SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000
Commission File Number 0-9881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1162806
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization Identification Number)
PO Box 459, Edinburg, Virginia 22824
(Address of principal executive office and zip code)
Registrant's telephone number, including area code: (540) 984-4141
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
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 October 31, 2000
Common Stock, No Par Value 3,759,244 Shares
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited), and
December 31,1999 1-2
Condensed Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 2000 and 1999 (unaudited) 3
Condensed Consolidated Statements of
Stockholders' Equity Nine Months Ended
September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended
September 30, 2000 and 1999 (unaudited) 5
Notes To Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 20
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
ITEM 1. Financial Statements
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands
ASSETS
September 30 December 31,
2000 1999
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 3,648 $ 7,156
Accounts receivable, including interest 4,563 4,918
Materials and supplies 3,335 4,089
Prepaid expenses and other current assets 471 544
------- -------
Total Current Assets 12,017 16,707
SECURITIES AND INVESTMENTS
Available-for-sale securities 14,743 30,719
Other Investments 6,604 5,094
------- -------
21,347 35,813
PROPERTY, PLANT AND EQUIPMENT
Plant in service 112,834 97,344
Plant under construction 28,614 9,134
-------- --------
141,448 106,478
Less accumulated depreciation 36,266 31,929
-------- --------
105,182 74,549
OTHER ASSETS
Cost in excess of net assets of business
Acquired 5,630 5,630
Deferred charges and other assets 552 590
Radio spectrum license 1,341 1,341
-------- --------
7,523 7,561
Less accumulated amortization 1,777 1,579
-------- --------
5,746 5,982
TOTAL ASSETS $144,292 $133,051
======== ========
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31
2000 1999
(unaudited)
-------------- -----------
CURRENT LIABILITIES
Current maturities of long-term debt $ 2,167 $ 1,341
Accounts payable 3,922 2,196
Advance billings & payments 363 871
Refundable equipment deposit 3,871 3,871
Customers' deposits 125 119
Accrued compensation 932 947
Other current liabilities 1,204 781
Other taxes payable 1,212 909
-------- --------
Total Current Liabilities 13,796 11,035
Long-Term Debt, less current maturities 45,945 31,689
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred investment tax credit 28 76
Deferred income taxes 9,909 16,062
Pension and other 1,465 1,454
-------- --------
11,402 17,592
Minority Interests 1,975 2,460
STOCKHOLDERS' EQUITY
Common stock 4,796 4,734
Retained earnings 59,355 48,499
Accumulated other comprehensive income,
unrealized gain on available-for-sale
securities, net 7,023 17,042
-------- --------
Total Stockholders' Equity 71,174 70,275
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $144,292 $133,051
======== ========
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
<TABLE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Dollars in thousands, except per share data
THREE MONTHS ENDED NINE MONTHS ENDED
<CAPTION>
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
Operating Revenues 2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Telephone:
Local service $ 1,145 $ 1,040 $ 3,367 $ 3,009
Access 2,103 1,825 6,012 5,665
Directory 314 297 963 911
Facility leases 1,077 786 3,261 1,909
Miscellaneous 118 156 438 488
---------------------- -----------------------
Total Telephone revenues 4,757 4,104 14,041 11,982
PCS 4,757 891 10,724 2,532
Mobile 4,602 3,777 12,728 9,357
ShenTel Service 1,260 965 3,871 2,695
Cable Television 923 886 2,708 2,548
Long Distance, Network and other 428 467 1,253 1,317
--------------------- ----------------------
Total Operating Revenues 16,727 11,090 45,325 30,431
Operating Expense
Cost of products and services sold 1,544 546 4,306 1,827
Line costs 699 636 2,070 1,513
Plant specific 1,472 878 3,780 2,445
Plant non-specific:
Network and other 2,925 1,353 6,986 3,856
Depreciation and amortization 1,819 1,599 5,593 4,774
Customer operations 1,822 1,429 5,264 3,909
Corporate operations 809 775 2,158 2,131
Other operating expenses 209 143 1,269 342
---------------------- -----------------------
