SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 0-24064
CONESTOGA ENTERPRISES, INC.
a Pennsylvania Corporation Employer IRS No. 23-2565087
202 East First Street, Birdsboro, Pennsylvania 19508
Registrant's telephone number, including area code (610) 582-8711
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock (par value $5.00 per share)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X____ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate the number of shares outstanding of each of the issuers' classes of
Common Stock, as of the close of the period covered by this report.
Class Outstanding at December 31, 1998
*Common Stock, $5.00 par value 6,975,276
*(adjusted for 3-for-2 stock split declared in January, 1999)
The aggregate market value of the voting stock held by non-affiliates on
February 26, 1999, was $135,936,769. The stock of the Company is traded on
NASDAQ National Market (ticker symbol "CENI"). Therefore, the price is based
on the most recent price at which the Company's stock has been traded.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 1, 1999, are incorporated by reference into
Part III of this report.
PART I
ITEM 1. BUSINESS
Conestoga Enterprises, Inc. (CEI, or the Company) is a Pennsylvania
corporation that is doing business as a holding company owning all of the
outstanding shares of the following operating companies: Conestoga
Telephone and Telegraph Company (CTT); Buffalo Valley Telephone Company (BVT);
Conestoga Communications, Inc. (CCI); Conestoga Mobile Systems, Inc. (CMS);
Conestoga Wireless Company (CWC); and Infocore Inc. (INF). CEI's subsidiary
CTT owns an 11.85% interest in the PenTeleData Limited Partnership I. CEI's
subsidiaries until April, 1998 owned a 70% partnership interest in the Berks
and Reading Area Cellular Enterprises Limited Partnership (BRACE); and until
August, 1997 a 10 % interest in the Lancaster Area Cellular Enterprises (LACE).
CTT and BVT are independent local exchange carriers, which furnish
communication services, mainly local and toll telephone service in their
respective service areas. CTT serves an area of approximately 300 square miles
which includes parts of the counties of Berks, Chester, Lancaster, and
Montgomery, in the Commonwealth of Pennsylvania. BVT serves an area of
approximately 275 square miles in Union and Northumberland Counties in the
Commonwealth of Pennsylvania. Both Companies services' are distributed
through their telephone exchanges and systems of overhead and underground wire
and cables. CTT's and BVT's entire telephone systems are digitally
equipped. The population of CTT's service area is estimated to be 121,900,
with an average annual growth rate of .76%. The population of BVT's service
area is estimated to be 36,900, with an average annual growth rate of .45%.
CTT was incorporated on August 20, 1902 and the original BVT, on
September 13, 1904. CEI acquired BVT on May 31, 1996. Both are incorporated
under the laws of the Commonwealth of Pennsylvania. They are subject to the
jurisdiction of the Pennsylvania Public Utility Commission (PUC), which
franchised and established their geographical service areas. Within their
areas, at the present time, they are not in competition with any other
company in providing local exchange telephone service. They are subject to
the jurisdiction of the Federal Communications Commission (FCC) with respect
to interstate services.
ITEM 1. BUSINESS (Continued)
CEI acquired INF on April 30, 1997. INF is a diversified
telecommunications service company founded in 1981, which designs, installs
and maintains telephone and computer systems and resells local exchange and
toll services.
CWC was formed on March 17, 1995 as a Limited Liability Company owned
60% by CEI and 40% by INF. The limited liability company was merged into a
corporation by the same name on January 1, 1998, with the result that CEI now
owns 100% of the outstanding shares of CWC, the corporation. CWC began
providing digital wireless telecommunication services in Eastern and Central
Pennsylvania in May 1998, pursuant to Federal Communications Commission PCS
licenses.
Northern Communications, Inc. (NCI) was organized in March 1981 as a
non-regulated commercial enterprise operated for the resale of long distance
service. During 1997, NCI's name was changed to Conestoga Communications,
Inc. (CCI) and CCI began operations as a full-service interexchange carrier.
During 1998 CCI began operations as a Competitive Local Exchange Carrier
(CLEC), operating in adjacent Bell of Pennsylvania territories.
PenTeleData Limited Partnership I provides data transmission and
interconnection services, including Internet services.
CEI liquidated its interest in BRACE in April 1998. BRACE was a
limited partner in the Reading SMSA Limited Partnership, which provides
cellular telephone service in the Reading metropolitan area.
CEI sold its interest in LACE in August 1997. LACE was a limited partner
in the Susquehana Cellular Communications Limited Partnership, which provides
cellular telephone service in the Harrisburg, Lancaster and York metropolitan
areas.
CMS is engaged in the business of providing radio paging services in the
Eastern and Central Pennsylvania regions.
CEI's earnings for 1998 were impacted by several events as follows:
1. INF was included in the consolidated financial reporting for the
entire year.
2. During the second quarter of 1998 the Company, through a
subsidiary liquidated its 70% minority partnership interest in BRACE
for $11.1 million, realizing a before tax gain of $7.7 million.
3. CWC began commercial operations in the second quarter of 1998,
after completing its initial phase of plant construction, and for
the year incurred a loss of $3.9 million.
ITEM 1. BUSINESS (Continued)
Percentages of the Company's consolidated operating revenue in
local, long distance, equipment sale and lease, and other services are shown
on the following table:
1998 1997 1996 1995 1994
Local* 18% 18% 19% 19% 19%
Long Distance
and Access 58% 61% 67% 67% 68%
Equipment Sales
and Lease** 15% 13% 8% 9% 8%
Other*** 9% 8% 6% 5% 5%
100% 100% 100% 100% 100%
* CTT and BVT bill for local service on a flat rate basis.
** Includes revenues from CTT and BVT for their nonregulated
sales and lease of telecommunication equipment, CMS nonregulated
sale and lease of pager equipment, INF sale and lease of
telecommunications equipment and CWC sale of PCS equipment.
*** Includes consulting revenue, rent revenues, billing and
collection revenues, directory advertising revenues, net of
uncollectible revenues.
The local, long distance and access services' gross revenues, which are
regulated by the Pa. Public Utility Commission and the Federal Communications
Commission, contribute a greater percentage to net income than the more
competitive nonregulated sale and lease gross revenues.
On December 31, 1998, the Company had 74,780 telephone access lines in
service, of which 18,200 served business customers, as set forth in the
following table:
ACCESS LINES BY COMPANY
YEAR
END CTT BVT
12/31 TOTAL TOTAL
1994 44,176
1995 45,696
1996 48,133 19,086
1997 51,015 20,124
1998 53,829 20,951
CTT had a total of 149 employees as of December 31, 1998, of which
93 were covered by one collective bargaining agreement. BVT had a total of 53
employees; INF had a total of 50; CWC had a total of 28, none of which are
covered by a bargaining agreement.
ITEM 2. PROPERTIES
CTT, BVT, CWC and CMS are engaged in the business of furnishing
communication service. Their properties do not lend themselves to description
by character and location of principal unit because their plant is widely
distributed in their service territories.
As of December 31, 1998, investment in telephone plant in service by CTT
and BVT consisted of the following categories and approximate percentages:
A. Digital Switching equipment 35%;
B. Land and buildings (occupied principally by digital
switching equipment) 4%;
C. Connecting lines not on subscribers' premises (a majority
of which are on or under public highways, streets, and alleys,
and the remainder on or under private property) 56%;
D. General purpose computers 2%;
E. Motor vehicles, other work equipment and furniture and
office equipment 3%.
As of December 31, 1998 investment in plant in service by CWC and CMS
consisted of the following categories and approximate percentages:
A. Land, Buildings, and Towers 36%
B. Transmitters and terminal equipment 57%;
C. Customer premise equipment 1%;
D. Computers and other plant 6%.
CTT and BVT own most of their occupied buildings as well as most of the land
on which the buildings are located. Several of the remote switching center
buildings of CTT and BVT are located on leased properties, as are the towers
of CWC. CTT, BVT and CWC are leasing some office space for corporate purposes.
INF has fixed assets consisting of vehicles and furniture and
fixtures. INF leases office space for its operations.
Standard practices prevailing in the telephone industry are followed by
both CTT and BVT in the construction and maintenance of their plant and
facilities. Both consider their plant and facilities, as a whole, to be in
sound physical and operating condition. Modernization of plant and facilities
is very important in the telecommunications industry. CTT and BVT together
added 8.7 miles of fiber optic cable during 1998 and at the end of 1998 had 448
miles of fiber optic cable in service. Software additions to both of their
digital switches are added each year in order to fulfill the demand for
enhanced service through the digital network.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, there was no litigation that was material, as
defined in Regulation S-K Item 103, pending against the Company and its
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was nothing submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) CEI's Common Stock is trading on the NASDAQ National Market under
the Ticker Symbol "CENI". The high and low sales prices for each quarter of
1998 and 1997 are listed below.
1998 High Low
1st Quarter $32.625 $28.75
2nd Quarter $33.50 $32.00
3rd Quarter $33.625 $31.50
4th Quarter $35.25 $31.00
1997 High Low
1st Quarter $26.75 $23.375
2nd Quarter $26.75 $23.75
3rd Quarter $29.00 $25.25
4th Quarter $30.00 $28.00
(b) Approximate Number of Equity Security Holders.
Approximate Number of
Record Holders (as of
Title of Class December 31, 1998)
Common Stock 1,886 (1)
Preferred Stock 64 (1)
(1) Included in the number of stockholders of record are
shares held in "nominee"or "street" name.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (continued)
(C) Dividends
Payments of common stock dividends will be within the discretion of
the Company's Board of Directors and will depend, among other factors, on
earnings, capital requirements, and the operating and financial condition of
the Company. During the years 1997 and 1998, the total cash dividend paid each
year by the Company was $.81 per share adjusted for the 3-for-2 stock split .
Dividends were paid quarterly throughout the years. Under the most restrictive
covenants of the Company's debt agreement, $19,900,000 of the consolidated
retained earnings is available for payment of cash dividends in 1999.
