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, 2000
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)
Registrants 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, 2000, the outstanding number of shares of Common
Stock, par value $1.00, was 7,851,450.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 2000 and December 31, 1999
(In Thousands, Except Shares and Per Share Data)
ASSETS
9/30 12/31
2000 1999*
Current Assets
Cash and Cash Equivalents $ 11,704 $ 2,507
Accounts receivable,
including unbilled revenue 11,142 11,449
Inventories, at average cost 2,432 2,062
Prepaid expenses 2,981 1,545
Total Current Assets 28,259 17,563
Investments and Other Assets
Cost in Excess of Net Assets of
Businesses Acquired 43,827 45,183
Investments in partnerships 32 65
Investments in equity securities 543 3,724
Prepaid Pension Costs 2,998 2,871
Other 1,932 2,068
49,332 53,911
Plant
In Service 193,967 179,993
Under Construction 11,662 3,875
205,629 183,868
Less accumulated depreciation 96,556 87,194
109,073 96,674
Total Assets $186,664 $168,148
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
* 1999 amounts have been restated to include the acquisition of
TeleBeam , Inc. recorded as a pooling of interests.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
September 30, 2000 and December 31, 1999
(In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30 12/31
2000 1999*
Current Liabilities
Current maturities of long term debt $ 3,955 $ 3,982
Current liability under capital lease 64 0
Notes payable 0 1,000
Accounts payable 5,630 6,900
Accrued:
Taxes 2,644 1,290
Interest 559 197
Payroll & Vacation Pay 1,346 932
Advance billings/Customer Deposits 3,933 2,651
Total Current Liabilities 18,131 16,952
Long Term Liabilities
Long term debt, less current maturities 71,045 50,616
Liability under capital lease, less
current maturities 2,811 0
Accrued post retirement cost 1,125 1,108
Other 866 1,387
75,847 53,111
Deferred Income Taxes 9,052 10,878
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized
900,000 shares; issued and outstanding;
9/30/2000 -155,073,12/31/99 - 156,779 10,080 10,191
Common Stockholders' Equity
Common Stock par value $1 per share;
authorized 9/30/2000 200,000,000 shares;
12/31/1999 20,000,000; Issued 7,897,914 7,898 7,898
Additional Paid-In Capital 44,937 44,929
Retained earnings 21,345 24,041
Net unrealized appreciation on
marketable equity securities 233 1,667
Less cost of treasury stock; 9/30/2000
46,464 shares and 12/31/99 82,225 shares (859) (1,519)
73,554 77,016
Total Liabilities and
Stockholders' Equity 186,664 168,14
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED
2000 *1999 2000 *1999
Operating Revenues:
Local Services $3,829 $3,271 $10,786 $9,191
Long Distance and Access
Services 11,976 12,686 36,421 38,437
Wireless Services 1,144 571 2,624 1,366
Equipment and Other 4,664 5,452 15,753 15,345
21,613 21,980 65,584 64,339
Operating Expenses:
Network Operations and Cost
of Sales 8,895 9,673 27,076 26,333
Depreciation and Amortization 4,178 3,907 12,329 11,345
Selling, General and
Administrative 5,966 6,249 19,219 17,881
19,039 19,829 58,624 55,559
Operating Income 2,574 2,151 6,960 8,780
Other Income(Deductions), Net:
Interest Expense (1,328) (1,009) (3,409) (3,078)
Loss from unconsolidated
partnershIp interest (120) (37) (357) (70)
Gain on Sale of Securities 321 0 2,118 0
Other, Net 102 91 188 340
(1,025) (955) (1,460) (2,808)
Income Before Income Taxes 1,549 1,196 5,500 5,972
Income Taxes 778 1,005 2,988 3,468
Net Income $771 $191 $2,512 $2,504
*Basic earnings per common share $0.08 $0.01 $0.27 $0.27
*Diluted earnings per common share $0.08 $0.01 $0.27 $0.27
*Dividends per common share $0.210 $0.210 $0.630 $0.623
* 1999 amounts have been restated to include the acquisition of
TeleBeam , Inc. recorded as a pooling of interests.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999
(In Thousands, Except Per Share Data)
2000 1999
Net Income $2,512 $2,504
Unrealized gains on Securities
Unrealized holding gains
during period (36) 36
Less: reclassification adjustment
for gains included in net income (1,398) 0
Comprehensive Income $1,078 $2,540
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(in thousands)
2000 1999
Cash Flows from Operating Activities
Net cash provided by operating activities $12,126 $12,882
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs and
salvage (23,247) (11,829)
Proceeds from sale of marketable equity
securities 2,986 0
Proceeds from sale of unconsolidated
partnership interests 0 0
Capital investments in unconsolidated
