-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GNq1yftxHB61Z/rNUkZG7J/DLWGpbTRlfioHT1S1EU2pVBnvTa6olo/QjDxu7EMa opmCpdKOnO0a9dZZCR04SA== 0000354963-99-000007.txt : 19990403 0000354963-99-000007.hdr.sgml : 19990403 ACCESSION NUMBER: 0000354963-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHENANDOAH TELECOMMUNICATIONS CO/VA/ CENTRAL INDEX KEY: 0000354963 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 541162807 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09881 FILM NUMBER: 99584144 BUSINESS ADDRESS: STREET 1: PO BOX 459 STREET 2: 124 SOUTH MAIN ST CITY: EDINBURG STATE: VA ZIP: 22824 BUSINESS PHONE: 5409844141 MAIL ADDRESS: STREET 1: P O BOX 459 CITY: EDINBURG STATE: VA ZIP: 22824 10-K 1 SHENANDOAH TELECOMMUNICATIONS COMPANY 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 1998 Commission File No.: 0-9881 SHENANDOAH TELECOMMUNICATIONS COMPANY (Exact name of registrant as specified in its charter) VIRGINIA 54-1162807 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 124 South Main Street, Edinburg, VA 22824 (Address of principal executive office, including zip code) Registrant's telephone number, including area code: (540) 984-4141 Securities Registered Pursuant to Section 12(b) of the Act: COMMON STOCK (NO PAR VALUE) (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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 [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 1, 1999. $72,775,301. (In determining this figure, the registrant has assumed that all of its officers and directors are affiliates. Such assumption shall not be deemed to be conclusive for any other purpose.) The Company's stock is not listed on any national exchange nor NASDAQ; therefore, the value of the Company's stock has been determined based upon the average of the prices of transactions in the Company's stock that were reported to the Company during the year. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 1, 1999 Common Stock, No Par Value 3,755,760 Documents Incorporated by Reference 1998 Annual Report to Security Holders Parts II, IV Proxy Statement, Dated March 26, 1999 Parts III EXHIBIT INDEX PAGES 7 -8 SHENANDOAH TELECOMMUNICATIONS COMPANY Item Page Number Number PART I 1. Business 1 2. Properties 1-2 3. Legal Proceedings 2 4. Submission of Matters to a Vote of Security Holders 2 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters 3 6. Selected Financial Data 3 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 8. Financial Statements and Supplementary Data 4 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 4 PART III 10. Directors and Executive Officers of the Registrant 5 11. Executive Compensation 5 12. Security Ownership of Certain Beneficial Owners and Management 5 13. Certain Relationships and Related Transactions 5 PART IV 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 6-7 PART I ITEM 1. BUSINESS Shenandoah Telecommunications Company is a diversified telecommunications holding company providing both regulated and unregulated telecommunications services through its eight wholly-owned subsidiaries. The Company's business strategy is to provide integrated, full service telecommunications products and services in the Northern Shenandoah Valley and surrounding areas. This geographic area includes the four-state region from Harrisonburg, Virginia to Chambersburg, Pennsylvania, and on a limited basis into Northern Virginia. Our fiber network, consisting of 4,778 fiber miles, is a state-of-the-art electronic backbone utilized for many of our services. The main lines of this network cover 146 miles on the Interstate-81 corridor and 62 miles on the Interstate-66 corridor. The Company has also submitted an application for authority to offer competitive local exchange services in portions of the state that are outside of our present telephone service area. The Company has approximately 170 employees. The Company operates nine reporting segments based on the products and services provided by the parent company and the operating subsidiaries. There are minimal seasonal variations in the Company's operations. The Company holds licenses for personal communications services, and as managing partner of the VA 10 RSA partnerships controls a cellular license, all in the Northern Shenandoah Valley of Virginia. The company also holds paging and other radio telecommunications licenses. Shenandoah Telecommunications Company The Holding Company invests in both affiliated and non-affiliated companies. The Company's largest investments in non-affiliated companies are Loral Space and Communications Limited (Loral), Concept Five Technologies, and South Atlantic Venture Fund III (SAVF III), and South Atlantic Private Equity IV LP (SAPE IV). Loral is a publicly traded corporation offering satellite communications. Concept Five Technologies is a startup company developing security software for electronic financial transactions. SAVF III and SAPE IV are venture capitalist funds that generally invest in startup telecommunications companies. Shenandoah Telephone Company This subsidiary provides both regulated and non-regulated telephone services to approximately 22,000 customers, primarily in Shenandoah County and small service areas in Rockingham, Frederick, and Warren counties in Virginia. Its largest source of revenue is for access to the local exchange network by interexchange carriers. In addition, this subsidiary offers facility leases of fiber optic capacity in Frederick, Rockingham, and Shenandoah Counties, and along the Interstate-66 corridor into Herndon, Virginia. The Telephone subsidiary has a 20 percent ownership in ValleyNet, which is a partnership offering network facilities in western, central, and northern Virginia, as well as the Interstate 81 corridor through West Virginia, and Maryland, terminating in Carlisle, Pennsylvania. The Company has one customer that accounts for greater than 10% of its revenue, primarily consisting of carrier access charges for long distance service as referenced in Note 8 to the Consolidated Financial Statements. Shenandoah Cable Television Company This subsidiary provides coaxial-based cable television service to approximately 8,500 customers in Shenandoah County. On September 30, 1996, the Company purchased the Shenandoah County cable television assets of FrontierVision Operating Partners LP, more than doubling the then existing Cable Television customer base. In 1997, the rebuild and expansion of this wireline system to a state-of-the art hybrid fiber coaxial network was initiated. The upgrade to 750 megahertz provides better signal quality, expands the number of channels, and provides the infrastructure for future offerings of broadband services. ShenTel Service Company (ShenTel) ShenTel Service Company sells and services telecommunications equipment and provides Internet access to customers in the Northern Shenandoah Valley. The Internet service, established in late 1994, now represents over 54% of this subsidiary's total revenues. During 1998, work was completed on upgrading all of our modems to the v.90 standard, the latest available for dial-up access. Shenandoah Valley Leasing Company This subsidiary finances purchases of telecommunications equipment to customers of the other subsidiaries, particularly ShenTel Service Company. Shenandoah Mobile Company Shenandoah Mobile Company provides paging and mobile telephone service throughout the Virginia portion of the Northern Shenandoah Valley. This subsidiary also provides tower services along the Interstate-81 corridor from Chambersburg, Pennsylvania to Harrisonburg, Virginia, as well as the western most portions of the Intersate-66 corridor in Virginia. The towers are typically located where multiple wireless services can be jointly offered. Shenandoah Mobile Company is the managing partner and 66% owner of the Virginia 10 RSA Limited Partnerships, which provide cellular service in the Northern Shenandoah Valley of Virginia. The cellular service is marketed under the Shenandoah Cellular name through retail stores in Winchester and Front Royal, Virginia. Shenandoah Long Distance Company This subsidiary principally offers long distance service for calls placed to locations outside the regulated telephone service area. This operation purchases switching and billing and collection services from the telephone subsidiary. Shenandoah Network Company This subsidiary operates the Maryland and West Virginia portions of our fiber optic network in the Interstate-81 corridor. In conjunction with the telephone subsidiary, Shenandoah Network Company is associated with the ValleyNet fiber network. Shenandoah Personal Communications Company This subsidiary began offering personal communications services (PCS) the next generation of wireless telephone and data service, in 1996. The service is offered from Chambersburg, Pennsylvania to Harrisonburg, Virginia under an agreement with American Personal Communications (APC) for the western part of the Washington/Baltimore metropolitan trading area. The service is marketed under the Sprint SpectrumSM name to a potential customer base of 750,000. Retail stores are operated in Hagerstown, Maryland; Winchester, Virginia; and Harrisonburg, Virginia. Additional detail on the operating segments is referenced in Note 2 of the 1998 Annual Report. The registrant does not engage in operations in foreign countries. Working capital practices and competitive conditions are discussed in Management Discussion and Analysis of the Consolidated Financial Statements. The Company has no research and development expenses. This Annual 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. ITEM 2. PROPERTIES The Company owns a 24,000 square foot building in Edinburg, Virginia that houses the corporate headquarters and the main telecommunications equipment. A separate 10,000 square foot building in Edinburg, Virginia is used for customer services and retail sales. The Company also owns eight telephone exchange buildings that are located in the major towns and some of the rural communities, serving the regulated service area. These buildings contain switching and fiber optic equipment and associated local exchange telecommunications equipment. The Company owns a 6,000 square foot service building outside of the town limits of Edinburg, Virginia. The Company owns a 10,000 square foot retail store in Winchester, Virginia. The Company has fiber optic hubs or points of presence in Hagerstown, Maryland; Harrisonburg, Herndon, Stephens City, Weyers Cave, and Winchester, Virginia; and Martinsburg, West Virginia. The buildings are a mixture of owned on leased land, leased space, and leasehold improvements. The majority of the identified properties are of masonry construction, are suitable to their existing use, and are in adequate condition to meet the foreseeable future needs of the organization. The Company also leases retail space in Harrisonburg and Front Royal, Virginia and Hagerstown, Maryland. