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 June 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 close of the period covered by this report.
Class Outstanding at July 31, 2000
Common Stock, No Par Value 3,757,402 Shares
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and December 1999 1-2
Condensed Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 2000 and 1999 3
Condensed Consolidated Statements of
Stockholders' Equity Six Months Ended
June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flow
Six Months Ended June 30, 2000 and 1999 5
Notes To Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. Other Information
Item 4. Submission of Matters To a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 December 31, 1999
ASSETS (Unaudited)
-------------- -----------------
Current Assets
Cash and cash equivalents $ 4,996,482 $ 7,155,827
Accounts receivable, including interest 4,474,612 4,918,089
Materials and supplies 3,671,965 4,089,605
Prepaid expenses and other current assets 484,382 543,735
----------- -----------
Total current assets 13,627,441 16,707,256
Securities and Investments
Available-for-sale securities 26,240,100 30,719,358
Other Investments 5,758,191 5,094,020
---------- ----------
31,998,291 35,813,378
Property, Plant and Equipment
Plant in service 112,135,270 99,821,705
Plant under construction 15,579,981 9,133,665
------------ ------------
127,715,251 108,955,370
Less accumulated depreciation 37,285,375 34,406,816
------------ ------------
90,429,876 74,548,554
Other assets
Cost in excess of net assets of business 5,630,042 5,630,042
acquired
Deferred charges and other assets 531,646 590,019
Radio spectrum license 1,340,750 1,340,750
------------ ------------
7,502,438 7,560,811
Less accumulated amortization 1,668,039 1,579,417
------------ ------------
5,834,399 5,981,394
Total Assets $141,890,007 $133,050,582
============ ============
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 December 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
------------- -----------------
Current Liabilities
Current maturities of long-term debt $ 1,444,473 $ 1,340,711
Accounts payable 3,444,453 2,195,958
Advance billings and payments 524,169 870,717
Refundable equipment deposit 3,871,365 3,871,365
Customers' deposits 122,948 118,641
Accrued compensation 722,241 947,401
Other current liabilities 1,275,458 781,248
Other taxes payable 1,052,133 908,677
----------- -----------
Total current liabilities 12,457,240 11,034,718
Long-Term Debt, less current maturities 35,663,213 31,688,737
Other Liabilities and Deferred Credits
Deferred investment tax credit 41,542 76,323
Deferred income taxes 14,352,627 16,061,709
Pension and other 1,488,382 1,453,724
----------- -----------
15,882,551 17,591,756
Minority Interests 2,063,653 2,460,412
Stockholders' Equity
Common stock 4,769,206 4,734,377
Retained earnings 56,898,698 48,498,503
Accumulated other comprehensive income,
unrealized gain on available-for-sale 14,155,446 17,042,079
securities, net
----------- ----------
75,823,350 70,274,959
Total Liabilities and
Stockholders'Equity $141,890,007 $133,050,582
============ ============
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
<TABLE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
Operating Revenues 2000 1999 2000 1999
<S> <C> <C> <C> <C>
------------------------------- ------------------------------
Telephone:
Local service $1,138,100 $1,008,967 $2,222,008 $1,969,071
Access 1,985,833 1,948,981 3,909,170 3,839,932
Directory 324,863 299,334 648,466 613,480
Facility leases 1,288,673 621,502 2,183,574 1,123,884
Billing, collection, tolls and 127,533 163,635 320,678 331,376
