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| SHEN > SEC Filings for SHEN > Form 10-K on 9-Mar-2009 | All Recent SEC Filings |
9-Mar-2009
Annual Report
This annual report contains 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 those discussed in this report under
"Business-Recent Developments" and "Risk Factors." The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances, except as required by law.
General
Overview. Shenandoah Telecommunications Company is a diversified telecommunications company providing both regulated and unregulated telecommunications services through its wholly owned subsidiaries. These subsidiaries provide local exchange telephone services and wireless personal communications services (as a Sprint PCS affiliate), as well as cable television, video, Internet and data services, long distance, sale of telecommunications equipment, fiber optics facilities, and leased tower facilities. The Company has the following five reporting segments, which it operates and manages as strategic business units organized geographically and by line of business:
• wireless personal communications services, or PCS, as a Sprint PCS affiliate, through Shenandoah Personal Communications Company;
• telephone, which involves the provision of regulated and non-regulated telephone services, through Shenandoah Telephone Company;
• mobile, which involves the provision of tower leases and paging services, through Shenandoah Mobile Company;
• cable television, which involves the provision of analog, digital and high-definition television services, through Shenandoah Cable Television and Shentel Cable Company;
• other, which involves the provision of Internet, network facility leasing, long-distance, CLEC, and wireless broadband services, through ShenTel Service Company, Shenandoah Network Company, Shenandoah Long Distance Company, ShenTel Communications Company and Converged Services of West Virginia, and the provision of investment and management services to its subsidiaries, through Shenandoah Telecommunications Company.
During the third quarter of 2005, Shenandoah Valley Leasing Company changed its name to Shentel Wireless Company to record the activities associated with the Company's Wireless Broadband Group. During the fourth quarter of 2006, Shentel Wireless Company terminated all but one contract to provide wireless services, transferred that contract to Shentel Converged Services, Inc., and ceased operations.
The Company is the exclusive provider of wireless mobility communications network products and services on the 1900 MHz band under the Sprint brand from Harrisonburg, Virginia to Harrisburg, York and Altoona, Pennsylvania. The Company's primary service area for the telephone, cable television and long-distance business is Shenandoah County, Virginia. The county is a rural area in northwestern Virginia, with an estimated population of approximately 41,000 inhabitants, which has increased by approximately 6,000 since 2000. While a number of new housing developments are being planned for Shenandoah County, the Company believes that the potential for significant numbers of additional wireline customers in the Shenandoah County
operating area is limited. With the acquisition in December 2008 of cable system assets and customers from Rapid Communications, LLC, through the Company's Shentel Cable Company subsidiary, the Company has expanded its cable television services to portions of West Virginia and Alleghany County, Virginia.
As a result of the November 30, 2004 acquisition of the 83.9% of NTC Communications, L.L.C. ("NTC") that the Company did not already own, the Company, through its subsidiary Shentel Converged Services, provides local and long distance voice, video, and Internet services on an exclusive and non-exclusive basis to MDU communities, consisting primarily of off-campus college student housing throughout the southeastern United States including Virginia, North Carolina, Maryland, South Carolina, Georgia, Florida, Tennessee, Mississippi and Delaware. As of December 31, 2008, Converged Services has been classified as a discontinued operation and its assets and liabilities reclassified as held for sale in the consolidated financial statements.
The Company sells and leases equipment, mainly related to the services it provides. The Company participates in emerging services and technologies by investment in technology venture funds and direct investment in non-affiliated companies.
Additional Information About the Company's Business
The following table shows selected operating statistics of the Company for the
three months ending on, or as of, the dates shown:
Dec. 31, Dec. 31, Dec. 31,
2008 2007 2006
---------------------------------
Retail PCS Subscribers 211,462 187,303 153,503
PCS Market POPS (000) (1) 2,310 2,297 2,268
PCS Covered POPS (000) (1) 1,931 1,814 1,752
PCS Average Monthly Retail Churn % (2) 1.9 % 2.3 % 1.9 %
CDMA Base Stations (sites) 411 346 332
EVDO-enabled sites 211 52 -
EVDO Covered POPS (000) 1,663 624 -
Telephone Access Lines 24,209 24,536 24,830
Total Switched Access Minutes (000) 90,460 92,331 80,587
Originating Switched Access Minutes (000) 25,425 26,128 23,995
Long Distance Subscribers 10,842 10,689 10,499
Long Distance Calls (000) (3) 7,981 7,944 7,235
Total Fiber Miles 46,733 35,872 33,764
Fiber Route Miles 756 647 625
Towers (100 foot and over) 103 101 100
Towers (under 100 foot) 15 14 13
Cable Television Subscribers(4) 25,369 8,303 8,440
DSL Subscribers 10,038 8,136 6,599
Dial-up Internet Subscribers 5,151 7,547 9,869
Employees (full time equivalents) 445 411 376
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1) POPS refers to the estimated population of a given geographic area and is based on information purchased by Sprint Nextel from Geographic Information Services. Market POPS are those within a market area which the Company is authorized to serve under its Sprint Nextel agreements, and Covered POPS are those covered by the network's service area.
