FORM 10 Q QUARTERLY REPORT UNDER SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For quarter ended June 30, 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 June 30, 2000, the number of shares outstanding of Common
Stock, par value $1.00, were 7,840,072.
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS ( UNAUDITED )
June 30, 2000 and December 31, 1999
(In Thousands, Except Shares and Per Share Data)
ASSETS
6/30 12/31
2000 1999*
Current Assets
Cash and Cash Equivalents $3,922 $2,507
Accounts receivable, including unbilled
revenue 11,475 11,449
Inventories, at average cost 2,415 2,062
Prepaid expenses 2,510 1,545
Total Current Assets 20,322 17,563
Investments and Other Assets
Cost in Excess of Net Assets of Businesses
Acquired 44,204 45,183
Investments in partnerships 152 65
Investments in equity securities 1,063 3,724
Prepaid Pension Costs 2,937 2,871
Other 1,998 2,068
50,354 53,911
Plant
In Service 189,036 179,993
Under Construction 6,878 3,875
193,014 183,868
Less accumulated depreciation 93,097 87,194
99,917 96,674
Total Assets $173,493 $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 )
June 30, 2000 and December 31, 1999
(In Thousands, Except Shares and Per Share Data)
LIABILITIES AND STOCKHOLDERS EQUITY
6/30 12/31
2000 1999*
Current Liabilities
Current maturities of long term debt $3,206 $3,982
Current liability under capital lease 90 0
Notes payable 2,500 1,000
Accounts payable 3,379 6,900
Accrued:
Taxes 2,592 1,290
Interest 452 197
Payroll & Vacation Pay 1,216 932
Advance billings/Customer Deposits 3,735 2,651
Total Current Liabilities 17,170 16,952
Long Term Liabilities
Long term debt, less current maturities 57,045 50,616
Liability under capital lease,
less current maturities 2,810 0
Accrued post retirement cost 1,127 1,108
Other 1,070 1,387
59,242 53,111
Deferred Income Taxes 9,786 10,878
Convertible\Redeemable Preferred Stock
Par value $65 per share; authorized 900,000
shares; issued and outstanding; 6/30/2000
- 155,073 12/31/99 - 156,779 10,080 10,191
Common Stockholders' Equity
Common Stock par value $1 per share;
authorized 6/30/2000 200,000,000 shares;
12/31/1999 20,000,000; Issued 7,897,914 7,898 7,898
Additional Paid-In Capital 44,938 44,929
Retained earnings 22,220 24,041
Net unrealized appreciation on marketable
equity securities 419 1,667
Less cost of treasury stock; 6/30/2000
57,842 shares and 12/31/99 82,225 shares (1,070) (1,519)
74,405 77,016
Total Liabilities and Stockholders Equity $170,593 $168,148
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2000 and 1999
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
2000 *1999 2000 *1999
Operating Revenues:
Local Services $3,572 $2,988 $6,957 $5,920
Long Distance & Access Services 12,133 12,913 24,445 25,751
Wireless Services 807 485 1,480 795
Equipment and Other 5,512 5,420 11,089 9,893
22,024 21,806 43,971 42,359
Operating Expenses:
Network Operations and Cost
of Sales 8,983 8,683 18,181 16,660
Depreciation and Amortization 4,039 3,674 8,151 7,438
Selling, General and
Administrative 6,208 5,952 13,253 11,632
19,230 18,309 39,585 35,730
Operating Income 2,794 3,497 4,386 6,629
Other Income(Deductions), Net:
Interest Expense (1,052) (1,029) (2,081) (2,069)
Loss from unconsolidated
partnership interest (151) (23) (237) (33)
Gain on Sale of Securities 990 0 1,797 0
Other, Net (10) 131 86 249
(223) (921) (435) (1,853)
Income Before Income Taxes 2,571 2,576 3,951 4,776
Income Taxes 1,211 1,317 2,210 2,463
Net Income $1,360 $1,259 $1,741 $2,313
Basic earnings per common share $0.16 $0.14 $0.19 $0.26
Diluted earnings per common share $0.16 $0.14 $0.19 $0.26
Dividends per common share $0.210 $0.210 $0.420 $0.413
* 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)
SIX MONTHS ENDED JUNE 30, 2000 and 1999
