SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1162807
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Shentel Way, Edinburg, VA 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report)
------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (No Par Value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
Indicate 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. |_|
Indicate by check mark whether the registration is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |X| NO |_|
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004, based on the closing sale price of such stock on
the Nasdaq National Market on such date, was approximately $182 million. (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.)
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 FEBRUARY 23, 2005
Common Stock, No Par Value 7,641,536
---------------------------------
DOCUMENT INCORPORATED BY REFERENCE
Information in Part III is incorporated by reference to the Company's definitive
proxy statement for its 2005 Annual Meeting of Shareholders.
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SHENANDOAH TELECOMMUNICATIONS COMPANY
Item Page
Number Number
PART I
1. Business 5
2. Properties 25
3. Legal Proceedings 26
4. Submission of Matters to a Vote of Security Holders 26
PART II
5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchasers of Equity Securities 27
6. Selected Financial Data 28
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
7A. Quantitative and Qualitative Disclosures About Market Risk 47
8. Financial Statements and Supplementary Data 47
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
9A. Controls and Procedures 48
9B Other Information 49
PART III
10. Directors and Executive Officers of the Registrant 49
11. Executive Compensation 50
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters 50
13. Certain Relationships and Related Transactions 50
14. Principal Accountant Fees and Services 50
PART IV
15. Exhibits and Financial Statement Schedules 51
Index to the Consolidated 2004 Financial Statements F-1
Exhibits Index
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "may," "will," "anticipate," "estimate,"
"expect," "intend," "plan," "continue" and similar expressions as they relate to
us or our management are intended to identify these forward-looking statements.
All statements by us regarding our expected financial position, revenues, cash
flow and other operating results, business strategy, financing plans, forecasted
trends related to the markets in which we operate and similar matters are
forward-looking statements. Our expectations expressed or implied in these
forward-looking statements may not turn out to be correct. Our results could be
materially different from our expectations because of various risks, including
the risks discussed in this report under "Business-Recent Developments" and
"Risk Factors."
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PART I
Some of the information contained in this report concerning the
markets and industry in which we operate is derived from publicly
available information and from industry sources. Although we believe
that this publicly available information and the information
provided by these industry sources are reliable, we have not
independently verified the accuracy of any of this information.
Unless we indicate otherwise, references in this report to "we,"
"us," "our" and "the Company" means Shenandoah Telecommunications
Company and its subsidiaries.
ITEM 1. BUSINESS
Overview
Shenandoah Telecommunications Company is a diversified
telecommunications holding company that, through its operating
subsidiaries, provides both regulated and unregulated
telecommunications services to end-user customers and other
communications providers in the southeastern United States. The
Company offers a comprehensive suite of voice and data
communications services. The Company operates eleven reporting
segments based on the holding company's business and the products
and services provided by the operating subsidiaries.
The Company's primary market area historically has been the northern
Shenandoah Valley of Virginia and surrounding areas. This market
area includes, in addition to parts of Virginia ranging from
Harrisonburg in the south to Winchester in the north, parts of
Maryland, West Virginia and Pennsylvania, and on a limited basis,
northern Virginia. Pursuant to a management agreement with Sprint
Communications Company and its related parties (collectively,
"Sprint"), the Company is the exclusive personal communications
service ("PCS") Affiliate of Sprint providing mobility
communications network products and services in the 1900 megahertz
spectrum range in the four-state area extending from Harrisonburg,
Virginia to Harrisburg, York and Altoona, Pennsylvania. The Company
operates its PCS network under the Sprint radio spectrum license and
brand. The Company also holds paging radio telecommunications
licenses.
Following its acquisition of NTC Communications LLC ("NTC") in
November 2004, the Company provides high speed internet, cable
television and local and long distance voice services to
multi-dwelling unit communities (primarily off-campus student
housing) in Virginia, Maryland, North Carolina, South Carolina,
Georgia, Florida, Tennessee and Mississippi. At December 31, 2004,
NTC served 107 multi-unit, multi-building properties.
The Company offers many of its services over its own fiber optic
network of approximately 557 miles at December 31, 2004. The main
lines of the network follow the Interstate 81 corridor and the
Interstate 66 corridor in the northwestern part of Virginia.
Secondary routes provide alternate routing in the event of an
outage. In addition to its own fiber network, the Company through
its telephone subsidiary has a 20 percent ownership in Valley
Network Partnership ("ValleyNet"), which is a partnership offering
fiber network facility capacity in western, central, and northern
Virginia, as well as the Interstate 81 corridor from Johnson City,
Tennessee to Carlisle, Pennsylvania.
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The Company is certified to offer competitive local exchange
services in Virginia outside of its present telephone service area
and is in the process of obtaining certification to provide
competitive local exchange services in North Carolina.
There are minimal seasonal variations in the Company's core wireline
operations. The Company's PCS subsidiary experiences seasonality in
the retail sale of wireless handsets and services. Because NTC has
historically focused its marketing efforts on communities that cater
to college students, the sale of services by NTC is historically
lower in the summer months, when students are on vacation.
In February 2003, the Company sold its 66% general partner interest
in the Virginia 10 RSA Limited Partnership, which was engaged in
cellular operations, to Verizon Wireless for $37.0 million. The
total proceeds received were $38.7 million, of which $5.0 million
were held in escrow for the payment of potential specified
contingencies and indemnification obligations during the two-year
post-closing period. In February 2005, the full escrowed deposit of
$5.0 million, included as an escrow receivable at December 31, 2004,
was released to the Company. The Company's net after tax gain on the
total transaction was approximately $22.4 million. The operating
results of the partnership are reflected in discontinued operations
for the applicable periods presented in the Company's consolidated
financial statements appearing elsewhere in this report.
Recent Developments
On December 15, 2004, Sprint and Nextel Communications, Inc.
announced that they had entered into a definitive agreement to
merge. Nextel is a provider of digital wireless communications
services in the Company's PCS service area.
The impact of the Sprint-Nextel merger on the Company's PCS
operations is uncertain as of the date of this report. Based on
currently available information and assuming that no changes are
effected with respect to Sprint's agreements with the Company, it is
possible, that Sprint could be in violation of the exclusivity
provisions of the Company's agreements with Sprint at some point
following the completion of the Sprint-Nextel transaction.
The Company's agreements with Sprint provide for specific remedies
in the event of a material violation by Sprint of such agreements.
No determination has been made as to the impact on the value of the
Company or its business of any of such remedies or whether any such
remedy would be more or less favorable to the Company and its
shareholders than the existing arrangements with Sprint or any new
arrangements the Company may negotiate with Sprint.
As a result of the Sprint-Nextel merger, Sprint PCS may require the
Company to meet additional program requirements, which could
increase the Company's expenses.
The Company is committed to working with Sprint to reach mutually
acceptable arrangements with respect to the foregoing matters. There
can be no assurances, however, that the Company and Sprint will be
able to reach mutually acceptable arrangements or as to the terms of
any such arrangements or the likely impact on the Company of any
such arrangements.
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Services
The Company provides integrated voice and data communications
services to end-user customers and other communications providers
through the following operating subsidiaries:
Shenandoah Telephone Company
Shenandoah Telephone Company provides both regulated and
non-regulated telephone services to approximately 24,700 customers
as of December 31, 2004, primarily in Shenandoah County and small
service areas in Rockingham, Frederick, and Warren counties in
Virginia. This subsidiary provides access for inter-exchange
carriers to the local exchange network. This subsidiary has a 20
percent ownership interest in ValleyNet, which offers fiber network
facility capacity to other communications providers in western,
central, and northern Virginia, as well as the Interstate 81
corridor from Johnson City, Tennessee to Carlisle, Pennsylvania.
Shenandoah Personal Communications Company ("PCS")
PCS has offered personal communications services through a digital
wireless telephone and data network since 1995. In 1999, PCS
executed a management agreement with Sprint. The network, which
utilities call division multiple access, or CDMA, currently covers
233 miles of Interstates 81 and 83, and a 126-mile section of the
Pennsylvania Turnpike between Pittsburgh and Philadelphia. Under its
agreements with Sprint, the Company is the exclusive PCS Affiliate
of Sprint in the Company's territory, providing wireless mobility
communications network products and services in the 1900 megahertz
spectrum range. The Company had approximately 102,600 retail PCS
customers and 27,300 wholesale PCS customers at December 31, 2004.
Of the Company's total operating revenues, 63.5% in 2004, 61.3% in
2003 and 57.7% in 2002 were generated by or through Sprint and its
customers using the Company's portion of Sprint's nationwide PCS
network. No other customer relationship generated more than 2.5% of
the Company's total operating revenues in 2004, 2003 or 2002.
Under the Sprint agreements, Sprint provides the Company significant
support services such as customer service, billing, collections,
long distance, national network operations support, inventory
logistics support, use of the Sprint brand names, national
advertising, national distribution and product development. In
addition, the Company derives substantial travel revenue and incurs
substantial travel expenses when subscribers of Sprint and Sprint's
PCS Affiliate partners incur minutes of use in the Company's
territory and when the Company's subscribers incur minutes of use in
territories of Sprint and Sprint's PCS Affiliate partners.
