SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission File Number 0-9881 SHENANDOAH TELECOMMUNICATIONS COMPANY (Exact name of registrant as specified in its charter) Virginia 54-1162806 -------- ---------- (State or other jurisdiction (IRS Employer of incorporation or Identification organization) Number) P.O. Box 459, Edinburg, Virginia 22824 -------------------------------------- (Address of principal executive office and zip code) Registrant's telephone number, including area code: (540) 984-4141 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the period covered by this report. Class Outstanding at September 30, 1999 Common Stock, No Par Value 3,755,760 Shares
SHENANDOAH TELECOMMUNICATIONS COMPANY INDEX Page Number PART I. FINANCIAL INFORMATION Item I. Financial Statements Consolidated Balance Sheets September 30, 1999 and December 31, 1998 1 - 2 Consolidated Statements of Income Three Months and Nine Months Ended September 30, 1999 and 1998 3 - 4 Consolidated Statements of Cash Flow Nine Months Ended September 30, 1999 and 1998 5 Condensed Consolidated Statement of Stockholders' Equity 6 Notes To Consolidated Financial Statements 7 Item II. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 15 PART II. OTHER INFORMATION Item 4. Submission of Matters To a Vote of Security Holders 16 Item 6. Exhibits and Reports On Form 8-K 16 Signatures 17
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS September 30, 1999 December 31, 1998 ----------------- ---------------- (Unaudited) Current Assets Cash & cash equivalents 6,811,502 4,891,109 Certificates of deposit 0 499,581 Accounts receivable 4,974,835 4,272,016 Materials 3,859,860 3,488,137 Prepaid and other current assets 354,710 777,853 ----------------- ---------------- Total current assets 16,000,907 13,928,696 Securities and Investments Invest in available for sale 4,152,094 2,677,789 securities Other investments 5,444,721 5,921,206 ----------------- ---------------- 9,596,815 8,598,995 Property, Plant and Equipment Plant in service 92,560,958 88,427,844 Plant under construction 13,646,377 5,670,371 Less accumulated depreciation 32,857,975 29,063,738 ----------------- ---------------- 73,349,360 65,034,477 Other Assets Cost in excess of net assets of business less accumulated 4,499,911 4,876,215 amortization Deferred charges and other assets 480,708 354,216 Radio spectrum license net of accumulated amortization 1,214,430 653,145 ----------------- ---------------- 6,195,049 5,883,576 105,142,131 93,445,744 See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES & STOCKHOLDERS' EQUITY September 30, 1999 December 31, 1998 ----------------- ---------------- (Unaudited) Current Liabilities Current maturities of long-term 1,500,500 863,972 debt Accounts payable 2,613,090 1,149,286 Advance billings & payments 377,164 712,581 Customers' deposits 120,095 113,586 Accrued compensation 812,477 890,443 Other current liabilities 970,748 1,072,422 Income taxes payable 362,572 0 Other taxes payable 481,399 214,433 ----------------- ---------------- Total current liabilities 7,238,045 5,016,723 Long-Term Debt, less current 31,645,389 28,398,374 maturities Other Liabilities and Deferred Credits Deferred investment tax credit 93,720 145,909 Deferred income taxes 7,038,337 6,741,121 Pension & other 1,644,843 1,331,465 ----------------- ---------------- 8,776,900 8,218,495 Minority Interests 2,288,414 2,265,426 Stockholders' Equity Common stock 4,734,377 4,734,377 Retained earnings 49,381,834 44,173,730 Unrealized gains on available for sale securities 1,077,172 638,619 ----------------- ---------------- 55,193,383 49,546,726 ----------------- ---------------- $105,142,131 $93,445,744 See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 Operating revenues: 1999 1998 1999 1998 -------------------------- ----------------------- Telephone revenues: Local service $1,040,129 $962,261 $3,009,197 $2,813,616 Access 1,825,230 1,914,811 5,665,161 5,861,962 Toll 6,588 18,800 18,536 49,142 Miscellaneous: Directory 297,445 287,577 910,925 888,724 Facility leases 785,513 528,230 1,909,398 1,525,164 Billing & collection 100,226 133,238 337,693 389,372 