During the second quarter of 1996 the Company issued Series A
Convertible Preferred Stock. Cumulative dividends of $3.42 per share per annum
are paid semi-annually. During 1997 and 1998 the total cash dividend paid
per share was $3.42 per share.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except shares and per share data)
1998 1997 1996 1995 1994
Selected Income Statement Data:
Operating Revenue $62,833 $56,185 $42,899 $32,553 $31,703
Net Income 10,352 9,314 8,506 6,531 6,294
Basic Earnings per
Common Share* $1.39 $1.25 $1.27 $1.13 $1.09
Diluted Earnings per
Common Share* $1.38 $1.25 $1.27 $1.13 $1.09
Cash Dividends declared
per Common Share* $0.814 $0.806 $0.800 $0.800 $0.740
*adjusted for announced 3-for-2 stock split declared January 1999 and 5%
stock dividend February 1995
Selected Balance Sheet Data:
Net Plant $ 87,385 $70,573 $62,934 $46,140 $45,599
Total Assets 150,609 129,290 119,852 58,595 55,799
Long-term Debt
Less Current Maturities 41,250 23,250 27,218 4,645 5,035
Redeemable Preferred Stock 11,719 12,780 12,780 - -
Stockholders' Equity 74,860 71,553 63,074 42,089 39,908
When comparing 1996 through 1998 with 1995 and before, many of the variances
are a direct result of the merger with BVT effective June, 1996 and INF
effective May, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
In 1998, the Company achieved sound financial results and embarked upon
significant change. Net income rose to $10.352 million or $1.39 per common
share, compared to $9.314 million or $1.25 per common share in 1997, and
$8.506 million or $1.27 per common share in 1996. The Company launched new
businesses, a wireless telecommunications system, known as Personal
Communications Service (PCS), and local telephone service outside of its local
exchange service territories, known as Competitive Local Exchange Carrier
service (CLEC). The Company liquidated its interest in the partnership which
provides cellular telephone services in Berks County, Pennsylvania and
reinvested the proceeds in its wireless telecommunications system. The
continued strong operating performance of the Company's local networks and
related markets provides the Company with the financial resources to meet the
challenges of the rapidly changing telecommunications industry and to
strengthen its position in existing markets and expand into new ones.
Several developments significantly impacted the Company's 1998 financial
results. Income increased as the result of the sale of the cellular
partnership interest. Revenue increased as the result of the inclusion of
Infocore, Inc. ("INF"), acquired in April, 1997, for all of 1998. The new
business start-up and operating expenses of the Company's wireless
telecommunications system and the direct provision of long distance services
by Conestoga Wireless Company (CWC) and Conestoga Communications Inc (CCI),
respectively, negatively impacted earnings.
The Company's increase in revenues and expenses over the 1996 through 1998
period reflects the inclusion of the operations of INF and Buffalo Valley
Telephone Company (BVT) in its consolidate d financial statement. The decline
in operating income for financial accounting purposes during the same period
resulted from the amortization of goodwill associated with the acquisitions of
INF and BVT and the operating expenses of the new wireless and long distance
businesses. The continued build-out and operating costs of the PCS network
will negatively impact the Company's financial results in the near future.
RESULTS OF OPERATIONS:
REVENUES
0perating Revenues:
Increase
(in thousands)
1997-1998 $ 6,648 11.8%
1996-1997 13,286 31.0
The 11.8% increase in Operating Revenues during 1998 resulted primarily
from the acquisition of INF and the commencement of CCI's long distance service
in the third quarter of 1997. INF generated $7.6 million and CCI
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
generated over $4.8 million in revenues during 1998, compared with $4.4
million and $2.4 million, respectively, in 1997. Primarily for the same
reasons and the inclusion of BVT acquired in June 1996, operating revenues
increased 46.5% during the 1996 to 1998 period.
Local Service Revenues
Increase
(in thousands)
1997-1998 $ 1,299 13.1%
1996-1997 1,603 19.3
Local Service Revenues are generated from the provision of local exchange
services, including enhanced services, primarily by the Company's operating
telephone subsidiaries, CTT and BVT. Enhanced services include Caller ID,
Call Waiting and Return Call. These services are regulated by the Pennsylvania
Public Utility Commission (PUC). In September 1998 CTT and BVT received
approval from the PUC to "rebalance" their rates. The impact of this reduced
intrastate access charges as well as some custom calling feature charges and
increased local service rates in certain areas.
The number of CTT's and BVT's access lines in service has increased
substantially in recent years. This has been a major factor in the increase in
CTT's and BVT's local service revenues. During 1998, the Company's telephone
access lines in service increased 3,641, or 5.1%, to a total of 74,780 with
CTT having 53,829 lines and BVT having 20, 951. During the past two years,
the installation by residential customers of more than one access line, largely
as a result of increasing Internet usage, has been a major factor in such
increases. The Company anticipates that the number of access lines in service
will continue to increase for the next few years, largely as a result of
increased Internet usage.
The inclusion of BVT for the full year 1997 had a major impact on the 19.3%
growth in Local Service Revenues in 1997.
Access Service Revenues
Increase
(in thousands)
1997-1998 $ 1,265 5.2%
1996-1997 4,779 24.2
Access Service Revenues consist of payments from end-user subscribers and
from long distance carriers to access the Company's local exchange facilities
to provide long distance services.
Access Service Revenues increased by 30.7% during the 1996 to 1998 period.
The inclusion of BVT for the full year 1997 provided 75% of the increase from
1996 to 1997. Total switched access minutes of use on the Company's networks
increased 17.1 % during 1998. As mentioned above, intrastate access rates
were reduced in 1998. We
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
anticipate that access rates will decline as local competition in the
telecommunications industry becomes more widespread. This could negatively
impact future Access Service Revenues.
Long Distance Service Revenues
Increase
(in thousands)
1997-1998 $ 893 9.3%
1996-1997 704 7.9
Long Distance Service Revenues are derived from customer calls to locations
outside of the customer's local calling area. CTT and BVT provide intralata
toll services for calls outside of the customer's local calling area but
within the same local access and transport area. CCI provides intralata and
interlata toll services, the latter being for calls outside of the customer's
local calling area and local access and transport area.
Long distance revenues increased by 17.9% during the 1996 to 1998 period.
In late 1997, CCI converted to a full service, facilities based interexchange
carrier to offer full long distance service, in order to attract new long
distance customers as well as retain its existing customer base. As a result,
its long distance revenues almost doubled to $4.9 million in 1998 and the
number of long distance customers increased by 59% to over 17,000.
Long distance toll service is becoming increasingly competitive. The
Pennsylvania Public Utility Commission adopted a regulation, effective January
1, 1998, requiring intralata toll competition within the Commonwealth of
Pennsylvania, which decreased the intralata toll revenues from the local
exchange carriers.
Equipment Sales and Lease Revenues
Increase
(in thousands)
1997-1998 $ 2,240 30.5%
1996-1997 4,142 129.6
Equipment Sales and Lease Revenues include: (1) sale and lease of
telephone equipment by CTT and BVT ; (2) sale and lease of pager equipment by
CMS; (3) sale of telecommunication equipment by INF; and (4) sale of PCS
wireless telephone equipment by CWC. Equipment Sales and Lease Revenues
increased by 200% during the 1996 to 1998 period. The inclusion of the
Equipment Sales and Lease Revenues of BVT and INF for the full years starting
in 1997 and 1998, respectively, accounted for a large portion of the revenue
increase. Modest growth was experienced during 1997 and 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Other Revenues
Increase
(in thousands)
1997-1998 $ 951 19.8%
1996-1997 2,058 74.7
Other Revenues, (net of uncollectibles) include CTT and BVT revenues for
directory advertising, rents, and billing and collection, and INF revenues for
facility management and consulting services. Uncollectible accounts of all
subsidiaries of the Company are netted against Other Revenues.
Other Revenues increased 19.8% during 1998, largely as a result of the
inclusion of INF for the full twelve months of 1998. Other Revenues increased
by 109.2% during the 1996 to 1998 period. Billing and collection revenues of
both CTT and BVT are non-growth items, while directory advertising revenues
continue to increase. Uncollectible revenues were about .5% of total operating
revenues in 1998, compared with .6% in 1997.
EXPENSES
Operating Expenses
Increase
(in thousands)
1997-1998 $ 9,630 23.7%
1996-1997 11,798 40.9
The 23.7% increase in Operating Expenses in 1998 resulted from the
acquisition of INF during the second quarter of 1997, and the business
development costs of CCI and CWC. INF's operating expenses in 1998 were $8.3
million, of which $907 thousand was amortization of goodwill, compared with
$5.2 million in 1997. CCI and CWC were both new ventures which required
intensive advertising and marketing campaigns. CCI's expenses were $5.1
million and CWC's $5.7 million. The operating expenses of BVT also heavily
impacted the 74.3% increase in operating expenses during the 1996 to1998
period.
Plant Operations and Cost of Sales Expenses
Increase
(in thousands)
1997-1998 $ 728 4.8%
1996-1997 5,574 58.0%
Plant Operations and Cost of Sales Expenses include outside plant
expenses, digital switching expenses, engineering
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
expenses, cost of sales and other related administrative expenses. The
expenses of CTT and BVT, the local exchange carriers, are primarily regulated
expenses for network and outside plant maintenance. Cost of sales expenses
are incurred by CTT, BVT, CWC and INF mostly for equipment sales and leases.
Plant Operations and Cost of Sales Expenses increased by 65.6 % during the
1996 to 1998 period primarily as a result of the acquisitions of BVT and INF
and the business development expenses of CCI and CWC.
Depreciation and Amortization Expenses
Increase
(in thousands)
1997-1998 $ 2,061 19.8%
1996-1997 2,444 30.8
The increase in Depreciation and Amortization Expenses in 1998, was caused
by the amortization of goodwill resulting from the acquisition of INF and, to
a much greater extent, the depreciation of the capitalized costs of CWC's
wireless system. The increase in Depreciation and Amortization Expenses during
the 1996 through 1998 period also reflects the depreciation expenses and
goodwill amortization expenses of BVT. Depreciation expense for 1998,
computed by the straight-line method, totaled $10.6 million and equated to a
7.40% effective composite rate, compared with 7.08% for 1997.
Customer Operations Expenses
Increase
(in thousands)
1997-1998 $ 5,780 67.4%
1996-1997 2,420 39.3
Customer Operations Expenses, including expenses from all of the Company's
subsidiaries, consists of cost of services, customer services for ordering and
billing, and marketing and advertising expenses. INF contributed $3.0 million,
and CCI contributed $2.8 million, to the increase in Customer Operations
Expenses in 1998. The acquisitions of BVT and INF contributed substantially
to the 133.3% increase in Customer Operations Expenses in the 1996 through
1998 period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Corporate Operations Expenses
Increase
(in thousands)
1997-1998 $ 1,019 22.1%
1996-1997 1,144 33.0
Corporate Operations Expenses include regulatory, executive, and insurance
expenses and professional fees, such as fees for legal and accounting
services. These expenses include regulated expenses of CTT and BVT and
expenses of CEI and the other subsidiaries. The increases in Corporate
Operations Expenses in 1998 resulted from the inclusion of a full year of
INF's corporate operations expenses in 1998 and expenses incurred by CCI and
CWC in developing their businesses, especially expenses and fees related to
the build-out of CWC's PCS system. Corporate Operations Expenses increased
62.3% during the 1996 through 1998 period .
Taxes Other than Income Taxes
Increase
(in thousands)
1997-1998 $ 42 2.2%
1996-1997 216 13.0
Taxes Other Than Income Taxes consist primarily of gross receipts,
property, and capital stock taxes. The increase of 15.5% for the 1996 through
1998 period was primarily due to the inclusion of BVT after its acquisition
in May, 1996.
