FORM 10-Q QUARTERLY REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For quarter Ended September 30, 1997 Commission File Number 0-24064
CONESTOGA ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2565087
(State of Incorporation) (IRS Employer Number)
202 East First Street, Birdsboro, Pennsylvania 19508
(Address of Principal executive offices)
Registrant's telephone number, including area code (610) 582-8711
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_______
As of September 30, 1997, the number of shares of Common Stock, par value
$5.00, outstanding was 4,693,976.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1997, September 30, 1996 and December 31, 1996
ASSETS
9/30 9/30 12/31
1997 1996 1996
Current Assets
Cash and Cash Equivalents $8,276,758 $2,705,565 $1,956,554
Accounts receivable, including unbilled
revenue 7,747,937 7,317,433 6,888,667
Inventories, at average cost 1,071,701 1,184,542 867,205
Prepaid expenses 232,537 218,949 206,351
Total Current Assets 17,328,933 11,426,489 9,918,777
Investments and Other Assets
Cost in Excess of Net Assets of
Business Acquired 39,958,098 38,643,227 38,337,140
Investments in partnerships 3,748,894 3,255,260 3,377,027
Investments in equity securities 1,885,651 1,466,842 1,622,107
Prepaid Pension Costs 2,320,488 2,110,352 2,148,700
Other 506,150 1,562,580 1,513,920
48,419,281 47,038,261 46,998,894
Plant
In Service 126,471,252 117,255,941 123,137,474
Under Construction 1,977,109 2,573,732 557,293
128,448,361 119,829,673 123,694,767
Less accumulated depreciation 65,757,213 56,969,206 60,760,620
62,691,148 62,860,467 62,934,147
Total Assets $128,439,362 $121,325,217 $119,851,818
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1997, September 30, 1996 and December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30 9/30 12/31
1997 1996 1996
Current Liabilities
Notes payable $0 $0 $0
Current maturities of long term debt 3,000,000 2,971,000 831,000
Accounts payable 3,340,028 3,211,530 2,769,189
Accrued:
Taxes 2,148,518 0 0
Interest 51,675 39,780 0
Payroll & Vacation Pay 891,643 623,343 855,981
Advance billings/Customer Deposits 882,023 1,167,627 307,806
Total Current Liabilities 10,313,887 8,013,280 4,763,976
Long Term Liabilities
Long Term Debt, less Current Maturities 23,500,000 25,175,500 27,218,000
Accrued Post Retirement Cost 710,887 558,980 596,742
Other 751,210 884,585 834,201
24,962,097 26,619,065 28,648,943
Deferred Income Taxes 9,341,023 9,873,337 10,185,015
Minority Interest 0 420,169 400,198
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized
900,000 shares; issues and
outstanding 196,618 sh 12,780,170 12,780,170 12,780,170
Common Stockholders' Equity
Common Stock par value $5 per share;
authorized 10,000,000 shares; issued;
9/30/97 9/30/96 12/31/96
4,775,301 4,568,500 4,568,500 23,876,505 22,842,500 22,842,500
Additional Paid-In Capital 24,709,944 20,420,005 20,420,005
Retained earnings 23,834,013 20,165,938 20,863,934
Net unrealized appreciation on
marketable equity securitie 543,615 190,753 315,602
Less cost of treasury stock;
9/30/97 81,325 shs. 12/31/96
58,400 shs (1,921,892) 0 (1,368,525)
71,042,185 63,619,196 63,073,516
Total Liabilities and Stockholders'
Equity $128,439,362 $121,325,217 $119,851,818
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
Operating Revenues:
Local Service $2,324,011 $2,119,495 $6,807,656 $5,318,903
Access Service 6,505,797 5,851,073 18,226,958 13,816,913
Long Dist. Service 2,400,347 2,360,220 7,197,959 6,589,352
Nonreg. Sales & Lease 4,395,719 1,739,422 8,813,839 4,177,910