Other miscellaneous 49,413 30,174 131,375 111,398 --------------------- ----------------------- Total telephone revenues 4,104,544 3,875,091 11,982,285 11,639,378 Cable television revenues 885,931 802,010 2,548,192 2,302,911 ShenTel service revenues 965,279 716,104 2,694,881 1,816,072 Leasing revenues 2,313 3,965 8,342 12,853 Mobile revenues 3,777,061 2,611,213 9,357,097 7,094,584 PCS revenues 890,963 847,990 2,531,263 2,425,674 Long distance revenues 263,116 251,484 784,898 686,479 Network revenues 200,970 153,733 524,013 461,200 -------------------------- ------------------------ Total operating revenues 11,090,177 9,261,590 30,430,971 26,439,151 Operating expenses: Cost of products and services sold 276,631 418,974 1,031,214 1,125,201 Line costs 125,228 89,812 344,629 299,178 Plant specific 880,108 833,803 2,450,170 2,142,949 Plant non-specific: Network & other 1,854,467 1,384,463 4,992,822 4,068,187 Depreciation 1,598,945 1,386,371 4,774,580 3,980,466 Customer operations 1,436,481 1,271,145 3,934,768 3,683,190 Corporate operations 774,937 620,100 2,130,432 1,959,632 Other operating expenses 269,658 225,188 795,892 653,990 Taxes other than income 142,994 124,394 342,468 392,076 -------------------------- ------------------------ 7,359,449 6,354,250 20,796,975 18,304,869 -------------------------- ------------------------ Operating income 3,730,728 2,907,340 9,633,996 8,134,282 -------------------------- ------------------------ See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ------------------------ ---------------------- Gain on sale of investment 0 2,000 0 2,000 Non-operating income less 468,530 965,914 1,342,550 1,588,681 expense Interest expense 441,520 431,429 1,351,646 1,162,695 ------------------------ ---------------------- Income before income taxes 3,757,738 3,443,825 9,624,900 8,562,268 Provision for income taxes 1,180,704 1,119,138 3,135,807 2,799,184 ------------------------ ---------------------- Net income before minority interest 2,577,034 2,324,687 6,489,093 5,763,084 Minority interest (623,270) (373,223) (1,280,989) (955,229) ------------------------ ----------------------- Net income $1,953,764 $5,208,104 $1,951,464 $4,807,855 Earnings per share weighted average common shares outstanding 3,755,760 3,755,760 3,755,760 3,756,602 Net earnings per share, basic and diluted $0.52 $0.52 $1.39 $1.28 See notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) Nine Months Ended September 30, 1999 1998 --------------------------------- Cash Flows From Operating Activities Net income 5,208,104 4,807,855 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 4,774,580 3,980,466 Deferred taxes (75,074) (22,841) Gain (loss) on disposal of assets (2,000) Gain (loss) on equity investment (1,125,243) (1,331,463) Minority share of income 22,988 610,228 Other (47,026) 258,227 Changes in assets and liabilities: (Increase) decrease in Accounts receivable (702,819) (3,056,497) Materials and supplies (371,723) 897,391 Increase/(decrease) in Accounts payable 1,463,804 (44,116) Income taxes payable 362,572 1,027,417 Deferrals & accruals 494,939 261,578 --------------------------------- Net cash provided by operating activities 10,005,102 7,386,245 Cash Flows From Investing Activities Purchase of property plant & equipment (12,792,625) (10,745,522) Purchase of intangible assets (561,285) Purchase of investment securities (138,698) (1,037,263) Maturities of certificates of deposit 499,581 104,122 Maturities of investment securities 0 1,622,433 Cash flows from securities 1,024,775 1,155,042 --------------------------------- Net cash used in investing activities (11,968,252) (8,901,188) Cash Flows From Financing Activities Proceeds from long term debt 4,386,209 2,166,556 Stock redemption 0 (100,000) Principal payments on long term debt (502,666) (179,438) --------------------------------- Net cash provided by financing activities 3,883,543 1,887,118 --------------------------------- Net increase in cash and cash equivalents 1,920,393 372,175 Cash and cash equivalents Beginning 4,891,109 5,203,521 Ending 6,811,502 5,575,696 See accompanying notes to condensed consolidated financial statements.
SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARY COMPANIES PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Accumulated Other Common Retained Comprehensive Shares Stock Earnings Income Total -------------------------------------------------------- Balance, January 1, 1998 3,760,760 $4,740,677 $40,579,090 $1,190,717 $46,510,484 Comprehensive income Net income 5,603,775 - 5,603,775 Change in unrealized gain on securities available-for-sale net of tax ($368,110) (552,098) (552,098) ----------- Total comprehensive income 5,051,677 ----------- Dividends declared (1,915,435) (1,915,435) Redemption of common stock (5,000) (6,300) (93,700) (100,000) ------------------------------------------------------- Balance, December 31, 1998 3,755,760 4,734,377 44,173,730 638,619 49,546,726 Comprehensive income - Net income 5,208,104 5,208,104 Change in unrealized gain on securities available-for-sale net of tax $297,216 438,553 438,553 ----------- Total comprehensive income 5,646,657 -------------------------------------------------------- Balance, September 30, 1999 3,755,760 $4,734,377 $49,381,834 $1,077,172 $55,193,383 ======================================================== See notes to condensed consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying condensed consolidated financial statements, contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly Shenandoah Telecommunications Company's financial position as of September 30, 1999 and the results of operations and cash flows for the nine-month periods ended September 30, 1999 and 1998. While the Company believes that the disclosures presented are adequate, to make the information not misleading these financial statements should be read in conjunction with the financial statements and notes included in the Company's annual report on Form 10-K. 2. The results of operations for the nine-month period ended September 30, 1999 and 1998 are not necessarily indicative of the results to be expected for the full year. 3. The earnings per common share were computed on the weighted average number of shares outstanding. The Company has stock options outstanding, which are not dilutive; therefore basic and diluted earnings per share are the same. 4. On July 8, 1999 AvData Systems, Inc. (AvData), in which the Company had a book basis of $149,860, was merged with Interstate FiberNet, Inc., a wholly-owned subsidiary of ITC^DeltaCom, Inc. (ITCD). At the closing, the Company received 36,579 shares of ITCD common stock as the first of three tranches. The remaining two tranches, designated as earn out shares and escrowed shares, may or may not be distributed, based on specific measures. The earn out and escrow shares have not been recognized by the Company at this time. Through the investments in South Atlantic Venture Fund III, L.P. and South Atlantic Private Equity Fund IV, L.P., two non-affiliated companies that were also invested in AvData, the Company received additional initial distributions of 20,117 shares of ITCD common stock. The AvData-ITCD merger is primarily responsible for the changes in Available For Sale Securities, Other Investments, and Unrealized Gain on Available - For Sale Securities categories reflected in the consolidated balance sheets. A subsequent event in a non-affiliated investment was the initial public offering (IPO) of Illuminet Holding, Inc. The Company's cost basis and book value was $893,508 in 463,604 shares (post-IPO) or approximately $1.93 per share. There is a six-month restriction on the Company selling these shares from the offering date of October 7, 1999. The closing market price as of November 4, 1999 was $44.00 per share.
SHENANDOAH TELECOMMUNICATIONS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. In the third quarter we began constructing a CDMA network for use by Sprint PCS, activating the network the last week of October. On November 8, 1999 the Company finalized its agreements with Sprint PCS to manage and operate an expanded CDMA network as a Sprint PCS Network member. The service will be offered as part of the Sprint PCS nationwide network. Additionally, the agreement expands our existing PCS territory from an area serving a population of 679,000 to one of 2,043,000 people. The additional areas are in the Altoona, Harrisburg, and York-Hanover BTA's of Pennsylvania. The capital build out and initial operating losses are projected to require additional capitalization of approximately $30 million, which will be financed through equity and external debt. 6. 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. A summary of external revenues and net income es. A summary of external revenues and net income for each segment is as follows: for each segment is as follows: Nine Months Nine Months September 30, 1999 September 30, 1998 External External Subsidiary Revenues Income Revenues Income Holding $ $ 476,094 $ $ 380,784 Telephone 11,982,285 4,210,689 11,639,378 4,517,627 Cable TV 2,548,192 (147,041) 2,302,911 (170,652) ShenTel 2,694,881 (163,329) 1,816,072 (261,810) Leasing 8,342 15,373 A2,853 21,469 Mobile 9,357,097 1,703,369 7,094,584 1,256,237 Long Distance 784,898 155,708 686,479 230,224 Network 524,013 258,493 461,200 112,398 PCS 2,531,263 (1,301,260) 2,425,674 (1,278,422) Net Income $ 30,430,971 $ 5,208,105 $26,439,151 $ 4,807,855