2) PCS Average Monthly Churn is the average of the three monthly subscriber turnover, or churn calculations for the period.
3) Originated by customers of the Company's Telephone subsidiary.
4) The increase at December 31, 2008 is primarily a result of the acquisition of cable customers from Rapid Communications, LLC, effective December 1, 2008.
Significant Transactions
The 2008, 2007 and 2006 financial results of the Company reflected several
transactions considered non-recurring in nature or significant in size. These
transactions should be noted in understanding the financial results of the
Company for 2008, 2007 and 2006. The following table summarizes the impact of
these transactions, which are described in more detail in the subsequent
paragraphs:
Income Statement Impact
-----------------------------------
Significant Transactions Effective Date 2008 2007 2006
-------------------------------- -------------- -------- ----------- --------
(in thousands)
Cost of share award December 2007 $ - $ (2,074 ) $ -
Net gain from curtailment of November 2006
pension benefits - - 1,022
Cost of early retirement December 2006
incentives - (2,675 ) (389 )
Gain on RTB dissolution March 2006 - - 10,540
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In September 2008, the Company announced its intention to sell its Converged Services segment. The operating results of this segment were reclassified to discontinued operations, and the assets and liabilities were reclassified as assets and liabilities held for sale. Certain costs previously charged or allocated to the Converged Services segment are not appropriately chargeable to discontinued operations, and these costs have been reclassified to the "Other" segment within continuing operations for all periods presented.
In December 2008, the Company closed on the acquisition of certain cable assets serving approximately 17,000 customers in Virginia and West Virginia. The 2008 consolidated income statement includes one month of operations for the Company's new Shentel Cable subsidiary, which is included as part of the Company's Cable Segment.
In March 2007 retroactive to January 1, 2007, the Company amended the Management Agreement with Sprint Nextel. As more fully described below, this amendment simplified the settlement process between the Company and Sprint Nextel primarily by combining the net effect of travel revenue and expense and certain costs charged by Sprint Nextel into a new net service fee of 8.8% of net billed revenue. The net effect of this change was a reduction in both revenues and expenses in our PCS segment. The amended agreement also provided for the Company to acquire the retail store locations described below, and to begin servicing the Sprint Nextel iDEN customer base. This "net" accounting results in revenues, expenses and profit margins of the PCS segment and the Company that may not be directly comparable to other wireless carriers.
In May 2007, the Company acquired 13 retail store locations from Sprint Nextel and began servicing Sprint Nextel's iDEN customers. The Company hired a number of Sprint Nextel employees upon acquisition of the stores, and added additional staff in the stores and to support the expanded retail effort.
In December 2007, the Board of Directors approved an award of shares of common stock to 26 management level employees with more than one year of service. The Company issued 97,730 shares of common stock to the recipients; half were unrestricted shares and the other half carry a two year restriction on disposition of the stock. The Company recorded a $2.1 million charge for the aggregate fair value of the shares distributed.
On November 30, 2006, the Company announced that it would freeze benefit accruals for all participants in the Company's defined benefit pension plans as of January 31, 2007, and that it would replace the frozen benefits by increasing the Company's contributions to the existing 401(k) Supplemental Retirement Plan, as well as a new non-qualified defined contribution plan to be established for selected employees, going forward. The Company also announced that it intended to terminate and settle the defined benefit pension
plan. Included in net pension costs for 2006 was a gain on the curtailment of the pension plans of $1.8 million, offset by $0.8 million of accelerated amortization of prior unrecognized pension costs.
The Company also announced a voluntary early retirement incentive plan for 58 eligible participants, as well as the intention to use the early retirement incentive, attrition, and if necessary, an involuntary reduction in force to eliminate up to 50 positions. Severance benefits on a sliding scale based on pay category and years of service were payable under the reduction in force. As of December 31, 2006, seven employees had elected to accept the early retirement incentive. Included in the Company's consolidated statement of income for 2006 were $0.4 million in estimated costs of the early retirement incentives for these employees. During January 2007, 25 additional employees elected to accept the early retirement offer, and during February 2007, ten employees, including three hired on a temporary basis, separated from service under the reduction in force. The Company recorded approximately $2.0 million in costs associated with the additional early retirements during the first quarter of 2007, and during the fourth quarter of 2007, recognized $0.7 million in pension expense related to the settlement of pension liabilities for employees who took lump sum pension payments following their early retirement. At this time, the Company expects to complete the settlement of the defined benefit pension plan in 2009, and will record approximately $3.4 million in pension expense as settlements occur.