Miscellaneous 245,294 213,497 763,173 609,696
15,871,168 12,283,707 41,809,585 30,512,774
Operating Expenses:
Plant Operations 1,505,200 1,449,372 5,135,797 3,957,482
Depreciation and
Amortization 2,523,762 2,182,064 7,185,063 5,155,759
Customer Operations 2,076,517 1,902,474 6,321,771 5,193,692
Corporate Operations 1,240,107 872,227 3,115,512 2,259,039
Nonreg. Sales & Lease 3,835,423 1,028,988 7,050,757 2,488,188
Taxes, other than income 562,563 457,882 1,533,372 1,179,791
11,743,572 7,893,007 30,342,272 20,233,951
Operating Income 4,127,596 4,390,700 11,467,313 10,278,823
Other Income(Deductions), Net:
Interest Expense (519,660) (538,037) (1,577,760) (762,659)
Income from unconsolidated
partnerships interests 335,409 204,088 1,024,423 813,390
Gain on sale of partnership
interests and other assets 1,983,038 0 1,983,038 0
Other, Net 272,165 152,650 472,146 268,393
2,070,952 (181,299) 1,901,847 319,124
Income Before Income Taxes 6,198,548 4,209,401 13,369,160 10,597,947
Income Taxes 2,735,682 1,806,070 5,956,801 4,512,575
Income Before Minority
Interest 3,462,866 2,403,331 7,412,359 6,085,372
Minority Interest in net loss
of Subsidiary 0 2,144 10,400 33,198
Net Income $3,462,866 $2,405,475 $7,422,759 $6,118,570
Earnings per common share $0.70 $0.49 $1.51 $1.41
Dividends per common share $0.305 $0.30 $0.905 $0.90
* Some amounts have been adjusted for comparative purposes.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
Cash Flows from Operating Activities
Net Income $7,422,759 $6,118,570
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and Amortization $7,610,071 $5,581,379
Income from unconsolidated partnership
interests (1,024,423) (813,390)
Minority interest in loss of subsidiary (10,400) (33,198)
Gain on sale of assets (1,983,038) 0
Changes in assets and liabilities:
(Increase) decrease in:
Accounts Receivable 147,222 (946,659)
Material and supplies (38,714) 120,727
Prepaid expenses (2,756) 741,082
Prepaid pension costs (171,788) (127,057)
Other Assets 155,747 88,529
Increase (decrease) in:
Accounts Payable (4,714) (1,026,236)
Accrued expenses and other current liabil 2,503,783 647,833
Other liabilities 31,154 (351,100)
Deferred income taxes (299,992) (377,632)
6,912,152 3,504,278
Net cash provided by
operating activities 14,334,911 9,622,848
Cash Flows From Investing Activities
Purchase of Plant, net of removal
costs and salvage (6,244,507) (4,971,867)
Proceeds from surrender of Life
Insurance Policy 427,015 0
Capital investments in unconsolidated
partnershp interests (237,000) (300,000)
Proceeds from sale of partnership
interest and other Assets 3,428,686 0
Capital distributions from unconsolidated
partnershp interests 0 110,400
Acquisition of business, net of cash
and cash equival 965,231 (20,154,908)
Net cash used in investing activities (1,660,575) (25,316,375)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 5,000,000 22,000,000
Principal payments on long term borrowing (6,549,000) (292,500)
Borrowing on line of credit 0 1,400,000
Principal payments on line of credit 0 (1,900,000)
Proceeds from issuance of stock under the
dividend reinvestment plan 436,002 0
Common and preferred dividends paid (4,452,682) (3,679,903)
Purchase of common stock for the treasury (788,452) 0
Minority interest investment in subsidiary 0 200,000
Net cash provided by (used in)
financing activities (6,354,132) 17,727,597
Increase (decrease) in cash and
cash equivalents 6,320,204 2,034,070
Cash and cash equivalents
Beginning 1,956,554 671,495
Ending $8,276,758 $2,705,565
CONESTOGA ENTERPRISES, INC.