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders for the three months ended December 31, 1998. EXECUTIVE OFFICERS Name Title Age Date In Position Christopher E. French President 41 April 1988 David E. Ferguson Vice President of Customer 52 November 1982 Service Laurence F. Paxton Vice President of Finance 46 June 1991 William L. Pirtle Vice President of PCS 39 November 1992 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) Common stock price ranges are incorporated by reference - 1998 Annual Report to Security Holders Market Information - Inside Front Cover (b) Number of equity security holders are incorporated by reference - 1998 Annual Report to Security Holders Five-Year Summary of Selected Financial Data - Page 24 (c) Frequency and amount of cash dividends are incorporated by reference - 1998 Annual Report to Security Holders Market and Dividend Information - Inside Front Cover Additionally, the terms of a mortgage agreement require the maintenance of defined amounts of the subsidiary's equity and working capital after payment of dividends. Accordingly, approximately $3,067,000 of retained earnings was available for payment of dividends at December 31, 1998. For additional information, see Note 4 in the Consolidated Financial Statements of the 1998 Annual Report to Security Holders, which is incorporated as a part of this report. ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary of Selected Financial Data is incorporate by reference - 1998 Annual Report to Security Holders Five-Year Summary of Selected Financial Data - Page 24 PART II (Continued) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of operations, liquidity, and capital resources are incorporated by reference - 1998 Annual Report to Security Holders Management's Discussion and Analysis of Financial Condition and Results of Operations - Pages 21`-23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements included in the 1998 Annual Report to Security Holders are incorporated by reference as identified in Part IV, Item 14, on Pages 6-21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors and executive officers is incorporated by reference - Proxy Statement, Dated March 26, 1999 - Pages 2 - 6 ITEM 11. EXECUTIVE COMPENSATION by reference - Proxy Statement, Dated March 26, 1999 - Pages 5 - 6 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) No person, director or officer owned over 5 percent of the common stock as of March 1, 1999. (b) Security ownership by management is incorporated by reference - Proxy Statement, Dated March 26, 1999 Stock Ownership - Page 3 (c) Contractual arrangements - The Company knows of no contractual arrangements which may, at a subsequent date, result in change of control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no relationships or transactions to disclose other than services provided by Directors which are incorporated by reference - Proxy Statement, Dated March 26, 1999 Directors - Page 3 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Document List The following documents are filed as part of this Form 10-K. Financial statements are incorporated by reference and are found on the pages noted. Page Reference Annual Report 1. Financial Statements The following consolidated financial statements of Shenandoah Telecommunications are included in Part II, Item 8 Auditor's Report 1998, 1997, and 1996 Financial Statements 21 Consolidated Balance Sheets at December 31, 1998, 1997, and 1996 6&7 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 8 Consolidated Statement of Changes in Stockholders' Earnings Equity Years Ended December 31, 1998, 1997, and 1996 9 Consolidated Statements of Cash Flow for the Years Ended December 31, 1998, 1997, and 1996 10 Notes to Consolidated Financial Statements 11-20 PART IV (Continued) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (Continued) Page Reference Annual Report 2. Financial Statement Schedules All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the accompanying financial statements or notes thereto. 3. Exhibits Exhibit No. 13. Annual Report to Security Holders - Filed Herewith 20. Proxy Statement, prepared by Registrant for 1999 Annual Stockholders Meeting - 21. List of Subsidiaries - Filed Herewith 23. Consent of McGladrey & Pullen, LLP 27. Financial Data Schedule B. Reports on Form 8-K None PART IV (Continued) SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) 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 March 30, 1999 By /s/ CHRISTOPHER E. FRENCH Christopher E. French, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. President & Chief Executive /s/ CHRISTOPHER E. FRENCH Officer March 30, 1999 Christopher E. French /s/ LAURENCE F. PAXTON Principal Financial March 30, 1999 Laurence F. Paxton Accounting Officer /s/ DICK D. BOWMAN Treasurer & Director March 30, 1999 Dick D. Bowman /s/ DOUGLAS C. ARTHUR Director March 30, 1999 Douglas C. Arthur /s/ KEN L. BURCH Director March 30, 1999 Ken L. Burch /s/ HAROLD MORRISON, Jr. Director March 30, 1999 Harold Morrison, Jr. /s/ NOEL M. BORDEN Director March 30, 1999 Noel M. Borden /s/ JAMES E. ZERKEL II Director March 30, 1999 James E. Zerkel II Stockholder 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 communications equipment and services; Internet access; financing of purchases of telecommunications facilities and equipment; paging, mobile telephone, and cellular telephone services in the Northern Shenandoah Valley; resale of long distance services; operation and maintenance of an interstate fiber optic network; and building and operating a personal communications network in the four-state region from Chambersburg, Pennsylvania to Harrisonburg, Virginia. ANNUAL MEETING The Board of Directors extends an invitation to all stockholders to attend the Annual Meeting of Stockholders. The meeting will be held Tuesday, April 20, 1999, at 11:00 a.m. in the Social Hall of the Edinburg Fire Department, Stoney Creek Boulevard, Edinburg, Virginia. Notice of the Annual Meeting, Proxy Statement, and Proxy were mailed to each stockholder on or about March 26, 1999. FORM 10-K The company's annual report on form 10-k filed with the securities and exchange commission is available to stockholders, without charge, upon request to mr. Laurence f. Paxton, vice president - finance, shenandoah telecommunications company, p. O. Box 459, edinburg, va 22824. INDEPENDENT AUDITOR McGladrey & Pullen, LLP 1051 East Cary Street Richmond, VA 23219 CORPORATE HEADQUARTERS Shenandoah Telecommunications Company 124 South Main Street Edinburg, VA 22824 MARKET AND DIVIDEND INFORMATION The stock of Shenandoah Telecommunications Company is not listed on any national exchange or NASDAQ, and the Company is not aware of any broker who maintains a position in the Company's stock. It, however, is aware of unconfirmed transactions of the stock which have been handled privately and by brokers and local auctioneers. Additionally, the stock is traded on the over-the-counter bulletin board system. Some of these prices include commissions and auctioneers' fees. Since some prices are not reported to the Company and family transactions are not applicable, all transactions are not included in the following summary of prices. The Company has maintained a policy of declaring an annual cash dividend. 1997 - ---------------------------------------- No. No. Quarter Trans. Shares High Low 1st 90 7,614 $30.00 $20.00 2nd 221 18,124 25.00 19.00 3rd 223 16,357 25.00 18.00 4th 36 3,380 25.00 17.00 Weighted average price per $20.59 share - Annual cash dividend per .43 share - 1998 - ---------------------------------------- No. No. Quarter Trans. Shares High Low 1st 58 16,948 $26.50 $18.00 2nd 87 11,779 25.00 18.00 3rd 21 2,591 24.75 18.00 4th 88 14,726 25.00 18.75 Weighted average price per $19.94 share - Annual cash dividend per .51 share - STOCKHOLDERS' 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 Stockholders 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 Stockholders March 26, 1999 Dear Stockholder: [GRAPHIC APPEARS HERE] Your Company had an excellent year in 1998. Our financial performance was very strong as we achieved net income of $1.49 per share, basic and diluted, compared to $1.19 in 1997, an increase of 25 percent. Net income was $5.6 million, compared to $4.5 million in the previous year. In 1998, our revenues grew to $35.6 million, compared to $31.0 million in 1997, an increase of 14.9 percent. The Board of Directors declared a cash dividend of 51 cents per share, which was paid on December 1, 1998 to stockholders of record as of November 13, 1998. The $1.9 million total dividend was a cash payout to stockholders of 34.2 percent of the Company's net income and represented an 18.6 percent increase over the 1997 dividend. In addition to the improved financial performance, the quality of service provided to our customers, as measured by our trouble index, improved to 1.41 from 1997's index of 1.59 troubles reported per 100 customers. This improvement is in large part due to the significant investment we have made to upgrade our CATV system; our continued deployment of fiber optic technology in our local network facilities; and, our ongoing efforts to correct any deficiencies in our facilities or