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, 1999
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 30,1999, the number of shares of Common Stock, par value $1.00
outstanding was 7,054,211.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
June 30, 1999 and December 31, 1998
( In Thousands, Except Shares and Per Share Data)
ASSETS
6/30 12/31
1999 1998
Current Assets
Cash and Cash Equivalents $3,564 $8,403
Accounts receivable, including unbilled
revenue 9,294 7,840
Inventories, at average cost 1,000 1,520
Prepaid taxes 0 332
Prepaid expenses 176 127
Total Current Assets 14,034 18,222
Investments and Other Assets
Cost in Excess of Net Assets of Business Acquired 36,686 37,626
Investments in partnerships 408 415
Investments in equity securities 3,686 3,306
Prepaid Pension Costs 2,819 2,730
Other 1,842 925
45,441 45,002
Plant
In Service 163,341 157,414
Under Construction 4,908 4,991
168,249 162,405
Less accumulated depreciation 79,973 75,020
88,276 87,385
Total Assets $147,751 $150,609
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
June 30, 1999 and December 31, 1998
( In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
6/30 12/31
1999 1998
Current Liabilities
Current maturities of long term debt $3,000 $3,000
Accounts payable 4,178 5,777
Accrued:
Taxes 1,047 0
Interest 203 216
Payroll & Vacation Pay 1,198 1,065
Advance billings/Customer Deposits 811 803
Total Current Liabilities 10,437 10,861
Long Term Liabilities
Long Term Debt, less Current Maturities 38,750 41,250
Accrued Post Retirement Cost 1,038 960
Other 921 934
40,709 43,144
Deferred Income Taxes 9,892 10,025
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issued and outstanding; 6/30/99 - 158,104
12/31/98 - 180,289 10,277 11,719
Common Stockholders' Equity
Common Stock par value; 6/30/99 $1 per share and
12/31/98 $5 per share authorized; 6/30/99
20,000,000 shares and 12/31/98 10,000,000 shares;
Issued; 6/30/99 and 12/31/98 7,162,951 7,163 35,814
Additional Paid-In Capital 41,984 13,018
Retained earnings 27,524 27,972
Net unrealized appreciation on
marketable equity securities 1,774 1,523
Less cost of treasury stock; 3/31/99 119,674
shares and 12/31/98 187,675 shares (2,009) (3,467)
76,436 74,860
Total Liabilities and Stockholders' Equity $147,751 $150,609
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 and 1998
( In Thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
1999 **1998 1999 **1998
Operating Revenues: $3,005 $2,716 $5,962 $5,219
Local Exchange Services
Long Distance and Access Services 9,880 9,048 19,380 18,156
Wireless Services 464 147 809 299
Other 4,530 3,713 8,299 7,115
17,879 15,624 34,450 30,789
Operating Expenses:
Plant Operations and Cost of Sales 5,294 4,687 9,887 8,459
Depreciation and Amortization 3,395 3,055 6,885 5,812
Customer Operations 3,421 3,133 6,561 6,047
Corporate Operations 1,664 1,477 3,287 2,871
Taxes, other than income 482 460 1,034 940
14,256 12,812 27,654 24,129
Operating Income 3,623 2,812 6,796 6,660
Other Income(Deductions), Net:
Interest Expense (740) (782) (1,493) (1,441)
Income from unconsolidated
partnerships interests (23) 112 (33) 441
Gain on Sale of Partnership Interest 0 7,749 0 7,749
Other, Net 105 208 195 498
(658) 7,287 (1,331) 7,247
Income Before Income Taxes 2,965 10,099 5,465 13,907
Income Taxes 1,479 4,458 2,729 6,205
Net Income $1,486 $5,641 $2,736 $7,702
*Basic earnings per common share $0.19 $0.79 $0.35 $1.05
*Diluted earnings per common share $0.19 $0.76 $0.35 $1.02
*Dividends per common share $0.210 $0.204 $0.413 $0.407
* adjusted for the 3-for-2 stock split in May, 1999
** 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)
1999 1998
Net Income $2,736 $7,702
Unrealized gains on Securities
Unrealized holding gains
during period 251 258
