding
shares of the common stock of the Company. The Company intends to
solicit proxies by the use of the mail, in person, and by
telephone. The cost of soliciting proxies will be paid by the
Company.
Executed proxies may be revoked at any time prior to
exercise. Proxies will be voted as indicated by the stockholders.
Executed but unmarked proxies will be voted "FOR" Proposals 1 and
2. Abstentions and broker non-votes will be treated as shares
that are present, in person or by proxy, and entitled to vote for
purposes of determining the presence of a quorum at the Annual
Meeting. Broker non-votes will not be counted as a vote cast on
any matter presented at the Annual Meeting.
PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY TO
PROVIDE FOR A CLASSIFIED BOARD OF DIRECTORS
Directors of the Company presently are elected annually by
the stockholders to serve until the next annual meeting and until
their successors are elected and qualified. Rather than elect
the entire Board on an annual basis, a significant number of
public companies have classified their Boards to stagger the
terms of their directors. In this regard, the Board of Directors
has unanimously approved and recommends that the stockholders
adopt an amendment (the "Classified Board Amendment") to the
Company's Articles of Incorporation to add a new paragraph which
would classify the Board of Directors into three classes of
directors.
PAGE
<PAGE>
The Board of Directors is recommending the adoption of the
Classified Board Amendment in order to further continuity and
stability in the leadership and policies of the Company and to
discourage certain types of tactics which could involve changes
of control that are not in the best interests of the
stockholders. The Classified Board Amendment is permitted under
the Virginia Stock Corporation Act. The Classified Board
Amendment is not in response to any specific efforts of which the
Company is aware to accumulate shares of Common Stock or to
obtain control of the Company.
The Classified Board Amendment provides for a board of
directors of the Company divided into three classes of directors
serving staggered three-year terms. If adopted, the Classified
Board Amendment would divide the Board into three equal classes,
designated Class I, Class II, and Class III. At the Annual
Meeting, at which nine directors are to be elected, the first
class, consisting of three directors, would be elected for a term
expiring at the 1999 Annual Meeting; the second class, consisting
of three directors, would be elected for a term expiring at the
2000 Annual Meeting; and the third class, consisting of the
remaining three directors, would be elected for a term expiring
at the 2001 Annual Meeting (and in each case until their
respective successors are duly elected and qualified). Commencing
with the reelection of directors to Class I in 1999, each class
of directors elected at an annual stockholders' meeting would be
elected to three-year terms. If the number of directors
constituting the Board is increased or decreased, the resulting
number would be apportioned by the Board of Directors among the
three classes so as to make all classes as nearly equal in number
as possible. The Company presently has no agreement or plans to
increase or decrease the size of the Board.
The Classified Board Amendment also provides that a director
may be removed from office at a meeting called expressly for
that purpose by the vote of stockholders holding not less than
75% of the shares entitled to vote at the election of directors.
The Company's Bylaws provide that special meetings of
stockholders may only be called by the President of the Company
or a majority of the Board of Directors.
Information concerning the current nominees for election as
directors at the Annual Meeting and the terms for which they will
serve if the Classified Board Amendment is adopted is contained
under the caption "The Election of Directors" below. If the
Classified Board Amendment is not adopted, all directors will be
elected to serve until the 1999 Annual Meeting and until their
successors are elected and qualified.
The Classified Board Amendment would facilitate director
continuity and experience, since a majority of the Company's
directors at any given time will have prior experience as Company
directors. While the Company has not experienced any problems
with such continuity in the past, it wishes to ensure that this
experience will continue. If adopted, the provisions of the
amendment would be applicable to every election of directors.
PAGE
<PAGE>
The Board of Directors believes that the Classified Board
Amendment will encourage persons who may seek to acquire control
of the Company to initiate such an acquisition through
negotiations with the Board of Directors. The Board believes that
it will therefore be in a better position to protect the
interests of all the stockholders. In addition, the stockholders
of the Company will have a more meaningful opportunity to
evaluate any such action.
The Classified Board Amendment would significantly extend
the time required to make any change in composition of a majority
of the Board and may discourage certain unsolicited takeover bids
for the Company which the Board may deem to be unfair or
coercive. Presently, a change in control of the Board can be made
by a majority of the Company's stockholders at a single annual
meeting. Under the proposed amendment, it will take at least two
annual meetings to effect a change in the majority control of the
Board of Directors, except in the event of vacancies resulting
from removal. Because of the additional time required to change
control of the Board, the Classified Board Amendment will tend to
perpetuate present management and will tend to discourage certain
tender offers. The Classified Board Amendment will also make it
more difficult for the stockholders to change the composition of
the Board even if the stockholders believe such a change would be
desirable.
Upon adoption of the Classified Board Amendment by the
stockholders, the Board of Directors will amend the Bylaws of the
Company to conform to the Articles of Incorporation as amended by
the Classified Board Amendment. The Board of Directors does not
currently contemplate recommending the adoption of any further
amendments to the Articles of Incorporation or Bylaws or any
other action designed to affect the ability of third parties to
take over or change control of the Company.
Recommendation
The Board of Directors recommends that you vote FOR approval
of the amendment to the Company's Articles of Incorporation
providing for a classified Board of Directors. Approval of the
amendment requires the affirmative vote of the holders of more
than two-thirds of the Company's outstanding shares of Common
Stock. Abstentions and broker non-votes are treated as votes
against the proposal.
Text of the Amendment
A new Article VI of the Company's Articles of Incorporation
is proposed to be adopted to replace the existing Article VI of
the Company's Articles of Incorporation. The new Article VI would
read in its entirety as follows:
"ARTICLE VI
The authorized number of directors of this Corporation shall
be not less than seven (7) and not more than nine (9). The number
of directors within this range shall be stated in the
Corporation's Bylaws, as may be amended from time to time. When
the number of directors is changed the Board of Directors shall
determine the class or classes to which the increased or
decreased number of directors shall be apportioned, provided that
the directors in each class shall be as nearly equal in number as
PAGE
<PAGE>
possible. No decrease in the number of directors shall have the
effect of shortening the term of any incumbent director.
Effective as of the annual meeting of stockholders in 1998,
the Board of Directors shall be divided into three classes,
designated as Class I, Class II, and Class III, as nearly equal
in number as possible; and the term of office of directors of one
class shall expire at each annual meeting of stockholders, and in
all cases until their successors shall be elected and shall
qualify, or until their earlier resignation, removal from office,
death or incapacity. The initial term of office of Class I shall
expire at the annual meeting of stockholders in 1999; that of
Class II shall expire at the annual meeting in 2000; and that of
Class III shall expire at the annual meeting in 2001, and in all
cases as to each director until his successor shall be elected
and shall qualify, or until his earlier resignation, removal from
office, death or incapacity.
Subject to the foregoing, at each meeting of stockholders
the successors to the class of directors whose term shall then
expire shall be elected to hold office for a term expiring at the
third succeeding annual meeting and until their successors shall
be elected and qualified.
The directors remaining in office acting by a majority vote,
or a sole remaining director, although less than a quorum, are
hereby expressly delegated the power to fill any vacancies in the
Board of Directors, however occurring, whether by an increase in
the number of directors, death, resignation, retirement,
disqualification, removal from office or otherwise; and any
director so chosen shall hold office until the next shareholders
meeting at which directors are elected and until his successor
shall have been elected and qualified, or until his earlier
resignation, removal from office, death, or incapacity.
Any director may be removed from office at a meeting called
expressly for that purpose by the vote of stockholders holding
not less than 75% of the shares entitled to vote at the election
of directors."
Existing Defensive Provisions
Certain other provisions also exist under the Company's
Bylaws and Rights Plan (as defined below) and the Virginia Stock
Corporation Act which could be characterized as having an
anti-takeover effect, including the following:
Stockholders' Rights Plan. On February 9, 1998, the Board of
Directors adopted a Stockholders' Rights Plan for the Company
(the "Rights Plan"). Pursuant to the Rights Plan, the Board
declared a dividend of Rights to each of the corporation's
existing stockholders. Under certain circumstances, if a person
acquires 15% or more of the Company's common stock or causes the
Company to merge into or with another company, these Rights can
be exercised to purchase the common stock of the Company or the
acquirer at a price that represents a substantial discount to
market value. Because Rights held by the acquirer would become
void under the Rights Plan, the exercise of Rights by the<PAGE>
Company's other stockholders would have the effect of diluting
the economic and voting power of the acquirer and dramatically
increasing the cost of acquiring the Company. The threat that the
Rights will become exercisable, coupled with the ability of the
Board of Directors to eliminate the Rights by redemption,
increases the leverage of the Company's Board of Directors and
enhances its ability to negotiate with the acquirer on behalf of
the Company and its shareholders.
The Company's Bylaws. The Company's existing Bylaws also
include certain provisions which could be characterized as having
an anti-takeover effect, including (i) a requirement that notice
of stockholder nominations for election of directors at an annual
meeting must be given to the Company at least 120 days prior to
the meeting and that certain information specified in the Bylaws
must be included with such notice; and (ii) providing that a
special meeting of stockholders may only be called by the
President or a majority of the Board of Directors.