(In Thousands, Except Per Share Data)
2000 1999
Net Income $1,741 $2,313
Unrealized gains on Securities
Unrealized holding gains
during period (62) 251
Less: reclassification adjustment
for gains included in net income (1,186) 0
Comprehensive Income $ 493 $2,564
CONESTOGA ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(in thousands)
2000 1999
Cash Flows from Operating Activities
Net cash provided by operating activities $5,616 $7,191
Cash Flows From Investing Activities
Purchase of Plant, net of removal costs
and salvage (10,319) (7,205)
Proceeds from sale of marketable equity
securities 2,487 0
Proceeds from sale of unconsolidated
partnership interests 0 0
Capital investments in unconsolidated
partnership interests (324) 0
Net cash used in investing activities (8,156) (7,205)
Cash Flows From Financing Activities
Proceeds from long-term borrowing 20,000 0
Proceeds from short-term borrowing (net) 1,500 727
Principal payments on long term borrowing (14,346) (3,212)
Proceeds from issuance of stock 61 600
Proceeds from issuance of stock under the
dividend reinvestment plan 403 438
Common stock dividends paid (3,285) (2,909)
Preferred stock redemption (111) (159)
Preferred stock dividends paid (267) (275)
Purchase of common stock for the treasury 0 0
Net cash provided by (used in) financing
activities 3,955 (4,790)
Increase (decrease) in cash and cash
equivalents 1,415 (4,804)
Cash and cash equivalents
Beginning 2,507 9,319
Ending 3,922 4,515
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Payments for:
Interest $1,826 $2,082
Income Taxes 2,135 2,256
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 six months
ended June 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 six months ended June 30, 2000 and 1999 are
based on the weighted average number of shares outstanding of 7,823,485
and 7,756,965 for 2000 and 1999 respectively. Net income available for
the common shareholders was approximately $1,474,000 and $2,037,000 for
2000 and 1999 respectively. Per share data for the three months ended
June 30, 2000 and 1999 are based on the weighted average number of
shares outstanding of 7,829,315 and 7,774,338 for 2000 and 1999,
respectively. Net income available for the common shareholders was
approximately $1,227,000 and $1,120,000 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)
6/30/00 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. 1,750 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
Other term loans payable to
Bank at various rates 1 11,848
$60,251 $54,598
Less current Maturities 3,206 3,982
$57,045 $50,616
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.
During the first six months of 2000 the Companys line of credit with a
local bank was increased from $5 million to $10 million.
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 June 30, 2000. The
remaining contractual life of the options is 9.9 years.
The Company applies APB Opinion 25 and related interpretations in
accounting for the stock option plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the 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 June 30, 2000 and 1999 are as follows:
CLEC
and
Long
Telephone Wireless Distance Other Total
( in thousands )
Six months ended
June 30, 2000:
Operating revenues
from external customers;
Local Service $ 6,371 $ $ 586 $ $6,957
Long distance and
access service 14,996 9,450 24,446
Wireless service 1,480 1,480
Equipment and Other 3,974 449 1,371 5,294 11,088
25,341 1,929 11,407 5,294 43,971
Inter segment operating
Revenues 1,765 54 49 1,868
Operating profit (loss) 9,794 (4,373) (835) (200) 4,386
Total Assets 115,236 35,086 23,210 8,750 182,282
Capital expenditures 5,825 3,134 1,273 87 10,319
CONESTOGA ENTERPRISES, INC.
