EXHIBIT 13 SHENANDOAH TELECOMMUNICATIONS COMPANY 2001 ANNUAL REPORT
Shareholder 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 telecommunications
equipment sales and services; Internet access provided to the multistate region
surrounding the Northern Shenandoah Valley of Virginia; financing of purchases
of telecommunications facilities and equipment; paging and cellular telephone
services in the Northern Shenandoah Valley; resale of long distance services;
operation and maintenance of an interstate fiber optic network; and a wireless
personal communications service (PCS) and tower network in the four-state region
from Harrisonburg, Virginia to the Altoona and Harrisburg, Pennsylvania markets.
ANNUAL MEETING
The Board of Directors extends an invitation to all shareholders to attend
the Annual Meeting of Shareholders. The meeting will be held Tuesday, April 16,
2002, at 11:00 a.m. in the Auditorium of the Company's offices at 500 Mill Road,
Edinburg, Virginia. Notice of the Annual Meeting, Proxy Statement, and Proxy
were mailed to each shareholder on or about March 22, 2002.
FORM 10-K
The Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available to shareholders, without charge, upon request
to Mr. Laurence F. Paxton, Vice President - Finance, Shenandoah
Telecommunications Company, P. O. Box 459, Edinburg, VA 22824.
MARKET INFORMATION
Prior to October 23, 2000 the Company's stock was not listed on any
national exchange or NASDAQ, but was traded on the Over-the-Counter (OTC)
Bulletin Board system under the symbol "SHET." On October 23, 2000 the Company's
stock began trading on the NASDAQ National Market, with continued use of the
symbol "SHET." In April 2002, the Company's trading symbol will be changed to
"SHEN". Information on OTC and NASDAQ trading activity is available from any
stockbroker, or from numerous internet websites.
CORPORATE HEADQUARTERS INDEPENDENT AUDITOR
Shenandoah Telecommunications Company KPMG LLP
124 South Main Street 1021 East Cary Street
Edinburg, VA 22824 Richmond, VA 23219
SHAREHOLDERS' QUESTIONS AND STOCK TRANSFERS
CALL (540) 984-5200
Transfer Agent - Common Stock
Shenandoah Telecommunications Company
P.O. Box 459
Edinburg, VA 22824
This Annual Report to Shareholders 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.
Letter To The Shareholders
March 22, 2002
Dear Shareholder:
Your Company had a good year in 2001, and relative to the
telecommunications industry as a whole, the Company's performance was excellent.
We achieved record financial results, improved many key operating performance
measurements, invested in network expansion and service improvements, and
profitably grew the overall size of our Company in terms of revenues, services,
market areas and employees.
Financial highlights of the year were the record revenues and earnings,
both in total and from ongoing operations. Total consolidated net income for
2001 was $16.4 million, an increase of 66 percent from $9.9 million in 2000.
Results for 2001 included a non-cash, after-tax gain of $7.9 million on exchange
of investment securities. Net income from ongoing operations (which excludes
gains or losses on external investments and the 2000 sale of a limited
partnership interest in the Virginia RSA 6 cellular operation) was $8.3 million
during the year, or $2.21 per share on a diluted basis, up from $6.3 million and
$1.68 per share in 2000. Total revenues were $88.7 million, an increase of 47
percent.
The non-cash, after-tax gain of $7.9 million in 2001 was a result of the
December 2001 merger between Illuminet Holdings, Inc. and VeriSign, Inc. Under
generally accepted accounting principles, the Company was required to book this
merger at its fair value, reflecting the market price of the VeriSign shares the
Company received in the merger in exchange for its shares of Illuminet. Details
of this investment, including our historical cash returns on the original
investment, are provided in the following pages of this Annual Report.
The improvement in our operating results occurred while we were also
continuing to make substantial investments in our various businesses, most
significantly our portion of Sprint's nationwide PCS network. In total, the
Company invested an additional $23.2 million in its facilities during 2001,
bringing gross property, plant, and equipment to $175.3 million. Total debt
increased $7.1 million from $55.5 million to $62.6 million by the end of the
year.
During 2001, we expanded our Sprint PCS network coverage, commencing
service in our Central Pennsylvania market in February, and then working to
extend service to Altoona, PA and the surrounding area. By the end of the year,
our network covered 1.4 million of the 2.1 million total population within our
territory which reaches from Harrisonburg, VA to Altoona and Harrisburg, PA.
Under our affiliation agreement with Sprint, we are licensed to use the Sprint
brand name as the exclusive provider of their PCS products and services in this
territory. During the year, we increased the total number of base stations to
184, and will be adding third generation (3G) service capabilities to increase
capacity and improve data transmission speeds. Our Sprint PCS customer base more
than doubled last year, increasing 111 percent to approximately 49,000 customers
by the end of 2001. Having completed our initial build-out requirements, our
future PCS efforts will be to improve coverage and service, and to improve the
financial results of this high fixed-cost business.
Another important part of our operations, our extensive fiber optic
network, was enhanced during 2001. This network, which is extensively used by
other segments of our operation, generated a total of $6.6 million in lease
revenue, an increase of $1.4 million from 2000. Efforts were undertaken during
2001 to add alternate routes to supplement existing routes between important
nodes on our network. Our route between the Shenandoah Valley and Herndon, VA is
being supplemented with a diverse route which will help protect our major link
to Northern Virginia from accidental cuts and equipment failures, as well as
making the facility more attractive for use by new customers. The diverse route
originates in Strasburg, and passes through Front Royal, Warrenton, and
Manassas, giving our Company a foundation which can be used to deliver future
services to new markets.
Another area of investment and improvement during 2001 was in our CATV
operation. In conjunction with an expanded program offering, the Company's CATV
headend was upgraded during the year. The headend is the equipment location
where all programming is received and processed for transmission out to
subscriber homes. An increasing number of programming services are now
transmitted to cable television systems in a digital format, and the Company has
continued to add digital receivers to process these signals. The Company
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expanded its channel offering during the year, adding five new channels to its
basic package, and additional premium and pay-per-view packages. While
continuing to enhance its service offerings, the Company incurred increased
charges from programmers for the right to transmit their channels. During
December, rates for the basic service package were increased; but, prices for
both the economy and digital packages remained the same.
While we continue to manage your Company to best take advantage of its
business opportunities, we are constantly reminded of the importance of our
employees and their efforts to deliver the quality services our customers
expect. During the year, we received numerous phone calls, notes, and emails
praising our employees for their extraordinary efforts. Despite the changes in
our business, these correspondences reinforce the fact that we remain a company
where our employees' efforts ultimately determine the quality of the services we
provide. Day in and day out, our employees are there, building and improving our
networks, installing and repairing services, and interacting with our customers.
Three recent retirees, all with over 25 years of service, are prime examples of
the employees who assist in our mission of service. Shelby Hollar had 26 years
of service when she retired in January, Carroll Lambert completed a 40 year
career on his retirement in February, and Dot Baker retired this month with
nearly 36 years of service. Employees with long-term careers at one company are
rare in this day and age, and quality employees like these three are even rarer.
While we are primarily focusing on our existing businesses, we are also
continuing to explore ways to provide new services to our customers and create
new sources of revenues and earnings for our shareholders. One initiative was
the development and launch of our electronic yellow pages, known as Shentel
Pages. As use of the Internet continues to become more and more pervasive, we
are positioning our Company to be the leading provider of current, readily
available information for consumers. Traditionally, telephone companies
fulfilled this role by providing their directories with customer listings and
Yellow Pages advertising. The growth of the Internet challenges this traditional
role, but also provides an opportunity for us to be the leading provider of
information to Internet users interested in local and regional information.
Another new information service is 511 Virginia. An outgrowth of our Travel
Shenandoah efforts launched in 1998, this traveler information service covers
the entire 325-mile Interstate 81 corridor in Virginia. Real-time traffic
incident reports and traveler information on hotels, restaurants, local
attractions and seasonal events is available simply by dialing 511 or visiting
the 511Virginia.org website. In partnership with the Virginia Department of
Transportation and the Virginia Tech Transportation Institute, Shentel manages
the telecommunications infrastructure, provides sales and marketing support, and
collects and manages the tourism database of this advanced system.
By comparison to other telecommunications companies, our stock price
performance was exceptional during 2001. Of course, we recognize that the
comparison looks better because a lot of companies in our industry fell on hard
times in 2001. We are also aware that one year's performance alone does not
qualify a stock as a great investment. There is no doubt that the excesses of
the late 1990's contributed to the magnitude of the value declines for many
companies in our industry. While growth remains important, it should not replace
the ultimate objective of earning profits in which our owners will share.
Long-term growth in earnings remains our primary goal, and we believe our
shareholders will ultimately be best rewarded if we are successful in achieving
this objective.
For the Board of Directors,
/s/ Christopher E. French
Christopher E. French
President
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Senior Management
[PHOTO] [PHOTO] [PHOTO]
Christopher E. French David E. Ferguson David K. MacDonald
President VP-Customer Service VP-Engineering and
Construction
[PHOTO] [PHOTO] [PHOTO]
Laurence F. Paxton William L. Pirtle Cynthia F. Soltis
VP-Finance VP-Personal Communications Human Resources Manager
Service
Comparative Highlights
(Dollar figures in thousands, except per share data.)
Increase
December 31 (Decrease)
2001 2000 Amount Percent
---------- ---------- -------- --------
Operating Revenues $ 88,715 $ 60,479 $ 28,236 46.7
Operating Expenses $ 66,953 $ 44,293 $ 22,660 51.2
Income Taxes $ 9,961 $ 5,994 $ 3,967 66.2
Interest Expense $ 4,127 $ 2,936 $ 1,191 40.6
Net Income $ 16,372 $ 9,855 $ 6,517 66.1
Net Income from Operations (1) $ 8,306 $ 6,329 $ 1,977 31.2
Earnings per Share - diluted $ 4.34 $ 2.61 $ 1.73 66.3
Cash Dividend per Share $ 0.70 $ 0.66 $ 0.04 6.1
Percent Return on Equity 21.9 14.9 7.0 47.0
Common Shares Outstanding 3,765,478 3,759,231 6,247 0.2
No. of Shareholders 3,752 3,726 26 0.7
No. of Employees (full-time equivalent) 252.5 206.5 46 22.3
Wages & Salaries $ 8,994 $ 7,402 $ 1,592 21.5
Investment in Net Plant $ 128,104 $ 111,808 $ 16,296 14.6
Capital Expenditures $ 28,395 $ 44,267 ($15,872) (35.9)
(1) Excludes gains and losses on external investments unaffiliated with
operations, and excludes gain on sale of partnership interest in the
Virginia RSA 6 cellular operation.
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Sprint PCS Growth Continues
During 2001, the Company fulfilled its obligation to build out the final
phase of its portion of Sprint's nationwide PCS network. During 2001, we added
126 sites, the majority in our Central Pennsylvania market. During the year,
these additional sites added 80 miles of interstate highway coverage, bringing
our total to 476. Coverage was also extended on other well traveled routes
within our service area. With the additional coverage resulting from the new
sites, we added 1,000,000 potential customers to our service area, bringing the
total to 1.4 million people.
In addition to extending coverage, many areas also received upgrades to
provide additional capacity to handle the growing use of the network. During the
year, sites were equipped to handle future capacity upgrades and expanded data
traffic requirements. Other network activities included the re-homing of the
remaining base stations to the Company-owned switch installed in Edinburg during
the summer.
Work is already in progress for additional sites which we will add during
2002, both to extend coverage and provide additional traffic handling
capabilities. By mid-2002, the network will be upgraded with 3G (third
generation) capabilities. These enhancements will allow us to offer greater data
speeds, provide increased capability for both voice and data calls, and allow
the network to more easily introduce new wireless applications for both consumer
and business markets.
By the end of 2001, the Company had approximately 49,000 Sprint PCS
customers, a 111 percent increase from the prior year. We are now selling Sprint
PCS services through our eight retail stores and 137 retail outlets provided by
third-party distributors. These retail channels are supplemented by a growing
direct sales force which focuses on sales to business and non-retail consumers.
[GRAPHIC] Current Sprint PCS Service Area Provided by Shentel
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Shenandoah Cable Expands Programming and Updates Equipment
During the past year, Shentel made significant improvements to its cable
television network and expanded its programming offerings. In an effort to
provide better value to customers, five new channels were added and three
channels were scheduled to be dropped from the basic cable package.
Additionally, optional services were added, including the Fans Choice Package
(all sports programming), the Home Life Package, and the Spanish Language
Package. The Company also introduced expanded movie packages for HBO, Showtime,
and Encore. With these programming changes, customers can now choose from
packages that range from twelve channels including the five major networks for
as low as $19.95; to plans with 106 viewing channels; 46 CD-quality,
commercial-free music channels; 24 digital channels of pay-per-view movies; and
sports and special events for only $39.95 per month.
In order to provide the best quality picture for its cable television
customers and to reduce interruptions, Shenandoah Cable Television has upgraded
its equipment receivers at the headend. In order to reduce television
interruptions, major networks are beginning to provide companies like Shentel
with receivers that have multiple backup capabilities. With this backup
protection, if a signal is lost from one satellite, the program provider can
switch to one of two other satellites so that transmission will not be
interrupted.
