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, 1998
Commission File Number 0-24064
CONESTOGA ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA
(State of Incorporation)
23-2565087
(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 30,1998, the number of shares of Common Stock, par value
$5.00 outstanding was 4,644,376.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1998, September 30, 1997 and December 31, 1997
( In Thousands, Except Shares and Per Share Data)
ASSETS
9/30 9/30 12/31
1998 1997 1997
Current Assets
Cash and Cash Equivalents $12,763 $8,276 $2,517
Accounts receivable, including unbilled
revenue 7,431 7,748 6,895
Inventories, at average cost 1,574 1,072 1,104
Prepaid expenses 209 233 214
Total Current Assets 21,977 17,329 10,730
Investments and Other Assets
Cost in Excess of Net Assets of Business Acqu 38,096 39,958 39,506
Investments in partnerships 449 3,749 2,979
Investments in equity securities 2,655 1,886 2,308
Prepaid Pension Costs 2,563 2,320 2,423
Other 715 506 772
44,478 48,419 47,988
Plant
In Service 149,409 126,471 126,337
Under Construction 4,593 1,977 10,778
154,002 128,448 137,115
Less accumulated depreciation 72,366 65,757 66,543
81,636 62,691 70,572
Total Assets $148,091 $128,439 $129,290
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1998, September 30, 1997 and December 31, 1997
( In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30 9/30 12/31
1998 1997 1997
Current Liabilities
Current maturities of long term debt $3,000 $3,000 $3,000
Accounts payable 3,045 3,340 4,858
Accrued:
Taxes 794 2,149 667
Interest 229 52 0
Payroll & Vacation Pay 1,095 891 1,070
Advance billings/Customer Deposits 618 882 860
Total Current Liabilities 8,781 10,314 10,455
Long Term Liabilities
Long Term Debt, less Current Maturities 41,500 23,500 23,250
Accrued Post Retirement Cost 921 711 749
Other 947 751 987
43,368 24,962 24,986
Deferred Income Taxes 8,935 9,341 9,516
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issued and outstanding; 9/30/98 - 184,084
1997 - 196,618 11,965 12,780 12,780
Common Stockholders' Equity
Common Stock par value $5 per share; authorized
10,000,000 shares; issued;
9/30/98 9/30/97 12/31/97
4,775,301 4,775,301 4,775,301 23,876 23,876 23,876
Additional Paid-In Capital 24,929 24,710 24,742
Retained earnings 28,772 23,834 23,958
Net unrealized appreciation on
marketable equity securitie 1,093 544 762
Less cost of treasury stock; 9/30/98 130,925 shares
9/30/97 81,325 shares 12/31/97 75,536 shares (3,628) (1,922) (1,785)
75,042 71,042 71,553
Total Liabilities and Stockholders' Equity $148,091 $128,439 $129,290
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 1998 1997
Operating Revenues:
Local Service 2,623 2,492 8,125 7,470
Access Service 6,564 6,506 19,392 18,227
Long Dist. Service 2,639 2,400 7,965 7,198
Eguipment Sales & Lease 2,766 3,136 6,872 5,433
Other 1,404 1,337 4,429 3,482
15,996 15,871 46,783 41,810
Operating Expenses:
Plant Operations and Cost of Sales 4,138 4,092 11,561 10,643
Depreciation and Amortization 3,127 2,704 8,939 7,677
Customer Operations 3,448 2,984 10,523 6,952
Corporate Operations 1,350 1,394 4,186 3,525
Taxes, other than income 495 569 1,476 1,545
12,558 11,743 36,685 30,342
Operating Income 3,438 4,128 10,098 11,468
Other Income(Deductions), Net:
Interest Expense (714) (520) (2,155) (1,578)
Income from unconsolidated
partnerships interests 10 335 451 1,024
Gain on Sale of Partnership Interest 0 1,983 7,749 1,983
Other, Net 288 273 786 483
(416) 2,071 6,831 1,912
Income Before Income Taxes 3,022 6,199 16,929 13,380
Income Taxes $1,304 $2,736 $7,509 $5,957
Net Income $1,718 $3,463 $9,420 $7,423
Basic earnings per common share 0.33 0.7 1.92 1.51
Diluted earnings per common share 0.33 0.69 1.89 1.51
Dividends per common share 0.305 0.305 0.915 0.905
* Some amounts have been adjusted for comparative purposes.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
( In Thousands, Except Per Share Data)
1998 1997
Net Income 9,420 7,423
Unrealized gains on Securities
Unrealized holding gains
during period 369 228
Less: reclassification adjustment
for gains included in net income (38) 0
Comprehensive Income 9,751 7,651
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
( In Thousands)
1998 1997
Cash Flows from Operating Activities
Net Income 9,420 7,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 8,939 7,677
Income from unconsolidated partnership interests (450) (1,024)
