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 March 31, 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 March 31, 2000, the number of shares of Common Stock, par value
$1.00, outstanding were 7,825,196.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
March 31, 2000 and December 31, 1999
( In Thousands, Except Shares and Per Share Data)
ASSETS
3/31 12/31
2000 1999*
Current Assets
Cash and Cash Equivalents $2,629 $2,507
Accounts receivable, including unbilled
revenue 11,697 11,449
Inventories, at average cost 2,572 2,062
Prepaid expenses 1,428 1,545
Total Current Assets 18,326 17,563
Investments and Other Assets
Cost in Excess of Net Assets of Businesses Acquired 44,612 45,183
Investments in partnerships 303 65
Investments in equity securities 2,317 3,724
Prepaid Pension Costs 2,897 2,871
Other 1,761 2,068
51,890 53,911
Plant
In Service 183,878 179,993
Under Construction 3,949 3,875
187,827 183,868
Less accumulated depreciation 90,110 87,194
97,717 96,674
Assets $167,933 $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 )
March 31, 2000 and December 31, 1999
( In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
3/31 12/31
2000 1999*
Current Liabilities
Current maturities of long term debt $3,001 $3,982
Notes payable 2,745 1,000
Accounts payable 5,141 6,900
Accrued:
Taxes 1,960 1,290
Interest 194 197
Payroll & Vacation Pay 1,004 932
Advance billings/Customer Deposits 4,222 2,651
Total Current Liabilities 18,267 16,952
Long Term Liabilities
Long Term Debt, less Current Maturities 51,500 50,616
Accrued Post Retirement Cost 1,121 1,108
Other 1,323 1,387
53,944 53,111
Deferred Income Taxes 10,263 10,878
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issued and outstanding; 3/31/2000 - 155,479
12/31/99 - 156,779 10,106 10,191
Common Stockholders' Equity
Common Stock par value 3/31/2000 $1 per share;
authorized 3/31/2000 20,000,000 shares;
Issued 3/31/2000 7,897,580 7,898 7,898
Additional Paid-In Capital 44,958 44,929
Retained earnings 22,779 24,041
Net unrealized appreciation on
marketable equity securities 1,035 1,667
Less cost of treasury stock; 3/31/2000 72,384 shares and
12/31/99 82,225 shares (1,317) (1,519)
75,353 77,016
Total Liabilities and Stockholders' Equity $167,933 $168,148
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 and 1999
( In Thousands, Except Per Share Data)
2000 1999*
Operating Revenues:
Local Services $3,385 $2,932
Long Distance and Access Services 12,312 12,838
Wireless Services 673 346
Equipment and Other 5,577 4,437
21,947 20,553
Operating Expenses:
Network Operations and Cost of Sales 9,198 7,977
Depreciation and Amortization 4,112 3,764
Selling, General and Administrative 7,045 5,680
20,355 17,421
Operating Income 1,592 3,132
Other Income(Deductions), Net:
Interest Expense (1,029) (1,040)
Income (loss) from unconsolidated
partnerships interests (86) (10)
Gain on Sale of Securities 807 0
Other, Net 96 119
(212) (931)
Income Before Income Taxes 1,380 2,201
Income Taxes 999 1,146
Net Income $381 $1,055
Basic earnings per common share $0.03 $0.12
Diluted earnings per common share $0.03 $0.12
Dividends per common share $0.210 $0.203
* 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)
THREE MONTHS ENDED MARCH 31, 2000 and 1999
( In Thousands, Except Per Share Data)
2000 1999
Net Income $381 $1,055
Unrealized gains on Securities
Unrealized holding gains (losses)
during period (101) (142)
Less: reclassification adjustment
for gains included in net income (531) 0
Comprehensive Income ($251) $913
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(in thousands)
2000 1999
Cash Flows from Operating Activities
Net Income $381 $1,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization $4,113 $3,765
(Income) loss from unconsolidated partnership
interests 86 10
Provision for loss of equity securities 20 0
Gain on sale of marketable securities (807) 0
Gain on disposal of assets (5) 0
Write-off of loan fees 199 0
Changes in assets and liabilities:
(Increase) decrease in:
Accounts Receivable (246) (1,524)
Material and supplies (510) (55)
Prepaid expenses 116 (1,484)
Prepaid pension costs (26) (23)
Other Assets (83) 172
Increase (decrease) in:
Accounts Payable (1,759) (978)
Accrued expenses and other current
liabilities 1,640 263
Accrued taxes 670 1,362
Other liabilities (52) (277)
Deferred income taxes (290) (165)
Net cash provided by operating activities 3,447 2,121
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs and
salvage (4,390) (2,773)
Proceeds from sale of marketable equity securities 1,237 0
Proceeds from sale of unconsolidated partnership
interest 0 0
Capital investments in unconsolidated partnershp
interest (324) 0
Net cash used in investing activities (3,477) (2,773)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 500 0
Proceeds from short-term borrowing 13,745 230
Principal payments on long term borrowing (12,596) (251)