It is a constant challenge to provide our customers with the best service
possible and keep up with consumer demand for new program offerings. These
improvements in programming and technology have positioned Shentel to continue
providing their customers with the best cable service possible and high quality
programming at a competitive price.
[PHOTO] Employees Chris Haynes and Eugene Miller
check newly installed headend receivers
Shentel Pages
Shenandoah Telephone Company generates over $1 million in revenue each year
through traditional printed Yellow Pages advertising. With more consumers today
using Internet and web-based services to research and decide on which products
and services they will purchase, we felt it was important to develop an
electronic medium to address the changing shopping habits of customers. Shentel
Pages was introduced during the fall of 2001 to address this need.
The Shentel Pages web site provides business directory listings for the
six-county area of Shenandoah, Frederick, Clarke, Warren, Page, and Rockingham.
With this expanded service area there is an even greater
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variety of products and services that can be advertised to customers, as well as
a broader base of advertisers that could make use of this new advertising
approach. Advertising in the Shentel Pages is similar to the ads found in
traditional, printed Yellow Pages directories. Even the advertising styles are
familiar, with full-page display ads, in-column text and basic listings. But the
similarities end there. While printed directories are updated only once a year,
Internet directories can be updated anytime the advertiser chooses to change a
display ad message. Shentel Pages display ads are single-page web sites that
conveniently link to the on-line Yellow Pages listings. Interactive maps help
customers locate businesses they would like to visit in person. Advertisers can
also include audio and video sales presentations in their Shentel Pages
listings, and offer specials and discount coupons.
The Company's team of graphic designers and web developers can design and
customize web sites that reflect the expanding needs of businesses and create
unique web identities and commercial functionality for businesses of all sizes.
All customized web sites are hosted locally in Edinburg, making use of the
Company's high quality Internet services.
From on-line business directory listings to custom web sites, Shentel Pages
serves a growing, and changing business community where more and more people
choose the Internet as a new and better way to shop locally. Shentel Pages can
be found at www.shentelpages.com.
Employees Retire With Over 100 Years of Combined Service
Three long-time employees of Shenandoah Telephone Company retired in the
early part of 2002, each with over 25 years of service to the Company and its
customers. Each of these employees worked in various positions, but retired from
the following: Carroll Lambert, Electronic Technician in the Central Office
Department; Dot Baker, Accounting Clerk in the Revenue Accounting Department;
and, Shelby Hollar, Supervisor of the Communications Center. We appreciate the
loyalty and dedication each of these employees had for the Company and wish them
the best in their well-deserved retirement.
[PHOTO] Carroll Lambert - 40 Years of Service
[PHOTO] Dot Baker - 36 Years of Service
[PHOTO] Shelby Hollar - 26 Years of Service
Shentel to Complete Fiber Optic Line to Herndon/Dulles
The Company is nearing completion of its second fiber optic route to the
Herndon/Dulles area in Northern Virginia. The new fiber route will pass through
five counties, and the communities of Front Royal, Marshall, Warrenton, and
Manassas, attaching to more than 1,400 telephone poles along the way. The total
distance, once constructed, will be 90 miles.
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The Northern Virginia area is one of Virginia's largest and fastest growing
regions for data traffic, Internet access, and telecommunications technology,
and is a hub for technology industries and the Federal Government. There are a
number of major carriers and consumers of data traffic located in this area, and
through interconnections with other network providers, customers on Shentel's
network can fulfill almost any communications need.
With customers demanding uninterrupted service around the clock, alternate
fiber routes become increasingly important. For our customers, this means that
service over our network will be even more reliable than in the past. These
additions to our infrastructure and our diverse facilities now in place
guarantee our network can continue to operate without service disruption. Our
customers will have a higher level of confidence that when they pick up a
telephone, log on to the Internet, or watch cable television, the service will
be there.
Impact of Illuminet/VeriSign Merger
The Company's financial results for 2001 included after-tax gains on
investments of $8.1 million. Within this total gain, $7.9 million was a non-cash
gain resulting from the December 12, 2001 merger between Illuminet Holdings,
Inc. and VeriSign, Inc. At the time of the closing of this merger, the Company
received 310,158 shares of VeriSign stock, valued at $13.2 million. Subsequent
to the merger, the market value of VeriSign's stock had declined and the gain
recognized at the time of the merger was offset by approximately $1.4 million in
losses recorded in the fourth quarter of 2001. Subsequent declines in VeriSign's
stock price in the first quarter of 2002 have contributed to a further reduction
in the value of the Company's investment in VeriSign. At the end of 2001, the
Company carried its investment in VeriSign at $38.04 per share. Additional
losses may be recorded in future periods if VeriSign's stock price remains below
$38.04.
The Company's recognition of the gain on exchange of Illuminet shares for
VeriSign shares in 2001 was in accordance with generally accepted accounting
principles. The Company cautions readers, however, that this is a non-cash gain;
and, until the Company sells its stock in VeriSign, the actual total gains or
losses realized on this investment may significantly differ.
The Company's current investment in VeriSign is a result of its prior
investments in Illuminet's predecessor companies. In total, the Company
originally invested $990,000 and has received cash proceeds of $5.3 million from
sales of Illuminet stock prior to the exchange for VeriSign shares. Its
remaining holdings of 310,158 shares of VeriSign represent 54 percent of the
Company's original investment in Illuminet; but, due to the non-cash gain
described above, were carried on the books for $11.8 million as of the end of
2001.
Planning Under Way for 100th Anniversary Celebration
On June 9, 2002, Shenandoah Telecommunications Company will reach the 100th
anniversary of the incorporation of its predecessor company, The Farmers Mutual
Telephone System of Shenandoah County. In honor of this occasion, the Company is
planning a series of celebration activities culminating with a public Open House
on Sunday, June 9, 2002. The Open House will be held at the Company's offices at
500 Mill Road, Edinburg, VA. This is the former Shenandoah Knitting Mills
building in Edinburg, VA, which the Company purchased in 2000. Initially used
for storage and limited office space, renovations are currently underway to
convert the building into additional office and meeting facilities.
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Board of Directors
[PHOTO]
Seated, left to right: James E. Zerkel II, Grover M. Holler, Jr., Christopher
E. French, Harold Morrison, Jr., Noel M. Borden.
Standing, left to right: Zane Neff, Douglas C. Arthur,
Dick D. Bowman, Ken L. Burch
Five-Year Summary of Selected Financial Data
(Dollar figures in thousands, except per share data.)
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- -----------
Operating Revenues $ 88,715 $ 60,479 $ 42,334 $ 35,496 $ 30,970
Operating Expenses $ 66,953 $ 44,293 $ 29,793 $ 24,992 $ 22,603
Income Taxes $ 9,961 $ 5,994 $ 3,797 $ 3,599 $ 2,594
Interest Expenses $ 4,127 $ 2,936 $ 1,951 $ 1,501 $ 1,556
Net Income $ 16,372 $ 9,855 $ 6,428 $ 5,604 $ 4,480
Net Income from Operations(1) $ 8,306 $ 6,329 $ 6,082 $ 5,364 $ 4,531
Total Assets $ 166,797 $ 152,293 $ 133,644 $ 94,137 $ 89,408
Long-term Obligations $ 56,436 $ 55,487 $ 33,030 $ 29,262 $ 27,361
Shareholder Information
Number of Shareholders 3,752 3,726 3,683 3,654 3,567
Shares of Stock 3,765,478 3,759,231 3,755,760 3,755,760 3,760,760
Earnings per Share - diluted $ 4.34 $ 2.61 $ 1.71 $ 1.49 $ 1.19
Cash Dividend per Share $ 0.70 $ 0.66 $ 0.56 $ 0.51 $ 0.43
(1) Excludes gains and losses on external investments unaffiliated with
operations, and excludes gain on sale of partnership interest in the
Virginia RSA 6 cellular operation.
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SHENANDOAH TELECOMMUNICATIONS COMPANY
AND SUBSIDIARIES
2001 Financial Statements
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INDEPENDENT AUDITORS' REPORT
[GRAPHIC] MCGLADREY & PULLEN, LLP
Certified Public Accountants
The Board of Directors and Shareholders
Shenandoah Telecommunications Company
Edinburg, Virginia
We have audited the accompanying consolidated balance sheets of Shenandoah
Telecommunications Company and Subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity and
comprehensive income (loss), 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
January 26, 2001
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INDEPENDENT AUDITORS' REPORT
KPMG
The Board of Directors and Shareholders
Shenandoah Telecommunications Company:
We have audited the accompanying consolidated balance sheet of Shenandoah
Telecommunications Company and subsidiaries, (the Company) as of December 31,
2001, and the related consolidated statements of income, shareholders' equity
and comprehensive income (loss), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2001 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, 2001, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Richmond, Virginia
February 1, 2002
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001, 2000 and 1999
in thousands
ASSETS (Note 4) 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 2,173 $ 3,133 $ 7,156
Accounts receivable (Note 6) 8,498 7,320 5,511
Income taxes receivable 1,205 2,052 --
Materials and supplies 2,999 2,856 4,089
Prepaid expenses and other 1,159 854 544
------------------------------------
Total current assets 16,034 16,215 17,300
------------------------------------
Securities and Investments (Notes 2 and 7)
Available-for-sale securities 12,025 11,771 30,719
Other investments 6,438 6,996 5,094
------------------------------------
Total securities and investments 18,463 18,767 35,813
------------------------------------
Property, Plant and Equipment
Plant in service (Note 3) 160,325 122,750 99,822
Plant under construction 14,961 29,350 9,134
------------------------------------
175,286 152,100 108,956
Less accumulated depreciation 47,182 40,292 34,407
------------------------------------
Net property, plant and equipment 128,104 111,808 74,549
------------------------------------
Other assets
Cost in excess of net assets of business acquired 5,630 5,630 5,630
Deferred charges and other assets 979 436 590
Radio spectrum license -- 1,341 1,341
------------------------------------
6,609 7,407 7,561
Less accumulated amortization 2,413 1,904 1,579
------------------------------------
Net other assets 4,196 5,503 5,982
------------------------------------
Total assets $166,797 $152,293 $133,644
====================================
See accompanying notes to consolidated financial statements.
(Continued)
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001, 2000 and 1999
in thousands
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of long-term debt (Note 4) $ 4,387 $ 2,403 $ 1,341
Revolving line of credit (Note 4) 6,200 -- --
Accounts payable (Note 6) 5,394 9,654 2,789
Advance billings and customer deposits 2,889 1,577 990
Refundable equipment payment (Note 6) -- 3,871 3,871
Accrued compensation 1,084 996 947
Other current liabilities 1,687 1,838 950
Income taxes payable -- -- 740
------------------------------------
Total current liabilities 21,641 20,339 11,628
------------------------------------
Long-term debt, less current maturities (Note 4) 52,049 53,084 31,689
------------------------------------
Other Liabilities
Deferred income taxes (Note 5) 14,402 9,218 16,062
Pension and other (Note 8) 2,265 1,602 1,530
------------------------------------
Total other liabilities 16,667 10,820 17,592
------------------------------------
Minority Interests 1,838 1,715 2,460
------------------------------------
Commitments and Contingencies (Notes 2, 4, 5,
6, 8, 11 and 12)
Shareholders' Equity (Notes 4 and 9)
Common stock, no par value, authorized 8,000
shares; issued and outstanding, 3,765 shares in 2001,
3,759 shares in 2000, and 3,756 shares in 1999 4,950 4,817 4,734
Retained earnings 69,610 55,873 48,499
Accumulated other comprehensive income (Note 2) 42 5,645 17,042
------------------------------------
Total shareholders' equity 74,602 66,335 70,275
------------------------------------
Total liabilities and shareholders' equity $166,797 $152,293 $133,644
====================================
See accompanying notes to consolidated financial statements.
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
in thousands, except per share amounts
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Operating revenues:
Wireless (Note 6) $ 56,144 $ 30,964 $ 17,114
Wireline 27,468 24,480 21,634
Other 5,103 5,035 3,586
---------------------------------------------
Total operating revenues 88,715 60,479 42,334
---------------------------------------------
Operating expenses:
Cost of goods and services 7,612 6,074 3,013
Network operating costs 29,949 18,477 11,083
Depreciation and amortization 11,834 7,318 6,712
Selling, general and administrative 17,558 12,424 8,985
---------------------------------------------
Total operating expenses 66,953 44,293 29,793
---------------------------------------------
Operating income 21,762 16,186 12,541
---------------------------------------------
Other income (expense):
Non-operating income, net 281 76 1,043
Interest expense (4,127) (2,936) (1,951)
Net gain on investments (Note 2) 12,943 5,602 555
---------------------------------------------
9,097 2,742 (353)
---------------------------------------------
Income before income taxes and minority interest 30,859 18,928 12,188
Income tax provision (Note 5) 9,961 5,994 3,797
---------------------------------------------
20,898 12,934 8,391
Minority interest 4,526 3,079 1,963
---------------------------------------------
Net income $ 16,372 $ 9,855 $ 6,428
=============================================
Net earnings per share, basic $ 4.35 $ 2.62 $ 1.71
=============================================
Net earnings per share, diluted $ 4.34 $ 2.61 $ 1.71
=============================================
Cash dividends per share $ 0.70 $ 0.66 $ 0.56
=============================================
Weighted average shares outstanding, basic 3,761 3,757 3,756
=============================================
Weighted average shares outstanding, diluted 3,774 3,771 3,756
=============================================
See accompanying notes to consolidated financial statements.