Gain on sale unconsolidated partnership interest (7,749) (1,983)
Minority interest in loss of subsidiary 0 (10)
Gain on sale of marketable securities (102) 0
Changes in assets and liabilities:
(Increase) decrease in:
Accounts Receivable (536) 147
Material and supplies (471) (39)
Prepaid expenses 5 (3)
Prepaid pension costs (140) (172)
Other Assets 56 156
Increase (decrease) in:
Accounts Payable (1,813) (5)
Accrued expenses and other current liabi 138 2,437
Other liabilities 132 31
Deferred income taxes (703) (300)
(2,694) 6,912
Net cash provided by operating activities 6,726 14,335
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs and salvage (18,591) (6,245)
Proceeds from sale of marketable equity securities 208 0
Proceeds from surrender of life insurance policy 0 427
Proceeds from sale of unconsolidated partnership interes 11,084 3,429
Capital investments in unconsolidated partnershp interes (355) (237)
Acquisition of business, net cash and cash equivalents 0 965
Net cash used in investing activities (7,654) (1,661)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 21,000 5,000
Principal payments on long term borrowing (2,750) (6,549)
Proceeds from issuance of stock under the
employee stock purchase plan 82 0
Proceeds from issuance of stock under the
dividend reinvestment plan 516 436
Common stock dividends paid (4,258) (4,117)
Preferred stock redemption (401) 0
Preferred stock dividends paid (347) (336)
Purchase of common stock for the treasury (2,668) (788)
Net cash provided by (used in) financing activities 11,174 (6,354)
Increase (decrease) in cash and cash equivalents 10,246 6,320
Cash and cash equivalents
Beginning 2,517 1,957
Ending 12,763 8,277
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
( In Thousands)
1998 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest 1,926 1,495
Income Taxes 6,056 4,344
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of business:
Working Capital acquired, net of cash and cash equivalents 0 314
Plant and other assets acquired 1,122
Cost in excess of net assets acquired 2,722
Long-term debt and other liabilities assumed 0
Redeemable preferred stock issued 0
Common stock issued (5,123)
Cash Paid (Received) (965)
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. The December 31, 1997 condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
included in Conestoga's 1997 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts of 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.
NOTE 2: LONG TERM DEBT
Long term debt is summarized as follows:
(In thousands)
9/30/98 9/30/97 12/31/97
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 4,000 6,000 6,000
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 16,000 16,000
CONESTOGA ENTERPRISES, INC.
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 3,500 4,500 4,250
Senior Note interest payable
quarterly at 6.22%, quarterly
principal payments of $750,000
starting May 11, 2001 through
February 11, 2008,
unsecured 21,000 0 0
$44,500 $26,500 $26,250
Less current Maturities 3,000 3,000 3,000
$41,500 $23,500 $23,250
NOTE 3: Acquisitions
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 purchase price over the book value acquired of
$2,722,155 is being amortized over 36 months using the straight-line method.
NOTE 4: Comprehensive Income
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income"' in June 1997. The Company adopted the provision of
the new standard in the first quarter of 1998. In accordance with the
statement, prior year financial statements have been reclassified in order to
be consistent with the current year presentation.
NOTE 5: OTHER
Certain items of the September 30, 1997 consolidated financial statements
have been restated to conform to the September 30, 1998 financial statements.
There was no impact on net income.
CONESTOGA ENTERPRISES, INC.
Inventories, at average cost, are both material and supplies used to provide
service, and equipment held for resale.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE QUARTERLY INCOME STATEMENTS
The Company has six operating subsidiaries. Conestoga Telephone and
Telegraph Company ("CTT") provides regulated local telephone service in parts
of Berks, Lancaster, Chester and Montgomery Counties, Pennsylvania. Buffalo
Valley Telephone Company ("BVT") provides regulated local telephone service
in parts of Union, North Umberland and Snyder Counties, Pennsylvania.