Total Operating Expense 11,299 7,359 31,426 20,797
---------------------- -----------------------
Operating Income 5,428 3,731 13,899 9,634
Non-operating income, net 119 469 725 1,343
Gain on investments - - 6,885 -
Interest expense 741 442 1,741 1,352
--------------------- ----------------------
Income before income taxes 4,806 3,758 19,768 9,625
Provision for income taxes 1,487 1,181 6,593 3,136
--------------------- ----------------------
Net income before minority interest 3,319 2,577 13,175 6,489
Minority interest (863) (623) (2,319) (1,281)
---------------------- -----------------------
Net income $ 2,456 $ 1,954 $10,856 $ 5,208
====================== =======================
EARNINGS PER SHARE
Net earnings per share, basic $ 0.65 $ 0.52 $ 2.89 $ 1.39
====================== =======================
Net earnings per share, diluted $ 0.64 $ 0.52 $ 2.88 $ 1.39
====================== ========================
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Dollars in thousands
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
----------------------------------------------------------------
<CAPTION> <C> <C> <C> <C> <C>
Balance, December 31, 1998 3,756 $ 4,734 $ 44,174 $ 639 $ 49,547
----------
Comprehensive income
Net income 6,428 6,428
Change in unrealized gain
on securities
available-for-sale
net of tax ($10,079) 16,403 16,403
---------
Total comprehensive income 22,831
Dividends declared (2,103) (2,103)
-
-------------------------------------------------------------
Balance, December 31, 1999 3,756 4,734 48,499 17,042 70,275
---------
Comprehensive income
Net income 10,856 10,856
Change in unrealized gain
on securities
available-for-sale
net of tax $6,130 (10,019) (10,019)
---------
Total comprehensive income 837
Issue shares of common stock 2 62 62
----------------------------------------------------------------
Balance, September 30, 2000 3,758 $ 4,796 $ 59,355 $ 7,023 $ 71,174
================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands
Nine Months Ended
September 30, September 30,
2000 1999
----------------------------
Cash Flows from Operating Activities
Net income $ 10,856 $ 5,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,248 4,429
Amortization 346 346
Deferred taxes (22) (75)
(Gain)/loss on equity investments (6,992) --
Equity in earnings of investees (717) (1,125)
Loss on impairment of equipment 673 --
Minority share of income, net of distributions (486) 23
Other (198) (47)
Decrease/(increase) in
Accounts receivable 356 (703)
Materials 755 (372)
Increase in Accounts payable 1,726 1,464
Deferrals & accruals 331 858
-------- ---------
Net cash provided by operating activities 11,876 10,006
Cash Flows from Investing Activities
Purchase of property and equipment (36,554) (12,793)
Purchase of intangible assets -- (561)
Purchase of investments (1,654) (139)
Maturity of investments -- 500
Cash flows from investments 7,680 1,025
-------- ---------
Net cash used in investing activities (30,528) (11,968)
Cash Flows from Financing Activities
Proceeds from long-term debt 16,223 4,386
Issuance of common stock 62 --
Principal payments on long-term debt (1,141) (503)
-------- ---------
Net cash provided by financing activities 15,144 3,883
-------- ---------
Net increase (decrease) in cash
and cash equivalents (3,508) 1,921
Cash and cash equivalents:
Beginning 7,156 4,891
-------- ---------
Ending $ 3,648 $ 6,812
======== ========
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of September 30, 2000 and December 31, 1999 its
results of operations for the three and nine month periods ended September 30,
2000 and 1999, and its cash flows for the nine months ended September 30, 2000
and 1999. Such adjustments consist only of normal recurring accruals. The
balance sheet at December 31, 1999 is derived from the audited financial
statements at that date. While the Company believes the disclosures presented
are adequate for a fair presentation, it is suggested that these financial
statements be read in conjunction with the financial statements and notes
included in the Company's annual report on Form 10-K. The results of operations
for the three-month and nine month periods ended September 30, 2000 and 1999 are
not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. Earnings per Share
Basic earnings per share are calculated for the three and nine month
periods ended September 30, 2000 and 1999 are calculated by dividing net
income by weighted average common shares outstanding for the period.