services. Telephone and Mobile Subsidiaries Lead Growth in Net Income Both our Telephone and Mobile subsidiaries had solid increases in net income. Our PCS, ShenTel, and CATV subsidiaries all reduced their losses from the previous year but have not yet reached profitability. Our PCS operation's loss was reduced by $578,000, from 1997's loss of $2.5 million. While this was a good improvement, much more will be needed before we will have this line of business at breakeven or profitable levels. We are continuing our efforts to reduce our operating costs for this business while maintaining the quality of service that our customers expect from our organization, and that we expect of ourselves. Internet Business Fastest Growing ShenTel Service Company's Internet business continued its strong growth, with revenues increasing over 64 percent. Our Internet customer base grew 56 percent, and Internet revenues now represent over 54 percent of this subsidiary's total revenues. We are also finding that in addition to the rapid growth in customers, the usage patterns of our customers are also changing. Our customers are increasingly spending longer periods of time on the "Net", and are connecting more frequently than in the past. [GRAPHIC APPEARS HERE] [CAPTION]James Wellard inspects state-of-the-art modem pool used by ShenTel Internet The Company has continued to invest heavily in this business and the network needed to support this rapidly growing customer base. During 1998, work was completed on upgrading all of our modems to the v.90 standard, the latest available for dial-up access, and the Company continued to add additional modem capacity. Expanding demand for this service has created some growing pains, particularly in our ability to obtain additional trunking capacity from some of the other network providers we must depend on in parts of our Internet service area. Along with the additions to our modem and trunking capacity, we have recently replaced our mail server with a new redundant system, which has many features to enhance reliability. The server and its associated disk array are specifically designed to be extremely reliable, and to perform well in the most demanding environments. When we started our Internet business in September of 1994, one of our objectives was to offer a service which approached the levels of reliability that we had achieved with our telephone service, and which we believed our customers would demand. The rate at which we are adding customers, and the rate at which customers are increasing their time on-line, indicates that we are making progress toward this goal. CATV Service Improved Our CATV operation had another loss for the year, primarily due to the pressures on expenses from increased programming and royalty fees, as well as increased depreciation and interest expenses to support our ongoing system upgrades. In 1998 over $2.2 million was spent on a major upgrade to a portion of our cable system. Because of this significant investment, there has been a drastic reduction in the number of customer complaints on picture quality and service outages. By the end of 1999, our plans are to complete this upgrade throughout the entire system. With this upgrade, and through the extensive use of our fiber optic network, we will be able to offer additional enhanced services, such as pay-per-view and multiple music audio channels. In addition to these investments to provide a state-of-the-art cable television system, we are faced with increased operating costs. In order to provide better service, more channels, more original programming, and keep pace with the cost of doing business, we will again have to adjust our service rates. When compared to the cost of cable service in the surrounding communities and other entertainment options, our offerings are still a great value for our customer's entertainment dollars. To give our customers the option to reduce their cable television cost if they do not wish to take advantage of all of the programming that is available, we have introduced a new Economy Service Plan. The new plan offers 12 channels of programming, including all of the major networks. [GRAPHIC APPEARS HERE] [CAPTION]Company Participates in Development of Advanced Traveler Information System While most of our efforts during 1998 were focused on growing and improving our present businesses, we also began to build the foundation for future expansion and growth. One of these efforts led to our involvement in two projects, valued at over $900,000, to develop and build a comprehensive advanced traveler information system (ATIS) for the Shenandoah Valley region of Virginia, and then to expand that model statewide. In addition to the contributions of ShenTel, funding for this initiative is also being provided by the Virginia Department of Transportation (VDOT), the Virginia Tourism Corporation, and the Virginia Intelligent Transportation Systems Implementation Center. The Shenandoah ATIS, called "Travel Shenandoah", will be an integrated traveler information service, providing comprehensive, timely, accurate, and useful information on traffic and travel conditions, traveler services, tourist destinations, and emergency services information to travelers, potential travelers and those serving travelers in the I-81 corridor. Additionally, VDOT and the State Police will be able to use Travel Shenandoah to help manage I-81 traffic incidents, including disruptions in traffic flow created by highway construction as I-81 is widened. Potential delivery mechanisms for this information include the world-wide-web, kiosks, cellular phones, PCS/digital wireless phones, pagers, changeable roadside advisory signs, radio, and cable TV. ShenTel's wide array of telecommunications products and services makes the Company an ideal partner to help put this project together. [GRAPHIC APPEARS HERE] [CAPTION]Early mockup of "Travel Shenandoah" web page Application for Authority to Offer Competitive Local Services in Virginia In November of 1998, the Company filed with the Virginia State Corporation Commission for a certificate to provide competitive local exchange services in portions of the state that are outside of our present telephone service area. A hearing to consider granting this certificate was held by the Commission on March 9, 1999. Having this authority will enable the Company to offer a package of services to our customers that better meets all of their telecommunications needs. Receiving the necessary regulatory authority is just the first step in a lengthy process, which must then be followed with negotiations to interconnect with the incumbent local telephone companies serving the areas we choose to serve. We will closely evaluate each opportunity to expand our service offering to ensure that we can maximize use of our existing infrastructure and economically grow our business. These competitive services will be provided under a new subsidiary, ShenTel Communications Company. Employee Efforts Lead System Changes As covered in management's review later in this report, our Company continued its work preparing for the date change to the year 2000 (Y2K). Many employees have been involved in various aspects of our readiness efforts. When it was recognized that our existing financial accounting software package would not be Y2K compliant, we seized the opportunity to find a system which would not only handle the date changes, but one which would also give us improved accounting capabilities. Our project team handling the implementation of our new financial accounting software package has expended a tremendous amount of effort. Once the project is completed in the second quarter of 1999, we will have a system which allows us to better track our costs and to produce more timely and detailed management reports. [GRAPHIC APPEARS HERE] [CAPTION]Members of project team participate in one of many work sessions for implementation of new financial accounting system Board of Directors Adopts Dividend Reinvestment Plan Last fall we surveyed your level of interest in the Company offering a Dividend Reinvestment Plan, and the results were overwhelmingly in favor of the Company putting such a plan in place. The Board of Directors has adopted a plan, which has been filed with the Securities and Exchange Commission. A prospectus and enrollment card is expected to be mailed to all stockholders sometime in May of this year. The details of the plan and how it operates will be outlined in the prospectus. Briefly, this optional plan will enable those who elect to participate to have their dividends reinvested in Company stock. It is the Board's intention that the shares to be purchased by the reinvested dividends will come from open-market purchases. These purchases will be made by Legg Mason Wood Walker, Inc., who will act as the Purchasing Agent for the plan. These dividend dollars will then be reinvested in stock, based on the average market price that the Purchasing Agent paid to obtain the required number of shares. The Company will then transfer to the participating stockholders the number of whole shares that their reinvested dividends are able to purchase; and, any remaining cash balance will then be distributed. Stock Price Did Not Reflect Improved Financial Performance While our financial and service performances during the year were excellent, the prices reported for transactions in our Company's stock continued to be a disappointment. While we recognize the decreases in earnings that we had prior to 1998 could have had a negative impact on our stock price, we would expect that our strong growth in earnings and large increase in dividend payout should now have a positive effect. We continue to have very low turnover in our stockholder base; however, the number of shareholders grows steadily each year. Prices reported on the over-the-counter bulletin board system for our stock (which is traded under the symbol SHET) have varied and ranged from $19 to $23 since the beginning of December. This price range equates to a multiple of 12.8 to 15.4 times our 1998 earnings of $1.49 per