| SHENANDOAH TELECOMMUNICATIONS CO/VA/ ITEM 1A RISK FACTORS Our business and operations are subject to a number of risks and uncertainties, including those set forth under “Business-Recent Developments” and the following: Risks Related to the PCS Business 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 Nextel’s business |
| We rely on Sprint Nextel’s ongoing operations to continue to offer our PCS subscribers the seamless national services that we currently provide |
| Any interruption in Sprint Nextel’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 Nextel 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 of dlra0dtta058 per minute is effective through the end of 2006 |
| We anticipate that the rate will 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 Nextel,” a substantial portion of costs of service and roaming are attributable to fees and charges we pay to Sprint Nextel for billing and collection, customer care and other back-office support |
| Our ability to manage costs charged by Sprint Nextel 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 correctly identify 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 Nextel 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 |
| 29 ______________________________________________________________________ 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 Nextel and its PCS Affiliates, has experienced a rate of churn higher than industry average rates |
| We experienced a relatively consistent churn rate in 2004 and 2005 |
| Our 2006 business plan assumes that our churn rate will remain fairly stable under existing operating conditions |
| Because of significant competition in the 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: • inability or unwillingness of subscribers to pay, which would result in involuntary deactivations; • subscriber mix and credit class, particularly an increase in sub-prime credit subscribers; • competition of products, services and pricing of other providers; • inadequate network performance and coverage relative to that provided by competitors in our service area; • inadequate customer service; • increased prices; and, • any future changes by Sprint Nextel 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 Nextel |
| The allowance for doubtful accounts may underestimate actual unpaid receivables for various reasons, including the following: • the churn rate may exceed estimates; • bad debt as a percentage of service revenues may increase rather than remain consistent with historical trends; • general economic conditions may worsen; or • there may be unanticipated changes in Sprint Nextel’s wireless products and services |
| 30 ______________________________________________________________________ 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 Nextel and the other Sprint Nextel Affiliates when their customers use our network, could be less than we anticipate |
| 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 habits by the subscribers in the Company’s market areas or other Sprint Nextel subscribers and numerous other factors beyond the Company’s control |
| A change in this balance could adversely affect our liquidity, financial condition and results of operations |
| 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 Customer concerns over radio frequency emissions may discourage use of wireless handsets or expose us to potential litigation |
| 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 |
| Any decrease in demand for wireless services, costs of litigation or damage awards resulting from customer concern regarding such emissions 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 31 ______________________________________________________________________ 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 US states and local governments are considering or have 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 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 32 ______________________________________________________________________ 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 Cable Industry We face risks from increasing competition for the provision of cable and related video services |
| Video services historically have been provided by incumbent cable companies and direct broadcast satellite providers |
| Recently, however, some of the largest providers of wireline telecommunications services such as Verizon and AT&T have begun to upgrade their networks to provide video services in addition to voice and broadband services |
| Wireless providers also are entering the market for video services by making such services available on handsets |
| The influx of competitors in this area, together with the development of new technologies to support them, are resulting in significant changes in the business models and regulatory provisions that have applied to the provision of video and other services |
| These developments may lead to a broad decline in the price and profitability of video and other services |
| Our inability to retain preferred or exclusive access to buildings and developments would negatively affect our ability to serve some of our customers |
| We currently have an advantage in our ability to provide video and other services in some areas because we have entered into preferred or exclusive agreements with property owners to serve those areas |
| As competition continues to develop in the market for these services, our ability to retain and expand these access agreements may be threatened |
| If we cannot maintain such access, or if regulations are enacted that proscribe such activity, particularly in areas that we currently serve, our market share in those affected areas may decline and our ability to profit from operating efficiencies may diminish |
| Changes to key regulatory requirements can affect our ability to compete |
| Congress, the Federal Communications Commission and various states are considering changes to some key regulatory issues that affect the cost and manner in which we provide cable and other services |
| These regulatory issues include the manner in which franchises to provide cable service are issued, the jurisdiction of franchising authorities over cable service, and the control and ownership over inside wiring in a subscriber’s location |
| Changes to the laws and regulations governing these and other matters could prevent us from competing effectively and may improve the ability of our competitors to compete |
| Risks Related to Our Relationship with Sprint Nextel The termination of our affiliation with Sprint Nextel would severely restrict our ability to conduct the wireless business |
| Our ability to offer Sprint Nextel wireless products and services and operate a PCS network is dependent on continuation of the agreements we have with Sprint Nextel |
| Our management agreement with Sprint Nextel will be automatically renewed at the expiration of the 20-year initial term, which ends in 2019, for an additional 10-year period and two subsequent 10-year periods unless we are in material default |
| Either Sprint Nextel or 33 ______________________________________________________________________ we 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 Nextel nor we exercises this right, the agreement will terminate in 2049 |
| Each of our agreements with Sprint Nextel may be terminated by Sprint Nextel for our breach of any material term, including, 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 Nextel with little notice to us |
| As a result, we may not always be in compliance with all requirements of the Sprint Nextel agreements |
| The non-renewal or termination of any of the Sprint Nextel agreements or the failure of Sprint Nextel to perform its obligations under the Sprint Nextel agreements would severely restrict our ability to conduct business |
| Sprint Nextel 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 decrease our revenues |
