FORM 10-Q QUARTERLY REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For quarter ended September 30, 1999
Commission File Number 0-24064
CONESTOGA ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA
(State of Incorporation)
23-2565087
(IRS Employer Number)
202 East First Street, Birdsboro, Pennsylvania 19508
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (610) 582-8711
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of September 30,1999, the number of shares of Common Stock, par value
$1.00 outstanding was 7,065,932.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1999 and December 31, 1998
( In Thousands, Except Shares and Per Share Data)
ASSETS
9/30 12/31
1999 1998
Current Assets
Cash and Cash Equivalents $3,161 $8,403
Accounts receivable, including unbilled
revenue 9,613 7,840
Inventories, at average cost 1,612 1,520
Prepaid taxes 0 332
Prepaid expenses 284 127
Total Current Assets 14,670 18,222
Investments and Other Assets
Cost in Excess of Net Assets of
Business Acquired 36,216 37,626
Investments in partnerships 386 415
Investments in equity securities 3,360 3,306
Prepaid Pension Costs 2,845 2,730
Other 2,082 925
44,889 45,002
Plant
In Service 167,386 157,414
Under Construction 5,021 4,991
172,407 162,405
Less accumulated depreciation 82,899 75,020
89,508 87,385
Total Assets $149,067 $150,609
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 1999 and December 31, 1998
( In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30 12/31
1999 1998
Current Liabilities
Current maturities of long term debt $3,000 $3,000
Accounts payable 4,729 5,777
Accrued:
Taxes 1,950 0
Interest 209 216
Payroll & Vacation Pay 1,238 1,065
Advance billings/Customer Deposits 2,099 803
Total Current Liabilities 13,225 10,861
Long Term Liabilities
Long Term Debt, less Current Maturities 38,500 41,250
Accrued Post Retirement Cost 1,058 960
Other 909 934
40,467 43,144
Deferred Income Taxes 9,520 10,025
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issued and outstanding; 9/30/99 - 156,979
12/31/98 - 180,289 10,204 11,719
Common Stockholders' Equity
Common Stock par value 9/30/99 $1 per share and
12/31/98 $5 per share ;
authorized 9/30/99 20,000,000 shares and
12/31/98 10,000,000 shares;
Issued 9/30/99 and 12/31/98 7,162,951 7,163 35,814
Additional Paid-In Capital 42,015 13,018
Retained earnings 26,675 27,972
Net unrealized appreciation on
marketable equity securities 1,559 1,523
Less cost of treasury stock; 9/30/99 94,780
shares and 12/31/98 187,675 shares (1,761) (3,467)
75,651 74,860
Total Liabilities and Stockholders' Equity $149,067 $150,609
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
THREE MONTHS NINE MONTHS
ENDED ENDED
1999 **1998 1999 **1998
Operating Revenues:
Local Exchange Services $3,229 $2,445 $9,191 $7,664
Long Distance and Access Services 9,473 9,201 28,853 27,357
Wireless Services 550 162 1,359 461
Equipment and Other 4,575 4,188 12,874 11,303
17,827 15,996 52,277 46,785
Operating Expenses:
Network Operations and Cost of Sales 5,311 4,735 15,198 13,194
Depreciation and Amortization 3,628 3,126 10,513 8,938
Customer Operations 4,333 2,844 10,894 8,891
Corporate Operations 1,731 1,364 5,018 4,235
Taxes, other than income 498 489 1,532 1,429
15,501 12,558 43,155 36,687
Operating Income 2,326 3,438 9,122 10,098
Other Income(Deductions), Net:
Interest Expense (719) (714) (2,212) (2,155)
Income from unconsolidated
partnerships interests (37) 10 (70) 451
Gain on Sale of Partnership Interest 0 0 0 7,749
Other, Net 70 288 265 786
(686) (416) (2,017) 6,831
Income Before Income Taxes 1,640 3,022 7,105 16,929
Income Taxes 1,006 1,304 3,735 7,509
Net Income $634 $1,718 $3,370 $9,420
*Basic earnings per common share $0.07 $0.23 $0.42 $1.28
*Diluted earnings per common share $0.07 $0.23 $0.42 $1.26
*Dividends per common share $0.210 $0.203 $0.623 $0.610
* adjusted for the 3-for-2 stock split in May, 1999
** Some amounts have been adjusted for comparative purposes.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
( In Thousands, Except Per Share Data)
1999 1998
Net Income $3,370 $9,420
Unrealized gains on Securities
Unrealized holding gains
during period 36 369