Sprint provides back-office and other services including travel
clearing-house functions, to the Company. For periods before January
1, 2004, there was no prescribed formula defined in the agreements
with Sprint for the calculation of the fee charged to the Company
for these services. Sprint adjusted these fees at least annually.
This situation changed with the execution of an amendment to the
Agreement which occurred on January 31, 2004, retroactive to January
1, 2004 (the "Amended Agreement"). By simplifying the formulas used
and fixing certain fees, the Amended Agreement provides greater
certainty to the Company for certain future expenses and revenues
during the term of the agreement that expires on December 31, 2006
and simplifies the methods used to settle revenue and expenses
between the Company and Sprint. The Company entered into an
amendment to the Amended Agreement with Sprint on May 24, 2004.
Under the terms of the agreement, the Company has agreed to
participate in all new and
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renewed reseller agreements signed through December 31, 2006. In
addition, the Company signed an agreement to participate in all
existing Sprint reseller arrangements applicable to the Company's
service area. In consideration for this participation, the Company
received a reduction in the monthly fee per subscriber paid to
Sprint for back-office services and specified network services.
Prior to January 1, 2004, with the exception of certain roaming and
equipment sales revenues, the Company recorded its PCS revenues
based on the revenues collected by Sprint, net of the 8% fee
retained by Sprint. After the adoption of the Amended Agreement,
effective January 1, 2004, the Company records its PCS revenues,
with the exception of certain roaming and equipment sales revenues,
based on the PCS revenues billed, as opposed to collected, by
Sprint, net of the 8% fee retained by Sprint. The cash settlements
received from Sprint are net of the 8% fee, customer credits,
account write offs and other billing adjustments. The Amended
Agreement only changes the timing of the Company's receipt of the
cash settlements from Sprint and does not change the Company's
recording of revenue.
The Company receives and pays travel fees for inter-market usage of
the network by Sprint wireless subscribers not homed in a market in
which they may use the service. Sprint and its PCS Affiliates pay
the Company for the use of its network by their wireless
subscribers, while the Company pays Sprint and its PCS Affiliates
reciprocal fees for Company subscribers using other segments of the
network not operated by the Company. The rates paid on inter-market
travel were reduced to $0.10 per minute as of January 1, 2002. The
rate in effect for 2004 and 2003 was $0.058 per minute and will
remain at this rate through December 31, 2006.
The Sprint agreements require the Company to maintain certain
minimum network performance standards and to meet other performance
requirements. The Company was in compliance in all material respects
with these requirements as of December 31, 2004.
Additional information regarding the Company's agreements with
Sprint is set forth in Note 7 of the Company's consolidated
financial statements and related notes thereto appearing elsewhere
in this report.
Shenandoah Cable Television Company
Shenandoah Cable Television Company provides coaxial cable-based
television service to approximately 8,600 customers in Shenandoah
County at December 31, 2004. The system is a 750 megahertz hybrid
fiber coaxial network. Shenandoah Cable currently offers 75 channels
of analog and 173 channels of digital programming along with pay per
view.
ShenTel Service Company
ShenTel Service Company sells and services telecommunications
equipment and provides information services and Internet access to
customers in the northern Shenandoah Valley and surrounding areas.
The Internet service has approximately 15,000 dial-up customers and
nearly 2,600 digital subscriber line, or DSL, customers at December
31, 2004. This subsidiary offers broadband Internet access via
asymmetric digital subscriber line, or ADSL, technology in
Shenandoah County, Virginia.
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Shentel Converged Services, Inc. and NTC Communications, LLC.
These subsidiaries provide bundles of high speed internet, cable
television and local and long distance voice services to residential
communities throughout the southeastern United States outside of
Shenandoah County.
Shenandoah Valley Leasing Company
Shenandoah Valley Leasing Company finances purchases of
telecommunications equipment by customers of the other subsidiaries,
particularly ShenTel Service Company.
Shenandoah Mobile Company
Shenandoah Mobile Company owns and leases tower space in the PCS
service territory in Virginia, West Virginia, Maryland and
Pennsylvania to Shenandoah Personal Communications Company and other
wireless communications providers. This subsidiary provides paging
service throughout the Virginia portion of the northern Shenandoah
Valley.
Shenandoah Long Distance Company
Shenandoah Long Distance Company principally offers resale of long
distance service for calls placed to locations outside the regulated
telephone service area. This operation purchases billing and
collection services from the telephone subsidiary similar to other
long distance providers. In addition, this subsidiary offers
facility leases of fiber optic capacity in surrounding counties, and
into Herndon, Virginia. This subsidiary had approximately 9,900
customers at December 31, 2004.
Shenandoah Network Company
This subsidiary owns and operates the Maryland and West Virginia
portions of a fiber optic network along the Interstate 81 corridor.
In conjunction with the telephone subsidiary, Shenandoah Network
Company is associated with the ValleyNet fiber optic network.
ShenTel Communications Company
This subsidiary is certified as a competitive local exchange
carrier, or CLEC, in Virginia and currently provides DSL service in
Front Royal, Virginia. Currently there are minimal subscribers
receiving service from this subsidiary.
Additional information concerning the operating segments is set
forth in Note 15 of the Company's consolidated financial statements
appearing elsewhere in this report.
Competition
The communications industry is highly competitive. We compete
primarily on the basis of the price, availability, reliability,
variety and quality of our offerings and on the quality of our
customer service. Our ability to compete effectively depends on our
ability to maintain high-quality services at prices generally equal
to or below those charged by our competitors. In particular, price
competition in the integrated communications services markets
generally has been intense and is expected to
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increase. Our competitors include, among others, larger providers
such as AT&T Corp., MCI and Verizon Wireless, as well as various
competitive carriers. The larger providers have substantially
greater infrastructure, financial, personnel, technical, marketing
and other resources, larger numbers of established customers and
more prominent name recognition than the Company. We also may
increasingly face competition from businesses offering long distance
data and voice services over the internet. These businesses could
enjoy a significant cost advantage because currently they generally
do not pay carrier access charges or universal service fees.
In some markets, we compete in the provision of local services
against the incumbent local telephone company. Incumbent carriers
enjoy substantial competitive advantages arising from their
historical monopoly position in the local telephone market,
including pre-existing customer relationships with all or virtually
all end-users. In addition, incumbent carriers are expected to
compete in each other's markets in some cases, which will increase
the competition we face. Wireless communications providers are
competing with wireline local telephone service providers, which
further increases competition.
Competition is intense in the wireless communications industry.
Competition has caused, and we anticipate that competition will
continue to cause, the market prices for two-way wireless products
and services to decline in the future. Our ability to compete
effectively will depend, in part, on our ability to anticipate and
respond to various competitive factors affecting the wireless
industry.
The recent emergence of service providers that use Voice Over
Internet Protocol applications also could present a competitive
threat. Because the regulatory status of Voice Over Internet
Protocol applications is largely unsettled, providers of such
applications may be able to avoid costly regulatory requirements,
including the payment of intercarrier compensation. This could
impede our ability to compete with these providers on the basis of
price. More generally, the emergence of new service providers will
increase competition, which could adversely affect our ability to
succeed in the marketplace for communications services.
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the communications industry also could
increase the level of competition we face.
Regulation
Our operations are subject to regulation by the Federal
Communications Commission ("FCC"), the Virginia State Corporation
Commission ("VSCC"), and other federal, state, and local
governmental agencies. The laws governing these agencies, and the
regulations and policies that they administer, are subject to
constant review and revision, and some of these changes might have
material impacts on our revenues and expenses.
The discussion below focuses on the regulation of our wireless
subsidiary, Shenandoah Personal Communications Company, and our
incumbent local exchange carrier ("ILEC") subsidiary, Shenandoah
Telephone Company. Other lines of business (e.g., Shenandoah Cable
Company our cable television operations, and our competitive local
exchange carrier ("CLEC") business) are also subject to regulation,
but those described below are the most significant to the Company as
a whole. NTC Communications, LLC while providing voice and video
services, services only multi-dwelling unit communities and as a
result operates in a manner that generally does not subject it to
direct regulation.
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Regulation of Shentel's Wireless Operations
We operate our wireless business primarily using radio spectrum
licensed to Sprint under the Sprint management agreements.
Nonetheless, we are directly or indirectly subject to, or affected
by, a number of regulations and requirements of the FCC and other
governmental authorities.
Interconnection. The FCC has the authority to order interconnection
between commercial mobile radio service ("CMRS") providers (which
includes us) and any other common carrier. The FCC has ordered local
exchange carriers to provide reciprocal compensation to CMRS
providers for the termination of traffic. Under these rules, we
benefit from interconnection agreements negotiated by us, or by
Sprint (for our wireless network) on our behalf, with Verizon and
with several smaller independent local exchange carriers.
Interconnection agreements are negotiated on a statewide basis. If
an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to federal or state
regulators for arbitration. Negotiated interconnection agreements
are subject to state approval.
The FCC has underway a rulemaking proceeding in which the agency is
considering making major changes to the inter-carrier compensation
rules that govern the telecommunications industry. In addition, the
FCC is considering a number of petitions for declaratory ruling and
other proceedings regarding disputes among carriers relating to
interconnection payment obligations; resolutions of these petitions
could set precedents that would affect us in the future.
