SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number 0-24064
CONESTOGA ENTERPRISES, INC.
a Pennsylvania Corporation Employer IRS No. 23-2565087
202 East First Street, Birdsboro, Pennsylvania 19508
Registrant's telephone number, including area code (610) 582-8711
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (par value $5.00 per share)
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 the number of shares outstanding of each of the issuers' classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding at December 31, 1996
Common Stock, $5.00 par value 4,510,100
The aggregate market value of the voting stock held by non-affiliates on
February 28, 1997, was $104,697,777. The stock of the Company is traded on
NASDAQ Small Cap market (ticker symbol "CENI"). Therefore, the price is
based on the most recent price at which the Company's stock has been traded.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 3, 1997, are incorporated by reference into
Part III of this report.
PART I
ITEM 1. BUSINESS
Conestoga Enterprises, Inc. (CEI, or the Company) is a
Pennsylvania corporation that is doing business as a holding company owning
all of the outstanding shares of the Conestoga Telephone and Telegraph
Company (CTT), Buffalo Valley Telephone Company (BVT), Northern
Communications, Inc. (NCI), Conestoga Mobile Systems, Inc. (CMS), and
Conestoga Investment Corporation (CIC). CEI has a 1% general partnership
interest in the Berks and Reading Area Cellular Enterprises Partnership
(BRACE) and a 10% partnership interest in the Lancaster Area Cellular
Enterprises Partnership (LACE). It also has a 60% interest in Conestoga
Wireless Company (CWC), a limited liability company, formed during 1995 to
provide personal communication services (PCS). CEI was incorporated on
January 27, 1989 under the provisions of the Business Corporation Law
of Pennsylvania, Act of May 5, 1933, P.L. 364, as amended and supplemented,
to do all things and exercise all powers, rights and privileges which a
business corporation may now or hereafter be organized or authorized to do or
exercise under such act.
CEI owns all of the outstanding shares of CTT and BVT. Both
companies are independent local exchange carriers, which furnish communication
services, mainly local and toll telephone service in their respective service
areas. CTT serves an area of approximately 300 square miles which includes
parts of the counties of Berks, Chester, Lancaster, and Montgomery, in the
Commonwealth of Pennsylvania. BVT serves an area in Union and Northumberland
Counties. Both Companies services' are distributed through their telephone
exchanges and systems of overhead and underground wire and cables. CTT's and
BVT's entire telephone systems are digitally equipped. The population of
CTT's service area is estimated to be 120,400, with an average annual growth
rate of .76%. The population of BVT's service area is estimated to be 36,500,
with an average annual growth rate of .45%.
CEI became the owner of all of the outstanding stock of CTT on
December 31, 1989, pursuant to a plan of merger in which the owners of all of
the outstanding shares of voting stock of CTT exchanged their shares for
outstanding shares of CEI. CEI's shares are registered under the Securities
Act of 1933.
CEI acquired BVT on May 31, 1996, pursuant to an Agreement and
Plan of Merger in which (1) the original BVT was merged into a subsidiary of
CEI; (2) the name of the subsidiary was changed to BVT; and (3) the owners of
all of the outstanding shares of common stock of BVT received for each share
of BVT common stock one of the following, $65.00 in cash; 1 share of CEI
$3.42 Series A Convertible Preferred Stock, par value $65.00; or 2.4 shares of
CEI Common Stock.
CTT was organized and incorporated on August 20, 1902. Old BVT which
was merged into the CEI merger subsidiary in the merger transaction, was
incorporated on September 13, 1904.
ITEM 1. BUSINESS (Continued)
Both were incorporated under the laws of the Commonwealth of Pennsylvania as
telephone utility companies. Their geographic service areas are authorized
and established by the Pennsylvania Public Utility Commission (PUC). Such
authorization is perpetual. Within their areas, at the present time, they are
not in competition with any other company in providing local exchange
telephone service. The PUC has approved petitions of several Competitive
Local Exchange Carriers (CLEC's) to offer local exchange telephone service in
Bell of Pennsylvania areas. The Telecommunications Act of 1996 does contain
provisions which open the telephone utilities' local exchange
markets to competition as well as provisions which permit the telephone
utilities'local exchange carriers to provide long distance service outside
their regions. CTT and BVT are subject to the jurisdiction of the Federal
Communications Commission (FCC) with respect to interstate services. CTT and
BVT are also subject to the jurisdiction of the Pennsylvania Public Utility
Commission (PUC) with respect to intrastate services.
The earnings for 1996 were impacted by several events as follows:
1. During the second and fourth quarter of 1996, CTT expensed
additional Signaling system 7 (SS7) software for CLASS type
services, which include Caller ID, Return Call and Repeat Call.
2. During the second quarter of 1996 BVT was added to the
consolidated financial reporting of the Company.
3. During the third quarter of 1996 CTT recorded a positive
retroactive access billing adjustment.
4. The partnerships providing cellular telephone service in both
the Reading metropolitan area as well as the Harrisburg, Lancaster,
York metropolitan area recorded substantial increases in the
undistributed net income for the year.
On January 1, 1991, CTT transferred to CEI 100% stock ownership of
Northern Communications, Inc. (NCI), which had been organized in March 1981
as a non-regulated commercial enterprise operated for the resale of long
distance service. This transfer had no effect on the consolidated financial
statements.
The net operating profits of NCI for 1996, 1995, and 1994 were
$498,778, $491,703, and $475,762 respectively.
On January 1, 1991, CTT assigned to CEI, CTT's interests in two
joint ventures which provide cellular telephone services. The assigned
interests consist of:
ITEM 1. BUSINESS (Continued)
1. A 70% partnership interest in the Berks and Reading Area Cellular
Enterprises Partnership (BRACE) which in turn owns a 39% limited partnership
interest in the Reading SMSA Limited Partnership providing cellular telephone
service in the Reading Metropolitan Area; and
2. A 10% partnership interest in the Lancaster Area Cellular
Enterprises Partnership (LACE) which in turn owns an 18.4% limited partnership
interest in the Susquehanna Cellular Communications Limited Partnership
providing cellular telephone service in the Harrisburg, Lancaster, and York
metropolitan areas.
In December, 1996 BRACE was converted to a limited partnership.
CEI then assigned its 69% limited partnership interest in the Berks and
Reading Area Cellular Enterprises Partnership (BRACE) to CIC, a holding
company, organized and incorporated in the state of Delaware, as an investment
company.
These transfers had no effect on the consolidated financial
statements of CEI. As of December 31, 1996. CEI's investment in BRACE is
$2,555,292 and in LACE is $731,279. BRACE has in turn invested $3,634,583
in the Reading SMSA Limited Partnership; and LACE has invested $7,318,118 in
the Susquehanna Cellular Communications Limited Partnership.
During 1995, CTT acquired an 11.85% interest in the PenTeleData
Limited Partnership I, which provides certain data transmission and
interconnection services, including Internet services. As of December 31,
1996 and December 31, 1995, CTT had a net investment of $90,456 and $201,349
respectively. CTT's share of the losses for 1996 and 1995 were $110,892 and
$118,651 respectively.
Conestoga Mobile Systems, Inc. (CMS) was incorporated on April 1,
1991 to provide pager services. It began operating on June 1, 1992 in the
central Pennsylvania region, after receiving regulatory approvals to acquire
and operate certain radio paging systems formerly owned by United Telephone
Company of Pennsylvania.
During the last half of 1992, CTT transferred its non-regulated
paging and cellular property and equipment to CEI as a non-cash dividend and
CEI in turn transferred the same to CMS as additional paid in capital. Since
the end of 1992 all paging operations of CEI and its subsidiaries have been
provided by CMS. The transactions described above had no effect on
consolidated financial statements. During the second quarter of 1994, CTT
instituted monthly bulk rates for paging access lines, and established CMS
as a reseller of pager access lines. The net operating loss for CMS for 1996,
1995, and 1994 was $52,353, $72,557, and $56,189 respectively.
Conestoga Wireless Company (CWC) was formed on March 17, 1995 as a
Limited Liability Company (Organized in Pa.). CEI has 60% interest and
Infocore, Inc., a telecommunications company with headquarters in King of
Prussia, Pa., has 40% interest. CWC participated in the Federal
Communications PCS Spectrum Auction and was successful in acquiring licenses
to provide personal communications services in the Eastern and
Central Pa. regions.
ITEM 1. BUSINESS (Continued)
Percentages of the Company's consolidated operating revenue in
local, long distance, nonregulated, and other services are shown on the
following table:
1996 1995 1994 1993 1992
Local* 17% 18% 18% 19% 20%
Long Distance
and Access 67% 67% 68% 67% 67%
Nonregulated** 14% 13% 12% 11% 10%
Other*** 2% 2% 2% 3% 3%
100% 100% 100% 100% 100%
* CTT and BVT bill for local service on a flat rate basis.
** Includes revenues from CTT and BVT for their nonregulated
business, (sales and lease of equipment and directory advertising) and CMS
nonregulated business (sale and lease of pager and cellular equipment and
wide area pager service).
*** Includes rent revenues, billing and collection revenues, and
uncollectible revenues.
The regulated local, long distance and access services' gross revenues
contribute a greater percentage to net income than the more competitive
nonregulated service gross revenues.
The Company had 72,266 access lines in service on December 31, 1996.
CTT had 48,133 access lines in service, BVT had 19,086 and CMS 5,047 access
lines. Approximately 21,000 access lines served business customers.
