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 June 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 June 30,1998, the number of shares of Common Stock, par value $5.00
outstanding was 4,626,388.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
June 30, 1998, June 30, 1997 and December 31, 1997
( In Thousands, Except Shares and Per Share Data)
ASSETS
6/30 6/30 12/31
1998 1997 1997
Current Assets
Cash and Cash Equivalents $19,346 $2,917 $2,517
Accounts receivable, including unbilled
revenue 7,501 7,021 6,895
Inventories, at average cost 1,601 1,097 1,104
Prepaid expenses 270 224 214
Total Current Assets 28,718 11,259 10,730
Investments and Other Assets
Cost in Excess of Net Assets of Busine 38,566 40,426 39,506
Investments in partnerships 440 4,185 2,979
Investments in equity securities 2,486 1,787 2,308
Prepaid Pension Costs 2,468 2,259 2,423
Other 732 1,453 772
44,692 50,110 47,988
Plant
In Service 146,641 125,152 126,337
Under Construction 4,669 1,412 10,778
151,310 126,564 137,115
Less accumulated depreciation 70,106 63,806 66,543
81,204 62,758 70,572
Total Assets $154,614 $124,127 $129,290
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
June 30, 1998, June 30, 1997 and December 31, 1997
( In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
6/30 6/30 12/31
1998 1997 1997
Current Liabilities
Current maturities of long term debt $3,000 $3,000 $3,000
Accounts payable 7,014 3,081 4,858
Accrued:
Taxes 2,930 166 667
Interest 203 56 0
Payroll & Vacation Pay 1,251 891 1,070
Advance billings/Customer Deposits 742 1,039 860
Total Current Liabilities 15,140 8,233 10,455
Long Term Liabilities
Long Term Debt, less Current Maturities 41,750 23,750 23,250
Accrued Post Retirement Cost 887 673 749
Other 960 619 987
43,597 25,042 24,986
Deferred Income Taxes 9,064 9,393 9,516
Minority Interest
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issues and outstanding 196,618 sha 12,780 12,780 12,780
Common Stockholders' Equity
Common Stock par value $5 per share; authorized
10,000,000 shares; issued;
6/30/98 6/30/97 12/31/97
4,775,301 4,775,301 4,775,3 23,876 23,876 23,876
Additional Paid-In Capital 24,822 24,681 24,742
Retained earnings 28,480 21,800 23,958
Net unrealized appreciation on
marketable equity se 982 479 762
Less cost of treasury stock; 6/30/98 148,913 shares
6/30/97 91,273 shares 12/31/97 75 (4,127) (2,157) (1,785)
74,033 68,679 71,553
Total Liabilities and Stockholders' E $154,614 $124,127 $129,290
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 and 1997
( In Thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 1998 1997
Operating Revenues:
Local Service $2,998 $2,665 $5,502 $4,978
Access Service 6,398 5,978 12,828 11,721
Long Dist. Service 2,643 2,388 5,326 4,798
Eguipment Sales & Lease 2,145 1,608 4,106 2,297
Other 1,438 1,111 3,025 2,145
15,622 13,750 30,787 25,939
Operating Expenses:
Plant Operations and Cost of Sales 4,178 3,585 7,423 6,551
Depreciation and Amortization 3,055 2,570 5,812 4,973
Customer Operations 3,614 2,354 7,075 3,968
Corporate Operations 1,486 1,160 2,836 2,131
Taxes, other than income 477 502 981 976
12,810 10,171 24,127 18,599
Operating Income 2,812 3,579 6,660 7,340
Other Income(Deductions), Net:
Interest Expense (781) (522) (1,441) (1,058)
Income from unconsolidated
partnerships interests 112 381 441 689
Gain on Sale of Partnership Interest 7,749 0 7,749 0
Other, Net 207 99 498 210
7,287 (42) 7,247 (159)
Income Before Income Taxes 10,099 3,537 13,907 7,181
Income Taxes 4,458 1,692 6,205 3,221
Net Income $5,641 $1,845 $7,702 $3,960
Basic earnings per common share $1.18 $0.37 $1.58 $0.80
Diluted earnings per common share $1.13 $0.37 $1.53 $0.80
Dividends per common share $0.305 $0.30 $0.61 $0.60
* Some amounts have been adjusted for comparative purposes.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 and 1997
( In Thousands, Except Per Share Data)
1998 1997
Net Income $7,702 $3,960
Unrealized gains on Securities
Unrealized holding gains
during period 258 163
Less: reclassification adjustment
for gains included in net income -38 0
Comprehensive Income $7,922 $4,123
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
( In Thousands)
1998 1997
Cash Flows from Operating Activities
Net Income $7,702 $3,960
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization $5,812 $4,939
Income from unconsolidated partnership in (437) (689)
Gain on sale unconsolidated partnership i (7,749)
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 (606) 874
Material and supplies (497) (64)
Prepaid expenses (56) 6
Prepaid pension costs (45) (110)
Other Assets 39 (365)
Increase (decrease) in:
Accounts Payable 2,155 (265)
Accrued expenses and other curren 2,529 683
Other liabilities 110 (139)
Deferred income taxes (516) (249)
637 4,611
Net cash provided by operating activ 8,339 8,571