Virginia's Affiliated Transactions Statute. Virginia's
Affiliated Transactions Statute provides that if a person
acquires 10% or more of the stock of a Virginia corporation
without the approval of its board of directors, such person may
not engage in certain transactions with the corporation
(including a merger and purchase or sale of greater than 5% of
the corporation's assets or voting stock) for a period of three
years, and then only with the specified super-majority
shareholder vote, disinterested director approval, or fair price
and procedural protections. Virginia's statute includes certain
exceptions to this prohibition. For example, if a majority of
disinterested directors approves the acquisition of stock or the
transaction prior to the time that the person became an
interested shareholder, or if the transaction is approved by a
majority of the disinterested directors and by the affirmative
vote of two-thirds of the outstanding voting stock which is not
owned by the interested shareholder, the prohibition does not
apply.
THE ELECTION OF DIRECTORS
Subject to the Amendment of the Company's Articles of
Incorporation as described above, at the meeting, nine directors
(constituting the entire Board of Directors of the Company) are
to be elected at the Annual Meeting, each to hold office for the
term specified below and until his successor is elected and
qualified.
The proxy holders will vote the proxies received by them
(unless contrary instructions are noted on the proxies) for the
election as directors of the following nominees, all of whom are
now members of and constitute the Company's Board of Directors.
If any such nominees should be unavailable, the proxy holders
will vote for substitute nominees in their discretion.
Stockholders may withhold the authority to vote for the election
of directors or one or more of the nominees. Directors will be
elected by a plurality of the votes cast. Abstentions and shares
held in street name that are not voted in the election of
directors will not be included in determining the number of votes
cast. PAGE
<PAGE>
<TABLE>
<CAPTION> Nominees for Election of Directors
Year
<S> Elected Principal Occupation and Other
Name of Director Director Age Directorships for Past Five Years
(1) (2) (3)
<C> <C> <C>
Class I (Term expires 1999)
Douglas C. Arthur 1997 55 Attorney-at-Law; Dir., 1st National Corp.
Harold Morrison, Jr. 1979 68 Chairman of the Board, Woodstock Garage, Inc.
Secretary of the Co. (an auto sales & repair firm); Dir., 1st Virginia
Bank-BR
Zane Neff 1976 69 Retired Manager, Hugh Saum Co., Inc.(a hardware
Asst. Secretary of the Co. and furniture store); Dir., Crestar Bank
Class II (Term expires 2000)
Noel M. Borden 1972 61 Pres., H. L. Borden Lumber Co. (a retail building
Vice President materials firm); Chairman of the Board, 1st
National Corp.
Ken L. Burch 1995 53 Farmer
Grover M. Holler, Jr. 1952 77 Pres., Valley View, Inc. (a real estate
developer)
Class III (Term expires 2001)
Dick D. Bowman 1980 69 Pres., Bowman Bros., Inc. (a farm equipment
Treasurer of the Co. dealer); Dir., Shen. Valley Elec. Coop.; Dir., The
Rockingham Group; Dir., Old Dominion Electric
Coop.
Christopher E. French 1996 40 Pres., Shenandoah Telecommunications Co.
President & its Subsidiaries; Dir., 1st National Corp.
James E. Zerkel II 1985 53 Vice Pres., James E. Zerkel, Inc. (a heating, gas,
& hardware firm), Dir., Shen. Valley Elec. Coop.
(1) The directors who are not full-time employees of the Company were compensated in 1997 for their
services on the Board and one or more of the Boards of the Company's subsidiaries at the rate
of $370 per month plus $370 for each Board meeting attended. Additional compensation was paid
to the Vice President, Secretary, Assistant Secretary, and Treasurer, for their services in
these capacities, in the amounts of $1,360, $2,840, $1,360, and $2,840, respectively.
(2) Years shown are when first elected to the Board of the Company or the Company's predecessor,
Shenandoah Telephone Company. Each nominee has served continuously since the year he joined
the Board.
(3) Each director also serves as a director of one or more of the Company's subsidiaries.
</TABLE>
<PAGE>
Standing Audit, Nominating, and Compensation Committees
of the Board of Directors
1. Audit Committee - The Finance Committee of the Board of
Directors, consisted of the following directors: Dick
D. Bowman (Chairman), Grover M. Holler, Jr., and Noel M.
Borden. It performed a function similar to that of an
Audit Committee. This committee is responsible for the
employment of outside auditors and for receiving and
reviewing the auditor's report. During 1997 there were
two meetings of the Finance Committee. Additional
business of the committee was conducted in connection
with the regular Board meetings.
2. Nominating Committee - The Board of Directors does not
have a standing Nominating Committee.
3. Compensation Committee - The Personnel Committee of the
Board of Directors, consisted of the following
directors: Noel M. Borden (Chairman), Harold Morrison,
Jr., and. James E. Zerkel. This committee performed a
function similar to that of a Compensation Committee. It
is responsible for the wages, salaries, and benefit
programs for all employees. During 1997 there were three
meetings of this committee.
Attendance of Board Members at Board and Committee Meetings
During 1997, the Board of Directors held 14 meetings.
All of the directors attended at least 75 percent of the
aggregate of: (1) the total number of meetings of the Board
of Directors; and (2) the total number of meetings held by
all committees of the Board on which they served.
CERTAIN TRANSACTIONS
In 1997, the Company received services from Mr.
Morrison's company in the amount of $45,993 and from Mr.
Zerkel's company in the amount of $13,803. Management
believes that each of the companies provides these services
to the Company on terms comparable to those available to the
Company from other similar companies. No other director is an
officer, director, employee, or owner of a significant
supplier or customer of the Company.
PAGE
<PAGE>
STOCK OWNERSHIP
The following table presents information relating to the
beneficial ownership of the Company's outstanding shares of
common stock by all directors, the president, and all
directors and officers as a group.
No. of Shares
Name and Address Owned as of 2-1-98 Percent of Class
(1) (2)
Douglas C. Arthur 1,440 *
Strasburg, VA 22657
Noel M. Borden 18,096 *
Strasburg, VA 22657
Dick D. Bowman 43,744 1.16
Edinburg, VA 22824
Ken L. Burch 45,172 1.20
Quicksburg, VA 22847
Christopher E. French 137,209 3.65
Woodstock, VA 22664
Grover M. Holler, Jr. 70,736 1.88
Edinburg, VA 22824
Harold Morrison, Jr. 20,528 *
Woodstock, VA 22664
Zane Neff 7,716 *
Edinburg, VA 22824
James E. Zerkel II 4,498 *
Mt. Jackson, VA 22842
Total shares beneficially
owned by 13 directors and
officers as a group 351,395 9.36
(1) Includes shares held by relatives and in certain trust
relationships, which may be deemed to be beneficially owned
by the nominees under the rules and regulations of the
Securities and Exchange Commission; however, the inclusion of
such shares does not constitute an admission of beneficial
ownership.
(2) Asterisk indicates less than 1%. <PAGE>
<TABLE>
<CAPTION> SUMMARY COMPENSATION TABLE
The following Summary Table is furnished as to the salary and incentive payment paid by the
Company and its subsidiaries on an accrual basis during the fiscal years 1995, 1996, and 1997 to, or
on behalf of, the chief executive officer and each of the next four most highly compensated
executive officers who earn $100,000 or more per year.
Long-Term
<S> Annual Compensation Compensation
Name and Principal Incentive Other
Position Year Salary ($) Payment ($) Options (#) Compensation ($)(1)
<C> <C> <C> <C> <C>
Christopher E. French 1997 $136,491 $ 12,405 471 $ 7,291
President 1996 130,612 11,013 -- 6,778
1995 114,684 20,150 -- 6,329
David E. Ferguson 1997 94,141 5,981 352 6,647
Vice President- 1996 91,270 6,134 -- 5,807
Customer Service 1995 82,857 10,029 -- 5,561
(1) Includes amounts contributed by the company under its 401(k) and Flexible Benefits Plans, each
of which is available to all regular company employees.
<CAPTION> OPTION GRANTS TABLE
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
% of Total
Options Exercise
Options Granted to or Base
<S> Granted Employees in Price Expiration
Name (Shares) Fiscal Year per Share Date 5% (1) 10% (1)
<C> <C> <C> <C> <C> <C>
Christopher E. French 471 3.4% $21.86 2/10/2002 $2,845 $6,288
David E. Ferguson 352 2.5% 21.86 2/10/2002 2,125 4,699
(1) In order to realize the potential value set forth, the price per share of the Company's common
stock would be approximately $27.90 and $35.21, respectively, at the end of the five-year option
term./TABLE><PAGE
<PAGE>
<TABLE>
<CAPTION> OPTION EXERCISES AND YEAR END VALUE TABLE
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Value
Value of Unexercised
No. of Unexercised in the Money
Options/ Options/
FY-End (Shares) FY-End ($)
<S> Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
<C> <C> <C> <C>
Christopher E. French 0 0 0 / 471 0 / 0
David E. Ferguson 0 0 0 / 352 0 / 0
Average reported price for transactions reported to the Company during 1997 was $20.59.
</TABLE>
PAGE
<PAGE>
RETIREMENT PLAN
The Company maintains a noncontributory defined benefit
Retirement Plan for its employees. The following table
illustrates normal retirement benefits based upon Final
Average Compensation and years of credited service. The
normal retirement benefit is equal to the sum of:
(1) 1.14% times Final Average Compensation plus 0.65%
times Final Average Compensation in excess of Covered
Compensation (average annual compensation with respect to
which Social Security benefits would be provided at Social
Security retirement age) times years of service (not greater
than 30); and
(2) 0.29% times Final Average Compensation times years
of service in excess of 30 years (such excess service not to
exceed 15 years).