Less: reclassification adjustment
for gains included in net income 0 (38)
Comprehensive Income $2,987 $7,922
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
( In Thousands)
1999 1998
Cash Flows from Operating Activities
Net Income $2,736 $7,702
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 6,885 5,812
Income from unconsolidated partnership interests 19 (437)
Gain on sale of unconsolidated partnership interests 0 (7,749)
Gain on sale of marketable securities 0 (102)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts Receivable (1,454) (606)
Material and supplies 520 (497)
Prepaid expenses (49) (56)
Prepaid pension costs (89) (45)
Other Assets (929) 39
Increase (decrease) in:
Accounts Payable (1,599) 2,155
Accrued expenses and other current liabilities 129 267
Accrued taxes 1,378 2,262
Other liabilities 65 110
Deferred income taxes (263) (516)
Net cash provided by operating activities 7,349 8,339
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs and salvage (6,835) (15,507)
Proceeds from sale of marketable equity securities 0 208
Proceeds from sale of unconsolidated partnership interests 0 11,084
Capital investments in unconsolidated partnershp interests 0 (355)
Net cash used in investing activities (6,835) (4,570)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 0 21,000
Principal payments on long term borrowing (2,500) (2,500)
Proceeds from issuance of stock under the
employee stock purchase plan 52 57
Proceeds from issuance of stock under the
dividend reinvestment plan 438 350
Common stock dividends paid (2,909) (2,843)
Preferred stock redemption (159) 0
Preferred stock dividends paid (275) (336)
Purchase of common stock for the treasury 0 (2,668)
Net cash provided by (used in) financing
activities (5,353) 13,060
Increase (decrease) in cash and cash equivalents (4,839) 16,829
Cash and cash equivalents
Beginning 8,403 2,517
Ending $3,564 $19,346
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
( In Thousands)
1999 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $1,507 $1,286
Income Taxes $2,256 $2,070
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 six months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. The
December 31, 1998 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
1998 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)
6/30/99 12/31/98
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 2,000 4,000
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
CONESTOGA ENTERPRISES, INC.
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 2,750 3,250
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 21,000
$41,750 $44,250
Less current Maturities 3,000 3,000
$38,750 $41,250
NOTE 3: OPERATING SEGMENTS
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements.
The Company's reportable segments are strategic business units that
offer different services. They are managed separately because each
business unit requires different technology and marketing
strategies. The Company has two reportable segments: Telephone -
traditional telephone service provided by CTT and BVT; and wireless
paging and PCS communication services provided by CWC and CMS.
The "Other" column primarily includes the long distance and
consulting services provided by CCI and INF, and corporate related
items.
The accounting policies of the segments are the same as those
described in the summary of accounting policies. The Company
evaluates performance based on profit or loss from operations before
corporate allocations, interest, income taxes and non-recurring
gains and losses. Transactions occurring between segments are
recorded on the same basis as transactions with third parties.
Segment information as of June 30, 1999 and 1998 are as follows:
CONESTOGA ENTERPRISES, INC.