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs a (15,507) (3,944)
Proceeds from sale of marketable equity s 208 0
Proceeds from surrender of life insurance 0 427
Proceeds from sale of unconsolidated part 11,084 0
Capital investments in unconsolidated par (355) (119)
Acquisition of business, net cash and cas 0 965
Net cash used in investing activitie (4,570) (2,671)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 21,000 5,000
Principal payments on long term borrowing (2,500) (6,299)
Proceeds from issuance of stock under the
employee stock purchase plan 57 0
Proceeds from issuance of stock under the
dividend reinvestment plan 350 172
Common stock dividends paid (2,843) (2,688)
Preferred stock dividends paid (336) (336)
Purchase of common stock for the treasury (2,668) (789)
Net cash provided by (used in) finan 13,060 (4,940)
Increase (decrease) in cash and cash 16,829 960
Cash and cash equivalents
Beginning 2,517 1,957
Ending $19,346 $2,917
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
( In Thousands)
1998 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $1,286 $1,003
Income Taxes $2,070 $3,018
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
( In Thousands)
Acquisition of business:
Working Capital acquired, net of cash 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 six months ended June 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.
CONESTOGA ENTERPRISES, INC.
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)
6/30/98 6/30/97 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
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 3,750 4,750 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
$44,750 $26,750 $26,250
Less current Maturities 3,000 3,000 3,000
$41,750 $23,750 $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 the purchase price over the book value acquired of
$2,722,155 is being amortized over 36 months using the straight-line method.
NOTE 4: Comprehensive Income
CONESTOGA ENTERPRISES, INC.
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 June 30, 1997 consolidated financial statements have
been restated to conform to the June 30, 1998 financial statements. There
was no impact on net income.
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 County, Pennsylvania. Conestoga Communications, Inc.
("CC") provides long distance telephone service. 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 six months of 1998 was $7.7 million or $1.58
per common share, an increase of 94.5% over the first six months of 1997.
This increase reflects an after tax gain of $4.5 million ($.97 per common
share) realized by the Company from the liquidation of its partnership
interest in Berks Reading Area Cellular Enterprises (BRACE). It also
includes an after tax loss of $1.2 million ($.26 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
second quarter 1998 earnings per common share were 47.5% lower than its first
quarter 1998 earnings and 43.2%. lower than its second quarter 1997 earnings.
The consolidated financial statements of the Company and its subsidiaries for
the six months ending June 30, 1998, include net incomes as follows:
Local Exchange Carriers $ 4.8 million
Parent Company and Others* $ 2.9 million
CONESTOGA ENTERPRISES, INC.
*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 six months ending June 30, 1998 were $30.8
million, compared to $25.9 million during the same period of 1997, an 18.7%
increase. Operating revenues for the second quarter 1998 were $15.6 million
a 13.6% increase over the second quarter of 1997 and a 3.0% increase over the
first quarter of 1998. The increases in operating revenues over the first
six months of 1997 by category are as follows:
Increase/(Decrease) %
(In thousands)
Local Service $ 524 10.5%
Access Service 1,107 9.4%
Long Distance Service 528 11.0%
Equipment Sales and Lease 1,809 78.8%
Other (net of uncollectibles) 880 41.0%
The operating revenues for the first six months of 1998 include operating
revenues of INF totaling $3.5 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 six
months of 1997. Combined local service revenues were 12.5% higher in the
second quarter of 1998 than in the second quarter of 1997, and 19.7% higher
than the first 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 six months of 1998 the access lines in service increased by 1,878 to a
total of 73,017. 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 six months of 1998 were
$12.8 million, 9.4% higher than during the first six months of 1997. When
comparing the second quarter of 1998 with the second quarter of 1997, access
revenue increased 7.0% and compared with the first quarter of 1998, decreased
.5%. CTT's and BVT's growth in access service revenues during the first six
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
commenced to
CONESTOGA ENTERPRISES, INC.