Other Income/Expenses (net)
Increase
(in thousands)
1997-1998 $ 4,833 315.1%
1996-1997 1,292 533.9
Other Income/Expenses (net) consist primarily of interest and dividend
income, interest expense, income from unconsolidated partnership interests,
and gains from the sale of unconsolidated partnership interests or assets.
Interest expense increased 47.9% during 1998, primarily because the
Company borrowed $21.0 million in long term debt in February, 1998, to finance
the build-out of its PCS wireless telephone network. The 130.1% increase in
interest expense during the 1996 through 1998 period also includes interest
paid on $22.0 million of long term debt incurred by the Company to finance a
portion of the acquisition of BVT in 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Company drew on a bank line of credit for interim financing in 1996,
but did not draw thereon in 1997 and 1998. No balances remained on its bank
lines of credit at the end of any year during the 1996 through 1998 period.
In February, 1997, CTT obtained a $5.0 million unsecured term loan from a
bank at an interest rate of 6.89% to refinance two 10-year unsecured term
loans with interest rates at prime with ceilings of 8.5% and 8.4%,
respectively. In June, 1997, BVT retired, without early payment penalty, a
$1.4 million indebtedness with an interest rate of 8.5%.
During 1998, the Berks and Reading Area Cellular Enterprises, limited
partnership ("BRACE"), in which subsidiaries of the Company held a 70%
interest, sold its 39% limited partnership interest in the Reading SMSA
Limited Partnership. The Reading SMSA Limited Partnership provides cellular
telephone service in the Reading metropolitan area. The Company received
$11.1 million and realized a $7.7 million pretax gain upon the liquidation of
BRACE after the sale. In 1997, the Company sold its interest in Lancaster
Area Cellular Enterprises (LACE) for $2.8 million and realized a pretax gain of
$1.9 million. LACE, through the Susquehanna Cellular Communications Limited
Partnership, provides cellular telephone service in the Lancaster SMSA. The
Company recognized that CWC would be in direct competition with BRACE and LACE
and sold its interests therein to raise capital to finance CWC's build-out of
the PCS network. CTT owns an 11.85% limited partnership interest in the
PenTeleData, L.P., which provides Internet access.
BRACE's income for the relevant period was: $493 thousand in 1998; $1.4
million in 1997; and $1.1 million in 1996. LACE's income was $158 thousand
in 1997 and $222 thousand in 1996.
Income Taxes
Income taxes increased 10.3% during 1998. The income tax liability from
the gain on the sale of the BRACE was partially offset by CWC's losses during
its first year of operations. Income taxes increased 46.7% over the 1996 to
1998 period. The federal and state income tax rates over the period remained
unchanged.
NET INCOME
Increase
(in thousands)
1997-1998 $ 1,038 11.1%
1996-1997 808 9.5
1998 Net Income was $10.352 million, an increase as provided above. The
$7.7 million pre-tax gain from the liquidation of BRACE after the sale of its
interest in the Reading SMSA Limited Partnership was the primary cause of the
increase in the Company's 1998 earnings. However, the net income of CTT and
BVT, the local exchange carriers, increased by 14% to $8.3 million and 178 %
to $1.2 million, respectively, primarily due to excellent growth in access
lines and minutes of use on their networks.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
As projected, 1998 net income was negatively impacted by the operating
losses of CWC and CCI, and the goodwill amortization associated with the
acquisitions of BVT and INF. Although net income increased 21.7% during the
1996 through 1998 period, the Company anticipates that net income will be
negatively impacted in the near future as a result of (i) the expenses
associated with CWC's build-out and development of the wireless PCS business,
(ii) the continued amortization of goodwill for BVT and INF and (iii) the loss
of the income of BRACE and LACE.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Years Ended December 31, 1998 1997 1996
Cash Flows From (Used In):
Operating activities $14,253 $17,427 $13,380
Investing activities (17,500) (8,665) (26,666)
Financing activities 9,133 (8,202) 14,572
The Company uses the net cash generated from its operations and from
external financing to fund capital expenditures for network expansion and
modernization, 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 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.
On December 31, 1998, the Company had commitments totaling $2.9 million,
including commitments to purchase equipment and materials to continue the
upgrade of its telecommunications plant base and to build the PCS network.
The Company plans to finance its projected capital budget requirements for
1999 totaling $20.7 million from internally generated funds, and possibly
some short term financing.
Cash Flows From Operating Activities
Our primary source of funds continues to be cash generated from operations.
Taking into account net income plus the various adjustments for depreciation
and amortization and eliminating the gain on sale of investment assets, the
cash flows from operating activities in 1998 were $14 million. Although 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 expenses 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 1998 included $7.5 million for the
Company's local exchange operations and $20.8 million for the build-out and
development of its PCS operation. The investment in local exchange operations
was consistent with the investments made in 1996 and 1997. The investment in
the PCS operation was $20.8 million in 1998 compared to $7.2 million in 1997
and $39,000 in 1996. 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. The investment in the
PCS system is treated by the Company as an investment in a new business.
During 1998, the Company received proceeds in excess of $11 million from
the liquidation of its partnership interest in BRACE and in 1997 received
approximately $2.8 million from the sale of its partnership interest in LACE.
In 1998, it also received proceeds totaling $220,000 from the sale of equity
securities.
Substantial amounts of additional capital will be needed for the
remaining build-out of the PCS network. CWC's capital requirements over the
next several years to complete the build out of its entire PCS network could
exceed $25 million. Additional financing could come from (1) internal
sources, (2) long term debt, (3) common stock issue, or a combination of the
three.
Cash Flows Used in Financing Activities
As in prior years, dividend payments were a significant use of cash. In
1998 the Company paid dividends totaling $6.3 million and expended $2.7 million
to purchase common stock for its treasury and $647,000 to redeem preferred
stock.
In 1998, the Company borrowed $21 million to finance the capital
requirements for the build-out and develop of CWC's wireless PCS network. At
the end of 1998, the Company also had two unused bank lines of credit in the
amounts of $5 million and $10 million, respectively.
In January, 1998, the Company in a private transaction purchased 86,074
shares of common stock at $31.00 per share. In September, 1996 the Company
undertook to repurchase up to one hundred thousand shares of common stock on
the open market or in negotiated transactions at a maximum price of $24.00 per
share depending on market conditions and other factors. As of June 30, 1997,
the close of the offer, the Company had purchased 91,273 common shares at an
average price of $23.632 per share. Some of these shares have been reissued
under the Company's Dividend Reinvestment Plan and Employee Stock Purchase
Plan. As of December 31, 1998, a balance of 187,675 of these shares, as
adjusted for the 3 for 2 split, remained in Treasury.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Equity Investments
The Company has continued to invest in the future of the
telecommunications industry through the ownership of the publicly traded stock
of other telecommunication companies. During 1998, the Company's total
investment in this stock increased due to unrealized appreciation. The current
market value of the Company's investment stock is $3.3 million. Management
views this investment as a source of future liquidity. In February, 1998, the
Company sold some of its investment stock for $220,000.
OTHER FACTORS
Personal Communication Services (PCS)
CWC began commercial operations as a provider of wireless
telecommunications services in May, 1998. By the end of the year it had 70
base stations in service throughout the Reading, Sunbury and Williamsport
areas. CWC plans to put an additional 27 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 radio spectrum in the D and F blocks. 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,
and Williamsport, Pennsylvania, covering nine counties in Pennsylvania.
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.
The development of the PCS network and business is subject to the risks
and delays associated with the design and construction of the wireless system
and the commencement of a new business. The Company has already invested
almost $28 million in the PCS network and business and could invest an
additional $25 million over the next five years. The Company has projected
PCS operating losses for the near future. The capital cost of the PCS system,
the depreciation expense of the PCS assets, and the projected PCS operating
losses will significantly impact the Company's earnings.
Effects of Substantial Indebtedness and Preferred Stock on Future Operations
At December 31, 1998, the Company had approximately $44.3 million of long
term debt outstanding and approximately $11.7 million of redeemable preferred
stock, compared to approximately $74.9 million of common equity. This
resulted in a ratio of 43% debt and preferred stock to 57% equity. At
December 31, 1997 the ratio was 35% debt to 65% equity. The increased debt
ratio reflects the debt incurred in February, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Although a higher level of debt and preferred stock is not unusual in
the telecommunications industry, the additional debt and preferred stock
may have important consequences on the Company's future operations,
including: (i) the Company will incur additional interest expense and
significant principal repayment obligations; (ii) the Company is subject to
significant unscheduled preferred stock redemption obligations; (iii) the
Company's increased leverage may make it more vulnerable to economic
downturns and reduce its flexibility in responding to changing business and
economic conditions; and (iv) payment of dividends on the Company's common
shares may be restricted by the level of financial resources needed to
service the Company's additional debt and preferred stock.
Regulated Industry
CTT, and BVT are subject to a rate making process regulated jointly by
the Pennsylvania Public Utility Commission (PUC) and the Federal Communications
Commission (FCC) 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 for the state jurisdiction. 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 producer 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 Chapter 30 Plans in July 1998 and
approval is expected in June 1999.
The telecommunication industry continues to undergo fundamental changes,
which may have a significant impact on financial performance. The Federal
Telecommunications Act of 1996, 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 Pennsylvania PUC of a petition that has significantly
strengthened the companies' competitive position.
Management believes that competition will continue to 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. During 1998 CCI significantly grew
its long distance business both in the CTT and BVT franchise territories, as
well a surrounding areas. In addition CCI's competitive local telephone
business became operational in 1998 and began offering service in Bell
Atlantic's franchise territory. Strong growth in this business segment is
anticipated in 1999.
Accounting for the Effects of Certain Types of Regulation ("SFAS 71")
The Company follows the accounting statement which recognizes the
economic effect of rate regulation by recording costs and return on
investment as such amounts are recovered through regulatory authorized rates.
As of December 31, 1998, the Company had no regulated assets but had regulated
liabilities totaling $940 thousand. The Company currently expects to follow
the accounting practices prescribed by SFAS 71 in the foreseeable future, but,
if the Company discontinued this practice, the effect of writing off any
regulatory assets and liabilities would not be material to the Company's
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Year 2000 Potential Problems
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.
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 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 should be 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.
Effects of Inflation
It is the opinion of management that the effects of inflation on
operating revenues and expenses over the past three years have been
immaterial. Management anticipates that this trend will continue in the near
future.
Forward-Looking Statements
Information contained above in this Management's Discussion and Analysis
and elsewhere in this Annual 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; and (iii) the impact
of new technologies. You should not 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.
ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company does not invests funds in derivative financial instruments
or other market risk sensitive instruments for any purpose. Furthermore,
management believes that the market risk of its fixed-rate debt is
immaterial to the Company's financial statement as a whole.
Part II
Item 8. Financial Statements and
Supplementary Data
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Conestoga Enterprises, Inc.