partnershp interests (324) 0
Net cash used in investing activities (20,585) (11,829)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 35,000 1,000
Proceeds from short-term borrowing (net) (1,000) 223
Proceeds from capital lease financing 2,900 0
Principal payments on long term borrowing (14,597) (3,672)
Principal payments on capital lease financing (25) 0
Proceeds from issuance of stock 93 633
Proceeds from issuance of stock under the
dividend reinvestment plan 595 645
Common stock dividends paid (4,932) (4,391)
Preferred stock redemption (111) (192)
Preferred stock dividends paid (267) (275)
Purchase of common stock for the treasury 0 0
Net cash provided by (used in)
financing activities 17,656 (6,029)
Increase (decrease) in cash and cash
equivalents 9,197 (4,976)
Cash and cash equivalents
Beginning 2,507 9,319
Ending $11,704 $4,343
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $3,047 $2,490
Income Taxes $3,623 $3,056
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 three months and nine months
ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. The
December 31, 1999 condensed balance sheet data was derived from audited
financial statements, and restated to include the acquisition of
TeleBeam, Inc. which was accounted for as a pooling of interests. For
further information, refer to the consolidated financial statements and
footnotes included in Conestogas 1999 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: ACQUISITION
On January 31, 2000 the Company acquired all the outstanding shares of
TeleBeam, Inc. including the value of TeleBeams stock options
outstanding. The Company issued 734,962 shares to TeleBeam, Inc.
shareholders. The transaction is accounted for as a pooling of
interests, which accordingly required restatement of the financial
statements. All financial information presented for current and prior
periods include the results of TeleBeam, Inc.
NOTE 3: EARNINGS PER SHARE
Per share data for the nine months ended September 30, 2000 and 1999
are based on the weighted average number of shares outstanding of
7,828,838 and 7,768,535 for 2000 and 1999 respectively. Net income
available for the common shareholders was approximately $2,111,000
and $2,085,000 for 2000 and 1999 respectively. Per share data for the
three months ended September 30, 2000 and 1999 are based on the
weighted average number of shares outstanding of 7,842,518 and
7,791,673 for 2000 and 1999, respectively. Net income available for
the common shareholders was approximately $637,000 and $57,000 for 2000
and 1999 respectively. Net income available for common shareholders
differs from net income on the consolidated statement of income by the
amount of preferred stock dividends.
The effect of convertible preferred stock in 2000 and 1999 and the
effect of stock options outstanding in 2000 were anti dilutive and
therefore excluded from the computation of diluted earnings per share.
NOTE 4: LONG TERM DEBT
Long term debt is summarized as follows:
(In thousands)
9/30/00 12/31/99
Series A Senior Note interest payable
quarterly at 6.91%, annual principal
payments of $2,000,000 through June
30, 2000, unsecured 0 2,000
Series B Senior Note interest payable
quarterly at 7.59%, annual principal
payments of $1,454,545 starting
June 30, 2001 through June 30,
2011, unsecured 16,000 16,000
Promissory note, interest payable
quarterly at 6.89%. Quarterly principal
payments of $250,000 through
February 1, 2002 unsecured. 1,500 2,250
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
8 Year Term Loan interest payable
monthly at Wall Street Journal
Prime Rate, unsecured principal due
in full at end of term March 2006 1,500 1,500
15 year term loan interest payable
quarterly at 7.84%, quarterly
principal payments of $500,000
starting January 20, 2005 through
October 20, 2014, Unsecured 20,000 0
15 year term loan interest payable
quarterly at 7.86%, quarterly
principal payments of $375,000
starting January 20, 2005 through
October 20, 2014, Unsecured 15,000 0
Other term loans payable to
Bank at various rates 0 11,848
$75,000 $54,598
Less current Maturities 3,955 3,982
$71,045 $50,616
On April 28, 2000, the Company borrowed $20 million of the term loan at
7.84%. On September 1, 2000 the Company took down the second part of
the term loan in the amount of $15 million at 7.86%. During the first
nine months of 2000 the Companys line of credit with a local bank was
increased from $5 million to $10 million. As of September 30, 2000
there was no balance outstanding on the companys lines of credit.