Less: reclassification adjustment
for gains included in net income 0 -38
Comprehensive Income $3,406 $9,751
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
( In Thousands)
1999 1998
Cash Flows from Operating Activities
Net Income $3,370 $9,420
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 10,513 8,939
(Income) loss from unconsolidated partnership
interests 41 (450)
Gain on sale of unconsolidated partnership interests 0 (7,749)
Gain on sale of marketable securities 0 (102)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts Receivable (1,773) (536)
Material and supplies (92) (471)
Prepaid expenses (157) 5
Prepaid pension costs (115) (140)
Other Assets (1,169) 56
Increase (decrease) in:
Accounts Payable (1,047) (1,813)
Accrued expenses and other current
liabilities 1,462 12
Accrued taxes 2,282 126
Other liabilities 72 132
Deferred income taxes (524) (703)
Net cash provided by operating activities 12,863 6,726
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs and salvage (11,227) (18,591)
Proceeds from sale of marketable equity securities 0 208
Proceeds from sale of unconsolidated
partnership interests 0 11,084
Capital investments in unconsolidated
partnershp interests 0 (355)
Net cash used in investing activities (11,227) (7,654)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 0 21,000
Principal payments on long term borrowing (2,750) (2,750)
Proceeds from issuance of stock under the
employee stock purchase plan 85 82
Proceeds from issuance of stock under the
dividend reinvestment plan 645 516
Common stock dividends paid (4,391) (4,258)
Preferred stock redemption (192) (401)
Preferred stock dividends paid (275) (347)
Purchase of common stock for the treasury 0 (2,668)
Net cash provided by (used in) financing activities (6,878) 11,174
Increase (decrease) in cash and cash equivalents (5,242) 10,246
Cash and cash equivalents
Beginning 8,403 2,517
Ending 3,161 12,763
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
( In Thousands)
1999 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $2,220 $1,926
Income Taxes $2,962 $6,056
CONESTOGA ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. The
December 31, 1998 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. For further information, refer to
the consolidated financial statements and footnotes included in Conestoga's
1998 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
NOTE 2: LONG TERM DEBT
Long term debt is summarized as follows:
(In thousands)
9/30/99 12/31/98
Series A Senior Note interest payable
quarterly at 6.91%, annual principal
payments of $2,000,000 starting
June 30, 1998 through June 30,
2000, unsecured 2,000 4,000
Series B Senior Note interest payable
quarterly at 7.59%, annual principal
payments of $1,454,545 starting
June 30, 2001 through June 30,
2011, unsecured 16,000 16000
CONESTOGA ENTERPRISES, INC.
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 2,500 3,250
Senior Note interest payable
quarterly at 6.22%, quarterly
principal payments of $750,000
starting May 11, 2001 through
February 11, 2008,
Unsecured 21,000 21,000
$41,500 $44,250
Less current Maturities 3,000 3,000
$38,500 $41,250
NOTE 3: OPERATING SEGMENTS
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements.
The Company's reportable segments are strategic business units that
offer different services. They are managed separately because each
business unit requires different technology and marketing
strategies. The Company has two reportable segments: Telephone -
traditional telephone service provided by CTT and BVT; and wireless
paging and PCS communication services provided by CWC and CMS.
The "Other" column primarily includes the long distance and
consulting services provided by CCI and INF, and corporate related
items.
The accounting policies of the segments are the same as those
described in the summary of accounting policies. The Company
evaluates performance based on profit or loss from operations before
corporate allocations, interest, income taxes and non-recurring
gains and losses. Transactions occurring between segments are
recorded on the same basis as transactions with third parties.