Birdsboro, Pennsylvania
We have audited the accompanying consolidated balance sheets of Conestoga
Enterprises, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, common stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conestoga
Enterprises, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
BEARD & COMPANY, INC.
Reading, Pennsylvania
January 20, 1999, except for Note 2,
as to which the date is January 26, 1999
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 1997
(In Thousands, Except Shares And Per Share Data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,403 $ 2,517
Accounts receivable, including
unbilled revenue 7,840 6,895
Inventories, at average cost 1,520 1,104
Prepaid taxes 332 -
Prepaid expenses 127 214
Total current assets 18,222 10,730
INVESTMENTS AND OTHER ASSETS
Cost in excess of net assets of
businesses acquired,less amortization
1998 $ 3,994; 1997 $ 2,144 37,626 39,506
Investments in partnerships 415 2,979
Investments in equity securities 3,306 2,308
Prepaid pension costs 2,730 2,423
Other 925 772
45,002 47,988
PLANT
In service 157,414 126,337
Under construction 4,991 10,778
162,405 137,115
Less accumulated depreciation 75,020 66,543
87,385 70,572
$ 150,609 $ 129,290
See Notes to Consolidated Financial Statements.
December 31, 1998 1997
(In Thousands, Except Shares And Per Share Data)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of
long-term debt $ 3,000 $ 3,000
Accounts payable 5,777 4,858
Accrued expenses:
Payroll and vacation pay 1,065 1,070
Taxes - 667
Other 1,019 860
Total current liabilities 10,861 10,455
LONG-TERM LIABILITIES
Long-term debt, less current
maturities 41,250 23,250
Accrued postretirement cost 960 749
Other 934 987
43,144 24,986
DEFERRED INCOME TAXES 10,025 9,516
COMMITMENTS
REDEEMABLE PREFERRED STOCK, par value $ 65
per share; authorized 900,000 shares;
issued and outstanding 1998 180,289
shares; 1997 196,618 shares;
$ 3.42 cumulative dividends 11,719 12,780
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $ 5 per share;
authorized 10,000,000 shares; issued
1998 7,162,951 shares; 1997 4,775,301
shares 35,814 23,876
Additional paid-in capital 13,018 24,742
Retained earnings 27,972 23,958
Accumulated other comprehensive
income 1,523 762
Less cost of treasury stock 1998
187,675 shares; 1997 75,536 shares (3,467) (1,785)
74,860 71,553
$ 150,609 $ 129,290
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Years Ended December 31, 1998 1997 1996
(In Thousands, Except Per Share Data)
Operating revenues:
Local service $ 11,191 $ 9,892 $ 8,289
Access service 25,763 24,498 19,719
Long distance service 10,535 9,642 8,938
Equipment sales and lease 9,579 7,339 3,197
Other 5,765 4,814 2,756
62,833 56,185 42,899
Operating expenses:
Plant operations and
Cost of Sales 15,907 15,179 9,605
Depreciation and amortization 12,448 10,387 7,943
Customer operations 14,352 8,572 6,152
Corporate operations 5,634 4,615 3,471
Taxes other than income 1,922 1,880 1,664
50,263 40,633 28,835
Operating income 12,570 15,552 14,064
Other income (expense), net:
Interest expense (2,984) (2,017) (1,297)
Income from unconsolidated
partnership interests 424 1,345 1,256
Gain on sale of unconsolidated partnership
interests 7,740 1,890 -
Interest and dividend income 826 307 277
Other, net 361 9 6
6,367 1,534 242
Income before income taxes 18,937 17,086 14,306
Income taxes 8,585 7,782 5,853
Income before minority
interest 10,352 9,304 8,453
Minority interest in net loss
of subsidiary - 10 53
Net income $ 10,352 $ 9,314 $ 8,506
Basic earnings per share $ 1.39 $ 1.25 $ 1.27
Diluted earnings per share $ 1.38 $ 1.25 $ 1.27
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1998, 1997 and 1996
Additional
Common Stock Paid-In
Shares Amount Capital
(In Thousands, Except Shares And Per Share Data)
Balance, December 31, 1995 3,848,922 $ 19,244 $ 4,769
Comprehensive income:
Net income - - -
Change in net unrealized gains (losses)
on securities - - -
Total comprehensive income
Common stock dividends
($ 0.80 per share) - - -
Preferred stock dividends - - -
Common stock issued for
business acquired 719,578 3,598 15,651
Purchase of common stock
for the treasury - - -
Balance, December 31, 1996 4,568,500 22,842 20,420
Comprehensive income:
Net income - - -
Change in net unrealized gains
(losses) on securities - - -
Total comprehensive income
Common stock dividends
($ 0.81 per share) - - -
Preferred stock dividends - - -
Issuance of stock under
employee stock purchase plan - - 10
Issuance of stock under
dividend reinvestment plan 6,878 34 189
Common stock issued for
business acquired 199,923 1,000 4,123
Purchase of common stock
for the treasury - - -
Balance, December 31, 1997 4,775,301 23,876 24,742
Comprehensive income:
Net income - - -
Change in net unrealized
gains (losses) on securities,
net of reclassification adjustment - - -
Total comprehensive income
Common stock dividends
($ 0.81 per share) - - -
Preferred stock dividends - - -
Issuance of stock under
employee stock purchase plan - - 13
Issuance of stock under
dividend reinvestment plan - - 120
Conversion of preferred shares - - 81
Purchase of common stock for
the treasury - - -
3-for-2 stock split in the form
of a 50% stock dividend 2,387,650 11,938 (11,938)
Balance, December 31, 1998 7,162,951 $ 35,814 $ 13,018
See Notes to Consolidated Financial Statements.
Accumulated
Other
Retained Comprehensive Treasury Stock
Earnings Income Shares Amount Total
$ 17,727 $ 348 - $ - $ 42,088
8,506 - - - 8,506
- (32) - - (32)
8,474
(5,033) - - - (5,033)
(336) - - - (336)
- - - - 19,249
- - (58,400) (1,369) (1,369)
20,864 316 (58,400) (1,369) 63,073
9,314 - - - 9,314
- 446 - - 446
9,760
(5,548) - - - (5,548)
(672) - - - (672)
- - 3,531 83 93
- - 12,206 289 512
- - - - 5,123
- - (32,873) (788) (788)
23,958 762 (75,536 ) (1,785) 71,553
10,352 - - - 10,352
- 761 - - 761
11,113
(5,675) - - - (5,675)
(663) - - - (663)
- - 3,565 96 109
- - 20,901 557 677
- - 12,027 333 414
- - (86,074) (2,668) (2,668)
- - (62,558) - -
$ 27,972 $ 1,523 (187,675) $ (3,467) $ 74,860
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1998 1997 1996
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,352 $ 9,314 $ 8,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 12,448 10,387 7,943
Income from unconsolidated partnership
interests (424) (1,345) (1,256)
Gain on sale of unconsolidated partnership
Interest (7,740) (1,890) -
Gain on sale of nonregulated
property (63) (181) -
Gain on sale of equity
securities (73) - -
Minority interest in loss of
subsidiary - (10) (53)
Change in assets and liabilities, net of
effects from acquisition of business:
(Increase) decrease in:
Accounts receivable (945) 1,000 (406)
Materials and supplies (416) (71) 377
Prepaid expenses (245) 15 497
Prepaid pension costs (307) (274) (165)
Other assets (220) 304 (565)
Increase (decrease) in:
Accounts payable 2,116 (890) (1,529)
Accrued expenses and other current
Liabilities (513) 1,151 (36)
Other liabilities 158 306 405
Deferred income taxes 125 (389) (338)
Net cash provided by operating
activities 14,253 17,427 13,380
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant, net of
removal costs and salvage
from retirements (28,594) (14,424) (7,354)
Proceeds on sale of
nonregulated property 146 734 -
Capital investments in
unconsolidated partnership
interests (356) (237) -
Capital distributions from
unconsolidated partnership
interests - 1,091 432
Proceeds from sale of
unconsolidated partnership
interest 11,084 2,779 -
Proceeds from sale of
equity securities 220 - -
Proceeds from surrender of
life insurance policies - 427 -
Acquisition of business,
net of cash and cash
equivalents acquir - 965 (19,744)
Net cash used in
investing activities (17,500) (8,665) (26,666)
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Years Ended December 31, 1998 1997 1996
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term
borrowings $ 21,000 $ 5,000 $ 22,000
Principal payments on
long-term debt (3,000) (6,799) (390)
Borrowings on line of
credit - - 900
Principal payments on
line of credit - - (1,400)
Proceeds from issuance
of stock under the employee
stock purchase plan 109 93 -
Proceeds from issuance
of stock under the dividend
reinvestment plan 677 512 -
Common and preferred dividends
paid (6,338) (6,220) (5,369)
Purchase of common stock
for the treasury (2,668) (788) (1,369)
Redemption of preferred stock (647) - -
Minority interest investment
in subsidiary - - 200
Net cash provided by (used in)
financing activities 9,133 (8,202) 14,572
Increase in cash and
cash equivalents 5,886 560 1,286
Cash and cash equivalents:
Beginning 2,517 1,957 671
Ending $ 8,403 $ 2,517 $ 1,957
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 2,826 $ 1,980 $ 1,297
Income taxes $ 9,591 $ 7,544 $ 6,066
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of business:
Working capital acquired, net of cash and
cash equivalents 1997 $ 967;
1996 $ 5,459 $ - $ 314 $ 977
Plant and other assets
acquired - 1,098 16,924
Cost in excess of net
assets acquired - 2,746 38,904
Long-term liabilities
assumed - - (5,033)
Redeemable preferred
stock issued - - (12,780)
Common stock issued - (5,123) (19,248)
$ - $ (965) $ 19,744
See Notes to Consolidated Financial Statements.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and nature of operations:
The consolidated financial statements include the accounts of Conestoga
Enterprises, Inc. (CEI) and its subsidiaries. CEI's wholly-owned operating
subsidiaries include:
The Conestoga Telephone and Telegraph Company (CTT) and Buffalo Valley
Telephone Company (BVT), which are independent local exchange carriers
providing both regulated and nonregulated communication services.
Conestoga Communications, Inc. (CCI), which provides long distance
services.
Conestoga Mobile Systems, Inc. (CMS), which provides paging
communication services.
Conestoga Wireless Company (CWC), which provides personal communication
services (PCS).
Infocore, Inc. (INF), which provides communication consulting services
including the design and installation of communication systems.
The Companies are collectively referred to herein as the Company. All
significant intercompany transactions have been eliminated in
consolidation.
The Company operates predominately in the communications and related
services industry providing services to customers in eastern and central
Pennsylvania.
The Company's local exchange carriers are subject to rate regulations by
the Federal Communications Commission (FCC) and the Pennsylvania Public
Utility Commission (PUC) and, accordingly, follow the accounting
prescribed by Statement of Financial Accounting Standards No. 71,
"Accounting for Certain Types of Regulation".