Conestoga Communications, Inc. ("CC") provides long distance telephone
service, as well competitive local exchange carrier services (CLEC).
Conestoga Mobile Systems, Inc. ("CMS") provides paging and related services.
Infocore, Inc. ("INF") provides general consulting and telecommunications
services and equipment to customers. Conestoga Wireless Company ("CWC")
provides digital wireless telephone services known as Personal Communications
Services ("PCS") to its customers. CWC commenced commercial operations of its
PCS system on May 1, 1998.
RESULTS OF OPERATIONS
Net income during the first nine months of 1998 was $9.4 million or $1.92
per common share, an increase of 27.2% over the first nine months of 1997.
This increase reflects an after tax gain of $4.5 million ($.97 per common
share) realized by the Company from the sale of its partnership interest in
Berks Reading Area Cellular Enterprises (BRACE). It also includes an after
tax loss of $2.2 million ($.48 per common share) caused by CWC's development,
construction and start-up of its wireless communications system, commonly
referred to as Personal Communications Services (PCS). Excluding the gain
from the sale of BRACE and including the losses incurred in the development,
construction and start-up of the PCS system, the Company's third quarter 1998
earnings per common share were 57.1% greater than its second quarter 1998.
The Company's third quarter 1998 earnings were 24.8% lower than the third
quarter of 1997, excluding the gain from the sale of LACE during the third
quarter of 1997. The consolidated financial statements of the Company and its
subsidiaries for the nine months ending September 30, 1998, include net
incomes as follows:
CONESTOGA ENTERPRISES, INC.
Local Exchange Carriers $ 6.6 million
Parent Company and Others* $ 2.8 million
*Including various subsidiaries that provide long distance,
paging and wireless PCS, sale and lease of
telecommunications equipment, and design and install
telecommunications systems.
Operating Revenues
Operating revenues for the nine months ending September 30, 1998 were $46.8
million, compared to $41.8 million during the same period of 1997, an 11.9%
increase. Operating revenues for the third quarter 1998 were $16.0 million a
0.8% increase over the third quarter of 1997 and a 2.4% increase over the
second quarter of 1998. The increases in operating revenues over the first
nine months of 1997 by category are as follows:
Increase/(Decrease) %
(In thousands)
Local Service $ 655 8.8%
Access Service 1,165 6.4%
Long Distance Service 767 10.7%
Equipment Sales and Lease 1,439 26.5%
Other (net of uncollectibles) 947 27.2%
The operating revenues for the first nine months of 1998 include operating
revenues of INF totaling $5.3 million. INF was acquired by the Company on
May 1, 1997.
Local service revenues include regulated revenues of CTT and BVT. Both
reported increases in local service revenues when compared with the first
nine months of 1997. Combined local service revenues were 5.2% higher in the
third quarter of 1998 than in the third quarter of 1997, and 5.7% lower than
the second quarter of 1998.
The increase in local service revenues continues to be directly related to
the growth in the number of telephone access lines in service. During the
first nine months of 1998, the access lines in
CONESTOGA ENTERPRISES, INC.
service increased by 3,065 to a total of 74,204. 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 first nine months of 1998 were
$19.4 million, 6.4% higher than during the first nine months of 1997. When
comparing the third quarter of 1998 with the third quarter of 1997, access
revenue increased 0.9% and compared with the second quarter of 1998, increased
2.6%. CTT's and BVT's growth in access service revenues during the first nine
months of 1998 is due to an increase in combined interstate and intrastate
minutes of use through their respective networks, and the interstate
settlement process through the National Exchange Carrier Association (NECA).
Long distance service revenues include CTT's and BVT's intralata toll
revenues and CC's long distance service revenues. On August 1, 1997, CC began
providing long distance services directly to its customers. During the first
nine months of 1998, CC's long distance service revenues were $3.3 million
compared to $1.7 million during the same period of 1997. The Company's total
long distance revenues increased 10.0% during the third quarter of 1998, when
compared with the same quarter of 1997, and were about even with the second
quarter of 1998.