-14-
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2001, 2000 and 1999
in thousands, except per share amounts
Accumulated
Other
Common Retained Comprehensive
Shares Stock Earnings Income Total
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 3,756 $4,734 $ 44,174 $ 639 $ 49,547
--------
Comprehensive income:
Net income -- -- 6,428 -- 6,428
Net unrealized change in
securities available-for-sale, net
of tax of ($10,079) -- -- -- 16,403 16,403
--------
Total comprehensive income 22,831
--------
Dividends declared ($0.56 per share) -- -- (2,103) -- (2,103)
--------------------------------------------------------------------------
Balance, December 31, 1999 3,756 4,734 48,499 17,042 70,275
Comprehensive income:
Net income -- -- 9,855 -- 9,855
Net unrealized change in
securities available-for-sale, net
of tax of $6,974 -- -- -- (11,397) (11,397)
--------
Total comprehensive loss (1,542)
--------
Dividends declared ($0.66 per share) -- -- (2,481) -- (2,481)
Common stock issued through
exercise of incentive stock
options 3 83 -- -- 83
--------------------------------------------------------------------------
Balance, December 31, 2000 3,759 4,817 55,873 5,645 66,335
Comprehensive income:
Net income -- -- 16,372 -- 16,372
Net unrealized change in
securities available-for-sale, net
of tax of $3,482 -- -- -- (5,603) (5,603)
--------
Total comprehensive income 10,769
--------
Dividends declared ($0.70 per share) -- -- (2,635) -- (2,635)
Common stock issued through
exercise of incentive stock
options 6 133 -- -- 133
--------------------------------------------------------------------------
Balance, December 31, 2001 3,765 $4,950 $ 69,610 $ 42 $ 74,602
==========================================================================
See accompanying notes to consolidated financial statements.
-15-
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
in thousands
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 16,372 $ 9,855 $ 6,428
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,111 6,993 6,216
Amortization 723 325 496
Deferred tax charges (benefit) 8,666 130 (758)
Loss on disposal of assets 506 15 1
Net (gain) loss on disposal of investments (14,162) (5,178) --
Net (gain) loss from patronage and equity
investments 789 (975) (1,154)
Minority interest, net of distributions 123 (745) 195
Other 987 263 (70)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,502) (787) (646)
Materials and supplies (143) 1,233 (601)
Increase (decrease) in:
Accounts payable (4,260) 5,518 1,047
Other prepaids, deferrals and accruals (2,454) (1,444) 4,851
------------------------------------------
Net cash provided by operating activities 16,756 15,203 16,005
------------------------------------------
Cash Flows From Investing Activities
Purchase and construction of plant and equipment, net
of retirements (28,395) (44,267) (15,731)
Purchase of radio spectrum license -- -- (607)
Purchase of investment securities (1,250) (2,787) (581)
Proceeds from sale of equipment 482 -- --
Proceeds from sale of radio spectrum license 1,133 -- --
Proceeds from sale of securities (Note 2) 5,842 7,615 1,503
Other, net -- 154 11
------------------------------------------
Net cash used in investing activities (22,188) (39,285) (15,405)
------------------------------------------
(Continued)
-16-
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
in thousands
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of long-term debt $ 24,641 $ 24,120 $ 4,598
Principal payments on long-term debt (23,692) (1,663) (830)
Net proceeds from line of credit 6,200 -- --
Debt issuance costs (175) -- --
Dividends paid (2,635) (2,481) (2,103)
Proceeds from exercise of incentive stock options 133 83 --
------------------------------------------
Net cash provided by financing activities 4,472 20,059 1,665
------------------------------------------
Net increase (decrease) in cash and cash
equivalents (960) (4,023) 2,265
Cash and cash equivalents:
Beginning 3,133 7,156 4,891
------------------------------------------
Ending $ 2,173 $ 3,133 $ 7,156
==========================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of capitalized interest of $134 in 2001;
$301 in 2000; $229 in 1999 $ 4,217 $ 3,057 $ 2,132
==========================================
Income taxes $ 506 $ 8,656 $ 3,519
==========================================
Non-cash transactions:
The Company received 310,158 shares of VeriSign Inc. common stock in
exchange for 333,504 shares of Illuminet Holdings, Inc. stock as a result
of the merger of the two entities.
The Company completed the sale of its GSM network equipment in January
2001, for approximately $6.5 million of which approximately $4.9 million
was escrowed as part of a like-kind exchange transaction. The escrowed
funds were disbursed as new equipment was received during the first six
months of 2001.
See accompanying notes to consolidated financial statements.
-17-
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of business: Shenandoah Telecommunications Company and subsidiaries
(the "Company") provides telephone service, wireless personal communications
service (PCS) under the Sprint brand name, cellular telephone, cable television,
unregulated communications equipment sales and services, Internet access, and
paging services. In addition, through its subsidiaries, the Company leases
towers and operates and maintains an interstate fiber optic network. The
Company's operations are located in the four state region surrounding the
Northern Shenandoah Valley of Virginia. Operations follow the Interstate 81
corridor, through West Virginia, Maryland and into South-Central Pennsylvania.
The Company is the exclusive Sprint PCS Network Partner providing wireless
mobility communications network products and services in the geographic area
extending from Altoona, Harrisburg and York, Pennsylvania, south through Western
Maryland, and the panhandle of West Virginia, to Harrisonburg, Virginia. The
Company is licensed to use the Sprint brand name in this territory, and operates
its network under the Sprint radio spectrum license (see Note 6). 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 other entities where effective
control is exercised. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of estimates: Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management reviews its estimates, including those related to
recoverability and useful lives of assets as well as liabilities of income taxes
and pension benefits. Changes in facts and circumstances may result in revised
estimates or actual results could differ from those reported 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, these investments may be in excess of FDIC insurance
limits. Cash equivalents in thousands, at December 31, 2001, 2000 and 1999 were
$2,173, $3,133, and $7,156, respectively.
Accounts receivable: The Company grants credit and terms to customers in
accordance with standard industry practices. Accounts receivable are
concentrated among customers within the Company's geographic service area and
large telecommunications companies. The Company's reserve for uncollectible
receivables was $666 thousand, $343 thousand and $16 thousand at December 31,
2001, 2000 and 1999, respectively.
Securities and investments: The classification of debt and equity securities is
determined by management at the date individual investments are acquired. The
appropriateness of such classification is continually reassessed. The Company
monitors the fair value of all investments, and based on factors such as market
conditions, financial information and industry conditions, the Company will
reflect impairments in values as is warranted. The classification of those
securities and the related accounting policies are as follows:
Available-for-Sale Securities: Debt and equity securities classified as
available-for-sale consist of securities which 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 similar criteria. Available-for-sale securities are recorded at fair
value as determined by quoted market prices. Unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings and are
reportable as a separate component of other comprehensive income until
realized. Realized gains and losses are determined on a specific
identification basis. A decline in the market value of any
available-for-sale security below cost that is deemed to be other than
temporary results in a reduction in the carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established.
Investments Carried at Cost: Investments in which the Company does not have
a significant ownership (less than 20%) and for which there is no ready
market, are carried at cost. Information regarding investments carried at
cost is reviewed continuously for evidence of impairment in value.
Impairments are charged to earnings and a new cost basis for the investment
is established.
-18-
Note 1. Summary of Significant Accounting Policies (Continued)
Equity Method Investments: Investments in partnerships and investments in
unconsolidated corporations where the Company's ownership is 20% or more
are reported under the equity method. Under this method, the Company's
equity in earnings or losses of investees is reflected in net income.
Distributions received reduce the carrying value of these investments. The
Company would recognize a loss when there is a decline in value in the
investment which is other than a temporary decline.
Materials and supplies: New and reusable materials are carried in inventory
principally at average original cost. Individual significant items are stated at
actual cost. Non-reusable material is carried at estimated salvage value.
Property, plant and equipment: Property, plant and equipment is stated at cost.
The Company capitalizes all costs associated with the purchase, deployment and
installment of property, plant and equipment, including interest on major
capital projects during the period of their construction. Expenditures,
including those on leased assets, that extend the useful life or increase its
utility are capitalized. Maintenance expense is recognized when repairs are
performed. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets. Depreciation expense was approximately
7.9%, 6.3% and 6.1% of average depreciable assets for the years 2001, 2000 and
1999, respectively. Depreciation lives are assigned to assets based on their
estimated useful lives in conjunction with industry and regulatory guidelines,
where applicable. Such lives, while similar, may exceed the lives that would
have been used if the Company did not operate certain segments of the business
in a regulated environment. The Company takes technology changes into
consideration as it assigns the estimated useful lives, and monitors the
remaining useful lives of asset groups to reasonably match the remaining
economic life with the useful life and makes adjustments where necessary.
Cost in excess of net assets of business acquired: Intangible assets, which
represent the cost in excess of identifiable net assets of businesses acquired,
are amortized on a straight-line basis over the expected periods to be
benefited, generally 15 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining useful life can be recovered through the undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Retirement plans: The Company maintains a noncontributory defined benefit 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. The Company also maintains a defined contribution plan under which
substantially all employees may defer a portion of their earnings on a pretax
basis, up to the allowable federal maximum. The Company may make matching and
discretionary contributions to this plan. Neither plan holds stock of the
Company in the respective portfolios.
Income taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Revenue recognition: Revenues are recognized by the Company based on the various
types of transactions generating the revenue. For equipment sales, revenue is
recognized when the sales transaction is complete. For services, revenue is
recognized when it is earned. Beginning in 2000, coinciding with the inception
of activation fees in its PCS segment, nonrefundable PCS activation fees and the
portion of the activation costs deemed to be direct costs of acquiring new
customers (primarily activation costs and credit analysis costs) are deferred
and recognized ratably over the estimated life of the customer relationship,
which is generally 30 months. The amounts of deferred revenue at December 31,
2001 and 2000 were $1.2 million and $0.4 million, respectively. The deferred
costs at December 31, 2001 and 2000 were $0.7 million and $0.3 million,
respectively.
Stock Option Plan: To account for its fixed plan stock options, the Company
applies the intrinsic value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations including Financial Accounting Standards
Board (FASB) Interpretation No. 44 "Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25" issued in
March 2000. Under
-19-
Note 1. Summary of Significant Accounting Policies (Continued)
this method, compensation expense is recorded on the date of the grant only if
the current market price of the underlying stock exceeded the exercise price.
Statements of Financial Accounting Standards (SFAS) No. 123 "Accounting for
Stock-Based Compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
Earnings per share: Basic earnings per share were computed by dividing net
income by the weighted average number of common shares outstanding during the
year. Diluted earnings per share were computed under the treasury stock method,
assuming the conversion, as of the beginning of the year, of all dilutive stock
options. In 2001 and 2000, all options were dilutive except the grants made in
2000. There were no adjustments to net income in the computation of diluted
earnings per share for any of the years presented. All stock options outstanding
for 1999 were antidilutive; therefore, basic and diluted earnings per share are
the same for that year. The following tables show the computation of basic and
diluted earnings per share for 2001, 2000 and 1999:
2001 2000 1999
-------------------------------------
Basic earnings per share
Net income $ 16,372 $ 9,855 $6,428
-------------------------------------
Weighted average shares outstanding 3,761 3,757 3,756
-------------------------------------
Basic earnings per share $ 4.35 $ 2.62 $ 1.71
=====================================
Effect of stock options outstanding:
Weighted average shares outstanding 3,761 3,757 3,756
Assumed exercise of options at strike price at
beginning of year 52 40 --
Assumed repurchase of options under treasury stock
method (39) (26) --
-------------------------------------
Diluted weighted average shares outstanding 3,774 3,771 3,756
-------------------------------------
Diluted earnings per share $ 4.34 $ 2.61 $ 1.71
=====================================
Recently Issued Accounting Standards: In June 2001, the FASB issued SFAS No.
141, "Business Combinations." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations transacted after June 30, 2001.
SFAS No. 141 also specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported separately from
goodwill. The Company adopted SFAS No.141 as of July 1, 2001, but the impact of
such adoption did not have an effect on the Company's consolidated financial
statements.
In June 2001, the FASB also issued SFAS No.142, "Goodwill and Other Intangible
Assets," which eliminates amortization of goodwill and intangible assets that
have indefinite useful lives and requires annual tests of impairment of those
assets. SFAS No. 142 also provides specific guidance about how to determine and
measure goodwill and intangible asset impairments, and requires additional
disclosures of information about goodwill and other intangible assets. The
provisions of SFAS No. 142 are required to be applied starting with fiscal years
beginning after December 15, 2001 and applied to all goodwill and other
intangible assets recognized in financial statements at that date. In connection
with SFAS No. 142 transitional goodwill impairment evaluation, the Statement
requires the Company to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To accomplish this, the
Company must identify its reporting units and determine the carrying value of
each unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company will then have six months from January 1, 2002 to determine the fair
value of each reporting unit and compare it to the carrying value of the
reporting unit. If the fair value of the reporting unit is less than the
carrying value including the reporting unit goodwill, the Company must perform a
second step of the transitional impairment test. The second step is to be
completed as soon as possible but no later than the end of the year of adoption.