Segment information as of September 30, 1999 and 1998 are as follows:
CONESTOGA ENTERPRISES, INC.
Telephone Wireless Other Total
( in thousands )
September 30, 1999:
Operating revenues
from external customers $ 38,188 $ 1,907 $12,182 $ 52,277
Intersegment operating
Revenues 2,064 12 183 2,259
Operating profit (loss) 15,882 (5,669) (1,091) 9,122
Total Assets 110,622 32,022 6,423 149,067
Capital expenditures 7,899 3,086 242 11,227
Depreciation and
Amortization 7,480 2,197 836 10,513
September 30, 1998:
Operating revenues
from external customers $ 37,380 $ 788 $ 8,617 $ 46,785
Intersegment operating
Revenues 1,009 15 345 1,369
Operating profit (loss) 14,112 (2,983) (1,031) 10,098
Total Assets 109,473 24,634 13,986 148,093
Capital expenditures 6,098 12,738 245 18,591
Depreciation and
Amortization 7,386 747 806 8,939
Certain items in the schedule above need to be reconciled to the consolidated
financial statements and are provided in the schedules below:
September 30: 1999 1998
Revenues:
Total revenue for
Reportable segments $ 42,171 $ 39,190
Other Revenues 12,365 8,962
Elimination of
Intersegment revenues (2,259) (1,369)
Total consolidated revenues $ 52,277 $ 30,789
Total Assets:
Total assets for
Reportable segments $146,501 $ 140,332
Other assets 8,939 17,007
Elimination of
Intersegment receivables (6,373) (9,246)
Total consolidated assets $149,067 $ 148,093
CONESTOGA ENTERPRISES, INC.
Note 4: STOCK OPTION PLAN
The Company adopted a Stock Option Plan for the certain employees and
officers of the Company, which was approved by the shareholders on May 1,
1999. An aggregate of 450,000 shares of authorized but unissued common stock
of the Company were reserved for future issuance under the Plan. The stock
options have expiration terms of ten years. The per share exercise price of
a stock option shall be, at a minimum, equal to the fair value of a share of
common stock on the date that the option is granted.
On June 1, 1999 41,750 options were granted to employees of the Company at
an exercise price of $22.34 per share, with a vesting period of three years.
No shares are exercisable as of September 30, 1999. The remaining contractual
life of the options is 9.7 years.
The Company applies APB Opinion 25 and related interpretations in accounting
for the stock option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the
plan consistent with the method prescribed by FASB Statement No. 123, there
would have been no significant impact to the Company's net income or earnings
per share.
NOTE 5: PENDING ACQUISITION
In November 1999, the Company signed an Agreement and Plan of Merger
(Agreement) to acquire all of the common stock of TeleBeam, Inc., a
telecommunications company based in State College, Pennsylvania. Under the
terms of the agreement the Company will issue 735,000 shares of common stock
to TeleBeam, Inc.'s stockholders in exchange for all outstanding shares of
TeleBeam, Inc. The acquisition is subject to certain conditions, including
approval of the merger by TeleBeam, Inc.'s stockholders. The tranaction will
be accounted for as a pooling of interest method, and the effective date of
the merger is expected to be in the first quarter of 2000.
NOTE 6: OTHER
Certain items of the September 30, 1998 consolidated financial statements
have been restated to conform to the September 30, 1999 financial statements.
There was no impact on net income.
Inventories, at average cost, are both material and supplies used to provide
service, and equipment held for resale.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE QUARTERLY INCOME STATEMENTS
Overview
During the third quarter of 1999, net income was $634 thousand or $0.07
per common share compared to $1.486 million or $0.19 per common share for the
second quarter of 1999. Net income for the
CONESTOGA ENTERPRISES, INC.