CTT had a total of 127 employees as of December 31, 1996, of which 83
are covered by one collective bargaining agreement. BVT had a total of 61
employees, none of which are covered by a bargaining agreement.
ITEM 2. PROPERTIES
Since the business of CTT and BVT is that of furnishing communication
service, and as their plant is widely distributed in the territories serviced
by them, their properties do not lend themselves to description by character
and location of principal unit.
As of December 31, 1996, digital switching equipment represented
approximately 35% of CTT'S and BVT's investment in telephone plant in service;
land and buildings (occupied principally by digital switching equipment) 4%;
connecting lines not on subscribers' premises (a majority of which are on or
under public highways, streets, and alleys, and the remainder on or under
private property) 55%; general purpose computers 2%; and motor vehicles,
other work equipment and furniture and office equipment 4% of such investment.
Conestoga Mobile Systems, Inc.'s business is that of furnishing radio
paging service, and as its plant is widely distributed in the territory
serviced by it, its properties do not lend themselves to description by
character and location of principal unit.
ITEM 2. PROPERTIES (Continued)
As of December 31, 1996, Land, Buildings, and Towers represented
approximately 33% of CMS's investment in plant; transmitters and terminal
equipment 58%, and computers and other plant 9%.
CTT and BVT own most of their occupied buildings as well as most of the
land on which the buildings are located. Several of the remote switching
center buildings are located on properties which are leased. During 1995 and
1996, CTT leased office space for its customer service and marketing
departments.
The following tables set forth additional information in connection with
the properties of the Company:
TELEPHONE PLANT STATISTICS
YEAR MILES OF MILES OF MILES OF MILES OF CENTRAL
END POLE WIRE IN AERIAL FIBER OPTICS DIAL
12/31 LINES AERIAL CABLE WIRES CABLE OFFICES
1992 651 345,770 694 249 10
1993 651 355,914 665 256 10
1994 651 364,761 637 271 10
1995 651 369,971 620 298 10
1996* 892 582,439 2,132 434 14
*Includes BVT
ACCESS LINES BY COMPANY
YEAR
END CTT CMS BVT
12/31 TOTAL TOTAL TOTAL
1992 44,028 1,249
1993 45,359 1,190
1994* 44,176 4,138
1995 45,696 4,716
1996 48,133 5,047 19,086
Standard practices prevailing in the telephone industry are followed by both
CTT and BVT in the construction and maintenance of their plant and facilities,
and both consider their plant and facilities are, as a whole, in sound
physical and operating condition.
* Paging Access Lines transferred to CMS
ITEM 3. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings as of
December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was nothing submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) On June 9, 1994 CEI's Common Stock began trading in the NASDAQ
Over-the-Counter Small Cap Market. The Ticker Symbol is CENI. The high and
low sales prices for each quarter of 1996 and 1995 are listed below.
1996 High Low
1st Quarter $29.00 $27.50
2nd Quarter $28.75 $24.00
3rd Quarter $24.50 $22.875
4th Quarter $24.75 $22.875
1995 High Low
1st Quarter $27.00 $24.00
2nd Quarter $26.50 $24.50
3rd Quarter $28.25 $25.25
4th Quarter $29.50 $27.00
(b) Approximate Number of Equity Security Holders.
Approximate Number of
Record Holders (as of
Title of Class December 31, 1996)
Common Stock 1,858 (1)
Preferred Stock 69 (1)
(1) Included in the number of stockholders of record are
shares held in "nominee"or "street" name.
(C) Dividends
Payments of common stock dividends will be within the discretion of
the Company's Board of Directors and will depend, among other factors, on
earnings, capital requirements, and the operating and financial condition of
the Company. During the years 1995 and 1996, the total cash dividend paid
each year by the Company was $1.20 per share. Dividends were paid quarterly
throughout the years. A 5% stock dividend was declared by the Board of
Directors during 1994, payable February 28, 1995 to shareholders of record on
January 31, 1995. Under the most restrictive covenants of the Company's debt
agreement, $11,800,000 of the consolidated retained earnings is available for
payment of cash dividends in 1997.
During the second quarter of 1996 the Company issued Series A
Convertible Preferred Stock. Cumulative dividends of $3.42 per share per
annum are paid semi-annually. During 1996 the total cash dividend paid per
share was $1.71 per share.
ITEM 6. SELECTED FINANCIAL DATA
Selected Income Statement Data:
1996 1995 1994 1993 1992
Operating Revenue $42,898,943 $32,552,703 $31,702,785 $30,077,940 $29,070,940
Net Income 8,505,814 6,530,858 6,293,983 6,135,813 6,373,077
Earnings per Common
Share* $1.91 $1.70 $1.64 $1.60 $1.66
1996 1995 1994 1993 1992
Cash Dividends declared
per Common Share* $1.20 $1.20 $1.11 $1.10 $1.09
*adjusted for 5% stock dividend February, 1995
Selected Balance Sheet Data:
1996 1995 1994 1993 1992
Net Plant $ 62,934,147 $46,140,262 $45,599,261 $44,989,591 $44,581,057
Total Assets 119,851,818 58,594,725 55,799,116 53,231,772 52,041,087
Long-term Debt
Less Current
Maturities 27,218,000 4,645,000 5,035,000 5,425,000 5,815,000
Minority Interest
in Subsidiary * 400,198 253,367 0 0 0
Stockholders'
Equity 63,073,516 42,088,955 39,908,356 37,649,118 35,772,871
*Conestoga Wireless Company
When comparing 1996 with 1995 many of the variances are a direct result of
the merger with BVT efffective May 31, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
The following table sets forth for the periods indicated (a)
percentages which certain items reflected in the financial data bear to total
revenues and (b) the percentage increase of such items as compared to the
indicated prior period.
Relationship To Period to Period
Total Revenues Increase (Decrease)
Year Ended December 31 Years Ended
1996 1995 1994 1996-95 1995-94
Local Service Revenues 17.3% 17.7% 18.0% 28.4% 1.3%
Long Distance and
Access Revenues 66.8% 66.9% 68.0% 31.6% 1.1%
Nonregulated 13.9% 13.1% 11.6% 40.1% 16.2%
Other Revenues 2.0% 2.3% 2.4% 15.5% (6.2%)
100.0% 100.0% 100.0% 31.8% 2.7%
Relationship to Period to Period
Total REvenues Increase (Decrease)
Year Ended December 31 Years Ended
1996 1995 1994 1996-95 1995-94
Operating Expenses 67.2% 67.5% 66.4% 31.3% 4.4%
Operating Income 32.8% 32.5% 33.6% 32.9% (.6%)
Other Income (Net) .5% 1.0% .2% (25.0%) 374.8%
Income Taxes 13.6% 13.4% 13.9% 33.3% ( .8%)
Minority Interest .1% 0 0 N/A N/A
Net Income 19.8% 20.1% 19.9% 30.2% 3.8%
RESULTS OF OPERATIONS:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Operating Revenues:
Operating Revenues increased 31.8% during 1996 when compared with 1995,
a direct result of the addition of BVT during the second quarter of 1996. BVT
added $7.9 million in operating revenues for the seven month period of 1996,
or 76% of the increase. During the 1994-96 period the increase was 35.3%.
Local Service Revenues, which include regulated revenues from CTT, BVT and
CMS, increased 28.4% during 1996, when compared with 1995. BVT added $1.3
million in local service revenue during 1996, or 81% of the increase. The
increase is partly due to the record setting increase in access lines added
for both CTT and BVT throughout the year.
The Company's access lines increased 5.9% during 1996, adding 3,853
lines. The total access lines in service as of December 31, 1996 are 72,266.
CTT had 48,133, BVT had 19,086, and CMS had 5,047 access lines in service.
The Company anticipates that the trend of residential customers installing
more than one access line to their residence will continue in the near future
and therefore the growth of access lines should continue. CTT and BVT were
very successful in their marketing of such second line installations to
their residential customers during 1996.
Access Service Revenues increased 39.8% during 1996, and for the 1994-96
period increased 46.8%. BVT provided $3.9 million of access revenue during
1996, or 70% of the increase. Interstate Interlata access minutes of use
increased 8.8%. Intrastate interlata access minutes of use increased 14.4%
during 1996. Intrastate intralata minutes of use increased 9.5% during 1996.
These increases are a result of continued increases in usage on the toll
network of CTT and BVT. During the third quarter of 1996 CTT recorded a
prior period access billing adjustment, which added about $275,000 in access
revenue for 1996. It is anticipated that access rates will decline when
local competition becomes more widespread.
Long Distance Service Revenues, which include regulated CTT and BVT
intralata toll revenue, as well as NCI long distance reseller revenues,
increased 16.5% during 1996 when compared with 1995. BVT provided $1.1
million of long distance revenue during 1996 or 85% of the increase. For the
1994-96 period they increased 10.0%. With the enactment of the
Telecommunications Act of 1996, long distance toll service will become very
competitive with the potential for loss of customer base and revenue.
Nonregulated Sales and Lease Revenues which include (1) CTT and BVT
sale and lease of telephone equipment and directory advertising revenues, and
(2) CMS sale and lease of pager and cellular equipment and local and wide
area reseller operations, increased 40.1% during 1996 and increased 62.8%
during the 1994-96 period. BVT provided nonregulated revenue of $1.5 million
for 1996, or 88% of the increase. Modest growth was experienced by all
entities during 1996.