Telephone Wireless Other Total
( in thousands )
June 30, 1999:
Operating revenues
from external customers $ 25,581 $ 1,171 $ 7,698 $ 34,450
Intersegment operating
Revenues 1,320 8 127 1,455
Operating profit (loss) 10,911 (3,619) (496) 6,796
Total Assets 108,753 31,243 7,755 147,751
Capital expenditures 5,364 1,245 226 6,835
Depreciation and
Amortization 4,950 1,379 556 6,885
June 30, 1998:
Operating revenues
from external customers $ 24,685 $ 475 $ 5,629 $ 30,789
Intersegment operating
Revenues 480 10 266 756
Operating profit (loss) 9,132 (1,727) (745) 6,660
Total Assets 109,397 22,671 22,547 154,615
Capital expenditures 3,653 11,756 98 15,507
Depreciation and
Amortization 4,904 375 533 5,812
Certain items in the schedule above need to be reconciled to the consolidated
financial statements and are provided in the schedules below:
June 30: 1999 1998
Revenues:
Total revenue for
Reportable segments $ 28,080 $ 25,650
Other Revenues 7,825 5,895
Elimination of
Intersegment revenues (1,455) (756)
Total consolidated revenues $ 34,450 $ 30,789
Total Assets:
Total assets for
Reportable segments $143,293 $ 137,287
Other assets 7,936 23,439
Elimination of
Intersegment receivables (3,478) (6,111)
Total consolidated assets $147,751 $ 154,615
CONESTOGA ENTERPRISES, INC.
Note 4: STOCK OPTION PLAN
The Company adopted a Stock Option Plan for the certain employees and
officers of the Company, which was approved by the shareholders on May 1,
1999. An aggregate of 450,000 shares of authorized but unissued common stock
of the Company were reserved for future issuance under the Plan. The stock
options have expiration terms of ten years. The per share exercise price of
a stock option shall be, at a minimum, equal to the fair value of a share of
common stock on the date that the option is granted.
On June 1, 1999 41,750 options were granted to employees of the Company at
an exercise price of $22.34 per share, with a vesting period of three years.
No shares are exercisable as of June 30, 1999. The remaining contractual life
of the options is 9.9 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has
been recognized. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant dates for awards under
the plan consistent with the method prescribed by FASB Statement No. 123,
there would have been no significant impact to the Company's net income or
earnings per share.
NOTE 5: OTHER
Certain items of the June 30, 1998 consolidated financial statements have
been restated to conform to the June 30, 1999 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
Overview
During the second quarter of 1999, net income was $1.486 million or $0.19
per common share compared to $1.250 million or $0.16 per common share in the
first quarter of 1999 per share data being adjusted for the 3-for-2 stock
split on May 14, 1999. Net income
CONESTOGA ENTERPRISES, INC.
for the second quarter of 1998, which included a extraordinary after tax gain
of $4.508 million, or $.066 per common share from the liquidation of the
Company's interest in a cellular partnership, was $5.641 million or $0.79 per
common share. Excluding the impact of the liquidation of the cellular
partnership interest during the second quarter of 1998, the earnings per
common share for the second quarter of 1999 were 46.2% greater than the second
quarter of 1998. Net income for the first six months of 1999 was $2.736
million or $0.35 per common share compared with $7.702 million or $1.05 per
common share or excluding the impact of the liquidation of the cellular
partnership interest, $3.194 million or $0.41 per common share.
The continued strong operating performance of the Company's local exchange
networks and related markets have provided the Company with the financial
resources to strengthen its position in existing markets and expand into new
ones. The Company's net income was adversely impacted by the operating
expenses of the wireless telecommunications system, known as Personal
Communications Service (PCS) provided by Conestoga Wireless Company (CWC), and
long distance service and competitive local exchange service provided by
Conestoga Communications, Inc. (CCI). Both CWC and CCI increased their
respective customer bases dramatically, during the second quarter or 1999.
RESULTS OF OPERATIONS
REVENUES
0perating Revenues:
Increase
(in thousands)
Second Quarter Ended
June 30 1999 compared to June 30 1998
Local Exchange Service $ 289 10.6%
Long Distance and Access Service 832 9.2%
Wireless Service 317 215.6%
Other 817 22.0%
Total $2,255 14.4%
CONESTOGA ENTERPRISES, INC.
Increase
(in thousands)
Six Months Ended
June 30 1999 compared to June 30 1998
Local Exchange Service $ 743 14.2%
Long Distance and Access Service 1,224 6.7%
Wireless Service 510 170.6%
Other 1,184 16.6%
Total $3,661 11.9%
The increases in operating revenues during the second quarter and the
first six months of 1999 when compared with the same periods of 1998 resulted
from increases in all of the various operating segments. Second quarter 1999
operating revenues are $1.308 million or 7.9% above the first quarter of 1999
operating revenues.