NOTE 5: 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, 2000, 109,000 options were granted to employees of the
Company at an exercise price of $17.48 per share, with a vesting period
of three years. No shares are exercisable as of September 30, 2000.
The remaining contractual life of the options is 9.6 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 Companys 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
Companys net income or earnings per share.
NOTE 6: OPERATING SEGMENTS
Statement of Financial Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information establishes standards
for the way that public enterprises report information about operating
segments in annual financial statements.
The Companys 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 three reportable segments: Telephone -
traditional telephone service provided by CTT and BVT; wireless
paging and PCS communication services provided by CWC and CMS; and CLEC
and full service inter exchange long distance provided by CCI and TLB.
The Other column primarily includes equipment sale and consulting
services provided by 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, 2000 and 1999 are as follows:
CLEC
and
Long
Telephone Wireless Distance Other Total
( in thousands )
Nine months ended
September 30, 2000:
Operating revenues
from external customers;
Local Service $ 9,775 $ $1,012 $ $10,787
Long distance and
access service 22,395 14,024 36,419
Wireless service 2,624 2,624
Equipment and Other 6,121 614 2,112 6,907 15,754
38,291 3,238 17,148 6,907 65,584
Inter segment operating
Revenues 2,656 83 74 60 2,873
Operating profit (loss) 15,004 (6,330) (1,218) (496) 6,960
Total Assets 118,182 36,937 25,659 16,237 197,015
Capital expenditures 9,160 6,055 7,889 143 23,247
Depreciation and
Amortization 7,926 2,887 1,028 488 12,329
Nine months ended
September 30, 1999:
Operating revenues
from external customers;
Local Service $ 8,664 $ $ 527 $ $ 9,191
Long distance and
access service 23,506 14,930 38,436
Wireless service 1,366 1,366
Equipment and Other 6,052 561 2,277 6,456 15,346
38,222 1,927 17,734 6,456 64,339
Inter segment operating
Revenues 2,030 22 206 2,258
CLEC
and
Long
Telephone Wireless Distance Other Total
( in thousands )
Operating profit (loss) 15,867 (5,669) (667) (751) 8,780
Total Assets 115,479 32,019 20,439 8,047 175,984
Capital expenditures 7,752 3,086 577 242 11,657
Depreciation and
Amortization 7,480 2,197 841 827 11,345
Certain items in the schedule above need to be reconciled to the
consolidated financial statements and are provided in the schedules
below:
Nine Months Ended
September 30 September 30
2000 1999
Revenues:
Total revenue for
Reportable segments $ 61,490 $ 60,141
Other Revenues 6,967 6,456
Elimination of
Intersegment revenues (2,873) (2,258)
Total consolidated revenues $ 65,584 $ 64,339
Total Assets:
Total assets for
Reportable segments $180,778 $ 167,937
Other assets 16,237 8,047
Elimination and
adjustments (10,351) (7,836)
Total consolidated assets $186,664 $ 168,148
NOTE 7: OTHER
Certain items of the September 30, 1999 consolidated financial
statements have been restated to conform to the September 30, 2000
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.
On May 6, 2000 the shareholders approved an amendment to the
Articles of Incorporation to increase the number of authorized common
shares from 20 million to 200 million.
During the second quarter of 2000, the Company began leasing a
building under a long term capital lease agreement. The agreement
provides for monthly rentals of approximately $24,000 for the next
twenty years.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF THE QUARTERLY INCOME STATEMENTS
Overview
During the third quarter of 2000, the Companys net income was $771
thousand, $0.08 per common share, compared to $1.360 million, $0.16 per
common share, in the second quarter of 2000, and $191 thousand, $0.01
per common share, in the third quarter of 1999. The Companys 1999
financial statements have been restated to include the 1999 results of
TeleBeam, Incorporated, (TeleBeam), which was acquired by the Company
on January 31, 2000. The TeleBeam acquisition has been accounted for
as a pooling of interests. Inclusion of TeleBeams results for the
first nine months of 1999 caused the Companys net income to decrease
from $0.42 per common share to $0.27 per common share.