In the second step, the Company must compare the implied fair value of the
reporting unit goodwill with the carrying amount of the reporting unit goodwill,
both of which would be measured as of the date of adoption. The fair value of
the goodwill is determined by allocating the fair value of the reporting unit to
all the assets (recognized and unrecognized) and the liabilities of the
reporting unit in a manner
-20-
Note 1. Summary of Significant Accounting Policies (Continued)
similar to the approach used in accordance with SFAS No. 141. The residual fair
value after this allocation is the implied fair value of the reporting unit
goodwill. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of income.
Goodwill amortization expense was $360 thousand per year for 2001, 2000 and 1999
and the unamortized goodwill as of December 31, 2001 was approximately $3.2
million. Management does not anticipate the adoption of SFAS No. 142 will
materially impact the consolidated financial statements of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from acquisition, construction, development and/or normal use of the
assets. The Company also records a corresponding asset which is depreciated over
the life of the asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS No. 143 on
January 1, 2003. The Company is currently evaluating the timing of adoption and
the effect that implementation of the new standard may have on its results of
operations and financial position.
In August 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset. SFAS
No. 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of carrying
amount or fair value less costs of sale. The Company was required to adopt SFAS
No. 144 on January 1, 2002. The adoption of SFAS No. 144 is not expected to
materially impact the Company's results of operations and financial position.
Reclassifications: Certain amounts reported in the 2000 and 1999 financial
statements have been reclassified to conform with the 2001 presentation, with no
affect on net income or shareholders' equity.
-21-
Note 2. Securities and Investments
Available-for-sale securities at December 31 consist of the following:
Gross
Gross Unrealized
Unrealized Holding Fair
Cost Holding Gains Losses Value
----------------------------------------------------------
(in thousands)
2001
-------------------------------------------------------------------------------------------------------
VeriSign, Inc. $11,798 $ -- $ -- $11,798
Deutsche Telekom, AG 85 10 -- 95
Other 74 58 -- 132
----------------------------------------------------------
$11,957 $ 68 $ -- $12,025
==========================================================
2000
-------------------------------------------------------------------------------------------------------
Loral Space and Communications, LTD $ 885 $ -- $ 406 $ 479
Illuminet Holdings, Inc. 844 9,783 -- 10,627
ITC^DeltaCom, Inc. 715 -- 381 334
Other 174 157 -- 331
----------------------------------------------------------
$ 2,618 $ 9,940 $ 787 $11,771
==========================================================
1999
-------------------------------------------------------------------------------------------------------
Loral Space and Communications, LTD $ 1,636 $ 2,019 $ -- $ 3,655
Illuminet Holdings, Inc. 844 24,658 -- 25,502
ITC^DeltaCom, Inc. 715 847 -- 1,562
----------------------------------------------------------
$ 3,195 $27,524 $ -- $30,719
==========================================================
During 2001, the Company liquidated its holdings of Loral Space and
Communications, LTD and ITC^DeltaCom, Inc. for proceeds of $0.2 million and a
realized loss of $1.4 million. Additionally, the Company sold 130,000 shares of
Illuminet Holdings, Inc. (Illuminet) for proceeds of $5.3 million and a realized
gain of $5.0 million. In September 2001, the Company was notified by Illuminet
that VeriSign, Inc. (VeriSign) made an offer to acquire Illuminet. The Company
decided to accept the VeriSign stock for the Illuminet investment. The Company
received VeriSign stock valued at $13.2 million, and based on the fair value of
the new asset received, recorded a realized gain of $12.7 million on the
transaction through net gain on investments in the other income (expense)
section of the income statement. Subsequent to the close of the transaction, the
VeriSign stock declined in value and the Company recognized an impairment of
$1.5 million, as management viewed the decline to be other than temporary.
Gross realized gains on available-for-sale securities included in income in 2001
were $17.7 million. There were none in 2000 or 1999. Gross realized losses
included in income in 2001 and 2000 were $3.0 million, $0.7 million,
respectively. There were none in 1999.
-22-
Note 2. Securities and Investments (Continued)
Changes in the unrealized gains on available-for-sale securities during the
years ended December 31, 2001, 2000, and 1999 reported as a separate component
of shareholders' equity are as follows:
2001 2000 1999
---------------------------------------
(in thousands)
Beginning Balance $ 9,153 $ 27,524 $ 1,042
Unrealized holding gains (losses) during the year, net 5,615 (19,118) 26,482
Reclassification of recognized (gain) losses
during the year, net (14,700) 747 --
---------------------------------------
68 9,153 27,524
Deferred tax effect related to net unrealized gains 26 3,508 10,482
---------------------------------------
Ending Balance $ 42 $ 5,645 $17,042
=======================================
As of December 31, other investments, comprised of equity securities, (except as
noted) which do not have readily determinable fair values, consist of the
following:
2001 2000 1999
---------------------------------------
(in thousands)
Rural Telephone Bank 796 771 653
NECA Services, Inc. 500 500 --
CoBank 768 411 202
NTC Communications (Convertible debt) 500 -- --
Concept Five Technologies -- 635 1,335
Coriss.net -- -- 250
Other 254 283 318
---------------------------------------
2,818 2,600 2,758
---------------------------------------
Equity method:
South Atlantic Venture Fund III L.P. 393 749 672
South Atlantic Private Equity Fund IV L.P. 891 1,140 822
Dolphin Communications Parallel Fund, L.P. 441 844 171
Dolphin Communications Fund II, L.P. 518 318 --
Burton Partnership 970 1,000 --
Virginia Independent Telephone Alliance 400 326 328
Virginia Rural Service Area 6 -- -- 318
ValleyNet 7 19 25
---------------------------------------
3,620 4,396 2,336
---------------------------------------
$ 6,438 $ 6,996 $ 5,094
=======================================
During 2001, the Company recognized a loss of $635 thousand on the liquidation
of Concept Five Technologies. The Company invested $357 thousand in additional
capital in CoBank as a result of its new traunch of long-term debt obtained in
2001. Additionally, the Company invested $500 thousand in NTC Communications
which provides telecommunications facilities and services to student housing
facilities near college and university campuses.
During 2000, the Company sold its limited interest in Virginia Rural Service
Area 6 Cellular Partnership for $7.4 million. As a result, the Company recorded
a one time pre-tax gain of $6.9 million on the sale.
-23-
Note 2. Securities and Investments (Continued)
The Company has committed to invest an additional $3.9 million in various equity
method investees pursuant to capital calls from the fund managers. It is not
practical to estimate the fair value of the other investments due to their
limited market and restrictive nature of their transferability.
The Company's ownership interests in Virginia Independent Telephone Alliance and
ValleyNet are approximately 22% and 20%, respectively. Other equity method
investees are investment limited partnerships which are approximately 2% owned
each.
Note 3. Plant in Service
Plant in service consists of the following at December 31:
Estimated
Useful Lives 2001 2000 1999
----------------------------------------------------------
(in thousands)
Land $ 775 $ 757 $ 578
Buildings and structures 15-40 years 20,437 18,941 11,536
Cable and wire 15-50 years 45,188 41,668 41,240
Equipment 5-16.6 years 93,925 61,384 46,468
-------------------------------------
$160,325 $122,750 $99,822
=====================================
Note 4. Long-Term Debt and Revolving Lines of Credit
Total debt consists of the following at December 31:
Weighted
Average
Interest Rate 2001 2000 1999
----------------------------------------------------------
(in thousands)
Rural Telephone Bank (RTB) Fixed 6.74% $ 11,428 $ 11,634 $ 9,814
Rural Utilities Service (RUS) Fixed 4.17% 224 295 382
CoBank (term portion) Fixed 7.58% 44,584 23,637 22,634
CoBank 2-year (revolver) Variable 5.14%-7.75% -- 19,721 --
RUS Development Loan interest free 200 200 200
-------------------------------------
56,436 55,487 33,030
Current maturities 4,387 2,403 1,341
-------------------------------------
Total long-term debt $ 52,049 $ 53,084 $31,689
=====================================
CoBank 1-year Revolver Variable 3.37%-5.03% $ 6,200 $ -- $ --
=====================================
The RTB loans are payable $70 thousand monthly and $225 thousand quarterly,
including interest. RUS loans are payable $24 thousand monthly, including
interest. The RUS and RTB loan facilities have maturities through 2019. The
CoBank term facility requires monthly payments of $600 thousand, including
interest. The final maturity of the CoBank facility is 2013.
The CoBank revolver is a $35.0 million facility expiring on June 30, 2002, with
interest due monthly. The Company is evaluating financing alternatives in
relation to this revolver facility, including converting portions of the
revolver into a long-term financing facility, or establishing a new revolver for
the future. At December 31, 2001 the balance outstanding was $6.2 million, with
$28.8 million available on the facility. The Company is required to pay a
commitment fee of 12.5 basis points (annual rate) multiplied by the unused
balance of the facility at each month end.
-24-
Note 4. Long-Term Debt and Revolving Lines of Credit (Continued)
The aggregate maturities of long-term debt for each of the five years subsequent
to December 31, 2001 are as follows:
Year Amount
---- ---------
2002 $ 4,387
2003 4,482
2004 4,643
2005 4,816
2006 5,006
Later years 33,102
---------
$ 56,436
=========
Substantially all of the Company's assets serve as collateral for the long-term
debt. The long-term debt agreements have certain financial and capital measures
that the Company must maintain. These requirements include maintenance of
defined working capital levels, restrictions on dividends and capital stock
repurchases. The covenants also require the Company to maintain certain levels
of debt service coverage to be in compliance with the loan agreements. The
Company was in compliance with all financial requirements of the loan agreements
as of December 31, 2001.
The estimated fair value of fixed rate debt instruments as of December 31, 2001
and 2000 was $57.1 million and $36.2 million, respectively, determined by
discounting the future cash flows of each instrument at rates offered for
similar debt instruments of comparable maturities as of the respective year end
dates.
As of December 31, 2001, the Company had a $2.0 million revolving line of credit
available from a bank. The Company accesses this facility for short term
variations in liquidity, and anticipates renewing this facility before it
expires in June 2002. There are no commitment fees related to this facility.
There was no balance outstanding as of December 31, 2001.
All other financial instruments presented on the consolidated balance sheets
approximate fair value. They include, cash and cash equivalents, receivables,
prepaid expenses, other assets, investments, payables, and accrued liabilities.
Note 5. Income Taxes
Total income taxes for the years ended December 31, 2001, 2000 and 1999 were
allocated as follows:
2001 2000 1999
----------------------------------------
(in thousands)
Income from continuing operations $ 9,961 $ 5,994 $ 3,797
Accumulated other comprehensive income for unrealized
holding gains on equity securities (3,482) (6,974) 10,079
----------------------------------------
$ 6,479 $ (980) $136,876
========================================
-25-
Note 5. Income Taxes (Continued)
The Company and its subsidiaries file income tax returns in several
jurisdictions. The provision for the federal and state income taxes included in
the consolidated statements of income consists of the following components:
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------------------------------------
(in thousands)
Current provision
Federal taxes $ 1,091 $ 4,870 $ 3,835
State taxes 204 994 720
------------------------------------------
Total current provision 1,295 5,864 4,555
Deferred provision
Federal taxes 7,296 108 (636)
State taxes 1,370 22 (122)
------------------------------------------
Total deferred provision 8,666 130 (758)
------------------------------------------
Income tax provision $ 9,961 $ 5,994 $ 3,797
==========================================
A reconciliation of income taxes determined by applying the U.S. Federal tax
rate of 34% to pretax income is as follows:
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------------------------------------
(in thousands)
Computed "expected" tax expense $ 8,953 $ 5,389 $ 3,477
State income taxes, net of federal tax benefit 525 405 1,043
Other, net (35) 80 (85)
------------------------------------------
Income tax provision $ 9,961 $ 5,994 $ 3,797
==========================================
Net deferred tax liabilities consist of the following at December 31:
2001 2000 1999
------------------------------------------
(in thousands)
Deferred tax assets:
Recognized investment impairment losses $ -- $ 658 $ --
Accrued compensation costs 149 136 136
Accrued pension costs 397 367 361
Other, net 426 215 --
------------------------------------------
972 1,376 497
Deferred tax liabilities:
Plant-in-service 11,313 7,086 6,063
Unrealized gain on investments 26 3,508 10,482
Recognized gain on investments, net 4,035 -- --
Other, net -- -- 14
------------------------------------------
15,374 10,594 16,559
------------------------------------------
Net deferred tax liabilities $ 14,402 $ 9,218 $ 16,062
==========================================
-26-
Note 5. Income Taxes (Continued)
In assessing the ability to realize deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
Note 6. Significant Contractual Relationship
In 1999, the Company executed a Management Agreement (the "Agreement") with
Sprint PCS ("Sprint") whereby the Company committed to construct and operate a
PCS network using CDMA air interface technology, replacing an earlier PCS
network based on GSM technology. Under this Agreement, the Company is the
exclusive Sprint PCS Network Partner providing wireless mobility communications
network products and services in its territory which extends from Altoona,
Harrisburg and York, Pennsylvania, south through Western Maryland, and the
panhandle of West Virginia, to Harrisonburg, Virginia. The Company is authorized
to use the Sprint brand name in its territory, and operate its network under the
Sprint radio spectrum license.