Interconnection costs represent a significant expense item for the
Company and any significant changes in the inter-carrier
compensation scheme may have a material impact on the Company. The
Company is unable to determine at this time whether any such changes
would be beneficial to or detrimental to the Company financially.
Universal Service Contribution Requirements. Sprint PCS is required
to contribute, based in part on the revenues it receives in
connection with our wireless operations, to the federal universal
service fund. The purpose of this fund is to subsidize
telecommunications services in rural areas, for low-income
consumers, and for schools, libraries, and rural healthcare
facilities. Sprint PCS is permitted to, and does, pass through these
mandated payments as surcharges paid by customers. The FCC is
considering a number of major changes to the universal service rules
that could affect us. For example, the FCC is considering possible
changes to the current rules, in which contribution obligations are
assessed as a variable percentage of interstate end-user
telecommunications revenues. The FCC could, instead, impose the
contribution obligations based on the number of telephone numbers,
the number of end-user connections, or on some other basis. The FCC
may also broaden the base of the fund by requiring Voice over
Internet Protocol providers and other service providers to make
contributions. The share of payments from wireless companies may
increase or decrease, and the overall size of the fund could well
increase. At the present time it is not possible to predict whether
and how these changes could affect the extent of our total federal
universal service assessments or our ability to recover costs
associated with the universal service fund.
In addition, payments are due based on revenues received in
connection with our wireless (and wireline) operations to funds that
support and maintain the Telecommunications Relay Fund, the North
American Numbering Plan, and to the FCC itself (regulatory fees).
Under our agreement with Sprint, Sprint is responsible for
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making these payments with respect to our wireless operations, and
is able to pass through the costs in surcharges paid by customers.
Transfers, Assignments and Changes of Control of PCS Licenses. The
FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS
license. The FCC also requires licensees to maintain effective
working control over their licenses. Our agreements with Sprint PCS
reflect an alliance that the parties believe meets the FCC
requirements for licensee control of licensed spectrum. If the FCC
were to determine that the Sprint PCS agreements need to be modified
to increase the level of licensee control, we have agreed with
Sprint PCS under the terms of our Sprint PCS agreements to use our
best efforts to modify the agreements as necessary to cause the
agreements to comply with applicable law and to preserve to the
extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be modified, the agreements may
be terminated pursuant to their terms. The FCC could also impose
sanctions on the Company.
Personal communication service licenses are granted for ten-year
periods. Licensees have an expectance of license renewal if they
have provided "substantial" performance and complied with FCC rules,
policies and the Communications Act.
Construction and Operation of Wireless Facilities. Wireless systems
must comply with certain FCC and Federal Aviation Administration
regulations regarding the registration, siting, marking, lighting
and construction of transmitter towers and antennas. The FCC also
requires that aggregate radio wave emissions from every site
location meet certain standards. These regulations also affect site
selection for new network build-outs and may increase the costs of
improving our network. The increased costs and delays from these
regulations may have a material adverse affect on our operations.
In addition, the FCC's decision to license a proposed tower may be
subject to environmental review pursuant to the National
Environmental Policy Act of 1969, or NEPA, which requires federal
agencies to evaluate the environmental impacts of their decisions
under certain circumstances. FCC regulations implementing NEPA place
responsibility on each applicant to investigate any potential
environmental effects, including health effects relating to radio
frequency emissions, of a proposed operation and to disclose any
significant effects on the environment to the agency prior to
commencing construction. In the event that the FCC determines that a
proposed tower would have a significant environmental impact, the
FCC would require preparation of an environmental impact statement.
In addition, tower construction is subject to regulations
implementing the Historic Preservation Act. Compliance with
environmental or historic preservation requirements could
significantly delay or prevent the registration or construction of a
particular tower or make tower construction more costly. In certain
jurisdictions, local laws or regulations may impose similar
requirements.
Wireless Facilities Siting. State and localities are authorize to
engage forms of regulation, including zoning and land-use
regulation, that affect the Company's ability to select and modify
sites for wireless facilities. States and localities may not engage
in forms of regulation that effectively prohibit the provision of
wireless services, discriminate among providers of such services, or
use radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC
is considering numerous requests for preemption of local actions and
other ongoing proceedings affecting wireless facilities siting.
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Enhanced 911. In order to enable wireless customers to dial 911 for
emergency medical or police assistance, and ensure that emergency
service providers will be able to locate the wireless user, the FCC
has required all wireless providers to provide enhanced 911
("E-911") in a two-phased process. In Phase I, wireless providers
are required to provide the cell site from which a wireless call has
been made and the caller's wireless phone number. The triggering
event for Phase I compliance is a request from a Phase I-enabled
Public Safety Answering Point ("PSAP"), after which a wireless
provider has six months to reach compliance. In Phase II, wireless
providers must be capable of transmitting precise automatic location
identification ("ALI") of subscribers by latitude and longitude with
a specified accuracy. The FCC has adopted a number of deadlines and
benchmarks for compliance with the Phase I and Phase II E-911
requirements. Sprint PCS has obtained conditional waivers of certain
of these requirements based on a modified deployment plan, which
includes a number of interim benchmarks and other conditions, and
would provide for completing Phase II enhanced 911 deployment by
2005. These waivers apply to our operations. To date we are in
compliance with the provisions of these rules and conditional
waivers.
Communications Assistance for Law Enforcement Act ("CALEA"). CALEA
was enacted in 1994 to preserve electronic surveillance capabilities
by law enforcement officials in the face of rapidly changing
telecommunications technology. CALEA requires telecommunications
carriers, including us, to modify their equipment, facilities, and
services to allow for authorized electronic surveillance based on
either industry or FCC standards. Following adoption of interim
standards and a lengthy rulemaking proceeding, including an appeal
and remand proceeding, as of June 30, 2002, all carriers were
required to be in compliance with the CALEA requirements. We are
currently in compliance with the CALEA requirements.
Local Number Portability. Since November 24, 2003, all covered CMRS
providers, including us, are required to allow customers in the 100
largest metropolitan areas to retain their existing telephone
numbers when switching from one telecommunications carrier to
another. These rules are generally referred to wireless local number
portability ("WLNP"). As of May 24, 2004, FCC regulations require
that such CMRS providers must implement WLNP outside the 100 largest
metropolitan areas in the United States as well. Given how recently
these rules were implemented, it is not yet clear whether and to
what extent the WLNP mandate has resulted in increased operating
costs, higher subscriber churn rates, or increased subscriber
acquisition and retention costs. In addition, we may be able to
obtain additional new customers that wish to change their service
from other wireless carriers as a result of wireless number
portability. The future volume of any porting requests, and the
processing costs related thereto, may increase our operating costs
in the future. Any of the above factors could have an adverse affect
on our competitive position, costs of obtaining new subscribers,
liquidity, financial position and results of operations. In
addition, in September 2004, the FCC issued a proposal to reduce the
mandatory time interval during which number porting must be
achieved. These proceedings, the outcomes of which cannot be
determined at this time, may have a material impact on the porting
obligations to which the Company is subject.
Number Pooling. The FCC regulates the assignment and use of
telephone numbers by wireless and other telecommunications carriers
to preserve numbering resources. CMRS providers in the top 100
markets are required to be capable of sharing blocks of 10,000
numbers among themselves in subsets of 1,000 numbers ("1000s-block
number pooling"). In addition, all CMRS carriers, including those
operating outside the top 100 markets, must be able to support
roaming calls on their network placed by users with pooled numbers.
Wireless carriers must also maintain detailed records of the numbers
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they have used, subject to audit. The pooling requirements may
impose additional costs and increase operating expenses on us and
limit our access to numbering resources.
Telecommunications Relay Services ("TRS"). Federal law requires
wireless service providers to take steps to enable the hearing
impaired and other disabled persons to have reasonable access to
wireless services. The FCC has adopted rules and regulations
implementing this requirement to which the Company is subject, and
requires the Company to pay a regulatory assessment to support TRS
for the disabled. The Company is in compliance with these
requirements.
Consumer Privacy. The Company is subject to various federal and
state laws intended to protect the privacy of end-users who
subscribe to the Company's services. For example, the FCC has
regulations that place certain restrictions on the permissible uses
that the Company can make of customer-specific information (known as
"Customer Proprietary Network Information" or "CPNI") received from
subscribers. In addition, the FCC is considering adopting
restrictions on the extent to which wireless data customers will be
subjected to receiving unsolicited junk e-mail or spam. One such
restriction, which became effective October 18, 2004, is the
prohibition of sending commercial messages to any address
referencing an internet domain name associated with wireless
subscriber messaging services and the requirement that all CMRS
providers must submit to the FCC a list of their internet domain
names that are associated with wireless subscriber messaging
services. Complying with these requirements may impose costs on us
or force us to alter the way we provide or promote our services.