Miscellaneous Revenues (net of uncollectibles), which include CTT and
BVT regulated revenues for rents and billing and collection, increased 15.4%
during 1996 and for the 1994-96 period increased 8.3%. BVT provided $109,000
in miscellaneous revenues during 1996, or 96% of the increase. Both entities
are experiencing decreases in billing and collection revenue due to an
interexchange carrier taking back certain billing and collection functions
previously performed by both. Miscellaneous Revenues continue to be a non
growth part of the company's revenue stream. Uncollectible revenues were
about .4% of total operating revenues for 1996.
Operating Expenses:
Operating Expenses increased 31.3% during 1996 when compared with 1995,
a direct result of the merger with BVT in 1996. During the 1994-96 period
operating expenses
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
increased 37.0%. BVT added $5.6 million in operating expenses, or 81% of the
increase. Plant Operations Expenses, which are predominantly CTT and BVT
regulated expenses, increased 29.5% in 1996 and increased over the 1994-96
period 34.6%. These expenses include outside plant , digital switching,
engineering and related administrative expenses. BVT added plant operation
expenses of $875,000 during 1996, or 67% of the increase. The demand for
enhanced services required that the additional SS7 software additions
planned for the next two years be completed during 1996. CTT added
$500,000 of software to its digital switch during the current year. BVT will
be adding similar software during 1997.
Depreciation and Amortization Expenses, for 1996 increased 45.0% over
1995 and for the 1994-96 period increased 54.5%. BVT added $1.9 million in
depreciation and amortization expense during 1996, or 83% of the increase.
Depreciation expense for 1996 from CTT, BVT and CMS was $6.8 million and
equates to a 6.93% effective composite rate consistent with the two previous
years. Amortization expense represents the cost in excess of net assets
associated with the acquisition of BVT, which is being amortized
over 40 years.
Customer Operations Expense, which includes CTT, BVT and CMS regulated,
and NCI expenses, increased 15.1% during 1996 and increased 17.9% over the
1994-96 period. Customer Operations Expenses consist of customer services
for ordering and billing, as well as marketing and advertising expenses. BVT
added $1.2 million of customer operations expenses, which accounts for all the
difference when compared with 1995, and the majority of the difference over
the 1994-96 period.
Corporate Operations Expense, which includes regulated charges from
CTT and BVT as well as charges from CEI, CMS, NCI , CWC and CIC, increased
51.1% during 1996 when compared with 1995, and increased during the 1994-96
period 82.2%. BVT added about $500,000 during 1996 to corporate operation
charges, or 45% of the increase. During 1995 CTT began to position its
corporate structure for change with the addition of a Vice President
Operations and Vice President, Finance & Administration, and continued in
1996 with the addition of a Vice President of Regulatory and External
Affairs. It is anticipated that the Company will experience additional
charges during 1997 as the Company becomes actively involved in start up
operation PCS service through CWC and the pending acquisition of Infocore,
Inc.
Labor sensitive operating expenses increased as a result of the three
year contract negotiated with the union during 1996. Effective May 10, 1996,
the first year of the contract, wage rates increased 3.1%, which had the
effect of increasing labor sensitive benefits as well.
Non-regulated Sales and Lease Expenses, which include charges from CTT,
BVT and CMS, increased 33.7% during 1996, and during the 1994-96 period
increased 31.6%. BVT added about $800,000 in nonregulated expenses during
1996, or 32% of the increase.
Taxes other than income taxes increased 26.2% during 1996 when compared
with 1995. The increase is primarily due to the addition of BVT which added
$273,000.
Other Income/Expense (net):
Interest expense increased substantially during 1996 as a result of the
acquisition of BVT when compared with 1995 and during the 1994-96 period.
External financing in the amount of $22,000,000 was required to provide most
of the cash needed for those BVT shareholders who chose cash rather than
preferred or common stock of CEI. There was some interim financing required
throughout 1996 and 1995 against its lines of credit but there was no balance
remaining at the end of 1996. CTT has two 10-year unsecured term loans
obtained through a local bank. One carries an interest rate at
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
prime and a ceiling of 8.5% , with principal due 1997, the other one carries
an interest rate at prime with a ceiling of 8.4% through May 1997, with
principal payments due quarterly. Both of these current term loans have been
refinanced in 1997, through a $5.0 million unsecured loan at an interest rate
of 6.89%. BVT had existing debt of $1.4 million at an interest rate of 8.5%
which the Company acquired through the merger, the balance of which is due
the second quarter of 1998.
During 1996, the Company held a 70% partnership interest in the BRACE
partnership which in turn owns a 39% limited partnership interest in the
Reading SMSA Limited Partnership providing cellular telephone service in the
Reading metropolitan area, and a 10% partnership interest in the LACE
partnership, which in turn owns an 18.4% limited partnership interest in the
Susquehanna Cellular Communications Limited Partnership providing cellular
telephone service in the Harrisburg, Lancaster, York metropolitan area. The
Company, through CTT, holds an 11.5% interest in PenTeleData which provides
local access to the Internet. The pre-tax income from the Company's
interests in these ventures increased 90.5% in 1996 when compared with 1995,
to $1,256,357. Profits from the cellular interests might be adversely
impacted with the advent of PCS services.
On December 24, 1996 the Company transferred its 69% Limited
Partnership interest in BRACE to CIC.
Income Taxes:
Income taxes increased 33.3% during 1996 when compared with 1995 due to
the 31.2% increase in income before income taxes, and 32.3% during the two
year period 1994-96. The federal income tax rates over the period remained
unchanged. The state income tax rate during 1996 and 1995 was 9.99% but
during 1994 was 11.99%.
Minority Interest:
The minority interest recorded during 1996 and 1995 reflects Infocore,
Inc.'s 40% interest in net loss for Conestoga Wireless Company (CWC).
Net Income:
Net Income for 1996 increased 30.2% when compared with 1995, and for the
1994-96 period increased 35.1%. BVT after absorbing the merger costs added
about $800,000 to net income for 1996, or 40% of the increase. The balance of
the increases can be attributed to excellent growth in access lines,
increased minutes of use on the network for access, and increased
undistributed profits from the partnerships providing cellular services.
Accounting for the Effects of Certain Types of Regulation ("SFAS 71"):
The Company follows the accounting statement which recognizes the
economic effect of rate regulation by recording costs and a return on
investment as such amounts are recovered through regulatory authorized rates.
As of December 31, 1996, the Company had no regulated assets but had regulated
liabilities which total $858,680. The Company currently expects to follow the
accounting prescribed by SFAS 71 in the foreseeable future, but if the Company
discontinued this practice, the effects of writing off any regulatory assets
and liabilities would not be material to operations of the Company.
Liquidity and Capital Commitments:
Current Operations: The Company had commitments at December 31, 1996 of
$1,400,000 for the purchase of equipment and materials to continue to upgrade
its telecommunications plant base. The projected capital budget requirements
for 1997 of approximately $7.0 million will be financed through internally
generated funds.
A line of credit with a bank at $3 million remained during 1996, with
the interest rate at one-half of one percent under the bank's prime rate.
During 1996 a second line of credit was secured from another bank for $10
million with interest at
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
one percent below the bank's prime rate or .35 percent above the bank's
overnight base rate. The prime rate applicable at December 31, 1996 and 1995
was 8.25% and 8.75%, respectively. The overnight base interest rate on
December 31, 1996 was 7.35%. The line of credit was utilized several times
during the current year to cover current expenses. There was no balance
outstanding on December 31, 1996, but there was a $500,000 balance outstanding
on December 31, 1995.
The Company has continued to invest in the future of the
telecommunications industry through the ownership of the publicly traded stock
of other telecommunication companies. During 1996 the Company's total
investment in these publicly traded stock decreased due to unrealized
depreciation of such stock. The current market value of such investment is
$1,622,107. This investment may be a source of future liquidity.
The Board of Directors at its monthly meeting on September 24, 1996
authorized the repurchase of up to one hundred thousand shares of CEI common
stock on the open market or in negotiated transactions. The maximum price
which will be offered at any time will be $24.00 per common share depending
on market conditions and other factors. As of February 28, 1997 there were
87,273 common shares purchased back at an average price of $23.34 per share.
Management believes that the current working capital is adequate to
meet the immediate operating requirements, and that the current available
credit facilities are adequate to provide short term financing for
unforeseen requirements.
The capital requirement over the next five years, for CWC to provide
the high mobility services through PCS, could exceed $50 million. The
financing of the project could come from (1) internal sources, (2) long term
debt, or possibly (3) stock issue, or a combination of the three.
Pending Acquisition:
On February 13, 1997 the Company signed a letter of intent
(Agreement) to acquire all of the common stock of Infocore, Inc., a
telecommunications company based in King of Prussia, Pennsylvania. Under the
terms of the Agreement, the Company will issue 200,000 shares of common stock
to Infocore, Inc.'s stockholders in exchange for all outstanding shares of
Infocore, Inc. The transaction will be accounted for by the purchase method,
with the effective date of the merger expected to be third quarter of 1997.
Management views the proposed acquisition of Infocore as an important
step which will strengthen the Company's capabilities of being a full service
telecommunications provider. It enhances the Company's customer base and
provides additional experienced telecom and data professionals to the
organization. The acquisition solidifies a business relationship which was
established in March 1995, when the Company and Infocore, Inc. ("Infocore")
formed Conestoga Wireless Company (CWC). The Company owns 60% and Infocore
owns 40%, of CWC. After the pending acquisition the Company and its
subsidiaries will have 100% ownership of CWC. The proposed acquisition will
provide a well qualified and experienced PCS management team.