As a Sprint PCS Network Partner, the Company has the exclusive right to build,
own and maintain its portion of Sprint's nationwide PCS network in the
aforementioned areas, to Sprint's specifications. The initial term of the
agreement is for 20 years and is automatically renewable for three 10-year
options, unless terminated by either party under provisions outlined in the
Agreement. The Company complied with its network contractual build-out
obligations in 2001, and currently projects to spend $18 million in 2002 to
expand and improve the network and to provide appropriate 3G technology service
to its subscribers.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out and enhancement of Sprint's nationwide PCS network. The Company's PCS
subsidiary's continued operations are dependent upon Sprint's ability to execute
certain functions like billing, customer care, collections and other operating
activities under the Company's Sprint Agreements. Additionally, the Company's
ability to attract and maintain a sufficient customer base is critical to
maintaining a positive cash flow from operations. Changes in technology,
increased competition, or economic conditions, individually and or collectively,
could have an adverse effect on the Company's financial position and results of
operations.
Sprint retains 8% of all collected service revenue from subscribers with their
service home in the Company's territory. Additionally, Sprint retains 8% of the
roaming revenue generated by non-Sprint wireless subscribers who use the
Company's network.
The Company receives and pays travel fees for inter-market usage of the network
by Sprint wireless subscribers not homed in a market in which they may use the
service. Sprint and its affiliates pay the Company for the use of its network by
their wireless subscribers, while the Company pays Sprint and its affiliates
reciprocal fees for Company subscribers using other segments of the network not
operated by the Company. The rates paid on inter-market travel have been reduced
during 2001 from $0.20 per minute through April 30, 2001, $0.15 through
September 30, 2001, and $0.12 through December 31, 2001 to $0.10 per minute as
of January 1, 2002. The $0.10 rate will apply for the full year of 2002, with
future travel rates yet to be determined.
As part of the Agreement executed in 1999, the Company received $3.9 million
from Sprint as an advance payment for the Company's expenditures in building the
initial CDMA network. These funds were recorded as a refundable equipment
payment to be repaid following the sale of the Company's original GSM PCS
network assets. In January 2001, the Company sold its GSM network assets to
VoiceStream and its affiliates for $6.5 million which equaled the carrying value
of the assets. The transaction included the GSM equipment and the radio spectrum
licenses for two areas in the western part of Virginia. As a result of the sale
of the assets, and per the Agreement, the Company refunded the $3.9 million
payment to Sprint in early 2001.
-27-
Note 7. Related Party Transactions
ValleyNet, an equity method investee of the Company, resells capacity on the
Company's fiber network under an operating lease agreement. Facility lease
revenue from ValleyNet was approximately $4.1 million, $3.1 million, and $1.6
million in 2001, 2000, and 1999, respectively. At December 31, 2001, the Company
had accounts receivable from ValleyNet of approximately $0.4 million.
Several of the Company's operating subsidiaries lease capacity through ValleyNet
fiber facilities. These subsidiaries include the PCS and Mobile Companies.
Payment for usage of these facilities was $1.2 million in 2001, $0.7 million in
2000, and $0.2 million in 1999 for the PCS Company. The Mobile Company similarly
incurred costs of $13 thousand in 2001, $13 thousand in 2000, and $8 thousand in
1999.
Note 8. Retirement Plans
The Company maintains a noncontributory defined benefit pension plan and a
separate defined contribution plan. The following table presents the defined
benefit plan's funded status and amounts recognized in the Company's
consolidated balance sheets.
2001 2000 1999
------------------------------------------
Change in benefit obligation: (in thousands)
Benefit obligation, beginning $ 6,847 $ 6,004 $ 6,434
Service cost 313 277 321
Interest cost 507 460 429
Actuarial (gain) loss 1,054 95 (1,032)
Benefits paid (183) (160) (148)
Change in plan provisions -- 171 --
------------------------------------------
Benefit obligation, ending 8,538 6,847 6,004
------------------------------------------
Change in plan assets:
Fair value of plan assets, beginning 8,081 7,967 6,875
Actual return on plan assets (523) 274 1,241
Benefits paid (183) (160) (149)
------------------------------------------
Fair value of plan assets, ending 7,375 8,081 7,967
------------------------------------------
Funded status (1,163) 1,234 1,963
Unrecognized net gain (124) (2,442) (3,035)
Unrecognized prior service cost 315 346 196
Unrecognized net transition asset (67) (96) (124)
------------------------------------------
Accrued benefit cost $(1,039) $ (958) $(1,000)
==========================================
2001 2000 1999
------------------------------------------
Components of net periodic benefit costs: (in thousands)
Service cost $ 313 $ 277 $ 321
Interest cost 507 460 429
Expected return on plan assets (640) (632) (544)
Amortization of prior service costs 31 21 21
Amortization of net gain (102) (140) (39)
Amortization of net transition asset (29) (29) (28)
------------------------------------------
Net periodic benefit cost $ 80 $ (43) $ 160
==========================================
-28-
Note 8. Retirement Plans (Continued)
Weighted average assumptions used by the Company in the determination of pension
plan information consisted of the following at December 31:
2001 2000 1999
---------------------------------
Discount rate 7.00% 7.50% 7.75%
Rate of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
The Company's matching contributions to the defined contribution plan were
approximately $182 thousand, $162 thousand and $144 thousand for the years ended
December 31, 2001, 2000 and 1999, respectively.
Note 9. Stock Incentive Plan
The Company has a shareholder approved Company Stock Incentive Plan (the
"Plan"), providing for the grant of incentive compensation to employees in the
form of stock options. The Plan authorizes grants of options to purchase up to
240,000 shares of common stock over a ten-year period beginning in 1997. The
option price is the average of the market for the five days preceding the date
of grant. Grants have been made in which one-half of the options are exercisable
on each of the first and second anniversaries of the date of grant, with the
options expiring five years after they are granted.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2001 2000 1999
---------------------------------
Dividend rate 1.78% 2.05% 1.70%
Risk-free interest rate 4.31% 6.81% 4.77%
Expected lives of options 5 years 5 years 5 years
Price volatility 38.29% 52.51% 26.20%
Grants of options under the Plan are accounted for following the APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense has been
recognized under the Plan. Had compensation expense been recorded, as determined
based on fair values of the awards at the grant date (the method described in
SFAS No. 123), reported net income and earnings per share would have been
reduced to the pro forma amounts shown below:
2001 2000 1999
-------------------------------------------------
Net income (in thousands, except per share amounts)
As reported $ 16,372 $ 9,855 $ 6,428
Pro forma $ 16,254 $ 9,655 $ 6,281
Earnings per share, basic and diluted
As reported, basic $ 4.35 $ 2.62 $ 1.71
As reported, diluted $ 4.34 $ 2.61 $ 1.71
Pro forma, basic $ 4.32 $ 2.57 $ 1.67
Pro forma, diluted $ 4.31 $ 2.56 $ 1.67
-29-
Note 9. Stock Incentive Plan (Continued)
A summary of the status of the Plan at December 31, 2001, 2000 and 1999 and
changes during the years ended on those dates is as follows:
Weighted
Average
Grant Price Fair Value
Shares Per Share Per Share
----------------------------------------------
Outstanding January 1, 1999 27,782 $ 21.23
Granted 17,578 19.94 15.40
Cancelled (1,303) 20.70
-------
Outstanding December 31, 1999 44,057 20.73
Granted 19,191 34.37 14.19
Cancelled (1,160) 28.74
Exercised (3,527) 21.47
-------
Outstanding December 31, 2000 58,561 25.00
Granted 19,969 31.58 16.12
Cancelled (3,290) 29.72
Exercised (6,213) 21.43
-------
Outstanding December 31, 2001 69,027 27.01
=======
There were 41,731, 31,945 and 19,708 shares exercisable at December 31, 2001,
2000 and 1999, at weighted average exercise prices per share of $23.43, $20.88
and $21.47, respectively.
The following table summarizes information about stock options outstanding at
December 31, 2001:
Exercise Shares Option Life Shares
Prices Outstanding Remaining Exercisable
----------------------------------------------------
$ 21.98 7,020 1 year 7,020
20.59 12,079 2 years 12,079
19.94 13,973 3 years 13,973
34.37 16,969 4 years 8,456
31.58 18,986 5 years --
-30-
Note 10. Major Customers
The Company has several major customers. In 2001, the Company's relationship
with Sprint continued to increase significantly, due to growth in the PCS
business segment. Approximately 35.1% of total revenues were generated through
Sprint and its customers using the Company's portion of Sprint's nationwide PCS
network. This was compared to 19.1% of total revenue in 2000. A roaming partner
of the Company's cellular business segment accounted for 13.1% of total revenue
in 2001 for roaming revenue, compared to 11.6% generated in 2000, through the
cellular operation of the Mobile subsidiary. As a result of the growth in total
revenues, carrier access charges to long distance carriers for use of the
telephone subsidiary's network, which historically was a source of revenue
concentrated in a few customers, became less significant in 2001. In 2001, the
largest carrier access billing customer was 3.7% of total revenues, compared to
2000 when a single customer generated 8% of total revenue.
Note 11. Shareholder Rights
The Board of Directors adopted a Shareholder Rights Plan in 1998, whereby, under
certain circumstances, holders of each right (granted in 1998 at one right per
share of outstanding stock) will be entitled to purchase $80 worth of the
Company's common stock for $40. The rights are neither exercisable nor traded
separately from the Company's common stock. The rights are only exercisable if a
person or group becomes or attempts to become, the beneficial owner of 15% or
more of the Company's common stock. Under the terms of the Plan, such a person
or group is not entitled to the benefits of the Rights.
Note 12. Lease Commitments
The Company leases land, towers and tower space under various non-cancelable
agreements, which expire between 2002 and 2006 and require various minimum
annual rental payments. The leases generally contain certain renewal options for
periods ranging from 5 to 20 years.
Future minimum lease payments under non-cancelable operating leases with initial
variable lease terms in excess of one year as of December 31, 2001 are as
follows:
Year
Ending Amount
-----------------------
(in thousands)
2002 $ 1,895
2003 1,774
2004 1,483
2005 971
2006 527
-------
$ 6,650
=======
The Company's total rent expense for each of the previous three years was $2.5
million in 2001, $1.2 million in 2000, and $0.6 million in 1999.
-31-
Note 12. Lease Commitments (Continued)
As lessor, the Company has leased towers, tower space and communications
equipment to other entities under various non-cancelable agreements, which
require various minimum annual payments. The Company records lease revenue as
revenue on the Income Statement based on the business unit in which it is
generated. The total minimum rental receipts at December 31, 2001 are as
follows:
Year
Ending Amount
--------------------
(thousands)
2002 $ 1,885
2003 1,867
2004 1,759
2005 1,600
2006 428
-------
$ 7,539
=======
Note 13. Quarterly Results (unaudited)
The following table shows selected quarterly results for the Company.
In thousands except for per share data
For the year ended December 31, 2001 First Second Third Fourth Total
-------------------------------------------------------------------------------
Revenues (a) $ 17,833 $ 21,281 $ 24,545 $ 25,056 $88,715
Operating income 3,898 5,075 6,369 6,420 21,762
Net income (b) $ 489 $ 1,996 $ 2,094 $ 11,793 $16,372
Earnings per share - basic $ 0.13 $ 0.53 $ 0.56 $ 3.13 $ 4.35
Earnings per share - diluted 0.13 0.53 0.55 3.12 4.34
Closing Stock price High $ 34.50 $ 31.50 $ 40.03 $ 40.90
Low 29.88 28.00 27.50 32.70
For the year ended December 31, 2000 First Second Third Fourth Total
-------------------------------------------------------------------------------
Revenues (a) $ 13,397 $ 14,501 $ 16,387 $ 16,194 $60,479
Operating income 3,899 3,750 4,583 3,954 16,186
Net income (c) $ 2,028 $ 5,860 $ 1,932 $ 36 $ 9,855
Earnings per share - basic $ 0.54 $ 1.56 $ 0.50 $ 0.01 $ 2.62
Earnings per share - diluted 0.54 1.56 0.50 0.01 2.61
Closing Stock price High $ 55.00 $ 42.75 $ 46.00 $ 38.13
Low 32.00 28.00 30.50 32.00
(a) Certain costs previously netted with revenues have been reclassified to
selling, general and administrative expenses.
(b) Fourth quarter results of 2001 include the gain of $12.7 million on the
exchange of the Illuminet stock for VeriSign stock as a result of their
merger.
(c) Second quarter results of 2000 include the $7.4 million gain on the sale of
the Company's interest in the Virginia RSA 6 partnership.
Per share earnings may not add to the full year values as each per share
calculation stands on its own.
-32-
Note 14. Segment Reporting
The Company has identified nine reporting segments based on the products and
services each provide. Each segment is managed and evaluated separately because
of differing technologies and marketing strategies.