| Under its agreements with us, Sprint Nextel has a substantial amount of control over the conduct of our PCS business |
| Accordingly, Sprint Nextel may make decisions that could adversely affect our PCS business, such as the following: • Sprint Nextel 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; • Sprint Nextel could develop products and services, or establish credit policies, that could adversely affect our results of operations; • subject to limitations under our agreements, Sprint Nextel 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; • Sprint Nextel may reduce the reciprocal travel rate charged when subscribers of Sprint Nextel or its PCS Affiliates use our network after 2006; • subject to limitations under our agreements, Sprint Nextel 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 • Sprint Nextel could make decisions that could adversely affect the Sprint Nextel brand names, products or services |
| Our dependence on Sprint Nextel for services may limit our ability to forecast operating results |
| Our dependence on Sprint Nextel injects a degree of uncertainty into our business and financial planning |
| We may, at times, disagree with Sprint Nextel concerning the applicability, calculation approach or accuracy of Sprint Nextel-supplied revenues and expenses |
| It is our policy to reflect the information supplied by Sprint Nextel in our financial statements for the applicable periods and to make corrections, if any, no earlier than the period in which Sprint Nextel and we agree to the corrections |
| 34 ______________________________________________________________________ Inaccuracies in data provided by Sprint Nextel could overstate or understate our expenses or revenues and result in out-of-period adjustments that may adversely affect our financial results |
| Because Sprint Nextel provides billing and collection services for us, Sprint Nextel remits a significant portion of our total revenues |
| We rely on Sprint Nextel 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 Nextel have previously discovered billing and other errors or inaccuracies, which, while not material to Sprint Nextel, 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 Nextel, 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 Nextel’s provision of back office services, and changes in products, services, plans and programs |
| Any failure by Sprint Nextel to provide high-quality back office services could lead to subscriber dissatisfaction, increased churn or otherwise increased costs |
| We rely on Sprint Nextel’s internal support systems, including customer care, billing and back office support |
| Our operations could be disrupted if Sprint Nextel is unable to provide and expand its internal support systems while maintaining acceptable service levels, or to efficiently outsource those services and systems through third-party vendors |
| The competitiveness of Sprint Nextel’s PCS products and services is a key factor in our ability to attract and retain subscribers |
| Changes in Sprint Nextel’s PCS products and services may reduce subscriber additions, increase subscriber turnover and decrease subscriber credit quality |
| Sprint Nextel’s roaming arrangements to provide service outside of the Sprint Nextel 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 Nextel’s roaming arrangements with other wireless service providers for coverage in some areas where Sprint Nextel 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 Nextel wireless services may be less attractive to new subscribers |
| The risks related to our roaming arrangements include the following: • 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 Nextel PCS network; • the price of a roaming call off network may not be competitive with prices of other wireless companies for roaming calls; • subscribers must end a call in progress and initiate a new call when leaving the Sprint Nextel PCS network and entering another wireless network; 35 ______________________________________________________________________ • customers may not be able to use Sprint Nextel’s advanced features, such as voicemail notification, while roaming; and • Sprint Nextel or the carriers providing the service may not be able to provide accurate billing information on a timely basis |
| Some provisions of the Sprint Nextel agreements may diminish the value of our common stock and restrict or diminish the value of our business |
| Under limited contractual circumstances, Sprint Nextel may purchase the operating assets of our PCS operations at a discount |
| In addition, Sprint Nextel must approve any assignment of the Sprint Nextel agreements by us |
| Sprint Nextel 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 Nextel 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 Nextel agreements |
| We may have difficulty in obtaining an adequate supply of handsets from Sprint Nextel |
| We depend on our relationship with Sprint Nextel to obtain handsets |
| Sprint Nextel orders handsets from various manufacturers |
| We could have difficulty obtaining specific types of handsets in a timely manner if: • Sprint Nextel does not adequately project the need for handsets for itself, its PCS Affiliates and its other third-party distribution channels, particularly in connection with the transition to new technologies; • Sprint Nextel gives preference to other distribution channels; • we do not adequately project our need for handsets; • Sprint Nextel modifies its handset logistics and delivery plan in a manner that restricts or delays access to handsets; or • there is an adverse development in the relationship between Sprint Nextel 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 Nextel 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 Nextel’s national network and on the networks of Sprint Nextel’s other Affiliates |
| Sprint Nextel’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 Nextel currently intends to cover a significant portion of the population of the United States, Puerto Rico and the US Virgin Islands by creating a nationwide network through its own construction efforts and those of its PCS Affiliates |
| Sprint Nextel is 36 ______________________________________________________________________ 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 Nextel 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 Nextel have financial difficulties or cease operating, or if Sprint Nextel’s PCS licenses are not renewed or are revoked, our PCS business would be harmed |
| Sprint Nextel’s national digital wireless network involves a combination of networks |
| The networks serving large metropolitan areas are owned and operated by Sprint Nextel, while those serving connecting areas are generally owned and operated by Sprint Nextel PCS Affiliates, all of which are independent companies |
| Although the total number of PCS Affiliates has been declining in the aggregate due to acquisitions by Sprint Nextel, Sprint Nextel’s digital wireless network could be disrupted if any of the remaining PCS Affiliates experiences financial difficulties |
| Although Sprint Nextel may have the right to operate the network in the affected territory, there can be no assurance that the transition from the applicable PCS Affiliate 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 Nextel to enforce the payment obligations of such PCS Affiliates |
| Non-renewal or revocation by the FCC of Sprint Nextel’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 Nextel’s PCS licenses upon their expiration, and Sprint Nextel’s PCS licenses may not be renewed |
| The FCC has adopted specific standards to apply to PCS license renewals |
| Any failure by Sprint Nextel to comply with these standards could cause revocation or forfeiture of Sprint Nextel’s PCS licenses |
| If Sprint Nextel does not maintain control over its licensed spectrum, our Sprint Nextel agreements may be terminated, which would render us unable to continue providing service to our subscribers |