The Companys net income during the first nine months of 2000
included a before tax gain totaling $2.1 million from the sale of
investment securities.
The Companys net income for the first nine months of 2000 was
negatively impacted by (i) over $800 thousand in one time acquisition
costs associated with the acquisition of TeleBeam, (ii) the operating
losses of Conestoga Wireless Companys wireless telecommunications
system, known as Personal Communications Service (PCS), and (iii) the
operating losses of the long distance and competitive local exchange
services of Conestoga Communications, Inc.
The revenues and customer base of Conestoga Wireless Company
substantially increased during the first nine months of 2000 compared
to the first nine months of 1999. During the third quarter of 2000,
Conestoga Wireless Company built five new telecommunications towers
bringing the total towers added during the year to twelve. Conestoga
Wireless Company is progressing with the build out of its PCS system in
State College, Pennsylvania.
Conestoga Communications, Inc. and TeleBeam, Inc. have adopted
the common trade name, CEI Networks. Their CLEC revenues and customer
base increased substantially during the first nine months of 2000. CEI
Networks is moving its CLEC customers from resale to facilities based
service. Its CLEC customer base grew 95%, over 3,600 lines, during the
first nine months of 2000.
The access lines in service of the Companys local exchange
carriers increased during the first nine months of 2000 by 2,935 to a
total of 81,804.
The Companys subscriber and access line data as of September 30,
2000 and December 31, 1999 is as follows:
Sept. 30 Dec. 31
2000 1999 change
LEC Lines 81,804 78,869 +4%
CLEC Lines 7,509 3,849 +95%
PCS Subscribers 13,265 9,792 +36%
Long Distance Subscribers 36,274 33,341 +9%
Paging Lines 6,190 6,246 1%
DSL Subscribers 294 0 N/A
(began offering Jul. 2000)
Cable Modem Subscribers 331 23 +1,339%
Video Subscribers 2,650 2,312 +15%
RESULTS OF OPERATIONS
REVENUES
Operating Revenues:
Increase/(Decrease)
(in thousands)
Third Quarter Ended
September 30, 2000 compared to September 30, 1999
Local Service $ 558 17.1%
Long Distance and Access Service (710) (5.6%)
Wireless Service 573 100.4%
Equipment and Other (788) (14.4%)
Total $ (367) (1.7%)
Nine Months Ended
September 30, 2000 compared to September 30, 1999
Local Service $1,595 17.4%
Long Distance and Access Service (2,016) (5.2%)
Wireless Service 1,258 92.1%
Equipment and Other 408 2.7%
Total $1,245 1.9%
Operating revenues increased during the first nine months of 2000
over the first nine months of 1999 by $1.2 million or 1.9%. Operating
revenues for third quarter of 2000 decreased 1.9% from the second
quarter of 2000, and 1.7% from the third quarter 1999. This decrease
was caused by decreases in long distance and access revenues and
equipment revenues. Increased competition and the reduction of the
telephone companies access and long distance rates caused the decrease
in access and long distance revenues. The one time revenues from the
installation of security monitoring systems for a major account during
the second half of 1999 caused a spike in equipment revenues during the
third quarter of 1999.
The local exchange revenues of the telephone companies and the
competitive local exchange carriers increased during the first nine
months of 2000. The wireless revenue increase was due to increased
service revenues from the PCS provider, Conestoga Wireless Company.
Local Service
Conestoga Telephone and Telegraph Company (Conestoga Telephone)
and Buffalo Valley Telephone Company (Buffalo Valley Telephone), the
local telephone companies, and CEI Networks, the competitive local
exchange companies, contributed to the increase in local service
revenue during the third quarter of 2000. The local service rates of
Conestoga Telephone and Buffalo Valley Telephone increased during the
second quarter of 2000 as a result of the Pennsylvania Public Utility
Commissions Global Order. The competitive local exchange companies
revenue during the third quarter of 2000 was 42% greater than their
revenue during the second quarter of 2000, and 68% greater than the
third quarter of 1999. The Company had a total of 89,313 access lines
in service as of September 30, 2000, an increase of 6,595 lines during
the first nine months of 2000.