First nine months of 1999 was $3.370 million. Net income for the first three
quarter of 1998, which included an extraordinary after-tax gain of $4.508
million,
or $.066 per common share realized from the liquidation of the Company's
interest
in a cellular telephone partnership was $9.420 million. Excluding the income
derived from the liquidation of the cellular partnership interest, the
earnings for the first nine month of 1998 were $.63 per common share or $4.912
million.
The Company's local exchange networks and related markets have continued
their strong operating performances. The Company's operations have been
adversely impacted, however, by the operating expenses of the wireless
telecommunications system, known as Personal Communications Service (PCS)
offered by Conestoga Wireless Company (CWC), and by the operating expenses of
the long distance service and competitive local exchange service provided by
Conestoga Communications, Inc. (CCI). Both CWC and CCI dramatically increased
their customer bases during the first three quarters of 1999. CWC began
offering service and opened new retail stores in Williamsport, Pennsylvania
during the third quarter of 1999. CCI improved the operating efficiencies of
its long distance switching network which should lower operating costs and is
installing its own switching facilities in Reading and Pottstown, Pennsylvania
areas to convert CLEC customers from resale to facilities based service.
RESULTS OF OPERATIONS
REVENUES
Operating Revenues:
Increase
(in thousands)
Third Quarter Ended
September 30 1999 compared to
September 30 1998
Local Exchange Service $ 784 32.1%
Long Distance and Access Service 272 3.0%
Wireless Service 388 239.5%
Other 387 9.2%
Total $1,831 11.5%
CONESTOGA ENTERPRISES, INC.
Increase
(in thousands)
Nine Months Ended
September 30, 1999 compared to
September 30 1998
Local Exchange Service $1,527 19.9%
Long Distance and Access Service 1,496 5.5%
Wireless Service 898 194.8%
Other 1,571 13.9%
Total $5,492 11.7%
The increases in operating revenues during the third quarter and the first
nine months of 1999, over the same periods of 1998, resulted from increases in
all of the various operating segments. Operating revenues for the third
quarter 1999 were down slightly (0.3%) from the second quarter of 1999, due
to one-time settlement adjustments in Access and Long Distance revenue during
the second quarter.
Local Exchange Service
The increase in local service revenue has been generated primarily by the
local telephone companies, Conestoga Telephone Co. (CTT) and Buffalo Valley
Telephone Co (BVT). These increases are a result of the continued growth in
the number of access lines in service over the past few years, as well as the
increased demand for enhanced service features. In addition CCI generated
over $527 thousand of CLEC revenue during the first nine months of 1999, and
now has over 3,700 CLEC lines in service.
Long Distance and Access Service
Long Distance and Access Service revenues are generated by the telephone
companies and CCI. CTT & BVT's access revenue continued to grow due to
increases in the minutes of use in both their interstate and intrastate toll
networks. The minutes of use in their combined systems increased 18.0% during
the first nine months of 1999 when compared with the first nine months of
1998. Intralata competition within Pennsylvania has caused the long distance
revenue of CTT & BVT to decline. During the first nine months of 1999 their
combined long distance revenue fell 27.9% or $1.3 million. In contrast, CCI's
long distance revenue during the first nine months of 1999 was $5.4 million, a
58.4% increase when compared to the first nine months of 1998.
CONESTOGA ENTERPRISES, INC.
CCI's long distance revenue during the third quarter of 1999 was 6.3% greater
than during the second quarter of 1999. As of September 30, 1999 CCI had
over 23,000 long distance customers. Among long distance cariers, CCI has the
second highest number of customers within the franchised territories of CTT
and BVT.
Wireless Service
Wireless Service revenue is generated by the PCS service of CWC and the
paging service of Conestoga Mobile Systems (CMS). CWC began commercial
operation of its PCS system in May 1998. During the first nine months of
1999, CWC generated $1.159 million of revenue from its PCS operations. PCS
revenue in the third quarter of 1999 was $613 thousand, representing a 12.5%
increase over the second quarter of 1999. The Company experienced substantial
increases in the bad debt expense and took a $160,000 write off during the
third quarter. Stricter credit policies have been instituted in order to
reduce bad debt expense to acceptable industry norms. The numer of wireless
telephones in service on CWC's PCS System as of September 30, 1999 was over
7,300 which represents a 150.0% increase from the December 31, 1998 figure.