other
------------------------------- ------------------------------
Total telephone revenues 4,865,002 4,042,419 9,283,896 7,877,743
Cable television 897,648 876,520 1,785,598 1,662,261
ShenTel service 1,246,605 796,859 2,611,137 1,729,603
Long distance 256,814 241,523 530,368 521,782
Mobile 4,367,770 3,158,602 8,125,749 5,580,036
Network 143,857 169,310 289,681 323,043
PCS 3,442,841 937,822 5,966,692 1,640,300
Other 2,490 2,733 4,942 6,028
------------------------------- ------------------------------
Total operating revenues 15,223,027 10,225,788 28,598,063 19,340,796
Operating Expense
Cost of products and services 968,123 292,469 2,180,448 754,583
sold
Plant specific 1,223,195 814,223 2,307,525 1,566,315
Plant non-specific:
Network and other 3,007,008 1,756,004 5,431,937 3,361,502
Depreciation and amortization 1,933,657 1,617,700 3,774,259 3,175,636
Customer operations 1,768,316 1,285,139 3,441,892 2,498,287
Corporate operations 681,262 687,227 1,348,951 1,355,497
Other operating expenses 962,595 261,717 1,255,305 526,234
Taxes other than income 203,142 160,106 387,197 199,474
------------------------------- ------------------------------
10,747,298 6,874,585 20,127,514 13,437,528
------------------------------- ------------------------------
Operating Income $ 4,475,729 $3,351,203 $ 8,470,549 $5,903,268
Non-operating income (expense), net 76,978 641,490 607,097 874,020
Gain on sale of investments 6,885,180 0 6,885,180 0
Interest expense (492,431) (441,565) (1,000,321) (910,126)
------------------------------- ----------------
--------------
Income before income taxes 10,945,456 3,551,128 14,962,505 5,867,162
Provision for income taxes 3,839,465 1,170,464 5,106,069 1,955,103
------------------------------- ------------------------------
Net income before minority interest 7,105,991 2,380,664 9,856,436 3,912,059
Minority interest (795,719) (439,220) (1,456,241) (657,718)
------------------------------- ------------------------------
Net income $ 6,310,272 $1,941,444 $ 8,400,195 $3,254,341
=============================== ==============================
Net earnings per share, basic and
diluted $1.68 $0.52 $2.24 $0.87
=============================== ==============================
Weighted average shares outstanding 3,757,300 3,755,760 3,756,766 3,755,760
=============================== ==============================
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
--------------------------------------------------------
-------------
Balance, December 31, 1998 $4,734,377 $ 638,619
3,755,760 $44,173,730 $49,546,726
-------------
Comprehensive income
Net income
3,254,341 3,254,341
Change in unrealized gain
on securities
available-for-sale
net of tax ($2,165) 3,247 3,247
-------------
Total comprehensive income 3,257,588
Balance, June 30, 1999
---------------------------------------------------------------------
3,755,760 $4,734,377 $47,428,071 $641,866 $52,804,314
=====================================================================
Balance, December 31, 1999
3,755,760 4,734,377 48,498,503 17,042,079 70,274,959
-------------
Comprehensive income
Net income
8,400,195 8,400,195
Change in unrealized gain
on securities
available-for-sale
net of tax ($1,766,223)
(2,886,633) (2,886,633)
-------------
Total comprehensive income
5,513,562
Issue shares of common stock 34,829
1,642 34,829
---------------------------------------------------------------------
Balance, June 30, 2000 $4,769,206 $ 14,155,446 $75,823,350
3,757,402 $56,898,698
=====================================================================
See accompanying notes to the condensed consolidated financial statements.