Proceeds from issuance of stock under the
employee stock purchase plan 29 24
Proceeds from issuance of stock under the
dividend reinvestment plan 201 229
Common stock dividends paid (1,641) (1,430)
Preferred stock redemption (85) 0
Preferred stock dividends paid (1) 0
Purchase of common stock for the treasury 0 0
Net cash provided by (used in) financing
activities 152 (1,198)
Increase (decrease) in cash and cash equivalents 122 (1,850)
Cash and cash equivalents
Beginning 2,507 9,319
Ending $2,629 $7,469
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
( In Thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
2000 1999
Cash Payments for:
Interest $979 $972
Income Taxes $427 $1,286
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 ended March 31,
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, 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 are based on the weighted average number of shares
outstanding of 7,817,394 and 7,675,289 for 2000 and 1999 respectively.
Net income available for the common shareholders was approximately
$247,000 and $917,000 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)
3/31/00 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 2,000 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. 2,000 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
In full at end of term Mar. 2006 1,500 1,500
Short term note payable to
Bank at March 31, 2000 expected
To be refinanced * 12,000
Other term loans payable to
Bank at various rates were
Repaid February 1, 2000* 1 11,848
$54,501 $54,598
Less current Maturities 3,001 3,982
$51,500 $50,616
* On April 28, 2000, the Company borrowed $20 million 15 year unsecured
term loan from a cooperative bank at 7.84%. The Company intends to use
a portion of the proceeds to pay $12 million of the short term notes
and accordingly the amount has been classified as long term at March
31, 2000. The new loan is to be repaid in 40 equal quarterly principal
payments commencing on January 20, 2005. The credit agreement contains
provisions which among other things require maintenance of certain
financial ratios, limit the amount of additional indebtedness and
restrict dividends.
NOTE 5: 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 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 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 March 31, 2000 and 1999 are as follows:
CONESTOGA ENTERPRISES, INC.
CLEC
and
Long
Telephone| Wireless| Distance| Other| Total
( in thousands )
March 31, 2000:
Operating revenues
from external customers;
Local Service $ 3,099 $ $ 286 $ $3,385
Long distance and
access service 7,456 4,858 12,314
Wireless service 673 673
Equipment and Other 1,904 238 661 2,772 5,575
12,459 911 5,805 2,772 21,947
Inter segment operating
Revenues 904 30 21 955
Operating profit (loss) 4,651 (2,230) (616) (213) 1,592
Total Assets 117,740 31,008 19,593 6,653 174,994
Capital expenditures 2,053 1,884 359 94 4,390
Depreciation and
Amortization 2,621 919 294 278 4,112
March 31, 1999:
Operating revenues
from external customers;
Local Service $ 2,820 $ $ 113 $ $ 2,933
Long distance and
access service 7,901 4,936 12,837
Wireless service 346 346
Equipment and Other 1,920 151 587 1,779 4,437
12,641 497 5,636 1,779 20,553
Inter segment operating
Revenues 644 7 72 723
Operating profit (loss) 5,093 (1,604) (102) (255) 3,132
Total Assets 112,443 31,349 19,975 7,609 171,376
Capital expenditures 2,026 447 219 81 2,773
Depreciation and
Amortization 2,538 674 276 276 3,764
Certain items in the schedule above need to be reconciled to the
consolidated financial statements and are provided in the schedules
below:
March 31: 2000 1999
Revenues:
Total revenue for
Reportable segments $ 20,130 $ 19,497
Other Revenues 2,772 1,779
Elimination of
Intersegment revenues (955) (723)
Total consolidated revenues $ 21,947 $ 20,553
Total Assets:
Total assets for
Reportable segments $168,341 $ 163,767
Other assets 6,653 7,609
Elimination of
Intersegment receivables (7,061) (3,228)
Total consolidated assets $167,933 $ 168,148
NOTE 6: OTHER
Certain items of the March 31, 1999 consolidated financial statements
have been restated to conform to the March 31, 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.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF THE QUARTERLY INCOME STATEMENTS
Overview
During the first quarter of 2000, net income was $381 thousand, or
$0.03 per common share, compared to $1.055 million, or $0.12 per common
share, in the first quarter of 1999. The financial statements for both
periods have been restated to include TeleBeam, which was acquired by
the Company on January 31, 2000. The TeleBeam acquisition was
accounted for as a pooling of interests. The inclusion of TeleBeams
results for the first quarter of 1999 resulted in the decrease of the
Companys net income from $0.16 per common share to $0.12 per common
share.