Diluted earnings per common share are calculated by dividing net income by
weighted average common shares outstanding during the period plus dilutive
potential common shares. Dilutive potential common shares are calculated in
accordance with the treasury stock method, which assumes that proceeds from
the exercise of all options are used to repurchase common stock at market
value. The following is a reconciliation between the calculation of basic
and diluted net earnings per common share:
In thousands except per share data
For the three months For the nine months
ended September 30, ended September 30,
2000 1999 2000 1999
------------ ----------- ----------- ----------
Basic EPS Computation
Numerator: Net earnings $ 2,456 $ 1,954 $ 10,856 $ 5,208
Denominator
Weighted average common shares
outstanding 3,757 3,756 3,757 3,756
Basic earnings per share $ .65 $ .52 $ 2.89 $ 1.39
Diluted EPS Computation
Numerator: Net earnings $ 2,456 $ 1,954 $10,856 $ 5,208
Denominator:
Common shares outstanding 3,757 3,756 3,757 3,756
Effect of outstanding stock
options 11 3 11 3
Diluted weighted average
common shares outstanding 3,768 3,759 3,768 3,759
Diluted earnings per share .64 .52 2.88 1.39
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. Segment Information
The Company has identified nine reporting segments based on the
products and services each provide. Each segment is managed and evaluated
separately because of diverse technologies and marketing strategies. A
summary of external operating revenues, internal operating revenues and net
income of each segment is as follows:
<TABLE>
Dollars in thousands
<CAPTION> For the nine months ended September 30, 2000 September 30, 2000
External Internal
Operating Operating Net Total
Revenues Revenues Income Assets
------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
Holding $ - $ - $ 425 $ 63,4139
Telephone 14,041 1,778 4,487 75,749
Cable TV 2,708 2 (104) 12,053
ShenTel 3,871 170 (19) 5,226
Leasing 11 10 290
-
Mobile 12,728 650 7,401 5,566
PCS 10,724 20 (1,712) 41,079
Long Distance 808 285 135 214
Network 434 143 233 1,146
------------------------------------------------- ---------------------
Combined Totals $ 45,325 $ 3,048 $ 10,856 $ 204,736
Inter-segment eliminations (3,048) (60,444)
-
------------------------------------------------- ---------------------
Consolidated Totals $ 45,325 $ - $ 10,856 $ 144,292
================================================= =====================
For the nine months ended September 30, 1999 September 30, 1999
External Internal
Operating Operating Net Total
Revenues Revenues Income Assets
------------------------------------------------- ---------------------
Holding $ - $ - $ 476 $ 30,128
Telephone 11,982 4,211
1,347,808 70,719
Cable TV 2,548 (147)
1,800 11,072
ShenTel 2,695 (163)
181,121 3,881
Leasing 15
8 - 295
Mobile 9,357 1,703
334,866 10,327
PCS 2,532 (1,301)
11,956 22,422
Long Distance 785 156
229,666 358
Network 524 258
72,971 1,647
------------------------------------------------- ---------------------
Combined Totals $ 30,431 $ 2,180 $ 5,208 $ 150,849
Inter-segment eliminations (2,180) (45,707)
-
------------------------------------------------- ---------------------
Consolidated Totals $ 30,431 $ - $ 5,208 $ 105,142
================================================= =====================
</TABLE>
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Dollars in thousands
For the three months ended September 30, 2000
External Internal Net
Revenues Revenues Income
------------------------------------------------------
Holding $ - $ - $ 147
Telephone 4,757 658 1,480
Cable TV 923 1 (36)
ShenTel 1,260 56 (78)
Leasing 6 - 1
Mobile 4,602 245 1,116
PCS 4,757 8 (280)
Long Distance 278 90 40
Network 144 49 66
--------------------------------------------------
Combined totals $ 16,727 $ 1,107 $ 2,456
Inter-segment eliminations - (1,107)
-------------------------------------------------
Consolidated totals $ 16,727 $ - $ 2,456
=================================================
For the three months ended September 30, 1999
External Internal Net
Revenues Revenues Income
--------------------------------------------------
Holding $ - $ - $ 223
Telephone 4,104 470 1,307
Cable TV 886 1 (12)
ShenTel 965 60 (126)
Leasing 2 - 5
Mobile 3,777 140 861
PCS 891 4 (467)
Long Distance 264 94 53
Network 201 23 110
--------------------------------------------------
Combined totals $ 11,090 $ 792 $ 1,954
Inter-segment eliminations - (792)
--------------------------------------------------
Consolidated totals $ 11,090 $ - $ 1,954
==================================================
Inter-segment eliminated assets represent amounts invested in and notes payable
between the reporting segments.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
Comprehensive income includes net income along with gains and losses
on the Company's available-for-sale investments.