Consumer Protection. Many members of the wireless industry,
including us, have voluntarily committed to comply with the CTIA
Consumer Code for Wireless, which includes consumer protection
provisions regarding the content and format of bills; advance
disclosures regarding rates, terms of service, contract provisions,
and network coverage; and the right to terminate service after a
trial period or after changes to contract provisions are
implemented. Both the FCC and the state commissions are considering
imposing additional consumer protection requirements upon wireless
service providers, and a number of regulatory proceedings are
pending. Any further changes to these requirements could increase
our costs of doing business and the costs of acquiring and retaining
customers.
Radio Frequency Emissions. Some studies (and media reports) have
suggested that radio frequency emissions from handsets, wireless
data devices and cell sites may raise various health concerns,
including cancer, and may interfere with various electronic medical
devices, including hearing aids and pacemakers. Most of the expert
reviews conducted to date have concluded that the evidence does not
support a finding of adverse health effects but that further
research is appropriate. Courts have dismissed a number of lawsuits
filed against other wireless service operators and manufacturers,
asserting claims relating to radio frequency transmissions to and
from handsets and wireless data devices. However, there can be no
assurance that the outcome of other lawsuits, or general public
concerns over these issues, will not have a material adverse effect
on the wireless industry, including the Company.
Incumbent Local Exchange Carrier Regulation
As an incumbent local exchange carrier ("ILEC"), Shenandoah
Telephone Company's operations are regulated by federal and state
regulatory agencies.
14
State Regulation. Shenandoah Telephone's rates for local exchange
service, intrastate toll service, and intrastate access charges are
subject to the approval of the Virginia State Corporation Commission
("VSCC"). The VSCC also establishes and oversees implementation of
the provisions of the federal and state telecommunications laws,
including interconnection requirements, promotion of competition,
and the deployment of advanced services. The VSCC also regulates
rates, service areas, service standards, accounting methods,
affiliated charge transactions and certain other financial
transactions.
Federal Regulation of Access Charges. Shenandoah Telephone
participates in the access revenue pools administered by the
FCC-supervised National Exchange Carrier Association ("NECA"), which
collects and distributes the revenues from interstate access charges
that long-distance carriers pay us for originating and terminating
interstate calls over our network. Shenandoah Telephone also
participates in certain NECA tariffs that govern the rates, terms,
and conditions of our interstate access offerings. Certain of those
tariffs are under review by the FCC, and we may be obligated to
refund certain access charges collected in the past or in the future
if the FCC ultimately finds that the tariffed rates were
unreasonable. We cannot predict whether, when, and to what extent
such refunds may be due.
The FCC is considering a number of broad possible changes to the
rules governing the interstate access rates charged by
small-to-midsize ILECs such as Shenandoah Telephone. For example,
the FCC is considering proposals to overhaul the rules regarding
inter-carrier compensation, including interstate and intrastate
access charges. These changes might include substantial reductions
in the access charges paid by long distance carriers - possibly to
zero, under a so-called "bill and keep" regime - accompanied by
increases to the subscriber line charges paid by business and
residential end users.
More narrowly, the FCC is also considering implementing
incentive-type regulation for rate of return carriers, including us.
The FCC is also considering additional questions regarding what
compensation wireless carriers, competitive local exchange carriers,
Voice over Internet Protocol providers, and providers of other
Internet-enabled services should pay (and receive) for their traffic
interconnected with ILECs networks. For example, the FCC recently
adopted policy changes that could increase the amounts of payments
from ILECs to competitive local exchange carriers that send traffic
to dial-up Internet service providers, and the FCC is considering
further changes to its policies governing these payments. These
changes are likely to increase our expenses, but at this time we
cannot estimate the amount of such additional expenses.
Interstate and intrastate access charges are an important source of
revenues for Shenandoah Telephone's operations. Unless these
revenues can be recovered through a new universal service mechanism,
or be reflected in higher rates to the local end user, or other
methods of cost recovery can be created, the loss of revenues could
be significant. There can be no assurance that access charges will
be continued or that sufficient substitutes for the lost revenues
will be provided. If access charges are reduced without sufficient
substitutes for the lost revenues, this could have a material
adverse effect on the Company's financial condition, results of
operations and cash flows. In addition, changes to the inter-carrier
compensation rules and policies could have a material impact on our
competitive position vis-a-vis other service providers.
Universal Service Fund. Shenandoah Telephone receives revenues from
the federal universal service fund ("USF"). As discussed above (in
the section on wireless regulation), the FCC is considering major
changes to the rules regarding carriers
15
mandated payments into the fund. In addition, the FCC is considering
potential changes to the rules governing disbursements from the
universal service fund to rural ILECs such as Shenandoah Telephone,
and to other providers. These rules are not likely to change until
July 2006, when the current plan governing USF disbursements to
rural ILECs (adopted in 2001) is set to expire. Despite interim
adjustments to make the funding more sustainable, the FCC has
indicated that additional changes are necessary to stabilize the
fund. Total federal funding has doubled since 1998, and some FCC
members and members of Congress have expressed concerns that it will
soon reach politically unacceptable levels. At the same time,
changes to the inter-carrier compensation rules that reduce levels
of access charges could be accompanied by increases in the universal
service fund. Changes in the universal service fund that reduce the
size of the fund and payments to Shenandoah Telephone could have a
material adverse impact on the Company's financial position, results
of operations, and cash flows.
All forms of federal USF support available to incumbent local
exchange carriers are now "portable" to any local competitor that
qualifies for support as an "eligible telecommunications carrier."
Recently, two wireless carriers - Nextel Partners and Virginia
Cellular - have received designation as eligible telecommunications
carriers in Shenandoah Telephone's service area. The FCC recently
adopted changes that make it somewhat more difficult for wireless
carriers and other prospective entrants to obtain designation as
eligible telecommunications carriers. The FCC and the Federal-State
Joint Board are also currently considering whether to change the
rules governing the amount of support to be disbursed to competitive
eligible telecommunications carriers, which could make it more or
less attractive for wireless carriers and other prospective entrants
to enter our Shenandoah Telephone service areas.
The FCC mandated that, effective October 1, 2004, the Universal
Service Administrative Company ("USAC") must begin accounting for
the USF program in accordance with generally accepted accounting
principles for federal agencies, rather than the accounting rules
that USAC formerly used. This accounting method change subjected
USAC to the Anti-Deficiency Act (the "ADA"), the effect of which
could have caused delays in USF payments to USF program recipients
and significantly increase the amount of USF regulatory fees charged
to wireline and wireless consumers. In December 2004, Congress
passed legislation to exempt USAC from the ADA for one year to allow
for a more thorough review of the impact the ADA would have on the
universal service program. It is likely that Congress will consider
additional changes to the USF program during 2005.
The FCC, USAC, and other authorities have expressed interest in
conducting more extensive audits of USF support recipients and
conducting other heightened oversight activities. The impact of
these activities on the Company, if any, is uncertain.
Other Regulatory Obligations. Shenandoah Telephone, like our
wireless operation, is subject to requirements relating to CALEA
implementation (to enable law enforcement agencies officers to
monitor and intercept telephone lines and otherwise assisting in
investigations), interconnection, access to rights of way number
portability (letting subscribers change to wireline and wireless
competitors' services without changing their telephone numbers),
number pooling (taking actions to preserve the available pool of
telephone numbers), and making telecommunications accessible for
those with disabilities, and other obligations. Many of these
requirements are discussed above in the section on regulation of
wireless operations.
16
Broadband Services. The FCC and other authorities continue to
consider policies to encourage nationwide advanced broadband
infrastructure development. For example, the FCC has largely
eliminated unbundling obligations relating to broadband facilities,
and has proposed to largely deregulate digital subscriber line and
other broadband services offered by ILECs. Such changes could
benefit our ILEC, but could also make it more difficult for us (or
for NECA) to tariff and pool digital subscriber line costs.
Long-Distance Services. Shentel, through its subsidiary, Shenandoah
Long Distance Company, provides long distance service to our
customers. Our long distance rates are not subject to FCC
regulation, but we are obligated to offer long-distance service
through a subsidiary other than Shenandoah Telephone, to disclose
our long distance rates on a website, to maintain geographically
averaged rates, to pay contributions to the universal service fund
and other mandatory payments based on our long-distance revenues,
and to comply with certain other filing and other requirements. We
are in compliance with these requirements.
Employees
At December 31, 2004, we had approximately 380 employees, of whom
approximately 345 were full-time employees. None of our employees is
represented by a union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is
good.
Websites and Additional Information
The Company maintains a corporate website at www.shentel.com. We
make available free of charge through our website our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such material
with or to the SEC. The contents of our website are not a part of
this report. In addition, the SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other
information regarding the Company
We also make available on our website, and in print to any
shareholder who requests them, copies of the charters of each
standing committee of our board of directors and our code of
business conduct and ethics. Requests for copies of these documents
may be directed to our Company Secretary at Shenandoah
Telecommunications Company, 500 Shentel Way, P.O. Box 459, Edinburg,
Virginia 22824. To the extent required by SEC rules, we intend to
disclose any amendments to our code of conduct and ethics, and any
waiver of a provision of the code with respect to the Company's
directors, principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, on our website referred to above within five
business days following any such amendment or waiver, or within any
other period that may be required under SEC rules from time to time.