</TABLE>
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended June 30,
2000 1999
------------------------
Cash Flows from Operating Activities
Net income $ 8,400,195 $ 3,254,340
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,541,783 2,951,768
Amortization 232,476 223,868
Deferred tax charges (benefits) 57,141 (59,460)
(Gain) on equity investments (6,915,180) 0
Equity in earnings of investees (577,839) (742,776)
Loss on impairment of equipment 673,420 0
Minority share of income, net of distributions (396,759) (90,282)
Other, net (156,602) 66,967
Decrease/(increase) in
Accounts receivable 443,477 (176,014)
Materials 417,640 150,261
Increase/(decrease) in
Accounts payable 1,248,495 355,947
Other prepaids, deferrals and accruals 115,486 (2,804)
----------------------
Net cash provided by operating activities 7,083,733 5,931,815
Cash Flows From Investing Activities
Purchase of property and equipment (20,096,525) (4,666,121)
Purchase of intangible assets 0 (486,214)
Net cash flows from investments 6,740,380 1,259,239
----------------------
Net cash used in investing activities (13,356,145) (3,893,096)
Cash Flows From Financing Activities
Proceeds from long-term debt 4,801,717 0
Proceeds from issuance of common stock 34,829 0
Principal payments on long-term debt (723,479) (273,936)
-----------------------
Net cash provided by (used in) financing activities 4,113,067 (273,936)
-----------------------
Net increase (decrease) in cash and cash equivalents (2,159,345) 1,764,783
Cash and cash equivalents:
Beginning 7,155,827 4,891,109
-----------------------
Ending $ 4,996,482 $ 6,655,892
=======================
See accompanying notes to the condensed consolidated financial statements.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying condensed financial
statements contain all adjustments necessary to present fairly Shenandoah
Telecommunications Company's financial position as of June 30, 2000 and the
results of operations and cash flows for the three and six month periods
ended June 30, 2000 and 1999.
While the Company believes that the disclosures presented are adequate, to
make the information not misleading 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.
2. The results of operations for the three-month and six month periods ended
June 30, 2000 and 1999 are not necessarily indicative of the results to be
expected for the full year.
3. The earnings per common share were computed on the weighted average number
of shares outstanding. Diluted net income per share for the three month and
six months ended June 30, 2000 (which was not materially different from
basic net income per share) was computed under the treasury stock method,
assuming the conversion, as of the beginning of the respective period, for
all dilutive stock options. There were no adjustments to net income in the
computation of diluted net income per share for 1999.
4. 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:
For the six months ended June 30, 2000 June 30, 2000
External Internal
Operating Operating Net Total
Revenues Revenues Income Assets
---------------------------------------- ------------
Holding $ 0 $ 0 $ 277,861 $60,838,642
Telephone 9,283,896 1,119,575 3,007,057 75,312,992
Cable TV 1,785,598 1,200 (68,063) 12,029,463
ShenTel 2,611,137 114,111 58,867 5,428,399
Leasing 4,942 0 9,131 290,856
Mobile 8,125,749 523,590 6,285,510 16,937,093
PCS 5,966,692 11,562 (1,431,802) 23,455,182
Long Distance 530,368 195,025 167,382 174,991
Network 289,681 94,774 94,774 1,087,740
-------------------------------------- ----------
Combined Totals $28,598,063 $ 2,059,837 $8,400,195 $195,555,358
Inter-segment 0 (2,059,837) 0 (53,665,351)
eliminations -------------------------------------- -----------
Consolidated Totals $28,598,063 $ 0 $8,400,195 $141,890,007
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the six months ended June 30, 2000 June 30, 2000
External Internal
Operating Operating Net Total
Revenues Revenues Income Assets
---------------------------------------- ------------
Holding $ 0 $ 0 $ 252,759 $ 28,215,912
Telephone 7,877,743 877,017 2,903,950 65,599,517
Cable TV 1,662,261 1,200 (134,971) 10,994,841
ShenTel 1,729,603 120,913 (37,562) 3,677,349
Leasing 6,028 0 10,725 284,768
Mobile 5,580,036 265,676 842,762 15,461,655
PCS 1,640,300 8,208 (834,114) 8,502,522
Long Distance 521,782 135,205 102,386 265,394
Network 323,043 50,034 148,406 1,484,762
-------------------------------------- -----------
Combined Totals $ 19,340,796 $1,458,253 $ 3,254,341 $134,486,720
Inter-segment 0 (1,458,253) 0 (37,979,196)
eliminations
-------------------------------------- -----------
Consolidated Totals $ 19,340,796 $ 0 $ 3,254,340 $ 96,507,524
Inter-segment eliminated assets represent amounts invested in and notes payable
between the reporting segments.