The Companys net income was enhanced by the strong operating
performances of the local exchange carriers and a gain on the sale of
some of its investment securities.
The Companys net income for the first quarter of 2000 was
negatively impacted by (i) over $800 thousand in one time acquisition
costs associated with the acquisition of TeleBeam; (ii) the operating
expenses of Conestoga Wireless Companys wireless telecommunications
system, known as Personal Communications Service (PCS), and the
operating expenses of the long distance and competitive local exchange
services of Conestoga Communications, Inc.
Both Conestoga Wireless Company and Conestoga Communications,
Inc. dramatically increased their revenues and customer bases during
the first quarter of 2000 compared to the first quarter of 1999.
During the first quarter of 2000, Conestoga Wireless Company built four
new telecommunications towers and began the build out of its PCS system
in State College, Pennsylvania. Conestoga Communications, Inc.
continued to move its CLEC customers from resale to facilities based
service. The access lines in service of the local exchange carriers
increased during the first quarter of 2000 by 1,137 to a total of over
80 thousand.
RESULTS OF OPERATIONS
REVENUES
Operating Revenues:
Increase/(Decrease)
(in thousands)
First Quarter Ended
March 31 2000 compared to March 31 1999
Local Service $ 453 15.5%
Long Distance and Access Service (526) 4.1%
Wireless Service 327 94.5%
Equipment and Other 1,140 25.7%
Total $1,394 6.8%
The increase in operating revenues during the first quarter of
2000 when compared with the same period of 1999 was due in large part
to the increase in revenue from the sale of equipment and related
revenue resulting from a large contract for installation of security
monitoring systems for a major account. TeleBeams long distance
revenues decreased during the first quarter of 2000 from the first
quarter of 1999 as the result of its sale of certain long distance
assets in the second quarter of 1999. This caused a decrease in the
long distance and access revenues of the Company for the period.
Operating revenues for the first quarter 2000 were down 3.3% when
compared with the fourth quarter of 1999.
Local Service
The local telephone companies, Conestoga Telephone and Buffalo
Valley Telephone, and the CLEC company, Conestoga Communications,
contributed to the increase in local service revenue during the first
quarter of 2000. The Company had a total of 83,968 access lines in
service as of March 31, 2000, including an increase of 1,250 lines
during the first quarter of 2000. In addition, the revenue of
Conestoga Communications during the first quarter of 2000 was more than
double its revenue during the first quarter of 1999.
Long Distance and Access Service
Long Distance and Access Service revenues are generated by the
local telephone companies, Conestoga Telephone and Buffalo Valley
Telephone, the CLEC company, Conestoga Communications and TeleBeam.
The growth rate of the access revenues of Conestoga Telephone and
Buffalo Valley Telephone decreased during the first quarter of 2000 due
to a decline in the rate of growth in the minutes of use on their
networks compared to the first quarter of 1999. The interlata minutes
of use in their combined systems increased 10.0% during the first
quarter of 2000 compared with a 19% increase during the first quarter
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 has
caused long distance revenue of Conestoga Telephone and Buffalo Valley
Telephone to decline. During the first quarter of 2000 the combined
long distance revenues of Conestoga Telephone and Buffalo Valley
Telephone declined 22.2%, or $272 thousand, the long distance revenues
of Conestoga Communications increased 29.6%, or $481 thousand, and the
long distance revenues of TeleBeam declined 18.1%, or $612 thousand,
compared to the first quarter of 1999.