Personal Communication Services (PCS):
CWC was a successful bidder in the Federal Communications Commission
(FCC) auctions for Personal Communication Services ("PCS") radio spectrum D,
E, and F bandwidth. PCS is a wireless communications service based on lower
power and a higher frequency bandwidth than cellular service. PCS is
anticipated to be more reliable, of better quality and less expensive for the
customer, than cellular. The Basic Trading Areas in which CWC was the
successful bidder are Reading, Pottsville, Sunbury, and Williamsport, Pa.
These territories cover nine counties in Pennsylvania with a population of
840,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(Continued)
Management views participation in PCS as being an important part of its
future business. PCS is expected to be a reliable, convenient and inexpensive
vehicle for providing mobile telephone service. It will provide the Company
with a tremendous opportunity to expand the business into neighboring
territories while maintaining the Company's current customer base.
Effects of Substantial Indebtedness and Preferred Stock on Future Operations:
At December 31, 1996, the Company had approximately $28.0 million of long
term debt outstanding and approximately $12.8 million of redeemable preferred
stock, compared to approximately $63.1 million of common equity. This
resulted in a ratio of 40% debt and preferred stock to 60% equity. At
December 31, 1995 the ratio was 12% debt to 88% equity. The increases are a
result of the acquisition of BVT. It is anticipated that with the pending
acquisition of Infocore, Inc. and the building of the PCS infrastructure the
Company will incur additional amounts of debt and/or capital.
Although a higher level of debt and preferred stock is not unusual in
the telecommunications industry, the additional debt and preferred stock may
have important consequences on the Company's future operations, including (i)
the Company will incur additional interest expense, which may have
significant principal repayment obligations, (ii) the Company will be subject
to significant unscheduled preferred stock redemption obligations because the
preferred shares issued in the acquisition of BVT which may be "put" by the
holders thereof beginning in 1998; (iii)the Company's increased leverage may
make it more vulnerable to economic downturns and reduce its flexibility in
responding to changing business and economic conditions; and (iv) payment of
dividends on the Company's common shares, may be restricted by the
level of financial resources needed to service the Company's additional debt
and preferred stock.
Regulated Industry:
Conestoga Telephone Company (CTT), and Buffalo Valley Telephone Company
(BVT) are subject to a rate making process regulated by the Pennsylvania
Public Utility Commission (PUC) called rate of return regulation. An
amendment to the Pennsylvania Public Utility Act passed in 1993, provides for
streamlined rate regulation and a method for determining rates other than the
rate of return regulation and procedures. This new regulation referred to as
Chapter 30, provides a price stability mechanism in which a telephone
company's annual revenues from non-competitive services may be permitted to
change in line with the gross domestic product price index, minus a
productivity offset, with no limitation on earnings by the regulated company.
In order for the Company to avail itself of the procedures permitted by
chapter 30, CTT and BVT must commit to providing universal broadband services
by 2015. As of yet, neither have determined the full effects of such a
pricing mechanism, therefore, they have not availed themselves of the
alternate pricing procedures.
The telecommunication industry continues to undergo fundamental changes,
which may have a significant impact on financial performance. The Federal
Telecommunications Act of 1996, while apparently lifting the ban on cross
ownership between cable and telephone companies in communities served by the
local telephone company, opens the local telephone company's market to new
competitors providing local exchange service.
Management recognizes that there will be substantial competitive
pressure in the local exchange market from many players in the future. It also
believes that competition will bring many new opportunities for the local
exchange companies. Management is endeavoring to position the Company to take
advantage of these opportunities as they arise, and remains optimistic about
the future.
Forward-Looking Statements:
Management's Discussion and Analysis of Financial Conditions and
Results of Operations relating toOperating Revenues, Other Income/Expense,
Liquidity and Capital Commitments, Pending Acquisitions, PCS, Effects of
Substantial Indebtedness and Preferred Stock on Future Operations and
Regulated Industry 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 outcomes 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-referenced
sections and accompany such forward-looking statements.
PART II
ITEM 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Conestoga Enterprises, Inc.
Birdsboro, Pennsylvania
We have audited the accompanying consolidated balance sheets of Conestoga
Enterprises, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, common stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conestoga
Enterprises, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
BEARD & COMPANY, INC.
Reading, Pennsylvania
January 18, 1997, except for Note 13 as to which the date is
February 13, 1997
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,956,554 $671,495
Accounts receivable, including unbilled revenue 6,888,667 3,751,182
Inventories, at average cost 867,205 576,786
Prepaid expenses 206,351 404,271
Total current assets 9,918,777 5,403,734
INVESTMENTS AND OTHER ASSETS
Cost in excess of net assets of business acquired,
less amortization of $ 567,357 38,337,140 -
Investments in partnerships 3,377,027 2,552,270
Investments in equity securities 1,622,107 2,361,102
Prepaid pension costs 2,148,700 1,425,584
Other 1,513,920 711,773
46,998,894 7,050,729
PLANT
In service 123,137,474 86,222,150
Under construction 557,293 1,064,075
123,694,767 87,286,225
Less accumulated depreciation 60,760,620 41,145,963
62,934,147 46,140,262
$119,851,818 $58,594,725
See Notes to Consolidated Financial Statements.
December 31, 1996 1995
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ - $500,000
Current maturities of long-term debt 831,000 390,000
Accounts payable 2,769,189 1,982,689
Accrued payroll and vacation pay 855,981 390,372
Advance billings and customer deposits 307,806 484,617
Total current liabilities 4,763,976 3,747,678
LONG-TERM LIABILITIES
Long-term debt, less current maturities 27,218,000 4,645,000
Accrued postretirement cost 596,742 447,908
Other 834,201 189,681
28,648,943 5,282,589
DEFERRED INCOME TAXES 10,185,015 7,222,136
COMMITMENTS
MINORITY INTEREST IN SUBSIDIARY 400,198 253,367
REDEEMABLE PREFERRED STOCK, par value $ 65 per share;
authorized 900,000 shares; issued and outstanding 1996
196,618 shares; $ 3.42 cumulative dividends 12,780,170 -
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $ 5 per share; authorized
10,000,000 shares; issued 1996 4,568,500 shares;
1995 3,848,922 shares 22,842,500 19,244,610
Additional paid-in capital 20,420,005 4,769,183
Retained earnings 20,863,934 17,727,271
Net unrealized appreciation on marketable equity
securities 315,602 347,891
Less cost of treasury stock 1996 58,400 shares (1,368,525) -
63,073,516 42,088,955
$119,851,818 $58,594,725
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Years Ended December 31, 1996 1995 1994
Operating revenues:
Local service $ 7,416,992 $ 5,774,650 $ 5,699,215
Access service 19,718,523 14,104,359 13,428,850
Long distance service 8,937,836 7,672,932 8,122,348
Nonregulated sales and lease 5,982,170 4,270,249 3,673,849
Miscellaneous 843,422 730,513 778,523
42,898,943 32,552,703 31,702,785
Operating expenses:
Plant operations 5,751,212 4,440,292 4,271,326
Depreciation and amortization 7,449,751 5,138,828 4,822,211
Customer operations 7,445,712 6,470,809 6,314,176
Corporate operations 3,230,656 2,137,427 1,773,415
Nonregulated sales and lease 3,293,229 2,462,666 2,502,042
Taxes other than income 1,664,650 1,318,887 1,368,848
28,835,210 21,968,909 21,052,018
Operating income 14,063,733 10,583,794 10,650,767
Other income (expense), net:
Interest expense (1,297,226) (427,812) (422,106)
Income from unconsolidated
partnership interests 1,256,357 659,526 385,077
Other, net 283,202 91,251 105,048
242,333 322,965 68,019
Income before income taxes 14,306,066 10,906,759 10,718,786
Income taxes 5,853,421 4,390,341 4,424,803
Income before minority interest 8,452,645 6,516,418 6,293,983
Minority interest in net loss of
subsidiary 53,169 14,440 -
Net income $ 8,505,814 $ 6,530,858 $ 6,293,983
Earnings per common share $1.91 $1.70 $1.64
Weighted average common shares
outstanding 4,260,420 3,848,922 3,843,174
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1996, 1995 and 1994
Common
Additional Stock
Common Stock Paid-In Dividend
Shares Amount Capital Distributable
Balance,
December 31, 1993 3,660,494 $18,302,470 $837,032 $ -
Adjustment to
beginning balance
for change in
accounting method,
net of taxes - - - -
Net income - - - -
Common stock dividends
($ 1.11 per share) - - - -
Issuance of stock
under employee
stock purchase plan 5,473 27,365 113,017 -
5% stock dividend
distributable - - - 4,733,909
Net change in
unrealized appreciation
on marketable equity
securities, net
of taxes - - - -
Balance,
December 31, 1994 3,665,967 18,329,835 950,049 4,733,909
Net income - - - -
Common stock dividends
($ 1.20 per share) - - - -
Distribution of
5% stock dividend 182,955 914,775 3,819,134 (4,733,909)
Netchange in
unrealized appreciation
on marketable equity
securities, net
of taxes - - - -
Balance,
December 31, 1995 3,848,922 19,244,610 4,769,183 -
Net income - - - -
Common stock dividends
($ 1.20 per share) - - - -
Preferred stock dividends - - - -
Common stock issued
for business acquired 719,578 3,597,890 15,650,822 -
Purchase of common
stock for the treasury - - - -
Net change in
unrealized appreciation
on marketable equity
securities, net
of taxes - - - -
Balance,
December 31, 1996 4,568,500 $22,842,500 $20,420,005 $ -
See Notes to Consolidated Financial Statements.