Risk Factors
Our business and operations are subject to a number of risks and
uncertainties, including those set forth under "Recent Developments"
and the following:
Risks Related to the PCS Business
17
The performance of Shenandoah Personal Communications Company, our
largest operating subsidiary in terms of revenues and assets, may be
adversely affected by any interruption in Sprint's business.
We rely on Sprint's ongoing operations to continue to offer our PCS
subscribers the seamless national services that we currently
provide. Any interruption in Sprint's business could adversely
affect our results of operations, liquidity and financial condition.
Our business may suffer as a result of competitive pressures.
Our revenue growth is primarily dependent on the growth of the
subscriber base, average monthly revenues per user, travel and
roaming revenue. Competitive pressures may adversely affect our
ability to increase our future revenues at anticipated levels. A
continuation of competitive pressures in the wireless
telecommunications market has caused some major carriers to offer
plans with increasingly larger bundles of minutes of use at lower
prices that may compete with the Sprint wireless calling plans we
sell. Increased price competition may lead to lower average monthly
revenues per user than we anticipate. The current reciprocal travel
rate is effective through 2006. We anticipate that the rate may
decrease thereafter.
We may not be able to implement our business plan if our operating
costs are higher than we anticipate.
Increased competition may lead to higher promotional costs, losses
on sales of handsets and other costs to acquire subscribers.
Further, as described below under "Risks Related to Our Relationship
With Sprint," a substantial portion of costs of service and roaming
are attributable to fees and charges paid to Sprint for billing and
collection, customer care and other back-office support. Our ability
to manage costs charged by Sprint is limited. If these costs are
more than we anticipate, the actual amount of funds available to
implement our operating strategy and business plan may fall short of
our estimates.
The dynamic nature of the wireless market may limit management's
ability to quickly discern causes of volatility in key operating
performance measures.
Our business plan and estimated future operating results are based
on estimates of key operating performance measures, including
subscriber growth, subscriber turnover (commonly known as churn),
average monthly revenue per subscriber, losses on sales of handsets
and other subscriber acquisition costs and other operating costs.
The dynamic nature of the wireless market, economic conditions,
increased competition in the wireless telecommunications industry,
new service offerings by Sprint or competitors of increasingly
larger bundles of minutes of use at lower prices, and other issues
facing the wireless telecommunications industry in general have
created a level of uncertainty that may adversely affect our ability
to predict these key measures.
We may experience a high rate of subscriber turnover, which could
adversely affect our future financial performance.
The wireless personal communications services industry in general,
including the operations of Sprint and its PCS Affiliates, has
experienced a rate of churn higher than past cellular industry
average rates. We experienced a relatively consistent churn rate in
2003 and 2004. Our 2005 business plan assumes that our churn rate
will remain fairly stable under existing operating conditions.
Because of significant competition in the
18
industry and general economic conditions, among other factors, this
stability may not occur and the future rate of subscriber turnover
may be higher than rates in recent periods. Factors that may
contribute to higher churn include the following:
o inability or unwillingness of subscribers to pay,
which would result in involuntary deactivations;
o subscriber mix and credit class, particularly an
increase in sub-prime credit subscribers;
o competition of products, services and pricing of
other providers;
o inadequate network performance and coverage
relative to that provided by competitors in our
service area;
o inadequate customer service;
o increased prices; and,
o any future changes by Sprint and/or the Company in
the products and services offered.
A high rate of subscriber turnover could increase the costs and
losses we incur in obtaining new subscribers, especially because,
consistent with industry practice, we subsidize some of the costs
related to the purchases of handsets by subscribers.
The allowance for doubtful accounts is an estimate and may not be
sufficient to cover uncollectible accounts.
On an ongoing basis, we estimate the amount of subscriber
receivables that will not be collectible based on historical results
and actual write-offs reported by Sprint. The allowance for doubtful
accounts may underestimate actual unpaid receivables for various
reasons, including the following:
o the churn rate may exceed estimates;
o bad debt as a percentage of service revenues may
increase rather than remain consistent with
historical trends;
o general economic conditions may worsen; or
o there may be unanticipated changes in Sprint's
wireless products and services.
If the allowance for doubtful accounts is insufficient to cover
losses on receivables, our liquidity and financial condition could
be impaired.
Travel revenue, which is the fee paid to us by Sprint and the other
Sprint Affiliates when their customers use our network, could be
less than we anticipate, which could adversely affect our liquidity,
financial condition and results of operations.
The net balance of PCS travel revenue and expense could change
significantly due to changes in service plan offerings, changes in
the travel settlement rate, changes in travel
19
habits by the subscribers in the Company's market areas or other
Sprint subscribers and numerous other factors beyond the Company's
control.
We may incur significantly higher wireless handset subsidy costs
than we anticipate for existing subscribers who upgrade to a new
handset.
As our subscriber base matures, and technological innovations occur,
we anticipate that existing subscribers will continue to upgrade to
new wireless handsets. To discourage customer defections to
competitors, we subsidize a portion of the price of wireless
handsets and in some cases incur sales commissions for handset
upgrades. If more subscribers upgrade to new wireless handsets than
we project, our results of operations would be adversely affected.
If we do not continue to subsidize the cost of the handsets for
handset up-grades, subscribers could choose to deactivate the
handsets and move to other carriers.
If we are unable to secure additional tower sites or leases to
install equipment to expand the wireless coverage, or are unable to
renew expiring leases, the level of service we provide could be
adversely affected.
Many of our cell sites are co-located on leased tower facilities
shared with one or more wireless providers. A large portion of these
leased tower sites are owned by a limited number of companies. If
economic conditions affect the leasing company, our lease may be
affected and the ability to remain on the tower at reasonable rates
could be jeopardized, which could leave areas of our service area
without service and increase customer turnover.
Risks Related to the Wireless Industry
Media reports have suggested that certain radio frequency emissions
from wireless handsets may be linked to various health problems,
including cancer, and may interfere with various electronic medical
devices, including hearing aids and pacemakers. Concerns over radio
frequency emissions may discourage use of wireless handsets or
expose us to potential litigation. Any resulting decrease in demand
for wireless services, costs of litigation or damage awards could
impair our ability to sustain profitable operations.
Regulation by government or potential litigation relating to the use
of wireless phones while driving could adversely affect results of
our wireless operations. Some studies have indicated that some
aspects of using wireless phones while driving may impair drivers'
attention in certain circumstances, making accidents more likely.
These concerns could lead to litigation relating to accidents,
deaths or serious bodily injuries, or to new restrictions or
regulations on wireless phone use. A number of U.S. states and local
governments are considering or have recently enacted legislation
that would restrict or prohibit the use of a wireless handset while
driving a vehicle or, alternatively, require the use of a hands-free
telephone. Legislation of this nature, if enacted, may require
wireless service providers to supply to their subscribers hands-free
enhanced services, such as voice activated dialing and hands-free
speaker phones and headsets, so that they can keep generating
revenue from their subscribers, who make many of their calls while
on the road. If we are unable to provide hands-free services and
products to subscribers in a timely and adequate fashion, the volume
of wireless phone usage would likely decrease, and the ability of
our wireless operations to generate revenues would suffer.
Risks Related to the Telecommunications Industry
20
Intensifying competition in all segments of our business may limit
our ability to sustain profitable operations.
As new technologies are developed and deployed by competitors in our
service area, some of our subscribers may select other providers'
offerings based on price, capabilities and personal preferences.
Most of our competitors possess greater resources, have more
extensive coverage areas, and offer more services than we do. If
significant numbers of our subscribers elect to move to other
competing providers, or if market saturation limits the rate of new
subscriber additions, we may not be able to sustain profitable
operations.
Alternative technologies, changes in the regulatory environment and
current uncertainties in the marketplace may reduce future demand
for existing telecommunication services.
The telecommunications industry is experiencing significant
technological change, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology,
shorter development cycles for new products and enhancements and
changes in end-user requirements and preferences. Technological
advances and industry changes could cause the technology we use to
become obsolete. We and our vendors may not be able to respond to
such changes and implement new technology on a timely basis, or at
an acceptable cost.
A recession in the United States or adverse economic conditions in
our market area involving significantly reduced consumer spending
could have a negative impact on our results of operations.
Our customers are individual consumers and businesses that provide
goods and services to others, and are located in a relatively
concentrated geographic area. An economic downturn on a national
scale or in our market could depress consumer spending and harm our
operating performance.
Regulation by government and taxing agencies may increase our costs
of providing service or require changes in services, either of which
could impair our financial performance.
Our operations are subject to varying degrees of regulation by the
Federal Communications Commission, the Federal Trade Commission, the
Federal Aviation Administration, the Environmental Protection
Agency, and the Occupational Safety and Health Administration, as
well as by state and local regulatory agencies. Action by these
regulatory bodies could negatively affect our operations and our
costs of doing business. For example, changes in tax laws or the
interpretation of existing tax laws by state and local authorities
could increase income, sales, property or other tax costs.
Risks Related to the Company's Relationship with Sprint
The termination of our affiliation with Sprint would severely
restrict our ability to conduct the wireless business.