provide long distance services directly to its customers. During the first
six months of 1998, CC's long distance service revenues were $2.1 million
compared to $1.1 million during the same period of 1997. The Company's total
long distance revenues increased 10.7% during the second quarter of 1998, when
compared with the same quarter of 1997 and decreased 1.5% from the first
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 six months of 1998, equipment sales and lease
revenues increased 78.8% when compared with the first six months of 1997.
CTT, BVT and CMS together reported a 9.4% increase in equipment sales and
lease revenues during the first six months of 1998. INF contributed $2.3
million of equipment sales revenue during this same period, which accounts
for the large increase in equipment sales and lease revenues when comparing
the first six months of 1998 and 1997. Equipment sales and lease revenues in
the second quarter 1998 increased 33.4% over the second quarter of 1997 and
9.4% over the first 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
six months of 1998 were lower than the first six months of 1997. A sign-on
bonus for directory advertising in 1997 shifted additional directory
advertising revenues to 1997. The acquisition of INF, which generated $1.2
million in "other revenues" during the first six months of 1998, was the
cause of the increase in consolidated "other revenues" during that period.
Other revenues in the second quarter of 1998 were 29.4% higher than the second
quarter of 1997 and 9.4% lower than the first quarter of 1998.
Operating Expenses
Operating Expenses for the six month period ending June 30, 1998 were $24.1
million compared to $18.6 million during the same period of 1997, a 29.7%
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. When comparing the
second quarter of 1998 with the second quarter of 1997, operating expenses are
up 25.9%, and when compared with the first quarter of 1998 are up 13.2%.
The increases in operating expenses over the first six months of 1997 are
comprised of the following:
Increase/(Decrease) %
(In thousands)
Plant Operations and
Cost of Sales $ 872 13.3%
Depreciation and Amortization 839 16.9%
Customer Operations 3,107 78.3%
Corporate Operations 705 33.1%
Taxes, other than income 5 .5%
CONESTOGA ENTERPRISES, INC.
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 six months
of 1998 were down from the first six months 1997, due to lower digital switch
software expense and to less intralata terminating minutes of use charges.
The acquisition of INF accounted for $784 thousand in plant operations and
cost of sales expense, and CWC added $890 thousand. Plant operations and
cost of sales expenses were 16.5% higher when comparing the second quarter of
1998 with the second quarter of 1997, and when compared with the first
quarter of 1998 up 28.8%.
Depreciation and amortization expenses include charges from CTT, CMS, BVT,
INF and CWC. They were 16.9% higher during the first six months of 1998 than
the same period of 1997. CTT and BVT experienced normal increases in
depreciation expenses for the first quarter of 1998 compared with the same
period of 1997. INF accounted for $532 thousand of expenses of which $454
thousand was goodwill amortization expense resulting from the acquisition.
CWC added $331 of depreciation expense, with the start up of the PCS
operations.
Customer operations expenses include expenses of all the subsidiaries of
the Company. The local exchange carriers (CTT and BVT) recorded modest
increases during the first six months of 1998, when compared with the same
period of 1997. CC's customer operations expenses increased $1.4 million, due
to additional costs for the long distance service offering. The acquisition
of INF added $2.4 million of customer operations expense during the first six
months of 1998 and CWC added another $258 thousand. Customer operations
expense increased 53.5% during the second quarter of 1998 when compared with
the second quarter of 1997, and increased 4.4% when compared with the first
quarter of 1998.
Corporate operations expenses include charges from all the subsidiaries of
the Company. CTT's and BVT's corporate operations expenses for the six-month
period ended June 30, 1998 were in line with the first six months of 1997.