Net
Unrealized
Appreciation
On Marketable
Retained Equity Treasury Stock
Earnings Securities Shares Amount Total
$18,509,616 $ - - $ - $ 37,649,118
- 153,260 - - 153,260
6,293,983 - - - 6,293,983
(4,246,172) - - - (4,246,172)
- - - - 140,382
(4,742,834) - - - (8,925)
- (73,290) - - (73,290)
15,814,593 79,970 - - 39,908,356
6,530,858 - - - 6,530,858
(4,618,708) - - - (4,618,708)
528 - - - 528
- 267,921 - - 267,921
17,727,271 347,891 - - 42,088,955
8,505,814 - - - 8,505,814
(5,032,934) - - - (5,032,934)
(336,217) - - - (336,217)
- - - - 19,248,712
- - (58,400) (1,368,525) (1,368,525)
- (32,289) - - (32,289)
$20,863,934 $ 315,602 (58,400) $(1,368,525) $ 63,073,516
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,505,814 $ 6,530,858 $ 6,293,983
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,937,706 5,494,723 5,188,997
Income from unconsolidated partnership
interests (1,256,357) (659,526) (385,077)
Minority interest in loss of subsidiary (53,169) (14,440) -
Change in assets and liabilities, net of
effects from acquisition of business:
(Increase) decrease in:
Accounts receivable (405,542) (149,080) (82,574)
Materials and supplies 377,315 19,930 (200,277)
Prepaid expenses 497,281 (42,736) (278,803)
Prepaid pension costs (165,405) (328,853) (124,640)
Other assets (560,591) (653,961) (5,169)
Increase (decrease) in:
Accounts payable (1,528,996) 114,322 295,600
Accrued expenses and other current
liabilities (36,445) (430,889) 123,195
Other liabilities 405,191 170,082 180,238
Deferred income taxes (337,750) 218,640 32,443
Net cash provided by operating
activities 13,379,052 10,269,070 11,037,916
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant, net of removal costs
and salvage from retirements (7,353,793) (6,035,724) (5,798,667)
Purchase of investments - - (776,000)
Capital investments in unconsolidated
partnership interests - (320,000) (7,000)
Capital distributions from unconsolidated
partnership interests 431,600 92,000 17,900
Acquisition of business, net of cash and
cash equivalents acquired (19,744,124) - -
Net cash used in investing activities (26,666,317) (6,263,724) (6,563,767)
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Years Ended December 31, 1996 1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings $ 22,000,000 $ - $ -
Principal payments on long-term debt (390,000) (390,000) (390,000)
Borrowings on line of credit 900,000 2,000,000 2,300,000
Principal payments on line of credit (1,400,000) (1,500,000) (2,300,000)
Proceeds from issuance of stock under the
employee stock purchase plan - - 140,382
Common and preferred dividends paid (5,369,151) (4,618,708) (4,246,172)
Purchase of common stock for the
treasury (1,368,525) - -
Minority interest investment in subsidiary 200,000 267,807 -
Net cash provided by (used in)
financing activities 14,572,324 (4,240,901) (4,495,790)
Increase (decrease) in cash and
cash equivalents 1,285,059 (235,555) (21,641)
Cash and cash equivalents:
Beginning 671,495 907,050 928,691
Ending $ 1,956,554 $ 671,495 $ 907,050
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 1,297,226 $ 427,812 $ 422,106
Income taxes $ 6,065,817 $4,283,881 $ 4,859,254
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of business:
Working capital acquired, net of cash and
cash equivalents of $ 5,458,768 $ 977,299 $ - $ -
Plant and other assets acquired 16,924,033 - -
Cost in excess of net assets acquired 38,904,497 - -
Long-term liabilities assumed (5,032,823) - -
Redeemable preferred stock issued (12,780,170) - -
Common stock issued (19,248,712) - -
$ 19,744,124 $ - $ -
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations:
The consolidated financial statements include the accounts of Conestoga
Enterprises, Inc. (CEI) and its subsidiaries:
The Conestoga Telephone and Telegraph Company (CTT) and Buffalo Valley
Telephone Company (BVT), wholly-owned subsidiaries, which are
independent local exchange carriers providing both regulated and
nonregulated communication services.
Northern Communications, Inc. (NCI), a wholly-owned subsidiary, which
resells long distance services.
Conestoga Mobile Systems, Inc. (CMS), a wholly-owned subsidiary, which
provides paging communication services.
Conestoga Wireless Company (CWC), a majority-owned subsidiary, formed
in March 1995 as a Pennsylvania Limited Liability Corporation. In
January 1997, CWC acquired licenses for approximately $ 600,000 which
will allow the Company to provide personal communication services (PCS)
in selected markets throughout eastern and central Pennsylvania.
Conestoga Investment Company (CIC), a wholly-owned subsidiary, formed in
December 1996 as an investment holding company.
The above companies are collectively referred to herein as the Company. All
significant intercompany transactions have been eliminated in consolidation.
The Company operates predominately in the communications and related services
industry providing services to customers in eastern and central Pennsylvania.
The Company's local exchange carriers are subject to rate regulations by the
Federal Communications Commission (FCC) and the Pennsylvania Public Utility
Commission (PUC) and, accordingly, follow the accounting prescribed by
Statement of Financial Accounting Standards No. 71, "Accounting for Certain
Types of Regulation".
Telecommunications Act of 1996:
The Telecommunications Act of 1996 is the most comprehensive revision of the
federal communications laws in over 60 years. In general, the Act includes
provisions that open the telephone subsidiaries' local exchange markets to
competition upon certain conditions and permit local exchange carriers, such
as the Company, to provide long distance service outside their regions.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition:
The Company's revenues are recognized when earned. Access service and
long distance service revenues are derived from access charges, toll rates and
settlement arrangements. The Company records retroactive settlements as
revenues in the year the settlements become known in accordance with industry
practice.
Cash and cash equivalents:
For purposes of reporting the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. At times, cash balances exceed
F.D.I.C. limits.
Cost in excess of net assets of business acquired:
The excess of the acquisition cost over the net assets of the business
acquired is being amortized by the straight-line method over 40 years.
Management continually reviews the appropriateness of the carrying value of
the excess acquisition cost and the related amortization period.
Investments:
All marketable equity securities are classified as available for sale.
These securities are recorded at fair value based on quoted market prices, and
unrealized appreciation, net of taxes, is reported as a separate component of
common stockholders' equity until realized. Gains and losses are determined
using the specific-identification method.
The Company is accounting for its investments in partnerships by the equity
method.
Plant and depreciation:
Plant is recorded at cost. Normal renewals and betterments of units of
property are charged to plant accounts, while ordinary repairs and replacements
of items considered to be less than units of property are charged to plant
specific expenses. The cost of plant retired, plus removal costs, less salvage
is charged to accumulated depreciation. Accordingly, no gain or loss
is recognized in connection with ordinary retirements.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Plant and depreciation (continued):
Depreciation is computed by the straight-line method. Rates used for
calculating depreciation are based on the economic useful lives of the assets.
The effective composite depreciation rates for the years 1996, 1995 and 1994
were 6.93%, 6.56% and 6.58% respectively.
Income taxes:
Deferred taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Employee benefits:
Pension plans:
Substantially all employees are covered under noncontributory defined
benefit pension plans. The plans provide benefits based on years of service
and employee compensation. The Company's funding policy is to make
contributions in compliance with applicable regulations.
Postretirement benefit plan:
A subsidiary of the Company sponsors a postretirement health care plan
for substantially all of its salaried employees and their spouses. The plan
is contributory, with retirees contributing 50% of the premiums. The plan is
unfunded. The Company's share of the estimated costs that will be paid after
retirement is generally being accrued by charges to expense over the employees'
active service periods to the dates they are fully eligible for benefits,
except that the Company's unfunded cost that existed at January 1, 1993 is
being accrued primarily under the straight-line method that will result in
full accrual by December 31, 2012. The Company has received approval from
the PUC to include the expense of this Plan for ratemaking purposes.
Savings plans:
The Company has contributory savings plans for substantially all
employees. The Company contributes matching amounts for participating
employees in accordance with the provisions of the plans. The Company
contributed $ 230,752, $ 200,068 and $ 187,305 to the plans for 1996, 1995
and 1994 respectively.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee benefits (continued):
Deferred compensation agreements:
The Company has deferred compensation agreements with certain officers
and employees which provide benefits payable to them upon retirement. The
estimated liabilities under the agreements are being accrued over the expected
remaining years of employment.
Earnings per common share:
Earnings per common share is computed by dividing net income less
preferred stock dividends by the weighted average of common shares outstanding
during the year. Preferred stock dividends for 1996 include dividends paid of
$ 336,217 and cumulative dividends of $ 56,036. The computation of fully
diluted earnings per share was antidilutive.
Reclassifications:
Certain items in the 1995 and 1994 consolidated financial statements have
been reclassified to conform to the 1996 consolidated financial statement
presentation format. The reclassifications had no impact on net income.