CLEC
and
Long
Telephone Wireless Distance Other Total
( in thousands )
Depreciation and
Amortization 5,258 1,859 602 432 8,151
Six months ended
June 30, 1999:
Operating revenues
from external customers;
Local Service $ 5,646 $ 0 $ 274 $ 0 $ 5,920
Long distance and
access service 15,932 0 9,819 0 25,751
Wireless service 0 795 0 0 795
Equipment and Other 4,027 370 1,426 4,070 9,893
25,605 1,165 11,519 4,070 42,359
Inter segment operating
Revenues 1,299 14 143 0 1,456
Operating profit (loss) 10,896 (3,622) (226) (419) 6,629
Total Assets 111,970 31,240 20,094 9,171 172,475
Capital expenditures 5,262 1,245 472 226 7,205
Depreciation and
Amortization 4,949 1,379 558 552 7,438
Certain items in the schedule above need to be reconciled to the
consolidated financial statements and are provided in the schedules
below:
Six Months Ended
June 30 June 30
2000 1999
Revenues:
Total revenue for
Reportable segments $ 40,545 $ 39,745
Other Revenues 5,294 4,070
Elimination of
Intersegment revenues (1,868) (1,456)
Total consolidated revenues $ 43,971 $ 42,359
Total Assets:
Total assets for
Reportable segments $174,422 $ 163,304
Six Months Ended
June 30 June 30
2000 1999
Other assets 8,750 9,171
Elimination and
adjustments (9,679) (5,536)
Total consolidated assets $173,493 $ 166,939
NOTE 7: OTHER
Certain items of the June 30, 1999 consolidated financial statements
have been restated to conform to the June 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 second quarter of 2000, the Companys net income was
$1.360 million or $0.16 per common share, compared to $381 thousand, or
$0.03 per common share in the first quarter of 2000 and $1.259 million
or $0.14 per common share for the second quarter of 1999. The
financial statements for 1999 have been restated to include TeleBeam,
Incorporated (TeleBeam) which was acquired by the Company on January
31, 2000. The TeleBeam acquisition was accounted for as a pooling of
interests. Inclusion of TeleBeams results for the first six months of
1999 resulted in the decrease of the Companys net income from $0.35 per
common share to $0.26 per common share.
The Companys net income during the first six months was enhanced
by the $1.8 million before tax gains from the sale of some of the
Companys investment securities. The local exchange carriers operating
performance during the period, though strong, was 10% less than the
first six months of 1999.
The Companys net income for the first six 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.
Both Conestoga Wireless Company and Conestoga Communications,
Inc. dramatically increased their revenues and customer bases during
the first six months of 2000 compared to the first six months of 1999.
During the second quarter of 2000, Conestoga Wireless Company built
three new telecommunications towers bringing the total towers added
during the year to seven. Conestoga Wireless Company is progressing
with its 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, and grew its CLEC customer
base 17% or over 600 lines during the first six months of 2000. The
access lines in service of the local exchange carriers increased during
the first six months of 2000 by 1,610 to a total of 80,479.
RESULTS OF OPERATIONS
REVENUES
Operating Revenues:
Increase/(Decrease)
(in thousands)
Second Quarter Ended
June 30 2000 compared to June 30 1999
Local Service $ 584 19.5%
Long Distance and Access Service (780) (6.0%)
Wireless Service 535 110.3%
Equipment and Other (121) (2.2%)
Total $ 218 1.0%
Six Months Ended
June 30 2000 compared to June 30 1999
Local Service $1,037 17.5%
Long Distance and Access Service (1,306) (5.1%)
Wireless Service 862 103.7%
Equipment and Other 1,019 10.3%
Total $1,612 3.8%
The increase in operating revenues during the second quarter of
2000 when compared with the same period of 1999 was due to the increase
in local service revenues of the telephone companies (partially due to
a rate increase), and of the competitive local exchange carrier,
Conestoga Communications, Inc. (Conestoga Communications). The
Companys Equipment and related revenue declined in part as a result of
the completion of a large contract for installation of security
monitoring systems for a major account during the first quarter of
2000. The decrease in access and long distance revenues is due to
TeleBeams sale of certain long distance assets in the second quarter of
1999, increased competition, and to a reduction of the telephone
companies access and long distance rates. Operating revenues for the
second quarter of 2000 increased .4% when compared with the first
quarter of 2000.