Long Distance and Access Service
Long Distance and Access Service revenues are generated by
Conestoga Telephone and Buffalo Valley Telephone, and CEI Networks.
The growth rate of the access revenues of Conestoga Telephone and
Buffalo Valley Telephone decreased during the first nine months of 2000
due to a decline in the rate of growth in the minutes of use on their
networks compared to the first nine months of 1999, and to the Global
Order which decreased long distance and access rates in the second
quarter of 2000. The interlata minutes of use in their combined
systems increased 6.7% during the first nine months of 2000 compared
with an 18% increase during the same period of 1999. During the first
quarter of 2000, Conestoga Telephones access revenues were adversely
impacted by adjustments for prior periods through the interlata
settlement process of the National Exchange Carriers Association.
Intralata competition within Pennsylvania and the long distance
rate decrease have caused long distance revenue of Conestoga Telephone
and Buffalo Valley Telephone to decline. During the first nine months
of 2000 the combined long distance revenues of Conestoga Telephone and
Buffalo Valley Telephone declined 27.4%, or $926 thousand, and the long
distance revenues of CEI Networks decreased 6.9%, or $1.038 million,
compared to the first nine months of 1999.
Wireless Service
Wireless Service revenue is generated by Conestoga Wireless
Companys PCS service and Conestoga Mobile Systems paging service.
During the third quarter of 2000, Conestoga Wireless generated $986
thousand in PCS revenue, as compared with $621 thousand during the
third quarter of 1999, and $762 thousand during the second quarter of
2000. PCS revenues for the first nine months of 2000 and 1999 were
$2.413 million and $1.166 million respectively. As of September 30,
2000, Conestoga Wireless had 107 telecommunications antenna facilities
in service. During the first nine months of 2000 Conestoga Wireless
placed twelve additional telecommunications antenna facilities into
service.
Equipment and Other
Equipment and Other revenues include the sale and lease of
communications equipment, including telephones, PBX equipment, pagers
and PCS wireless telephones, by all of the subsidiaries. Billing and
collection revenue and directory advertising revenue are also included
as revenue of the telephone company subsidiaries. Conestoga Telephone
posted a decrease in equipment sales during the first nine months of
2000 compared with the same period of 1999. Infocores equipment sales
increased due to the completion of the security system installation
earlier this year as mentioned above.
EXPENSES:
Operating Expenses
Increase (Decrease)
(in thousands)
Third Quarter Ended
September 30, 2000 compared to September 30, 1999
Network Operations and Cost of Sales $ (778) (8.0%)
Depreciation and Amortization 271 6.9%
Selling, General and Administrative (283) (4.5%)
Total $ (790) (4.0%)
Nine Months Ended
September 30, 2000 compared to September 30, 1999
Network Operations and Cost of Sales $ 743 2.8%
Depreciation and Amortization 984 8.7%
Selling, General and Administrative 1,338 7.5%
Total $3,065 5.5%
The 4.0% decrease in operating expenses during the third quarter
of 2000 from the third quarter of 1999 was caused by expense decreases
resulting from decreased equipment sales and long distance revenues and
certain one time charges booked during that quarter. The telco
operating expenses during the third quarter 2000 were relatively flat
when compared with the third quarter of 1999. The wireless operating
expenses during the third quarter 2000 increased 14% over the third
quarter 1999. The 5.5% increase in operating expenses during the first
nine months of 2000 includes certain one time acquisition costs
associated with the TeleBeam acquisition.
Network Operations and Cost of Sales
The increase in network operations and cost of sales expenses
during the first nine months of 2000 was caused in large part by the
expansion of the Companys PCS, long distance and CLEC businesses and an
increase in Infocores equipment sales and installation.