Equipment Sales and Lease Revenues include CTT's and BVT's sale and lease of
telephone equipment, CMS's sale and lease of pager equipment, and INF's
equipment sales. In the first nine months of 1998, equipment sales and lease
revenues increased 26.5% when compared with the first nine months of 1997.
INF contributed $3.5 million of equipment sales revenue during the first nine
months of 1998, which accounts for the large increase in equipment sales and
lease revenues when comparing the first nine months of 1998 and 1997.
Equipment sales and lease revenues in the third quarter of 1998 decreased
11.8% from the third quarter of 1997, due to a large installation billed
during the third quarter of 1997, and increased 29.0% over the second quarter
of 1998.
Other revenues include CTT's and BVT's billing and collection revenues, and
directory advertising revenue, as well as INF's facility management and
consulting revenues. CTT's directory advertising revenues during the first
nine months of 1998 were lower than the first nine months of 1997. A sign-on
bonus for directory
CONESTOGA ENTERPRISES, INC.
advertising in 1997 shifted additional directory advertising revenues to 1997.
The acquisition of INF, which generated $1.8 million in other revenues during
the first nine months of 1998, was the cause of the increase in consolidated
other revenues during that period. Other revenues in the third quarter of
1998 were 5.0% greater than the third quarter of 1997 and 2.4% lower than the
second quarter of 1998.
Operating Expenses
Operating Expenses for the nine month period ending September 30, 1998 were
$36.7 million compared to $30.3 million during the same period of 1997, a
20.9% increase. This increase was due in part to the acquisition of INF and
the goodwill amortization resulting therefrom, and to the development and
construction expenses of CWC for the PCS operations. Operating expenses in
the third quarter of 1998 were 6.9% higher than in the third quarter of 1997,
and 2.0% lower than the second quarter of 1998.
The increases in operating expenses over the first nine months of 1997 are
comprised of the following:
Increase/(Decrease) %
(In thousands)
Plant Operations and
Cost of Sales $ 918 8.6%
Depreciation and Amortization 1,262 16.4%
Customer Operations 3,571 51.4%
Corporate Operations 661 18.8%
Taxes, other than income (69) (4.5%)
Plant operations and cost of sales expenses include local exchange carrier
(LEC) expenses of CTT and BVT, as well as expenses from CMS, CWC and INF.
CTT's plant operations and cost of sales expenses for the first nine months
of 1998 were down from the first nine months of 1997, due to lower digital
switch software expense and to lower costs associated to less intralata
terminating minutes of use. INF added $1.2 million in plant operations and
cost of sales expense, and CWC added $1.5 million. Plant operations and cost
of sales expenses were 1.1% higher in the third quarter of 1998 than the third
quarter of 1997, and 1% lower than the second quarter of 1998.
CONESTOGA ENTERPRISES, INC.
Depreciation and amortization expenses include charges from CTT, CMS, BVT,
INF and CWC. They were 16.4% higher during the first nine months of 1998 than
the same period of 1997. CTT and BVT experienced normal increases in
depreciation expenses for the first three quarters of 1998 compared with the
same period of 1997. INF accounted for $803 thousand of expenses of which
$681 thousand was goodwill amortization expense resulting from the
acquisition. Depreciation expense taken on the capital expenditures for the
development, construction and start-up of CWC's PCS operations has added $680
thousand of depreciation expense.
Customer operations expenses include expenses of all the subsidiaries of
the Company. The local exchange carriers, CTT and BVT, recorded increases of
11.0% and 10.3% respectively during the first nine months of 1998, when
compared with the same period of 1997. CC's customer operations expenses
increased to $3.4 million from $1.3 million for the same period of 1997, due
to additional costs for the long distance service offering. INF added $3.7
million of customer operations expense during the first nine months of 1998
and CWC added another $513 thousand. Customer operations expense increased
15.5% during the third quarter of 1998 when compared with the third quarter of
1997 and decreased 4.6% when compared with the second quarter of 1998.
Corporate operations expenses include charges from all the subsidiaries of
the Company. CTT's corporate operations expenses for the nine-month period
ended September 30, 1998 increased 7.7%, when compared with the first nine
months of 1997. BVT's decreased 13.6% due to one-time charges in the third
quarter of 1997. INF added $406 thousand to corporate operations expenses and
CWC added another $536 thousand. Corporate operation expenses decreased 3.2%
during the third quarter of 1998 from the third quarter of 1997 and 9.2% from
the second quarter of 1998.