2
PURCHASE ACQUISITION
On May 31, 1996, the Company acquired all of the outstanding shares of
Buffalo Valley Telephone Company (BVT), an independent local exchange carrier
providing regulated and nonregulated communication services in central
Pennsylvania. The consideration for the stock of BVT totaled approximately
$ 57 million which included 196,618 shares of $ 3.42 Series A Preferred Stock,
719,578 shares of common stock and approximately $ 25 million in cash. The
acquisition was accounted for as a purchase, and results of operations of BVT
since the date of acquisition are included in the consolidated financial
statements.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
PURCHASE ACQUISITION (CONTINUED)
Unaudited pro forma consolidated results of operations for the years
ended December 31, 1996 and 1995 as though BVT has been acquired at the
beginning of the respective periods follows (in thousands, except per share
amounts):
1996 1995
(Unaudited)
Operating revenues $47,885 $43,873
Operating income 15,373 13,936
Net income available for common stock 7,801 6,552
Earnings per common share $1.71 $1.43
The above amounts reflect adjustments for amortization of goodwill,
interest on debt issued to fund the cash portion of the acquisition and
related tax benefits, removal of expenses related to the acquisition, net of
taxes and preferred stock dividend requirements.
The pro forma consolidated results of operations are provided for
comparative purposes only. They are based upon historical information which
has been restated to reflect the purchase acquisition and do not necessarily
reflect the actual results that would have occurred nor are they necessarily
indicative of future results of operations of the combined companies.
3
INVESTMENTS IN EQUITY SECURITIES
The following is a summary of the Company's investments in equity securities:
December 31,
1996 1995
Marketable equity securities:
Aggregate cost $1,142,148 $ 999,490
Gross unrealized appreciation 479,959 585,612
Fair value 1,622,107 1,585,102
Nonmarketable equity security, investment in
Buffalo Valley Telephone Company common
stock, at cost - 776,000
$1,622,107 $ 2,361,102
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
INVESTMENTS IN EQUITY SECURITIES (CONTINUED)
The Company's investments in equity securities are concentrated in the
telecommunications industry.
4
INVESTMENTS IN PARTNERSHIPS
The following is a summary of the Company's investments in partnerships:
December 31,
1996 1995
Berks and Reading Area Cellular Enterprises
(BRACE), 70% interest $ 2,555,292 $ 1,675,746
Lancaster Area Cellular Enterprises (LACE),
10% interest 731,279 675,175
PenTeleData, 11.85% interest 90,456 201,349
$ 3,377,027 $ 2,552,270
BRACE's sole activity is a 39% limited partnership interest in the
Reading SMSA Limited Partnership, which provides cellular telephone service to
the Reading metropolitan area. BRACE is reported on the equity method since
the Company effectively has a 27.3% interest in the operating partnership.
LACE is an 18.4% limited partner in the Susquehanna Cellular Communications
Limited Partnership, which provides cellular telephone service in the
Harrisburg, Lancaster and York metropolitan areas. LACE is reported on the
equity method since the Company, as one of the three general partners in that
entity, has significant influence over its operating and financial policies.
PenTeleData is a limited partnership which provides Internet access services
in central and eastern Pennsylvania. PenTeleData is reported on the
equity method in accordance with Statement of Position 78-9. The Company's
equity in undistributed net income of the partnerships was $ 1,256,357,
$ 659,526 and $ 385,077 for 1996, 1995 and 1994 respectively.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PLANT
Plant is carried at cost less accumulated depreciation and consists of
the following:
December 31,
1996 1995
Telephone plant:
In service:
Land and buildings $5,342,010 $4,080,085
Digital switching equipment 41,777,768 28,019,258
Other equipment 6,852,686 4,867,984
Outside plant facilities 65,321,649 46,922,475
119,294,113 83,889,802
Under construction 557,293 1,064,075
119,851,406 84,953,877
Less accumulated depreciation 58,698,418 39,716,521
61,152,988 45,237,356
Nonregulated property and equipment:
Land and buildings 653,641 112,527
Equipment 3,189,720 2,219,821
3,843,361 2,332,348
Less accumulated depreciation 2,062,202 1,429,442
1,781,159 902,906
$62,934,147 $46,140,262
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt is summarized as follows:
December 31,
1996 1995
Promissory notes (see below). $ 4,645,000 $ 5,035,000
8.5% notes, interest payable semi-annually,
principal due in annual installments of
$ 81,000, with the balance due in 1998. 1,404,000 -
6.91% Series A Senior Notes, interest payable
quarterly, principal due in annual installments
of $ 2,000,000 from 1998 through 2000. 6,000,000 -
7.59% Series B Senior Notes, interest payable
quarterly, principal due in annual installments
of $ 1,454,545 from 2001 through 2011. 16,000,000 -
28,049,000 5,035,000
Less current maturities 831,000 390,000
$27,218,000 $4,645,000
On December 30, 1996, the Company signed a commitment letter to
refinance its promissory notes with its current lender. Under the terms of
the new agreement, the notes will be converted to a $ 5,000,000 unsecured
term loan. The term loan will require quarterly principal payments beginning
May 1997 through 2002 with interest at 6.89% per annum. The notes to be
refinanced are classified in the accompanying balance sheet in accordance
with the terms of the new agreement.
On July 1, 1996, the Company entered into an unsecured credit agreement
through June 30, 1997 with a bank under which it may borrow up to $ 10,000,000
for working capital or general business purposes in the form of line of credit
loans or letters of credit. Interest is payable monthly on advances at the
Company's option of either one percent below the bank's prime rate or .35
percent above the bank's overnight base rate. The prime and overnight base
interest rates were 8.25% and 7.35% respectively at December 31, 1996.
Issuance fees on letters of credit shall be mutually agreed between the bank
and the Company on a case-by-case basis.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
LONG-TERM DEBT AND CREDIT ARRANGEMENTS (CONTINUED)
The Company also has an unsecured $ 3,000,000 line of credit from a bank
available until May 31, 1997 with interest at one-half of one percent under
the bank's prime rate. There were no borrowings outstanding on the line of
credit at December 31,1996 and $ 500,000 was outstanding at December 31, 1995.
The prime interest rate applicable to the line of credit was 8.25% and 8.75%
at December 31, 1996 and 1995 respectively.
The credit agreements contain provisions which, among other things,
require maintenance of certain financial ratios and limit the amount of
additional indebtedness. The Senior Notes also contain provisions which,
among other things, restrict mergers and consolidations, encumbrances and
sales of certain assets, redemptions of preferred stock and purchases of
restricted investments. Under the most restrictive covenants of the debt
agreements, approximately $ 11,800,000 of the consolidated retained earnings
is available for payment of cash dividends in 1997.
The aggregate amounts of maturities for each of the five years subsequent
to December 31, 1996 are as follows:
1997 $831,000
1998 4,323,000
1999 3,000,000
2000 3,000,000
2001 2,349,545
7
INCOME TAX MATTERS
Net deferred tax liabilities consist of the following components as of
December 31, 1996 and 1995:
1996 1995
Deferred tax liabilities:
Plant, in service $9,914,064 $6,718,147
Prepaid pension costs 850,351 549,229
Investments 329,458 369,066
11,093,873 7,636,442
Deferred tax assets 908,858 414,306
$ 10,185,015 $ 7,222,136
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
INCOME TAX MATTERS (CONTINUED)
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 was as follows:
1996 1995 1994
Current:
Federal $4,631,691 $3,136,592 $3,129,698
State 1,507,025 1,035,109 1,262,662
6,138,716 4,171,701 4,392,360
Deferred:
Federal (244,174) 167,915 23,312
State (41,121) 50,725 9,131
(285,295) 218,640 32,443
$5,853,421 $4,390,341 $4,424,803
The income tax provision differs from the amount of income tax determined
by applying the federal income tax rate to pretax income for the years ended
December 31, 1996, 1995 and 1994 due to the following:
1996 1995 1994
Normal statutory federal income tax rate 34.0% 34.0% 34.0%
Increase resulting from:
State income tax, net of federal tax benefit 6.8 6.8 8.0
Other 0.1 - (0.7)
40.9% 40.8% 41.3%
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
DEFINED BENEFIT PENSION PLANS
The components of the pension cost charged to expense for 1996, 1995 and
1994 consisted of the following:
1996 1995 1994
Service cost (benefits earned) $420,292 $ 270,153 $317,134
Interest cost on projected benefit
obligation 789,634 603,315 568,597
Actual return on plan assets (1,542,076) (2,001,488) 78,407
Net amortization and deferral 444,546 1,299,338 (777,411)
Total expense $112,396 $ 171,318 $186,727
Assumptions used in the determination of pension plan information for
1996, 1995 and 1994 consisted of the following:
1996 1995 1994
Discount rate 7.5% 7.0% 8.0%
Rate of increase in compensation levels 5.0 5.0 5.0
Expected long-term rate of return on plan assets 8.5 8.5 8.5
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
DEFINED BENEFIT PENSION PLANS (CONTINUED)
The following table sets forth the plans' funded status as of December 31,
1996 and 1995 and the amount recognized in the accompanying consolidated
balance sheets:
1996 1995
Actuarial present value of benefit obligations:
Vested benefits $8,876,091 $6,680,657
Accumulated benefits $8,890,240 $6,696,921
Projected benefits $(12,905,922)$(9,827,790)
Plan assets at fair value 16,083,105 10,217,166
Plan assets in excess of projected benefit
obligation 3,177,183 389,376
Unrecognized net (gain) loss (573,531) 1,308,705
Unrecognized net (asset) (1,124,152) (506,933)
Unrecognized prior service cost 669,200 234,436
Prepaid pension cost $2,148,700 $1,425,584
Plan assets consist primarily of U.S. Government securities, corporate
bonds and common stocks, including CEI's common stock of $ 200,720 and
$ 151,393 at December 31, 1996 and 1995 respectively.