share. By comparison, the multiple for the S&P 500 and the average of the large telephone companies is over 20 times earnings, possibly indicating there is room for our price to increase. Based on the prices reported to the Company for private and auction sales in January and February of this year, these transactions appear to be approximately 10 percent greater than the same months for 1998. As we have talked with stockholders and worked with our financial advisors, one clear message is that we must continue to show long-term growth and profitability. We believe we are on the right path to this continued, profitable growth, and trust this will ultimately be reflected in the value of your investment in the Company. For the Board of Directors /s/ Christopher E. French -------------------------- Christopher E. French, President Comparative Highlights Increase (Decrease) December 31 1998 1997 Amount Percent Operating Revenues $35,594,025 $30,970,348 $ 4,623,677 14.9 Operating Expenses $25,089,784 $22,603,314 $ 2,486,470 11.0 Income Taxes $ 3,598,642 $ 2,593,631 $ 1,005,011 38.7 Interest Expense $ 1,501,729 $ 1,556,352 $ (54,623) (3.5) Net Income $ 5,603,775 $ 4,479,563 $ 1,124,212 25.1 Net Income from Operations (1) $ 5,364,242 $ 4,530,642 $ 833,600 18.4 diluted $ 1.49 $ 1.19 $ .30 25.2 Cash Dividend per share $ .51 $ .43 $ .08 18.6 Percent Return on Equity 11.2 9.6 1.6 16.7 Common Shares Outstanding 3,755,760 3,760,760 (5,000) (.1) No. of Stockholders 3,654 3,567 87 2.4 No. of Employees (full-time equivalent) 170.5 176 (5.5) (3.1) Wages & Salaries $ 6,129,485 $ 5,675,907 $ 453,578 8.0 Investment in Net Plant $65,034,477 $57,064,176 $ 7,970,301 14.0 Capital Expenditures $13,664,692 $10,687,958 $ 2,976,734 27.9 Access Lines 22,357 21,541 816 3.8 Long Distance Messages 14,550,514 13,423,706 1,126,808 8.4 CATV Customers 8,428 8,186 242 3.0 (1) Excludes gains and losses on external investments unaffiliated with operations. Officers Christopher E. French Noel M. Borden President Vice President Dick D. Bowman Zane Neff Treasurer Assistant Secretary Harold Morrison, Jr. Laurence F. Paxton Secretary Vice President-Finance [GRAPHIC APPEARS HERE] (Seated l to r ) Holler, Zerkel, Bowman, Morrison, and Borden. (Standing l to r) Neff, French, Arthur, and Burch. Board of Directors Douglas C. Arthur, Attorney-at-Law; Director, First National Corporation Noel M. Borden, President, H. L. Borden Lumber Co. (a retail building materials firm); Chairman of the Board, First National Corporation Dick D. Bowman, President, Bowman Brothers, Inc; Director, The Rockingham Group; Director, Old Dominion Electric Cooperative Ken L. Burch, Farmer Christopher E. French, President, Shenandoah Telecommunications Co. & its Subsidiaries; Director, First National Corporation Grover M. Holler, Jr., President, Valley View, Inc. (a real estate developer) Harold Morrison, Jr., Chairman of the Board, Woodstock Garage, Inc. (auto sales & repair firm); Director, First Virginia Bank-Blue Ridge Zane Neff, Retired Manager, Hugh Saum Co., Inc. (a hardware and furniture store); Director, Crestar Bank James E. Zerkel II, Vice President, James E. Zerkel, Inc. (a hardware firm); Director, Shenandoah Valley Electric Cooperative; Member, Shenandoah County Industrial Development Authority Consolidated Balance Sheets December 31, 1998, 1997 and 1996 ASSETS (Note 4) 1998 1997 1996 - ------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 4,891,109 $5,203,521 $ 3,763,468 Certificates of deposit - 204,122 1,142,181 Held-to-maturity securities (Note 3) 499,581 1,622,433 2,148,945 Accounts receivable, including interest 4,272,016 5,682,798 4,208,742 Materials and supplies 3,488,137 3,968,791 2,888,709 Prepaid expenses and other current assets 777,853 507,165 399,074 --------------------------------------- Total current assets 13,928,696 17,188,830 14,551,119 --------------------------------------- Securities and Investments (Note 3) Available-for-sale securities 2,677,789 3,597,997 2,738,431 Held-to-maturity securities - 499,581 1,622,433 Other investments 5,921,206 4,721,517 4,112,947 --------------------------------------- 8,598,995 8,819,095 8,473,811 --------------------------------------- Property, Plant and Equipment Plant in service 88,427,844 74,144,956 65,215,491 Plant under construction 5,670,371 8,232,517 5,626,710 --------------------------------------- 94,098,215 82,377,473 70,842,201 Less accumulated depreciation 29,063,738 25,313,297 21,648,820 --------------------------------------- 65,034,477 57,064,176 49,193,381 --------------------------------------- Other Assets Cost in excess of net assets of business 4,876,215 5,157,078 5,532,601 acquired, less accumulated amortization Deferred charges and other assets 354,216 476,687 523,185 Radio Spectrum License net of accumulated amortization 653,145 702,036 - Deposit - - 1,100,000 --------------------------------------- 5,883,576 6,335,801 7,155,786 --------------------------------------- $ 93,445,744 $ 89,407,902 $79,374,097 ======================================= See Notes to Consolidated Financial Statements. LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 1996 - ------------------------------------------------------------------------------- Current Liabilities Current maturities of long- term debt (Note 4) $ 863,972 $ 544,954 $ 529,405 Accounts payable 1,149,286 3,743,701 2,097,115 Advance billings and payments 712,581 631,815 590,336 Customers' deposits 113,586 98,905 89,591 Accrued compensation 890,443 660,659 478,300 Other current liabilities 1,072,422 1,266,110 639,495 Other taxes payable 214,433 153,678 128,144 --------------------------------------- Total current liabilities 5,016,723 7,099,822 4,552,386 --------------------------------------- Long-Term Debt, less current maturities (Note 4) 28,398,374 26,815,706 24,176,834 --------------------------------------- Other Liabilities and Deferred Credits Deferred investment tax credit 145,909 216,256 291,957 Deferred income taxes (Note 5) 6,741,121 5,987,860 4,908,170 Pension and other (Note 6) 1,331,465 883,568 573,363 --------------------------------------- 8,218,495 7,087,684 5,773,490 --------------------------------------- Minority Interests 2,265,426 1,894,206 1,743,465 --------------------------------------- Stockholders' Equity (Note 4) Common stock, no par value, authorized 8,000,000 shares; issued 1998-3,755,760 shares, 1997 and 1996-3,760,760 shares 4,734,377 4,740,677 4,740,677 Retained earnings 44,173,730 40,579,090 37,716,654 Accumulated other comprehensive income, Unrealized gain on available-for-sale Securities, net (Note 3) 638,619 1,190,717 670,591 --------------------------------------- 49,546,726 46,510,484 43,127,922 --------------------------------------- $93,445,744 $89,407,902 $79,374,097 ======================================= Consolidated Statements of Income Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------- Operating revenues: Telephone: Local service $3,782,026 $3,589,042 $3,319,648 Access and toll service 7,835,509 7,347,703 7,021,504 Directory 1,189,578 1,129,976 1,131,540 Facility leases 2,043,930 1,977,122 1,838,293 Billing, collection and other 680,802 589,443 549,360 --------------------------------------- Total telephone revenues 15,531,845 14,633,286 13,860,345 Other: Cable television 3,098,160 2,513,802 1,277,017 ShenTel Service 2,530,982 2,115,443 1,688,795 Long distance 930,433 902,276 1,042,083 Mobile 9,754,858 8,424,016 6,620,093 Network 614,934 614,934 535,225 PCS 3,131,130 1,751,291 387,446 Other 1,683 15,300 18,850 --------------------------------------- Total operating revenues 35,594,025 30,970,348 25,429,854 --------------------------------------- Operating expenses: Cost of products sold 1,464,505 2,189,810 1,626,181 Line costs 387,652 382,924 421,064 Plant specific 2,852,691 2,719,811 2,262,224 Plant nonspecific: Network and other 5,483,253 4,480,998 3,291,073 Depreciation and amortization 5,429,815 4,681,858 3,529,554 Customer operations 4,925,552 4,312,552 3,347,804 Corporate operations 2,702,029 2,669,743 2,297,308 Taxes other than income 958,681 463,109 367,590 Other 885,606 702,509 342,405 --------------------------------------- 25,089,784 22,603,314 17,485,203 --------------------------------------- Operating income $10,504,241 $ 8,367,034 $ 7,944,651 Other income (expenses): Nonoperating income, less expenses 2,054,437 1,396,881 1,115,888 Interest expense (1,501,729) (1,556,352) (803,300) Gain (loss) on disposal of assets (718,312) (48,628) 228,250 --------------------------------------- 10,338,637 8,158,935 8,485,489 Income taxes (Note 5) 3,598,642 2,593,631 2,821,586 --------------------------------------- 6,739,995 5,565,304 5,663,903 Minority interests (1,136,220) (1,085,741) (669,314) --------------------------------------- Net income $5,603,775 $4,479,563 $4,994,589 ======================================= Net earnings per share, basic and diluted $ 1.49 $ 1.19 $ 1.33 ======================================= Cash dividends per share $ 0.51 $ 0.43 $ 0.42 ======================================= Weighted average shares outstanding 3,756,388 3,760,760 3,760,760 ======================================= See Notes to Consolidated Financial Statements. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1998, 1997 and 1996 Accumulated Other Common Retained Comprehensive Shares Stock Earnings Income Total ------------------------------------------------------------------------------ Balance, January 1, 1996 3,760,760 4,740,677 $34,301,584 $229,012 $39,271,273 ---------- Comprehensive income: Net income - - 4,994,589 - 4,994,589 Change in unrealized gain on securities available-for-sale, net of tax of $285,198 - - - 441,579 441,579 --------- Total comprehensive income 5,436,168 --------- Dividends declared - - (1,579,519) - (1,579,519 ----------------------------------------------------- Balance, December 31,1996 3,760,760 4,740,677 37,716,654 670,591 43,127,922 ---------- Comprehensive income: Net income - - 4,479,563 - 4,479,563 Change in unrealized gain on securities available-for-sale, net of tax of $346,046 - - - 520,126 520,126 -------- Total comprehensive income 4,999,689 --------- Dividends declared - - (1,617,127) - (1,617,127) ----------------------------------------------------- Balance, December 31, 1997 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 of ($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 ==================================================== See Notes to Consolidated Financial Statements. Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $5,603,775 $4,479,563 $4,994,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,976,079 4,246,049 3,402,794 Amortization 453,736 435,809 126,760 Deferred taxes 1,121,371 733,644 695,921 (Gain) loss on disposal of assets 718,312 48,628 (228,250) (Gain) loss on equity investments (1,816,236) (301,435) 189,389 Minority share of income, net of distributions 371,220 150,741 244,314 Other (70,347) (106,665) 75,883 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 1,410,782 (1,474,056) (1,134,612) Material and supplies 480,654 (1,080,082) (952,981) Increase (decrease) in: Accounts payable (2,594,415) 808,119 1,283,228 Other prepaids, deferrals and accruals 369,507 530,509 43,018 ------------------------------------- Net cash provided by 11,024,438 8,470,824 8,740,053 operating activities ------------------------------------- Cash Flows From Investing Activities Purchases of property and equipment (13,664,692) 10,687,958) (15,217,862) Acquisition of cable television - - (7,617,199) assets Deposit (refund) on licenses - 397,964 (1,100,000) Purchase of certificates of deposit - (2,436,818) (1,134,528) Maturities of certificates of 204,122 3,374,877 1,234,575 deposits Cash flows from securities (Note 3) 2,238,980 1,328,857 185,437 Other, net (1,511) (16,337) 54,628 ------------------------------------- Net cash used in investing (11,223,101) (8,039,415) (23,594,949) activities ------------------------------------- Cash Flows From Financing Activities Dividends paid $(1,915,435) $1,617,127) $1,579,519) Redemption of common stock (100,000) - - Proceeds from long-term debt 2,405,500 3,179,500 14,584,839 Principal payments on long-term debt (503,814) (553,729) (493,403) ------------------------------------- Net cash provided by (used in) financing activities (113,749) 1,008,644 12,511,917 ------------------------------------- Net increase (decrease) in cash and cash equivalents (312,412) 1,440,053 (2,342,979) Cash and cash equivalents: Beginning 5,203,521 3,763,468 6,106,447 ===================================== Ending $ 4,891,109 $5,203,521 $3,763,468 ===================================== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest, net of capitalized interest of $422,403 in 1998, $279,398 in 1997, and $210,168 in 1996 $2,116,323 $1,835,750 $ 726,242 ===================================== Income taxes $2,760,400 $1,929,172 $2,071,027 ===================================== Proceeds of long-term debt for stock in Rural Telephone Bank $ - $ 28,650 $ 55,850 ===================================== See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Note 1. Summary of Accounting Policies Shenandoah Telecommunications Company and subsidiaries (the "Company") operates entirely in the telecommunications industry. The Company provides telephone service, cable television service, unregulated communications equipment and services, paging, mobile telephone, cellular telephone, Internet access, and personal communications services. In addition, through its subsidiaries, the Company finances purchases of telecommunications facilities and equipment and operates and maintains an interstate fiber optic network. The Company's operations are located primarily in the Northern Shenandoah Valley of Virginia and the surrounding areas. The Company grants credit in accordance with standard industry practices. Accounts receivable are concentrated among customers within the Company's geographic service area and large telecommunications companies. 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 accounts and transactions have been eliminated. Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those 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 the FDIC insurance limit. Securities and investments: The Company has investments in debt and equity securities, which consist of shares of common and preferred stock and partnership interests. Debt securities consist primarily of obligations of the U. S. Government. The classification of debt and equity securities is determined by management at the date individual investment securities are acquired. The appropriateness of such classification is reassessed continually. The classification of those securities and the related accounting policies are as follows: Held-to-maturity securities: Debt securities for which the Company has both the intent and ability to hold to maturity, regardless of changes in market conditions, liquidity needs or changes in general economic conditions, are classified as held-to-maturity securities. They are carried at amortized historical cost. 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 carried at fair value as determined by quoted market prices. Unrealized gains and losses are reportable as increases and decreases in other comprehensive income net of tax. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in net income. Investments carried at cost: Investments in which the Company does not have significant ownership and for which there is no ready market are carried at cost. Information regarding these and all other investments is reviewed continuously for evidence of impairment in value. No impairment was deemed to have occurred at December 31, 1998. 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. Materials and supplies: New and reusable materials are carried in inventory principally at average original cost. Specific costs are used in the case of large individual items. Nonreusable material is carried at estimated salvage value. Note 1. Summary of Accounting Policies (Continued) Property, plant and equipment: Property, plant and equipment is stated at cost. Accumulated depreciation is charged with the cost of property retired, plus removal cost, less salvage. Depreciation is determined under the remaining life method and straight-line composite rates. Depreciation provisions were approximately 6.1%, 6.1% and 5.8% of average depreciable assets for the years 1998, 1997 and 1996, respectively. Cost in excess of net assets of business acquired: Intangible assets consisting of the cost in excess of identifiable net assets of businesses acquired are amortized on a straight-line basis over 15 years. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends and prospects, as well as market and economic conditions. Pension plan: The Company maintains a noncontributory defined benefit retirement 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. Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment. Investment tax credits have been deferred and are amortized over the estimated life of the related assets. Revenue recognition: Revenues are recognized when earned, regardless of the period in which they are billed. Earnings per share: The Company presents both basic and diluted per share amounts. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. The Company has stock options outstanding which are antidilutive; therefore, basic and diluted earnings per share are equal. Reporting changes: In 1998, the Company adopted FASB Statements No. 130, Reporting Comprehensive Income and No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has elected to present comprehensive income together with other changes in stockholders' equity in a consolidated statement of changes in stockholders' equity for all years presented. Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, requires public business enterprises to report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. Segments are components of an enterprise about which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The statement also requires public business enterprises to report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company has defined its operating segments as the parent Company and individual operating subsidiaries and has provided disclosures about these segments elsewhere in the consolidated financial statements. Note 2. 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 Holding company which invests in both Company (Holding) affiliated and non-affiliated companies. Shenandoah Telephone Company Provides both regulated and (Telephone) non-regulated telephone services primarily throughout the Shenandoah Valley. Shenandoah Cable Television Provides cable service in Shenandoah Company (CATV) County. ShenTel Service Company (ShenTel) Sells and services telecommunications equipment and provides Internet access to customers in 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, mobile telephone, and cellular services throughout the Northern Shenandoah Valley. Shenandoah Long Distance Company Provides long distance services. (Long Distance) Shenandoah Network Company Leases interstate fiber optic facilities. (Network) Shenandoah Personal Provides digital wireless service to a Communications Company four-state region from Chambersburg, (PCS) 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 recognized from equity method nonaffiliated investees by segment is as follows: Consolidated Holding Telephone Mobile Totals ----------------------------------------- 1998 $ 485,542 $ 934,249 $ 396,445 $1,816,236 1997 267,967 191,550 339,562 799,079 1996 95,343 145,489 211,969 452,801 Note 2. Segment Reporting (Continued) Selected financial data for each segment is as follows: Holding Telephone CATV ShenTel Leasing ---------------------------------------------------------- Operating revenues - external: 1998 $ - $15,531,845 $3,098,160 $2,530,982 $ 1,683 1997 - 14,633,286 2,513,802 2,115,443 15,300 1996 - 13,860,345 1,277,017 1,688,795 18,850 Operating revenues - internal: 1998 $ - $ 1,411,023 $ 2,340 $ 224,561 - 1997 - 1,248,694 2,329 222,137 - 1996 - 1,257,076 2,328 170,826 - Depreciation and amortization: 