Dollars in thousands
For the three months For the nine months
ended September 30 ended September 30
2000 1999 2000 1999
--------------------------------------------------
Net income $ 2,456 $ 1,954 $ 10,856 $ 5,208
Net unrealized gain (loss) (7,133) 435 (10,019) 439
--------------------------------------------------
Comprehensive income (loss) $ (4,677) $ 2,389 $ 837 $ 5,647
==================================================
5. Subsequent Events
On October 9, 2000, the Company declared a cash dividend of $0.66 per
share payable December 1, 2000 to shareholders of record on November
9,2000.
At October 31, 2000, the Company's management wrote down to fair
market value certain equity and debt security investments. The write-down
amounted to approximately $1.5 million dollars and was due to a decline in
the value of the securities, which, in the opinion of management, was
considered to be other than temporary.
6. Staff Accounting Bulletin
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB (101) requires
that revenue and related costs from telecommunication service activation
fees be deferred and recognized over the life of the contract or
relationship. In June 2000, the SEC issued an amendment to SAB 101, which
deferred the required adoption date for those registrants with fiscal years
that end after December 15, 2000 until the fourth quarter of 2000. The
effective date for Shentel will be for the quarter ending December 31,
2000. Management has not completed its evaluation of the impact of this
pronouncement.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
This report 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.
Shenandoah Telecommunications Company is a diversified telecommunication
holding company providing both regulated and unregulated telecommunication
services through its nine wholly owned subsidiaries. These subsidiaries
provide local exchange telephone services as well as cable television,
cellular, paging, personal communications services (PCS), Internet access,
long distance, and leased fiber and tower facilities. Competitive local
exchange carrier (CLEC) services are also being planned. Additionally, the
Company sells and leases equipment, mainly related to services provided,
and also participates in emerging technologies by direct investment in
non-affiliated companies.
In recent years, the Company has made significant investments to take
advantage of new technologies in the increasingly competitive
telecommunications industry. Net Plant in service increased from $36.8
million at the end of 1995 to $105.2 million at September 30, 2000. This
increase incorporates continued expansion of our operations from Virginia's
northern Shenandoah Valley to other surrounding areas. In conjunction with
our growing PCS service, we are expanding our presence in central
Pennsylvania and will be operational by early 2001. Our business is
changing; as the PCS business grows, it is becoming a more significant
portion of our total revenue. In the calendar year 1995, Telephone revenue
was 60% of the total revenue, mobile revenue, consisting primarily of
cellular and tower rental revenue was 23% of total revenue, and PCS was 0%
of total revenue. For the nine months ended September 30, 2000, Telephone
revenue was 30% of total revenue, mobile revenue was 28% of total revenue
and PCS revenue had grown to nearly 24% of total revenue. This revenue
shift will continue as the impact of the PCS expansion and growth is
reflected in the Company's results.
The Company's strategy is to continue the expansion of services and the
geographic areas served. In late 1999, our PCS subsidiary executed an
affiliate agreement with Sprint PCS and finished constructing and activated
a CDMA network where our GSM network existed. Additionally, we converted
our then GSM customer base to CDMA service. The agreement expands our PCS
territory from an area serving a population of nearly 0.7 million, to an
area serving a population of nearly 2.1 million potential customers. The
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
additional areas are in the Altoona, Harrisburg, and York-Hanover Basic
Trading Areas of Pennsylvania. The capital build out and initial operating
losses associated with thisexpansion, which will require significant
capital resources, are consistent with the strategy to take advantage of
new technologies and expand our service areas. Losses in the PCS operation
are expected to continue and also increase, particularly in the fourth
quarter of 2000 and in the first part of 2001, when the additional network
facilities are anticipated to commence operations. Additionally,
incremental selling, marketing and administrative costs are being incurred
to support the expansion of the PCS network.
RESULTS OF OPERATIONS THIRD QUARTER 2000 VS THIRD QUARTER 1999
Revenues
Total revenue for the third quarter 2000 increased $5.6 million or 50.8% to
$16.7 million compared to the same period last year. The significant
revenue increase is due primarily to a large increase in PCS revenues,
along with increases in cellular roaming revenue, telephone revenues,
equipment sales, and tower rental revenues. Earnings increased $0.5 million
or 25.7% to $2.5 million compared to $2.0 million for the same quarter last
year. Net earnings per share, basic and fully diluted, increased $0.13
cents per share, up 25.0% to $0.65 cents per share. Comparable third
quarter results for 1999 were $0.52 cents per share.
