SHEN

Business Context and Reporting Period

Company: Shenandoah Telecommunications Company (Shentel)
Filing Type: Form 10-K
Period Ended: December 31, 1999
Headquarters: Edinburg, Virginia

Shentel is a diversified telecommunications holding company operating nine wholly-owned subsidiaries. The company provides regulated and unregulated services including local telephone, cable television, cellular, paging, personal communications services (PCS), Internet access, and long-distance services. Operations are concentrated in the Northern Shenandoah Valley of Virginia and surrounding areas in Maryland, West Virginia, and Pennsylvania. The company owns a fiber network of approximately 7,468 miles.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 18.7% to $42.2 million. Growth was driven primarily by the Mobile subsidiary (cellular operations), which saw revenue increase by nearly $3.6 million. Internet services (ShenTel) grew 40.3%, and Cable Television revenues grew 10.8%.
• Profitability: Net income rose 14.7% to $6.4 million. Earnings per share increased 14.8% to $1.71.
• Investment Valuation: A significant non-operating gain occurred due to the Initial Public Offering (IPO) of Illuminet Holdings, Inc. The company's investment, originally costing $843,486, had a market value of approximately $25.5 million at year-end, resulting in a substantial unrealized gain included in stockholders' equity.
• Debt Levels: Long-term debt increased to $33.0 million to fund capital expansion, particularly for PCS network buildouts. Interest expense rose 28.7% to $1.9 million.
• Customer Base: Total customer relationships exceeded 67,000, a compound annual growth rate of over 20% since 1993. Wireless services now represent approximately 36% of the customer base.

Guidance, Outlook, and Risks

• Strategic Shift in PCS: In Q4 1999, the company executed an affiliate agreement with Sprint PCS, converting its network from GSM to CDMA technology. This expanded the service territory from a population of 679,000 to 2,048,000, extending into Pennsylvania markets (Altoona, Harrisburg, York-Hanover).
• Capital Requirements: Management anticipates continued operating losses in the PCS segment as it expands. The 2000 capital budget is approximately $45 million, with $26.8 million allocated to PCS equipment and towers. Financing will rely on internal cash flows and a new $35 million loan facility with CoBank (totaling a $60 million facility).
• Asset Liquidation: The company received approximately $3.9 million as partial reimbursement for the CDMA network buildout. It is negotiating the sale of its obsolete GSM equipment (carrying value ~$6.4 million) to recover book value.
• Infrastructure Upgrades: The cable television system upgrade to a hybrid fiber-coaxial network was completed, enabling digital services and future broadband offerings. A new 60,000 sq. ft. facility was purchased in Edinburg to support growth.
• Risks: Forward-looking statements are subject to risks including changes in interest rates, regulatory conditions, and the success of the PCS expansion. The company notes that new technologies are capital intensive with short life cycles.

Investor Verification Checklist

• Illuminet Investment: Verify the status of the lock-up provision on the Illuminet shares (restricting sales until April 2000) and management's intent to sell.
• PCS Expansion Costs: Monitor the execution of the $45 million 2000 capital budget and the impact of PCS operating losses on consolidated net income.
• GSM Asset Disposal: Confirm the sale of the obsolete GSM network equipment and whether the book value of $6.4 million is fully recovered.
• Debt Covenants: Review the terms of the CoBank and Rural Telephone Bank loans, specifically regarding dividend restrictions and working capital maintenance.
• Customer Concentration: Note that two major customers (Bell Atlantic Mobile Systems and a long-distance carrier) each account for 8-12% of total revenues.