1998 $ - $ 2,735,658 $ 841,452 $300,122 - 1997 - 2,370,817 773,560 260,585 - 1996 - 2,230,135 378,603 151,435 - Nonoperating income less expenses: 1998 $1,005,372 $ 2,245,060 $ 537 $ 2,794 $ 5,069 1997 991,413 1,607,327 3,013 1,017 12,980 1996 802,099 743,012 3,149 925 29,549 Interest expense: 1998 $ 68 $ 1,491,954 $ 685,537 $167,998 $ - 1997 - 1,549,799 654,504 161,397 - 1996 7,985 795,141 234,318 92,566 - Income tax expense (benefit) 1998 $ 294,600 $ 3,712,719 $(232,061) $(197,800) $ (15,316) 1997 298,368 3,002,628 (224,947) (204,627) (8,106) 1996 354,004 2,866,818 (132,479) (132,751) (2,358) Net income 1998 $ 480,476 $ 5,737,264 $(378,124) $(326,786) $ 14,783 1997 562,806 5,497,074 (379,561) (340,569) 26,257 1996 580,491 5,027,579 (199,913) (217,668) 36,239 Total assets 1998 $27,714,953 $61,249,082 $11,266,265 $3,658,486 $ 302,126 1997 24,727,104 60,061,156 10,616,821 3,668,737 386,950 1996 22,889,905 53,209,710 10,331,933 3,146,251 476,259 Note 2. Segment Reporting (Continued) Long Combined Eliminating Consolidated Mobile Distance Network PCS Totals Entries Totals ----------------------------------------------------------------------------- $ 9,754,858 $ 930,433 $ 614,934 $3,131,130 $ 35,594,025 $ - $35,594,025 8,424,016 902,276 614,934 1,751,291 30,970,348 - 30,970,348 6,620,093 1,042,083 535,225 387,446 25,429,854 - 25,429,854 $ 340,382 $ 206,525 $ 105,836 $ 13,623 $ 2,304,290 $(2,304,290)$ - 318,577 170,143 99,317 6,888 2,068,085 (2,068,085) - 189,581 267,909 88,320 - 1,976,040 (1,976,040) - $ 636,512 $ - $ 161,604 $ 754,467 $ 5,429,815 $ - $ 5,429,815 553,484 - 118,498 604,914 4,681,858 - 4,681,858 411,808 - 83,538 274,035 3,529,554 - 3,529,554 $ 501,061 $ 2,682 $ 15,512 $ (10,548)$ 3,767,539 $(1,713,102)$2,054,437 428,518 6,256 8,755 2,297 3,061,576 (1,664,695) 1,396,881 276,026 11,993 5,200 3,858 1,875,811 (759,923) 1,115,888 $ 224,600 $ - $ - $ 644,674 $ 3,214,831 $(1,713,102)$1,501,729 341,461 - - 513,886 3,221,047 (1,664,695) 1,556,352 248,381 - 2,632 182,200 1,563,223 (759,923) 803,300 $ 924,000 $ 98,400 $ 174,500$(1,160,400)$ 3,598,642 $ - $3,598,642 887,496 97,506 200,972 (1,455,659) 2,593,631 - 2,593,631 473,091 121,515 172,511 (898,765) 2,821,586 - 2,821,586 $ 1,531,128 $ 160,602 $ 284,522$(1,900,090)$ 5,603,775 $ - $5,603,775 1,203,018 160,194 325,215 (2,477,721) 4,576,713 (97,150) 4,479,563 759,310 197,487 280,397 (1,469,333) 4,994,589 - 4,994,589 $15,100,474 $201,735 $1,314,393 $13,614,839 $134,422,353$(40,976,609)$93,445,744 13,029,769 231,165 1,437,188 10,209,395 124,368,285 (34,960,383) 89,407,902 12,710,637 284,197 1,202,415 6,851,836 111,103,143 (31,729,046) 79,374,097 Note 3. Investments Investments consist of the following: 1998 1997 1996 ---------------------------------- Investment in held-to-maturity securities: U. S. Treasury securities, current $499,581 $1,622,433 $2,148,945 U. S. Treasury securities, noncurrent - 499,581 1,622,433 ---------------------------------- $499,581 $2,122,014 $3,771,378 ================================== Fair value approximates carrying value for all held-to-maturity investments at December 31, 1998, 1997 and 1996. 1998 1997 1996 ---------------------------------- Investment in available-for-sale securities: Loral Space and Communications, Ltd, (formerly Orion Network Systems), Common stock (including unrealized gains of $1,041,877 in 1998, $1,962,085 in 1997 and $1,070,007 in 1996) $2,677,789 $3,597,997 $2,705,926 Comsat Corporation (including unrealized gains of $25,906 in 1996) - - 32,505 ---------------------------------- $2,677,789 $3,597,997 $2,738,431 ================================== No gains were realized in 1998. The Company realized gains of approximately $25,900 and $228,000 in 1997 and 1996, respectively, on the sale of available-for-sale securities. Changes in the unrealized gain on available-for-sale securities during the years ended December 31, 1998, 1997 and 1996 reported as a separate component of stockholders' equity are as follows: 1998 1997 1996 ---------------------------------- Unrealized holding gains, beginning balance $1,962,085 $1,095,913 $369,136 Unrealized holding gains (losses) during the year (920,208) 892,072 937,527 Realization of prior year unrealized gains - (25,900) (210,750) ---------------------------------- Unrealized holding gains, ending balance 1,041,877 1,962,085 1,095,913 Deferred tax effect related to net unrealized gains 403,258 771,368 425,322 ---------------------------------- Unrealized gain included in stockholders' equity $ 638,619 $1,190,717 $670,591 ================================== Cash flows from purchases, sales and maturities of securities consist of the following: 1998 1997 1996 ---------------------------------- Available-for-sale securities: Sales $ - $1,226,489 $ 550,000 Purchases - (1,196,296) - Held-to-maturity securities: Maturities 1,622,433 2,148,945 2,488,773 Purchases - (499,581) (1,672,410) Other investments: Sales and distributions 1,468,787 48,412 - Purchases (852,240) (399,112) (1,180,926) ---------------------------------- Total $2,238,980 $1,328,857 $ 185,437 ================================== Note 3. Investments (Continued) Other investments, comprised of equity securities which do not have readily determinable fair values, consist of the following: 1998 1997 1996 ---------------------------------- Cost method: Illuminet Holdings, Inc. $ 843,486 $843,486 $843,486 AvData Systems, Inc. 149,860 149,860 149,860 Rural Telephone Bank 653,492 653,492 624,837 Concept Five Technologies 1,304,083 1,000,003 1,000,003 CoBank 227,913 19,380 - Other 330,601 133,381 163,002 ---------------------------------- 3,509,435 2,799,602 2,781,188 ---------------------------------- Equity method (with approximate % owned at December 31, 1998): South Atlantic Venture Fund III L.P.(1%) 605,816 765,966 589,632 South Atlantic Venture Fund IV L.P.(1%) 745,122 300,121 - Dolphin Communications, L.P. (1%) 168,258 - - Virginia Independent Telephone 299,483 271,509 234,943 Alliance (22%) Rural Service Area - 6 (11%) 416,148 543,255 474,007 ValleyNet (20%) 176,944 41,064 33,177 ---------------------------------- 2,411,771 1,921,915 1,331,759 ---------------------------------- $5,921,206 $4,721,517 $4,112,947 ================================== The Company has committed to invest an additional $500,000 in the South Atlantic Venture Fund IV L.P. during 1999 and approximately $830,000 in Dolphin Communications, L.P.pursuant to capital calls. It was not practical to estimate the fair value of these investments due to their limited market and the restrictive nature of their transferability. Note 4. Long-Term Debt and Lines of Credit Long-term debt consists of the following: Interest Rate 1998 1997 1996 ---------------------------------------------------- Rural Telephone Bank (RTB) 6.04% - 8% $10,305,886 10,765,742 10,582,040 Rural Utilities Service (RUS) 2% - 5% 476,622 520,580 619,638 CoBank 6.69% - 7.97% 18,279,838 16,074,338 13,467,838 RUS development loan interest free 200,000 - - Other 77.7% of prime - - 36,723 ---------------------------------- 29,262,346 27,360,660 24,706,239 Current maturities 863,972 544,954 529,405 ---------------------------------- Total long-term debt $28,398,374 $26,815,706 $24,176,834 ================================== The notes payable to RTB are pursuant to an agreement which allows for additional borrowings of approximately $3,000,000. In July 1996, the Company entered into a financing agreement with CoBank. Pursuant to this agreement, the Company can borrow up to $25,000,000, for a three-year period ending September 1, 1999. During this period only interest is payable. On September 1, 1999, the outstanding principal balance will be amortized and repaid in monthly installments over twelve years, with the final installment due 2011. As borrowings occur, the Company can choose between several fixed and variable rate interest options. Note 4. Long-Term Debt and Lines of Credit (Continued) The approximate annual debt maturities for the five years subsequent to December 31, 1998 are as follows: Year Amount - ----------------------------------- 1999 $ 863,972 2000 1,436,123 2001 1,739,654 2002 2,325,385 2003 2,312,029 Later years 20,585,183 ----------- $ 29,262,346 =========== Substantially all of the Company's assets serve as collateral for the long-term debt. The long-term debt agreements contain restrictions on the payment of dividends and redemption of capital stock. The terms of the agreements require the maintenance of defined amounts of equity and working capital after payment of dividends. Approximately $3,067,000 of retained earnings was available for payment of dividends at December 31, 1998. Long-term debt carries rates which approximate market rates for similar debt being issued. Therefore, the carrying value of long-term debt is not significantly different than fair value at December 31, 1998. As of December 31, 1998, the Company had no borrowings outstanding on other approved lines of credit totaling $7,000,000. Note 5. Income Taxes The Company and its subsidiaries file consolidated federal and state income tax returns. The provision for income taxes included in the consolidated statements of income consists of the following components: Years Ended December 31, --------------------------------- 1998 1997 1996 --------------------------------- Current $2,477,271 $1,859,987 $2,125,665 Deferred 1,121,371 733,644 695,921 --------------------------------- Total provision for income taxes $3,598,642 $2,593,631 $2,821,586 ================================= A reconciliation of income taxes determined using the statutory federal income tax rates to actual income taxes provided is as follows: Years Ended December 31, --------------------------------- 1998 1997 1996 --------------------------------- Federal income tax expense at statutory rates $3,128,822 $2,404,886 $2,657,499 State income taxes, net of federal tax benefit 364,416 220,803 217,614 Amortization of investment tax credit (70,347) (75,701) (75,701) Other 175,751 43,643 22,174 --------------------------------- Provision for income taxes $3,598,642 $2,593,631 $2,821,586 ================================= Net deferred tax liabilities consist of the following at December 31: 1998 1997 1996 --------------------------------- Deferred tax liabilities: Accelerated depreciation $6,708,551 $5,556,071 $4,776,802 Unrealized gain on securities available-for-sale 403,258 771,368 425,32 Other 53,515 4,701 - --------------------------------- 7,165,324 6,332,140 5,202,124 --------------------------------- Deferred tax assets: Accrued compensation costs 128,607 115,512 96,292 Accrued pension costs 295,596 228,768 152,684 Equity investments - - 44,978 --------------------------------- 424,203 344,280 293,954 --------------------------------- Net deferred tax liabilities $6,741,121 $5,987,860 $4,908,170 ================================= Note 6. Pension Plan The Company maintains a noncontributory defined benefit pension plan. The following table presents the plan's funded status and amounts recognized in the Company's consolidated balance sheets. 