Consolidated Statement of Cash Flow (Unaudited) continued
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $1,494,941 $780,975
Income Taxes $4,343,890 $4,855,821
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of business:
Working Capital acquired, net of cash
and cash equivalents $313,862 $1,017,550
Plant and other assets acquired 1,121,779 16,924,033
Cost in excess of net assets acquired 2,722,155 39,451,159
Long-term debt and other liabilities
assumed 0 (5,208,952)
Redeemable preferred stock issued 0 (12,780,170)
Common stock issued (5,123,027) (19,248,712)
Cash Paid (Received) ($965,231) $20,154,908
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the nine months period ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2: LONG TERM DEBT
Long term debt is summarized as follows:
9/30/97 9/30/96 12/31/96
Promissory note, interest payable
monthly at prime, with a ceiling
of 8.5% $0 $2,500,000 2,500,000
Promissory note, interest payable
monthly at prime, with a ceiling
of 8.4% 0 2,242,500 2,145,000
Series A Senior Note interest payable
quarterly at 6.91%, annual principal
payments of $2,000,000 starting
June 30, 1998 through June 30,
2000, unsecured 6,000,000 6,000,000 6,000,000
Series B Senior Note interest payable
quarterly at 7.59%, annual principal
payments of $1,454,545 starting
June 30, 2001 through June 30,
2011, unsecured 16,000,000 16,000,000 16,000,000
Promissory note, interest payable
June 1 and December 1, at 8.5% 0 1,404,000 1,404,000
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 4,500,000 0 0
$26,500,000 $28,146,500 $28,049,000
Less current Maturities 3,000,000 2,971,000 831,000
$23,500,000 $25,175,500 $27,218,000
CONESTOGA ENTERPRISES, INC.
NOTE 3: ACQUISITIONS
On May 31, 1996, Conestoga Enterprises, Inc. (CEI) acquired all of the
outstanding shares of Buffalo Valley Telephone Company (BVT) an independent
local exchange carrier which provides both regulated and nonregulated
communication services in Central Pennsylvania. The consideration for the
stock included 196,618 shares of CEI $3.42 Series A Preferred Stock, 719,578
shares of CEI Common Stock, and approximately $25 million in cash.
The acquisition has been accounted for as a purchase and the results of
operation of BVT since the date of acquisition are included in the
consolidated financial statements. The excess of the purchase price over the
book value acquired of $39,451,159 is being amortized over 40 years using the
straight line method. The allocation of purchase price is in accordance with
Statement of Financial Accounting Standards No. 71 " Accounting for Certain
Types of Regulation." This practice differs from the requirements of
Accounting Principles Board No. 16 "Business Combinations" which requires
adjusting assets and liabilities to their fair values and which is applicable
for nonregulated entities.
On May 1, 1997, the Company acquired all of the outstanding shares of
Infocore, Inc. (INF), a telecommunications company based in King of Prussia,
Pennsylvania. The Company issued 199,923 shares of common stock to Infocore,
Inc. Shareholders as consideration for all outstanding shares of Infocore,
Inc. Stock.
The acquisition has been accounted for as a purchase and the results of
operations of INF since that date are included in the consolidated financial
statements. The excess of the purchase price over the book value acquired of
$2,722,155 is being amortized over 36 months using the straight line method.
NOTE 4: OTHER
Certain items of the September 30, 1996 consolidated financial statements
have been restated to conform to the September 30, 1997 financial statements.
There was no impact on net income.
Inventories, at average cost, are primarily material and supplies used to
provide service.
CONESTOGA ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE QUARTERLY INCOME STATEMENTS
RESULTS OF OPERATIONS
Net income during the first nine months of 1997 was $7,422,759, a 21.3%
increase over the net income of the same period of 1996. The consolidated
financial statements of the Company and its subsidiaries for the period
include net incomes as follows:
Local Exchange Carriers $ 5,801,519
Parent Company and Others* $ 1,621,240
*Including various subsidiaries that provide long distance,
paging, and personal communication services, sell and lease
of telecommunications equipment and design and install
telecommunications systems.
The net income for the third quarter includes a gain of $1.8 million on the
sale of the Company's interest in the Lancaster Area Cellular Enterprises
(LACE), a joint venture that provides cellular telephone services in the
Harrisburg, Lancaster and York metropolitan areas.