Estimated Annual Pension
Years of Credited Service
Final Average
Compensation 15 20 25 30 35
$ 20,000 $ 3,420 $ 4,560 $ 5,700 $ 6,840 $ 7,130
35,000 6,363 8,483 10,604 12,725 13,233
50,000 10,390 13,853 17,317 20,780 21,505
75,000 17,103 22,803 28,504 34,205 35,293
100,000 23,815 31,753 39,692 47,630 49,080
125,000 30,528 40,703 50,879 61,055 62,868
150,000 37,240 49,653 62,067 74,480 76,655
160,000 39,925 53,233 66,542 79,850 82,170
Covered Compensation for those retiring in 1998 is
$31,128. Final Average Compensation equals an employee's
average annual compensation for the five consecutive years of
credited service for which compensation was the highest. The
amounts shown as estimated annual pensions were calculated on
a straight-life basis assuming the employee retires in 1998.
The Company did not make a contribution to the Retirement
Plan in 1997, as the Plan was adequately funded. Christopher
French and David Ferguson had 16 years and 30 years,
respectively, of credited service under the plan as of
January 1, 1998.
PAGE
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The members of the Personnel Committee of the Board of
Directors of the Company perform the function of a
Compensation Committee. The Committee's approach to
compensation of the Company's executive officers, including
the chief executive officer, is to award a total compensation
package consisting of salary, incentive, and fringe benefit
components. The compensation package is designed to provide a
level of compensation to enable the Company to attract and
retain the executive talent necessary for the long-term
success of the organization. The incentive plan component of
the total compensation package provides an incentive to the
officers to meet or exceed certain performance objectives.
The plan also places a portion of the officers' total
compensation at risk in the event the Company does not
achieve its objectives. The objectives include a component
measuring the improvement in the level of service provided to
the Company's customers and a component measuring the
Company's financial performance. In 1997, the Company reached
over 61 percent of its combined goals.
Submitted by the Company's Personnel Committee:
Noel M. Borden, Chairman
Harold Morrison, Jr.
James E. Zerkel II
PAGE
<PAGE>
FIVE-YEAR STOCKHOLDER RETURN COMPARISON
The Securities and Exchange Commission requires that the
Company include in its Proxy Statement a line graph
presentation comparing cumulative, five-year stockholder
returns on an indexed basis with a performance indicator of
the overall stock market and either a nationally recognized
industry standard or an index of peer companies selected by
the Company. The broad market index used in the graph is the
NASDAQ Market Index. The S&P Telephone Index consists of the
regional Bell Operating Companies, GTE, ALLTEL, and Frontier
Corporation.
The Company's stock is not listed on any national
exchange nor NASDAQ; therefore, for purposes of the following
graph, the value of the Company's stock, including the price
at which dividends are assumed to have been reinvested, has
been determined based upon the average of the prices of
transactions in the Company's stock that were reported to the
Company in each fiscal year.
Comparison of Five-Year Cumulative Total Return*
among Shenandoah Telecommunications Company,
NASDAQ Market Index, and S&P Telephone Index
1992 1993 1994 1995 1996 1997
Shenandoah
Telecommunications 100.00 104.72 100.03 107.86 112.19 107.88
NASDAQ Market
Index 100.00 114.80 112.21 158.70 195.19 239.53
S&P Telephone
Index 100.00 115.49 110.71 166.78 168.45 235.22
Assumes $100 invested December 31, 1992 in Shenandoah
Telecommunications Company stock, NASDAQ Market Index, and
S&P Telephone Index
*Total return assumes reinvestment of dividends
<PAGE>
<PAGE>
EMPLOYMENT OF AUDITORS
The Board of Directors, on the recommendation of the
Audit Committee, has appointed the firm of McGladrey and
Pullen, LLP as auditors to make an examination of the
accounts of the Company for the 1998 fiscal year. It is not
expected that representatives of the firm will be present at
the annual meeting.
PROPOSALS OF SECURITY HOLDERS
Proposals of security holders to be included in
management's proxy statement and form of proxy relating to
next year's annual meeting must be received at the Company's
principal executive offices not later than November 27, 1998.
OTHER MATTERS
Management does not intend to bring before the meeting
any matters other than those specifically described above and
knows of no matters other than the foregoing to come before
the meeting. If any other matters properly come before the
meeting, it is the intention of the persons named in the
accompanying form of proxy to vote such proxy in accordance
with their judgment on such matters, including any matters
dealing with the conduct of the meeting.
FORM 10-K
The Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available to
stockholders, without charge, upon request to Mr. Laurence F.
Paxton, Vice President-Finance, Shenandoah Telecommunications
Company, P. O. Box 459, Edinburg, VA 22824.
PAGE
<PAGE>
(Front)
PROXY
Shenandoah Telecommunications Company
124 South Main Street
Edinburg, VA 22824 This proxy is solicited on
behalf of the Board of
Directors
____________________________________________
The undersigned hereby appoints Christopher E. French,
Noel M. Borden, and Grover M. Holler, Jr., and each of them,
as Proxies with full power of substitution, to vote all
common stock of Shenandoah Telecommunications Company held of
record by the undersigned as of March 24, 1998, at the Annual
Meeting of Stockholders to be held on April 21, 1998, and at
any and all adjournments thereof.
1. Approval of Classifying the Board of Directors into Three
Classes
( ) FOR ( ) AGAINST ( ) ABSTAIN
The Board of Directors unanimously recommends a vote
"FOR" approval of classifying the Board of Directors.
2. Election of Directors
( ) FOR CLASS I Douglas C. Arthur, Harold Morrison, Jr.
and Zane Neff
CLASS II Noel M. Borden, Ken L. Burch, and
Grover M. Holler, Jr.
CLASS III Dick D. Bowman, Christopher E. French,
and James E. Zerkel II
To withhold authority to vote for any individual nominee,
strike a line through the nominee's name listed above.
( ) Vote Withheld for all nominees listed above
The Board of Directors unanimously recommends a vote "FOR"
election of directors.
PAGE
<PAGE>
(Back)
3. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the
meeting.
THIS PROXY, WHEN PROPERLY EXECUTED WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1
AND 2.
Please mark, sign exactly as name appears below, date,
and return this proxy card promptly, using the enclosed
envelope, whether or not you plan to attend the meeting.
When signing as attorney, executor,
administrator, trustee, guardian, or
agent, please give full title as
such. If a corporation, please sign
in full corporate name by president
or other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
Dated , 1998
Signature
( ) I plan to attend the
meeting
( ) Number of persons
attending
( ) I cannot attend the Additional Signature
meeting (if held jointly)
Additional Signature (if held jointly)
PAGE
<PAGE>
EXHIBIT 13. ANNUAL REPORT
1997
Annual Report
Continuing the Organization Founded June 9, 1902
Edinburg, Virginia
<PAGE>
<PAGE>
Stockholder Information
OUR BUSINESS
Shenandoah Telecommunications Company is a holding company which
provides various telecommunications services through its operating
subsidiaries. These services include: telephone service, primarily in
Shenandoah County and small service areas in Rockingham, Frederick,
and Warren counties, all in Virginia; cable television service in
Shenandoah County; unregulated communications equipment and services;
Internet Access; financing of purchases of telecommunications
facilities and equipment; paging, mobile telephone, business radio,
and cellular telephone services in the northern Shenandoah Valley;
resale of long distance services; operation and maintenance of an
interstate fiber optic network; and building and operating a personal
communications network in the four-state region from Chambersburg,
Pennsylvania to Harrisonburg, Virginia.
ANNUAL MEETING
The Board of Directors extends an invitation to all stockholders to
attend the Annual Meeting of Stockholders. The meeting will be held
Tuesday, April 21, 1998, at 11:00 a.m. in the Social Hall of the
Edinburg Fire Department, Stoney Creek Boulevard, Edinburg, Virginia.
Notice of the Annual Meeting, Proxy Statement, and Proxy were mailed
to each stockholder on or about March 27, 1998.
FORM 10-K
The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission is available to stockholders, without charge,
upon request to Mr. Laurence F. Paxton, Vice President - Finance,
Shenandoah Telecommunications Company, P. O. Box 459, Edinburg, VA
22824.
MARKET AND DIVIDEND INFORMATION
The stock of Shenandoah Telecommunications Company is not listed on
any national exchange or NASDAQ, and the Company is not aware of any
broker who maintains a position in the Company's stock. It, however,
is aware of unconfirmed transactions of the stock which have been
handled privately and by brokers and local auctioneers. Additionally,
the stock is traded on the over-the-counter bulletin board system.
Some of these prices include commissions and auctioneers' fees. Since
some prices are not reported to the Company and family transactions
are not applicable, all transactions are not included in the following
summary of prices. The Company has maintained a policy of declaring an
annual cash dividend.
1997 1996
No. No. No. No.