Taxes, other than income, decreased 4.5% during the first nine months of 1998
compared with the same period of 1997. Operating taxes, other than income,
decreased 13.0% during the third quarter of 1998 compared with the third
quarter of 1997 and 3.8% compared with the second quarter of 1998.
CONESTOGA ENTERPRISES, INC.
Other Income (Deductions), Net
Interest expenses incurred during the first nine months of 1998 exceeded
those of the first nine months of 1997 by $577 thousand, or 36.6%. In
February 1998, the Company incurred additional long-term debt of $21 million
at an interest rate of 6.22% to finance CWC's wireless PCS system.
Income from unconsolidated partnership interests includes income from Berks
Reading Area Cellular Enterprises ("BRACE"), which owned a partnership
interest in the entity which provides cellular services in the Reading and
Berks County area, and Penteledata Limited Partnership One which primarily
provides Internet access. In May 1998, BRACE sold its cellular interest,
liquidated and distributed its assets. Income for the first nine months of
1997 included income from the Lancaster Area Cellular Enterprises ("LACE"),
which provides cellular service in the Harrisburg, Lancaster and York
metropolitan areas. On September 5, 1997, the Company sold its partnership
interest in LACE. During the first nine months of 1998, the Company derived
before tax earnings in the amount of $493 thousand from
its interest in BRACE and recorded a before tax loss of $42 thousand from its
interest in the Penteledata Limited Partnership One. Income for the nine-
month period ended September 30, 1997 included $1.2 million from BRACE and
LACE.
The gain of $7.7 million on the sale of partnership interest during the
nine months ending September 30, 1998 was realized upon the liquidation of
BRACE after the sale of its interest in the cellular enterprise serving the
Reading and Berks County area. Included in the gain on the sale of
partnership interest during the nine month period ending September 30, 1997,
is $1.8 million which was realized upon the liquidation of LACE after its
sale of its interest in the cellular enterprise serving the Harrisburg,
Lancaster and York metropolitan areas.
The Company's income during the first nine months of 1998 also includes
a net capital gain of $102 thousand from the sale of certain equity securities
held by the Company.
CONESTOGA ENTERPRISES, INC.
Income Taxes
Income taxes for the first nine months of 1998 were $7.5 million, an
increase of 26.1% over the same period of 1997, primarily due to the sale of
the BRACE partnership interest.
FINANCIAL CONDITION
"Cash and cash equivalents" for the nine months ending September 30, 1998
increased to $12.8 million, as a result of the additional debt of $21.0
million added in February, 1998. As of September 30, 1998, the Company had
available lines of credit with two regional banks totaling $15 million.
Capital expenditures through the first nine months of 1998, except for the
wireless PCS build out, were financed primarily by internally generated funds.
No outside short term borrowing was required during this period.
Management believes that, except for the development and construction of the
PCS network, the cash provided from operations will be sufficient to fund
current capital projects. The Company borrowed $21 million, as mentioned
above, to finance part of the development and construction of the PCS
infrastructure, which is likely to be as much as $28 million by December 31,
1998.
The long-term 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 incurrence of
additional debt by the Company and its subsidiaries. The Company is currently
in compliance with all loan covenants.
Preferred Stock
The holders of the preferred stock are able to convert their shares into
common stock at any time and after May 31, 1998 could redeem it at $65 per
share. As of September 30, 1998, 6,370 shares have been converted into common
stock and 6,164 shares have been redeemed for cash. 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.
CONESTOGA ENTERPRISES, INC.
As of September 30, 1998, the Company's debt (including the CEI $3.42 Series
A Preferred Stock) to equity ratio was 43% debt to 57% equity.
The Company from time to time buys back large blocks of its common stock as
such stock becomes available. During the first quarter of 1998, the Company
bought a block of 86,074 shares which is held as treasury stock.
Other
PCS SERVICE:
During the first nine months of 1998, CWC continued construction of its PCS
infrastructure. On May 1, 1998, CWC began commercial operation of its PCS
service, offering wireless digital PCS in Berks, Union, Snyder, Northumberland
and Montour counties in Pennsylvania. The PCS network will eventually cover
the nine county area in which CWC was granted Federal Communication Commission
(FCC) licenses.