5. 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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 telecommunications
holding company providing both regulated and unregulated telecommunications
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 and the increasingly competitive telecommunications
industry. Net Plant in Service increased from $36.8 million at the end of 1995
to $90.4 million at June 30, 2000. This increase incorporates continued
expansion of our operations from Virginia's northern Shenandoah Valley to other
surrounding areas. In conjunction with growing our PCS and Internet services, we
expanded our presence north along the Interstate-81 corridor in West Virginia,
Maryland, and southern Pennsylvania.
The Company's strategy is to continue the expansion of services as well as the
geographic areas served. In late 1999, our PCS subsidiary executed an affiliate
agreement with Sprint PCS, finished constructing and activated a CDMA network
where our GSM network existed, and converted our PCS customer base from GSM to
CDMA service. The agreement expands our existing PCS territory from an area
serving a population of 679,000 to one of 2,048,000 people. The 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
this expansion, 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 subsidiary are expected to increase, particularly in
the fourth quarter of 2000, when the additional network facilities are scheduled
to commence operations.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
Total revenue increased $4,997,000 or 48.9% compared to the same period last
year. The increase is due primarily to a significant growth in wireless
revenues, both in the cellular and PCS operations. Operating income increased
$1,125,000 to $4,476,000 or 33.6% over 1999 second quarter results. The major
contributors to improved operations are: a growing customer base, increased
travel revenues in the PCS operation and increased roamer revenue in the
cellular operation. Other notable improvements occurred in the ShenTel Service
equipment sales and Internet operations. Net income is up $4,369,000 due to
improved operating results and the impact of the gain on the sale of a
partnership interest during the period.
Revenues
Total telephone revenues increased 20.3% or $820,000 over the second quarter of
1999. This increase is primarily the result of a $667,000 or 107.3% increase in
facility lease revenue. The majority of this growth is attributable to increased
customer demand. Local Service revenues increased $129,000 or 12.8%. The change
is due to increased demand for interconnection to wireless carriers and for
enhanced telephone services, as well as a 4.1% increase in access lines. The
total number of telephone customers, measured in access lines, at June 30, 2000
was approaching 24,000. The Company recently introduced digital subscriber loop
(DSL) service, which provides a much faster communications path over existing
copper facilities. This is expected to boost Local Service revenues in the
future. The telephone subsidiary's largest revenue source is for access to the
local exchange network by interexchange carriers. Despite a 5.9% increase in
minutes of use over the second quarter of 1999, these revenues increased only
1.8% or $37,000 as a result of reductions in tariffed prices. Access rates are
expected to continue declining, but the impact cannot reasonably be estimated at
this time.
Cable Television revenues increased $21,000 or 2.4% over the same period last
year. Subscriptions increased 1% over last year, with a customer count of 8,600
as of June 30, 2000. The remainder of the increase is attributed to the
introduction of new services and programming options.
ShenTel Service revenues increased $450,000 or 56.4% compared to the second
quarter of last year. The growth in revenue was mainly generated from equipment
sales, which increased $291,000 and new subscriptions from Internet customers,
which contributed $136,000 of additional revenue for the quarter. Equipment
sales revenue is expected to decrease during the second half of 2000 due to
fewer customer projects outstanding. The total number of Internet subscribers at
the end of June 2000 was 12,900.
Mobile revenues are up $1,209,000 to $4,368,000 or 38.3% compared to second
quarter 1999. Cellular revenue is the major source of the revenue growth for the
second quarter. The Company experienced a 65.7% increase in roamer usage on the
analog cellular network. Additional facilities will be placed in service in the
second half of the year to handle anticipated increased demand. Future revenue
patterns are uncertain due to the increasingly competitive wireless market.
Cellular customer count at June 30 was 11,700, up 1.5% from June 1999, but down
1.5% from December 1999.