On August 4, 2005, the board of directors of the Rural Telephone Bank ("RTB") adopted resolutions for the purpose of dissolving RTB as of October 1, 2005. The Company held 10,821,770 shares of Class B and Class C RTB Common Stock ($1.00 par value) which was reflected on the Company's books at $796,000 under the cost method at December 31, 2005. In 2006, the Company received $11.3 million in proceeds, and recognized a gain of approximately $6.4 million, net of tax, related to the dissolution of the RTB and the redemption of the stock. In the fourth quarter of 2007, the Company received an additional $0.1 million as a final distribution on the dissolution of the RTB.
Critical Accounting Policies
The Company relies on the use of estimates and makes assumptions that affect its financial condition and operating results. These estimates and assumptions are based on historical results and trends as well as the Company's forecasts as to how these might change in the future. The most critical accounting policies that materially affect the Company's results of operations include the following:
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are based on historical collection and write-off experience, current trends, credit policies, and the analysis of the accounts receivable by aging category. In determining these estimates, the Company compares historical write-offs in relation to the estimated period in which the subscriber was originally billed. The Company also looks at the historical average length of time that elapses between the original billing date and the date of write-off and the financial position of its larger customers in determining the adequacy of the allowance for doubtful accounts. From this information, the Company assigns specific amounts to the aging categories. The Company provides an allowance for substantially all receivables over 90 days old.
The allowance for doubtful accounts balance as of December 31, 2008, 2007 and 2006 was $0.1 million, $0.2 million and $0.6 million, respectively. If the allowance for doubtful accounts is not adequate, it could have a material adverse effect on our liquidity, financial position and results of operations. The decrease in the reserve (above) and in net bad debt write-offs (below) during 2007 reflects changes in the handling of bad debt and related transactions under the amended Sprint Nextel management agreement.
The following table shows bad debt write-offs, net of recoveries, for the three-year period ended December 31, 2008:
(in thousands) Year Ended December 31,
2008 2007 2006
-------- ----- ------- -------
PCS subscribers $ - $ - $ 3,208
Interexchange carriers - - 106
Other subscribers and entities 557 (16 ) 229
-- ----- -- -- ----- - - -----
Net bad debt write-offs $ 557 $ (16 ) $ 3,543
-- ----- -- -- ----- - - -----
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Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the price to the buyer is fixed and determinable and collectability is reasonably assured. Revenues are recognized by the Company based on the various types of transactions generating the revenue. For services, revenue is recognized as the services are performed. For equipment sales, revenue is recognized when the sales transaction is complete.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force ("EITF") No. 00-21, "Accounting for Revenue Arrangements with Multiple Element Deliverables." The EITF guidance addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, are presumed to be a bundled transaction, and the consideration is measured and allocated to the separate units based on their relative fair values. The adoption of EITF 00-21 has required evaluation of each arrangement entered into by the Company for each sales channel. The Company will continue to monitor arrangements with its sales channels to determine if any changes in revenue recognition would need to be made in the future. Substantially all activation fee revenue and associated direct costs are recognized at the time the related wireless handset is sold and is classified as equipment revenue and cost of goods and services, respectively.
Under the Sprint Nextel Management Agreement, wireless service revenues are reported net of the 8% Management Fee and, since its imposition effective January 1, 2007, the 8.8% Net Service Fee retained by Sprint Nextel, in accordance with EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
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. The Company evaluates the recoverability of deferred tax assets generated on a state-by-state basis from net operating losses apportioned to that state. Management uses a more likely than not threshold to make the determination if a valuation allowance is warranted for tax assets in each state. Management will evaluate the effective rate of taxes based on apportionment factors, the Company's operating results, and the various state income tax rates. Currently, management anticipates that the future effective income tax rate will be approximately 40%.
Leases
The Company accounts for operating leases following the guidance of SFAS No. 13, "Accounting for Leases," and FASB Technical Bulletin No. 85-3, "Accounting for Operating Leases with Scheduled Rent Increases." In light of the Company's investment in each site, including acquisition costs and leasehold improvements, the Company includes the exercise of certain renewal options in the recording of operating leases. The Company recognizes rent expense on a straight-line basis over the initial lease term and renewal periods that are reasonably assured at the inception of the lease. Where the Company is the lessor, the Company recognizes revenue on a straight line basis over the non-cancelable term of the lease.