During September 1999 the company added over 1,000 units as a result of
another successful promotional campaign. CWC added six additional cell sites
during the third quarter of 1999 and now has 82 cell sites throughout its
system.
Equipment and Other
Equipment and Other revenues include the sale and lease of communications
equipment, such as telephones, PBX equipment, pagers and PCS wireless
telephones, by all of the subsidiaries. Billing and collection revenue and
directory advertising revenue are also included as revenue of the telephone
company subsidiaries. All of the subsidiaries posted increases in their
respective equipment sales during the first nine months of 1999 when compared
with the first nine months of 1998. Infocore, Inc. generated 55.2% of the
revenue in this category and increased its revenues 37.0% over the first nine
months of 1998.
CONESTOGA ENTERPRISES, INC.
EXPENSES:
Operating Expenses
Increase
(in thousands)
Third Quarter Ended
September 30 1999 compared to
September 30 1998
Network Operations and
Cost of Sales $ 576 12.2%
Depreciation and Amortization 502 16.1%
Customer Operations 1,489 52.4%
Corporate Operations 367 26.9%
Taxes, Other than Income 9 1.8%
Total $2,943 23.4%
Nine Months Ended
September 30 1999 compared to September 30 1998
Network Operations and
Cost of Sales $2,004 15.2%
Depreciation and Amortization 1,575 17.6%
Customer Operations 2,003 22.5%
Corporate Operations 783 18.5%
Taxes, Other than Income 103 7.2%
Total $6,468 17.6%
The overall increase in operating expenses during the third quarter and the
first nine months of 1999 (when compared with the same periods of 1998)
resulted from new and additional increases in various segments of the company.
Included in the nine months operating expenses for 1999 are nine months of CWC
operations compared to five months during the same period of 1998. Operating
expenses were $1.243 million or 8.7% above the second quarter of 1999
operating expenses.
Network Operations and Cost of Sales
The increase in network operations and cost of sales expenses directly
relates to the PCS business operations in the second quarter of 1998, as well
as the increase in equipment sales from INF during the first nine months of
1999. During the first nine months of 1999 CWC's cost of service and
CONESTOGA ENTERPRISES, INC.
equipment sold was over $2.4 million, and INF's cost of equipment sold was
over $2.0 million. Together CTT and BVT reduced the costs of network
operations and sales during the first nine months of 1999 by 9.2% when
compared to the first nine months of 1998. Network operations and cost of
sales expenses for the third quarter of 1999 were 0.3% greater than the
second quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expenses include charges from all of the
subsidiaries. The 17.6% increase during the first nine months of 1999
compared to the same period of 1998 is a direct result of the timing of the
start of commercial operations of CWC. For the first nine months of 1999 CWC
had depreciation expense of $2.1 million compared with only $680 thousand
during the first nine months of 1998. The depreciation expense of the local
exchange carriers CTT and BVT increased only 1.3% or $94 thousand during the
first nine months of 1999. This was a result of the implementation of new
depreciation rates during the second quarter of 1999, applied retroactively to
January 1, 1999, which decreased the depreciation rates on certain capital
accounts. The new rates are based on findings contained in a depreciation
study performed by an outside consulting firm. Depreciation and amortization
expenses for the third quarter of 1999 were 6.7% greater than the second
quarter of 1999.
Customer Operations
All of the Company's subsidiaries incur customer operations expenses. The
overall increase in the customer operations expenses during the first nine
months of 1999 is attributable to CCI's increased customer operations expenses
for its long distance and CLEC services some of which were start up costs.
CWC's customer operations expenses increased as a result of greater
advertising and sales expenses for the PCS business. The operations expenses
of the telephone companies increased 2.5% or $103 thousand during the first
nine months of 1999 and 1998. Customer operations expenses for the third
quarter of 1999 were 26.7% greater than the second quarter of 1999.