Local Exchange Service
The increase in local service revenue has been primarily from the local
telephone companies, Conestoga Telephone Co. (CTT) and Buffalo Valley
Telephone Co (BVT), as a result of the continuation of growth in access lines
in service over the past few years, and in enhanced features. In addition CCI
generated over $274 thousand of CLEC revenue during the first six months of
1999. More importantly, during the second quarter of 1999, CCI doubled its
customer base and now has over 2,800 CLEC lines in service.
Long Distance and Access Service
Long Distance and Access Service revenues generated by the telephone
companies, CTT & BVT continued to grow due to increases in the minutes of use
in their interstate and intrastate toll networks. The interlata minutes of use
in their combined systems increased 17.9% during the first six months of 1999
when compared with the first six months of 1998. CCI's long distance revenue
during the first six months of 1999 was $3.5 million, 56.7% greater than
during the first six months of 1998. CCI's long distance revenue during the
second quarter of 1999 increased 15.7% over the first quarter of 1999. As of
June 30, 1999 CCI has over 21,000 long distance customers, an increase of
50.5% during the first six months of 1999.
CONESTOGA ENTERPRISES, INC.
During the second quarter alone CCI added 5,000 customers. As of June 30,
1999 CCI is second only to AT&T as the long distance carrier of choice within
the franchised territories of CTT and BVT.
Wireless Service
Wireless Service revenue is generated by the PCS service of CWC and the
paging service of Conestoga Mobile Systems (CMS). CWC began commercial
operation of its PCS system in May 1998. During the first six months of 1999,
CWC generated $545 thousand in PCS revenue. PCS revenue in the second quarter
of 1999 was $340 thousand a 65.9% an increase over the first quarter of 1999.
CWC's telephones in service increased to over 6,000 during the first
six months of 1999 which is a 106.3%. During the second quarter of 1999 the
company added over 2,500 units as a result of a very successful promotional
campaign. CWC had 76 cell sites in service as of June 30, 1999, adding six
additional sites during the first six months of 1999.
Equipment and Other
Equipment and Other revenues include the sale and lease of communications
equipment, including telephones, PBX equipment, pagers and PCS wireless
telephones, by all of the subsidiaries. Billing and collection revenue and
directory advertising revenue are also included as revenue of the telephone
company subsidiaries. All of the subsidiaries posted increases in their
respective equipment sales during the first six months of 1999 when compared
with both the first six months of 1998 and the first quarter of 1999.
Infocore, Inc. generated 48% of the revenue in this category and increased
its revenues 13.5% over the first six months of 1998 and 29.9% over the first
quarter of 1999.
CONESTOGA ENTERPRISES, INC.
EXPENSES:
Operating Expenses
Increase
(in thousands)
Second Quarter Ended
June 30 1999 compared to June 30 1998
Network Operations and
Cost of Sales $ 607 13.0%
Depreciation and Amortization 340 11.1%
Customer Operations 288 9.2%
Corporate Operations 187 12.7%
Taxes, Other than Income 22 4.8%
Total $1,444 11.3%
Six Months Ended
June 30 1999 compared to June 30 1998
Network Operations and
Cost of Sales $1,428 16.9%
Depreciation and Amortization 1,073 18.5%
Customer Operations 514 8.5%
Corporate Operations 416 14.5%
Taxes, Other than Income 94 10.0%
Total $3,525 14.6%
The increases in operating expenses during the second quarter and the first
six months of 1999 when compared with the same periods of 1998 resulted from
increases in all of the various segments. Included in the six months
operating expenses for 1999 are six months of CWC operations compared to two
months during the same period of 1998. Operating expenses were $858 thousand
or 6.4% above the first quarter of 1999 operating expenses.