Wireless Service
Wireless Service revenue is generated by Conestoga Wireless
Companys PCS service and Conestoga Mobile Systems paging service.
During the first quarter of 2000, Conestoga Wireless generated $663
thousand in PCS revenue, as compared with $205 thousand during the
first quarter of 1999. As of March 31, 2000, Conestoga Wireless had
over 11,000 telephones in service, a 14.3% increase over the end of
1999, and 99 telecommunications antenna facilities in service. During
the first quarter Conestoga Wireless placed four 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. All of the
subsidiaries, except Conestoga Telephone, posted increases in their
equipment sales during the first quarter of 2000 compared with the
first quarter of 1999. Infocore, Inc. increased its equipment revenues
78% due to a contract for the installation of security monitoring
systems for a large customer.
EXPENSES:
Operating Expenses
Increase (Decrease)
(in thousands)
First Quarter Ended
March 31 2000 compared to March 31 1999
Network Operations and Cost of Sales $1,221 15.3%
Depreciation and Amortization 348 9.2%
Selling, General and Administrative 1,365 24.0%
Total $2,934 16.8%
The 16.8% increase in operating expenses during the first quarter of
2000 over the first quarter of 1999 resulted from expense increases in
various segments of the company, including the non telco related costs
of expansion and development and certain one time acquisition costs
associated with the TeleBeam acquisition. Operating expenses during
the first quarter of 2000 were $343 thousand, or 1.7%, less than the
fourth quarter of 1999.
Network Operations and Cost of Sales
The increase in network operations and cost of sales expenses is
directly related to the expansion of the commercial operation of the
PCS, long distance and the CLEC businesses, as well as the increase in
Infocores equipment sales, during the first quarter of 2000. During
the first quarter of 2000, Conestoga Wireless cost of service and
equipment sold increased 74%, or $524 thousand, Conestoga
Communications costs increased 34%, or $505 thousand, and Infocores
costs increased 54%, or $794 thousand over the first quarter of 1999.
During the first quarter of 2000, Conestoga Telephone and Buffalo
Valley Telephone in combination reduced their costs of network
operations and sales by 3.9% from the first quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expenses include charges from all of
the subsidiaries. The continuing build out of the wireless PCS infra
structure caused the 9.2% increase in depreciation and amortization
expenses during the first quarter of 2000 compared to the same period
of 1999. During the first three months of 2000 the depreciation
expense of Conestoga Wireless was $898 thousand compared with $656
thousand during the first three months of 1999. As of March 31, 2000,
Conestoga Wireless's plant in service was $34.437 million, an $8.9
million increase over March 31, 1999. The depreciation expense of the
local exchange carriers, Conestoga Telephone and Buffalo Valley
Telephone, increased 3.2% or $82 thousand during the first quarter of
2000 when compared with the first quarter of 1999.
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. A large portion of these
costs are attributable to the increased customer care expenses incurred
by Conestoga Communications for its long distance and CLEC services,
which expenses increased from $96 thousand during the first quarter of
1999 to $180 thousand during the first quarter of 2000. The customer
care costs of Conestoga Wireless also increased. However, the
customer acquisition costs incurred by Conestoga Wireless increased
more, totaling $457 thousand during the first quarter of 2000 compared
to $202 thousand during the first quarter of 1999. During the first
quarter of 2000 Conestoga Telephone incurred sales and marketing costs
totaling $372 thousand, double that of the first quarter of 1999,
largely due to increased labor costs. The sales and marketing expenses
of Conestoga Telephone during the period ending March 31, 2000, were in
line with the fourth quarter of 1999.
General and administrative expenses include executive, accounting and
finance, information technology expenses, and taxes, other than income.
When comparing the first quarter of 2000 with the first quarter of
1999, a large portion of the increase is in labor related costs for
additional personnel in the Human Resource Department and the
Management Information Department (MIS). Also included in the first
quarter of 2000 is $837,000 of one time costs relating to the
acquisition of TeleBeam on January 31, 2000.
Other Income (Deductions), Net
The sale of some of the Companys investment marketable securities
during the first quarter of 2000 caused most of the change in this item
compared with the first quarter of 1999. The sale of these securities
resulted in a before tax gain of $806 thousand. The Company did not
have such extraordinary income or gains during the first quarter of
1999.