Corporate Operations
Corporate operations expenses include charges from all the Company's
subsidiaries. The increase during the first nine months
CONESTOGA ENTERPRISES, INC.
of 1999, when compared with the first nine months of 1998, is largely the
result of additional personnel in the Human Resource Department and the
Management Information Department (MIS). One time costs attributable to the
implementation of a new corporate information and accounting system by the MIS
department added to the increase. The new system will be in service by the
end of the fourth quarter of 1999.
Taxes, other than income
Taxes, other than income, increased primarily due to the increased
operations of various business segments.
Other Income (Deductions), Net
The shift in this line item from income of $6.8 million for the first nine
months of 1998 to a loss of $2.0 million for the same period of 1999 is
primarily attributable to the income derived from the Company's cellular
partnership interest in 1998 and its subsequent liquidation thereof during the
same period, totaling $8.2 million. An addition item contributing to the
variance were the gains realized from the sale of equity securities during
1998. The Company did not have such income or gains during the first nine
months of 1999. The decrease in Other, net is directly related to additional
interest income earned on short term investments during 1998.
Income Taxes
Increase/(Decrease)
(in thousands)
Third Quarter Ended
September 30 1999 compared to
September 30 1998 $ (298) -22.9%
Nine Months Ended
September 30 1999 compared to
September 30 1998 $ (3,774) -50.3%
Income taxes incurred during the first nine months of 1998 were higher than
during the same period of 1999 as a result of the extraordinary gain from the
liquidation of the cellular partnership interest. The income tax provision
differs from the amount of income tax determined by applying the federal
income tax rate to pretax income primarily due to state income taxes and
goodwill amortization. The percentage of income tax to pretax income was
52.6% for the nine months ended September 30, 1999 compared to 44.4% for the
nine months ended September 30, 1998.
CONESTOGA ENTERPRISES, INC.
NET INCOME
Increase/(Decrease)
(in thousands)
Third Quarter Ended
September 30 1999 compared to
September 30 1998 $ (1,084) -63.1%
Nine Months Ended
September 30 1999 compared to
September 30 1998 $ (6,050) -64.2%
The comparison of net income for the first nine months of 1999 and 1998 is
distorted by the extraordinary $4.5 million after tax gain from the
liquidation cellular partnership interest during the second quarter of 1998.
Excluding the gain from the liquidation of this partnership interest net
income during the first nine months of 1999 was 31.4% less than during the
first nine months of 1998. This variance reflects the additional costs
associated with the Company's expansion of its PCS, long distance and CLEC
businesses. CWC's operating loss during the first nine months of 1999 was
$5.7 million, and was slightly over $2.0 million during the third quarter, but
remains within the overall business plan. CCI experienced a $340 thousand
operating loss for the period due to some very aggressive pricing competition
and expenses associated with the CLEC expansion. The net income for the third
quarter of 1999 was $852 thousand or 57.3% under the second quarter 1999 net
income.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Nine Months Ended September 30, 1999 1998
Cash Flows From (Used In):
Operating activities $12,863 $ 6,726
Investing activities (11,227) (7,654)
Financing activities ( 6,878) 11,174
The Company uses the net cash generated from its operations and from
external financing to fund capital expenditures for network
CONESTOGA ENTERPRISES, INC.
expansion and modernization, to pay dividends, and to invest in new
businesses. The Company's obtains funds, for these purposes primarily from
operations and, to the extent necessary, from readily available external
financing arrangements. These funding sources are sufficient to meet ongoing
operating and investing requirements. We expect that presently foreseeable
capital requirements will be financed primarily through internally generated
funds, but some draw on the lines of credit may be required. Additional debt
or equity financing may be needed to fund additional development activities or
to maintain our capital structure to ensure financial flexibility.