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to changes in the interest rate environment; management's business strategy; national, regional, and local market conditions; and legislative and regulatory conditions. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Shenandoah Telecommunications Company is a diversified telecommunications holding company providing both regulated and unregulated telecommunications services through its nine wholly-owned subsidiaries. This industry has, for some time, been in a period of transition from a protected monopoly to a competitive environment. A milestone in this transition was the passage of the Telecommunications Act of 1996. As a result of this ongoing change, Shenandoah Telecommunications has made and plans to continue to make significant investments in the new and emerging technologies. The most significant revenues are from the telephone local exchange company accounting for 37.0% of revenue and the cellular dominated operations of the Mobile subsidiary, accounting for 34.1% of revenue during the most recent quarter. Other significant services provided are paging, personal communications services (PCS), cable television, Internet access, long distance, and leased fiber and tower facilities. The Company also sells and leases equipment, mainly related to services provided, and also participates in emerging technologies by direct investment in non-affiliated companies. RESULTS OF OPERATIONS Access revenues are fees for connection to the local exchange network charged to interexchange carriers. The volume for approximately two-thirds of these access revenues typically correlates with changes in minutes of use. This has not held true in 1999 due to rate reductions effective January 1 and July 1, 1999. The minutes of use during the third quarter and the first nine months of 1999 increased .1% and 2.3% respectively from the total minutes of use in comparative periods in 1998. The revenue decreased 4.7% in the third quarter and 3.4% year-to-date for the associated revenues.
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) Second quarter cable television revenues increased 10.5% over the third quarter of 1998, due principally to a rate increase effective April 1, 1999. The year-to-date increase is 10.7%. The increase in the ShenTel Service revenues category for the third quarter of 1999 compared to 1998 was 34.8%. The year-to-date increase is 48.4%. This was due to increases in Internet Service revenues. The third quarter Internet revenues increased $174,517 or 43.4%. Third quarter 1998 revenues from our Internet Service operations increased $159,069 or 65.5% compared to the third quarter of 1997. Equipment sales revenue for the third quarter of 1999 increased $62,253 over third quarter 1998. The Mobile revenues are mainly comprised of revenues from cellular services. Total cellular revenues represented 32.2% of the Company's revenues during the third quarter. Third quarter 1999 local service cellular revenues increased $153,698 or 13.6% compared to the same period in 1998. The year-to-date increase is $386,715 or 12.0%. Price reductions in our service plans instituted in January 1999 were more than offset by customer growth. The year-to-date increase in outcollect roamer revenues is $1,657,542 or 48.0%. This change is attributed to additional network facilities our Company placed in service in late 1998, complemented by growth in usage. Total revenues from the Cellular operation accounted for 28.9% of total Company revenues year-to-date, compared to 25.4% for the first nine months of 1998. Long Distance revenues are principally for toll calls placed to locations outside the regulated telephone service area. These revenues increased by 4.6% for the third quarter and 14.3% for the first nine months as compared to the corresponding periods in 1998. Network revenues are derived from fiber facility leases in Maryland and West Virginia. These revenues increased 30.7% in the third quarter and 13.6% in the first six months as compared to the corresponding periods in 1998. A portion of these increases are attributable to reclassification from other categories. Additional leases secured in 1999 have been offset in part by rate reductions in this increasingly competitive business. Cost of Goods Sold decreased 34.0% in the third quarter compared to the same period in 1998. The year-to-date decrease is 8.4%. This is due primarily to a decrease in PCS handset sales.