Qtr. Trans. Shares High Low Trans. Shares High Low
1st 90 7,614 $30.00 $20.00 145 14,045 $28.00 $19.75
2nd 221 18,124 25.00 19.00 123 10,368 27.00 20.00
3rd 223 16,357 25.00 18.00 126 12,391 25.50 20.00
4th 36 3,380 25.00 17.00 92 9,339 31.00 20.00
Weighted average price per
share - $20.59 $21.86
Annual cash dividend per
share - .43 .42
<PAGE>
CORPORATE HEADQUARTERS INDEPENDENT AUDITOR
Shenandoah Telecommunications Company McGladrey & Pullen,
LLP
124 South Main Street 1051 East Cary
Street
Edinburg, VA 22824 Richmond, VA 23219
STOCKHOLDERS' QUESTIONS AND STOCK TRANSFERS - CALL (540) 984-5260
Transfer Agent - Common Stock
Shenandoah Telecommunications Company
P.O. Box 459
Edinburg, VA 22824
This Annual Report to Stockholders contains forward-looking
statements. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to:
changes 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 undertakes no obligation to
publicly revise these forward-looking statements to reflect subsequent
events or circumstances. PAGE
<PAGE>
<TABLE>
<CAPTION> Five-Year Summary of Selected Financial Data
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 30,970,348 $ 25,429,854 $ 21,919,150 $ 20,229,178 $ 18,329,886
Operating Expenses 22,603,314 17,485,203 13,027,468 12,050,713 11,455,136
Income Taxes 2,593,631 2,821,586 3,572,956 2,577,641 2,481,764
Other Income less Other
Expenses (1) 311,140 446,574 456,544 (90,897) (154,454)
Interest Expenses 1,556,352 803,300 685,971 658,908 621,944
Gain (loss) on Security
Dispositions 48,628 228,250 1,141,386 - -
Net Income $ 4,479,563 $ 4,994,589 $ 6,230,685 $ 4,851,019 $ 4,602,619
Net Income from Continuing
Operations (2) $ 4,530,642 $ 4,790,006 $ 5,522,904 $ 4,851,019 $ 4,156,300
Total Assets $89,407,902 $79,374,097 $ 59,896,990 $ 52,464,150 $ 49,652,064
Long-term Obligations $27,360,660 $24,706,239 $ 10,558,953 $ 9,941,209 $ 9,381,813
Stockholder Information (3)
Number of Stockholders 3,567 3,399 3,226 2,979 2,879
Shares of Stock 3,760,760 3,760,760 3,760,760 3,760,760 3,760,760
Earnings per Share-basic
& diluted $ 1.19 $ 1.33 $ 1.66 $ 1.29 $ 1.22
Regular Cash Dividend
per Share $ .43 $ .42 $ .42 $ .375 $ .30
Special Cash Dividend
per Share $ - $ - $ .06 $ - $ -
(1) Includes non-operating income less expenses and minority interest in net income of
consolidated subsidiaries.
(2) Excludes gains and losses on disposition of investments.
(3) The information has been restated to reflect a 2-for-1 split to stockholders of
record January 23, 1995.
/TABLE
<PAGE>
CATV System Improvements
Shenandoah Cable Television Company faced many challenges in
1997. These challenges were brought about, in part, by the 1996
purchase of the Shenandoah County cable television systems from
FrontierVision Partners. With that acquisition, we added 4,914
customers and approximately 136 miles of CATV facilities to our
existing operation. We inherited operational, plant, and customer
service problems that needed to be addressed. In addition, our 2,884
existing customers were limited in the amount of channels they could
receive because of the technical limitations of our 300 megahertz
system which was installed in the early 1980's. To address these
issues, we embarked on a $2 million state-of-the-art upgrade project
with our primary focus on improving the quality, dependability, and
channel capacity of our cable television facilities. Major upgrades
to the system have been completed, allowing for the elimination of
multiple headends and the utilization of our fiber network to improve
the performance level of the CATV system. System enhancements now
allow all of our customers to receive identical programming, with
adequate reserve capacity for channel growth for new programming and
new service offerings, such as high-speed Internet access, advanced
pay-per-view services, and deployment of interactive programming.
In August of 1997, a survey was sent to all of our customers to
determine their perception of the service level they were receiving
from us and what choices in programming they would like to see added
to our system. We were very proud of the fact that 90 percent of the
customers responding to the survey rated our overall service level as
excellent or good. Each customer who indicated a service or billing
concern on the survey was personally contacted by a service
representative for appropriate action. As a result of the comments
received from our customers, we added ten additional channels of
programming, bringing the total number of channels offered to 56.
A significant change afforded our newly acquired customers was an
enhanced level of customer service. Their service irregularities
could now be reported to our repair service by simply dialing 611.
Operators are on duty 24 hours a day to receive and respond
appropriately to all trouble reports. Bill payment was made simpler
by allowing customers to take advantage of our automatic bank draft or
receive their billing for cable service with their telephone
statement. All residents of Shenandoah County now have the benefit of
local ownership and operation of their CATV services. At the same
time, it will enable Shenandoah Cable Television Company to continue
expanding its broadband network services in order to provide the
services needed by our customers today and in the future.
Shenandoah Cable Television Company increased its basic service
rate in 1997. The increased cost for network programming continued to
be a major contributor in the need for higher rates, as well as the
continued increase in wages, insurance, utilities, and other operating
expenses. In order to provide better service and to keep pace with
the cost of doing business, it was necessary to adjust our rates. We
believe we offer a great value for the dollar when compared to other
entertainment options. Shenandoah Cable Television Company's basic
rates are still well below those charged by cable systems in the
surrounding counties.
<PAGE>
Fiber Network Extended to Washington, D.C. Area
Shenandoah Telephone Company has activated its new fiber optic
route from the Shenandoah Valley to the Washington, D.C. metropolitan
area. The construction of the fiber route to Herndon, Virginia, was
completed on January 23, 1998, and initial services to customers began
the following week. Shentel's route is also an expansion of the
ValleyNet interstate fiber optic network which reaches an eight state
area of the southeastern and mid-Atlantic United States.
The new route allows ValleyNet customers to lease fiber optic
transmission capacity in DS1, DS3, OC3, or higher capacity
configurations. Completion of this route gives our customers an
alternative connection to meet their telecommunications needs to and
from the Washington metropolitan area. The route gives ValleyNet and
its customers high quality network capabilities into Northern
Virginia, adding another major market area to those already served by
ValleyNet and its interconnected partners.
Shentel was a founding partner of the ValleyNet partnership which
was created in 1989 to provide a single point of contact for
marketing, operations, and maintenance of broadband fiber optic
telecommunications services. ValleyNet has a connection agreement
with Carolinas FiberNet, which markets an extensive fiber optic
network throughout North Carolina, South Carolina and portions of
Georgia. The connected networks serve eight states with a total of
4,100 miles of fiber optic cable.
SHENANDOAH.COM Debuts on the Internet
On November 1, 1997, Shentel launched Shenandoah.com, a daily
news and information service. This innovative web site is the first
of its kind in the Shenandoah Valley.
Shenandoah.com is a World Wide Web Homepage that includes local
weather, news, and sports as well as story articles contributed by
members of the community. The web site offers an electronic version
of the Company's Yellow Pages, public service announcements, and
community information. The association with content partners
reflects the philosophy behind the development of the service to
actively involve members of the community rather than merely providing
static listings of information. Also featured is an up-to-date,
searchable five-county information directory featuring non-profit and
government listings which include e-mail and web site hypertext links.
Yellow Page advertisers and others can advertise on the Electronic
Yellow Page listings, as well as on Banner Ads that appear on the web
pages.
One formal objective of the Shenandoah.com information service
is to act as a clearing house that refers users to a variety of
community partners through various links. Reflecting the broad scope
and reach of the Internet, users from all over the world have visited
the site, and viewed the wide variety of information pertaining to the
northern Shenandoah Valley. Daily usage of the site continues to grow
as does the ever developing and expanding range of pertinent
information.
Personnel Support Growth of Organization
The year 1997 was exciting for the staff of Shenandoah
Telecommunications Company. We experienced growth in all areas of our
business, which resulted in many new and challenging opportunities. As
our business grew, so did our staff. Thirty new employees joined our
organization, and forty employees moved to new opportunities through
promotions or transfers. This resulted in 176 full-time equivalent
(FTE) employees, an increase over 152 FTE employees at the end of
1996. A large portion of this growth was for staffing the new ShenTel
Center in Winchester and our new retail store in Harrisonburg. Both
locations offer an array of telecommunications products and services,
and support our expanding geographic presence in the Northern
Shenandoah Valley.
During the year, we supplemented our staffing needs with
temporary help, job sharing, and our summer internship program. Twenty-
seven summer interns worked in all areas of our business, assisting
with increased work loads, special projects, and helping to cover for
vacations. This program offers us the opportunity to provide valuable
work experience to area youth, while meeting the needs of our
organization.
During 1997 we recognized 21 employees who reached milestone
anniversaries. These employees represented a total of 345 years of
service, demonstrating the commitment and dedication of our staff to
the continued success of our company.
We remain committed to providing quality products and services to
our customers. The first step in achieving this goal is a well-
informed and well-trained work force. During 1997, 113 employees
participated in job training or attended industry-related events. We
also sponsored on-site computer training, in which 116 employees
participated.