Operating Revenues
Operating revenues through the third quarter of 1997 were $41,809,585, a
37.0% increase over the same period of 1996. Operating revenues were
$15,871,168 during the third quarter of 1997, a 15.4% increase over the second
quarter of 1997, and a 29.2% increase over the third quarter of 1996.
The increased operating revenues through the third quarter of 1997 resulted
primarily from the acquisitions of Buffalo Valley Telephone Company (BVT)
effective May 31, 1996 and Infocore, Inc. (INF) effective May 1, 1997 and the
inclusion of their operating revenues in the Company's consolidated revenues.
The increases in operating revenues by category were as follows:
Increase/(Decrease) %
Local Service $ 1,488,753 28.0%
Access Service $ 4,410,045 31.9%
Long Distance Service $ 608,607 9.2%
Nonregulated Sales
and Lease $ 4,635,923 111.0%
Miscellaneous (net of
uncollectible) $ 153,477 25.2%
CONESTOGA ENTERPRISES, INC.
Local service revenues include regulated revenues of Conestoga Telephone
Company (CTT), BVT, and Conestoga Mobile Systems (CMS), all three of which
achieved increases in local service revenues during the first three quarters
of 1997. Combined local service revenues were 2.8% higher in the third
quarter than in the second quarter of 1997 and 9.6% higher than in the third
quarter of 1996.
The increase in local service revenues directly reflects the increase in
the number of access lines. 3,138 additional access lines were placed in
service by the three companies during the first three quarters of 1997 with
the result that as of September 30, 1997, the Company had a total of 75,404
access lines in service, comprised of 50,411 in CTT, 5,174 in CMS, and
19,819 in BVT. The rate of increase in the number of access lines through
the third quarter of 1997 set a record for CTT. Much of the increase was due
to the installation of residential second lines and the increased demand for
custom calling service features.
The Company's total access revenues in the third quarter of 1997 were
$6,505,797, 11.2% higher than during the third quarter of 1996. CTT's access
service revenues continued to grow during the third quarter due to an increase
in excess of 20% in interlata minutes of use through the network compared to
the same period in 1996. CTT's access service revenues through the third
quarter of 1997 totaled $12,539,761, a 7.8% increase over its access service
revenues during the same period of 1996; and BVT's access service revenues
through the third quarter of 1997 totaled $5,687,197, a 14.2% increase over
its access service revenues during the same period of 1996.
Long distance service revenues include CTT's and BVT's intralata toll
revenues and Conestoga Communications, Inc's. (CCI) (formally Northern
Communications, Inc.) resale of long distance service revenues and,
commencing on August 1, 1997, CCI's long distance service revenues. On
August 1, 1997, CCI commenced providing long distance services directly to
its customers. During the first three quarters of 1997, BVT contributed
$1,325,082 in long distance service revenues, compared to its contribution of
$631,456 during the same period of 1996. Long distance revenues of the
Company were about the same during the third quarter of 1997 when compared to
the second quarter.
Nonregulated Sales and Lease Revenues include CTT's, BVT's sale and lease
of telephone equipment and directory advertising, CMS's sale and lease of
pager and cellular equipment, and INF's equipment sales and other services.
CTT's and CMS's nonregulated sales and lease revenues decreased during the
first three quarters of 1997, from the first three quarters of 1996. During
the first three quarters of 1997, BVT contributed $2,423,947 in nonregulated
revenues compared to its contribution of $ 851,204 in the same period of
1996. INF
CONESTOGA ENTERPRISES, INC.
contributed $3.0 million of nonregulated revenues during the last two months
of the second quarter and the entire third quarter. Nonregulated revenues
during the third quarter of 1997 were 52.8% higher than during the second
quarter of 1997, primarily as a result of the acquisition of INF.
Miscellaneous revenues include CTT's and BVT's billing and collection
revenues. CTT's miscellaneous revenues were similar during the first three
quarters of 1997 and 1996. The increase in the consolidated miscellaneous
revenues was caused by the acquisition of BVT, which contributed $162,090
during the period. During the third quarter of 1997, miscellaneous revenues
fell by .9% compared with the second quarter of 1997.