9
POSTRETIREMENT BENEFIT PLAN
The components of the net periodic postretirement benefit cost charged to
expense for 1996, 1995 and 1994 consisted of the following:
1996 1995 1994
Service cost $37,372 $34,356 $41,903
Interest cost on projected benefit
obligation 92,104 94,181 92,350
Amortization of transition obligation 56,267 56,267 56,267
Total expense $185,743 $184,804 $190,520
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
POSTRETIREMENT BENEFIT PLAN (CONTINUED)
The following sets forth the plans' funded status reconciled with the
amount recognized in the Company's consolidated balance sheets as of December
31, 1996 and 1995:
1996 1995
Actuarial present value of accumulated
postretirement benefit obligations:
Retirees $(398,192) $(481,252)
Fully eligible active employees (496,864) (366,498)
Other active members (441,713) (496,656)
(1,336,769) (1,344,406)
Unrecognized transition obligation 900,262 956,529
Unrecognized net (gain) (160,235) (60,031)
Accrued postretirement cost $(596,742) $(447,908)
Assumptions used by the Company in the determination of postretirement
benefit plan information consisted of the following:
1996 1995 1994
Projected health care cost trend rate 8.5% 9.5% 10.5%
Ultimate trend rate 6.0 6.0 6.0
Year ultimate trend rate is achieved 2000 2000 2000
Discount rate 7.5% 7.0% 8.0%
Increasing the assumed health care cost trend rates by one percentage
point in each year will increase the accumulated postretirement benefit
obligation as of December 31, 1996 by $ 188,757 and the aggregate service and
interest cost components of net periodic postretirement benefit cost for 1996
by $ 24,282.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
REDEEMABLE PREFERRED STOCK
The Company has outstanding 196,618 shares of Series A Convertible
Preferred Stock. Cumulative dividends of $ 3.42 per share per annum are paid
semi-annually. Each share of preferred stock may be converted, at the option
of the holder, into shares of Common Stock at a conversion price of $ 34.425,
subject to adjustment under certain circumstances. Each holder may require
the Company to redeem all or a portion of such holder's preferred stock,
after May 31, 1998, for $ 65 per share plus accrued dividends.
The Company may redeem the stock, in whole or in part for $ 66.95, $ 66.30,
$ 65.65 and $ 65.00 per share beginning on May 31, 2000, 2001, 2002 and 2003
and thereafter respectively, plus all accumulated and unpaid dividends. In
the event of liquidation of the Company, the holders of preferred stock shall
be entitled to receive a distribution of $ 65 per share plus accrued dividends.
11
COMMON STOCK AND DIVIDEND REINVESTMENT PLAN
CTT has a Stock Purchase Plan for all employees who meet minimum
eligibility requirements which provides for the issuance and sale of CEI
common stock. The Plan is being implemented by a series of offerings. Under
the fourth offering of the Plan, participating employees of CTT authorized
deductions for a period of two years ended December 31, 1994. As of December
31, 1994, the Company issued 5,473 shares under the fourth offering of the
Plan at a price of $ 25.65 per share. Under the fifth offering of the Plan,
participating employees of CTT authorized deductions for a period of two years
ending August 31, 1997. The price the employee pays for a share of stock is
95% of the average of the closing sales price of the shares as quoted on
NASDAQ for the days on which sales are reported during the ten (10) business
dates prior to August 31, 1997 but will not be less than $ 24.85 nor more
than $ 28.38 per share. A maximum of 146,237 shares are authorized for
subscription under the fifth or subsequent offerings. As of December 31, 1996,
employees have reserved 4,660 shares for purchase under the fifth offering of
the Plan.
On October 26, 1994, the Company declared a 5% common stock dividend,
payable February 28, 1995, to stockholders of record on January 31, 1995.
The Company sponsors a Stock Reinvestment Plan for all shareholders who
wish to participate. Participants' dividends will be used to purchase shares
on the open market. A participant's purchase price per share will be the
average market price per share for all shares purchased under the Plan for
each dividend period.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
COMMITMENTS
At December 31, 1996, the Company had commitments for the purchase of
equipment and materials approximating $ 1,400,000.
13
PENDING ACQUISITION
On February 13, 1997, the Company signed a letter of intent (Agreement) to
acquire all of the common stock of Infocore, Inc., a telecommunications
company based in King of Prussia, Pennsylvania. Under the terms of the
Agreement, the Company will issue 200,000 shares of common stock to Infocore,
Inc.'s stockholders in exchange for all outstanding shares of Infocore, Inc.
The acquisition is subject to certain conditions, including approval of the
merger by Infocore, Inc.'s stockholders. The transaction will be accounted
for by the purchase method, and the effective date of the merger is expected
to be in the third quarter of 1997.
14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
Cash and cash equivalents:
The carrying amount approximates fair value because of the short
maturity of those instruments.
Investments in equity securities:
The fair values of investments in equity securities are based on
quoted market prices.
Letters of credit:
It was not practicable to estimate the fair value of the letters of
credit due to the absence of definite issuance fee terms.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Note payable and long-term debt:
The fair values of the note payable and long-term debt are estimated
based on interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities. The carrying amounts
approximate fair value.
Redeemable preferred stock:
The carrying amount approximates fair value based on the fixed
redemption price available to holders of preferred stock.
15
QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
1996
Operating revenues $8,694,024 $9,535,043 $12,283,707 $12,386,169
Operating income 3,031,728 2,936,741 4,390,700 3,704,564
Net income 1,920,974 1,792,121 2,405,475 2,387,244
Earnings per common
share 0.50 0.42 0.49 0.52
1995
Operating revenues $7,737,068 $8,604,873 $7,991,579 $ 8,219,183
Operating income 2,514,855 2,983,315 2,577,922 2,507,702
Net income 1,439,572 1,914,303 1,653,292 1,523,691
Earnings per common
share 0.37 0.50 0.43 0.40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information as to the Directors and Executive Officers of the Company
set forth under the Subcaption "Election of Directors " of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 3, 1997 is
incorporated by reference into this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information as to the Executive Officers' Compensation set forth under
the caption "Executive Compensation" of the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 3, 1997 is incorporated by
reference into this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Election of Directors" and
"Security Ownership of Management" of the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 3, 1997 is incorporated by
reference into this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or related transactions as described in Item 404
of Regulation S-K.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following consolidated financial statements of Conestoga
Enterprises, Inc. and subsidiaries are included in Part II, Item 8:
Opinion of Independent Certified Public Accountants
Consolidated balance sheets - December 31, 1996 and 1995
Consolidated statements of income - years ended December 31, 1996,
1995 and 1994
Consolidated statements of stockholders' equity - years ended
December 31,1996, 1995, and 1994
Consolidated statements of cash flows - years ended December 31,
1996, 1995 and 1994
Notes to consolidated financial statements
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, not
required, or because the required information is included in the
financial statements or notes thereto.
(a)(3) Exhibits -
(10) Material contracts Attachment 10 D
(11) Statement re: Computation of
Per Share Earnings Attachment 11
(12) Statement re: Computation of Ratios Attachment 12
(21) Subsidiaries of the registrant Attachment 21 D
(b) Reports on Form 8-K
A report on Form 8-K has been filed by the Registrant on October
2, 1996 to report that on September 24, 1996 the Board of Directors
authorized the repurchase of up to one hundred thousand shares
of the common stock of CEI on the open market or in negotiated
tranactions, depending on market conditions and other factors.
INDEX TO EXHIBITS
Page
(a) Articles of Incorporation, as amended 53 - 56*
(b) By-laws 57 - 66*
Instruments defining the rights of security holders
(b) Relevant portions of the by-laws 67*
Material contracts
(a) Agreement dated January 28, 1987 with
John R. Bentz, Executive Vice President 68 - 74*
(b) Agreement dated March 22, 1989 with
Donald R. Breitenstein, Controller 75 - 81*
(c) Agreement dated September 1, 1995 with 47 - 51**
Albert H. Kramer, Vice-President, Finance and Administration
(d) Agreement dated May 29, 1996 with 44- 50
Joseph J. Laffey, Vice-President, Regulatory and External Affairs
Statement re: Computation of Per Share Earnings 51
Statement re: Computation of Ratios 52
Subsidiaries of the registrant 53
*These exhibits appear in the 1992 10K.
** This exhibit appears in the 1995 10K.
EMPLOYMENT AGREEMENT
AGREEMENT made this 29th day of May, 1996, between THE CONESTOGA
TELEPHONE & TELEGRAPH COMPANY, a Pennsylvania business corporation, having its
principal office in the Borough of Birdsboro, County of Berks and State of
Pennsylvania (hereinafter called "Employer") and JOSEPH J. LAFFEY, of 912
Ralph Lane, Moosic, Pennsylvania 18507 (hereinafter called the "Employee").
A G R E E M E N T
1. Employment. The Employer employs the Employee and the Employee
accepts employment upon the terms and conditions of this Agreement.
2. Term. The term of this Agreement shall begin on
May 29, 1996 and shall terminate on May 28, 1999. It is the intention of the
Employer and the Employee that this relationship shall continue beyond the
three (3) years period, but either party may terminate the same under the
terms hereinafter set forth in this Agreement.