Income Taxes
Increase/(Decrease)
(in thousands)
First Quarter Ended
March 31, 2000 compared to
March 31 1999 $ (147) 12.8%
Due to the decrease in operating income, income taxes incurred during
the first quarter of 2000 were lower than during the first quarter of
1999. The Company's effective tax rate (income tax expense as a
percentage of income before income taxes) was 72.4% and 52.1% for the
first three months of 2000 and 1999 respectively. The increase in the
effective tax rate in 2000 is due primarily to a valuation allowance on
state net operating losses and the relationship of nondeductible
goodwill amortization and merger costs to pretax income.
NET INCOME
Increase/(Decrease)
(in thousands)
First Quarter Ended
March 31 2000 compared to
March 31 1999 $ (674) 63.9%
Net income during the first quarter of 2000 was $381 thousand, a
decrease of $674 thousand from the first quarter of 1999. This
decrease was primarily caused by the additional costs associated with
the continued expansions of the PCS, long distance and CLEC businesses.
Conestoga Wireless operating loss during the first quarter of 2000 was
$2.241 million, compared with $1.600 million during the first quarter
of 1999. Conestoga Wireless operating loss during the first quarter of
2000 was 5% less than its operating loss during the fourth quarter of
1999. Conestoga Communications experienced a $25 thousand operating
loss for the first quarter of 2000 compared with a $71 thousand
operating loss for the first quarter of 1999. Conestoga Communications
operating loss during the first quarter of 2000 was 77% less than its
operating loss during the fourth quarter of 1999. Conestoga Telephones
operating income during the first quarter of 2000 decreased by $672
thousand or 17.5%, compared with the first quarter of 1999 as the
result of less revenue and greater expenses. Conestoga Telephones
operating income during the first quarter of 2000 declined 10.7%
compared with the fourth quarter of 1999.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Three Months Ended March 31, 2000 1999
Cash Flows From (Used In):
Operating activities $ 3,447 $ 2,121
Investing activities ( 3,477) (2,773)
Financing activities 152 (1,198)
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 or equity 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%. The Company anticipates that it
will take down the second part of the term loan in the amount of $15
million at 7.86% in August 2000.
Cash Flows From Operating Activities
The Companys 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 quarter of 2000 were $3.4 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. 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 quarter
of 2000 included $2.1 million for the Companys local exchange
operations and $1.9 million for the continued build out of its PCS
operations. The Companys capital investments during the first quarter
of 2000 were 58% or $1.6 million greater than during the first quarter
of 1999. 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 first quarter of 2000 the Company paid
common stock dividends totaling $1.641 million. During the first three
months of 2000, 1,300 shares of preferred stock were redeemed for cash.
During the first quarter of 2000, $596 thousand was paid on
principal of long term debt in accordance with the Company's long term
debt obligations, and the Company used $12 million of short term debt
to pay down the TeleBeam $12 million long term debt.
During the first quarter of 2000, the Companys line of credit with
a local bank was increased from $5 million to $10 million and the total
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 quarter of 2000.
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 quarter of 2000 the
Company sold a portion of its investment portfolio and will most likely
sell the balance during the year. The proceeds from the sale during the
first quarter was $1.2 million.
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 March 31, 2000 it had 99 base
stations in service throughout the Reading, Sunbury and Williamsport
areas. Conestoga Wireless plans to put an additional 34 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 July 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 Conestoga
Telephone and Buffalo Valley Telephone received approval by the
Pennsylvania Public Utility Commission of a petition that has
significantly strengthened the companies competitive position relative
to non facilities based competition. However, facilities based
competition is not precluded.
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 1999 Conestoga Communications significantly grew 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 began offering service in Bell Atlantics
franchise territory. Strong growth in this business segment was
experienced in 1999 and is expected to continue in 2000.
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.
CONESTOGA ENTERPRISES, INC.
PART II. OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 6(B) EXIBITS AND REPORTS ON FORM 8 K
NONE
CONESTOGA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE May 15, 2000 \s\ Albert H Kramer
Albert H Kramer
President
DATE May 15, 2000 \s\ Donald R Breitenstein
Donald R Breitenstein
Sr. Vice President/
Chief Financial Officer
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