Local Service
The local telephone companies, Conestoga Telephone and Telegraph
Company (Conestoga Telephone) and Buffalo Valley Telephone Company
(Buffalo Valley Telephone), and the CLEC company, Conestoga
Communications, contributed to the increase in local service revenue
during the second 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 Company had a total of 85,254 access
lines in service as of June 30, 2000, including an increase of 2,536
lines during the first six months of 2000. In addition, the revenue of
Conestoga Communications during the second quarter of 2000 was more
than double its revenue during the second quarter of 1999.
Long Distance and Access Service
Long Distance and Access Service revenues are generated by the
incumbent local telephone companies, Conestoga Telephone and Buffalo
Valley Telephone, and competitive local telephone companies, Conestoga
Communications and TeleBeam. The growth rate of the access revenues of
Conestoga Telephone and Buffalo Valley Telephone decreased during the
first six months of 2000 due to a decline in the rate of growth in the
minutes of use on their networks compared to the first six 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 8.3% during the first six 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 has caused long
distance revenue of Conestoga Telephone and Buffalo Valley Telephone to
decline. During the first six months of 2000 the combined long
distance revenues of Conestoga Telephone and Buffalo Valley Telephone
declined 26.3%, or $612 thousand, the long distance revenues of
Conestoga Communications increased 18.3%, or $643 thousand, and the
long distance revenues of TeleBeam declined 17.2%, or $1.107 million,
compared to the first six months of 1999.
Wireless Service
Wireless Service revenue is generated by Conestoga Wireless
Companys PCS service and Conestoga Mobile Systems paging service.
During the second quarter of 2000, Conestoga Wireless generated $762
thousand in PCS revenue, as compared with $341 thousand during the
second quarter of 1999, and for the six month periods PCS revenues were
$1.426 million and $545 thousand respectively. As of June 30, 2000,
Conestoga Wireless had over 12,000 subscribers, a 23.1% increase over
the end of 1999, and 102 telecommunications antenna facilities in
service. During the first six months of 2000 Conestoga Wireless placed
seven 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 six months of 2000 compared with the
same period of 1999. Infocore, Inc. increased its equipment revenues
41% due to a contract for the installation of security monitoring
systems for a large customer, which began in the second quarter of 1999
and was completed during the second quarter of 2000.
CONESTOGA ENTERPRISES, INC.
EXPENSES:
Operating Expenses
Increase (Decrease)
(in thousands)
Second Quarter Ended
June 30 2000 compared to June 30 1999
Network Operations and Cost of Sales $ 300 3.5%
Depreciation and Amortization 365 9.9%
Selling, General and Administrative 256 4.3%
Total $ 921 5.0%
Six Months Ended
June 30 2000 compared to June 30 1999
Network Operations and Cost of Sales $1,521 9.1%
Depreciation and Amortization 713 9.6%
Selling, General and Administrative 1,621 13.9%
Total $3,855 10.8%
The 5.0% increase in operating expenses during the second quarter of
2000 over the second quarter of 1999 resulted from expense increases in
various segments of the company. Conestoga Telephones operating
expenses increased 11% due to increased selling general and
administrative costs that are mostly labor related. The non telco
related costs of expansion and development also added to the increase.
In addition for the first six months certain one time acquisition costs
associated with the TeleBeam acquisition were included. Operating
expenses during the second quarter of 2000 were $1.125 million or 5.5%,
less than the first quarter of 2000.