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (Continued) Plant Specific expense consists mainly of maintenance to the Company's plant in service. This expense category increased 5.6% in the third quarter compared to the third quarter of 1998. The year-to-date increase is 14.3% over the same period of 1998, principally in the Telephone, Cable Television, and PCS companies due to network expansions. The expense category Network and Other consists primarily of network support, engineering and leased facilities costs. This was our largest expense category in the third quarter. These costs increased 34.0% in the third quarter compared to the third quarter of 1998. The year-to-date increase is 22.7%. These increases are primarily due to increased incollect roaming costs in the cellular operation, and increased leased facilities costs in the PCS and Internet operations due to network expansion. Depreciation and Amortization, historically our largest expense category, was 15.3% higher in the third quarter of 1999 compared to the same period in 1998. This is principally due to the pace of plant additions due mainly to the expansion of our fiber network and Cable TV upgrade. Plant in Service increased $4,133,000 or 4.7% at the end of third quarter 1999 compared to year-end 1998. Depreciation expense has also been increased as a result of decreasing the useful life estimates on a portion of the wireless equipment, effective January 1, 1999. The year-to-date increase is 20.0%. Customer operations increased 13.0% for the quarter and 6.8% year-to-date compared to the same periods in 1998. These costs are for the marketing and sales, billing, and customer service functions. Customer growth in the Internet and cellular businesses is primarily responsible for the increase. The Other Operating Expense category consists of royalty expense paid to programming providers for the Cable Television subsidiary. As part of the April 1, 1999 rate increase on CATV services, the channel lineup was expanded, resulting in increased royalty expense. The increase for the third quarter was 19.8% compared to the third quarter of 1998. Interest expense increased 2.3% in the third quarter compared to the third quarter of 1998, and increased 16.3% year-to-date.
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENTS IN NON-AFFILIATED COMPANIES During the third quarter of 1999 AvData Systems, Inc. (AvData), in which the Company had a cost basis of $369,860 and a book basis of $149,860 as a result of a $220,000 writedown recorded in 1992, was merged with Interstate FiberNet, Inc., a wholly-owned subsidiary of ITC^DeltaCom, Inc. (ITCD). At the closing, the Company received 36,579 shares of ITCD common stock as the first of three tranches. The remaining two tranches, designated as earn out shares and escrowed shares, may or may not be distributed, based on specific measures. The earn out and escrow shares have not been recognized by the Company at this time. Through the investments in South Atlantic Venture Fund III, L.P. and South Atlantic Private Equity Private Equity Fund IV, L.P., two non-affiliated companies that were also invested in AvData, the Company received additional initial distributions of 20,117 shares of ITCD common stock. As of September 30, 1999, the shares of ITCD had a market value of $1,559,140. The AvData - ITCD merger is primarily responsible for the changes in Available For Sale Securities, Other Investments, and Unrealized Gain on Available - For Sale Securities categories reflected in the consolidated balance sheets. A subsequent event in a non-affiliated investment was the initial public offering (IPO) of Illuminet Holding, Inc. The Company's cost basis and book value was $893,508 in 463,604 shares (post-IPO) or approximately $1.93 per share. There is a six-month restriction on the Company selling these shares from the offering date of October 7, 1999. The closing market price as of November 4, 1999 was $44.00 per share. LIQUIDITY AND CAPITAL RESOURCES The Company has a note with CoBank to borrow up to $25 million. The term of the loan is for 15 years, with multiple interest options. The Company has borrowed approximately $22,600,000 at September 30, 1999 against this note, with the last draw made on September 30, 1999. The Company is currently in discussions with CoBank about enlarging this facility, particularly with regard to potential capital requirements for our PCS operation. A loan agreement with the RTB allows for additional borrowings of approximately $2,800,000. Expenditures of the RTB loan funds are limited to capital projects for the regulated local exchange carrier. The Company has a $2 million line of credit with First Union Bank and a $5 million line of credit with CoBank. No draws are outstanding on these lines of credit as of October 31, 1999. The Company budgeted potential capital expenditures of approximately $17,800,000 for our subsidiaries in 1999. These capital needs will be met through internally generated cash flows and the existing CoBank facility and Rural Telephone Bank note.