1998 1997 1996 --------------------------------- Change in benefit obligation: Benefit obligation, beginning $5,504,065 $5,112,231 $4,408,161 Service cost 261,595 231,270 170,089 Interest cost 380,726 378,404 326,314 Actuarial (gain) loss 428,028 (86,162) 332,300 Benefits paid (140,281) (131,678) (124,633) --------------------------------- Benefit obligation, ending 6,434,133 5,504,065 5,112,231 --------------------------------- Change in plan assets: Fair value of plan assets, beginning 5,712,651 5,077,518 4,669,840 Actual return on plan assets 1,302,256 766,811 532,311 Employer contribution - - - Benefits paid (140,281) (131,678) (124,633) --------------------------------- Fair value of plan assets, ending 6,874,626 5,712,651 5,077,518 --------------------------------- Funded status 440,493 208,586 (34,713) Unrecognized net gain (1,344,253) (943,738) (466,565) Unrecognized prior service cost 216,398 237,103 257,808 Unrecognized net transition asset (153,002) (181,746) (210,490) --------------------------------- Accrued benefit cost $(840,364) $679,795) $453,960) ================================= Components of net periodic benefit cost: Service cost $ 261,595 $231,270 $170,089 Interest cost 380,726 378,404 326,314 Expected return on plan assets (451,803) (375,800) (345,940) Amortization of prior service cost 20,705 20,705 20,705 Amortization of net (gain) loss (21,910) - (9,094) Amortization of net transition asset (28,744) (28,744) (28,744) --------------------------------- Net periodic benefit cost $ 160,569 $225,835 $133,330 ================================= Assumptions used by the Company in the determination of pension plan information consisted of the following at December 31, 1998, 1997 and 1996: 1998 1997 1996 --------------------------------- Discount rate 7.00% 7.00% 7.50% Rate of increase in compensation levels 5.00% 5.00% 5.50% Expected long-term rate of return on plan assets 8.00% 7.50% 7.50% Note 7. Stock Incentive Plan On April 16, 1996, the stockholders approved a Company Stock Incentive Plan providing for the possible 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. The option price is the market value of the stock at the date of grant. One-half of the options are exercisable on each of the first and second anniversaries of the date of grant and the options expire five years from the date 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 assumptions (no options were granted in 1996): 1998 1997 --------------- ------------ Dividend rate 2.48% 1.96% Risk free interest rate 5.44% 6.13% Expected lives of options 5 years 5 years Price volatility 17.98% 19.70% Note 7. Stock Incentive Plan (Continued) Grants of options under the Plan are accounted for following Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized under the Plan. Had compensation cost for the Plan been determined based on fair values of the awards at the grant date (the method described in FASB Statement No. 123), reported net income and earnings per share would have been reduced to the proforma amounts shown below: 1998 1997 --------- --------- Net income As reported $ 5,603,775 $ 4,479,563 Pro forma $ 5,539,768 $ 4,445,578 Earnings per share As reported $ 1.49 $ 1.19 Pro forma $ 1.47 $ 1.18 A summary of the status of the option plan at December 31, 1998 and 1997 and changes during the years ended on those dates is as follows: 1998 1997 ---------------------- ----------------------- Weighted Weighted Average Average Shares Exercise Shares Exercise Price Price ---------------------- ----------------------- Outstanding at beginning of year 13,375 $ 21.98 - $ - Granted 15,565 20.59 14,044 21.98 Exercised - - - - Forfeited (1,158) 21.33 (669) 21.98 ---------------------- ----------------------- Outstanding at end of year 27,782 $ 21.23 13,375 $ 21.98 ====== ====== Exercisable at end of year 6,378 - Fair value of options granted during the year $ 4.11 $ 5.35 Note 8. Major Customer The Company has one customer that accounts for greater than 10% of its revenue, primarily consisting of carrier access charges for long distance service provided by the Shenandoah Telephone Company segment, as follows: Percent of Operating Year Revenue - -------------------------------- 1998 11% 1997 12% 1996 19% Note 9. Stockholder Rights The Board of Directors has adopted a Stockholder Rights Plan whereby, under certain circumstances, holders of each right will be entitled to purchase the Company's common stock at one-half of the then current market price. As of December 31, 1998, 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 person or group is not entitled to the benefits of the Rights. Independent Auditor's Report The Board of Directors and Stockholders Shenandoah Telecommunications Company Edinburg, Virginia We have audited the accompanying consolidated balance sheets of Shenandoah Telecommunications Company and Subsidiaries as of December 31, 1998, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, 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 generally accepted auditing standards. 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, 1998, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Richmond, Virginia January 29, 1999 Management's Discussion and Analysis of Financial Condition and Results of Operations Shenandoah Telecommunications Company is a diversified telecommunications holding company providing both regulated and unregulated telecommunications services through its eight wholly-owned subsidiaries. This industry is in a period of transition from a protected monopoly to a competitive environment as evidenced by the passage of the Telecommunications Act of 1996. As a result, Shenandoah Telecommunications has made, and plans to continue to make, significant investments in the new and emerging technologies. The most significant revenue contributors are the regulated local exchange telephone company, which accounted for 54.5% of total revenues in 1996, 47.2% in 1997, and 43.6% in 1998, and the cellular dominated operations of the Mobile subsidiary, which accounted for 26.0% of total revenues in 1996, 27.2% in 1997, and 27.4% in 1998. Other significant services provided are paging, personal communications services (PCS), cable television, Internet access, long distance, and fiber facilities and towers leased to other telecommunications carriers. The Company also sells and leases equipment, mainly related to services provided. The Company also participates in emerging technologies by direct investments in non-affiliated companies. RESULTS OF OPERATIONS The regulated telephone company's largest source of revenue continues to be for access to the local exchange network by interexchange carriers. These revenues increased 6.6% in 1998 compared to 4.6% in 1997. The change in access revenues generally corresponds with growth in minutes of use and in access lines. The minutes of use increased 9.3% during 1998 compared to an increase of 5.7% in 1997. The number of access lines increased by 3.8% in 1998 and 4.2% in 1997. Mobile revenues, which are the single largest revenue source outside of the regulated telephone local exchange operations, are mainly derived from wireless communications services. Local cellular service revenues increased $737,243 or 20.1% in 1998, compared to $682,021 or 22.8% in 1997. Outcollect roamer revenues increased $387,668 or 8.9% in 1998, compared to $960,240 or 28.2% in 1997. The increase in local cellular revenues reflects a 21.0% increase in the customer base in 1998 and a 31.8% increase in 1997. Cable Television revenues increased principally as a result of an increase in rates in early 1998. In 1997, revenues increased significantly due to the September 30, 1996 acquisition of the Shenandoah County cable television assets of FrontierVision Operating Partners, LP, which more than doubled the customer base. Cable Television revenues increased 23.2% in 1998 as compared to 96.8% in 1997. The increase in ShenTel Service revenues was 19.6% for 1998 compared to a 25.3% increase in 1997. Both increases are due to expansion of our Internet service operation. Long Distance revenues are principally for toll calls placed to locations outside the regulated telephone service area. These revenues increased by 3.1% in 1998 following a decline of 13.4% in 1997, due principally to market share changes. PCS revenues increased by 78.8% in 1998 and 352.0% in 1997, due to customer growth. Network revenues are for leasing capacity tointerexchange carriers on the Company's fiber optic facilities in West Virginia and Maryland. This service experienced no revenue increase in 1998, and a 14.9% increase in 1997. Cost of Products Sold decreased by $725,305 or 33.1% in 1998, following an increase of 563,629 or 34.7% in 1997, due principally to volume changes in handsets sold in the Personal Communications Service operation. Plant Specific is chiefly comprised of ongoing operating and maintenance expenses for the physical plant. This category increased by 4.9% in 1998 and 20.2% in 1997. The cable television acquisition discussed above is principally responsible for the large increase in 1997. The largest expense category in 