Many of our staff are involved in local, civic, and charitable
organizations; and they participate in a wide variety of community and
industry events, including parades, community trade fairs, and
telephone book recycling. Our employees were also generous with their
time, talents, and money by supporting the American Cancer Society's
Relay for Life and by assisting Shenandoah Social Services in
providing Christmas gifts for needy children. Shenandoah
Telecommunications Company and its staff remain committed to serving
our community, not only with our products and services but also with
our talents and support, both as an organization and as individuals.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Shenandoah Telecommunications Company is a diversified
telecommunications holding company providing both regulated and
unregulated telecommunications services through its eight wholly-owned
subsidiaries.
This industry is in a period of transition from a protected
monopoly to a competitive environment as evidenced by the passage of
the Telecommunications Act of 1996. As a result, Shenandoah
Telecommunications has made, and plans to continue to make,
significant investments in the new and emerging technologies. The
Company was a pioneering provider of Internet access and Personal
Communications Services in a rural location. On September 30, 1996,
the Company purchased the Shenandoah County cable television assets of
FrontierVision Operating Partners, L.P., more than doubling the cable
television customer base. These efforts, in conjunction with steady
growth in cellular service, have reduced the regulated telephone local
exchange company's portion of revenues from 59.6% in 1995 to 54.4% in
1996, and to 47.2% in 1997.
Other services provided include equipment sales and leases, long
distance services, and facility leases to interexchange carriers on a
Company owned fiber optic cable network. The Company also
participates in emerging technologies by direct investment in non-
affiliated companies.
RESULTS OF OPERATIONS
The regulated Telephone Company's largest source of revenue
continues to be for access to the Company's local exchange network by
interexchange carriers. These revenues increased 4.6% in 1997 and
5.5% in 1996. The changes in access revenues generally corresponds
with growth in minutes of use and in access lines. The minutes of use
during 1997 increased 5.7% compared to an increase of 8.8% in 1996.
The number of access lines increased by 4.2% in 1997 and 3.8% in 1996.
The Mobile revenues, which are now the single largest revenue
source outside of the telephone operations, are mainly derived from
wireless communications services. Local cellular service revenues
increased $682,021 or 22.8% in 1997 compared to $776,949 or 35.6% in
1996. Outcollect roamer revenues increased $960,240 or 28.2% in 1997
compared to $819,092 or 31.6% in 1996. The increase in local cellular
revenues was due to a 31.8% increase in the customer base in 1997 and
a 56.7% increase in 1996, with a larger proportion of new customers
applying for low-usage plans.
Cable Television revenues increased principally as a result of
the acquisition mentioned above. Cable Television revenues increased
96.8% in 1997 as compared to 47.1% in 1996. Channel capacity
additions in late 1997 and early 1998 are expected to result in
further revenue growth during 1998.
The increase in the ShenTel Service revenues was 25.3% for 1997
compared to an 18.3% increase in 1996. Both increases are due to
expansion of our Internet Service operation.
Long Distance revenues declined by 13.4% in 1997 and by 7.7% in
1996 due principally to loss of market share. The 1996 revenue
decrease of $87,471 was more than offset by the $122,809 reduction in
underlying line costs stemming from a new contract for terminating
calls.
PCS revenues increased by 352.0% in 1997 over 1996, due to
customer growth. There were no PCS revenues in 1995.
Network revenues are for leasing capacity to interexchange
carriers on the Company's fiber optic facilities in West Virginia and
Maryland. This service experienced a revenue increase of 14.9% in
1997 compared to 8.0% in 1996.
Cost of Products Sold increased by $563,629 or 34.7% in 1997.
Handset sales in the Personal Communications Service operation was
responsible for this change.
Plant Specific is chiefly comprised of ongoing operating and
maintenance expense for the physical plant. This category increased
by 20.2% in 1997 and 22.3% in 1996. Over half of the 1997 increase is
attributed to plant improvements and recurring service support
necessitated by the CATV acquisition.
The expense category with the largest increase in 1997 and 1996
was Network and Other. The increases were due primarily to switching
facilities and costs attributed to the PCS, Cellular, and Internet
Service operations. These costs increased $1,189,925 or 36.2% in 1997
compared to $1,231,818 or 59.8% in 1996, primarily due to the rapidly
increasing customer base for these operations.
Depreciation and Amortization, our largest expense category,
increased by 32.6% in 1997 compared to 23.2% in 1996. Plant in
Service, combined with goodwill and noncompete values appraised for
the CATV acquisition, collectively increased the basis for this
category by $8,553,942 or 12.1% in 1997 compared to $17,671,554 or
33.3% in 1996. Over half of the 1997 increase in the Plant in Service
account was in the telephone local exchange subsidiary, particularly
for metallic and fiber cable and switching equipment. In 1996, the
CATV acquisition and investments in towers and equipment for wireless
services were principal contributors to the increase in Depreciation
and Amortization expense.
Total payroll costs (including capitalized costs) increased 10.2%
in 1997 compared to 1996. Total payroll costs in 1996 increased 23.4%
from the previous year. The cost increases are primarily due to an
increase in the number of employees, principally in the Personal
Communications Services operations. Payroll is primarily responsible
for the 28.8% increase in 1997 compared to the 35.8% increase in 1996
for customer operations. The growth in employees is also the primary
contributor to the 16.2% increase in 1997.
The increase in Taxes Other Than Income in 1997 and 1996 was
primarily due to the increased amount of Plant in Service, and the
associated property taxes.
The Non-operating Income Less Expenses category consists mainly
of the income or loss from interest bearing instruments and external
investments made by the Company. The increase reflected on the income
statement is principally due to income recognized in one of the
Company's partnership investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company has two principal sources of funds for funding
current expansion activities. First, the Company has a loan agreement
with the Rural Telephone Bank with approximately $3,000,000 remaining
for future advances. Expenditure of these loan funds is limited to
capital projects for the regulated local exchange carrier subsidiary.
The second principal liquidity source is a credit facility
agreement with CoBank, entered into in July 1996. Pursuant to this
agreement, the Company can borrow up to $25,000,000 for a three-year
period ending September 1, 1999. During this period only interest is
payable. On September 1, 1999, the outstanding principal balance will
be amortized and repaid in monthly installments over the next twelve
years, with the final installment due August 20, 2011. Draws on this
loan for 1997 totaled $2,606,500 compared to $13,467,838 in 1996,
leaving $8,925,662 for future advances.
The Company's Board of Directors has approved a 1998 baseline
capital budget of potential capital projects totaling approximately
$17,890,000. This budget includes approximately $9,759,000 for the
telephone local exchange company, primarily for central office
equipment and fiber optic and metallic cable facilities. The Company
is evaluating possible additional investments in its Personal
Communications Service operation. These investments are not included
in the baseline capital budget.
The Company expects to finance these planned additions through
internally generated cash flows and additional advances from the RTB
note and CoBank agreement. The Company secured lines of credit for $2
million with First Union Bank and for $5 million with CoBank in 1997.
No draws have been made on these lines of credit as of January 31,
1998.
IMPACT OF THE YEAR 2000 ISSUE
Based on a preliminary assessment, the Company has determined
that significant portions of its software must be modified or replaced
so that its computer systems will properly utilize dates beyond
December 31, 1999. The vast majority of this software is provided by
third parties. The Company is now in the process of implementing
third party financial software that is Year 2000 certified, at an
estimated cost of $900,000. The Company also utilizes third party
software for customer care applications. These suppliers have
asserted their software is presently Year 2000 compliant or will be in
mid-1998. The Company estimates its remaining software will be Year
2000 compliant by March 31, 1999.
FUTURE REPORTING REQUIREMENTS
The FASB has issued Statements No. 130, Reporting Comprehensive
Income, and No. 131, Disclosures about Segments of an Enterprise and
Related Information, both of which the Company is required to adopt in
1998. A more detailed analysis of the standards and the expected
effect on the Company is described in Note 1 of the Notes to
Consolidated Financial Statements.