Compared to the third quarter of 1999, during the third quarter
of 2000, the various subsidiaries of the Company experienced cost
changes as follows:
(i) Conestoga Communications cost of service decreased
4%, or $73 thousand, due to a decline in the rates
charged by the long distance carriers that provide
its long distance access;
(ii) Infocores costs decreased 25%, or $542 thousand due
to lower equipment sales revenues;
(iii) The costs of network operations and sales of
Conestoga telephone and Buffalo Valley Telephone
increased by 3%; and
(iv) TeleBeams costs were 14% lower, in line with its
lower long distance revenues.
During the third quarter of 2000, the Companys network and cost
of operations expenses were 1% lower than during the second quarter.
Depreciation and Amortization
Depreciation and amortization expenses include charges from all
of the subsidiaries. The continued build out of the wireless PCS and
the CLEC infrastructures caused most of the increase in depreciation
and amortization expenses from the third quarter of 1999 to the third
quarter of 2000. The increase in the depreciation and amortization
expenses of the PCS and the CLEC infrastructures was $353 thousand, or
33%, between the two quarters. Comparing the same quarters, the local
telephone companies combined depreciation expense increased $138
thousand or 5%.
During the second quarter of 2000 the amortization of the
purchase price of the 1997 acquisition of Infocore was completed, so
that this item of amortization expense was discontinued during the
third quarter.
The depreciation expenses of the various business entities of the
Company during the first nine months of 2000 compared with the first
nine months of 1999 are as follows:
(i) the depreciation expense of Conestoga Wireless was
$2.831 million compared with $2.143 million;
(ii) The depreciation expense of the competitive local
exchange carriers, Conestoga Communications and
TeleBeam, Inc. was $1.027 million compared to $841
thousand; and
(iii) The depreciation expense of the telephone companies
was $7.9 million compared to $7.5 million.
Depreciation expense increased 3.4% during the third quarter 2000
when compared with the second quarter.
Selling, General and Administrative
The Company and all of its subsidiaries incur selling, general and
administrative expenses. Selling expenses include customer care
expenses along with advertising and marketing. General and
administrative expenses include executive, accounting and finance,
information technology expenses, and taxes other than income. When
comparing the third quarter 2000 with the third quarter of 1999 the
decrease is primarily due to decreased costs from TeleBeam, Inc. which
reflects some one time charges during the third quarter of 1999.
When comparing the first nine months of 2000 with the first nine
months of 1999 the telephone companies selling general and
administrative costs were up 11.7%, or $1.082 million mostly in labor
related charges for additional personnel in the Sales and Marketing,
Human Resource and Management Information departments. Conestoga
Wireless also incurred increased selling, general and administrative
expenses with such expenses increasing 36.2%, or $685 thousand. Also
included in these expenses during the first nine months of 2000 is
$837,000 of one time costs relating to the acquisition of TeleBeam on
January 31, 2000.
When comparing the third quarter 2000 with the second quarter 2000
selling, general and administrative expenses were down 3.9% or $242
thousand.
Other Income (Deductions), Net
The change in other income (deductions) was mostly impacted by the
sale of some of the Companys marketable securities held for investment
during the first nine months of 2000. The sale of these securities
resulted in a before tax gain of $2.118 million. The Company did not
sell any investment securities during the first nine months of 1999.
The increase in long term debt also increased interest expense $331
thousand or 10.8% during this period.
Income Taxes
Increase/(Decrease)
(in thousands)
Third Quarter Ended
September 30, 2000 compared to September 30, 1999
$ (227) (22.6%)
Nine Months Ended
September 30, 2000 compared to September 30, 1999
$ (480) (13.8%)
Due to the decrease in operating income, income taxes incurred
during the third quarter and the first nine months of 2000 were lower
than during the same two periods of 1999. The Companys effective tax
rate (income tax expense as a percentage of income before income taxes)
was 54.3% and 58.1% for the first nine months of 2000 and 1999
respectively. The effective tax rate takes into consideration a
valuation allowance on state net operating losses and the relationship
of nondeductible goodwill amortization and merger costs to pretax
income. The third quarter 2000 effective tax rate was 50.2% compared
with 47.1% for the second quarter.