INF added $268 thousand to corporate operations expenses and CWC another
$338 thousand. When comparing the second quarter of 1998 with the second
quarter of 1997 corporate operation expenses increased 28.1%, and when
compared with the first quarter of 1998 increased 10.1%.
Taxes, other than income, were about even when comparing the first six
months of 1998 with the same period of 1997. When comparing the second
quarter of 1998 with the second quarter of 1997 and the first quarter of
1998, operating taxes, other than income, decreased 5.0% and 5.4%
respectively.
Other Income (Deductions), Net
Interest expenses incurred during the first six months of 1998 exceeded
those of the first six months of 1997 by $383 thousand, or 36.2%. 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.
CONESTOGA ENTERPRISES, INC.
In May 1998, BRACE sold its cellular interest, liquidated and distributed
its assets. Income for the first six 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 six
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 $52
thousand from its interest in the Penteledata Limited Partnership One.
Included in the six month period ended June 30, 1997 is $756 thousand from
BRACE and LACE.
The gain of $7.7 million on the sale of partnership interest during the six
months ending June 30, 1998 was realized upon the liquidation of BRACE after
its sale of its interest in the cellular enterprise serving the Reading and
Berks County area.
The Company's income during the first quarter of 1998 also includes a net
capital gain of $102 thousand from the sale of certain equity securities held
by the Company.
Income Taxes
Income taxes for the first six months of 1998 were $6.2 million, an increase
of 92.6% over the same period of 1997, primarily due to the sale of the BRACE
partnership interest.
Financial Condition
Cash and cash equivalents for the six months ending June 30, 1998 increased
to $19.3 million, which reflects the additional debt added. The net cash
provided by operating activities, decreased 2.7% to $8.3 million, compared
with $8.6 million for the first six months of 1997. As of June 30, 1998, the
Company had available lines of credit with two regional banks totaling $15
million.
Capital expenditures through the first six 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 $30 million by December 31,
1998. The Company's cash flow is greater than net income, for financial
reporting purposes, as a result of the amortization of goodwill, from the
acquisitions of BVT and INF as expense deductions for financial reporting
purposes without actual cash outlays therefor. The annual amortization of the
goodwill of BVT and INF will be approximately $1.9 million.
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.
CONESTOGA ENTERPRISES, INC.
The holders of the preferred stock may convert it into common stock at any
time and may redeem it after May 31, 1998, at $65 per share. The Company
believes that internally generated cash flow, along with existing lines of
credit, will be adequate to fund any cash requirements for the redemption of
preferred stock.
As of June 30, 1998, the Company's debt (including the CEI $3.42 Series A
Preferred Stock) to equity ratio was 44% debt to 56% 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 six months of 1998 CWC continued construction of its
infrastructure with the goal of commencing operations. On May 1, 1998, CWC
began commercial operation, 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 up to $30 million in PCS by the end of
1998, the impact on 1998's financial statements will be significant. Interest
and depreciation expense, will both increase substantially while CWC will just
be building its customer base. The Company anticipates that the start up of
CWC will negatively impact earnings for the next several years until CWC
builds its customer base. PCS is a capital intensive, long term investment
on the part of the Company and 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.
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
CONESTOGA ENTERPRISES, INC.
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. A favorable ruling on the petition was received on
March 26, 1998.
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.
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
CONESTOGA ENTERPRISES, INC.
Management's Discussion and Analysis of Results of Operations and Financial
Conditions relating to Liquidity and Capital Commitments, and other statements
relating to anticipated growth, anticipated sources of funding for continuing
operating activities and construction expenditures (see . . . above)
constitute "forward-looking statements" as defined in the Securities
Litigation Reform Act of 1995. Such forward-looking statements involve risks
and uncertainties, which could cause actual results or outcome to differ
materially, from those expressed in forward-looking statements. The
projections made herein are expressed in good faith and believed by the
Company to have a reasonable basis, but there can be no assurance that actual
outcomes or results will not differ materially from the expected outcomes or
results described herein. Important factors that could cause actual results
to differ materially from the forward-looking statements identified in this
paragraph are discussed in the above reference sections and accompany such
forward-looking statements.
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 __August 15, 1998__ ____________________
Albert H Kramer
President
DATE __August 15, 1998__ ____________________
Donald R Breitenstein
Controller
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