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PCS ACTIVITIES Our PCS subsidiary has operated a GSM network since January 1996 under an agreement with American Personal Communications (APC), in which switching, billing, and other services are provided by APC. Sprint Spectrum, the current controlling interest of APC, announced in early 1999 the APC customer base would be transitioned to CDMA as Sprint PCS customers. In the third quarter we began constructing a CDMA network for use by Sprint PCS, activating the network the last week of October. On November 8, 1999 the Company finalized its agreements with Sprint PCS to manage and operate the CDMA network as a Sprint PCS (network partner). The service will be offered as part of the Sprint PCS nationwide network. Additionally, the agreement expands our existing PCS territory from an area serving a population of 679,000 to one of 2,048,000 people. The additional areas are in the Altoona, Harrisburg, and York-Hanover BTA's of Pennsylvania. The capital build out and initial operating losses are projected to require additional capitalization of approximately $30 million, which will be financed through equity and external debt. Our GSM customers are now being transferred to the CDMA network. Operation of this additional PCS network may lead to increased Network and Other and Depreciation expense in the fourth quarter 1999. The Company's GSM equipment has a book value of approximately $6 million. Management is exploring various options for use of the GSM network or disposing of the equipment. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 (Y2K) issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Some computer systems may be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. Year 2000 readiness means the ability to (a) continue to operate without substantial interruption attributable to the inability of systems to correctly process, provide, store and receive date data in and around the Year 2000 and (b) to mitigate the risks associated with such system limitations to an acceptable level. The Company developed and implemented a four-phase program for Y2K readiness. Phase I (Inventory and Assessment): In this Phase, an inventory was conducted of all hardware and software that might be at risk, including third-party businesses whose Y2K failures might significantly impact the Company, and an assessment was made on corrective direction. A Y2K Task Force, reporting to senior management, started work on this Phase in 1997. The Company determined that software provided by third parties was its most vulnerable link to the Y2K event.
SHENANDOAH TELECOMMUNICATIONS COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF THE YEAR 2000 ISSUE (Continued) Phase II (Strategy): In this Phase, the Company classified each at-risk system as "routine upgrade", "obsolete", or "non-critical." The majority of this classification work was completed mid-1998. Phase III (Installation and Testing): In this Phase, the selected approach to Y2K remediation was executed. The information that follows reflects the Company's current plans and estimates as of October 1999 and is subject to change. Routine upgrade classification: A performance enhancing upgrade of the mainframe computer, which also made the hardware and operating system Y2K compliant, was performed in the first quarter of 1998. The main telephone switches received new feature upgrades, incorporating Y2K compliance, in the fourth quarter of 1998. The latest releases of end user billing software, placed in service in the second quarter of 1999, have been represented by the vendors to be Y2K compliant. A comprehensive Y2K test of the mainframe computer hardware and software, conducted in October 1999 to validate vendor representations, identified three minor Y2K problems that have been submitted to the vendors for correction. The local area network, comprised of the hardware and software on the server and the microcomputers, was approaching full Y2K compliance at the end of October with 1999, with the remaining known work regarded as non-critical. Obsolete classification: The new financial software and new carrier access billing software were placed in service in the second quarter of 1999. Non-critical classification: The few remaining measures identified to deal with these low priority systems are expected to be implemented by the end of the year, potentially through manual steps. Phase IV (Monitoring and Contingency planning): In this Phase, the implemented changes have been monitored and backup plans designed where necessary. With the majority of the required hardware and software changes completed by mid-1999, the Company has been utilizing the changes in a production setting. This approach minimized disruption to current operations and has provided a basis for ongoing testing and monitoring. Other contingency plans are now being finalized. A full backup of all computer systems will be performed the evening of December 31, 1999. The appropriate managers and technicians are scheduled to be on-site and/or available the night of the date change as well as January 1 and 2 to correct any unforeseen problems. With this four-phase program, where the normal business practice of weighing replacement against adopting routine upgrades was followed, the Company's non-routine expenditures in making its core operations Y2K compliant has thus far been minimal. The Company has been expensing or capitalizing these costs in accordance with appropriate accounting policies. The Company has also reviewed other third party relationships that could affect its operation. Most relationships are with large interexchange carriers and suppliers who state that they are or will be Y2K compliant.
SHENANDOAH TELECOMMUNICATIONS COMPANY PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 6. Exhibits and Reports on Form 8-K A. Exhibit No. 27 - Financial Data Schedule B. No reports on Form 8-K were file for the period covered by this report.
SHENANDOAH TELECOMMUNICATIONS COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHENANDOAH TELECOMMUNICATIONS COMPANY (Registrant) November 15, 1999 Christopher E. French President November 15, 1999 Laurence F. Paxton Vice President - Finance