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue recognition:
The Company's revenues are recognized when earned. Access service and
long distance service revenues are derived from access charges, toll
rates and settlement arrangements. The Company records retroactive
settlements as revenues in the year the settlements become known in
accordance with industry practice.
Cash and cash equivalents:
For purposes of reporting the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. At times,
cash balances exceed F.D.I.C. limits.
Cost in excess of net assets of busines acquired:
The excess of the acquisition cost over the net assets of the
businesses acquired are being amortized by the straight-line method
over 3 to 40 years. Management continually reviews the appropriateness
of the carrying value of the excess acquisition cost and the related
amortization period.
Investments:
All marketable equity securities are classified as available for sale.
These securities are recorded at fair value based on quoted market
prices, and unrealized gains, net of taxes, are reported in other
comprehensive income. Gains and losses are determined using the
specific-identification method.
The Company is accounting for its investments in partnerships by the
equity method.
Plant and depreciation:
Plant is recorded at cost. Depreciation is computed by the straight-
line method. Rates used for calculating depreciation are based on the
economic useful lives of the assets. The effective composite
depreciation rates for the years 1998, 1997 and 1996 were 7.40%, 7.08%
and 6.93% respectively.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Plant and depreciation (continued):
Telephone plant:
Normal renewals and betterments of units of property are charged to
plant accounts, while ordinary repairs and replacements of items
considered to be less than units of property are charged to plant
specific expenses. When telephone plant is replaced or retired, the
cost of the plant retired, plus removal costs, less salvage is charged
to accumulated depreciation. Accordingly, no gain or loss is
recognized in connection with ordinary retirements.
Other property:
When other property is retired or otherwise disposed of, the property's
cost and accumulated depreciation are removed from the plant accounts
and any gain or loss on disposition is recognized in income.
Income taxes:
Deferred taxes are provided on the liability method whereby deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis and net
operating loss carryforwards. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
Employee benefits:
Pension plans:
All eligible employees of CTT and BVT are covered under noncontributory
defined benefit pension plans. The plans provide benefits based on
years of service and employee compensation. The Company's funding
policy is to make contributions in compliance with applicable
regulations.
Postretirement benefit plan:
A subsidiary of the Company sponsors a postretirement health care
plan for substantially all of its salaried employees and their spouses.
The plan is contributory, with retirees contributing 50% of the
premiums. The plan is unfunded. The Company's share of the estimated
costs that will be paid after retirement is generally being accrued by
charges to expense over the employees' active service periods to the
dates they are fully eligible for benefits, except that the Company's
unfunded cost that existed at January 1, 1993 is being accrued
primarily under the straight-line method that will result in full
accrual by December 31, 2012.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee benefits (continued):
401(k) savings plans:
The Company has contributory 401(k) savings plans for substantially all
employees. The Company contributes matching amounts for participating
employees in accordance with the provisions of the plans. The Company
contributed approximately $ 404,000, $ 312,000 and $ 230,000 to the
plans for 1998, 1997 and 1996 respectively.
Deferred compensation agreement:
The Company has a deferred compensation agreement with an officer which
provides benefits payable to him upon retirement. The estimated
liability under the agreement is being accrued over the expected
remaining years of employment.
Reclassification:
Certain items on the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 financial statement presentation.
Such reclassification had no impact on net income.
2
SUBSEQUENT EVENT - STOCK SPLIT
On January 26, 1999, the Company's Board of Directors authorized a 3-for-2
stock split effected in the form of a 50% stock dividend to be distributed
on May 14, 1999 to stockholders of record on April 15, 1999. Accordingly,
stockholders' equity was restated to give retroactive recognition to the
stock split by increasing common stock by 2,387,650 shares, reclassifying
$ 11,938,250 from additional paid-in capital to common stock, representing
the par value of the additional shares, and increasing treasury stock by
62,558 shares as of December 31, 1998. References in the consolidated
financial statements and the notes thereto with regard to per share and
related data have been restated to give effect to this transaction.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PURCHASE 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 INF shareholders as consideration for all outstanding shares of INF
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 fair value of net assets acquired of $ 2,746,000 is being amortized
over 3 years using the straight-line method.
On May 31, 1996, the Company acquired all of the outstanding shares of
Buffalo Valley Telephone Company (BVT), an independent local exchange
carrier providing regulated and nonregulated communication services in
central Pennsylvania. The consideration for the stock of BVT totaled
approximately $ 57 million which included 196,618 shares of $ 3.42 Series
A Preferred Stock, 719,578 shares of common stock and approximately $ 25
million in cash. The acquisition was accounted for as a purchase, and the
results of operations of BVT since the date of acquisition are included in
the consolidated financial statements. The excess of the purchase price
over the book value of the net assets acquired of approximately $ 39
million is being amortized over 40 years using the straight-line method.
Unaudited pro forma consolidated results of operations for the year ended
December 31, 1996 as though BVT has been acquired at the beginning of the
period follows (in thousands, except per share amounts):
Operating revenues $ 47,885
Operating income 15,373
Net income available for common stock 7,801
Basic and diluted earnings per share $ 1.14
The previous amounts reflect adjustments for amortization of goodwill,
interest on debt issued to fund the cash portion of the acquisition and
related tax benefits, removal of expenses related to the acquisition, net
of taxes and preferred stock dividend requirements.
Pro forma results of operations of the Infocore acquisition have not been
presented because the pro forma effect of the acquisition was not
significant.
The pro forma consolidated results of operations are provided for
comparative purposes only. They are based upon historical information
which has been restated to reflect the purchase acquisition and do not
necessarily reflect the actual results that would have occurred nor are
they necessarily indicative of future results of operations of the
combined companies.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
INVESTMENTS IN EQUITY SECURITIES
The following is a summary of the Company's investments in equity
securities:
December 31,
1998 1997
(In Thousands)
Marketable equity securities:
Aggregate cost $ 998 $ 1,142
Gross unrealized gains 2,308 1,166
Fair value $ 3,306 $ 2,308
The Company's investments in equity securities are concentrated in the
telecommunications industry.
Proceeds and gross gains from the sale of equity securities were $ 220,000
and $ 73,000 respectively, for the year ended December 31, 1998. There
were no sales of equity securities in 1997 and 1996.
5
INVESTMENTS IN PARTNERSHIPS
The following is a summary of the Company's investments in partnerships:
December 31,
1998 1997
(In Thousands)
PenTeleData, 11.85% interest $ 415 $ 128
Berks and Reading Area Cellular
Enterprises (BRACE), 70% interest - 2,851
$ 415 $ 2,979
PenTeleData is a limited partnership which provides Internet access services
in central and eastern Pennsylvania. PenTeleData is reported on the equity
method in accordance with Statement of Position 78-9.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
INVESTMENTS IN PARTNERSHIPS (CONTINUED)
In May 1998, BRACE sold its partnership interest in Reading SMSA for
$ 15,835,000, of which the Company received $ 11,084,000 and realized a
pretax gain of $ 7,740,000. BRACE's sole activity was a 39% limited
partnership interest in the Reading SMSA Limited Partnership, which
provides cellular telephone service to the Reading metropolitan area.
BRACE was reported on the equity method since the Company effectively has
a 27.3% interest in the operating partnership.
In September 1997, the Company sold its partnership interest in LACE for
$ 2,779,000 and realized a pretax gain of $ 1,890,000 on the sale. LACE was
an 18.4% limited partner in the Susquehanna Cellular Communications Limited
Partnership, which provides cellular telephone service in the Harrisburg,
Lancaster and York metropolitan areas.
The Company's equity in undistributed net income of the partnerships was
approximately $ 424,000, $ 1,345,000 and $ 1,256,000 for 1998, 1997 and 1996
respectively, which includes $ 493,000, $ 1,544,000 and $ 1,368,000
respectively from BRACE and LACE.
6
PLANT
Plant is carried at cost less accumulated depreciation and consists of the
following:
December 31,
1998 1997
(In Thousands)
Telephone plant:
In service:
Land and buildings $ 5,341 $ 5,314
Digital switching equipment 44,649 42,260
Other equipment 6,742 6,716
Outside plant facilities 71,521 68,445
128,253 122,735
Under construction 1,343 1,227
129,596 123,962
Less accumulated depreciation 71,230 64,337
58,366 59,625
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PLANT (CONTINUED)
December 31,
1998 1997
(In Thousands)
Nonregulated property and equipment:
Land and buildings $ 113 $ 113
Equipment 29,048 3,489
29,161 3,602
Under construction 3,648 9,551
32,809 13,153
Less accumulated depreciation 3,790 2,206
29,019 10,947
$ 87,385 $ 70,572
7
LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt is summarized as follows:
December 31,
1998 1997
(In Thousands)
6.91% Series A Senior Notes, interest payable
quarterly, principal due in annual installments
of $ 2,000,000 through 2000. $ 4,000 $ 6,000
7.59% Series B Senior Notes, interest payable
quarterly, principal due in annual installments
of $ 1,454,000 from 2001 through 2011. 16,000 16,000
6.22% Senior Notes, interest payable quarterly,
principal due in quarterly installments of
$ 750,000 from 2001 through 2008. 21,000 -
6.89% term loan, interest payable quarterly,
principal due in quarterly installments of
$ 250,000 through 2002. 3,250 4,250
44,250 26,250
Less current maturities 3,000 3,000
$ 41,250 $ 23,250
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
LONG-TERM DEBT AND CREDIT ARRANGEMENTS (CONTINUED)
The aggregate amounts of maturities of long-term debt for each of the
five years subsequent to December 31, 1998 are as follows (in thousands):
1999 3,000
2000 3,000
2001 4,705
2002 4,705
2003 4,455
The Company has an unsecured credit agreement through June 30, 1999 with a
bank under which it may borrow up to $ 10,000,000 for working capital or
general business purposes in the form of line of credit loans or letters of
credit. Interest is payable monthly on advances at the Company's option of
either one percent below the bank's prime rate or .35 percent above the
bank's overnight base rate. There were no borrowings outstanding on the line
of credit at December 31, 1998 and 1997. The prime and overnight base
interest rates were 7.75% and 5.50% at December 31, 1998 and 8.50% and 6.75%
at December 31, 1997. Issuance fees on letters of credit shall be mutually
agreed between the bank and the Company on a case-by-case basis.
The Company also has an unsecured $ 5,000,000 line of credit from a bank
available until June 30, 1999 with interest at the Federal Reserve Open
Market Committee Target Federal Funds Rate plus one percent. There were no
borrowings outstanding on the line of credit at December 31, 1998 and 1997.
The interest rate applicable to the line of credit was 5.75% and 5.50% at
December 31, 1998 and 1997 respectively.