The reporting segments and the nature of their activities are as follows:
Shenandoah Telecommunications Company (Holding) Holding company which invests in both
companies. affiliated and non-affiliated
Shenandoah Telephone Company (Telephone) Provides both regulated and unregulated
telephone services and leases fiber
optic facilities primarily throughout
the Northern Shenandoah Valley.
Shenandoah Cable Television Company (CATV) Provides cable television service in
Shenandoah County.
ShenTel Service Company (ShenTel) Sells and services telecommunications
equipment and provides Internet access
to customers in the multistate region
surrounding the Northern Shenandoah
Valley.
Shenandoah Valley Leasing Company (Leasing) Finances purchases of
telecommunications equipment to
customers of other segments.
Shenandoah Mobile Company (Mobile) Provides paging and cellular services
throughout the Northern Shenandoah
Valley, and tower rental in the PCS
territory.
Shenandoah Long Distance Company (Long Distance) Provides long distance services.
Shenandoah Network Company (Network) Leases interstate fiber optic facilities.
Shenandoah Personal Communications Company (PCS) Provides digital wireless service as a
Sprint PCS network partner to a
four-state area covering the region
from Harrisburg and Altoona,
Pennsylvania, to Harrisonburg,
Virginia.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Performance is evaluated based on
the net income of each company, less dividend income from other segments. Each
segment accounts for intersegment sales and transfers as if the sales or
transfers were to outside parties.
Income (loss) recognized from equity method nonaffiliated investees by segment
is as follows:
Consolidated
Year Holding Telephone Mobile Totals
------------------------------------------------------------------
(in thousands)
2001 $(1,218) $104 $ -- $(1,114)
2000 554 126 87 767
1999 540 394 220 1,154
-33-
Note 14. Segment Reporting (Continued)
Selected financial data for each segment is as follows:
Holding Telco CATV ShenTel Leasing
---------------------------------------------------------------------------
Operating revenues - external: (in thousands)
2001 $ -- $21,599 $ 3,792 $ 5,078 $ 25
2000 -- 19,146 3,620 5,017 18
1999 -- 16,568 3,397 3,576 11
===========================================================================
Operating revenues - internal:
2001 $ -- $ 2,532 $ 2 $ 362 $ --
2000 -- 2,362 2 220 --
1999 -- 2,005 2 236 --
===========================================================================
Depreciation and amortization:
2001 $ 196 $ 3,609 $ 1,354 $ 472 $ --
2000 196 3,296 1,009 473 --
1999 123 3,170 906 355 --
===========================================================================
Nonoperating income less expenses:
2001 $ 3,804 $ 646 $ (184) $ (36) $ 1
2000 1,385 2,209 (14) (15) 3
1999 634 2,029 3 1 4
===========================================================================
Interest expense:
2001 $ 2,664 $ 1,428 $ 690 $ 237 $ --
2000 503 2,602 705 287 --
1999 -- 1,943 759 196 --
===========================================================================
Income tax expense (benefit):
2001 $ 5,117 $ 4,373 $ (312) $ (32) $ 4
2000 (374) 3,523 (126) (76) (4)
1999 360 3,420 (124) (199) (12)
===========================================================================
Net income:
2001 $ 8,463 $ 7,167 $ (509) $ (73) $ 7
2000 (521) 6,420 (169) (127) 13
1999 587 5,751 (203) (295) 20
===========================================================================
Total assets:
2001 $ 110,447 $55,942 $ 11,466 $ 5,359 $ 254
2000 65,667 77,542 12,193 5,076 300
1999 55,234 71,423 11,415 4,128 301
===========================================================================
EBITDA:
2001 $ 16,440 $16,577 $ 1,223 $ 604 $ 11
2000 (269) 15,715 1,316 439 9
1999 947 11,114 432 (298) 8
===========================================================================
EBITDA is calculated as net income plus income tax expense (benefit), interest
expenses, and depreciation and amortization expenses.
-34-
Long Combined Eliminating Consolidated
Mobile Distance Network PCS Totals Entries Totals
- -----------------------------------------------------------------------------------------------------------
(in thousands)
$22,123 $1,114 $ 963 $ 34,021 $ 88,715 $ -- $ 88,715
17,071 1,079 635 13,893 60,479 -- 60,479
13,441 1,058 610 3,673 42,334 -- 42,334
===========================================================================================================
$ 535 $ 679 $ 109 $ 17 $ 4,236 $ (4,236) $ --
892 378 192 30 4,076 (4,076) --
552 334 133 16 3,278 (3,278) --
===========================================================================================================
$ 1,098 $ -- $ 114 $ 4,991 $ 11,834 $ -- $ 11,834
965 -- 148 1,231 7,318 -- 7,318
873 -- 124 1,161 6,712 -- 6,712
===========================================================================================================
$ 108 $ 2 $ -- $ 50 $ 4,391 $ (4,110) $ 281
153 2 6 (670) 3,059 (2,983) 76
311 3 14 14 3,014 (1,971) 1,043
===========================================================================================================
$ 87 $ -- $ -- $ 3,131 $ 8,237 $ (4,110) $ 4,127
71 -- -- 1,751 5,919 (2,983) 2,936
184 -- -- 840 3,922 (1,971) 1,951
===========================================================================================================
$ 3,636 $ 223 $ 313 $ (3,361) $ 9,961 $ -- $ 9,961
5,437 104 228 (2,718) 5,994 -- 5,994
1,597 129 198 (1,572) 3,797 -- 3,797
===========================================================================================================
$ 5,931 $ 364 $ 511 $ (5,489) $ 16,372 $ -- $ 16,372
7,990 169 339 (4,259) 9,855 -- 9,855
2,606 211 324 (2,573) 6,428 -- 6,428
===========================================================================================================
$15,273 $ 22 $1,005 $ 61,530 $261,298 $(94,501) $166,797
18,286 238 1,199 45,142 225,643 (73,350) 152,293
15,631 264 1,145 15,820 175,361 (41,717) 133,644
===========================================================================================================
$10,752 $ 587 $ 938 $ (728) $ 46,404 $ (4,110) $ 42,294
14,371 273 691 (4,065) 28,480 (2,983) 25,497
4,387 340 522 (3,305) 14,147 (1,971) 12,176
===========================================================================================================
-35-
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The statements contained in this Annual Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including statements regarding our expectations, hopes, intentions, or
strategies regarding the future. 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.
General
Shenandoah Telecommunications Company and subsidiaries (the Company) is a
diversified telecommunications company providing both regulated and unregulated
telecommunications services through its nine wholly owned subsidiaries. These
subsidiaries provide local exchange telephone services, wireless personal
communications services (PCS), as well as cable television, cellular telephone,
paging, Internet access, long distance, fiber optics facilities, and leased
tower facilities. The Company is the exclusive provider of wireless mobility
communications network products and services under the Sprint brand from
Harrisonburg, Virginia to Harrisburg, York and Altoona, Pennsylvania. The
Company refers to the Hagerstown, Maryland, Martinsburg, West Virginia, and
Harrisonburg and Winchester, Virginia markets as its Quad State region. The
Company refers to the Altoona, Harrisburg, and York, Pennsylvania markets as its
Central Penn region. Competitive local exchange carrier (CLEC) services are now
being established on a limited basis. In addition, the Company sells and leases
equipment, mainly related to services it provides, and also participates in
emerging services and technologies by direct investment in non-affiliated
companies.
To better conform to industry standards, the Company has adopted the approach of
reporting revenues as wireline, wireless and other revenues. These revenue
classifications are defined as follows: Wireless revenues are made up of the
Sprint PCS (Personal Communications Service) Company, the Mobile Company, and
within the Mobile Company the revenues of the cellular operation. Wireline
revenues include the following subsidiary revenues in the financial results:
Telephone Company, Network Company, Cable Television Company, and the Long
Distance Company. Other revenues are comprised of the revenues of ShenTel
Service Company, the Leasing Company, and the Holding Company. The Company has
reclassified prior period results to reflect this change.
Over the past five years the Company has made significant investments in
upgrading and adding equipment to provide up-to-date services to its customers
in an increasingly dynamic and competitive telecommunications industry. The
Company's gross plant investment, inclusive of plant under construction,
increased from $70.8 million at year-end 1996 to $175.3 million at the end of
2001. This increase reflects the Company's continuing expansion of its
operations from its historical roots in Shenandoah County, Virginia to portions
of West Virginia, Maryland and Pennsylvania, principally along the Interstate 81
corridor. Recent expansion has been most extensive in the wireless operations of
the business, particularly the PCS segment. Through this expansion the Company
has completed the contractual obligations it had regarding its territory
build-out under its Sprint affiliation.
With the expansion and growth of the Company's wireless businesses through its
Sprint PCS and cellular operations, a smaller percentage of the Company's total
revenue has been generated by its wireline operations. In 1996, 67.1% of the
Company's total revenue was generated by the wireline operations, while in 2001
those operations contributed 31.0% of total revenue. The Company expanded its
Sprint PCS operations with additional investments in 2001, opening three retail
stores and activating 100 base stations in the Central Penn region, and
activating an additional 26 base stations in the Quad State region. As a result
of the Company's increased
-36-
marketing and sales efforts, and its expansion into new markets, the Company
experienced accelerated growth in Sprint PCS revenues and customers, and a
continued shift in its historical revenue mix. Revenue sources for 2001 were as
follows: $56.1 million or 63.3% from wireless revenues, $27.5 million or 31.0%
from wireline operations, and $5.1 million or 5.7% from other revenue.
The Company's strategy is to continue to expand services and geographic coverage
areas where it is economically feasible. The expanded market area of the Sprint
PCS operation increased the Company's covered populations from approximately 400
thousand persons in late 1999, to over 1.0 million as of mid-February 2001, and
1.4 million by December 31, 2001. As a Sprint PCS Network Partner, the Company
markets a nationally branded service associated with over 15 million nationwide
Sprint wireless customers at the end of 2001.
Results of Operations
2001 compared to 2000
Total revenue was $88.7 million in 2001, an increase of $28.2 million or 47%.
Total revenues included $56.1 million of wireless revenues, an increase of $25.2
million or 81.3%; wireline revenues of $27.5 million, an increase of $3.0
million or 12.2%; and, other revenues of $5.1 million, an increase of $0.1
million or 1.4%.
Within wireless revenues, the PCS operation contributed $34.5 million, an
increase of $20.1 million. PCS service revenues were $19.4 million, an increase
of $10.4 million or 115.6%. These revenues were driven by the increased
subscriber base, which totaled 48,914 at December 31, 2001, an increase of
25,682 or 110.6% compared to 23,232 subscribers at year-end 2000. The subscriber
increase is attributed to expanded sales and marketing efforts starting with the
February 2001 launch of the Central Penn market, as well as continued strong
demand for services in the Quad State markets.
PCS travel revenue, which is compensation between Sprint and its affiliates for
use of the other party's network, was $13.6 million, an increase of $9.5 million
or 231.5%. Travel revenue is impacted by the geographic size of the Company's
network service area, the overall number of Sprint wireless customers, and the
travel exchange rate. The Sprint PCS operation service area increased
substantially with the February 2001 launch of the Central Penn markets and
continued enhancements to the Quad State markets. Wireless subscribers of Sprint
and its affiliates grew by approximately 5.2 million during 2001. The rates paid
on travel have been declining, from $0.20 per minute through April 30, 2001;
$0.15 through September 30, 2001; $0.12 through December 31, 2001; and ending at
$0.10 per minute as of January 1, 2002. The $0.10 rate will apply for the full
year of 2002, with future travel rates yet to be determined.
PCS equipment sales were $1.5 million, an increase of $0.6 million or 64.9%.
Three additional retail stores were opened in the Central Penn region, and the
overall sales force was increased in size during the year.
The Company's Sprint PCS service was extended to Altoona, Pennsylvania in late
2001. The Altoona market launch and planned enhancements on the other existing
sections of the network are expected to have a positive impact on travel use and
support continued subscriber growth in 2002. There are no significant additions
to coverage planned during 2002, although investments will continue to be made
for capacity and service improvements.
In accordance with Sprint's requirements, the Company is scheduled to launch
third generation (3G 1X) service in mid-2002. 3G 1X is the first of a four-stage
migration path that will enable additional voice capacity and increased data
speeds for subscribers. The network upgrades are comprised of software changes,
channel card upgrades, and some new network elements for packet data. The
Company's existing base stations are compatible with the network card
enhancements, thereby allowing the Company to provide 3G 1X service without
wholesale changeouts of base stations. 3G 1X is backwards compatible with the
existing 2G network, thereby allowing continued use of current customer
handsets. The impact of 3G 1X on revenues cannot be estimated at this time.
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The analog cellular operation contributed $20.0 million to wireless revenues, an
increase of $3.9 million or 24.6%. Roaming revenues, generated from use of our
cellular network by customers of other providers, were $16.1 million, an
increase of $4.4 million or 37.9%. Cellular local service revenues were $3.2
million, a decrease of $0.3 million or 7.7%, as the cellular operation's
customer base declined 12.9% to 9,440.