We do not own the licenses to operate our PCS network. Our ability
to offer Sprint wireless products and services and operate a PCS
network is dependent on continuation of the agreements we have with
Sprint. Our management agreement with Sprint will be automatically
renewed at the expiration of the 20-year initial term, which ends in
2019,
21
for an additional 10-year period and two subsequent 10-year periods
unless we are in material default. Either Sprint or the Company may
choose not to renew the management agreement at the expiration of
any the renewal terms by giving at least two years prior notice. If
neither Sprint nor the Company exercises this right, the agreement
will terminate in 2049.
Each of our agreements with Sprint may be terminated by Sprint for
our breach of any material term, including, among others, marketing,
build-out and network operational requirements. Many of these
requirements are technical and detailed in nature. In addition, many
of these requirements may be changed by Sprint with little notice.
As a result, we may not always be in compliance with all
requirements of the Sprint agreements. The non-renewal or
termination of any of the Sprint agreements or the failure of Sprint
to perform its obligations under the Sprint agreements would
severely restrict our ability to conduct business.
Sprint may make business decisions that are not in our best
interests, which may adversely affect our relationships with
subscribers in our territory, increase our expenses and/or decrease
our revenues.
Under its agreements with us, Sprint has a substantial amount of
control over the conduct of our PCS business. Accordingly, Sprint
may make decisions that could adversely affect our PCS business,
such as the following:
o Sprint could price its national plans based on its own
objectives and could set price levels or other terms
that may not be economically advantageous for us;
o Sprint could develop products and services, or establish
credit policies, which could adversely affect our
results of operations;
o subject to limitations under our agreements, Sprint
could raise the costs to perform certain services or
maintain the costs above those we expect, reduce levels
of services, or otherwise seek to increase expenses and
other amounts charged;
o Sprint may reduce the reciprocal travel rate charged
when subscribers of Sprint or its PCS Affiliates use our
network after 2006;
o subject to limitations under our agreements, Sprint
could alter its network and technical requirements or
request us to build out additional areas within our
territories, which could result in increased equipment
and build-out costs; or
o Sprint could make decisions that could adversely affect
the Sprint brand names, products or services.
The occurrence of any of the foregoing events could harm our
business by adversely affecting our relationship with wireless
subscribers in our territories and damaging our reputation.
Our dependence on Sprint for services may limit our ability to
forecast operating results.
Our dependence on Sprint injects a degree of uncertainty into our
business and financial planning. We may, at times, disagree with
Sprint concerning the applicability, calculation approach or
accuracy of Sprint-supplied revenues and expenses. It is our
22
policy to reflect the information supplied by Sprint in our
financial statements for the applicable periods and to make
corrections, if any, no earlier than the period in which Sprint and
we agree to the corrections.
Inaccuracies in data provided by Sprint could overstate or
understate our expenses or revenues and result in out-of-period
adjustments that may adversely affect our financial results.
Because Sprint provides billing and collection services for us,
Sprint remits a significant portion of our total revenues. We rely
on Sprint to provide accurate, timely and sufficient data and
information to enable us to record properly revenues, expenses and
accounts receivable, which underlie a substantial portion of our
financial statements and other financial disclosures. We and Sprint
have previously discovered billing and other errors or inaccuracies,
which, while not material to Sprint, could be material to us. If we
are required in the future to make additional adjustments or incur
charges as a result of errors or inaccuracies in data provided by
Sprint, such adjustments or charges could materially affect our
financial results for the period with respect to which the
adjustments are made or charges are incurred. Such adjustments or
charges could require restatement of our financial statements.
We are subject to risks relating to Sprint's provision of back
office services, changes in products, services, plans and programs.
Any failure by Sprint to provide high quality back office services
could lead to subscriber dissatisfaction, increased churn or
otherwise increased costs. We rely on Sprint's internal support
systems, including customer care, billing and back office support.
Our operations could be disrupted if Sprint is unable to provide and
expand its internal support systems in a high quality manner, or to
efficiently outsource those services and systems through third-party
vendors.
Changes in Sprint's PCS products and services may reduce subscriber
additions, increase subscriber turnover and decrease subscriber
credit quality. The competitiveness of Sprint's PCS products and
services is a key factor in our ability to attract and retain
subscribers.
Sprint's roaming arrangements to provide service outside of the
Sprint National Network may not be competitive with other wireless
service providers, which may restrict our ability to attract and
retain subscribers and may increase our costs of doing business.
We rely on Sprint's roaming arrangements with other wireless service
providers for coverage in some areas where Sprint service is not yet
available. If customers are not able to roam quickly or efficiently
onto other wireless networks, we may lose current subscribers and
Sprint wireless services may be less attractive to new subscribers.
The risks related to our roaming arrangements include the following:
o the quality of the service provided by another provider
during a roaming call may not approximate the quality of
the service provided by the Sprint PCS network;
o the price of a roaming call off network may not be
competitive with prices of other wireless companies for
roaming calls;
23
o subscribers must end a call in progress and initiate a
new call when leaving the Sprint PCS network and
entering another wireless network;
o customers may not be able to use Sprint's advanced
features, such as voicemail notification, while roaming;
and
o Sprint or the carriers providing the service may not be
able to provide accurate billing information on a timely
basis.
Some provisions of the Sprint agreements may diminish the value of
our common stock and restrict or diminish the value of our business.
Under limited contractual circumstances, Sprint may purchase the
operating assets of our PCS operation at a discount. In addition,
Sprint must approve any assignment of the Sprint agreements by us.
Sprint also has a right of first refusal to purchase our PCS
operating assets if we decide to sell those assets to a third party.
These restrictions and other restrictions contained in the Sprint
agreements could adversely affect the value of our common stock, may
limit our ability to sell the foregoing assets on advantageous
terms, may reduce the value a buyer would be willing to pay, and may
reduce the "entire business value," as described in the Sprint
agreements.
We may have difficulty in obtaining an adequate supply of certain
handsets from Sprint.
PCS depends on the Company's relationship with Sprint to obtain
handsets. Sprint orders handsets from various manufacturers. We
could have difficulty obtaining specific types of handsets in a
timely manner if:
o Sprint does not adequately project the need for handsets
for itself, its PCS Affiliates and its other third-party
distribution channels, particularly in transition to new
technologies;
o Sprint gives preference to other distribution channels;
o we do not adequately project our need for handsets;
o Sprint modifies its handset logistics and delivery plan
in a manner that restricts or delays access to handsets;
or
o there is an adverse development in the relationship
between Sprint and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt subscribers'
service or result in a decrease in our subscribers.
If Sprint does not continue to enhance its nationwide digital
wireless network, we may not be able to attract and retain
subscribers.
Our PCS operations are dependent on Sprint's national network and on
the networks of Sprint's other Affiliates. Sprint's digital wireless
network may not provide nationwide coverage to the same extent as
the networks of its competitors, which could adversely affect our
ability to attract and retain subscribers. Sprint currently intends
to cover a significant portion of the population of the United
States, Puerto Rico and the U.S.
24
Virgin Islands by creating a nationwide network through its own
construction efforts and those of its PCS Affiliates. Sprint is
still constructing its nationwide network and does not offer PCS
services, either on its own network or through its roaming
agreements, in every part of the United States. Sprint has entered
into management agreements similar to its agreement with us with
companies in other markets under its nationwide digital wireless
build-out strategy.
If other PCS Affiliates of Sprint have financial difficulties or
cease operating, or if Sprint's PCS licenses are not renewed or are
revoked, our PCS business would be harmed.
Sprint's national digital wireless network is a combination of
networks. The large metropolitan areas are owned and operated by
Sprint, and the areas in between them are generally owned and
operated by Sprint PCS Affiliates, all of which are independent
companies. If other PCS Affiliates experience financial
difficulties, Sprint's digital wireless network could be disrupted.
Although Sprint may have the right operate the network in the
affected territory, there can be no assurance that the transition
would occur in a timely and effective manner. In addition, we do not
have the ability to require other PCS Affiliates to pay amounts due
for travel in our market areas by subscribers of such other PCS
Affiliates. We rely on Sprint to enforce the payment obligations of
such PCS Affiliates.
Non-renewal or revocation by the FCC of Sprint's PCS licenses would
significantly harm us. Wireless spectrum licenses are subject to
renewal and revocation by the FCC. There may be opposition to
renewal of Sprint's PCS licenses upon their expiration, and Sprint's
PCS licenses may not be renewed. The FCC has adopted specific
standards to apply to PCS license renewals. Any failure by Sprint to
comply with these standards could cause revocation or forfeiture of
Sprint's PCS licenses. conduct business.
If Sprint does not maintain control over its licensed spectrum, our
Sprint agreements may be terminated, which would render us unable to
continue providing service to our subscribers.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters, which occupies a
60,000-square foot building in Edinburg, Virginia. The Company also
owns a 24,000-square foot building in Edinburg that houses the
Company's main switching center and technical staff, a 10,000-square
foot building in Edinburg used for customer services and retail
sales, a 6,000-square foot service building outside of the town
limits of Edinburg and a 10,000-square foot building in Winchester,
Virginia used for both the Company's retail sales and office space
and rental space to a non-affiliated tenant.