Cash Flows From Operating Activities
The Company's primary source of funds continues to be cash generated from
operations. Taking into account net income plus the various adjustments for
depreciation and amortization, the cash flows from operating activities in the
first nine months of 1999 were $12.9 million. Cash flows from operating
activities for the third quarter of 1999 was over $5.5 million and was $176
thousand greater than the second quarter of 1999. Net income for accounting
purposes is decreased by the amortization of the goodwill arising from the
acquisitions of BVT and INF, and the higher depreciation expense arising from
the capital investment the in PCS system. Amortization and depreciation are
non-cash expenses, and consequently a source of cash that the Company can use
for the capital investments necessary to maintain and upgrade its network and
build and develop its PCS system.
Cash Flows Used in Investing Activities
Capital expenditures are the Company's primary use of cash resources. The
Company's capital expenditures in the first nine months of 1999 included $7.9
million for the Company's local exchange operations and $3.1 million for the
continued build-out of its PCS operation. The investment in local exchange
operations was $1.8 million or 29.5% greater during the first nine months of
1999 when compared with the investments made during the first nine months of
1998. The investments are made to support the Company's businesses by
facilitating the introduction of new products and services, enhancing
responsiveness to competitive challenges and increasing the operating
efficiency and productivity of the Company's networks.
CONESTOGA ENTERPRISES, INC.
Substantial amounts of additional capital will be needed to complete the
remaining build-out of the PCS network. CWC's budgeted capital requirements
for 1999 are $10 million. The capital required over the next several years to
complete the build out of its entire PCS network, could exceed $20 million.
Additional funding could come from (1) internally generated funds, (2) long-
term debt, or(3) the issuance of additional common stock or a combination of
the three sources.
Cash Flows Used in Financing Activities
As in prior years, dividend payments were a significant use of capital
resources. In the first nine months of 1999 the Company paid common stock
dividends totaling $4.391 million. During the first nine months of 1999,
2,952 shares of preferred stock were redeemed for cash and 20,358 shares of
preferred stock were converted into common shares.
During the first nine months of 1999 $2.75 million was paid on principal on
long term debt in accordance with the Company's long term debt obligations.
During the first nine months of 1999, the Company did not borrow against the
two lines of credit totaling $15 million. During the first quarter of 1998,
the Company borrowed $21 million to finance the capital requirements
associated with the development of CWC's wireless PCS network.
In May 1999 the Company amended its articles of incorporation to increase
the number of authorized common shares to 20 million and to reduce the par
value from $5 to $1 per share.
Equity Investments
The Company continues to invest in the future of the telecommunications
industry through ownership of publicly traded stock of other telecommunication
companies. During the first nine months of 1999, the market value of the
Company's total investment increased. The market value of the Company's
investment stock as of September 30, 1999 was $3.36 million. Management views
this investment as a source of future liquidity.
CONESTOGA ENTERPRISES, INC.
Long Term Debt
The long-term debt obligations are unsecured, but impose certain financial
covenants upon the company including, but not limited to, restrictions upon
types of investments, the amount of dividends paid and the incurrence of
additional debt by the Company and its subsidiaries. The Company is currently
in compliance with all loan covenants.
OTHER FACTORS:
PCS SERVICE:
CWC began commercial operations as a provider of wireless
telecommunications services in May 1998. As of September 30, 1999 it had
82 base stations in service throughout the Reading, Sunbury and
Williamsport areas. CWC plans to put an additional 14 base stations into
service during 1999, in an effort to augment coverage in those markets.
CWC holds licenses to provide wireless services known as Personal
Communication Services ("PCS") in the C and D block radio spectrum. PCS is a
wireless communications service based on lower power and a higher frequency
bandwidth than cellular service. PCS is anticipated to be more reliable, of
better quality and less expensive for the customer, than cellular
communication. The Basic Trading Areas in which CWC holds licenses are
Reading, Pottsville, Sunbury, Williamsport, and State College, encompassing
ten counties in Pennsylvania. In April 1999 CWC was the successful bidder in
the Federal Communications Commission C Block re-auction for additional
bandwidth in the Basic Trading Areas (BTA)where the Company already held
licenses and for bandwidth in the State College BTA.
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.