Long-lived Assets
The Company views the determination of the carrying value of long-lived assets as a critical accounting estimate since the Company must determine an estimated economic useful life in order to properly amortize or depreciate long-lived assets and because the Company must consider if the value of any long-lived assets have been impaired, requiring adjustment to the carrying value.
Economic useful life is the duration of time the asset is expected to be productively employed by us, which may be less than its physical life. The Company's assumptions on obsolescence, technological advances, and other factors affect the determination of estimated economic useful life. The estimated economic useful life of an asset is monitored to determine if it continues to be appropriate in light of changes in business circumstances. For example, technological advances may result in a shorter estimated useful life than originally anticipated. In such a case, the Company would depreciate the remaining net book value of the asset over the new estimated remaining life, increasing depreciation expense on a prospective basis.
Fair Value of Converged Services
The Company's assessment of the fair value of the Converged Services assets is based on a review of information related to executed sales transactions for similar businesses. Based on this assessment, the Company has concluded that the fair value (less costs required to sell) is greater than the carrying value of these assets. The ultimate selling price will very much depend on the dynamics of the market and the sale process, and the financial circumstances of the telecommunications industry and the buyers at the time of the sale. It is not possible at this time to anticipate how all of these factors might influence the final sales price or whether the eventual sale will result in a future gain or loss.
In addition, the Company may choose not to sell the business if the current sales process does not result in an offer that the Company deems to be appropriate.
Other
The Company does not have any unrecorded off-balance sheet transactions or arrangements: however, the Company has commitments under operating leases and is subject to up to $0.3 million in capital calls under its investments.
Results of Continuing Operations
2008 Compared to 2007
Consolidated Results
The Company's consolidated results from continuing operations for the years
ended December 31, 2008 and 2007 are summarized as follows:
Year Ended
(in thousands) December 31, Change
2008 2007 $ %
--------- - --------- - -------- - ---- -
Operating revenues $ 144,424 $ 130,365 14,059 10.8
Operating expenses 98,778 93,678 5,100 5.4
Operating income 45,646 36,687 8,959 24.4
Other income (expense) (1,648 ) 589 (2,237 ) n/m
Income tax provision 17,669 15,112 2,557 16.9
Net income from continuing operations $ 26,329 $ 22,164 4,165 18.8
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Operating revenues
For the year ended December 31, 2008, operating revenue increased $14.1 million,
or 10.8%, primarily due to increased revenue in the Company's PCS segment as a
result of a 12.9% increase in retail PCS subscribers during 2008. See the PCS
Segment Results section below for additional details of these changes. In
addition, operating revenue in the Cable TV segment increased by $1.1 million,
largely due to the acquisition of cable customers from Rapid Communications,
LLC. See the Cable TV Segment Results section for additional details on this
change.
Operating expenses
For the year ended December 31, 2008, operating expenses increased $5.1 million, or 5.4%, primarily due to increases in the Company's PCS segment due to network expansion and the provision of EVDO (high speed wireless data access) service, partially offset by costs incurred in 2007 associated with the early retirement offer announced in late 2006, and the cost of the share award distributed in December 2007 to management level employees. The Company recognized expenses associated with these two programs of approximately $4.8 million in 2007.
Other income (expense)
For the year ended December 31, 2008, interest income, dividends and losses on investments totaled $1.1 million of net losses, while for 2007, interest income, dividends and gains on investments totaled $1.6 million of net gains, principally reflecting market losses on investments. Partially offsetting this decline in income was a reduction in interest expense of $0.9 million, principally due to an increase in interest capitalized to capital projects during 2008.
Income tax provision
The Company's effective tax rate decreased slightly from 40.5% in 2007 to 40.2% in 2008.
Segment Results
PCS
Year Ended
(in thousands) December 31, Change
2008 2007 $ %
--------- -- - ------- -- -------- -- - ------ -
Segment operating revenues
Wireless service revenue $ 92,149 $ 80,054 $ 12,095 15.1
Travel and roaming revenue - 45 (45 ) (100.0 )
Equipment revenue 5,214 5,015 199 4.0
Other revenue 2,788 2,193 595 27.1
- ------- -- - ------- -- - ------ -- - ------ -
Total segment operating revenues 100,151 87,307 12,844 14.7
- ------- -- - ------- -- - ------ -- - ------ -
Segment operating expenses
Cost of goods and services, exclusive of
depreciation and amortization shown
separately below 33,536 28,150 5,386 19.1
Selling, general and administrative,
exclusive of depreciation and
amortization shown separately below 16,811 15,226 1,585 10.4
Depreciation and amortization 16,330 15,107 1,223 8.1
- ------- -- - ------- -- - ------ -- - ------ -
Total segment operating expenses 66,677 58,483 8,194 14.0
- ------- -- - ------- -- - ------ -- - ------ -
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