For the second quarter of 2000, PCS revenue increased $2,505,000 or 22.6% to
$3,443,000 or 22.6% of total revenue. Travel revenues, which are charges for use
of the Company's network by customers of Sprint PCS or other Sprint PCS
affiliates, are responsible for $1,448,000 or 57.8% of the increase for the
quarter. The remainder of the increase is primarily attributed to increased
service revenues and equipment sales from the expanding customer base. The
Company's customer base continued to grow with 15,000 customers at the end of
June 2000, compared to 7,600 at December, 1999. Comparative numbers as of June
1999 are not meaningful due to the change to CDMA technology. PCS revenue growth
is expected to accelerate as the Company opens new retail sales locations and
expands the network in several central Pennsylvania markets later this year.
Operating Expenses
Operating expenses increased $3,873,000 to $10,747,000, or 56.3% compared to the
second quarter last year. The increase is due primarily to additional network
usage in the cellular operation, a combination of customer growth and increased
network usage in the PCS operation, increased maintenance expenses in the
telephone operation and a one time $673,000 impairment to the Company's wireless
assets.
Cost of Goods Sold increased $676,000 from $292,000 to $968,000 over the second
quarter of 1999, due principally to increased equipment sales associated with
the ShenTel Service and PCS operations. Plant Specific expenses increased
$409,000 or 50.2%. Significant items were additional site rents associated with
the PCS network expansion, expenditures for rights-of-way clearing for wireline
facilities, and increased annual maintenance fees associated with computer
upgrades completed in 1999. Network and Other expenses were up $1,251,000 or
71.2% due principally to higher volumes of calls associated with the cellular
and PCS operations. Customer support operations increased $483,000 or 37.6%,
with a majority of the increase attributed to billing and customer care costs
for the PCS operation. Depreciation costs are up $316,000 or 19.5% due to the
expanding infrastructure of our operations. Other Operating expenes increased of
$701,000 from $262,000 to $963,000 due primarily to the the impairment of
wireless assets. Operating expense growth is expected to continue at an
accelerated pace as the Company's PCS operation continues to expand.
Other Income
Non-operating income increased $6,321,000 due to a one-time gain of $6,915,000
on the sale of the company's interest in a cellular operation. This gain was
partially offset by reduced income from the Company's equity investments.
Interest expense is up $51,000 due to increased amounts of money borrowed
compared to the same period last year.
Income taxes are up due to the one-time gain recorded in the quarter and
improved operating results.
Minority Interest increased $356,000 due to improved results of the cellular
operation, which is not wholly owned.
RESULTS OF OPERATIONS
FIRST SIX MONTHS 2000 VS FIRST SIX MONTHS 1999
The Company's total revenue increased $9,257,000 or 47.9%, for the six months
ended June 30, 2000, compared to the same period last year. The change is the
result of an increase in PCS revenue of $4,326,000 from $1,640,000 to
$5,966,000, a $2,546,000 or 45.6% increase in Mobile revenue, a $1,406,000 or
17.8% increase in Telephone revenue, a $882,000 or 51.0% increase in ShenTel
service revenue, and a $97,000 or 3.9% increase in other revenues. Operating
income is up $2,567,000 or 43.5% compared to the six months of 1999, due
principally to the same factors as discussed above for quarterly results. Net
income is up $5,146,000, the result of higher operating income and the impact of
the after tax gain on the sale of the partnership interest of the Virginia RSA 6
cellular operation.
Revenues
Telephone revenues increased $1,406,000 to $9,284,000 or 17.8% for the six
months ended June 30, 2000, compared to the same period last year. Facility
Lease revenue increased $1,060,000 or 94.3% due to the factors discussed above
under quarterly results. Local Service revenue increased $253,000 or 12.8% to
$2,222,000, as the number of access lines increased 4.1% and there was increased
the demand for enhanced services.