The PCS (Personal Communications Services) business experienced continued
growth in revenues during the quarter. Revenue increased $3.9 million or
433 %, to $4.8 million compared to the same period last year for the
existing quad-state network area. The on-going work to expand the PCS CDMA
network into the south-central part of Pennsylvania is continuing. There
have been minor delays in the project, with startup anticipated by early
2001. The addition to the network will increase covered pops (population)
from 0.4 million to nearly 1.1 million pops. The expanded network will
increase major road coverage from less than 200 miles, to over 500 miles.
The Company will benefit from this expanding network with increased
potential customers in addition to increased revenue from non-customer
usage of the Company's network.
The Company joined the Sprint PCS network as an affiliate in late 1999.
This affiliation has helped spur the growth in revenue, which should
continue, as we expand our PCS network and market presence. As part of this
expansion, the Company plans to open several retail store locations within
the next 90 to 120 days. These retail locations will be located in the
central Pennsylvania markets where the added network coverage is being
built. The Company's customer base continued to grow to over 17,000 as of
September 30, 2000, compared to 7,600 at January 1, 2000. Comparative
numbers as of the end of September 1999 are not meaningful, as the Company
changed to CDMA technology for its PCS service in late fall 1999.
<PAGE
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
The Company's Mobile operation revenues increased $0.8 million or 21.8% to
$4.6 million for the third quarter 2000, compared to $3.8 million of
revenue reported in third quarter 1999. Cellular revenue remained the major
source of revenue growth for the third quarter of 2000 for the Mobile
operation. The Company continues to benefit from non-customer roaming usage
of the cellular network, which has generated nearly $3.2 million of revenue
during the quarter compared to $2.3 million from the same period last year.
Retail service revenue in the cellular operation has leveled out and is
declining, as the market becomes more competitive for new customers.
Cellular subscribers decreased by 400 subscribers or 3.4% during the
quarter, to 11,300, compared to 11,800 subscribers at September 30, 1999.
The Company owns and operates 39 tower sites for its existing wireless
operations. Numerous sites are rented to other wireless providers, and as
the Company expands its PCS operations new tower sites will be added,
providing opportunity for additional rental income from other wireless
providers. There will be approximately 10 new tower sites added in the next
60 to 120 days to support the PCS operation, as well as providing spaces
available for other wireless providers to occupy.
Total Telephone revenues increased $0.7 million or 15.9% to $4.8 million,
for the third quarter 2000. The increase is due to a $0.3 million or 37.0%
increase in facility leases, generated from expanded use of fiber capacity
put in place earlier this year. Access revenue was up $0.3 million or
15.2%, as additional usage of the CompanySs network occurred in the
quarter. Local service revenue is up $0.1 million or 10.1%, compared to the
same period last year as new access lines have been added, in addition to
subscribers purchasing value-added services such as call forwarding and
caller ID. Other telephone revenues remained nearly the same, compared to
the third quarter 1999.
ShenTel Service revenue increased $0.3 million or 30.6% to $1.3 million,
for the third quarter 2000, compared to $1.0 million generated in the third
quarter of 1999. The increase is due to growth in Internet subscriptions
and higher equipment sales compared to last year. Internet subscribers
increased by 1,000 subscribers during the quarter, to nearly 14,000,
compared to 9,400 subscribers on September 30, 1999.
Cable Television revenue increased marginally over third quarter 1999. The
current customer count is approximately 8,700, up 1% from 8,600 at the end
of September 1999. The Company is now providing digital and pay per view
services, which are gaining acceptance in the service areas, and generating
incremental revenue for the Company.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
Operating Expenses
Operating expenses increased $3.9 million or 53.5% to $11.3 million
compared to third quarter last year. Network and other operating expenses
were up $1.6 million due to the expansion and increased use of the network,
particularly in support of wireless services. The cost of products sold
increased $1.0 million, driven by increased handset sales in the PCS
business and increased equipment sales in the ShenTel service operation.