The Company owns eight telephone exchange buildings that are located
in the major towns and some of the rural communities that are served
by the regulated telecommunications operations. These buildings
contain switching and fiber optic equipment and associated local
exchange telecommunications equipment. The Company has fiber optic
hubs or points of presence in Hagerstown, Maryland; Ashburn,
Berryville, Edinburg, Front Royal, Harrisonburg, Herndon, Leesburg,
Stephens City, Warrenton and Winchester, Virginia; and Martinsburg,
West Virginia.
The Company leases a warehouse, office space and an operations area
in Pennsylvania to support the network and sales efforts in the
central Pennsylvania market. The Company also leases office space in
Harrisonburg and Blacksburg, Virginia, and retail
25
space in Harrisonburg and Front Royal, Virginia, Hagerstown,
Maryland, Martinsburg, West Virginia and Harrisburg, Mechanicsburg,
and York, Pennsylvania. The Company leases land, buildings and tower
space in support of its PCS operations. As of December 31, 2004, the
Company had 271 sites, including sites on property owned by the
Company. The leases for the foregoing land, buildings and tower
space expire on various dates between 2005 and 2043. For information
about these leases, see Note 13 to the consolidated financial
statements appearing elsewhere in this report.
The Company plans to lease additional land, equipment space, and
retail space in support of the ongoing PCS expansion.
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, 2004.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASERS OF EQUITY SECURITIES
The Company's stock is traded on the Nasdaq National Market under the symbol
"SHEN." The following table shows the high and low sales prices per share of
common stock as reported by the Nasdaq National Market for each quarter during
the last two years:
2004 High Low
---- ---- ---
Fourth Quarter $34.69 $23.99
Third Quarter 27.27 22.70
Second Quarter 30.71 22.37
First Quarter 27.36 21.91
2003 High Low
---- ---- ---
Fourth Quarter $27.50 $18.63
Third Quarter 26.37 18.88
Second Quarter 25.00 13.90
First Quarter 24.75 13.58
All share and per share figures are restated to reflect the 2-for-1 stock split
effected February 23, 2004.
As of February 23, 2005, there were approximately 4,129 holders of record of the
Company's common stock.
Shenandoah Telecommunications Company historically has paid an annual cash
dividend on or about December 1 of each year. The cash dividend was $0.43 per
share in 2004 and $0.39 per share in 2003. Dividends are paid to Shenandoah
Telecommunications Company shareholders from dividends paid to it by its
operating subsidiaries. The terms of a loan agreement between Shenandoah
Telephone Company and Rural Utility Service require the subsidiary to maintain
defined amounts of equity and working capital after payment of dividends to the
holding company. Approximately $400,000 of the subsidiary's retained earnings
were available for payment of dividends at December 31, 2004. The foregoing loan
agreement is not expected to limit dividends in amounts that Shenandoah
Telecommunications Company historically has paid to its shareholders.
27
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data as of December 31, 2004,
2003, 2002, 2001 and 2000 and for each of the five years ended December 31,
2004.
The selected financial data as of December 31, 2004, 2003 and 2002 and for each
of the years in the three-year period ended December 31, 2004 are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this report.
The selected financial data as of December 31, 2001 and 2000 and for the years
ended December 31, 2001 and 2000 are derived from the Company's financial
statements which have been audited.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes thereto appearing
elsewhere in this report.
(Dollar figures in thousands, except per share data.)
2004 2003 2002 2001 2000
---------- ----------- ----------- ---------- ----------
Operating Revenues $ 120,974 $ 105,617 $ 92,720 $ 68,722 $ 44,426
Operating Expenses 101,349 86,989 83,382 62,298 39,048
Interest Expense 3,129 3,510 4,195 4,127 2,936
Income Taxes (Benefit) 6,078 5,304 (2,109) 5,811 2,975
Income (Loss) from Continuing
Operations $ 10,243 $ 9,761 $ (2,893) $ 9,694 $ 5,091
Discontinued Operations, net of tax -- 22,389 7,412 6,678 4,764
Cumulative effect of a change in
accounting, net of tax -- (76) -- -- --
Net Income 10,243 32,074 4,519 16,372 9,855
Total Assets 211,247 185,364 164,004 167,372 152,585
Long-term Obligations 52,291 43,346 52,043 56,436 55,487
Shareholder Information
Number of Shareholders 4,116 3,930 3,954 3,752 3,726
Shares Outstanding 7,629,810 7,592,768 7,551,818 7,530,956 7,518,462
Income (Loss) per share from
Continuing Operations-diluted $ 1.34 $ 1.28 $ (0.38) $ 1.28 $ 0.68
Income per share from
Discontinued Operations-diluted -- 2.94 0.98 0.88 ..63
Loss per share from cumulative effect of
a change in accounting -- (0.01) -- -- --
Net Income per share-diluted 1.34 4.22 0.60 2.17 1.31
Cash dividends per share $ 0.43 $ 0.39 $ 0.37 $ 0.35 $ 0.33
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our expectations, hopes,
intentions, or strategies regarding the future. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements. Factors
that might cause such a difference include, 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.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances, except as required by
law.
General
Shenandoah Telecommunications Company is a diversified telecommunications
company providing both regulated and unregulated telecommunications services
through ten wholly owned subsidiaries. These subsidiaries provide local exchange
telephone services, wireless personal communications services (PCS), as well as
cable television, paging, Internet access, long distance, fiber optics
facilities, and leased tower facilities. The Company is the exclusive provider
of wireless mobility communications network products and services on the 1900
MHz band under the Sprint brand from Harrisonburg, Virginia to Harrisburg, York
and Altoona, Pennsylvania. The Company refers to the Hagerstown, Maryland;
Martinsburg, West Virginia; and Harrisonburg and Winchester, Virginia markets as
its Quad State markets. The Company refers to the Altoona, Harrisburg, and York,
Pennsylvania markets as its Central Penn markets. Competitive local exchange
carrier (CLEC) services were established on a limited basis during 2002. In
addition, the Company sells and leases equipment, mainly related to services it
provides, and also participates in emerging services and technologies by direct
investment in non-affiliated companies. As a result of the NTC Communications,
L.L.C.(NTC) acquisition, the Company, through its newly created subsidiary
Shentel Converged Services, provides local and long distance voice, cable
television, internet and data services on an, at times, exclusive basis to
multi-dwelling unit (MDU) communities (primarily off-campus student housing)
throughout the southeastern United States including Virginia, North Carolina,
Maryland, South Carolina, Georgia, Florida, Tennessee and Mississippi.
The Company reports revenues as wireless, wireline and other revenues. These
revenue classifications are defined as follows: Wireless revenues are made up of
revenues from the Personal Communications Company (a PCS Affiliate of Sprint),
and the Mobile Company. Wireline revenues include revenues from the Telephone
Company, Network Company, Cable Television Company, Converged Services and the
Long Distance Company. Other revenues are comprised of the revenues of ShenTel
Service Company, the Leasing Company, ShenTel Communications Company, the
Holding Company and the data services revenue from Converged Services. For
additional information on the Company's business segments, see Note 15 to the
audited consolidated financial statements appearing elsewhere in this report.
The Company operations require substantial investment in fixed assets or plant.
This significant capital requirement may preclude profitability during the
initial years of operation. The strategy of the Company is to grow and diversify
the business by adding services and geographic areas that can leverage the
existing plant, but to do so within the opportunities and constraints presented
by the industry. For many years the Company focused on reducing reliance on its
regulated telephone operation, which up until 1981 was the only significant
business within the Company. This initial diversification was concentrated in
other wireline businesses, such as the cable television and regional fiber
facility businesses. In 1990 the Company made its first significant investment
in the wireless sector through its former investment in the Virginia 10 RSA
Limited partnership. By 1998, revenues of the regulated telephone operation had
decreased to 59.2% of total revenues. In that same year more than 76.6% of the
Company's total revenue was generated by wireline operations, and initiatives
were already underway to make wireless a more significant contributor to total
revenues.
During the 1990's significant investments were made in the cellular and PCS
(wireless) businesses. The VA 10 RSA cellular operation, in which the Company
held a 66% interest and was the general partner, experienced rapid revenue
growth and excellent margins in the late 1990's. The cellular operation covered
only six counties, and became increasingly dependent on roaming revenues.
Management believed the roaming revenues and associated margins would be
unsustainable as other wireless providers increasingly offered
nationally-branded services with significantly reduced usage charges. To
position it to participate in the newer, more advanced, digital wireless
services, in 1995 the Company entered the PCS business through an affiliation
with American Personal Communications (APC), initiating service along the
Interstate 81 corridor from Harrisonburg, Virginia to Chambersburg,
Pennsylvania. This territory was
29
a very close match to the Company's fiber network, thereby providing economic
integration that might not be available to other wireless carriers. In 1999, the
Company entered a new affiliation arrangement with Sprint, the successor to APC
thereby becoming part of a nationally branded wireless service and expanded the
PCS footprint further into Central Pennsylvania.
The growing belief that national branding was critical to our wireless
operations, the expectation that roaming revenues from our analog cellular
operation would not continue to grow, and the increase in the number of wireless
competitors in our markets, prompted the Company to exit the cellular business
in order to focus on our PCS operations. The Company entered into an agreement
on November 21, 2002, to sell its 66% ownership interest in the Virginia 10 RSA
cellular operation which was classified as a discontinued operation. The closing
occurred February 28, 2003. The Company received $37.0 million in proceeds,
including $5.0 million in escrow for two years and $1.7 million for working
capital. The $5.0 million was released from escrow in February 2005.