Network Operations and Cost of Sales
The increase in network operations and cost of sales expenses is directly
related to the start up of commercial operation of the PCS business in the
second quarter of 1998. During the first six months of 1999 CWC's cost of
service and equipment sold was over $1.6 million and its system operating
expenses were $362 thousand. CCI's costs were $238 thousand. Together CTT
and BVT reduced the
CONESTOGA ENTERPRISES, INC.
costs of network operations and sales during the first six months of 1999 by
9.0% compared to the fist six months of 1998. Network operations and cost of
sales expenses for the second quarter of 1999 were 15.3% greater than the
first quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expenses include charges from all of the
subsidiaries. The 18.5% increase during the first six months of 1999 compared
to the same period of 1998 is again a direct result of the timing of the
start of commercial operations of CWC. For the first six months of 1999 CWC
had depreciation expense of $1.3 million compared with only $331 thousand
during the first six months of 1998. The depreciation expenses of the local
exchange carriers CTT and BVT, were approximately the same during the first
six months of 1999 and 1998. This was due to the decrease of the depreciation
rates on certain capital accounts resulting from the implementation of new
depreciation rates in the second quarter of 1999 retroactive to January 1,
1999, based on a depreciation study performed by an outside consulting firm.
Depreciation and amortization expenses for the second quarter of 1999 were
2.7% below the first quarter of 1999.
Customer Operations
All of the Company's subsidiaries incur customer operations expenses. The
increase in the customer operations expenses during the first six months of
1999 is attributable to CCI's increased customer operations expenses for its
long distance and CLEC services some of which were start up costs. CWC's
customer operations expenses increased as a result of greater advertising and
sales expenses for the PCS business. The operations expenses of the telephone
companies were approximately the same during the first six months of 1999 and
1998. Customer operations expenses for the second quarter of 1999 were 8.9%
greater than the first quarter of 1999.
Corporate Operations
Corporate operations expenses include charges from all the Company's
subsidiaries. Most of the 14.5% increase during the first six months of 1999
when compared with the first six months of 1998 is the result of additional
personnel in the human resource
CONESTOGA ENTERPRISES, INC.
department and the management information department. Some additional second
quarter 1999 costs are attributable to the implementation of a new corporate
information and accounting system by the Management information department.
The new system will be in service by the end of the fourth quarter of 1999.
Taxes, other than income
Taxes, other than income, increased primarily due to increases in the
operations of the various business segments.
Other Income (Deductions), Net
The liquidation of the Company's cellular partnership interest in the
second quarter of 1998 primarily caused the change in this item from an income
of $7.2 million during the first six months of 1998 to a loss of $1.3 million
during the same period of 1999. During the first six months of 1998 the
Company realized income from its cellular partnership interest and gains from
the liquidation thereof. In addition during that period of 1998, the Company
realized gains from the sale of equity securities. The Company did not have
such income or gains during the first six months of 1999.
Income Taxes
Increase/(Decrease)
(in thousands)
Second Quarter Ended
June 30 1999 compared to June 30 1998
$ (2,979) -66.8%
Six Months Ended
June 30 1999 compared to June 30 1998
$ (3,476) -56.0%
Income taxes incurred during the first six months of 1998 were higher than
during the same period of 1999 as a result of the extraordinary gain from the
liquidation of the cellular partnership interest in 1998.
CONESTOGA ENTERPRISES, INC.
NET INCOME
Increase/(Decrease)
(in thousands)
Second Quarter Ended
June 30 1999 compared to June 30 1998
$ (4,155) -73.7%
First Six Months Ended
June 30 1999 compared to June 30 1998
$ (4,966) -64.5%
The comparison of net income for the first six months of 1999 and 1998 is
distorted by the extraordinary $4.5 million after tax gain from the
liquidation cellular partnership interest during the second quarter of 1998.