Tower leases added $1.7 million to wireless revenues, an increase of $1.2
million or 227.9%. The increase was a result of other wireless carriers
executing additional leases to use space on the Company's portfolio of towers.
Of the 70 towers owned by the Company, 41 have space leased to other carriers.
Wireless revenues from the Company's paging operation were $0.4 million, a
decrease of $0.1 million as the local customer base increasingly chose
competing, digital wireless services. Paging service subscribers declined by
33.3% in 2001.
Within wireline revenues, the Telephone Company contributed $21.6 million, an
increase of $2.5 million, or 12.8%. Telephone access revenues were $9.6 million,
an increase of $1.4 million or 16.4%. The growth in access revenues was driven
by a 7.4% increase in access minutes of use on the Company's network and an
increased percentage of minutes in the intrastate jurisdiction, where rates are
higher than the interstate jurisdiction. Access revenues will be impacted in
2002, due to the January 1, 2002 increase of the Federal subscriber line charge
(SLC) for residential customers from $3.50 to $5.00 per month. The SLC is
scheduled to increase again on July 1, 2002 to $6.00. Comparable rate increases
are also scheduled for business subscribers. Tied to these SLC rate increases
are offsetting declines in rates charged to interexchange carriers for
interstate minutes of use. Management expects overall access revenues to change
only slightly in 2002, as changes in network usage are expected to balance the
changes in rates.
Facility lease revenue contributed $6.6 million to wireline revenues, an
increase of $1.4 million or 26.9%. During 2001 the Company started constructing
a second, diverse fiber route to its existing interconnecting point in the
Dulles airport area of Northern Virginia. The construction will provide an
increased level of security in the event of fiber cuts or breaks, and extend the
availability of the Company's fiber network to additional market locations.
Project completion is expected in early 2002.
Billing and collection services contributed $0.4 million to wireline revenues, a
decrease of $0.1 million or 23.2%. Revenues from this source have been and are
expected to continue declining, as interexchange carriers issue a greater
proportion of their bills directly to their customers.
Wireline revenues from cable television service were $3.8 million, an increase
of $0.2 million or 4.8%. During 2001 there was an increased penetration of
digital services and increased pay per view sales. The Company enacted a basic
service rate increase effective in December 2001, which should increase cable
television revenues by approximately $0.4 million annually, based on the
year-end 2001 customer base.
Within other revenues, Internet service revenues were $3.9 million, an increase
of $0.9 million or 28.3%. The Company had 17,423 Internet subscribers at
December 31, 2001 compared to 14,900 at the end of the previous year. Services
provided to the Travel Shenandoah and 511Virginia programs contributed $0.3
million to other revenues, an increase of $0.2 million. Telephone equipment
sales revenues were $0.6 million, a decrease of $0.8 million, or 54.1%, due to
decreased sales of larger telephone systems and equipment.
Total operating expenses were $67.0 million, an increase of $22.7 million or
51.2%. The expansion of the PCS operation was principally responsible for the
change.
Cost of goods and services was $7.6 million, an increase of $1.5 million or
25.3%. The PCS cost of goods sold was $5.5 million, an increase of $2.1 million
or 63.2%. This change is due primarily to higher volumes of handsets sold
through Company owned stores and PCS handset subsidies paid to third-party
retailers. The cable television royalty (cost of service) expense was $1.3
million, an increase of $0.2 million or 13.4%. The cost of
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goods sold for telephone system equipment was $0.5 million, a decline of $0.6
million or 56.2%, while other cost of goods sold decreased by $0.2 million.
Network operating costs were $29.9 million, an increase of $11.5 million or
62.1%. Line and switching costs were $10.0 million, an increase of $3.0 million
or 43.6%, due principally to the expanded PCS network. Travel expense, generated
by the Company's PCS subscribers' use of minutes on other providers' portions of
the Sprint PCS network, was $9.9 million, an increase of $6.1 million or 159.0%.
Rates for travel expense are the same as those for travel revenue. Due in large
part to operation and maintenance of the additional plant placed in service in
recent years, plant specific costs were $7.3 million, an increase of $1.9
million or 36.0%. Tower, building, and land rentals, as well as PCS equipment
maintenance, were major contributors to the plant specific expense growth. Other
network costs such as power, network administration, and engineering, were $2.7
million, an increase of $0.5 million or 23.6%.
Depreciation and amortization expense was $11.8 million, an increase of $4.5
million or 61.7%. The PCS operation had depreciation expense of $5.0 million, an
increase of $3.6 million or 270.4%. The PCS switch was placed in service in
February 2001, and 126 additional PCS base stations were activated and three
retail stores were opened during the year. Amortization expense in the cable
television operation was $0.7 million, an increase of $0.3 million due to
additional amortization on certain intangible assets.
Selling, general and administrative expenses were $17.6 million, growing $5.1
million or 41.3%. Customer support costs were $5.4 million, an increase of $1.1
million or 26.4%. The growth in Sprint PCS subscribers is primarily responsible
for this change. Advertising expense was $2.8 million, an increase of $1.9
million or 198.3%. The change is primarily attributed to the increased marketing
efforts in support of the launch of the Harrisburg and York, Pennsylvania PCS
markets. PCS sales staff expenses were $2.1 million, an increase of $1.3 million
or 157.4%. The increase was principally due to the opening of three retail
locations and the additional staff to support the increased market area. An
additional expense category related to the growth in PCS subscribers is bad debt
expense, which reached $1.3 million, increasing $0.5 million or 70.6%.
Operating income grew to $21.8 million, an increase of $5.6 million or 34.4%.
Increased revenues, primarily in the wireless operations, were greater than the
increase in operating expenses, although the overall operating margin declined
to 24.5%, compared to 26.8% in 2000.
Other income (expense) is comprised of non-operating income and expenses,
interest expense and gain or loss on investments. Collectively, the net
contribution of these items to pre-tax income was $9.1 million, an increase of
$6.4 million or 231.8%. The largest component was a non-cash gain on investments
that is discussed below.
Non-operating income was $0.3 million, an increase of $0.2 million, primarily
due to an increase in patronage equity earned from CoBank, the Company's primary
lender.
Interest expense was $4.1 million, an increase of $1.2 million or 40.6%. The
Company's average debt outstanding was greater during the year as compared to
the previous year. Long-term debt (inclusive of current maturities), was $56.4
million at year-end 2001, versus $55.5 million at year-end 2000. The Company
secured long-term fixed rate financing in June 2001, on funds previously
borrowed under a variable rate revolver facility.
Net gain on investments was $12.9 million, an increase of $7.3 million or
131.0%. Results include the $12.7 million non-cash gain recognized as a result
of the merger between Illuminet Holdings, Inc. (Illuminet) and VeriSign, Inc.
(VeriSign). The Company's recognition of the gain on the exchange of Illuminet
shares for VeriSign shares was in accordance with generally accepted accounting
principles. The Company cautions readers that this is a non-cash gain, and until
the Company sells its stock in VeriSign, the actual total cash gains or losses
recognized on this investment may significantly differ. Additionally, the
Company realized net gains on the sales of other investments of $3.9 million,
including the sale of 130,000 shares of Illuminet stock sold prior to the
-39-
acquisition of Illuminet by VeriSign. The Company also recognized impairment
losses of $2.4 million on available-for-sale securities, and partnership
investments incurred losses totaling $1.2 million, during 2001.
Income before taxes was $30.9 million, an increase of $12.0 million or 63.0%.
The Company recognizes income tax expense at an effective rate of approximately
38.0%.
Minority interest, which is pre-tax income allocated to the 34.0% minority
partners in the cellular operation, was $4.5 million, an increase of $1.4
million or 47.0%. Increased earnings in the cellular partnership, driven by the
growth in roaming revenue, are responsible for this change.
Net income was $16.4 million, an increase of $6.5 million or 66.1%. The increase
is primarily made up of the one-time impact of the non-cash gain on the exchange
of the Illuminet stock, and the improved financial performance of the cellular
operation.
One of the Company's performance measures is net income from ongoing operations,
which excludes gains or losses on external investments. In 2001, net income from
ongoing operations was $8.3 million, an increase of $2.0 million or 30.8% over
2000.
2000 compared to 1999
Total revenue was $60.5 million in 2000, an increase of $18.2 million or 42.9%.
Wireless revenues were $31.0 million, an increase of $13.9 million or 80.9%.
Wireline revenues were $24.5 million, an increase of $2.8 million or 13.2%.
Other revenues were $5.0 million, an increase of $1.4 million or 40.4%.
Within wireless revenues, the analog cellular operation contributed $16.1
million, an increase of $3.5 million or 27.8%. Roaming revenues generated from
the use of our cellular network by customers of other providers were $11.7
million, an increase of $4.1 million or 54.5%. Cellular local service revenues
were $3.5 million, a decrease of $0.5 million or 12.7% as the cellular
operation's customer base declined 8.9% to 10,836.
The PCS operation contributed $13.9 million to wireless revenues, an increase of
$10.2 million. PCS service revenues were $9.0 million, an increase of $5.6
million or 153.4%. These revenues were driven by the increased subscriber base,
which totaled 23,232, at December 31, 2000, an increase of 13,476 or 138.1%,
compared to 9,756 subscribers at year-end 1999. PCS travel revenue was $4.1
million, compared to $40 thousand in 1999. This increase is attributed to the
full year of CDMA network operation in the Quad State region, along with the
growth in usage by other Sprint wireless customers utilizing our network.
Equipment sales, made through our own retail stores and third parties, were $0.8
million, an increase of $0.7 million or 520.2%.
Tower leases contributed $0.5 million to wireless revenues, an increase of $0.2
million or 75.1%. The increase was a result of other wireless carriers executing
additional leases to use space on the Company's portfolio of existing towers.
Within wireline revenues, the Telephone Company contributed $19.1 million, an
increase of $2.6 million, or 15.6%. Telephone access revenues were $8.2 million,
an increase of $0.4 million or 4.7%. The growth in access revenues was driven in
part by a 6.4% increase in access minutes of use on the Company's network.
Telephone local service revenues were $4.6 million, an increase of $0.5 million
or 12.1%. The change was due in part to increased use of custom calling
features. Access lines increased by 3.2%.
Facility lease revenue contributed $5.2 million to wireline revenues, an
increase of $1.8 million or 51.9%. Increased use of our fiber facilities was
primarily responsible for this change.
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Cable television revenues were $3.6 million, an increase of $0.2 million or
6.6%. Increased subscription to digital television services was the primary
driver. Subscriber growth was 1.2%.
Within other revenues, Internet service revenues were $2.9 million, an increase
of $0.6 million or 29.0%. The Company had 14,900 Internet subscribers at
December 31, 2000 compared to 10,647 at the end of the previous year. Telephone
equipment sales revenues were $1.4 million, an increase of $0.8 million, or
136.8%, due to an increase in sales of larger telephone systems and equipment.
Total operating expenses were $44.3 million, an increase of $14.5 million or
48.7%. The expansion of the Sprint PCS operation was principally responsible for
the change.
Cost of goods and services was $6.1 million, an increase of $3.1 million or
101.6%. The PCS cost of goods sold was $3.4 million, an increase of $2.3 million
or 223.7%. This change was due primarily to higher volumes of handsets sold
through Company owned stores and Sprint PCS handset subsidies paid to
third-party retailers, associated with the first full year of operating with the
Sprint brand name. The cost of goods sold for telephone system equipment was
$1.1 million, an increase of $0.7 million or 159.3%, as part of the large
telephone and equipment systems sales mentioned under other revenues.
Network operating costs were $18.5 million, an increase of $7.4 million or
66.7%. Line and switching costs were $7.0 million, an increase of $1.0 million
or 16.1%, due principally to the expanded PCS network. Due in part to operation
and maintenance of the additional plant placed in service in recent years, plant
specific costs were $5.4 million, an increase of $1.9 million or 54.5%. Tower,
building, and land rentals, as well as PCS equipment maintenance, were major
contributors to the plant specific expense growth. Travel expense, generated by
the Company's PCS subscribers' use of minutes on other providers' portions of
the Sprint PCS network, was $3.8 million, compared to an immaterial amount in
the prior year. Other network costs such as power, network administration, and
engineering were $2.2 million, an increase of $0.7 million or 44.4%.
Selling, general and administrative expenses were $12.4 million, an increase of
$3.4 million or 38.3%. Customer support costs were $4.3 million, an increase of
$1.2 million or 40.0%. The growth in Sprint PCS subscribers is primarily
responsible for this change. Advertising expense was $0.9 million, an increase
of $0.5 million or 94.2%. The change is primarily attributed to the increased
marketing efforts in support of the first full year of operating with the Sprint
brand name. PCS sales staff expenses were $0.8 million, an increase of $0.3
million or 57.7%. An additional expense category related to the growth in Sprint
PCS subscribers is bad debt expense, which reached $0.8 million, increasing $0.6
million or 461.7%.
Operating income grew to $16.2 million, an increase of $3.6 million or 29.1%.
Increased revenues, primarily in the wireless operations, were greater than the
increase in operating expenses, although the overall operating margin declined
to 26.8%, compared to 29.6% in 1999.