Plant specific costs combined with depreciation increased by $0.8 million
as new assets have been added to the networks along with expanded services
compared to the same period last year. Customer support operations costs
increased $0.4 million as additional staff and support have been added to
service new subscribers. Other costs have increased $0.1 million compared
to the same period last year.
Interest expense increased $0.3 million or 67.7% to $0.7 million over the
same period last year, a result of increased borrowing levels to support
the PCS expansion. The Company expects interest expense will continue to
increase compared to the prior year same-period, until the PCS business
generates adequate cash to fund its cash needs.
Income before taxes is up $1.0 million due to the increase in operating
income somewhat offset by higher interest expense.
Minority interest increased $0.2 million due to the improved performance of
the cellular operation, which is not wholly owned by the Company.
Net income is up $0.5 million or 25.7% to $2.5 million for the third
quarter due to continued growth in revenues in the wireless businesses
compared to last year's results.
RESULTS OF OPERATIONS
FIRST NINE MONTHS 2000 VS FIRST NINE MONTHS 1999
Revenues
Through the first nine months of 2000, the Company's total revenues are up
$14.9 million or 48.9% to $45.3 million, compared to the nine-month revenue
results of 1999, which were $30.4 million. The increase was the result of a
large increase in PCS revenues, which made up over 55% of the total
increase in revenue. Additionally, revenue growth occurred in cellular
operations, Internet services, telephone services and also equipment sales,
compared to the same period last year. The Company's net income grew to
$10.9 million, up $5.7 million or 108% over 1999 year to date results. This
significant increase includes a one-time after tax gain of $4.3 million, on
the sale of the Companys partnership interest in a cellular operation,
which occurred during the second quarter of this year. Net earnings per
share, basic and diluted, increased $1.50 over 1999 nine month results to
$2.89 per share.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
PCS revenues grew $8.2 million or 323% to $10.7 million in the first nine
months, up from $2.5 million in the prior year. The increase was the result
of higher service revenues of $3.6 million which were generated by adding
PCS customers to our Sprint PCS service. Travel revenue, which results from
the use of our network by other Sprint PCS users, was up $4.2 million,
while PCS equipment sales increased $0.4 million over the same period last
year. Roamer revenue, which results from our Sprint PCS customers roaming
on non-Sprint PCS or affiliate networks also increased $0.4 million
compared to the first nine-months of 1999.
Mobile revenue increased $3.4 million or 36.0% to $12.7 million for the
nine-months of 2000. Cellular roaming revenue increased $3.7 million,
somewhat offset by a $0.3 million decrease in service revenue and equipment
sales related to the cellular operation. The roaming revenue is the result
of other cellular providers' customers making calls in our network coverage
area.
Telephone revenues increased $2.1 million or 17.1% to $14.0 million
compared to 1999 results through the first nine months. Increased access
lines and higher facility lease revenues contributed to the increased
revenue for 2000 compared to 1999. The increased use of the Company's
expanded fiber network contributed nearly $1.4 million of the increase in
revenue. This increase was a 70.8% increase over the nine-month 1999
facilities revenues. Local service revenue increased $0.4 million or 11.8%
to $3.4 million for the nine-month period, due to increased customers and
higher valued services purchased by existing customers. Access revenue
increased $0.3 million, the result of increased use of our local telephone
network by other service providers.
ShenTel Service revenue increased $1.2 million for the first nine months of
2000, due to increased sales of telephone system equipment and the increase
in Internet subscribers compared to last year. Equipment sales are up $0.8
million compared to 1999 year-to-date equipment sales. Internet revenue
increased $0.4 million to $2.1 million for the nine months of 2000,
compared to $1.7 million for the same period of 1999. The number of
Internet subscribers has increased from 9,400 at the end of September 1999,
to 14,000 as of September 30, 2000.
Cable Television revenue increased $0.2 million or 6.2%, to $2.7 million,
compared to $2.5 million for the nine-months of 1999. Revenues have grown,
as customers upgrade to higher value services, such as digital and pay per
view services, and also due to a 1% increase in subscribers compared to the
same period last year.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
Operating Expenses
Operating expenses are up $10.6 million or 51.1% to $31.4 million for the
nine-month period ended September 30, 2000 compared to $20.8 million for
the same period last year. Network expenses were up $3.1 million, or 81.2%
to $7.0 million due to expansion of the PCS network, compared to $3.9
million last year. Costs related to equipment sold are up $2.5 million, or
135% due to increased handset sales in the PCS business, in addition to
higher sales in telephone equipment business. Line costs increased $0.5
million and plant costs are up $1.3 million over the same period from 1999.