3. Compensation.
(a) The Employer shall pay the Employee for all services
rendered a salary of One Hundred Ten Thousand Dollars ($110,000.00) per year,
payable in equal weekly installments at the end of each week. Salary payments
shall be subject to withholding and other applicable taxes.
(b) Employer will review Employee's compensation on an annual
basis along with the review of all their management employees.
4. Duties. The Employee shall serve as the Employer's Vice President
Regulatory and External Relations and shall be responsible for the Employer's
overall regulatory matters. The exact responsibilities for the position are
set forth in the job description for Vice President Regulatory and External
Relations of the Employer. A copy of said job description is attached hereto
and referred to as Schedule A.
5. Extent of Services. The Employee shall devote his entire time and
attention to the Employer's business. During the term of this Agreement, the
Employee shall not engage in any other business activity, regardless of
whether it is pursued for gain or profit. Employee, however, may invest his
assets in other companies so long as they do not require the Employee's
services in the operation of their affairs.
6. Working Facilities. The Employee shall have a private office,
stenographic help, a personal computer and other facilities and services that
are suitable to his position and appropriate for the performance of his duties.
7. Disclosure of Information. The Employee acknowledges that the
list of the Employer's customers, as the Employer may determine from time to
time, is a valuable, special and unique asset of the Employer's business. The
Employee shall not, during and after the term of his employment, disclose all
or any part of the Employer's customer list to any person, firm, corporation,
association, or other entity for any reason or purpose. In the event of the
Employee's breach or threatened breach of this paragraph, the Employer shall
be entitled to a preliminary restraining order and an injunction restraining
and enjoining the Employee from disclosing all or any part of the Employer's
customer list to any person, firm, corporation, association, or other entity
for any reason or purpose and from rendering any services to any person, firm,
corporation, association, or other entity to whom all or any part of such list
has been, or is threatened to be, disclosed. In addition to, or in lieu of,
the above, the Employer may pursue all other remedies available to the
Employer for such breach, or threatened breach, including the recovery of
damages from the Employee.
8. Expenses. The Employer shall reimburse Employee for all
reasonable and necessary expenses incurred in carrying out his duties under
this Agreement. Employee shall present to the Employer, from time to time,
an itemized account of such expenses in any form required by the Employer.
9. Vacations. The Employee shall be entitled each year to a vacation
of four (4) weeks commencing January 1, 1997, during which time his
compensation shall be paid in full.
10. Termination Without Cause. Commencing May 28, 1999, the Employer
may without cause, terminate this Agreement at any time by giving thirty (30)
days written notice to the Employee. In that event, the Employee, if requested
by the Employer, shall continue to render his services and shall be paid his
regular compensation up to the date of termination. Employee may, without
cause, terminate this Agreement by giving sixty (60) days written notice to
the Employer. In such event, the Employee shall continue to render his
services and shall be paid his regular compensation up until the date of
termination.
11. Termination for Proper Cause. Employer may terminate Employee's
employment at any time for "proper cause". Proper cause for the termination
of Employee's employment shall be as follows:
(a) Violation by Employee of the restrictive covenants set forth
in Paragraph 7 hereof;
(b) Employee's disloyal, dishonest or illegal conduct; or
(c) Employee's willful dereliction of his duties to the Company.
12. Death During Employment. If the Employee dies during the term of
employment, the Employer shall pay to the Employee's estate the compensation
that would otherwise be payable to the Employee up to the end of the month in
which his death occurs. In addition, if Employee qualifies under the terms of
the Employer's existing life insurance coverage, Employer will provide life
insurance on the life of Employee amounting to two and one-half (2-1/2) times
his annual salary up to a maximum of Three Hundred Thousand Dollars
($300,000.00).
13. Restricted Covenant. For a period of two (2) years after the
termination or expiration of this Agreement, the Employee shall not within a
radius of twenty-five (25) miles from the present place of the Employer's
business, directly or indirectly, own, manage, operate, control, be employed
by, participate in, or be connected in any manner with the ownership,
management, operation or control of any business similar and competitive to
the type of business conducted by the Employer at the time this Agreement
terminates. In the event of the Employee's actual or threatened breach of
this paragraph, the Employer shall be entitled to a preliminary
restraining order and injunction restraining the Employee from violating its
provisions. Nothing in this Agreement shall be construed to prohibit the
Employer from pursuing any other available remedies for such breach or
threatened breach, including the recovery of damages from the Employee.
14. Arbitration. Any controversy or claim arising out of, or relating
to this Agreement, or its breach, shall be settled by arbitration in the City
of Reading in accordance with the then governing rules of the American
Arbitration Association, provided that Employer may seek the injunctive and
other relief provided for in Paragraphs 7 and 13 hereof in any court having
jurisdiction. Judgment upon the award rendered may be entered and enforced
in any court of competent jurisdiction.
15. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and sent by certified mail,
return receipt requested, to the Employee's residence or to the Employer's
principal office, as the case may be.
16. Waiver of Breach. The Employer's waiver of a breach of any
provision in this Agreement by the Employee shall not operate or be construed
as a waiver of any subsequent breach by the Employee. No waiver shall be
valid unless in writing and signed by an authorized officer of the Employer.
17. Assignment. The Employee acknowledges that his services are
unique and personal. Accordingly, the Employee may not assign his rights or
delegate his duties or obligations under this Agreement. The Employer's
rights and obligations under this Agreement shall inure to the benefit of, and
shall be binding upon, the Employer's successors and assigns.
18. Entire Agreement. This Agreement contains the entire
understanding of the parties. It may not be changed orally but only by an
agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
19. Headings. Headings in this Agreement are for convenience only and
shall not be used to interpret or construe its provisions.
20. Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
CONESTOGA TELEPHONE AND TELEGRAPH
COMPANY
By \s\ John R Bentz
President
Attest \s\ Kenneth A Benner
Secretary
\s\ Joseph J. Laffey (SEAL)
Joseph J. Laffey
Exhibit 11
CONESTOGA ENTERPRISES, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Years Ended December 31, 1996 1995 1994
Net income $ 8,506 $ 6,531 $ 6,294
Less preferred dividends:
Declared and paid (336) - -
Cumulative (56) - -
Income applicable to common stock $ 8,114 $ 6,531 $ 6,294
Average shares outstanding 4,260 3,849 3,843
Earnings per common share $ 1.91 $ 1.70 $ 1.64
EXHIBIT 12
CONESTOGA ENTERPRISES, INC.
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Years Ended December 31, 1996 1995 1994 1993 1992
(In thousands, Except Ratios)
Consolidated pre-tax income $14,306 $10,907 $10,719 $10,340 $ 11,120
Undistributed earnings from
unconsolidated partnerships
interests (1,257) (660) (385) (424) (46)
Interest 1,297 428 422 368 459
Earnings $14,346 $10,675 $10,756 $10,284 $ 11,533
Interest $1,297 $ 428 $ 422 $ 368 $ 459
Preferred stock dividends (1) 566 - - - 116
Fixed charges and preferred
stock dividends $1,863 $ 428 $ 422 $ 368 $ 575
Ratio 7.70 24.95 25.48 27.92 20.06
(1) Preferred stock dividends/(100% - income tax rate)
Attachment 21D
SUBSIDIARIES OF CONESTOGA ENTERPRISES, INC.
1. The Conestoga Telephone and Telegraph Company
Incorporated August 20, 1902
Pennsylvania
Operates - The Conestoga Telephone and Telegraph Company
2. Buffalo Valley Telephone Company
Incorporated September 13, 1904
Pennsylvania
Operates - Buffalo Valley Telephone Company
3. Northern Communications, Inc.
Incorporated March 5, 1981
Pennsylvania
Operates - Northern Communications, Inc.
4. Conestoga Mobile Systems, Inc.
Incorporated April 1, 1991
Pennsylvania
Operates - Conestoga Mobile Systems, Inc.
5. Conestoga Wireless Company
Limited Liability Company
Formed March 1995
Pennsylvania
Operates - Conestoga Wireless Company
6. Conestoga Investment Corporation
Incorporated November 27, 1996
Delaware
Operates - Conestoga Investment Corporation
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONESTOGA ENTERPRISES, INC.
Date ____________ By __\s\ John R Bentz________
John R Bentz
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date ____________ ____\s\ F. M. Brown__________
F. M. Brown
Chairman of the Board
Date ____________ __\s\ James H Murray_________
James H.Murray
Vice President
Date ____________ __\s\ Kenneth A Benner______
Kenneth A. Benner
Secretary/Treasurer
Date ____________ _\s\ Donald R Breitenstein___
Donald R. Breitenstein
Controller, Chief Accounting Officer
Date ____________ _\s\ John M Sausen_______
John M. Sausen
Director
Date ____________ _\s\Richard G Weidner________
Richard G. Weidner
Director
Date ____________ _\s\ Robert M Myers __________
Robert M. Myers
Director
Date ____________ __\s\ Jean M Ruhl ____________
Jean M. Ruhl
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated (continued).
Date ____________ __\s\ Thomas C Keim _________
Thomas C. Keim
Vice President - Operations
Date ____________ _\s\ Albert H Kramer _________
Albert H. Kramer
Vice President - Finance and
Administration, Chief Financial
Officer
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
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<INCOME-TAX-EXPENSE> 5,853,421
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<OPERATING-INCOME-LOSS> 14,063,733
<OTHER-INCOME-NET> 1,539,559
<INCOME-BEFORE-INTEREST-EXPEN> 15,603,292
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