Laurence F. Paxton
Vice-President, Finance
PAGE
<PAGE>
<TABLE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997, 1996, and 1995
<S>
ASSETS 1997 1996 1995
Current Assets <C> <C> <C>
Cash and cash equivalents $ 5,203,521 $ 3,763,468 $ 6,106,447
Certificates of deposit 204,122 1,142,181 1,242,228
Held-to-maturity securities (Note 2) 1,622,433 2,148,945 2,488,773
Accounts receivable, including interest 5,682,798 4,208,742 3,068,379
Materials and supplies 3,968,791 2,888,709 1,922,090
Prepaid expenses and other current assets 507,165 399,074 481,003
----------- ---------- ----------
Total current assets 17,188,830 14,551,920 15,308,920
Securities and Investments (Note 2 and 3)
Available-for-sale securities 3,597,987 2,738,431 2,333,411
Held-to-maturity securities 499,581 1,622,433 2,098,968
Other investments 4,721,517 4,112,947 3,072,728
8,819,095 8,473,811 7,505,107
Property, Plant and Equipment (Note 3)
Plant in service 74,144,956 65,215,491 53,076,538
Plant under construction 8,232,717 5,626,710 2,372,750
82,377,473 70,842,201 55,449,288
Less accumulated depreciation 25,313,297 21,648,820 18,795,430
57,064,176 49,193,381 36,653,858
Other Assets
Cost in excess of net assets of
business acquired, less
accumulated amortization 5,157,078 5,532,601 -
Radio Spectrum License net of
accumulated amortization 702,036 - -
Deposit - 1,100,000 -
6,355,801 7,155,786 429,105
$ 89,407,902 $79,374,097 $59,896,990
See Notes to Consolidated Financial Statements. PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997, 1996, and 1995
LIABILITIES AND STOCKHOLDERS'
EQUITY 1997 1996 1995
<S> <C> <C> <C>
Current Liabilities
Current maturities of long-term debt (Note 3) $ 544,954 $ 529,405 $ 461,927
Accounts payable 3,743,701 2,097,115 813,887
Advance billings and payments 631,815 590,336 625,559
Customers' deposits 98,905 89,591 107,509
Other current liabilities 1,926,769 1,117,795 2,164,069
Other taxes payable 153,678 128,144 85,804
Total current liabilities 7,099,822 4,552,755 4,258,755
Long-Term Debt, less current maturities
(Note 3) 26,815,706 24,176,834 10,097,026
Other Liabilities and Deferred Credits
Deferred investment tax credit 216,256 291,957 367,143
Deferred income taxes (Note 4) 5,987,860 4,908,170 3,965,318
Pension and other (Note 5) 883,568 573,364 438,324
7,087,684 5,773,490 4,770,785
Minority Interests 1,894,206 1,743,465 1,499,151
Stockholders' Equity (Note 3)
Common stock, no par value, authorized
8,000,000 shares; issued 3,760,760 shares 4,740,677 4,740,677 4,740,677
Retained earnings 40,579,090 37,716,654 34,301,584
Unrealized gain on available-for-sale
securities, net (Note 2) 1,190,717 670,591 229,012
46,510,484 43,127,922 39,271,273
$89,407,902 $79,374,097 $59,896,990
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<S> 1997 1996 1995
Operating revenues
Telephone revenues: <C> <C> <C>
Local service $3,589,042 $ 3,319,648 $ 3,072,097
Access and toll service 7,347,703 7,021,504 6,658,076
Directory 1,129,976 1,131,540 1,119,858
Facility leases 1,977,122 1,838,293 1,699,709
Billing and collection 441,814 432,212 409,983
Other miscellaneous 147,629 117,148 109,910
---------- ---------- ----------
Total telephone revenues 14,633,286 13,860,345 13,069 633
Cable Television revenues 2,513,802 1,277,017 868,310
ShenTel Service revenues 2,115,443 1,688,795 1,379,200
Long Distance revenues 902,276 1,042,083 1,129,554
Mobile revenues 8,424,016 6,620,093 4,952,967
Network revenues 614,934 535,225 495,370
PCS revenues 1,751,291 387,446 -
Other 15,300 18,850 24,116
---------- ---------- ----------
Total operating revenues 30,970,348 25,429,854 21,919,150
Operating expenses:
Cost of products sold 2,189,810 1,626,181 764,264
Line costs 382,924 421,064 543,873
Plant specific 2,719,811 2,262,224 1,850,316
Plant nonspecific:
Network and other 4,480,998 3,291,073 2,059,255
Depreciation and amortization 4,681,858 3,529,554 2,864,521
Customer operations 4,312,552 3,347,804 2,465,316
Corporate operations 2,669,743 2,297,308 1,988,852
Taxes other than income 463,109 367,590 305,938
Other 702,509 342,405 185,133
---------- ---------- ----------
22,603,314 17,485,203 13,027,468
See Notes to Consolidated Financial Statements.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
<S> <C> <C> <C>
Operating income $ 8,367,034 $ 7,944,651 $ 8,891,682
Other income (expenses):
Nonoperating income,
less expenses 1,396,881 1,115,888 991,202
Interest expense (1,556,352) (803,300 (685,971)
Gain (loss) on sale of assets (48,628) 228,250 1,141,386
----------- ---------- ----------
8,158,935 8,485,489 10,338,299
Income taxes (Note 4) 2,593,631 2,821,586 3,572,956
----------- ---------- ----------
5,565,304 5,663,903 6,765,343
Minority interests (1,085,741) (669,314) (534,658
----------- ---------- ----------
Net income $ 4,479,563 $ 4,994,589 $ 6,230,685
=========== =========== ===========
Earnings per share,
basic and diluted $ 1.19 $ 1.33 $ 1.66
============ =========== ===========
Cash dividends per share $ 0.43 $ 0.42 $ 0.48
============ =========== ===========
Weighted average shares
outstanding 3,760,760 3,760,760 3,760,760
============ =========== ===========
See Notes to Consolidated Financial Statements.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Retained Earnings
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning $37,716,654 $34,301,584 $29,876,064
Net income 4,479,563 4,994,589 6,230,685
----------- ----------- -----------
42,196,217 39,296,173 36,106,749
Cash dividends 1,617,127 1,579,519 1,805,165
----------- ----------- ----------
Balance, ending $40,579,090 $37,716,654 $34,301,584
=========== =========== ===========
See Notes to Consolidated Financial Statements.
<PAGE> <PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<S> 1997 1996 1995
Cash Flows From Operating Activities <C> <C> <C>
Net income $4,479,563 $ 4,994,589 $ 6,230,685
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 4,246,049 3,402,794 2,864,521
Amortization 404,845 126,760 -
Deferred taxes 733,644 695,921 323,680
(Gain) loss on sale of assets 48,628 (228,250 (1,141,386)
Losses (gains) on equity investments (301,435) 189,389 43,763
Minority share of income, net of distributions 150,741 244,314 279,658
Other (75,701) 75,883 (4,551)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,474,056) (1,134,612) (187,951)
Material and supplies (1,080,082) (952,981) (411,084)
Increase (decrease) in:
Accounts payable 808,119 1,283,228 396,307
Other prepaids, deferrals and accruals 530,509 43,018 (232,349)
---------- ---------- ----------
Net cash provided by operating activities 8,470,824 8,740,053 8,161,293
---------- ---------- ----------
Cash Flows From Investing Activities
Purchases of property and equipment (10,687,958) (15,217,862) (6,697,476)
Acquisition of cable television assets - (7,617,199) -
(Deposit) refund on licenses 397,964 (1,100,000) -
Purchase of certificates of deposit (2,436,818) (1,134,528) (1,252,016)
Maturities of certificates of deposit 3,374,877 1,234,575 940,699
Cash flows from securities (Note 2) 1,328,857 185,437 (2,427,349)
Other, net (16,337) 54,628 44,053
----------- ----------- ---------
Net cash used in investing activities (8,039,415) (23,594,949) (9,392,089)
----------- ------------ ----------
See Notes to Consolidated Financial Statements.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S>
Cash Flows From Financing Activities <C> <C> <C>
Dividends paid (1,617,127) (1,579,519) (1,805,165)
Proceeds from long-term debt 3,179,500 14,584,839 998,000
Principal payments on long-term debt (553,729) (493,403) (430,151)
Net cash provided by (used in) financing ---------- ---------- ----------
activities 1,008,644 12,511,917 (1,237,316)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 1,440,053 (2,342,979) (2,468,112)
Cash and cash equivalents:
Beginning 3,763,468 6,106,447 8,574,559
---------- ---------- -----------
Ending $5,203,521 $ 3,763,468 $ 6,106,447
========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of capitalized interest of
$279,398 in 1997, $210,168 in 1996, and
$39,070 in 1995 $1,835,750 $ 726,242 $ 683,313
---------- ----------- -----------
Income taxes $1,929,172 $ 2,071,027 $ 3,081,596
========== =========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities
Common stock received in sale of equity investee $ - $ - $ 1,446,942
=========== =========== ===========
Change in classification of investments
from cost method to available-for-sale (Note 2) $ - $ - $ 1,225,858
=========== =========== ===========
Proceeds of long-term debt for stock in
Rural Telephone Bank $ 28,650 $ 55,850 $ 49,900
=========== =========== ===========
<PAGE> <PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 1. Summary of Accounting Policies
Shenandoah Telecommunications Company and subsidiaries (the "Company")
operates entirely in the telecommunications industry. The Company
provides telephone service, cable television service, unregulated
communications equipment and services, paging, mobile telephone,
business radio, cellular telephone, and personal communications
services. In addition, through its subsidiaries, the Company finances
purchases of telecommunications facilities and equipment and operates
and maintains an interstate fiber optic network. The Company's
operations are primarily located in the Northern Shenandoah Valley of
Virginia and the surrounding areas. A summary of the Company's
significant accounting policies follows:
Principles of consolidation: The consolidated financial statements
include the accounts of all wholly-owned subsidiaries and those
partnerships where effective control is exercised. All significant
intercompany accounts and transactions have been eliminated.
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents: The Company considers all temporary cash
investments with a purchased maturity of three months or less to be
cash equivalents. The Company places its temporary cash investments
with high credit quality financial institutions. At times such
investments may be in excess of the FDIC insurance limit.
Securities and investments: The Company has investments in debt and
equity securities, which consist of shares of common and preferred
stock and partnership interests. Debt securities consist primarily
of obligations of the U. S. Government.
<PAGE> <PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 1. Summary of Accounting Policies (Continued)
The Company follows the provisions of Financial Accounting Standards
Board (FASB) Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Statement 115 requires that
management determine the appropriate classification of debt and
equity securities that have readily determinable fair values.
Classification is determined at the date individual investment
securities are acquired. The appropriateness of such classification
is reassessed continually. The classification of those securities
and the related accounting policies are as follows:
Held-to-maturity securities: These consist entirely of debt
securities which are obligations of the U. S. Government. The
Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are
valued at amortized cost.