The complete 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
additional capital requirements to complete the PCS project build out.
Since the Company will have invested as much as $28 million in PCS by the
end of 1998, the impact on 1998's financial statements will be significant.
Interest and depreciation expenses will increase substantially, while CWC
will just be developing its customer base. During the first nine months of
1998, the Company recognized operating expenses of $3.2 million resulting
from the deployment of the PCS network. The Company anticipates that the
start up of CWC will negatively impact earnings for the next several years
until CWC builds its customer base. PCS is a capital intensive, long term
investment on the part of the Company. The Company believes that its low
acquisition costs for its FCC licenses and its expertise in telephony will
allow it to compete effectively in the PCS marketplace. The PCS system will
compliment CEI's objective to be a full service telecommunications provider.
CONESTOGA ENTERPRISES, INC.
BRACE:
On May 14, 1998, BRACE sold its interest in the Reading SMSA cellular
partnership to Cellco Partnership, d.b.a. Bell Atlantic
Mobile ("Bam"), which provides cellular wireless service in the Reading and
Berks County area. The Company received $11.1 million
for its 70% partnership interest in BRACE. The Company no longer has any
investment in partnerships providing cellular service.
REGULATED INDUSTRY:
CTT and 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. Both companies filed a Chapter 30 Plan
on July 31, 1998.
The telecommunication industry continues to undergo fundamental changes,
which may have a significant impact on financial performance. The Federal
Telecommunications Act of 1996 (TA 96) creates a regulatory environment that
encourages competition. As rural companies, CTT and BVT are exempt from many
of the most onerous aspects of competition, unless prospective competitors
can pass a public interest standard and agree to offer service throughout the
telephone companies' territories. In order to strengthen this position, CTT
and BVT petitioned the Pa. P.U.C. for a suspension of the interconnection
requirements of TA96, which requires local exchange carriers to provide access
to their local facilities to competitors. A favorable ruling on the petition
was received on March 26, 1998.
In September 1998, CTT and BVT received favorable rulings from the PUC in
regard to rate change filings filed in July 1998. These filings will more
closely align rates with costs. They provide for decreases in access service
rates and vertical service rates
CONESTOGA ENTERPRISES, INC.
accompanied by increases in basic local service rates. These filings
represent an initial step in the process of revising rate structure in
preparation for competition. The financial impact of these rate are estimated
to initially reduce annual revenues $125,000.
Management 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. In this regard, during 1997 CC received approval
from the Pa. P.U.C. to provide 1+ long distance service. In addition, in
February 1998, CC received Pa. P.U.C. approval to provide competitive local
exchange service in the franchise territories of Bell Atlantic of Pa. and GTE.
CC currently is providing 1+ long distance services to customers in both of
CEI's franchise territories, as well as the service areas of other telephone
companies. CC is also operational as a competitive local exchange provider in
portions of the Bell Atlantic of Pa. service territory.
YEAR 2000 ISSUES:
The Company is heavily dependent on computer systems and utilizes a
significant number of software programs and operating systems throughout the
organization. To the extent the software applications are unable to interpret
the calendar year 2000, some level of modification or replacement of these
applications will be necessary. The Company is also very dependent on vendor
compliance and will require them to represent that their systems are year
2000 compliant.
The Company is on track with its year 2000 strategic action plan that will
bring the Company's network and computer systems to year 2000 compliant by
the second quarter of 1999, at an estimated cost of $400 thousand. This will
include utilizing outside organizations to complete the project. No assurance
can be given that the impact of the Company's failure to achieve substantial
year 2000 compliance will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Forward-Looking Statements
Management's Discussion and Analysis of the Quarterly Income Statements,
Results of Operations and Financial Condition, PCS
CONESTOGA ENTERPRISES, INC.
Services, BRACE, Regulated Industry and Year 2000 issues, and other
statements relating to anticipated growth, anticipated sources of funding for
continuing operating activities and construction expenditures 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 referenced 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) EXIBITS 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.
DATE __November 13, 1998__ \s\ Albert H Kramer
Albert H Kramer
President
DATE __November 13, 1998__ \s\ Donald R Breitenstein
Donald R Breitenstein
Controller
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