Depreciation expenses increased $0.8 million, a result of new equipment
that has been added to expand and enhance the Company's networks. Customer
operations expenses increased $1.4 million or 34% to $5.3 million due to
added support expenses related to the growing customer base. Other expenses
accounted for the remaining $0.4 million of the increased operating
expenses on a year-to-date comparison.
Operating Income is up $4.3 million or 44.3%, to $13.9 million. Increased
travel revenue and roamer revenue from the wireless businesses contributed
to the incremental improvement in operating income.
The significant change in non-operating income primarily reflects the
one-time gain on the sale of the Virginia 6-RSA Partnership interest, which
was $6.9 million, and occurred in the second quarter 2000, and was
previously disclosed in the 10Q filed in May 2000. Additionally, in the
first nine-months of 2000, the Company realized income of $0.7 million
generated from investments.
Interest expense is up $0.4 million, primarily due to increased borrowing
to cover the continued expansion of the PCS network into the southern
portions of central Pennsylvania.
Income before taxes increased $10.1 million, which reflects the improved
results from operations, and the one-time gain mentioned above. Provisions
for income taxes are up $3.5 million based on applying the applicable
statutory tax rates.
Minority interest is up $1.0 million, as the operation that is not wholly
owned continues to increase its net income after taxes.
Net income is up $5.6 million compared to the nine-month results of 1999,
the result of higher operating income of $1.3 million, and the impact of
the after-tax gain of $4.3 million on the sale of the Virginia 6-RSA
Partnership interest.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
INVESTMENTS IN NON-AFFILIATED COMPANIES
The Company participates in emerging technologies by investing in start-up
companies. This includes indirect participation through capital venture
funds such as South Atlantic Funds and Dolphin Communications Funds. It
also includes direct participation in start-up companies such as Concept
Five and Coriss.Net. For those investments that eventually go public, it is
the intent of the Company to evaluate whether to hold or sell parts or all
of each investment on an individual basis. The Company currently holds
shares of four companies with NASDAQ or NYSE listings. As of September 30,
2000, the market value of these investments were, $12.9 million in
Illuminet (ILUM); $0.7 million in ITC^DeltaCom (ITCD); $0.9 million in
Loral Communications (LOR) and $0.2 million in NetIQ (NTIQ). Unrealized
gains on the securities available for sale decreased $7.1 million during
the third quarter of 2000 to $7.0 million, with a year to date decrease of
$10.0 million, both of which reflect the volatile stock prices of these
technology securities and current market conditions.
Subsequent to the end of the period, the valuation of the Loral investment
was reexamined, due to Loral's announcement concerning its own investment
in Globalstar. As a result, the Company will value its Loral investment at
the lower of cost or market beginning with the period ended December 31,
2000. Based on this approach, and Loral's share price as of October 31,
2000, the Company will record a loss on the impairment of the investment in
Loral. Management is also reviewing the valuation of ITC^DeltaCom, due to
its recent market performance, and the performance of several similar
enterprises. Based the October 31, 2000 valuations, the Company expects to
record an impairment charge of approximately $1.5 million. The actual
charge may differ from this value depending on the market value of these
investments at the time of the valuation. Subsequent to the close of the
quarter, the Board of Directors authorized management to invest up to $1.5
million in two new ventures. These ventures will be funded over an
unspecified term in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's two principal sources of funds for financing expansion
activities are internally generated funds and loan arrangements with
CoBank. On January 12, 2000 the Company entered into a $35.0 million bridge
loan agreement with CoBank, principally to finance the PCS build-out in
Pennsylvania. Outstanding draws on this facility as of September 30, 2000
were $11.8 million. The Company and CoBank contemplate replacing this $35.0
million bridge loan and a previously existing $25.0 million CoBank credit
facility with a single term loan agreement for $60.0 million at terms
similar to the existing facilities. The existing $25.0 million credit
facility is almost fully drawn, with monthly repayment requirements through
August 2011.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
Additionally, the Company has a $9.2 million loan agreement with the Rural
Telephone Bank (RTB) with approximately $0.5 million remaining as of
September 30, 2000 for future advances. Expenditure of these loan funds is
limited to capital projects for the regulated local exchange carrier
subsidiary.