Available-for-sale securities: Securities classified as available
for sale are those securities that the Company intends to hold for
an indefinite period of time, but not necessarily to maturity.
Any decision to sell a security classified as available for sale
would be based on various factors, including changes in market
conditions, liquidity needs and other similar factors. Available-
for-sale securities are carried at fair value. Unrealized gains
and losses are reportable as increases and decreases in
stockholders' equity net of tax. Realized gains and losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
Investments carried at cost: These investments are those where the
Company does not have significant ownership and for which there is
no ready market. Information regarding these and all other
investments is reviewed continuously for evidence of impairment in
value. No impairment was deemed to have occurred at December 31,
1997.
Equity method investments: These investments consist of
partnership and corporate investments where the Company's ownership
is 20% or more, except where such investments meet the requirements
for consolidation. Under the equity method, the Company's equity
in earnings or losses of these companies is reflected in the
earnings.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 1. Summary of Accounting Policies (Continued)
Materials and supplies: New and reusable materials are carried in
inventory principally at average original cost. Specific costs are
used in the case of large individual items. Nonreusable material is
carried at estimated salvage value.
Property, plant and equipment: Property, plant and equipment is
stated at cost. Accumulated depreciation is charged with the cost
of property retired, plus removal cost, less salvage. Depreciation
is determined under the remaining life method and straight-line
composite rates. Depreciation provisions were approximately 6.1%,
5.8% and 5.7% of average depreciable assets for the years 1997, 1996
and 1995, respectively.
Cost in excess of net assets of business acquired: Intangibles
resulting from business acquisitions, comprising cost in excess of
net assets of business acquired are being amortized on a straight-
line basis over 15 years. The Company periodically evaluates the
recoverability of intangibles resulting from business acquisitions
and measures the amount of impairment, if any, by assessing current
and future levels of income and cash flows as well as other factors,
such as business trends and prospects and market and economic
conditions.
Pension plan: The Company maintains a noncontributory defined
benefit retirement plan covering substantially all employees.
Pension benefits are based primarily on the employee's compensation
and years of service. The Company's policy is to fund the maximum
allowable contribution calculated under federal income tax
regulations.
Income taxes: Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets and liabilities are adjusted for the
effect of changes in tax laws and rates on the date of enactment.
Investment tax credits have been deferred and are amortized over the
estimated life of the related assets.
Revenue recognition: Revenues are recognized when earned,
regardless of the period in which they are billed.
Earnings per share: The Company has adopted FASB Statement No. 128,
Earnings Per Share, which establishes standards for computing and
presenting earnings per share and applies to entities with publicly
held common stock or potential common stock. Those entities that
have only common stock outstanding are required to present basic
earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share
amounts assume the conversion, exercise or issuance of all potential
common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase
earnings per share. The Company has stock options outstanding which
are not dilutive; therefore basic and diluted earnings per share are
equal.
Future Reporting Requirements: The FASB has issued Statements No.
130, Reporting Comprehensive Income and No. 131, Disclosures about
Segments of an Enterprise and Related Information, both of which the
Company is required to adopt in 1998.
Statement No. 130, Reporting Comprehensive Income, establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Statement requires that
all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements. The Statement does not require a
specific format for that financial statement, but requires that an
enterprise display an amount representing total comprehensive income
for the period in that financial statement. It is not expected that
this statement will materially affect the presentation of the
Company's financial statements.
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information, requires that public business enterprises
report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. Segments are
components of an enterprise about which separate financial
information is available and is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and
in assessing performance. The statement also requires that public
business enterprises report certain information about their products
and services, the geographic areas in which they operate, and their
major customers. It is expected that this statement will require
additional disclosures by the Company.
Note 2. Investments
Investments consist of the following
Investment in held-to-maturity
securities:
1997 1996 1995
U. S. Treasury securities,
current $ 1,622,433 $ 2,148,945 $ 2,488,773
U. S. Treasury securities,
noncurrent
(due within three years) 499,581 1,622,433 2,098,968
----------- ---------- ----------
$ 2,122,014 $ 3,771,378 $ 4,587,741
=========== =========== ===========
The fair market value approximates the carrying value for all held to
maturity investments at December 31, 1997, 1996 and 1995.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 2. Investments (Continued)
1997 1996 1995
Investment in available-for-sale
securities:
Orion Network Systems, Inc.
Common and Preferred
(including unrealized gains
of $1,962,071 in 1997,
$1,070,007 in 1996 and
$142,263 in 1995) $ 3,597,997 $ 2,705,926 $ 1,778,189
MFS Communications Company,
Inc.(including unrealized
gain of $210,750 in 1995) - - 532,500
Comsat Corporation (including
unrealized gains of $25,906
in 1996 and $16,123 in 1995) - 32,505 22,722
---------- ----------- ----------
Total securities available
for sale $ 3,597,997 $ 2,738,431 $ 2,333,411
=========== =========== ===========
The Company realized a gain of approximately $25,900 in 1997, $228,000
in 1996 and $269,000 in 1995 on the sale of available-for-sale
securities.
Changes in the unrealized gain on available-for-sale securities during
the years ended December 31, 1997, 1996 and 1995 reported as a
separate component of stockholders' equity are as follows:
1997 1996 1995
Unrealized gain, beginning
balance $ 1,095,913 $ 369,136 $ -
Unrealized holding gains
during the 892,072 937,527 369,136
Realization of prior year
unrealized gains (25,900) (210,750) -
---------- ---------- -----------
Unrealized gains, ending balance 1,962,085 1,095,913 369,136
Deferred tax effect related
to net unrealized gains 771,368 435,322 140,124
--------- --------- ----------
Unrealized gain included in
stockholders' equity $ 1,190,717 $ 670,591 $ 229,012
=========== =========== ===========
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 2. Investments (Continued)
Cash flows from purchases, sales and maturities of securities:
1997 1996 1995
<S>
Available-for-sale securities: <C> <C> <C>
Sales $ 1,226,489 $ 550,000 $ 1,392,354
Purchases (1,196,296) - (83,335)
Held-to-maturity securities:
Maturities 2,148,945 2,488,773 5,466,558
Purchases (499,581) (1,672,410) (8,603,862)
Other investments:
Sales 48,412 - 63,751
Purchases (399,112) (1,180,926) (662,815)
---------- ---------- ----------
Total $ 1,328,857 $ 185,437 $(2,427,349)
=========== =========== ===========
Other investments comprised of equity securities which do not have
readily determinable fair values consist of the following:
<S> 1997 1996 1995
Cost method: <C> <C> <C>
USTN Holdings, Inc. $ 843,486 $ 843,486 $ 820,618
AvData Systems, Inc. 149,860 149,860 149,860
Rural Telephone Bank 653,492 624,837 568,992
Concept Five Technologies 1,000,003 1,000,003 -
Other 152,761 163,002 170,165
---------- ----------- ----------
2,799,602 2,781,188 1,709,635
---------- ----------- ----------
Equity method:
South Atlantic Venture
Fund III, LP 765,966 589,632 369,289
South Atlantic Venture
Fund IV, LP 300,121 - -
Virginia Independent Telephone
Alliance 271,509 234,943 206,138
Rural Service Area - 6 543,255 474,007 378,989
Other 41,064 33,177 408,677
---------- ---------- ----------
1,921,915 1,331,759 1,363,093
---------- ---------- ----------
$4,721,517 $ 4,112,947 $ 3,072,728
========== =========== ===========
In addition, the Company is committed to invest an additional $750,000
in the South Atlantic Venture Fund IV L.P. during 1998.
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 3. Long-Term Debt and Lines of Credit
Long-term debt consists of the following:
Interest
<S> Rate 1997 1996 1995
Rural Telephone <C> <C> <C> <C>
Bank (RTB) 6.04%-8% $10,765,742 $10,582,040 $ 9,765,672
Rural Utilities
Service (RUS) 2%-5% 520,580 619,638 716,562
CoBank 6.69%-7.97% 16,074,338 13,467,838 -
Other 77.7% of Prime - 36,723 76,719
----------- ----------- -----------
27,360,660 24,706,239 10,558,953
Current maturities 544,954 529,405 461,927
---------- ----------- -----------
Total long-term debt $26,815,706 $24,176,834 $10,097,026
The notes payable to RTB are pursuant to an agreement which allows for
additional borrowings of approximately $3,000,000.
In July 1996, the Company entered into a financing agreement with
CoBank. Pursuant to this agreement, the Company can borrow up to
$25,000,000, for a three-year period ending September 1, 1999. During
this period only interest is payable. On September 1, 1999, the
outstanding principal balance will be amortized and repaid in monthly
installments over the next twelve years, with the final installment
due August 20, 2011. As borrowings occur, the Company can choose
between several fixed and variable rate interest options.
The approximate annual debt maturities for the five years subsequent
to December 31, 1997 are as follows:
Year Amount
1998 $ 544,954
1999 816,273
2000 1,321,060
2001 1,590,858
2002 2,109,417
Later years 20,978,098
-----------
$ 27,360,660
============
Substantially all of the Company's assets serve as collateral for the
long-term debt. The long-term debt agreements contain restrictions on
the payment of dividends and redemption of capital stock. The terms
of the agreements require the maintenance of defined amounts of equity
and working capital after payment of dividends. Accordingly,
approximately $11,000,000 of retained earnings was available for
payment of dividends at December 31, 1997.