Operating Expenses
Operating Expenses were $30,342,272 through the third quarter of 1997, an
increase of 50.0% over the first three quarters of 1996. During the third
quarter of 1997, operating expenses increased 15.4% over the second quarter
of 1997, and 48.8% over the third quarter of 1996.
The increase in operating expenses through the third quarter of 1997
primarily reflects the acquisitions of BVT and INF and the goodwill
amortization resulting therefrom. The increases are comprised of the
following:
Increase/(Decrease) %
Plant Operations $ 1,178,315 29.8%
Depreciation and
Amortization $ 2,029,304 39.4%
Customer Operations $ 1,128,079 21.7%
Corporate Operations $ 856,473 37.9%
Nonregulated Sales and
Lease $ 4,562,569 183.4%
Operating Taxes $ 353,581 30.0%
Plant operations expenses include regulated expenses of CTT, BVT, and CMS.
CTT's plant operations expenses through the third quarter of 1997 increased
over the same period of 1996, partially due to a digital switch software
upgrade costing $450,000 during the second quarter. The acquisition of BVT
added $1.5 million to plant operations expenses, including a digital switch
software upgrade costing $265,000 during the second quarter of 1997. For the
most part, digital switch software upgrades are annual expenses. During the
third quarter of 1997, plant operations expense decreased 21.2% when compared
with the second quarter of 1997, due to the software additions mentioned
above.
Depreciation and amortization expenses include charges from CTT, CMS, BVT,
CONESTOGA ENTERPRISES, INC.
and INF. CTT and BVT experienced normal increases in depreciation expenses
through the third quarter of 1997 compared with the same period of 1996. The
acquisition of BVT added $1.7 million in depreciation expense and $723,000 in
goodwill amortization expense for 1997. During the two months of the second
quarter that INF was a subsidiary of the Company and the third quarter of
1997, INF added depreciation and amortization expenses of $433,229, of which
$378,076 was goodwill amortization. Depreciation and amortization expenses
were 4.5% higher during the third quarter of 1997 than the second quarter of
1997.
Customer operations expenses, which include expenses of CTT, BVT, and CMS,
increased 21.7% through the third quarter of 1997 compared with the same
period of 1996. BVT's customer operations expenses increased $224,413, a
15.8% increase over the same period of 1996, due to one time charges for set
up costs of a new billing system. CTT's expenses were about even with the
same period of 1996. Customer operations expenses during the third quarter
were about even with the second quarter of 1997.
Corporate operations expenses through the third quarter of 1997 increased
37.9% over the same period of 1996, due to changes in the expense allocations
of certain operating officers of the Company and the addition of a Vice
President Regulatory and External Affairs during the second quarter of 1996.
BVT's corporate operations expenses were $701,932 for the period. Corporate
operations expenses increased 24.3% during the third quarter of 1997 compared
with the second quarter of 1997.
Nonregulated sale and lease expenses, including expenses for CTT, BVT, CMS,
and INF, were $4,562,569 higher through the third quarter of 1997 compared
with the same period of 1996. The increase is primarily due to the
acquisitions of BVT and INF, which accounted for $2,324,364 and $2,696,537,
respectively, in nonregulated expenses of the Company through the third
quarter of 1997.
Taxes, other than income, increased 30.0% through the third quarter of 1997
compared with the same period of 1996, due to the acquisitions of BVT and INF.
Operating taxes increased 13.3% during the third quarter of 1997 compared with
the second quarter of 1997.
Other Income (Deductions), Net
Interest expense, including expenses of CTT, CEI, and BVT, through the
third quarter of 1997 increased by $815,101 when compared with the same period
of 1996. The interest expense for the period reflects the additional long
term debt financing required for the acquisition of BVT.
CONESTOGA ENTERPRISES, INC.
On June 1, 1997, BVT, using internally generated funds, paid off the
balance of $1,404,000 of funded debt in the form of long-term notes issued
May, 1978, with annual interest of 8.5%.
On January 31, 1997, CTT borrowed $5.0 million, from a local bank, the
terms of which require quarterly interest and principal payments through May,
2002 with interest at the rate of 6.89% per annum. The funds were used to pay
off existing more expensive debt of CTT.