NET INCOME
Increase/(Decrease)
(in thousands)
Third Quarter Ended
September 30, 2000 compared to September 30, 1999
$ 580 303.7%
Nine Months Ended
September 30, 2000 compared to September 30, 1999
$ 8 0.3%
Third quarter 2000 net income was $771 thousand compared with $191
thousand for third quarter 1999 net income of $191 thousand. Net
income for the first nine months of 2000 and 1999 was $2.512 million
and $2.504 million, respectively. Net income for the first nine months
of both years include additional costs associated with the continued
expansions of the PCS, long distance and CLEC businesses. Net income
for the nine months ending on September 30, 2000, includes a $1.398
million after tax gain on the sale of investment securities, which are
partially offset by one time merger costs. Net Income for the nine
month period ended September 30, 1999 included some large one time
wireless and long distance bad debt write off costs.
Conestoga Wireless operating loss during the third quarter of 2000
was $1.975 million, compared with $2.062 million during the third
quarter of 1999. Conestoga Wireless operating loss during the third
quarter of 2000 was 9.7% less than its operating loss during the second
quarter of 2000, and 11.9% less than its loss during the first quarter
of 2000. Its operating loss for the first nine months of 2000 was
$6.330 million.
Excluding $750 thousand in costs related to the acquisition of
TeleBeam Inc., CEI Networks, including Conestoga Communications Inc.
and TeleBeam Inc. incurred a $467 thousand operating loss during the
first nine months of 2000.
The telephone companies operating income during the third quarter
of 2000 increased $239 thousand, or 4.8%, from the third quarter of
1999. The telephone companies operating income during the first nine
months of 2000 declined 5.4% compared to the first nine months of 1999,
primarily due to greater operating expenses.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Nine Months Ended September 30, 2000 1999
Cash Flows From (Used In): (in thousands)
Operating activities $ 12,126 $ 12,882
Investing activities (20,585) (11,829)
Financing activities 17,656 ( 6,029)
The Company uses the net cash generated from its operations and
from external financing to fund capital expenditures for network
expansion and modernization, pay dividends, and invest in new
businesses. The Companys 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. The Companys capital requirements for additional
development activities during the year 2000 necessitated additional
debt financing. Accordingly, on April 28, 2000, the Company entered
into a borrowing arrangement for a $35 million, unsecured, 15 year
term loan, and a $50 million line of credit to be renewed annually
until April 28, 2005. On April 28, 2000, the Company borrowed $20
million of the term loan at 7.84%, and on September 1, the balance of
$15 million of the term loan at 7.86%.
Cash Flows From Operating Activities
The Companys primary source of funds continues to be cash generated
from operations. Taking into account net income plus various
adjustments and depreciation and amortization, the cash flows from
operating activities in the third quarter of 2000 were $6.5 million,
and for the nine month period were $12.1 million. Net income for
accounting purposes is decreased by the amortization of the goodwill
arising from the acquisitions of Buffalo Valley Telephone and Infocore,
and the higher depreciation expense arising from the capital investment
in PCS and CLEC. Amortization and depreciation are non cash expenses,
and consequently a source of cash that the Company can use for the
capital investments necessary to maintain and upgrade its network and
build and develop PCS and its CLEC operations.
Cash Flows Used in Investing Activities
Capital expenditures are the Companys primary use of cash
resources. The Companys capital expenditures during the first nine
months of 2000 included $9.2 million for the Companys local exchange
operations, $6.1 million for the continued build out of its PCS
operations, and $7.9 million for the build out of its CLEC operations.
The Companys capital investments during the first nine months of 2000
were $11.4 million greater than during the first nine months of 1999.
For the third quarter 2000 capital expenditures were $12.9 million.
The investments are made to support the Companys businesses in order to
facilitate the introduction of new products and services, enhance
responsiveness to competitive challenges and increase the operating
efficiency and productivity of its networks. Substantial amounts of
additional capital will be needed for the remaining build out of the
PCS network and for the construction of TeleBeams fiber ring in State
College Pennsylvania. The budgeted capital requirements for 2000 for
Conestoga Wireless and TeleBeam are $9 million and $12 million
respectively. The capital required over the next several years to
complete the current phases of the Conestoga Wireless and TeleBeam
systems and to maintain state of the art telephone facilities could
require additional funding from (1) internal sources, (2) long term
debt (the $50 million line of credit facility), or (3) the issuance of
additional common stock or a combination of the three.