Long-term debt carries rates which approximate market rates for
similar debt being issued. Therefore the carrying value of long-term
debt is not significantly different than fair market value at
December 31, 1997. PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 3. Long-Term Debt and Lines of Credit (Continued)
As of December 31, 1997, the Company had no borrowings outstanding on
other approved lines of credit for $5,000,000 and $2,000,000.
Note 4. Income Taxes
The Company and its subsidiaries file consolidated tax returns. The
provision for income taxes included in the consolidated statements of
income consists of the following components:
Years Ended December 31,
1997 1996 1995
Current:
Federal $1,601,973 $1,905,945 $2,837,187
State 258,014 219,720 412,089
---------- ---------- ----------
Total 1,859,987 2,125,665 3,249,276
---------- --------- ---------
Deferred:
Federal 657,108 585,934 272,529
State 76,536 109,998 51,151
--------- --------- --------
Total 733,644 695,921 323,680
--------- --------- ---------
Provision for income taxes $2,593,631 $2,821,586 $3,572,596
========== ========== ==========
A reconciliation of income taxes determined using the statutory
federal income tax rates to actual income taxes provided is as
follows:
Years Ended December 31,
1997 1996 1995
Federal income tax expense
at statutory rates $2,404,806 $2,657,499 $3,336,620
State income taxes net of
of federal tax benefit 220,803 217,614 305,738
Amortization of investment
tax credit (75,701) (75,701) (75,701)
Other 43,643 22,174 6,299
--------- ---------- ---------
Provision for income taxes $2,593,631 $2,821,586 $3,572,956
========== ========== ==========
Net deferred tax liabilities consist of the following at December 31:
1997 1996 1995
Deferred tax liabilities:
Accelerated depreciation $5,556,071 $4,776,802 $4,106,119
Unrealized gain on securities
Available for sale 771,368 425,322 140,124
Other 4,701 - -
---------- ---------- ----------
6,332,140 5,202,124 4,246,243
---------- ---------- ----------
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 4. Income Taxes (Continued)
Deferred tax assets
Accrued compensation costs 115,512 96,292 92,329
Accrued pension costs 228,768 152,684 105,084
Equity investments - 44,978 83,512
--------- ---------- ---------
344,280 293,954 280,925
--------- ---------- ---------
Net deferred tax liabilities $5,987,860 $4,908,170 $3,965,318
========== ========== ==========
Note 5. Pension Plan
The Company maintains a noncontributory defined benefit pension plan. The
following table presents the plan's funded status and amounts recognized in
the Company's consolidated balance sheets.
1997 1996 1995
<S>
Actuarial present value of benefit
obligations:
<C> <C> <C>
Vested $ 3,333,480 $ 2,882,966 $ 2,645,748
Nonvested 124,897 82,376 52,826
----------- ----------- -----------
Accumulated benefit obligations $ 3,458,377 $ 2,965,342 $ 2,698,574
=========== =========== ===========
Projected benefit obligation for
service rendered to date $ 5,504,065 $ 5,112,231 $ 4,408,161
Plan assets at fair value,
common stocks and bonds 5,712,651 5,077,518 4,669,840
----------- ----------- ----------
Plan assets in excess (deficient)
of projected benefit obligation 208,586 (34,713) 261,679
Unrecognized prior service cost 237,103 257,808 278,513
Unrecognized transition asset at
January 1, 1987, being recognized
over 17 years (181,746) (210,490) (239,234)
Unrecognized net gain (943,738) (466,565) (621,588)
------------ ----------- -----------
Net pension liability $ (679,795) $ (453,960) $ (320,630)
============ =========== ===========
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 5. Pension Plan (Continued)
Net pension cost included the following components:
1997 1995 1996
<S> <C> <C> <C>
Service costs (benefits earned) $ 231,270 $ 170,089 $ 147,568
Interest cost on projected benefit
obligation 378,404 326,314 280,691
Actual (return) on plan assets (766,811) (532,311) (914,207)
Net amortization and deferral 382,972 169,238 634,862
------------ ----------- -----------
Net periodic pension cost $ 225,835 $ 133,330 $ 148,814
============ =========== ===========
Assumptions used by the Company in the determination of pension
plan information consisted of the following at December 31,
1997, 1996 and 1995:
1997 1996 1995
<S> <C> <C> <C>
Discount rate 7.00% 7.50% 7.50%
Rate of increase in compensation levels 5.00 5.50 5.50
Expected long-term rate of return on plan assets 7.50 7.50 7.50
</TABLE>
PAGE
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 6. Stock Incentive Plan
On April 16, 1996, the stockholders approved a Company Stock Incentive
Plan providing for the possible grant of incentive compensation to
employees in the form of stock options, stock appreciation rights, and
stock awards. The Plan authorized the issuance of up to 240,000
shares of common stock over a ten-year period. Options granted under
the Plan may be incentive stock options or nonqualified stock options.
The option price will be fixed at the time the option is granted, but
the price cannot be less than the fair market value at the date of the
grant. On February 10, 1997, options were granted to purchase 14,440
shares of common stock at an exercise price of $21.98. One-half of
the options are exercisable on each of the first and second
anniversaries of the date of grant. No options were exercisable at
December 31, 1997.
Grants of options under the Plan are accounted for following
Accounting Principles Board (APB) Opinion No. 25 and related
interpretations. Accordingly, no compensation costs have been
recorded. FASB Statement No. 123 requires disclosures concerning the
fair value of options and encourages accounting recognition for
options using the fair value method. The Company has elected to apply
the disclosure-only provisions of the Statement. However, had
compensation cost been recorded based on the fair value of awards at
the grant date, the pro forma impact on the Company's net income and
net income per common share would have been to decrease net income and
earnings per share by approximately $40,000 and $0.01, respectively.
The fair value of options is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions for
1997: dividend rate of 1.96%, risk-free interest rate of 6.13%,
expected lives of 5 years, and price volatility of 19.7%. The fair
value per option of options granted during the year is $5.35.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
Notes to Consolidated Financial Statements
Note 7. Major Customer
The Company has one customer that accounts for greater than 10% of its
revenue, primarily consisting of carrier access charges for long
distance service, as follows:
Percent of
Operating
Year Revenue
1997 13%
1996 16
1995 19
Note 8. Subsequent Event
On February 9, 1998, the Board of Directors adopted a Stockholders'
Rights Plan for the Company. Under the plan, existing stockholders
were granted the right to acquire additional shares of the Company's
common stock, at a substantial discount, if anyone acquires 15% or
more of the Company's common stock or causes the Company to merge into
or with another company. This plan is intended to increase the
leverage of the Company's Board of Directors and enhance its ability
to negotiate with a potential acquirer on behalf of the Company and
its shareholders.
<PAGE>
Independent Auditor's Report
The Board of Directors
Shenandoah Telecommunications Company
Edinburg, Virginia
We have audited the accompanying consolidated balance sheets
of Shenandoah Telecommunications Company and subsidiaries as
of December 31, 1997, 1996 and 1995, and the related
consolidated statements of income, retained earnings, and
cash flows for the years then ended. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Shenandoah Telecommunications
Company and subsidiaries as of December 31, 1997, 1996 and
1995, and the results of their operations and their cash
flows for the years then ended in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a
whole. The consolidating information is presented for
purposes of additional analysis of the basic consolidated
financial statements rather than to present the financial
position and results of operations of the individual
companies. The consolidating information has been subjected
to the auditing procedures applied in the audits of the
basic consolidated financial statements and, in our opinion,
is fairly stated in all material respects in relation to the
basic consolidated financial statements taken as a whole.
McGladrey & Pullen, LLP
Richmond, Virginia
January 30, 1998, except for Note 8, as to which
the date is February 9, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 5203521 3763468 6106447
<SECURITIES> 5720011 6509809 6921152
<RECEIVABLES> 5682798 4208742 3068379
<ALLOWANCES> 0 0 0
<INVENTORY> 3968791 2888709 1922090
<CURRENT-ASSETS> 17188830 14551119 15308920
<PP&E> 74144956 65215491 53076538
<DEPRECIATION> 25313297 21648820 18795430
<TOTAL-ASSETS> 89407902 79374097 59896990
<CURRENT-LIABILITIES> 7099822 4552386 4258755
<BONDS> 26815706 24176834 10097026
0 0 0
0 0 0
<COMMON> 4740677 4740677 4740677
<OTHER-SE> 41769807 38387245 34530596
<TOTAL-LIABILITY-AND-EQUITY> 89407902 79374097 59896990
<SALES> 977934 679920 558031
<TOTAL-REVENUES> 30970348 25429854 21919150
<CGS> 2189810 1626181 764264
<TOTAL-COSTS> 22603314 17485203 13027468
<OTHER-EXPENSES> 1085741 669314 534658
<LOSS-PROVISION> 146396 129214 29386
<INTEREST-EXPENSE> 1556352 803300 685971
<INCOME-PRETAX> 7073194 7816175 9803641
<INCOME-TAX> 2593631 2821586 3572956
<INCOME-CONTINUING> 4530642 4877188 5522904
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4479563 4994589 6230685
<EPS-PRIMARY> 1.19 1.33 1.66
<EPS-DILUTED> 1.19 1.33 1.66
</TABLE>