Excluding the gain from the liquidation of this partnership interest net
income during the first six months of 1999 was 14.3% less than during the
first six months of 1998, and during the second quarter of 1999 was 31.2%
greater than during the second quarter of 1998. CWC's operating loss during
the first six months of 1999 was $3.6 million. The net income for the second
quarter of 1999 was $236 thousand or 18.9% higher than the first quarter 1999
net income.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Six Months Ended June 30, 1999 1998
Cash Flows From (Used In):
Operating activities $ 7,349 $ 8,339
Investing activities ( 6,835) (4,570)
Financing activities ( 5,353) 13,060
The Company uses the net cash generated from its operations and from
external financing to fund capital expenditures for network expansion and
modernization, pay dividends, and invest in new businesses. The Company's
sources of funds, primarily from operations and, to the extent necessary, from
readily available external financing arrangements, are sufficient to meet
ongoing
CONESTOGA ENTERPRISES, INC.
operating and investing requirements. We expect that presently foreseeable
capital requirements will be financed primarily through
internally generated funds. Additional debt or equity financing may be needed
to fund additional development activities or to maintain our capital structure
to ensure our financial flexibility.
Cash Flows From Operating Activities
The Company's primary source of funds continues to be cash generated from
operations. Taking into account net income plus the various adjustments for
depreciation and amortization, the cash flows from operating activities in the
first six months of 1999 were $7.3 million. Cash flows from operating
activities for the second quarter of 1999 was over $5.0 million greater than
the first quarter of 1999. Net income for accounting purposes is decreased by
the amortization of the goodwill arising from the acquisitions of BVT and INF,
and the higher depreciation expense arising from the capital investment in
PCS. Amortization and depreciation are non-cash expenses, and consequently a
source of cash that the Company can use for the capital investments necessary
to maintain and upgrade its network and build and develop PCS.
Cash Flows Used in Investing Activities
Capital expenditures are the Company's primary use of cash resources. The
Company's capital expenditures in the first six months of 1999 included $5.4
million for the Company's local exchange operations and $1.2 million for the
continued build-out of its PCS operation. The investment in local exchange
operations was $1.6 million greater during the first six months of 1999 when
compared with the investments made during the first six months of 1998. The
investments are made to support the Company's businesses in order to
facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges and increase the operating efficiency
and productivity of its networks.
Substantial amounts of additional capital will be needed for the remaining
build-out of the PCS network. CWC's budgeted capital requirements for 1999
$10 million. The capital required over the next several years to complete the
build out of its entire PCS network, could exceed $20 million. Additional
funding could come
CONESTOGA ENTERPRISES, INC.
from (1) internal sources, (2) long-term debt, or(3) the issuance of
additional common stock or a combination of the three.
Cash Flows Used in Financing Activities
As in prior years, dividend payments were a significant use of capital
resources. In the first six months of 1999 the Company paid common stock
dividends totaling $2.9 million. During the first six months of 1999, 2,452
shares of preferred stock were redeemed for cash and 19,733 shares of
preferred stock were converted into common shares.
During the first six months of 1999 $2.5 million was paid on principal
on long term debt in accordance with the Company's long term debt obligations.
During the first six months of 1999, the Company did not borrow against
the two lines of credit totaling $15 million. During the first quarter of
1998, the Company borrowed $21 million to finance the capital requirements
for the build-out and development of CWC's wireless PCS network.
In May 1999 the Company amended its articles of incorporation to increase
the number of authorized common shares to 20 million and to reduce the par
value from $5 to $1 per share.
Equity Investments
The Company continues to invest in the future of the
telecommunications industry through the ownership of the publicly traded stock
of other telecommunication companies. During the first six months of 1999,
the market value of the Company's total investment increased.
The market value of the Company's investment stock as of June 30, 1999 was
$3.6 million. Management views this investment as a source of future
liquidity.
The long-term debt obligations 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.