Cash Flows Used in Financing Activities
As in prior years, dividend payments are a significant use of
capital resources. In the third quarter and the first nine months of
2000 the Company paid common stock dividends totaling $1.647 million
and $4.932 million respectively. During the first nine months of 2000,
1,706 shares of preferred stock were redeemed for cash.
During the third quarter of 2000, the Company paid $251 thousand on
principal of long term debt in accordance with its long term debt
obligations. During the first nine months the Company paid $3.0
million on principal of long term debt. In the second quarter the
Company used $12 million of the $20 million long term debt secured in
April to refinance and pay off short term debt totaling $12 million in
the TeleBeam acquisition.
During the first quarter of 2000, the Companys line of credit with
a local bank was increased from $5 million to $10 million. The lines
of credit available to the Company, in addition to the $50 million line
mentioned above, now total $20 million. The Company borrowed against
its lines of credit during the first nine months of 2000. As of
September 30, 2000, the Company had no balance of short term debt
outstanding.
Equity Investments
The Company continues to invest in the future of the
telecommunications industry through ownership of publicly traded stock
of other telecommunication companies. Management views this
investment as a source of future liquidity. During the first nine
months of 2000 the Company sold a portion of its investment portfolio
and will most likely sell the balance during this year. The proceeds
from the sale during the third quarter were $499 thousand, and for the
first nine months were $3.0 million. The remaining portfolio had an
estimated market value of $483 thousand on September 30, 2000.
The Companys 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:
Conestoga Wireless is the provider of the Companys digital wireless
telecommunications services. As of September 30, 2000 it had 107 base
stations in service throughout the Reading, Sunbury, Pottsville and
Williamsport license areas. Conestoga Wireless plans to put an
additional 26 base stations into service during 2000, to augment
coverage in those markets and to expand into the State College,
Pennsylvania area.
Conestoga Wireless holds licenses to provide wireless services
known as Personal Communication Services (PCS) in the C and D
block radio spectrums. The Basic Trading Areas in which Conestoga
Wireless holds licenses are Reading, Pottsville, Sunbury, Williamsport,
and State College, covering ten counties in Pennsylvania.
Regulated Industry
Conestoga Telephone and Buffalo Valley Telephone are subject to a
rate making process regulated jointly by the Pennsylvania Public
Utility Commission and the Federal Communications Commission 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 companys 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,
Conestoga Telephone and Buffalo Valley Telephone must commit to
providing universal broadband services by 2015. Both Companies filed
Chapter 30 Plans in July 1998 and approval is expected in fourth
quarter 2000.
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, Conestoga
Telephone and Buffalo Valley Telephone 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, the
Pennsylvania Public Utility Commission approved a petition of Conestoga
Telephone and Buffalo Valley Telephone that has significantly
strengthened the companies competitive position relative to non
facilities based competition. However, facilities based competition is
not precluded.
Management is endeavoring to position the Company to take
advantage of the opportunities in the telecommunications industry as
they arise and remains optimistic about the future. During 2000
Conestoga Communications has continued to grow its long distance
business both in the Conestoga Telephone and Buffalo Valley Telephone
franchise territories, as well as surrounding areas. In addition
Conestoga Communications competitive local telephone business became
operational in 1998 and continues to offer service in Bell Atlantics
franchise territory. With the acquisition of TeleBeam in January 2000,
the Companys competitive long distance and local service businesses
were greatly expanded. In July 2000, Conestoga Communications and
TeleBeam began doing business under the name CEI Networks.
Forward Looking Statements
Information contained in this Managements 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.
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
On July 20, 2000 the Company filed Form 8 K, Exhibit 99.1 the
Registrants Restated Consolidated Statement of Income and Restated
Consolidated Balance Sheet for the year end 1999, restated to reflect
the pooling of interests method of accounting for the acquisition of
TeleBeam.
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, 2000 \s\ Albert H Kramer
Albert H Kramer
President
DATE November 15, 2000 \s\ Donald R Breitenstein
Donald R Breitenstein
Sr. Vice President/
Chief Financial Officer