Other income (expense) is comprised of non-operating income and expenses,
interest expense and gain or loss on investments. Collectively, the net
contribution of these items to pre-tax income was $2.7 million, an increase of
$3.1 million over the negative net expense of $0.4 million the previous year.
The largest component was the sale of the interest in a limited partnership as
discussed below.
Non-operating income was $76 thousand, a decrease of $1.0 million or 92.7%. The
$0.7 million charge on the value of the GSM equipment in the PCS subsidiary, to
its estimated realizable value, was primarily responsible for this change.
Interest expense was $2.9 million, an increase of $1.0 million or 50.5%. The
Company's debt was larger during the year as compared to the previous year.
Long-term debt (inclusive of current maturities), was $55.5 million at year-end
2000, versus $33.0 million at year-end 1999. A majority of these funds were
drawn to finance the expansion of the PCS territory.
-41-
Net gain on investments was $5.6 million, an increase of $5.0 million compared
to 1999. The change was principally due to the sale of the Virginia RSA 6
Partnership interest in May 2000. The Company received $7.4 million in cash, and
realized a one-time gain of $6.9 million on the transaction. Additionally, the
Company incurred impairment charges of $1.4 million on two investments during
the year which somewhat offset the aforementioned gain.
Income before taxes was $18.9 million, an increase of $6.7 million or 55.3%. The
Company recognizes income tax expense at an effective rate of approximately
38.0%. The provision for taxes was $6.0 million compared to $3.8 million the
previous year.
Minority interest, which is pre-tax income allocated to the 34% minority
partners in the cellular operation, was $3.1 million, an increase of $1.1
million or 56.9%. Increased earnings in the cellular partnership, driven by the
growth in roaming revenue, were responsible for this change.
Net income was $9.9 million, an increase of $3.4 million or 53.3%. The increase
was primarily made up of the one-time gain on the sale of the interest in the
Virginia RSA 6 cellular operation.
One of the Company's performance measures is net income from ongoing operations,
which excludes gains or losses on external investments. In 2000, net income from
ongoing operations was $6.3 million, an increase of $0.5 million or 8.6%. The
2000 figure excludes not only the gains or losses on external investments, but
the gain on the sale of the limited partnership interest in the Virginia RSA 6
cellular operation as well.
Investments in Non-Affiliated Companies
The Company has investments in several available-for-sale securities, which the
Company may choose to liquidate from time to time, based on market conditions,
capital needs, other investment opportunities, or a combination of any number of
these factors. As a result of the uncertainty of these factors, there is also
uncertainty as to what the value of the investments may be when they are sold.
In December 2001, the Company recognized a non-cash gain on the exchange of
Illuminet stock for VeriSign stock, totaling $12.7 million. The Company held
333,504 shares of Illuminet Holding Company stock, and elected to convert those
shares into VeriSign stock on the date of the merger. The conversion rate was
.93 shares of VeriSign for each share of Illuminet, giving the Company 310,158
shares of VeriSign. The Company's recognition of the VeriSign gain was in
accordance with generally accepted accounting principles. The Company cautions
readers, however, that this recognition of gain is purely non-cash; and, until
the Company sells its stock in VeriSign, the actual cash gains or losses
realized on this investment may be materially different.
The fair value of the Company's available-for-sale securities was $12.0 million
at the end of 2001, compared to $11.8 million at the end of 2000. The Company's
available-for-sale portfolio at December 31, 2001 is made up of three
investments, all of which are within the telecommunications industry. Therefore,
due to the volatility of the securities markets, particularly in the
telecommunications industry, there is uncertainty about the ultimate value these
investments will realize in the future.
Sale of GSM PCS Equipment, Refundable Equipment Payment, Like-Kind Exchange
On January 11, 2001, the Company completed a transaction to sell its GSM
technology PCS equipment and three radio spectrum licenses for $6.5 million,
which was the book value of the assets that were sold. In June 2000, the Company
had recorded a charge of $0.7 million to value the assets it intended to sell at
their estimated realizable value. As a result of the impairment charge recorded
in June 2000, there was no additional impact to the operating statement as a
result of the transaction closing.
-42-
As part of the original Sprint PCS Network Partner agreements, in late 1999 the
Company received a refundable equipment payment of $3.9 million in cash from
Sprint. The payment was to provide liquidity during the construction of the CDMA
network while the Company attempted to sell its GSM equipment, and to cover the
shortfall in the event a sale was made at less than net book value. As a result
of the sale of the GSM equipment in January 2001, the Company repaid the
refundable equipment payment to Sprint, as required by the affiliate agreement.
The Company entered into an agreement with a third party to act as the Company's
agent in a like-kind exchange in the sale of the Company's GSM PCS network
equipment and the purchase of new CDMA PCS equipment. This transaction was
completed in 2001, and allowed the Company to defer taxes on the sale of the GSM
equipment.
Financial Condition Liquidity and Capital Resources
The Company has four principal sources of funds available to meet the financing
needs of its operations, capital projects, debt service and potential dividends.
These sources include cash flows from operations, two revolving credit
facilities (both of which mature in 2002), and investments which can be
liquidated. Management routinely considers these alternatives to determine what
mix of the external sources is best suited for the long-term benefit of the
Company.
Management anticipates its operations will generate similar operating cash flows
in 2002, compared to 2001, although there are items outside the control of the
Company that could have an adverse impact on cash flows. Outside factors that
could adversely impact operating results include, but are not limited to;
changes in overall economic conditions, regulatory requirements, changes in
technologies, availability of labor resources and capital, and other conditions.
The PCS subsidiary's continued operations are dependent upon Sprint's ability to
execute certain functions like billing, customer care, collections and other
operating activities under the Company's Sprint PCS Agreements. Additionally,
the Company's ability to attract and maintain a sufficient customer base is
critical to maintaining a positive cash flow from operations. These items
individually and or collectively could impact the Company's results.
Capital expenditures budgeted for the next three years total approximately $65.1
million, including approximately $34.3 million for the Sprint PCS operation for
additional base stations and switch enhancements to improve and enhance the PCS
network. There is nearly $5.8 million included for new towers to support the
expanding Sprint PCS network in addition to approximately $18.8 million for
improvements, and replacements in the telephone operation. The remaining $6.2
million includes new cable for the cable television operation, building
renovations at Company facilities, and a fiber cable project to improve
reliability and expand the network into new areas.
The most significant source of external funding is the $35.0 million revolving
line of credit with CoBank that allows the Company to borrow up to $35.0 million
with the option to term out the amount on the revolving line of credit. There
was $6.2 million outstanding as of December 31, 2001, at an interest rate of
approximately 3.5% as of that date. This facility expires in June 2002.
Management anticipates terming out all outstanding balances on the revolving
line of credit, prior to its expiration, at terms similar to the existing term
facilities with CoBank. Management is evaluating replacing the $35.0 million
revolving credit facility with another multi-year facility that will provide
adequate funding for any further expansion of the operations. Management has not
determined the amount at which the new facility will be established, but
anticipates that it will not exceed the current level of $35.0 million.
Another external source of funding is the $2.0 million unsecured, variable rate
revolving line of credit with SunTrust Bank. The facility expires in June 2002.
Management anticipates renewing this facility with SunTrust Bank under similar
terms and conditions. The Company uses this facility as a source of short-term
liquidity in its daily cash management operations. As of February 15, 2002, the
Company's unused balance on this facility was $2.0 million.
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At the end of 2001, current maturities of the Company's long-term debt were $4.4
million. If the current balance of $6.2 million on the $35.0 million revolver is
added to this, and termed out over the life of the other CoBank debt, the
current maturities would increase approximately $0.6 million.
Management anticipates being able to generate adequate capital to fund the
capital projects, debt payments, and potential dividend payments through
operating cash flow, existing financing facilities and the anticipated financing
facilities discussed previously. Additionally, the Company may, at its election,
liquidate some of its investments to generate additional cash for its capital
needs as market conditions allow.
Critical Accounting Policies and Estimates and Recently Issued Accounting
Standards
The Company views its critical accounting policies to be: revenue recognition,
security and investment valuations and accounting for property, plant and
equipment including determination of useful lives. The accounting policies for
these areas are described in Note 1 to the accompanying consolidated financial
statements.
Also included in Note 1 is a description of recently issued accounting standards
including the effective dates of the standards and the expected impact the
adoption of the standards will have on the Company's results.
Other Commitments, Contingencies and Risks
The Company is one of twelve Sprint PCS Network Partners, and accordingly, is
impacted by decisions and requirements adopted by Sprint PCS in regard to the
PCS operation. As part of the national roll-out of 3G by Sprint, the Company is
required to make upgrades to its network by mid-year 2002. These commitments are
reflected in the capital budget described above. Management continually reviews
its relationship with Sprint as new developments and requirements are added to
the affiliation with Sprint. Note 6 to the accompanying consolidated financial
statements contains a detailed description of the significant contractual
relationship.
Market Risk
The Company's 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. As of December 31, 2001, the balance of the Company's variable rate debt
was $6.2 million, made up of a single traunch of the revolving note payable to
CoBank, which matures June 1, 2002. 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 $2.0 million, with no outstanding borrowings at December 31, 2001. The
Company's remaining debt has fixed rates through its maturity. A 10.0% decline
in interest rates would increase the fair value of the fixed rate debt by
approximately $1.8 million, while the current fair value of the fixed rate debt
is approximately $57.1 million.
The second component of interest rate 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 to repay existing
and anticipated new debt obligations, maintaining and upgrading capital
equipment, ongoing operations expenses, investment opportunities in new and
emerging technologies, and potential dividends to the Company's shareholders.
Management does not view market risk as having a significant impact on the
Company's results of operations, although adverse results could be generated if
interest rates were to escalate markedly.
Due to the significant investment in VeriSign stock, the Company has a market
price risk related to the investment. As of December 31, 2001, the stock closing
price for VeriSign was $38.04 per share, while the range of closing prices
during the time the shares were held (December 12, 2001 through December 31,
2001) was a high of $42.75 per share and a low of $37.94 per share. For 2002,
through March 1, the trading price varied from $39.23 per share to $21.47 per
share. As a result of the significant swings in value of this security, the
market price risk to the Company is a risk that is significant, and may impact
financial results.
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Selected Statistics
OPERATING STATISTICS
Three Month Period Ended
Dec. 31, Sep 30, Jun 30, Mar 31, Dec 31,
2001 2001 2001 2001 2000
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Telephone Access Lines 24,704 24,583 24,432 24,288 24,117
CATV Subscribers 8,770 8,834 8,756 8,742 8,707
Internet Subscribers 17,423 16,923 16,385 16,045 14,900
Digital PCS Subscribers 48,914 39,724 32,067 27,339 23,232
Analog Cellular Subscribers 9,440 9,526 9,985 10,416 10,836
Paging Subscribers 3,190 4,160 4,640 4,710 4,786
Long Distance Customers 9,159 9,047 8,718 8,532 8,178
Fiber Route Miles 485 482 468 438 408
Total Fiber Miles 23,893 23,854 23,162 20,229 17,295
Long Distance Calls (000) 5,561 5,712 5,335 4,858 4,714
Switched Access Minutes (000) 33,067 31,873 30,550 30,417 29,513
CDMA Base Stations (sites) 184 150 130 126 58
Cellular Base Stations 20 20 20 20 20
Towers Owned (over 100 foot) 70 64 64 64 64
PCS Market POPS (000) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) 1,395 1,100 1,100 1,100 400
Cellular Market POPS (000) 170 170 170 170 170
PCS ARPU (excluding travel) $53.28 $53.49 $54.11 $50.86 $54.36
PCS Travel Revenue per Subscriber $33.73 $25.53 $27.78 $19.97 $15.06
PCS Average Management Fee per Subscriber $ 4.26 $ 4.28 $ 4.33 $ 4.07 $ 4.35
PCS Ave monthly churn % 2.77% 2.02% 1.83% 2.18% 2.33%
PCS CPGA $317.72 $294.34 $395.60 $350.97 $311.57
PCS CCPU $45.14 $55.29 $56.07 $55.02 $53.70
POPS is the estimated population of people in a given geographic area. Market
POPS are those within a market area, and Covered POPS are those covered by the
network's service area. ARPU is Average Revenue Per User, before travel, roaming
revenue, and management fee. PCS Travel revenue includes roamer revenue and is
divided by average subscribers. PCS Average management fee per subscriber is 8 %
of collected revenue paid to Sprint, excluding travel revenue. PCS Ave Monthly
Churn is the average of three monthly calculations of deactivations (excluding
returns less than 30 days) divided by beginning of period subscribers. CPGA is
Cost Per Gross Add and includes selling costs, product costs, and advertising
costs. CCPU is Cash Cost Per User, and includes network, customer care and other
costs.
PLANT FACILITY STATISTICS Telephone CATV
Route Miles 2,066.0 515.8
Customers Per Route Mile 12.0 17.0
Miles of Distribution Wire 562.9 --
Telephone Poles 7,790 35
Miles of Aerial Copper Cable 346.7 162.4
Miles of Buried Copper Cable 1,430.3 318.0
Miles of Underground Copper Cable 39.1 1.9
Lines of Switching Equipment 36,462 --
Intertoll Circuits to Interexchange Carriers 1,426 --
Special Service Circuits to Interexchange Carriers 262 --