On September 5, 1997, a subsidiary of the Company sold the Company's 10%
partnership interest in LACE, a joint venture which provides cellular service
in the Harrisburg, Lancaster and York metropolitan areas, for $2,779,456. The
gain on the sale of $1.8 million is included in the consolidated income of
the Company. The Company disposed of this minority interest to provide funds
for the build out of its Personal Communications Service (PCS) network which
will become operational during 1998.
The earnings of LACE during 1997 through the date of the sale, included in
the consolidated financial statements, were $158,277 compared with $168,591
for the same period of 1996.
The before tax earnings of the Company's interest in Berks Reading Area
Cellular Enterprises (BRACE) were $1,018,800 through the third quarter of
1997, which ia an increase of 41.2% over its earnings during the same period
of 1996.
CTT's interest in Penteledata Limited Partnership I, which primarily
provides access to the Internet, recorded a before tax loss of $152,690
through the third quarter of 1997.
Minority Interest
The minority interest recorded during the first two quarters of 1997
reflects Infocore, Inc.'s 40% interest in net loss of CWC during the first
four months before the acquisition.
Income Taxes
Income taxes for the first three quarters of 1997 were $6.0 million, an
increase of 32.0% over the same period of 1996. When comparing the third
quarter of 1997 with the second quarter of 1997, income taxes increased
61.7%, due in part to the one time gain on the sale of LACE.
Financial Condition
The cash and cash equivalents for the first nine months of the current year
increased by $6,320,204, part of which is the result of the sale of LACE.
The net
CONESTOGA ENTERPRISES, INC.
cash provided by operating activities increased by 49% to $14.3 million,
compared with $9.6 million for the first nine months of 1996. As of September
30, 1997, the Company had available lines of credit with two regional banks
totaling $15 million.
Capital expenditures through the third quarter were financed primarily by
internally generated funds. No outside short term borrowing was required
during the first three quarters of 1997.
Management believes that, except for the development and construction of
the Personal Communications Services (PCS) network, the cash provided from
operations will be sufficient to fund current capital projects. The
development and construction of the PCS infrastructure, which is likely to
cost as much as $30 million by December 31, 1998, will necessitate additional
long term debt or capital in late 1997 or early 1998. The Company's cash
flow is greater than net income for financial reporting purposes as a result
of the amortization of goodwill from the acquisitions of BVT and INF as
expense deductions for financial reporting purposes without actual cash
outlays therefor. The annual amortization of the goodwill of BVT and INF will
be approximately $1,871,500.
The $22 million of Senior Notes are unsecured but impose certain financial
covenants upon the Company, including, but not limited to, restrictions upon
types of investments, the amount of dividends paid and the incurrance of
additional debt by the Company and its subsidiaries. The Company is currently
in compliance with all loan covenants.
The holders of the preferred stock may convert it into common stock at any
time and may redeem it after May 31, 1998, at $65 per share. The Company
believes that internally generated cash flow, along with existing lines of
credit, will be adequate to fund any cash requirements for the redemption of
preferred stock.
On June 1, 1997, the Company retired $1.4 million 8.5% promissory notes
which were due on June 1, 1998, without premium, using internally generated
funds.
As of September 30, 1997, the Company's debt (including the CEI $3.42
Series A Preferred Stock) to equity ratio was 36% debt to 64% equity.
Other
PCS SERVICE; During the first quarter of 1997 CWC was a successful bidder
in the Federal Communication Commission (FCC) Personal Communication Services
(PCS) radio spectrum D, E, and F Block Auction in four basic trading areas,
covering nine counties in Pennsylvania and a population of 840,000. The
licenses were granted during the second quarter of 1997. CWC has selected
the
CONESTOGA ENTERPRISES, INC.
equipment which it will use to operate the wireless system and the system is
currently under construction. The PCS network will require significant
investment of capital which could be funded by additional debt, or equity, or
a combination of the two. The Company believes that it has adequate debt
capacity to finance any capital requirements for the PCS project build out.