Cable Television revenue increased $123,000 or 6.9% due to a 1% increase in the
customer base and the sale of new digital pay-per-view services in late spring
2000. As discussed above, the Compan's cable TV system upgrade has provided
customers with additional service and programming options, and offers new
revenue sources to the Company.
ShenTel Service revenues increased $882,000 or 51.0% for the first six months of
2000. Equipment sales are up $615,000 compared to the same period last year.
Internet subscriber revenue is up $260,000. The Internet customer base increased
53.0% over the same period last year.
Mobile revenues have increased $2,546,000 to $8,126,000 for the six months ended
June 30, 2000. This 45.6% increase is the result of a $2,491,000 increase in
roaming revenue earned from other providers' customers roaming on our network.
The balance of the increase is due to more tower lease revenue as the number of
towers in the wireless network increases, and other users lease space on the
towers. The Company had approximately 40 towers in service as of June 30, 2000.
PCS revenues grew $4,326,000 or 263.8% over the same period last year, the
result of changing to the CDMA technology and becoming an affiliate of Sprint
PCS. Service revenue (revenue generated by our PCS customers) increased
$1,965,000 or 141.2% while travel roaming revenue (Sprint PCS and other
affiliates' customers traveling through our territory) increased $2,043,000.
Equipment sales revenue increased $287,000, the result of our retail stores
selling PCS telephones backed by the Sprint PCS marketing support and brand
name.
Operating Expenses
Operating expenses are up $6,690,000 to $20,128,000 or 43.5% compared to the
first half of 1999. Cost of products and services sold increased $1,425,000.
This increase was due to more PCS handsets sold and the impact of higher sales
of equipment in the ShenTel Service subsidiary. Plant Specific expenses
increased $741,000, due to the factors discussed above under quarterly results.
Network and Other expenses increased $2,070,000 due to increased cellular and
PCS traffic. Customer operations grew by $944,000 due principally to increased
customer growth in the PCS operation. Depreciation increased by $599,000 due to
additional equipment placed in service. Other Operating expenses are up $730,000
primarily the of a write down on wireless assets. Operating expense growth is
expected to continue at an elevated pace as the Company's PCS operation opens
new retail sales locations and expands the network in several central
Pennsylvania markets later this year.
The change in non-operating income reflects the one-time gain on the sale of the
Virginia RSA 6 limited partnership interest, somewhat offset by the write down
of the wireless assets and results of investment income generated in the first
six months of 2000.
Interest expense increased $90,000 primarily, due to higher amounts borrowed for
the PCS expansion.
Income before taxes is up $9,095,000 and reflects increased income from
operations and the gain on the sale of the partnership interest. Provisions for
income taxes are up $3,151,000 based on applying statutory rates
Minority interest is up $799,000 due to increased earnings attributable to the
minority owners of the cellular operation.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALE OF PARTNERSHIP INTEREST
On May 1, 2000, the Company sold its limited interest in the Virginia RSA 6
cellular partnership, which serves Augusta and Rockingham counties in Virginia,
for $7.4 million in cash. The Company recorded a one time pre-tax gain of
approximately $6.9 million on the sale.
INVESTMENTS IN NON-AFFILIATED COMPANIES
The Company participates in emerging technologies by investments in start-up
companies. This includes indirect participation through capital venture funds
such as South Atlantic Venture Fund III, South Atlantic Private Equity IV, and
Dolphin Communications Parallel Fund. The Company's remaining commitments to
these investments is approximately $576,000. 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 part or all of each investment on an individual
basis. In the second quarter the Company agreed to participate in Dolphin
Communications Fund II, which is expected to be funded over several years, for
an amount not to exceed $5,000,000.
