SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 2002
Business Overview: The Company provides telephone, long-distance, PCS, cellular, cable television, and internet services, primarily along the Interstate 81 corridor. Operations are heavily dependent on a partnership with Sprint for its PCS network, which accounted for approximately 49.5% of total revenue in the third quarter of 2002.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($4,428) + Notes payable ($4,661) + Long-term debt ($48,724) = $57,813. Management commentary cites total debt of $57.8 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 21.6% in Q3 and 30.7% year-to-date (YTD) compared to 2001. Wireless revenue drove this growth, up 28.7% in Q3 and 44.2% YTD, primarily due to a 46.5% increase in gross PCS subscriber additions.
• Net Income Decline: Despite revenue growth, YTD net income fell 50.5% to $2.3 million. This was primarily caused by a $9.6 million loss on investments (VeriSign impairment and sale) compared to a $2.0 million loss in the prior year.
• Bad Debt Expense: Bad debt expense surged 234% in Q3 to $1.8 million and increased $2.3 million YTD. This was driven by the "Clear Pay" no-deposit program for credit-challenged customers and financial difficulties of interexchange carriers.
• Operating Margins: Q3 operating margin decreased to 22.5% from 25.9% in the prior year due to bad debt. YTD operating margin remained stable at 24.3% (vs. 24.1% in 2001).
• Investment Losses: The Company recorded an $8.0 million non-cash impairment charge on VeriSign stock in the first half of 2002 and a $0.6 million loss on the sale of remaining shares in Q3.

Guidance, Outlook, and Risks

• Capital Spending: The Company has a total capital budget of approximately $30.3 million for 2002. YTD spending was $18.8 million. Spending on the PCS network has slowed as initial build-out requirements with Sprint are complete.
• Sprint Dependency: The Company relies on Sprint for approximately 50% of its revenue and significant expense reporting. Risks include Sprint's national business decisions, system reliability, and potential rate reductions (travel rate expected to drop to $0.058/min in 2003).
• Dividend: A cash dividend of $0.74 per share was declared, payable December 2, 2002, representing a 5.7% increase over the prior year.
• Liquidity: The Company generated $26.0 million in operating cash flow YTD. It maintains a $20 million revolving credit facility with CoBank and a $2.5 million facility with SunTrust Bank. Management expects cash flow and debt facilities to be adequate for the remainder of 2002.
• Regulatory/Market Risks: Risks include changes in inter-carrier compensation, line-sharing arrangements for DSL, and customer churn in the analog cellular segment.

Investor Verification Checklist

• VeriSign Impact: Verify the full extent of the $9.6 million investment loss and confirm no further impairments are anticipated on remaining small holdings.
• Bad Debt Sustainability: Assess the effectiveness of the new $125 deposit requirement for "Clear Pay" customers in curbing future bad debt expenses.
• Sprint Rate Changes: Monitor the impact of the announced 2003 travel rate reduction ($0.058/min) on future wireless margins.
• Debt Covenants: Confirm continued compliance with leverage and debt service coverage covenants given the reduction in the CoBank facility size.
• Subscriber Quality: Review the ratio of gross additions to disconnects in the PCS segment to ensure growth is not being offset by high churn from credit-challenged customers.