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 CLEC businesses, as well as the increase in
Infocores equipment sales, during the first six months of 2000. During
the second quarter of 2000, Conestoga Communications cost of service
increased 31%, or $501 thousand, and Infocores costs increased 9%, or
$178 thousand, over the second quarter of 1999. During the same period
of 2000, Conestoga Telephone and Buffalo Valley Telephone in
combination increased their costs of network operations and sales by 2%
and TeleBeams costs were lower by 10% from the second quarter of 1999.
In total, network and cost of operations expenses, in the second
quarter of 2000, were 2% less than the first quarter.
Depreciation and Amortization
Depreciation and amortization expenses include charges from all of
the subsidiaries. The continuing build out of the wireless PCS
infrastructure caused most of the 9.9% increase in depreciation and
amortization expenses during the second quarter of 2000 compared to the
same period of 1999. During the second quarter of 2000 the excess of
the purchase price over the fair value of net assets from the Infocore
merger in 1997 was completely amortized. During the first six months
of 2000 the depreciation expense of Conestoga Wireless was $1.822
million compared with $1.343 during the first six months of 1999. The
depreciation expense of the local exchange carriers, Conestoga
Telephone and Buffalo Valley Telephone, increased 6.2%, or $307
thousand, during the first six months of 2000 when compared with the
first six months of 1999. Depreciation expense was relatively even
during the second quarter 2000 when compared with the first 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 second quarter 2000 with the second quarter of 1999
Conestoga Telephones costs were up 18%, or $404 thousand, mostly in
labor related charges in sales and marketing and management
information, but were in line with the first quarter of 2000.
Conestoga Wireless also incurred increased costs during these periods
mostly in customer acquisition costs. Conestoga Wireless selling
general and administrative expenses increased 60.4%, or $365 thousand,
during the second quarter 2000 over the second quarter of 1999, and
16.7%, or $138 thousand, over than the first quarter of 2000.
When comparing the first six months of 2000 with the first six
months of 1999, a large portion of the increase is in labor related
costs for additional personnel in Sales and Marketing, Human Resource
and the Management Information Departments. Also included in the first
six months of 2000 is $837,000 of one time costs relating to the
acquisition of TeleBeam on January 31, 2000.
Other Income (Deductions), Net
The change in other income (deductions) was mostly impacted by the
sale of some of the Companys investment in marketable securities during
the first six months of 2000. The sale of these securities resulted in
a before tax gain of $1.797 million. The Company did not sell any
securities during the first six months of 1999.
Income Taxes
Increase/(Decrease)
(in thousands)
Second Quarter Ended
June 30 2000 compared to June 30 1999
$ (106) (8.0%)
Six Months Ended
June 30 2000 compared to June 30 1999
$ (253) (10.3%)
Due to the decrease in operating income, income taxes incurred
during the second quarter and the first six 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 55.9% and 51.6% for the first six 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. The second quarter 2000 effective tax rate was
47.1% compared with 72.4% for the first quarter (which included the
nondeductible merger costs).
NET INCOME
Increase/(Decrease)
(in thousands)
Second Quarter Ended
June 30 2000 compared to June 30 1999
$ 101 8.0%
Six Months Ended
June 30 2000 compared to June 30 1999
$(572) (24.7%)
Net income during the second quarter of 2000 was $1.360 million
compared with $1.259 million for the second quarter of 1999 an increase
of $101 thousand or 8%. Net income for the first six months of 2000
was $1.741 million compared with $2.313 million for the first six
months of 1999. This decrease was primarily caused by the additional
costs associated with the continued expansions of the PCS, long
distance and CLEC businesses, and the one time merger costs. Net
income for the six months ending on June 30, 2000, includes a $1.186
million after tax gain on the sale of investment securities. Conestoga
Wireless operating loss during the second quarter of 2000 was $2.185
million, compared with $2.032 million during the second quarter of
1999. Conestoga Wireless operating loss during the second quarter of
2000 was 2.5% less than its operating loss during the first quarter of
2000. Its operating loss for the first six months of 2000 was $4.426
million. Conestoga Communications experienced a $229 thousand
operating loss for the second quarter of 2000 compared with a $5
thousand operating loss for the second quarter of 1999. Conestoga
Communications operating loss during the first six months of 2000 was
$254 thousand. Conestoga Telephones operating income during the second
quarter of 2000 decreased $596 thousand, or 14.2%, from the second
quarter of 1999, the result of less revenue and greater expenses; but
its operating income was 13.1%, or $417 thousand, better than the first
quarter of 2000. Conestoga Telephones operating income during the
first six months of 2000 declined 15.8% compared to the first six
months of 1999.