The Company maintains an unsecured line of credit for $2 million with a
local bank. No draws were made on this line during the first nine-months of
2000 and no amounts are outstanding as of September 30, 2000.
At its option, the Company may also liquidate portions of the securities
available for sale portfolio, to provide for its expansion needs. These
securities had a market value of $14.7 million as of September 30, 2000.
Management believes that the funds generated from operations, in addition
to the funds available from the above sources, will provide ample capital
resources to meet the capital, operating and investing needs of the
Company.
Year-to-date capital spending was $36.6 million, compared to a total annual
capital budget of $45.0 million. The budget includes approximately $26.8
million for equipment and towers associated with the PCS expansion,
principally in Pennsylvania. Included in the $26.8 million amount is $11.0
million for CDMA equipment and towers that were purchased from Sprint,
primarily in the third quarter of 2000. The remaining PCS equipment
purchases and installations planned for this year, are in progress, and
should be substantially complete by the end of 2000. Spending to date on
this equipment is approximately $13.1 million. The Telephone subsidiary
capital budget is $10.9 million, primarily for central office equipment and
fiber optic and metallic cable facilities with year-to date spending at
approximately $5.5 million. Thus far in 2000, the Company has funded its
capital projects through internally generated funds, proceeds from the sale
of the partnership noted above, and debt.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Operations (Continued)
REIMBURSEMENT FOR PCS CONVERSION
As part of the execution of the Sprint PCS affiliate agreement, the Company
received approximately $3.9 million as partial reimbursement for the
Company' expenditures in building the CDMA network, which replaces the
Company's earlier PCS network constructed using GSM technology. Under the
terms of the agreement, all or a portion of this amount is to be reimbursed
in the event the GSM network is sold. The Company has signed a letter of
intent to sell the GSM network, and as a result, has reflected the $3.9
million as a current liability.
NASDAQ LISTING
Subsequent to the end of the third quarter, the Company's application for
listing of the Company's stock on the NASDAQ National Market exchange was
accepted. Trading of the Company's stock on the NASDAQ National Market
began on October 23, 2000 under the symbol SHET.
DIVIDEND DECLARATION
Subsequent to the end of the quarter, the Board of Directors of the Company
declared a cash dividend of $0.66 cents per share payable on December 1,
2000, to shareholders of record on November 9, 2000. The total payout of
the dividend will be approximately $2.5 million.
STAFF ACCOUNTING BULLETIN
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB (101) requires
that revenue and related costs from telecommunication service activation
fees be deferred and recognized over the life of the contract or
relationship. In June 2000, the SEC issued an amendment to SAB 101, which
deferred the required adoption date for those registrants with fiscal years
that end after December 15, 2000 until the fourth quarter of 2000. The
effective date for Shentel will be for the quarter ending December 31,
2000. Management has not completed its evaluation of the impact of this
pronouncement.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks relate primarily to changes in interest rates, on
instruments held for other than trading purposes. Our interest rate risk
involves two components. The first component is outstanding debt with
variable rates. This consists of notes payable to CoBank totaling $15.0
million. The rate of this note is based upon the lender's cost of funds.
The Company also has a variable rate line of credit totaling $2 million,
with no outstanding borrowings at September 30, 2000. The Company's
remaining debt has fixed rates through its maturity. The second component
of market risk is temporary excess cash, primarily invested in overnight
repurchase agreements and short-term certificates of deposit. As the
Company continues to expand its operations, temporary excess cash is
expected to be minimal. Available cash will be used for existing and
anticipated new debt obligations, maintaining and upgrading capital
equipment, ongoing operations, and investment opportunities in new and
emerging technologies.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
ITEM 4. Submission of Matters to a Vote of Security Holders
set forth below:
None
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibit 27 - Financial Data Schedule
B. One report on Form 8-K was filed for the period covered by
this report.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Registrant)
November 9, 2000 /s/ CHRISTOPHER E FRENCH
Christopher E. French
President
November 9, 2000 /s/ LAURENCE F PAXTON
Laurence F. Paxton
Vice President - Finance