OTHER FACTORS:
PCS SERVICE:
CWC began commercial operations as a provider of wireless telecommunications
services in May 1998. As of June 30, 1999 it had 76 base stations in service
throughout the Reading, Sunbury and Williamsport areas. CWC plans to put an
additional 20 base stations into service during 1999, to augment coverage in
those markets.
CWC holds licenses to provide wireless services known as Personal
Communication Services ("PCS") in the C and D block radio spectrum. 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 holds licenses are Reading, Pottsville, Sunbury,
Williamsport, and Penn State Pennsylvania, covering ten counties in
Pennsylvania. In April 1999 CWC was the successful bidder in the Federal
Communications Commission auction for additional bandwidth in the Basic
Trading Areas in which it already held licenses and for bandwidth in the State
College Basic Trading Area.
Management views participation in PCS as an important part of its future
business. PCS is expected to be a reliable, convenient and inexpensive
vehicle for providing wireless telephone service. It will provide the Company
with an opportunity to expand its business into neighboring territories while
maintaining the Company's current customer base.
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
CONESTOGA ENTERPRISES, INC.
permitted by Chapter 30, CTT and BVT must commit to providing universal
broadband services by 2015. Both companies filed a Chapter 30 Plan in July
1998 and approval is expected in September 1999.
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 addition in March 1998 CTT and BVT
received approval by the Pa. P.U.C. of a petition that has significantly
strengthened the companies'competitive position.
Management believes that competition will continue to bring many new
opportunities. Management has positioned the Company to take advantage of
these opportunities and remains optimistic about the future. CCI has
significantly grown its long distance business both in the CTT and BVT
franchise territories, as well as surrounding areas. In addition CCI's
competitive local exchange business is operational and is offering services in
Bell Atlantic's franchise territory. We have experienced strong growth in this
business segment during the first six months of 1999.
YEAR 2000 ISSUES:
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field
to identify years in computer programs, e.g., 85=1985, and the assumption of
a single century, the 1900s. Any program so created may read, or attempt to
read, "00" as the year 1900. There are two other related issues which could
also lead to incorrect calculations or failure, such as (i) some systems'
programming assigns special meaning to certain dates, such as 9/9/99, and (ii)
the year 2000 is a leap year. Accordingly, some computer hardware and
software, including programs embedded within machinery and parts, will need to
be modified prior to the year 2000 in order to remain functional.
CONESTOGA ENTERPRISES, INC.
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 is 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 addressing the year 2000 problem. It has appointed a
task force to assess the scope of the risk and to bring its applications into
compliance. This has included utilizing outside service organizations.
Conestoga's digital network and all major billing and information systems have
been tested and are ready for the year 2000. Potential problems, which are
out of the Company's control, could present themselves, such as customer-owned
premise equipment that is attached to Conestoga's network. The potential
costs from such third party problems are difficult to estimate. No assurance
can be given that all of the Company's third party systems are or will be Year
2000 compliant. However the Company does not believe that the costs required
to address such problems will have a material adverse effect on the Company's
business, financial condition or results of operations, but it cannot be
certain given the complexities of the interactions of its systems with the
systems of third parties.
Forward-Looking Statements
Information contained in this Management's Discussion and Analysis and
elsewhere in this quarterly report with respect to expected financial results
and future events and trends is forward-looking, based on our estimates and
assumptions and subject to risks and uncertainties. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of our
company and could cause those results to differ materially from those
expressed in the forward-looking statements: (i) changes in economic and
market conditions; (ii) effects of state and federal regulation; (iii) the
impact of new technologies. You should not
CONESTOGA ENTERPRISES, INC.
place undue reliance on these forward-looking statements, which are applicable
only as of the date hereof. We have no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date hereof or to reflect the occurrence of
unanticipated events.
CONESTOGA ENTERPRISES, INC.
PART II. OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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 13, 1999 \s\ Albert H Kramer
Albert H Kramer
President
DATE August 13, 1999 \s\ Donald R Breitenstein
Donald R Breitenstein
Controller
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