AVAILABLE FOR SALE SECURITIES
The Company currently holds shares of four companies with NASDAQ or NYSE
listings. As of June 30, 2000, the market values of the Company's holdings were
$23,586,000 in Illuminet (ILUM), $1,390,000 in ITC^Delta Com (ITCD), $1,052,000
in Loral Communications (LOR) and $211,000 in NetIQ (NTIQ). Unrealized Gains on
Securities Available for Sale, adjusted for income tax effect, decreased
$409,000 to $14,155,000 during the second quarter of 2000, with a year-to-date
decrease of $2,887,000, both of which reflect the stock price movements of these
technology securities.
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 $35,000,000 bridge loan agreement with CoBank,
principally to finance the PCS build-out in Pennsylvania. Outstanding draws on
this facility as of June 30, 2000 is $400,000. The Company and CoBank
contemplate replacing this $35,000,000 bridge loan and a previously existing
$25,000,000 CoBank credit facility with a single term loan agreement for
$60,000,000 at terms similar to the existing facilities. The existing
$25,000,000 credit facility is almost fully drawn, with monthly repayment
requirements through August 2011.
Additionally, the Company has a $9,200,000 loan agreement with the Rural
Telephone Bank (RTB) with approximately $500,000 remaining as of June 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 half of 2000 and no
amounts are outstanding as of June 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 $26,240,000 as of June 30, 2000.
Year-to-date capital spending was $20,097,000, compared to a total capital
budget of $45,000,000. The budget includes approximately $26,800,000 for
equipment and towers associated with the PCS expansion, principally in
Pennsylvania. Included in the $26,800,000 amount is $11,000,000 for CDMA
equipment and towers that will be purchased from Sprint, of which $9,500,000 has
been purchased as of June 30, 2000. The remaining $1,500,000 of equipment
purchases from Sprint should occur by the end of the third quarter. The
remaining PCS equipment purchases and installations, which are in progress,
should occur by the end of 2000. Spending to date on this equipment is
approximately $1,200,000. The Telephone subsidiary capital budget is
$10,900,000, primarily for central office equipment and fiber optic and metallic
cable facilities with year-to date spending at approximately $3,629,000. 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.
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's
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 to the grantor, in the event
the GSM network is sold. The Company is continuing to explore a potential sale
of its GSM equipment and has reflected the $3.9 million as a current liability.
NASDAQ APPLICATION
During the second quarter, the Company filed an application for NASDAQ listing
of the Company's stock on the NASDAQ National Market exchange.
<PAGE>
SHENANDOAH TELECOMMUNICATIONS COMPANY
PART II
OTHER INFORMATION
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 a two notes payable to CoBank totaling $2.3 million. The
rates of these notes are based upon the lender's cost of funds. The Company also
has variable rate lines of credit totaling $2 million, with no outstanding
borrowings at June 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.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) At the Annual Meeting of Shareholders of the Company held on April 18,
2000, 2,508,608 of the Company's 3,756,634 outstanding shares were present in
person or by proxy and entitled to vote, which constituted a quorum.
(b) At the Annual Meeting, the following nominees were elected:
CLASS I DIRECTORS - To serve until the 2003 Annual Meeting
Noel M. Borden
Ken L. Burch
Grover M. Holler, Jr.
(c) At the Annual Meeting, the following matters were voted upon and
received the vote set forth below:
(1) Election of Directors. Provided that a quorum is present, the nominees
receiving the greatest number of votes cast are elected as directors and, as a
result in tabulating the vote, votes withheld have no effect upon the election
of directors. Each nominee for director was elected, having received the
following vote:
NOMINEE FOR WITHHELD
Noel M. Borden 2,498,609 9,999
Ken L. Burch 2,494,132 14,476
Grover M. Holler, Jr. 2,499,616 8,992
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibit 27 - Financial Data Schedule
B. No reports on Form 8-K were 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)
August 11, 2000 /s/ CHRISTOPHER E. FRENCH
-------------------------
Christopher E. French
President
August 11, 2000 /s/ LAURENCE F. PAXTON
------------------------
Laurence F. Paxton
Vice President - Finance