CONESTOGA ENTERPRISES, INC.
REGULATED INDUSTRY:
CTT and BVT are currently subject to a rate making process imposed by the
Pennsylvania Public Utility Commission (PUC) through its "rate of return
regulation and procedures". An amendment to the Pennsylvania Public Utility
Act passed in 1993 provides for streamlined rate regulation and an alternate
method for determining rates. This new regulation, referred to as Chapter 30,
provides a price stability mechanism in which a telephone company's annual
revenues from non-competitive services may be permitted to change in line with
the gross domestic product price index, minus a productivity offset, with no
limitation on earnings by the regulated company. In order for the Company to
avail itself of the procedures permitted by Chapter 30, CTT and BVT must
commit to providing universal broadband services by 2015. Both companies
filed a Chapter 30 Plan in July 1998 and approval is expected in November
1999.
The telecommunication industry continues to undergo fundamental changes,
which may have a significant impact on financial performance. The Federal
Telecommunications Act of 1996 (TA 96) creates a regulatory environment that
encourages competition. As rural companies, CTT and BVT are exempt from many
of the most onerous aspects of competition, unless prospective competitors can
pass a public interest standard and agree to offer service throughout the
telephone companies' territories. In addition CTT and BVT received approval
from the Pa. P.U.C. in March of 1998 of a petition that has significantly
strengthened the companies' competitive position.
Management believes that competition will continue to bring many new
opportunities. Management has positioned the Company to take advantage of
these opportunities and remains optimistic about the future. CCI has
significantly grown its long distance business both in the CTT and BVT
franchise territories, as well as surrounding areas. In addition CCI's
competitive local exchange business is operational and is offering services in
Bell Atlantic's franchise territory. The Company has experienced strong
growth in this business segment during the first nine months of 1999.
CONESTOGA ENTERPRISES, INC.
YEAR 2000 ISSUES:
The information provided below constitutes a "Year 2000 Readiness Disclosure"
for purposes of the Year 2000 Information and Readiness Act.
The Year 2000 ("Y2K") problem arises from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the inability of such
programs to differentiate between years with same two final digits. Any
program so created may read, or attempt to read, "00" as the year 1900, rather
than the year 2000. There are other related issues which could also lead to
incorrect calculations or failure, such as (i) the assignment by some systems
of a special meaning to certain dates, such as 9/9/99, and (ii) extra
resulting from the year 2000 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 depends heavily on computer systems and uses a significant
number of software programs and operating systems throughout the organization.
To the extent the software applications are unable to interpret the calendar
year 2000, some level of modification or replacement of these applications is
necessary. The Company also depends on vendor compliance and will require its
vendors to represent that their systems are year 2000 compliant.
The Company is addressing the year 2000 problem. It has appointed a task
force to assess the scope of the risk and to bring its applications into
compliance. This has included utilizing outside service organizations.
Conestoga's digital network and all major billing and information systems have
been tested and are ready for the year 2000. Potential problems 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 complex interactions of its systems with the systems of
third parties.
CONESTOGA ENTERPRISES, INC.
Forward-Looking Statements
Information contained in this Management's Discussion and Analysis and
elsewhere in this quarterly report with respect to expected financial results
and future events and trends is forward-looking, based on our estimates and
assumptions and subject to risks and uncertainties. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
The following important factors could affect the future results of our
company and could cause those results to differ materially from those
expressed in the forward-looking statements: (i) changes in economic and
market conditions; (ii)effects of state and federal regulation; (iii) the
impact of new technologies. You should not place undue reliance on these
forward-looking statements, which are applicable only as of the date hereof.
We have no obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof or to reflect
the occurrence of unanticipated events.
CONESTOGA ENTERPRISES, INC.
PART II. OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 6(B) EXHIBITS AND REPORTS ON FORM 8-K
NONE
CONESTOGA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATE November 15, 1999 \s\ Albert H Kramer
Albert H Kramer
President
DATE November 15, 1999 \s\ Donald R Breitenstein
Donald R Breitenstein
Controller
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