The credit agreements contain provisions which, among other things, require
maintenance of certain financial ratios and limit the amount of additional
indebtedness. The Senior Notes also contain provisions which, among other
things, restrict mergers and consolidations, encumbrances and sales of
certain assets, redemptions of preferred stock and purchases of restricted
investments. Under the most restrictive covenants of the debt agreements,
approximately $ 19,900,000 of the consolidated retained earnings is
available for payment of cash dividends in 1999.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
INCOME TAX MATTERS
The provision for income taxes for the years ended December 31, 1998,
997 and 1996 was as follows:
1998 1997 1996
(In Thousands)
Current:
Federal $ 6,007 $ 6,251 $ 4,631
State 2,426 1,974 1,507
8,433 8,225 6,138
Deferred:
Federal 228 (357) (244)
State (76) (86) (41)
152 (443) (285)
$ 8,585 $ 7,782 $ 5,853
The income tax provision differs from the amount of income tax determined
by applying the federal income tax rate to pretax income for the years
ended December 31, 1998, 1997 and 1996 due to the following:
1998 1997 1996
Normal statutory federal
income tax rate 35.0 % 35.0 % 35.0 %
Increase (decrease) resulting
from: State income tax,
net of federal tax benefit 8.1 7.2 6.7
Goodwill amortization 3.5 3.2 1.4
Other (1.3) 0.2 (2.2)
45.3 % 45.6 % 40.9 %
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
INCOME TAX MATTERS (CONTINUED)
Net deferred tax liabilities consist of the following components as of
December 31, 1998 and 1997:
1998 1997
(In Thousands)
Deferred tax liabilities:
Plant, in service $ 9,542 $ 9,482
Prepaid pension costs 1,108 942
Investments 834 597
11,484 11,021
Deferred tax assets:
Employee benefits (952) (876)
Net operating loss carryforwards (1,449) (592)
Other (185) (316)
(2,586) (1,784)
Valuation allowance 1,127 279
$ 10,025 $ 9,516
The Company has approximately $ 933,000 of net operating loss carryforwards
for federal income tax purposes, which expire between the years 2006 and
2012.
The Company has approximately $ 11,366,000 of net operating loss
carryforwards for state income tax purposes which expire between the years
2005 and 2008. A valuation allowance of $ 1,127,000 and $ 279,000 was
recorded at December 31, 1998 and 1997 for these state loss carryforwards
which may expire unutilized.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
DEFINED BENEFIT PENSION PLANS
Information pertaining to the activity in the Company's Defined Benefit
Plans is as follows:
Years Ended December 31,
1998 1997 1996
(In Thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year $ 14,946 $ 12,906 $ 9,787
Service cost 540 481 420
Interest cost 1,052 960 790
Amendment 84 - 220
Actuarial (gain) loss 983 977 (842)
Acquisition - - 2,854
Benefits paid (1,125) (378) (323)
Benefit obligation at end
of year 16,480 14,946 12,906
Change in plan assets:
Fair value of plan assets at
beginning of year 19,237 16,083 10,217
Actual return on plan
assets 2,779 3,251 1,542
Employer contribution 217 281 280
Acquisition - - 4,367
Benefits paid (1,125) (378) (323)
Fair value of plan assets
at end of year 21,108 19,237 16,083
Funded status 4,628 4,291 3,177
Unrecognized net actuarial
(gain) (1,811) (1,648) (573)
Unrecognized prior service
cost 809 790 669
Unrecognized net transition
(asset) (896) (1,010) (1,124)
Prepaid benefit cost $ 2,730 $ 2,423 $ 2,149
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
DEFINED BENEFIT PENSION PLANS (CONTINUED)
Net pension cost (benefit) for these Plans consisted of the following
components:
Years Ended December 31,
1998 1997 1996
(In Thousands)
Service cost $ 540 $ 481 $ 420
Interest cost on projected benefit
Obligation 1,052 960 790
Actual return on plan assets (2,779) (3,251) (1,542)
Net amortization and deferral 1,169 1,817 444
$ (18) $ 7 $ 112
Assumptions used by the Company in the determination of pension plan
information for 1998, 1997 and 1996 consisted of the following:
1998 1997 1996
Discount rate 6.75 % 7.00 % 7.50 %
Rate of increase in compensation levels 5.00 5.00 5.00
Expected long-term rate of return on plan assets 8.50 8.50 8.50
Plan assets consist primarily of U.S. Government securities, corporate bonds
and common stocks, including CEI's common stock of $ 293,000, $ 239,000 and
$ 200,000 at December 31, 1998, 1997 and 1996 respectively.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
POSTRETIREMENT BENEFIT PLAN
Information pertaining to the activity in the postretirement benefit
plan is as follows:
Years Ended December 31,
1998 1997 1996
(In Thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year $ 1,438 $ 1,337 $ 1,344
Service cost 58 44 37
Interest cost 86 98 92
Actuarial (gain) (130) (8) (99)
Benefits paid (37) (33) (37)
Benefit obligation at
end of year 1,415 1,438 1,337
Fair value of plan
assets at end of year - - -
Funded status (1,415) (1,438) (1,337)
Unrecognized net actuarial (gain) (332) (155) (160)
Unrecognized net transition obligation 787 844 900
Accrued benefit cost $ (960) $ (749) $ (597)
Net pension cost for this Plan consisted of the following components:
Years Ended December 31,
1998 1997 1996
(In Thousands)
Service cost $ 58 $ 44 $ 38
Interest cost on projected
benefit obligation 86 98 92
Net amortization and deferral 37 54 56
$ 181 $ 196 $ 186
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
POSTRETIREMENT BENEFIT PLAN (CONTINUED)
Assumptions used by the Company in the determination of pension plan
information consisted of the following:
Years Ended December 31,
1998 1997 1996
Discount rate 6.75% 7.00% 7.50%
For measurement purposes, a 7.0 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The rate
was assumed to decrease gradually to 5.5 percent for 2000 and remain at that
level thereafter.
Assumed health care trend rates have a significant impact on the amounts
reported. A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
One- One-
Percentage- Percentage-
Point Point
Increase Increase
(In Thousands)
Effect on total of service and interest cost
components $ 26 $ (21)
Effect on postretirement benefit obligation 214 (182)
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
REDEEMABLE PREFERRED STOCK
The Company has outstanding 180,289 shares of Series A Convertible Preferred
Stock. Cumulative dividends of $ 3.42 per share per annum are paid semi-
annually. Each share of preferred stock may be converted, at the option of
the holder, into shares of Common Stock at a conversion price of $ 22.95,
(adjusted for the effect of the 3-for-2 stock split), subject to adjustment
under certain circumstances. Each holder may require the Company to redeem
all or a portion of such holder's preferred stock for $ 65 per share plus
accrued dividends.
The Company may redeem the stock, in whole or in part for $ 66.95, $ 66.30,
$ 65.65 and $ 65.00 per share beginning on May 31, 2000, 2001, 2002 and 2003
and thereafter respectively, plus all accumulated and unpaid dividends. In
the event of liquidation of the Company, the holders of preferred stock shall
be entitled to receive a distribution of $ 65 per share plus accrued
dividends.
During 1998, preferred stockholders converted 6,370 shares of preferred
stock in exchange for 12,027 shares of common stock. In addition,
preferred stockholders redeemed 9,959 shares for $ 647,000 during the year.
12
COMMON STOCK AND DIVIDEND REINVESTMENT PLAN
CTT had a Stock Purchase Plan for all employees who met minimum eligibility
requirements which provided for the issuance and sale of CEI common stock.
The Plan was implemented by a series of offerings. Under the fifth offering
of the Plan, participating employees of CTT authorized deductions for a
period of two years ended August 31, 1997. The Plan was terminated in 1997.
Effective January 1, 1998, CEI established an employee stock purchase plan
for eligible employees of CEI and its subsidiaries. Shares of common stock
are purchased monthly by participating employees at a price of 95% of the
stock's fair market value, as defined in the Plan document. A maximum of
150,000 shares is authorized for issuance under the Plan.
The Company sponsors a Dividend Reinvestment Plan for all stockholders who
wish to participate. Participants' dividends and optional cash
considerations are used to purchase shares of common stock. A participant's
purchase price per share is fair market value, as defined in the Plan
document.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on equity securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no
effect on the Company's net income or stockholders' equity.
The components of other comprehensive income and related tax effects for
the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
In Thousands)
Unrealized holding gains (losses) on
available for sale securities, less tax
effect 1998 $ 415; 1997 $ 240 and
1996 $(74) $ 803 $ 446 $ (32)
Less reclassification adjustment
for gains realized in net income,
less tax effect 1998 $ 31 42 - -
$ 761 $ 446 $ (32)
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1998 1997 1996
(In Thousands, Except Per Share Data)
Numerator:
Net income $ 10,352 $ 9,314 $ 8,506
Preferred stock dividends (659) (672) (392)
Numerator for basic earnings
per share, income available to
common stockholders 9,693 8,642 8,114
Effect of dilutive securities,
preferred stock dividends 659 672 392
Numerator for diluted earnings
per share, income available to
common stockholders after
assumed conversions $ 10,352 $ 9,314 $ 8,506
Denominator:
Denominator for basic earnings
per share, weighted average
shares 6,971 6,930 6,390
Effect of dilutive securities,
convertible preferred stock 548 557 326
Dilutive potential common shares,
denominator for diluted earnings
per share, adjusted weighted
average shares and assumed
conversions 7,519 7,487 6,716
Basic earnings per share $ 1.39 $ 1.25 $ 1.27
Diluted earnings per share $ 1.38 $ 1.25 $ 1.27
All share and per share data has been restated to give effect for the
3-for-2 stock split.
15
COMMITMENTS
At December 31, 1998, the Company had commitments for the purchase of
equipment and materials approximating $ 2,868,000.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
COMMITMENTS (CONTINUED)
The Company leases remote sites and buildings under operating lease
agreements which expire between January 1999 and June 2026. Future minimum
payments under the leases are (in thousands):
1999 $ 851
2000 710
2001 705
2002 674
2003 335
Thereafter 432
$ 3,707
16
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 occuring
between segments are recorded on the same basis as transactions with third
parties.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
OPERATING SEGMENTS (CONTINUED)
Segment information as of and for the years ended December 31, 1998, 1997
and 1996 are as follows:
Telephone Wireless Other Total
(in thousands)
1998:
Operating revenues from
external customers $ 49,453 $ 1,271 $ 12,109 $ 62,833
Intersegment operating
Revenues 1,861 19 262 2,142
Operating profit (loss) 19,006 (5,235) (1,201) 12,570
Total assets 106,924 33,315 10,897 151,136
Capital expenditures 7,477 20,848 269 28,594
Depreciation and
Amortization 9,932 1,432 1,084 12,448
1997:
Operating revenues from
external customers $ 48,556 $ 731 $ 6,898 $ 56,185
Intersegment operating
Revenues 593 19 237 849
Operating profit (loss) 16,403 (466) (385) 15,552
Total assets 107,900 10,860 11,133 129,893
Capital expenditures 7,011 7,246 167 14,424
Depreciation and
Amortization 9,599 83 705 10,387
1996:
Operating revenues from
external customers $ 39,546 $ 770 $ 2,583 $ 42,899
Intersegment operating
Revenues 263 17 - 280
Operating profit (loss) 13,672 (168) 560 14,064
Total assets 112,932 1,747 5,920 120,599
Capital expenditures 7,315 39 - 7,354
Depreciation and
Amortization 7,866 74 3 7,943
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
OPERATING SEGMENTS (CONTINUED)
Certain items in the schedule above need to be reconciled to the
consolidated financial statements and are provided in the schedules below:
Years Ended December 31,
1998 1997 1996
(In Thousands)
Revenues:
Total revenues for reportable
segments $ 52,604 $ 49,899 $ 40,596
Other revenues 12,371 7,135 2,583
Elimination of intersegment revenues (2,142) (849) (280)
Total consolidated revenues $ 62,833 $ 56,185 $ 42,899
Total assets:
Total assets for reportable
segments $140,239 $118,760 $ 114,679
Other assets 10,897 11,133 5,920
Elimination of intersegment
receivables (527) (603) (747)
Total consolidated assets $150,609 $129,290 $ 119,852
17
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
Cash and cash equivalents:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Investments in equity securities:
The fair values of investments in equity securities are based on quoted
market prices.