Since the Company will be investing up to $30 million in 1997 and 1998 in
PCS and will not begin operations until approximately the second quarter of
1998, the impact on 1998's financial statements will be significant. Interest
expense and depreciation expense will both increase substantially while CWC
will just be building its customer base. The Company anticipates that the
start up of CWC will negatively impact earnings for the next several years
until CWC builds its customers base. PCS is a capital intensive, long term
investment on the part of the Company and the Company believes that its low
cost to acquire the FCC licenses and its expertise in telephony will allow it
to compete effectively in the PCS marketplace. A decision on the financing
should be finalized during the fourth quarter of 1997.
PENNSYLVANIA REGULATORY DEVELOPMENTS;
There were significant events in the state regulatory arena. On May 23,
1996, the Pennsylvania Public Utility Commission (Pa. P.U.C.) issued an order
which requires new local telephone companies that wish to provide telephone
service in areas that are currently served by rural telephone companies to
commit to serving the entire territory served by the rural telephone company.
Since CTT and BVT are both classified as rural telephone companies in the
Telecommunications Act of 1996 (TA 96), this means that new competitors will
not be able to "cherry pick" our best customers. This order was designed to
promote fair and equal competition in rural areas. In addition, in order to
further address the issue of local competition, in September, 1997, CTT and
BVT filed a petition with the Pa. P.U.C. seeking a suspension of the local
interconnection requirements of TA96. The requested suspension would
preclude non-facilities based competition in the CTT and BVT franchise areas
for an initial period of two years with the possibility of three one year
extensions. A favorable ruling is expected in the near future.
In January of 1997, the Pa. P.U.C. issued an order addressing universal
service. In response to this order, several petitions for reconsideration
were filed by interested parties. The PUC responded to those petitions in
July, 1997. The response was generally favorable to incumbent LEC's and
efforts are currently focused on coordinating the Pa. PUC's plan with the
FCC's Universal Service Order issued in May, 1997. In addition, the Pa.
P.U.C. has initiated a generic investigation in the area of access reform.
This process began with comments from interested parties filed in June, 1997.
Final orders in these proceedings are expected in late 1997 or early 1998.
Due the changes described above, it is not anticipated that local
competition
CONESTOGA ENTERPRISES, INC.
will have a significant impact on CEI in the near future. Beginning in
January, 1998, CTT and BVT will face heightened competition for the
companies' short-haul toll traffic due to the introduction of intraLATA toll
equal access. Some lost market share is expected, however, the companies
will receive access charges from competitors to partially offset lost toll
revenues.
Competition will also create opportunities for CEI in markets that were
heretofore closed to CEI in a monopoly telecommunications environment. In
August of 1997, Conestoga Communications filed with the Pa. P.U.C. for
authority to provide competitive local exchange service in parts of the state
served by non-rural LECs. A favorable ruling is expected in the near term
and negotiations with Bell Atlantic of Pennsylvania regarding a local
interconnection agreement are nearing completion. It is expected that
Conestoga Communications will be positioned to offer competitive local
service in first quarter 1998.
Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Conditions relating to Liquidity and Capital Commitments, and other statements
relating to anticipated growth, anticipated sources of funding for continuing
operating activities and construction expenditures (see . . . above)
constitute "forward-looking statements" as defined in the Securities
Litigation Reform Act of 1995. Such forward-looking statements involve risks
and uncertainties which could cause actual results or outcome to differ
materially from those expressed in forward-looking statements. The
projections made herein are expressed in good faith and believed by the
Company to have a reasonable basis, but there can be no assurance that actual
outcomes or results will not differ materially from the expected outcomes or
results described herein. Important factors that could cause actual results
to differ materially from the forward-looking statements identified in this
paragraph are discussed in the above-reference sections and
accompany such forward-looking statements.
CONESTOGA ENTERPRISES, INC.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II. OTHER INFORMATION
Item 6 (b) EXHIBITS AND REPORTS ON FORM 8-K
NONE
CONESTOGA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONESTOGA ENTERPRISES, INC.
Date November 15, 1997 /s/ John R Bentz
_______________ _________________________________
John R. Bentz
President
Date November 15, 1997 /s/ Albert H Kramer
_________________ ________________________________
Albert H. Kramer
Executive Vice President
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