In 2004, the Company continued its profitable growth. The PCS operation
contributed $80.2 million of revenue, a $13.4 million or 20% increase compared
to 2003. PCS net income of $2.9 million for the year ended 2004 is a $2.6
million improvement over 2003. Churn was 2.2%, comparable to the same period
last year. The NTC acquisition provided for growth in the fourth quarter of 2004
as well as a driver for future growth as the Company continues to diversify away
from its traditional wireline business. The Company had approximately 17,700
internet customers of which 2,646 access the service through Digital Subscriber
Lines (DSL) for an increase of 104% over the same period in 2003.
Additional Information About the Company's Business
(unaudited)
Three Month Period Ended Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31,
2004 2004 2004 2004 2003
----------------------------------------------------------------------
Telephone Access Lines 24,691 24,818 24,867 24,901 24,877
CATV Subscribers 8,631 8,684 8,709 8,701 8,696
Internet Subscribers dial-up 15,051 15,817 16,422 17,063 17,420
DSL Subscribers 2,646 2,152 1,856 1,637 1,298
Retail PCS Subscribers 102,613 98,053 94,475 89,632 85,139
Wholesale PCS Users (1) 27,337 19,603 18,059 16,349 12,858
Paging Subscribers 1,595 1,684 1,782 1,862 1,989
Long Distance Subscribers 9,918 9,719 9,559 9,542 9,526
Fiber Route Miles 557 554 554 552 552
Total Fiber Miles 28,830 28,771 28,770 28,743 28,740
Long Distance Calls (000) (2) 6,265 6,117 6,228 5,821 5,851
Total Switched Access Minutes (000) 66,449 63,867 60,874 58,099 55,932
Originating Switched Access MOU (000) 18,870 18,596 18,280 18,252 17,829
Employees (full time equivalents) 374 303 284 272 268
CDMA Base Stations (sites) 271 261 257 257 253
Towers (100 foot and over) 80 78 78 78 77
Towers (under 100 foot) 11 10 10 11 11
NTC properties served (3) 107 -- -- -- --
PCS Market POPS (000) (4) 2,048 2,048 2,048 2,048 2,048
PCS Covered POPS (000) (4) 1,629 1,611 1,610 1,585 1,581
PCS Ave. Monthly Churn % (5) 2.2% 2.2% 1.9% 2.2% 2.00%
December 31, 2004
----------------------
Telephone CATV
PLANT FACILITY STATISTICS(6) ----------------------
Route Miles 2,177 558
Customers Per Route Mile 11 15
Miles of Distribution Wire 601 166
Telephone Poles 7,662 36
Miles of Aerial Copper Cable 330 163
Miles of Buried Copper Cable 1,340 360
Miles of Underground Copper Cable 39 2
Fiber Optic Cable-Fiber Miles 262 --
Inter-toll Circuits to Interexchange Carriers 1,790 --
Special Service Circuits to Interexchange Carriers 345 --
30
(1) - Wholesale PCS Users are private label subscribers with numbers homed in
the Company's wireless network service area.
(2) - Originated by customers of the Company's Telephone subsidiary.
(3) - NTC properties served refers to multi-unit housing facilities with NTC
services provided.
(4) - POPS refers to the estimated population of a given geographic area and
is based on information purchased by Sprint from Geographic Information
Services. Market POPS are those within a market area which the Company is
authorized to serve under its Sprint agreements, and Covered POPS are
those covered by the network's service area.
(5) - PCS Ave Monthly Churn is the average of three monthly calculations of
deactivations (excluding returns less than 30 days) divided by beginning
of period subscribers.
(6) - Excludes NTC
Significant Transactions
Reflected in the 2004 results are several unusual items, which should be noted
in understanding the financial results of the Company for 2004.
On November 30, 2004, the Company purchased the 83.9% of NTC that it did not
already own for $10 million and the assumption of NTC's existing debt. The
results of NTC's operations have been included in the consolidated financial
statements since the purchase date.
On January 30, 2004, the Company, a PCS Affiliate of Sprint, signed agreements
with Sprint that resolved disputed items and documented changes in the
management and operating agreements between the two companies related to the
operations of the nationwide Sprint PCS network. The agreements provide the
Company with the ability to better estimate the future costs of certain
operating expenses and in the Company's opinion improve the contract between
Sprint and itself. Under the agreements:
1. For the period 2004 through 2006, the travel and reseller rates
between the Company and Sprint were set at $0.058 per minute for
voice and $0.002 per kilobyte for data. Without this agreement the
voice travel rate for 2004 would have decreased to $0.041. Since the
Company is in a net receivable position related to travel with
Sprint, the impact on net travel and reseller revenue would have
been a reduction of $1.4 million had the $0.041 rate been in effect
in 2004. Beginning in 2007, the Sprint travel and reseller rate will
be changed annually to equal 90% of Sprint's retail yield from the
prior year. Sprint's retail yield will be determined based on
Sprint's average revenue per PCS user for voice services divided by
the average minutes of use per user.
2. Sprint agreed to meet certain service level goals related to the
provision of customer services. If Sprint does not reach the stated
goals before the end of 2006, the Company will have the opportunity
to either provide the services itself or contract with a third
party.
3. Sprint agreed to provide back office and network services through
2006 at a fixed rate per subscriber per month of $7.70.
4. Through 2006, a methodology is provided to determine if the Company
is required to make certain capital expenditures and participate in
Sprint national marketing programs.
5. Effective January 1, 2004, the method of cash settlement changed
from Sprint distributing cash from customers based on collected
revenue to billed revenue. The absolute amount of cash received by
the Company should remain the same, but the Company should receive
cash on a more timely basis.
31
6. The Company is entitled to a Most Favored Nations (MFN) clause.
During the period through 2006, the Company will have the
opportunity to adopt any addendum to the Management and/or Service
Agreements that Sprint signs with another PCS Affiliate.
The Management and Services Agreements were further amended in May 2004, Under
the terms of the May amendment, the Company has agreed to participate in all new
and renewed reseller agreements signed through December 31, 2006. Additionally,
the Company signed a letter of agreement to participate in all existing Sprint
reseller arrangements applicable to the Company's service area. In consideration
for this participation, the Company received a reduction in the monthly fee per
subscriber paid to Sprint for back office services and certain network services.
The reduction per subscriber per month is $0.45 in 2004, $0.70 in 2005 and $0.95
in 2006, from the amounts agreed upon in the management agreement amendment
dated January 2004.
Beginning in November 2003 and continuing through 2004, the Company has
undergone a management reorganization. The reorganization was in recognition of
the Company's growth and changes in the telecom industry. The Company shifted
from an organization structure that was focused on lines of business to a plan
that organizes on function. As a result, the Company has expanded the senior
staff and corresponding departments to better position itself for future
opportunities.
Summary
The Company's three major lines of business are wireless, wireline and other
businesses. Each of the three areas has unique issues and challenges that are
critical to the understanding of the operations of the Company. The wireless
business is made up of two different operations, the PCS operation and the tower
business. The wireline business is made up of traditional telephone operations,
a cable TV operation, fiber network leasing, a company that resells
long-distance and beginning December 2004, NTC Communications which provides
voice and video. Other business includes the Company's Internet operation, the
Interstate 81 corridor Travel 511 project and the sales and service of
telecommunications systems.
The PCS operation must be understood within the context of the Company's
relationship with Sprint and its PCS Affiliates. The Company operates its PCS
wireless network as an affiliate of Sprint. The Company receives revenues from
Sprint for subscribers that obtain service in the Company's network coverage
area and those subscribers using the Company's network when they travel. The
Company relies on Sprint to provide timely, accurate and complete information
for the Company to record the appropriate revenue and expenses for the periods
reflected.
The Company's PCS business has operated in a net travel receivable position for
several years. The Company received $6.0 million in net travel revenue in 2004,
compared to $6.0 million in 2003, and $5.8 million in 2002. This relationship
could change due to service plan changes, subscriber travel habit changes, a
rate reduction after 2006 and other changes beyond the control of the Company.
Through Sprint, the Company began receiving revenue from wholesale resellers of
wireless PCS service in late 2002. These resellers pay a flat rate per minute of
use for all traffic their subscribers generate on the Company's network. The
Company's cost to handle this traffic is the incremental cost to provide the
necessary network capacity.
The Company faces vigorous competition in the wireless business as numerous
national carriers are aggressively marketing their services in the Company's
markets. The competitive landscape could change significantly depending on the
marketing initiatives of our competitors, or in the event of consolidation in
the wireless industry.
The wireline business is made up of traditional telephony, cable TV, fiber
network operations, the Company's long-distance resale business and NTC
Communications. The Company's primary service area for the telephone, cable TV
and long-distance business is Shenandoah County, Virginia. The county is a rural
area in northwestern Virginia, with a population of approximately 37,300
inhabitants, which has increased by approximately 2,200 since 2000. While a
number of new housing developments are being