Letters of credit:
It was not practicable to estimate the fair value of the letters of
credit due to the absence of definite issuance fee terms.
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Note payable and long-term debt:
The fair values of the note payable and long-term debt are estimated based
on interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities. The carrying amounts
approximate fair value.
Redeemable preferred stock:
The carrying amount approximates fair value based on the fixed
redemption price available to holders of preferred stock.
18
QUARTERLY DATA (UNAUDITED)
First Second Third Fourth
(In Thousands, Except Per Share Data)
1998
Operating revenues $ 15,165 $ 15,622 $ 15,996 $ 16,050
Operating income 3,848 2,812 3,438 2,472
Net income 2,061 5,641 1,718 932
Basic earnings per share 0.27 0.79 0.22 0.11
Diluted earnings per share 0.27 0.75 0.22 0.11
1997
Operating revenues $ 12,189 $ 13,748 $ 15,871 $ 14,377
Operating income 3,762 3,578 4,128 4,084
Net income 2,115 1,845 3,462 1,892
Basic earnings per share 0.29 0.24 0.47 0.25
Diluted earnings per share 0.29 0.24 0.45 0.25
All per share data has been restated for the effect of the 3-for-2 stock
split.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The names, ages, and positions of the executive officers of the Company
are set forth below. All officers of the Company serve for terms of one year
and until re-elected or until a successor is duly elected at the Annual
Meeting of directors, which follows the annual shareholders' meeting. No
officers have any arrangements or understandings with any other person
pursuant to which such officer was or is to be selected as an officer.
Albert H. Kramer; Age 44; President
Mr. Kramer was appointed President in May, 1998. He has been employed by
the Company since September, 1995, serving as Vice President, Finance and
Administration from September, 1995, until August, 1997, and as Executive Vice
President from August, 1997 until May, 1998. Prior to that he was employed by
Denver and Ephrata Telephone Company for 11 years, serving as Chief Financial
Officer during the last 5 years of his employment.
Joseph P. Laffey; Age 46; Vice President, Regulatory and External Affairs
Mr. Laffey has been employed by the Company as Vice President, Regulatory
and External Affairs, since May 1996. Prior to that he was employed by
Commonwealth Telephone Company for 17 years, serving as Vice President of
Revenue Requirements during the last year of his employment; and Director of
Revenue Requirements for four years prior thereto.
Donald R. Breitenstein; Age 58; Controller
Mr. Breitenstein has been employed by CT&T since 1962. He worked as
Accountant until September, 1979, when he was appointed Accounting Supervisor.
He was appointed CT&T's Accounting Manager in 1981, and Controller in 1986.
He was appointed to the board of directors of CT&T in 1987. He was elected
the Company's Controller and a member of its Board at its organizational
meeting in June, 1989.
Thomas C. Keim; Age 53; Vice President Telecom Group
Mr. Keim was appointed Vice President Telecom Group in August, 1997. He
had previously served as Vice President, Operations, since October, 1994, and
prior to that as Network Services Manager since February 1984. Mr. Keim has
been employed by CT&T since 1964.
Kenneth A. Benner; Age 51; Secretary/Treasurer
Mr. Benner has been employed by CT&T since 1974. He was elected to the
board of directors of CT&T in 1972, and has served as its Secretary/Treasurer
since 1982. He was elected Secretary/Treasurer and a member of the Company's
Board at its organizational meeting in June, 1989. In June, 1996, he was
appointed Vice President and General Manager of BVT.
Lawrence T. Killeen; Age 55; Vice President, Conestoga Communications, Inc.
Mr. Killeen was appointed Vice President of Conestoga Communications, Inc.
in August, 1997. Prior to that he had served as Director of Customer Services
of CT&T. He has been employed by CT&T since 1982.
Harrison H. Clement, Jr.; Age 55; Vice President Wireless Group and President
of Infocore, Inc.
Mr. Clement began his career in the telecommunications industry in 1966
with the Bell system holding a variety of management positions of increasing
responsibility until 1981. In 1981 he co-founded Infocore, Inc. serving as
president since that time.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
William D. Chamblin, III; Age 42; President of Conestoga Wireless Company
Mr. Chamblin was appointed President of Conestoga Wireless Company in
February, 1996. He had been employed by Infocore, Inc. since 1984. His
latest position with Infocore, Inc. was Vice President, Development, in which
position he was active in processing the PCS licenses from the FCC for
Conestoga Wireless Company.
The information as to the Directors as set forth under the caption
"Election of Directors" of the Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 1, 1999 is incorporated by reference into
this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information as to the Executive Officers' Compensation set forth
under the caption "Executive Compensation" of the Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 1, 1999 is incorporated
by reference into this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Election of Directors" and
"Security Ownership of Management" of the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 1, 1999 is incorporated by
reference into this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information as to Certain Relationships and Related Tranactions set
forth under the caption "Directors Compensation" of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 1, 1999 is
incorporated by reference into this Report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
The following consolidated financial statements of Conestoga Enterprises,
Inc. and subsidiaries are included in Part II, Item 8:
Opinion of Independent Certified Public Accountants
Consolidated balance sheets - December 31, 1998 and 1997
Consolidated statements of income - years ended December 31, 1998,
1997 and 1996
Consolidated statements of common stockholders' equity - years ended
December 31, 1998, 1997, and 1996
Consolidated statements of cash flows - years ended December 31,
1998, 1997 and 1996
Notes to consolidated financial statements
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial
statements or notes thereto.
(a)(3) Exhibits -
(10) Material contracts Attachment 10E
(12) Statement re: Computation of Ratios Attachment 12
(21) Subsidiaries of the registrant Attachment 21 D
(b)Reports on Form 8-K
None filed during the fourth quarter of 1998.
INDEX TO EXHIBITS
Page
(a) Articles of Incorporation, as amended 53 - 56*
(b) By-laws 57 - 66*
Instruments defining the rights of security holders
(b) Relevant portions of the by-laws 67*
Material contracts
(a) Agreement dated January 28, 1987 with
John R. Bentz, Executive Vice President 68 - 74*
(b) Agreement dated March 22, 1989 with
Donald R. Breitenstein, Controller 75 - 81*
(C) Agreement dated September 1, 1998 with
Albert H. Kramer, President 59 - 67
(d) Agreement dated May 29, 1996 with 44 - 50**
Joseph J. Laffey, Vice-President, Regulatory and External Affairs
(e) Agreement dated April 30, 1997 with 44 - 52***
Harrison H. Clement, Jr., President of Infocore, Inc.
(f) Agreement dated April 30, 1997 with 53 - 61***
Henry M. Stringer, Sr. Vice-President of Infocore, Inc.
Statement re: Computation of Ratios 58
Subsidiaries of the registrant 68
*These exhibits appear in the 1992 10K.
** This exhibit appears in the 1996 10K.
*** This exhibit appears in the 1997 10K.
Attachment 10E EMPLOYMENT AGREEMENT
AGREEMENT made this 1st day of September, 1998, between CONESTOGA
ENTERPRISES, INC., a Pennsylvania business corporation, having its principal
office in the Borough of Birdsboro, County of Berks and State of Pennsylvania
(hereinafter called "Employer") and ALBERT H. KRAMER, of 1932 Heatherton Drive,
Lancaster, Pennsylvania 17601 (hereinafter called the "Employee").
A G R E E M E N T
1. Employment. The Employer employs the Employee and the
Employee accepts employment by Employer and its subsidiaries and affiliates,
upon the terms and conditions of this Agreement.
2. Term. The term of this Agreement shall be three (3) years
commencing on September 1, 1998 and shall terminate on August 31, 2001. It is
the intention of the Employer and the Employee that this relationship shall
continue beyond the three (3) years period but either party may terminate the
same under the terms hereinafter set forth in this Agreement.
3. Compensation.
(a) For all services rendered by the Employee, the Employer
shall (i) pay Employee a base salary of One Hundred Forty Thousand Five Hundred
Dollars ($140,500.00) per year, payable in equal weekly installments at the end
of each week, (ii) include the Employee as a participant in the Employer's
Executive Incentive Plan, (iii) include the Employee as a participant in the
Employer's salaried employees' benefit programs; and (iv) provide an automobile
to Employee. Salary payments shall be subject to withholding and other
applicable taxes.
(b) Employer will review Employee's compensation on an
annual basis along with the review of all its management employees.
4. Duties. The Employee shall serve as the Employer's President
at the discretion of Employee's Board of Directors. The exact responsibilities
for the position are set forth in the job description for President of the
Employer. A copy of said job description is attached hereto and referred to as
Schedule A.
5. Extent of Services. The Employee shall devote his entire time
and attention to the Employer's business. During the term of this Agreement,
the Employee shall not engage in any other business activity, regardless of
whether it is pursued for gain or profit. Employee, however, may invest his
assets in other companies so long as they do not require the Employee's
services in the operation of their affairs. Employer is aware that Employee
is Vice-President of BKM Enterprises, and does attend stockholders, directors
and officers meetings. Employer does not object to Employee's continued
participation in this Company so long as it remains passive and does not
interfere with the performance of his duties as President.
6. Working Facilities. The Employee shall have a private office,
stenographic help, a personal computer and other facilities and services that
are suitable to his position and appropriate for the performance of his duties.