1998 was Network and Other. The increase in this category was due primarily to increases of switching and facility costs attributed to the PCS, Cellular, and Internet service operations. These costs increased $1,002,255 or 22.4% in 1998 compared to $1,189,925 or 36.2% in 1997, primarily due to the rapidly increasing customer base for these operations. Depreciation and Amortization increased by 16.0% in 1998 compared to 32.6% in 1997. The smaller percentage increase in 1998 is attributed to the longer useful lives of plant placed in service in 1998, as compared to 1997. The increases in Taxes other than income in 1998 and 1997 were primarily due to property taxes associated with the increased amount of Plant in Service. The Non-operating Income Less Expenses category consists mainly of the income or loss from interest bearing instruments and external investments made by the Company. The increase reflected on the income statement is principally due to income recognized in one of the Company's partnership investments. LIQUIDITY AND CAPITAL RESOURCES The Company has two principal sources of funds for financing current expansion activities. First, the Company has a loan agreement with the Rural Telephone Bank (RTB) with approximately $3,000,000 remaining for future advances. Expenditure of these loan funds is limited to capital projects for the regulated local exchange carrier subsidiary. The second principal liquidity source is a credit facility agreement with CoBank, entered into in July 1996. Pursuant to this agreement, the Company can borrow up to $25,000,000 for a three-year period ending September 1, 1999. During this period only interest is payable. On September 1, 1999, the outstanding principal balance will be amortized and repaid in monthly installments over the next twelve years, with the final installment due August 20, 2011. Draws on this loan for 1998 totaled $2,205,500 compared to $2,606,500 in 1997. These draws, on top of 1996's draws of $13,468,000, leave approximately $6,720,000 for future advances. The Company's Board of Directors has approved a 1999 capital budget of potential projects totaling approximately $17,780,000. This budget includes approximately $8,660,000 for the telephone local exchange company, primarily for central office equipment and fiber optic and metallic cable facilities. The Company expects to finance these planned additions through internally generated cash flows and additional advances from the RTB note and CoBank agreement. The Company secured lines of credit for $2 million with First Union Bank and for $5 million with CoBank in 1998. No draws were outstanding on these lines of credit as of December 31, 1998. 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 has developed 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. The at-risk software included switching, end user billing, carrier access billing, and financial accounting systems. The Company further identified that it had one mainframe and a local area network consisting of a server and approximately 75 individual microcomputers that may be vulnerable. Phase II (Strategy): In this Phase, the Company determined whether each at-risk system should be classified as "routine upgrade", "obsolete", or "non-critical." A "routine upgrade" involves the upgrade of hardware or software as part of the normal course of doing business. An "obsolete" designation involves total replacement in that the application no longer meets our business needs. A "non-critical" designation is for those applications that can be addressed through simple work-around solutions, manual updates, or other inexpensive measures. The majority of this classification work was completed mid-1998. Phase III (Installation and Testing): In this Phase, the selected approach to Y2K remediation is executed. The information that follows reflects the Company's current plans and estimates as of February 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, which are currently in testing and are expected to be in service in the second quarter of 1999, have been represented by the vendors to be Y2K compliant. The local area network, comprised of the hardware and software on the server and the microcomputers, is scheduled to be Y2K compliant by the end of the second quarter of 1999. Obsolete classification: Approximately 90% of the testing has been completed on new financial software and new carrier access billing software, with both systems scheduled to be placed in service in the second quarter of 1999. Non-critical classification: The measures identified to deal with these low priority systems are expected to be tested by the end of the second quarter of 1999, and implemented as necessary. Phase IV (Monitoring and Contingency Planning): In this Phase, the implemented changes are monitored and backup plans designed where necessary. With the majority of the required hardware and software changes completed by mid-1999, the Company will be utilizing the changes in a production setting. This approach minimizes disruption to current operations and provides a basis for ongoing testing and monitoring. Contingency plans, if deemed necessary, will be developed in mid-1999. With this four-phase program, where the normal business practice of weighing replacement against adopting routine upgrades was followed, the Company believes that its non-routine expense in making its core operations Y2K compliant will be minimal. 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. /s/ Laurence F. Paxton ---------------------- Laurence F. Paxton Vice President-Finance [GRAPH APPEARS HERE] 1993 REVENUES 1998 REVENUES Telephone 63.30% 43.64% Cable TV 3.75% 8.70% ShenTel Service 6.28% 7.11% Long Distance 6.39% 2.61% Mobile 17.31% 27.41% Network 2.09% 1.73% PCS 0.00% 8.80% Other 0.89% 0.00% [CAPTION) Five Year Comparison of Revenue Sources [GRAPHIC APPEARS HERE] Members of Shentel Senior Management Team (Seated l to r) Pirtle, Paxton. (Standing l to r) Fadely, Soltis, French, Ferguson, MacDonald.
Five-Year Summary of Selected Financial Data 1998 1997 1996 1995 1994 ---------- ----------- ----------- ----------- ----------- Operating Revenues $ 35,594,025 $ 30,970,348 $25,429,854 $21,919,150 $20,229,178 Operating Expenses $ 25,089,784 $ 22,603,314 $17,485,203 $13,027,468 $12,050,713 Income Taxes $ 3,598,642 $ 2,593,631 $ 2,821,586 $ 3,572,956 $ 2,577,641 Interest Expenses $ 1,501,729 $ 1,556,352 $ 803,300 $ 685,971 $ 658,908 Gain (loss) on Security Dispositions $ - $ (48,628)$ 228,250 $ 1,141,386 $ - Net Income $ 5,603,775 $ 4,479,563 $ 4,994,589 $ 6,230,685 $ 4,851,019 Net Income from Operations (1) $ 5,364,242 $ 4,530,642 $ 4,790,006 $ 5,522,904 $ 4,851,019 Total Assets $ 93,445,744 $ 89,407,902 $79,374,097 $59,896,990 $52,464,150 Long-term Obligations $ 29,262,346 $ 27,360,660 $24,706,239 $10,558,953 $ 9,941,209 Stockholder Information (2) Number of Stockholders 3,654 3,567 3,399 3,226 2,979 Shares of Stock 3,755,760 3,760,760 3,760,760 3,760,760 3,760,760 Earnings per Share - basic & diluted $ 1.49 $ 1.19 $ 1.33 $ 1.66 $ 1.29 Cash Dividend per Share - regular $ .51 $ .43 $ .42 $ .42 $ .375 - special $ - $ - $ - $ .06 $ - (1) Excludes gains and losses on external investments unaffiliated with operations. (2) The information has been restated to reflect a 2-for-1 split to stockholders of record January 23, 1995.
Statistics Percent Increase Increase 1998 1997 (Decrease) (Decrease) TELEPHONE Access Lines Residential 17,176 16,505 671 4.1 Business Single-Line 3,580 3,473 107 3.1 Paystations 288 273 15 5.5 Business Multi-Line 1,313 1,290 23 1.8 ------------------------------------------------ Totals 22,357 21,541 816 3.8 Access Lines by Exchange New Market 2,655 2,534 121 4.8 Mt. Jackson 2,432 2,332 100 4.3 Edinburg 2,911 2,904 7 .2 Fort Valley 693 670 23 3.4 Woodstock 5,278 5,067 211 4.2 Toms Brook 1,634 1,552 82 5.3 Strasburg 4,348 4,166 182 4.4 Basye 1,978 1,910 68 3.6 Bergton 428 406 22 5.4 ------------------------------------------------ Totals 22,357 21,541 816 3.8 Exchanges 9 9 - - Long Distance Calls Operator Handled 275,403 393,345 (117,942) (30.0) Direct Dialed 14,275,111 13,030,361 1,244,750 9.6 ------------------------------------------------ Totals 14,550,514 13,423,706 1,126,808 8.4 Switched Access Minutes 105,465,690 96,474,853 8,990,837 9.3 OTHER SERVICES CATV 8,428 8,186 242 3.0 Paging 4,112 3,089 1,023 33.1 VoiceMail 1,843 1,660 183 11.0 PLANT FACILITIES Telephone CATV Route Miles 1,976.2 457.6 Customers Per Route Mile 11.3 18.4 Miles of Distribution Wire 530.3 - Telephone Poles 7,857 13 Miles of Aerial Copper Cable 359.8 149.2 Miles of Buried Copper Cable 1,310.9 267.3 Miles of Underground Copper Cable 36.8 1.5 Fiber Optic Cable - Fiber Miles 4,778.0 - Lines of Switching Equipment 30,130 - Intertoll Circuits to Interexchange 1,228 - Carriers Special Service Circuits to 197 - Interexchange Carriers SHENANDOAH TELECOMMUNICAITONS COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT The following are all subsidiaries of Shenandoah Telecommunications Company, and are incorporated in the State of Virginia. - - Shenandoah Telephone Company - - Shenandoah Cable Television Company - - Shenandoah Long Distance Company - - Shenandoah Valley Leasing Company - - Shenandoah Mobile Company - - Shenandoah Network Company - - Shenandoah Personal Communications Company Exhibit 23 CONSENT OF INDEPENDENT AUDITORS As independent auditors, we hereby consent to the incorporation of our report, dated January 29, 1999, incorporated by reference in this annual report of Shenandoah Telecommunications Company on Form 10-K, into the Company's previously filed Form S-8 Registration Statement, File No. 333-21733 and Form S-3D Registration Statement No.333-74297. Richmond, Virginia March 30, 1999 EX-27 2
5 YEAR DEC-31-1998 DEC-31-1998 4,891,109 3,177,370 4,272,016 0 3,488,137 13,928,696 94,098,215 29,063,738 65,034,477 5,016,723 28,398,374 0 0 4,734,377 44,812,349 93,445,744 1,007,363 35,594,025 1,464,505 25,089,784 1,136,220 139,503 1,501,729 9,202,417 3,598,642 5,364,242 0 0 0 5,603,775 1.49 1.49
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