FINANCIAL CONDITION
Liquidity and Capital Commitments
Six Months Ended June 30, 2000 1999
Cash Flows From (Used In):
Operating activities $ 5,616 $ 7,191
Investing activities (8,156) (7,205)
Financing activities 3,955 (4,790)
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%. 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 second quarter of 2000 were $2.2 million,
and for the six month period were $5.6 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 six
months of 2000 included $5.8 million for the Companys local exchange
operations and $3.1 million for the continued build out of its PCS
operations. The Companys capital investments during the first six
months of 2000 were 48% or $3.3 million greater than during the first
six months of 1999. For the second quarter 2000 capital expenditures
were $6.0 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 second quarter and the first six months of
2000 the Company paid common stock dividends totaling $1.643 million
and $3.285 million respectively. During the first six months of 2000,
1,706 shares of preferred stock were redeemed for cash.
During the second quarter of 2000, $2.3 million was paid on
principal of long term debt in accordance with the Companys long term
debt obligations. During the first six months $2.8 million was paid 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 the $12 million of short term debt incurred to pay down the
TeleBeam long term debt of $12 million.
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 six months of 2000, and, as of
June 30, 2000, had $2.5 million 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 six 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 second quarter were $1.3 million, and for the first six
months were $2.5 million. The remaining portfolio had an estimated
market value of $943,300 on June 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.
CONESTOGA ENTERPRISES, INC.
OTHER FACTORS:
PCS SERVICE:
Conestoga Wireless is the provider of the Companys digital wireless
telecommunications services. As of June 30, 2000 it had 102 base
stations in service throughout the Reading, Sunbury and Williamsport
areas. Conestoga Wireless plans to put an additional 31 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 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. With the acquisition of TeleBeam
in January 2000, the Companys competitive long distance and local
service businesses were greatly expanded. In July 2000, both Conestoga
Communications and TeleBeam began doing business as CEI Networks.
Strong growth in this business segment had occurred in 2000 and is
expected to continue.
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
The following matters were submitted to a vote of the Shareholders
of the Company at its Annual Shareholders' Meeting on May 6, 2000
1. A proposal to amend the Company's Articles of Incorporation
to increase the number of the Company's authorized common shares
from 20,000,000 to 200,000,000.
FOR 4,209,228 AGAINST 1,343,727 ABSTAIN 37,110
2. A proposal to amend the Company's Articles of Incorporation to
eliminate cumulative voting.
FOR 3,374,374 AGAINST 1,191,345 ABSTAIN 24,080
3. A proposal to amend the Company's By-Laws:
a. to provide that the Annual Meeting of the Shareholders
of the Company shall be held on or before May 31 of each
year.
b. to provide that there shall be no cumulative voting for
the election of directors;
c. to provide that the number of directors shall be not less
than nine nor more than eleven; and
d. to detail the application procedures for nominees for
directors.
FOR 3,871,150 AGAINST 702,636 ABSTAIN 16,013
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 August 15, 2000 \s\ Albert H Kramer
Albert H Kramer
President
DATE August 15, 2000 \s\ Donald R Breitenstein
Donald R Breitenstein
Sr. Vice President/
Chief Financial Officer