7. Disclosure of Information. The Employee acknowledges that the
list of the Employer's customers, as the Employer may determine from time to
time, is a valuable, special and unique asset of the Employer's business. The
Employee shall not, during and after the term of his employment, disclose all
or any part of the Employer's customer list to any person, firm, corporation,
association, or other entity for any reason or purpose. In the event of the
Employee's breach or threatened breach of this paragraph, the Employer shall be
entitled to a preliminary restraining order and an injunction restraining and
enjoining the Employee from disclosing all or any part of the Employer's
customer list to any person, firm, corporation, association, or other entity
for any reason or purpose and from rendering any services to any person, firm,
corporation, association, or other entity to whom all or any part of such list
has been, or is threatened to be, disclosed. In addition to or in lieu of the
above, the Employer may pursue all other remedies available to the Employer for
such breach or threatened breach, including the recovery of damages from the
Employee.
8. Expenses. The Employer shall reimburse Employee for all
reasonable and necessary expenses incurred in carrying out his duties under
this Agreement. Employee shall present to the Employer, from time to time, an
itemized account of such expenses in any form required by the Employer.
9. Vacations. The Employee shall be entitled each year to a
vacation of four (4) weeks, during which time his compensation shall be paid in
full.
10. Termination By Employee. Employee may, without cause,
terminate this Agreement by giving sixty (60) days written notice to the
Employer. In such event, the Employee shall continue to render his services
and shall be paid his regular compensation up until the date of termination.
11. Termination for Proper Cause. Employer may terminate
Employee's employment at any time for "proper cause". Proper cause for the
termination of Employee's employment shall be as follows:
(a) Violation by Employee of the restrictive covenants set
forth in paragraph 7 hereof;
(b) Employee's disloyal, dishonest or illegal conduct; or
(c) Employee's willful dereliction of his duties to the
Company.
12. Severance Compensation.
12.1 General Rule. Unless the provisions of Paragraph 12.2
apply, in the event of the termination of the Employee's employment by the
Employer, other than for cause, prior to the expiration of the three (3) year
term referred to in Paragraph 2, the Employer shall be obligated to pay to the
Employee, within fifteen (15) days after the date of termination, an amount
equal to the greater of: (i) fifty percent (50%) of the Employee's annual
salary determined as of the date of termination of employment, or (ii) the
aggregate salary otherwise payable to the Employee for the balance of the
three (3) year term referred to in Paragraph 2, determined as of the date of
termination of employment.
12.2 Change of Control. If, during the term of this
Agreement, the Employee's employment with the Employer is terminated after a
change of control, as defined below, (hereinafter called "Control
Termination"), either by the Employee or by the Employer, the Employer shall
pay to the Employee the Employee's annual salary, determined as of the date of
the Control Termination, for a period of three (3) years from and after the
date of the Control Termination in such periodic installments as were being
paid at the time of the Control Termination. The Employer shall be obligated
to make such payment in lieu of, and not in addition to, the Employer's
payment obligations under Paragraph 12.1. For purposes of this Agreement, a
change of control shall be deemed to have occurred in the event of: (i) the
acquisition, directly or indirectly, by any person or entity, or persons or
entities acting in concert, whether by purchase, merger, consolidation or
otherwise, of voting power over that number of voting shares of the capital
stock of the Employer which, when combined with the existing voting power of
such persons or entities, would enable them to cast fifty percent (50%) or
more of the votes which all shareholders of the Employer would be entitled to
cast in the election of directors of the Employer, or (ii) the sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Employer to a
transferee other than Employer or an entity of which a controlling interest is
owned by Employer.
12.3 Termination for Cause. In the event of the termination
of the Employee's employment at any time by the Employer for cause, except for
a Control Termination, the Employer shall have no obligation to pay the
Employee any sums following the termination of his employment.
13. Death During Employment. If the Employee dies during the term
of employment, the Employer shall pay to the Employee's estate the compensation
that would otherwise be payable to the Employee up to the end of the month in
which his death occurs. In addition, if Employee qualifies under the terms of
the Employer's existing life insurance coverage, Employer will provide life
insurance on the life of Employee amounting to two and one-half (2-1/2) times
his annual salary up to a maximum of Three Hundred Thousand Dollars
($300,000.00).
14. Restricted Covenant. For a period of three (3) years after
the termination or expiration of this Agreement, the Employee shall not within
Berks County or Union County, Pennsylvania, directly or indirectly, own,
manage, operate, control, be employed by, participate in, or be connected in
any manner with the ownership, management, operation or control of any business
similar and competitive to the type of business conducted by the Employer at
the time this Agreement terminates. In the event of the Employee's actual or
threatened breach of this paragraph, the Employer shall be entitled to a
preliminary restraining order and injunction restraining the Employee from
violating its provisions. Nothing in this Agreement shall be construed to
prohibit the Employer from pursuing any other available remedies for such
breach or threatened breach, including the recovery of damages from the
Employee.
15. Arbitration. Any controversy or claim arising out of, or
relating to this Agreement, or its breach, shall be settled by arbitration in
the City of Reading in accordance with the then governing rules of the American
Arbitration Association. Judgment upon the award rendered may be entered and
enforced in any court of competent jurisdiction.
16. Notices. Any notice required or desired to be given under
this Agreement shall be deemed given if in writing and sent by certified mail,
return receipt requested, to the Employee's residence or to the Employer's
principal office, as the case may be.
17. Waiver of Breach. The Employer's waiver of a breach of any
provision in this Agreement by the Employee shall not operate or be construed
as a waiver of any subsequent breach by the Employee. No waiver shall be valid
unless in writing and signed by an authorized officer of the Employer.
18. Assignment. The Employee acknowledges that his services are
unique and personal. Accordingly, the Employee may not assign his rights or
delegate his duties or obligations under this Agreement. The Employer's rights
and obligations under this Agreement shall inure to the benefit of, and shall
be binding upon, the Employer's successors and assigns.
19. Entire Agreement. This Agreement contains the entire
understanding of the parties. It may not be changed orally but only by an
agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension, or discharge is sought.
20. Headings. Headings in this Agreement are for convenience only
and shall not be used to interpret or construe its provisions.
21. Counterparts. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
the day and year first above written.
CONESTOGA ENTERPRISES, INC.
By \s\ John R Bentz
Chairman
Attest \s\ Kenneth A Benner
Secretary
(SEAL)
\s\ Albert H. Kramer
ATTACHMENT 12
CONESTOGA ENTERPRISES, INC.
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Years Ended December 31, 1998 1997 1996 1995 1994
(In thousands, Except Ratios)
Consolidated pre-tax income $ 18,937 $ 17,086 $ 14,306 $ 10,907 $ 10,719
Undistributed earnings from
unconsolidated partnerships
interests - (1,345) (1,257) (660) (385)
Equity in losses from unconsolidated
Partnership interests 69 - - - -
Interest 2,984 2,017 1,297 428 422
Earnings $ 21,990 $ 17,758 $14,346 $10,675 $10,756
Interest $ 2,984 $ 2,017 $ 1,297 $ 428 $ 422
Preferred stock
dividends (1) 1,213 1,234 569 - -
Fixed charges and preferred
stock dividends $ 4,197 $ 3,251 $ 1,866 $ 428 $ 422
Ratio 5.24 5.46 7.70 24.95 25.48
(1)Preferred stock dividends/(100% - income tax rate)
Attachment 21E
SUBSIDIARIES OF CONESTOGA ENTERPRISES, INC.
1. The Conestoga Telephone and Telegraph Company
Incorporated August 20, 1902
Pennsylvania
Operates - The Conestoga Telephone and Telegraph Company
2. Buffalo Valley Telephone Company
Incorporated September 13, 1904
Pennsylvania
Operates - Buffalo Valley Telephone Company
3. Conestoga Communications, Inc.
Incorporated March 5, 1981
Pennsylvania
Operates - Conestoga Communications, Inc.
4. Conestoga Mobile Systems, Inc.
Incorpoarted April 1, 1991
Pennsylvania
Operates Conestoga Mobile Systems, Inc.
5. Conestoga Wireless Company
Incorpoarted January 1, 1998
Pennsylvania
Opeartes - Conestoga Wireless Company
6. Conestoga Investment Corporation
Incorporated November 27, 1996
Delaware
Opeartes - Conestoga Investment Corporation
7. Infocore, Inc.
Incorpoarted March 3, 1997
Pennsylvania
Opeartes - Infocore, Inc.
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONESTOGA ENTERPRISES, INC.
Date March 30, 1999 By __\s\ Albert H. Kramer__
Albert H. Kramer
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date __3/30/99___ __\s\ John R. Bentz___________
John R. Bentz
Chairman of the Board
Date __3/30/99___ __\s\ James H. Murray_________
James H. Murray
Vice President
Date __3/30/99___ __\s\ Kenneth A Benner________
Kenneth A. Benner
Secretary/Treasurer
Date __3/30/99____ ___\s\ Donald R. Breitenstein_
Donald R. Breitenstein
Controller, Chief Accounting Officer
Date __3/30/99____ __\s\ F. M. Brown_____________
F. M. Brown
Director
Date __3/30/99____ ___\s\ John M. Sausen_________
John M. Sausen
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date __3/30/99____ __\s\ Richard G. Weidner_______
Richard G. Weidner
Director
Date __3/30/99____ __\s\ Robert M. Myers__________
Robert M. Myers
Director
Date _3/30/99_____ ___\s\ Jean M. Ruhl____________
Jean M. Ruhl
Director
Date __3/30/99____ __\s\ Thomas C. Keim___________
Thomas C. Keim
Vice President - Telecom Group
Date __3/30/99_____ ___\s\ Joseph J. Laffey________
Joseph J. Laffey
Vice President, Requlatory and
External Affairs
Date __3/30/99_____ _\s\ Harrison H. Clement, Jr.__
Harrison H Clement, Jr.
President, Infocore, Inc.
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 87,384,615
<OTHER-PROPERTY-AND-INVEST> 41,347,223
<TOTAL-CURRENT-ASSETS> 18,221,702
<TOTAL-DEFERRED-CHARGES> 3,655,194
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 150,608,734
<COMMON> 32,347,401
<CAPITAL-SURPLUS-PAID-IN> 13,017,085
<RETAINED-EARNINGS> 29,495,174
<TOTAL-COMMON-STOCKHOLDERS-EQ> 74,859,660
0
11,718,785
<LONG-TERM-DEBT-NET> 41,250,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,000,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 19,780,289
<TOT-CAPITALIZATION-AND-LIAB> 150,608,734
<GROSS-OPERATING-REVENUE> 62,832,520
<INCOME-TAX-EXPENSE> 8,584,726
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 50,263,378
<OPERATING-INCOME-LOSS> 12,569,142
<OTHER-INCOME-NET> 9,352,260
<INCOME-BEFORE-INTEREST-EXPEN> 21,921,230
<TOTAL-INTEREST-EXPENSE> 2,984,300
<NET-INCOME> 10,352,376
663,345
<EARNINGS-AVAILABLE-FOR-COMM> 9,689,031
<COMMON-STOCK-DIVIDENDS> 5,674,572
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 14,253,123
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.38
</TABLE>
